-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RrHIbVr5CyGix70VfUFShsFat1jzpdqiCrYfTsspPaCfa8DIPZkBZiPiS2olVBZr JL/cX6Wan186eGjacqYAxQ== 0000038721-05-000096.txt : 20051130 0000038721-05-000096.hdr.sgml : 20051130 20051130115012 ACCESSION NUMBER: 0000038721-05-000096 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051130 DATE AS OF CHANGE: 20051130 EFFECTIVENESS DATE: 20051130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN CUSTODIAN FUNDS INC CENTRAL INDEX KEY: 0000038721 IRS NUMBER: 132573775 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-00537 FILM NUMBER: 051233629 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 N-CSR 1 ncsr.txt 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 --------- FRANKLIN CUSTODIAN FUNDS, INC. ------------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 650 312-2000 ------------ Date of fiscal year end: 9/30 ---- Date of reporting period: 9/30/05 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- SEPTEMBER 30, 2005 - -------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund - -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER LETTER - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN Eligible shareholders CUSTODIAN FUNDS, INC. can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] FRANKLIN(R) TEMPLETON(R) INVESTMENTS FRANKLIN o Templeton o Mutual Series FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the annual report CONTENTS SHAREHOLDER LETTER ....................................................... 1 ANNUAL REPORT Franklin DynaTech Fund ................................................... 4 Franklin Growth Fund ..................................................... 13 Franklin Income Fund ..................................................... 24 Franklin U.S. Government Securities Fund .......................................................... 39 Franklin Utilities Fund .................................................. 52 Financial Highlights and Statements of Investments ................................................ 63 Financial Statements ..................................................... 110 Notes to Financial Statements ..................................................... 119 Report of Independent Registered Public Accounting Firm .......................................................... 137 Tax Designation .......................................................... 138 Board Members and Officers ............................................... 139 Shareholder Information .................................................. 144 - -------------------------------------------------------------------------------- ANNUAL REPORT FRANKLIN DYNATECH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in the equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin DynaTech Fund's annual report for the fiscal year ended September 30, 2005. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +13.49% cumulative total return for the 12-month period under review. For the same period, the Fund slightly outperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of +13.37%, and outperformed the broad Standard & Poor's 500 Composite Index (S&P 500), which posted a +12.25% cumulative total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2005, a maturing domestic economic expansion was driven by perceived staying power across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from personal consumption and greater business investment. Demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates and strong economic growth in the U.S. relative to many of its major trading partners. (1) Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 66. 