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
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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
----
Date of reporting period: 9/30/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
SEPTEMBER 30, 2008
Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN
CUSTODIAN FUNDS
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(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the annual report
Contents
CEO'S MESSAGE ............................................................ 1
ANNUAL REPORT
Economic and Market Overview ............................................. 4
Franklin DynaTech Fund ................................................... 6
Franklin Growth Fund ..................................................... 16
Franklin Income Fund ..................................................... 25
Franklin U.S. Government Securities Fund ................................. 39
Franklin Utilities Fund .................................................. 50
Financial Highlights and Statements of Investments ....................... 59
Financial Statements ..................................................... 107
Notes to Financial Statements ............................................ 116
Report of Independent Registered Public Accounting Firm .................. 135
Tax Designation .......................................................... 136
Board Members and Officers ............................................... 137
Shareholder Information .................................................. 142
A Message from Gregory E. Johnson,
President and Chief Executive Officer of Franklin Resources, Inc.
October 31, 2008
Dear Shareholder:
The enclosed annual report for Franklin Custodian Funds covers the year ended
September 30, 2008, but I would like to add some comments on market events that
occurred in October. Recent market volatility has been jarring to everyone,
including those of us who have worked in financial markets for many years. Bank
lending around the world has seized up, and the fallout has impacted venerable
firms alongside broader stock and bond indexes.
This environment is bound to provoke great concern, but it's equally important
to put the latest market developments in perspective. That's why I'd like to
offer a few thoughts on these events, our company's approach to investing and
the strong health of our organization.
A key point to recognize is that global financial turmoil is being addressed by
global action. Central banks around the world have coordinated their efforts to
cut interest rates and supply liquidity to frozen funding markets. A number of
governments have also intervened to rescue major financial institutions or
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
find an orderly way for them to be acquired. Here in the U.S., the Federal
Reserve and Treasury Department have moved rapidly to establish new programs for
easing money market pressures and handling troubled financial assets. The
outcome of all these efforts may take a while to be realized, but I believe the
latest actions here and abroad mark a significant turning point for global
capital markets.
It's also important to remember that as daunting as current market conditions
may be, we have navigated through other periods of market volatility. U.S. stock
markets recorded three bear markets during the 1960s as the nation grappled with
the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in
1973 led to a deep U.S. recession and a stock market plunge of 45.1% from
January 1973 through December 1974.(1) And the "Black Monday" stock market crash
of 1987 remains the largest single-day percentage decline in the history of the
Dow Jones Industrial Average.(2)
Advice applicable throughout these upheavals remains true today. The late Sir
John Templeton, writing 15 years ago, ended a list of his core investment
principles with these thoughts: "Do not be fearful or negative too often....
For 100 years optimists have carried the day in U.S. stocks. Even in the dark
'70s, many professional money managers -- and many individual investors too --
made money in stocks.... In this century or the next it's still 'Buy low, sell
high.'"(3)
Sir John knew these simple concepts were difficult to execute in the face of
pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual
Series portfolio managers are contending with today's challenging environment.
They are using their expertise to sort through investment opportunities,
avoiding those firms that have become merely cheap and identifying those firms
best positioned to be eventual winners. This kind of rigorous, bottom-up,
security-by-security analysis is the fundamental investment discipline practiced
across our global platform.
These asset management strengths are also the core of our business. Unlike
financial firms that have dominated recent headlines, Franklin Templeton derives
its revenue primarily from investment management, not investment banking or
securities brokerage. Additionally, our assets under management are diversified
by investment objective, clientele and geographic region. Diversified
positioning helps our firm maintain healthy operating margins even when
(1.) Source: Ned Davis Research, Inc.
(2.) Source: NYSE Euronext. 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.
(3.) Source: "16 Rules for Investment Success" by Sir John Templeton.
2 | Not part of the annual report
volatile markets reduce assets under management. It is also important to note
that maintaining a strong balance sheet has been a pillar of our management
strategy. We have a substantial pool of cash and investments and low levels of
debt, and we are in the enviable position of not having to depend on credit to
meet our operating needs. In fact, our strong franchise, sound capitalization
and minimal leverage led Standard & Poor's to recently raise its credit ratings
on Franklin Resources, Inc. (BEN) to the highest level currently applied to a
publicly traded asset manager.(4)
Franklin Templeton's six-decade growth into a premier global asset manager has
given us the conviction that although conditions remain challenging, there are
ample reasons to be optimistic about eventual market stabilization and recovery.
Being able to take advantage of markets shaken by maximum pessimism has helped
our firm develop into an organization that stretches across 29 countries and
manages assets for more than 20 million shareholder accounts.
In the enclosed annual report for Franklin Custodian Funds, the portfolio
managers discuss market conditions, investment decisions and Fund performance
during the year ended September 30, 2008. The report contains additional
performance data and financial information. Our website, FRANKLINTEMPLETON.COM,
offers more timely discussions, daily prices, portfolio holdings and other
information. We encourage you to discuss your concerns with your financial
advisor, who can review your overall portfolio, reassess your goals and help you
stay focused on the long term. As times like these illustrate, all securities
markets fluctuate, as do fund share prices.
We are grateful for the trust you have placed in Franklin Templeton and remain
focused on serving your investment needs.
Sincerely,
/s/ Gregory E. Johnson
Gregory E. Johnson
President and Chief Executive Officer
Franklin Resources, Inc.
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
(4.) Source: Standard & Poor's press release, 10/6/08.
Not part of the annual report | 3
Annual Report
Economic and Market Overview
For the year ended September 30, 2008, the decelerating U.S. economy contended
with a staggering financial markets crisis amid a wave of government
interventions and emergency funding. In addition, high oil prices, the worst
housing market contraction in decades, a severe credit crunch and rising
joblessness weighed on the economy. Economic growth, as measured by gross
domestic product (GDP), reported a -0.2% annualized rate for the fourth quarter
of 2007. GDP edged up to 0.9% annualized in the first quarter of 2008 and
improved at a 2.8% annualized pace in the second quarter, based largely on
strong exports and government spending. However, GDP fell an estimated
annualized 0.3% in 2008's third quarter as the subprime financial crisis
deepened and spread into all aspects of the economy. The U.S. dollar declined
for much of the 12 months compared with most foreign currencies, which
contributed to increased export demand and aided the manufacturing sector. The
greenback then rallied toward period-end, breaking a six-year downward trend as
commodity prices fell, inflationary concerns abated and global economic growth
began to subside. Supports to the economy included an inventory buildup,
expanding government spending and a boost to household finances from a fiscal
stimulus package. Although tax rebate checks lifted spending temporarily, retail
sales remained weak and new vehicle sales hit a 15-year low.
The U.S. labor market contracted and the unemployment rate rose from 4.7% at the
beginning of the period to 6.1% in September, the highest level since September
2003.(1) Volatile oil prices soared to an all-time trading high of $145 per
barrel in July 2008 but eased to $101 by period-end. Many other commodity prices
- -- including those for coal, natural gas, precious metals, raw materials and
agricultural commodities -- also neared or surpassed all-time highs due to
increased worldwide demand and investors seeking alternatives to shaky stocks
and corporate bonds. These prices plummeted through much of third quarter 2008
as global demand and speculative buying subsided. For the 12 months ended
September 30, 2008, inflation as measured by the core Consumer Price Index
(CPI), which excludes food and energy costs, rose 2.5%; this was higher than its
2.2% 10-year average rate.(1)
(1.) Source: Bureau of Labor Statistics.
4 | Annual Report
Seeking to stimulate the sagging economy without stoking inflation, the Federal
Reserve Board (Fed) made six cuts to its key federal funds target rate during
the period, lowering it 275 basis points, from 4.75% to a four-year low of
2.00%. In this uncertain environment, LIBOR (London Interbank Offered Rate), the
interest rate that banks charge each other for loans, jumped to record highs.
Fixed income spreads generally widened relative to Treasury yields over the
period as investors sought the relative safety of short- and intermediate-term
U.S. Treasury securities. Treasury yields declined and the yield curve steepened
as short-term, two- and five-year yields declined significantly, with the
two-year bill yielding 2.00% at the end of September, down from 3.97% a year
earlier. Over the same period, the 10-year U.S. Treasury note yield declined
from 4.59% to 3.85%.
U.S. stock markets endured high volatility and suffered losses during this
challenging period. For the 12 months under review, the blue chip stocks of the
Dow Jones Industrial Average had a total return of -19.85%, the broader Standard
& Poor's 500 Index (S&P 500) a -21.98% total return, and the technology-heavy
NASDAQ Composite Index a -21.99% total return.(2) Consumer staples was the only
sector to record positive results, while the financials, telecommunications and
industrials sectors had the largest declines. In general, small-capitalization
stocks performed better than large caps, and growth stocks fared better than
their value counterparts.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF SEPTEMBER 30,
2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
(2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. 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. 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 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 | 5
Franklin DynaTech Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing substantially in equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin DynaTech Fund covers the fiscal year ended
September 30, 2008.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A had a -21.36% cumulative total return for the
12 months under review. For the same period, the Fund performed better than its
narrow benchmark, the NASDAQ 100 Index, which had a price-only return of
- -24.22%, and performed comparably to the broader Standard & Poor's 500 Index
(S&P 500), which had a -21.98% total return.(1) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 9.
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
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The NASDAQ 100 Index includes 100 of the largest domestic
and international nonfinancial companies listed on The NASDAQ Stock Market
based on market capitalization. The index reflects companies across major
industry groups including computer hardware and software,
telecommunications, retail/wholesale trade and biotechnology. It does not
contain financial companies including investment companies. The NASDAQ 100
Index is calculated under a modified capitalization-weighted methodology.
Index returns are price-return only and do not include reinvested
dividends. The S&P 500 consists of 500 stocks chosen for market size,
liquidity and industry group representation. Each stock's weight in the
index is proportionate to its market value. The S&P 500 includes reinvested
dividends and is one of the most widely used benchmarks of U.S. equity
performance. The indexes are unmanaged. One cannot invest directly in an
index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 63.
6 | Annual Report
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 this challenging year, many Fund holdings declined in value and hurt Fund
performance. These included computer processing hardware manufacturer Apple,
Internet search engine Google and computer technology firm NVIDIA. Apple's share
price fell late in the reporting period after investors began questioning
whether consumers would continue to buy the company's high-end products amid the
current global economic slowdown. Google's shares suffered largely due to
decelerating advertising revenue. NVIDIA's share price declined mainly due to
expectations for slowing computer and semiconductor sales, and we sold it by
period-end.
The information technology sector suffered steep declines during the year under
review.(2) Within the sector, the semiconductors and semiconductor equipment
industry, including Intel and Varian Semiconductor Equipment, hurt performance
on an absolute basis during the period. The industry can be sensitive to
economic changes, and this poor performance reflected slow growth in the current
global economic downturn. Most of the industries in this sector, such as
Internet software and services, software, and communications equipment, also
weighed on the Fund's performance.
One of the most significant contributors to Fund performance during the year
under review was global retail electronic payments network operator Visa, whose
initial public offering in March was the largest ever recorded. Other major
contributors to performance included biotechnology giant Genentech, whose shares
shot up in price after drugmaker Roche offered to buy full control of the
company, and drug manufacturer Millennium Pharmaceuticals, whose share price
increased after it agreed to be acquired by Takeda Pharmaceuticals. These
companies led biotechnology to boost Fund performance from an industry
perspective. We no longer held Millennium Pharmaceuticals by period-end.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 9/30/08
(PERFORMANCE GRAPH)
Software 15.8%
Biotechnology 12.2%
Computers & Peripherals 7.6%
Health Care Equipment & Supplies 7.3%
Semiconductors & Semiconductor Equipment 6.4%
Communications Equipment 5.5%
Internet Software & Services 5.5%
Pharmaceuticals 5.4%
Chemicals 4.7%
Communications Equipment 4.6%
IT Services 4.5%
Energy Equipment & Services 4.5%
Life Sciences Tools & Services 3.7%
Electronic Equipment, Instruments & Components 2.2%
Other 10.0%
Short-Term Investments & Other Net Assets 5.6%
(2.) The information technology sector comprises communications equipment;
computers and peripherals; electronic equipment, instruments and
components; Internet software and services; IT services; semiconductors and
semiconductor equipment; and software in the SOI.
Annual Report | 7
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Genentech Inc. 4.9%
BIOTECHNOLOGY
Intel Corp. 4.6%
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT
Apple Inc. 4.1%
COMPUTERS & PERIPHERALS
Google Inc., A 3.6%
INTERNET SOFTWARE & SERVICES
Hewlett-Packard Co. 3.5%
COMPUTERS & PERIPHERALS
Visa Inc., A 3.4%
IT SERVICES
Adobe Systems Inc. 3.0%
SOFTWARE
Gilead Sciences Inc. 3.0%
BIOTECHNOLOGY
Sigma-Aldrich Corp. 2.9%
CHEMICALS
Celgene Corp. 2.8%
BIOTECHNOLOGY
Thank you for your continued participation in Franklin DynaTech Fund. We look
forward to serving your future investment needs.
(PHOTO OF RUPERT H. JOHNSON)
/s/ Rupert H. Johnson
Rupert H. Johnson, Jr.
(PHOTO OF MATTHEW J. MOBERG)
/s/ Matthew J. Moberg
Matthew J. Moberg, CPA
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2008, 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.
8 | Annual Report
Performance Summary as of 9/30/08
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
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: FKDNX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$7.46 $24.87 $32.33
DISTRIBUTIONS (10/1/07-9/30/08)
Long-Term Capital Gain $0.7062
CLASS B (SYMBOL: FDNBX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$7.30 $23.48 $30.78
DISTRIBUTIONS (10/1/07-9/30/08)
Long-Term Capital Gain $0.7062
CLASS C (SYMBOL: FDYNX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$7.23 $23.23 $30.46
DISTRIBUTIONS (10/1/07-9/30/08)
Long-Term Capital Gain $0.7062
ADVISOR CLASS (SYMBOL: N/A) CHANGE 9/30/08 5/15/08
- --------------------------- ------ ------- -------
Net Asset Value (NAV) -$6.50 $24.90 $31.40
Annual Report | 9
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; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) -21.36% +26.05% +52.12%
Average Annual Total Return(2) -25.88% +3.51% +3.67%
Value of $10,000 Investment(3) $7,412 $11,880 $14,336
Total Annual Operating Expenses(4) 0.99%
INCEPTION
CLASS B 1-YEAR 5-YEAR (2/1/00)
- ------- ------ ------- ---------
Cumulative Total Return(1) -21.96% +21.31% -11.37%
Average Annual Total Return(2) -25.01% +3.59% -1.38%
Value of $10,000 Investment(3) $7,499 $11,931 $8,863
Total Annual Operating Expenses(4) 1.75%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) -21.93% +21.39% +41.21%
Average Annual Total Return(2) -22.69% +3.95% +3.51%
Value of $10,000 Investment(3) $7,731 $12,139 $14,121
Total Annual Operating Expenses(4) 1.74%
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------ ------- ---------
Cumulative Total Return(1) -21.27% +26.20% +52.30%
Average Annual Total Return(2) -21.27% +4.76% +4.30%
Value of $10,000 Investment(3) $7,873 $12,620 $15,230
Total Annual Operating Expenses(4) 0.75%
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 (800) 342-5236.
10 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The indexes are unmanaged. They
differ from the Fund in composition and do not pay management fees or expenses.
One cannot invest directly in an index.
CLASS A (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS A INDEX INDEX
- ---------- ----------------- ------- ----------
10/1/1998 $ 9,424 $10,000 $10,000
10/31/1998 $ 9,683 $10,813 $10,409
11/30/1998 $10,280 $11,469 $11,579
12/31/1998 $10,985 $12,130 $13,646
1/31/1999 $11,841 $12,637 $15,810
2/28/1999 $11,295 $12,244 $14,309
3/31/1999 $11,664 $12,734 $15,655
4/30/1999 $11,696 $13,227 $15,878
5/31/1999 $11,504 $12,915 $15,531
6/30/1999 $12,092 $13,632 $17,070
7/31/1999 $12,081 $13,206 $16,878
8/31/1999 $12,418 $13,141 $17,814
9/30/1999 $12,360 $12,781 $17,896
10/31/1999 $12,862 $13,589 $19,602
11/30/1999 $13,622 $13,866 $22,049
12/31/1999 $15,070 $14,682 $27,558
1/31/2000 $15,222 $13,945 $26,534
2/29/2000 $16,562 $13,681 $31,713
3/31/2000 $16,731 $15,019 $32,686
4/30/2000 $15,824 $14,567 $28,043
5/31/2000 $15,065 $14,268 $24,706
6/30/2000 $15,993 $14,620 $27,974
7/31/2000 $15,710 $14,391 $26,826
8/31/2000 $16,850 $15,285 $30,306
9/30/2000 $15,520 $14,478 $26,538
10/31/2000 $15,124 $14,417 $24,395
11/30/2000 $13,513 $13,280 $18,629
12/31/2000 $13,226 $13,345 $17,404
1/31/2001 $13,893 $13,819 $19,272
2/28/2001 $12,215 $12,559 $14,183
3/31/2001 $11,498 $11,763 $11,693
4/30/2001 $12,248 $12,677 $13,788
5/31/2001 $12,059 $12,762 $13,377
6/30/2001 $11,971 $12,452 $13,622
7/31/2001 $11,593 $12,329 $12,513
8/31/2001 $11,121 $11,557 $10,923
9/30/2001 $10,421 $10,624 $ 8,684
10/31/2001 $10,898 $10,827 $10,143
11/30/2001 $11,576 $11,657 $11,862
12/31/2001 $11,492 $11,759 $11,721
1/31/2002 $11,402 $11,588 $11,521
2/28/2002 $10,866 $11,364 $10,102
3/31/2002 $11,199 $11,792 $10,798
4/30/2002 $10,595 $11,077 $ 9,492
5/31/2002 $10,460 $10,995 $ 8,981
6/30/2002 $9,811 $10,212 $ 7,814
7/31/2002 $9,304 $ 9,416 $ 7,151
8/31/2002 $9,264 $ 9,478 $ 7,004
9/30/2002 $8,667 $ 8,448 $ 6,188
10/31/2002 $9,400 $ 9,191 $ 7,355
11/30/2002 $9,981 $ 9,732 $ 8,295
12/31/2002 $9,208 $ 9,160 $ 7,316
1/31/2003 $9,107 $ 8,920 $ 7,306
2/28/2003 $9,197 $ 8,786 $ 7,505
3/31/2003 $9,276 $ 8,871 $ 7,571
4/30/2003 $9,890 $ 9,602 $ 8,221
5/31/2003 $10,623 $10,109 $ 8,903
6/30/2003 $10,804 $10,238 $ 8,931
7/31/2003 $11,193 $10,418 $ 9,491
8/31/2003 $11,605 $10,621 $ 9,968
9/30/2003 $11,373 $10,509 $ 9,689
10/31/2003 $12,152 $11,103 $10,527
11/30/2003 $12,377 $11,201 $10,585
12/31/2003 $12,766 $11,789 $10,910
1/31/2004 $13,042 $12,005 $11,097
2/29/2004 $12,901 $12,172 $10,928
3/31/2004 $12,828 $11,989 $10,691
4/30/2004 $12,614 $11,800 $10,415
5/31/2004 $13,127 $11,962 $10,897
6/30/2004 $13,274 $12,194 $11,272
7/31/2004 $12,174 $11,790 $10,408
8/31/2004 $11,954 $11,838 $10,172
9/30/2004 $12,411 $11,965 $10,500
10/31/2004 $12,676 $12,148 $11,050
11/30/2004 $13,245 $12,641 $11,680
12/31/2004 $13,747 $13,070 $12,049
1/31/2005 $12,930 $12,752 $11,294
2/28/2005 $13,099 $13,020 $11,230
3/31/2005 $12,811 $12,789 $11,019
4/30/2005 $12,586 $12,546 $10,560
5/31/2005 $13,460 $12,946 $11,465
6/30/2005 $13,324 $12,964 $11,100
7/31/2005 $14,007 $13,446 $11,930
8/31/2005 $14,108 $13,324 $11,756
9/30/2005 $14,086 $13,432 $11,904
10/31/2005 $13,973 $13,208 $11,737
11/30/2005 $14,869 $13,707 $12,431
12/31/2005 $14,734 $13,712 $12,228
1/31/2006 $15,326 $14,075 $12,715
2/28/2006 $15,027 $14,113 $12,416
3/31/2006 $15,123 $14,289 $12,662
4/30/2006 $15,033 $14,481 $12,640
5/31/2006 $14,052 $14,064 $11,740
6/30/2006 $14,159 $14,083 $11,708
7/31/2006 $13,719 $14,170 $11,219
8/31/2006 $14,232 $14,507 $11,741
9/30/2006 $14,548 $14,881 $12,294
10/31/2006 $14,886 $15,366 $12,877
11/30/2006 $15,236 $15,658 $13,313
12/31/2006 $15,123 $15,878 $13,058
1/31/2007 $15,473 $16,118 $13,321
2/28/2007 $15,213 $15,803 $13,093
3/31/2007 $15,332 $15,979 $13,173
4/30/2007 $16,048 $16,687 $13,882
5/31/2007 $16,533 $17,269 $14,331
6/30/2007 $16,426 $16,983 $14,375
7/31/2007 $16,482 $16,456 $14,360
8/31/2007 $17,046 $16,703 $14,781
9/30/2007 $18,230 $17,327 $15,542
10/31/2007 $19,256 $17,603 $16,641
11/30/2007 $18,337 $16,867 $15,527
12/31/2007 $18,613 $16,750 $15,496
1/31/2008 $16,129 $15,745 $13,686
2/29/2008 $15,794 $15,234 $12,971
3/31/2008 $16,013 $15,168 $13,244
4/30/2008 $17,316 $15,907 $14,253
5/31/2008 $18,008 $16,113 $15,107
6/30/2008 $16,953 $14,754 $13,654
7/31/2008 $16,768 $14,630 $13,743
8/31/2008 $16,642 $14,842 $13,917
9/30/2008 $14,336 $13,519 $11,852
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08
- ------- -------
1-Year -25.88%
5-Year +3.51%
10-Year +3.67%
CLASS B (2/1/00-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS B INDEX INDEX
- ---------- ----------------- ------- ----------
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 $10,484 $10,543
7/31/2000 $10,278 $10,320 $10,110
8/31/2000 $11,020 $10,961 $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 $ 9,570 $ 6,559
1/31/2001 $ 9,053 $ 9,910 $ 7,263
2/28/2001 $ 7,958 $ 9,006 $ 5,345
3/31/2001 $ 7,488 $ 8,436 $ 4,407
4/30/2001 $ 7,968 $ 9,091 $ 5,196
5/31/2001 $ 7,841 $ 9,152 $ 5,042
6/30/2001 $ 7,779 $ 8,929 $ 5,134
7/31/2001 $ 7,528 $ 8,842 $ 4,716
8/31/2001 $ 7,219 $ 8,288 $ 4,117
9/30/2001 $ 6,760 $ 7,619 $ 3,273
10/31/2001 $ 7,062 $ 7,764 $ 3,823
11/30/2001 $ 7,499 $ 8,360 $ 4,471
12/31/2001 $ 7,437 $ 8,433 $ 4,417
1/31/2002 $ 7,378 $ 8,310 $ 4,342
2/28/2002 $ 7,026 $ 8,150 $ 3,807
3/31/2002 $ 7,239 $ 8,456 $ 4,069
4/30/2002 $ 6,842 $ 7,943 $ 3,577
5/31/2002 $ 6,751 $ 7,885 $ 3,385
6/30/2002 $ 6,329 $ 7,323 $ 2,945
7/31/2002 $ 5,995 $ 6,752 $ 2,695
8/31/2002 $ 5,969 $ 6,797 $ 2,640
9/30/2002 $ 5,576 $ 6,058 $ 2,332
10/31/2002 $ 6,046 $ 6,591 $ 2,772
11/30/2002 $ 6,413 $ 6,979 $ 3,126
12/31/2002 $ 5,917 $ 6,569 $ 2,757
1/31/2003 $ 5,848 $ 6,397 $ 2,754
2/28/2003 $ 5,903 $ 6,301 $ 2,828
3/31/2003 $ 5,947 $ 6,362 $ 2,853
4/30/2003 $ 6,340 $ 6,886 $ 3,098
5/31/2003 $ 6,806 $ 7,249 $ 3,355
6/30/2003 $ 6,916 $ 7,342 $ 3,366
7/31/2003 $ 7,158 $ 7,471 $ 3,577
8/31/2003 $ 7,419 $ 7,617 $ 3,757
9/30/2003 $ 7,268 $ 7,536 $ 3,652
10/31/2003 $ 7,760 $ 7,963 $ 3,967
11/30/2003 $ 7,896 $ 8,033 $ 3,989
12/31/2003 $ 8,142 $ 8,454 $ 4,112
1/31/2004 $ 8,311 $ 8,609 $ 4,182
2/29/2004 $ 8,215 $ 8,729 $ 4,119
3/31/2004 $ 8,164 $ 8,597 $ 4,029
4/30/2004 $ 8,025 $ 8,462 $ 3,925
5/31/2004 $ 8,344 $ 8,578 $ 4,107
6/30/2004 $ 8,432 $ 8,745 $ 4,248
7/31/2004 $ 7,727 $ 8,455 $ 3,923
8/31/2004 $ 7,584 $ 8,489 $ 3,834
9/30/2004 $ 7,867 $ 8,581 $ 3,957
10/31/2004 $ 8,028 $ 8,712 $ 4,164
11/30/2004 $ 8,388 $ 9,065 $ 4,402
12/31/2004 $ 8,696 $ 9,373 $ 4,541
1/31/2005 $ 8,179 $ 9,145 $ 4,257
2/28/2005 $ 8,278 $ 9,337 $ 4,233
3/31/2005 $ 8,091 $ 9,171 $ 4,153
4/30/2005 $ 7,944 $ 8,997 $ 3,980
5/31/2005 $ 8,491 $ 9,284 $ 4,321
6/30/2005 $ 8,399 $ 9,297 $ 4,183
7/31/2005 $ 8,825 $ 9,643 $ 4,496
8/31/2005 $ 8,880 $ 9,555 $ 4,431
9/30/2005 $ 8,865 $ 9,632 $ 4,486
10/31/2005 $ 8,784 $ 9,471 $ 4,423
11/30/2005 $ 9,342 $ 9,830 $ 4,685
12/31/2005 $ 9,254 $ 9,833 $ 4,608
1/31/2006 $ 9,621 $10,093 $ 4,792
2/28/2006 $ 9,423 $10,121 $ 4,679
3/31/2006 $ 9,478 $10,247 $ 4,772
4/30/2006 $ 9,416 $10,384 $ 4,764
5/31/2006 $ 8,795 $10,086 $ 4,425
6/30/2006 $ 8,858 $10,099 $ 4,412
7/31/2006 $ 8,579 $10,162 $ 4,228
8/31/2006 $ 8,895 $10,403 $ 4,425
9/30/2006 $ 9,085 $10,671 $ 4,633
10/31/2006 $ 9,291 $11,019 $ 4,853
11/30/2006 $ 9,504 $11,229 $ 5,017
12/31/2006 $ 9,427 $11,386 $ 4,921
1/31/2007 $ 9,640 $11,558 $ 5,020
2/28/2007 $ 9,471 $11,332 $ 4,935
3/31/2007 $ 9,541 $11,459 $ 4,965
4/30/2007 $ 9,977 $11,967 $ 5,232
5/31/2007 $10,271 $12,384 $ 5,401
6/30/2007 $10,201 $12,179 $ 5,418
7/31/2007 $10,231 $11,801 $ 5,412
8/31/2007 $10,572 $11,978 $ 5,571
9/30/2007 $11,299 $12,426 $ 5,857
10/31/2007 $11,927 $12,624 $ 6,272
11/30/2007 $11,354 $12,096 $ 5,852
12/31/2007 $11,515 $12,012 $ 5,840
1/31/2008 $ 9,971 $11,291 $ 5,158
2/29/2008 $ 9,765 $10,924 $ 4,889
3/31/2008 $ 9,900 $10,877 $ 4,991
4/30/2008 $10,706 $11,407 $ 5,372
5/31/2008 $11,133 $11,555 $ 5,693
6/30/2008 $10,481 $10,581 $ 5,146
7/31/2008 $10,367 $10,492 $ 5,180
8/31/2008 $10,288 $10,643 $ 5,245
9/30/2008 $ 8,863 $ 9,695 $ 4,467
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08
- ------- -------
1-Year -25.01%
5-Year +3.59%
Since Inception (2/1/00) -1.38%
Annual Report | 11
Performance Summary (CONTINUED)
CLASS C (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100
DATE FUND - CLASS C INDEX INDEX
- ---------- ----------------- ------- ----------
10/1/1998 $10,000 $10,000 $10,000
10/31/1998 $10,268 $10,813 $10,409
11/30/1998 $10,896 $11,469 $11,579
12/31/1998 $11,634 $12,130 $13,646
1/31/1999 $12,531 $12,637 $15,810
2/28/1999 $11,950 $12,244 $14,309
3/31/1999 $12,329 $12,734 $15,655
4/30/1999 $12,358 $13,227 $15,878
5/31/1999 $12,151 $12,915 $15,531
6/30/1999 $12,761 $13,632 $17,070
7/31/1999 $12,743 $13,206 $16,878
8/31/1999 $13,089 $13,141 $17,814
9/30/1999 $13,019 $12,781 $17,896
10/31/1999 $13,537 $13,589 $19,602
11/30/1999 $14,331 $13,866 $22,049
12/31/1999 $15,845 $14,682 $27,558
1/31/2000 $15,996 $13,945 $26,534
2/29/2000 $17,396 $13,681 $31,713
3/31/2000 $17,558 $15,019 $32,686
4/30/2000 $16,600 $14,567 $28,043
5/31/2000 $15,787 $14,268 $24,706
6/30/2000 $16,757 $14,620 $27,974
7/31/2000 $16,449 $14,391 $26,826
8/31/2000 $17,628 $15,285 $30,306
9/30/2000 $16,229 $14,478 $26,538
10/31/2000 $15,805 $14,417 $24,395
11/30/2000 $14,115 $13,280 $18,629
12/31/2000 $13,799 $13,345 $17,404
1/31/2001 $14,489 $13,819 $19,272
2/28/2001 $12,732 $12,559 $14,183
3/31/2001 $11,983 $11,763 $11,693
4/30/2001 $12,755 $12,677 $13,788
5/31/2001 $12,549 $12,762 $13,377
6/30/2001 $12,449 $12,452 $13,622
7/31/2001 $12,048 $12,329 $12,513
8/31/2001 $11,547 $11,557 $10,923
9/30/2001 $10,815 $10,624 $ 8,684
10/31/2001 $11,305 $10,827 $10,143
11/30/2001 $12,001 $11,657 $11,862
12/31/2001 $11,900 $11,759 $11,721
1/31/2002 $11,805 $11,588 $11,521
2/28/2002 $11,247 $11,364 $10,102
3/31/2002 $11,580 $11,792 $10,798
4/30/2002 $10,950 $11,077 $ 9,492
5/31/2002 $10,802 $10,995 $ 8,981
6/30/2002 $10,125 $10,212 $ 7,814
7/31/2002 $ 9,596 $ 9,416 $ 7,151
8/31/2002 $ 9,549 $ 9,478 $ 7,004
9/30/2002 $ 8,925 $ 8,448 $ 6,188
10/31/2002 $ 9,679 $ 9,191 $ 7,355
11/30/2002 $10,267 $ 9,732 $ 8,295
12/31/2002 $ 9,472 $ 9,160 $ 7,316
1/31/2003 $ 9,359 $ 8,920 $ 7,306
2/28/2003 $ 9,448 $ 8,786 $ 7,505
3/31/2003 $ 9,519 $ 8,871 $ 7,571
4/30/2003 $10,149 $ 9,602 $ 8,221
5/31/2003 $10,891 $10,109 $ 8,903
6/30/2003 $11,069 $10,238 $ 8,931
7/31/2003 $11,461 $10,418 $ 9,491
8/31/2003 $11,877 $10,621 $ 9,968
9/30/2003 $11,633 $10,509 $ 9,689
10/31/2003 $12,423 $11,103 $10,527
11/30/2003 $12,643 $11,201 $10,585
12/31/2003 $13,035 $11,789 $10,910
1/31/2004 $13,308 $12,005 $11,097
2/29/2004 $13,153 $12,172 $10,928
3/31/2004 $13,070 $11,989 $10,691
4/30/2004 $12,844 $11,800 $10,415
5/31/2004 $13,355 $11,962 $10,897
6/30/2004 $13,498 $12,194 $11,272
7/31/2004 $12,369 $11,790 $10,408
8/31/2004 $12,144 $11,838 $10,172
9/30/2004 $12,595 $11,965 $10,500
10/31/2004 $12,856 $12,148 $11,050
11/30/2004 $13,426 $12,641 $11,680
12/31/2004 $13,919 $13,070 $12,049
1/31/2005 $13,094 $12,752 $11,294
2/28/2005 $13,254 $13,020 $11,230
3/31/2005 $12,951 $12,789 $11,019
4/30/2005 $12,714 $12,546 $10,560
5/31/2005 $13,593 $12,946 $11,465
6/30/2005 $13,444 $12,964 $11,100
7/31/2005 $14,127 $13,446 $11,930
8/31/2005 $14,216 $13,324 $11,756
9/30/2005 $14,192 $13,432 $11,904
10/31/2005 $14,068 $13,208 $11,737
11/30/2005 $14,959 $13,707 $12,431
12/31/2005 $14,816 $13,712 $12,228
1/31/2006 $15,398 $14,075 $12,715
2/28/2006 $15,089 $14,113 $12,416
3/31/2006 $15,178 $14,289 $12,662
4/30/2006 $15,077 $14,481 $12,640
5/31/2006 $14,086 $14,064 $11,740
6/30/2006 $14,181 $14,083 $11,708
7/31/2006 $13,735 $14,170 $11,219
8/31/2006 $14,240 $14,507 $11,741
9/30/2006 $14,549 $14,881 $12,294
10/31/2006 $14,875 $15,366 $12,877
11/30/2006 $15,214 $15,658 $13,313
12/31/2006 $15,095 $15,878 $13,058
1/31/2007 $15,428 $16,118 $13,321
2/28/2007 $15,166 $15,803 $13,093
3/31/2007 $15,273 $15,979 $13,173
4/30/2007 $15,974 $16,687 $13,882
5/31/2007 $16,443 $17,269 $14,331
6/30/2007 $16,330 $16,983 $14,375
7/31/2007 $16,378 $16,456 $14,360
8/31/2007 $16,930 $16,703 $14,781
9/30/2007 $18,088 $17,327 $15,542
10/31/2007 $19,098 $17,603 $16,641
11/30/2007 $18,177 $16,867 $15,527
12/31/2007 $18,431 $16,750 $15,496
1/31/2008 $15,963 $15,745 $13,686
2/29/2008 $15,623 $15,234 $12,971
3/31/2008 $15,830 $15,168 $13,244
4/30/2008 $17,106 $15,907 $14,253
5/31/2008 $17,781 $16,113 $15,107
6/30/2008 $16,729 $14,754 $13,654
7/31/2008 $16,535 $14,630 $13,743
8/31/2008 $16,401 $14,842 $13,917
9/30/2008 $14,121 $13,519 $11,852
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08
- ------- -------
1-Year -22.69%
5-Year +3.95%
10-Year +3.51%
ADVISOR CLASS (10/1/98-9/30/08)(5)
(PERFORMANCE GRAPH)
(PLOT POINTS TO COME)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(5) 9/30/08
- ---------------- -------
1-Year -21.27%
5-Year +4.76%
10-Year +4.30%
12 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND
TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE), COULD RESULT
IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID
PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF
COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE FUND MAY ALSO
INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE
PRICES 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.
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.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(5.) Effective 5/15/08, 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 5/15/08, 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 5/14/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -20.70%.
(6.) Source: (C) 2008 Morningstar. 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 | 13
Your Fund's Expenses
FRANKLIN DYNATECH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
14 | 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
VALUE 4/1/08 VALUE 9/30/08 PERIOD* 4/1/08-9/30/08
----------------- -------------- ----------------------
CLASS A
Actual $1,000 $ 895.20 $4.60
Hypothetical (5% return before expenses) $1,000 $1,020.15 $4.90
CLASS B
Actual $1,000 $ 891.70 $8.13
Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67
CLASS C
Actual $1,000 $ 892.10 $8.14
Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67
ADVISOR CLASS
Actual (5/15/08-9/30/08) $1,000 $ 793.00 $2.49
Hypothetical (5% return before expenses) $1,000 $1,021.35 $3.69
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.97%; B: 1.72%; C: 1.72%; and Advisor Class:
0.73%), multiplied by the average account value over the period, multiplied
by 183/366 (Hypothetical for all share classes; Actual for Classes A, B and
C) to reflect the one-half year period. For Actual Advisor Class expenses,
the multiplier is 139/366 to reflect the number of days since the class's
inception.
Annual Report | 15
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Genentech Inc. 3.8%
PHARMACEUTICALS, BIOTECHNOLOGY
& LIFE SCIENCES
Apple Inc. 3.4%
TECHNOLOGY HARDWARE & EQUIPMENT
Johnson & Johnson 3.2%
PHARMACEUTICALS, BIOTECHNOLOGY
& LIFE SCIENCES
General Dynamics Corp. 3.1%
CAPITAL GOODS
International Business Machines Corp. 2.9%
TECHNOLOGY HARDWARE & EQUIPMENT
Northrop Grumman Corp. 2.6%
CAPITAL GOODS
The Boeing Co. 2.6%
CAPITAL GOODS
3M Co. 2.5%
CAPITAL GOODS
Amgen Inc. 2.4%
PHARMACEUTICALS, BIOTECHNOLOGY
& LIFE SCIENCES
Lockheed Martin Corp. 2.3%
CAPITAL GOODS
This annual report for Franklin Growth Fund covers the fiscal year ended
September 30, 2008.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A had a -19.59% cumulative total return for the 12
months under review. The Fund performed better than its benchmark, the Standard
& Poor's 500 Index (S&P 500), which had a -21.98% total return for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 18.
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 businesses selling at depressed prices
but offering favorable recovery possibilities. We analyze securities
individually and buy stocks of large and small companies in our effort to
maintain a solid and diversified portfolio.
MANAGER'S DISCUSSION
Franklin Growth Fund owned 115 companies at period-end. We continue to invest in
a broad array of companies of all sizes and in varied industries.
In a challenging environment for stocks, several of our holdings dragged on Fund
performance during the fiscal year. Within the capital goods sector, our
position in major aerospace and defense company Boeing was a primary
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 is one of the
most widely used benchmarks of U.S. equity performance. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in
an index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 71.
16 | Annual Report
detractor. Northrop-Grumman, another big defense contractor held by the Fund,
also declined substantially. Some other capital goods holdings also declined in
value, where Textron and 3M were particular disappointments. In the
transportation sector, the airlines industry struggled and some airline holdings
weighed on Fund performance during the period. Among the poorest performers were
Continental Airlines, Texas-based AMR (the parent company of American Airlines)
and U.K.-based British Airways.
During the period under review, Fund performance was largely driven by the
positive returns of holdings in the pharmaceuticals, biotechnology and life
sciences sector. Among these were biotech leaders Genentech and Amgen, and
diversified health care products manufacturer Johnson & Johnson. Baxter
International, in the health care equipment and services sector, also aided the
Fund. Other key contributors included road and rail stocks in the transportation
sector. Our investments in railroad transportation operators such as Union
Pacific and Arkansas Best appreciated significantly during the year under
review.
Thank you for your continued participation in Franklin Growth Fund. We look
forward to serving your future investment needs.
(PHOTO OF V. JERRY PALMIERI)
/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, 2008, 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.
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 9/30/08
(PERFORMANCE GRAPH)
Capital Goods* 28.8%
Pharmaceuticals, Biotechnology & Life Sciences 20.7%
Technology Hardware & Equipment 12.9%
Transportation 9.8%
Software & Services 6.3%
Health Care Equipment & Services 4.0%
Automobiles & Components 2.7%
Materials 2.4%
Commercial & Professional Services 2.3%
Media 2.2%
Energy 2.2%
Other 5.7%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio.
Annual Report | 17
Performance Summary as of 9/30/08
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 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$9.19 $37.17 $46.36
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1302
CLASS B (SYMBOL: FKGBX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$8.98 $35.44 $44.42
CLASS C (SYMBOL: FRGSX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$8.89 $35.14 $44.03
CLASS R (SYMBOL: FGSRX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$9.12 $36.87 $45.99
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.0304
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$9.20 $37.25 $46.45
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.2332
18 | 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: 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) -19.59% +39.80% +46.49%
Average Annual Total Return(2) -24.22% +5.67% +3.28%
Value of $10,000 Investment(3) $7,578 $13,176 $13,808
Total Annual Operating Expenses(4) 0.93%
INCEPTION
CLASS B 1-YEAR 5-YEAR (1/1/99)
- ------- ------ ------- ---------
Cumulative Total Return(1) -20.22% +34.65% +22.83%
Average Annual Total Return(2) -23.41% +5.81% +2.13%
Value of $10,000 Investment(3) $7,659 $13,265 $ 12,283
Total Annual Operating Expenses(4) 1.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------- ---------
Cumulative Total Return(1) -20.19% +34.64% +35.88%
Average Annual Total Return(2) -20.99% +6.13% +3.11%
Value of $10,000 Investment(3) $7,901 $13,464 $13,588
Total Annual Operating Expenses(4) 1.69%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------ ------- ---------
Cumulative Total Return(1) -19.78% +38.07% +17.12%
Average Annual Total Return(2) -19.78% +6.66% +2.37%
Value of $10,000 Investment(3) $8,022 $13,807 $11,712
Total Annual Operating Expenses(4) 1.19%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------ ------- ---------
Cumulative Total Return(1) -19.39% +41.51% +50.11%
Average Annual Total Return(2) -19.39% +7.19% +4.15%
Value of $10,000 Investment(3) $8,061 $14,151 $15,011
Total Annual Operating Expenses(4) 0.69%
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 (800) 342-5236.
