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
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(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: 9/30/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
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SEPTEMBER 30, 2006
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Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government
Securities Fund
Franklin Utilities Fund
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ANNUAL REPORT AND SHAREHOLDER LETTER
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN Eligible shareholders
CUSTODIAN FUNDS, INC. can sign up for
eDelivery at
franklintempleton.com.
See inside for
details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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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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Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Franklin DynaTech Fund ................................................... 3
Franklin Growth Fund ..................................................... 12
Franklin Income Fund ..................................................... 22
Franklin U.S. Government Securities Fund ................................. 37
Franklin Utilities Fund .................................................. 50
Financial Highlights and Statements of Investments ....................... 61
Financial Statements ..................................................... 108
Notes to Financial Statements ............................................ 117
Report of Independent Registered Public Accounting Firm .................. 136
Tax Designation .......................................................... 137
Board Members and Officers ............................................... 138
Shareholder Information .................................................. 142
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Annual Report
Franklin DynaTech Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing 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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This annual report for Franklin DynaTech Fund covers the fiscal year ended
September 30, 2006.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +3.28% cumulative total return for the
12 months under review. The Fund performed comparably to its narrow benchmark,
the NASDAQ 100 Index, which had a price-only return of +3.28% for the same
period. 1 The Fund underperformed the broad Standard & Poor's 500 Index (S&P
500), which posted a +10.78% cumulative total return. 2 You can find the Fund's
long-term performance data in the Performance Summary beginning on page 7.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2006, the U.S. economy advanced at a
moderate pace. After a slow fourth quarter 2005, gross domestic product grew an
annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates
of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven
by corporate profits, and consumer and government spending. Export growth picked
up some momentum, but a wide trade deficit remained. Employment generally
increased and the unemployment rate fell from 5.1% to 4.6%. 3
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.
2. 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 indexes are unmanaged. One cannot invest directly in an index, nor is
an index representative of the Fund's portfolio.
3. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 64.
Annual Report | 3
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 10.3%
Biotechnology 9.4%
Packaged Software 9.0%
Medical Specialties 8.7%
Telecommunications Equipment 6.0%
Internet Software & Services 5.0%
Computer Processing Hardware 4.4%
Electronic Production Equipment 4.0%
Information Technology Services 4.0%
Air Freight & Couriers 3.5%
Electronic Equipment & Instruments 3.4%
Oilfield Services & Equipment 3.2%
Other Pharmaceuticals 2.8%
Major Pharmaceuticals 2.7%
Services to the Health Industry 2.5%
Recreational Products 2.1%
Other 18.8%
Short-Term Investments & Other Net Assets 0.2%
Although labor costs rose during the reporting period, hiring increased in many
industries and personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices were volatile and declined from a record high of $77 per barrel in July
to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer
confidence and spending remained strong but could weaken with the impact of
higher prices. As home price appreciation slowed, borrowing against home equity
flattened and could have a gradual effect on consumer spending. Inflation was
also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12
months ended September 30, 2006, which was higher than the 2.2% 10-year
average. 4
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 3.75% to 5.25%. In August and September, the Fed left the
rate unchanged, citing moderate economic growth, a cooling housing market, and
the lagging effect of prior tightening. The Fed stated that some inflation risk
may remain and the extent and timing of any additional interest rate hikes will
depend upon incoming data on inflation and economic growth.
In this environment, equity markets experienced dramatic rallies late in the
period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted
a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while
the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 5
Telecommunications, materials and financials stocks performed particularly well.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
5. 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 2 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.
4 | Annual Report
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.
MANAGER'S DISCUSSION
During the year under review, several holdings contributed to Fund performance.
In particular, the Fund's overweighted position in Internet software and
services company Google rose 27% in value mainly due to the strong online
advertising market. Computer processing hardware company Apple Computer, which
appreciated 44% in value during the reporting period, benefited from a strong
product cycle, which included the iPod. Strength in the global oil markets
benefited oilfield services and equipment company Schlumberger, which surged 48%
in value.
Some stocks had negative returns and hurt Fund performance during the reporting
period. Internet software and services company Yahoo! fell 25% in value largely
due to the delay of Project Panama, the company's algorithmic search product. We
reduced the Fund's exposure to Yahoo! during the year under review. NAVTEQ
Corp., a packaged navigation software company, declined 48% in value for the
time we held it. NAVTEQ recently shifted its design focus from pre-installed
auto maps to less expensive portable navigation devices. The company fell short
of its revenue forecasts partly due to lower auto sales and a delay in the
launch of new personal navigation devices. We sold our shares of NAVTEQ near
period-end. Autodesk, a packaged software company, fell 25% in value mainly due
to stock option concerns and a perceived end to the company's 2D design software
in favor of 3D.
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Microsoft Corp. 3.8%
PACKAGED SOFTWARE
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Intel Corp. 3.5%
SEMICONDUCTORS
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Genentech Inc. 3.4%
BIOTECHNOLOGY
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Google Inc., A 3.0%
INTERNET SOFTWARE & SERVICES
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Adobe Systems Inc. 2.6%
PACKAGED SOFTWARE
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Motorola Inc. 2.5%
TELECOMMUNICATIONS EQUIPMENT
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Apple Computer Inc. 2.4%
COMPUTER PROCESSING HARDWARE
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Amgen Inc. 2.1%
BIOTECHNOLOGY
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Hewlett-Packard Co. 2.1%
COMPUTER PROCESSING HARDWARE
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Electronic Arts Inc. 2.1%
RECREATIONAL PRODUCTS
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Annual Report | 5
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
Matthew J. Moberg, CPA
[PHOTO OMITTED] /s/ Robert R. Dean
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2006, 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 INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
6 | Annual Report
Performance Summary as of 9/30/06
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
a shareholder would pay 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 9/30/06 9/30/05
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Net Asset Value (NAV) +$0.82 $25.80 $24.98
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CLASS B (SYMBOL: FDNBX) CHANGE 9/30/06 9/30/05
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Net Asset Value (NAV) +$0.60 $24.75 $24.15
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CLASS C (SYMBOL: FDYNX) CHANGE 9/30/06 9/30/05
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Net Asset Value (NAV) +$0.60 $24.50 $23.90
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PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +3.28% +39.61% +115.78%
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Average Annual Total Return 2 -2.64% +5.65% +7.35%
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Value of $10,000 Investment 3 $9,736 $13,161 $20,332
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CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00)
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Cumulative Total Return 1 +2.48% +34.40% -9.15%
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Average Annual Total Return 2 -1.52% +5.77% -1.43%
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Value of $10,000 Investment 3 $9,848 $13,240 $9,085
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +2.51% +34.52% +99.39%
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Average Annual Total Return 2 +1.51% +6.11% +7.14%
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Value of $10,000 Investment 3 $10,151 $13,452 $19,939
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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.
Annual Report | 7
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The indexes are unmanaged. They
differ from the Fund in composition and do not pay management fees or expenses.
One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
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CLASS A 9/30/06
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1-Year -2.64%
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5-Year +5.65%
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10-Year +7.35%
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CLASS A (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN
DYNATECH NASDAQ 100
DATE FUND S&P 500 4 INDEX 4
10/1/1996 $9,422 $10,000 $10,000
10/31/1996 $9,597 $10,276 $10,196
11/30/1996 $10,517 $11,052 $11,308
12/31/1996 $10,518 $10,833 $11,136
1/31/1997 $11,299 $11,509 $12,494
2/28/1997 $10,663 $11,600 $11,531
3/31/1997 $10,394 $11,124 $10,807
4/30/1997 $10,857 $11,787 $11,860
5/31/1997 $11,465 $12,504 $13,000
6/30/1997 $11,569 $13,064 $12,979
7/31/1997 $12,696 $14,103 $15,009
8/31/1997 $12,468 $13,314 $14,564
9/30/1997 $12,779 $14,043 $14,875
10/31/1997 $12,150 $13,574 $13,824
11/30/1997 $12,281 $14,202 $14,243
12/31/1997 $12,056 $14,446 $13,433
1/31/1998 $12,470 $14,605 $14,522
2/28/1998 $13,023 $15,658 $16,190
3/31/1998 $13,082 $16,459 $16,550
4/30/1998 $13,333 $16,625 $16,922
5/31/1998 $12,861 $16,339 $16,162
6/30/1998 $13,488 $17,003 $18,132
7/31/1998 $13,555 $16,822 $18,673
8/31/1998 $12,314 $14,392 $15,461
9/30/1998 $13,171 $15,314 $18,242
10/31/1998 $13,533 $16,559 $18,988
11/30/1998 $14,367 $17,562 $21,123
12/31/1998 $15,352 $18,574 $24,893
1/31/1999 $16,548 $19,350 $28,841
2/28/1999 $15,786 $18,749 $26,103
3/31/1999 $16,302 $19,499 $28,559
4/30/1999 $16,346 $20,254 $28,965
5/31/1999 $16,077 $19,776 $28,332
6/30/1999 $16,900 $20,873 $31,140
7/31/1999 $16,885 $20,222 $30,789
8/31/1999 $17,355 $20,122 $32,497
9/30/1999 $17,273 $19,571 $32,646
10/31/1999 $17,976 $20,809 $35,759
11/30/1999 $19,037 $21,232 $40,223
12/31/1999 $21,061 $22,482 $50,271
1/31/2000 $21,274 $21,352 $48,403
2/29/2000 $23,147 $20,948 $57,851
3/31/2000 $23,382 $22,996 $59,626
4/30/2000 $22,116 $22,305 $51,157
5/31/2000 $21,054 $21,848 $45,068
6/30/2000 $22,351 $22,387 $51,030
7/31/2000 $21,956 $22,037 $48,936
8/31/2000 $23,549 $23,405 $55,284
9/30/2000 $21,691 $22,170 $48,410
10/31/2000 $21,137 $22,076 $44,502
11/30/2000 $18,885 $20,337 $33,984
12/31/2000 $18,484 $20,437 $31,749
1/31/2001 $19,416 $21,161 $35,156
2/28/2001 $17,071 $19,233 $25,873
3/31/2001 $16,070 $18,015 $21,330
4/30/2001 $17,118 $19,414 $25,152
5/31/2001 $16,854 $19,544 $24,403
6/30/2001 $16,730 $19,069 $24,848
7/31/2001 $16,202 $18,881 $22,826
8/31/2001 $15,542 $17,700 $19,926
9/30/2001 $14,564 $16,271 $15,841
10/31/2001 $15,231 $16,581 $18,504
11/30/2001 $16,178 $17,853 $21,639
12/31/2001 $16,060 $18,010 $21,382
1/31/2002 $15,934 $17,747 $21,017
2/28/2002 $15,186 $17,405 $18,428
3/31/2002 $15,651 $18,059 $19,697
4/30/2002 $14,807 $16,965 $17,315
5/31/2002 $14,618 $16,840 $16,383
6/30/2002 $13,712 $15,641 $14,255
7/31/2002 $13,003 $14,422 $13,044
8/31/2002 $12,948 $14,517 $12,777
9/30/2002 $12,112 $12,940 $11,287
10/31/2002 $13,137 $14,078 $13,416
11/30/2002 $13,948 $14,906 $15,132
12/31/2002 $12,869 $14,031 $13,346
1/31/2003 $12,727 $13,664 $13,328
2/28/2003 $12,853 $13,459 $13,690
3/31/2003 $12,963 $13,588 $13,811
4/30/2003 $13,822 $14,708 $14,996
5/31/2003 $14,847 $15,482 $16,241
6/30/2003 $15,099 $15,680 $16,293
7/31/2003 $15,643 $15,956 $17,313
8/31/2003 $16,218 $16,267 $18,184
9/30/2003 $15,895 $16,095 $17,676
10/31/2003 $16,982 $17,005 $19,203
11/30/2003 $17,298 $17,154 $19,310
12/31/2003 $17,841 $18,053 $19,902
1/31/2004 $18,228 $18,384 $20,243
2/29/2004 $18,031 $18,640 $19,935
3/31/2004 $17,928 $18,359 $19,502
4/30/2004 $17,629 $18,071 $19,000
5/31/2004 $18,346 $18,318 $19,879
6/30/2004 $18,551 $18,674 $20,563
7/31/2004 $17,014 $18,056 $18,987
8/31/2004 $16,707 $18,129 $18,557
9/30/2004 $17,345 $18,325 $19,154
10/31/2004 $17,715 $18,605 $20,157
11/30/2004 $18,511 $19,358 $21,306
12/31/2004 $19,213 $20,016 $21,979
1/31/2005 $18,070 $19,528 $20,603
2/28/2005 $18,306 $19,939 $20,486
3/31/2005 $17,905 $19,586 $20,100
4/30/2005 $17,589 $19,215 $19,263
5/31/2005 $18,811 $19,826 $20,915
6/30/2005 $18,622 $19,854 $20,249
7/31/2005 $19,575 $20,592 $21,763
8/31/2005 $19,717 $20,405 $21,445
9/30/2005 $19,685 $20,570 $21,715
10/31/2005 $19,528 $20,227 $21,411
11/30/2005 $20,781 $20,991 $22,677
12/31/2005 $20,592 $20,998 $22,306
1/31/2006 $21,419 $21,554 $23,194
2/28/2006 $21,002 $21,613 $22,650
3/31/2006 $21,136 $21,882 $23,098
4/30/2006 $21,009 $22,175 $23,058
5/31/2006 $19,638 $21,538 $21,416
6/30/2006 $19,788 $21,566 $21,357
7/31/2006 $19,173 $21,699 $20,465
8/31/2006 $19,890 $22,215 $21,418
9/30/2006 $20,332 $22,787 $22,427
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS B 9/30/06
- --------------------------------------------
1-Year -1.52%
- --------------------------------------------
5-Year +5.77%
- --------------------------------------------
Since Inception (2/1/00) -1.43%
- --------------------------------------------
CLASS B (2/1/00-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN
DYNATECH NASDAQ 100
DATE FUND S&P 500 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 $8,865 $9,634 $4,486
10/31/2005 $8,784 $9,473 $4,423
11/30/2005 $9,342 $9,831 $4,685
12/31/2005 $9,254 $9,834 $4,608
1/31/2006 $9,621 $10,095 $4,792
2/28/2006 $9,423 $10,122 $4,679
3/31/2006 $9,478 $10,248 $4,772
4/30/2006 $9,416 $10,385 $4,764
5/31/2006 $8,795 $10,087 $4,425
6/30/2006 $8,858 $10,100 $4,412
7/31/2006 $8,579 $10,163 $4,228
8/31/2006 $8,895 $10,404 $4,425
9/30/2006 $9,085 $10,672 $4,633
8 | Annual Report
Performance Summary (CONTINUED)
CLASS C (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN
DYNATECH NASDAQ 100
DATE FUND S&P 500 4 INDEX 4
10/1/1996 $10,000 $10,000 $10,000
10/31/1996 $10,171 $10,276 $10,196
11/30/1996 $11,140 $11,052 $11,308
12/31/1996 $11,135 $10,833 $11,136
1/31/1997 $11,964 $11,509 $12,494
2/28/1997 $11,282 $11,600 $11,531
3/31/1997 $10,988 $11,124 $10,807
4/30/1997 $11,465 $11,787 $11,860
5/31/1997 $12,096 $12,504 $13,000
6/30/1997 $12,192 $13,064 $12,979
7/31/1997 $13,374 $14,103 $15,009
8/31/1997 $13,117 $13,314 $14,564
9/30/1997 $13,432 $14,043 $14,875
10/31/1997 $12,764 $13,574 $13,824
11/30/1997 $12,889 $14,202 $14,243
12/31/1997 $12,642 $14,446 $13,433
1/31/1998 $13,048 $14,605 $14,522
2/28/1998 $13,619 $15,658 $16,190
3/31/1998 $13,674 $16,459 $16,550
4/30/1998 $13,932 $16,625 $16,922
5/31/1998 $13,424 $16,339 $16,162
6/30/1998 $14,073 $17,003 $18,132
7/31/1998 $14,127 $16,822 $18,673
8/31/1998 $12,830 $14,392 $15,461
9/30/1998 $13,705 $15,314 $18,242
10/31/1998 $14,073 $16,559 $18,988
11/30/1998 $14,933 $17,562 $21,123
12/31/1998 $15,944 $18,574 $24,893
1/31/1999 $17,174 $19,350 $28,841
2/28/1999 $16,377 $18,749 $26,103
3/31/1999 $16,898 $19,499 $28,559
4/30/1999 $16,937 $20,254 $28,965
5/31/1999 $16,653 $19,776 $28,332
6/30/1999 $17,489 $20,873 $31,140
7/31/1999 $17,465 $20,222 $30,789
8/31/1999 $17,938 $20,122 $32,497
9/30/1999 $17,843 $19,571 $32,646
10/31/1999 $18,553 $20,809 $35,759
11/30/1999 $19,640 $21,232 $40,223
12/31/1999 $21,716 $22,482 $50,271
1/31/2000 $21,923 $21,352 $48,403
2/29/2000 $23,841 $20,948 $57,851
3/31/2000 $24,064 $22,996 $59,626
4/30/2000 $22,751 $22,305 $51,157
5/31/2000 $21,637 $21,848 $45,068
6/30/2000 $22,966 $22,387 $51,030
7/31/2000 $22,544 $22,037 $48,936
8/31/2000 $24,159 $23,405 $55,284
9/30/2000 $22,241 $22,170 $48,410
10/31/2000 $21,661 $22,076 $44,502
11/30/2000 $19,345 $20,337 $33,984
12/31/2000 $18,912 $20,437 $31,749
1/31/2001 $19,858 $21,161 $35,156
2/28/2001 $17,449 $19,233 $25,873
3/31/2001 $16,423 $18,015 $21,330
4/30/2001 $17,482 $19,414 $25,152
5/31/2001 $17,199 $19,544 $24,403
6/30/2001 $17,061 $19,069 $24,848
7/31/2001 $16,512 $18,881 $22,826
8/31/2001 $15,825 $17,700 $19,926
9/30/2001 $14,823 $16,271 $15,841
10/31/2001 $15,493 $16,581 $18,504
11/30/2001 $16,447 $17,853 $21,639
12/31/2001 $16,310 $18,010 $21,382
1/31/2002 $16,179 $17,747 $21,017
2/28/2002 $15,414 $17,405 $18,428
3/31/2002 $15,870 $18,059 $19,697
4/30/2002 $15,007 $16,965 $17,315
5/31/2002 $14,804 $16,840 $16,383
6/30/2002 $13,876 $15,641 $14,255
7/31/2002 $13,152 $14,422 $13,044
8/31/2002 $13,087 $14,517 $12,777
9/30/2002 $12,232 $12,940 $11,287
10/31/2002 $13,266 $14,078 $13,416
11/30/2002 $14,071 $14,906 $15,132
12/31/2002 $12,981 $14,031 $13,346
1/31/2003 $12,826 $13,664 $13,328
2/28/2003 $12,948 $13,459 $13,690
3/31/2003 $13,046 $13,588 $13,811
4/30/2003 $13,909 $14,708 $14,996
5/31/2003 $14,926 $15,482 $16,241
6/30/2003 $15,170 $15,680 $16,293
7/31/2003 $15,707 $15,956 $17,313
8/31/2003 $16,277 $16,267 $18,184
9/30/2003 $15,943 $16,095 $17,676
10/31/2003 $17,026 $17,005 $19,203
11/30/2003 $17,327 $17,154 $19,310
12/31/2003 $17,864 $18,053 $19,902
1/31/2004 $18,238 $18,384 $20,243
2/29/2004 $18,027 $18,640 $19,935
3/31/2004 $17,913 $18,359 $19,502
4/30/2004 $17,604 $18,071 $19,000
5/31/2004 $18,303 $18,318 $19,879
6/30/2004 $18,499 $18,674 $20,563
7/31/2004 $16,952 $18,056 $18,987
8/31/2004 $16,643 $18,129 $18,557
9/30/2004 $17,262 $18,325 $19,154
10/31/2004 $17,620 $18,605 $20,157
11/30/2004 $18,401 $19,358 $21,306
12/31/2004 $19,077 $20,016 $21,979
1/31/2005 $17,945 $19,528 $20,603
2/28/2005 $18,165 $19,939 $20,486
3/31/2005 $17,750 $19,586 $20,100
4/30/2005 $17,425 $19,215 $19,263
5/31/2005 $18,629 $19,826 $20,915
6/30/2005 $18,426 $19,854 $20,249
7/31/2005 $19,361 $20,592 $21,763
8/31/2005 $19,484 $20,405 $21,445
9/30/2005 $19,451 $20,570 $21,715
10/31/2005 $19,280 $20,227 $21,411
11/30/2005 $20,501 $20,991 $22,677
12/31/2005 $20,306 $20,998 $22,306
1/31/2006 $21,103 $21,554 $23,194
2/28/2006 $20,680 $21,613 $22,650
3/31/2006 $20,802 $21,882 $23,098
4/30/2006 $20,664 $22,175 $23,058
5/31/2006 $19,305 $21,538 $21,416
6/30/2006 $19,435 $21,566 $21,357
7/31/2006 $18,824 $21,699 $20,465
8/31/2006 $19,516 $22,215 $21,418
9/30/2006 $19,939 $22,787 $22,427
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS C 9/30/06
- --------------------------------------------------
1-Year +1.51%
- --------------------------------------------------
5-Year +6.11%
- --------------------------------------------------
10-Year +7.14%
- --------------------------------------------------
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC
OR TECHNOLOGICAL ADVANCEMENTS. 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
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.
Annual Report | 9
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 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.
10 | 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 962.00 $4.62
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.36 $4.76
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 958.60 $8.30
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.54
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 958.50 $8.25
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.65 $8.49
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.94%; B: 1.69%; and C: 1.68%), multiplied by the average account value
over the period, multiplied by 183/365 to reflect the one-half year
period.
Annual Report | 11
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, 2006.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A posted a +12.46% cumulative total return for the
12 months under review. The Fund outperformed its benchmark, the Standard &
Poor's 500 Index (S&P 500), which returned +10.78% for the same period. 1 You
can find the Fund's long-term performance data in the Performance Summary
beginning on page 15.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2006, the U.S. economy advanced at a
moderate pace. After a slow fourth quarter 2005, gross domestic product grew an
annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates
of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven
by corporate profits, and consumer and government spending. Export growth picked
up some momentum, but a wide trade deficit remained. Employment generally
increased and the unemployment rate fell from 5.1% to 4.6%. 2 Although labor
costs rose during the reporting period, hiring increased in many industries and
personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices were volatile and declined from a record high of $77 per barrel in July
to $63 at period-end. Medical and pharmacy costs climbed substantially.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 73.
12 | Annual Report
Consumer confidence and spending remained strong but could weaken with the
impact of higher prices. As home price appreciation slowed, borrowing against
home equity flattened and could have a gradual effect on consumer spending.
Inflation was also a concern, as the core Consumer Price Index (CPI) rose 2.9%
for the 12 months ended September 30, 2006, which was higher than the 2.2%
10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 3.75% to 5.25%. In August and September, the Fed left the
rate unchanged, citing moderate economic growth, a cooling housing market, and
the lagging effect of prior tightening. The Fed stated that some inflation risk
may remain and the extent and timing of any additional interest rate hikes will
depend upon incoming data on inflation and economic growth.
In this environment, equity markets experienced dramatic rallies late in the
period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted
a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while
the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 4
Telecommunications, materials and financials stocks performed particularly well.
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.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
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.
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 22.5%
Health Technology* 21.6%
Producer Manufacturing 18.9%
Technology Services* 8.7%
Transportation 6.0%
Consumer Services 4.6%
Distribution Services 3.0%
Commercial Services 2.8%
Consumer Non-Durables 2.7%
Consumer Durables 2.2%
Health Services 2.1%
Process Industries 2.0%
Other 2.2%
Short-Term Investments & Other Net Assets 0.7%
* 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.
Annual Report | 13
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Genentech Inc. 3.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
The Boeing Co. 3.3%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Apple Computer Inc. 3.2%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 3.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.8%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 2.8%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Johnson & Johnson 2.7%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
3M Co. 2.5%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Pfizer Inc. 2.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
United Technologies Corp. 2.1%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
The Fund was nearly fully invested with holdings in 95 companies at period-end.
We continued to invest in a broad array of companies of all sizes and in varied
industries.
During the Fund's fiscal year, performance generally was driven by individual
company performances rather than any particular sector strength or weakness. Our
two best performing stock holdings were Continental Airlines (+193%) and AMR, or
American Airlines (+107%). Another airline position, British Airways, also
performed well, rising 55% in value. Largely due to struggles faced by the
airline industry in recent years, we did not accumulate significant exposure to
the industry. At period-end, our six airline holdings represented 4.9% of the
Fund's total net assets. Elsewhere, electronic technology holding Apple Computer
rose 44% in value and contributed to performance. The company benefited from a
strong product cycle, which included the iPod.
The Fund had some detractors from performance during the fiscal year. For
example, Yahoo! (-25%) suffered due to the delay of its Project Panama, the
company's algorithmic search product. Gateway (-30%) and Dell (-33%) fell in
value amid disappointing earnings results.
Thank you for your continued participation in Franklin Growth Fund. We look
forward to serving your future investment needs.
[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, 2006, 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 INVESTMENT MANAGER 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.
14 | Annual Report
Performance Summary as of 9/30/06
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
that a shareholder would pay 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 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.27 $39.10 $34.83
- --------------------------------------------------------------------------------
Dividend Income $0.0644
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FKGBX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.92 $37.65 $33.73
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRGSX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.89 $37.32 $33.43
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FGSRX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.21 $38.80 $34.59
- --------------------------------------------------------------------------------
Dividend Income $0.0013
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.28 $39.17 $34.89
- --------------------------------------------------------------------------------
Dividend Income $0.1518
- --------------------------------------------------------------------------------
Annual Report | 15
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +12.46% +42.45% +100.26%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.00% +6.07% +6.56%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,600 $13,424 $18,877
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +11.62% +37.31% +28.79%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +7.62% +6.23% +3.32%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,762 $13,531 $12,879
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +11.60% +37.21% +85.66%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.60% +6.53% +6.38%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,060 $13,721 $18,566
- ------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +12.18% +45.17% +23.15%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +12.18% +13.23% +4.49%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,218 $14,517 $12,315
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS 4 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +12.73% +44.23% +106.66%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +12.73% +7.60% +7.53%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,273 $14,423 $20,666
- ------------------------------------------------------------------------------------------------------
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.
16 | 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.
CLASS A (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
DATE FRANKLIN GROWTH FUND S&P 500 5
10/1/1996 $9,426 $10,000
10/31/1996 $9,451 $10,276
11/30/1996 $10,045 $11,052
12/31/1996 $9,843 $10,833
1/31/1997 $10,091 $11,509
2/28/1997 $10,112 $11,600
3/31/1997 $9,860 $11,124
4/30/1997 $10,213 $11,787
5/31/1997 $10,776 $12,504
6/30/1997 $10,978 $13,064
7/31/1997 $11,414 $14,103
8/31/1997 $11,032 $13,314
9/30/1997 $11,381 $14,043
10/31/1997 $11,284 $13,574
11/30/1997 $11,541 $14,202
12/31/1997 $11,675 $14,446
1/31/1998 $11,795 $14,605
2/28/1998 $12,291 $15,658
3/31/1998 $12,558 $16,459
4/30/1998 $12,726 $16,625
5/31/1998 $12,545 $16,339
6/30/1998 $12,782 $17,003
7/31/1998 $12,735 $16,822
8/31/1998 $11,662 $14,392
9/30/1998 $12,317 $15,314
10/31/1998 $13,075 $16,559
11/30/1998 $13,545 $17,562
12/31/1998 $13,837 $18,574
1/31/1999 $14,079 $19,350
2/28/1999 $13,929 $18,749
3/31/1999 $14,308 $19,499
4/30/1999 $14,774 $20,254
5/31/1999 $14,594 $19,776
6/30/1999 $15,205 $20,873
7/31/1999 $14,959 $20,222
8/31/1999 $15,020 $20,122
9/30/1999 $14,611 $19,571
10/31/1999 $14,849 $20,809
11/30/1999 $15,038 $21,232
12/31/1999 $15,523 $22,482
1/31/2000 $15,393 $21,352
2/29/2000 $15,033 $20,948
3/31/2000 $16,341 $22,996
4/30/2000 $16,535 $22,305
5/31/2000 $16,602 $21,848
6/30/2000 $16,836 $22,387
7/31/2000 $16,575 $22,037
8/31/2000 $17,303 $23,405
9/30/2000 $16,589 $22,170
10/31/2000 $16,809 $22,076
11/30/2000 $16,373 $20,337
12/31/2000 $16,692 $20,437
1/31/2001 $17,007 $21,161
2/28/2001 $16,154 $19,233
3/31/2001 $14,958 $18,015
4/30/2001 $16,163 $19,414
5/31/2001 $16,411 $19,544
6/30/2001 $15,658 $19,069
7/31/2001 $15,620 $18,881
8/31/2001 $14,910 $17,700
9/30/2001 $13,252 $16,271
10/31/2001 $13,695 $16,581
11/30/2001 $14,996 $17,853
12/31/2001 $15,112 $18,010
1/31/2002 $14,896 $17,747
2/28/2002 $14,790 $17,405
3/31/2002 $15,303 $18,059
4/30/2002 $14,335 $16,965
5/31/2002 $14,052 $16,840
6/30/2002 $12,992 $15,641
7/31/2002 $11,822 $14,422
8/31/2002 $11,846 $14,517
9/30/2002 $10,556 $12,940
10/31/2002 $11,289 $14,078
11/30/2002 $12,061 $14,906
12/31/2002 $11,432 $14,031
1/31/2003 $10,995 $13,664
2/28/2003 $10,745 $13,459
3/31/2003 $10,745 $13,588
4/30/2003 $11,528 $14,708
5/31/2003 $12,282 $15,482
6/30/2003 $12,647 $15,680
7/31/2003 $13,022 $15,956
8/31/2003 $13,310 $16,267
9/30/2003 $12,906 $16,095
10/31/2003 $13,670 $17,005
11/30/2003 $13,843 $17,154
12/31/2003 $14,636 $18,053
1/31/2004 $14,857 $18,384
2/29/2004 $14,924 $18,640
3/31/2004 $14,578 $18,359
4/30/2004 $14,587 $18,071
5/31/2004 $14,823 $18,318
6/30/2004 $15,429 $18,674
7/31/2004 $14,616 $18,056
8/31/2004 $14,491 $18,129
9/30/2004 $14,703 $18,325
10/31/2004 $14,881 $18,605
11/30/2004 $15,751 $19,358
12/31/2004 $16,289 $20,016
1/31/2005 $15,730 $19,528
2/28/2005 $16,005 $19,939
3/31/2005 $15,986 $19,586
4/30/2005 $15,605 $19,215
5/31/2005 $16,222 $19,826
6/30/2005 $16,044 $19,854
7/31/2005 $16,882 $20,592
8/31/2005 $16,820 $20,405
9/30/2005 $16,786 $20,570
10/31/2005 $16,656 $20,227
11/30/2005 $17,465 $20,991
12/31/2005 $17,651 $20,998
1/31/2006 $17,829 $21,554
2/28/2006 $18,071 $21,613
3/31/2006 $18,495 $21,882
4/30/2006 $18,640 $22,175
5/31/2006 $18,235 $21,538
6/30/2006 $18,128 $21,566
7/31/2006 $17,916 $21,699
8/31/2006 $18,341 $22,215
9/30/2006 $18,877 $22,787
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------
CLASS A 9/30/06
- ----------------------------------------------------
1-Year +6.00%
- ----------------------------------------------------
5-Year +6.07%
- ----------------------------------------------------
10-Year +6.56%
- ----------------------------------------------------
CLASS B (1/1/99-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
DATE FRANKLIN GROWTH FUND S&P 500 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
10/31/2005 $11,439 $10,890
11/30/2005 $11,990 $11,301
12/31/2005 $12,109 $11,306
1/31/2006 $12,226 $11,605
2/28/2006 $12,383 $11,636
3/31/2006 $12,667 $11,781
4/30/2006 $12,756 $11,939
5/31/2006 $12,469 $11,596
6/30/2006 $12,393 $11,611
7/31/2006 $12,239 $11,683
8/31/2006 $12,523 $11,960
9/30/2006 $12,879 $12,268
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------
CLASS B 9/30/06
- ----------------------------------------------------
1-Year +7.62%
- ----------------------------------------------------
5-Year +6.23%
- ----------------------------------------------------
Since Inception (1/1/99) +3.32%
- ----------------------------------------------------
Annual Report | 17
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS C 9/30/06
- --------------------------------------------------
1-Year +10.60%
- --------------------------------------------------
5-Year +6.53%
- --------------------------------------------------
10-Year +6.38%
- --------------------------------------------------
CLASS C (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
DATE FRANKLIN GROWTH FUND S&P 500 5
10/1/1996 $10,000 $10,000
10/31/1996 $10,022 $10,276
11/30/1996 $10,645 $11,052
12/31/1996 $10,423 $10,833
1/31/1997 $10,675 $11,509
2/28/1997 $10,693 $11,600
3/31/1997 $10,419 $11,124
4/30/1997 $10,787 $11,787
5/31/1997 $11,375 $12,504
6/30/1997 $11,577 $13,064
7/31/1997 $12,034 $14,103
8/31/1997 $11,617 $13,314
9/30/1997 $11,980 $14,043
10/31/1997 $11,873 $13,574
11/30/1997 $12,133 $14,202
12/31/1997 $12,266 $14,446
1/31/1998 $12,385 $14,605
2/28/1998 $12,898 $15,658
3/31/1998 $13,168 $16,459
4/30/1998 $13,337 $16,625
5/31/1998 $13,140 $16,339
6/30/1998 $13,378 $17,003
7/31/1998 $13,319 $16,822
8/31/1998 $12,193 $14,392
9/30/1998 $12,865 $15,314
10/31/1998 $13,653 $16,559
11/30/1998 $14,129 $17,562
12/31/1998 $14,428 $18,574
1/31/1999 $14,670 $19,350
2/28/1999 $14,503 $18,749
3/31/1999 $14,884 $19,499
4/30/1999 $15,363 $20,254
5/31/1999 $15,167 $19,776
6/30/1999 $15,795 $20,873
7/31/1999 $15,525 $20,222
8/31/1999 $15,581 $20,122
9/30/1999 $15,144 $19,571
10/31/1999 $15,381 $20,809
11/30/1999 $15,567 $21,232
12/31/1999 $16,064 $22,482
1/31/2000 $15,913 $21,352
2/29/2000 $15,536 $20,948
3/31/2000 $16,875 $22,996
4/30/2000 $17,059 $22,305
5/31/2000 $17,121 $21,848
6/30/2000 $17,352 $22,387
7/31/2000 $17,073 $22,037
8/31/2000 $17,814 $23,405
9/30/2000 $17,069 $22,170
10/31/2000 $17,286 $22,076
11/30/2000 $16,824 $20,337
12/31/2000 $17,143 $20,437
1/31/2001 $17,451 $21,161
2/28/2001 $16,571 $19,233
3/31/2001 $15,330 $18,015
4/30/2001 $16,557 $19,414
5/31/2001 $16,800 $19,544
6/30/2001 $16,020 $19,069
7/31/2001 $15,965 $18,881
8/31/2001 $15,235 $17,700
9/30/2001 $13,531 $16,271
10/31/2001 $13,973 $16,581
11/30/2001 $15,295 $17,853
12/31/2001 $15,402 $18,010
1/31/2002 $15,173 $17,747
2/28/2002 $15,059 $17,405
3/31/2002 $15,566 $18,059
4/30/2002 $14,576 $16,965
5/31/2002 $14,278 $16,840
6/30/2002 $13,193 $15,641
7/31/2002 $11,994 $14,422
8/31/2002 $12,014 $14,517
9/30/2002 $10,701 $12,940
10/31/2002 $11,437 $14,078
11/30/2002 $12,213 $14,906
12/31/2002 $11,566 $14,031
1/31/2003 $11,119 $13,664
2/28/2003 $10,855 $13,459
3/31/2003 $10,850 $13,588
4/30/2003 $11,636 $14,708
5/31/2003 $12,387 $15,482
6/30/2003 $12,745 $15,680
7/31/2003 $13,119 $15,956
8/31/2003 $13,397 $16,267
9/30/2003 $12,984 $16,095
10/31/2003 $13,740 $17,005
11/30/2003 $13,905 $17,154
12/31/2003 $14,696 $18,053
1/31/2004 $14,905 $18,384
2/29/2004 $14,969 $18,640
3/31/2004 $14,611 $18,359
4/30/2004 $14,611 $18,071
5/31/2004 $14,840 $18,318
6/30/2004 $15,437 $18,674
7/31/2004 $14,611 $18,056
8/31/2004 $14,477 $18,129
9/30/2004 $14,681 $18,325
10/31/2004 $14,850 $18,605
11/30/2004 $15,706 $19,358
12/31/2004 $16,233 $20,016
1/31/2005 $15,666 $19,528
2/28/2005 $15,929 $19,939
3/31/2005 $15,904 $19,586
4/30/2005 $15,511 $19,215
5/31/2005 $16,113 $19,826
6/30/2005 $15,929 $19,854
7/31/2005 $16,750 $20,592
8/31/2005 $16,681 $20,405
9/30/2005 $16,636 $20,570
10/31/2005 $16,492 $20,227
11/30/2005 $17,283 $20,991
12/31/2005 $17,457 $20,998
1/31/2006 $17,626 $21,554
2/28/2006 $17,850 $21,613
3/31/2006 $18,263 $21,882
4/30/2006 $18,392 $22,175
5/31/2006 $17,979 $21,538
6/30/2006 $17,865 $21,566
7/31/2006 $17,646 $21,699
8/31/2006 $18,054 $22,215
9/30/2006 $18,566 $22,787
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS R 9/30/06
- --------------------------------------------------
1-Year +12.18%
- --------------------------------------------------
3-Year +13.23%
- --------------------------------------------------
Since Inception (1/1/02) +4.49%
- --------------------------------------------------
CLASS R (1/1/02-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
DATE FRANKLIN GROWTH FUND S&P 500 5
1/1/2002 $10,000 $10,000
1/31/2002 $9,832 $9,854
2/28/2002 $9,759 $9,664
3/31/2002 $10,098 $10,028
4/30/2002 $9,455 $9,420
5/31/2002 $9,265 $9,351
6/30/2002 $8,566 $8,685
7/31/2002 $7,793 $8,008
8/31/2002 $7,806 $8,061
9/30/2002 $6,957 $7,185
10/31/2002 $7,436 $7,817
11/30/2002 $7,946 $8,277
12/31/2002 $7,528 $7,791
1/31/2003 $7,240 $7,587
2/28/2003 $7,071 $7,473
3/31/2003 $7,071 $7,545
4/30/2003 $7,586 $8,167
5/31/2003 $8,080 $8,596
6/30/2003 $8,318 $8,706
7/31/2003 $8,562 $8,860
8/31/2003 $8,750 $9,032
9/30/2003 $8,483 $8,937
10/31/2003 $8,984 $9,442
11/30/2003 $9,095 $9,525
12/31/2003 $9,613 $10,024
1/31/2004 $9,755 $10,208
2/29/2004 $9,799 $10,350
3/31/2004 $9,571 $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 $9,505 $10,066
9/30/2004 $9,640 $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 $10,306 $10,843
2/28/2005 $10,483 $11,071
3/31/2005 $10,467 $10,876
4/30/2005 $10,217 $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
10/31/2005 $10,889 $11,231
11/30/2005 $11,416 $11,655
12/31/2005 $11,534 $11,660
1/31/2006 $11,651 $11,968
2/28/2006 $11,804 $12,001
3/31/2006 $12,083 $12,150
4/30/2006 $12,172 $12,313
5/31/2006 $11,906 $11,959
6/30/2006 $11,836 $11,975
7/31/2006 $11,693 $12,049
8/31/2006 $11,969 $12,335
9/30/2006 $12,315 $12,653
18 | Annual Report
Performance Summary (CONTINUED)
ADVISOR CLASS (10/1/96-9/30/06) 4
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
DATE FRANKLIN GROWTH FUND S&P 500 5
10/1/1996 $10,000 $10,000
10/31/1996 $10,026 $10,276
11/30/1996 $10,657 $11,052
12/31/1996 $10,442 $10,833
1/31/1997 $10,793 $11,509
2/28/1997 $10,820 $11,600
3/31/1997 $10,555 $11,124
4/30/1997 $10,932 $11,787
5/31/1997 $11,535 $12,504
6/30/1997 $11,751 $13,064
7/31/1997 $12,222 $14,103
8/31/1997 $11,813 $13,314
9/30/1997 $12,190 $14,043
10/31/1997 $12,087 $13,574
11/30/1997 $12,371 $14,202
12/31/1997 $12,512 $14,446
1/31/1998 $12,646 $14,605
2/28/1998 $13,177 $15,658
3/31/1998 $13,469 $16,459
4/30/1998 $13,648 $16,625
5/31/1998 $13,460 $16,339
6/30/1998 $13,714 $17,003
7/31/1998 $13,667 $16,822
8/31/1998 $12,517 $14,392
9/30/1998 $13,224 $15,314
10/31/1998 $14,041 $16,559
11/30/1998 $14,549 $17,562
12/31/1998 $14,867 $18,574
1/31/1999 $15,131 $19,350
2/28/1999 $14,971 $18,749
3/31/1999 $15,377 $19,499
4/30/1999 $15,878 $20,254
5/31/1999 $15,694 $19,776
6/30/1999 $16,355 $20,873
7/31/1999 $16,091 $20,222
8/31/1999 $16,162 $20,122
9/30/1999 $15,722 $19,571
10/31/1999 $15,982 $20,809
11/30/1999 $16,190 $21,232
12/31/1999 $16,717 $22,482
1/31/2000 $16,577 $21,352
2/29/2000 $16,195 $20,948
3/31/2000 $17,607 $22,996
4/30/2000 $17,816 $22,305
5/31/2000 $17,893 $21,848
6/30/2000 $18,155 $22,387
7/31/2000 $17,873 $22,037
8/31/2000 $18,662 $23,405
9/30/2000 $17,898 $22,170
10/31/2000 $18,140 $22,076
11/30/2000 $17,671 $20,337
12/31/2000 $18,017 $20,437
1/31/2001 $18,361 $21,161
2/28/2001 $17,446 $19,233
3/31/2001 $16,154 $18,015
4/30/2001 $17,461 $19,414
5/31/2001 $17,733 $19,544
6/30/2001 $16,921 $19,069
7/31/2001 $16,885 $18,881
8/31/2001 $16,124 $17,700
9/30/2001 $14,329 $16,271
10/31/2001 $14,813 $16,581
11/30/2001 $16,227 $17,853
12/31/2001 $16,353 $18,010
1/31/2002 $16,120 $17,747
2/28/2002 $16,010 $17,405
3/31/2002 $16,571 $18,059
4/30/2002 $15,523 $16,965
5/31/2002 $15,222 $16,840
6/30/2002 $14,075 $15,641
7/31/2002 $12,808 $14,422
8/31/2002 $12,840 $14,517
9/30/2002 $11,444 $12,940
10/31/2002 $12,243 $14,078
11/30/2002 $13,083 $14,906
12/31/2002 $12,401 $14,031
1/31/2003 $11,932 $13,664
2/28/2003 $11,661 $13,459
3/31/2003 $11,666 $13,588
4/30/2003 $12,516 $14,708
5/31/2003 $13,339 $15,482
6/30/2003 $13,735 $15,680
7/31/2003 $14,147 $15,956
8/31/2003 $14,460 $16,267
9/30/2003 $14,027 $16,095
10/31/2003 $14,861 $17,005
11/30/2003 $15,048 $17,154
12/31/2003 $15,919 $18,053
1/31/2004 $16,160 $18,384
2/29/2004 $16,237 $18,640
3/31/2004 $15,861 $18,359
4/30/2004 $15,877 $18,071
5/31/2004 $16,138 $18,318
6/30/2004 $16,797 $18,674
7/31/2004 $15,919 $18,056
8/31/2004 $15,782 $18,129
9/30/2004 $16,018 $18,325
10/31/2004 $16,217 $18,605
11/30/2004 $17,169 $19,358
12/31/2004 $17,755 $20,016
1/31/2005 $17,151 $19,528
2/28/2005 $17,455 $19,939
3/31/2005 $17,439 $19,586
4/30/2005 $17,025 $19,215
5/31/2005 $17,702 $19,826
6/30/2005 $17,513 $19,854
7/31/2005 $18,427 $20,592
8/31/2005 $18,370 $20,405
9/30/2005 $18,332 $20,570
10/31/2005 $18,196 $20,227
11/30/2005 $19,079 $20,991
12/31/2005 $19,290 $20,998
1/31/2006 $19,490 $21,554
2/28/2006 $19,754 $21,613
3/31/2006 $20,229 $21,882
4/30/2006 $20,387 $22,175
5/31/2006 $19,944 $21,538
6/30/2006 $19,838 $21,566
7/31/2006 $19,612 $21,699
8/31/2006 $20,081 $22,215
9/30/2006 $20,666 $22,787
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
ADVISOR CLASS 4 9/30/06
- --------------------------------------------------
1-Year +12.73%
- --------------------------------------------------
5-Year +7.60%
- --------------------------------------------------
10-Year +7.53%
- --------------------------------------------------
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. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN
STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
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 +97.91% and +7.25%.