4 | Annual Report Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended September 30, 2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(2) With controlling inflation at the forefront of its agenda, the Federal Reserve Board raised the federal funds target rate from 1.75% to 3.75%, and said it would respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a one-year total return of +7.23%, while the broader S&P 500 and technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(3) INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. (2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. (3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 9/30/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Semiconductors 11.3% Biotechnology 10.8% Medical Specialties 9.8% Packaged Software 9.0% Internet Software & Services 6.2% Managed Health Care 4.7% Telecommunications Equipment 4.5% Computer Processing Hardware 3.9% Electronic Production Equipment 3.6% Electronic Equipment & Instruments 3.6% Data Processing Services 2.8% Air Freight & Couriers 2.7% Major Pharmaceuticals 2.4% Oilfield Services & Equipment 2.3% Recreational Products 2.0% Other 20.0% Short-Term Investments & Other Net Assets 0.4% Annual Report | 5 TOP 10 HOLDINGS Franklin DynaTech Fund 9/30/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Intel Corp. 3.9% SEMICONDUCTORS - -------------------------------------------------------------------------------- Genentech Inc. 3.5% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Microsoft Corp. 3.4% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Amgen Inc. 3.3% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Google Inc., A 3.1% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- UnitedHealth Group Inc. 3.1% MANAGED HEALTH CARE - -------------------------------------------------------------------------------- Yahoo! Inc. 2.8% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- Alcon Inc. (Switzerland) 2.7% MEDICAL SPECIALTIES - -------------------------------------------------------------------------------- Motorola Inc. 2.1% TELECOMMUNICATIONS EQUIPMENT - -------------------------------------------------------------------------------- Linear Technology Corp. 2.1% SEMICONDUCTORS - -------------------------------------------------------------------------------- MANAGER'S DISCUSSION During the year under review, several Fund holdings generated notable returns and contributed to Fund performance. In particular, Google surged 144% due to the strong performance of Internet advertising. The Internet has gained popularity as an effective medium for advertisers to promote their products. Google also benefited from their efforts to expand internationally during the year. Genentech, a biotechnology company, appreciated 61% during the reporting period. The stock benefited from significantly positive clinical outcomes on two drugs, Avastin and Herceptin, which help increase cancer patients' life expectancies. UnitedHealth Group, an owner and manager of a variety of health care plans and services, gained by further consolidating the health insurance industry. The stock rose 52% as the company was able to effect