Annual Report | 19
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 (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500
DATE FUND - CLASS A INDEX
- ---------- --------------- --------
10/1/1998 $ 9,426 $10,000
10/31/1998 $10,007 $10,813
11/30/1998 $10,366 $11,469
12/31/1998 $10,590 $12,130
1/31/1999 $10,775 $12,637
2/28/1999 $10,660 $12,244
3/31/1999 $10,950 $12,734
4/30/1999 $11,307 $13,227
5/31/1999 $11,169 $12,915
6/30/1999 $11,637 $13,632
7/31/1999 $11,448 $13,206
8/31/1999 $11,495 $13,141
9/30/1999 $11,182 $12,781
10/31/1999 $11,364 $13,589
11/30/1999 $11,509 $13,866
12/31/1999 $11,880 $14,682
1/31/2000 $11,781 $13,945
2/29/2000 $11,505 $13,681
3/31/2000 $12,506 $15,019
4/30/2000 $12,654 $14,567
5/31/2000 $12,706 $14,268
6/30/2000 $12,885 $14,620
7/31/2000 $12,685 $14,391
8/31/2000 $13,242 $15,285
9/30/2000 $12,695 $14,478
10/31/2000 $12,864 $14,417
11/30/2000 $12,530 $13,280
12/31/2000 $12,775 $13,345
1/31/2001 $13,015 $13,819
2/28/2001 $12,363 $12,559
3/31/2001 $11,447 $11,763
4/30/2001 $12,370 $12,677
5/31/2001 $12,560 $12,762
6/30/2001 $11,983 $12,452
7/31/2001 $11,954 $12,329
8/31/2001 $11,411 $11,557
9/30/2001 $10,142 $10,624
10/31/2001 $10,481 $10,827
11/30/2001 $11,476 $11,657
12/31/2001 $11,565 $11,759
1/31/2002 $11,400 $11,588
2/28/2002 $11,319 $11,364
3/31/2002 $11,712 $11,792
4/30/2002 $10,971 $11,077
5/31/2002 $10,754 $10,995
6/30/2002 $ 9,943 $10,212
7/31/2002 $ 9,047 $ 9,416
8/31/2002 $ 9,066 $ 9,478
9/30/2002 $ 8,078 $ 8,448
10/31/2002 $ 8,640 $ 9,191
11/30/2002 $ 9,231 $ 9,732
12/31/2002 $ 8,749 $ 9,160
1/31/2003 $ 8,414 $ 8,920
2/28/2003 $ 8,223 $ 8,786
3/31/2003 $ 8,223 $ 8,871
4/30/2003 $ 8,822 $ 9,602
5/31/2003 $ 9,400 $10,109
6/30/2003 $ 9,679 $10,238
7/31/2003 $ 9,966 $10,418
8/31/2003 $10,186 $10,621
9/30/2003 $ 9,877 $10,509
10/31/2003 $10,462 $11,103
11/30/2003 $10,594 $11,201
12/31/2003 $11,201 $11,789
1/31/2004 $11,370 $12,005
2/29/2004 $11,422 $12,172
3/31/2004 $11,157 $11,989
4/30/2004 $11,164 $11,800
5/31/2004 $11,344 $11,962
6/30/2004 $11,808 $12,194
7/31/2004 $11,186 $11,790
8/31/2004 $11,090 $11,838
9/30/2004 $11,252 $11,965
10/31/2004 $11,388 $12,148
11/30/2004 $12,055 $12,641
12/31/2004 $12,467 $13,070
1/31/2005 $12,039 $12,752
2/28/2005 $12,249 $13,020
3/31/2005 $12,234 $12,789
4/30/2005 $11,943 $12,546
5/31/2005 $12,415 $12,946
6/30/2005 $12,279 $12,964
7/31/2005 $12,920 $13,446
8/31/2005 $12,872 $13,324
9/30/2005 $12,847 $13,432
10/31/2005 $12,747 $13,208
11/30/2005 $13,367 $13,707
12/31/2005 $13,508 $13,712
1/31/2006 $13,645 $14,075
2/28/2006 $13,830 $14,113
3/31/2006 $14,155 $14,289
4/30/2006 $14,266 $14,481
5/31/2006 $13,955 $14,064
6/30/2006 $13,874 $14,083
7/31/2006 $13,711 $14,170
8/31/2006 $14,037 $14,507
9/30/2006 $14,447 $14,881
10/31/2006 $15,038 $15,366
11/30/2006 $15,430 $15,658
12/31/2006 $15,421 $15,878
1/31/2007 $15,910 $16,118
2/28/2007 $15,617 $15,803
3/31/2007 $15,591 $15,979
4/30/2007 $16,221 $16,687
5/31/2007 $16,884 $17,269
6/30/2007 $16,729 $16,983
7/31/2007 $16,399 $16,456
8/31/2007 $16,577 $16,703
9/30/2007 $17,173 $17,327
10/31/2007 $17,747 $17,603
11/30/2007 $16,999 $16,867
12/31/2007 $16,520 $16,750
1/31/2008 $15,447 $15,745
2/29/2008 $15,190 $15,234
3/31/2008 $15,008 $15,168
4/30/2008 $15,699 $15,907
5/31/2008 $16,156 $16,113
6/30/2008 $14,692 $14,754
7/31/2008 $15,153 $14,630
8/31/2008 $15,473 $14,842
9/30/2008 $13,808 $13,519
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08
- ------- -------
1-Year -24.22%
5-Year +5.67%
10-Year +3.28%
CLASS B (1/1/99-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500
DATE FUND - CLASS B INDEX
- ---------- --------------- --------
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 $12,382
4/30/2000 $11,831 $12,010
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 $12,602
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 $11,002
1/31/2001 $12,102 $11,393
2/28/2001 $11,491 $10,354
3/31/2001 $10,630 $ 9,698
4/30/2001 $11,477 $10,452
5/31/2001 $11,648 $10,522
6/30/2001 $11,108 $10,266
7/31/2001 $11,070 $10,165
8/31/2001 $10,565 $ 9,528
9/30/2001 $ 9,380 $ 8,759
10/31/2001 $ 9,687 $ 8,926
11/30/2001 $10,609 $ 9,611
12/31/2001 $10,683 $ 9,695
1/31/2002 $10,522 $ 9,553
2/28/2002 $10,444 $ 9,369
3/31/2002 $10,796 $ 9,721
4/30/2002 $10,108 $ 9,132
5/31/2002 $ 9,903 $ 9,065
6/30/2002 $ 9,147 $ 8,419
7/31/2002 $ 8,319 $ 7,763
8/31/2002 $ 8,333 $ 7,814
9/30/2002 $ 7,420 $ 6,965
10/31/2002 $ 7,929 $ 7,578
11/30/2002 $ 8,470 $ 8,024
12/31/2002 $ 8,018 $ 7,552
1/31/2003 $ 7,710 $ 7,354
2/28/2003 $ 7,529 $ 7,244
3/31/2003 $ 7,526 $ 7,314
4/30/2003 $ 8,070 $ 7,917
5/31/2003 $ 8,590 $ 8,334
6/30/2003 $ 8,839 $ 8,440
7/31/2003 $ 9,096 $ 8,589
8/31/2003 $ 9,291 $ 8,756
9/30/2003 $ 9,003 $ 8,664
10/31/2003 $ 9,530 $ 9,154
11/30/2003 $ 9,647 $ 9,235
12/31/2003 $10,190 $ 9,719
1/31/2004 $10,338 $ 9,898
2/29/2004 $10,382 $10,035
3/31/2004 $10,132 $ 9,884
4/30/2004 $10,136 $ 9,728
5/31/2004 $10,293 $ 9,862
6/30/2004 $10,707 $10,053
7/31/2004 $10,132 $ 9,720
8/31/2004 $10,043 $ 9,759
9/30/2004 $10,184 $ 9,865
10/31/2004 $10,300 $10,016
11/30/2004 $10,895 $10,421
12/31/2004 $11,258 $10,775
1/31/2005 $10,868 $10,513
2/28/2005 $11,049 $10,734
3/31/2005 $11,032 $10,544
4/30/2005 $10,762 $10,344
5/31/2005 $11,179 $10,673
6/30/2005 $11,049 $10,688
7/31/2005 $11,617 $11,085
8/31/2005 $11,569 $10,984
9/30/2005 $11,538 $11,073
10/31/2005 $11,439 $10,889
11/30/2005 $11,990 $11,301
12/31/2005 $12,109 $11,304
1/31/2006 $12,226 $11,604
2/28/2006 $12,383 $11,635
3/31/2006 $12,667 $11,780
4/30/2006 $12,756 $11,938
5/31/2006 $12,469 $11,595
6/30/2006 $12,393 $11,611
7/31/2006 $12,239 $11,682
8/31/2006 $12,523 $11,960
9/30/2006 $12,879 $12,268
10/31/2006 $13,396 $12,668
11/30/2006 $13,738 $12,909
12/31/2006 $13,717 $13,090
1/31/2007 $14,152 $13,288
2/28/2007 $13,891 $13,028
3/31/2007 $13,868 $13,174
4/30/2007 $14,428 $13,757
5/31/2007 $15,018 $14,237
6/30/2007 $14,880 $14,001
7/31/2007 $14,587 $13,567
8/31/2007 $14,744 $13,770
9/30/2007 $15,275 $14,285
10/31/2007 $15,785 $14,512
11/30/2007 $15,119 $13,906
12/31/2007 $14,693 $13,809
1/31/2008 $13,738 $12,981
2/29/2008 $13,510 $12,559
3/31/2008 $13,348 $12,505
4/30/2008 $13,962 $13,114
5/31/2008 $14,368 $13,284
6/30/2008 $13,066 $12,164
7/31/2008 $13,477 $12,062
8/31/2008 $13,761 $12,236
9/30/2008 $12,283 $11,146
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08
- ------- -------
1-Year -23.41%
5-Year +5.81%
Since Inception (1/1/99) +2.13%
20 | Annual Report
Performance Summary (CONTINUED)
CLASS C (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500
DATE FUND - CLASS C INDEX
- ---------- --------------- -------
10/1/1998 $10,000 $10,000
10/31/1998 $10,612 $10,813
11/30/1998 $10,982 $11,469
12/31/1998 $11,215 $12,130
1/31/1999 $11,403 $12,637
2/28/1999 $11,273 $12,244
3/31/1999 $11,569 $12,734
4/30/1999 $11,941 $13,227
5/31/1999 $11,789 $12,915
6/30/1999 $12,277 $13,632
7/31/1999 $12,067 $13,206
8/31/1999 $12,111 $13,141
9/30/1999 $11,771 $12,781
10/31/1999 $11,955 $13,589
11/30/1999 $12,100 $13,866
12/31/1999 $12,486 $14,682
1/31/2000 $12,369 $13,945
2/29/2000 $12,076 $13,681
3/31/2000 $13,117 $15,019
4/30/2000 $13,260 $14,567
5/31/2000 $13,307 $14,268
6/30/2000 $13,487 $14,620
7/31/2000 $13,271 $14,391
8/31/2000 $13,846 $15,285
9/30/2000 $13,267 $14,478
10/31/2000 $13,436 $14,417
11/30/2000 $13,076 $13,280
12/31/2000 $13,325 $13,345
1/31/2001 $13,564 $13,819
2/28/2001 $12,881 $12,559
3/31/2001 $11,915 $11,763
4/30/2001 $12,869 $12,677
5/31/2001 $13,058 $12,762
6/30/2001 $12,452 $12,452
7/31/2001 $12,410 $12,329
8/31/2001 $11,842 $11,557
9/30/2001 $10,518 $10,624
10/31/2001 $10,861 $10,827
11/30/2001 $11,888 $11,657
12/31/2001 $11,972 $11,759
1/31/2002 $11,794 $11,588
2/28/2002 $11,705 $11,364
3/31/2002 $12,099 $11,792
4/30/2002 $11,330 $11,077
5/31/2002 $11,098 $10,995
6/30/2002 $10,255 $10,212
7/31/2002 $ 9,323 $ 9,416
8/31/2002 $ 9,338 $ 9,478
9/30/2002 $ 8,317 $ 8,448
10/31/2002 $ 8,890 $ 9,191
11/30/2002 $ 9,493 $ 9,732
12/31/2002 $ 8,990 $ 9,160
1/31/2003 $ 8,642 $ 8,920
2/28/2003 $ 8,437 $ 8,786
3/31/2003 $ 8,433 $ 8,871
4/30/2003 $ 9,044 $ 9,602
5/31/2003 $ 9,628 $10,109
6/30/2003 $ 9,907 $10,238
7/31/2003 $10,197 $10,418
8/31/2003 $10,413 $10,621
9/30/2003 $10,092 $10,509
10/31/2003 $10,680 $11,103
11/30/2003 $10,808 $11,201
12/31/2003 $11,423 $11,789
1/31/2004 $11,585 $12,005
2/29/2004 $11,635 $12,172
3/31/2004 $11,357 $11,989
4/30/2004 $11,357 $11,800
5/31/2004 $11,535 $11,962
6/30/2004 $11,999 $12,194
7/31/2004 $11,357 $11,790
8/31/2004 $11,252 $11,838
9/30/2004 $11,411 $11,965
10/31/2004 $11,542 $12,148
11/30/2004 $12,207 $12,641
12/31/2004 $12,617 $13,070
1/31/2005 $12,177 $12,752
2/28/2005 $12,381 $13,020
3/31/2005 $12,362 $12,789
4/30/2005 $12,057 $12,546
5/31/2005 $12,525 $12,946
6/30/2005 $12,381 $12,964
7/31/2005 $13,020 $13,446
8/31/2005 $12,965 $13,324
9/30/2005 $12,931 $13,432
10/31/2005 $12,818 $13,208
11/30/2005 $13,433 $13,707
12/31/2005 $13,569 $13,712
1/31/2006 $13,700 $14,075
2/28/2006 $13,874 $14,113
3/31/2006 $14,195 $14,289
4/30/2006 $14,296 $14,481
5/31/2006 $13,975 $14,064
6/30/2006 $13,886 $14,083
7/31/2006 $13,716 $14,170
8/31/2006 $14,033 $14,507
9/30/2006 $14,431 $14,881
10/31/2006 $15,011 $15,366
11/30/2006 $15,394 $15,658
12/31/2006 $15,374 $15,878
1/31/2007 $15,850 $16,118
2/28/2007 $15,552 $15,803
3/31/2007 $15,517 $15,979
4/30/2007 $16,132 $16,687
5/31/2007 $16,782 $17,269
6/30/2007 $16,616 $16,983
7/31/2007 $16,279 $16,456
8/31/2007 $16,445 $16,703
9/30/2007 $17,026 $17,327
10/31/2007 $17,586 $17,603
11/30/2007 $16,832 $16,867
12/31/2007 $16,349 $16,750
1/31/2008 $15,278 $15,745
2/29/2008 $15,015 $15,234
3/31/2008 $14,821 $15,168
4/30/2008 $15,494 $15,907
5/31/2008 $15,939 $16,113
6/30/2008 $14,485 $14,754
7/31/2008 $14,930 $14,630
8/31/2008 $15,235 $14,842
9/30/2008 $13,588 $13,519
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08
- ------- -------
1-Year -20.99%
5-Year +6.13%
10-Year +3.11%
CLASS R (1/1/02-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500
DATE FUND - CLASS R INDEX
- ---------- --------------- -------
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 $ 9,350
6/30/2002 $ 8,566 $ 8,684
7/31/2002 $ 7,793 $ 8,007
8/31/2002 $ 7,806 $ 8,060
9/30/2002 $ 6,957 $ 7,184
10/31/2002 $ 7,436 $ 7,816
11/30/2002 $ 7,946 $ 8,276
12/31/2002 $ 7,528 $ 7,790
1/31/2003 $ 7,240 $ 7,585
2/28/2003 $ 7,071 $ 7,472
3/31/2003 $ 7,071 $ 7,544
4/30/2003 $ 7,586 $ 8,166
5/31/2003 $ 8,080 $ 8,596
6/30/2003 $ 8,318 $ 8,706
7/31/2003 $ 8,562 $ 8,859
8/31/2003 $ 8,750 $ 9,032
9/30/2003 $ 8,483 $ 8,936
10/31/2003 $ 8,984 $ 9,442
11/30/2003 $ 9,095 $ 9,525
12/31/2003 $ 9,613 $10,025
1/31/2004 $ 9,755 $10,209
2/29/2004 $ 9,799 $10,351
3/31/2004 $ 9,571 $10,195
4/30/2004 $ 9,575 $10,035
5/31/2004 $ 9,730 $10,172
6/30/2004 $10,123 $10,370
7/31/2004 $ 9,587 $10,026
8/31/2004 $ 9,505 $10,067
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 $11,115
1/31/2005 $10,306 $10,844
2/28/2005 $10,483 $11,072
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 $11,435
8/31/2005 $11,004 $11,330
9/30/2005 $10,978 $11,422
10/31/2005 $10,889 $11,232
11/30/2005 $11,416 $11,656
12/31/2005 $11,534 $11,660
1/31/2006 $11,651 $11,969
2/28/2006 $11,804 $12,002
3/31/2006 $12,083 $12,151
4/30/2006 $12,172 $12,314
5/31/2006 $11,906 $11,960
6/30/2006 $11,836 $11,976
7/31/2006 $11,693 $12,050
8/31/2006 $11,969 $12,337
9/30/2006 $12,315 $12,655
10/31/2006 $12,813 $13,067
11/30/2006 $13,147 $13,315
12/31/2006 $13,136 $13,502
1/31/2007 $13,549 $13,706
2/28/2007 $13,295 $13,438
3/31/2007 $13,272 $13,589
4/30/2007 $13,806 $14,191
5/31/2007 $14,364 $14,686
6/30/2007 $14,231 $14,442
7/31/2007 $13,949 $13,994
8/31/2007 $14,095 $14,204
9/30/2007 $14,600 $14,735
10/31/2007 $15,086 $14,969
11/30/2007 $14,444 $14,344
12/31/2007 $14,034 $14,244
1/31/2008 $13,123 $13,390
2/29/2008 $12,900 $12,955
3/31/2008 $12,742 $12,899
4/30/2008 $13,326 $13,527
5/31/2008 $13,713 $13,702
6/30/2008 $12,468 $12,547
7/31/2008 $12,856 $12,441
8/31/2008 $13,126 $12,621
9/30/2008 $11,712 $11,497
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08
- ------- -------
1-Year -19.78%
5-Year +6.66%
Since Inception (1/1/02) +2.37%
Annual Report | 21
Performance Summary (CONTINUED)
ADVISOR CLASS (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN GROWTH
FUND - ADVISOR S&P 500
DATE CLASS INDEX
- ---------- --------------- -------
10/1/1998 $10,000 $10,000
10/31/1998 $10,618 $10,813
11/30/1998 $11,002 $11,469
12/31/1998 $11,243 $12,130
1/31/1999 $11,443 $12,637
2/28/1999 $11,321 $12,244
3/31/1999 $11,629 $12,734
4/30/1999 $12,007 $13,227
5/31/1999 $11,868 $12,915
6/30/1999 $12,368 $13,632
7/31/1999 $12,168 $13,206
8/31/1999 $12,222 $13,141
9/30/1999 $11,889 $12,781
10/31/1999 $12,086 $13,589
11/30/1999 $12,243 $13,866
12/31/1999 $12,642 $14,682
1/31/2000 $12,536 $13,945
2/29/2000 $12,247 $13,681
3/31/2000 $13,315 $15,019
4/30/2000 $13,473 $14,567
5/31/2000 $13,531 $14,268
6/30/2000 $13,729 $14,620
7/31/2000 $13,516 $14,391
8/31/2000 $14,113 $15,285
9/30/2000 $13,535 $14,478
10/31/2000 $13,718 $14,417
11/30/2000 $13,363 $13,280
12/31/2000 $13,625 $13,345
1/31/2001 $13,885 $13,819
2/28/2001 $13,193 $12,559
3/31/2001 $12,217 $11,763
4/30/2001 $13,205 $12,677
5/31/2001 $13,411 $12,762
6/30/2001 $12,796 $12,452
7/31/2001 $12,769 $12,329
8/31/2001 $12,193 $11,557
9/30/2001 $10,836 $10,624
10/31/2001 $11,202 $10,827
11/30/2001 $12,271 $11,657
12/31/2001 $12,367 $11,759
1/31/2002 $12,190 $11,588
2/28/2002 $12,108 $11,364
3/31/2002 $12,532 $11,792
4/30/2002 $11,739 $11,077
5/31/2002 $11,511 $10,995
6/30/2002 $10,644 $10,212
7/31/2002 $ 9,686 $ 9,416
8/31/2002 $ 9,710 $ 9,478
9/30/2002 $ 8,654 $ 8,448
10/31/2002 $ 9,258 $ 9,191
11/30/2002 $ 9,894 $ 9,732
12/31/2002 $ 9,378 $ 9,160
1/31/2003 $ 9,023 $ 8,920
2/28/2003 $ 8,818 $ 8,786
3/31/2003 $ 8,822 $ 8,871
4/30/2003 $ 9,465 $ 9,602
5/31/2003 $10,087 $10,109
6/30/2003 $10,387 $10,238
7/31/2003 $10,698 $10,418
8/31/2003 $10,935 $10,621
9/30/2003 $10,608 $10,509
10/31/2003 $11,238 $11,103
11/30/2003 $11,380 $11,201
12/31/2003 $12,038 $11,789
1/31/2004 $12,220 $12,005
2/29/2004 $12,279 $12,172
3/31/2004 $11,995 $11,989
4/30/2004 $12,006 $11,800
5/31/2004 $12,204 $11,962
6/30/2004 $12,702 $12,194
7/31/2004 $12,038 $11,790
8/31/2004 $11,935 $11,838
9/30/2004 $12,113 $11,965
10/31/2004 $12,263 $12,148
11/30/2004 $12,983 $12,641
12/31/2004 $13,427 $13,070
1/31/2005 $12,970 $12,752
2/28/2005 $13,200 $13,020
3/31/2005 $13,188 $12,789
4/30/2005 $12,874 $12,546
5/31/2005 $13,387 $12,946
6/30/2005 $13,244 $12,964
7/31/2005 $13,935 $13,446
8/31/2005 $13,891 $13,324
9/30/2005 $13,864 $13,432
10/31/2005 $13,760 $13,208
11/30/2005 $14,428 $13,707
12/31/2005 $14,587 $13,712
1/31/2006 $14,739 $14,075
2/28/2006 $14,938 $14,113
3/31/2006 $15,297 $14,289
4/30/2006 $15,417 $14,481
5/31/2006 $15,082 $14,064
6/30/2006 $15,002 $14,083
7/31/2006 $14,831 $14,170
8/31/2006 $15,186 $14,507
9/30/2006 $15,629 $14,881
10/31/2006 $16,271 $15,366
11/30/2006 $16,698 $15,658
12/31/2006 $16,690 $15,878
1/31/2007 $17,224 $16,118
2/28/2007 $16,911 $15,803
3/31/2007 $16,887 $15,979
4/30/2007 $17,573 $16,687
5/31/2007 $18,294 $17,269
6/30/2007 $18,130 $16,983
7/31/2007 $17,777 $16,456
8/31/2007 $17,973 $16,703
9/30/2007 $18,623 $17,327
10/31/2007 $19,252 $17,603
11/30/2007 $18,443 $16,867
12/31/2007 $17,925 $16,750
1/31/2008 $16,768 $15,745
2/29/2008 $16,490 $15,234
3/31/2008 $16,293 $15,168
4/30/2008 $17,050 $15,907
5/31/2008 $17,550 $16,113
6/30/2008 $15,966 $14,754
7/31/2008 $16,466 $14,630
8/31/2008 $16,820 $14,842
9/30/2008 $15,011 $13,519
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08
- ------------- -------
1-Year -19.39%
5-Year +7.19%
10-Year +4.15%
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 PRICES 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.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(5.) Source: (C) 2008 Morningstar. 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.
22 | Annual Report
Your Fund's Expenses
FRANKLIN GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 | 23
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 ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
VALUE VALUE PERIOD*
4/1/08 9/30/08 4/1/08-9/30/08
--------- --------- --------------
CLASS A
Actual $1,000 $ 920.10 $4.13
Hypothetical (5% return before expenses) $1,000 $1,020.70 $4.34
CLASS B
Actual $1,000 $ 916.70 $7.71
Hypothetical (5% return before expenses) $1,000 $1,016.95 $8.12
CLASS C
Actual $1,000 $ 916.80 $7.72
Hypothetical (5% return before expenses) $1,000 $1,016.95 $8.12
CLASS R
Actual $1,000 $ 919.20 $5.33
Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.60
ADVISOR CLASS
Actual $1,000 $ 921.30 $2.93
Hypothetical (5% return before expenses) $1,000 $1,021.95 $3.08
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.86%; B: 1.61%; C: 1.61%; R: 1.11%; and
Advisor: 0.61%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
24 | Annual Report
Franklin Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize
income while maintaining prospects for capital appreciation through a
diversified portfolio of debt and equity 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Income Fund covers the fiscal year ended
September 30, 2008.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A had a -21.36% cumulative total return for the
year under review. The Fund performed comparably with its equity benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return;
underperformed its fixed income benchmark, the Barclays Capital (BC; formerly,
Lehman Brothers) U.S. Aggregate Index, which returned +3.65%; and underperformed
its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds
Classification Average, which had a -14.89% total return, for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 30.
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
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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 BC 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.
Source: Lipper Inc. 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 9/30/08,
there were 498 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.
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 81.
Annual Report | 25
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/07-9/30/08
DIVIDEND PER SHARE (CENTS)
------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- ----- ------- ------- ---------- ------- ------- -------------
October 1.20 1.01 1.09 1.09 1.12 1.24
November 1.20 1.01 1.09 1.09 1.12 1.24
December*** 1.75 1.55 1.63 1.63 1.67 1.78
January 1.20 1.00 1.08 1.08 1.12 1.23
February 1.25 1.05 1.13 1.13 1.17 1.28
March 1.25 1.08 1.15 1.15 1.18 1.28
April 1.25 1.08 1.15 1.15 1.18 1.28
May 1.25 1.08 1.15 1.15 1.18 1.28
June 1.25 1.08 1.15 1.15 1.18 1.28
July 1.25 1.08 1.15 1.15 1.18 1.28
August 1.25 1.08 1.15 1.15 1.18 1.28
September 1.25 1.09 1.16 1.16 1.19 1.27
----- ----- ----- ----- ----- -----
TOTAL 15.35 13.19 14.08 14.08 14.47 15.72
===== ===== ===== ===== ===== =====
* 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.
*** Includes an additional 0.55 cent per share distribution to meet excise tax
requirements.
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
The Fund's equity holdings generally underperformed its fixed income holdings.
Stocks struggled with a difficult bear market, which declined more than 20%
during the year under review. This was exacerbated by the -39.32% return of the
S&P 500 Financials Index for the same period.(2)
(2.) Source: (C) 2008 Morningstar. The S&P 500 Financials Index is market value
weighted and includes all the financial stocks in the S&P 500.
26 | Annual Report
As the credit crisis spread and engulfed more companies, some of the Fund's
preferred stock and convertible preferred stock holdings in financial companies
including Fannie Mae, Freddie Mac, Lehman Brothers Holdings and American
International Group (AIG) negatively impacted results. Although the Fund avoided
positions in these companies' common stocks in favor of investment-grade-rated
securities higher in the capital structure, the unforeseen market distress
hampered the Fund's performance.
Weakness spread across equity markets beyond financials and affected several of
the Fund's large positions including AT&T, which declined mostly due to renewed
concerns that softening economic conditions would further pressure consumer and
business spending.
Although utility stocks generally outperformed the broader equity market,
returns remained negative. Thus, several of the Fund's holdings lost value
including Public Service Enterprise Group, American Electric Power and Ameren,
mostly resulting from concerns that falling commodity and ultimately power
prices would reduce earnings. Partially offsetting these declines were several
of the Fund's utility holdings that delivered positive total returns including
Southern Co., Dominion Resources and FirstEnergy.
The Fund's fixed income holdings also suffered from the credit crunch and a
substantial widening of credit spreads over the course of the Fund's fiscal
year. The 10-year U.S. Treasury note's yield declined from 4.59% at the
beginning of the period to a low of 3.31% on March 17, 2008. Partly due to
investors' fears of increased U.S. government obligations associated with the
credit crisis, the yield subsequently rose and ended the period at 3.85%.
Investment-grade and high yield corporate bonds were hard hit and
under-performed U.S. Treasury securities. According to the BC U.S. Corporate
Investment Grade Index, investment-grade corporate bonds declined 6.78%, and
their average spread to Treasuries increased from 152 basis points (bps) (100
bps equal one percentage point) to 467 bps.(3) The BC U.S. Corporate High Yield
Index fell 11.24%, and high yield corporate bonds' average spread to Treasuries
increased from 436 bps to 1,088 bps.(4)
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 9/30/08
(PERFORMANCE GRAPH)
Corporate Straight Bonds 45.2%
Utilities Stocks 18.4%
Financials Stocks 5.2%
Energy Stocks 5.1%
Health Care Stocks 4.8%
Senior Floating Rate Interests 4.7%
Telecommunication Services Stocks 2.7%
Information Technology Stocks 2.3%
Mortgage-Backed Securities 2.0%
Materials Stocks 1.3%
Consumer Discretionary Stocks 0.9%
Corporate Convertible Bonds 0.9%
Industrials Stocks 0.2%
Short-Term Investments & Other Net Assets 6.3%
(3.) Source: (C) 2008 Morningstar. The BC U.S. Corporate Investment Grade Index
is the corporate component of the BC U.S. Credit Index, which includes
publicly issued, SEC-registered bonds that meet specified maturity,
liquidity and quality requirements.
(4.) Source: (C) 2008 Morningstar. The BC U.S. Corporate High Yield Index is the
corporate component of the BC U.S. High Yield Index, which includes fixed
rate, non-investment-grade debt.
Annual Report | 27
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
9/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Pfizer Inc. 2.3%
HEALTH CARE
The Southern Co. 2.3%
UTILITIES
Canadian Oil Sands Trust (Canada) 2.0%
ENERGY
AT&T Inc. 1.8%
TELECOMMUNICATION SERVICES
Dominion Resources Inc. 1.7%
UTILITIES
TOP 5 BOND HOLDINGS*
Franklin Income Fund
9/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Ford Motor Credit Co. LLC 3.7%
CONSUMER DISCRETIONARY
Tenet Healthcare Corp. 3.0%
HEALTH CARE
Texas Competitive Electric Holdings
Co. LLC 2.5%
UTILITIES
GMAC LLC 2.5%
FINANCIALS
Dynegy Holdings Inc. 1.7%
UTILITIES
* Does not include convertible bonds.
Within the Fund's fixed income holdings, detractors from Fund performance were
concentrated in the financial sector including investment-grade-rated positions
in AIG and Lehman Brothers Holdings. These two long-standing institutions'
significant exposure to the credit crunch led to a crisis of confidence
regarding their viability. This culminated in Lehman's bankruptcy filing and
AIG's government-sponsored bailout aimed at preventing the systemic risk
associated with the company's possible bankruptcy filing. GMAC and Ford Motor
Credit Company also pressured results due to concerns that the credit crisis
would further curtail these companies' abilities to operate and meet debt
obligations as they become due.
Despite a solid revenue and earnings growth period driven by strong performance
in high speed Internet, digital video and telephony, Charter Communications
bonds declined in value as investors grew increasingly nervous about the
company's long-term ability to manage its debt load in light of the credit
markets' current state.
Some positive fixed income contributors to Fund performance for the 12 months
under review include hospital operator Tenet Healthcare, which benefited from
favorable company-specific performance and investors' perception of solid
underlying asset value from its owned and operated hospitals. Dollar General
also benefited from a cyclical shift toward lower-priced retailers particularly
due to fuel price increases that pressured consumers during the reporting
period, as well as from the company's improved management execution.
Mortgage-backed security holdings issued by Ginnie Mae, Fannie Mae and Freddie
Mac also performed well despite continued mortgage market turmoil.
28 | Annual Report
Thank you for your continued participation in Franklin Income Fund. We look
forward to serving your future investment needs.
(PHOTO OF EDWARD PERKS)
/s/ Edward Perks
Edward Perks, CFA
(PHOTO OF CHARLES B. JOHNSON)
/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, 2008, 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 | 29
Performance Summary as of 9/30/08
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 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.76 $1.98 $2.74
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1535
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.2144
CLASS B (SYMBOL: FBICX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.76 $1.97 $2.73
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1319
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1928
CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/08 9/30/07
- ------------------------ ------ ------- -------
Net Asset Value (NAV) -$0.76 $1.98 $2.74
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1408
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.2017
CLASS C (SYMBOL: FCISX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.77 $1.99 $2.76
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1408
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.2017
30 | Annual Report
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
CLASS R (SYMBOL: FISRX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.76 $1.95 $2.71
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1447
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.2056
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/08 9/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.76 $1.97 $2.73
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.1572
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.2181
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) -21.36% +25.64% +85.05%
Average Annual Total Return(2) -24.66% +3.76% +5.90%
Value of $10,000 Investment(3) $ 7,534 $12,029 $17,747
Distribution Rate(4) 7.25%
30-Day Standardized Yield(5) 8.92%
Total Annual Operating Expenses(6) 0.63%
INCEPTION
CLASS B 1-YEAR 5-YEAR (11/1/01)
- ------- ------- ------- ---------
Cumulative Total Return(1) -22.13% +20.47% +43.90%
Average Annual Total Return(2) -25.02% +3.49% +5.41%
Value of $10,000 Investment(3) $ 7,498 $11,871 $14,390
Distribution Rate(4) 6.64%
30-Day Standardized Yield(5) 8.36%
Total Annual Operating Expenses(6) 1.48%
INCEPTION
CLASS B1 1-YEAR 5-YEAR (1/1/99)
- -------- ------- ------- ---------
Cumulative Total Return(1) -21.77% +22.47% +72.14%
Average Annual Total Return(2) -24.66% +3.84% +5.73%
Value of $10,000 Investment(3) $ 7,534 $12,071 $ 17,214
Distribution Rate(4) 7.03%
30-Day Standardized Yield(5) 8.74%
Total Annual Operating Expenses(6) 1.13%
Annual Report | 31
Performance Summary (CONTINUED)
PERFORMANCE (CONTINUED)
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) -21.98% +22.35% +76.24%
Average Annual Total Return(2) -22.70% +4.12% +5.83%
Value of $10,000 Investment(3) $ 7,730 $12,235 $17,624
Distribution Rate(4) 6.99%
30-Day Standardized Yield(5) 8.79%
Total Annual Operating Expenses(6) 1.13%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- ------- ------- ------- ---------
Cumulative Total Return(1) -21.91% +23.09% +43.65%
Average Annual Total Return(2) -21.91% +4.24% +5.52%
Value of $10,000 Investment(3) $ 7,809 $12,309 $14,365
Distribution Rate(4) 7.32%
30-Day Standardized Yield(5) 8.99%
Total Annual Operating Expenses(6) 0.98%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------- ------- -------
Cumulative Total Return(1) -21.33% +26.67% +87.42%
Average Annual Total Return(2) -21.33% +4.84% +6.48%
Value of $10,000 Investment(3) $ 7,867 $12,667 $18,742
Distribution Rate(4) 7.74%
30-Day Standardized Yield(5) 9.50%
Total Annual Operating Expenses(6) 0.48%
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 (800) 342-5236.