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 | 19
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 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.
20 | 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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,020.60 $4.56
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.56 $4.56
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,016.70 $8.39
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.39
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,016.60 $8.39
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.39
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,019.20 $5.87
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87
- ---------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,021.60 $3.34
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.76 $3.35
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.90%; B: 1.66%; C: 1.66%; R: 1.16%; and Advisor: 0.66%), multiplied by
the average account value over the period, multiplied by 183/365 to
reflect the one-half year period.
Annual Report | 21
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, 2006.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +9.73% cumulative total return for the
12 months under review. The Fund underperformed the equity benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +10.78%; outperformed the
fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which
returned +3.67%; and outperformed its peers as measured by the Lipper
Mixed-Asset Target Allocation Moderate Funds Classification Average, which
returned +7.33%, for the same period. 1 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 28.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2006, the U.S. economy advanced at a
moderate pace. After a slow fourth quarter 2005, gross domestic product grew an
annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates
of 2.6% in the second quarter and 1.6% in the third quarter.
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 securities
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 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 Mixed-Asset Target Allocation
Moderate Funds Classification Average is calculated by averaging the total
returns of all funds within the Lipper Mixed-Asset Target Allocation
Moderate Funds classification in the Lipper Open-End underlying funds
universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined
as funds that, by portfolio practice, maintain a mix of between 40%-60%
equity securities, with the remainder invested in bonds, cash and cash
equivalents. For the 12-month period ended 9/30/06, there were 400 funds
in this category. Lipper calculations do not include sales charges or
expense subsidization by a fund's manager. The Fund's performance relative
to the average may have differed if these and other factors had been
considered. Past performance does not guarantee future results. 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.
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 83.
22 | Annual Report
Growth was driven by corporate profits, and consumer and government spending.
Export growth picked up some momentum, but a wide trade deficit remained.
Employment generally increased and the unemployment rate fell from 5.1% to
4.6%. 2 Although labor costs rose during the reporting period, hiring increased
in many industries and personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices were volatile and declined from a record high of $77 per barrel in July
to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer
confidence and spending remained strong but could weaken with the impact of
higher prices. As home price appreciation slowed, borrowing against home equity
flattened and could have a gradual effect on consumer spending. Inflation was
also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12
months ended September 30, 2006, which was higher than the 2.2% 10-year
average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 3.75% to 5.25%. In August and September, the Fed left the
rate unchanged, citing moderate economic growth, a cooling housing market, and
the lagging effect of prior tightening. The Fed stated that some inflation risk
may remain and the extent and timing of any additional interest rate hikes will
depend upon incoming data on inflation and economic growth.
In this environment, equity markets experienced dramatic rallies late in the
period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted
a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while
the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 4
Telecommunications, materials and financials stocks performed particularly well.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
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. Please 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 | 23
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/05-9/30/06
- -----------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------------
October 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------------------------
November 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------------------------------
December 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents
- -----------------------------------------------------------------------------------------------------------------
January 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents
- -----------------------------------------------------------------------------------------------------------------
February 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.14 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
March 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
April 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
May 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
June 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
July 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
August 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------------------------------
September 1.13 cents 0.96 cents 1.02 cents 1.02 cents 1.06 cents 1.16 cents
- -----------------------------------------------------------------------------------------------------------------
TOTAL 14.53 CENTS 12.42 CENTS 13.27 CENTS 13.30 CENTS 13.67 CENTS 14.89 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.
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.
MANAGER'S DISCUSSION
During the 12 months under review, the Fund's performance relative to the gains
experienced in the overall U.S. equity market can be attributed to several
factors. Significant investments in the health care and communications sectors,
as well as strong performance from high yield electric utility and finance
stocks, aided
24 | Annual Report
Fund performance. 5 Our emphasis on high yield corporate bonds helped offset
modestly higher long-term interest rates during the period and drove the Fund's
favorable performance relative to the overall fixed income market, as measured
by the LB U.S. Aggregate Index.
At period-end, we had approximately 49% of the Fund's total net assets invested
in equity securities including common stocks and convertible preferred stocks,
about 48% in fixed income securities, and less than 2% in short-term investments
and other net assets. During the Fund's fiscal year, short- and long-term
interest rates rose relatively quickly, which provided us an attractive
opportunity to increase the Fund's fixed income holdings. At the beginning of
the reporting period, the Fund had approximately 53% invested in common stocks
and convertible preferred stocks, 41% in fixed income securities, and 5% in
short-term investments and other net assets.
The Fund held a significant amount of its total net assets in
below-investment-grade corporate debt during the period due to our assessment of
the attractive risk-reward tradeoff relative to other fixed income asset
classes. During the period, higher coupon payments and tightening credit
spreads, or yields over benchmark U.S. Treasury securities, contributed to the
strong performance of high yield bonds, as represented by the +8.07% total
return of the LB U.S. High Yield Index, relative to the +3.67% total return of
the LB U.S. Aggregate Index. 6 The spread declined from 3.69 percentage points
on September 30, 2005, to 3.52 percentage points at period-end. 6 This decline
in average spread, which represents the amount of incremental yield required to
compensate investors for credit risk, helped mitigate the effect of rising
interest rates on the Fund's investments. A number of significant bond holdings,
including Allied Waste North America, Case New Holland and General Motors
Acceptance Corp., experienced price appreciation in addition to providing income
over the 12-month period.
Contributors to Fund performance included health care sector investments,
particularly common stock of some major pharmaceutical companies. Despite
near-term challenges presented by drug patent disputes and expirations, generic
drug competition, and drug liability issues, we found, based on our analysis,
that the sector offered an attractive longer-term opportunity given
above-average dividend yields, strong investment grade-rated balance sheets, and
low valuations relative to historical ranges. During the period, the sector
showed early signs of long-term, fundamental improvement from operational
restructurings, cost reductions and drug development. Several investments
performed well, including
5. The health care sector comprises health technology and health services in
the SOI.
6. Sources: Lehman Brothers, Inc.; Standard & Poor's Micropal. The LB High
Yield Index covers the universe of fixed rate, noninvestment-grade debt.
The index includes both corporate and non-corporate sectors. Please see
footnote 1 for a description of the LB U.S. Aggregate Index.
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
9/30/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Pfizer Inc. 2.8%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Merck & Co. Inc. 2.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Bank of America Corp. 2.4%
FINANCE
- --------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 2.2%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
FirstEnergy Corp. 1.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
TOP 5 BOND HOLDINGS*
Franklin Income Fund
9/30/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
General Motors Acceptance Corp. 3.8%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Ford Motor Credit Corp. 3.6%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Tenet Healthcare Corp. 2.6%
HEALTH SERVICES
- --------------------------------------------------------------------------------
Allied Waste North America Inc. 1.8%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
TXU Corp. 1.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
* Does not include convertible bonds.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Corporate Straight Bonds 42.6%
Utilities Stocks 17.6%
Health Technology Stocks 8.5%
Finance Stocks 6.6%
Energy Minerals Stocks 4.6%
U.S. Government & Agency Securities 3.7%
Communications Stocks 3.3%
Corporate Convertible Bonds 2.4%
Electronic Technology Stocks 2.0%
Producer Manufacturing Stocks 1.7%
Industrial Services Stocks 1.4%
Gas Distributors Stocks 1.3%
Other 2.6%
Short-Term Investments & Other Net Assets 1.7%
Merck, Pfizer and Wyeth. We increased our stake in Johnson & Johnson in light of
its leading position in a wide range of health care segments including
pharmaceuticals, consumer products, medical devices and diagnostic markets.
During the period Johnson & Johnson increased its dividend 13.6%.
The Fund's telecommunication services industry exposure helped performance,
particularly our investment in BellSouth, which appreciated significantly
following its announced merger with AT&T. 7 The telecommunication services
industry's strong relative performance can be attributed in part to optimism
regarding recent consolidation and resulting prospects for improved financial
performance reflecting the benefits of scale and network synergies. A recent
initiative to broaden product platforms to include video services offered
telecommunications companies the potential to improve and expand their services
to consumers, which may ultimately benefit companies' financial performance and
the industry's competitive position. Although in its early stages, the
initiative may create the opportunity to offer consumers an array of services
including local and long-distance telephone, wireless phone, high-speed
Internet, and television, which could provide a long-term competitive advantage
over other services providers. During the period, the Fund's Verizon
Communications position also benefited Fund performance.
The Fund's large weighting in the electric utilities sector helped Fund
performance during the period. Utilities, as measured by the S&P 500 Utilities
Index, returned +6.28% during the 12-month period. 8 Despite pressure from
rising long-term interest rates, utility stocks benefited from
above-market-average dividend yields and, what were, in our assessment,
reasonable valuations relative to prospects for future earnings and dividend
growth. One of our major investment themes is seeking utilities we believe can
grow their dividends at above-average rates, which can help offset a rise in
interest rates. At period-end, 23 of the Fund's 31 utility common stock
investments were in companies that increased dividends in the past fiscal year.
The remaining eight maintained their dividends. Examples of companies that
increased their dividends include FirstEnergy, which paid a $1.78 dividend, up
from $1.6125, and Alliant Energy, which distributed $1.125 in dividends, 7.1%
more than the previous $1.05 dividend. During the reporting period, these two
companies were among the Fund's top performing holdings.
The Fund also had several detractors from performance. Despite significant
long-term asset value, independent power producer Calpine sought bankruptcy
court protection on December 21, 2005, as fundamental conditions failed to
improve quickly enough for the company to address a highly leveraged balance
7. Telecommunication services holdings are in the communications sector in
the SOI.
8. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a
market capitalization-weighted index that includes electric utility stocks
in the S&P 500.
26 | Annual Report
sheet. The default hindered Fund performance as the value of the Fund's
investment in Calpine's senior convertible and nonconvertible unsecured notes
declined in value, but the decline was partially offset by strength in our
second-priority lien-secured notes. By period-end, the value of Calpine debt
recovered somewhat from lows reached in late 2005.
Energy sector performance was volatile during the period as commodity prices
fluctuated following substantial increases at the end of 2005. Last year's
hurricane-induced supply disruptions were gradually replaced with increasing
supplies and inventories as demand fell below expectations due to a
warmer-than-expected winter season. Crude oil prices declined from $66 per
barrel at the beginning of the period to $63 per barrel at period-end. Natural
gas prices declined from $14 to $4 per million British thermal units (BTUs).
Several energy sector holdings underperformed the Fund and overall market,
including BP and Royal Dutch Shell, which hindered the Fund's results.
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, 2006, 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 INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 27
Performance Summary as of 9/30/06
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
that a shareholder would pay 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 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $2.57 $2.50
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1453
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1605
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBICX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $2.56 $2.49
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1242
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1394
- --------------------------------------------------------------------------------
CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $2.57 $2.50
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1327
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1479
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCISX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.08 $2.59 $2.51
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1330
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1482
- --------------------------------------------------------------------------------
28 | Annual Report
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FISRX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $2.55 $2.48
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1367
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1519
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $2.56 $2.49
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1489
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0062
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.1641
- --------------------------------------------------------------------------------
Annual Report | 29
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25%
MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND
MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.73% +71.84% +147.26%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.11% +10.43% +9.01%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,511 $16,424 $23,695
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 5.06%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.20%
- ---------------------------------------------------------------------------------------------
CLASS B 1-YEAR 3-YEAR INCEPTION (11/1/01)
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.83% +36.63% +63.21%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +4.83% +10.15% +10.21%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,483 $13,363 $16,121
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 4.50%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.59%
- ---------------------------------------------------------------------------------------------
CLASS B1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.17% +67.59% +92.04%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.17% +10.61% +8.79%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,517 $16,559 $19,204
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 4.76%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.94%
- ---------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.56% +67.85% +136.32%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.56% +10.91% +8.98%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,856 $16,785 $23,632
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 4.73%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.93%
- ---------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.43% +38.92% +62.12%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +9.43% +11.58% +10.73%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,943 $13,892 $16,212
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 4.99%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.08%
- ---------------------------------------------------------------------------------------------
ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.94% +72.72% +152.70%
- ---------------------------------------------------------------------------------------------
Average Annual Total Return 2 +9.94% +11.55% +9.71%
- ---------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,994 $17,272 $25,270
- ---------------------------------------------------------------------------------------------
Distribution Rate 4 5.44%
- ---------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.59%
- ---------------------------------------------------------------------------------------------
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.
30 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
10/1/1996 $9,583 $10,000 $10,000 $10,000
10/31/1996 $9,772 $10,276 $10,222 $10,220
11/30/1996 $10,004 $11,052 $10,397 $10,665
12/31/1996 $10,068 $10,833 $10,300 $10,597
1/31/1997 $10,218 $11,509 $10,331 $10,861
2/28/1997 $10,326 $11,600 $10,357 $10,914
3/31/1997 $10,087 $11,124 $10,242 $10,650
4/30/1997 $10,152 $11,787 $10,396 $10,886
5/31/1997 $10,482 $12,504 $10,494 $11,324
6/30/1997 $10,682 $13,064 $10,619 $11,643
7/31/1997 $10,971 $14,103 $10,905 $12,213
8/31/1997 $10,904 $13,314 $10,812 $11,916
9/30/1997 $11,243 $14,043 $10,971 $12,374
10/31/1997 $11,083 $13,574 $11,130 $12,173
11/30/1997 $11,425 $14,202 $11,182 $12,356
12/31/1997 $11,764 $14,446 $11,294 $12,548
1/31/1998 $11,647 $14,605 $11,439 $12,605
2/28/1998 $11,811 $15,658 $11,431 $13,059
3/31/1998 $12,167 $16,459 $11,470 $13,417
4/30/1998 $12,000 $16,625 $11,530 $13,476
5/31/1998 $11,880 $16,339 $11,639 $13,371
6/30/1998 $11,904 $17,003 $11,738 $13,525
7/31/1998 $11,685 $16,822 $11,763 $13,357
8/31/1998 $10,929 $14,392 $11,954 $12,260
9/30/1998 $11,493 $15,314 $12,234 $12,683
10/31/1998 $11,518 $16,559 $12,170 $13,104
11/30/1998 $11,891 $17,562 $12,239 $13,546
12/31/1998 $11,876 $18,574 $12,275 $13,943
1/31/1999 $11,699 $19,350 $12,363 $14,106
2/28/1999 $11,367 $18,749 $12,147 $13,760
3/31/1999 $11,547 $19,499 $12,215 $14,027
4/30/1999 $12,141 $20,254 $12,253 $14,479
5/31/1999 $12,219 $19,776 $12,146 $14,291
6/30/1999 $12,193 $20,873 $12,107 $14,615
7/31/1999 $12,061 $20,222 $12,056 $14,406
8/31/1999 $12,088 $20,122 $12,050 $14,256
9/30/1999 $11,955 $19,571 $12,189 $14,100
10/31/1999 $11,928 $20,809 $12,234 $14,439
11/30/1999 $11,739 $21,232 $12,234 $14,624
12/31/1999 $11,788 $22,482 $12,175 $15,088
1/31/2000 $11,872 $21,352 $12,135 $14,724
2/29/2000 $11,678 $20,948 $12,281 $14,796
3/31/2000 $11,873 $22,996 $12,443 $15,462
4/30/2000 $12,296 $22,305 $12,408 $15,188
5/31/2000 $12,494 $21,848 $12,402 $15,044
6/30/2000 $12,580 $22,387 $12,660 $15,347
7/31/2000 $12,723 $22,037 $12,775 $15,274
8/31/2000 $13,447 $23,405 $12,960 $15,910
9/30/2000 $13,709 $22,170 $13,041 $15,588
10/31/2000 $13,504 $22,076 $13,128 $15,482
11/30/2000 $13,414 $20,337 $13,342 $14,886
12/31/2000 $14,215 $20,437 $13,590 $15,296
1/31/2001 $14,187 $21,161 $13,812 $15,614
2/28/2001 $14,460 $19,233 $13,933 $14,997
3/31/2001 $14,245 $18,015 $14,002 $14,495
4/30/2001 $14,524 $19,414 $13,944 $15,093
5/31/2001 $14,803 $19,544 $14,028 $15,172
6/30/2001 $14,459 $19,069 $14,081 $14,973
7/31/2001 $14,301 $18,881 $14,396 $14,924
8/31/2001 $14,460 $17,700 $14,561 $14,560
9/30/2001 $13,789 $16,271 $14,731 $13,791
10/31/2001 $13,885 $16,581 $15,039 $14,065
11/30/2001 $14,176 $17,853 $14,832 $14,549
12/31/2001 $14,308 $18,010 $14,738 $14,651
1/31/2002 $14,406 $17,747 $14,857 $14,522
2/28/2002 $14,506 $17,405 $15,001 $14,409
3/31/2002 $14,940 $18,059 $14,751 $14,714
4/30/2002 $15,028 $16,965 $15,037 $14,480
5/31/2002 $14,980 $16,840 $15,165 $14,443
6/30/2002 $14,046 $15,641 $15,296 $13,866
7/31/2002 $13,381 $14,422 $15,481 $13,202
8/31/2002 $13,817 $14,517 $15,742 $13,336
9/30/2002 $13,212 $12,940 $15,997 $12,630
10/31/2002 $13,303 $14,078 $15,924 $13,047
11/30/2002 $14,028 $14,906 $15,920 $13,507
12/31/2002 $14,156 $14,031 $16,249 $13,244
1/31/2003 $14,247 $13,664 $16,263 $13,080
2/28/2003 $14,053 $13,459 $16,488 $13,012
3/31/2003 $14,364 $13,588 $16,475 $13,069
4/30/2003 $15,262 $14,708 $16,611 $13,720
5/31/2003 $16,092 $15,482 $16,921 $14,291
6/30/2003 $16,409 $15,680 $16,887 $14,412
7/31/2003 $16,208 $15,956 $16,319 $14,408
8/31/2003 $16,455 $16,267 $16,428 $14,621
9/30/2003 $16,928 $16,095 $16,863 $14,707
10/31/2003 $17,404 $17,005 $16,705 $15,134
11/30/2003 $17,655 $17,154 $16,745 $15,287
12/31/2003 $18,539 $18,053 $16,916 $15,785
1/31/2004 $18,793 $18,384 $17,052 $15,987
2/29/2004 $18,817 $18,640 $17,236 $16,176
3/31/2004 $18,840 $18,359 $17,365 $16,138
4/30/2004 $18,549 $18,071 $16,914 $15,777
5/31/2004 $18,493 $18,318 $16,846 $15,824
6/30/2004 $18,756 $18,674 $16,941 $16,043
7/31/2004 $18,860 $18,056 $17,109 $15,786
8/31/2004 $19,285 $18,129 $17,435 $15,928
9/30/2004 $19,552 $18,325 $17,483 $16,111
10/31/2004 $19,819 $18,605 $17,629 $16,314
11/30/2004 $20,252 $19,358 $17,489 $16,722
12/31/2004 $20,796 $20,016 $17,650 $17,108
1/31/2005 $20,407 $19,528 $17,760 $16,896
2/28/2005 $20,928 $19,939 $17,656 $17,119
3/31/2005 $20,529 $19,586 $17,565 $16,890
4/30/2005 $20,214 $19,215 $17,803 $16,726
5/31/2005 $20,658 $19,826 $17,995 $17,047
6/30/2005 $21,275 $19,854 $18,093 $17,190
7/31/2005 $21,723 $20,592 $17,929 $17,529
8/31/2005 $21,659 $20,405 $18,159 $17,566
9/30/2005 $21,594 $20,570 $17,971 $17,636
10/31/2005 $20,921 $20,227 $17,829 $17,354
11/30/2005 $20,856 $20,991 $17,908 $17,706
12/31/2005 $21,181 $20,998 $18,078 $17,857
1/31/2006 $21,823 $21,554 $18,079 $18,282
2/28/2006 $22,019 $21,613 $18,139 $18,291
3/31/2006 $22,126 $21,882 $17,961 $18,435
4/30/2006 $22,414 $22,175 $17,929 $18,625
5/31/2006 $22,342 $21,538 $17,910 $18,256
6/30/2006 $22,542 $21,566 $17,948 $18,264
7/31/2006 $23,108 $21,699 $18,190 $18,379
8/31/2006 $23,493 $22,215 $18,469 $18,678
9/30/2006 $23,695 $22,787 $18,631 $18,923
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS A 9/30/06
- -----------------------------------------------
1-Year +5.11%
- -----------------------------------------------
5-Year +10.43%
- -----------------------------------------------
10-Year +9.01%
- -----------------------------------------------
CLASS B (11/1/01-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
11/1/2001 $10,000 $10,000 $10,000 $10,000
11/30/2001 $10,186 $10,767 $9,862 $10,344
12/31/2001 $10,229 $10,861 $9,799 $10,416
1/31/2002 $10,344 $10,703 $9,879 $10,325
2/28/2002 $10,411 $10,496 $9,975 $10,244
3/31/2002 $10,671 $10,891 $9,809 $10,461
4/30/2002 $10,774 $10,231 $9,999 $10,295
5/31/2002 $10,731 $10,156 $10,084 $10,268
6/30/2002 $10,006 $9,433 $10,171 $9,859
7/31/2002 $9,571 $8,698 $10,294 $9,386
8/31/2002 $9,875 $8,755 $10,468 $9,481
9/30/2002 $9,437 $7,804 $10,637 $8,980
10/31/2002 $9,445 $8,490 $10,589 $9,276
11/30/2002 $9,955 $8,990 $10,586 $9,603
12/31/2002 $10,091 $8,462 $10,804 $9,416
1/31/2003 $10,098 $8,241 $10,814 $9,299
2/28/2003 $10,004 $8,117 $10,963 $9,251
3/31/2003 $10,167 $8,195 $10,955 $9,292
4/30/2003 $10,851 $8,870 $11,045 $9,754
5/31/2003 $11,382 $9,337 $11,251 $10,160
6/30/2003 $11,653 $9,456 $11,229 $10,247
7/31/2003 $11,502 $9,623 $10,851 $10,243
8/31/2003 $11,671 $9,810 $10,923 $10,395
9/30/2003 $11,944 $9,706 $11,213 $10,456
10/31/2003 $12,273 $10,255 $11,108 $10,760
11/30/2003 $12,496 $10,345 $11,135 $10,868
12/31/2003 $13,057 $10,887 $11,248 $11,223
1/31/2004 $13,228 $11,087 $11,338 $11,366
2/29/2004 $13,290 $11,241 $11,461 $11,500
3/31/2004 $13,242 $11,072 $11,547 $11,474
4/30/2004 $13,082 $10,898 $11,247 $11,217
5/31/2004 $12,979 $11,048 $11,201 $11,251
6/30/2004 $13,210 $11,262 $11,265 $11,406
7/31/2004 $13,219 $10,890 $11,376 $11,223
8/31/2004 $13,508 $10,933 $11,593 $11,324
9/30/2004 $13,687 $11,052 $11,625 $11,455
10/31/2004 $13,866 $11,220 $11,722 $11,599
11/30/2004 $14,160 $11,674 $11,629 $11,889
12/31/2004 $14,531 $12,071 $11,736 $12,164
1/31/2005 $14,306 $11,777 $11,810 $12,013
2/28/2005 $14,602 $12,025 $11,740 $12,171
3/31/2005 $14,313 $11,812 $11,680 $12,008
4/30/2005 $14,082 $11,588 $11,838 $11,892
5/31/2005 $14,381 $11,957 $11,966 $12,120
6/30/2005 $14,803 $11,974 $12,031 $12,222
7/31/2005 $15,107 $12,419 $11,921 $12,463
8/31/2005 $15,053 $12,306 $12,074 $12,489
9/30/2005 $14,996 $12,405 $11,950 $12,539
10/31/2005 $14,516 $12,198 $11,855 $12,338
11/30/2005 $14,459 $12,659 $11,908 $12,589
12/31/2005 $14,675 $12,664 $12,021 $12,696
1/31/2006 $15,111 $12,999 $12,022 $12,998
2/28/2006 $15,236 $13,034 $12,062 $13,004
3/31/2006 $15,300 $13,196 $11,943 $13,107
4/30/2006 $15,488 $13,374 $11,922 $13,242
5/31/2006 $15,427 $12,989 $11,909 $12,980
6/30/2006 $15,555 $13,006 $11,934 $12,985
7/31/2006 $15,936 $13,086 $12,095 $13,067
8/31/2006 $16,191 $13,397 $12,281 $13,280
9/30/2006 $16,121 $13,742 $12,388 $13,454
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS B 9/30/06
- --------------------------------------------
1-Year +4.83%
- --------------------------------------------
3-Year +10.15%
- --------------------------------------------
Since Inception (11/1/01) +10.21%
- --------------------------------------------
Annual Report | 31
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B1 9/30/06
- ---------------------------------------------
1-Year +5.17%
- ---------------------------------------------
5-Year +10.61%
- ---------------------------------------------
Since Inception (1/1/99) +8.79%
- ---------------------------------------------
CLASS B1 (1/1/99-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $9,851 $10,418 $10,071 $10,117
2/28/1999 $9,568 $10,094 $9,896 $9,869
3/31/1999 $9,717 $10,498 $9,950 $10,061
4/30/1999 $10,213 $10,905 $9,982 $10,385
5/31/1999 $10,230 $10,647 $9,894 $10,250
6/30/1999 $10,248 $11,238 $9,863 $10,482
7/31/1999 $10,133 $10,887 $9,821 $10,332
8/31/1999 $10,150 $10,834 $9,816 $10,225
9/30/1999 $10,035 $10,537 $9,930 $10,112
10/31/1999 $10,009 $11,203 $9,967 $10,356
11/30/1999 $9,845 $11,431 $9,966 $10,489
12/31/1999 $9,883 $12,104 $9,918 $10,821
1/31/2000 $9,949 $11,496 $9,885 $10,560
2/29/2000 $9,782 $11,279 $10,005 $10,612
3/31/2000 $9,941 $12,381 $10,137 $11,090
4/30/2000 $10,290 $12,009 $10,108 $10,893
5/31/2000 $10,452 $11,763 $10,103 $10,790
6/30/2000 $10,519 $12,053 $10,313 $11,007
7/31/2000 $10,633 $11,865 $10,407 $10,955
8/31/2000 $11,233 $12,601 $10,558 $11,411
9/30/2000 $11,448 $11,936 $10,624 $11,180
10/31/2000 $11,271 $11,886 $10,694 $11,104
11/30/2000 $11,242 $10,949 $10,869 $10,677
12/31/2000 $11,856 $11,003 $11,071 $10,970
1/31/2001 $11,827 $11,393 $11,252 $11,199
2/28/2001 $12,051 $10,355 $11,350 $10,756
3/31/2001 $11,867 $9,699 $11,407 $10,396
4/30/2001 $12,093 $10,453 $11,360 $10,825
5/31/2001 $12,321 $10,523 $11,428 $10,881
6/30/2001 $12,030 $10,267 $11,471 $10,739
7/31/2001 $11,894 $10,166 $11,728 $10,703
8/31/2001 $12,021 $9,530 $11,862 $10,442
9/30/2001 $11,460 $8,760 $12,000 $9,891
10/31/2001 $11,535 $8,927 $12,251 $10,088
11/30/2001 $11,772 $9,612 $12,082 $10,435
12/31/2001 $11,877 $9,696 $12,006 $10,508
1/31/2002 $11,954 $9,555 $12,103 $10,415
2/28/2002 $12,031 $9,371 $12,220 $10,334
3/31/2002 $12,388 $9,723 $12,017 $10,553
4/30/2002 $12,455 $9,134 $12,250 $10,385
5/31/2002 $12,410 $9,067 $12,354 $10,358
6/30/2002 $11,630 $8,421 $12,461 $9,945
7/31/2002 $11,074 $7,765 $12,611 $9,469
8/31/2002 $11,429 $7,816 $12,824 $9,564
9/30/2002 $10,925 $6,967 $13,032 $9,058
10/31/2002 $10,995 $7,580 $12,972 $9,357
11/30/2002 $11,590 $8,025 $12,969 $9,688
12/31/2002 $11,690 $7,554 $13,237 $9,499
1/31/2003 $11,762 $7,357 $13,248 $9,381
2/28/2003 $11,597 $7,246 $13,431 $9,332
3/31/2003 $11,849 $7,316 $13,421 $9,373
4/30/2003 $12,583 $7,919 $13,532 $9,840
5/31/2003 $13,261 $8,335 $13,784 $10,249
6/30/2003 $13,517 $8,442 $13,757 $10,337
7/31/2003 $13,347 $8,591 $13,294 $10,333
8/31/2003 $13,546 $8,758 $13,383 $10,486
9/30/2003 $13,929 $8,665 $13,737 $10,548
10/31/2003 $14,314 $9,155 $13,609 $10,854
11/30/2003 $14,514 $9,236 $13,641 $10,964
12/31/2003 $15,234 $9,720 $13,780 $11,321
1/31/2004 $15,437 $9,898 $13,891 $11,466
2/29/2004 $15,514 $10,036 $14,041 $11,601
3/31/2004 $15,461 $9,884 $14,147 $11,575
4/30/2004 $15,215 $9,729 $13,778 $11,315
5/31/2004 $15,162 $9,863 $13,723 $11,349
6/30/2004 $15,371 $10,054 $13,801 $11,506
7/31/2004 $15,450 $9,722 $13,938 $11,322
8/31/2004 $15,793 $9,761 $14,203 $11,424
9/30/2004 $16,004 $9,866 $14,242 $11,555
10/31/2004 $16,217 $10,017 $14,361 $11,701
11/30/2004 $16,564 $10,422 $14,247 $11,993
12/31/2004 $17,001 $10,777 $14,378 $12,270
1/31/2005 $16,743 $10,514 $14,468 $12,118
2/28/2005 $17,093 $10,735 $14,383 $12,278
3/31/2005 $16,761 $10,545 $14,309 $12,114
4/30/2005 $16,497 $10,345 $14,503 $11,996
5/31/2005 $16,851 $10,674 $14,660 $12,226
6/30/2005 $17,347 $10,690 $14,739 $12,329
7/31/2005 $17,706 $11,087 $14,605 $12,572
8/31/2005 $17,647 $10,986 $14,793 $12,598
9/30/2005 $17,587 $11,075 $14,640 $12,649
10/31/2005 $17,032 $10,890 $14,524 $12,446
11/30/2005 $16,970 $11,301 $14,589 $12,699
12/31/2005 $17,228 $11,306 $14,727 $12,807
1/31/2006 $17,743 $11,605 $14,728 $13,112
2/28/2006 $17,896 $11,636 $14,777 $13,118
3/31/2006 $17,975 $11,781 $14,632 $13,222
4/30/2006 $18,201 $11,939 $14,605 $13,358
5/31/2006 $18,134 $11,596 $14,590 $13,094
6/30/2006 $18,288 $11,611 $14,621 $13,099
7/31/2006 $18,740 $11,683 $14,818 $13,181
8/31/2006 $19,045 $11,960 $15,045 $13,396
9/30/2006 $19,204 $12,268 $15,177 $13,572
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 9/30/06
- ----------------------------------------------
1-Year +8.56%
- ----------------------------------------------
5-Year +10.91%
- ----------------------------------------------
10-Year +8.98%
- ----------------------------------------------
CLASS C (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
10/1/1996 $10,000 $10,000 $10,000 $10,000
10/31/1996 $10,192 $10,276 $10,222 $10,220
11/30/1996 $10,474 $11,052 $10,397 $10,665
12/31/1996 $10,492 $10,833 $10,300 $10,597
1/31/1997 $10,644 $11,509 $10,331 $10,861
2/28/1997 $10,797 $11,600 $10,357 $10,914
3/31/1997 $10,544 $11,124 $10,242 $10,650
4/30/1997 $10,561 $11,787 $10,396 $10,886
5/31/1997 $10,900 $12,504 $10,494 $11,324
6/30/1997 $11,148 $13,064 $10,619 $11,643
7/31/1997 $11,444 $14,103 $10,905 $12,213
8/31/1997 $11,370 $13,314 $10,812 $11,916
9/30/1997 $11,672 $14,043 $10,971 $12,374
10/31/1997 $11,549 $13,574 $11,130 $12,173
11/30/1997 $11,852 $14,202 $11,182 $12,356
12/31/1997 $12,197 $14,446 $11,294 $12,548
1/31/1998 $12,071 $14,605 $11,439 $12,605
2/28/1998 $12,236 $15,658 $11,431 $13,059
3/31/1998 $12,598 $16,459 $11,470 $13,417
4/30/1998 $12,470 $16,625 $11,530 $13,476
5/31/1998 $12,292 $16,339 $11,639 $13,371
6/30/1998 $12,361 $17,003 $11,738 $13,525
7/31/1998 $12,130 $16,822 $11,763 $13,357
8/31/1998 $11,343 $14,392 $11,954 $12,260
9/30/1998 $11,871 $15,314 $12,234 $12,683
10/31/1998 $11,943 $16,559 $12,170 $13,104
11/30/1998 $12,322 $17,562 $12,239 $13,546
12/31/1998 $12,250 $18,574 $12,275 $13,943
1/31/1999 $12,114 $19,350 $12,363 $14,106
2/28/1999 $11,767 $18,749 $12,147 $13,760
3/31/1999 $11,947 $19,499 $12,215 $14,027
4/30/1999 $12,553 $20,254 $12,253 $14,479
5/31/1999 $12,574 $19,776 $12,146 $14,291
6/30/1999 $12,596 $20,873 $12,107 $14,615
7/31/1999 $12,456 $20,222 $12,056 $14,406
8/31/1999 $12,424 $20,122 $12,050 $14,256
9/30/1999 $12,282 $19,571 $12,189 $14,100
10/31/1999 $12,304 $20,809 $12,234 $14,439
11/30/1999 $12,105 $21,232 $12,234 $14,624
12/31/1999 $12,150 $22,482 $12,175 $15,088
1/31/2000 $12,174 $21,352 $12,135 $14,724
2/29/2000 $12,026 $20,948 $12,281 $14,796
3/31/2000 $12,221 $22,996 $12,443 $15,462
4/30/2000 $12,649 $22,305 $12,408 $15,188
5/31/2000 $12,788 $21,848 $12,402 $15,044
6/30/2000 $12,870 $22,387 $12,660 $15,347
7/31/2000 $13,070 $22,037 $12,775 $15,274
8/31/2000 $13,805 $23,405 $12,960 $15,910
9/30/2000 $14,068 $22,170 $13,041 $15,588
10/31/2000 $13,852 $22,076 $13,128 $15,482
11/30/2000 $13,756 $20,337 $13,342 $14,886
12/31/2000 $14,567 $20,437 $13,590 $15,296
1/31/2001 $14,531 $21,161 $13,812 $15,614
2/28/2001 $14,805 $19,233 $13,933 $14,997
3/31/2001 $14,579 $18,015 $14,002 $14,495
4/30/2001 $14,856 $19,414 $13,944 $15,093
5/31/2001 $15,134 $19,544 $14,028 $15,172
6/30/2001 $14,779 $19,069 $14,081 $14,973
7/31/2001 $14,612 $18,881 $14,396 $14,924
8/31/2001 $14,768 $17,700 $14,561 $14,560
9/30/2001 $14,080 $16,271 $14,731 $13,791
10/31/2001 $14,171 $16,581 $15,039 $14,065
11/30/2001 $14,460 $17,853 $14,832 $14,549
12/31/2001 $14,587 $18,010 $14,738 $14,651
1/31/2002 $14,681 $17,747 $14,857 $14,522
2/28/2002 $14,776 $17,405 $15,001 $14,409
3/31/2002 $15,211 $18,059 $14,751 $14,714
4/30/2002 $15,294 $16,965 $15,037 $14,480
5/31/2002 $15,239 $16,840 $15,165 $14,443
6/30/2002 $14,288 $15,641 $15,296 $13,866
7/31/2002 $13,608 $14,422 $15,481 $13,202
8/31/2002 $14,042 $14,517 $15,742 $13,336
9/30/2002 $13,426 $12,940 $15,997 $12,630
10/31/2002 $13,512 $14,078 $15,924 $13,047
11/30/2002 $14,239 $14,906 $15,920 $13,507
12/31/2002 $14,363 $14,031 $16,249 $13,244
1/31/2003 $14,379 $13,664 $16,263 $13,080
2/28/2003 $14,251 $13,459 $16,488 $13,012
3/31/2003 $14,558 $13,588 $16,475 $13,069
4/30/2003 $15,456 $14,708 $16,611 $13,720
5/31/2003 $16,286 $15,482 $16,921 $14,291
6/30/2003 $16,599 $15,680 $16,887 $14,412
7/31/2003 $16,390 $15,956 $16,319 $14,408
8/31/2003 $16,632 $16,267 $16,428 $14,621
9/30/2003 $17,100 $16,095 $16,863 $14,707
10/31/2003 $17,571 $17,005 $16,705 $15,134
11/30/2003 $17,815 $17,154 $16,745 $15,287
12/31/2003 $18,695 $18,053 $16,916 $15,785
1/31/2004 $18,944 $18,384 $17,052 $15,987
2/29/2004 $19,038 $18,640 $17,236 $16,176
3/31/2004 $18,975 $18,359 $17,365 $16,138
4/30/2004 $18,753 $18,071 $16,914 $15,777
5/31/2004 $18,610 $18,318 $16,846 $15,824
6/30/2004 $18,945 $18,674 $16,941 $16,043
7/31/2004 $18,962 $18,056 $17,109 $15,786
8/31/2004 $19,381 $18,129 $17,435 $15,928
9/30/2004 $19,639 $18,325 $17,483 $16,111
10/31/2004 $19,899 $18,605 $17,629 $16,314
11/30/2004 $20,323 $19,358 $17,489 $16,722
12/31/2004 $20,857 $20,016 $17,650 $17,108
1/31/2005 $20,542 $19,528 $17,760 $16,896
2/28/2005 $20,970 $19,939 $17,656 $17,119
3/31/2005 $20,564 $19,586 $17,565 $16,890
4/30/2005 $20,240 $19,215 $17,803 $16,726
5/31/2005 $20,674 $19,826 $17,995 $17,047
6/30/2005 $21,365 $19,854 $18,093 $17,190
7/31/2005 $21,718 $20,592 $17,929 $17,529
8/31/2005 $21,645 $20,405 $18,159 $17,566
9/30/2005 $21,571 $20,570 $17,971 $17,636
10/31/2005 $20,892 $20,227 $17,829 $17,354
11/30/2005 $20,818 $20,991 $17,908 $17,706
12/31/2005 $21,132 $20,998 $18,078 $17,857
1/31/2006 $21,760 $21,554 $18,079 $18,282
2/28/2006 $21,945 $21,613 $18,139 $18,291
3/31/2006 $22,043 $21,882 $17,961 $18,435
4/30/2006 $22,319 $22,175 $17,929 $18,625
5/31/2006 $22,239 $21,538 $17,910 $18,256
6/30/2006 $22,427 $21,566 $17,948 $18,264
7/31/2006 $23,069 $21,699 $18,190 $18,379
8/31/2006 $23,442 $22,215 $18,469 $18,678
9/30/2006 $23,632 $22,787 $18,631 $18,923
32 | Annual Report
Performance Summary (CONTINUED)
CLASS R (1/1/02-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,069 $9,854 $10,081 $9,912
2/28/2002 $10,136 $9,664 $10,179 $9,835
3/31/2002 $10,390 $10,028 $10,009 $10,043
4/30/2002 $10,448 $9,420 $10,203 $9,883
5/31/2002 $10,412 $9,351 $10,290 $9,858
6/30/2002 $9,709 $8,685 $10,379 $9,464
7/31/2002 $9,289 $8,008 $10,504 $9,011
8/31/2002 $9,590 $8,061 $10,682 $9,102
9/30/2002 $9,166 $7,185 $10,855 $8,621
10/31/2002 $9,178 $7,817 $10,805 $8,905
11/30/2002 $9,681 $8,277 $10,802 $9,219
12/31/2002 $9,817 $7,791 $11,025 $9,040
1/31/2003 $9,829 $7,587 $11,035 $8,928
2/28/2003 $9,741 $7,473 $11,188 $8,881
3/31/2003 $9,905 $7,545 $11,179 $8,920
4/30/2003 $10,577 $8,167 $11,271 $9,364
5/31/2003 $11,102 $8,596 $11,481 $9,754
6/30/2003 $11,319 $8,706 $11,459 $9,837
7/31/2003 $11,227 $8,860 $11,073 $9,834
8/31/2003 $11,344 $9,032 $11,147 $9,980
9/30/2003 $11,670 $8,937 $11,442 $10,038
10/31/2003 $11,997 $9,442 $11,335 $10,330
11/30/2003 $12,168 $9,525 $11,362 $10,434
12/31/2003 $12,779 $10,024 $11,478 $10,774
1/31/2004 $12,953 $10,208 $11,570 $10,912
2/29/2004 $12,966 $10,350 $11,696 $11,041
3/31/2004 $12,978 $10,194 $11,783 $11,015
4/30/2004 $12,772 $10,034 $11,477 $10,769
5/31/2004 $12,730 $10,171 $11,431 $10,801
6/30/2004 $12,908 $10,369 $11,495 $10,950
7/31/2004 $12,977 $10,026 $11,609 $10,775
8/31/2004 $13,268 $10,066 $11,831 $10,872
9/30/2004 $13,449 $10,175 $11,863 $10,997
10/31/2004 $13,631 $10,331 $11,962 $11,135
11/30/2004 $13,927 $10,749 $11,867 $11,414
12/31/2004 $14,299 $11,114 $11,976 $11,677
1/31/2005 $14,026 $10,843 $12,051 $11,532
2/28/2005 $14,383 $11,071 $11,980 $11,685
3/31/2005 $14,102 $10,876 $11,919 $11,528
4/30/2005 $13,879 $10,669 $12,080 $11,416
5/31/2005 $14,182 $11,009 $12,211 $11,636
6/30/2005 $14,605 $11,024 $12,277 $11,733
7/31/2005 $14,912 $11,434 $12,165 $11,964
8/31/2005 $14,864 $11,330 $12,321 $11,990
9/30/2005 $14,814 $11,422 $12,194 $12,037
10/31/2005 $14,344 $11,231 $12,098 $11,845
11/30/2005 $14,295 $11,655 $12,151 $12,085
12/31/2005 $14,516 $11,660 $12,267 $12,188
1/31/2006 $14,955 $11,968 $12,268 $12,478
2/28/2006 $15,087 $12,001 $12,308 $12,484
3/31/2006 $15,156 $12,150 $12,188 $12,583
4/30/2006 $15,350 $12,313 $12,165 $12,713
5/31/2006 $15,233 $11,959 $12,152 $12,461
6/30/2006 $15,366 $11,975 $12,178 $12,466
7/31/2006 $15,815 $12,049 $12,343 $12,544
8/31/2006 $16,077 $12,335 $12,532 $12,749
9/30/2006 $16,212 $12,653 $12,642 $12,916
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS R 9/30/06
- -----------------------------------------------
1-Year +9.43%
- -----------------------------------------------
3-Year +11.58%
- -----------------------------------------------
Since Inception (1/1/02) +10.73%
- -----------------------------------------------
ADVISOR CLASS (10/1/96-9/30/06) 6
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN LB U.S. LIPPER MIXED-ASSET TARGET
INCOME AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND S&P 500 7 INDEX 7 CLASSIFICATION AVERAGE 7
10/1/1996 $10,000 $10,000 $10,000 $10,000
10/31/1996 $10,197 $10,276 $10,222 $10,220
11/30/1996 $10,439 $11,052 $10,397 $10,665
12/31/1996 $10,505 $10,833 $10,300 $10,597
1/31/1997 $10,708 $11,509 $10,331 $10,861
2/28/1997 $10,868 $11,600 $10,357 $10,914
3/31/1997 $10,618 $11,124 $10,242 $10,650
4/30/1997 $10,689 $11,787 $10,396 $10,886
5/31/1997 $10,991 $12,504 $10,494 $11,324
6/30/1997 $11,249 $13,064 $10,619 $11,643
7/31/1997 $11,556 $14,103 $10,905 $12,213
8/31/1997 $11,487 $13,314 $10,812 $11,916
9/30/1997 $11,797 $14,043 $10,971 $12,374
10/31/1997 $11,679 $13,574 $11,130 $12,173
11/30/1997 $11,993 $14,202 $11,182 $12,356
12/31/1997 $12,400 $14,446 $11,294 $12,548
1/31/1998 $12,230 $14,605 $11,439 $12,605
2/28/1998 $12,404 $15,658 $11,431 $13,059
3/31/1998 $12,780 $16,459 $11,470 $13,417
4/30/1998 $12,656 $16,625 $11,530 $13,476
5/31/1998 $12,481 $16,339 $11,639 $13,371
6/30/1998 $12,558 $17,003 $11,738 $13,525
7/31/1998 $12,329 $16,822 $11,763 $13,357
8/31/1998 $11,533 $14,392 $11,954 $12,260
9/30/1998 $12,130 $15,314 $12,234 $12,683
10/31/1998 $12,158 $16,559 $12,170 $13,104
11/30/1998 $12,553 $17,562 $12,239 $13,546
12/31/1998 $12,539 $18,574 $12,275 $13,943
1/31/1999 $12,354 $19,350 $12,363 $14,106
2/28/1999 $12,005 $18,749 $12,147 $13,760
3/31/1999 $12,196 $19,499 $12,215 $14,027
4/30/1999 $12,825 $20,254 $12,253 $14,479
5/31/1999 $12,855 $19,776 $12,146 $14,291
6/30/1999 $12,884 $20,873 $12,107 $14,615
7/31/1999 $12,746 $20,222 $12,056 $14,406
8/31/1999 $12,720 $20,122 $12,050 $14,256
9/30/1999 $12,580 $19,571 $12,189 $14,100
10/31/1999 $12,611 $20,809 $12,234 $14,439
11/30/1999 $12,412 $21,232 $12,234 $14,624
12/31/1999 $12,466 $22,482 $12,175 $15,088
1/31/2000 $12,499 $21,352 $12,135 $14,724
2/29/2000 $12,353 $20,948 $12,281 $14,796
3/31/2000 $12,561 $22,996 $12,443 $15,462
4/30/2000 $12,951 $22,305 $12,408 $15,188
5/31/2000 $13,161 $21,848 $12,402 $15,044
6/30/2000 $13,254 $22,387 $12,660 $15,347
7/31/2000 $13,407 $22,037 $12,775 $15,274
8/31/2000 $14,175 $23,405 $12,960 $15,910
9/30/2000 $14,454 $22,170 $13,041 $15,588
10/31/2000 $14,238 $22,076 $13,128 $15,482
11/30/2000 $14,208 $20,337 $13,342 $14,886
12/31/2000 $14,996 $20,437 $13,590 $15,296
1/31/2001 $15,032 $21,161 $13,812 $15,614
2/28/2001 $15,324 $19,233 $13,933 $14,997
3/31/2001 $15,034 $18,015 $14,002 $14,495
4/30/2001 $15,396 $19,414 $13,944 $15,093
5/31/2001 $15,629 $19,544 $14,028 $15,172
6/30/2001 $15,266 $19,069 $14,081 $14,973
7/31/2001 $15,101 $18,881 $14,396 $14,924
8/31/2001 $15,270 $17,700 $14,561 $14,560
9/30/2001 $14,629 $16,271 $14,731 $13,791
10/31/2001 $14,665 $16,581 $15,039 $14,065
11/30/2001 $14,976 $17,853 $14,832 $14,549
12/31/2001 $15,117 $18,010 $14,738 $14,651
1/31/2002 $15,293 $17,747 $14,857 $14,522
2/28/2002 $15,401 $17,405 $15,001 $14,409
3/31/2002 $15,793 $18,059 $14,751 $14,714
4/30/2002 $15,961 $16,965 $15,037 $14,480
5/31/2002 $15,912 $16,840 $15,165 $14,443
6/30/2002 $14,850 $15,641 $15,296 $13,866
7/31/2002 $14,218 $14,422 $15,481 $13,202
8/31/2002 $14,610 $14,517 $15,742 $13,336
9/30/2002 $13,969 $12,940 $15,997 $12,630
10/31/2002 $14,067 $14,078 $15,924 $13,047
11/30/2002 $14,839 $14,906 $15,920 $13,507
12/31/2002 $14,977 $14,031 $16,249 $13,244
1/31/2003 $15,076 $13,664 $16,263 $13,080
2/28/2003 $14,948 $13,459 $16,488 $13,012
3/31/2003 $15,204 $13,588 $16,475 $13,069
4/30/2003 $16,160 $14,708 $16,611 $13,720
5/31/2003 $17,046 $15,482 $16,921 $14,291
6/30/2003 $17,386 $15,680 $16,887 $14,412
7/31/2003 $17,174 $15,956 $16,319 $14,408
8/31/2003 $17,440 $16,267 $16,428 $14,621
9/30/2003 $17,945 $16,095 $16,863 $14,707
10/31/2003 $18,455 $17,005 $16,705 $15,134
11/30/2003 $18,724 $17,154 $16,745 $15,287
12/31/2003 $19,668 $18,053 $16,916 $15,785
1/31/2004 $19,941 $18,384 $17,052 $15,987
2/29/2004 $20,052 $18,640 $17,236 $16,176
3/31/2004 $19,996 $18,359 $17,365 $16,138
4/30/2004 $19,688 $18,071 $16,914 $15,777
5/31/2004 $19,632 $18,318 $16,846 $15,824
6/30/2004 $19,914 $18,674 $16,941 $16,043
7/31/2004 $20,027 $18,056 $17,109 $15,786
8/31/2004 $20,484 $18,129 $17,435 $15,928
9/30/2004 $20,770 $18,325 $17,483 $16,111
10/31/2004 $21,059 $18,605 $17,629 $16,314
11/30/2004 $21,523 $19,358 $17,489 $16,722
12/31/2004 $22,105 $20,016 $17,650 $17,108
1/31/2005 $21,694 $19,528 $17,760 $16,896
2/28/2005 $22,251 $19,939 $17,656 $17,119
3/31/2005 $21,830 $19,586 $17,565 $16,890
4/30/2005 $21,495 $19,215 $17,803 $16,726
5/31/2005 $21,972 $19,826 $17,995 $17,047
6/30/2005 $22,634 $19,854 $18,093 $17,190
7/31/2005 $23,116 $20,592 $17,929 $17,529
8/31/2005 $23,050 $20,405 $18,159 $17,566
9/30/2005 $22,983 $20,570 $17,971 $17,636
10/31/2005 $22,267 $20,227 $17,829 $17,354
11/30/2005 $22,200 $20,991 $17,908 $17,706
12/31/2005 $22,551 $20,998 $18,078 $17,857
1/31/2006 $23,240 $21,554 $18,079 $18,282
2/28/2006 $23,453 $21,613 $18,139 $18,291
3/31/2006 $23,571 $21,882 $17,961 $18,435
4/30/2006 $23,881 $22,175 $17,929 $18,625
5/31/2006 $23,710 $21,538 $17,910 $18,256
6/30/2006 $23,927 $21,566 $17,948 $18,264
7/31/2006 $24,632 $21,699 $18,190 $18,379
8/31/2006 $25,048 $22,215 $18,469 $18,678
9/30/2006 $25,270 $22,787 $18,631 $18,923
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
ADVISOR CLASS 6 9/30/06
- -----------------------------------------------
1-Year +9.94%
- -----------------------------------------------
5-Year +11.55%
- -----------------------------------------------
10-Year +9.71%
- -----------------------------------------------
Annual Report | 33
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING,
LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER.
THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT
GRADE SECURITIES. 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 OF INTEREST RATES. THUS, AS 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 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (NAV for Classes B, B1,
C, R and Advisor) per share on 9/30/06.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/06.
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 +140.54% and +9.42%.
7. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of
500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The LB U.S. Aggregate Index represents securities
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 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 Mixed-Asset Target Allocation
Moderate Funds Classification Average is calculated by averaging the total
returns of all funds within the Lipper Mixed-Asset Target Allocation
Moderate Funds classification in the Lipper Open-End underlying funds
universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined
as funds that, by portfolio practice, maintain a mix of between 40%-60%
equity securities, with the remainder invested in bonds, cash and cash
equivalents. For the 12-month period ended 9/30/06, there were 400 funds
in this category. Lipper calculations do not include sales charges or
expense subsidization by a fund's manager. The Fund's performance relative
to the average may have differed if these or other factors had been
considered.
34 | Annual Report
Your Fund's Expenses
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 35
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,070.90 $3.32
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.86 $3.24
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,066.70 $7.72
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.60 $7.54
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B1
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,068.20 $5.91
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.35 $5.77
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,072.10 $5.87
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.72
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,069.70 $5.14
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.10 $5.01
- ---------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,072.00 $2.55
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.61 $2.48
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.64%; B: 1.49%; B1: 1.14%; C: 1.13%; R: 0.99%; and Advisor: 0.49%),
multiplied by the average account value over the period, multiplied by
183/365 to reflect the one-half year period.
36 | Annual Report
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund
seeks high, current income 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin U.S. Government Securities Fund
Based on Total Net Assets as of 9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ............................................................ 98.6%
Short-Term Investments & Other Net Assets ....................... 1.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 U.S. Government Securities Fund covers the
fiscal year ended September 30, 2006.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +3.40% cumulative
total return for the 12 months under review. The Fund performed comparably to
the Lehman Brothers (LB) U.S. Government: Intermediate Index, which returned
+3.54%. 2 In comparison, the Lipper GNMA Funds Classification Average
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.
2. Source: Standard & Poor's Micropal. The LB U.S. Government: Intermediate
Index includes fixed-rate debt issues rated investment grade or higher by
Moody's, S&P or Fitch, in that order. All issues have at least one year to
maturity and an outstanding par value of at least $100 million for U.S.
government issues. All returns are market value weighted inclusive of
accrued interest. The index includes issues of the U.S. government or any
agency thereof. It includes only issues with a remaining term to maturity
of less than 10 years. Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The total return index is rebalanced monthly by market
capitalization. The index is unmanaged and includes reinvestment of any
income or distributions. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 98.
Annual Report | 37
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (10/01-9/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A PLOTTED CHART IN THE PRINTED
MATERIAL.]
SERIES NAME RISK RETURN
- ------------------------------------------------------------------
P&R US TNote 1 Yr $TR 0.631833% 2.140505%
P&R US TNote 10 Yr $TR 8.076611% 4.270923%
P&R US TNote 30 Yr $TR 13.166289% 6.975728%
Franklin US Govt Sec 2.650596% 3.836954%
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.
returned +3.22% for the same period. 3 The Fund's return reflects the effect of
management fees and expenses, while the LB U.S. Government: Intermediate Index
does not have such costs. You can find the Fund's long-term performance data in
the Performance Summary beginning on page 42.
ECONOMIC AND MARKET OVERVIEW
The U.S. economy continued to grow during the year under review, although the
pace in the second and third quarters of 2006 slowed from the first quarter's
3. Source: Lipper Inc. 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 9/30/06, there were 62 funds in this
category. Lipper calculations do not include sales charges or expense
subsidization by a fund's manager. The Fund's performance relative to the
average may have differed if these or other factors had been considered.
Past performance does not guarantee future results. The index is unmanaged
and includes reinvestment of any income or distributions. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
38 | Annual Report
5.6% annualized rate. Overall, several factors contributed to real growth.
During most of the reporting period, labor markets improved, indicated by
nonfarm payroll data and the unemployment rate. Rising personal income also
helped support consumer spending increases. However, the economy experienced
rising inflation pressures, largely due to high energy prices and increasing
labor costs. In addition, productivity growth and the pace of business spending
slowed.
Oil prices reached a historical high during the year, which contributed to the
rise in headline, or overall, inflation. Core inflation, which excludes food and
energy costs, remained contained but nonetheless began to experience some upward
pressure. For example, while September's headline Consumer Price Index (CPI)
reported a 12-month rise of 2.1%, core CPI increased 2.9%. 4 Oil prices fell in
the latter part of the reporting period, partly due to ample supply and easing
demand. This price drop, in conjunction with relatively stable inflation,
contributed to declining interest rates.
Several times during the period the Federal Reserve Board (Fed) acknowledged the
economy's strength as well as the potential inflationary pressure from high
energy prices. The Fed raised the federal funds target rate from 3.75% to 5.25%,
and then suspended its rate hikes in August. The Fed indicated its future
decisions would be highly dependent on forthcoming economic data. The 10-year
Treasury note yield rose from 4.34% at the beginning of the period to a high of
5.25% on June 28, 2006, and then fell to 4.64% on September 30, 2006. The
decline reflected some concerns about the slowing housing market and its
potential effect on the economy.
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.
YIELD COMPARISON
9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Franklin U.S Government Securities Fund - Class A* 4.52%
10-Year Treasury Note* 4.64%
Lipper GNMA Funds Average* 4.54%
Lipper Money Market Funds Average* 3.76%
4. Source: Bureau of Labor Statistics.
* Sources: Federal Reserve H15 Report; 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
9/30/06. 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 9/30/06. The Lipper Money
Market Funds Classification Average is an average of the monthly SEC
yields of 356 funds in the Lipper Money Market Funds classification for
the 30 days ended 9/30/06. Lipper averages do not include sales charges or
expense subsidization by a fund's manager.
Annual Report | 39
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/05-9/30/06
- ----------------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------------
October 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.66 cents
- ----------------------------------------------------------------------------------------------------------------------
November 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents
- ----------------------------------------------------------------------------------------------------------------------
December 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents
- ----------------------------------------------------------------------------------------------------------------------
January 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents
- ----------------------------------------------------------------------------------------------------------------------
February 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.66 cents
- ----------------------------------------------------------------------------------------------------------------------
March 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents
- ----------------------------------------------------------------------------------------------------------------------
April 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents
- ----------------------------------------------------------------------------------------------------------------------
May 2.63 cents 2.35 cents 2.35 cents 2.42 cents 2.69 cents
- ----------------------------------------------------------------------------------------------------------------------
June 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.71 cents
- ----------------------------------------------------------------------------------------------------------------------
July 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.69 cents
- ----------------------------------------------------------------------------------------------------------------------
August 2.63 cents 2.36 cents 2.37 cents 2.43 cents 2.70 cents
- ----------------------------------------------------------------------------------------------------------------------
September 2.63 cents 2.37 cents 2.37 cents 2.44 cents 2.71 cents
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 31.35 CENTS 28.02 CENTS 28.02 CENTS 28.88 CENTS 32.17 CENTS
- ----------------------------------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
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.
As the mortgage-backed securities (MBS) market has evolved, we believe technical
research tools have increased in importance. In the GNMA sector, we applied our
proprietary research models seeking to uncover areas of the markets where we
believed prepayment risk may have offered value.
We continued to evaluate the price difference between securities in the GNMA I
and GNMA II programs using our proprietary models. We concluded that, for
certain coupons, valuations for GNMA II securities moved closer to those of
their GNMA I counterparts. In the second half of the Fund's fiscal year, we
slightly reduced our exposure to GNMA II securities, partly due to the recent
strong relative performance of certain of these securities.