32 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET
FRANKLIN INCOME S&P 500 LEHMAN BROTHERS ALLOCATION MODERATE FUNDS
DATE FUND - CLASS A INDEX U.S. AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- -------------------- -------------------------
10/1/1998 $ 9,590 $10,000 $10,000 $10,000
10/31/1998 $ 9,611 $10,813 $ 9,947 $10,346
11/30/1998 $ 9,922 $11,469 $10,004 $10,707
12/31/1998 $ 9,910 $12,130 $10,034 $11,035
1/31/1999 $ 9,762 $12,637 $10,105 $11,179
2/28/1999 $ 9,485 $12,244 $ 9,929 $10,884
3/31/1999 $ 9,635 $12,734 $ 9,984 $11,111
4/30/1999 $10,131 $13,227 $10,015 $11,478
5/31/1999 $10,196 $12,915 $ 9,928 $11,321
6/30/1999 $10,174 $13,632 $ 9,896 $11,584
7/31/1999 $10,064 $13,206 $ 9,854 $11,415
8/31/1999 $10,086 $13,141 $ 9,849 $11,302
9/30/1999 $ 9,975 $12,781 $ 9,963 $11,187
10/31/1999 $ 9,953 $13,589 $10,000 $11,477
11/30/1999 $ 9,795 $13,866 $ 9,999 $11,630
12/31/1999 $ 9,836 $14,682 $ 9,951 $12,015
1/31/2000 $ 9,906 $13,945 $ 9,919 $11,719
2/29/2000 $ 9,744 $13,681 $10,039 $11,784
3/31/2000 $ 9,908 $15,019 $10,171 $12,315
4/30/2000 $10,260 $14,567 $10,142 $12,085
5/31/2000 $10,425 $14,268 $10,137 $11,960
6/30/2000 $10,497 $14,620 $10,348 $12,192
7/31/2000 $10,616 $14,391 $10,442 $12,135
8/31/2000 $11,220 $15,285 $10,593 $12,651
9/30/2000 $11,439 $14,478 $10,660 $12,397
10/31/2000 $11,268 $14,417 $10,730 $12,328
11/30/2000 $11,193 $13,280 $10,906 $11,865
12/31/2000 $11,861 $13,345 $11,108 $12,192
1/31/2001 $11,838 $13,819 $11,290 $12,415
2/28/2001 $12,066 $12,559 $11,388 $11,946
3/31/2001 $11,887 $11,763 $11,445 $11,553
4/30/2001 $12,119 $12,677 $11,398 $12,029
5/31/2001 $12,352 $12,762 $11,467 $12,099
6/30/2001 $12,065 $12,452 $11,510 $11,950
7/31/2001 $11,933 $12,329 $11,767 $11,913
8/31/2001 $12,065 $11,557 $11,902 $11,625
9/30/2001 $11,506 $10,624 $12,041 $11,020
10/31/2001 $11,586 $10,827 $12,293 $11,236
11/30/2001 $11,829 $11,657 $12,123 $11,619
12/31/2001 $11,939 $11,759 $12,046 $11,705
1/31/2002 $12,021 $11,588 $12,144 $11,608
2/28/2002 $12,104 $11,364 $12,261 $11,535
3/31/2002 $12,467 $11,792 $12,057 $11,777
4/30/2002 $12,540 $11,077 $12,291 $11,595
5/31/2002 $12,500 $10,995 $12,396 $11,569
6/30/2002 $11,721 $10,212 $12,503 $11,126
7/31/2002 $11,166 $ 9,416 $12,654 $10,590
8/31/2002 $11,529 $ 9,478 $12,868 $10,694
9/30/2002 $11,025 $ 8,448 $13,076 $10,117
10/31/2002 $11,100 $ 9,191 $13,016 $10,454
11/30/2002 $11,706 $ 9,732 $13,013 $10,813
12/31/2002 $11,812 $ 9,160 $13,282 $10,598
1/31/2003 $11,888 $ 8,920 $13,293 $10,457
2/28/2003 $11,726 $ 8,786 $13,477 $10,393
3/31/2003 $11,986 $ 8,871 $13,467 $10,435
4/30/2003 $12,735 $ 9,602 $13,578 $10,952
5/31/2003 $13,427 $10,109 $13,831 $11,413
6/30/2003 $13,692 $10,238 $13,804 $11,508
7/31/2003 $13,525 $10,418 $13,339 $11,496
8/31/2003 $13,731 $10,621 $13,428 $11,664
9/30/2003 $14,125 $10,509 $13,783 $11,733
10/31/2003 $14,523 $11,103 $13,655 $12,067
11/30/2003 $14,732 $11,201 $13,688 $12,184
12/31/2003 $15,469 $11,789 $13,827 $12,582
1/31/2004 $15,682 $12,005 $13,938 $12,743
2/29/2004 $15,701 $12,172 $14,089 $12,898
3/31/2004 $15,720 $11,989 $14,195 $12,874
4/30/2004 $15,478 $11,800 $13,825 $12,577
5/31/2004 $15,431 $11,962 $13,770 $12,620
6/30/2004 $15,650 $12,194 $13,848 $12,797
7/31/2004 $15,737 $11,790 $13,985 $12,586
8/31/2004 $16,092 $11,838 $14,252 $12,699
9/30/2004 $16,315 $11,965 $14,291 $12,846
10/31/2004 $16,538 $12,148 $14,410 $13,004
11/30/2004 $16,899 $12,641 $14,295 $13,332
12/31/2004 $17,353 $13,070 $14,427 $13,640
1/31/2005 $17,028 $12,752 $14,518 $13,470
2/28/2005 $17,463 $13,020 $14,432 $13,650
3/31/2005 $17,130 $12,789 $14,358 $13,466
4/30/2005 $16,867 $12,546 $14,552 $13,336
5/31/2005 $17,238 $12,946 $14,710 $13,598
6/30/2005 $17,752 $12,964 $14,790 $13,712
7/31/2005 $18,127 $13,446 $14,655 $13,985
8/31/2005 $18,073 $13,324 $14,843 $14,017
9/30/2005 $18,019 $13,432 $14,690 $14,076
10/31/2005 $17,457 $13,208 $14,574 $13,851
11/30/2005 $17,403 $13,707 $14,638 $14,139
12/31/2005 $17,674 $13,712 $14,777 $14,268
1/31/2006 $18,210 $14,075 $14,778 $14,619
2/28/2006 $18,373 $14,113 $14,827 $14,629
3/31/2006 $18,463 $14,289 $14,682 $14,750
4/30/2006 $18,703 $14,481 $14,655 $14,905
5/31/2006 $18,643 $14,064 $14,640 $14,599
6/30/2006 $18,809 $14,083 $14,671 $14,607
7/31/2006 $19,282 $14,170 $14,869 $14,694
8/31/2006 $19,603 $14,507 $15,096 $14,946
9/30/2006 $19,772 $14,881 $15,229 $15,144
10/31/2006 $20,251 $15,366 $15,330 $15,475
11/30/2006 $20,810 $15,658 $15,508 $15,750
12/31/2006 $21,053 $15,878 $15,418 $15,868
1/31/2007 $21,228 $16,118 $15,411 $16,028
2/28/2007 $21,483 $15,803 $15,649 $15,995
3/31/2007 $21,740 $15,979 $15,649 $16,123
4/30/2007 $22,400 $16,687 $15,734 $16,511
5/31/2007 $22,740 $17,269 $15,615 $16,802
6/30/2007 $22,269 $16,983 $15,569 $16,629
7/31/2007 $21,713 $16,456 $15,698 $16,346
8/31/2007 $21,893 $16,703 $15,891 $16,475
9/30/2007 $22,568 $17,327 $16,011 $16,928
10/31/2007 $22,749 $17,603 $16,155 $17,218
11/30/2007 $22,185 $16,867 $16,446 $16,815
12/31/2007 $22,172 $16,750 $16,492 $16,739
1/31/2008 $21,674 $15,745 $16,769 $16,220
2/29/2008 $21,176 $15,234 $16,792 $16,000
3/31/2008 $20,937 $15,168 $16,849 $15,869
4/30/2008 $22,093 $15,907 $16,814 $16,330
5/31/2008 $22,202 $16,113 $16,691 $16,472
6/30/2008 $20,990 $14,754 $16,678 $15,680
7/31/2008 $20,569 $14,630 $16,664 $15,473
8/31/2008 $20,503 $14,842 $16,822 $15,503
9/30/2008 $17,747 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08
- ------- -------
1-Year -24.66%
5-Year +3.76%
10-Year +5.90%
CLASS B (11/1/01-9/30/08)
(PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET
FRANKLIN INCOME S&P 500 LEHMAN BROTHERS ALLOCATION MODERATE FUNDS
DATE FUND - CLASS B INDEX U.S. AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- -------------------- -------------------------
11/1/2001 $10,000 $10,000 $10,000 $10,000
11/30/2001 $10,186 $10,767 $ 9,862 $10,341
12/31/2001 $10,229 $10,861 $ 9,799 $10,418
1/31/2002 $10,344 $10,703 $ 9,879 $10,331
2/28/2002 $10,411 $10,497 $ 9,975 $10,266
3/31/2002 $10,671 $10,891 $ 9,809 $10,482
4/30/2002 $10,774 $10,231 $ 9,999 $10,319
5/31/2002 $10,731 $10,156 $10,084 $10,296
6/30/2002 $10,006 $ 9,432 $10,171 $ 9,902
7/31/2002 $ 9,571 $ 8,697 $10,294 $ 9,425
8/31/2002 $ 9,875 $ 8,754 $10,468 $ 9,517
9/30/2002 $ 9,437 $ 7,803 $10,637 $ 9,004
10/31/2002 $ 9,445 $ 8,489 $10,589 $ 9,304
11/30/2002 $ 9,955 $ 8,989 $10,586 $ 9,623
12/31/2002 $10,091 $ 8,461 $10,805 $ 9,432
1/31/2003 $10,098 $ 8,239 $10,814 $ 9,306
2/28/2003 $10,004 $ 8,115 $10,964 $ 9,249
3/31/2003 $10,167 $ 8,194 $10,955 $ 9,287
4/30/2003 $10,851 $ 8,869 $11,046 $ 9,747
5/31/2003 $11,382 $ 9,337 $11,251 $10,157
6/30/2003 $11,653 $ 9,456 $11,229 $10,242
7/31/2003 $11,502 $ 9,623 $10,852 $10,231
8/31/2003 $11,671 $ 9,810 $10,924 $10,381
9/30/2003 $11,944 $ 9,706 $11,213 $10,442
10/31/2003 $12,273 $10,256 $11,108 $10,740
11/30/2003 $12,496 $10,346 $11,135 $10,844
12/31/2003 $13,057 $10,888 $11,248 $11,197
1/31/2004 $13,228 $11,089 $11,339 $11,341
2/29/2004 $13,290 $11,243 $11,461 $11,479
3/31/2004 $13,242 $11,073 $11,547 $11,457
4/30/2004 $13,082 $10,899 $11,247 $11,194
5/31/2004 $12,979 $11,049 $11,202 $11,232
6/30/2004 $13,210 $11,263 $11,265 $11,389
7/31/2004 $13,219 $10,890 $11,377 $11,201
8/31/2004 $13,508 $10,934 $11,594 $11,302
9/30/2004 $13,687 $11,052 $11,625 $11,433
10/31/2004 $13,866 $11,221 $11,723 $11,574
11/30/2004 $14,160 $11,675 $11,629 $11,865
12/31/2004 $14,531 $12,072 $11,736 $12,139
1/31/2005 $14,306 $11,778 $11,810 $11,988
2/28/2005 $14,602 $12,025 $11,740 $12,148
3/31/2005 $14,313 $11,812 $11,680 $11,984
4/30/2005 $14,082 $11,588 $11,838 $11,869
5/31/2005 $14,381 $11,957 $11,966 $12,102
6/30/2005 $14,803 $11,974 $12,031 $12,204
7/31/2005 $15,107 $12,419 $11,922 $12,446
8/31/2005 $15,053 $12,306 $12,075 $12,475
9/30/2005 $14,996 $12,406 $11,950 $12,527
10/31/2005 $14,516 $12,199 $11,856 $12,327
11/30/2005 $14,459 $12,660 $11,908 $12,583
12/31/2005 $14,675 $12,665 $12,021 $12,698
1/31/2006 $15,111 $13,000 $12,022 $13,010
2/28/2006 $15,236 $13,035 $12,062 $13,019
3/31/2006 $15,300 $13,198 $11,944 $13,127
4/30/2006 $15,488 $13,375 $11,922 $13,265
5/31/2006 $15,427 $12,990 $11,909 $12,993
6/30/2006 $15,555 $13,008 $11,935 $13,000
7/31/2006 $15,936 $13,088 $12,096 $13,078
8/31/2006 $16,191 $13,399 $12,281 $13,301
9/30/2006 $16,320 $13,745 $12,389 $13,478
10/31/2006 $16,706 $14,193 $12,471 $13,772
11/30/2006 $17,157 $14,462 $12,615 $14,017
12/31/2006 $17,346 $14,665 $12,542 $14,122
1/31/2007 $17,479 $14,887 $12,537 $14,265
2/28/2007 $17,677 $14,596 $12,730 $14,235
3/31/2007 $17,875 $14,759 $12,731 $14,349
4/30/2007 $18,408 $15,413 $12,800 $14,695
5/31/2007 $18,675 $15,951 $12,703 $14,953
6/30/2007 $18,273 $15,686 $12,665 $14,799
7/31/2007 $17,803 $15,199 $12,771 $14,548
8/31/2007 $17,938 $15,427 $12,927 $14,663
9/30/2007 $18,479 $16,004 $13,025 $15,066
10/31/2007 $18,616 $16,259 $13,142 $15,324
11/30/2007 $18,140 $15,579 $13,379 $14,965
12/31/2007 $18,114 $15,471 $13,416 $14,898
1/31/2008 $17,691 $14,543 $13,641 $14,436
2/29/2008 $17,270 $14,071 $13,660 $14,240
3/31/2008 $17,062 $14,010 $13,707 $14,123
4/30/2008 $17,995 $14,692 $13,678 $14,534
5/31/2008 $18,071 $14,882 $13,578 $14,660
6/30/2008 $17,070 $13,628 $13,567 $13,955
7/31/2008 $16,714 $13,513 $13,556 $13,771
8/31/2008 $16,720 $13,709 $13,685 $13,797
9/30/2008 $14,390 $12,487 $13,501 $12,815
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08
- ------- -------
1-Year -25.02%
5-Year +3.49%
Since Inception (11/1/01) +5.41%
Annual Report | 33
Performance Summary (CONTINUED)
CLASS B1 (1/1/99-9/30/08)
(PERFORMANCE GRAPH)
LEHMAN BROTHERS LIPPER MIXED-ASSET TARGET
FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS
DATE FUND - CLASS B1 INDEX INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- --------------- -------------------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $ 9,851 $10,418 $10,071 $10,131
2/28/1999 $ 9,568 $10,094 $ 9,896 $ 9,864
3/31/1999 $ 9,717 $10,498 $ 9,950 $10,069
4/30/1999 $10,213 $10,905 $ 9,982 $10,402
5/31/1999 $10,230 $10,647 $ 9,894 $10,259
6/30/1999 $10,248 $11,238 $ 9,863 $10,497
7/31/1999 $10,133 $10,887 $ 9,821 $10,344
8/31/1999 $10,150 $10,834 $ 9,816 $10,242
9/30/1999 $10,035 $10,537 $ 9,930 $10,138
10/31/1999 $10,009 $11,203 $ 9,967 $10,401
11/30/1999 $ 9,845 $11,431 $ 9,966 $10,539
12/31/1999 $ 9,883 $12,104 $ 9,918 $10,888
1/31/2000 $ 9,949 $11,496 $ 9,885 $10,620
2/29/2000 $ 9,782 $11,279 $10,005 $10,679
3/31/2000 $ 9,941 $12,382 $10,137 $11,160
4/30/2000 $10,290 $12,010 $10,108 $10,952
5/31/2000 $10,452 $11,763 $10,103 $10,839
6/30/2000 $10,519 $12,053 $10,313 $11,049
7/31/2000 $10,633 $11,865 $10,407 $10,997
8/31/2000 $11,233 $12,602 $10,558 $11,465
9/30/2000 $11,448 $11,936 $10,624 $11,234
10/31/2000 $11,271 $11,886 $10,694 $11,172
11/30/2000 $11,242 $10,949 $10,869 $10,752
12/31/2000 $11,856 $11,002 $11,071 $11,049
1/31/2001 $11,827 $11,393 $11,252 $11,251
2/28/2001 $12,051 $10,354 $11,350 $10,826
3/31/2001 $11,867 $ 9,698 $11,407 $10,470
4/30/2001 $12,093 $10,452 $11,360 $10,901
5/31/2001 $12,321 $10,522 $11,428 $10,964
6/30/2001 $12,030 $10,266 $11,471 $10,829
7/31/2001 $11,894 $10,165 $11,728 $10,796
8/31/2001 $12,021 $ 9,528 $11,862 $10,535
9/30/2001 $11,460 $ 8,759 $12,000 $ 9,987
10/31/2001 $11,535 $ 8,926 $12,251 $10,183
11/30/2001 $11,772 $ 9,611 $12,082 $10,530
12/31/2001 $11,877 $ 9,695 $12,006 $10,608
1/31/2002 $11,954 $ 9,553 $12,103 $10,520
2/28/2002 $12,031 $ 9,369 $12,220 $10,453
3/31/2002 $12,388 $ 9,721 $12,017 $10,673
4/30/2002 $12,455 $ 9,132 $12,250 $10,507
5/31/2002 $12,410 $ 9,065 $12,354 $10,484
6/30/2002 $11,630 $ 8,419 $12,461 $10,083
7/31/2002 $11,074 $ 7,763 $12,612 $ 9,597
8/31/2002 $11,429 $ 7,814 $12,825 $ 9,691
9/30/2002 $10,925 $ 6,965 $13,032 $ 9,169
10/31/2002 $10,995 $ 7,578 $12,973 $ 9,474
11/30/2002 $11,590 $ 8,024 $12,969 $ 9,799
12/31/2002 $11,690 $ 7,552 $13,237 $ 9,604
1/31/2003 $11,762 $ 7,354 $13,249 $ 9,476
2/28/2003 $11,597 $ 7,244 $13,432 $ 9,418
3/31/2003 $11,849 $ 7,314 $13,422 $ 9,457
4/30/2003 $12,583 $ 7,917 $13,532 $ 9,925
5/31/2003 $13,261 $ 8,334 $13,785 $10,343
6/30/2003 $13,517 $ 8,440 $13,757 $10,429
7/31/2003 $13,347 $ 8,589 $13,295 $10,418
8/31/2003 $13,546 $ 8,756 $13,383 $10,570
9/30/2003 $13,929 $ 8,664 $13,737 $10,633
10/31/2003 $14,314 $ 9,154 $13,609 $10,936
11/30/2003 $14,514 $ 9,235 $13,642 $11,042
12/31/2003 $15,234 $ 9,719 $13,781 $11,402
1/31/2004 $15,437 $ 9,898 $13,892 $11,548
2/29/2004 $15,514 $10,035 $14,042 $11,689
3/31/2004 $15,461 $ 9,884 $14,147 $11,666
4/30/2004 $15,215 $ 9,728 $13,779 $11,398
5/31/2004 $15,162 $ 9,862 $13,724 $11,437
6/30/2004 $15,371 $10,053 $13,801 $11,597
7/31/2004 $15,450 $ 9,720 $13,938 $11,406
8/31/2004 $15,793 $ 9,759 $14,204 $11,508
9/30/2004 $16,004 $ 9,865 $14,243 $11,642
10/31/2004 $16,217 $10,016 $14,362 $11,785
11/30/2004 $16,564 $10,421 $14,248 $12,082
12/31/2004 $17,001 $10,775 $14,379 $12,361
1/31/2005 $16,743 $10,513 $14,469 $12,207
2/28/2005 $17,093 $10,734 $14,384 $12,370
3/31/2005 $16,761 $10,544 $14,310 $12,203
4/30/2005 $16,497 $10,344 $14,503 $12,086
5/31/2005 $16,851 $10,673 $14,660 $12,323
6/30/2005 $17,347 $10,688 $14,740 $12,426
7/31/2005 $17,706 $11,085 $14,606 $12,674
8/31/2005 $17,647 $10,984 $14,793 $12,703
9/30/2005 $17,587 $11,073 $14,641 $12,756
10/31/2005 $17,032 $10,889 $14,525 $12,552
11/30/2005 $16,970 $11,301 $14,589 $12,813
12/31/2005 $17,228 $11,304 $14,728 $12,930
1/31/2006 $17,743 $11,604 $14,729 $13,248
2/28/2006 $17,896 $11,635 $14,778 $13,257
3/31/2006 $17,975 $11,780 $14,633 $13,367
4/30/2006 $18,201 $11,938 $14,606 $13,507
5/31/2006 $18,134 $11,595 $14,591 $13,231
6/30/2006 $18,288 $11,611 $14,621 $13,237
7/31/2006 $18,740 $11,682 $14,819 $13,317
8/31/2006 $19,045 $11,960 $15,046 $13,544
9/30/2006 $19,201 $12,268 $15,178 $13,724
10/31/2006 $19,733 $12,668 $15,278 $14,024
11/30/2006 $20,193 $12,909 $15,456 $14,273
12/31/2006 $20,421 $13,090 $15,366 $14,380
1/31/2007 $20,591 $13,288 $15,360 $14,526
2/28/2007 $20,838 $13,028 $15,597 $14,495
3/31/2007 $21,086 $13,174 $15,597 $14,611
4/30/2007 $21,727 $13,757 $15,681 $14,963
5/31/2007 $22,057 $14,237 $15,562 $15,226
6/30/2007 $21,600 $14,001 $15,516 $15,070
7/31/2007 $21,060 $13,567 $15,646 $14,813
8/31/2007 $21,235 $13,770 $15,838 $14,930
9/30/2007 $21,889 $14,285 $15,958 $15,341
10/31/2007 $22,064 $14,512 $16,101 $15,603
11/30/2007 $21,517 $13,906 $16,391 $15,238
12/31/2007 $21,504 $13,809 $16,437 $15,170
1/31/2008 $21,020 $12,981 $16,713 $14,699
2/29/2008 $20,537 $12,559 $16,736 $14,500
3/31/2008 $20,305 $12,505 $16,793 $14,381
4/30/2008 $21,426 $13,114 $16,758 $14,799
5/31/2008 $21,531 $13,284 $16,635 $14,928
6/30/2008 $20,355 $12,164 $16,622 $14,210
7/31/2008 $19,948 $12,062 $16,608 $14,022
8/31/2008 $19,884 $12,236 $16,766 $14,049
9/30/2008 $17,214 $11,146 $16,541 $13,049
AVERAGE ANNUAL TOTAL RETURN
CLASS B1 9/30/08
- ------- -------
1-Year -24.66%
5-Year +3.84%
Since Inception (1/1/99) +5.73%
CLASS C (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET
FRANKLIN INCOME S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS
DATE FUND - CLASS C INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- -------------------- -------------------------
10/1/1998 $10,000 $10,000 $10,000 $10,000
10/31/1998 $10,060 $10,813 $ 9,947 $10,346
11/30/1998 $10,380 $11,469 $10,004 $10,707
12/31/1998 $10,319 $12,130 $10,034 $11,035
1/31/1999 $10,204 $12,637 $10,105 $11,179
2/28/1999 $ 9,912 $12,244 $ 9,929 $10,884
3/31/1999 $10,064 $12,734 $ 9,984 $11,111
4/30/1999 $10,575 $13,227 $10,015 $11,478
5/31/1999 $10,592 $12,915 $ 9,928 $11,321
6/30/1999 $10,611 $13,632 $ 9,896 $11,584
7/31/1999 $10,493 $13,206 $ 9,854 $11,415
8/31/1999 $10,466 $13,141 $ 9,849 $11,302
9/30/1999 $10,346 $12,781 $ 9,963 $11,187
10/31/1999 $10,365 $13,589 $10,000 $11,477
11/30/1999 $10,197 $13,866 $ 9,999 $11,630
12/31/1999 $10,235 $14,682 $ 9,951 $12,015
1/31/2000 $10,255 $13,945 $ 9,919 $11,719
2/29/2000 $10,130 $13,681 $10,039 $11,784
3/31/2000 $10,295 $15,019 $10,171 $12,315
4/30/2000 $10,655 $14,567 $10,142 $12,085
5/31/2000 $10,773 $14,268 $10,137 $11,960
6/30/2000 $10,842 $14,620 $10,348 $12,192
7/31/2000 $11,010 $14,391 $10,442 $12,135
8/31/2000 $11,629 $15,285 $10,593 $12,651
9/30/2000 $11,850 $14,478 $10,660 $12,397
10/31/2000 $11,669 $14,417 $10,730 $12,328
11/30/2000 $11,588 $13,280 $10,906 $11,865
12/31/2000 $12,271 $13,345 $11,108 $12,192
1/31/2001 $12,241 $13,819 $11,290 $12,415
2/28/2001 $12,471 $12,559 $11,388 $11,946
3/31/2001 $12,281 $11,763 $11,445 $11,553
4/30/2001 $12,515 $12,677 $11,398 $12,029
5/31/2001 $12,749 $12,762 $11,467 $12,099
6/30/2001 $12,449 $12,452 $11,510 $11,950
7/31/2001 $12,309 $12,329 $11,767 $11,913
8/31/2001 $12,440 $11,557 $11,902 $11,625
9/30/2001 $11,861 $10,624 $12,041 $11,020
10/31/2001 $11,937 $10,827 $12,293 $11,236
11/30/2001 $12,181 $11,657 $12,123 $11,619
12/31/2001 $12,288 $11,759 $12,046 $11,705
1/31/2002 $12,367 $11,588 $12,144 $11,608
2/28/2002 $12,447 $11,364 $12,261 $11,535
3/31/2002 $12,813 $11,792 $12,057 $11,777
4/30/2002 $12,883 $11,077 $12,291 $11,595
5/31/2002 $12,837 $10,995 $12,396 $11,569
6/30/2002 $12,036 $10,212 $12,503 $11,126
7/31/2002 $11,463 $ 9,416 $12,654 $10,590
8/31/2002 $11,829 $ 9,478 $12,868 $10,694
9/30/2002 $11,310 $ 8,448 $13,076 $10,117
10/31/2002 $11,382 $ 9,191 $13,016 $10,454
11/30/2002 $11,995 $ 9,732 $13,013 $10,813
12/31/2002 $12,099 $ 9,160 $13,282 $10,598
1/31/2003 $12,113 $ 8,920 $13,293 $10,457
2/28/2003 $12,005 $ 8,786 $13,477 $10,393
3/31/2003 $12,264 $ 8,871 $13,467 $10,435
4/30/2003 $13,020 $ 9,602 $13,578 $10,952
5/31/2003 $13,719 $10,109 $13,831 $11,413
6/30/2003 $13,983 $10,238 $13,804 $11,508
7/31/2003 $13,807 $10,418 $13,339 $11,496
8/31/2003 $14,010 $10,621 $13,428 $11,664
9/30/2003 $14,405 $10,509 $13,783 $11,733
10/31/2003 $14,801 $11,103 $13,655 $12,067
11/30/2003 $15,007 $11,201 $13,688 $12,184
12/31/2003 $15,749 $11,789 $13,827 $12,582
1/31/2004 $15,958 $12,005 $13,938 $12,743
2/29/2004 $16,038 $12,172 $14,089 $12,898
3/31/2004 $15,984 $11,989 $14,195 $12,874
4/30/2004 $15,797 $11,800 $13,825 $12,577
5/31/2004 $15,676 $11,962 $13,770 $12,620
6/30/2004 $15,959 $12,194 $13,848 $12,797
7/31/2004 $15,973 $11,790 $13,985 $12,586
8/31/2004 $16,326 $11,838 $14,252 $12,699
9/30/2004 $16,544 $11,965 $14,291 $12,846
10/31/2004 $16,762 $12,148 $14,410 $13,004
11/30/2004 $17,120 $12,641 $14,295 $13,332
12/31/2004 $17,570 $13,070 $14,427 $13,640
1/31/2005 $17,305 $12,752 $14,518 $13,470
2/28/2005 $17,664 $13,020 $14,432 $13,650
3/31/2005 $17,323 $12,789 $14,358 $13,466
4/30/2005 $17,050 $12,546 $14,552 $13,336
5/31/2005 $17,416 $12,946 $14,710 $13,598
6/30/2005 $17,997 $12,964 $14,790 $13,712
7/31/2005 $18,295 $13,446 $14,655 $13,985
8/31/2005 $18,234 $13,324 $14,843 $14,017
9/30/2005 $18,171 $13,432 $14,690 $14,076
10/31/2005 $17,599 $13,208 $14,574 $13,851
11/30/2005 $17,536 $13,707 $14,638 $14,139
12/31/2005 $17,801 $13,712 $14,777 $14,268
1/31/2006 $18,330 $14,075 $14,778 $14,619
2/28/2006 $18,486 $14,113 $14,827 $14,629
3/31/2006 $18,568 $14,289 $14,682 $14,750
4/30/2006 $18,802 $14,481 $14,655 $14,905
5/31/2006 $18,734 $14,064 $14,640 $14,599
6/30/2006 $18,892 $14,083 $14,671 $14,607
7/31/2006 $19,433 $14,170 $14,869 $14,694
8/31/2006 $19,747 $14,507 $15,096 $14,946
9/30/2006 $19,908 $14,881 $15,229 $15,144
10/31/2006 $20,378 $15,366 $15,330 $15,475
11/30/2006 $20,850 $15,658 $15,508 $15,750
12/31/2006 $21,163 $15,878 $15,418 $15,868
1/31/2007 $21,330 $16,118 $15,411 $16,028
2/28/2007 $21,576 $15,803 $15,649 $15,995
3/31/2007 $21,823 $15,979 $15,649 $16,123
4/30/2007 $22,391 $16,687 $15,734 $16,511
5/31/2007 $22,799 $17,269 $15,615 $16,802
6/30/2007 $22,321 $16,983 $15,569 $16,629
7/31/2007 $21,759 $16,456 $15,698 $16,346
8/31/2007 $21,928 $16,703 $15,891 $16,475
9/30/2007 $22,589 $17,327 $16,011 $16,928
10/31/2007 $22,761 $17,603 $16,155 $17,218
11/30/2007 $22,192 $16,867 $16,446 $16,815
12/31/2007 $22,084 $16,750 $16,492 $16,739
1/31/2008 $21,664 $15,745 $16,769 $16,220
2/29/2008 $21,161 $15,234 $16,792 $16,000
3/31/2008 $20,830 $15,168 $16,849 $15,869
4/30/2008 $22,052 $15,907 $16,814 $16,330
5/31/2008 $22,151 $16,113 $16,691 $16,472
6/30/2008 $20,943 $14,754 $16,678 $15,680
7/31/2008 $20,430 $14,630 $16,664 $15,473
8/31/2008 $20,444 $14,842 $16,822 $15,503
9/30/2008 $17,624 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08
- ------- -------
1-Year -22.70%
5-Year +4.12%
10-Year +5.83%
34 | Annual Report
Performance Summary (CONTINUED)
CLASS R (1/1/02-9/30/08)
(PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET
FRANKLIN INCOME S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS
DATE FUND - CLASS R INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- -------------------- -------------------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,069 $ 9,854 $10,081 $ 9,917
2/28/2002 $10,136 $ 9,664 $10,179 $ 9,855
3/31/2002 $10,390 $10,028 $10,009 $10,061
4/30/2002 $10,448 $ 9,420 $10,204 $ 9,906
5/31/2002 $10,412 $ 9,350 $10,290 $ 9,884
6/30/2002 $ 9,709 $ 8,684 $10,379 $ 9,505
7/31/2002 $ 9,289 $ 8,007 $10,505 $ 9,047
8/31/2002 $ 9,590 $ 8,060 $10,682 $ 9,136
9/30/2002 $ 9,166 $ 7,184 $10,855 $ 8,643
10/31/2002 $ 9,178 $ 7,816 $10,806 $ 8,931
11/30/2002 $ 9,681 $ 8,276 $10,803 $ 9,237
12/31/2002 $ 9,817 $ 7,790 $11,026 $ 9,054
1/31/2003 $ 9,829 $ 7,585 $11,035 $ 8,933
2/28/2003 $ 9,741 $ 7,472 $11,188 $ 8,879
3/31/2003 $ 9,905 $ 7,544 $11,179 $ 8,915
4/30/2003 $10,577 $ 8,166 $11,272 $ 9,356
5/31/2003 $11,102 $ 8,596 $11,482 $ 9,750
6/30/2003 $11,319 $ 8,706 $11,459 $ 9,831
7/31/2003 $11,227 $ 8,859 $11,074 $ 9,821
8/31/2003 $11,344 $ 9,032 $11,147 $ 9,965
9/30/2003 $11,670 $ 8,936 $11,442 $10,024
10/31/2003 $11,997 $ 9,442 $11,336 $10,309
11/30/2003 $12,168 $ 9,525 $11,363 $10,409
12/31/2003 $12,779 $10,025 $11,478 $10,749
1/31/2004 $12,953 $10,209 $11,571 $10,886
2/29/2004 $12,966 $10,351 $11,696 $11,019
3/31/2004 $12,978 $10,195 $11,784 $10,998
4/30/2004 $12,772 $10,035 $11,477 $10,745
5/31/2004 $12,730 $10,172 $11,431 $10,782
6/30/2004 $12,908 $10,370 $11,496 $10,933
7/31/2004 $12,977 $10,026 $11,610 $10,752
8/31/2004 $13,268 $10,067 $11,831 $10,849
9/30/2004 $13,449 $10,175 $11,863 $10,975
10/31/2004 $13,631 $10,331 $11,963 $11,110
11/30/2004 $13,927 $10,749 $11,867 $11,390
12/31/2004 $14,299 $11,115 $11,976 $11,653
1/31/2005 $14,026 $10,844 $12,052 $11,507
2/28/2005 $14,383 $11,072 $11,981 $11,661
3/31/2005 $14,102 $10,876 $11,919 $11,504
4/30/2005 $13,879 $10,669 $12,080 $11,394
5/31/2005 $14,182 $11,009 $12,211 $11,617
6/30/2005 $14,605 $11,024 $12,278 $11,714
7/31/2005 $14,912 $11,435 $12,166 $11,948
8/31/2005 $14,864 $11,330 $12,322 $11,975
9/30/2005 $14,814 $11,422 $12,195 $12,025
10/31/2005 $14,344 $11,232 $12,098 $11,833
11/30/2005 $14,295 $11,656 $12,152 $12,079
12/31/2005 $14,516 $11,660 $12,267 $12,189
1/31/2006 $14,955 $11,969 $12,268 $12,489
2/28/2006 $15,087 $12,002 $12,309 $12,498
3/31/2006 $15,156 $12,151 $12,188 $12,601
4/30/2006 $15,350 $12,314 $12,166 $12,734
5/31/2006 $15,233 $11,960 $12,153 $12,473
6/30/2006 $15,366 $11,976 $12,179 $12,479
7/31/2006 $15,815 $12,050 $12,343 $12,554
8/31/2006 $16,077 $12,337 $12,532 $12,768
9/30/2006 $16,212 $12,655 $12,642 $12,938
10/31/2006 $16,603 $13,067 $12,726 $13,220
11/30/2006 $16,997 $13,315 $12,874 $13,456
12/31/2006 $17,192 $13,502 $12,799 $13,556
1/31/2007 $17,397 $13,706 $12,794 $13,693
2/28/2007 $17,536 $13,438 $12,991 $13,665
3/31/2007 $17,810 $13,589 $12,991 $13,774
4/30/2007 $18,284 $14,191 $13,061 $14,106
5/31/2007 $18,626 $14,686 $12,962 $14,354
6/30/2007 $18,232 $14,442 $12,924 $14,206
7/31/2007 $17,702 $13,994 $13,032 $13,965
8/31/2007 $17,912 $14,204 $13,192 $14,075
9/30/2007 $18,395 $14,735 $13,292 $14,462
10/31/2007 $18,607 $14,969 $13,411 $14,709
11/30/2007 $18,138 $14,344 $13,652 $14,365
12/31/2007 $18,051 $14,244 $13,691 $14,301
1/31/2008 $17,705 $13,390 $13,921 $13,857
2/29/2008 $17,219 $12,955 $13,940 $13,669
3/31/2008 $17,017 $12,899 $13,987 $13,557
4/30/2008 $17,963 $13,527 $13,958 $13,951
5/31/2008 $18,048 $13,702 $13,856 $14,073
6/30/2008 $17,046 $12,547 $13,845 $13,396
7/31/2008 $16,694 $12,441 $13,833 $13,219
8/31/2008 $16,708 $12,621 $13,965 $13,244
9/30/2008 $14,365 $11,497 $13,777 $12,301
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08
- ------- -------
1-Year -21.91%
5-Year +4.24%
Since Inception (1/1/02) +5.52%
ADVISOR CLASS (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN INCOME LIPPER MIXED-ASSET TARGET
FUND - ADVISOR S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS
DATE CLASS INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE
- ---------- --------------- ------- -------------------- -------------------------
10/1/1998 $10,000 $10,000 $10,000 $10,000
10/31/1998 $10,023 $10,813 $ 9,947 $10,346
11/30/1998 $10,349 $11,469 $10,004 $10,707
12/31/1998 $10,337 $12,130 $10,034 $11,035
1/31/1999 $10,184 $12,637 $10,105 $11,179
2/28/1999 $ 9,897 $12,244 $ 9,929 $10,884
3/31/1999 $10,055 $12,734 $ 9,984 $11,111
4/30/1999 $10,574 $13,227 $10,015 $11,478
5/31/1999 $10,597 $12,915 $ 9,928 $11,321
6/30/1999 $10,621 $13,632 $ 9,896 $11,584
7/31/1999 $10,508 $13,206 $ 9,854 $11,415
8/31/1999 $10,486 $13,141 $ 9,849 $11,302
9/30/1999 $10,371 $12,781 $ 9,963 $11,187
10/31/1999 $10,396 $13,589 $10,000 $11,477
11/30/1999 $10,233 $13,866 $ 9,999 $11,630
12/31/1999 $10,277 $14,682 $ 9,951 $12,015
1/31/2000 $10,304 $13,945 $ 9,919 $11,719
2/29/2000 $10,183 $13,681 $10,039 $11,784
3/31/2000 $10,356 $15,019 $10,171 $12,315
4/30/2000 $10,677 $14,567 $10,142 $12,085
5/31/2000 $10,850 $14,268 $10,137 $11,960
6/30/2000 $10,927 $14,620 $10,348 $12,192
7/31/2000 $11,053 $14,391 $10,442 $12,135
8/31/2000 $11,686 $15,285 $10,593 $12,651
9/30/2000 $11,916 $14,478 $10,660 $12,397
10/31/2000 $11,738 $14,417 $10,730 $12,328
11/30/2000 $11,713 $13,280 $10,906 $11,865
12/31/2000 $12,363 $13,345 $11,108 $12,192
1/31/2001 $12,392 $13,819 $11,290 $12,415
2/28/2001 $12,633 $12,559 $11,388 $11,946
3/31/2001 $12,394 $11,763 $11,445 $11,553
4/30/2001 $12,693 $12,677 $11,398 $12,029
5/31/2001 $12,884 $12,762 $11,467 $12,099
6/30/2001 $12,585 $12,452 $11,510 $11,950
7/31/2001 $12,449 $12,329 $11,767 $11,913
8/31/2001 $12,589 $11,557 $11,902 $11,625
9/30/2001 $12,060 $10,624 $12,041 $11,020
10/31/2001 $12,089 $10,827 $12,293 $11,236
11/30/2001 $12,346 $11,657 $12,123 $11,619
12/31/2001 $12,462 $11,759 $12,046 $11,705
1/31/2002 $12,608 $11,588 $12,144 $11,608
2/28/2002 $12,696 $11,364 $12,261 $11,535
3/31/2002 $13,021 $11,792 $12,057 $11,777
4/30/2002 $13,158 $11,077 $12,291 $11,595
5/31/2002 $13,118 $10,995 $12,396 $11,569
6/30/2002 $12,243 $10,212 $12,503 $11,126
7/31/2002 $11,721 $ 9,416 $12,654 $10,590
8/31/2002 $12,045 $ 9,478 $12,868 $10,694
9/30/2002 $11,516 $ 8,448 $13,076 $10,117
10/31/2002 $11,597 $ 9,191 $13,016 $10,454
11/30/2002 $12,234 $ 9,732 $13,013 $10,813
12/31/2002 $12,347 $ 9,160 $13,282 $10,598
1/31/2003 $12,429 $ 8,920 $13,293 $10,457
2/28/2003 $12,323 $ 8,786 $13,477 $10,393
3/31/2003 $12,535 $ 8,871 $13,467 $10,435
4/30/2003 $13,323 $ 9,602 $13,578 $10,952
5/31/2003 $14,053 $10,109 $13,831 $11,413
6/30/2003 $14,333 $10,238 $13,804 $11,508
7/31/2003 $14,159 $10,418 $13,339 $11,496
8/31/2003 $14,377 $10,621 $13,428 $11,664
9/30/2003 $14,795 $10,509 $13,783 $11,733
10/31/2003 $15,214 $11,103 $13,655 $12,067
11/30/2003 $15,436 $11,201 $13,688 $12,184
12/31/2003 $16,214 $11,789 $13,827 $12,582
1/31/2004 $16,439 $12,005 $13,938 $12,743
2/29/2004 $16,531 $12,172 $14,089 $12,898
3/31/2004 $16,484 $11,989 $14,195 $12,874
4/30/2004 $16,231 $11,800 $13,825 $12,577
5/31/2004 $16,184 $11,962 $13,770 $12,620
6/30/2004 $16,417 $12,194 $13,848 $12,797
7/31/2004 $16,510 $11,790 $13,985 $12,586
8/31/2004 $16,887 $11,838 $14,252 $12,699
9/30/2004 $17,123 $11,965 $14,291 $12,846
10/31/2004 $17,361 $12,148 $14,410 $13,004
11/30/2004 $17,744 $12,641 $14,295 $13,332
12/31/2004 $18,224 $13,070 $14,427 $13,640
1/31/2005 $17,884 $12,752 $14,518 $13,470
2/28/2005 $18,345 $13,020 $14,432 $13,650
3/31/2005 $17,996 $12,789 $14,358 $13,466
4/30/2005 $17,721 $12,546 $14,552 $13,336
5/31/2005 $18,114 $12,946 $14,710 $13,598
6/30/2005 $18,659 $12,964 $14,790 $13,712
7/31/2005 $19,056 $13,446 $14,655 $13,985
8/31/2005 $19,002 $13,324 $14,843 $14,017
9/30/2005 $18,947 $13,432 $14,690 $14,076
10/31/2005 $18,357 $13,208 $14,574 $13,851
11/30/2005 $18,302 $13,707 $14,638 $14,139
12/31/2005 $18,591 $13,712 $14,777 $14,268
1/31/2006 $19,159 $14,075 $14,778 $14,619
2/28/2006 $19,334 $14,113 $14,827 $14,629
3/31/2006 $19,431 $14,289 $14,682 $14,750
4/30/2006 $19,688 $14,481 $14,655 $14,905
5/31/2006 $19,547 $14,064 $14,640 $14,599
6/30/2006 $19,725 $14,083 $14,671 $14,607
7/31/2006 $20,307 $14,170 $14,869 $14,694
8/31/2006 $20,650 $14,507 $15,096 $14,946
9/30/2006 $20,831 $14,881 $15,229 $15,144
10/31/2006 $21,340 $15,366 $15,330 $15,475
11/30/2006 $21,934 $15,658 $15,508 $15,750
12/31/2006 $22,195 $15,878 $15,418 $15,868
1/31/2007 $22,383 $16,118 $15,411 $16,028
2/28/2007 $22,655 $15,803 $15,649 $15,995
3/31/2007 $22,930 $15,979 $15,649 $16,123
4/30/2007 $23,546 $16,687 $15,734 $16,511
5/31/2007 $23,994 $17,269 $15,615 $16,802
6/30/2007 $23,497 $16,983 $15,569 $16,629
7/31/2007 $22,912 $16,456 $15,698 $16,346
8/31/2007 $23,105 $16,703 $15,891 $16,475
9/30/2007 $23,823 $17,327 $16,011 $16,928
10/31/2007 $24,019 $17,603 $16,155 $17,218
11/30/2007 $23,425 $16,867 $16,446 $16,815
12/31/2007 $23,323 $16,750 $16,492 $16,739
1/31/2008 $22,889 $15,745 $16,769 $16,220
2/29/2008 $22,363 $15,234 $16,792 $16,000
3/31/2008 $22,021 $15,168 $16,849 $15,869
4/30/2008 $23,341 $15,907 $16,814 $16,330
5/31/2008 $23,459 $16,113 $16,691 $16,472
6/30/2008 $22,177 $14,754 $16,678 $15,680
7/31/2008 $21,639 $14,630 $16,664 $15,473
8/31/2008 $21,666 $14,842 $16,822 $15,503
9/30/2008 $18,742 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08
- ------------- -------
1-Year -21.33%
5-Year +4.84%
10-Year +6.48%
Annual Report | 35
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'S SHARE PRICE AND YIELD WILL BE AFFECTED
BY INTEREST RATE MOVEMENTS. 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. WHILE STOCKS HAVE
HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO
FLUCTUATE OVER THE SHORT TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL
COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. 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 9/30/08.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/08.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(7.) Sources: (C) 2008 Morningstar; 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 BC 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 9/30/08, there were 498 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.
36 | Annual Report
Your Fund's Expenses
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 | 37
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 4/1/08 VALUE 9/30/08 PERIOD* 4/1/08-9/30/08
- ------- ----------------- -------------- ----------------------
Actual $1,000 $ 847.60 $2.86
Hypothetical (5% return before expenses) $1,000 $1,021.90 $3.13
CLASS B
Actual $1,000 $ 843.40 $6.77
Hypothetical (5% return before expenses) $1,000 $1,017.65 $7.41
CLASS B1
Actual $1,000 $ 845.50 $5.17
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.65
CLASS C
Actual $1,000 $ 846.10 $5.17
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.65
CLASS R
Actual $1,000 $ 844.10 $4.47
Hypothetical (5% return before expenses) $1,000 $1,020.15 $4.90
ADVISOR CLASS
Actual $1,000 $ 851.10 $2.18
Hypothetical (5% return before expenses) $1,000 $1,022.65 $2.38
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.62%; B: 1.47%; B1; 1.12%; C: 1.12%; R:
0.97%; and Advisor: 0.47%), multiplied by the average account value over
the period, multiplied by 183/366 to reflect the one-half year period.
38 | Annual Report
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund
seeks 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 substantially 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 9/30/08
(PIE-CHART)
GNMA ....................... 94.0%
Short-Term Investments &
Other Net Assets ........... 6.0%
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 (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, 2008.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +6.00% cumulative
total return for the 12 months under review. The Fund outperformed the +5.51%
total return of its peers as measured by the Lipper GNMA Funds Classification
Average.(2) In comparison, the Barclays Capital (BC; formerly, Lehman Brothers)
U.S. Government: Intermediate Index returned +7.52% for
(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: 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 GNMA securities. For the 12-month period ended 9/30/08,
there were 63 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. 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 96.
Annual Report | 39
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/07-9/30/08
DIVIDEND PER SHARE
-------------------------------------------------------------------
ADVISOR
MONTH CLASS A CLASS B CLASS C CLASS R CLASS
- --------- ----------- ----------- ----------- ----------- -----------
October 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents
November 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents
December 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
January 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
February 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
March 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents
April 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents
May 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents
June 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents
July 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents
August 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents
September 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents
----------- ----------- ----------- ----------- -----------
TOTAL 31.72 CENTS 28.29 CENTS 28.38 CENTS 29.31 CENTS 32.51 CENTS
=========== =========== =========== =========== ===========
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
the same period.(3) The Fund's return reflects the effect of management fees and
expenses, while the BC 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 43.
INVESTMENT STRATEGY
We seek to invest substantially in GNMA (Ginnie Mae) obligations. We analyze
securities using proprietary models to help us identify attractive investment
opportunities. The Fund's short-term investments may include short-term
government securities and cash or cash equivalents.
(3.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC U.S. Government: Intermediate Index is the
intermediate component of the BC U.S. Government Index, which covers
securities issued by the U.S. government (i.e., securities in the BC U.S.
Treasury and Agency Indexes), including public obligations of the U.S.
Treasury with a remaining maturity of one year or more and publicly issued
debt of U.S. government agencies, quasi-federal corporations, and corporate
or foreign debt guaranteed by the U.S. government. 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.
40 | Annual Report
MANAGER'S DISCUSSION
During the 12 months under review, we were pleased with the Fund's performance
versus its peers as measured by the Lipper GNMA Funds Classification Average.
Increased volatility and uncertainty characterized the fixed income market
environment and investors' appetite for risk declined as economic prospects
worsened and credit market conditions deteriorated. Against this backdrop, GNMA
mortgage-backed securities (MBS) were among the best performing sectors in the
fixed income market, although they lagged the superior performance of U.S.
Treasuries during the reporting period.
Overall conditions were challenging due to concerns about housing market
weakness, inflation, and continued financial market deleveraging and
recapitalization. Although GNMA securities were not immune to the volatility,
they were somewhat buffered from recent credit market disruptions due to their
high degree of credit safety. While concerns swirled around Fannie Mae and
Freddie Mac debt, particularly near the end of the reporting period, many
investors appeared to find GNMA securities attractive due to their explicit
government guarantee.(1)
Based on our belief that income should continue to drive performance within the
GNMA market, we focused primarily on 30-year collateral bonds rather than their
15-year counterparts, which was consistent with our investment strategy.
Historically, we have allocated the Fund's assets between the two tiers of the
GNMA market -- the GNMA I (comprising single-issuer pools) and GNMA II
(comprising multiple-issuer pools) programs. Over the period, we slightly
reduced our allocation to GNMA I securities relative to our GNMA II sector
holdings. We maintained a bias toward premium coupons versus discounts, as we
continued to believe the income stream from these securities should remain the
same as prepayments slow.
Our analysis indicated the high-quality prime mortgage market presented
opportunities as spreads have widened with weakness in lower-quality market
sectors. In light of many of the recent events in financial markets, we will
continue to monitor changes to the regulatory landscape carefully. We believe
our dedication to our long-term disciplined investment process and portfolio
strategy has served shareholders well over time as we seek opportunities with
strong fundamentals and valuations across the entire GNMA investment universe.
Annual Report | 41
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 OF ROGER A. BAYSTON)
/s/ Roger A. Bayston
Roger A. Bayston, CFA
(PHOTO OF JACK LEMEIN)
/s/ Jack Lemein
Jack Lemein
(PHOTO OF PAUL VARUNOK)
/s/ Paul Varunok
Paul Varunok
Portfolio Management Team
Franklin U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF SEPTEMBER 30, 2008, 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.
42 | Annual Report
Performance Summary as of 9/30/08
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 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.06 $6.45 $6.39
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.3172
CLASS B (SYMBOL: FUGBX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.06 $6.44 $6.38
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.2829
CLASS C (SYMBOL: FRUGX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.06 $6.42 $6.36
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.2838
CLASS R (SYMBOL: FUSRX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$0.06 $6.45 $6.39
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.2931
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/08 9/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.06 $6.47 $6.41
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.3251
Annual Report | 43
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- ------ ------ ---------
Cumulative Total Return(1) +6.00% +21.82% +61.30%
Average Annual Total Return(2) +1.55% +3.13% +4.44%
Distribution Rate(3) 4.54%
30-Day Standardized Yield(4) 4.42%
Total Annual Operating Expenses(5) 0.73%
INCEPTION
CLASS B 1-YEAR 5-YEAR (1/1/99)
- -------------------------------------- ------ ------ ---------
Cumulative Total Return(1) +5.61% +18.88% +53.92%
Average Annual Total Return(2) +1.61% +3.19% +4.52%
Distribution Rate(3) 4.26%
30-Day Standardized Yield(4) 4.10%
Total Annual Operating Expenses(5) 1.26%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- ------ ------ ---------
Cumulative Total Return(1) +5.48% +18.77% +53.07%
Average Annual Total Return(2) +4.48% +3.50% +4.35%
Distribution Rate(3) 4.28%
30-Day Standardized Yield(4) 4.09%
Total Annual Operating Expenses(5) 1.26%
INCEPTION
CLASS R 1-YEAR 5-YEAR (1/1/02)
- -------------------------------------- ------ ------ ---------
Cumulative Total Return(1) +5.61% +19.58% +30.93%
Average Annual Total Return(2) +5.61% +3.64% +4.08%
Distribution Rate(3) 4.41%
30-Day Standardized Yield(4) 4.26%
Total Annual Operating Expenses(5) 1.11%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- ------ ------ ---------
Cumulative Total Return(1) +6.11% +22.53% +63.36%
Average Annual Total Return(2) +6.11% +4.15% +5.03%
Distribution Rate(3) 4.86%
30-Day Standardized Yield(4) 4.76%
Total Annual Operating Expenses(5) 0.61%
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 (800) 342-5236.