40 | Annual Report
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
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2006, 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 INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 41
Performance Summary as of 9/30/06
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
that a shareholder would pay 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 9/30/06 9/30/05
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.43 $6.53
- -------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -------------------------------------------------------------------------------
Dividend Income $0.3135
- -------------------------------------------------------------------------------
CLASS B (SYMBOL: FUGBX) CHANGE 9/30/06 9/30/05
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.42 $6.52
- -------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -------------------------------------------------------------------------------
Dividend Income $0.2802
- -------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUGX) CHANGE 9/30/06 9/30/05
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.40 $6.50
- -------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -------------------------------------------------------------------------------
Dividend Income $0.2802
- -------------------------------------------------------------------------------
CLASS R (SYMBOL: FUSRX) CHANGE 9/30/06 9/30/05
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.43 $6.53
- -------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -------------------------------------------------------------------------------
Dividend Income $0.2888
- -------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/06 9/30/05
- -------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.45 $6.55
- -------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -------------------------------------------------------------------------------
Dividend Income $0.3217
- -------------------------------------------------------------------------------
42 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN
INCLUDES MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.40% +20.72% +73.57%
- --------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.99% +2.93% +5.21%
- --------------------------------------------------------------------------------------
Distribution Rate 3 4.70%
- --------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.52%
- --------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.87% +17.46% +38.94%
- --------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.07% +2.94% +4.34%
- --------------------------------------------------------------------------------------
Distribution Rate 3 4.43%
- --------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.22%
- --------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.88% +17.50% +64.56%
- --------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.89% +3.28% +5.11%
- --------------------------------------------------------------------------------------
Distribution Rate 3 4.44%
- --------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.24%
- --------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.01% +8.61% +18.92%
- --------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.01% +2.79% +3.72%
- --------------------------------------------------------------------------------------
Distribution Rate 3 4.55%
- --------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.37%
- --------------------------------------------------------------------------------------
ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.53% +21.61% +76.43%
- --------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.53% +3.99% +5.84%
- --------------------------------------------------------------------------------------
Distribution Rate 3 5.04%
- --------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.87%
- --------------------------------------------------------------------------------------
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 | 43
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes 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 9/30/06
- ------------------------------------------
1-Year -0.99%
- ------------------------------------------
5-Year +2.93%
- ------------------------------------------
10-Year +5.21%
- ------------------------------------------
CLASS A (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA
GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION
DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6
10/1/1996 $9,573 $10,000 $10,000 $10,000
10/31/1996 $9,746 $10,164 $10,032 $10,202
11/30/1996 $9,892 $10,287 $10,051 $10,357
12/31/1996 $9,835 $10,231 $10,051 $10,285
1/31/1997 $9,895 $10,271 $10,082 $10,350
2/28/1997 $9,925 $10,287 $10,114 $10,371
3/31/1997 $9,897 $10,229 $10,139 $10,265
4/30/1997 $10,047 $10,344 $10,152 $10,422
5/31/1997 $10,135 $10,425 $10,146 $10,517
6/30/1997 $10,254 $10,514 $10,158 $10,638
7/31/1997 $10,449 $10,708 $10,171 $10,857
8/31/1997 $10,417 $10,667 $10,190 $10,816
9/30/1997 $10,538 $10,783 $10,215 $10,960
10/31/1997 $10,644 $10,908 $10,241 $11,071
11/30/1997 $10,658 $10,932 $10,234 $11,097
12/31/1997 $10,765 $11,021 $10,222 $11,204
1/31/1998 $10,873 $11,165 $10,241 $11,317
2/28/1998 $10,871 $11,153 $10,260 $11,329
3/31/1998 $10,917 $11,188 $10,279 $11,368
4/30/1998 $10,995 $11,242 $10,298 $11,428
5/31/1998 $11,070 $11,319 $10,317 $11,516
6/30/1998 $11,114 $11,395 $10,330 $11,568
7/31/1998 $11,173 $11,439 $10,342 $11,614
8/31/1998 $11,282 $11,655 $10,355 $11,730
9/30/1998 $11,424 $11,927 $10,368 $11,882
10/31/1998 $11,370 $11,947 $10,393 $11,823
11/30/1998 $11,431 $11,910 $10,393 $11,890
12/31/1998 $11,476 $11,957 $10,387 $11,932
1/31/1999 $11,555 $12,010 $10,412 $12,002
2/28/1999 $11,482 $11,845 $10,425 $11,907
3/31/1999 $11,545 $11,924 $10,456 $11,982
4/30/1999 $11,591 $11,956 $10,532 $12,027
5/31/1999 $11,500 $11,883 $10,532 $11,946
6/30/1999 $11,444 $11,900 $10,532 $11,880
7/31/1999 $11,353 $11,902 $10,564 $11,809
8/31/1999 $11,361 $11,918 $10,589 $11,792
9/30/1999 $11,544 $12,021 $10,640 $11,976
10/31/1999 $11,606 $12,044 $10,659 $12,017
11/30/1999 $11,615 $12,053 $10,665 $12,025
12/31/1999 $11,571 $12,015 $10,665 $11,966
1/31/2000 $11,473 $11,975 $10,697 $11,872
2/29/2000 $11,607 $12,074 $10,760 $12,009
3/31/2000 $11,778 $12,211 $10,849 $12,191
4/30/2000 $11,751 $12,207 $10,856 $12,170
5/31/2000 $11,798 $12,239 $10,868 $12,211
6/30/2000 $11,992 $12,434 $10,925 $12,425
7/31/2000 $12,058 $12,516 $10,951 $12,475
8/31/2000 $12,236 $12,656 $10,951 $12,652
9/30/2000 $12,341 $12,767 $11,008 $12,762
10/31/2000 $12,428 $12,855 $11,027 $12,839
11/30/2000 $12,610 $13,043 $11,033 $13,029
12/31/2000 $12,793 $13,273 $11,027 $13,218
1/31/2001 $12,976 $13,450 $11,096 $13,421
2/28/2001 $13,046 $13,573 $11,141 $13,504
3/31/2001 $13,116 $13,672 $11,166 $13,583
4/30/2001 $13,128 $13,629 $11,210 $13,557
5/31/2001 $13,219 $13,685 $11,261 $13,645
6/30/2001 $13,251 $13,729 $11,280 $13,691
7/31/2001 $13,499 $13,985 $11,248 $13,957
8/31/2001 $13,591 $14,109 $11,248 $14,062
9/30/2001 $13,763 $14,410 $11,299 $14,261
10/31/2001 $13,953 $14,635 $11,261 $14,455
11/30/2001 $13,824 $14,460 $11,242 $14,302
12/31/2001 $13,774 $14,390 $11,198 $14,225
1/31/2002 $13,883 $14,453 $11,223 $14,361
2/28/2002 $14,053 $14,572 $11,267 $14,514
3/31/2002 $13,877 $14,352 $11,331 $14,332
4/30/2002 $14,132 $14,621 $11,394 $14,602
5/31/2002 $14,222 $14,723 $11,394 $14,698
6/30/2002 $14,334 $14,907 $11,401 $14,820
7/31/2002 $14,488 $15,188 $11,413 $14,993
8/31/2002 $14,622 $15,361 $11,451 $15,116
9/30/2002 $14,735 $15,625 $11,470 $15,254
10/31/2002 $14,786 $15,615 $11,489 $15,271
11/30/2002 $14,785 $15,491 $11,489 $15,261
12/31/2002 $14,956 $15,778 $11,464 $15,429
1/31/2003 $14,998 $15,743 $11,515 $15,460
2/28/2003 $15,063 $15,920 $11,603 $15,551
3/31/2003 $15,062 $15,924 $11,673 $15,541
4/30/2003 $15,105 $15,968 $11,648 $15,578
5/31/2003 $15,105 $16,219 $11,629 $15,618
6/30/2003 $15,148 $16,193 $11,641 $15,648
7/31/2003 $14,795 $15,800 $11,654 $15,310
8/31/2003 $14,906 $15,828 $11,698 $15,411
9/30/2003 $15,128 $16,171 $11,736 $15,668
10/31/2003 $15,060 $16,012 $11,724 $15,590
11/30/2003 $15,127 $16,014 $11,692 $15,637
12/31/2003 $15,222 $16,138 $11,679 $15,745
1/31/2004 $15,312 $16,226 $11,736 $15,822
2/29/2004 $15,403 $16,381 $11,800 $15,925
3/31/2004 $15,448 $16,495 $11,876 $15,977
4/30/2004 $15,195 $16,126 $11,914 $15,709
5/31/2004 $15,167 $16,074 $11,984 $15,665
6/30/2004 $15,301 $16,115 $12,022 $15,782
7/31/2004 $15,435 $16,232 $12,003 $15,902
8/31/2004 $15,640 $16,473 $12,009 $16,111
9/30/2004 $15,650 $16,479 $12,034 $16,117
10/31/2004 $15,763 $16,580 $12,098 $16,220
11/30/2004 $15,734 $16,426 $12,104 $16,167
12/31/2004 $15,800 $16,515 $12,060 $16,248
1/31/2005 $15,890 $16,536 $12,085 $16,327
2/28/2005 $15,837 $16,444 $12,155 $16,270
3/31/2005 $15,808 $16,403 $12,250 $16,231
4/30/2005 $15,947 $16,595 $12,332 $16,380
5/31/2005 $16,058 $16,727 $12,319 $16,475
6/30/2005 $16,073 $16,782 $12,326 $16,512
7/31/2005 $16,014 $16,639 $12,383 $16,442
8/31/2005 $16,152 $16,824 $12,446 $16,572
9/30/2005 $16,068 $16,694 $12,598 $16,484
10/31/2005 $16,009 $16,624 $12,624 $16,400
11/30/2005 $16,049 $16,692 $12,522 $16,443
12/31/2005 $16,238 $16,793 $12,471 $16,619
1/31/2006 $16,278 $16,792 $12,567 $16,654
2/28/2006 $16,293 $16,795 $12,592 $16,680
3/31/2006 $16,182 $16,743 $12,662 $16,577
4/30/2006 $16,122 $16,759 $12,769 $16,520
5/31/2006 $16,062 $16,764 $12,833 $16,474
6/30/2006 $16,078 $16,794 $12,858 $16,471
7/31/2006 $16,273 $16,970 $12,896 $16,680
8/31/2006 $16,495 $17,161 $12,921 $16,910
9/30/2006 $16,615 $17,285 $12,858 $17,020
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS B 9/30/06
- ------------------------------------------
1-Year -1.07%
- ------------------------------------------
5-Year +2.94%
- ------------------------------------------
Since Inception (1/1/99) +4.34%
- ------------------------------------------
CLASS B (1/1/99-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA
GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION
DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $10,068 $10,045 $10,024 $10,058
2/28/1999 $9,986 $9,907 $10,037 $9,979
3/31/1999 $10,051 $9,973 $10,067 $10,041
4/30/1999 $10,087 $10,000 $10,140 $10,080
5/31/1999 $10,005 $9,938 $10,140 $10,011
6/30/1999 $9,936 $9,953 $10,140 $9,956
7/31/1999 $9,868 $9,954 $10,171 $9,896
8/31/1999 $9,856 $9,968 $10,195 $9,882
9/30/1999 $10,025 $10,053 $10,244 $10,037
10/31/1999 $10,074 $10,073 $10,262 $10,071
11/30/1999 $10,062 $10,080 $10,268 $10,078
12/31/1999 $10,019 $10,049 $10,268 $10,028
1/31/2000 $9,946 $10,015 $10,299 $9,949
2/29/2000 $10,042 $10,098 $10,360 $10,065
3/31/2000 $10,186 $10,213 $10,445 $10,216
4/30/2000 $10,174 $10,209 $10,451 $10,199
5/31/2000 $10,210 $10,236 $10,464 $10,234
6/30/2000 $10,373 $10,399 $10,519 $10,413
7/31/2000 $10,410 $10,468 $10,543 $10,455
8/31/2000 $10,560 $10,585 $10,543 $10,603
9/30/2000 $10,662 $10,678 $10,598 $10,695
10/31/2000 $10,717 $10,751 $10,616 $10,759
11/30/2000 $10,869 $10,909 $10,622 $10,919
12/31/2000 $11,021 $11,101 $10,616 $11,077
1/31/2001 $11,191 $11,249 $10,683 $11,248
2/28/2001 $11,230 $11,352 $10,726 $11,317
3/31/2001 $11,302 $11,434 $10,750 $11,383
4/30/2001 $11,291 $11,398 $10,793 $11,361
5/31/2001 $11,364 $11,446 $10,842 $11,435
6/30/2001 $11,403 $11,482 $10,860 $11,474
7/31/2001 $11,595 $11,696 $10,830 $11,697
8/31/2001 $11,669 $11,800 $10,830 $11,784
9/30/2001 $11,829 $12,052 $10,879 $11,952
10/31/2001 $11,970 $12,240 $10,842 $12,114
11/30/2001 $11,871 $12,094 $10,824 $11,986
12/31/2001 $11,806 $12,035 $10,781 $11,921
1/31/2002 $11,912 $12,087 $10,805 $12,036
2/28/2002 $12,035 $12,187 $10,848 $12,163
3/31/2002 $11,879 $12,004 $10,909 $12,011
4/30/2002 $12,092 $12,228 $10,970 $12,237
5/31/2002 $12,164 $12,314 $10,970 $12,318
6/30/2002 $12,254 $12,468 $10,976 $12,420
7/31/2002 $12,381 $12,703 $10,988 $12,565
8/31/2002 $12,490 $12,848 $11,025 $12,668
9/30/2002 $12,582 $13,068 $11,043 $12,784
10/31/2002 $12,620 $13,059 $11,062 $12,798
11/30/2002 $12,614 $12,956 $11,062 $12,790
12/31/2002 $12,754 $13,196 $11,037 $12,931
1/31/2003 $12,785 $13,166 $11,086 $12,956
2/28/2003 $12,834 $13,315 $11,171 $13,033
3/31/2003 $12,828 $13,318 $11,239 $13,024
4/30/2003 $12,859 $13,355 $11,214 $13,055
5/31/2003 $12,871 $13,565 $11,196 $13,089
6/30/2003 $12,884 $13,543 $11,208 $13,114
7/31/2003 $12,578 $13,214 $11,220 $12,831
8/31/2003 $12,667 $13,238 $11,263 $12,915
9/30/2003 $12,850 $13,525 $11,300 $13,131
10/31/2003 $12,788 $13,392 $11,287 $13,065
11/30/2003 $12,839 $13,393 $11,257 $13,104
12/31/2003 $12,914 $13,497 $11,245 $13,195
1/31/2004 $12,985 $13,571 $11,300 $13,260
2/29/2004 $13,056 $13,700 $11,361 $13,346
3/31/2004 $13,089 $13,795 $11,434 $13,390
4/30/2004 $12,868 $13,487 $11,470 $13,165
5/31/2004 $12,839 $13,444 $11,538 $13,128
6/30/2004 $12,946 $13,478 $11,574 $13,226
7/31/2004 $13,054 $13,575 $11,556 $13,327
8/31/2004 $13,222 $13,777 $11,562 $13,502
9/30/2004 $13,225 $13,782 $11,586 $13,507
10/31/2004 $13,315 $13,867 $11,647 $13,593
11/30/2004 $13,285 $13,738 $11,653 $13,549
12/31/2004 $13,334 $13,812 $11,611 $13,616
1/31/2005 $13,404 $13,830 $11,635 $13,683
2/28/2005 $13,354 $13,753 $11,702 $13,635
3/31/2005 $13,323 $13,719 $11,794 $13,602
4/30/2005 $13,435 $13,879 $11,873 $13,728
5/31/2005 $13,523 $13,990 $11,861 $13,807
6/30/2005 $13,549 $14,036 $11,867 $13,838
7/31/2005 $13,474 $13,916 $11,922 $13,779
8/31/2005 $13,583 $14,070 $11,983 $13,888
9/30/2005 $13,507 $13,962 $12,129 $13,815
10/31/2005 $13,451 $13,904 $12,154 $13,744
11/30/2005 $13,478 $13,961 $12,056 $13,780
12/31/2005 $13,632 $14,045 $12,007 $13,927
1/31/2006 $13,659 $14,044 $12,099 $13,957
2/28/2006 $13,666 $14,047 $12,123 $13,979
3/31/2006 $13,567 $14,003 $12,190 $13,892
4/30/2006 $13,510 $14,016 $12,294 $13,845
5/31/2006 $13,454 $14,021 $12,355 $13,806
6/30/2006 $13,462 $14,046 $12,379 $13,804
7/31/2006 $13,620 $14,193 $12,416 $13,979
8/31/2006 $13,800 $14,352 $12,441 $14,172
9/30/2006 $13,894 $14,456 $12,379 $14,264
44 | Annual Report
Performance Summary (CONTINUED)
CLASS C (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA
GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION
DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6
10/1/1996 $10,000 $10,000 $10,000 $10,000
10/31/1996 $10,177 $10,164 $10,032 $10,202
11/30/1996 $10,339 $10,287 $10,051 $10,357
12/31/1996 $10,260 $10,231 $10,051 $10,285
1/31/1997 $10,333 $10,271 $10,082 $10,350
2/28/1997 $10,345 $10,287 $10,114 $10,371
3/31/1997 $10,310 $10,229 $10,139 $10,265
4/30/1997 $10,461 $10,344 $10,152 $10,422
5/31/1997 $10,564 $10,425 $10,146 $10,517
6/30/1997 $10,682 $10,514 $10,158 $10,638
7/31/1997 $10,880 $10,708 $10,171 $10,857
8/31/1997 $10,826 $10,667 $10,190 $10,816
9/30/1997 $10,948 $10,783 $10,215 $10,960
10/31/1997 $11,053 $10,908 $10,241 $11,071
11/30/1997 $11,063 $10,932 $10,234 $11,097
12/31/1997 $11,169 $11,021 $10,222 $11,204
1/31/1998 $11,276 $11,165 $10,241 $11,317
2/28/1998 $11,269 $11,153 $10,260 $11,329
3/31/1998 $11,312 $11,188 $10,279 $11,368
4/30/1998 $11,387 $11,242 $10,298 $11,428
5/31/1998 $11,460 $11,319 $10,317 $11,516
6/30/1998 $11,500 $11,395 $10,330 $11,568
7/31/1998 $11,557 $11,439 $10,342 $11,614
8/31/1998 $11,665 $11,655 $10,355 $11,730
9/30/1998 $11,807 $11,927 $10,368 $11,882
10/31/1998 $11,728 $11,947 $10,393 $11,823
11/30/1998 $11,804 $11,910 $10,393 $11,890
12/31/1998 $11,844 $11,957 $10,387 $11,932
1/31/1999 $11,920 $12,010 $10,412 $12,002
2/28/1999 $11,840 $11,845 $10,425 $11,907
3/31/1999 $11,899 $11,924 $10,456 $11,982
4/30/1999 $11,941 $11,956 $10,532 $12,027
5/31/1999 $11,842 $11,883 $10,532 $11,946
6/30/1999 $11,779 $11,900 $10,532 $11,880
7/31/1999 $11,680 $11,902 $10,564 $11,809
8/31/1999 $11,683 $11,918 $10,589 $11,792
9/30/1999 $11,867 $12,021 $10,640 $11,976
10/31/1999 $11,925 $12,044 $10,659 $12,017
11/30/1999 $11,928 $12,053 $10,665 $12,025
12/31/1999 $11,878 $12,015 $10,665 $11,966
1/31/2000 $11,772 $11,975 $10,697 $11,872
2/29/2000 $11,905 $12,074 $10,760 $12,009
3/31/2000 $12,075 $12,211 $10,849 $12,191
4/30/2000 $12,042 $12,207 $10,856 $12,170
5/31/2000 $12,085 $12,239 $10,868 $12,211
6/30/2000 $12,279 $12,434 $10,925 $12,425
7/31/2000 $12,322 $12,516 $10,951 $12,475
8/31/2000 $12,500 $12,656 $10,951 $12,652
9/30/2000 $12,621 $12,767 $11,008 $12,762
10/31/2000 $12,705 $12,855 $11,027 $12,839
11/30/2000 $12,865 $13,043 $11,033 $13,029
12/31/2000 $13,047 $13,273 $11,027 $13,218
1/31/2001 $13,248 $13,450 $11,096 $13,421
2/28/2001 $13,294 $13,573 $11,141 $13,504
3/31/2001 $13,380 $13,672 $11,166 $13,583
4/30/2001 $13,387 $13,629 $11,210 $13,557
5/31/2001 $13,453 $13,685 $11,261 $13,645
6/30/2001 $13,500 $13,729 $11,280 $13,691
7/31/2001 $13,728 $13,985 $11,248 $13,957
8/31/2001 $13,815 $14,109 $11,248 $14,062
9/30/2001 $14,005 $14,410 $11,299 $14,261
10/31/2001 $14,173 $14,635 $11,261 $14,455
11/30/2001 $14,055 $14,460 $11,242 $14,302
12/31/2001 $13,977 $14,390 $11,198 $14,225
1/31/2002 $14,102 $14,453 $11,223 $14,361
2/28/2002 $14,249 $14,572 $11,267 $14,514
3/31/2002 $14,063 $14,352 $11,331 $14,332
4/30/2002 $14,316 $14,621 $11,394 $14,602
5/31/2002 $14,402 $14,723 $11,394 $14,698
6/30/2002 $14,509 $14,907 $11,401 $14,820
7/31/2002 $14,660 $15,188 $11,413 $14,993
8/31/2002 $14,789 $15,361 $11,451 $15,116
9/30/2002 $14,920 $15,625 $11,470 $15,254
10/31/2002 $14,943 $15,615 $11,489 $15,271
11/30/2002 $14,937 $15,491 $11,489 $15,261
12/31/2002 $15,103 $15,778 $11,464 $15,429
1/31/2003 $15,140 $15,743 $11,515 $15,460
2/28/2003 $15,220 $15,920 $11,603 $15,551
3/31/2003 $15,192 $15,924 $11,673 $15,541
4/30/2003 $15,229 $15,968 $11,648 $15,578
5/31/2003 $15,223 $16,219 $11,629 $15,618
6/30/2003 $15,260 $16,193 $11,641 $15,648
7/31/2003 $14,896 $15,800 $11,654 $15,310
8/31/2003 $15,000 $15,828 $11,698 $15,411
9/30/2003 $15,217 $16,171 $11,736 $15,668
10/31/2003 $15,142 $16,012 $11,724 $15,590
11/30/2003 $15,203 $16,014 $11,692 $15,637
12/31/2003 $15,292 $16,138 $11,679 $15,745
1/31/2004 $15,376 $16,226 $11,736 $15,822
2/29/2004 $15,461 $16,381 $11,800 $15,925
3/31/2004 $15,500 $16,495 $11,876 $15,977
4/30/2004 $15,238 $16,126 $11,914 $15,709
5/31/2004 $15,202 $16,074 $11,984 $15,665
6/30/2004 $15,353 $16,115 $12,022 $15,782
7/31/2004 $15,458 $16,232 $12,003 $15,902
8/31/2004 $15,658 $16,473 $12,009 $16,111
9/30/2004 $15,661 $16,479 $12,034 $16,117
10/31/2004 $15,767 $16,580 $12,098 $16,220
11/30/2004 $15,731 $16,426 $12,104 $16,167
12/31/2004 $15,790 $16,515 $12,060 $16,248
1/31/2005 $15,874 $16,536 $12,085 $16,327
2/28/2005 $15,813 $16,444 $12,155 $16,270
3/31/2005 $15,777 $16,403 $12,250 $16,231
4/30/2005 $15,909 $16,595 $12,332 $16,380
5/31/2005 $16,014 $16,727 $12,319 $16,475
6/30/2005 $16,046 $16,782 $12,326 $16,512
7/31/2005 $15,956 $16,639 $12,383 $16,442
8/31/2005 $16,087 $16,824 $12,446 $16,572
9/30/2005 $15,996 $16,694 $12,598 $16,484
10/31/2005 $15,929 $16,624 $12,624 $16,400
11/30/2005 $15,962 $16,692 $12,522 $16,443
12/31/2005 $16,144 $16,793 $12,471 $16,619
1/31/2006 $16,176 $16,792 $12,567 $16,654
2/28/2006 $16,184 $16,795 $12,592 $16,680
3/31/2006 $16,067 $16,743 $12,662 $16,577
4/30/2006 $15,999 $16,759 $12,769 $16,520
5/31/2006 $15,932 $16,764 $12,833 $16,474
6/30/2006 $15,942 $16,794 $12,858 $16,471
7/31/2006 $16,130 $16,970 $12,896 $16,680
8/31/2006 $16,344 $17,161 $12,921 $16,910
9/30/2006 $16,456 $17,285 $12,858 $17,020
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------
CLASS C 9/30/06
- ----------------------------------------------------
1-Year +1.89%
- ----------------------------------------------------
5-Year +3.28%
- ----------------------------------------------------
10-Year +5.11%
- ----------------------------------------------------
CLASS R (1/1/02-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN U.S. LB U.S. LIPPER GNMA
GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION
DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,109 $10,043 $10,023 $10,096
2/28/2002 $10,215 $10,126 $10,062 $10,203
3/31/2002 $10,098 $9,974 $10,119 $10,075
4/30/2002 $10,281 $10,160 $10,175 $10,265
5/31/2002 $10,343 $10,231 $10,175 $10,333
6/30/2002 $10,421 $10,359 $10,181 $10,418
7/31/2002 $10,530 $10,554 $10,192 $10,540
8/31/2002 $10,625 $10,675 $10,226 $10,627
9/30/2002 $10,704 $10,858 $10,243 $10,723
10/31/2002 $10,722 $10,851 $10,260 $10,735
11/30/2002 $10,733 $10,765 $10,260 $10,729
12/31/2002 $10,854 $10,964 $10,238 $10,847
1/31/2003 $10,866 $10,940 $10,283 $10,869
2/28/2003 $10,924 $11,063 $10,362 $10,933
3/31/2003 $10,921 $11,066 $10,424 $10,925
4/30/2003 $10,948 $11,097 $10,402 $10,951
5/31/2003 $10,945 $11,271 $10,385 $10,980
6/30/2003 $10,958 $11,252 $10,396 $11,001
7/31/2003 $10,715 $10,979 $10,407 $10,763
8/31/2003 $10,791 $10,999 $10,447 $10,834
9/30/2003 $10,948 $11,237 $10,481 $11,015
10/31/2003 $10,897 $11,127 $10,470 $10,960
11/30/2003 $10,926 $11,128 $10,441 $10,993
12/31/2003 $11,008 $11,215 $10,430 $11,069
1/31/2004 $11,053 $11,276 $10,481 $11,123
2/29/2004 $11,115 $11,383 $10,538 $11,195
3/31/2004 $11,160 $11,462 $10,606 $11,232
4/30/2004 $10,975 $11,206 $10,640 $11,043
5/31/2004 $10,950 $11,170 $10,702 $11,012
6/30/2004 $11,044 $11,198 $10,736 $11,095
7/31/2004 $11,121 $11,280 $10,719 $11,179
8/31/2004 $11,265 $11,447 $10,724 $11,326
9/30/2004 $11,286 $11,452 $10,747 $11,330
10/31/2004 $11,364 $11,522 $10,804 $11,403
11/30/2004 $11,323 $11,414 $10,809 $11,365
12/31/2004 $11,384 $11,476 $10,770 $11,422
1/31/2005 $11,445 $11,491 $10,792 $11,478
2/28/2005 $11,386 $11,427 $10,855 $11,438
3/31/2005 $11,361 $11,399 $10,939 $11,410
4/30/2005 $11,475 $11,532 $11,013 $11,515
5/31/2005 $11,534 $11,624 $11,002 $11,582
6/30/2005 $11,559 $11,662 $11,007 $11,608
7/31/2005 $11,513 $11,562 $11,058 $11,559
8/31/2005 $11,590 $11,691 $11,115 $11,650
9/30/2005 $11,544 $11,601 $11,251 $11,588
10/31/2005 $11,481 $11,552 $11,273 $11,529
11/30/2005 $11,505 $11,599 $11,183 $11,559
12/31/2005 $11,638 $11,670 $11,138 $11,683
1/31/2006 $11,663 $11,669 $11,222 $11,707
2/28/2006 $11,670 $11,671 $11,245 $11,726
3/31/2006 $11,604 $11,635 $11,307 $11,654
4/30/2006 $11,539 $11,646 $11,404 $11,614
5/31/2006 $11,510 $11,649 $11,460 $11,581
6/30/2006 $11,500 $11,670 $11,483 $11,579
7/31/2006 $11,655 $11,793 $11,517 $11,726
8/31/2006 $11,810 $11,925 $11,539 $11,888
9/30/2006 $11,892 $12,011 $11,483 $11,965
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------
CLASS R 9/30/06
- ----------------------------------------------------
1-Year +3.01%
- ----------------------------------------------------
3-Year +2.79%
- ----------------------------------------------------
Since Inception (1/1/02) +3.72%
- ----------------------------------------------------
Annual Report | 45
Performance Summary (CONTINUED)
ADVISOR CLASS (10/1/96-9/30/06) 5
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
ADVISOR CLASS 5 9/30/06
- ------------------------------------------------
1-Year +3.53%
- ------------------------------------------------
5-Year +3.99%
- ------------------------------------------------
10-Year +5.84%
- ------------------------------------------------
FRANKLIN U.S. LB U.S. LIPPER GNMA
GOVERNMENT GOVERNMENT: FUNDS CLASSIFICATION
DATE SECURITIES FUND INTERMEDIATE INDEX 6 AVERAGE 6 CPI 6
10/1/1996 $10,000 $10,000 $10,000 $10,000
10/31/1996 $10,181 $10,164 $10,032 $10,202
11/30/1996 $10,333 $10,287 $10,051 $10,357
12/31/1996 $10,274 $10,231 $10,051 $10,285
1/31/1997 $10,383 $10,271 $10,082 $10,350
2/28/1997 $10,400 $10,287 $10,114 $10,371
3/31/1997 $10,371 $10,229 $10,139 $10,265
4/30/1997 $10,545 $10,344 $10,152 $10,422
5/31/1997 $10,638 $10,425 $10,146 $10,517
6/30/1997 $10,763 $10,514 $10,158 $10,638
7/31/1997 $10,969 $10,708 $10,171 $10,857
8/31/1997 $10,921 $10,667 $10,190 $10,816
9/30/1997 $11,063 $10,783 $10,215 $10,960
10/31/1997 $11,159 $10,908 $10,241 $11,071
11/30/1997 $11,191 $10,932 $10,234 $11,097
12/31/1997 $11,305 $11,021 $10,222 $11,204
1/31/1998 $11,402 $11,165 $10,241 $11,317
2/28/1998 $11,418 $11,153 $10,260 $11,329
3/31/1998 $11,467 $11,188 $10,279 $11,368
4/30/1998 $11,533 $11,242 $10,298 $11,428
5/31/1998 $11,630 $11,319 $10,317 $11,516
6/30/1998 $11,676 $11,395 $10,330 $11,568
7/31/1998 $11,723 $11,439 $10,342 $11,614
8/31/1998 $11,837 $11,655 $10,355 $11,730
9/30/1998 $12,005 $11,927 $10,368 $11,882
10/31/1998 $11,932 $11,947 $10,393 $11,823
11/30/1998 $12,014 $11,910 $10,393 $11,890
12/31/1998 $12,062 $11,957 $10,387 $11,932
1/31/1999 $12,146 $12,010 $10,412 $12,002
2/28/1999 $12,054 $11,845 $10,425 $11,907
3/31/1999 $12,120 $11,924 $10,456 $11,982
4/30/1999 $12,187 $11,956 $10,532 $12,027
5/31/1999 $12,094 $11,883 $10,532 $11,946
6/30/1999 $12,018 $11,900 $10,532 $11,880
7/31/1999 $11,941 $11,902 $10,564 $11,809
8/31/1999 $11,933 $11,918 $10,589 $11,792
9/30/1999 $12,144 $12,021 $10,640 $11,976
10/31/1999 $12,210 $12,044 $10,659 $12,017
11/30/1999 $12,202 $12,053 $10,665 $12,025
12/31/1999 $12,157 $12,015 $10,665 $11,966
1/31/2000 $12,074 $11,975 $10,697 $11,872
2/29/2000 $12,197 $12,074 $10,760 $12,009
3/31/2000 $12,378 $12,211 $10,849 $12,191
4/30/2000 $12,370 $12,207 $10,856 $12,170
5/31/2000 $12,421 $12,239 $10,868 $12,211
6/30/2000 $12,626 $12,434 $10,925 $12,425
7/31/2000 $12,677 $12,516 $10,951 $12,475
8/31/2000 $12,866 $12,656 $10,951 $12,652
9/30/2000 $12,997 $12,767 $11,008 $12,762
10/31/2000 $13,089 $12,855 $11,027 $12,839
11/30/2000 $13,261 $13,043 $11,033 $13,029
12/31/2000 $13,475 $13,273 $11,027 $13,218
1/31/2001 $13,670 $13,450 $11,096 $13,421
2/28/2001 $13,724 $13,573 $11,141 $13,504
3/31/2001 $13,819 $13,672 $11,166 $13,583
4/30/2001 $13,833 $13,629 $11,210 $13,557
5/31/2001 $13,908 $13,685 $11,261 $13,645
6/30/2001 $13,983 $13,729 $11,280 $13,691
7/31/2001 $14,225 $13,985 $11,248 $13,957
8/31/2001 $14,323 $14,109 $11,248 $14,062
9/30/2001 $14,505 $14,410 $11,299 $14,261
10/31/2001 $14,707 $14,635 $11,261 $14,455
11/30/2001 $14,593 $14,460 $11,242 $14,302
12/31/2001 $14,521 $14,390 $11,198 $14,225
1/31/2002 $14,638 $14,453 $11,223 $14,361
2/28/2002 $14,818 $14,572 $11,267 $14,514
3/31/2002 $14,634 $14,352 $11,331 $14,332
4/30/2002 $14,903 $14,621 $11,394 $14,602
5/31/2002 $15,000 $14,723 $11,394 $14,698
6/30/2002 $15,120 $14,907 $11,401 $14,820
7/31/2002 $15,283 $15,188 $11,413 $14,993
8/31/2002 $15,425 $15,361 $11,451 $15,116
9/30/2002 $15,568 $15,625 $11,470 $15,254
10/31/2002 $15,600 $15,615 $11,489 $15,271
11/30/2002 $15,602 $15,491 $11,489 $15,261
12/31/2002 $15,784 $15,778 $11,464 $15,429
1/31/2003 $15,830 $15,743 $11,515 $15,460
2/28/2003 $15,922 $15,920 $11,603 $15,551
3/31/2003 $15,923 $15,924 $11,673 $15,541
4/30/2003 $15,947 $15,968 $11,648 $15,578
5/31/2003 $15,972 $16,219 $11,629 $15,618
6/30/2003 $15,997 $16,193 $11,641 $15,648
7/31/2003 $15,626 $15,800 $11,654 $15,310
8/31/2003 $15,744 $15,828 $11,698 $15,411
9/30/2003 $16,003 $16,171 $11,736 $15,668
10/31/2003 $15,933 $16,012 $11,724 $15,590
11/30/2003 $15,983 $16,014 $11,692 $15,637
12/31/2003 $16,084 $16,138 $11,679 $15,745
1/31/2004 $16,181 $16,226 $11,736 $15,822
2/29/2004 $16,278 $16,381 $11,800 $15,925
3/31/2004 $16,328 $16,495 $11,876 $15,977
4/30/2004 $16,063 $16,126 $11,914 $15,709
5/31/2004 $16,059 $16,074 $11,984 $15,665
6/30/2004 $16,201 $16,115 $12,022 $15,782
7/31/2004 $16,321 $16,232 $12,003 $15,902
8/31/2004 $16,538 $16,473 $12,009 $16,111
9/30/2004 $16,550 $16,479 $12,034 $16,117
10/31/2004 $16,696 $16,580 $12,098 $16,220
11/30/2004 $16,643 $16,426 $12,104 $16,167
12/31/2004 $16,739 $16,515 $12,060 $16,248
1/31/2005 $16,836 $16,536 $12,085 $16,327
2/28/2005 $16,756 $16,444 $12,155 $16,270
3/31/2005 $16,727 $16,403 $12,250 $16,231
4/30/2005 $16,875 $16,595 $12,332 $16,380
5/31/2005 $17,000 $16,727 $12,319 $16,475
6/30/2005 $17,043 $16,782 $12,326 $16,512
7/31/2005 $16,983 $16,639 $12,383 $16,442
8/31/2005 $17,104 $16,824 $12,446 $16,572
9/30/2005 $17,043 $16,694 $12,598 $16,484
10/31/2005 $16,955 $16,624 $12,624 $16,400
11/30/2005 $17,000 $16,692 $12,522 $16,443
12/31/2005 $17,202 $16,793 $12,471 $16,619
1/31/2006 $17,245 $16,792 $12,567 $16,654
2/28/2006 $17,263 $16,795 $12,592 $16,680
3/31/2006 $17,148 $16,743 $12,662 $16,577
4/30/2006 $17,086 $16,759 $12,769 $16,520
5/31/2006 $17,051 $16,764 $12,833 $16,474
6/30/2006 $17,043 $16,794 $12,858 $16,471
7/31/2006 $17,278 $16,970 $12,896 $16,680
8/31/2006 $17,516 $17,161 $12,921 $16,910
9/30/2006 $17,643 $17,285 $12,858 $17,020
46 | 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 OF
INTEREST RATES. THUS, AS 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
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 9/30/06.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/06.
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 +71.72% and +5.70%.
6. Sources: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government:
Intermediate Index includes fixed-rate debt issues rated investment grade
or higher by Moody's, S&P or Fitch, in that order. All issues have at
least one year to maturity and an outstanding par value of at least $100
million for U.S. government issues. All returns are market value weighted
inclusive of accrued interest. The index includes issues of the U.S.
government or any agency thereof. It includes only issues with a remaining
term to maturity of less than 10 years. Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The total return index is rebalanced monthly by market
capitalization. The Lipper GNMA Funds 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 9/30/06, there were 62 funds in this category.
Lipper calculations do not include sales charges or expense subsidization
by a fund's manager. The Fund's performance relative to the average may
have differed if these or other factors had been considered.
Annual Report | 47
Your Fund's Expenses
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
48 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.70 $3.61
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.51 $3.60
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.10 $6.24
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.23
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.20 $6.24
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.23
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.80 $5.48
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.65 $5.47
- ---------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.90 $2.95
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.16 $2.94
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.71%; B: 1.23%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied by
the average account value over the period, multiplied by 183/365 to
reflect the one-half year period.
Annual Report | 49
Franklin Utilities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income by investing at least 80% of its net
assets in public utility company 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 Utilities Fund covers the fiscal year ended
September 30, 2006.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Utilities Fund - Class A posted a
+6.69% cumulative total return. The Fund underperformed its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +10.78% for the same
period. 1 The Fund outperformed its narrow benchmark, the S&P 500 Utilities
Index, which returned +4.77%. 2 You can find the Fund's long-term performance
data in the Performance Summary beginning on page 54.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended September 30, 2006, the U.S. economy advanced at a
moderate pace. After a slow fourth quarter 2005, gross domestic product grew an
annualized 5.6% in first quarter 2006, then slowed to estimated annualized rates
of 2.6% in the second quarter and 1.6% in the third quarter. Growth was driven
by corporate profits, and consumer and government spending. Export growth picked
up some momentum, but a wide trade deficit remained. Employment generally
increased and the unemployment rate fell from 5.1% to 4.6%. 3 Although labor
costs rose during the reporting period, hiring increased in many industries and
personal income grew.
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 indexes are unmanaged and includes reinvested dividends.
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.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
3. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 105.
50 | Annual Report
Elevated energy and other commodity prices were a primary economic concern. Oil
prices were volatile and declined from a record high of $77 per barrel in July
to $63 at period-end. Medical and pharmacy costs climbed substantially. Consumer
confidence and spending remained strong but could weaken with the impact of
higher prices. As home price appreciation slowed, borrowing against home equity
flattened and could have a gradual effect on consumer spending. Inflation was
also a concern, as the core Consumer Price Index (CPI) rose 2.9% for the 12
months ended September 30, 2006, which was higher than the 2.2% 10-year
average. 4
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 3.75% to 5.25%. In August and September, the Fed left the
rate unchanged, citing moderate economic growth, a cooling housing market, and
the lagging effect of prior tightening. The Fed stated that some inflation risk
may remain and the extent and timing of any additional interest rate hikes will
depend upon incoming data on inflation and economic growth.
In this environment, equity markets experienced dramatic rallies late in the
period. Overall, the blue chip stocks of the Dow Jones Industrial Average posted
a 12-month total return of +13.14%, the broader S&P 500 returned +10.78%, while
the technology-heavy NASDAQ Composite Index had a total return of +6.66%. 5
Telecommunications, materials and financials stocks performed particularly well.
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.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
5. 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 Utilities Fund
Based on Total Net Assets as of 9/30/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Electric Utilities 85.5%
Gas Distributors 8.8%
Diversified Telecommunication Services 3.5%
Oil, Gas & Consumable Fuels 1.8%
Short-Term Investments & Other Net Assets 0.4%
Annual Report | 51
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
9/30/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
Entergy Corp. 5.3%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
Exelon Corp. 5.2%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
Duke Energy Corp. 5.1%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
Dominion Resources Inc. 4.7%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
FirstEnergy Corp. 4.5%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
FPL Group Inc. 4.0%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
Edison International 3.5%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
The Southern Co. 3.3%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 3.1%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
PG&E Corp. 3.1%
ELECTRIC UTILITIES
- -------------------------------------------------------------------------------
MANAGER'S DISCUSSION
In general, investments in networks and other infrastructure projects drove
operating performance for many of the Fund's utilities holdings during the
12-month reporting period. As we have pointed out in past reports, many
utilities companies continued to exit non-core diversified businesses to
strengthen their balance sheets and refocus on their core regulated businesses.
Two significant Fund holdings, Alliant Energy (+27%) and Northeast Utilities
(+21%), benefited from company decisions to exit non-core operations and invest
in regional infrastructure opportunities.
Alliant Energy regained some investor confidence by completing the sale of
non-core divisions operating in China and Brazil and using a portion of the
proceeds to repay corporate debt. With improved earnings and financial health,
Alliant also raised its dividend 9.5% during the year under review. In its core
utility businesses in Wisconsin and Iowa, Alliant is finding increased
investment opportunities. As part of our investment strategy, we look for
utilities with significant opportunities for investment in their own service
territories because we think the companies' managers know these areas best.
We held Northeast Utilities shares because the company has spent a significant
amount of capital improving the electric transmission grid in Connecticut.
During the reporting period, Northeast also announced its intention to divest
its non-core competitive businesses. According to our analysis, this action
means management is focused on the regulated business opportunity.
Although a relatively small component of the total portfolio, the Fund's
telecommunications holdings performed well during the year under review. 6
Earnings stabilized for AT&T and Verizon, which rose 43% and 19% in value during
the year under review.
Holdings that detracted from the Fund's 12-month performance included American
Electric Power (-5%) and Edison International (-10%). We continued to like these
two holdings, but recognize their high reliance on coal as fuel for generating
electricity. With increased attention over the past few years on carbon dioxide
emissions and the effect on global warming, it is possible that investors have
shied away from coal-burning utilities. We do support the industry's efforts to
invest in emission-control equipment at generating plants to reduce the amount
of byproducts released into the atmosphere. Because of carbon dioxide concerns,
we also are positive toward the nuclear power industry, and maintain significant
stakes in Exelon and Entergy, the two largest U.S. nuclear plant operators.
6. The Fund's telecommunication holdings are in diversified telecommunication
services in the SOI.
52 | Annual Report
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ John C. Kohli
John C. Kohli, CFA
Portfolio Manager
Franklin Utilities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2006, 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 INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 53
Performance Summary as of 9/30/06
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
that a shareholder would pay 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 9/30/06 9/30/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.30 $12.89 $12.59
- -----------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -----------------------------------------------------------------------------
Dividend Income $0.4123
- -----------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- -----------------------------------------------------------------------------
TOTAL $0.5037
- -----------------------------------------------------------------------------
CLASS B (SYMBOL: FRUBX) CHANGE 9/30/06 9/30/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.31 $12.88 $12.57
- -----------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -----------------------------------------------------------------------------
Dividend Income $0.3503
- -----------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- -----------------------------------------------------------------------------
TOTAL $0.4417
- -----------------------------------------------------------------------------
CLASS C (SYMBOL: FRUSX) CHANGE 9/30/06 9/30/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.30 $12.85 $12.55
- -----------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -----------------------------------------------------------------------------
Dividend Income $0.3521
- -----------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- -----------------------------------------------------------------------------
TOTAL $0.4435
- -----------------------------------------------------------------------------
CLASS R (SYMBOL: FRURX) CHANGE 9/30/06 9/30/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.29 $12.86 $12.57
- -----------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -----------------------------------------------------------------------------
Dividend Income $0.3733
- -----------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- -----------------------------------------------------------------------------
TOTAL $0.4647
- -----------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/06 9/30/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$0.31 $12.95 $12.64
- -----------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-9/30/06)
- -----------------------------------------------------------------------------
Dividend Income $0.4274
- -----------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- -----------------------------------------------------------------------------
TOTAL $0.5188
- -----------------------------------------------------------------------------
54 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.69% +68.53% +154.42%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.15% +10.05% +9.31%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,215 $16,144 $24,365
- ---------------------------------------------------------------------------------------
Distribution Rate 4 3.00%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.91%
- ---------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.25% +64.50% +74.15%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.25% +10.20% +7.42%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,225 $16,250 $17,415
- ---------------------------------------------------------------------------------------
Distribution Rate 4 2.62%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.54%
- ---------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.19% +64.36% +141.93%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.19% +10.45% +9.24%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,519 $16,436 $24,193
- ---------------------------------------------------------------------------------------
Distribution Rate 4 2.63%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.54%
- ---------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.29% +63.73% +59.46%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.29% +17.86% +10.34%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,629 $16,373 $15,946
- ---------------------------------------------------------------------------------------
Distribution Rate 4 2.79%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.69%
- ---------------------------------------------------------------------------------------
ADVISOR CLASS 6 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 1 +6.88% +69.84% +160.89%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.88% +11.18% +10.06%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,688 $16,984 $26,089
- ---------------------------------------------------------------------------------------
Distribution Rate 4 3.17%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.18%
- ---------------------------------------------------------------------------------------
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 | 55
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged 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 9/30/06
- ---------------------------------------
1-Year +2.15%
- ---------------------------------------
5-Year +10.05%
- ---------------------------------------
10-Year +9.31%
- ---------------------------------------
CLASS A (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN S&P 500
UTILITIES UTILITIES
DATE FUND S&P 500 7 INDEX 7
10/1/1996 $9,577 $10,000 $10,000
10/31/1996 $9,892 $10,276 $10,500
11/30/1996 $10,030 $11,052 $10,712
12/31/1996 $10,029 $10,833 $10,642
1/31/1997 $10,081 $11,509 $10,698
2/28/1997 $10,165 $11,600 $10,621
3/31/1997 $9,881 $11,124 $10,277
4/30/1997 $9,807 $11,787 $10,103
5/31/1997 $10,113 $12,504 $10,551
6/30/1997 $10,446 $13,064 $10,869
7/31/1997 $10,692 $14,103 $11,107
8/31/1997 $10,457 $13,314 $10,897
9/30/1997 $10,891 $14,043 $11,361
10/31/1997 $10,945 $13,574 $11,469
11/30/1997 $11,672 $14,202 $12,331
12/31/1997 $12,527 $14,446 $13,266
1/31/1998 $12,043 $14,605 $12,727
2/28/1998 $12,234 $15,658 $13,158
3/31/1998 $12,998 $16,459 $14,015
4/30/1998 $12,531 $16,625 $13,691
5/31/1998 $12,372 $16,339 $13,641
6/30/1998 $12,669 $17,003 $14,162
7/31/1998 $12,208 $16,822 $13,446
8/31/1998 $12,623 $14,392 $13,761
9/30/1998 $13,255 $15,314 $14,851
10/31/1998 $13,010 $16,559 $14,566
11/30/1998 $13,150 $17,562 $14,782
12/31/1998 $13,475 $18,574 $15,234
1/31/1999 $12,758 $19,350 $14,567
2/28/1999 $12,150 $18,749 $14,012
3/31/1999 $11,942 $19,499 $13,790
4/30/1999 $12,694 $20,254 $14,970
5/31/1999 $13,273 $19,776 $15,916
6/30/1999 $12,802 $20,873 $15,357
7/31/1999 $12,615 $20,222 $15,169
8/31/1999 $12,590 $20,122 $15,325
9/30/1999 $12,123 $19,571 $14,588
10/31/1999 $12,338 $20,809 $14,798
11/30/1999 $11,617 $21,232 $13,700
12/31/1999 $11,453 $22,482 $13,835
1/31/2000 $12,107 $21,352 $15,336
2/29/2000 $11,213 $20,948 $14,390
3/31/2000 $11,595 $22,996 $14,869
4/30/2000 $12,284 $22,305 $16,026
5/31/2000 $12,446 $21,848 $16,727
6/30/2000 $11,887 $22,387 $15,732
7/31/2000 $12,380 $22,037 $16,847
8/31/2000 $13,693 $23,405 $19,153
9/30/2000 $15,065 $22,170 $20,912
10/31/2000 $14,995 $22,076 $20,106
11/30/2000 $15,535 $20,337 $19,876
12/31/2000 $16,220 $20,437 $21,747
1/31/2001 $14,554 $21,161 $19,634
2/28/2001 $15,408 $19,233 $20,347
3/31/2001 $15,608 $18,015 $20,211
4/30/2001 $16,258 $19,414 $21,387
5/31/2001 $16,343 $19,544 $20,705
6/30/2001 $15,519 $19,069 $19,055
7/31/2001 $14,977 $18,881 $18,176
8/31/2001 $15,177 $17,700 $17,682
9/30/2001 $14,457 $16,271 $15,635
10/31/2001 $14,472 $16,581 $15,579
11/30/2001 $14,342 $17,853 $14,742
12/31/2001 $14,908 $18,010 $15,127
1/31/2002 $14,724 $17,747 $14,256
2/28/2002 $14,678 $17,405 $13,942
3/31/2002 $15,516 $18,059 $15,639
4/30/2002 $15,408 $16,965 $15,348
5/31/2002 $15,036 $16,840 $13,986
6/30/2002 $14,368 $15,641 $12,992
7/31/2002 $13,128 $14,422 $11,176
8/31/2002 $13,646 $14,517 $11,596
9/30/2002 $12,652 $12,940 $10,098
10/31/2002 $12,652 $14,078 $9,914
11/30/2002 $12,906 $14,906 $10,176
12/31/2002 $13,346 $14,031 $10,590
1/31/2003 $12,798 $13,664 $10,266
2/28/2003 $12,443 $13,459 $9,779
3/31/2003 $12,887 $13,588 $10,258
4/30/2003 $13,590 $14,708 $11,146
5/31/2003 $14,784 $15,482 $12,309
6/30/2003 $14,834 $15,680 $12,448
7/31/2003 $14,156 $15,956 $11,636
8/31/2003 $14,173 $16,267 $11,858
9/30/2003 $14,724 $16,095 $12,386
10/31/2003 $14,992 $17,005 $12,517
11/30/2003 $15,143 $17,154 $12,530
12/31/2003 $15,922 $18,053 $13,371
1/31/2004 $16,192 $18,384 $13,654
2/29/2004 $16,615 $18,640 $13,922
3/31/2004 $16,735 $18,359 $14,060
4/30/2004 $16,239 $18,071 $13,543
5/31/2004 $16,427 $18,318 $13,668
6/30/2004 $16,689 $18,674 $13,879
7/31/2004 $16,861 $18,056 $14,107
8/31/2004 $17,535 $18,129 $14,686
9/30/2004 $17,728 $18,325 $14,813
10/31/2004 $18,461 $18,605 $15,536
11/30/2004 $18,985 $19,358 $16,191
12/31/2004 $19,606 $20,016 $16,618
1/31/2005 $19,783 $19,528 $16,957
2/28/2005 $19,942 $19,939 $17,323
3/31/2005 $19,996 $19,586 $17,519
4/30/2005 $20,442 $19,215 $18,066
5/31/2005 $20,817 $19,826 $18,096
6/30/2005 $21,735 $19,854 $19,150
7/31/2005 $22,077 $20,592 $19,579
8/31/2005 $22,274 $20,405 $19,754
9/30/2005 $22,837 $20,570 $20,542
10/31/2005 $21,531 $20,227 $19,242
11/30/2005 $21,585 $20,991 $19,202
12/31/2005 $21,713 $20,998 $19,416
1/31/2006 $22,285 $21,554 $19,893
2/28/2006 $22,654 $21,613 $20,115
3/31/2006 $21,930 $21,882 $19,192
4/30/2006 $22,172 $22,175 $19,496
5/31/2006 $22,433 $21,538 $19,806
6/30/2006 $22,920 $21,566 $20,284
7/31/2006 $23,952 $21,699 $21,280
8/31/2006 $24,571 $22,215 $21,885
9/30/2006 $24,365 $22,787 $21,522
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS B 9/30/06
- ------------------------------------------------
1-Year +2.25%
- ------------------------------------------------
5-Year +10.20%
- ------------------------------------------------
Since Inception (1/1/99) +7.42%
- ------------------------------------------------
CLASS B (1/1/99-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN S&P 500
UTILITIES UTILITIES
FUND S&P 500 7 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 $16,395 $11,075 $13,484
10/31/2005 $15,469 $10,890 $12,631
11/30/2005 $15,495 $11,301 $12,605
12/31/2005 $15,580 $11,306 $12,746
1/31/2006 $15,991 $11,605 $13,059
2/28/2006 $16,243 $11,636 $13,204
3/31/2006 $15,717 $11,781 $12,598
4/30/2006 $15,890 $11,939 $12,798
5/31/2006 $16,063 $11,596 $13,002
6/30/2006 $16,393 $11,611 $13,315
7/31/2006 $17,132 $11,683 $13,969
8/31/2006 $17,575 $11,960 $14,366
9/30/2006 $17,415 $12,268 $14,128
56 | Annual Report
Performance Summary (CONTINUED)
CLASS C (10/1/96-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN S&P 500
UTILITIES UTILITIES
DATE FUND S&P 500 7 INDEX 7
10/1/1996 $10,000 $10,000 $10,000
10/31/1996 $10,319 $10,276 $10,500
11/30/1996 $10,463 $11,052 $10,712
12/31/1996 $10,460 $10,833 $10,642
1/31/1997 $10,514 $11,509 $10,698
2/28/1997 $10,590 $11,600 $10,621
3/31/1997 $10,284 $11,124 $10,277
4/30/1997 $10,207 $11,787 $10,103
5/31/1997 $10,515 $12,504 $10,551
6/30/1997 $10,860 $13,064 $10,869
7/31/1997 $11,116 $14,103 $11,107
8/31/1997 $10,860 $13,314 $10,897
9/30/1997 $11,306 $14,043 $11,361
10/31/1997 $11,363 $13,574 $11,469
11/30/1997 $12,107 $14,202 $12,331
12/31/1997 $12,993 $14,446 $13,266
1/31/1998 $12,490 $14,605 $12,727
2/28/1998 $12,677 $15,658 $13,158
3/31/1998 $13,464 $16,459 $14,015
4/30/1998 $12,980 $16,625 $13,691
5/31/1998 $12,803 $16,339 $13,641
6/30/1998 $13,106 $17,003 $14,162
7/31/1998 $12,629 $16,822 $13,446
8/31/1998 $13,047 $14,392 $13,761
9/30/1998 $13,708 $15,314 $14,851
10/31/1998 $13,442 $16,559 $14,566
11/30/1998 $13,575 $17,562 $14,782
12/31/1998 $13,907 $18,574 $15,234
1/31/1999 $13,166 $19,350 $14,567
2/28/1999 $12,538 $18,749 $14,012
3/31/1999 $12,322 $19,499 $13,790
4/30/1999 $13,085 $20,254 $14,970
5/31/1999 $13,682 $19,776 $15,916
6/30/1999 $13,181 $20,873 $15,357
7/31/1999 $12,976 $20,222 $15,169
8/31/1999 $12,950 $20,122 $15,325
9/30/1999 $12,465 $19,571 $14,588
10/31/1999 $12,686 $20,809 $14,798
11/30/1999 $11,932 $21,232 $13,700
12/31/1999 $11,759 $22,482 $13,835
1/31/2000 $12,431 $21,352 $15,336
2/29/2000 $11,499 $20,948 $14,390
3/31/2000 $11,902 $22,996 $14,869
4/30/2000 $12,595 $22,305 $16,026
5/31/2000 $12,762 $21,848 $16,727
6/30/2000 $12,173 $22,387 $15,732
7/31/2000 $12,678 $22,037 $16,847
8/31/2000 $14,011 $23,405 $19,153
9/30/2000 $15,413 $22,170 $20,912
10/31/2000 $15,328 $22,076 $20,106
11/30/2000 $15,881 $20,337 $19,876
12/31/2000 $16,575 $20,437 $21,747
1/31/2001 $14,871 $21,161 $19,634
2/28/2001 $15,730 $19,233 $20,347
3/31/2001 $15,930 $18,015 $20,211
4/30/2001 $16,580 $19,414 $21,387
5/31/2001 $16,667 $19,544 $20,705
6/30/2001 $15,821 $19,069 $19,055
7/31/2001 $15,252 $18,881 $18,176
8/31/2001 $15,456 $17,700 $17,682
9/30/2001 $14,720 $16,271 $15,635
10/31/2001 $14,735 $16,581 $15,579
11/30/2001 $14,587 $17,853 $14,742
12/31/2001 $15,160 $18,010 $15,127
1/31/2002 $14,973 $17,747 $14,256
2/28/2002 $14,926 $17,405 $13,942
3/31/2002 $15,760 $18,059 $15,639
4/30/2002 $15,634 $16,965 $15,348
5/31/2002 $15,255 $16,840 $13,986
6/30/2002 $14,577 $15,641 $12,992
7/31/2002 $13,302 $14,422 $11,176
8/31/2002 $13,828 $14,517 $11,596
9/30/2002 $12,821 $12,940 $10,098
10/31/2002 $12,805 $14,078 $9,914
11/30/2002 $13,079 $14,906 $10,176
12/31/2002 $13,509 $14,031 $10,590
1/31/2003 $12,954 $13,664 $10,266
2/28/2003 $12,594 $13,459 $9,779
3/31/2003 $13,032 $13,588 $10,258
4/30/2003 $13,727 $14,708 $11,146
5/31/2003 $14,936 $15,482 $12,309
6/30/2003 $14,975 $15,680 $12,448
7/31/2003 $14,289 $15,956 $11,636
8/31/2003 $14,306 $16,267 $11,858
9/30/2003 $14,844 $16,095 $12,386
10/31/2003 $15,098 $17,005 $12,517
11/30/2003 $15,267 $17,154 $12,530
12/31/2003 $16,017 $18,053 $13,371
1/31/2004 $16,291 $18,384 $13,654
2/29/2004 $16,717 $18,640 $13,922
3/31/2004 $16,837 $18,359 $14,060
4/30/2004 $16,337 $18,071 $13,543
5/31/2004 $16,492 $18,318 $13,668
6/30/2004 $16,752 $18,674 $13,879
7/31/2004 $16,926 $18,056 $14,107
8/31/2004 $17,605 $18,129 $14,686
9/30/2004 $17,777 $18,325 $14,813
10/31/2004 $18,514 $18,605 $15,536
11/30/2004 $19,023 $19,358 $16,191
12/31/2004 $19,654 $20,016 $16,618
1/31/2005 $19,813 $19,528 $16,957
2/28/2005 $19,973 $19,939 $17,323
3/31/2005 $20,018 $19,586 $17,519
4/30/2005 $20,447 $19,215 $18,066
5/31/2005 $20,805 $19,826 $18,096
6/30/2005 $21,725 $19,854 $19,150
7/31/2005 $22,050 $20,592 $19,579
8/31/2005 $22,248 $20,405 $19,754
9/30/2005 $22,784 $20,570 $20,542
10/31/2005 $21,477 $20,227 $19,242
11/30/2005 $21,531 $20,991 $19,202
12/31/2005 $21,652 $20,998 $19,416
1/31/2006 $22,205 $21,554 $19,893
2/28/2006 $22,574 $21,613 $20,115
3/31/2006 $21,842 $21,882 $19,192
4/30/2006 $22,083 $22,175 $19,496
5/31/2006 $22,306 $21,538 $19,806
6/30/2006 $22,785 $21,566 $20,284
7/31/2006 $23,814 $21,699 $21,280
8/31/2006 $24,412 $22,215 $21,885
9/30/2006 $24,193 $22,787 $21,522
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 9/30/06
- ---------------------------------------------
1-Year +5.19%
- ---------------------------------------------
5-Year +10.45%
- ---------------------------------------------
10-Year +9.24%
- ---------------------------------------------
CLASS R (1/1/02-9/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN S&P 500
UTILITIES UTILITIES
DATE FUND S&P 500 7 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 $10,304 $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 $9,543 $8,685 $8,589
7/31/2002 $8,720 $8,008 $7,388
8/31/2002 $9,053 $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 $8,489 $7,587 $6,786
2/28/2003 $8,254 $7,473 $6,465
3/31/2003 $8,546 $7,545 $6,781
4/30/2003 $9,001 $8,167 $7,368
5/31/2003 $9,794 $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 $9,380 $9,032 $7,839
9/30/2003 $9,739 $8,937 $8,188
10/31/2003 $9,917 $9,442 $8,275
11/30/2003 $10,017 $9,525 $8,283
12/31/2003 $10,524 $10,024 $8,839
1/31/2004 $10,692 $10,208 $9,026
2/29/2004 $10,971 $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 $10,838 $10,171 $9,035
6/30/2004 $11,013 $10,369 $9,175
7/31/2004 $11,127 $10,026 $9,326
8/31/2004 $11,572 $10,066 $9,708
9/30/2004 $11,690 $10,175 $9,792
10/31/2004 $12,174 $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 $13,028 $10,843 $11,209
2/28/2005 $13,133 $11,071 $11,451
3/31/2005 $13,163 $10,876 $11,581
4/30/2005 $13,458 $10,669 $11,943
5/31/2005 $13,693 $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
10/31/2005 $14,144 $11,231 $12,720
11/30/2005 $14,168 $11,655 $12,694
12/31/2005 $14,254 $11,660 $12,835
1/31/2006 $14,618 $11,968 $13,150
2/28/2006 $14,861 $12,001 $13,297
3/31/2006 $14,387 $12,150 $12,687
4/30/2006 $14,545 $12,313 $12,888
5/31/2006 $14,704 $11,959 $13,093
6/30/2006 $15,012 $11,975 $13,408
7/31/2006 $15,690 $12,049 $14,067
8/31/2006 $16,084 $12,335 $14,467
9/30/2006 $15,946 $12,653 $14,227
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS R 9/30/06
- --------------------------------------------
1-Year +6.29%
- --------------------------------------------
3-Year +17.86%
- --------------------------------------------
Since Inception (1/1/02) +10.34%
- --------------------------------------------
Annual Report | 57
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
ADVISOR CLASS 6 9/30/06
- ---------------------------------------------------
1-Year +6.88%
- ---------------------------------------------------
5-Year +11.18%
- ---------------------------------------------------
10-Year +10.06%
- ---------------------------------------------------
ADVISOR CLASS (10/1/96-9/30/06) 6
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
FRANKLIN S&P 500
UTILITIES UTILITIES
DATE FUND S&P 500 7 INDEX 7
10/1/1996 $10,000 $10,000 $10,000
10/31/1996 $10,329 $10,276 $10,500
11/30/1996 $10,473 $11,052 $10,712
12/31/1996 $10,473 $10,833 $10,642
1/31/1997 $10,615 $11,509 $10,698
2/28/1997 $10,703 $11,600 $10,621
3/31/1997 $10,408 $11,124 $10,277
4/30/1997 $10,330 $11,787 $10,103
5/31/1997 $10,652 $12,504 $10,551
6/30/1997 $11,007 $13,064 $10,869
7/31/1997 $11,266 $14,103 $11,107
8/31/1997 $11,007 $13,314 $10,897
9/30/1997 $11,479 $14,043 $11,361
10/31/1997 $11,525 $13,574 $11,469
11/30/1997 $12,290 $14,202 $12,331
12/31/1997 $13,208 $14,446 $13,266
1/31/1998 $12,698 $14,605 $12,727
2/28/1998 $12,899 $15,658 $13,158
3/31/1998 $13,710 $16,459 $14,015
4/30/1998 $13,229 $16,625 $13,691
5/31/1998 $13,049 $16,339 $13,641
6/30/1998 $13,367 $17,003 $14,162
7/31/1998 $12,881 $16,822 $13,446
8/31/1998 $13,307 $14,392 $13,761
9/30/1998 $14,027 $15,314 $14,851
10/31/1998 $13,769 $16,559 $14,566
11/30/1998 $13,916 $17,562 $14,782
12/31/1998 $14,252 $18,574 $15,234
1/31/1999 $13,508 $19,350 $14,567
2/28/1999 $12,865 $18,749 $14,012
3/31/1999 $12,650 $19,499 $13,790
4/30/1999 $13,445 $20,254 $14,970
5/31/1999 $14,056 $19,776 $15,916
6/30/1999 $13,563 $20,873 $15,357
7/31/1999 $13,352 $20,222 $15,169
8/31/1999 $13,339 $20,122 $15,325
9/30/1999 $12,837 $19,571 $14,588
10/31/1999 $13,078 $20,809 $14,798
11/30/1999 $12,303 $21,232 $13,700
12/31/1999 $12,148 $22,482 $13,835
1/31/2000 $12,839 $21,352 $15,336
2/29/2000 $11,881 $20,948 $14,390
3/31/2000 $12,302 $22,996 $14,869
4/30/2000 $13,032 $22,305 $16,026
5/31/2000 $13,203 $21,848 $16,727
6/30/2000 $12,602 $22,387 $15,732
7/31/2000 $13,137 $22,037 $16,847
8/31/2000 $14,526 $23,405 $19,153
9/30/2000 $15,982 $22,170 $20,912
10/31/2000 $15,909 $22,076 $20,106
11/30/2000 $16,494 $20,337 $19,876
12/31/2000 $17,209 $20,437 $21,747
1/31/2001 $15,448 $21,161 $19,634
2/28/2001 $16,351 $19,233 $20,347
3/31/2001 $16,568 $18,015 $20,211
4/30/2001 $17,257 $19,414 $21,387
5/31/2001 $17,362 $19,544 $20,705
6/30/2001 $16,480 $19,069 $19,055
7/31/2001 $15,906 $18,881 $18,176
8/31/2001 $16,117 $17,700 $17,682
9/30/2001 $15,361 $16,271 $15,635
10/31/2001 $15,376 $16,581 $15,579
11/30/2001 $15,239 $17,853 $14,742
12/31/2001 $15,844 $18,010 $15,127
1/31/2002 $15,649 $17,747 $14,256
2/28/2002 $15,617 $17,405 $13,942
3/31/2002 $16,494 $18,059 $15,639
4/30/2002 $16,379 $16,965 $15,348
5/31/2002 $16,001 $16,840 $13,986
6/30/2002 $15,282 $15,641 $12,992
7/31/2002 $13,952 $14,422 $11,176
8/31/2002 $14,518 $14,517 $11,596
9/30/2002 $13,468 $12,940 $10,098
10/31/2002 $13,468 $14,078 $9,914
11/30/2002 $13,755 $14,906 $10,176
12/31/2002 $14,209 $14,031 $10,590
1/31/2003 $13,628 $13,664 $10,266
2/28/2003 $13,251 $13,459 $9,779
3/31/2003 $13,727 $13,588 $10,258
4/30/2003 $14,474 $14,708 $11,146
5/31/2003 $15,758 $15,482 $12,309
6/30/2003 $15,816 $15,680 $12,448
7/31/2003 $15,096 $15,956 $11,636
8/31/2003 $15,113 $16,267 $11,858
9/30/2003 $15,705 $16,095 $12,386
10/31/2003 $15,972 $17,005 $12,517
11/30/2003 $16,150 $17,154 $12,530
12/31/2003 $16,964 $18,053 $13,371
1/31/2004 $17,252 $18,384 $13,654
2/29/2004 $17,720 $18,640 $13,922
3/31/2004 $17,853 $18,359 $14,060
4/30/2004 $17,326 $18,071 $13,543
5/31/2004 $17,508 $18,318 $13,668
6/30/2004 $17,791 $18,674 $13,879
7/31/2004 $17,994 $18,056 $14,107
8/31/2004 $18,710 $18,129 $14,686
9/30/2004 $18,922 $18,325 $14,813
10/31/2004 $19,701 $18,605 $15,536
11/30/2004 $20,257 $19,358 $16,191
12/31/2004 $20,932 $20,016 $16,618
1/31/2005 $21,121 $19,528 $16,957
2/28/2005 $21,309 $19,939 $17,323
3/31/2005 $21,355 $19,586 $17,519
4/30/2005 $21,849 $19,215 $18,066
5/31/2005 $22,228 $19,826 $18,096
6/30/2005 $23,233 $19,854 $19,150
7/31/2005 $23,597 $20,592 $19,579
8/31/2005 $23,807 $20,405 $19,754
9/30/2005 $24,409 $20,570 $20,542
10/31/2005 $23,019 $20,227 $19,242
11/30/2005 $23,077 $20,991 $19,202
12/31/2005 $23,222 $20,998 $19,416
1/31/2006 $23,832 $21,554 $19,893
2/28/2006 $24,225 $21,613 $20,115
3/31/2006 $23,462 $21,882 $19,192
4/30/2006 $23,720 $22,175 $19,496
5/31/2006 $23,997 $21,538 $19,806
6/30/2006 $24,526 $21,566 $20,284
7/31/2006 $25,625 $21,699 $21,280
8/31/2006 $26,305 $22,215 $21,885
9/30/2006 $26,089 $22,787 $21,522
ENDNOTES
IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY
COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN
INTEREST RATES FALL, UTILITY SECURITIES PRICES, AND THUS A UTILITIES FUND'S
SHARE PRICE, 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. Distribution rate is based on an annualization of the respective class's
most recent quarterly dividend and the maximum offering price (NAV for
Classes B, C, R and Advisor) per share on 9/30/06.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/06.
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 +149.12% and +9.82%.
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.
58 | 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 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 | 59
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 4/1/06 VALUE 9/30/06 PERIOD* 4/1/06-9/30/06
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,111.00 $3.97
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.31 $3.80
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,108.30 $6.61
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.33
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,107.70 $6.55
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.28
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,108.50 $5.87
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.62
- ---------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,111.90 $3.18
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.06 $3.04
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.75%; B: 1.25%; C: 1.24%; R: 1.11%; and Advisor: 0.60%), multiplied by
the average account value over the period, multiplied by 183/365 to
reflect the one-half year period.
60 | Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2006 2005 2004 2003 2002
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76
------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................. (0.05) (0.01) (0.09) (0.06) 0.03
Net realized and unrealized gains (losses) ..... 0.87 2.98 1.93 4.86 (3.11)
------------------------------------------------------------------
Total from investment operations ................ 0.82 2.97 1.84 4.80 (3.08)
------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- -- -- -- (0.29)
Tax return of capital .......................... -- -- -- -- (0.02)
------------------------------------------------------------------
Total distributions ............................. -- -- -- -- (0.31)
------------------------------------------------------------------
Redemption fees ................................. -- d -- d -- d -- --
------------------------------------------------------------------
Net asset value, end of year .................... $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37
==================================================================
Total return c .................................. 3.28% 13.49% 9.12% 31.23% (16.83)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $590,633 $628,732 $640,120 $558,687 $413,309
Ratios to average net assets:
Expenses ....................................... 0.97% e 1.00% e 0.97% 1.04% 1.00%
Net investment income (loss) ................... (0.20)% (0.02)% (0.41)% (0.40)% 0.13%
Portfolio turnover rate ......................... 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 61
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57
-----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................... (0.23) (0.18) (0.25) (0.25) (0.12)
Net realized and unrealized gains (losses) ........ 0.83 2.90 1.89 4.84 (3.08)
-----------------------------------------------------------------
Total from investment operations ................... 0.60 2.72 1.64 4.59 (3.20)
-----------------------------------------------------------------
Less distributions from:
Net investment income ............................. -- -- -- -- (0.16)
Tax return of capital ............................. -- -- -- -- (0.01)
-----------------------------------------------------------------
Total distributions ................................ -- -- -- -- (0.17)
-----------------------------------------------------------------
Redemption fees .................................... -- d -- d -- d -- --
-----------------------------------------------------------------
Net asset value, end of year ....................... $ 24.75 $ 24.15 $ 21.43 $ 19.79 $15.20
=================================================================
Total return c ..................................... 2.48% 12.69% 8.29% 30.20% (17.51)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $18,718 $19,497 $18,824 $10,406 $5,066
Ratios to average net assets:
Expenses .......................................... 1.72% e 1.74% e 1.72% 1.79% 1.75%
Net investment income (loss) ...................... (0.95)% (0.76)% (1.16)% (1.15)% (0.62)%
Portfolio turnover rate ............................ 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share. e Benefit of expense reduction
rounds to less than 0.01%.
62 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
-----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34
-----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .................... (0.23) (0.17) (0.25) (0.25) (0.11)
Net realized and unrealized gains (losses) ........ 0.83 2.86 1.87 4.80 (3.05)
-----------------------------------------------------------------
Total from investment operations ................... 0.60 2.69 1.62 4.55 (3.16)
-----------------------------------------------------------------
Less distributions from:
Net investment income ............................. -- -- -- -- (0.13)
Tax return of capital ............................. -- -- -- -- (0.01)
-----------------------------------------------------------------
Total distributions ................................ -- -- -- -- (0.14)
-----------------------------------------------------------------
Redemption fees .................................... -- d -- d -- d -- --
-----------------------------------------------------------------
Net asset value, end of year ....................... $ 24.50 $ 23.90 $ 21.21 $ 19.59 $15.04
=================================================================
Total return c ..................................... 2.51% 12.68% 8.27% 30.25% (17.48)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $69,069 $73,587 $75,642 $66,952 $51,809
Ratios to average net assets:
Expenses .......................................... 1.71% e 1.74% e 1.72% 1.79% 1.74%
Net investment income (loss) ...................... (0.94)% (0.76)% (1.16)% (1.15)% (0.61)%
Portfolio turnover rate ............................ 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS 99.8%
AIR FREIGHT/COURIERS 3.5%
C.H. Robinson Worldwide Inc. .................. United States 300,000 $13,374,000
United Parcel Service Inc., B ................. United States 140,000 10,071,600
-----------
23,445,600
-----------
BIOTECHNOLOGY 9.4%
a Amgen Inc. .................................... United States 200,000 14,306,000
a Biogen Idec Inc. .............................. United States 100,000 4,468,000
a Celgene Corp. ................................. United States 100,000 4,330,000
a Genentech Inc. ................................ United States 275,000 22,742,500
a Gilead Sciences Inc. .......................... United States 150,000 10,305,000
a Invitrogen Corp. .............................. United States 125,000 7,926,250
-----------
64,077,750
-----------
CABLE/SATELLITE TELEVISION 0.8%
a Comcast Corp., A .............................. United States 150,000 5,521,500
-----------
CASINOS/GAMING 1.5%
International Game Technology ................. United States 250,000 10,375,000
-----------
CHEMICALS: SPECIALTY 1.4%
Sigma-Aldrich Corp. ........................... United States 125,000 9,458,750
-----------
COMPUTER COMMUNICATIONS 1.7%
a Cisco Systems Inc. ............................ United States 500,000 11,500,000
-----------
COMPUTER PROCESSING HARDWARE 4.4%
a Apple Computer Inc. ........................... United States 210,000 16,176,300
Hewlett-Packard Co. ........................... United States 380,000 13,942,200
-----------
30,118,500
-----------
DATA PROCESSING SERVICES 1.6%
Paychex Inc. .................................. United States 300,000 11,055,000
-----------
ELECTRONIC EQUIPMENT/INSTRUMENTS 3.4%
a Agilent Technologies Inc. ..................... United States 300,000 9,807,000
a Dolby Laboratories Inc., A .................... United States 100,000 1,985,000
Rockwell Automation Inc. ...................... United States 150,000 8,715,000
a SunPower Corp., A ............................. United States 100,000 2,774,000
-----------
23,281,000
-----------
ELECTRONIC PRODUCTION EQUIPMENT 4.0%
Applied Materials Inc. ........................ United States 350,000 6,205,500
KLA-Tencor Corp. .............................. United States 200,000 8,894,000
a Lam Research Corp. ............................ United States 150,000 6,799,500
a Varian Semiconductor Equipment Associates Inc. United States 150,000 5,505,000
-----------
27,404,000
-----------
ELECTRONICS/APPLIANCE STORES 1.5%
Best Buy Co. Inc. ............................. United States 187,500 10,042,500
-----------
ELECTRONICS/APPLIANCES 0.4%
Sony Corp., ADR ............................... Japan 60,000 2,421,600
-----------
64 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
FINANCIAL PUBLISHING/SERVICES 1.5%
Moody's Corp. ................................. United States 150,000 $ 9,807,000
-----------
FOOD RETAIL 0.4%
Whole Foods Market Inc. ....................... United States 40,000 2,377,200
-----------
INFORMATION TECHNOLOGY SERVICES 4.0%
a Amdocs Ltd. ................................... United States 200,000 7,920,000
a Cognizant Technology Solutions Corp., A ....... United States 140,000 10,368,400
Infosys Technologies Ltd., ADR ................ India 180,000 8,591,400
-----------
26,879,800
-----------
INTERNET SOFTWARE/SERVICES 5.0%
a Akamai Technologies Inc. ...................... United States 75,000 3,749,250
a Google Inc., A ................................ United States 50,000 20,095,000
a Yahoo! Inc. ................................... United States 400,000 10,112,000
-----------
33,956,250
-----------
INVESTMENT BANKS/BROKERS 0.7%
The Goldman Sachs Group Inc. .................. United States 20,000 3,383,400
a Nasdaq Stock Market Inc. ...................... United States 40,000 1,209,600
-----------
4,593,000
-----------
MAJOR PHARMACEUTICALS 2.7%
Johnson & Johnson ............................. United States 150,000 9,741,000
Pfizer Inc. ................................... United States 300,000 8,508,000
-----------
18,249,000
-----------
MANAGED HEALTH CARE 1.7%
Caremark Rx Inc. .............................. United States 200,000 11,334,000
-----------
MEDICAL SPECIALTIES 8.7%
Alcon Inc. .................................... Switzerland 100,000 11,450,000
Medtronic Inc. ................................ United States 275,000 12,771,000
a Mindray Medical International Ltd., ADR ....... China 30,000 500,700
Stryker Corp. ................................. United States 200,000 9,918,000
a Varian Medical Systems Inc. ................... United States 165,000 8,809,350
a Waters Corp. .................................. United States 200,000 9,056,000
a Zimmer Holdings Inc. .......................... United States 100,000 6,750,000
-----------
59,255,050
-----------
MEDICAL/NURSING SERVICES 1.7%
a VCA Antech Inc. ............................... United States 325,000 11,719,500
-----------
MISCELLANEOUS COMMERCIAL SERVICES 1.1%
Corporate Executive Board Co. ................. United States 85,000 7,642,350
-----------
OILFIELD SERVICES/EQUIPMENT 3.2%
a FMC Technologies Inc. ......................... United States 120,000 6,444,000
Halliburton Co. ............................... United States 100,000 2,845,000
Schlumberger Ltd. ............................. United States 200,000 12,406,000
-----------
21,695,000
-----------
Annual Report | 65
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
OTHER CONSUMER SERVICES 0.1%
a Shutterfly Inc. ............................... United States 40,000 $ 622,000
-----------
OTHER PHARMACEUTICALS 2.8%
Allergan Inc. ................................. United States 80,000 9,008,800
Teva Pharmaceutical Industries Ltd., ADR ...... Israel 300,000 10,227,000
-----------
19,235,800
-----------
PACKAGED SOFTWARE 9.0%
Adobe Systems Inc. ............................ United States 475,000 17,788,750
Autodesk Inc. ................................. United States 200,000 6,956,000
a Commvault Systems Inc. ........................ United States 20,000 360,000
Microsoft Corp. ............................... United States 950,000 25,963,500
a Salesforce.com Inc. ........................... United States 50,000 1,794,000
SAP AG, ADR ................................... Germany 170,000 8,415,000
-----------
61,277,250
-----------
RECREATIONAL PRODUCTS 2.1%
a Electronic Arts Inc. .......................... United States 250,000 13,920,000
-----------
SEMICONDUCTORS 10.3%
Analog Devices Inc. ........................... United States 310,000 9,110,900
a Broadcom Corp., A ............................. United States 140,000 4,247,600
Intel Corp. ................................... United States 1,150,000 23,655,500
Linear Technology Corp. ....................... United States 400,000 12,448,000
a Marvell Technology Group Ltd. ................. Bermuda 420,000 8,135,400
Microchip Technology Inc. ..................... United States 210,000 6,808,200
a NVIDIA Corp. .................................. United States 175,000 5,178,250
-----------
69,583,850
-----------
SERVICES TO THE HEALTH INDUSTRY 2.5%
a Cerner Corp. .................................. United States 40,000 1,816,000
Pharmaceutical Product Development Inc. ....... United States 350,000 12,491,500
a WebMD Health Corp., A ......................... United States 85,000 2,918,900
-----------
17,226,400
-----------
SPECIALTY TELECOMMUNICATIONS 1.1%
a American Tower Corp., A ....................... United States 200,000 7,300,000
-----------
TELECOMMUNICATIONS EQUIPMENT 6.0%
a Corning Inc. .................................. United States 200,000 4,882,000
Garmin Ltd. ................................... Cayman Islands 80,000 3,902,400
Motorola Inc. ................................. United States 680,750 17,018,750
Nokia Corp., ADR .............................. Finland 315,000 6,202,350
QUALCOMM Inc. ................................. United States 235,000 8,542,250
-----------
40,547,750
-----------
66 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
WIRELESS COMMUNICATIONS 1.6%
America Movil SA de CV, L, ADR ...................................... Mexico 220,000 $ 8,661,400
a NII Holdings Inc. ................................................... United States 40,000 2,486,400
-------------
11,147,800
-------------
TOTAL COMMON STOCKS (COST $417,723,494) ............................. 677,070,200
-------------
SHORT TERM INVESTMENT (COST $4,719,412) 0.7%
MONEY MARKET FUND 0.7%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 4,719,412 4,719,412
-------------
TOTAL INVESTMENTS (COST $422,442,906) 100.5% ........................ 681,789,612
OTHER ASSETS, LESS LIABILITIES (0.5)% ............................... (3,370,175)
-------------
NET ASSETS 100.0% ................................................... $ 678,419,437
=============
See Selected Portfolio Abbreviations on page 107.