44 | 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 (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. INTERMEDIATE FUNDS
SECURITIES GOVERNMENT CLASSIFICATION
DATE FUND - CLASS A BOND INDEX CPI AVERAGE
- ---------- -------------- ----------------- ------- --------------
10/1/1998 $ 9,575 $10,000 $10,000 $10,000
10/31/1998 $ 9,530 $10,017 $10,024 $ 9,949
11/30/1998 $ 9,581 $ 9,986 $10,024 $10,003
12/31/1998 $ 9,619 $10,025 $10,018 $10,040
1/31/1999 $ 9,684 $10,069 $10,043 $10,099
2/28/1999 $ 9,624 $ 9,931 $10,055 $10,017
3/31/1999 $ 9,676 $ 9,997 $10,086 $10,079
4/30/1999 $ 9,715 $10,024 $10,159 $10,118
5/31/1999 $ 9,639 $ 9,963 $10,159 $10,050
6/30/1999 $ 9,592 $ 9,977 $10,159 $ 9,994
7/31/1999 $ 9,515 $ 9,979 $10,189 $ 9,935
8/31/1999 $ 9,523 $ 9,993 $10,214 $ 9,922
9/30/1999 $ 9,676 $10,078 $10,263 $10,075
10/31/1999 $ 9,728 $10,098 $10,281 $10,110
11/30/1999 $ 9,735 $10,105 $10,287 $10,117
12/31/1999 $ 9,698 $10,074 $10,287 $10,069
1/31/2000 $ 9,616 $10,040 $10,318 $ 9,992
2/29/2000 $ 9,728 $10,123 $10,379 $10,107
3/31/2000 $ 9,872 $10,239 $10,465 $10,259
4/30/2000 $ 9,849 $10,234 $10,471 $10,242
5/31/2000 $ 9,889 $10,262 $10,483 $10,279
6/30/2000 $10,051 $10,425 $10,538 $10,457
7/31/2000 $10,106 $10,494 $10,562 $10,503
8/31/2000 $10,256 $10,612 $10,562 $10,653
9/30/2000 $10,344 $10,704 $10,617 $10,745
10/31/2000 $10,417 $10,778 $10,636 $10,811
11/30/2000 $10,569 $10,936 $10,642 $10,969
12/31/2000 $10,722 $11,129 $10,636 $11,129
1/31/2001 $10,876 $11,277 $10,703 $11,301
2/28/2001 $10,934 $11,381 $10,746 $11,371
3/31/2001 $10,993 $11,463 $10,770 $11,437
4/30/2001 $11,004 $11,427 $10,813 $11,419
5/31/2001 $11,079 $11,474 $10,862 $11,492
6/30/2001 $11,106 $11,511 $10,880 $11,529
7/31/2001 $11,314 $11,726 $10,850 $11,757
8/31/2001 $11,391 $11,830 $10,850 $11,845
9/30/2001 $11,536 $12,082 $10,899 $12,015
10/31/2001 $11,695 $12,271 $10,862 $12,181
11/30/2001 $11,586 $12,124 $10,844 $12,053
12/31/2001 $11,544 $12,066 $10,801 $11,988
1/31/2002 $11,636 $12,118 $10,825 $12,105
2/28/2002 $11,779 $12,218 $10,868 $12,235
3/31/2002 $11,631 $12,034 $10,929 $12,082
4/30/2002 $11,845 $12,259 $10,990 $12,309
5/31/2002 $11,920 $12,344 $10,990 $12,390
6/30/2002 $12,014 $12,499 $10,996 $12,493
7/31/2002 $12,143 $12,734 $11,009 $12,640
8/31/2002 $12,255 $12,880 $11,045 $12,746
9/30/2002 $12,350 $13,101 $11,064 $12,861
10/31/2002 $12,393 $13,092 $11,082 $12,878
11/30/2002 $12,392 $12,988 $11,082 $12,871
12/31/2002 $12,535 $13,229 $11,057 $13,013
1/31/2003 $12,571 $13,199 $11,106 $13,040
2/28/2003 $12,625 $13,348 $11,192 $13,117
3/31/2003 $12,624 $13,351 $11,259 $13,109
4/30/2003 $12,660 $13,389 $11,235 $13,141
5/31/2003 $12,660 $13,599 $11,216 $13,172
6/30/2003 $12,696 $13,577 $11,229 $13,197
7/31/2003 $12,401 $13,247 $11,241 $12,914
8/31/2003 $12,493 $13,271 $11,284 $13,000
9/30/2003 $12,679 $13,559 $11,320 $13,216
10/31/2003 $12,623 $13,426 $11,308 $13,150
11/30/2003 $12,679 $13,427 $11,278 $13,189
12/31/2003 $12,758 $13,531 $11,265 $13,280
1/31/2004 $12,834 $13,605 $11,320 $13,347
2/29/2004 $12,910 $13,734 $11,381 $13,432
3/31/2004 $12,948 $13,830 $11,455 $13,478
4/30/2004 $12,736 $13,521 $11,491 $13,254
5/31/2004 $12,712 $13,478 $11,559 $13,218
6/30/2004 $12,825 $13,512 $11,595 $13,320
7/31/2004 $12,937 $13,610 $11,577 $13,420
8/31/2004 $13,109 $13,812 $11,583 $13,597
9/30/2004 $13,117 $13,817 $11,608 $13,605
10/31/2004 $13,212 $13,902 $11,669 $13,694
11/30/2004 $13,188 $13,772 $11,675 $13,650
12/31/2004 $13,243 $13,847 $11,632 $13,717
1/31/2005 $13,318 $13,865 $11,656 $13,784
2/28/2005 $13,274 $13,788 $11,724 $13,736
3/31/2005 $13,249 $13,754 $11,815 $13,703
4/30/2005 $13,366 $13,914 $11,895 $13,829
5/31/2005 $13,459 $14,025 $11,883 $13,909
6/30/2005 $13,472 $14,071 $11,889 $13,940
7/31/2005 $13,423 $13,951 $11,944 $13,881
8/31/2005 $13,538 $14,106 $12,005 $13,992
9/30/2005 $13,467 $13,998 $12,152 $13,918
10/31/2005 $13,418 $13,939 $12,176 $13,847
11/30/2005 $13,451 $13,996 $12,078 $13,883
12/31/2005 $13,610 $14,081 $12,029 $14,032
1/31/2006 $13,643 $14,080 $12,121 $14,061
2/28/2006 $13,656 $14,082 $12,145 $14,085
3/31/2006 $13,563 $14,039 $12,213 $13,998
4/30/2006 $13,512 $14,052 $12,317 $13,950
5/31/2006 $13,462 $14,056 $12,378 $13,911
6/30/2006 $13,476 $14,081 $12,402 $13,910
7/31/2006 $13,640 $14,229 $12,439 $14,086
8/31/2006 $13,826 $14,389 $12,463 $14,281
9/30/2006 $13,926 $14,493 $12,402 $14,374
10/31/2006 $14,007 $14,562 $12,335 $14,461
11/30/2006 $14,154 $14,678 $12,317 $14,587
12/31/2006 $14,112 $14,622 $12,335 $14,562
1/31/2007 $14,105 $14,624 $12,373 $14,555
2/28/2007 $14,276 $14,807 $12,439 $14,721
3/31/2007 $14,293 $14,845 $12,552 $14,749
4/30/2007 $14,376 $14,911 $12,634 $14,815
5/31/2007 $14,280 $14,826 $12,711 $14,726
6/30/2007 $14,207 $14,846 $12,735 $14,650
7/31/2007 $14,335 $15,029 $12,732 $14,765
8/31/2007 $14,487 $15,240 $12,709 $14,916
9/30/2007 $14,571 $15,345 $12,744 $15,025
10/31/2007 $14,724 $15,437 $12,771 $15,172
11/30/2007 $15,016 $15,809 $12,847 $15,460
12/31/2007 $15,009 $15,860 $12,838 $15,476
1/31/2008 $15,256 $16,234 $12,902 $15,736
2/29/2008 $15,319 $16,411 $12,940 $15,824
3/31/2008 $15,358 $16,512 $13,052 $15,849
4/30/2008 $15,328 $16,291 $13,131 $15,811
5/31/2008 $15,226 $16,145 $13,242 $15,718
6/30/2008 $15,239 $16,208 $13,375 $15,729
7/31/2008 $15,252 $16,294 $13,445 $15,723
8/31/2008 $15,384 $16,418 $13,392 $15,844
9/30/2008 $15,445 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08
- ------- -------
1-Year +1.55%
5-Year +3.13%
10-Year +4.44%
CLASS B (1/1/99-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. INTERMEDIATE FUNDS
SECURITIES GOVERNMENT CLASSIFICATION
DATE FUND - CLASS B BOND INDEX CPI AVERAGE
- ---------- -------------- ----------------- ------- --------------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $10,068 $10,045 $10,024 $10,059
2/28/1999 $ 9,986 $ 9,907 $10,037 $ 9,978
3/31/1999 $10,051 $ 9,973 $10,067 $10,039
4/30/1999 $10,087 $10,000 $10,140 $10,078
5/31/1999 $10,005 $ 9,938 $10,140 $10,010
6/30/1999 $ 9,936 $ 9,953 $10,140 $ 9,954
7/31/1999 $ 9,868 $ 9,954 $10,171 $ 9,895
8/31/1999 $ 9,856 $ 9,968 $10,195 $ 9,882
9/30/1999 $10,025 $10,053 $10,244 $10,036
10/31/1999 $10,074 $10,073 $10,262 $10,070
11/30/1999 $10,062 $10,080 $10,268 $10,077
12/31/1999 $10,019 $10,049 $10,268 $10,029
1/31/2000 $ 9,946 $10,015 $10,299 $ 9,952
2/29/2000 $10,042 $10,098 $10,360 $10,067
3/31/2000 $10,186 $10,213 $10,445 $10,219
4/30/2000 $10,174 $10,209 $10,451 $10,201
5/31/2000 $10,210 $10,236 $10,464 $10,238
6/30/2000 $10,373 $10,399 $10,519 $10,416
7/31/2000 $10,410 $10,468 $10,543 $10,462
8/31/2000 $10,560 $10,585 $10,543 $10,610
9/30/2000 $10,662 $10,678 $10,598 $10,703
10/31/2000 $10,717 $10,751 $10,616 $10,768
11/30/2000 $10,869 $10,909 $10,622 $10,925
12/31/2000 $11,021 $11,101 $10,616 $11,085
1/31/2001 $11,191 $11,249 $10,683 $11,257
2/28/2001 $11,230 $11,352 $10,726 $11,326
3/31/2001 $11,302 $11,435 $10,750 $11,392
4/30/2001 $11,291 $11,398 $10,793 $11,374
5/31/2001 $11,364 $11,446 $10,842 $11,447
6/30/2001 $11,403 $11,482 $10,860 $11,483
7/31/2001 $11,595 $11,696 $10,830 $11,711
8/31/2001 $11,669 $11,800 $10,830 $11,798
9/30/2001 $11,829 $12,052 $10,879 $11,967
10/31/2001 $11,970 $12,240 $10,842 $12,132
11/30/2001 $11,871 $12,094 $10,824 $12,005
12/31/2001 $11,806 $12,036 $10,781 $11,940
1/31/2002 $11,912 $12,088 $10,805 $12,057
2/28/2002 $12,035 $12,188 $10,848 $12,186
3/31/2002 $11,879 $12,004 $10,909 $12,034
4/30/2002 $12,092 $12,229 $10,970 $12,260
5/31/2002 $12,164 $12,314 $10,970 $12,341
6/30/2002 $12,254 $12,468 $10,976 $12,443
7/31/2002 $12,381 $12,703 $10,988 $12,590
8/31/2002 $12,490 $12,848 $11,025 $12,696
9/30/2002 $12,582 $13,069 $11,043 $12,810
10/31/2002 $12,620 $13,060 $11,062 $12,827
11/30/2002 $12,614 $12,956 $11,062 $12,820
12/31/2002 $12,754 $13,196 $11,037 $12,962
1/31/2003 $12,785 $13,167 $11,086 $12,989
2/28/2003 $12,834 $13,315 $11,171 $13,065
3/31/2003 $12,828 $13,318 $11,239 $13,058
4/30/2003 $12,859 $13,356 $11,214 $13,089
5/31/2003 $12,871 $13,565 $11,196 $13,120
6/30/2003 $12,884 $13,543 $11,208 $13,145
7/31/2003 $12,578 $13,214 $11,220 $12,863
8/31/2003 $12,667 $13,238 $11,263 $12,949
9/30/2003 $12,850 $13,525 $11,300 $13,164
10/31/2003 $12,788 $13,392 $11,287 $13,098
11/30/2003 $12,839 $13,393 $11,257 $13,137
12/31/2003 $12,914 $13,498 $11,245 $13,228
1/31/2004 $12,985 $13,571 $11,300 $13,294
2/29/2004 $13,056 $13,700 $11,361 $13,379
3/31/2004 $13,089 $13,796 $11,434 $13,425
4/30/2004 $12,868 $13,487 $11,470 $13,202
5/31/2004 $12,839 $13,444 $11,538 $13,166
6/30/2004 $12,946 $13,478 $11,574 $13,267
7/31/2004 $13,054 $13,576 $11,556 $13,367
8/31/2004 $13,222 $13,777 $11,562 $13,543
9/30/2004 $13,225 $13,783 $11,586 $13,552
10/31/2004 $13,315 $13,867 $11,647 $13,640
11/30/2004 $13,285 $13,738 $11,653 $13,596
12/31/2004 $13,334 $13,813 $11,611 $13,663
1/31/2005 $13,404 $13,831 $11,635 $13,730
2/28/2005 $13,354 $13,754 $11,702 $13,681
3/31/2005 $13,323 $13,719 $11,794 $13,649
4/30/2005 $13,435 $13,880 $11,873 $13,774
5/31/2005 $13,523 $13,990 $11,861 $13,854
6/30/2005 $13,549 $14,036 $11,867 $13,885
7/31/2005 $13,474 $13,917 $11,922 $13,826
8/31/2005 $13,583 $14,071 $11,983 $13,937
9/30/2005 $13,507 $13,963 $12,129 $13,863
10/31/2005 $13,451 $13,904 $12,154 $13,792
11/30/2005 $13,478 $13,961 $12,056 $13,828
12/31/2005 $13,632 $14,046 $12,007 $13,976
1/31/2006 $13,659 $14,045 $12,099 $14,005
2/28/2006 $13,666 $14,047 $12,123 $14,029
3/31/2006 $13,567 $14,004 $12,190 $13,942
4/30/2006 $13,510 $14,017 $12,294 $13,895
5/31/2006 $13,454 $14,021 $12,355 $13,856
6/30/2006 $13,462 $14,047 $12,379 $13,855
7/31/2006 $13,620 $14,194 $12,416 $14,031
8/31/2006 $13,800 $14,353 $12,441 $14,224
9/30/2006 $13,894 $14,457 $12,379 $14,317
10/31/2006 $13,970 $14,526 $12,312 $14,404
11/30/2006 $14,111 $14,642 $12,294 $14,529
12/31/2006 $14,063 $14,586 $12,312 $14,505
1/31/2007 $14,057 $14,588 $12,350 $14,497
2/28/2007 $14,227 $14,770 $12,416 $14,663
3/31/2007 $14,243 $14,809 $12,529 $14,690
4/30/2007 $14,326 $14,874 $12,610 $14,757
5/31/2007 $14,230 $14,789 $12,688 $14,668
6/30/2007 $14,157 $14,809 $12,712 $14,592
7/31/2007 $14,286 $14,991 $12,709 $14,707
8/31/2007 $14,437 $15,203 $12,686 $14,857
9/30/2007 $14,521 $15,307 $12,721 $14,965
10/31/2007 $14,674 $15,399 $12,748 $15,112
11/30/2007 $14,964 $15,770 $12,823 $15,399
12/31/2007 $14,957 $15,821 $12,815 $15,415
1/31/2008 $15,203 $16,194 $12,879 $15,674
2/29/2008 $15,266 $16,370 $12,916 $15,761
3/31/2008 $15,306 $16,471 $13,028 $15,787
4/30/2008 $15,275 $16,251 $13,107 $15,749
5/31/2008 $15,174 $16,105 $13,217 $15,656
6/30/2008 $15,186 $16,168 $13,351 $15,667
7/31/2008 $15,200 $16,254 $13,421 $15,661
8/31/2008 $15,332 $16,378 $13,367 $15,781
9/30/2008 $15,392 $16,457 $13,349 $15,794
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08
- ------- -------
1-Year +1.61%
5-Year +3.19%
Since Inception (1/1/99) +4.52%
Annual Report | 45
Performance Summary (CONTINUED)
CLASS C (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN U.S. LIPPER GNMA
GOVERNMENT LEHMAN BROTHERS FUNDS
SECURITIES U.S. INTERMEDIATE CLASSIFICATION
DATE FUND - CLASS C GOVERNMENT CPI AVERAGE
- ---------- -------------- ----------------- ------- --------------
10/1/1998 $10,000 $10,000 $10,000 $10,000
10/31/1998 $ 9,933 $10,017 $10,024 $ 9,949
11/30/1998 $ 9,997 $ 9,986 $10,024 $10,003
12/31/1998 $10,031 $10,025 $10,018 $10,040
1/31/1999 $10,096 $10,069 $10,043 $10,099
2/28/1999 $10,028 $ 9,931 $10,055 $10,017
3/31/1999 $10,078 $ 9,997 $10,086 $10,079
4/30/1999 $10,113 $10,024 $10,159 $10,118
5/31/1999 $10,030 $ 9,963 $10,159 $10,050
6/30/1999 $ 9,976 $ 9,977 $10,159 $ 9,994
7/31/1999 $ 9,892 $ 9,979 $10,189 $ 9,935
8/31/1999 $ 9,895 $ 9,993 $10,214 $ 9,922
9/30/1999 $10,050 $10,078 $10,263 $10,075
10/31/1999 $10,100 $10,098 $10,281 $10,110
11/30/1999 $10,103 $10,105 $10,287 $10,117
12/31/1999 $10,060 $10,074 $10,287 $10,069
1/31/2000 $ 9,970 $10,040 $10,318 $ 9,992
2/29/2000 $10,083 $10,123 $10,379 $10,107
3/31/2000 $10,227 $10,239 $10,465 $10,259
4/30/2000 $10,199 $10,234 $10,471 $10,242
5/31/2000 $10,235 $10,262 $10,483 $10,279
6/30/2000 $10,399 $10,425 $10,538 $10,457
7/31/2000 $10,436 $10,494 $10,562 $10,503
8/31/2000 $10,587 $10,612 $10,562 $10,653
9/30/2000 $10,689 $10,704 $10,617 $10,745
10/31/2000 $10,760 $10,778 $10,636 $10,811
11/30/2000 $10,896 $10,936 $10,642 $10,969
12/31/2000 $11,050 $11,129 $10,636 $11,129
1/31/2001 $11,220 $11,277 $10,703 $11,301
2/28/2001 $11,259 $11,381 $10,746 $11,371
3/31/2001 $11,332 $11,463 $10,770 $11,437
4/30/2001 $11,338 $11,427 $10,813 $11,419
5/31/2001 $11,394 $11,474 $10,862 $11,492
6/30/2001 $11,434 $11,511 $10,880 $11,529
7/31/2001 $11,626 $11,726 $10,850 $11,757
8/31/2001 $11,701 $11,830 $10,850 $11,845
9/30/2001 $11,861 $12,082 $10,899 $12,015
10/31/2001 $12,003 $12,271 $10,862 $12,181
11/30/2001 $11,903 $12,124 $10,844 $12,053
12/31/2001 $11,838 $12,066 $10,801 $11,988
1/31/2002 $11,944 $12,118 $10,825 $12,105
2/28/2002 $12,068 $12,218 $10,868 $12,235
3/31/2002 $11,911 $12,034 $10,929 $12,082
4/30/2002 $12,125 $12,259 $10,990 $12,309
5/31/2002 $12,197 $12,344 $10,990 $12,390
6/30/2002 $12,288 $12,499 $10,996 $12,493
7/31/2002 $12,416 $12,734 $11,009 $12,640
8/31/2002 $12,526 $12,880 $11,045 $12,746
9/30/2002 $12,636 $13,101 $11,064 $12,861
10/31/2002 $12,656 $13,092 $11,082 $12,878
11/30/2002 $12,650 $12,988 $11,082 $12,871
12/31/2002 $12,791 $13,229 $11,057 $13,013
1/31/2003 $12,822 $13,199 $11,106 $13,040
2/28/2003 $12,890 $13,348 $11,192 $13,117
3/31/2003 $12,866 $13,351 $11,259 $13,109
4/30/2003 $12,898 $13,389 $11,235 $13,141
5/31/2003 $12,893 $13,599 $11,216 $13,172
6/30/2003 $12,924 $13,577 $11,229 $13,197
7/31/2003 $12,616 $13,247 $11,241 $12,914
8/31/2003 $12,704 $13,271 $11,284 $13,000
9/30/2003 $12,888 $13,559 $11,320 $13,216
10/31/2003 $12,825 $13,426 $11,308 $13,150
11/30/2003 $12,876 $13,427 $11,278 $13,189
12/31/2003 $12,951 $13,531 $11,265 $13,280
1/31/2004 $13,023 $13,605 $11,320 $13,347
2/29/2004 $13,095 $13,734 $11,381 $13,432
3/31/2004 $13,127 $13,830 $11,455 $13,478
4/30/2004 $12,905 $13,521 $11,491 $13,254
5/31/2004 $12,875 $13,478 $11,559 $13,218
6/30/2004 $13,003 $13,512 $11,595 $13,320
7/31/2004 $13,092 $13,610 $11,577 $13,420
8/31/2004 $13,261 $13,812 $11,583 $13,597
9/30/2004 $13,264 $13,817 $11,608 $13,605
10/31/2004 $13,354 $13,902 $11,669 $13,694
11/30/2004 $13,323 $13,772 $11,675 $13,650
12/31/2004 $13,373 $13,847 $11,632 $13,717
1/31/2005 $13,444 $13,865 $11,656 $13,784
2/28/2005 $13,393 $13,788 $11,724 $13,736
3/31/2005 $13,362 $13,754 $11,815 $13,703
4/30/2005 $13,474 $13,914 $11,895 $13,829
5/31/2005 $13,563 $14,025 $11,883 $13,909
6/30/2005 $13,590 $14,071 $11,889 $13,940
7/31/2005 $13,514 $13,951 $11,944 $13,881
8/31/2005 $13,624 $14,106 $12,005 $13,992
9/30/2005 $13,547 $13,998 $12,152 $13,918
10/31/2005 $13,491 $13,939 $12,176 $13,847
11/30/2005 $13,519 $13,996 $12,078 $13,883
12/31/2005 $13,673 $14,081 $12,029 $14,032
1/31/2006 $13,700 $14,080 $12,121 $14,061
2/28/2006 $13,707 $14,082 $12,145 $14,085
3/31/2006 $13,608 $14,039 $12,213 $13,998
4/30/2006 $13,550 $14,052 $12,317 $13,950
5/31/2006 $13,494 $14,056 $12,378 $13,911
6/30/2006 $13,502 $14,081 $12,402 $13,910
7/31/2006 $13,661 $14,229 $12,439 $14,086
8/31/2006 $13,843 $14,389 $12,463 $14,281
9/30/2006 $13,938 $14,493 $12,402 $14,374
10/31/2006 $14,013 $14,562 $12,335 $14,461
11/30/2006 $14,155 $14,678 $12,317 $14,587
12/31/2006 $14,107 $14,622 $12,335 $14,562
1/31/2007 $14,095 $14,624 $12,373 $14,555
2/28/2007 $14,260 $14,807 $12,439 $14,721
3/31/2007 $14,270 $14,845 $12,552 $14,749
4/30/2007 $14,347 $14,911 $12,634 $14,815
5/31/2007 $14,244 $14,826 $12,711 $14,726
6/30/2007 $14,165 $14,846 $12,735 $14,650
7/31/2007 $14,287 $15,029 $12,732 $14,765
8/31/2007 $14,433 $15,240 $12,709 $14,916
9/30/2007 $14,511 $15,345 $12,744 $15,025
10/31/2007 $14,658 $15,437 $12,771 $15,172
11/30/2007 $14,920 $15,809 $12,847 $15,460
12/31/2007 $14,906 $15,860 $12,838 $15,476
1/31/2008 $15,147 $16,234 $12,902 $15,736
2/29/2008 $15,226 $16,411 $12,940 $15,824
3/31/2008 $15,259 $16,512 $13,052 $15,849
4/30/2008 $15,222 $16,291 $13,131 $15,811
5/31/2008 $15,114 $16,145 $13,242 $15,718
6/30/2008 $15,120 $16,208 $13,375 $15,729
7/31/2008 $15,103 $16,294 $13,445 $15,723
8/31/2008 $15,252 $16,418 $13,392 $15,844
9/30/2008 $15,307 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08
- ------- -------
1-Year +4.48%
5-Year +3.50%
10-Year +4.35%
CLASS R (1/1/02-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. INTERMEDIATE FUNDS
SECURITIES GOVERNMENT CLASSIFICATION
DATE FUND - CLASS R BOND INDEX CPI AVERAGE
- ---------- -------------- ----------------- ------- --------------
1/1/2002 $10,000 $10,000 $10,000 $10,000
1/31/2002 $10,109 $10,043 $10,023 $10,098
2/28/2002 $10,215 $10,126 $10,062 $10,206
3/31/2002 $10,098 $ 9,974 $10,119 $10,078
4/30/2002 $10,281 $10,160 $10,175 $10,268
5/31/2002 $10,343 $10,231 $10,175 $10,336
6/30/2002 $10,421 $10,359 $10,181 $10,422
7/31/2002 $10,530 $10,554 $10,192 $10,544
8/31/2002 $10,625 $10,675 $10,226 $10,633
9/30/2002 $10,704 $10,858 $10,243 $10,729
10/31/2002 $10,722 $10,851 $10,260 $10,743
11/30/2002 $10,733 $10,765 $10,260 $10,737
12/31/2002 $10,854 $10,964 $10,238 $10,855
1/31/2003 $10,866 $10,940 $10,283 $10,878
2/28/2003 $10,924 $11,063 $10,362 $10,942
3/31/2003 $10,921 $11,065 $10,424 $10,936
4/30/2003 $10,948 $11,097 $10,402 $10,962
5/31/2003 $10,945 $11,271 $10,385 $10,988
6/30/2003 $10,958 $11,252 $10,396 $11,009
7/31/2003 $10,715 $10,979 $10,407 $10,773
8/31/2003 $10,791 $10,999 $10,447 $10,845
9/30/2003 $10,948 $11,237 $10,481 $11,025
10/31/2003 $10,897 $11,127 $10,470 $10,970
11/30/2003 $10,926 $11,128 $10,441 $11,003
12/31/2003 $11,008 $11,215 $10,430 $11,078
1/31/2004 $11,053 $11,276 $10,481 $11,134
2/29/2004 $11,115 $11,383 $10,538 $11,205
3/31/2004 $11,160 $11,462 $10,606 $11,243
4/30/2004 $10,975 $11,206 $10,640 $11,057
5/31/2004 $10,950 $11,170 $10,702 $11,027
6/30/2004 $11,044 $11,199 $10,736 $11,112
7/31/2004 $11,121 $11,280 $10,719 $11,195
8/31/2004 $11,265 $11,447 $10,724 $11,343
9/30/2004 $11,286 $11,452 $10,747 $11,350
10/31/2004 $11,364 $11,522 $10,804 $11,423
11/30/2004 $11,323 $11,415 $10,809 $11,387
12/31/2004 $11,384 $11,477 $10,770 $11,443
1/31/2005 $11,445 $11,491 $10,792 $11,499
2/28/2005 $11,386 $11,427 $10,855 $11,458
3/31/2005 $11,361 $11,399 $10,939 $11,431
4/30/2005 $11,475 $11,532 $11,013 $11,536
5/31/2005 $11,534 $11,624 $11,002 $11,603
6/30/2005 $11,559 $11,662 $11,007 $11,628
7/31/2005 $11,513 $11,563 $11,058 $11,580
8/31/2005 $11,590 $11,691 $11,115 $11,672
9/30/2005 $11,544 $11,601 $11,251 $11,610
10/31/2005 $11,481 $11,552 $11,273 $11,551
11/30/2005 $11,505 $11,600 $11,183 $11,581
12/31/2005 $11,638 $11,670 $11,138 $11,705
1/31/2006 $11,663 $11,669 $11,222 $11,730
2/28/2006 $11,670 $11,671 $11,245 $11,750
3/31/2006 $11,604 $11,635 $11,307 $11,677
4/30/2006 $11,539 $11,646 $11,404 $11,637
5/31/2006 $11,510 $11,650 $11,460 $11,605
6/30/2006 $11,500 $11,671 $11,483 $11,603
7/31/2006 $11,655 $11,793 $11,517 $11,751
8/31/2006 $11,810 $11,925 $11,539 $11,913
9/30/2006 $11,892 $12,012 $11,483 $11,990
10/31/2006 $11,957 $12,069 $11,420 $12,063
11/30/2006 $12,061 $12,165 $11,404 $12,168
12/31/2006 $12,040 $12,119 $11,420 $12,148
1/31/2007 $12,031 $12,120 $11,455 $12,142
2/28/2007 $12,173 $12,272 $11,517 $12,280
3/31/2007 $12,183 $12,304 $11,622 $12,303
4/30/2007 $12,230 $12,358 $11,697 $12,359
5/31/2007 $12,164 $12,288 $11,768 $12,285
6/30/2007 $12,079 $12,304 $11,791 $12,221
7/31/2007 $12,185 $12,456 $11,788 $12,317
8/31/2007 $12,311 $12,631 $11,767 $12,443
9/30/2007 $12,398 $12,718 $11,799 $12,534
10/31/2007 $12,504 $12,794 $11,824 $12,657
11/30/2007 $12,749 $13,103 $11,895 $12,897
12/31/2007 $12,739 $13,145 $11,887 $12,910
1/31/2008 $12,944 $13,455 $11,946 $13,127
2/29/2008 $13,014 $13,601 $11,980 $13,200
3/31/2008 $13,024 $13,685 $12,084 $13,222
4/30/2008 $13,014 $13,502 $12,157 $13,190
5/31/2008 $12,923 $13,381 $12,260 $13,112
6/30/2008 $12,930 $13,433 $12,383 $13,121
7/31/2008 $12,917 $13,504 $12,448 $13,116
8/31/2008 $13,025 $13,608 $12,399 $13,217
9/30/2008 $13,093 $13,674 $12,382 $13,227
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08
- ------- -------
1-Year +5.61%
5-Year +3.64%
Since Inception (1/1/02) +4.08%
46 | Annual Report
Performance Summary (CONTINUED)
ADVISOR CLASS (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA
GOVERNMENT U.S. INTERMEDIATE FUNDS
SECURITIES FUND GOVERNMENT CLASSIFICATION
DATE ADVISOR - CLASS BOND INDEX CPI AVERAGE
- ---------- --------------- ----------------- ------- --------------
10/1/1998 $10,000 $10,000 $10,000 $10,000
10/31/1998 $ 9,939 $10,017 $10,024 $ 9,949
11/30/1998 $10,008 $ 9,986 $10,024 $10,003
12/31/1998 $10,048 $10,025 $10,018 $10,040
1/31/1999 $10,117 $10,069 $10,043 $10,099
2/28/1999 $10,040 $ 9,931 $10,055 $10,017
3/31/1999 $10,096 $ 9,997 $10,086 $10,079
4/30/1999 $10,152 $10,024 $10,159 $10,118
5/31/1999 $10,074 $ 9,963 $10,159 $10,050
6/30/1999 $10,010 $ 9,977 $10,159 $ 9,994
7/31/1999 $ 9,946 $ 9,979 $10,189 $ 9,935
8/31/1999 $ 9,940 $ 9,993 $10,214 $ 9,922
9/30/1999 $10,116 $10,078 $10,263 $10,075
10/31/1999 $10,171 $10,098 $10,281 $10,110
11/30/1999 $10,164 $10,105 $10,287 $10,117
12/31/1999 $10,126 $10,074 $10,287 $10,069
1/31/2000 $10,058 $10,040 $10,318 $ 9,992
2/29/2000 $10,160 $10,123 $10,379 $10,107
3/31/2000 $10,311 $10,239 $10,465 $10,259
4/30/2000 $10,304 $10,234 $10,471 $10,242
5/31/2000 $10,346 $10,262 $10,483 $10,279
6/30/2000 $10,517 $10,425 $10,538 $10,457
7/31/2000 $10,560 $10,494 $10,562 $10,503
8/31/2000 $10,717 $10,612 $10,562 $10,653
9/30/2000 $10,826 $10,704 $10,617 $10,745
10/31/2000 $10,903 $10,778 $10,636 $10,811
11/30/2000 $11,047 $10,936 $10,642 $10,969
12/31/2000 $11,224 $11,129 $10,636 $11,129
1/31/2001 $11,386 $11,277 $10,703 $11,301
2/28/2001 $11,432 $11,381 $10,746 $11,371
3/31/2001 $11,511 $11,463 $10,770 $11,437
4/30/2001 $11,523 $11,427 $10,813 $11,419
5/31/2001 $11,586 $11,474 $10,862 $11,492
6/30/2001 $11,650 $11,511 $10,880 $11,529
7/31/2001 $11,851 $11,726 $10,850 $11,757
8/31/2001 $11,933 $11,830 $10,850 $11,845
9/30/2001 $12,085 $12,082 $10,899 $12,015
10/31/2001 $12,253 $12,271 $10,862 $12,181
11/30/2001 $12,158 $12,124 $10,844 $12,053
12/31/2001 $12,098 $12,066 $10,801 $11,988
1/31/2002 $12,195 $12,118 $10,825 $12,105
2/28/2002 $12,345 $12,218 $10,868 $12,235
3/31/2002 $12,192 $12,034 $10,929 $12,082
4/30/2002 $12,417 $12,259 $10,990 $12,309
5/31/2002 $12,497 $12,344 $10,990 $12,390
6/30/2002 $12,597 $12,499 $10,996 $12,493
7/31/2002 $12,733 $12,734 $11,009 $12,640
8/31/2002 $12,851 $12,880 $11,045 $12,746
9/30/2002 $12,971 $13,101 $11,064 $12,861
10/31/2002 $12,998 $13,092 $11,082 $12,878
11/30/2002 $12,999 $12,988 $11,082 $12,871
12/31/2002 $13,150 $13,229 $11,057 $13,013
1/31/2003 $13,188 $13,199 $11,106 $13,040
2/28/2003 $13,265 $13,348 $11,192 $13,117
3/31/2003 $13,266 $13,351 $11,259 $13,109
4/30/2003 $13,286 $13,389 $11,235 $13,141
5/31/2003 $13,306 $13,599 $11,216 $13,172
6/30/2003 $13,327 $13,577 $11,229 $13,197
7/31/2003 $13,018 $13,247 $11,241 $12,914
8/31/2003 $13,117 $13,271 $11,284 $13,000
9/30/2003 $13,333 $13,559 $11,320 $13,216
10/31/2003 $13,275 $13,426 $11,308 $13,150
11/30/2003 $13,315 $13,427 $11,278 $13,189
12/31/2003 $13,400 $13,531 $11,265 $13,280
1/31/2004 $13,481 $13,605 $11,320 $13,347
2/29/2004 $13,562 $13,734 $11,381 $13,432
3/31/2004 $13,603 $13,830 $11,455 $13,478
4/30/2004 $13,382 $13,521 $11,491 $13,254
5/31/2004 $13,379 $13,478 $11,559 $13,218
6/30/2004 $13,498 $13,512 $11,595 $13,320
7/31/2004 $13,597 $13,610 $11,577 $13,420
8/31/2004 $13,779 $13,812 $11,583 $13,597
9/30/2004 $13,789 $13,817 $11,608 $13,605
10/31/2004 $13,910 $13,902 $11,669 $13,694
11/30/2004 $13,865 $13,772 $11,675 $13,650
12/31/2004 $13,946 $13,847 $11,632 $13,717
1/31/2005 $14,027 $13,865 $11,656 $13,784
2/28/2005 $13,960 $13,788 $11,724 $13,736
3/31/2005 $13,936 $13,754 $11,815 $13,703
4/30/2005 $14,060 $13,914 $11,895 $13,829
5/31/2005 $14,159 $14,025 $11,883 $13,909
6/30/2005 $14,195 $14,071 $11,889 $13,940
7/31/2005 $14,145 $13,951 $11,944 $13,881
8/31/2005 $14,246 $14,106 $12,005 $13,992
9/30/2005 $14,195 $13,998 $12,152 $13,918
10/31/2005 $14,123 $13,939 $12,176 $13,847
11/30/2005 $14,159 $13,996 $12,078 $13,883
12/31/2005 $14,328 $14,081 $12,029 $14,032
1/31/2006 $14,364 $14,080 $12,121 $14,061
2/28/2006 $14,379 $14,082 $12,145 $14,085
3/31/2006 $14,283 $14,039 $12,213 $13,998
4/30/2006 $14,231 $14,052 $12,317 $13,950
5/31/2006 $14,202 $14,056 $12,378 $13,911
6/30/2006 $14,195 $14,081 $12,402 $13,910
7/31/2006 $14,391 $14,229 $12,439 $14,086
8/31/2006 $14,589 $14,389 $12,463 $14,281
9/30/2006 $14,696 $14,493 $12,402 $14,374
10/31/2006 $14,783 $14,562 $12,335 $14,461
11/30/2006 $14,917 $14,678 $12,317 $14,587
12/31/2006 $14,897 $14,622 $12,335 $14,562
1/31/2007 $14,892 $14,624 $12,373 $14,555
2/28/2007 $15,073 $14,807 $12,439 $14,721
3/31/2007 $15,091 $14,845 $12,552 $14,749
4/30/2007 $15,156 $14,911 $12,634 $14,815
5/31/2007 $15,080 $14,826 $12,711 $14,726
6/30/2007 $14,981 $14,846 $12,735 $14,650
7/31/2007 $15,119 $15,029 $12,732 $14,765
8/31/2007 $15,281 $15,240 $12,709 $14,916
9/30/2007 $15,395 $15,345 $12,744 $15,025
10/31/2007 $15,533 $15,437 $12,771 $15,172
11/30/2007 $15,842 $15,809 $12,847 $15,460
12/31/2007 $15,836 $15,860 $12,838 $15,476
1/31/2008 $16,098 $16,234 $12,902 $15,736
2/29/2008 $16,190 $16,411 $12,940 $15,824
3/31/2008 $16,234 $16,512 $13,052 $15,849
4/30/2008 $16,203 $16,291 $13,131 $15,811
5/31/2008 $16,098 $16,145 $13,242 $15,718
6/30/2008 $16,113 $16,208 $13,375 $15,729
7/31/2008 $16,104 $16,294 $13,445 $15,723
8/31/2008 $16,245 $16,418 $13,392 $15,844
9/30/2008 $16,336 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08
- ------------- -------
1-Year +6.11%
5-Year +4.15%
10-Year +5.03%
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 9/30/08.
(4.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/08.
(5.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(6.) Sources: (C) 2008 Morningstar; Lipper Inc. The BC U.S. Government:
Intermediate Index is the intermediate component of the BC U.S. Government
Index, which covers securities issued by the U.S. government (i.e.,
securities in the BC U.S. Treasury and Agency Indexes), including public
obligations of the U.S. Treasury with a remaining maturity of one year or
more and publicly issued debt of U.S. government agencies, quasi-federal
corporations, and corporate or foreign debt guaranteed by the U.S.
government. 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 9/30/08, there were 63 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. The Consumer Price
Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a
commonly used measure of the inflation rate.
Annual Report | 47
Your Fund's Expenses
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
VALUE VALUE PERIOD*
4/1/08 9/30/08 4/1/08-9/30/08
--------- --------- --------------
CLASS A
Actual $1,000 $1,005.70 $3.61
Hypothetical (5% return before expenses) $1,000 $1,021.40 $3.64
CLASS B
Actual $1,000 $1,004.60 $6.21
Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26
CLASS C
Actual $1,000 $1,003.10 $6.21
Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26
CLASS R
Actual $1,000 $1,005.30 $5.46
Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.50
ADVISOR CLASS
Actual $1,000 $1,006.30 $2.96
Hypothetical (5% return before expenses) $1,000 $1,022.05 $2.98
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.72%; B: 1.24%; C: 1.24%; R: 1.09%; and
Advisor: 0.59%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
Annual Report | 49
Franklin Utilities Fund
YOUR FUND'S GOALS 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 9/30/08
(PERFORMANCE GRAPH)
Electric Utilities 51.8%
Multi-Utilities 39.0%
Oil, Gas & Consumable Fuels 3.0%
Diversified Telecommunication Services 2.7%
Gas Utilities 1.5%
Independent Power Producers & Energy Traders 1.2%
Water Utilities 0.5%
Short-Term Investments & Other Net Assets 0.3%
This annual report for Franklin Utilities Fund covers the fiscal year ended
September 30, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Utilities Fund - Class A had a -11.63%
cumulative total return. The Fund performed better than its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return for the
same period.(1) The Fund also performed better than the -14.25% total return of
its narrow benchmark, the S&P 500 Utilities Index.(2) You can find the Fund's
long-term performance data in the Performance Summary beginning on page 52.
INVESTMENT STRATEGY
We search for the best return opportunities available in the global utilities
arena with a specific focus on the U.S. electricity sector. Generally, we look
for companies producing a high percentage of earnings from regulated utility
franchise operations.
MANAGER'S DISCUSSION
In a difficult year for equities, utility stocks as a sector fared slightly
better than the overall market, as they are generally considered a defensive
investment.
(1.) (C) 2008 Morningstar. All Rights Reserved. The information contained
herein: (1) is proprietary to Morningstar and/or its content providers; (2)
may not be copied or distributed; and (3) is not warranted to be accurate,
complete or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information. 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.
(2.) Source: (C) 2008 Morningstar. The S&P 500 Utilities Index is a market
capitalization-weighted index that includes electric utility stocks in the
S&P 500.
The indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 103.
50 | Annual Report
A significant detractor from performance was Constellation Energy Group, an
independent power producer and energy trader. Constellation's share price
dropped after independent rating agency Standard & Poor's downgraded the
company's debt. We sold Constellation by period-end. Some electric utilities did
not fare as well as others and were among major detractors during the review
period. Entergy, which provides electricity to four southern states, and Exelon,
which operates in Illinois and Pennsylvania, weighed on Fund performance.
Among the most significant contributors to Fund performance during the year
under review was Southern Company, one of the largest electricity distributors
in the U.S. Other notable contributors included FirstEnergy, which appeared well
positioned for future carbon initiatives, and Washington state-based
multi-utility company Puget Energy.
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
(PHOTO OF JOHN C. KOHLI)
/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, 2008, 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.
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
9/30/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Entergy Corp. 6.8%
ELECTRIC UTILITIES
Exelon Corp. 6.0%
ELECTRIC UTILITIES
FirstEnergy Corp. 5.0%
ELECTRIC UTILITIES
Dominion Resources Inc. 4.3%
MULTI-UTILITIES
The Southern Co. 4.1%
ELECTRIC UTILITIES
PG&E Corp. 3.9%
MULTI-UTILITIES
FPL Group Inc. 3.7%
ELECTRIC UTILITIES
Sempra Energy 3.5%
MULTI-UTILITIES
PPL Corp. 3.2%
ELECTRIC UTILITIES
Public Service Enterprise Group Inc. 3.1%
MULTI-UTILITIES
Annual Report | 51
Performance Summary as of 9/30/08
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 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.66 $11.92 $14.58
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.4040
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $1.1391
CLASS B (SYMBOL: FRUBX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.65 $11.91 $14.56
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.3310
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $1.0661
CLASS C (SYMBOL: FRUSX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.65 $11.88 $14.53
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.3320
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $1.0671
CLASS R (SYMBOL: FRURX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.65 $11.89 $14.54
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.3532
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $1.0883
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$2.66 $11.98 $14.64
DISTRIBUTIONS (10/1/07-9/30/08)
Dividend Income $0.4248
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $1.1599
52 | 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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) -11.63% +75.94% +95.45%
Average Annual Total Return(2) -15.40% +11.00% + 6.47%
Value of $10,000 Investment(3) $ 8,460 $16,848 $18,721
Distribution Rate(4) 3.24%
30-Day Standardized Yield(5) 3.05%
Total Annual Operating Expenses(6) 0.75%
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------- ------- ------- ------------------
Cumulative Total Return(1) -12.04% +71.49% +84.82%
Average Annual Total Return(2) -15.31% +11.13% + 6.50%
Value of $10,000 Investment(3) $ 8,469 $16,949 $18,482
Distribution Rate(4) 2.83%
30-Day Standardized Yield(5) 2.66%
Total Annual Operating Expenses(6) 1.26%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) -12.06% +71.60% +85.81%
Average Annual Total Return(2) -12.88% +11.40% + 6.39%
Value of $10,000 Investment(3) $ 8,712 $17,160 $18,581
Distribution Rate(4) 2.84%
30-Day Standardized Yield(5) 2.66%
Total Annual Operating Expenses(6) 1.26%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- ------- ------- ------------------
Cumulative Total Return(1) -11.92% +72.95% +68.44%
Average Annual Total Return(2) -11.92% +11.58% + 8.04%
Value of $10,000 Investment(3) $ 8,808 $17,295 $16,844
Distribution Rate(4) 3.01%
30-Day Standardized Yield(5) 2.82%
Total Annual Operating Expenses(6) 1.11%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- ------------------
Cumulative Total Return(1) -11.45% +77.14% +98.34%
Average Annual Total Return(2) -11.45% +12.12% + 7.09%
Value of $10,000 Investment(3) $ 8,855 $17,714 $ 19,834
Distribution Rate(4) 3.54%
30-Day Standardized Yield(5) 3.34%
Total Annual Operating Expenses(6) 0.61%
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 (800) 342-5236.
Annual Report | 53
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 (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - CLASS A INDEX UTILITIES INDEX
- ---------- ------------------ ------- ---------------
10/1/1998 $ 9,578 $10,000 $10,000
10/31/1998 $ 9,401 $10,813 $ 9,809
11/30/1998 $ 9,503 $11,469 $ 9,954
12/31/1998 $ 9,738 $12,130 $10,258
1/31/1999 $ 9,219 $12,637 $ 9,809
2/28/1999 $ 8,780 $12,244 $ 9,435
3/31/1999 $ 8,630 $12,734 $ 9,286
4/30/1999 $ 9,173 $13,227 $10,081
5/31/1999 $ 9,592 $12,915 $10,717
6/30/1999 $ 9,251 $13,632 $10,342
7/31/1999 $ 9,116 $13,206 $10,215
8/31/1999 $ 9,098 $13,141 $10,319
9/30/1999 $ 8,760 $12,781 $ 9,823
10/31/1999 $ 8,916 $13,589 $ 9,965
11/30/1999 $ 8,395 $13,866 $ 9,225
12/31/1999 $ 8,277 $14,682 $ 9,316
1/31/2000 $ 8,749 $13,945 $10,327
2/29/2000 $ 8,103 $13,681 $ 9,690
3/31/2000 $ 8,379 $15,019 $10,012
4/30/2000 $ 8,877 $14,567 $10,792
5/31/2000 $ 8,994 $14,268 $11,264
6/30/2000 $ 8,590 $14,620 $10,594
7/31/2000 $ 8,946 $14,391 $11,344
8/31/2000 $ 9,895 $15,285 $12,897
9/30/2000 $10,886 $14,478 $14,082
10/31/2000 $10,836 $14,417 $13,539
11/30/2000 $11,226 $13,280 $13,384
12/31/2000 $11,721 $13,345 $14,644
1/31/2001 $10,517 $13,819 $13,221
2/28/2001 $11,134 $12,559 $13,702
3/31/2001 $11,279 $11,763 $13,609
4/30/2001 $11,749 $12,677 $14,401
5/31/2001 $11,810 $12,762 $13,942
6/30/2001 $11,215 $12,452 $12,831
7/31/2001 $10,823 $12,329 $12,240
8/31/2001 $10,967 $11,557 $11,907
9/30/2001 $10,447 $10,624 $10,528
10/31/2001 $10,458 $10,827 $10,490
11/30/2001 $10,364 $11,657 $ 9,927
12/31/2001 $10,773 $11,759 $10,186
1/31/2002 $10,640 $11,588 $ 9,600
2/28/2002 $10,607 $11,364 $ 9,388
3/31/2002 $11,213 $11,792 $10,531
4/30/2002 $11,134 $11,077 $10,335
5/31/2002 $10,865 $10,995 $ 9,417
6/30/2002 $10,383 $10,212 $ 8,749
7/31/2002 $ 9,487 $ 9,416 $ 7,526
8/31/2002 $ 9,861 $ 9,478 $ 7,808
9/30/2002 $ 9,143 $ 8,448 $ 6,800
10/31/2002 $ 9,143 $ 9,191 $ 6,676
11/30/2002 $ 9,326 $ 9,732 $ 6,852
12/31/2002 $ 9,644 $ 9,160 $ 7,131
1/31/2003 $ 9,248 $ 8,920 $ 6,913
2/28/2003 $ 8,992 $ 8,786 $ 6,585
3/31/2003 $ 9,313 $ 8,871 $ 6,908
4/30/2003 $ 9,821 $ 9,602 $ 7,505
5/31/2003 $10,684 $10,109 $ 8,288
6/30/2003 $10,720 $10,238 $ 8,382
7/31/2003 $10,230 $10,418 $ 7,841
8/31/2003 $10,242 $10,621 $ 7,990
9/30/2003 $10,640 $10,509 $ 8,346
10/31/2003 $10,834 $11,103 $ 8,434
11/30/2003 $10,943 $11,201 $ 8,443
12/31/2003 $11,506 $11,789 $ 9,010
1/31/2004 $11,701 $12,005 $ 9,201
2/29/2004 $12,007 $12,172 $ 9,381
3/31/2004 $12,093 $11,989 $ 9,476
4/30/2004 $11,735 $11,800 $ 9,127
5/31/2004 $11,871 $11,962 $ 9,211
6/30/2004 $12,060 $12,194 $ 9,355
7/31/2004 $12,185 $11,790 $ 9,509
8/31/2004 $12,672 $11,838 $ 9,900
9/30/2004 $12,811 $11,965 $ 9,985
10/31/2004 $13,341 $12,148 $10,472
11/30/2004 $13,719 $12,641 $10,913
12/31/2004 $14,168 $13,070 $11,201
1/31/2005 $14,296 $12,752 $11,430
2/28/2005 $14,411 $13,020 $11,677
3/31/2005 $14,450 $12,789 $11,808
4/30/2005 $14,772 $12,546 $12,176
5/31/2005 $15,043 $12,946 $12,198
6/30/2005 $15,706 $12,964 $12,909
7/31/2005 $15,953 $13,446 $13,198
8/31/2005 $16,096 $13,324 $13,318
9/30/2005 $16,503 $13,432 $13,849
10/31/2005 $15,559 $13,208 $12,973
11/30/2005 $15,598 $13,707 $12,946
12/31/2005 $15,691 $13,712 $13,091
1/31/2006 $16,104 $14,075 $13,412
2/28/2006 $16,370 $14,113 $13,562
3/31/2006 $15,848 $14,289 $12,939
4/30/2006 $16,023 $14,481 $13,145
5/31/2006 $16,211 $14,064 $13,353
6/30/2006 $16,563 $14,083 $13,675
7/31/2006 $17,309 $14,170 $14,347
8/31/2006 $17,756 $14,507 $14,755
9/30/2006 $17,607 $14,881 $14,510
10/31/2006 $18,522 $15,366 $15,295
11/30/2006 $19,151 $15,658 $15,660
12/31/2006 $19,439 $15,878 $15,838
1/31/2007 $19,410 $16,118 $15,792
2/28/2007 $20,136 $15,803 $16,626
3/31/2007 $20,954 $15,979 $17,309
4/30/2007 $21,613 $16,687 $18,037
5/31/2007 $21,799 $17,269 $18,163
6/30/2007 $20,763 $16,983 $17,243
7/31/2007 $20,012 $16,456 $16,597
8/31/2007 $20,488 $16,703 $16,977
9/30/2007 $21,185 $17,327 $17,580
10/31/2007 $22,507 $17,603 $18,753
11/30/2007 $22,522 $16,867 $18,858
12/31/2007 $22,631 $16,750 $18,907
1/31/2008 $21,096 $15,745 $17,614
2/29/2008 $20,067 $15,234 $16,749
3/31/2008 $20,300 $15,168 $17,028
4/30/2008 $21,336 $15,907 $17,928
5/31/2008 $22,017 $16,113 $18,529
6/30/2008 $21,553 $14,754 $18,386
7/31/2008 $20,649 $14,630 $17,257
8/31/2008 $20,571 $14,842 $17,015
9/30/2008 $18,721 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08
- ------- -------
1-Year -15.40%
5-Year +11.00%
10-Year +6.47%
CLASS B (1/1/99-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - CLASS B INDEX UTILITIES INDEX
- ---------- ------------------ ------- ---------------
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 $ 9,053
4/30/1999 $ 9,416 $10,905 $ 9,827
5/31/1999 $ 9,845 $10,647 $10,447
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 $12,382 $ 9,761
4/30/2000 $ 9,071 $12,010 $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 $12,602 $12,573
9/30/2000 $11,097 $11,936 $13,728
10/31/2000 $11,035 $11,886 $13,198
11/30/2000 $11,433 $10,949 $13,047
12/31/2000 $11,932 $11,002 $14,275
1/31/2001 $10,708 $11,393 $12,888
2/28/2001 $11,325 $10,354 $13,357
3/31/2001 $11,468 $ 9,698 $13,267
4/30/2001 $11,936 $10,452 $14,039
5/31/2001 $11,998 $10,522 $13,592
6/30/2001 $11,390 $10,266 $12,508
7/31/2001 $10,982 $10,165 $11,932
8/31/2001 $11,128 $ 9,528 $11,607
9/30/2001 $10,588 $ 8,759 $10,263
10/31/2001 $10,599 $ 8,926 $10,227
11/30/2001 $10,504 $ 9,611 $ 9,678
12/31/2001 $10,916 $ 9,695 $ 9,930
1/31/2002 $10,770 $ 9,553 $ 9,358
2/28/2002 $10,737 $ 9,369 $ 9,152
3/31/2002 $11,336 $ 9,721 $10,266
4/30/2002 $11,257 $ 9,132 $10,075
5/31/2002 $10,985 $ 9,065 $ 9,180
6/30/2002 $10,498 $ 8,419 $ 8,528
7/31/2002 $ 9,570 $ 7,763 $ 7,336
8/31/2002 $ 9,948 $ 7,814 $ 7,612
9/30/2002 $ 9,225 $ 6,965 $ 6,628
10/31/2002 $ 9,225 $ 7,578 $ 6,508
11/30/2002 $ 9,410 $ 8,024 $ 6,680
12/31/2002 $ 9,719 $ 7,552 $ 6,952
1/31/2003 $ 9,320 $ 7,354 $ 6,739
2/28/2003 $ 9,062 $ 7,244 $ 6,419
3/31/2003 $ 9,375 $ 7,314 $ 6,734
4/30/2003 $ 9,875 $ 7,917 $ 7,317
5/31/2003 $10,743 $ 8,334 $ 8,080
6/30/2003 $10,782 $ 8,440 $ 8,171
7/31/2003 $10,289 $ 8,589 $ 7,643
8/31/2003 $10,289 $ 8,756 $ 7,789
9/30/2003 $10,690 $ 8,664 $ 8,136
10/31/2003 $10,873 $ 9,154 $ 8,222
11/30/2003 $10,982 $ 9,235 $ 8,231
12/31/2003 $11,533 $ 9,719 $ 8,783
1/31/2004 $11,730 $ 9,898 $ 8,969
2/29/2004 $12,036 $10,035 $ 9,145
3/31/2004 $12,122 $ 9,884 $ 9,237
4/30/2004 $11,750 $ 9,728 $ 8,897
5/31/2004 $11,874 $ 9,862 $ 8,980
6/30/2004 $12,061 $10,053 $ 9,120
7/31/2004 $12,186 $ 9,720 $ 9,270
8/31/2004 $12,674 $ 9,759 $ 9,651
9/30/2004 $12,798 $ 9,865 $ 9,734
10/31/2004 $13,327 $10,016 $10,209
11/30/2004 $13,693 $10,421 $10,639
12/31/2004 $14,146 $10,775 $10,920
1/31/2005 $14,261 $10,513 $11,143
2/28/2005 $14,375 $10,734 $11,383
3/31/2005 $14,408 $10,544 $11,511
4/30/2005 $14,716 $10,344 $11,870
5/31/2005 $14,973 $10,673 $11,892
6/30/2005 $15,635 $10,688 $12,584
7/31/2005 $15,881 $11,085 $12,866
8/31/2005 $16,010 $10,984 $12,983
9/30/2005 $16,395 $11,073 $13,501
10/31/2005 $15,469 $10,889 $12,647
11/30/2005 $15,495 $11,301 $12,621
12/31/2005 $15,580 $11,304 $12,761
1/31/2006 $15,991 $11,604 $13,075
2/28/2006 $16,243 $11,635 $13,220
3/31/2006 $15,717 $11,780 $12,614
4/30/2006 $15,890 $11,938 $12,814
5/31/2006 $16,063 $11,595 $13,018
6/30/2006 $16,393 $11,611 $13,331
7/31/2006 $17,132 $11,682 $13,986
8/31/2006 $17,575 $11,960 $14,384
9/30/2006 $17,419 $12,268 $14,145
10/31/2006 $18,312 $12,668 $14,910
11/30/2006 $18,934 $12,909 $15,266
12/31/2006 $19,195 $13,090 $15,440
1/31/2007 $19,166 $13,288 $15,394
2/28/2007 $19,883 $13,028 $16,208
3/31/2007 $20,690 $13,174 $16,874
4/30/2007 $21,342 $13,757 $17,584
5/31/2007 $21,526 $14,237 $17,706
6/30/2007 $20,501 $14,001 $16,809
7/31/2007 $19,761 $13,567 $16,179
8/31/2007 $20,231 $13,770 $16,550
9/30/2007 $20,919 $14,285 $17,137
10/31/2007 $22,224 $14,512 $18,281
11/30/2007 $22,238 $13,906 $18,384
12/31/2007 $22,344 $13,809 $18,431
1/31/2008 $20,829 $12,981 $17,171
2/29/2008 $19,813 $12,559 $16,328
3/31/2008 $20,043 $12,505 $16,600
4/30/2008 $21,067 $13,114 $17,477
5/31/2008 $21,739 $13,284 $18,063
6/30/2008 $21,280 $12,164 $17,923
7/31/2008 $20,389 $12,062 $16,822
8/31/2008 $20,311 $12,236 $16,587
9/30/2008 $18,482 $11,146 $14,695
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08
- ------- -------
1-Year -15.31%
5-Year +11.13%
Since Inception (1/1/99) +6.50%
54 | Annual Report
Performance Summary (CONTINUED)
CLASS C (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - CLASS C INDEX UTILITIES INDEX
- ---------- ------------------ ------- ---------------
10/1/1998 $10,000 $10,000 $10,000
10/31/1998 $ 9,806 $10,813 $ 9,809
11/30/1998 $ 9,903 $11,469 $ 9,954
12/31/1998 $10,146 $12,130 $10,258
1/31/1999 $ 9,605 $12,637 $ 9,809
2/28/1999 $ 9,147 $12,244 $ 9,435
3/31/1999 $ 8,989 $12,734 $ 9,286
4/30/1999 $ 9,545 $13,227 $10,081
5/31/1999 $ 9,981 $12,915 $10,717
6/30/1999 $ 9,616 $13,632 $10,342
7/31/1999 $ 9,466 $13,206 $10,215
8/31/1999 $ 9,447 $13,141 $10,319
9/30/1999 $ 9,094 $12,781 $ 9,823
10/31/1999 $ 9,255 $13,589 $ 9,965
11/30/1999 $ 8,704 $13,866 $ 9,225
12/31/1999 $ 8,579 $14,682 $ 9,316
1/31/2000 $ 9,068 $13,945 $10,327
2/29/2000 $ 8,389 $13,681 $ 9,690
3/31/2000 $ 8,682 $15,019 $10,012
4/30/2000 $ 9,188 $14,567 $10,792
5/31/2000 $ 9,310 $14,268 $11,264
6/30/2000 $ 8,881 $14,620 $10,594
7/31/2000 $ 9,249 $14,391 $11,344
8/31/2000 $10,221 $15,285 $12,897
9/30/2000 $11,244 $14,478 $14,082
10/31/2000 $11,182 $14,417 $13,539
11/30/2000 $11,585 $13,280 $13,384
12/31/2000 $12,091 $13,345 $14,644
1/31/2001 $10,849 $13,819 $13,221
2/28/2001 $11,475 $12,559 $13,702
3/31/2001 $11,621 $11,763 $13,609
4/30/2001 $12,095 $12,677 $14,401
5/31/2001 $12,158 $12,762 $13,942
6/30/2001 $11,541 $12,452 $12,831
7/31/2001 $11,127 $12,329 $12,240
8/31/2001 $11,276 $11,557 $11,907
9/30/2001 $10,738 $10,624 $10,528
10/31/2001 $10,749 $10,827 $10,490
11/30/2001 $10,642 $11,657 $ 9,927
12/31/2001 $11,059 $11,759 $10,186
1/31/2002 $10,923 $11,588 $ 9,600
2/28/2002 $10,889 $11,364 $ 9,388
3/31/2002 $11,497 $11,792 $10,531
4/30/2002 $11,405 $11,077 $10,335
5/31/2002 $11,129 $10,995 $ 9,417
6/30/2002 $10,634 $10,212 $ 8,749
7/31/2002 $ 9,704 $ 9,416 $ 7,526
8/31/2002 $10,088 $ 9,478 $ 7,808
9/30/2002 $ 9,353 $ 8,448 $ 6,800
10/31/2002 $ 9,341 $ 9,191 $ 6,676
11/30/2002 $ 9,541 $ 9,732 $ 6,852
12/31/2002 $ 9,855 $ 9,160 $ 7,131
1/31/2003 $ 9,450 $ 8,920 $ 6,913
2/28/2003 $ 9,188 $ 8,786 $ 6,585
3/31/2003 $ 9,507 $ 8,871 $ 6,908
4/30/2003 $10,014 $ 9,602 $ 7,505
5/31/2003 $10,896 $10,109 $ 8,288
6/30/2003 $10,924 $10,238 $ 8,382
7/31/2003 $10,424 $10,418 $ 7,841
8/31/2003 $10,436 $10,621 $ 7,990
9/30/2003 $10,829 $10,509 $ 8,346
10/31/2003 $11,014 $11,103 $ 8,434
11/30/2003 $11,137 $11,201 $ 8,443
12/31/2003 $11,685 $11,789 $ 9,010
1/31/2004 $11,884 $12,005 $ 9,201
2/29/2004 $12,196 $12,172 $ 9,381
3/31/2004 $12,283 $11,989 $ 9,476
4/30/2004 $11,918 $11,800 $ 9,127
5/31/2004 $12,031 $11,962 $ 9,211
6/30/2004 $12,221 $12,194 $ 9,355
7/31/2004 $12,348 $11,790 $ 9,509
8/31/2004 $12,843 $11,838 $ 9,900
9/30/2004 $12,969 $11,965 $ 9,985
10/31/2004 $13,507 $12,148 $10,472
11/30/2004 $13,878 $12,641 $10,913
12/31/2004 $14,338 $13,070 $11,201
1/31/2005 $14,454 $12,752 $11,430
2/28/2005 $14,571 $13,020 $11,677
3/31/2005 $14,603 $12,789 $11,808
4/30/2005 $14,917 $12,546 $12,176
5/31/2005 $15,178 $12,946 $12,198
6/30/2005 $15,849 $12,964 $12,909
7/31/2005 $16,086 $13,446 $13,198
8/31/2005 $16,230 $13,324 $13,318
9/30/2005 $16,621 $13,432 $13,849
10/31/2005 $15,668 $13,208 $12,973
11/30/2005 $15,707 $13,707 $12,946
12/31/2005 $15,795 $13,712 $13,091
1/31/2006 $16,199 $14,075 $13,412
2/28/2006 $16,468 $14,113 $13,562
3/31/2006 $15,934 $14,289 $12,939
4/30/2006 $16,110 $14,481 $13,145
5/31/2006 $16,272 $14,064 $13,353
6/30/2006 $16,622 $14,083 $13,675
7/31/2006 $17,372 $14,170 $14,347
8/31/2006 $17,809 $14,507 $14,755
9/30/2006 $17,650 $14,881 $14,510
10/31/2006 $18,557 $15,366 $15,295
11/30/2006 $19,189 $15,658 $15,660
12/31/2006 $19,455 $15,878 $15,838
1/31/2007 $19,426 $16,118 $15,792
2/28/2007 $20,155 $15,803 $16,626
3/31/2007 $20,952 $15,979 $17,309
4/30/2007 $21,613 $16,687 $18,037
5/31/2007 $21,786 $17,269 $18,163
6/30/2007 $20,748 $16,983 $17,243
7/31/2007 $19,982 $16,456 $16,597
8/31/2007 $20,459 $16,703 $16,977
9/30/2007 $21,131 $17,327 $17,580
10/31/2007 $22,455 $17,603 $18,753
11/30/2007 $22,455 $16,867 $18,858
12/31/2007 $22,547 $16,750 $18,907
1/31/2008 $21,013 $15,745 $17,614
2/29/2008 $19,984 $15,234 $16,749
3/31/2008 $20,206 $15,168 $17,028
4/30/2008 $21,226 $15,907 $17,928
5/31/2008 $21,890 $16,113 $18,529
6/30/2008 $21,415 $14,754 $18,386
7/31/2008 $20,513 $14,630 $17,257
8/31/2008 $20,436 $14,842 $17,015
9/30/2008 $18,581 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08
- ------- -------
1-Year -12.88%
5-Year +11.40%
10-Year +6.39%
CLASS R (1/1/02-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - CLASS R INDEX UTILITIES INDEX
- ---------- ------------------ ------- ---------------
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 $ 9,350 $ 9,245
6/30/2002 $ 9,543 $ 8,684 $ 8,588
7/31/2002 $ 8,720 $ 8,007 $ 7,388
8/31/2002 $ 9,053 $ 8,060 $ 7,666
9/30/2002 $ 8,399 $ 7,184 $ 6,675
10/31/2002 $ 8,399 $ 7,816 $ 6,554
11/30/2002 $ 8,568 $ 8,276 $ 6,727
12/31/2002 $ 8,852 $ 7,790 $ 7,001
1/31/2003 $ 8,489 $ 7,585 $ 6,786
2/28/2003 $ 8,254 $ 7,472 $ 6,465
3/31/2003 $ 8,546 $ 7,544 $ 6,781
4/30/2003 $ 9,001 $ 8,166 $ 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 $ 8,859 $ 7,697
8/31/2003 $ 9,380 $ 9,032 $ 7,844
9/30/2003 $ 9,739 $ 8,936 $ 8,194
10/31/2003 $ 9,917 $ 9,442 $ 8,280
11/30/2003 $10,017 $ 9,525 $ 8,289
12/31/2003 $10,524 $10,025 $ 8,845
1/31/2004 $10,692 $10,209 $ 9,032
2/29/2004 $10,971 $10,351 $ 9,209
3/31/2004 $11,053 $10,195 $ 9,302
4/30/2004 $10,725 $10,035 $ 8,960
5/31/2004 $10,838 $10,172 $ 9,043
6/30/2004 $11,013 $10,370 $ 9,184
7/31/2004 $11,127 $10,026 $ 9,335
8/31/2004 $11,572 $10,067 $ 9,719
9/30/2004 $11,690 $10,175 $ 9,802
10/31/2004 $12,174 $10,331 $10,280
11/30/2004 $12,508 $10,749 $10,714
12/31/2004 $12,922 $11,115 $10,996
1/31/2005 $13,028 $10,844 $11,221
2/28/2005 $13,133 $11,072 $11,463
3/31/2005 $13,163 $10,876 $11,592
4/30/2005 $13,458 $10,669 $11,953
5/31/2005 $13,693 $11,009 $11,975
6/30/2005 $14,300 $11,024 $12,672
7/31/2005 $14,513 $11,435 $12,956
8/31/2005 $14,644 $11,330 $13,075
9/30/2005 $15,003 $11,422 $13,596
10/31/2005 $14,144 $11,232 $12,736
11/30/2005 $14,168 $11,656 $12,710
12/31/2005 $14,254 $11,660 $12,851
1/31/2006 $14,618 $11,969 $13,167
2/28/2006 $14,861 $12,002 $13,313
3/31/2006 $14,387 $12,151 $12,703
4/30/2006 $14,545 $12,314 $12,904
5/31/2006 $14,704 $11,960 $13,109
6/30/2006 $15,012 $11,976 $13,425
7/31/2006 $15,690 $12,050 $14,085
8/31/2006 $16,084 $12,337 $14,485
9/30/2006 $15,947 $12,655 $14,245
10/31/2006 $16,778 $13,067 $15,015
11/30/2006 $17,348 $13,315 $15,374
12/31/2006 $17,584 $13,502 $15,548
1/31/2007 $17,559 $13,706 $15,503
2/28/2007 $18,217 $13,438 $16,322
3/31/2007 $18,944 $13,589 $16,993
4/30/2007 $19,541 $14,191 $17,707
5/31/2007 $19,698 $14,686 $17,831
6/30/2007 $18,754 $14,442 $16,928
7/31/2007 $18,074 $13,994 $16,293
8/31/2007 $18,506 $14,204 $16,666
9/30/2007 $19,124 $14,735 $17,258
10/31/2007 $20,320 $14,969 $18,410
11/30/2007 $20,320 $14,344 $18,513
12/31/2007 $20,412 $14,244 $18,561
1/31/2008 $19,024 $13,390 $17,292
2/29/2008 $18,093 $12,955 $16,443
3/31/2008 $18,288 $12,899 $16,717
4/30/2008 $19,224 $13,527 $17,600
5/31/2008 $19,825 $13,702 $18,190
6/30/2008 $19,403 $12,547 $18,050
7/31/2008 $18,586 $12,441 $16,941
8/31/2008 $18,516 $12,621 $16,704
9/30/2008 $16,844 $11,497 $14,798
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08
- ------- -------
1-Year -11.92%
5-Year +11.58%
Since Inception (1/1/02) +8.04%
Annual Report | 55
Performance Summary (CONTINUED)
ADVISOR CLASS (10/1/98-9/30/08)
(PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500
DATE FUND - ADVISOR CLASS INDEX UTILITIES INDEX
- ---------- -------------------- ------- ---------------
10/1/1998 $10,000 $10,000 $10,000
10/31/1998 $ 9,816 $10,813 $ 9,809
11/30/1998 $ 9,921 $11,469 $ 9,954
12/31/1998 $10,160 $12,130 $10,258
1/31/1999 $ 9,629 $12,637 $ 9,809
2/28/1999 $ 9,172 $12,244 $ 9,435
3/31/1999 $ 9,019 $12,734 $ 9,286
4/30/1999 $ 9,585 $13,227 $10,081
5/31/1999 $10,021 $12,915 $10,717
6/30/1999 $ 9,669 $13,632 $10,342
7/31/1999 $ 9,519 $13,206 $10,215
8/31/1999 $ 9,510 $13,141 $10,319
9/30/1999 $ 9,152 $12,781 $ 9,823
10/31/1999 $ 9,323 $13,589 $ 9,965
11/30/1999 $ 8,771 $13,866 $ 9,225
12/31/1999 $ 8,661 $14,682 $ 9,316
1/31/2000 $ 9,153 $13,945 $10,327
2/29/2000 $ 8,470 $13,681 $ 9,690
3/31/2000 $ 8,770 $15,019 $10,012
4/30/2000 $ 9,290 $14,567 $10,792
5/31/2000 $ 9,412 $14,268 $11,264
6/30/2000 $ 8,984 $14,620 $10,594
7/31/2000 $ 9,365 $14,391 $11,344
8/31/2000 $10,356 $15,285 $12,897
9/30/2000 $11,394 $14,478 $14,082
10/31/2000 $11,342 $14,417 $13,539
11/30/2000 $11,759 $13,280 $13,384
12/31/2000 $12,269 $13,345 $14,644
1/31/2001 $11,013 $13,819 $13,221
2/28/2001 $11,657 $12,559 $13,702
3/31/2001 $11,812 $11,763 $13,609
4/30/2001 $12,302 $12,677 $14,401
5/31/2001 $12,377 $12,762 $13,942
6/30/2001 $11,749 $12,452 $12,831
7/31/2001 $11,339 $12,329 $12,240
8/31/2001 $11,490 $11,557 $11,907
9/30/2001 $10,951 $10,624 $10,528
10/31/2001 $10,962 $10,827 $10,490
11/30/2001 $10,864 $11,657 $ 9,927
12/31/2001 $11,295 $11,759 $10,186
1/31/2002 $11,157 $11,588 $ 9,600
2/28/2002 $11,133 $11,364 $ 9,388
3/31/2002 $11,759 $11,792 $10,531
4/30/2002 $11,677 $11,077 $10,335
5/31/2002 $11,407 $10,995 $ 9,417
6/30/2002 $10,895 $10,212 $ 8,749
7/31/2002 $ 9,947 $ 9,416 $ 7,526
8/31/2002 $10,350 $ 9,478 $ 7,808
9/30/2002 $ 9,602 $ 8,448 $ 6,800
10/31/2002 $ 9,602 $ 9,191 $ 6,676
11/30/2002 $ 9,806 $ 9,732 $ 6,852
12/31/2002 $10,130 $ 9,160 $ 7,131
1/31/2003 $ 9,715 $ 8,920 $ 6,913
2/28/2003 $ 9,447 $ 8,786 $ 6,585
3/31/2003 $ 9,786 $ 8,871 $ 6,908
4/30/2003 $10,318 $ 9,602 $ 7,505
5/31/2003 $11,234 $10,109 $ 8,288
6/30/2003 $11,275 $10,238 $ 8,382
7/31/2003 $10,762 $10,418 $ 7,841
8/31/2003 $10,774 $10,621 $ 7,990
9/30/2003 $11,196 $10,509 $ 8,346
10/31/2003 $11,386 $11,103 $ 8,434
11/30/2003 $11,513 $11,201 $ 8,443
12/31/2003 $12,094 $11,789 $ 9,010
1/31/2004 $12,299 $12,005 $ 9,201
2/29/2004 $12,632 $12,172 $ 9,381
3/31/2004 $12,727 $11,989 $ 9,476
4/30/2004 $12,352 $11,800 $ 9,127
5/31/2004 $12,481 $11,962 $ 9,211
6/30/2004 $12,684 $12,194 $ 9,355
7/31/2004 $12,828 $11,790 $ 9,509
8/31/2004 $13,338 $11,838 $ 9,900
9/30/2004 $13,489 $11,965 $ 9,985
10/31/2004 $14,045 $12,148 $10,472
11/30/2004 $14,441 $12,641 $10,913
12/31/2004 $14,923 $13,070 $11,201
1/31/2005 $15,057 $12,752 $11,430
2/28/2005 $15,191 $13,020 $11,677
3/31/2005 $15,224 $12,789 $11,808
4/30/2005 $15,576 $12,546 $12,176
5/31/2005 $15,847 $12,946 $12,198
6/30/2005 $16,563 $12,964 $12,909
7/31/2005 $16,822 $13,446 $13,198
8/31/2005 $16,972 $13,324 $13,318
9/30/2005 $17,402 $13,432 $13,849
10/31/2005 $16,410 $13,208 $12,973
11/30/2005 $16,452 $13,707 $12,946
12/31/2005 $16,555 $13,712 $13,091
1/31/2006 $16,990 $14,075 $13,412
2/28/2006 $17,270 $14,113 $13,562
3/31/2006 $16,726 $14,289 $12,939
4/30/2006 $16,910 $14,481 $13,145
5/31/2006 $17,108 $14,064 $13,353
6/30/2006 $17,485 $14,083 $13,675
7/31/2006 $18,268 $14,170 $14,347
8/31/2006 $18,753 $14,507 $14,755
9/30/2006 $18,599 $14,881 $14,510
10/31/2006 $19,561 $15,366 $15,295
11/30/2006 $20,236 $15,658 $15,660
12/31/2006 $20,524 $15,878 $15,838
1/31/2007 $20,509 $16,118 $15,792
2/28/2007 $21,272 $15,803 $16,626
3/31/2007 $22,140 $15,979 $17,309
4/30/2007 $22,849 $16,687 $18,037
5/31/2007 $23,030 $17,269 $18,163
6/30/2007 $21,946 $16,983 $17,243
7/31/2007 $21,157 $16,456 $16,597
8/31/2007 $21,673 $16,703 $16,977
9/30/2007 $22,398 $17,327 $17,580
10/31/2007 $23,806 $17,603 $18,753
11/30/2007 $23,836 $16,867 $18,858
12/31/2007 $23,945 $16,750 $18,907
1/31/2008 $22,312 $15,745 $17,614
2/29/2008 $21,245 $15,234 $16,749
3/31/2008 $21,481 $15,168 $17,028
4/30/2008 $22,590 $15,907 $17,928
5/31/2008 $23,307 $16,113 $18,529
6/30/2008 $22,809 $14,754 $18,386
7/31/2008 $21,857 $14,630 $17,257
8/31/2008 $21,791 $14,842 $17,015
9/30/2008 $19,834 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08
- ------------- -------
1-Year -11.45%
5-Year +12.12%
10-Year +7.09%
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
current quarterly dividend and the maximum offering price (NAV for Classes
B, C, R and Advisor) per share on 9/30/08.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/08.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(7.) Source: (C) 2008 Morningstar. 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.
56 | Annual Report
Your Fund's Expenses
FRANKLIN UTILITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 | 57
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 ENDING EXPENSES
ACCOUNT ACCOUNT PAID DURING
VALUE VALUE PERIOD*
4/1/08 9/30/08 4/1/08-9/30/08
--------- --------- --------------
CLASS A
Actual $1,000 $ 922.20 $3.56
Hypothetical (5% return before expenses) $1,000 $1,021.30 $3.74
CLASS B
Actual $1,000 $ 919.80 $6.00
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.31
CLASS C
Actual $1,000 $ 919.60 $6.00
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.31
CLASS R
Actual $1,000 $ 921.10 $5.28
Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.55
ADVISOR CLASS
Actual $1,000 $ 923.30 $2.88
Hypothetical (5% return before expenses) $1,000 $1,022.00 $3.03
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.74%; B: 1.25%; C: 1.25%; R: 1.10%; and
Advisor: 0.60%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
58 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .................... (0.08) (0.08) (0.05) (0.01) (0.09)
Net realized and unrealized gains (losses) ......... (6.67) 6.61 0.87 2.98 1.93
-------- -------- -------- -------- --------
Total from investment operations ...................... (6.75) 6.53 0.82 2.97 1.84
-------- -------- -------- -------- --------
Less distributions from net realized gains ............ (0.71) -- -- -- --
-------- -------- -------- -------- --------
Redemption fees(c, d) ................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .......................... $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01
======== ======== ======== ======== ========
Total return(e) ....................................... (21.36)% 25.31% 3.28% 13.49% 9.12%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ........................................... 0.97% 0.99% 0.97% 1.00% 0.97%
Net investment income (loss) .......................... (0.26)% (0.30)% (0.20)% (0.02)% (0.41)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $388,843 $553,347 $590,633 $628,732 $640,120
Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 59
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .................... (0.29) (0.28) (0.23) (0.18) (0.25)
Net realized and unrealized gains (losses) ......... (6.30) 6.31 0.83 2.90 1.89
-------- -------- -------- -------- --------
Total from investment operations ...................... (6.59) 6.03 0.60 2.72 1.64
-------- -------- -------- -------- --------
Less distributions from net realized gains ............ (0.71) -- -- -- --
-------- -------- -------- -------- --------
Redemption fees(c, d) ................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .......................... $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43
======== ======== ======== ======== ========
Total return(e) ....................................... (21.96)% 24.36% 2.48% 12.69% 8.29%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ........................................... 1.73% 1.75% 1.72% 1.74% 1.72%
Net investment income (loss) .......................... (1.02)% (1.06)% (0.95)% (0.76)% (1.16)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 10,704 $ 16,625 $ 18,718 $ 19,497 $ 18,824
Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
60 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) .................... (0.28) (0.28) (0.23) (0.17) (0.25)
Net realized and unrealized gains (losses) ......... (6.24) 6.24 0.83 2.86 1.87
-------- -------- -------- -------- --------
Total from investment operations ...................... (6.52) 5.96 0.60 2.69 1.62
-------- -------- -------- -------- --------
Less distributions from net realized gains ............ (0.71) -- -- -- --
-------- -------- -------- -------- --------
Redemption fees(c, d) ................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .......................... $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21
======== ======== ======== ======== ========
Total return(e) ....................................... (21.93)% 24.33% 2.51% 12.68% 8.27%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ........................................... 1.73% 1.74% 1.71% 1.74% 1.72%
Net investment income (loss) .......................... (1.02)% (1.05)% (0.94)% (0.76)% (1.16)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $ 53,289 $ 70,413 $ 69,069 $ 73,587 $ 75,642
Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 61
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
PERIOD ENDED
SEPTEMBER 30,
ADVISOR CLASS 2008(a)
- ------------- -------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........................... $ 31.40
-------
Income from investment operations(b):
Net investment income (loss)(c) ............................. (0.01)
Net realized and unrealized gains (losses) .................. (6.49)
-------
Total from investment operations ............................... (6.50)
-------
Redemption fees(d, e) .......................................... --
-------
Net asset value, end of period ................................. $ 24.90
=======
Total return(f) ................................................ (20.70)%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) .................................................... 0.73%
Net investment income (loss) ................................... (0.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .............................. $ 1,938
Portfolio turnover rate ........................................ 41.01%
(a) For the period May 15, 2008 (effective date) to September 30, 2008.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
62 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
---------------------- -------------- ------------- ---------------
COMMON STOCKS 94.4%
AIR FREIGHT & LOGISTICS 1.7%
C.H. Robinson Worldwide Inc. ....................... United States 150,000 $ 7,644,000
---------------
BIOTECHNOLOGY 12.2%
(a) Celgene Corp. ...................................... United States 200,000 12,656,000
(a) Genentech Inc. ..................................... United States 250,000 22,170,000
(a) Gilead Sciences Inc. ............................... United States 300,000 13,674,000
(a) Myriad Genetics Inc. ............................... United States 70,000 4,541,600
(a) OSI Pharmaceuticals Inc. ........................... United States 50,000 2,464,500
---------------
55,506,100
---------------
CAPITAL MARKETS 0.6%
The Goldman Sachs Group Inc. ....................... United States 20,000 2,560,000
---------------
CHEMICALS 4.6%
Monsanto Co. ....................................... United States 80,000 7,918,400
Sigma-Aldrich Corp. ................................ United States 250,000 13,105,000
---------------
21,023,400
---------------
COMMERCIAL SERVICES & SUPPLIES 1.4%
(a) Stericycle Inc. .................................... United States 110,000 6,480,100
---------------
COMMUNICATIONS EQUIPMENT 5.5%
(a) Cisco Systems Inc. ................................. United States 450,000 10,152,000
QUALCOMM Inc. ...................................... United States 225,000 9,668,250
(a) Research In Motion Ltd. ............................ Canada 75,000 5,122,500
---------------
24,942,750
---------------
COMPUTERS & PERIPHERALS 7.6%
(a) Apple Inc. ......................................... United States 165,000 18,753,900
Hewlett-Packard Co. ................................ United States 340,000 15,721,600
---------------
34,475,500
---------------
ELECTRICAL EQUIPMENT 1.4%
ABB Ltd., ADR ...................................... Switzerland 100,000 1,940,000
(a) Energy Conversion Devices Inc. ..................... United States 35,000 2,038,750
(a) SunPower Corp., A .................................. United States 35,000 2,482,550
---------------
6,461,300
---------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 2.2%
(a) Dolby Laboratories Inc., A ......................... United States 100,000 3,519,000
(a) FLIR Systems Inc. .................................. United States 170,000 6,531,400
---------------
10,050,400
---------------
ENERGY EQUIPMENT & SERVICES 4.5%
(a) FMC Technologies Inc. .............................. United States 180,000 8,379,000
Schlumberger Ltd. .................................. United States 125,000 9,761,250
(a) Weatherford International Ltd. ..................... United States 100,000 2,514,000
---------------
20,654,250
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 7.3%
Alcon Inc. ......................................... Switzerland 75,000 12,113,250
(a) Intuitive Surgical Inc. ............................ United States 15,000 3,614,700
Annual Report | 63
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
---------------------- -------------- ------------- ---------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES (CONTINUED)
Medtronic Inc. ..................................... United States 125,000 $ 6,262,500
Stryker Corp. ...................................... United States 180,000 11,214,000
---------------
33,204,450
---------------
HEALTH CARE PROVIDERS & SERVICES 1.9%
(a) Express Scripts Inc. ............................... United States 80,000 5,905,600
(a) VCA Antech Inc. .................................... United States 100,000 2,947,000
---------------
8,852,600
---------------
INTERNET & CATALOG RETAIL 1.4%
(a) Amazon.com Inc. .................................... United States 85,000 6,184,600
---------------
INTERNET SOFTWARE & SERVICES 5.4%
(a) Baidu.com Inc., ADR ................................ China 15,000 3,723,450
(a) Google Inc., A ..................................... United States 41,000 16,421,320
(a) MercadoLibre Inc. .................................. Argentina 80,000 1,628,000
(a) Sohu.com Inc. ...................................... China 50,000 2,787,500
---------------
24,560,270
---------------
IT SERVICES 4.5%
MasterCard Inc., A ................................. United States 30,000 5,319,900
Visa Inc., A ....................................... United States 250,000 15,347,500
---------------
20,667,400
---------------
LIFE SCIENCES TOOLS & SERVICES 3.7%
(a) Covance Inc. ....................................... United States 60,000 5,304,600
(a) Illumina Inc. ...................................... United States 65,000 2,634,450
(a) Waters Corp. ....................................... United States 150,000 8,727,000
---------------
16,666,050
---------------
MACHINERY 0.1%
(a) John Bean Technologies ............................. United States 38,880 492,221
---------------
PHARMACEUTICALS 4.7%
Johnson & Johnson .................................. United States 100,000 6,928,000
Novo-Nordisk AS, ADR ............................... Denmark 80,000 4,096,000
Teva Pharmaceutical Industries Ltd., ADR ........... Israel 225,000 10,302,750
---------------
21,326,750
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 6.4%
Intel Corp. ........................................ United States 1,125,000 21,071,250
(a) Lam Research Corp. ................................. United States 100,000 3,149,000
(a) Varian Semi conductor Equipment Associates Inc. .... United States 200,000 5,024,000
---------------
29,244,250
---------------
SOFTWARE 15.8%
(a) Activision Blizzard Inc. ........................... United States 560,000 8,640,800
(a) Adobe Systems Inc. ................................. United States 350,000 13,814,500
(a) ANSYS Inc. ......................................... United States 150,000 5,680,500
(a) Autodesk Inc. ...................................... United States 120,000 4,026,000
(a) Concur Technologies Inc. ........................... United States 150,000 5,739,000
(a) Electronic Arts Inc. ............................... United States 130,000 4,808,700
64 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
---------------------- -------------- ------------- ---------------
COMMON STOCKS (CONTINUED)
SOFTWARE (CONTINUED)
FactSet Research Systems Inc. ...................... United States 20,000 $ 1,045,000
Microsoft Corp. .................................... United States 250,000 6,672,500
Nintendo Co. Ltd., ADR ............................. Japan 160,000 8,457,600
(a) Salesforce.com Inc. ................................ United States 125,000 6,050,000
(a) UbiSoft Entertainment SA ........................... France 100,000 6,864,696
---------------
71,799,296
---------------
WIRELESS TELECOMMUNICATION SERVICES 1.5%
(a) American Tower Corp., A ............................ United States 185,000 6,654,450
---------------
TOTAL COMMON STOCKS (COST $251,742,286) ............ 429,450,137
---------------
SHORT TERM INVESTMENTS 7.5%
MONEY MARKET FUNDS (COST $21,757,500) 4.8%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.98% ................................ United States 21,757,500 21,757,500
---------------
PRINCIPAL
AMOUNT
-------------
REPURCHASE AGREEMENTS (COST $12,228,168) 2.7%
(c) Joint Repurchase Agreement, 1.347%, 10/01/08
(Maturity Value $12,228,626) .................... United States $ 12,228,168 12,228,168
ABN AMRO Bank, NV, New York Branch
(Maturity Value $1,934,691)
Banc of America Securities LLC
(Maturity Value $1,509,012)
Barclays Capital Inc.