a Non-income producing for the twelve months ended September 30, 2006.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
---------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2006 2005 2004 2003 2002
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......... $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................... 0.12 0.13 0.06 0.08 0.07
Net realized and unrealized gains (losses) 4.21 4.20 3.68 4.81 (5.65)
---------------------------------------------------------------------------
Total from investment operations ........... 4.33 4.33 3.74 4.89 (5.58)
---------------------------------------------------------------------------
Less distributions from:
Net investment income ..................... (0.06) (0.08) (0.03) (0.04) (0.16)
Net realized gains ........................ -- -- -- -- (0.05)
---------------------------------------------------------------------------
Total distributions ........................ (0.06) (0.08) (0.03) (0.04) (0.21)
---------------------------------------------------------------------------
Redemption fees ............................ -- d -- d -- d -- --
---------------------------------------------------------------------------
Net asset value, end of year ............... $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02
===========================================================================
Total return c ............................. 12.46% 14.17% 13.92% 22.27% (20.35)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............ $1,695,802 $1,567,675 $1,531,871 $1,433,742 $1,249,745
Ratios to average net assets:
Expenses .................................. 0.91% e 0.94% e 0.98% 1.06% 0.96%
Net investment income ..................... 0.34% 0.40% 0.20% 0.31% 0.24%
Portfolio turnover rate .................... 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges,if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
-------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2006 2005 2004 2003 2002
-------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................... (0.15) (0.11) (0.16) (0.11) (0.14)
Net realized and unrealized gains (losses) ....... 4.07 4.07 3.61 4.73 (5.57)
-------------------------------------------------------------------
Total from investment operations .................. 3.92 3.96 3.45 4.62 (5.71)
-------------------------------------------------------------------
Less distributions from net realized gains ........ -- -- -- -- (0.05)
-------------------------------------------------------------------
Redemption fees ................................... -- d -- d -- d -- --
-------------------------------------------------------------------
Net asset value, end of year ...................... $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70
===================================================================
Total return c .................................... 11.62% 13.30% 13.11% 21.29% (20.90)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $122,871 $123,926 $121,986 $103,499 $75,141
Ratios to average net assets:
Expenses ......................................... 1.67% e 1.69% e 1.73% 1.81% 1.71%
Net investment income (loss) ..................... (0.42)% (0.35)% (0.55)% (0.44)% (0.51)%
Portfolio turnover rate ........................... 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 69
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2006 2005 2004 2003 2002
------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24
------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ..................... (0.15) (0.11) (0.16) (0.11) (0.14)
Net realized and unrealized gains (losses) ......... 4.04 4.03 3.58 4.69 (5.54)
------------------------------------------------------------------
Total from investment operations .................... 3.89 3.92 3.42 4.58 (5.68)
------------------------------------------------------------------
Less distributions from net realized gains .......... -- -- -- -- (0.05)
------------------------------------------------------------------
Redemption fees ..................................... -- d -- d -- d -- --
------------------------------------------------------------------
Net asset value, end of year ........................ $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51
==================================================================
Total return c ...................................... 11.60% 13.32% 13.11% 21.29% (20.92)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $273,512 $270,538 $270,131 $259,169 $232,307
Ratios to average net assets:
Expenses ........................................... 1.66% e 1.69% e 1.73% 1.82% 1.70%
Net investment income (loss) ....................... (0.41)% (0.35)% (0.55)% (0.45)% (0.51)%
Portfolio turnover rate ............................. 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
70 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
----------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2006 2005 2004 2003 2002 g
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 34.59 $ 30.39 $ 26.74 $ 21.98 $ 31.59
----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ...................... 0.02 0.05 (0.02) -- --
Net realized and unrealized gains (losses) .......... 4.19 4.16 3.67 4.81 (9.61)
----------------------------------------------------------------
Total from investment operations ..................... 4.21 4.21 3.65 4.81 (9.61)
----------------------------------------------------------------
Less distributions from net investment income ........ -- d (0.01) -- (0.05) --
----------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- --
----------------------------------------------------------------
Net asset value, end of year ......................... $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98
================================================================
Total return c ....................................... 12.18% 13.87% 13.65% 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $37,804 $27,818 $20,060 $14,755 $ 2,788
Ratios to average net assets:
Expenses ............................................ 1.17% f 1.19% f 1.23% 1.31% 1.21% h
Net investment income (loss) ........................ 0.08% 0.15% (0.05)% 0.06% 0.02% h
Portfolio turnover rate .............................. 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d The fund made an income distribution of $0.001.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to September 30, 2002.
h Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
--------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.22 0.21 0.14 0.14 0.14
Net realized and unrealized gains (losses) ........ 4.21 4.21 3.67 4.82 (5.65)
--------------------------------------------------------------------
Total from investment operations ................... 4.43 4.42 3.81 4.96 (5.51)
--------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.15) (0.16) (0.09) (0.11) (0.24)
Net realized gains ................................ -- -- -- -- (0.05)
--------------------------------------------------------------------
Total distributions ................................ (0.15) (0.16) (0.09) (0.11) (0.29)
--------------------------------------------------------------------
Redemption fees .................................... -- c -- c -- c -- --
--------------------------------------------------------------------
Net asset value, end of year ....................... $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06
====================================================================
Total return ....................................... 12.73% 14.45% 14.19% 22.58% (20.14)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $274,603 $221,752 $133,332 $41,216 $27,431
Ratios to average net assets:
Expenses .......................................... 0.67% d 0.69% d 0.73% 0.81% 0.71%
Net investment income ............................. 0.58% 0.65% 0.45% 0.56% 0.49%
Portfolio turnover rate ............................ 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
72 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
- --------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- --------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 99.3%
COMMERCIAL SERVICES 2.8%
a Dun & Bradstreet Corp. ................. United States 122,000 $ 9,148,780
Equifax Inc. ........................... United States 400,000 14,684,000
Moody's Corp. .......................... United States 488,000 31,905,440
Robert Half International Inc. ......... United States 300,000 10,191,000
-------------
65,929,220
-------------
CONSUMER DURABLES 2.2%
Ford Motor Co. ......................... United States 1,100,000 8,899,000
General Motors Corp. ................... United States 400,000 13,304,000
Harley-Davidson Inc. ................... United States 500,000 31,375,000
-------------
53,578,000
-------------
CONSUMER NON-DURABLES 2.7%
The Hershey Co. ........................ United States 516,400 27,601,580
Tootsie Roll Industries Inc. ........... United States 23,161 678,849
VF Corp. ............................... United States 500,000 36,475,000
-------------
64,755,429
-------------
CONSUMER SERVICES 4.6%
Carnival Corp. ......................... United States 500,000 23,515,000
CBS Corp., A ........................... United States 100,000 2,822,000
CBS Corp., B ........................... United States 50,000 1,408,500
Clear Channel Communications Inc. ...... United States 500,000 14,425,000
a Expedia Inc. ........................... United States 300,100 4,705,568
a Live Nation Inc. ....................... United States 62,500 1,276,250
Time Warner Inc. ....................... United States 1,350,000 24,610,500
a Viacom Inc., A ......................... United States 100,000 3,730,000
a Viacom Inc., B ......................... United States 50,000 1,859,000
The Walt Disney Co. .................... United States 1,000,000 30,910,000
-------------
109,261,818
-------------
DISTRIBUTION SERVICES 3.0%
Cardinal Health Inc. ................... United States 300,000 19,722,000
Genuine Parts Co. ...................... United States 375,400 16,191,002
W.W. Grainger Inc. ..................... United States 550,000 36,861,000
-------------
72,774,002
-------------
ELECTRONIC TECHNOLOGY 22.5%
a Agilent Technologies Inc. .............. United States 400,000 13,076,000
a Apple Computer Inc. .................... United States 1,000,000 77,030,000
The Boeing Co. ......................... United States 1,000,000 78,850,000
a Cisco Systems Inc. ..................... United States 1,350,000 31,050,000
a Dell Inc. .............................. United States 500,000 11,420,000
a Dionex Corp. ........................... United States 250,000 12,735,000
a EMC Corp. .............................. United States 1,000,000 11,980,000
a Entegris Inc. .......................... United States 376,307 4,105,509
a Gateway Inc. ........................... United States 300,000 567,000
General Dynamics Corp. ................. United States 1,000,000 71,670,000
Hewlett-Packard Co. .................... United States 1,116,250 40,955,213
Annual Report | 73
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
Intel Corp. ............................ United States 800,000 $ 16,456,000
Lockheed Martin Corp. .................. United States 500,000 43,030,000
a Micrel Inc. ............................ United States 25,000 239,750
a Mindspeed Technologies Inc. ............ United States 100,000 173,000
Northrop Grumman Corp. ................. United States 1,000,000 68,070,000
Raytheon Co. ........................... United States 600,000 28,806,000
Rockwell Collins Inc. .................. United States 100,000 5,484,000
a Sun Microsystems Inc. .................. United States 1,600,000 7,952,000
Texas Instruments Inc. ................. United States 515,000 17,123,750
-------------
540,773,222
-------------
ENERGY MINERALS 1.6%
BP PLC, ADR ............................ United Kingdom 295,200 19,359,216
Royal Dutch Shell PLC, A, ADR .......... United Kingdom 280,000 18,508,000
-------------
37,867,216
-------------
FINANCE 0.2%
a ChoicePoint Inc. ....................... United States 160,000 5,728,000
-------------
HEALTH SERVICES 2.1%
Caremark Rx Inc. ....................... United States 75,625 4,285,669
IMS Health Inc. ........................ United States 500,000 13,320,000
a Medco Health Solutions Inc. ............ United States 48,240 2,899,706
Quest Diagnostics Inc. ................. United States 500,000 30,580,000
-------------
51,085,375
-------------
HEALTH TECHNOLOGY 21.6%
Abbott Laboratories .................... United States 400,000 19,424,000
a Advanced Medical Optics Inc. ........... United States 88,888 3,515,520
Allergan Inc. .......................... United States 400,000 45,044,000
a Amgen Inc. ............................. United States 932,000 66,665,960
Baxter International Inc. .............. United States 400,000 18,184,000
a Biogen Idec Inc. ....................... United States 400,000 17,872,000
a Edwards Lifesciences Corp. ............. United States 50,000 2,329,500
Eli Lilly and Co. ...................... United States 400,000 22,800,000
a Genentech Inc. ......................... United States 1,000,000 82,700,000
a Hospira Inc. ........................... United States 40,000 1,530,800
Johnson & Johnson ...................... United States 996,000 64,680,240
Merck & Co. Inc. ....................... United States 500,000 20,950,000
a Millipore Corp. ........................ United States 400,000 24,520,000
Pall Corp. ............................. United States 500,000 15,405,000
Pfizer Inc. ............................ United States 2,000,000 56,720,000
a Waters Corp. ........................... United States 500,000 22,640,000
Wyeth .................................. United States 600,000 30,504,000
a Zimmer Holdings Inc. ................... United States 64,000 4,320,000
-------------
519,805,020
-------------
74 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
PROCESS INDUSTRIES 2.0%
Air Products and Chemicals Inc. .................... United States 500,000 $ 33,185,000
Sigma-Aldrich Corp. ................................ United States 200,000 15,134,000
-------------
48,319,000
-------------
PRODUCER MANUFACTURING 18.9%
3M Co. ............................................. United States 800,000 59,536,000
American Power Conversion Corp. .................... United States 500,000 10,980,000
Avery Dennison Corp. ............................... United States 462,000 27,798,540
Emerson Electric Co. ............................... United States 500,000 41,930,000
Illinois Tool Works Inc. ........................... United States 1,000,000 44,900,000
Ingersoll-Rand Co. Ltd., A ......................... United States 1,002,000 38,055,960
Johnson Controls Inc. .............................. United States 400,000 28,696,000
Molex Inc. ......................................... United States 146,483 5,708,443
Molex Inc., A ...................................... United States 146,483 4,820,756
Teleflex Inc. ...................................... United States 500,000 27,820,000
Textron Inc. ....................................... United States 525,000 45,937,500
a Thomas & Betts Corp. ............................... United States 500,000 23,855,000
Tyco International Ltd. ............................ United States 1,550,052 43,385,955
United Technologies Corp. .......................... United States 800,000 50,680,000
-------------
454,104,154
-------------
RETAIL TRADE 0.4%
a InterActiveCorp .................................... United States 300,100 8,630,876
-------------
TECHNOLOGY SERVICES 8.7%
Automatic Data Processing Inc. ..................... United States 800,000 37,872,000
a Computer Sciences Corp. ............................ United States 1,000,000 49,120,000
International Business Machines Corp. .............. United States 560,000 45,886,400
Microsoft Corp. .................................... United States 1,000,000 27,330,000
a Oracle Corp. ....................................... United States 500,000 8,870,000
a Yahoo! Inc. ........................................ United States 1,600,000 40,448,000
-------------
209,526,400
-------------
TRANSPORTATION 6.0%
Air France-KLM, ADR ................................ France 550,000 16,676,000
a Air France-KLM, ADR, wts., 11/05/07 ................ France 500,000 2,030,000
a Alaska Air Group Inc. .............................. United States 500,000 19,020,000
a AMR Corp. .......................................... United States 1,080,000 24,991,200
a British Airways PLC, ADR ........................... United Kingdom 500,000 40,010,000
a Continental Airlines Inc., B ....................... United States 500,000 14,155,000
Southwest Airlines Co. ............................. United States 65,200 1,086,232
Union Pacific Corp. ................................ United States 300,000 26,400,000
-------------
144,368,432
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $904,689,198) 2,386,506,164
-------------
Annual Report | 75
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $20,082,694) 0.8%
MONEY MARKET FUND 0.8%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 20,082,694 $ 20,082,694
----------------
TOTAL INVESTMENTS (COST $924,771,892) 100.1% ........................ 2,406,588,858
OTHER ASSETS, LESS LIABILITIES (0.1)% ............................... (1,996,200)
----------------
NET ASSETS 100.0% ................................................... $ 2,404,592,658
================
See Selected Portfolio Abbreviations on page 107.
a Non-income producing for the twelve months ended September 30, 2006.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
76 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.14 0.14 0.12 0.14 0.14
Net realized and unrealized gains (losses) . 0.09 0.10 0.22 0.38 (0.21)
----------------------------------------------------------------------------
Total from investment operations ............ 0.23 0.24 0.34 0.52 (0.07)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.15) (0.15) (0.16) (0.16) (0.17)
Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02)
----------------------------------------------------------------------------
Total distributions ......................... (0.16) (0.16) (0.17) (0.17) (0.19)
----------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
============================================================================
Total return c .............................. 9.73% 10.45% 15.50% 28.12% (4.18)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $26,641,398 $21,934,575 $14,743,190 $9,640,156 $6,001,117
Ratios to average net assets:
Expenses ................................... 0.64% e 0.65% e 0.68% 0.73% 0.72%
Net investment income ...................... 5.61% 5.54% 5.11% 6.63% 6.67%
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2006 2005 2004 2003 2002 f
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.12 0.11 0.10 0.12 0.11
Net realized and unrealized gains (losses) . 0.08 0.11 0.22 0.37 (0.21)
-----------------------------------------------------------------------------
Total from investment operations ............ 0.20 0.22 0.32 0.49 (0.10)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.12) (0.13) (0.14) (0.14) (0.13)
Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02)
-----------------------------------------------------------------------------
Total distributions ......................... (0.13) (0.14) (0.15) (0.15) (0.15)
-----------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90
=============================================================================
Total return c .............................. 8.83% 9.57% 14.59% 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 3,743,374 $ 3,922,396 $ 3,486,880 $ 2,083,783 $ 558,580
Ratios to average net assets:
Expenses ................................... 1.49% e 1.50% e 1.53% 1.58% 1.57% g
Net investment income ...................... 4.76% 4.69% 4.26% 5.78% 6.01% g
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
f For the period November 1, 2001 (effective date) to September 30, 2002.
g Annualized.
78 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B1 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.13 0.12 0.11 0.13 0.13
Net realized and unrealized gains (losses) . 0.08 0.11 0.21 0.38 (0.22)
-----------------------------------------------------------------------------
Total from investment operations ............ 0.21 0.23 0.32 0.51 (0.09)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.13) (0.14) (0.14) (0.15) (0.16)
Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02)
-----------------------------------------------------------------------------
Total distributions ......................... (0.14) (0.15) (0.15) (0.16) (0.18)
-----------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
=============================================================================
Total return c .............................. 9.17% 9.90% 14.90% 27.51% (4.66)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $459,302 $493,063 $511,471 $495,004 $430,226
Ratios to average net assets:
Expenses ................................... 1.14% e 1.15% e 1.18% 1.23% 1.22%
Net investment income ...................... 5.11% 5.04% 4.61% 6.13% 6.15%
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
-----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.13 0.13 0.11 0.13 0.13
Net realized and unrealized gains (losses) . 0.09 0.10 0.21 0.38 (0.21)
-----------------------------------------------------------------------------
Total from investment operations ............ 0.22 0.23 0.32 0.51 (0.08)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.13) (0.14) (0.14) (0.15) (0.16)
Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02)
-----------------------------------------------------------------------------
Total distributions ......................... (0.14) (0.15) (0.15) (0.16) (0.18)
-----------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91
=============================================================================
Total return c .............................. 9.56% 9.84% 14.85% 27.37% (4.64)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $12,138,969 $10,113,365 $6,616,891 $3,764,372 $1,545,377
Ratios to average net assets:
Expenses ................................... 1.14% e 1.15% e 1.18% 1.24% 1.21%
Net investment income ...................... 5.11% 5.04% 4.61% 6.12% 6.21%
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
80 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
--------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2006 2005 2004 2003 2002 f
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18
--------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.13 0.13 0.11 0.13 0.10
Net realized and unrealized gains (losses) . 0.09 0.10 0.22 0.37 (0.27)
--------------------------------------------------------------------------
Total from investment operations ............ 0.22 0.23 0.33 0.50 (0.17)
--------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... (0.14) (0.14) (0.15) (0.15) (0.12)
Net realized gains .......................... (0.01) (0.01) (0.01) (0.01) --
--------------------------------------------------------------------------
Total distributions ......................... (0.15) (0.15) (0.16) (0.16) (0.12)
--------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89
==========================================================================
Total return c .............................. 9.43% 10.15% 15.25% 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $183,609 $122,222 $73,165 $36,417 $6,350
Ratios to average net assets:
Expenses ................................... 0.99% e 1.00% e 1.03% 1.08% 1.07% g
Net investment income ...................... 5.26% 5.19% 4.76% 6.28% 6.77% g
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.14 0.14 0.12 0.14 0.14
Net realized and unrealized gains (losses) . 0.09 0.11 0.22 0.38 (0.22)
----------------------------------------------------------------------------
Total from investment operations ............ 0.23 0.25 0.34 0.52 (0.08)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.15) (0.16) (0.16) (0.16) (0.17)
Net realized gains ......................... (0.01) (0.01) (0.01) (0.01) (0.02)
----------------------------------------------------------------------------
Total distributions ......................... (0.16) (0.17) (0.17) (0.17) (0.19)
----------------------------------------------------------------------------
Redemption fees ............................. -- c -- c -- c -- --
----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89
============================================================================
Total return ................................ 9.94% 10.65% 15.74% 28.47% (4.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $3,786,643 $2,280,318 $901,149 $95,009 $30,737
Ratios to average net assets:
Expenses ................................... 0.49% d 0.50% d 0.53% 0.58% 0.57%
Net investment income ...................... 5.76% 5.69% 5.26% 6.78% 6.85%
Portfolio turnover rate ..................... 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
82 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
- ------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.3%
COMMON STOCKS 41.8%
COMMUNICATIONS 3.3%
AT&T Inc. ............................... United States 22,000,000 $ 716,320,000
BellSouth Corp. ......................... United States 10,000,000 427,500,000
Verizon Communications Inc. ............. United States 11,000,000 408,430,000
-------------
1,552,250,000
-------------
ELECTRIC UTILITIES 17.4%
Alliant Energy Corp. .................... United States 3,000,000 107,190,000
a Ameren Corp. ............................ United States 11,274,400 595,175,576
American Electric Power Co. Inc. ........ United States 8,633,800 314,011,306
CenterPoint Energy Inc. ................. United States 6,000,000 85,920,000
Consolidated Edison Inc. ................ United States 4,632,100 214,003,020
Constellation Energy Group .............. United States 3,000,000 177,600,000
Dominion Resources Inc. ................. United States 10,000,000 764,900,000
DTE Energy Co. .......................... United States 5,270,400 218,774,304
Duke Energy Corp. ....................... United States 20,884,000 630,696,800
Edison International .................... United States 1,887,100 78,578,844
Energy East Corp. ....................... United States 4,530,000 107,451,600
Entergy Corp. ........................... United States 4,500,000 352,035,000
Exelon Corp. ............................ United States 300,000 18,162,000
FirstEnergy Corp. ....................... United States 14,000,000 782,040,000
FPL Group Inc. .......................... United States 7,500,000 337,500,000
Hawaiian Electric Industries Inc. ....... United States 1,720,000 46,543,200
Pepco Holdings Inc. ..................... United States 1,800,000 43,506,000
PG&E Corp. .............................. United States 12,492,700 520,320,955
a Pinnacle West Capital Corp. ............. United States 5,500,000 247,775,000
PPL Corp. ............................... United States 4,000,000 131,600,000
Progress Energy Inc. .................... United States 9,000,000 408,420,000
a Public Service Enterprise Group Inc. .... United States 16,500,000 1,009,635,000
a Puget Energy Inc. ....................... United States 7,500,000 170,475,000
The Southern Co. ........................ United States 19,125,000 659,047,500
TECO Energy Inc. ........................ United States 9,500,000 148,675,000
Xcel Energy Inc. ........................ United States 1,000,000 20,650,000
-------------
8,190,686,105
-------------
ENERGY MINERALS 3.6%
BP PLC, ADR ............................. United Kingdom 3,750,000 245,925,000
a Canadian Oil Sands Trust ................ Canada 25,770,600 687,831,096
Chevron Corp. ........................... United States 7,500,000 486,450,000
Royal Dutch Shell PLC, A, ADR ........... United Kingdom 4,000,000 264,400,000
-------------
1,684,606,096
-------------
FINANCE 5.4%
Bank of America Corp. ................... United States 21,000,000 1,124,970,000
Citigroup Inc. .......................... United States 3,000,000 149,010,000
Fifth Third Bancorp ..................... United States 7,750,000 295,120,000
JPMorgan Chase & Co. .................... United States 10,000,000 469,600,000
North Fork Bancorp Inc. ................. United States 10,000,000 286,400,000
Wachovia Corp. .......................... United States 3,750,000 209,250,000
-------------
2,534,350,000
-------------
Annual Report | 83
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
GAS DISTRIBUTORS 1.3%
AGL Resources Inc. ................................................... United States 600,000 $ 21,900,000
Atmos Energy Corp. ................................................... United States 2,235,000 63,809,250
NiSource Inc. ........................................................ United States 5,000,000 108,700,000
ONEOK Inc. ........................................................... United States 3,800,000 143,602,000
Sempra Energy ........................................................ United States 5,923,600 297,660,900
---------------
635,672,150
---------------
HEALTH TECHNOLOGY 7.3%
Bristol-Myers Squibb Co. ............................................. United States 16,500,000 411,180,000
Eli Lilly and Co. .................................................... United States 1,000,000 57,000,000
Johnson & Johnson .................................................... United States 6,000,000 389,640,000
Merck & Co. Inc. ..................................................... United States 28,000,000 1,173,200,000
Pfizer Inc. .......................................................... United States 47,000,000 1,332,920,000
Wyeth ................................................................ United States 1,500,000 76,260,000
---------------
3,440,200,000
---------------
INDUSTRIAL SERVICES 0.6%
GlobalSantaFe Corp. .................................................. Cayman Islands 5,500,000 274,945,000
---------------
NON-ENERGY MINERALS 0.5%
Alcoa Inc. ........................................................... United States 1,932,000 54,173,280
AngloGold Ashanti Ltd., ADR .......................................... South Africa 2,250,000 84,915,000
Barrick Gold Corp. ................................................... Canada 3,000,000 92,160,000
---------------
231,248,280
---------------
PROCESS INDUSTRIES 0.7%
The Dow Chemical Co. ................................................. United States 4,107,300 160,102,554
Lyondell Chemical Co. ................................................ United States 6,000,000 152,220,000
---------------
312,322,554
---------------
PRODUCER MANUFACTURING 1.7%
3M Co. ............................................................... United States 6,000,000 446,520,000
General Electric Co. ................................................. United States 7,000,000 247,100,000
Tyco International Ltd. .............................................. United States 3,000,000 83,970,000
---------------
777,590,000
---------------
TOTAL COMMON STOCKS (COST $15,813,782,352) ........................... 19,633,870,185
---------------
PREFERRED STOCK (COST $57,833,250) 0.0%b
PROCESS INDUSTRIES 0.0% b
c,d,e,f Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual .................. Indonesia 75,000,000 825,000
---------------
CONVERTIBLE PREFERRED STOCKS 7.8%
ELECTRIC UTILITIES 0.2%
CMS Energy Trust I, 7.75%, cvt. pfd. ................................. United States 1,508,000 74,305,041
---------------
ELECTRONIC TECHNOLOGY 2.0%
g,h The Bear Stearns Cos. Inc. into Broadcom Corp., 10.00%, cvt. pfd.,
144A ................................................................. United States 3,500,000 103,818,050
Citigroup Funding Inc. into Altera Corp., 7.00%, cvt. pfd ............ United States 5,000,000 93,601,500
84 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
g Deutsche Bank AG into Apple Computer Inc., 9.50%, cvt. pfd., 144A ......... United States 750,000 $ 51,641,025
Goldman Sachs Group Inc. into KLAC-Tencor Corp., 8.00%, cvt. pfd .......... United States 2,100,000 96,314,401
h Lehman Brothers Holdings Inc. into Analog Devices Inc., 10.00%, cvt. pfd. . United States 6,450,000 189,952,500
h Lehman Brothers Holdings Inc. into Cisco Systems Inc., 8.50%, cvt. pfd. ... United States 10,000,000 197,082,500
g Morgan Stanley into Applied Materials Inc., 7.75%, cvt. pfd., 144A ........ United States 5,650,000 98,959,750
g Morgan Stanley into Intel Corp., 7.40%, cvt. pfd., 144A ................... United States 6,500,000 135,427,500
------------
966,797,226
------------
ENERGY MINERALS 1.0%
g Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ........................... United States 900,000 92,957,400
Chesapeake Energy Corp., 6.25%, cvt. pfd. ................................. United States 700,000 175,606,200
g Deutsche Bank AG into ConocoPhillips, 8.50%, cvt. pfd., 144A .............. United States 2,500,000 150,125,000
g Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A ............ United States 900,000 54,031,500
------------
472,720,100
------------
FINANCE 1.2%
E*TRADE Financial Corp., 6.125%, cvt. pfd. ................................ United States 2,500,000 77,800,000
Fannie Mae, 5.375%, cvt. pfd. ............................................. United States 3,250 313,698,125
MetLife Inc., 6.375%, cvt. pfd. ........................................... United States 2,000,000 60,000,000
Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. ......................... United States 1,510,000 100,603,750
------------
552,101,875
------------
HEALTH TECHNOLOGY 1.2%
Lehman Brothers Holdings Inc. into Boston Scientific, 7.50%, cvt. pfd. .... United States 4,000,000 63,953,800
g Morgan Stanley into Eli Lilly and Co., 7.00%, cvt. pfd., 144A ............. United States 1,810,000 101,369,052
Schering-Plough Corp., 6.00%, cvt. pfd. ................................... United States 7,450,000 414,145,500
------------
579,468,352
------------
INDUSTRIAL SERVICES 0.8%
El Paso Corp., 4.99%, cvt. pfd. ........................................... United States 130,000 158,090,982
g Morgan Stanley into Williams Cos. Inc., 8.50%, cvt. pfd., 144A ............ United States 4,000,000 96,259,998
g Wachovia Bank into El Paso Corp., 9.05%, cvt. pfd., 144A .................. United States 8,200,000 104,468,000
------------
358,818,980
------------
NON-ENERGY MINERALS 0.4%
g Deutsche Bank AG into Barrick Gold Corp., 8.50%, cvt. pfd., 144A .......... United States 2,550,000 78,365,835
h Lehman Brothers Holdings Inc. into Alcoa Inc., 7.00%, cvt. pfd. ........... United States 4,200,000 122,094,840
------------
200,460,675
------------
REAL ESTATE INVESTMENT TRUSTS 0.4%
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ............................ United States 3,000,000 74,730,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ........................ United States 1,333,594 33,686,584
Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .................... United States 1,200,000 56,280,000
------------
164,696,584
------------
Annual Report | 85
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
RETAIL TRADE 0.6%
g,h Wachovia Bank into The Home Depot Inc., 7.25%, cvt. pfd., 144A ............... United States 3,800,000 $ 134,862,000
h Wachovia Bank into Target Corp., 6.40%, cvt. pfd. ............................ United States 3,000,000 153,000,000
--------------
287,862,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,520,891,178) .................... 3,657,230,833
--------------
-------------------
PRINCIPAL AMOUNT i
-------------------
CORPORATE BONDS 42.6%
ALTERNATIVE POWER GENERATION 2.9%
c,e Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 .................. Canada $350,000,000 232,750,000
c,e Calpine Corp.,
senior note, 7.875%, 4/01/08 ............................................. United States 101,818,000 75,345,320
senior note, 8.625%, 8/15/10 ............................................. United States 211,000,000 104,972,500
g senior secured note, 144A, 8.50%, 7/15/10 ................................ United States 200,000,000 202,250,000
Dynegy Holdings Inc., senior note,
6.875%, 4/01/11 .......................................................... United States 310,000,000 303,412,500
8.75%, 2/15/12 ........................................................... United States 225,500,000 234,801,875
8.375%, 5/01/16 .......................................................... United States 225,000,000 230,062,500
--------------
1,383,594,695
--------------
COMMERCIAL SERVICES 1.4%
Dex Media Inc.,
senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter,
11/15/13 ................................................................ United States 60,000,000 50,850,000
zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ........................ United States 210,000,000 177,975,000
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07,
10.67% thereafter, 5/15/13 ................................................. United States 156,000,000 135,720,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 .................. United States 125,000,000 126,250,000
R.H. Donnelley Corp.,
6.875%, 1/15/13 .......................................................... United States 26,300,000 24,130,250
senior discount note, 6.875%, 1/15/13 .................................... United States 94,400,000 86,612,000
senior note, 8.875%, 1/15/16 ............................................. United States 55,000,000 55,412,500
--------------
656,949,750
--------------
COMMUNICATIONS 2.0%
Qwest Capital Funding Inc.,
7.00%, 8/03/09 ........................................................... United States 300,000,000 303,000,000
7.25%, 2/15/11 ........................................................... United States 365,000,000 366,825,000
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 ........................................................... United States 105,000,000 105,787,500
B, 7.50%, 2/15/14 ........................................................ United States 145,000,000 146,087,500
Qwest Corp., 6.875%, 9/15/33 ................................................ United States 30,000,000 27,525,000
--------------
949,225,000
--------------
CONSUMER DURABLES 10.3%
Beazer Homes USA Inc., senior note,
6.875%, 7/15/15 .......................................................... United States 20,000,000 18,200,000
8.125%, 6/15/16 .......................................................... United States 85,000,000 83,087,500
86 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
D.R. Horton Inc.,
5.625%, 1/15/16 ...................................................... United States $ 35,000,000 $ 32,575,375
6.50%, 4/15/16 ....................................................... United States 35,000,000 34,403,215
Ford Motor Co., 7.45%, 7/16/31 ......................................... United States 600,000,000 466,500,000
Ford Motor Credit Co.,
7.375%, 10/28/09 ..................................................... United States 550,000,000 534,850,800
7.875%, 6/15/10 ...................................................... United States 355,000,000 345,997,910
7.375%, 2/01/11 ...................................................... United States 450,000,000 432,313,650
7.00%, 10/01/13 ...................................................... United States 100,000,000 92,908,300
g 144A, 9.75%, 9/15/10 ................................................. United States 105,000,000 108,497,655
senior note, 9.875%, 8/10/11 ......................................... United States 75,000,000 77,685,000
senior note, 7.25%, 10/25/11 ......................................... United States 120,000,000 113,285,760
General Motors Acceptance Corp.,
5.625%, 5/15/09 ...................................................... United States 125,000,000 121,969,125
7.75%, 1/19/10 ....................................................... United States 420,000,000 430,660,020
6.875%, 9/15/11 ...................................................... United States 800,000,000 796,584,000
6.875%, 8/28/12 ...................................................... United States 300,400,000 297,691,894
6.75%, 12/01/14 ...................................................... United States 125,000,000 122,220,125
General Motors Corp., senior deb., 8.375%, 7/15/33 ..................... United States 510,000,000 443,700,000
K Hovnanian Enterprises Inc.,
6.25%, 1/15/16 ....................................................... United States 10,000,000 8,850,000
senior note, 7.50%, 5/15/16 .......................................... United States 60,000,000 56,325,000
KB Home,
6.375%, 8/15/11 ...................................................... United States 25,000,000 24,279,425
senior note, 5.75%, 2/01/14 .......................................... United States 35,000,000 31,889,235
senior note, 6.25%, 6/15/15 .......................................... United States 40,000,000 36,986,760
senior note, 7.25%, 6/15/18 .......................................... United States 70,500,000 67,937,255
g Visant Holding Corp., senior note, 144A, 8.75%, 12/01/13 ............... United States 50,000,000 50,562,500
--------------
4,829,960,504
--------------
CONSUMER NON-DURABLES 0.2%
g Reynolds American Inc., 144A, 7.25%, 6/01/13 ........................... United States 100,000,000 103,402,800
--------------
CONSUMER SERVICES 7.0%
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............. United States 440,000,000 447,700,000
CCH I Holdings LLC, senior note,
13.50%, 1/15/14 ...................................................... United States 329,000,000 254,152,500
9.92%, 4/01/14 ....................................................... United States 117,380,000 80,845,475
11.75%, 5/15/14 ...................................................... United States 195,000,000 139,912,500
CCH I LLC, senior secured note, 11.00%, 10/01/15 ....................... United States 850,000,000 777,750,000
CCH II LLC, senior note, 10.25%, 9/15/10 ............................... United States 80,000,000 82,000,000
Clear Channel Communications Inc.,
5.50%, 9/15/14 ....................................................... United States 150,000,000 139,582,200
senior note, 5.75%, 1/15/13 .......................................... United States 75,000,000 72,173,175
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ......................................... United States 27,000,000 27,776,250
senior note, B, 7.625%, 4/01/11 ...................................... United States 200,000,000 206,250,000
DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ..................... United States 25,300,000 23,908,500
Annual Report | 87
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
g EchoStar DBS Corp., senior note, 144A, 7.125%, 2/01/16 .... United States $360,000,000 $ 349,650,000
Harrah's Operating Co. Inc., 5.625%, 6/01/15 .............. United States 10,000,000 9,310,660
g Hertz Corp.,
senior note, 144A, 8.875%, 1/01/14 ...................... United States 102,950,000 108,354,875
senior sub. note, 144A, 10.50%, 1/01/16 ................. United States 25,000,000 27,625,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 .......... United States 148,000,000 140,395,908
MGM MIRAGE Inc., senior note,
6.75%, 4/01/13 .......................................... United States 70,000,000 69,125,000
6.625%, 7/15/15 ......................................... United States 100,000,000 96,500,000
Six Flags Inc., senior note, 9.625%, 6/01/14 .............. United States 35,000,000 31,325,000
g Viacom Inc., senior note, 144A, 6.25%, 4/30/16 ............ United States 100,000,000 99,298,900
g XM Satellite Radio Inc., senior note, 144A, 9.75%, 5/01/14 United States 132,000,000 127,380,000
--------------
3,311,015,943
--------------
ELECTRIC UTILITIES 2.5%
Aquila Inc., senior note, 14.875%, 7/01/12 ................ United States 95,400,000 125,689,500
CMS Energy Corp., senior note, 7.75%, 8/01/10 ............. United States 30,000,000 31,650,000
NRG Energy Inc., senior note,
7.25%, 2/01/14 .......................................... United States 60,000,000 59,700,000
7.375%, 2/01/16 ......................................... United States 93,775,000 93,423,344
Reliant Resources Inc., senior note, 9.25%, 7/15/10 ....... United States 65,000,000 67,762,500
TXU Corp., senior note,
P, 5.55%, 11/15/14 ...................................... United States 350,000,000 332,422,300
Q, 6.50%, 11/15/24 ...................................... United States 310,000,000 295,258,260
R, 6.55%, 11/15/34 ...................................... United States 200,000,000 189,374,800
--------------
1,195,280,704
--------------
ELECTRONIC TECHNOLOGY 1.5%
DRS Technologies Inc., senior note, 6.625%, 2/01/16 ....... United States 55,000,000 54,312,500
Flextronics International Ltd., senior sub. note, 6.25%,
11/15/14 ................................................ Singapore 110,000,000 107,250,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ......................................... United States 31,500,000 30,082,500
6.375%, 10/15/15 ........................................ United States 75,000,000 73,312,500
Lucent Technologies Inc., 6.45%, 3/15/29 .................. United States 180,000,000 161,100,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 .......................................... United States 135,000,000 127,912,500
8.125%, 3/01/16 ......................................... United States 85,000,000 83,725,000
Seagate Technology HDD Holdings, senior note,
6.375%, 10/01/11 ........................................ United States 20,000,000 20,000,000
6.80%, 10/01/16 ......................................... United States 40,000,000 40,000,000
--------------
697,695,000
--------------
ENERGY MINERALS 1.9%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 ........ United States 105,000,000 108,675,000
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ......................................... United States 75,000,000 76,968,750
6.50%, 8/15/17 .......................................... United States 115,000,000 108,387,500
6.25%, 1/15/18 .......................................... United States 150,000,000 139,875,000
6.875%, 11/15/20 ........................................ United States 145,000,000 137,750,000
88 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY MINERALS (CONTINUED)
g Mariner Energy Inc., senior note, 144A, 7.50%, 4/15/13 ..... United States $ 40,000,000 $ 38,400,000
Massey Energy Co., senior note, 6.875%, 12/15/13 ........... United States 59,650,000 54,281,500
Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 United States 105,000,000 102,637,500
Pioneer Natural Resources Co., 6.875%, 5/01/18 ............. United States 55,000,000 55,236,170
g Pogo Producing Co., senior sub. note, 144A, 7.875%, 5/01/13 United States 78,175,000 80,031,656
--------------
902,243,076
--------------
FINANCE 0.6%
E*TRADE Financial Corp., senior note,
7.375%, 9/15/13 .......................................... United States 230,000,000 236,325,000
7.875%, 12/01/15 ......................................... United States 25,000,000 26,437,500
--------------
262,762,500
--------------
HEALTH SERVICES 3.8%
DaVita Inc.,
senior note, 6.625%, 3/15/13 ............................. United States 30,000,000 29,437,500
senior sub. note, 7.25%, 3/15/15 ......................... United States 49,400,000 48,782,500
HCA Inc.,
6.375%, 1/15/15 .......................................... United States 185,000,000 149,850,000
senior bond, 6.50%, 2/15/16 .............................. United States 350,000,000 281,750,000
senior note, 6.95%, 5/01/12 .............................. United States 50,000,000 43,937,500
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 ......................................... United States 515,000,000 455,131,250
6.50%, 6/01/12 ........................................... United States 250,000,000 219,687,500
7.375%, 2/01/13 .......................................... United States 350,000,000 317,187,500
j FRN, 9.25%, 2/01/15 ...................................... United States 240,000,000 232,200,000
--------------
1,777,963,750
--------------
INDUSTRIAL SERVICES 3.7%
Allied Waste North America Inc.,
senior note, 7.25%, 3/15/15 .............................. United States 130,000,000 129,675,000
senior note, 7.125%, 5/15/16 ............................. United States 169,000,000 167,521,250
senior note, B, 7.375%, 4/15/14 .......................... United States 190,000,000 188,100,000
senior secured note, 6.50%, 11/15/10 ..................... United States 120,000,000 118,800,000
senior secured note, 6.375%, 4/15/11 ..................... United States 35,000,000 34,300,000
senior secured note, 6.125%, 2/15/14 ..................... United States 207,000,000 194,062,500
Browning-Ferris Industries Inc., 7.40%, 9/15/35 ............ United States 70,000,000 63,000,000
El Paso Corp., senior note,
6.75%, 5/15/09 ........................................... United States 245,000,000 247,450,000
j FRN, 6.14%, 8/16/07 ...................................... United States 70,000,000 71,225,000
MTN, 7.75%, 1/15/32 ...................................... United States 280,000,000 288,400,000
El Paso Production Holding Co., 7.75%, 6/01/13 ............. United States 87,500,000 89,906,250
g Sesi LLC, senior note, 144A, 6.875%, 6/01/14 ............... United States 93,000,000 92,535,000
Sonat Inc., senior note, 7.625%, 7/15/11 ................... United States 35,000,000 36,050,000
--------------
1,721,025,000
--------------
NON-ENERGY MINERALS 0.3%
g Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ............ Canada 151,500,000 144,682,500
--------------
Annual Report | 89
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
PROCESS INDUSTRIES 2.2%
Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 Canada $100,600,000 $ 92,049,000
Chemtura Corp., senior note, 6.875%, 6/01/16 ................... United States 24,000,000 23,790,000
Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 .......... United States 195,000,000 187,687,500
Lyondell Chemical Co., senior note,
8.00%, 9/15/14 .............................................. United States 55,000,000 55,962,500
8.25%, 9/15/16 .............................................. United States 33,100,000 33,762,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 .................. United States 20,000,000 20,950,000
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09,
9.00% thereafter, 2/01/14 ..................................... United States 380,000,000 300,200,000
NewPage Corp., senior secured note, 10.00%, 5/01/12 ............ United States 57,000,000 59,137,500
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ...................................................... United States 50,000,000 47,750,000
c,d,f Pindo Deli Finance Mauritius Ltd., 144A,
j FRN, 4.675%, 4/29/15 ........................................ Indonesia 113,073 25,690
j FRN, 4.675%, 4/29/18 ........................................ Indonesia 294,012 66,799
zero cpn., 4/29/25 .......................................... Indonesia 607,466 138,016
Rhodia SA, senior note, 10.25%, 6/01/10 ........................ France 110,859,000 124,716,375
Stone Container Corp., senior note, 9.75%, 2/01/11 ............. United States 68,743,000 71,149,005
c,d,f Tjiwi Kimia Finance Mauritius, secured note, 144A,
j FRN, 5.248%, 4/29/15 ........................................ Indonesia 12,883,549 3,839,298
j FRN, 4.675%, 4/29/18 ........................................ Indonesia 33,160,560 9,881,847
zero cpn., 4/29/25 .......................................... Indonesia 42,601,657 12,695,294
--------------
1,043,800,824
--------------
PRODUCER MANUFACTURING 1.0%
Case New Holland Inc., senior note,
6.00%, 6/01/09 .............................................. United States 225,000,000 223,031,250
7.125%, 3/01/14 ............................................. United States 81,900,000 82,616,625
g Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ............... United Kingdom 38,816,000 42,115,360
g RBS Global & Rexnord Corp.,
senior note, 144A, 9.50%, 8/01/14 ........................... United States 40,000,000 40,800,000
senior sub. note, 144A, 11.75%, 8/01/16 ..................... United States 73,000,000 75,555,000
--------------
464,118,235
--------------
REAL ESTATE INVESTMENT TRUSTS 0.9%
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 ......................................... United States 50,000,000 50,875,000
O, 6.375%, 3/15/15 .......................................... United States 215,000,000 209,625,000
Q, 6.75%, 6/01/16 ........................................... United States 145,000,000 143,731,251
--------------
404,231,251
--------------
90 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
TECHNOLOGY SERVICES 0.4%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ............................... United States $ 59,300,000 $ 61,672,000
senior sub note, 10.25%, 8/15/15 ........................... United States 100,000,000 103,500,000
---------------
165,172,000
---------------
TOTAL CORPORATE BONDS (COST $19,849,401,614) .................. 20,013,123,532
---------------
CONVERTIBLE BONDS 2.4%
ALTERNATIVE POWER GENERATION 0.5%
c,e Calpine Corp., cvt.,
senior note, 6.00% to 9/30/06, zero cpn. to 9/30/09,
6.00% thereafter, 9/30/14 .................................. United States 137,000,000 54,971,250
sub. note, 7.75%, 6/01/15 .................................. United States 450,000,000 163,125,000
---------------
218,096,250
---------------
CONSUMER SERVICES 0.0% b
e Adelphia Communications Corp., cvt., junior sub. note, 6 00%,
2/15/06 ...................................................... United States 75,000,000 75,000
---------------
ELECTRONIC TECHNOLOGY 1.6%
Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 ........ United States 240,000,000 238,200,000
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ...... Canada 512,500,000 490,495,300
---------------
728,695,300
---------------
HEALTH TECHNOLOGY 0.1%
g Enzon Pharmaceuticals Inc., cvt., 144A, 4.00% 6/01/13 ......... United States 54,500,000 58,860,000
---------------
INDUSTRIAL SERVICES 0.2%
Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 United States 103,000,000 100,167,500
---------------
TOTAL CONVERTIBLE BONDS (COST $1,460,652,754) ................. 1,105,894,050
---------------
MORTGAGE-BACKED SECURITIES 3.7%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 2.3%
FHLMC Gold 30 Year,
5.00%, 5/01/33 - 8/01/34 ................................... United States 474,936,024 458,119,028
5.50%, 8/01/35 - 11/01/35 .................................. United States 330,050,758 325,755,262
6.00%, 8/01/35 - 6/01/36 ................................... United States 295,047,116 296,687,956
---------------
1,080,562,246
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.6% ..
FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 ........................ United States 284,304,196 280,324,316
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.8%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ................... United States 386,517,501 376,113,265
---------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $1,747,032,608) ........ 1,736,999,827
---------------
TOTAL LONG TERM INVESTMENTS (COST $42,449,593,756) ............ 46,147,943,427
---------------
Annual Report | 91
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 0.8%
MONEY MARKET FUND (COST $165,725,024) 0.3%
k Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.95% .......................................................... United States 165,725,024 $ 165,725,024
---------------
-------------------
PRINCIPAL AMOUNT i
-------------------
REPURCHASE AGREEMENT (COST $231,940,914) 0.5%
l Joint Repurchase Agreement, 5.201%, 10/02/06
(Maturity Value $232,041,441) .................................. United States $231,940,914 231,940,914
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $22,647,245)
Banc of America Securities LLC (Maturity Value $22,647,245)
Barclays Capital Inc. (Maturity Value $22,647,245)
Bear, Stearns & Co. Inc. (Maturity Value $22,647,245)
BNP Paribas Securities Corp. (Maturity Value $22,647,245)
Deutsche Bank Securities Inc. (Maturity Value $8,388,297)
Dresdner Kleinwort Wasserstein Securities LLC
(Maturity Value $11,743,616)
Greenwich Capital Markets Inc. (Maturity Value $21,809,575)
Lehman Brothers Inc. (Maturity Value $10,597,333)
Merrill Lynch Government Securities Inc.
(Maturity Value $21,809,575)
Morgan Stanley & Co. Inc. (Maturity Value $21,809,575)
UBS Securities LLC (Maturity Value $22,647,245)
Collateralized by U.S. Government Agency Securities,
2.70% - 7.125%, 10/15/06 - 6/15/11; m U.S. Treasury Bills,
12/28/06 - 3/29/07; and U.S. Treasury Notes, 3.50% - 6.50%,
2/05/10 - 5/31/11
---------------
TOTAL INVESTMENTS (COST $42,847,259,694) 99.1% .................... 46,545,609,365
OTHER ASSETS, LESS LIABILITIES 0.9% ............................... 407,686,199
---------------
NET ASSETS 100.0% ................................................. $46,953,295,564
===============
See Selected Portfolio Abbreviations on page 107.
a See Note 10 regarding holdings of 5% voting securities.
b Rounds to less than 0.1% of net assets.
c See Note 11 regarding other considerations.
d Security has been deemed illiquid because it may not be able to be sold
within seven days. At September 30, 2006, the aggregate value of these
securities was $27,471,944, representing 0.06% of net assets.
e See Note 8 regarding defaulted securities.
f See Note 9 regarding restricted securities.
g 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
guidelines approved by the Fund's Board of Directors. At September 30,
2006, the aggregate value of these securities was $2,952,286,356,
representing 6.29% of net assets.
h Non-income producing for the twelve months ended September 30, 2006.
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. The rate shown is the annualized seven-day
yield at period end.
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.
92 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93
-----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.30 0.28 0.27 0.28 0.38
Net realized and unrealized gains (losses) ... (0.09) (0.11) (0.04) (0.10) 0.09
-----------------------------------------------------------------------
Total from investment operations .............. 0.21 0.17 0.23 0.18 0.47
-----------------------------------------------------------------------
Less distributions from net investment income . (0.31) (0.32) (0.36) (0.36) (0.41)
-----------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
-----------------------------------------------------------------------
Net asset value, end of year .................. $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
=======================================================================
Total return c ................................ 3.40% 2.67% 3.46% 2.66% 7.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $5,291,117 $5,901,449 $6,420,381 $7,286,317 $7,726,914
Ratios to average net assets:
Expenses ..................................... 0.72% e 0.72% e 0.70% e 0.70% 0.69%
Net investment income ........................ 4.64% 4.29% 4.09% 4.11% 5.48%
Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 93
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.26 0.25 0.24 0.25 0.34
Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.10) 0.09
---------------------------------------------------------------------
Total from investment operations .............. 0.18 0.14 0.19 0.15 0.43
---------------------------------------------------------------------
Less distributions from net investment income . (0.28) (0.29) (0.32) (0.33) (0.38)
---------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
---------------------------------------------------------------------
Net asset value, end of year .................. $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98
=====================================================================
Total return c ................................ 2.87% 2.13% 2.92% 2.13% 6.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $388,807 $478,788 $568,276 $678,814 $559,966
Ratios to average net assets:
Expenses ..................................... 1.24% e 1.25% e 1.23% e 1.23% 1.22%
Net investment income ........................ 4.12% 3.76% 3.56% 3.58% 4.95%
Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
94 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.26 0.25 0.24 0.25 0.34
Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.11) 0.10
---------------------------------------------------------------------
Total from investment operations .............. 0.18 0.14 0.19 0.14 0.44
---------------------------------------------------------------------
Less distributions from net investment income . (0.28) (0.29) (0.32) (0.33) (0.38)
---------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
---------------------------------------------------------------------
Net asset value, end of year .................. $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97
=====================================================================
Total return c ................................ 2.88% 2.14% 2.91% 2.00% 6.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $424,462 $508,539 $597,451 $814,635 $803,049
Ratios to average net assets:
Expenses ..................................... 1.23% e 1.25% e 1.23% e 1.23% 1.21%
Net investment income ........................ 4.13% 3.76% 3.56% 3.58% 4.96%
Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 95
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2006 2005 2004 2003 2002 f
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.27 0.26 0.25 0.25 0.25
Net realized and unrealized gains (losses) ... (0.08) (0.11) (0.05) (0.09) 0.22
--------------------------------------------------------------------
Total from investment operations .............. 0.19 0.15 0.20 0.16 0.47
--------------------------------------------------------------------
Less distributions from net investment income . (0.29) (0.30) (0.33) (0.34) (0.29)
--------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year .................. $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
====================================================================
Total return c ................................ 3.01% 2.29% 3.08% 2.29% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $71,104 $65,790 $59,431 $54,042 $14,042
Ratios to average net assets:
Expenses ..................................... 1.09% e 1.10% e 1.08% e 1.08% 1.07% g
Net investment income ........................ 4.27% 3.91% 3.71% 3.73% 5.10% g
Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
g Annualized.
96 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.31 0.29 0.28 0.29 0.38
Net realized and unrealized gains (losses) ... (0.09) (0.10) (0.06) (0.10) 0.11
---------------------------------------------------------------------
Total from investment operations .............. 0.22 0.19 0.22 0.19 0.49
---------------------------------------------------------------------
Less distributions from net investment income . (0.32) (0.33) (0.36) (0.37) (0.42)
---------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- --
---------------------------------------------------------------------
Net asset value, end of year .................. $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01
=====================================================================
Total return .................................. 3.53% 2.95% 3.42% 2.79% 7.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $387,239 $334,681 $340,279 $308,411 $198,437
Ratios to average net assets:
Expenses ..................................... 0.59% d 0.60% d 0.58% d 0.58% 0.57%
Net investment income ........................ 4.77% 4.41% 4.21% 4.23% 5.60%
Portfolio turnover rate ....................... 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
- -----------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 98.6%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 98.6%
GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 232,910 $ 247,047
GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 414,483 445,469
GNMA GP 30 Year, 10.00%, 11/15/09 - 4/15/10 .................... 316,620 333,897
GNMA GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ..................... 12,748 14,148
GNMA GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ................... 604,412 648,142
GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 298,560 330,136
GNMA GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ..................... 57,023 62,900
GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 41,059 45,775
GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 21,927 24,178
GNMA GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ..................... 63,205 69,116
GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 5,957 6,619
GNMA I SF 15 Year, 6.50%, 5/15/18 - 11/15/28 ................... 3,836,606 3,923,990
GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/36 .................... 737,582,304 717,828,742
GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 .................... 1,268,435,815 1,261,509,579
a GNMA I SF 30 Year, 5.50%, 10/01/33 ............................. 30,000,000 29,803,140
GNMA I SF 30 Year, 6.00%, 10/15/23 - 10/15/36 .................. 786,656,810 797,462,988
GNMA I SF 30 Year, 6.50%, 5/15/23 - 8/15/36 .................... 445,900,112 458,195,716
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 73,212 75,112
GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ................... 262,802,161 271,414,566
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 769,974 797,337
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 71,501,716 74,403,237
GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 648,190 681,450
GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ................... 55,464,098 58,690,663
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................... 146,889 156,745
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 12,066,549 12,971,230
GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ................... 15,298,045 16,440,383
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................... 9,648,689 10,475,444
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................... 11,941,566 13,292,577
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................. 8,936,831 9,978,526
GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 .................. 8,411,054 9,259,525
GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 .................. 2,017,031 2,244,178
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 9,744,708 10,969,613
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 8,802,764 9,778,972
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................... 9,558,469 10,700,702
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 70,458 74,787
GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 16,919 18,598
GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 47,199,975 44,122,718
GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................... 301,535,559 292,017,358
GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 320,308,342 310,487,310
GNMA II SF 30 Year, 5.00%, 10/20/33 ............................ 67,044,066 64,992,860
GNMA II SF 30 Year, 5.50%, 6/20/34 ............................. 85,690,839 84,948,670
GNMA II SF 30 Year, 5.50%, 7/20/34 - 6/20/36 ................... 374,180,096 370,731,497
GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 261,563,980 259,298,572
GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 105,475,875 104,486,254
GNMA II SF 30 Year, 5.50%, 2/20/35 ............................. 132,433,195 131,190,649
GNMA II SF 30 Year, 5.50%, 6/20/35 ............................. 76,175,012 75,460,305
GNMA II SF 30 Year, 5.50%, 4/20/36 ............................. 70,124,171 69,458,796
98 | Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED)
GNMA II SF 30 Year, 6.00 %, 10/20/23 - 7/20/36 ....................... $ 425,034,135 $ 429,529,254
a GNMA II SF 30 Year, 6.00 %, 10/01/31 ................................. 80,000,000 80,975,040
GNMA II SF 30 Year, 6.00 %, 9/20/34 .................................. 84,772,411 85,757,102
GNMA II SF 30 Year, 6.00 %, 11/20/35 ................................. 76,641,720 77,438,934
GNMA II SF 30 Year, 6.50 %, 6/20/24 - 7/20/35 ........................ 93,849,829 96,218,160
a GNMA II SF 30 Year, 6.50 %, 10/01/30 ................................. 12,301,225 12,616,444
GNMA II SF 30 Year, 7.00 %, 2/20/28 - 7/20/33 ........................ 73,215,866 75,372,814
GNMA II SF 30 Year, 7.50 %, 10/20/22 - 4/20/32 ....................... 9,581,303 9,915,044
GNMA II SF 30 Year, 8.00 %, 8/20/16 - 6/20/30 ........................ 4,761,459 5,017,265
GNMA II SF 30 Year, 8.50 %, 4/20/16 - 6/20/25 ....................... 2,328,860 2,492,527
GNMA II SF 30 Year, 9.00 %, 7/20/16 - 11/20/21 ....................... 707,232 758,135
GNMA II SF 30 Year, 9.50 %, 10/20/17 - 4/20/25 ....................... 416,986 454,956
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................ 961,736 1,067,010
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ....................... 2,606,069 2,897,386
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................ 375,579 417,759
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ....................... 208,182 232,586
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................ 451,905 506,159
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ..................... 316,135 352,066
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ...................... 305,838 342,569
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,542,261,994) ............... 6,472,931,426
--------------
-----------------
SHARES
-----------------
SHORT TERM INVESTMENTS 3.1%
MONEY MARKET FUND (COST $165,722,265) 2.6%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% 165,722,265 165,722,265
--------------
-----------------
PRINCIPAL AMOUNT
-----------------
REPURCHASE AGREEMENT (COST $34,460,000) 0.5%
c Barclays Capital Inc., 4.95%, 10/02/06 (Maturity Value $34,474,215)
Collateralized by U.S. Treasury Note, 2.75%, 8/15/07 ............... $ 34,460,000 34,460,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $200,182,265) ..................... 200,182,265
--------------
TOTAL INVESTMENTS (COST $6,742,444,259) 101.7% ....................... 6,673,113,691
OTHER ASSETS, LESS LIABILITIES (1.7)% ................................ (110,385,360)
--------------
NET ASSETS 100.0% .................................................... $6,562,728,331
==============
See Selected Portfolio Abbreviations on page 107.
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. The rate shown is the annualized seven-day
yield at period end.
c See Note 1(c) regarding repurchase agreement.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS A 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.43 0.45 0.43 0.42 0.46
Net realized and unrealized gains (losses) ... 0.37 2.42 1.33 0.85 (1.60)
----------------------------------------------------------------------------
Total from investment operations .............. 0.80 2.87 1.76 1.27 (1.14)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.41) (0.44) (0.40) (0.43) (0.45)
Net realized gains ........................... (0.09) -- -- -- (0.47)
----------------------------------------------------------------------------
Total distributions ........................... (0.50) (0.44) (0.40) (0.43) (0.92)
----------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
----------------------------------------------------------------------------
Net asset value, end of year .................. $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96
============================================================================
Total return c ................................ 6.69% 28.81% 20.40% 16.38% (12.49)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $1,926,732 $1,986,034 $1,450,832 $1,259,886 $1,090,216
Ratios to average net assets:
Expenses ..................................... 0.76% e 0.78% e 0.80% 0.83% 0.80%
Net investment income ........................ 3.54% 3.92% 4.49% 5.00% 4.87%
Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
100 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS B 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.37 0.39 0.38 0.37 0.41
Net realized and unrealized gains (losses) ... 0.38 2.42 1.33 0.85 (1.58)
----------------------------------------------------------------------------
Total from investment operations .............. 0.75 2.81 1.71 1.22 (1.17)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.35) (0.39) (0.36) (0.39) (0.41)
Net realized gains ........................... (0.09) -- -- -- (0.47)
----------------------------------------------------------------------------
Total distributions ........................... (0.44) (0.39) (0.36) (0.39) (0.88)
----------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
----------------------------------------------------------------------------
Net asset value, end of year .................. $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97
============================================================================
Total return c ................................ 6.25% 28.11% 19.71% 15.88% (12.88)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $133,824 $154,277 $127,105 $95,321 $32,802
Ratios to average net assets:
Expenses ..................................... 1.26% e 1.28% e 1.30% 1.34% 1.31%
Net investment income ........................ 3.04% 3.42% 3.99% 4.49% 4.44%
Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 101
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS C 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.37 0.39 0.38 0.36 0.41
Net realized and unrealized gains (losses) ... 0.37 2.42 1.33 0.86 (1.59)
----------------------------------------------------------------------------
Total from investment operations .............. 0.74 2.81 1.71 1.22 (1.18)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.35) (0.39) (0.36) (0.39) (0.41)
Net realized gains ........................... (0.09) -- -- -- (0.47)
----------------------------------------------------------------------------
Total distributions ........................... (0.44) (0.39) (0.36) (0.39) (0.88)
----------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
----------------------------------------------------------------------------
Net asset value, end of year .................. $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95
============================================================================
Total return c ................................ 6.19% 28.16% 19.76% 15.77% (12.90)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $391,509 $435,714 $283,747 $222,030 $67,428
Ratios to average net assets:
Expenses ..................................... 1.25% e 1.28% e 1.30% 1.34% 1.29%
Net investment income ........................ 3.05% 3.42% 3.99% 4.49% 4.43%
Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
102 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
CLASS R 2006 2005 2004 2003 2002 f
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.39 0.43 0.39 0.37 0.32
Net realized and unrealized gains (losses) ... 0.36 2.40 1.34 0.86 (1.85)
----------------------------------------------------------------------------
Total from investment operations .............. 0.75 2.83 1.73 1.23 (1.53)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.37) (0.41) (0.37) (0.40) (0.32)
Net realized gains ........................... (0.09) -- -- -- --
----------------------------------------------------------------------------
Total distributions ........................... (0.46) (0.41) (0.37) (0.40) (0.32)
----------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- --
----------------------------------------------------------------------------
Net asset value, end of year .................. $ 12.86 $ 12.57 $10.15 $ 8.79 $ 7.96
============================================================================
Total return c ................................ 6.29% 28.35% 20.02% 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $27,736 $14,649 $1,590 $1,142 $ 142
Ratios to average net assets:
Expenses ..................................... 1.11% e 1.13% e 1.15% 1.19% 1.16% g
Net investment income ........................ 3.19% 3.57% 4.14% 4.64% 4.82% g
Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 103
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS 2006 2005 2004 2003 2002
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05
----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.45 0.48 0.44 0.42 0.47
Net realized and unrealized gains (losses) ... 0.38 2.42 1.34 0.87 (1.60)
----------------------------------------------------------------------------
Total from investment operations .............. 0.83 2.90 1.78 1.29 (1.13)
----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.43) (0.46) (0.42) (0.44) (0.46)
Net realized gains ........................... (0.09) -- -- -- (0.47)
----------------------------------------------------------------------------
Total distributions ........................... (0.52) (0.46) (0.42) (0.44) (0.93)
----------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- --
----------------------------------------------------------------------------
Net asset value, end of year .................. $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99
============================================================================
Total return .................................. 6.88% 29.00% 20.48% 16.61% (12.32)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $103,041 $110,249 $51,586 $47,167 $15,664
Ratios to average net assets:
Expenses ..................................... 0.61% d 0.63% d 0.65% 0.69% 0.66%
Net investment income ........................ 3.69% 4.07% 4.64% 5.14% 5.07%
Portfolio turnover rate ....................... 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
104 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
- ---------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.6%
COMMON STOCKS 93.9%
DIVERSIFIED TELECOMMUNICATION SERVICES 3.5%
AT&T Inc. ................................... United States 1,400,000 $ 45,584,000
Verizon Communications Inc. ................. United States 1,200,000 44,556,000
--------------
90,140,000
--------------
ELECTRIC UTILITIES 79.8%
Alliant Energy Corp. ........................ United States 1,300,000 46,449,000
Ameren Corp. ................................ United States 1,229,441 64,902,190
American Electric Power Co. Inc. ............ United States 1,500,000 54,555,000
CenterPoint Energy Inc. ..................... United States 1,500,000 21,480,000
Cleco Corp. ................................. United States 1,000,000 25,240,000
Consolidated Edison Inc. .................... United States 700,000 32,340,000
Constellation Energy Group .................. United States 500,000 29,600,000
Dominion Resources Inc. ..................... United States 1,600,000 122,384,000
DTE Energy Co. .............................. United States 400,000 16,604,000
Duke Energy Corp. ........................... United States 4,391,400 132,620,280
Edison International ........................ United States 2,200,000 91,608,000
Energy East Corp. ........................... United States 800,000 18,976,000
Entergy Corp. ............................... United States 1,750,000 136,902,500
Exelon Corp. ................................ United States 2,200,000 133,188,000
FirstEnergy Corp. ........................... United States 2,100,000 117,306,000
FPL Group Inc. .............................. United States 2,300,000 103,500,000
Hawaiian Electric Industries Inc. ........... United States 500,000 13,530,000
ITC Holdings Corp. .......................... United States 581,000 18,127,200
National Grid PLC ........................... United Kingdom 4,987,755 62,386,665
Northeast Utilities ......................... United States 1,971,500 45,876,805
NSTAR ....................................... United States 500,000 16,680,000
Pepco Holdings Inc. ......................... United States 1,600,000 38,672,000
PG&E Corp. .................................. United States 1,900,000 79,135,000
Pinnacle West Capital Corp. ................. United States 800,000 36,040,000
PPL Corp. ................................... United States 2,400,000 78,960,000
Progress Energy Inc. ........................ United States 1,500,000 68,070,000
Public Service Enterprise Group Inc. ........ United States 1,300,000 79,547,000
Puget Energy Inc. ........................... United States 1,725,000 39,209,250
Scottish Power PLC .......................... United Kingdom 780,952 9,526,842
a Sierra Pacific Resources .................... United States 3,472,473 49,795,263
The Southern Co. ............................ United States 2,500,000 86,150,000
TXU Corp. ................................... United States 500,000 31,260,000
United Utilities PLC ........................ United Kingdom 4,000,000 52,840,534
Westar Energy Inc. .......................... United States 900,000 21,159,000
Wisconsin Energy Corp. ...................... United States 1,000,000 43,140,000
Xcel Energy Inc. ............................ United States 2,082,200 42,997,430
---------------
2,060,757,959
---------------
GAS DISTRIBUTORS 8.8%
AGL Resources Inc. .......................... United States 1,300,000 47,450,000
Atmos Energy Corp. .......................... United States 1,000,000 28,550,000
Gaz de France ............................... France 544,033 21,664,198
KeySpan Corp. ............................... United States 326,600 13,436,324
Annual Report | 105
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
GAS DISTRIBUTORS (CONTINUED)
NiSource Inc. ....................................................... United States 2,000,000 $ 43,480,000
Sempra Energy ....................................................... United States 1,000,000 50,250,000
Vectren Corp. ....................................................... United States 800,000 21,480,000
--------------
226,310,522
--------------
OIL, GAS & CONSUMABLE FUELS 1.8%
Kinder Morgan Inc. .................................................. United States 200,000 20,970,000
The Williams Cos. Inc. .............................................. United States 1,100,000 26,257,000
--------------
47,227,000
--------------
TOTAL COMMON STOCKS (COST $1,648,984,689) ........................... 2,424,435,481
--------------
CONVERTIBLE PREFERRED STOCKS 1.3%
ELECTRIC UTILITIES 1.3%
CMS Energy Trust I, 7.75%, cvt. pfd ................................. United States 260,000 12,811,214
PNM Resources Inc., 6.75%, cvt. pfd ................................. United States 400,000 20,100,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,519) ............... 32,911,214
--------------
-------------
PRINCIPAL
AMOUNT c
-------------
CORPORATE BONDS 4.4%
ELECTRIC UTILITIES 4.4%
Aquila Inc., senior note,
9.95%, 2/01/11 ................................................... United States $ 6,000,000 6,611,142
8.27%, 11/15/21 .................................................. United States 6,100,000 6,344,000
CMS Energy Corp., senior note, 9.875%, 10/15/07 ..................... United States 8,500,000 8,871,875
MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ........ United States 25,000,000 31,888,350
Northeast Generation Co., senior note, 8.812%, 10/15/26 ............. United States 7,500,000 7,720,837
PP&L Capital Funding, 8.375%, 6/15/07 ............................... United States 15,000,000 15,295,245
TXU Corp., senior note, 6.55%, 11/15/34 ............................. United States 40,000,000 37,874,960
--------------
TOTAL CORPORATE BONDS (COST $107,970,682) ........................... 114,606,409
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,790,395,890) ................... 2,571,953,104
--------------
-------------
SHARES
-------------
SHORT TERM INVESTMENT (COST $5,327,376) 0.2%
MONEY MARKET FUND 0.2%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.95% United States 5,327,376 5,327,376
--------------
TOTAL INVESTMENTS (COST $1,795,723,266) 99.8% ....................... 2,577,280,480
OTHER ASSETS, LESS LIABILITIES 0.2% ................................. 5,560,782
--------------
NET ASSETS 100.0% ................................................... $2,582,841,262
==============
See Selected Portfolio Abbreviations on page 107.
a Non-income producing for the twelve months ended September 30, 2006.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
c The principal amount is stated in U.S. dollars unless otherwise indicated.