(Maturity Value $1,954,012)
BNP Paribas Securities Corp.
(Maturity Value $1,895,926)
Credit Suisse Securities (USA) LLC
(Maturity Value $386,914)
Deutsche Bank Securities Inc.
(Maturity Value $717,453)
Dresdner Kleinwort Securities LLC
(Maturity Value $1,451,049)
Greenwich Capital Markets Inc.
(Maturity Value $1,992,655)
UBS Securities LLC
(Maturity Value $386,914)
Collateralized by U.S. Government Agency
Securities, 2.20% - 7.25%, 11/07/08 -
4/24/13; (d) U.S. Government Agency
Discount Notes, 12/30/08 and U.S. Treasury
Notes, 1.875 - 4.875%, 1/15/09 - 7/31/13
---------------
TOTAL INVESTMENTS (COST $285,727,954) 101.9% ....... 463,435,805
OTHER ASSETS, LESS LIABILITIES (1.9)% .............. (8,661,671)
---------------
NET ASSETS 100.0% .................................. $ 454,774,134
===============
See Selected Portfolio Abbreviations on page 106.
(a) Non-income producing for the twelve months ended September 30, 2008.
(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 joint repurchase agreement.
(d) The security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
Annual Report | 65
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) .................... 0.24 0.16 0.12 0.13 0.06
Net realized and unrealized gains (losses) .. (9.30) 7.21 4.21 4.20 3.68
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (9.06) 7.37 4.33 4.33 3.74
---------- ---------- ---------- ---------- ----------
Less distributions from net investment income .. (0.13) (0.11) (0.06) (0.08) (0.03)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58
========== ========== ========== ========== ==========
Total return(e) ................................ (19.59)% 18.87% 12.46% 14.17% 13.92%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 0.89% 0.93% 0.91% 0.94% 0.98%
Net investment income .......................... 0.56% 0.37% 0.34% 0.40% 0.20%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,708,612 $2,123,419 $1,695,802 $1,567,675 $1,531,871
Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
66 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.08) (0.16) (0.15) (0.11) (0.16)
Net realized and unrealized gains (losses) .. (8.90) 6.93 4.07 4.07 3.61
------- -------- -------- -------- --------
Total from investment operations ............... (8.98) 6.77 3.92 3.96 3.45
------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year ................... $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77
======= ======== ======== ======== ========
Total return(e) ................................ (20.22)% 17.98% 11.62% 13.30% 13.11%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.64% 1.69% 1.67% 1.69% 1.73%
Net investment income (loss) ................... (0.19)% (0.39)% (0.42)% (0.35)% (0.55)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $89,779 $138,640 $122,871 $123,926 $121,986
Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 67
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09
Income from investment operations(a):
Net investment income (loss)(b) ............. (0.08) (0.16) (0.15) (0.11) (0.16)
Net realized and unrealized gains (losses) .. (8.81) 6.87 4.04 4.03 3.58
-------- -------- -------- -------- --------
Total from investment operations ............... (8.89) 6.71 3.89 3.92 3.42
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51
======== ======== ======== ======== ========
Total return(e) ................................ (20.19)% 17.98% 11.60% 13.32% 13.11%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.64% 1.69% 1.66% 1.69% 1.73%
Net investment income (loss) ................... (0.19)% (0.39)% (0.41)% (0.35)% (0.55)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $255,425 $340,671 $273,512 $270,538 $270,131
Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
68 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income (loss)(b) ............. 0.14 0.04 0.02 0.05 (0.02)
Net realized and unrealized gains (losses) .. (9.23) 7.16 4.19 4.16 3.67
------- ------- ------- ------- -------
Total from investment operations ............... (9.09) 7.20 4.21 4.21 3.65
------- ------- ------- ------- -------
Less distributions from net investment income .. (0.03) (0.01) --(c) (0.01) --
------- ------- ------- ------- -------
Redemption fees(c, d) .......................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ................... $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39
======= ======= ======= ======= =======
Total return(e) ................................ (19.78)% 18.55% 12.18% 13.87% 13.65%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) .................................... 1.14% 1.19% 1.17% 1.19% 1.23%
Net investment income (loss) ................... 0.31% 0.11% 0.08% 0.15% (0.05)%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $30,175 $53,134 $37,804 $27,818 $20,060
Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 69
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................... 0.34 0.27 0.22 0.21 0.14
Net realized and unrealized gains (losses) .. (9.31) 7.21 4.21 4.21 3.67
-------- -------- -------- -------- --------
Total from investment operations ............... (8.97) 7.48 4.43 4.42 3.81
-------- -------- -------- -------- --------
Less distributions from net investment income .. (0.23) (0.20) (0.15) (0.16) (0.09)
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 37.25 $ 46.45 $ 39.17 $ 34.89 $30.63
======== ======== ======== ======== ========
Total return ................................... (19.39)% 19.16% 12.73% 14.45% 14.19%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .................................... 0.64% 0.69% 0.67% 0.69% 0.73%
Net investment income .......................... 0.81% 0.61% 0.58% 0.65% 0.45%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $256,988 $363,221 $274,603 $221,752 $133,332
Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
70 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN GROWTH FUND SHARES VALUE
-------------------- --------- --------------
COMMON STOCKS 100.0%
AUTOMOBILES & COMPONENTS 2.7%
(a) Ford Motor Co. ..................................... 1,100,000 $ 5,720,000
General Motors Corp. ............................... 400,000 3,780,000
Harley-Davidson Inc. ............................... 500,000 18,650,000
Johnson Controls Inc. .............................. 1,200,000 36,396,000
--------------
64,546,000
--------------
BANKS 0.0%(b)
(a) Tree. Com, Inc. .................................... 10,003 48,214
--------------
CAPITAL GOODS 28.8%
3M Co. ............................................. 855,000 58,405,050
The Boeing Co. ..................................... 1,045,000 59,930,750
Emerson Electric Co. ............................... 1,000,000 40,790,000
General Dynamics Corp. ............................. 1,000,000 73,620,000
General Electric Co. ............................... 70,000 1,785,000
Illinois Tool Works Inc. ........................... 1,000,000 44,450,000
Ingersoll-Rand Co. Ltd., A ......................... 1,002,000 31,232,340
Lockheed Martin Corp. .............................. 500,000 54,835,000
Northrop Grumman Corp. ............................. 1,000,000 60,540,000
Pall Corp. ......................................... 500,000 17,195,000
Raytheon Co. ....................................... 600,000 32,106,000
Rockwell Collins Inc. .............................. 100,000 4,809,000
(a) SunPower Corp., A .................................. 2,000 141,860
Teleflex Inc. ...................................... 500,000 31,745,000
Textron Inc. ....................................... 1,050,000 30,744,000
(a) Thomas & Betts Corp. ............................... 500,000 19,535,000
Tyco International Ltd. ............................ 387,513 13,570,705
United Technologies Corp. .......................... 850,000 51,051,000
W.W. Grainger Inc. ................................. 550,000 47,833,500
--------------
674,319,205
--------------
COMMERCIAL & PROFESSIONAL SERVICES 2.3%
Avery Dennison Corp. ............................... 462,000 20,549,760
Dun & Bradstreet Corp. ............................. 122,000 11,511,920
Equifax Inc. ....................................... 400,000 13,780,000
Robert Half International Inc. ..................... 300,000 7,425,000
--------------
53,266,680
--------------
CONSUMER DURABLES & APPAREL 1.6%
VF Corp. ........................................... 500,000 38,655,000
--------------
CONSUMER SERVICES 0.9%
Carnival Corp. ..................................... 565,000 19,972,750
(a) Interval Leisure Group Inc. ........................ 60,020 624,208
--------------
20,596,958
--------------
DIVERSIFIED FINANCIALS 0.8%
Moody's Corp. ...................................... 538,000 18,292,000
--------------
Annual Report | 71
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
-------------------- --------- --------------
COMMON STOCKS (CONTINUED)
ENERGY 2.2%
BP PLC, ADR (United Kingdom) ....................... 350,200 $ 17,569,534
ConocoPhillips ..................................... 35,000 2,563,750
Devon Energy Corp. ................................. 50,000 4,560,000
Exxon Mobil Corp. .................................. 70,000 5,436,200
Royal Dutch Shell PLC, A, ADR (Netherlands) ........ 280,000 16,522,800
Schlumberger Ltd. .................................. 40,000 3,123,600
(a) Transocean Inc. .................................... 15,222 1,671,985
--------------
51,447,869
--------------
HEALTH CARE EQUIPMENT & SERVICES 4.0%
(a) Advanced Medical Optics Inc. ....................... 88,888 1,580,429
Baxter International Inc. .......................... 400,000 26,252,000
Cardinal Health Inc. ............................... 300,000 14,784,000
(a) Edwards Lifesciences Corp. ......................... 50,000 2,888,000
(a) Hospira Inc. ....................................... 40,000 1,528,000
IMS Health Inc. .................................... 500,000 9,455,000
(a) Intuitive Surgical Inc. ............................ 1,000 240,980
(a) Medco Health Solutions Inc. ........................ 96,480 4,341,600
Medtronic Inc. ..................................... 60,000 3,006,000
Quest Diagnostics Inc. ............................. 500,000 25,835,000
(a) Zimmer Holdings Inc. ............................... 64,000 4,131,840
--------------
94,042,849
--------------
HOUSEHOLD & PERSONAL PRODUCTS 0.1%
The Procter & Gamble Co. ........................... 35,000 2,439,150
--------------
MATERIALS 2.4%
Air Products and Chemicals Inc. .................... 500,000 34,245,000
Sigma-Aldrich Corp. ................................ 400,000 20,968,000
--------------
55,213,000
--------------
MEDIA 2.2%
Time Warner Inc. ................................... 1,350,000 17,698,500
The Walt Disney Co. ................................ 1,130,000 34,679,700
--------------
52,378,200
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 20.7%
Abbott Laboratories ................................ 400,000 23,032,000
Allergan Inc. ...................................... 800,000 41,200,000
(a) Amgen Inc. ......................................... 932,000 55,239,640
(a) Biogen Idec Inc. ................................... 400,000 20,116,000
(a) Celgene Corp. ...................................... 25,000 1,582,000
(a) Dionex Corp. ....................................... 250,000 15,887,500
Eli Lilly and Co. .................................. 400,000 17,612,000
(a) Genentech Inc. ..................................... 1,000,000 88,680,000
Johnson & Johnson .................................. 1,081,000 74,891,680
Merck & Co. Inc. ................................... 500,000 15,780,000
(a) Millipore Corp. .................................... 400,000 27,520,000
Pfizer Inc. ........................................ 2,170,000 40,014,800
72 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
-------------------- --------- --------------
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES
(CONTINUED)
Roche Holding AG, ADR (Switzerland) ................ 40,000 $ 3,102,000
Schering-Plough Corp. .............................. 500,000 9,235,000
(a) Waters Corp. ....................................... 500,000 29,090,000
Wyeth .............................................. 600,000 22,164,000
--------------
485,146,620
--------------
RETAILING 0.8%
(a) Expedia Inc. ....................................... 300,100 4,534,511
Genuine Parts Co. .................................. 300,400 12,079,084
(a) HSN Inc. ........................................... 60,020 660,820
(a) Ticketmaster ....................................... 60,020 644,015
--------------
17,918,430
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.2%
Intel Corp. ........................................ 900,000 16,857,000
Texas Instruments Inc. ............................. 515,000 11,072,500
(a) Verigy Ltd. (Singapore) ............................ 48,974 797,297
--------------
28,726,797
--------------
SOFTWARE & SERVICES 6.3%
Automatic Data Processing Inc. ..................... 700,000 29,925,000
(a) Computer Sciences Corp. ............................ 1,000,000 40,190,000
(a) Google Inc., A ..................................... 27,000 10,814,040
(a) IAC/InterActiveCorp. ............................... 150,050 2,595,865
Microsoft Corp. .................................... 975,000 26,022,750
(a) Oracle Corp. ....................................... 500,000 10,155,000
(a) Yahoo! Inc. ........................................ 1,600,000 27,680,000
--------------
147,382,655
--------------
TECHNOLOGY HARDWARE & EQUIPMENT 12.9%
(a) Agilent Technologies Inc. .......................... 400,000 11,864,000
(a) Apple Inc. ......................................... 700,000 79,562,000
(a) Cisco Systems Inc. ................................. 1,545,000 34,855,200
(a) Dell Inc. .......................................... 500,000 8,240,000
(a) EMC Corp. .......................................... 1,000,000 11,960,000
Hewlett-Packard Co. ................................ 1,156,250 53,465,000
International Business Machines Corp. .............. 580,000 67,836,800
(a) Logitech International SA (Switzerland) ............ 150,000 3,498,000
(a) Mettler-Toledo International Inc. .................. 50,000 4,900,000
Molex Inc. ......................................... 146,483 3,288,543
Molex Inc., A ...................................... 146,483 3,048,311
QUALCOMM Inc. ...................................... 110,000 4,726,700
(a) Sun Microsystems Inc. .............................. 400,000 3,040,000
Tyco Electronics Ltd. .............................. 387,513 10,718,610
--------------
301,003,164
--------------
TELECOMMUNICATION SERVICES 0.2%
(a) American Tower Corp., A ............................ 115,000 4,136,550
--------------
Annual Report | 73
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
-------------------- --------- --------------
COMMON STOCKS (CONTINUED)
TRANSPORTATION 9.8%
Air France-KLM, ADR (France) ....................... 550,000 $ 12,600,500
(a) Alaska Air Group Inc. .............................. 500,000 10,195,000
(a) AMR Corp. .......................................... 2,000,000 19,640,000
Arkansas Best Corp. ................................ 500,000 16,845,000
British Airways PLC, ADR (United Kingdom) .......... 500,000 15,062,500
Canadian National Railway Co. (Canada) ............ 500,000 23,915,000
Canadian Pacific Railway Ltd. (Canada) ............ 500,000 26,930,000
(a) Continental Airlines Inc., B ...................... 1,000,000 16,680,000
Expeditors International of Washington Inc. ........ 80,000 2,787,200
Forward Air Corp. .................................. 500,000 13,615,000
Heartland Express Inc. ............................. 500,000 7,760,000
Southwest Airlines Co. ............................. 65,200 946,052
Union Pacific Corp. ................................ 600,000 42,696,000
Werner Enterprises Inc. ............................ 500,000 10,855,000
(a) YRC Worldwide Inc. ................................. 700,000 8,372,000
--------------
228,899,252
--------------
UTILITIES 0.1%
Public Service Enterprise Group Inc. ............... 100,000 3,279,000
--------------
TOTAL COMMON STOCKS (COST $1,077,802,405) .......... 2,341,737,593
--------------
SHORT TERM INVESTMENTS (COST $1,560,596) 0.1%
MONEY MARKET FUNDS 0.1%
(c) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.98% ................................ 1,560,596 1,560,596
--------------
TOTAL INVESTMENTS (COST $1,079,363,001) 100.1% ..... 2,343,298,189
OTHER ASSETS, LESS LIABILITIES (0.1)% .............. (2,318,965)
--------------
NET ASSETS 100.0% .................................. $2,340,979,224
==============
See Selected Portfolio Abbreviations on page 106.
(a) Non-income producing for the twelve months ended September 30, 2008.
(b) Rounds to less than 0.1% of net assets.
(c) 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.
The accompanying notes are an integral part of these financial statements.
74 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ----------- ----------- ----------- ---------- -----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25
----------- ----------- ----------- ----------- -----------
Income from investment operations(a):
Net investment income(b) ...................... 0.16 0.14 0.14 0.14 0.12
Net realized and unrealized gains (losses) .... (0.71) 0.21 0.09 0.10 0.22
----------- ----------- ----------- ----------- -----------
Total from investment operations ................. (0.55) 0.35 0.23 0.24 0.34
----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income ......................... (0.15) (0.14) (0.15) (0.15) (0.16)
Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01)
----------- ----------- ----------- ----------- -----------
Total distributions .............................. (0.21) (0.18) (0.16) (0.16) (0.17)
----------- ----------- ----------- ----------- -----------
Redemption fees(c, d) ............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ..................... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42
=========== =========== =========== =========== ===========
Total return(e) .................................. (21.36)% 14.14% 9.73% 10.45% 15.50%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.62%(f) 0.63%(f) 0.64%(g) 0.65%(g) 0.68%(f)
Net investment income ............................ 6.44% 5.31% 5.61% 5.54% 5.11%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $26,892,973 $35,476,603 $26,641,398 $21,934,575 $14,743,190
Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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 p er share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 75
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ...................... 0.14 0.12 0.12 0.11 0.10
Net realized and unrealized gains (losses) .... (0.71) 0.21 0.08 0.11 0.22
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. (0.57) 0.33 0.20 0.22 0.32
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ......................... (0.13) (0.12) (0.12) (0.13) (0.14)
Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01)
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (0.19) (0.16) (0.13) (0.14) (0.15)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41
========== ========== ========== ========== ==========
Total return(e) .................................. (22.13)% 13.23% 8.83% 9.57% 14.59%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.47%(f) 1.48%(f) 1.49%(g) 1.50%(g) 1.53%(f)
Net investment income ............................ 5.59% 4.46% 4.76% 4.69% 4.26%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $2,428,765 $3,745,636 $3,743,374 $3,922,396 $3,486,880
Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
76 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
CLASS B1 2008 2007 2006 2005 2004
- -------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ..................... 0.15 0.13 0.13 0.12 0.11
Net realized and unrealized gains (losses) (0.71) 0.21 0.08 0.11 0.21
-------- -------- -------- -------- --------
Total from investment operations ................ (0.56) 0.34 0.21 0.23 0.32
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ........................ (0.14) (0.13) (0.13) (0.14) (0.14)
Net realized gains ........................... (0.06) (0.04) (0.01) (0.01) (0.01)
-------- -------- -------- -------- --------
Total distributions ............................. (0.20) (0.17) (0.14) (0.15) (0.15)
-------- -------- -------- -------- --------
Redemption fees(c,d) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42
======== ======== ======== ======== ========
Total return(e) ................................. (21.77)% 13.57% 9.17% 9.90% 14.90%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) 1.18%(f)
Net investment income ........................... 5.94% 4.81% 5.11% 5.04% 4.61%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $224,713 $397,224 $459,302 $493,063 $511,471
Portfolio turnover rate 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 77
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- ----------- ----------- ----------- ----------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26
----------- ----------- ----------- ----------- ----------
Income from investment operations(a):
Net investment income(b) ...................... 0.15 0.13 0.13 0.13 0.11
Net realized and unrealized gains (losses) .... (0.72) 0.21 0.09 0.10 0.21
----------- ----------- ----------- ----------- ----------
Total from investment operations ................. (0.57) 0.34 0.22 0.23 0.32
----------- ----------- ----------- ----------- ----------
Less distributions from:
Net investment income ......................... (0.14) (0.13) (0.13) (0.14) (0.14)
Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01)
----------- ----------- ----------- ----------- ----------
Total distributions .............................. (0.20) (0.17) (0.14) (0.15) (0.15)
----------- ----------- ----------- ----------- ----------
Redemption fees(c, d) ............................ -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Net asset value, end of year ..................... $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43
=========== =========== =========== =========== ==========
Total return(e) .................................. (21.98)% 13.47% 9.56% 9.84% 14.85%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) 1.18%(f)
Net investment income ............................ 5.94% 4.81% 5.11% 5.04% 4.61%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $12,433,143 $16,203,796 $12,138,969 $10,113,365 $6,616,891
Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23
-------- -------- -------- -------- -------
Income from investment operations(a):
Net investment income(b) ...................... 0.15 0.13 0.13 0.13 0.11
Net realized and unrealized gains (losses) .... (0.71) 0.20 0.09 0.10 0.22
-------- -------- -------- -------- -------
Total from investment operations ................. (0.56) 0.33 0.22 0.23 0.33
-------- -------- -------- -------- -------
Less distributions from:
Net investment income ......................... (0.14) (0.13) (0.14) (0.14) (0.15)
Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01)
-------- -------- -------- -------- -------
Total distributions .............................. (0.20) (0.17) (0.15) (0.15) (0.16)
-------- -------- -------- -------- -------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- -------- -------- -------- -------
Net asset value, end of year ..................... $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40
======== ======== ======== ======== =======
Total return(e) .................................. (21.91)% 13.47% 9.43% 10.15% 15.25%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.97%(f) 0.98%(f) 0.99%(g) 1.00%(g) 1.03%(f)
Net investment income ............................ 6.09% 4.96% 5.26% 5.19% 4.76%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $267,956 $286,670 $183,609 $122,222 $73,165
Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 79
\
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------- ---------- ---------- ---------- ---------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24
---------- ---------- ---------- ---------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.16 0.15 0.14 0.14 0.12
Net realized and unrealized gains (losses) .... (0.70) 0.21 0.09 0.11 0.22
---------- ---------- ---------- ---------- --------
Total from investment operations ................. (0.54) 0.36 0.23 0.25 0.34
---------- ---------- ---------- ---------- --------
Less distributions from:
Net investment income ......................... (0.16) (0.15) (0.15) (0.16) (0.16)
Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01)
---------- ---------- ---------- ---------- --------
Total distributions .............................. (0.22) (0.19) (0.16) (0.17) (0.17)
---------- ---------- ---------- ---------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- --------
Net asset value, end of year ..................... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41
========== ========== ========== ========== ========
Total return ..................................... (21.33)% 14.36% 9.94% 10.65% 15.74%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.47%(e) 0.48%(e) 0.49%(f) 0.50%(f) 0.53%(e)
Net investment income ............................ 6.59% 5.46% 5.76% 5.69% 5.26%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,259,806 $6,195,966 $3,786,643 $2,280,318 $901,149
Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
The accompanying notes are an integral part of these financial statements.
80 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
-------------------- -------------- ------------- ---------------
COMMON STOCKS 36.2%
ENERGY 4.8%
(a) Canadian Oil Sands Trust ........................... Canada 25,000,000 $ 910,243,765
Chevron Corp. ...................................... United States 7,000,000 577,360,000
ConocoPhillips ..................................... United States 5,750,000 421,187,500
Spectra Energy Corp. ............................... United States 13,000,000 309,400,000
---------------
2,218,191,265
---------------
FINANCIALS 3.2%
Bank of America Corp. .............................. United States 20,000,000 700,000,000
Duke Realty Corp. .................................. United States 3,163,800 77,766,204
HSBC Holdings PLC .................................. United Kingdom 35,000,000 566,175,447
iStar Financial Inc. ............................... United States 5,213,500 13,555,100
Wells Fargo & Co. .................................. United States 4,000,000 150,120,000
---------------
1,507,616,751
---------------
HEALTH CARE 4.6%
Bristol-Myers Squibb Co. ........................... United States 14,000,000 291,900,000
Merck & Co. Inc. ................................... United States 20,000,000 631,200,000
Pfizer Inc. ........................................ United States 58,080,000 1,070,995,200
Schering-Plough Corp. .............................. United States 7,938,467 146,623,485
---------------
2,140,718,685
---------------
INDUSTRIALS 0.2%
3M Co. ............................................. United States 783,568 53,525,530
General Electric Co. ............................... United States 2,400,000 61,200,000
---------------
114,725,530
---------------
INFORMATION TECHNOLOGY 1.8%
Intel Corp. ........................................ United States 36,213,400 678,276,982
Microchip Technology Inc. .......................... United States 5,000,000 147,150,000
---------------
825,426,982
---------------
MATERIALS 0.7%
AngloGold Ashanti Ltd., ADR ........................ South Africa 2,884,064 66,621,879
Barrick Gold Corp. ................................. Canada 298,200 10,955,868
The Dow Chemical Co. ............................... United States 7,181,222 228,219,235
---------------
305,796,982
---------------
TELECOMMUNICATION SERVICES 2.7%
AT&T Inc. .......................................... United States 30,000,000 837,600,000
Verizon Communications Inc. ........................ United States 11,000,000 352,990,000
Vodafone Group PLC ................................. United Kingdom 30,000,000 66,245,455
---------------
1,256,835,455
---------------
UTILITIES 18.2%
(a) AGL Resources Inc. ................................. United States 4,000,000 125,520,000
(a) Ameren Corp. ....................................... United States 12,500,000 487,875,000
American Electric Power Co. Inc. ................... United States 8,633,800 319,709,614
Atmos Energy Corp. ................................. United States 4,000,000 106,480,000
CenterPoint Energy Inc. ............................ United States 6,000,000 87,420,000
Consolidated Edison Inc. ........................... United States 12,000,000 515,520,000
Annual Report | 81
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
-------------------- -------------- ------------- ---------------
COMMON STOCKS (CONTINUED)
UTILITIES (CONTINUED)
Dominion Resources Inc. ............................ United States 18,000,000 $ 770,040,000
DTE Energy Co. ..................................... United States 5,270,400 211,448,448
Duke Energy Corp. .................................. United States 35,000,000 610,050,000
FirstEnergy Corp. .................................. United States 9,000,000 602,910,000
FPL Group Inc. ..................................... United States 7,000,000 352,100,000
Hawaiian Electric Industries Inc. .................. United States 1,720,000 49,897,200
NiSource Inc. ...................................... United States 4,500,000 66,420,000
(a) PG&E Corp. ......................................... United States 20,000,000 749,000,000
(a) Pinnacle West Capital Corp. ........................ United States 5,500,000 189,255,000
Portland General Electric Co. ...................... United States 3,100,000 73,346,000
Progress Energy Inc. ............................... United States 9,000,000 388,170,000
Public Service Enterprise Group Inc. ............... United States 20,000,000 655,800,000
(a) Puget Energy Inc. .................................. United States 7,500,000 200,250,000
Sempra Energy ...................................... United States 6,379,600 321,978,412
The Southern Co. ................................... United States 28,385,300 1,069,841,957
TECO Energy Inc. ................................... United States 9,500,000 149,435,000
Xcel Energy Inc. ................................... United States 18,544,750 370,709,552
---------------
8,473,176,183
---------------
TOTAL COMMON STOCKS (COST $15,704,888,054) 16,842,487,833
---------------
CONVERTIBLE PREFERRED STOCKS 2.4%
CONSUMER DISCRETIONARY 0.2%
General Motors Corp., 6.25%, cvt. pfd. ............. United States 11,000,000 88,000,000
---------------
FINANCIALS 1.8%
American International Group Inc., 8.50%, cvt.
pfd. ............................................ United States 5,200,000 44,668,000
Bank of America Corp., 7.25%, cvt. pfd., L ......... United States 399,000 334,362,000
Citigroup Inc., 6.50%, cvt. pfd. ................... United States 3,800,000 155,800,000
Fannie Mae, 5.375%, cvt. pfd. ...................... United States 4,700 16,450,000
Fannie Mae, 8.75%, cvt. pfd. ....................... United States 3,239,000 8,097,500
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ..... United States 3,000,000 36,750,000
Legg Mason Inc., 7.00%, cvt. pfd. .................. United States 2,625,000 91,875,000
Lehman Brothers Holdings Inc., 7.25%, cvt.
pfd., P ......................................... United States 1,000,650 1,000,650
Lehman Brothers Holdings Inc., 8.75%, cvt.
pfd., Q ......................................... United States 550,000 275,000
Wachovia Corp., 7.50%, cvt. pfd., L ................ United States 300,000 115,500,000
Washington Mutual Inc., 7.75%, cvt. pfd., R ........ United States 445,220 124,661
---------------
804,902,811
---------------
HEALTH CARE 0.2%
Schering-Plough Corp., 6.00%, cvt. pfd. ............ United States 500,000 86,506,813
---------------
UTILITIES 0.2%
CMS Energy Trust I, 7.75%, cvt. pfd. ............... United States 1,711,000 76,315,049
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $4,385,213,241) ........................... 1,055,724,673
---------------
82 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
-------------------- -------------- ------------- ---------------
EQUITY LINKED SECURITIES 2.1%
CONSUMER DISCRETIONARY 0.7%
Citigroup into Comcast Corp., 8.50% ................ United States 15,000,000 $ 291,343,500
(b) The Goldman Sachs Group Inc. into Comcast Corp.,
5.00%, 144A ..................................... United States 2,800,000 52,468,747
---------------
343,812,247
---------------
ENERGY 0.3%
(b) The Goldman Sachs Group Inc. into XTO Energy Inc.,
9.00%, 144A ..................................... United States 3,825,000 151,408,762
---------------
INFORMATION TECHNOLOGY 0.5%
(b) Morgan Stanley into Texas Instruments Inc., 7.50%
144A ............................................ United States 10,900,000 246,659,370
---------------
MATERIALS 0.6%
(b) The Goldman Sachs Group Inc. into Barrick Gold
Corp., 10.00%, 144A ............................. United States 8,282,800 292,855,664
---------------
TOTAL EQUITY LINKED SECURITIES
(COST $1,253,289,737) 1,034,736,043
---------------
PREFERRED STOCKS 0.2%
FINANCIALS 0.2%
Fannie Mae, 6.75%, pfd. ............................ United States 3,000,000 5,400,000
Fannie Mae, 7.625%, pfd., R ........................ United States 2,399,400 4,318,920
Fannie Mae, 8.25%, pfd. ............................ United States 11,784,000 25,689,120
Freddie Mac, 8.375%, pfd., Z ....................... United States 16,608,000 27,071,040
---------------
TOTAL PREFERRED STOCKS (COST $833,682,537) ......... 62,479,080
---------------
PRINCIPAL
AMOUNT(c)
-------------
(d, e) SENIOR FLOATING RATE INTERESTS 4.7%
CONSUMER DISCRETIONARY 1.4%
Clear Channel Communications Inc., Term Loan B,
7.359%, 11/13/15 ................................ United States 635,000,000 521,228,955
Idearc Inc.,
(f) Term Loan A, 5.50%, 11/17/13 ................ United States 45,000,000 28,718,250
Term Loan B, 5.71% - 5.77%, 11/17/14 ........ United States 24,936,548 14,213,833
Jarden Corp., Term Loan B-3, 6.262%, 1/24/12 ....... United States 123,437,661 111,865,380
---------------
676,026,418
---------------
HEALTH CARE 0.1%
Bausch and Lomb Inc.,
(g) Delayed Draw Term Loan, 7.012%, 4/28/15 ..... United States 5,268,000 4,903,628
Parent Term Loan B, 7.012%, 4/28/15 ......... United States 34,856,600 32,445,673
---------------
37,349,301
---------------
INDUSTRIALS 0.5%
Allison Transmission Inc., Term Loan B, 5.22% -
5.57%, 8/07/14 .................................. United States 160,786,341 133,624,865
U.S. Investigations Services Inc., Term Loan B,
5.954%, 2/21/15 ................................. United States 108,897,243 95,012,845
---------------
228,637,710
---------------
Annual Report | 83
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE
-------------------- -------------- ------------- ---------------
(d, e) SENIOR FLOATING RATE INTERESTS (CONTINUED)
INFORMATION TECHNOLOGY 1.1%
First Data Corp.,
Term Loan B-2, 5.926% - 6.512%, 9/24/14 ......... United States 247,500,000 $ 212,643,832
Term Loan B-3, 5.948% - 6.512%, 9/24/14 ......... United States 331,798,871 285,070,641
---------------
497,714,473
---------------
MATERIALS 0.2%
(h) Berry Plastics Holding Corp., Senior Unsecured Term
Loan, PIK, 9.791%, 6/15/14 ...................... United States 148,501,346 89,843,315
---------------
TRANSPORTATION 0.2%
Ceva Group PLC,
Dollar Pre-Refunded L/C Commitment, 6.762%,
8/01/12 ...................................... United States 13,684,211 12,332,895
EGL Term Loans, 6.188%, 8/01/12 ................. United States 114,861,842 101,652,730
---------------
113,985,625
---------------
UTILITIES 1.2%
Texas Competitive Electric Holdings Co. LLC,
Term Loan B-1, 5.989% - 7.262%, 10/10/14 ........ United States 149,248,120 126,456,738
Term Loan B-2, 5.989% - 7.262%, 10/10/14 ........ United States 247,499,999 210,065,624
Term Loan B-3, 5.989% - 7.262%, 10/10/14 ........ United States 272,250,000 230,683,142
---------------
567,205,504
---------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $2,470,189,625) ........................... 2,210,762,346
---------------
CORPORATE BONDS 45.2%
CONSUMER DISCRETIONARY 15.0%
Beazer Homes USA Inc., senior note,
6.875%, 7/15/15 ................................. United States 59,000,000 36,875,000
8.125%, 6/15/16 ................................. United States 14,900,000 9,536,000
Cablevision Systems Corp., senior note, B, 8.00%,
4/15/12 ......................................... United States 490,000,000 463,050,000
CCH I Holdings LLC, senior note,
13.50%, 1/15/14 ................................. United States 375,000,000 159,375,000
9.92%, 4/01/14 .................................. United States 117,380,000 44,017,500
11.75%, 5/15/14 ................................. United States 342,000,000 133,380,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 ... United States 755,000,000 502,075,000
CCH II LLC, senior note, 10.25%, 9/15/10 ........... United States 235,000,000 212,675,000
D.R. Horton Inc.,
5.625%, 1/15/16 ................................. United States 35,000,000 26,075,000
senior note, 6.50%, 4/15/16 ..................... United States 50,000,000 38,250,000
Dex Media Inc.,
B, 8.00%, 11/15/13 .............................. United States 25,000,000 11,625,000
senior disc. note, zero cpn. to 11/15/08, 9.00%
thereafter, 11/15/13 ......................... United States 285,000,000 132,525,000
(b) DIRECTV Holdings LLC, senior note, 144A, 7.625%,
5/15/16 ......................................... United States 300,000,000 273,000,000
Dollar General Corp.,
senior note, 10.625%, 7/15/15 ................... United States 600,000,000 594,000,000
(h) senior sub. note, PIK, 11.875%, 7/15/17 ......... United States 205,000,000 190,650,000
EchoStar DBS Corp., senior note,
7.75%, 5/31/15 .................................. United States 110,000,000 93,775,000
7.125%, 2/01/16 ................................. United States 240,000,000 193,800,000
84 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE
-------------------- -------------- ------------- ---------------
CORPORATE BONDS (CONTINUED)
CONSUMER DISCRETIONARY (CONTINUED)
Ford Motor Co., 7.45%, 7/16/31 ..................... United States 600,000,000 $ 261,000,000
Ford Motor Credit Co. LLC,
7.375%, 10/28/09 ................................ United States 840,000,000 675,494,400
7.875%, 6/15/10 ................................. United States 550,000,000 420,039,950
7.375%, 2/01/11 ................................. United States 450,000,000 299,214,000
7.00%, 10/01/13 ................................. United States 100,000,000 61,512,700
senior note, 9.75%, 9/15/10 ..................... United States 145,000,000 104,033,875
senior note, 9.875%, 8/10/11 .................... United States 75,000,000 51,814,350
senior note, 7.25%, 10/25/11 .................... United States 155,000,000 98,729,885
General Motors Corp., senior deb., 8.375%,
7/15/33 ......................................... United States 510,000,000 206,550,000
Host Hotels & Resorts LP, senior note,
6.875%, 11/01/14 ................................ United States 80,600,000 70,122,000
O, 6.375%, 3/15/15 .............................. United States 219,000,000 179,032,500
Q, 6.75%, 6/01/16 ............................... United States 165,000,000 135,712,500
K. Hovnanian Enterprises Inc., senior note, 7.50%,
5/15/16 ......................................... United States 30,100,000 17,608,500
KB Home, senior note,
6.375%, 8/15/11 ................................. United States 40,000,000 36,400,000
5.75%, 2/01/14 .................................. United States 75,000,000 60,750,000
6.25%, 6/15/15 .................................. United States 90,000,000 73,800,000
7.25%, 6/15/18 .................................. United States 70,500,000 58,162,500
Liberty Media Corp., senior note, 5.70%, 5/15/13 ... United States 130,400,000 109,095,509
MGM MIRAGE, senior note,
6.75%, 4/01/13 .................................. United States 70,000,000 54,950,000
6.625%, 7/15/15 ................................. United States 120,000,000 84,000,000
7.625%, 1/15/17 ................................. United States 250,000,000 181,250,000
R.H. Donnelley Corp.,
senior disc. note, A-1, 6.875%, 1/15/13 ......... United States 127,000,000 50,165,000
senior disc. note, A-2, 6.875%, 1/15/13 ......... United States 195,000,000 77,025,000
senior note, 6.875%, 1/15/13 .................... United States 55,000,000 21,725,000
senior note, 8.875%, 10/15/17 ................... United States 501,500,000 173,017,500
senior note, A-3, 8.875%, 1/15/16 ............... United States 193,100,000 66,619,500
(b, h) Univision Communications Inc., senior note, 144A,
PIK, 9.75%, 3/15/15 ............................. United States 357,000,000 167,790,000
Visant Holding Corp., senior note, 8.75%,
12/01/13 ........................................ United States 50,000,000 46,125,000
---------------
6,956,423,169
---------------
CONSUMER STAPLES 0.0%(i)
Dole Food Co. Inc., senior note, 8.625%, 5/01/09 ... United States 3,050,000 2,928,000
---------------
ENERGY 5.1%
Callon Petroleum Co., senior note, 9.75%,
12/08/10 ........................................ United States 110,000,000 103,400,000
Chesapeake Energy Corp., senior note,
6.50%, 8/15/17 .................................. United States 150,400,000 132,352,000
6.25%, 1/15/18 .................................. United States 150,000,000 129,000,000
7.25%, 12/15/18 ................................. United States 160,000,000 148,000,000
6.875%, 11/15/20 ................................ United States 135,000,000 116,100,000
El Paso Corp., senior note, MTN, 7.75%, 1/15/32 .... United States 250,000,000 210,065,250
El Paso Natural Gas Co., senior note, 7.25%,
4/01/18 ......................................... United States 50,000,000 46,750,000
Annual Report | 85
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE
-------------------- -------------- ------------- ---------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Mariner Energy Inc., senior note,
7.50%, 4/15/13 .................................. United States 45,000,000 $ 40,050,000
8.00%, 5/15/17 .................................. United States 25,000,000 21,250,000
Nalco Finance Holdings, senior note, zero cpn.