106 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2006
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
GP - Graduated Payment
MTN - Medium Term Note
SF - Single Family
Annual Report |
The accompanying notes are an integral part of these financial statements. | 107
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2006
--------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
--------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................. $ 417,723,494 $ 904,689,198 $ 40,625,655,897
Cost - Non-controlled affiliated issuers (Note 10) ........... -- -- 1,823,937,859
Cost - Sweep Money Fund (Note 7) ............................. 4,719,412 20,082,694 165,725,024
Cost - Repurchase agreements ................................. -- -- 231,940,914
--------------------------------------------------------
Total cost of investments .................................... $ 422,442,906 $ 924,771,892 $ 42,847,259,694
========================================================
Value - Unaffiliated issuers ................................. $ 677,070,200 $ 2,386,506,164 $ 43,437,051,755
Value - Non-controlled affiliated issuers (Note 10) .......... -- -- 2,710,891,672
Value - Sweep Money Fund (Note 7) ............................ 4,719,412 20,082,694 165,725,024
Value - Repurchase agreements ................................ -- -- 231,940,914
--------------------------------------------------------
Total value of investments ................................... 681,789,612 2,406,588,858 46,545,609,365
Cash .......................................................... -- -- 890
Receivables:
Investment securities sold ................................... -- 594,482 657,450
Capital shares sold .......................................... 520,413 2,792,079 191,287,879
Dividends and interest ....................................... 206,974 1,512,720 458,382,246
--------------------------------------------------------
Total assets ........................................... 682,516,999 2,411,488,139 47,195,937,830
--------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................. 600,000 -- 106,793,309
Capital shares redeemed ...................................... 2,573,338 4,091,859 69,383,230
Affiliates ................................................... 725,779 2,373,239 40,089,179
Deferred sales proceeds (Note 11) ............................ -- -- 20,940,385
Accrued expenses and other liabilities ........................ 198,445 430,383 5,436,163
--------------------------------------------------------
Total liabilities ...................................... 4,097,562 6,895,481 242,642,266
--------------------------------------------------------
Net assets, at value ................................. $ 678,419,437 $ 2,404,592,658 $ 46,953,295,564
========================================================
Net assets consist of:
Paid-in capital ............................................... $ 475,198,630 $ 1,036,919,160 $ 42,678,257,176
Undistributed net investment income (distributions in excess of
net investment income) ....................................... -- 3,691,950 (48,475,302)
Net unrealized appreciation (depreciation) .................... 259,346,706 1,481,816,966 3,698,349,671
Accumulated net realized gain (loss) .......................... (56,125,899) (117,835,418) 625,164,019
--------------------------------------------------------
Net assets, at value ................................. $ 678,419,437 $ 2,404,592,658 $ 46,953,295,564
========================================================
108 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2006
------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
CLASS A:
Net assets, at value ................................................ $590,632,982 $1,695,802,411 $26,641,398,160
================================================
Shares outstanding .................................................. 22,888,859 43,370,162 10,363,193,013
================================================
Net asset value per share a ......................................... $ 25.80 $ 39.10 $ 2.57
================================================
Maximum offering price per share (net asset value per share / 94.25%,
94.25% and 95.75%, respectively) ................................... $ 27.37 $ 41.49 $ 2.68
================================================
CLASS B:
Net assets, at value ................................................ $ 18,717,799 $ 122,871,429 $ 3,743,374,468
================================================
Shares outstanding .................................................. 756,135 3,263,788 1,461,427,024
================================================
Net asset value and maximum offering price per share a .............. $ 24.75 $ 37.65 $ 2.56
================================================
CLASS B1:
Net assets, at value ................................................ -- -- $ 459,302,056
================================================
Shares outstanding .................................................. -- -- 178,607,444
================================================
Net asset value and maximum offering price per share a .............. -- -- $ 2.57
================================================
CLASS C:
Net assets, at value ................................................ $ 69,068,656 $ 273,511,690 $12,138,969,290
================================================
Shares outstanding .................................................. 2,819,209 7,328,598 4,694,167,183
================================================
Net asset value and maximum offering price per share a .............. $ 24.50 $ 37.32 $ 2.59
================================================
CLASS R:
Net assets, at value ................................................ -- $ 37,803,704 $ 183,609,076
================================================
Shares outstanding .................................................. -- 974,340 72,082,679
================================================
Net asset value and maximum offering price per share a .............. -- $ 38.80 $ 2.55
================================================
ADVISOR CLASS:
Net assets, at value ................................................ -- $ 274,603,424 $ 3,786,642,514
================================================
Shares outstanding .................................................. -- 7,010,272 1,479,710,390
================================================
Net asset value and maximum offering price per share a .............. -- $ 39.17 $ 2.56
================================================
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 |
The accompanying notes are an integral part of these financial statements. | 109
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2006
----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................ $6,542,261,994 $1,790,395,890
Cost - Sweep Money Fund (Note 7) ................................... 165,722,265 5,327,376
Cost - Repurchase agreements ....................................... 34,460,000 --
--------------------------------
Total cost of investments .......................................... $6,742,444,259 $1,795,723,266
================================
Value - Unaffiliated issuers ....................................... $6,472,931,426 $2,571,953,104
Value - Sweep Money Fund (Note 7) .................................. 165,722,265 5,327,376
Value - Repurchase agreements ...................................... 34,460,000 --
--------------------------------
Total value of investments ......................................... 6,673,113,691 2,577,280,480
Receivables:
Investment securities sold ......................................... -- 5,020,446
Capital shares sold ................................................ 4,721,546 1,870,632
Dividends and interest ............................................. 29,603,916 6,164,048
--------------------------------
Total assets ................................................. 6,707,439,153 2,590,335,606
--------------------------------
Liabilities:
Payables:
Investment securities purchased .................................... 123,460,993 --
Capital shares redeemed ............................................ 14,986,435 4,958,292
Affiliates ......................................................... 4,801,182 2,091,764
Accrued expenses and other liabilities .............................. 1,462,212 444,288
--------------------------------
Total liabilities ............................................ 144,710,822 7,494,344
--------------------------------
Net assets, at value ....................................... $6,562,728,331 $2,582,841,262
================================
Net assets consist of:
Paid-in capital ..................................................... $7,029,692,037 $1,724,048,885
Undistributed net investment income ................................. 11,480,909 10,368,034
Net unrealized appreciation (depreciation) .......................... (69,330,568) 781,557,214
Accumulated net realized gain (loss) ................................ (409,114,047) 66,867,129
--------------------------------
Net assets, at value ....................................... $6,562,728,331 $2,582,841,262
================================
CLASS A:
Net assets, at value ................................................ $5,291,116,657 $1,926,731,549
================================
Shares outstanding .................................................. 822,760,091 149,477,642
================================
Net asset value per share a ......................................... $ 6.43 $ 12.89
================================
Maximum offering price per share (net asset value per share / 95.75%) $ 6.72 $ 13.46
================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
110 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2006
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
CLASS B:
Net assets, at value ................................. $388,806,605 $133,823,854
=================================
Shares outstanding ................................... 60,543,242 10,391,516
=================================
Net asset value and maximum offering price per share a $ 6.42 $ 12.88
=================================
CLASS C:
Net assets, at value ................................. $424,462,410 $391,508,607
=================================
Shares outstanding ................................... 66,306,863 30,461,416
=================================
Net asset value and maximum offering price per share a $ 6.40 $ 12.85
=================================
CLASS R:
Net assets, at value ................................. $71,103,697 $27,735,777
=================================
Shares outstanding ................................... 11,063,853 2,156,364
=================================
Net asset value and maximum offering price per share a $ 6.43 $ 12.86
=================================
ADVISOR CLASS:
Net assets, at value ................................. $387,238,962 $103,041,475
=================================
Shares outstanding ................................... 60,082,925 7,959,343
=================================
Net asset value and maximum offering price per share a $ 6.45 $ 12.95
=================================
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 |
The accompanying notes are an integral part of these financial statements. | 111
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended September 30, 2006
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................. $ 4,845,900 $ 27,604,449 $ 835,905,726
Non-controlled affiliated issuers (Note 10) ...................... -- -- 77,276,184
Sweep Money Fund (Note 7) ........................................ 290,807 1,347,534 7,463,149
Interest:
Unaffiliated issuers ............................................. -- -- 1,664,224,522
Non-controlled affiliated issuers (Note 10) ...................... -- -- 14,190,750
Income from securities loaned - net ............................... 399,477 -- --
Other income (Note 13) ............................................ 32,970 70,883 966,502
-------------------------------------------------
Total investment income .................................... 5,569,154 29,022,866 2,600,026,833
-------------------------------------------------
Expenses:
Management fees (Note 3a) ......................................... 3,488,806 10,676,078 164,786,276
Distribution fees: (Note 3c)
Class A .......................................................... 1,576,807 4,023,953 35,542,454
Class B .......................................................... 200,950 1,244,622 37,113,496
Class B1 ......................................................... -- -- 2,999,117
Class C .......................................................... 738,631 2,728,200 69,221,252
Class R .......................................................... -- 179,624 745,673
Transfer agent fees (Note 3e) ..................................... 1,458,706 4,342,709 30,818,017
Custodian fees (Note 4) ........................................... 18,963 47,999 869,166
Reports to shareholders ........................................... 120,886 279,182 3,630,787
Registration and filing fees ...................................... 63,392 149,069 2,021,251
Professional fees (Note 3g) ....................................... 36,101 66,345 318,662
Directors' fees and expenses ...................................... 3,397 10,527 182,669
Other ............................................................. 12,681 40,156 1,006,179
-------------------------------------------------
Total expenses ............................................. 7,719,320 23,788,464 349,254,999
Expense reductions (Note 4) ................................ (30) (661) (233,075)
Expenses waived/paid by affiliates (Note 3f) ............... -- -- (123,828)
-------------------------------------------------
Net expenses ............................................. 7,719,290 23,787,803 348,898,096
-------------------------------------------------
Net investment income (loss) ............................ (2,150,136) 5,235,063 2,251,128,737
-------------------------------------------------
Realized and unrealized gains (losses)
Net realized gain (loss) from:
Investments
Unaffiliated Issuers ........................................... 37,234,265 94,184,639 633,469,369
Non-controlled affiliated issuers (Note 10) .................... -- -- 75,114,093
Foreign currency transactions .................................... (142) (14,711) (79,265)
-------------------------------------------------
Net realized gain (loss) ................................ 37,234,123 94,169,928 708,504,197
-------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (13,111,219) 169,320,275 1,064,942,294
-------------------------------------------------
Net realized and unrealized gain (loss) ............................ 24,122,904 263,490,203 1,773,446,491
-------------------------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 21,972,768 $ 268,725,266 $ 4,024,575,228
=================================================
112 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended September 30, 2006
----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
----------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................. $ -- $ 98,624,439
Sweep Money Fund (Note 7) ........................................ 7,317,791 449,603
Interest .......................................................... 360,046,038 8,583,582
Income from securities loaned - net ............................... -- 8,430
Other income (Note 13) ............................................ -- 52,619
---------------------------------
Total investment income .................................... 367,363,829 107,718,673
---------------------------------
Expenses:
Management fees (Note 3a) ......................................... 30,413,885 11,524,045
Distribution fees: (Note 3c)
Class A .......................................................... 7,067,091 2,771,437
Class B .......................................................... 2,782,016 894,912
Class C .......................................................... 2,946,048 2,475,762
Class R .......................................................... 334,169 90,403
Transfer agent fees (Note 3e) ..................................... 8,619,714 3,094,345
Custodian fees (Note 4) ........................................... 131,458 89,713
Reports to shareholders ........................................... 692,437 275,722
Registration and filing fees ...................................... 197,093 131,137
Professional fees (Note 3g) ....................................... 96,244 66,675
Directors' fees and expenses ...................................... 32,608 11,925
Other ............................................................. 343,568 97,746
---------------------------------
Total expenses ............................................. 53,656,331 21,523,822
Expense reductions (Note 4) ................................ (11,326) (5,333)
---------------------------------
Net expenses ............................................. 53,645,005 21,518,489
---------------------------------
Net investment income ................................... 313,718,824 86,200,184
---------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................... (1,705,377) 79,107,847
Foreign currency transactions .................................... -- 361,230
---------------------------------
Net realized gain (loss) ................................ (1,705,377) 79,469,077
---------------------------------
Net change in unrealized appreciation (depreciation) on investments (93,987,541) (14,294,348)
---------------------------------
Net realized and unrealized gain (loss) ............................ (95,692,918) 65,174,729
---------------------------------
Net increase (decrease) in net assets resulting from operations .... $ 218,025,906 $ 151,374,913
=================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 113
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,
2006 2005 2006 2005
-----------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .................. $ (2,150,136) $ (860,145) $ 5,235,063 $ 6,147,997
Net realized gain (loss) from investments and
foreign currency transactions ............... 37,234,123 (905,096) 94,169,928 33,738,259
Net change in unrealized appreciation
(depreciation) on investments ............... (13,111,21) 93,542,036 169,320,275 244,117,335
-----------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ............................. 21,972,768 91,776,795 268,725,266 284,003,591
-----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ..................................... -- -- (2,878,816) (3,882,872)
Class R ..................................... -- -- (1,109) (10,415)
Advisor Class ............................... -- -- (964,032) (732,270)
-----------------------------------------------------------------------
Total distributions to shareholders ............ -- -- (3,843,957) (4,625,557)
-----------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ..................................... (58,206,95) (91,991,179) (61,066,872) (168,604,093)
Class B ..................................... (1,156,433) (1,613,902) (14,734,540) (13,722,938)
Class C ..................................... (6,007,946) (10,942,390) (27,044,966) (33,781,675)
Class R ..................................... -- -- 6,380,501 4,768,742
Advisor Class ............................... -- -- 24,459,918 66,279,985
-----------------------------------------------------------------------
Total capital share transactions ............... (65,371,33) (104,547,471) (72,005,959) (145,059,979)
-----------------------------------------------------------------------
Redemption fees ................................ 2,037 1,039 8,229 11,358
-----------------------------------------------------------------------
Net increase (decrease) in net assets ..... (43,396,53) (12,769,637) 192,883,579 134,329,413
Net assets:
Beginning of year .............................. 721,815,967 734,585,604 2,211,709,079 2,077,379,666
-----------------------------------------------------------------------
End of year .................................... $ 678,419,437 $ 721,815,967 $ 2,404,592,658 $ 2,211,709,079
=======================================================================
Undistributed net investment income included in
net assets:
End of year ................................... $ -- $ -- $ 3,691,950 $ 2,307,104
-----------------------------------------------------------------------
114 | The accompanying notes are an integral part of these 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,
2006 2005 2006 2005
------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 2,251,128,737 $ 1,736,884,708 $ 313,718,824 $ 320,563,601
Net realized gain (loss) from investments
and foreign currency transactions ..... 708,504,197 408,724,204 (1,705,377) 3,270,275
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ..... 1,064,942,294 893,534,036 (93,987,541) (126,557,362)
------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............. 4,024,575,228 3,039,142,948 218,025,906 197,276,514
------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (1,378,791,711) (1,104,437,012) (270,849,710) (302,745,166)
Class B ............................... (189,035,634) (206,484,397) (18,899,716) (23,185,787)
Class B1 .............................. (25,054,794) (28,826,258) -- --
Class C ............................... (571,320,771) (461,493,148) (20,148,370) (24,272,966)
Class R ............................... (8,167,468) (5,706,119) (2,989,468) (2,810,550)
Advisor Class ......................... (175,243,446) (95,145,372) (18,476,100) (15,327,999)
Net realized gains:
Class A ............................... (140,038,105) (84,143,096) -- --
Class B ............................... (23,629,261) (19,751,225) -- --
Class B1 .............................. (2,953,524) (2,705,174) -- --
Class C ............................... (63,765,145) (37,975,944) -- --
Class R ............................... (827,485) (432,526) -- --
Advisor Class ......................... (15,806,072) (5,808,100) -- --
------------------------------------------------------------------------------
Total distributions to shareholders ...... (2,594,633,416) (2,052,908,371) (331,363,364) (368,342,468)
------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... 3,892,312,218 6,640,381,449 (518,339,020) (380,358,442)
Class B ............................... (281,240,958) 317,307,812 (82,378,909) (77,684,862)
Class B1 .............................. (46,251,019) (34,777,479) -- --
Class C ............................... 1,657,633,123 3,242,801,825 (76,075,166) (76,479,175)
Class R ............................... 55,454,673 46,237,588 6,209,239 7,779,886
Advisor Class ......................... 1,379,240,071 1,334,835,525 57,275,425 1,208,804
------------------------------------------------------------------------------
Total capital share transactions ......... 6,657,148,108 11,546,786,720 (613,308,431) (525,533,789)
------------------------------------------------------------------------------
Redemption fees .......................... 265,535 173,429 125,755 31,088
------------------------------------------------------------------------------
Net increase (decrease) in
net assets .......................... 8,087,355,455 12,533,194,726 (726,520,134) (696,568,655)
Net assets:
Beginning of year ........................ 38,865,940,109 26,332,745,383 7,289,248,465 7,985,817,120
------------------------------------------------------------------------------
End of year .............................. $ 46,953,295,564 $ 38,865,940,109 $ 6,562,728,331 $ 7,289,248,465
==============================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of year ............................. $ (48,475,302) $ 145,660,727 $ 11,480,909 $ 949,733
==============================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 115
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------
FRANKLIN UTILITIES FUND
-----------------------------------
YEAR ENDED SEPTEMBER 30,
2006 2005
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................... $ 86,200,184 $ 87,329,712
Net realized gain (loss) from investments and foreign currency transactions 79,469,077 86,597,164
Net change in unrealized appreciation (depreciation) on investments ....... (14,294,348) 395,798,703
-----------------------------------
Net increase (decrease) in net assets resulting from operations ........ 151,374,913 569,725,579
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................................. (63,192,877) (65,898,832)
Class B .................................................................. (3,961,723) (4,861,315)
Class C .................................................................. (11,209,132) (12,160,417)
Class R .................................................................. (562,410) (210,458)
Advisor Class ............................................................ (3,148,388) (3,309,596)
Net realized gains:
Class A .................................................................. (14,345,312) --
Class B .................................................................. (1,090,928) --
Class C .................................................................. (3,070,998) --
Class R .................................................................. (117,357) --
Advisor Class ............................................................ (696,993) --
-----------------------------------
Total distributions to shareholders ......................................... (101,396,118) (86,440,618)
-----------------------------------
Capital share transactions: (Note 2)
Class A .................................................................. (98,910,206) 175,567,341
Class B .................................................................. (22,687,061) (3,086,774)
Class C .................................................................. (50,418,336) 76,710,176
Class R .................................................................. 12,337,719 11,865,292
Advisor Class ............................................................ (8,392,780) 41,716,286
-----------------------------------
Total capital share transactions ............................................ (168,070,664) 302,772,321
-----------------------------------
Redemption fees ............................................................. 10,894 4,687
-----------------------------------
Net increase (decrease) in net assets .................................. (118,080,975) 786,061,969
Net assets:
Beginning of year ........................................................... 2,700,922,237 1,914,860,268
-----------------------------------
End of year ................................................................. $ 2,582,841,262 $ 2,700,922,237
===================================
Undistributed net investment income included in net assets:
End of year ................................................................. $ 10,368,034 $ 6,871,929
===================================
116 | The accompanying notes are an integral part of these 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 (1940 Act) as a diversified, open-end investment
company, consisting of five funds (the Funds). The classes of shares offered
within each of the Funds are indicated below. Each class of shares differs by
its initial sales load, contingent deferred sales charges, distribution fees,
voting rights on matters affecting a single class and its exchange privilege.
- --------------------------------------------------------------------------------------------------------------------------
CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1,
& CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------------------------
Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
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, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The funds 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
Annual Report | 117
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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 fund. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. 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 Custodian Funds' Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. 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 Funds' 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
Statements 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
The Funds may enter into repurchase agreements. Repurchase agreements 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
118 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REPURCHASE AGREEMENTS (CONTINUED)
securities marked to market daily to maintain coverage of at least 100%. The
Funds may also enter into joint repurchase agreements 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. Repurchase agreements are valued at cost. At September 30, 2006, all
repurchase agreements held by the funds had been entered into on September 29,
2006.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
The Funds may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the funds will generally purchase these securities with
the intention of holding the securities, they may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
E. 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 Statements of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statements of Assets and Liabilities.
F. SECURITIES LENDING
Certain funds may loan securities to certain brokers through a securities
lending agent for which they receive 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 fund receives interest income from the investment
of cash collateral, adjusted by lender fees and broker rebates. The fund bears
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 fund
in the case of default of any securities borrower. At September 30, 2006, the
funds had no securities on loan.
Annual Report | 119
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. INCOME TAXES
No provision has been made for U.S. income taxes because each fund intends 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 except that certain
dividends from foreign securities are recognized as soon as the funds are
notified of 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 accounting principles generally accepted in
the United States. 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 may 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.
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. Differences in class-level
expenses may result in payment of different per share distributions by 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.
120 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Funds' 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
At September 30, 2006, there were 44.2 billion shares of Custodian Funds
authorized ($0.01 par value) and allocated to the Funds as follows (in
millions):
------------------------------------------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
------------------------------------------------------------------------------------------------
1,000 3,250 28,400 8,000 3,550
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, 2006
Shares sold ................. 7,549,106 $ 196,574,987 5,839,020 $ 216,936,848
Shares issued in reinvestment
of distributions ........... -- -- 72,200 2,651,898
Shares redeemed ............. (9,824,846) (254,781,943) (7,553,843) (280,655,618)
--------------------------------------------------------------
Net increase (decrease) ..... (2,275,740) $ (58,206,956) (1,642,623) $ (61,066,872)
==============================================================
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)
==============================================================
CLASS B SHARES:
Year ended September 30, 2006
Shares sold ................. 130,112 $ 3,277,620 131,693 $ 4,727,781
Shares redeemed ............. (181,335) (4,434,053) (542,288) (19,462,321)
--------------------------------------------------------------
Net increase (decrease) ..... (51,223) $ (1,156,433) (410,595) $ (14,734,540)
==============================================================
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)
==============================================================
Annual Report | 121
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
CLASS C SHARES:
Year ended September 30, 2006
Shares sold ...................................... 544,669 $ 13,596,186 805,722 $ 28,644,387
Shares redeemed .................................. (804,572) (19,604,132) (1,568,706) (55,689,353)
-----------------------------------------------------------
Net increase (decrease) .......................... (259,903) $ (6,007,946) (762,984) $(27,044,966)
===========================================================
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)
===========================================================
CLASS R SHARES:
Year ended September 30, 2006
Shares sold ...................................... 761,379 $ 28,236,014
Shares issued in reinvestment
of distributions ................................ 30 1,108
Shares redeemed .................................. (591,370) (21,856,621)
---------------------------
Net increase (decrease) .......................... 170,039 $ 6,380,501
===========================
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
===========================
ADVISOR CLASS SHARES:
Year ended September 30, 2006
Shares sold ...................................... 1,865,004 $ 68,842,317
Shares issued in reinvestment
of distributions ................................ 23,979 880,512
Shares redeemed .................................. (1,234,780) (45,262,911)
---------------------------
Net increase (decrease) .......................... 654,203 $ 24,459,918
===========================
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
===========================
122 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-----------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
CLASS A SHARES:
Year ended September 30, 2006
Shares sold .................................. 2,696,366,641 $ 6,638,171,639 74,108,689 $ 475,165,349
Shares issued in reinvestment
of distributions ............................ 419,071,279 1,027,948,938 27,302,160 174,712,964
Shares redeemed .............................. (1,536,463,921) (3,773,808,359) (182,139,799) (1,168,217,333)
-----------------------------------------------------------------------
Net increase (decrease) ...................... 1,578,973,999 $ 3,892,312,218 (80,728,950) $ (518,339,020)
=======================================================================
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)
=======================================================================
CLASS B SHARES:
Year ended September 30, 2006
Shares sold .................................. 26,637,625 $ 65,369,671 1,981,038 $ 12,637,018
Shares issued in reinvestment
of distributions ............................ 55,871,397 136,411,780 2,075,139 13,272,404
Shares redeemed .............................. (197,429,792) (483,022,409) (16,913,499) (108,288,331)
-----------------------------------------------------------------------
Net increase (decrease) ...................... (114,920,770) $ (281,240,958) (12,857,322) $ (82,378,909)
=======================================================================
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)
========================================================================
CLASS B1 SHARES:
Year ended September 30, 2006
Shares sold .................................. 1,061,971 $ 2,609,506
Shares issued in reinvestment
of distributions ............................ 6,529,196 15,992,703
Shares redeemed .............................. (26,407,031) (64,853,228)
----------------------------------
Net increase (decrease) ...................... (18,815,864) $ (46,251,019)
==================================
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)
==================================
Annual Report | 123
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
--------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
CLASS C SHARES:
Year ended September 30, 2006
Shares sold ................. 1,197,637,346 $ 2,970,142,401 9,638,095 $ 61,502,139
Shares issued in reinvestment
of distributions ........... 166,806,121 411,488,472 2,119,611 13,512,599
Shares redeemed ............. (698,120,168) (1,723,997,750) (23,652,039) (151,089,904)
--------------------------------------------------------------------
Net increase (decrease) ..... 666,323,299 $ 1,657,633,123 (11,894,333) $ (76,075,166)
====================================================================
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)
====================================================================
CLASS R SHARES:
Year ended September 30, 2006
Shares sold ................. 35,951,956 $ 87,751,074 3,883,199 $ 24,836,010
Shares issued in reinvestment
of distributions ........... 3,434,439 8,359,852 460,538 2,944,655
Shares redeemed ............. (16,667,648) (40,656,253) (3,359,689) (21,571,426)
--------------------------------------------------------------------
Net increase (decrease) ..... 22,718,747 $ 55,454,673 984,048 $ 6,209,239
====================================================================
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
====================================================================
ADVISOR CLASS SHARES:
Year ended September 30, 2006
Shares sold ................. 536,707,405 $ 1,314,899,137 20,893,833 $ 134,424,816
Shares issued in reinvestment
of distributions ........... 75,142,358 183,808,062 2,672,825 17,119,867
Shares redeemed ............. (49,253,364) (119,467,128) (14,613,605) (94,269,258)
--------------------------------------------------------------------
Net increase (decrease) ..... 562,596,399 $ 1,379,240,071 8,953,053 $ 57,275,425
====================================================================
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
====================================================================
124 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
------------------------------
FRANKLIN UTILITIES FUND
------------------------------
SHARES AMOUNT
------------------------------
CLASS A SHARES:
Year ended September 30, 2006
Shares sold .................................. 21,710,054 $ 263,631,372
Shares issued in reinvestment of distributions 4,863,147 59,003,083
Shares redeemed .............................. (34,893,525) (421,544,661)
------------------------------
Net increase (decrease) ...................... (8,320,324) $ (98,910,206)
==============================
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
==============================
CLASS B SHARES:
Year ended September 30, 2006
Shares sold .................................. 520,507 $ 6,326,393
Shares issued in reinvestment of distributions 231,269 2,799,228
Shares redeemed .............................. (2,628,864) (31,812,682)
------------------------------
Net increase (decrease) ...................... (1,877,088) $ (22,687,061)
==============================
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)
==============================
CLASS C SHARES:
Year ended September 30, 2006
Shares sold .................................. 4,480,664 $ 54,267,851
Shares issued in reinvestment of distributions 576,307 6,963,061
Shares redeemed .............................. (9,312,099) (111,649,248)
------------------------------
Net increase (decrease) ...................... (4,255,128) $ (50,418,336)
==============================
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
==============================
CLASS R SHARES:
Year ended September 30, 2006
Shares sold .................................. 1,759,282 $ 21,583,826
Shares issued in reinvestment of distributions 54,640 665,605
Shares redeemed .............................. (823,343) (9,911,712)
------------------------------
Net increase (decrease) ...................... 990,579 $ 12,337,719
==============================
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
==============================
Annual Report | 125
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
ADVISOR CLASS SHARES:
Year ended September 30, 2006
Shares sold .................................................... 2,685,330 $ 33,289,067
Shares issued in reinvestment of distributions ................. 269,026 3,282,823
Shares redeemed ................................................ (3,720,560) (44,964,670)
----------------------------
Net increase (decrease) ........................................ (766,204) $ (8,392,780)
============================
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
============================
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, LLC (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
A. MANAGEMENT FEES
Effective March 15, 2006, the Funds, except Franklin Growth Fund, pay an
investment management fee to Advisers, whereas 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 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
Prior to March 15, 2006, the Funds paid an annualized fee rate of 0.36% on net
assets in excess of $20 billion.
126 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
Under agreements with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
C. DISTRIBUTION FEES
The Custodian Funds Board of Directors has adopted distribution plans for each
share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1
under the 1940 Act. Under the Funds' Class A 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
its 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.
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 its 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
------------------------------------------------
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ..................................................... $133,316 $651,670 $20,808,243
Contingent deferred sales charges retained .......................... $ 42,270 $195,508 $ 8,991,494
Annual Report | 127
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS (CONTINUED)
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------------
Sales charges retained net of commissions paid to unaffiliated
broker/dealers ........................................................ $ 557,165 $329,830
Contingent deferred sales charges retained ............................. $1,131,306 $274,156
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
---------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
---------------------------------------
Transfer agent fees ..... $1,095,438 $3,328,015 $17,760,223
---------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------------------
Transfer agent fees ....... $5,954,309 $2,002,943
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Advisers agreed in advance to voluntarily waive a portion of management fees for
the Franklin Income Fund, 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
Effective March 15, 2006, the waiver was discontinued for the Franklin Income
Fund.
G. OTHER AFFILIATED TRANSACTIONS
Included in professional fees are legal fees of $191,237 that were paid to a law
firm in which a partner is an officer of the Funds.
128 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended September 30, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
At September 30, 2006, the Franklin Income Fund had tax basis capital losses of
$2,516,775 from the merged Franklin Multi-Income Trust which may be carried over
to offset future capital gains, subject to certain limitations.
At September 30, 2006, 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, 2006, the Franklin Dynatech Fund, Franklin Growth Fund and
Franklin Income Fund utilized $37,234,265, $94,184,639, and $6,834,626,
respectively, of capital loss carryforwards. At September 30, 2006, 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:
2007 ................................ $ -- $ -- $ -- $ 18,954,412
2008 ................................ -- -- -- 21,105,846
2009 ................................ -- -- -- 46,256,951
2010 ................................ -- -- -- 11,768,551
2011 ................................ 19,032,674 78,768,578 2,020,605 33,556,845
2012 ................................ 21,838,085 39,052,129 496,170 129,102,166
2013 ................................ 14,781,620 -- -- 74,283,298
2014 ................................ -- -- -- 47,763,112
--------------------------------------------------------------
$ 55,652,379 $117,820,707 $ 2,516,775 $382,791,181
==============================================================
On September 30, 2006, the Franklin U.S. Government Securities Fund had expired
capital loss carryforwards of $28,279,472, which were reclassified to paid-in
capital.
For tax purposes, realized capital losses and realized currency 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, 2006, the Franklin
U.S. Government Securities Fund had deferred realized capital losses of
$26,322,866. At September 30, 2006, the Franklin Dynatech Fund, Franklin Growth
Fund and Franklin Income Fund had deferred realized currency losses of $142,
$14,711 and $79,262, respectively.
Annual Report | 129
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended September 30,
2006 and 2005, was as follows:
------------------------------------------------------------------
FRANKLIN GROWTH FUND FRANKLIN INCOME FUND
------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------
Distributions paid from:
Ordinary income ..... $ 3,843,957 $ 4,625,557 $2,449,083,601 $1,902,092,306
Long term capital gain -- -- 145,549,815 150,816,065
------------------------------------------------------------------
$ 3,843,957 $ 4,625,557 $2,594,633,416 $2,052,908,371
==================================================================
------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND FRANKLIN UTILITIES FUND
------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------
Distributions paid from:
Ordinary income ..... $331,363,364 $ 368,342,468 $ 82,074,530 $ 86,440,618
Long term capital gain -- -- 19,321,588 --
------------------------------------------------------------------
$331,363,364 $ 368,342,468 $ 101,396,118 $ 86,440,618
==================================================================
At September 30, 2006, 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 ...................... $ 422,916,284 $ 924,771,892 $ 42,861,682,225
========================================================
Unrealized appreciation .................. $ 274,489,080 $ 1,487,902,900 $ 4,787,258,252
Unrealized depreciation .................. (15,615,752) (6,085,934) (1,103,331,112)
--------------------------------------------------------
Net unrealized appreciation (depreciation) $ 258,873,328 $ 1,481,816,966 $ 3,683,927,140
========================================================
Undistributed ordinary income ............ $ -- $ 3,691,950 $ 365,085,875
Undistributed long term capital gains .... -- -- 276,169,203
--------------------------------------------------------
Distributable earnings ................... $ -- $ 3,691,950 $ 641,255,078
========================================================
-----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------------
Cost of investments ...................... $ 6,742,444,259 $ 1,798,882,936
===================================
Unrealized appreciation .................. $ 33,166,751 $ 783,009,191
Unrealized depreciation .................. (102,497,319) (4,611,647)
-----------------------------------
Net unrealized appreciation (depreciation) $ (69,330,568) $ 778,397,544
===================================
Undistributed ordinary income ............ $ 11,480,909 $ 19,901,478
Undistributed long term capital gains .... -- 60,862,667
-----------------------------------
Distributable earnings ................... $ 11,480,909 $ 80,764,145
===================================
130 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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.
6. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short term securities) for the year ended
September 30, 2006, were as follows:
---------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
---------------------------------------------------------
Purchases ......... $133,726,079 $ 50,892,709 $18,821,712,854
Sales ............. $199,771,606 $146,805,409 $11,518,856,149
----------------------------------
FRANKLIN FRANKLIN
U.S. GOVERNMENT UTILITIES
SECURITIES FUND FUND
----------------------------------
Purchases ......... $1,362,412,104 $199,998,791
Sales ............. $1,750,549,814 $384,354,115
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 and
administrative fees paid by the Sweep Money Fund.
8. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 39.04% 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.
Annual Report | 131
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED)
The Franklin Income Fund held defaulted securities and/or other securities for
which the income has been deemed uncollectible. At September 30, 2006, the
aggregate value of these securities was $834,314,070, representing 1.78% 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. The securities have been identified on the accompanying
Statement of Investments.
9. RESTRICTED SECURITIES
Certain Funds may invest in securities that are restricted under the Securities
Act of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The fund has registration rights for certain
restricted securities held at period end. The issuer generally incurs all
registration costs.
At September 30, 2006, the Franklin Income Fund held investments in restricted
securities, excluding 144A securities deemed to be liquid, 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 2/14/97 - 7/18/00 $57,833,250 $ 825,000
113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%,
4/29/15 ..................................................... 4/30/05 26,274 25,690
294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%,
4/29/18 ..................................................... 4/30/05 68,317 66,799
607,466 Pindo Deli Finance Mauritius Ltd., 144A, zero cpn.,
4/29/25 ..................................................... 4/30/05 141,151 138,016
12,883,549 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN,
5.248%, 4/29/15 ............................................. 4/30/05 3,926,906 3,839,298
33,160,560 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN,
4.675%, 4/29/18 ............................................. 4/30/05 10,107,339 9,881,847
42,601,657 Tjiwi Kimia Finance Mauritius, secured note, 144A, zero cpn.,
4/29/25 ..................................................... 4/30/05 12,984,985 12,695,294
-----------
TOTAL RESTRICTED SECURITIES (0.06% of Net Assets) .......................................... $27,471,944
===========
132 | Annual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act 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 for the year
ended September 30, 2006 were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/ SHARES/
PRINCIPAL PRINCIPAL REALIZED
HELD AT HELD AT VALUE CAPITAL
BEGINNING GROSS GROSS END AT END INVESTMENT GAIN
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Ameren Corp. ................... 8,770,000 2,504,400 -- 11,274,400 $ 595,175,576 $ 24,428,450 $ --
Aquila Inc. .................... 25,000,000 -- 25,000,000 -- b -- 12,617,854
Aquila Inc., senior note,
14.875%, 7/01/12 ............. 95,400,000 -- -- 95,400,000 b 14,190,750 --
Canadian Oil Sands Trust a ..... 28,000,000 -- 2,229,400 25,770,600 687,831,096 20,293,439 52,690,560
Pinnacle West Capital Corp. .... 4,024,000 1,476,000 -- 5,500,000 247,775,000 10,000,000 --
Public Service Enterprise
Group Inc. ................... 6,023,560 11,000,000 523,560 16,500,000 1,009,635,000 15,895,045 9,805,679
Puget Energy Inc. .............. 4,137,000 3,363,000 -- 7,500,000 170,475,000 6,659,250 --
--------------------------------------------
TOTAL AFFILIATED SECURITIES
(5.77% of Net Assets) ........... $2,710,891,672 $91,466,934 $75,114,093
============================================
a Reflects a 5:1 stock split during the current period. Balance as of
September 30, 2005 was 5,600,000.
b As of September 30, 2006, no longer an affiliate.
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 sale, the transaction is being accounted for as a secured borrowing with a
pledge of collateral and any preliminary sales proceeds or other interest and
cash distributions received are deferred until the completion of the
transaction.
Directors or employees of Advisers, as the Franklin Income Fund's Investment
Manager, may serve as members of various bondholders' steering committees, on
credit committees, or may represent the funds in certain corporate restructuring
negotiations. At September 30, 2006, such individuals serve in one or more of
these capacities for Calpine Canada Energy Finance and Calpine Corp. As a result
of this involvement, such individuals may be in possession of certain material
non-public information. If the fund's Investment Manager, while in possession of
such information, seeks to buy or sell any of these securities, it will comply
with all applicable federal securities laws.
Annual Report | 133
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. MERGER
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 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 separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
134 | Annual Report
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 referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
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 intend 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 Custodian Funds,
it is committed to making the Custodian Funds or their shareholders whole, as
appropriate.
14. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Funds are currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Custodian Funds believes the adoption of
SFAS 157 will have no material impact on its financial statements.
Annual Report | 135
Franklin Custodian Funds, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS, INC.
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Dynatech Fund, Franklin
Growth Fund, Franklin Income Fund, Franklin U.S. Government Securities Fund and
Franklin Utilities Fund, separate portfolios of Franklin Custodian Funds, Inc.
(hereafter referred to as the "Funds") at September 30, 2006, 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 audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 2006 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 15, 2006
136 | Annual Report
Franklin Custodian Funds, Inc.
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Franklin
Income Fund and Franklin Utilities Fund designates the maximum amount allowable
but no less than $332,434,361 and $67,154,589, respectively, as a long term
capital gain dividend for the fiscal year ended September 30, 2006.
Under Section 871(k)(2)(C) of the Code, the Franklin Income Fund and Franklin
Utilities Fund designate the maximum amount allowable but no less than
$377,685,477 and $12,523,322, respectively, as a short term capital gain
dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended September 30, 2006.
Under Section 854(b)(2) of the Code, the Franklin Growth Fund, Franklin Income
Fund and Franklin Utilities Fund designates 100%, 28.60% and 100%, respectively,
of the ordinary income dividends as income qualifying for the dividends received
deduction for the fiscal year ended September 30, 2006.
Under Section 854(b)(2) of the Code, the Franklin Growth Fund, Franklin Income
Fund and Franklin Utilities Fund designates the maximum amount allowable but no
less than $28,160,824, $737,976,112, and $89,822,144, respectively, as qualified
dividends for purposes of the maximum rate under Section 1(h)(11) of the Code
for the fiscal year ended September 30, 2006. In January 2007, shareholders will
receive Form 1099-DIV which will include their share of qualified dividends
distributed during the calendar year 2006. 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 871(k)(1)(C) of the Code, the Franklin Income Fund, Franklin U.S.
Government Securities Fund and Franklin Utilities Fund designate the maximum
amount allowable but no less than $1,559,328,566, $338,887,475 and $9,423,748,
respectively, as interest related dividends for purposes of the tax imposed
under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30,
2006.
Annual Report | 137
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).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Director Since 1998 142 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 and refining of oil and 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).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2005 102 Director, Hess Corporation (formerly,
One Franklin Parkway Amerada Hess Corporation) (exploration
San Mateo, CA 94403-1906 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), UAL Corporation (airlines)
and White Mountains Insurance Group,
Ltd. (holding company).
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).
- ------------------------------------------------------------------------------------------------------------------------------------
138 | 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 and 1969, President
San Mateo, CA 94403-1906 Chief since 1984 and
Executive Chief Executive
Officer Officer -
- Investment Investment
Management Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, 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 41 of the investment companies in Franklin Templeton Investments.
- ---------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Director and Since 1983 126 None
One Franklin Parkway 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 44
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 44 of the investment companies in Franklin
Templeton Investments.
- ---------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President - AML
President Compliance since
- AML February 2006
Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ---------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------------
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 30 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, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 46 of the
investment companies in Franklin Templeton Investments.
- ---------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ---------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
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 46
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).
- ---------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice Vice President Not Applicable Not Applicable
One Franklin Parkway President since March 2006
San Mateo, CA 94403-1906 and and Secretary
Secretary since April 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company;
and officer of 30 of the investment companies in Franklin Templeton Investments.
- ---------------------------------------------------------------------------------------------------------------------------------
140 | 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
- ---------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 46 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 Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Fort Lauderdale, FL Officer and
33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 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 manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust 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 Fund's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Prior to September 30, 2006, Mr. S. Joseph Fortunato and Mr. Gordon S.
Macklin each ceased to be a director of the Funds.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF EDITH E. HOLIDAY AND HARRIS J. ASHTON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. HOLIDAY AND MR. ASHTON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR BUSINESS BACKGROUND AND EXPERIENCE. MS. HOLIDAY,
WHO CURRENTLY SERVES AS A DIRECTOR AND TRUSTEE OF VARIOUS COMPANIES AND TRUSTS,
INCLUDING H.J. HEINZ COMPANY WHERE SHE IS AUDIT COMMITTEE CHAIRPERSON, IS
CHAIRPERSON OF THE FUND'S AUDIT COMMITTEE, AND FORMERLY SERVED AS ASSISTANT TO
THE PRESIDENT OF THE UNITED STATES AND SECRETARY OF THE CABINET (1990-1993);
GENERAL COUNSEL TO THE UNITED STATES TREASURY DEPARTMENT (1989-1999); AND
ASSISTANT SECRETARY FOR PUBLIC AFFAIRS AND PUBLIC LIAISON-UNITED STATES TREASURY
DEPARTMENT (1988-1989). MR. ASHTON, WHO IS CURRENTLY A DIRECTOR OF BUSINESS AND
NON-PROFIT ORGANIZATIONS, SERVED AS CHIEF EXECUTIVE OFFICER OF GENERAL HOST
CORPORATION, A NEW YORK STOCK EXCHANGE LISTED COMPANY FROM 1967 TO 1998, AND WAS
A DIRECTOR OF RBC HOLDINGS, INC., A BANK HOLDING COMPANY UNTIL 2002. AS A RESULT
OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MS.
HOLIDAY AND MR. ASHTON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH
PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES,
AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND
LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE
FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR
FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS.
HOLIDAY AND MR. ASHTON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER
THE APPLICABLE SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 141
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 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.
142 | Annual Report
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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 BRIC 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 Balanced Fund
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 Global Real Estate 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
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement 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 Michigan 6
Arizona Minnesota 6
California 7 Missouri
Colorado New Jersey
Connecticut New York 7
Florida 7 North Carolina
Georgia Ohio 6
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 6 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.
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
07/06
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 A2006 11/06
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 $339,046 for the fiscal year ended September 30,
2006 and $241,951 for the fiscal year ended September 30, 2005.
(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.
There were no 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.
(c) Tax Fees
There were no fees paid to the principal accountant for
professional services rendered by the principal accountant to the
registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for
professional services rendered by the principal accountant to the
registrant's investment adviser and any entity controlling,
controlled by or under common control with the investment adviser
that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products
and services rendered by the principal accountant to the
registrant not reported in paragraphs (a)-(c) of Item 4 were
$30,073 for the fiscal year ended September 30, 2006 and $0 for
the fiscal year ended September 30, 2005. 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 $145,788 for the fiscal year
ended September 30, 2006 and $4,500 for the fiscal year ended
September 30, 2005. 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 $175,861 for the fiscal year ended September 30,
2006 and $4,500 for the fiscal year ended September 30, 2005.
(h) The registrant's audit committee of the board 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 27, 2006
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 27, 2006
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date November 27, 2006