to 8/01/09, 9.00% thereafter, 2/01/14 ........... United States 380,000,000 336,300,000
Newfield Exploration Co., senior sub. note,
6.625%, 4/15/16 ................................. United States 115,000,000 102,925,000
OPTI Canada Inc., senior note, 7.875%, 12/15/14 .... Canada 140,000,000 124,600,000
Petrohawk Energy Corp., senior note,
9.125%, 7/15/13 ................................. United States 50,000,000 47,250,000
(b) 144A, 7.875%, 6/01/15 ........................... United States 73,500,000 64,312,500
(b) Petroplus Finance Ltd., senior note, 144A, 6.75%,
5/01/14 ......................................... Switzerland 22,000,000 18,700,000
Pioneer Natural Resources Co., senior bond,
6.875%, 5/01/18 ................................. United States 110,000,000 98,424,150
Plains Exploration & Production Co., senior note,
7.75%, 6/15/15 .................................. United States 75,000,000 69,375,000
Sabine Pass LNG LP, senior secured note,
7.25%, 11/30/13 ................................. United States 95,000,000 75,525,000
7.50%, 11/30/16 ................................. United States 390,000,000 306,150,000
Sesi LLC, senior note, 6.875%, 6/01/14 ............. United States 110,000,000 96,250,000
(b) W&T Offshore Inc., senior note, 144A, 8.25%,
6/15/14 ......................................... United States 100,000,000 80,500,000
---------------
2,367,278,900
---------------
FINANCIALS 5.5%
American Express Co., senior note, 7.00%, 3/19/18 .. United States 90,000,000 79,563,330
American Express Credit Corp., C, 7.30%, 8/20/13 ... United States 150,000,000 144,824,250
(b) American International Group Inc.,
144A, 8.25%, 8/15/18 ............................ United States 175,000,000 101,808,875
(d) junior sub. deb., 144A, FRN, 8.175%, 5/15/58 .... United States 600,000,000 96,133,800
(j) Bank of America Corp., pfd., sub. bond, M, 8.125%,
Perpetual ....................................... United States 25,000,000 20,229,750
GMAC LLC,
5.625%, 5/15/09 ................................. United States 235,000,000 167,931,940
7.75%, 1/19/10 .................................. United States 600,000,000 359,368,200
7.25%, 3/02/11 .................................. United States 225,000,000 106,487,100
6.875%, 9/15/11 ................................. United States 800,000,000 357,497,600
6.875%, 8/28/12 ................................. United States 300,400,000 119,488,606
6.75%, 12/01/14 ................................. United States 125,000,000 48,025,625
iStar Financial Inc.,
8.625%, 6/01/13 ................................. United States 160,000,000 83,265,920
senior note, 5.95%, 10/15/13 .................... United States 20,000,000 10,409,660
(j) JPMorgan Chase & Co., junior sub. note, 1, 7.90%,
perpetual ....................................... United States 405,000,000 341,873,055
(k) Lehman Brothers Holdings Inc., senior note,
7.50%, 12/03/08 ................................. United States 400,000,000 35,860,000
7.50%, 1/21/09 .................................. United States 900,000,000 51,030,000
6.20%, 9/26/14 .................................. United States 326,000,000 42,380,000
6.875%, 5/02/18 ................................. United States 104,900,000 13,637,000
7.00%, 9/27/27 .................................. United States 100,000,000 13,000,000
(b, d) Liberty Mutual Group, junior sub. note, 144A,
FRN, 10.75%, 6/15/88 ............................ United States 100,000,000 72,120,700
Merrill Lynch & Co. Inc., 6.875%, 4/25/18 .......... United States 48,000,000 42,539,184
(b) Residential Capital LLC, junior note, 144A,
9.625%, 5/15/15 ................................. United States 49,429,000 12,110,105
86 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE
-------------------- -------------- ------------- ---------------
CORPORATE BONDS (CONTINUED)
FINANCIALS (CONTINUED)
(j) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ... United States 44,500,000 $ 38,835,150
(j) Wells Fargo Capital XV, 9.75%, Perpetual ........... United States 210,000,000 203,895,930
---------------
2,562,315,780
---------------
HEALTH CARE 5.2%
Community Health Systems Inc., senior sub. note,
8.875%, 7/15/15 ................................. United States 370,000,000 353,350,000
DaVita Inc.,
senior note, 6.625%, 3/15/13 .................... United States 140,000,000 133,700,000
senior sub. note, 7.25%, 3/15/15 ................ United States 80,000,000 76,400,000
HCA Inc.,
6.375%, 1/15/15 ................................. United States 125,000,000 99,062,500
senior note, 6.50%, 2/15/16 ..................... United States 150,000,000 119,625,000
senior secured note, 9.25%, 11/15/16 ............ United States 132,900,000 129,577,500
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 ................................ United States 540,000,000 500,850,000
6.50%, 6/01/12 .................................. United States 265,000,000 246,450,000
7.375%, 2/01/13 ................................. United States 380,000,000 347,700,000
(d) FRN, 9.25%, 2/01/15 ............................. United States 330,000,000 313,500,000
(d, h) U.S. Oncology Holdings Inc., senior note, PIK, FRN,
8.334%, 3/15/12 ................................. United States 75,232,814 58,305,431
Vanguard Health Holding Co. I LLC, senior disc.
note, zero cpn. to 10/01/09, 11.25% thereafter,
10/01/15 ........................................ United States 23,900,000 20,793,000
---------------
2,399,313,431
---------------
INDUSTRIALS 3.7%
Allied Waste North America Inc.,
senior note, B, 7.375%, 4/15/14 ................. United States 190,000,000 185,725,000
senior note, B, 7.125%, 5/15/16 ................. United States 79,000,000 74,062,500
senior secured note, 6.125%, 2/15/14 ............ United States 205,000,000 189,625,000
senior secured note, 6.875%, 6/01/17 ............ United States 106,450,000 99,530,750
Browning-Ferris Industries Inc., 7.40%, 9/15/35 .... United States 100,000,000 88,500,000
Hertz Corp.,
senior note, 8.875%, 1/01/14 .................... United States 290,300,000 251,835,250
senior sub. note, 10.50%, 1/01/16 ............... United States 25,000,000 21,000,000
johnsonDiversey Holdings Inc., senior disc. note,
10.67%, 5/15/13 ................................. United States 158,000,000 154,050,000
johnsonDiversey Inc., senior sub. note, B, 9.625%,
5/15/12 ......................................... United States 125,000,000 125,312,500
L-3 Communications Corp., senior sub. note, 5.875%,
1/15/15 ......................................... United States 15,600,000 14,196,000
(b) Nortek Inc., senior note, 144A, 10.00%, 12/01/13 ... United States 100,000,000 88,500,000
RBS Global & Rexnord Corp.,
senior note, 9.50%, 8/01/14 ..................... United States 85,000,000 80,325,000
senior sub. note, 11.75%, 8/01/16 ............... United States 83,200,000 79,040,000
(b, d, h) Rexnord Holdings Inc., senior note, 144A, PIK, FRN,
9.81%, 3/01/13 .................................. United States 89,220,363 68,699,679
Terex Corp., senior sub. note, 8.00%, 11/15/17 ..... United States 185,000,000 169,275,000
(b) U.S. Investigations Services Inc., senior note,
144A, 10.50%, 11/01/15 .......................... United States 50,000,000 44,750,000
---------------
1,734,426,679
---------------
Annual Report | 87
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE
-------------------- -------------- ------------- ---------------
CORPORATE BONDS (CONTINUED)
INFORMATION TECHNOLOGY 3.7%
(b) Ceridian Corp., senior note, 144A, 11.25%,
11/15/15 ........................................ United States 80,000,000 $ 66,200,000
(b) First Data Corp., senior note, 144A, 9.875%,
9/24/15 ......................................... United States 275,000,000 216,218,750
Fiserv Inc., senior note, 6.80%, 11/20/17 .......... United States 50,000,000 48,332,850
Flextronics International Ltd., senior sub. note,
6.25%, 11/15/14 ................................. Singapore 100,000,000 85,000,000
Freescale Semiconductor Inc., senior note,
8.875%, 12/15/14 ................................ United States 437,400,000 303,993,000
(l) 10.125%, 12/15/16 ............................... United States 630,000,000 406,350,000
Lucent Technologies Inc., 6.45%, 3/15/29 ........... United States 180,000,000 110,700,000
(b) Nortel Networks Ltd., senior note, 144A, 10.75%,
7/15/16 ......................................... Canada 77,100,000 47,609,250
NXP BV/NXP Funding LLC, senior note, 9.50%,
10/15/15 ........................................ Netherlands 50,000,000 25,875,000
Qwest Capital Funding Inc., 7.25%, 2/15/11 ......... United States 26,600,000 25,004,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 .................................. United States 150,000,000 132,000,000
8.125%, 3/01/16 ................................. United States 100,000,000 85,500,000
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 .................... United States 59,300,000 53,666,500
(b) senior note, 144A, 10.625%, 5/15/15 ............. United States 55,000,000 51,975,000
senior sub. note, 10.25%, 8/15/15 ............... United States 100,000,000 87,250,000
---------------
1,745,674,350
---------------
MATERIALS 1.3%
Freeport-McMoRan Copper & Gold Inc., senior note,
8.375%, 4/01/17 ................................. United States 75,000,000 73,985,325
(b) Ineos Group Holdings PLC, senior sub. note, 144A,
7.875%, 2/15/16 ................................. United Kingdom 175,000,000 EUR 131,086,861
jefferson Smurfit Corp., senior note, 8.25%,
10/01/12 ........................................ United States 200,000,000 168,000,000
Nalco Co., senior note, 7.75%, 11/15/11 ............ United States 5,000,000 4,925,000
Novelis Inc., senior note, 7.25%, 2/15/15 .......... Canada 190,000,000 166,250,000
Stone Container Corp., senior note, 8.00%,
3/15/17 ......................................... United States 68,000,000 53,380,000
---------------
597,627,186
---------------
TELECOMMUNICATION SERVICES 0.2%
(b) Digicel Group Ltd., senior note, 144A, 8.875%,
1/15/15 ......................................... Jamaica 140,000,000 117,950,000
---------------
TRANSPORTATION 0.2%
(b) Ceva Group PLC, senior note, 144A, 10.00%,
9/01/14 ......................................... United Kingdom 100,000,000 96,500,000
---------------
UTILITIES 5.3%
Aquila Inc., senior note, 14.875%, 7/01/12 ......... United States 43,450,000 48,106,406
Dynegy Holdings Inc., senior note,
6.875%, 4/01/11 ................................. United States 300,000,000 274,500,000
8.75%, 2/15/12 .................................. United States 275,000,000 261,250,000
8.375%, 5/01/16 ................................. United States 210,000,000 183,750,000
7.75%, 6/01/19 .................................. United States 90,000,000 72,450,000
Energy Future Holdings Corp., senior note,
(b) 144A, 10.875%, 11/01/17 ............................ United States 187,500,000 170,156,250
(b, h) 144A, PIK, 11.25%, 11/01/17 ........................ United States 243,700,000 207,145,000
P, 5.55%, 11/15/14 ................................. United States 300,000,000 225,269,100
88 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE
-------------------- -------------- ------------- ---------------
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
(b) Intergen NV, senior secured note, 144A, 9.00%,
6/30/17 ......................................... Netherlands 80,000,000 $ 80,400,000
PNM Resources Inc., senior note, 9.25%, 5/15/15 .... United States 31,700,000 31,383,000
Public Service Co. of New Mexico, senior note,
7.95%, 5/15/18 .................................. United States 52,400,000 49,509,092
Reliant Energy Inc., senior note,
7.625%, 6/15/14 ................................. United States 150,000,000 113,250,000
7.875%, 6/15/17 ................................. United States 153,100,000 114,059,500
(b) Texas Competitive Electric Holdings Co LLC, senior
note, 144A, 10.25%, 11/01/15 .................... United States 353,025,000 320,370,188
(h) 144A, PIK, 10.50%, 11/01/16 ..................... United States 150,000,000 127,875,000
B, 144A, 10.25%, 11/01/15 ....................... United States 186,900,000 169,611,750
---------------
2,449,085,286
---------------
TOTAL CORPORATE BONDS (COST $27,891,660,955) ....... 21,029,522,781
---------------
CONVERTIBLE BONDS 0.9%
FINANCIALS 0.3%
(d) iStar Financial Inc., cvt., senior note, FRN,
3.291%, 10/01/12 ................................ United States 250,000,000 135,000,000
---------------
HEALTH CARE 0.2%
(b) Mylan Inc., 144A, cvt., 3.75%, 9/15/15 ............. United States 80,000,000 79,000,000
---------------
INFORMATION TECHNOLOGY 0.4%
(b) Advanced Micro Devices Inc., cvt., senior note,
144A, 5.75%, 8/15/12 ............................ United States 325,000,000 186,875,000
---------------
TOTAL CONVERTIBLE BONDS (COST $640,286,205) ........ 400,875,000
---------------
MORTGAGE-BACKED SECURITIES 2.0%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)
FIXED RATE 0.8%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ....... United States 390,638,250 381,610,183
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
FIXED RATE 0.8%
FNMA 30 Year, 5.50%, 2/01/35 - 7/01/37 ............. United States 374,786,768 374,244,413
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
FIXED RATE 0.4%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 5/15/34 ........ United States 196,144,979 192,845,886
---------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $942,876,169) ............................. 948,700,482
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $54,122,086,523) .......................... 43,585,288,238
---------------
SHORT TERM INVESTMENTS 5.9%
U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $591,954,931) 1.2%
(m) FHLB, 10/01/08 - 10/09/08 .......................... United States 592,068,000 592,048,992
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS AND
REPURCHASE AGREEMENTS (COST $54,714,041,454) .... 44,177,337,230
---------------
Annual Report | 89
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
-------------------- -------------- ------------- ---------------
SHORT TERM INVESTMENTS (CONTINUED)
MONEY MARKET FUNDS (COST $268,661,516) 0.6%
(n) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.98% ................................ United States 268,661,516 $ 268,661,516
---------------
INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUNDS (COST $29,080,893) 0.1%
(o) Bank of New York Institutional Cash Reserve Fund,
2.18% ........................................... United States 29,080,893 28,790,084
---------------
PRINCIPAL
AMOUNT(C)
-------------
REPURCHASE AGREEMENTS (COST $1,864,985,975) 4.0%
(p) Joint Repurchase Agreement, 1.347%, 10/01/08 ....... 1,864,985,975 1,864,985,975
(Maturity Value $1,865,055,763)
ABN AMRO Bank, NV, New York Branch
(Maturity Value $295,070,472)
Banc of America Securities LLC
(Maturity Value $230,147,881)
Barclays Capital Inc.
(Maturity Value $298,017,260)
BNP Paribas Securities Corp.
(Maturity Value $289,158,245)
Credit Suisse Securities (USA) LLC
(Maturity Value $59,010,364)
Deutsche Bank Securities Inc.
(Maturity Value $109,422,822)
Dresdner Kleinwort Securities LLC
(Maturity Value $221,307,518)
Greenwich Capital Markets Inc.
(Maturity Value $303,910,837)
UBS Securities LLC
(Maturity Value $59,010,364)
Collateralized by U.S. Government Agency
Securities, 2.20% - 7.25%, 11/07/08 - 4/24/13;
(m)U.S. Government
Agency Discount Notes, 12/30/08 and U.S.
Treasury Notes, 1.875 - 4.875%,
1/15/09 - 7/31/13
---------------
TOTAL INVESTMENTS (COST $56,876,769,838) 99.6% ..... 46,339,774,805
OTHER ASSETS, LESS LIABILITIES 0.4% ................ 167,580,506
---------------
NET ASSETS 100.0% .................................. $46,507,355,311
===============
See Currency and Selected Portfolio Abbreviations on page 106.
(a) See Note 10 regarding holdings of 5% voting securities.
(b) 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 Trustees. At September 30, 2008,
the aggregate value of these securities was $3,936,651,251, representing
8.46% of net assets.
(c) The principal amount is stated in U.S. dollars unless otherwise indicated.
(d) The coupon rate shown represents the rate at period end.
(e) See Note 1(g) regarding senior floating rate interests.
(f) Security purchased on a delayed delivery basis. See Note 1(d).
(g) See Note 9 regarding unfunded loan commitments.
(h) Income may be received in additional securities and/or cash.
(i) Rounds to less than 0.1% of net assets.
(j) Perpetual bond with no stated maturity date.
(k) See Note 8 regarding defaulted securities.
(l) A portion or all of the security is on loan at September 30, 2008. See Note
1(f).
(m) The security is traded on a discount basis with no stated coupon rate.
(n) 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.
(o) The rate shown is the annualized seven-day yield at period end.
(p) See Note 1(c) regarding joint repurchase agreements.
The accompanying notes are an integral part of these financial statements.
90 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) ...................... 0.30 0.31 0.30 0.28 0.27
Net realized and unrealized gains (losses) .... 0.08 (0.02) (0.09) (0.11) (0.04)
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 0.38 0.29 0.21 0.17 0.23
---------- ---------- ---------- ---------- ----------
Less distributions from net investment income .... (0.32) (0.33) (0.31) (0.32) (0.36)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) ............................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ..................... $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68
========== ========== ========== ========== ==========
Total return(e) .................................. 6.00% 4.63% 3.40% 2.67% 3.46%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ...................................... 0.72% 0.72% 0.72% 0.72% 0.70%
Net investment income ............................ 4.64% 4.78% 4.64% 4.29% 4.09%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $5,353,961 $5,073,449 $5,291,117 $5,901,449 $6,420,381
Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 91
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.27 0.27 0.26 0.25 0.24
Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.34 0.26 0.18 0.14 0.19
-------- -------- -------- -------- --------
Less distributions from net investment income .... (0.28) (0.30) (0.28) (0.29) (0.32)
-------- -------- -------- -------- --------
Redemption fees(c,d) ............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67
======== ======== ======== ======== ========
Total return(e) .................................. 5.61% 4.10% 2.87% 2.13% 2.92%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ...................................... 1.24% 1.25% 1.24% 1.25% 1.23%
Net investment income ............................ 4.12% 4.25% 4.12% 3.76% 3.56%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $284,649 $316,720 $388,807 $478,788 $568,276
Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
92 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.27 0.27 0.26 0.25 0.24
Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.34 0.26 0.18 0.14 0.19
-------- -------- -------- -------- --------
Less distributions from net investment income .... (0.28) (0.30) (0.28) (0.29) (0.32)
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65
======== ======== ======== ======== ========
Total return(e) .................................. 5.48% 4.12% 2.88% 2.14% 2.91%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ...................................... 1.24% 1.25% 1.23% 1.25% 1.23%
Net investment income ............................ 4.12% 4.25% 4.13% 3.76% 3.56%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $610,148 $418,951 $424,462 $508,539 $597,451
Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 93
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81
-------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ...................... 0.28 0.28 0.27 0.26 0.25
Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05)
-------- ------- ------- ------- -------
Total from investment operations ................. 0.35 0.27 0.19 0.15 0.20
-------- ------- ------- ------- -------
Less distributions from net investment income .... (0.29) (0.31) (0.29) (0.30) (0.33)
-------- ------- ------- ------- -------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ..................... $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68
======== ======= ======= ======= =======
Total return(e) .................................. 5.61% 4.25% 3.01% 2.29% 3.08%
RATIOS TO AVERAGE NET ASSETS
Expenses(f) ...................................... 1.09% 1.10% 1.09% 1.10% 1.08%
Net investment income ............................ 4.27% 4.40% 4.27% 3.91% 3.71%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $104,648 $74,537 $71,104 $65,790 $59,431
Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
94 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.31 0.31 0.31 0.29 0.28
Net realized and unrealized gains (losses) .... 0.08 (0.01) (0.09) (0.10) (0.06)
-------- -------- -------- -------- --------
Total from investment operations ................. 0.39 0.30 0.22 0.19 0.22
-------- -------- -------- -------- --------
Less distributions from net investment income .... (0.33) (0.34) (0.32) (0.33) (0.36)
-------- -------- -------- -------- --------
Redemption fees(c, d) -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69
======== ======== ======== ======== ========
Total return ..................................... 6.11% 4.75% 3.53% 2.95% 3.42%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) ...................................... 0.59% 0.60% 0.59% 0.60% 0.58%
Net investment income ............................ 4.77% 4.90% 4.77% 4.41% 4.21%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $612,026 $470,751 $387,239 $334,681 $340,279
Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
FRANKLIN CUSTODIAN FUNDS
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------- ---------------- --------------
MORTGAGE-BACKED SECURITIES 94.0%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 94.0%
GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 105,993 $ 115,723
GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 232,073 254,457
GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 .................... 79,686 82,924
GNMA GP 30 Year, 10.25%, 5/15/20 ............................... 10,211 11,735
GNMA GP 30 Year, 11.00%, 1/15/10 - 12/15/10 .................... 193,181 205,739
GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 205,253 233,306
GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ..................... 32,046 36,132
GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 32,029 36,255
GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 11,321 12,506
GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 ..................... 18,039 19,476
GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 4,811 5,606
GNMA I SF 15 Year, 6.50%, 5/15/18 .............................. 1,332,741 1,398,826
GNMA I SF 15 Year, 7.00%, 10/15/09 ............................. 58,716 59,014
(a) GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/36 .................... 629,818,688 619,123,923
GNMA I SF 30 Year, 5.50%, 5/15/28 - 8/15/38 .................... 1,152,291,323 1,156,387,423
(a) GNMA I SF 30 Year, 5.50%, 10/15/37 ............................. 75,000,000 75,082,050
(a) GNMA I SF 30 Year, 6.00%, 10/15/23 - 9/15/38 ................... 1,458,260,023 1,483,249,866
GNMA I SF 30 Year, 6.00%, 3/15/38 .............................. 70,282,035 71,438,028
GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 .................... 387,574,361 398,509,618
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 69,110 72,513
GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 .................... 190,243,161 200,722,510
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 585,706 628,484
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 46,697,705 50,376,933
GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 414,816 450,965
GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................... 36,611,609 40,076,246
GNMA I SF 30 Year, 8.25%, 3/15/27 .............................. 36,991 40,527
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 8,002,101 8,834,075
GNMA I SF 30 Year, 9.00%, 12/15/08 - 7/15/23 ................... 10,074,577 11,065,694
GNMA I SF 30 Year, 9.50%, 5/15/09 - 8/15/22 .................... 6,046,942 6,730,963
GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ................... 7,936,285 9,061,750
GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 .................. 5,980,343 6,866,764
GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 .................. 4,635,885 5,243,778
GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................... 1,221,917 1,391,969
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 5,937,640 6,880,277
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 4,721,707 5,401,049
GNMA I SF 30 Year, 13.00%, 8/15/10 - 9/15/15 ................... 5,117,412 5,900,096
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 42,159 45,862
GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 13,208 14,841
GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 37,161,527 35,337,002
GNMA II SF 30 Year, 5.00%, 7/20/33 - 7/20/38 ................... 351,295,721 343,521,418
GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 183,951,359 180,105,944
GNMA II SF 30 Year, 5.50%, 6/20/34 - 8/20/38 ................... 650,402,539 649,836,484
GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 131,316,603 131,242,946
GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 77,762,616 77,699,384
GNMA II SF 30 Year, 5.50%, 6/20/38 ............................. 112,315,617 112,180,183
GNMA II SF 30 Year, 6.00%, 10/20/23 - 10/20/37 ................. 490,549,633 497,819,784
GNMA II SF 30 Year, 6.00%, 1/20/38 ............................. 73,915,489 75,004,573
GNMA II SF 30 Year, 6.00%, 7/20/38 ............................. 73,795,789 74,883,109
96 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (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%, 8/20/38 ............................. $ 79,888,707 $81,065,802
GNMA II SF 30 Year, 6.50%, 6/20/24 - 3/20/34 ................... 65,131,148 66,953,362
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................... 34,922,587 36,523,516
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .................. 6,394,868 6,875,203
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................... 3,048,761 3,330,152
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................... 1,596,085 1,754,921
GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 .................. 484,677 530,886
GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ................... 305,653 341,101
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 .................. 612,238 698,701
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 .................. 1,649,323 1,881,419
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 .................. 269,473 311,410
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 .................. 137,898 157,625
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 .................. 271,495 313,833
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ................ 202,232 233,805
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ................. 212,715 250,155
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,550,072,650) ......... 6,544,920,621
--------------
SHARES
----------------
SHORT TERM INVESTMENTS 7.1%
MONEY MARKET FUNDS (COST $268,656,075) 3.9%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.98% ............................................ 268,656,075 268,656,075
--------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENTS (COST $225,485,000) 3.2%
(c) Barclays Capital Inc., 0.20%, 10/01/08 (Maturity Value
$225,486,253) Collateralized by U.S. Treasury Note,
4.00%, 8/31/09 .............................................. $ 225,485,000 225,485,000
--------------
TOTAL INVESTMENTS (COST $7,044,213,725) 101.1% ................. 7,039,061,696
OTHER ASSETS, LESS LIABILITIES (1.1)% .......................... (73,630,644)
--------------
NET ASSETS 100.0% .............................................. $6,965,431,052
==============
See Selected Portfolio Abbreviations on page 106.
(a) A portion or all of the security purchased on a TBA basis. See Note 1(d).
(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 agreements.
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80
---------- ---------- ---------- ---------- ----------
Income from investment operations(a):
Net investment income(b) .................... 0.41 0.40 0.43 0.45 0.43
Net realized and unrealized gains (losses) .. (1.93) 2.16 0.37 2.42 1.33
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... (1.52) 2.56 0.80 2.87 1.76
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ....................... (0.40) (0.40) (0.41) (0.44) (0.40)
Net realized gains .......................... (0.74) (0.47) (0.09) -- --
---------- ---------- ---------- ---------- ----------
Total distributions ............................ (1.14) (0.87) (0.50) (0.44) (0.40)
---------- ---------- ---------- ---------- ----------
Redemption fees(c, d) .......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................... $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16
========== ========== ========== ========== ==========
Total returne(e) ............................... (11.63)% 20.32% 6.69% 28.81% 20.40%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.74%(f) 0.75%(f) 0.76%(f) 0.78%(f) 0.80%
Net investment income .......................... 2.92% 2.83% 3.54% 3.92% 4.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,769,397 $2,157,614 $1,926,732 $1,986,034 $1,450,832
Portfolio turnover rate ........................ 8.32% 10.84% 7.97% 13.53% 16.13%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
98 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.33 0.33 0.37 0.39 0.38
Net realized and unrealized gains (losses) .... (1.91) 2.15 0.38 2.42 1.33
------- -------- -------- -------- --------
Total from investment operations ................. (1.58) 2.48 0.75 2.81 1.71
------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.33) (0.33) (0.35) (0.39) (0.36)
Net realized gains ............................ (0.74) (0.47) (0.09) -- --
------- -------- -------- -------- --------
Total distributions .............................. (1.07) (0.80) (0.44) (0.39) (0.36)
------- -------- -------- -------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15
======= ======== ======== ======== ========
Total return(e) .................................. (12.04)% 19.66% 6.25% 28.11% 19.71%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.24%(f) 1.26%(f) 1.26%(f) 1.28%(f) 1.30%
Net investment income ............................ 2.42% 2.32% 3.04% 3.42% 3.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $92,695 $127,587 $133,824 $154,277 $127,105
Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 99
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ...................... 0.33 0.33 0.37 0.39 0.38
Net realized and unrealized gains (losses) .... (1.91) 2.15 0.37 2.42 1.33
-------- -------- -------- -------- --------
Total from investment operations ................. (1.58) 2.48 0.74 2.81 1.71
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ......................... (0.33) (0.33) (0.35) (0.39) (0.36)
Net realized gains ............................ (0.74) (0.47) (0.09) -- --
-------- -------- -------- -------- --------
Total distributions .............................. (1.07) (0.80) (0.44) (0.39) (0.36)
-------- -------- -------- -------- --------
Redemption fees(c, d) ............................ -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ..................... $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13
======== ======== ======== ======== ========
Total return(e) .................................. (12.06)% 19.72% 6.19% 28.16% 19.76%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.24%(f) 1.26%(f) 1.25%f 1.28%(f) 1.30%
Net investment income ............................ 2.42% 2.32% 3.05% 3.42% 3.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $339,247 $424,977 $391,509 $435,714 $283,747
Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
100 | Annual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- ------- ------- ------- ------- ------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.54 $ 12.86 $ 12.57 $ 10.15 $ 8.79
------- ------- ------- ------- ------
Income from investment operations(a):
Net investment income(b) ...................... 0.36 0.35 0.39 0.43 0.39
Net realized and unrealized gains (losses) .... (1.92) 2.16 0.36 2.40 1.34
------- ------- ------- ------- ------
Total from investment operations ................. (1.56) 2.51 0.75 2.83 1.73
------- ------- ------- ------- ------
Less distributions from:
Net investment income ......................... (0.35) (0.36) (0.37) (0.41) (0.37)
Net realized gains ............................ (0.74) (0.47) (0.09) -- --
------- ------- ------- ------- ------
Total distributions .............................. (1.09) (0.83) (0.46) (0.41) (0.37)
------- ------- ------- ------- ------
Redemption fees(c, d) ............................ -- -- -- -- --
------- ------- ------- ------- ------
Net asset value, end of year ..................... $ 11.89 $ 14.54 $ 12.86 $ 12.57 $10.15
======= ======= ======= ======= ======
Total return(e) .................................. (11.92)% 19.92% 6.29% 28.35% 20.02%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 1.09%(f) 1.11%(f) 1.11%(f) 1.13%(f) 1.15%
Net investment income ............................ 2.57% 2.47% 3.19% 3.57% 4.14%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $36,596 $41,845 $27,736 $14,649 $1,590
Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 101
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------- ------- ------- -------- -------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84
------- ------- -------- -------- -------
Income from investment operations(a):
Net investment income(b) ...................... 0.42 0.42 0.45 0.48 0.44
Net realized and unrealized gains (losses) .... (1.92) 2.17 0.38 2.42 1.34
------- ------- -------- -------- -------
Total from investment operations ................. (1.50) 2.59 0.83 2.90 1.78
------- ------- -------- -------- -------
Less distributions from:
Net investment income ......................... (0.42) (0.43) (0.43) (0.46) (0.42)
Net realized gains ............................ (0.74) (0.47) (0.09) -- --
------- ------- -------- -------- -------
Total distributions .............................. (1.16) (0.90) (0.52) (0.46) (0.42)
------- ------- -------- -------- -------
Redemption fees(c, d) ............................ -- -- -- -- --
------- ------- -------- -------- -------
Net asset value, end of year ..................... $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20
======= ======= ======== ======== =======
Total return ..................................... (11.45)% 20.43% 6.88% 29.00% 20.48%
RATIOS TO AVERAGE NET ASSETS
Expenses ......................................... 0.59%(e) 0.61%(e) 0.61%(e) 0.63%(e) 0.65%
Net investment income ............................ 3.07% 2.97% 3.69% 4.07% 4.64%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $58,817 $86,823 $103,041 $110,249 $51,586
Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(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 repurchases 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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
102 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
----------------------- -------------- ------------- ---------------
COMMON STOCKS 95.9%
DIVERSIFIED TELECOMMUNICATION SERVICES 2.7%
AT&T Inc. .......................................... United States 1,200,000 $ 33,504,000
Verizon Communications Inc. ........................ United States 900,000 28,881,000
---------------
62,385,000
---------------
ELECTRIC UTILITIES 49.7%
Allegheny Energy Inc. .............................. United States 300,000 11,031,000
American Electric Power Co. Inc. ................... United States 1,300,000 48,139,000
Cleco Corp. ........................................ United States 1,000,000 25,250,000
Duke Energy Corp. .................................. United States 3,800,000 66,234,000
Edison International ............................... United States 1,759,000 70,184,100
Entergy Corp. ...................................... United States 1,750,000 155,767,500
Exelon Corp. ....................................... United States 2,200,000 137,764,000
FirstEnergy Corp. .................................. United States 1,700,000 113,883,000
FPL Group Inc. ..................................... United States 1,700,000 85,510,000
Hawaiian Electric Industries Inc. .................. United States 400,000 11,604,000
Northeast Utilities ................................ United States 1,000,000 25,650,000
Pepco Holdings Inc. ................................ United States 1,300,000 29,783,000
Pinnacle West Capital Corp. ........................ United States 800,000 27,528,000
Portland General Electric Co. ...................... United States 1,200,000 28,392,000
PPL Corp. .......................................... United States 2,000,000 74,040,000
Progress Energy Inc. ............................... United States 1,400,000 60,382,000
Sierra Pacific Resources ........................... United States 4,500,000 43,110,000
The Southern Co. ................................... United States 2,500,000 94,225,000
UIL Holdings Corp. ................................. United States 230,400 7,909,632
Westar Energy Inc. ................................. United States 1,080,600 24,897,024
---------------
1,141,283,256
---------------
GAS UTILITIES 1.5%
AGL Resources Inc. ................................. United States 800,000 25,104,000
Southwest Gas Corp. ................................ United States 300,000 9,078,000
---------------
34,182,000
---------------
MULTI-UTILITIES 38.5%
Alliant Energy Corp. ............................... United States 1,200,000 38,652,000
Ameren Corp. ....................................... United States 1,200,000 46,836,000
CenterPoint Energy Inc. ............................ United States 1,700,000 24,769,000
CMS Energy Corp. ................................... United States 300,000 3,741,000
Consolidated Edison Inc. ........................... United States 800,000 34,368,000
Dominion Resources Inc. ............................ United States 2,300,000 98,394,000
DTE Energy Co. ..................................... United States 500,000 20,060,000
GDF Suez ........................................... France 700,000 35,941,186
Integrys Energy Group Inc. ......................... United States 700,000 34,958,000
National Grid PLC .................................. United Kingdom 4,987,755 63,302,955
PG&E Corp. ......................................... United States 2,400,000 89,880,000
PNM Resources Inc. ................................. United States 855,720 8,762,573
Public Service Enterprise Group Inc. ............... United States 2,200,000 72,138,000
Puget Energy Inc. .................................. United States 1,725,000 46,057,500
RWE AG ............................................. Germany 300,000 28,675,581
Annual Report | 103
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
----------------------- -------------- ------------- ---------------
COMMON STOCKS (CONTINUED)
MULTI-UTILITIES (CONTINUED)
SCANA Corp. ........................................ United States 900,000 $ 35,037,000
Sempra Energy ...................................... United States 1,600,000 80,752,000
United Utilities Group PLC ......................... United Kingdom 960,189 11,914,574
Vectren Corp. ...................................... United States 600,000 16,710,000
Wisconsin Energy Corp. ............................. United States 1,000,000 44,900,000
Xcel Energy Inc. ................................... United States 2,400,000 47,976,000
---------------
883,825,369
---------------
OIL, GAS & CONSUMABLE FUELS 3.0%
Spectra Energy Corp. ............................... United States 1,900,000 45,220,000
The Williams Cos. Inc. ............................. United States 1,000,000 23,650,000
---------------
68,870,000
---------------
WATER UTILITIES 0.5%
American Water Works Co. Inc. ...................... United States 500,000 10,750,000
---------------
TOTAL COMMON STOCKS (COST $1,557,072,533) .......... 2,201,295,625
---------------
CONVERTIBLE PREFERRED STOCKS (COST $13,497,475) 0.5%
ELECTRIC UTILITIES 0.5%
CMS Energy Trust I, 7.75%, cvt. pfd. ............... United States 270,050 12,044,932
---------------
Principal
Amount(a)
-------------
CORPORATE BONDS 3.3%
ELECTRIC UTILITIES 1.6%
MidAmerican Energy Holdings Co., senior note,
8.48%, 9/15/28 .................................. United States $ 25,000,000 27,529,500
Northeast Generation Co., senior secured note, B-1,
8.812%, 10/15/26 ................................ United States 7,356,445 8,074,699
---------------
35,604,199
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2%
Energy Future Holdings Corp., senior note,
P, 5.55%, 11/15/14 .............................. United States 32,300,000 24,253,973
R, 6.55%, 11/15/34 .............................. United States 5,700,000 3,524,128
---------------
27,778,101
---------------
MULTI-UTILITIES 0.5%
Aquila Inc., senior note,
9.95%, 2/01/11 .................................. United States 6,000,000 6,217,380
8.27%, 11/15/21 ................................. United States 6,100,000 5,961,225
---------------
12,178,605
---------------
TOTAL CORPORATE BONDS (COST $76,949,936) ........... 75,560,905
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $1,647,519,944) ........................... 2,288,901,462
---------------
104 | Annual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
----------------------- -------------- ------------- ---------------
SHORT TERM INVESTMENT (COST $2,283,674) 0.1%
MONEY MARKET FUND 0.1%
(b) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.98% ................................ United States 2,283,674 $ 2,283,674
---------------
TOTAL INVESTMENTS (COST $1,649,803,618) 99.8% ...... 2,291,185,136
OTHER ASSETS, LESS LIABILITIES 0.2% ................ 5,567,551
---------------
NET ASSETS 100.0% .................................. $ 2,296,752,687
===============
(a) The principal amount is stated in U.S. dollars unless otherwise indicated.
(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.
The accompanying notes are an integral part of these financial statements.
Annual Report | 105
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
CURRENCY ABBREVIATIONS
EUR - Euro
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
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
PIK - Payment-In-Kind
SF - Single Family
The accompanying notes are an integral part of these financial statements.
106 | Annual Report
FRANKLIN CUSTODIAN FUNDS
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2008
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
------------ -------------- ---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................. $251,742,286 $1,077,802,405 $52,876,329,339
Cost - Non-controlled affiliated issuers (Note 10) ....... -- -- 1,866,793,008
Cost - Sweep Money Fund (Note 7) ......................... 21,757,500 1,560,596 268,661,516
Cost - Repurchase agreements ............................. 12,228,168 -- 1,864,985,975
------------ -------------- ---------------
Total cost of investments ................................ $285,727,954 $1,079,363,001 $56,876,769,838
------------ -------------- ---------------
Value - Unaffiliated issuers ............................. $429,450,137 $2,341,737,593 $41,543,983,549
Value - Non-controlled affiilated issuers (Note 10) ...... -- -- 2,662,143,765
Value - Sweep Money Fund (Note 7) ........................ 21,757,500 1,560,596 268,661,516
Value - Repurchase agreements ............................ 12,228,168 -- 1,864,985,975
------------ -------------- ---------------
Total value of investments(a) ............................ 463,435,805 2,343,298,189 46,339,774,805
Cash ........................................................ -- 92,078 11,636,794
Receivables:
Investment securities sold ............................... -- 1,358,440 729,144,737
Capital shares sold ...................................... 380,224 2,109,578 63,311,100
Dividends and interest ................................... 134,721 2,286,558 679,490,375
------------ -------------- ---------------
Total assets .......................................... 463,950,750 2,349,144,843 47,823,357,811
------------ -------------- ---------------
Liabilities:
Payables:
Investment Securities purchased .......................... 7,816,581 -- 1,023,109,049
Capital shares redeemed .................................. 656,151 4,952,662 212,372,950
Affiliates ............................................... 547,435 2,547,815 43,073,921
Unaffiliated transfer agent fees ......................... 84,706 432,365 5,115,983
Payable upon return of securities loaned .................... -- -- 29,080,893
Unrealized depreciation on unfunded loan commitments (Note 9) -- -- 234,796
Accrued expenses and other liabiilties ...................... 71,743 232,777 3,014,908
------------ -------------- ---------------
Total liabilities ..................................... 9,176,616 8,165,619 1,316,002,500
------------ -------------- ---------------
Net assets, at value ............................... $454,774,134 $2,340,979,224 $46,507,355,311
------------ -------------- ---------------
Net assets consist of:
Paid-in capital ............................................. $249,241,823 $1,083,490,921 $57,059,155,974
Undistributed net investment income ......................... -- 10,241,399 151,244,134
Net unrealized appreciation (depreciation) .................. 177,707,851 1,263,935,188 (10,537,481,135)
Accumulated net realized gain (loss) ........................ 27,824,460 (16,688,284) (165,563,662)
------------ -------------- ---------------
Net assets, at value ............................... $454,774,134 $2,340,979,224 $46,507,355,311
------------ -------------- ---------------
(a) The Franklin Income Fund includes $27,124,727 of securities loaned.
The accompanying notes are an integral part of these financial statements.
Annual Report | 107
FRANKLIN CUSTODIAN FUNDS
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2008
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
------------ -------------- ---------------
CLASS A:
Net assets, at value ................................................ $388,843,211 $1,708,612,045 $26,892,972,557
------------ -------------- ---------------
Shares outstanding .................................................. 15,632,510 45,967,776 13,612,330,541
------------ -------------- ---------------
Net asset value per share(a) ........................................ $ 24.87 $ 37.17 $ 1.98
------------ -------------- ---------------
Maximum offering price per share (net asset value per share / 94.25%,
94.25% and 95.75%, respectively) ................................. $ 26.39 $ 39.44 $ 2.07
------------ -------------- ---------------
CLASS B:
Net assets, at value ................................................ $ 10,703,816 $ 89,778,767 $ 2,428,765,169
------------ -------------- ---------------
Shares outstanding .................................................. 455,933 2,532,916 1,234,208,794
------------ -------------- ---------------
Net asset value and maximum offering price per share(a) ............. $ 23.48 $ 35.44 $ 1.97
------------ -------------- ---------------
CLASS B1:
Net assets, at value ................................................ -- -- $ 224,712,648
------------ -------------- ---------------
Shares outstanding .................................................. -- -- 113,663,654
------------ -------------- ---------------
Net asset value and maximum offering price per share(a) ............. -- -- $ 1.98
------------ -------------- ---------------
CLASS C:
Net assets, at value ................................................ $ 53,289,341 $ 255,425,099 $12,433,142,763
------------ -------------- ---------------
Shares outstanding .................................................. 2,294,150 7,268,101 6,249,871,016
------------ -------------- ---------------
Net asset value and maximum offering price per share(a) ............. $ 23.23 $ 35.14 $ 1.99
------------ -------------- ---------------
CLASS R:
Net assets, at value ................................................ -- $ 30,175,455 $ 267,955,857
------------ -------------- ---------------
Shares outstanding .................................................. -- 818,448 137,082,084
------------ -------------- ---------------
Net asset value and maximum offering price per share ................ -- $ 36.87 $ 1.95
------------ -------------- ---------------
ADVISOR CLASS:
Net assets, at value ................................................ $ 1,937,766 $ 256,987,858 $ 4,259,806,317
------------ -------------- ---------------
Shares outstanding .................................................. 77,829 6,898,141 2,166,945,698
------------ -------------- ---------------
Net asset value and maximum offering price per share ................ $ 24.90 $ 37.25 $ 1.97
------------ -------------- ---------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
108 | Annual Report
FRANKLIN CUSTODIAN FUNDS
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2008
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- ---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........... $ 6,550,072,650 $ 1,647,519,944
Cost - Sweep Money Fund (Note 7) ...... 268,656,075 2,283,674
Cost - Repurchase agreements .......... 225,485,000 --
--------------- ---------------
Total cost of investments ............. $ 7,044,213,725 $ 1,649,803,618
--------------- ---------------
Value - Unaffiliated issuers .......... $ 6,544,920,621 $ 2,288,901,462
Value - Sweep Money Fund (Note 7) ..... 268,656,075 2,283,674
Value - Repurchase agreements ......... 225,485,000 --
--------------- ---------------
Total value of investments ............ 7,039,061,696 2,291,185,136
Cash ..................................... 3,618 --
Receivables:
Investment securities sold ............ -- 5,012,592
Capital shares sold ................... 51,645,997 2,083,560
Dividends and interest ................ 29,560,732 6,750,901
--------------- ---------------
Total assets ....................... 7,120,272,043 2,305,032,189
--------------- ---------------
Liabilities:
Payables:
Investment Securities purchased ....... 150,132,813 --
Capital shares redeemed ............... -- 5,808,087
Affiliates ............................ 3,531,786 1,960,331
Unaffiliated transfer agent fees ...... 811,317 308,167
Accrued expenses and other liabiilties ... 365,075 202,917
--------------- ---------------
Total liabilities .................. 154,840,991 8,279,502
--------------- ---------------
Net assets, at value ............ $ 6,965,431,052 $ 2,296,752,687
--------------- ---------------
Net assets consist of:
Paid-in capital .......................... $ 7,375,477,253 $ 1,633,844,922
Undistributed net investment income ...... 3,642,998 6,193,982
Net unrealized appreciation (depreciation) (5,152,029) 641,371,032
Accumulated net realized gain (loss) ..... (408,537,170) 15,342,751
--------------- ---------------
Net assets, at value ............ $ 6,965,431,052 $ 2,296,752,687
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
Annual Report | 109
FRANKLIN CUSTODIAN FUNDS
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2008
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- --------------
CLASS A:
Net assets, at value ................................................ $5,353,960,509 $1,769,397,237
--------------- --------------
Shares outstanding .................................................. 829,532,460 148,425,313
--------------- --------------
Net asset value per share(a) ........................................ $ 6.45 $ 11.92
--------------- --------------
Maximum offering price per share (net asset value per share / 95.75%) $ 6.74 $ 12.45
--------------- --------------
CLASS B:
Net assets, at value ................................................ $ 284,648,740 $ 92,695,069
--------------- --------------
Shares outstanding .................................................. 44,169,507 7,782,031
--------------- --------------
Net asset value and maximum offering price per share(a) ............. $ 6.44 $ 11.91
--------------- --------------
CLASS C:
Net assets, at value ................................................ $ 610,147,602 $ 339,246,835
--------------- --------------
Shares outstanding .................................................. 95,025,071 28,553,925
--------------- --------------
Net asset value and maximum offering price per share(a) ............. $ 6.42 $ 11.88
--------------- --------------
CLASS R:
Net assets, at value ................................................ $ 104,648,407 $ 36,596,226
--------------- --------------
Shares outstanding .................................................. 16,227,029 3,078,013
--------------- --------------
Net asset value and maximum offering price per share ................ $ 6.45 $ 11.89
--------------- --------------
ADVISOR CLASS:
Net assets, at value ................................................ $ 612,025,794 $ 58,817,320
--------------- --------------
Shares outstanding .................................................. 94,587,567 4,910,563
--------------- --------------
Net asset value and maximum offering price per share ................ $ 6.47 $ 11.98
--------------- --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
110 | Annual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended September 30, 2008
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------- ------------- ----------------
Investment income:
Dividends:
Unaffiliated issuers ..................................................... $ 3,653,727 $ 39,462,563 $ 1,164,911,091
Non-controlled affiliated issuers (Note 10) .............................. -- -- 181,060,531
Sweep Money Fund (Note 7) ................................................ 331,038 828,060 6,579,761
Interest .................................................................... 10,276 -- 2,758,067,928
Income from Securities loaned ............................................... 42,842 -- 3,041,178
------------- ------------- ----------------
Total investment income ............................................... 4,037,883 40,290,623 4,113,660,489
------------- ------------- ----------------
Expenses:
Management fees (Note 3a) ................................................... 2,755,024 12,544,223 219,689,327
Distribution fees: (Note 3c)
Class A .................................................................. 1,190,877 4,865,049 50,223,685
Class B .................................................................. 145,709 1,160,677 32,557,482
Class B1 ................................................................. -- -- 2,092,799
Class C .................................................................. 652,161 3,053,322 99,231,862
Class R .................................................................. -- 294,059 1,497,520
Transfer agent fees (Note 3e) ............................................... 1,135,236 4,528,767 42,660,610
Custodian fees (Note 4) ..................................................... 13,114 53,202 1,252,200
Reports to shareholders ..................................................... 86,463 396,386 5,112,111
Registration and filing fees ................................................ 93,265 161,600 1,059,141
Professional fees ........................................................... 32,615 56,575 530,022
Trustees' fees and expenses ................................................. 3,438 16,704 317,614
Other ....................................................................... 31,675 41,683 1,411,825
------------- ------------- ----------------
Total expenses ........................................................ 6,139,577 27,172,247 457,636,198
Expense reductions (Note 4) ........................................... (443) (195) (565,564)
------------- ------------- ----------------
Net expenses ....................................................... 6,139,134 27,172,052 457,070,634
------------- ------------- ----------------
Net investment income (loss) .................................... (2,101,251) 13,118,571 3,656,589,855
------------- ------------- ----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers .................................................. 43,424,048 93,114,666 (208,344,666)
Non-controlled affiliated issuers (Note 10) ........................... -- -- 130,968,043
Realized gain distributions from REITs ................................... -- -- 4,014,297
Foreign currency transactions ............................................ (40,773) 3,793 172,944
------------- ------------- ----------------
Net realized gain (loss) ........................................ 43,383,275 93,118,459 (73,189,382)
------------- ------------- ----------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. (169,942,555) (703,968,727) (16,753,477,846)
Translation of other assets and liabilities denominated in foreign
currencies ............................................................ -- -- (340,310)
------------- ------------- ----------------
Net change in unrealized appreciation (depreciation) ............ (169,942,555) (703,968,727) (16,753,818,156)
------------- ------------- ----------------
Net realized and unrealized gain (loss) ..................................... (126,559,280) (610,850,268) (16,827,007,538)
------------- ------------- ----------------
Net increase (decrease) in net assets resulting from operations ............. $(128,660,531) $(597,731,697) $(13,170,417,683)
============= ============= ================
The accompanying notes are an integral part of these financial statements.
Annual Report | 111
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended September 30, 2008
FRANKLIN
U.S.
GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------ -------------
Investment income:
Dividends:
Unaffiliated issuers ........................................................ $ -- $ 92,993,759
Sweep Money Fund (Note 7) ................................................... 6,532,256 778,899
Interest ....................................................................... 350,685,853 6,739,863
------------ -------------
Total investment income .................................................. 357,218,109 100,512,521
------------ -------------
Expenses:
Management fees (Note 3a) ...................................................... 29,639,832 12,462,430
Distribution fees: (Note 3c)
Class A ..................................................................... 7,030,144 3,063,384
Class B ..................................................................... 1,945,274 765,707
Class C ..................................................................... 3,230,384 2,648,265
Class R ..................................................................... 441,045 213,711
Transfer agent fees (Note 3e) .................................................. 8,426,391 3,125,123
Custodian fees (Note 4) ........................................................ 115,560 83,866
Reports to shareholders ........................................................ 537,561 288,905
Registration and filing fees ................................................... 238,166 153,415
Professional fees .............................................................. 86,501 24,642
Trustees' fees and expenses .................................................... 38,425 16,324
Other .......................................................................... 379,422 70,324
------------ -------------
Total expenses ........................................................... 52,108,705 22,916,096
Expense reductions (Note 4) .............................................. (29,554) (14,191)
------------ -------------
Net expenses .......................................................... 52,079,151 22,901,905
------------ -------------
Net investment income .............................................. 305,138,958 77,610,616
------------ -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................. (4,950,231) 55,038,209
Foreign currency transactions ............................................... -- 188,661
------------ -------------
Net realized gain (loss) ........................................... (4,950,231) 55,226,870
------------ -------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. 74,540,856 (444,636,557)
Translation of other assets and liabiilties denominated in foreign currencies -- (11,188)
------------ -------------
Net change in unrealized appreciation (depreciation) ............... 74,540,856 (444,647,745)
------------ -------------
Net realized and unrealized gain (loss) ........................................... 69,590,625 (389,420,875)
------------ -------------
Net increase (decrease) in net assets resulting from operations ................... $374,729,583 $(311,810,259)
============ =============
The accompanying notes are an integral part of these financial statements.
112 | Annual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
----------------------------- -------------------------------
2008 2007 2008 2007
------------- ------------- -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........................... $ (2,101,251) $ (2,484,227) $ 13,118,571 $ 7,383,921
Net realized gain (loss) from investments and foreign
currency transactions ............................... 43,383,275 54,267,988 93,118,459 8,027,309
Net change in unrealized appreciation (depreciation) on
investments ......................................... (169,942,555) 88,303,700 (703,968,727) 436,966,418
------------- ------------- -------------- --------------
Net increase (decrease) in net assets resulting from
operations ....................................... (128,660,531) 140,087,461 (597,731,697) 452,377,648
------------- ------------- -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ............................................. -- -- (6,070,923) (4,596,420)
Class R ............................................. -- -- (37,603) (7,075)
Advisor Class ....................................... -- -- (1,821,203) (1,417,769)
Net realized gains:
Class A ............................................. (11,692,397) -- -- --
Class B ............................................. (381,099) -- -- --
Class C ............................................. (1,631,082) -- -- --
------------- ------------- -------------- --------------
Total distributions to shareholders .................... (13,704,578) -- (7,929,729) (6,021,264)
------------- ------------- -------------- --------------
Capital share transactions: (Note 2)
Class A ............................................. (43,399,423) (159,197,616) 15,676,618 111,946,191
Class B ............................................. (2,207,134) (5,690,695) (23,505,949) (5,331,820)
Class C ............................................. (13,103) (13,236,699) (17,756,728) 18,194,989
Class R ............................................. -- -- (9,619,605) 8,345,533
Advisor Class ....................................... 2,370,407 -- (37,246,106) 34,972,750
------------- ------------- -------------- --------------
Total Capital share transactions ....................... (43,249,253) (178,125,010) (72,451,770) 168,127,643
------------- ------------- -------------- --------------
Redemption fees ........................................ 2,715 3,893 7,384 8,351
------------- ------------- -------------- --------------
Net increase (decrease) in net assets ............... (185,611,647) (38,033,656) (678,105,812) 614,492,378
Net assets:
Beginning of year ...................................... 640,385,781 678,419,437 3,019,085,036 2,404,592,658
------------- ------------- -------------- --------------
End of year ............................................ $ 454,774,134 $ 640,385,781 $2,340,979,224 $3,019,085,036
============= ============= ============== ==============
Undistributed net investment income included in net assets:
End of year ............................................ $ -- $ -- $ 10,241,399 $ 5,085,267
============= ============= ============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 113
Franklin Custodian Funds
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,
---------------------------------- -------------------------------
2008 2007 2008 2007
---------------- --------------- -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 3,656,589,855 $ 2,885,381,172 $ 305,138,958 $ 301,720,105
Net realized gain (loss) from investments, realized
gain distributions from REITs, and foreign currency
transactions ...................................... (73,189,382) 1,473,778,958 (4,950,231) (2,097,105)
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies ..... (16,753,818,156) 2,517,987,350 74,540,856 (10,362,317)
---------------- --------------- -------------- --------------
Net increase (decrease) in net assets resulting
from operations ............................. (13,170,417,683) 6,877,147,480 374,729,583 289,260,683
---------------- --------------- -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ........................................... (2,070,078,091) (1,687,207,815) (255,332,116) (264,748,989)
Class B ........................................... (175,223,876) (173,469,301) (13,147,734) (16,375,700)
Class B1 .......................................... (18,498,215) (21,754,097) -- --
Class C ........................................... (864,273,614) (694,869,015) (21,546,227) (19,237,012)
Class R ........................................... (17,491,311) (11,742,767) (3,921,392) (3,515,272)
Advisor Class ..................................... (358,190,789) (280,791,335) (27,206,570) (22,110,321)
Net realized gains:
Class A ........................................... (800,081,992) (420,454,280) -- --
Class B ........................................... (82,519,889) (56,272,957) -- --
Class B1 .......................................... (8,423,689) (6,844,643) -- --
Class C ........................................... (363,101,410) (190,856,659) -- --
Class R ........................................... (6,753,197) (2,957,517) -- --
Advisor Class ..................................... (142,671,699) (62,928,530) -- --
---------------- --------------- -------------- --------------
Total distributions to shareholders ..................... (4,907,307,772) (3,610,148,916) (321,154,039) (325,987,294)
---------------- --------------- -------------- --------------
Capital share transactions: (Note 2)
Class A ........................................... 1,818,347,709 6,982,490,371 236,684,954 (188,222,491)
Class B ........................................... (326,601,311) (237,976,392) (35,014,568) (69,804,640)
Class B1 .......................................... (76,335,994) (91,477,067) -- --
Class C ........................................... 1,004,888,472 3,211,521,930 189,199,415 (3,037,771)
Class R ........................................... 78,037,080 89,672,613 29,664,847 3,854,638
Advisor Class ..................................... (219,327,033) 2,131,138,371 136,835,144 85,580,325
---------------- --------------- -------------- --------------
Total Capital share transactions ........................ 2,279,008,923 12,085,369,826 557,369,792 (171,629,939)
---------------- --------------- -------------- --------------
Redemption fees ......................................... 176,722 231,167 78,148 35,787
---------------- --------------- -------------- --------------
Net increase (decrease) in net assets .......... (15,798,539,810) 15,352,599,557 611,023,484 (208,320,763)
Net assets:
Beginning of year .................................... 62,305,895,121 46,953,295,564 6,354,407,568 6,562,728,331
---------------- --------------- -------------- --------------
End of year .......................................... $ 46,507,355,311 $62,305,895,121 $6,965,431,052 $6,354,407,568
================ =============== ============== ==============
Undistributed net investment income (distributions in
excess of net investment income) included in net
assets:
End of year .......................................... $ 151,244,134 $ (9,898,818) $ 3,642,998 $ 4,662,479
================ =============== ============== ==============
The accompanying notes are an integral part of these financial statements.
114 | Annual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30,
-------------------------------
2008 2007
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................. $ 77,610,616 $ 77,162,851
Net realized gain (loss) from investments and foreign currency
transactions ....................................................... 55,226,870 122,861,109
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign
currencies ......................................................... (444,647,745) 304,461,563
-------------- --------------
Net increase (decrease) in net assets resulting from
operations (311,810,259) 504,485,523
-------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................ (60,642,671) (60,045,625)
Class B ............................................................ (2,772,274) (3,213,589)
Class C ............................................................ (9,718,344) (10,097,373)
Class R ............................................................ (1,082,816) (958,675)
Advisor Class ...................................................... (2,496,434) (2,754,192)
Net realized gains:
Class A ............................................................ (107,493,008) (68,750,277)
Class B ............................................................ (6,261,449) (4,691,564)
Class C ............................................................ (21,133,249) (14,079,324)
Class R ............................................................ (2,175,474) (1,073,396)
Advisor Class ...................................................... (4,410,835) (2,861,866)
-------------- --------------
Total distributions to shareholders ...................................... (218,186,554) (168,525,881)
-------------- --------------
Capital share transactions: (Note 2)
Class A ............................................................... 15,831,422 (21,840,975)
Class B ............................................................... (12,918,491) (23,358,533)
Class C ............................................................... (7,376,287) (17,678,674)
Class R ............................................................... 3,080,978 10,467,103
Advisor Class ......................................................... (10,722,085) (27,554,529)
-------------- --------------
Total Capital share transactions ......................................... (12,104,463) (79,965,608)
-------------- --------------
Redemption fees .......................................................... 8,502 10,165
-------------- --------------
Net increase (decrease) in net assets ........................... (542,092,774) 256,004,199
Net assets:
Beginning of year ........................................................ 2,838,845,461 2,582,841,262
-------------- --------------
End of year .............................................................. $2,296,752,687 $2,838,845,461
============== ==============
Undistributed net investment income included in net assets:
End of year .............................................................. $ 6,193,982 $ 5,263,467
============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 115
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as a diversified, open-end investment company,
consisting of five funds (Funds). The classes of shares offered within each of
the Funds are indicated below. Effective May 15, 2008, the Franklin DynaTech
Fund began offering a new class of shares, Advisor Class. 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 & ADVISOR CLASS 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 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 Trust 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 Trust'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.
116 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the 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 Trust's Board of Trustees.
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 Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 117
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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. All repurchase agreements held by the Funds at year end had been
entered into on September 30, 2008. Repurchase agreements are valued at cost.
D. SECURITIES PURCHASED ON A DELAYED DELIVERY AND TBA BASIS
The Funds may purchase securities on a delayed delivery and 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 at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
F. SECURITIES LENDING
Certain funds may loan securities to certain brokers through a securities
lending agent for which they receive initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at
118 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. SECURITIES LENDING (CONTINUED)
the close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
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.
G. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
H. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy 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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of September 30, 2008, and have
determined that no provision for income tax is required in the Funds' financial
statements.
I. 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. Facility fees are recognized as income over the expected term of the
loan. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with accounting
principles generally accepted in the United States of America.
Annual Report | 119
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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 Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
J. 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.
K. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the Funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Funds, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
120 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At September 30, 2008, there were an unlimited number of shares authorized
(without par value). 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, 2008
Shares sold ........................ 2,459,851 $ 74,264,719 8,827,142 $ 378,328,625
Shares issued in reinvestment
of distributions ................ 327,827 10,398,720 122,947 5,584,261
Shares redeemed .................... (4,271,990) (128,062,862) (8,782,747) (368,236,268)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (1,484,312) $ (43,399,423) 167,342 $ 15,676,618
========== ============= ========== =============
Year ended September 30, 2007
Shares sold ........................ 2,290,315 $ 65,251,876 7,116,058 $ 308,077,143
Shares issued on merger (Note 12) .. -- -- 3,043,797 137,823,135
Shares issued in reinvestment
of distributions ................ -- -- 101,412 4,209,599
Shares redeemed .................... (8,062,352) (224,449,492) (7,830,995) (338,163,686)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (5,772,037) $(159,197,616) 2,430,272 $ 111,946,191
========== ============= ========== =============
CLASS B SHARES:
Year ended September 30, 2008
Shares sold ........................ 52,403 $ 1,544,828 125,600 $ 5,153,957
Shares issued in reinvestment
of distributions ................ 11,458 345,223 -- --
Shares redeemed .................... (148,078) (4,097,185) (714,091) (28,659,906)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (84,217) $ (2,207,134) (588,491) $ (23,505,949)
========== ============= ========== =============
Year ended September 30, 2007
Shares sold ........................ 35,535 $ 983,338 126,580 $ 5,254,130
Shares issued on merger (Note 12) .. -- -- 417,038 18,128,654
Shares redeemed .................... (251,520) (6,674,033) (685,999) (28,714,604)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (215,985) $ (5,690,695) (142,381) $ (5,331,820)
========== ============= ========== =============
CLASS C SHARES:
Year ended September 30, 2008
Shares sold ........................ 463,723 $ 13,055,269 1,049,876 $ 42,650,882
Shares issued in reinvestment
of distributions ................ 49,809 1,484,796 -- --
Shares redeemed .................... (531,022) (14,553,168) (1,518,464) (60,407,610)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (17,490) $ (13,103) (468,588) $ (17,756,728)
========== ============= ========== =============
Year ended September 30, 2007
Shares sold ........................ 309,370 $ 8,310,379 908,813 $ 37,554,639
Shares issued on merger (Note 12) .. -- -- 716,864 30,896,850
Shares redeemed .................... (816,939) (21,547,078) (1,217,586) (50,256,500)
---------- ------------- ---------- -------------
Net increase (decrease) ............ (507,569) $ (13,236,699) 408,091 $ 18,194,989
========== ============= ========== =============
Annual Report | 121
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FRANKLIN GROWTH
FUND(a) FUND
------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ---------- ---------- ------------
CLASS R SHARES:
Year ended September 30, 2008
Shares sold ........................ 1,405,234 $ 60,391,562
Shares issued in reinvestment
of distributions ................ 831 37,532
Shares redeemed .................... (1,742,886) (70,048,699)
---------- ------------
Net increase (decrease) ............ (336,821) $ (9,619,605)
========== ============
Year ended September 30, 2007
Shares sold ........................ 673,616 $ 29,574,369
Shares issued on merger (Note 12) .. 111,203 4,998,560
Shares issued in reinvestment
of distributions ................ 170 7,025
Shares redeemed .................... (604,060) (26,234,421)
---------- ------------
Net increase (decrease) ............ 180,929 $ 8,345,533
========== ============
ADVISOR CLASS SHARES:
Year ended September 30, 2008
Shares sold ........................ 77,884 $2,371,991 435,026 $ 18,614,125
Shares issued in reinvestment
of distributions ................ -- -- 35,629 1,618,617
Shares redeemed .................... (55) (1,584) (1,391,576) (57,478,848)
------ ---------- ---------- ------------
Net increase (decrease) ............ 77,829 $2,370,407 (920,921) $(37,246,106)
====== ========== ========== ============
Year ended September 30, 2007
Shares sold ........................ 1,295,736 $ 56,171,819
Shares issued in reinvestment
of distributions ................ 30,693 1,273,761
Shares redeemed .................... (517,639) (22,472,830)
---------- ------------
Net increase (decrease) ............ 808,790 $ 34,972,750
========== ============
(a) For the period May 15, 2008 (effective date) to September 30, 2008, for
Advisor Class.
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- ------------ --------------
CLASS A SHARES:
Year ended September 30, 2008
Shares sold ........................ 2,544,696,021 $ 6,300,808,165 163,998,702 $1,063,757,904
Shares issued in reinvestment
of distributions ................ 861,810,845 2,170,625,893 26,672,832 172,606,574
Shares redeemed .................... (2,750,408,371) (6,653,086,349) (154,570,818) (999,679,524)
-------------- --------------- ------------ --------------
Net increase (decrease) ............ 656,098,495 $ 1,818,347,709 36,100,716 $ 236,684,954
============== =============== ============ ==============
Year ended September 30, 2007
Shares sold ........................ 3,628,482,534 $ 9,782,378,082 89,570,006 $ 572,054,399
Shares issued in reinvestment
of distributions ................ 571,568,447 1,528,060,841 27,176,503 173,586,391
Shares redeemed .................... (1,607,011,948) (4,327,948,552) (146,074,856) (933,863,281)
-------------- --------------- ------------ --------------
Net increase (decrease) ............ 2,593,039,033 $ 6,982,490,371 (29,328,347) $ (188,222,491)
============== =============== ============ ==============
122 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-------------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- ----------- -------------
CLASS B SHARES:
Year ended September 30, 2008
Shares sold ........................ 27,100,787 $ 66,950,743 5,348,092 $ 34,672,758
Shares issued in reinvestment
of distributions ................ 69,806,922 176,086,346 1,444,414 9,335,318
Shares redeemed .................... (235,941,388) (569,638,400) (12,232,414) (79,022,644)
-------------- --------------- ----------- -------------
Net increase (decrease) ............ (139,033,679) $ (326,601,311) (5,439,908) $ (35,014,568)
============== =============== =========== =============
Year ended September 30, 2007
Shares sold ........................ 26,283,586 $ 70,278,655 3,616,339 $ 23,020,104
Shares issued in reinvestment
of distributions ................ 57,504,745 152,858,061 1,811,967 11,565,622
Shares redeemed .................... (171,972,882) (461,113,108) (16,362,133) (104,390,366)
-------------- --------------- ----------- -------------
Net increase (decrease) ............ (88,184,551) $ (237,976,392) (10,933,827) $ (69,804,640)
============== =============== =========== =============
CLASS B1 SHARES:
Year ended September 30, 2008
Shares sold ........................ 822,057 $ 2,065,334
Shares issued in reinvestment
of distributions ................ 6,648,942 16,876,257
Shares redeemed .................... (38,805,221) (95,277,585)
-------------- ---------------
Net increase (decrease) ............ (31,334,222) $ (76,335,994)
============== ===============
Year ended September 30, 2007
Shares sold ........................ 899,431 $ 2,413,953
Shares issued in reinvestment
of distributions ................ 6,473,282 17,262,644
Shares redeemed .................... (40,982,281) (111,153,664)
-------------- ---------------
Net increase (decrease) ............ (33,609,568) $ (91,477,067)
============== ===============
CLASS C SHARES:
Year ended September 30, 2008
Shares sold ........................ 1,222,445,500 $ 3,049,617,623 48,720,410 $ 314,954,793
Shares issued in reinvestment
of distributions ................ 334,651,278 849,748,929 2,414,820 15,553,869
Shares redeemed .................... (1,188,226,292) (2,894,478,080) (21,953,511) (141,309,247)
-------------- --------------- ----------- -------------
Net increase (decrease) ............ 368,870,486 $ 1,004,888,472 29,181,719 $ 189,199,415
============== =============== =========== =============
Year ended September 30, 2007
Shares sold ........................ 1,644,870,588 $ 4,457,040,035 15,412,013 $ 97,975,806
Shares issued in reinvestment
of distributions ................ 222,758,383 598,767,427 2,096,225 13,330,712
Shares redeemed .................... (680,795,624) (1,844,285,532) (17,971,749) (114,344,289)
-------------- --------------- ----------- -------------
Net increase (decrease) ............ 1,186,833,347 $ 3,211,521,930 (463,511) $ (3,037,771)
============== =============== =========== =============
Annual Report | 123
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
------------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ---------- ------------
CLASS R SHARES:
Year ended September 30, 2008
Shares sold ........................ 58,875,986 $ 144,210,207 9,784,662 $ 63,518,662
Shares issued in reinvestment
of distributions ................ 8,993,345 22,370,464 589,231 3,808,045
Shares redeemed .................... (36,526,510) (88,543,591) (5,812,499) (37,661,860)
------------ --------------- ---------- ------------
Net increase (decrease) ............ 31,342,821 $ 78,037,080 4,561,394 $ 29,664,847
============ =============== ========== ============
Year ended September 30, 2007
Shares sold ........................ 53,585,214 $ 142,909,679 4,541,307 $ 28,992,426
Shares issued in reinvestment
of distributions ................ 5,151,276 13,638,691 540,550 3,451,439
Shares redeemed .................... (25,079,906) (66,875,757) (4,480,075) (28,589,227)
------------ --------------- ---------- ------------
Net increase (decrease) ............ 33,656,584 $ 89,672,613 601,782 $ 3,854,638
============ =============== ========== ============
ADVISOR CLASS SHARES:
Year ended September 30, 2008
Shares sold ........................ 150,837,000 $ 385,467,201 23,046,973 $149,358,584
Shares issued in reinvestment
of distributions ................ 194,550,584 488,488,071 3,926,708 25,461,308
Shares redeemed .................... (451,931,098) (1,093,282,305) (5,837,483) (37,984,748)
------------ --------------- ---------- ------------
Net increase (decrease) ............ (106,543,514) $ (219,327,033) 21,136,198 $136,835,144
============ =============== ========== ============
Year ended September 30, 2007
Shares sold ........................ 769,652,986 $ 2,071,994,710 12,993,585 $ 83,208,714
Shares issued in reinvestment
of distributions ................ 125,446,877 334,084,120 3,251,900 20,807,294
Shares redeemed .................... (101,321,041) (274,940,459) (2,877,041) (18,435,683)
------------ --------------- ---------- ------------
Net increase (decrease) ............ 793,778,822 $ 2,131,138,371 13,368,444 $ 85,580,325
============ =============== ========== ============
FRANKLIN UTILITIES FUND
--------------------------
SHARES AMOUNT
----------- ------------
CLASS A SHARES:
Year ended September 30, 2008
Shares sold ....................................... 16,043,525 $ 225,313,039
Shares issued in reinvestment of distributions .... 9,557,544 137,168,657
Shares redeemed ................................... (25,172,402) (346,650,274)
----------- -------------
Net increase (decrease) ........................... 428,667 $ 15,831,422
=========== =============
Year ended September 30, 2007
Shares sold ....................................... 16,452,979 $ 234,790,574
Shares issued in reinvestment of distributions .... 7,413,021 102,543,663
Shares redeemed ................................... (25,346,996) (359,175,212)
----------- -------------
Net increase (decrease) ........................... (1,480,996) $ (21,840,975)
=========== =============
124 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN UTILITIES FUND
--------------------------
SHARES AMOUNT
----------- ------------
CLASS B SHARES:
Year ended September 30, 2008
Shares sold ....................................... 520,447 $ 7,346,138
Shares issued in reinvestment of distributions .... 385,638 5,555,107
Shares redeemed ................................... (1,884,233) (25,819,736)
----------- ------------
Net increase (decrease) ........................... (978,148) $(12,918,491)
=========== ============
Year ended September 30, 2007
Shares sold ....................................... 350,265 $ 4,952,986
Shares issued in reinvestment of distributions .... 336,830 4,638,541
Shares redeemed ................................... (2,318,432) (32,950,060)
----------- ------------
Net increase (decrease) ........................... (1,631,337) $(23,358,533)
=========== ============
CLASS C SHARES:
Year ended September 30, 2008
Shares sold ....................................... 4,526,897 $ 63,185,313
Shares issued in reinvestment of distributions .... 1,256,000 18,036,872
Shares redeemed ................................... (6,474,947) (88,598,472)
----------- ------------
Net increase (decrease) ........................... (692,050) $ (7,376,287)
=========== ============
Year ended September 30, 2007
Shares sold ....................................... 4,165,031 $ 59,095,738
Shares issued in reinvestment of distributions .... 944,817 12,995,547
Shares redeemed ................................... (6,325,289) (89,769,959)
----------- ------------
Net increase (decrease) ........................... (1,215,441) $(17,678,674)
=========== ============
CLASS R SHARES:
Year ended September 30, 2008
Shares sold ....................................... 1,413,654 $ 19,831,591
Shares issued in reinvestment of distributions .... 223,864 3,206,653
Shares redeemed ................................... (1,437,674) (19,957,266)
----------- ------------
Net increase (decrease) ........................... 199,844 $ 3,080,978
=========== ============
Year ended September 30, 2007
Shares sold ....................................... 1,804,789 $ 25,896,475
Shares issued in reinvestment of distributions .... 144,680 2,003,404
Shares redeemed ................................... (1,227,664) (17,432,776)
----------- ------------
Net increase (decrease) ........................... 721,805 $ 10,467,103
=========== ============
ADVISOR CLASS SHARES:
Year ended September 30, 2008
Shares sold ....................................... 2,965,799 $ 43,092,338
Shares issued in reinvestment of distributions .... 392,475 5,664,728
Shares redeemed ................................... (4,378,036) (59,479,151)
----------- ------------
Net increase (decrease) ........................... (1,019,762) $(10,722,085)
=========== ============
Year ended September 30, 2007
Shares sold ....................................... 2,917,605 $ 42,109,228
Shares issued in reinvestment of distributions .... 339,912 4,731,472
Shares redeemed ................................... (5,286,535) (74,395,229)
----------- ------------
Net increase (decrease) ........................... (2,029,018) $(27,554,529)
=========== ============
Annual Report | 125
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
trustees of the Trust 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 January 1, 2008, the Franklin Income Fund and the Franklin Utilities
Fund pay an investment management fee to Advisers 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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% Over $50 billion, up to and including $65 billion
0.345% Over $65 billion, up to and including $80 billion
0.340% In excess of $80 billion
Effective January 1, 2008, the Franklin DynaTech Fund and the Franklin U.S.
Government Securities Fund pay an investment management fee to Advisers, and the
Franklin Growth Fund pays an investment management fee to Investment Advisory,
based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
126 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
Prior to January 1, 2008, the Funds, except Franklin Growth Fund, paid fees to
Advisers, and the Franklin Growth Fund paid fees 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
B. ADMINISTRATIVE FEES
Under an agreement with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees 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
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate. Under the Class A reimbursement distribution plans, costs exceeding
the maximum for the current plan year cannot be reimbursed in subsequent
periods.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
-------- -------- -------- --------------- ---------
Reimbursement Plans:
Class A................ 0.25% 0.25% 0.15% 0.15% 0.15%
Annual Report | 127
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
-------- -------- -------- --------------- ---------
Compensation Plans:
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......... $71,001 $852,127 $15,139,949
Contingent deferred sales charges retained..... $17,911 $100,295 $ 6,537,928
FRANKLIN U.S.
GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------- ---------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers......... $1,047,801 $365,618
Contingent deferred sales charges retained..... $ 421,134 $107,434
E. TRANSFER AGENT FEES
For the year ended September 30, 2008, 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..... $822,856 $3,360,973 $22,820,164
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------- ----------
Transfer agent fees..... $5,433,324 $1,962,749
128 | Annual Report
Franklin Custodian Funds
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, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At September 30, 2008, the capital loss carryforwards were as
follows:
FRANKLIN
U.S. GOVERNMENT
FRANKLIN SECURITIES
GROWTH FUND FUND
----------- ---------------
Capital loss carryforwards expiring in:
2009................................ $ -- $ 46,256,951
2010................................ -- 11,768,551
2011................................ -- 33,556,845
2012................................ 16,688,284 129,102,166
2013................................ -- 74,283,298
2014................................ -- 47,763,112
2015................................ -- 28,034,940
2016................................ -- 20,514,778
----------- ------------
$16,688,284 $391,280,641
=========== ============
During the year ended September 30, 2008, the Franklin DynaTech Fund and
Franklin Growth Fund utilized $1,854,237 and $93,093,955, respectively, of
capital loss carryforwards.
On September 30, 2008, the Franklin U.S. Government Securities Fund had expired
capital loss carryforwards of $21,105,846, 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, 2008, the Franklin Income
Fund and the Franklin U.S. Government Securities Fund deferred realized capital
losses of $178,431,115 and $17,256,529, respectively. At September 30, 2008, the
Franklin DynaTech Fund deferred realized currency losses of $40,773.
Annual Report | 129
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended September 30,
2008 and 2007, was as follows:
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
---------------------- -----------------------
2008 2007 2008 2007
----------- ---- ---------- ----------
Distributions paid from:
Ordinary income ............ $ -- $-- $7,929,729 $6,021,264
Long term Capital gain ..... 13,704,578 -- -- --
----------- --- ---------- ----------
$13,704,578 $-- $7,929,729 $6,021,264
=========== === ========== ==========
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
------------------------------- ---------------------------
2008 2007 2008 2007
-------------- -------------- ------------ ------------
Distributions paid from:
Ordinary income ............ $3,900,167,557 $3,235,233,816 $321,154,039 $325,987,294
Long term Capital gain ..... 1,007,140,215 374,915,100 -- --
-------------- -------------- ------------ ------------
$4,907,307,772 $3,610,148,916 $321,154,039 $325,987,294
============== ============== ============ ============
FRANKLIN UTILITIES FUND
---------------------------
2008 2007
------------ ------------
Distributions paid from:
Ordinary income ............ $ 94,770,295 $ 95,172,967
Long term Capital gain ..... 123,416,259 73,352,914
------------ ------------
$218,186,554 $168,525,881
============ ============
At September 30, 2008, 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 FUND GROWTH FUND INCOME FUND
------------- -------------- ----------------
Cost of investments .......................... $286,065,155 $1,081,960,404 $ 56,884,278,227
============ ============== ================
Unrealized appreciation ...................... $192,241,695 $1,320,387,049 $ 2,473,631,624
Unrealized depreciation ...................... (14,871,045) (59,049,264) (13,018,135,046)
------------ -------------- ----------------
Net unrealized appreciation (depreciation) ... $177,370,650 $1,261,337,785 $(10,544,503,422)
============ ============== ================
Undistributed ordinary income ................ $ -- $ 10,241,400 $ 185,725,899
Undistributed long term Capital gains ........ 28,202,434 -- --
------------ -------------- ----------------
Distributable earnings ....................... $ 28,202,434 $ 10,241,400 $ 185,725,899
============ ============== ================
130 | Annual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------- --------------
Cost of investments .......................... $7,044,213,725 $1,646,273,702
============== ==============
Unrealized appreciation ...................... $ 50,664,344 $ 688,632,028
Unrealized depreciation ...................... (55,816,373) (43,720,594)
-------------- --------------
Net unrealized appreciation (depreciation) ... $ (5,152,029) $ 644,911,434
============== ==============
Undistributed ordinary income ................ $ 3,642,998 $ 2,532,958
Undistributed long term Capital gains ........ -- 15,430,261
-------------- --------------
Distributable earnings ....................... $ 3,642,998 $ 17,963,219
============== ==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, paydown losses, payments-in-kind 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 of investments (excluding short term securities) for the
year ended September 30, 2008, were as follows:
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------- ------------ ---------------
Purchases .................................... $229,394,596 $155,068,895 $24,045,725,745
Sales ........................................ $314,740,070 $198,285,740 $22,133,582,573
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- --------------
Purchases .................................... $1,770,209,077 $225,630,496
Sales ........................................ $1,379,123,108 $351,183,675
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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.
Annual Report | 131
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 46.2% of its portfolio invested in high yield,
senior secured floating rate notes, or other securities rated below investment
grade. These securities may be more sensitive to economic conditions causing
greater price volatility and are potentially subject to a greater risk of loss
due to default than higher rated securities.
The Franklin Income Fund held defaulted securities and/or other securities for
which the income has been deemed uncollectible. At September 30, 2008, the
aggregate value of these securities was $155,907,000, representing 0.34% 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. UNFUNDED LOAN COMMITMENTS
The Franklin Income Fund may enter into certain credit agreements, all or a
portion of which may be unfunded. The fund is obligated to fund these loan
commitments at the borrowers' discretion. Funded portions of credit agreements
are presented on the Statement of Investments.
At September 30, 2008, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENT
- -------- ----------
FRANKLIN INCOME FUND
Bausch and Lomb Inc., Delayed Draw
Term Loan ................................. $3,512,000
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
132 | Annual Report
Franklin Custodian Funds
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, 2008, were as shown below.
NUMBER OF NUMBER OF
SHARES SHARES 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)
- -------------- ---------- --------- ---------- ---------- -------------- ------------ ------------
FRANKLIN INCOME FUND
NON-CONTROLLED AFFILIATES
AGL Resources Inc. ................ 500,000 3,500,000 -- 4,000,000 $ 125,520,000 $ 3,145,000 $ --
Ameren Corp ....................... 12,500,000 -- -- 12,500,000 487,875,000 31,750,000 --
Canadian Oil Sands Trust .......... 25,770,600 -- 770,600 25,000,000 910,243,765 74,975,531 29,276,549
PG&E Corp. ........................ 12,000,000 8,000,000 -- 20,000,000 749,000,000 26,940,000 --
Pinnacle West Capital Corp. ....... 5,500,000 -- -- 5,500,000 189,255,000 11,550,000 --
Public Service Enterprise
Group Inc. ..................... 13,500,000 -- 3,500,000 20,000,000(a) --(b) 25,200,000 101,691,494
Puget Energy Inc. ................. 7,500,000 -- -- 7,500,000 200,250,000 7,500,000 --
-------------- ------------ ------------
TOTAL AFFILIATED SECURITIES
(5.72% of Net Assets) ....... $2,662,143,765 $181,060,531 $130,968,043
============== ============ ============
(a) Reflects a 2:1 stock split during the period.
(b) As of September 30, 2008, no longer an affiliate.
11. UPCOMING MERGERS
On July 10, 2008, the Board of Trustees for the Franklin Custodian Funds
approved a proposal to merge the Franklin Global Communications Fund, the
Franklin Global Health Care Fund, and the Franklin Technology Fund into the
Franklin DynaTech Fund, subject to approval by the shareholders of the Franklin
Global Communications Fund, the Franklin Global Health Care Fund, and the
Franklin Technology Fund.
12. MERGER
On June 15, 2007, the Franklin Growth Fund acquired the net assets of the
Franklin Blue Chip Fund pursuant to a plan of reorganization approved by the
Franklin Blue Chip Fund's shareholders. The merger was accomplished by a
tax-free exchange of 3,043,797 Class A shares, 417,038 Class B shares, 716,864
Class C shares, and 111,203 Class R shares of the Franklin Growth Fund (valued
at $45.28, $43.47, $43.10 and $44.95, respectively) for the net assets of the
Franklin Blue Chip Fund which aggregate $191,847,199 and includes $49,120,531 of
unrealized appreciation (depreciation). The combined net assets of the Franklin
Growth Fund immediately after the merger were $2,955,373,004.
Annual Report | 133
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On October 17, 2006, the Board of Trustees approved an Agreement and Plan of
Reorganization (Agreement) whereby the Franklin Custodian Funds, Inc. would be
reorganized and its domicile changed from a Maryland corporation to a Delaware
statutory trust. In connection with these changes, the Trust's name was also
changed to Franklin Custodian Funds, formerly known as the Franklin Custodian
Funds, Inc. On April 11, 2007, shareholders of the Franklin Custodian Funds
approved the agreement. The reorganization became effective on February 1, 2008.
14. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (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
Trust believes the adoption of SFAS 157 will not have a material impact on its
financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Funds are currently evaluating the impact, if any,
of applying the various provisions of SFAS 161.
134 | Annual Report
Franklin Custodian Funds
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS
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,
formerly Franklin Custodian Funds, Inc., (hereafter referred to as the "Funds")
at September 30, 2008, 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, 2008 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 19, 2008
Annual Report | 135
Franklin Custodian Funds
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
long term capital gain dividends for the fiscal year ended September 30, 2008:
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND INCOME FUND UTILITIES FUND
- ------------- -------------- --------------
$13,704,578 $1,007,140,215 $123,416,259
Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as short term capital gain
dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended September 30, 2008:
FRANKLIN FRANKLIN
INCOME FUND UTILITIES FUND
- ------------ --------------
$396,411,663 $17,983,826
Under Section 854(b)(2) of the Code, the Funds designate the following
percentage amounts of the ordinary income dividends as income qualifying for the
dividends received deduction for the fiscal year ended September 30, 2008.
FRANKLIN FRANKLIN FRANKLIN
GROWTH FUND INCOME FUND UTILITIES FUND
- ----------- ----------- --------------
100% 23.58% 86.81%
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended September 30, 2008.
FRANKLIN FRANKLIN FRANKLIN
GROWTH FUND INCOME FUND UTILITIES FUND
- ----------- ------------ --------------
$39,713,360 $978,458,233 $91,279,054
Distributions, including qualified dividend income, paid during calendar year
2008 will be reported to shareholders on Form 1099-DIV in January 2009.
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 Funds designate the maximum amount
allowable but no less than the following amounts 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, 2008.
FRANKLIN
FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
- ----------- -------------- --------------- --------------
$274,156 $2,551,645,846 $318,538,221 $7,512,021
136 | Annual Report
Franklin Custodian Funds
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. Generally, each board member
serves 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) Trustee Since 1976 144 Bar-S Foods (meat packing company).
One Franklin Parkway
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).
ROBERT F. CARLSON (1928) Trustee Since 2007 122 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior President, Board of Administration, California Public member and Employees
Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate
Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings) Limited
(satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief
Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding
company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 144 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals,
Inc. (manufacture and distribution
of titanium), Canadian National
Railway (railroad) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary
of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 137
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ------------------ ----------------------- -----------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 2007 122 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2005 144 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and Sentient
San Mateo, CA 94403-1906 Jet (private jet service).
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).
LARRY D. THOMPSON (1945) Trustee Since 2007 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 122 None
One Franklin Parkway Independent 2007 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
January 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial
Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President -
Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting
firm) (1986-1990).
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) Trustee, Trustee since 144 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.; Director, Templeton Worldwide,
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 42 of the investment companies in Franklin Templeton Investments.
**RUPERT H. JOHNSON, JR. (1940) Trustee and Since 1983 56 None
One Franklin Parkway Vice President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, 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.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML
- AML Compliance since
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial Officer
Chief and Chief
Accounting Accounting Officer
Officer since February
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of
the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
Annual Report | 139
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------- --------------- ------------------ ----------------------- -----------------------------------
JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable
500 East Broward Blvd. 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and of 46 of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and 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).
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
- ------------------------------- --------------- ------------------ ----------------------- -----------------------------------
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the
other subsidiaries of Franklin Resources, Inc. and 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 Fund 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: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
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 HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS 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. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT 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 (800) DIAL BEN / (800) 342-5236 TO REQUEST THE SAI.
Annual Report | 141
Franklin Custodian Funds
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager 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 (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 (800)
SEC-0330.
142 | Annual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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 FUNDS
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(4)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(2)
Franklin Small Cap Growth Fund(3)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund(1)
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund(1)
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
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(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan(7)
Arizona Minnesota(7)
California(8) Missouri
Colorado New Jersey
Connecticut New York(8)
Florida North Carolina
Georgia Ohio(7)
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts(7) Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(3.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(4.) 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.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(6.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
11/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN TEMPLETON INVESTMENTS
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN CUSTODIAN FUNDS
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2008 11/08
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 John B. Wilson and he is
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 $354,500 for the fiscal year ended September 30, 2008 and $327,491 for the
fiscal year ended September 30, 2007.
(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.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $0 for the fiscal year ended
September 30, 2008 and $46,000 for the fiscal year ended September 30, 2007. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $54,268 for the fiscal year ended September
30, 2008 and $0 for the fiscal year ended September 30, 2007. The services for
which these fees were paid include 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 $229,809 for the fiscal year ended
September 30, 2008 and $0 for the fiscal year ended September 30, 2007. The
services for which these fees were paid include review of materials provided to
the fund Board in connection with the investment management contract renewal
process.
(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 $284,077 for the fiscal year ended September 30, 2008 and
$46,000 for the fiscal year ended September 30, 2007.
(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 MANGERS OF CLOSE-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 Trustees 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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
F. Fergerson, Chief Financial Officer and Chief Accounting 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
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date November 25, 2008
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/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date November 25, 2008
By /S/LAURA F. FERGERSON
---------------------
Laura F. Fergerson
Chief Financial Officer and Chief Accounting Officer
Date November 25, 2008