greater efficiency with Internet and other self-help technologies. Several stocks had negative returns and hurt Fund performance during the reporting period. The online auction provider eBay dropped 10%, suffering from decelerated growth, particularly within their U.S. division. Pfizer, a major producer of pharmaceuticals and hospital products, declined 16% as concerns over its Cox-II inhibitors (Celebrex and Bextra) surfaced and, separately, reports linked Viagra to blindness. Pfizer also faced patent challenges to its blockbuster drug Lipitor. International Game Technology (IGT), a casino game system designer and manufacturer, performed poorly and was down 24% during the year under review. The underperformance was partly due to the end of the most recent slot machine replacement cycle and delayed gaming legislation in California, Florida and Pennsylvania. 6 | Annual Report Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OMITTED] /s/ Matthew J. Moberg, CPA Matthew J. Moberg, CPA [PHOTO OMITTED] /s/ Robert R. Dean, CFA Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 7 PERFORMANCE SUMMARY AS OF 9/30/05 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKDNX) CHANGE 9/30/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 2.97 $ 24.98 $ 22.01 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FDNBX) CHANGE 9/30/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 2.72 $ 24.15 $ 21.43 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FDYNX) CHANGE 9/30/05 9/30/04 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 2.69 $ 23.90 $ 21.21 - -------------------------------------------------------------------------------- PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. - -------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------- Cumulative Total Return(1) +13.49% -9.24% +135.76% - -------------------------------------------------------------------------------- Average Annual Total Return(2) +6.98% -3.07% +8.31% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 10,698 $ 8,555 $ 22,220 - -------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00) - -------------------------------------------------------------------------------- Cumulative Total Return(1) +12.69% -12.63% -11.35% - -------------------------------------------------------------------------------- Average Annual Total Return(2) +8.69% -3.04% -2.27% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 10,869 $ 8,568 $ 8,779 - -------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR INCEPTION (9/16/96) - -------------------------------------------------------------------------------- Cumulative Total Return(1) +12.68% -12.55% +99.63% - -------------------------------------------------------------------------------- Average Annual Total Return(2) +11.68% -2.65% +7.95% - -------------------------------------------------------------------------------- Value of $10,000 Investment(3) $ 11,168 $ 8,745 $ 19,963 - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 8 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The indexes are unmanaged. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS A 9/30/05 - ---------------------------------------------- 1-Year +6.98% - ---------------------------------------------- 5-Year -3.07% - ---------------------------------------------- 10-Year +8.31% - ---------------------------------------------- CLASS A (10/1/95-9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS A INDEX(4) INDEX(4) - ------------------------------------------------------------------------ 9/30/1995 $ 9,425 $ 10,000 $ 10,000 10/31/1995 $ 9,609 $ 9,964 $ 10,234 11/30/1995 $ 9,476 $ 10,401 $ 10,148 12/31/1995 $ 9,218 $ 10,602 $ 9,849 1/31/1996 $ 9,225 $ 10,962 $ 10,115 2/29/1996 $ 9,551 $ 11,064 $ 10,645 3/31/1996 $ 9,362 $ 11,170 $ 10,421 4/30/1996 $ 10,127 $ 11,335 $ 11,396 5/31/1996 $ 10,491 $ 11,627 $ 11,834 6/30/1996 $ 10,158 $ 11,671 $ 11,576 7/31/1996 $ 9,551 $ 11,156 $ 10,870 8/31/1996 $ 9,900 $ 11,391 $ 11,342 9/30/1996 $ 10,635 $ 12,032 $ 12,606 10/31/1996 $ 10,832 $ 12,364 $ 12,853 11/30/1996 $ 11,871 $ 13,297 $ 14,255 12/31/1996 $ 11,872 $ 13,034 $ 14,038 1/31/1997 $ 12,754 $ 13,848 $ 15,751 2/28/1997 $ 12,036 $ 13,957 $ 14,536 3/31/1997 $ 11,731 $ 13,384 $ 13,623 4/30/1997 $ 12,254 $ 14,183 $ 14,951 5/31/1997 $ 12,941 $ 15,045 $ 16,388 6/30/1997 $ 13,058 $ 15,719 $ 16,362 7/31/1997 $ 14,331 $ 16,969 $ 18,921 8/31/1997 $ 14,073 $ 16,019 $ 18,359 9/30/1997 $ 14,424 $ 16,896 $ 18,752 10/31/1997 $ 13,714 $ 16,332 $ 17,427 11/30/1997 $ 13,862 $ 17,088 $ 17,955 12/31/1997 $ 13,608 $ 17,381 $ 16,934 1/31/1998 $ 14,075 $ 17,573 $ 18,307 2/28/1998 $ 14,700 $ 18,840 $ 20,410 3/31/1998 $ 14,766 $ 19,804 $ 20,863 4/30/1998 $ 15,050 $ 20,003 $ 21,332 5/31/1998 $ 14,516 $ 19,660 $ 20,374 6/30/1998 $ 15,225 $ 20,458 $ 22,857 7/31/1998 $ 15,300 $ 20,240 $ 23,540 8/31/1998 $ 13,900 $ 17,317 $ 19,490 9/30/1998 $ 14,866 $ 18,426 $ 22,997 10/31/1998 $ 15,275 $ 19,924 $ 23,937 11/30/1998 $ 16,216 $ 21,131 $ 26,628 12/31/1998 $ 17,329 $ 22,348 $ 31,380 1/31/1999 $ 18,678 $ 23,282 $ 36,357 2/28/1999 $ 17,818 $ 22,558 $ 32,906 3/31/1999 $ 18,400 $ 23,461 $ 36,002 4/30/1999 $ 18,451 $ 24,369 $ 36,514 5/31/1999 $ 18,147 $ 23,795 $ 35,716 6/30/1999 $ 19,075 $ 25,114 $ 39,256 7/31/1999 $ 19,058 $ 24,331 $ 38,814 8/31/1999 $ 19,590 $ 24,211 $ 40,967 9/30/1999 $ 19,497 $ 23,548 $ 41,155 10/31/1999 $ 20,290 $ 25,037 $ 45,078 11/30/1999 $ 21,488 $ 25,546 $ 50,706 12/31/1999 $ 23,772 $ 27,050 $ 63,373 1/31/2000 $ 24,012 $ 25,691 $ 61,018 2/29/2000 $ 26,127 $ 25,205 $ 72,929 3/31/2000 $ 26,392 $ 27,669 $ 75,166 4/30/2000 $ 24,962 $ 26,837 $ 64,490 5/31/2000 $ 23,764 $ 26,288 $ 56,814 6/30/2000 $ 25,228 $ 26,936 $ 64,329 7/31/2000 $ 24,783 $ 26,515 $ 61,690 8/31/2000 $ 26,580 $ 28,161 $ 69,693 9/30/2000 $ 24,483 $ 26,675 $ 61,028 10/31/2000 $ 23,858 $ 26,562 $ 56,100 11/30/2000 $ 21,316 $ 24,469 $ 42,841 12/31/2000 $ 20,863 $ 24,589 $ 40,024 1/31/2001 $ 21,915 $ 25,461 $ 44,319 2/28/2001 $ 19,269 $ 23,141 $ 32,616 3/31/2001 $ 18,138 $ 21,676 $ 26,889 4/30/2001 $ 19,321 $ 23,359 $ 31,708 5/31/2001 $ 19,023 $ 23,516 $ 30,763 6/30/2001 $ 18,883 $ 22,944 $ 31,325 7/31/2001 $ 18,287 $ 22,718 $ 28,776 8/31/2001 $ 17,542 $ 21,297 $ 25,120 9/30/2001 $ 16,438 $ 19,577 $ 19,969 10/31/2001 $ 17,192 $ 19,951 $ 23,326 11/30/2001 $ 18,261 $ 21,481 $ 27,279 12/31/2001 $ 18,128 $ 21,669 $ 26,954 1/31/2002 $ 17,986 $ 21,353 $ 26,495 2/28/2002 $ 17,141 $ 20,941 $ 23,231 3/31/2002 $ 17,665 $ 21,729 $ 24,831 4/30/2002 $ 16,714 $ 20,412 $ 21,827 5/31/2002 $ 16,500 $ 20,262 $ 20,653 6/30/2002 $ 15,477 $ 18,819 $ 17,970 7/31/2002 $ 14,677 $ 17,353 $ 16,444 8/31/2002 $ 14,614 $ 17,466 $ 16,107 9/30/2002 $ 13,671 $ 15,570 $ 14,229 10/31/2002 $ 14,828 $ 16,939 $ 16,913 11/30/2002 $ 15,744 $ 17,935 $ 19,076 12/31/2002 $ 14,525 $ 16,882 $ 16,824 1/31/2003 $ 14,365 $ 16,441 $ 16,802 2/28/2003 $ 14,508 $ 16,193 $ 17,258 3/31/2003 $ 14,632 $ 16,349 $ 17,411 4/30/2003 $ 15,602 $ 17,696 $ 18,904 5/31/2003 $ 16,758 $ 18,628 $ 20,474 6/30/2003 $ 17,043 $ 18,866 $ 20,539 7/31/2003 $ 17,656 $ 19,199 $ 21,825 8/31/2003 $ 18,306 $ 19,572 $ 22,923 9/30/2003 $ 17,941 $ 19,365 $ 22,282 10/31/2003 $ 19,169 $ 20,460 $ 24,208 11/30/2003 $ 19,524 $ 20,640 $ 24,343 12/31/2003 $ 20,138 $ 21,721 $ 25,089 1/31/2004 $ 20,574 $ 22,120 $ 25,519 2/29/2004 $ 20,352 $ 22,427 $ 25,131 3/31/2004 $ 20,236 $ 22,089 $ 24,585 4/30/2004 $ 19,898 $ 21,743 $ 23,952 5/31/2004 $ 20,707 $ 22,041 $ 25,060 6/30/2004 $ 20,939 $ 22,469 $ 25,922 7/31/2004 $ 19,204 $ 21,726 $ 23,935 8/31/2004 $ 18,857 $ 21,813 $ 23,393 9/30/2004 $ 19,578 $ 22,049 $ 24,146 10/31/2004 $ 19,996 $ 22,386 $ 25,411 11/30/2004 $ 20,894 $ 23,291 $ 26,860 12/31/2004 $ 21,686 $ 24,083 $ 27,708 1/31/2005 $ 20,396 $ 23,496 $ 25,973 2/28/2005 $ 20,663 $ 23,991 $ 25,826 3/31/2005 $ 20,209 $ 23,566 $ 25,339 4/30/2005 $ 19,853 $ 23,120 $ 24,284 5/31/2005 $ 21,232 $ 23,855 $ 26,366 6/30/2005 $ 21,019 $ 23,889 $ 25,527 7/31/2005 $ 22,095 $ 24,777 $ 27,435 8/31/2005 $ 22,255 $ 24,551 $ 27,034 9/30/2005 $ 22,220 $ 24,750 $ 27,375 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS B 9/30/05 - ---------------------------------------------- 1-Year +8.69% - ---------------------------------------------- 5-Year -3.04% - ---------------------------------------------- Since Inception (2/1/00) -2.27% - ---------------------------------------------- CLASS B (2/1/00-9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS B INDEX(4) INDEX(4) - --------------------------------------------------------------- 2/1/2000 $ 10,000 $ 10,000 $ 10,000 2/29/2000 $ 10,870 $ 9,811 $ 11,952 3/31/2000 $ 10,973 $ 10,770 $ 12,319 4/30/2000 $ 10,374 $ 10,446 $ 10,569 5/31/2000 $ 9,868 $ 10,232 $ 9,311 6/30/2000 $ 10,471 $ 10,485 $ 10,543 7/31/2000 $ 10,278 $ 10,321 $ 10,110 8/31/2000 $ 11,020 $ 10,962 $ 11,422 9/30/2000 $ 10,146 $ 10,383 $ 10,002 10/31/2000 $ 9,879 $ 10,339 $ 9,194 11/30/2000 $ 8,824 $ 9,524 $ 7,021 12/31/2000 $ 8,624 $ 9,571 $ 6,559 1/31/2001 $ 9,053 $ 9,911 $ 7,263 2/28/2001 $ 7,958 $ 9,008 $ 5,345 3/31/2001 $ 7,488 $ 8,437 $ 4,407 4/30/2001 $ 7,968 $ 9,092 $ 5,196 5/31/2001 $ 7,841 $ 9,153 $ 5,042 6/30/2001 $ 7,779 $ 8,931 $ 5,134 7/31/2001 $ 7,528 $ 8,843 $ 4,716 8/31/2001 $ 7,219 $ 8,290 $ 4,117 9/30/2001 $ 6,760 $ 7,620 $ 3,273 10/31/2001 $ 7,062 $ 7,766 $ 3,823 11/30/2001 $ 7,499 $ 8,361 $ 4,471 12/31/2001 $ 7,437 $ 8,435 $ 4,417 1/31/2002 $ 7,378 $ 8,312 $ 4,342 2/28/2002 $ 7,026 $ 8,151 $ 3,807 3/31/2002 $ 7,239 $ 8,458 $ 4,069 4/30/2002 $ 6,842 $ 7,945 $ 3,577 5/31/2002 $ 6,751 $ 7,887 $ 3,385 6/30/2002 $ 6,329 $ 7,325 $ 2,945 7/31/2002 $ 5,995 $ 6,754 $ 2,695 8/31/2002 $ 5,969 $ 6,799 $ 2,640 9/30/2002 $ 5,576 $ 6,060 $ 2,332 10/31/2002 $ 6,046 $ 6,593 $ 2,772 11/30/2002 $ 6,413 $ 6,981 $ 3,126 12/31/2002 $ 5,917 $ 6,571 $ 2,757 1/31/2003 $ 5,848 $ 6,399 $ 2,754 2/28/2003 $ 5,903 $ 6,303 $ 2,828 3/31/2003 $ 5,947 $ 6,364 $ 2,853 4/30/2003 $ 6,340 $ 6,888 $ 3,098 5/31/2003 $ 6,806 $ 7,251 $ 3,355 6/30/2003 $ 6,916 $ 7,343 $ 3,366 7/31/2003 $ 7,158 $ 7,473 $ 3,577 8/31/2003 $ 7,419 $ 7,618 $ 3,757 9/30/2003 $ 7,268 $ 7,538 $ 3,652 10/31/2003 $ 7,760 $ 7,964 $ 3,967 11/30/2003 $ 7,896 $ 8,034 $ 3,989 12/31/2003 $ 8,142 $ 8,455 $ 4,112 1/31/2004 $ 8,311 $ 8,610 $ 4,182 2/29/2004 $ 8,215 $ 8,730 $ 4,119 3/31/2004 $ 8,164 $ 8,598 $ 4,029 4/30/2004 $ 8,025 $ 8,463 $ 3,925 5/31/2004 $ 8,344 $ 8,579 $ 4,107 6/30/2004 $ 8,432 $ 8,746 $ 4,248 7/31/2004 $ 7,727 $ 8,456 $ 3,923 8/31/2004 $ 7,584 $ 8,490 $ 3,834 9/30/2004 $ 7,867 $ 8,582 $ 3,957 10/31/2004 $ 8,028 $ 8,713 $ 4,164 11/30/2004 $ 8,388 $ 9,066 $ 4,402 12/31/2004 $ 8,696 $ 9,374 $ 4,541 1/31/2005 $ 8,179 $ 9,146 $ 4,257 2/28/2005 $ 8,278 $ 9,338 $ 4,232 3/31/2005 $ 8,091 $ 9,173 $ 4,153 4/30/2005 $ 7,944 $ 8,999 $ 3,980 5/31/2005 $ 8,491 $ 9,285 $ 4,321 6/30/2005 $ 8,399 $ 9,298 $ 4,183 7/31/2005 $ 8,825 $ 9,644 $ 4,496 8/31/2005 $ 8,880 $ 9,556 $ 4,430 9/30/2005 $ 8,779 $ 9,634 $ 4,486 Annual Report | 9 PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS C 9/30/05 - ---------------------------------------------- 1-Year +11.68% - ---------------------------------------------- 5-Year -2.65% - ---------------------------------------------- Since Inception (9/16/96) +7.95% - ---------------------------------------------- CLASS C (9/16/96-9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS C INDEX(4) INDEX(4) - ------------------------------------------------------------------ 9/16/1996 $ 10,000 $ 10,000 $ 10,000 9/30/1996 $ 10,263 $ 10,262 $ 10,520 10/31/1996 $ 10,439 $ 10,545 $ 10,726 11/30/1996 $ 11,434 $ 11,342 $ 11,896 12/31/1996 $ 11,428 $ 11,117 $ 11,716 1/31/1997 $ 12,279 $ 11,811 $ 13,145 2/28/1997 $ 11,579 $ 11,904 $ 12,131 3/31/1997 $ 11,278 $ 11,416 $ 11,369 4/30/1997 $ 11,767 $ 12,097 $ 12,477 5/31/1997 $ 12,415 $ 12,833 $ 13,677 6/30/1997 $ 12,513 $ 13,407 $ 13,655 7/31/1997 $ 13,726 $ 14,473 $ 15,790 8/31/1997 $ 13,462 $ 13,663 $ 15,322 9/30/1997 $ 13,786 $ 14,411 $ 15,650 10/31/1997 $ 13,101 $ 13,930 $ 14,543 11/30/1997 $ 13,229 $ 14,575 $ 14,984 12/31/1997 $ 12,975 $ 14,825 $ 14,132 1/31/1998 $ 13,392 $ 14,989 $ 15,278 2/28/1998 $ 13,978 $ 16,069 $ 17,033 3/31/1998 $ 14,034 $ 16,891 $ 17,411 4/30/1998 $ 14,299 $ 17,061 $ 17,803 5/31/1998 $ 13,777 $ 16,768 $ 17,003 6/30/1998 $ 14,443 $ 17,449 $ 19,075 7/31/1998 $ 14,499 $ 17,263 $ 19,645 8/31/1998 $ 13,167 $ 14,770 $ 16,265 9/30/1998 $ 14,066 $ 15,716 $ 19,191 10/31/1998 $ 14,443 $ 16,994 $ 19,976 11/30/1998 $ 15,326 $ 18,023 $ 22,222 12/31/1998 $ 16,364 $ 19,061 $ 26,188 1/31/1999 $ 17,626 $ 19,858 $ 30,341 2/28/1999 $ 16,809 $ 19,241 $ 27,461 3/31/1999 $ 17,343 $ 20,010 $ 30,045 4/30/1999 $ 17,383 $ 20,785 $ 30,473 5/31/1999 $ 17,092 $ 20,295 $ 29,807 6/30/1999 $ 17,949 $ 21,420 $ 32,760 7/31/1999 $ 17,925 $ 20,753 $ 32,392 8/31/1999 $ 18,410 $ 20,650 $ 34,188 9/30/1999 $ 18,313 $ 20,084 $ 34,345 10/31/1999 $ 19,041 $ 21,355 $ 37,619 11/30/1999 $ 20,158 $ 21,789 $ 42,316 12/31/1999 $ 22,288 $ 23,071 $ 52,887 1/31/2000 $ 22,501 $ 21,912 $ 50,922 2/29/2000 $ 24,469 $ 21,498 $ 60,862 3/31/2000 $ 24,698 $ 23,600 $ 62,729 4/30/2000 $ 23,350 $ 22,890 $ 53,819 5/31/2000 $ 22,207 $ 22,422 $ 47,413 6/30/2000 $ 23,570 $ 22,974 $ 53,685 7/31/2000 $ 23,138 $ 22,616 $ 51,482 8/31/2000 $ 24,796 $ 24,020 $ 58,161 9/30/2000 $ 22,827 $ 22,752 $ 50,930 10/31/2000 $ 22,231 $ 22,655 $ 46,817 11/30/2000 $ 19,854 $ 20,871 $ 35,752 12/31/2000 $ 19,410 $ 20,973 $ 33,401 1/31/2001 $ 20,381 $ 21,717 $ 36,985 2/28/2001 $ 17,909 $ 19,738 $ 27,220 3/31/2001 $ 16,855 $ 18,488 $ 22,440 4/30/2001 $ 17,942 $ 19,924 $ 26,461 5/31/2001 $ 17,652 $ 20,057 $ 25,673 6/30/2001 $ 17,511 $ 19,569 $ 26,142 7/31/2001 $ 16,947 $ 19,376 $ 24,014 8/31/2001 $ 16,241 $ 18,165 $ 20,963 9/30/2001 $ 15,213 $ 16,698 $ 16,665 10/31/2001 $ 15,901 $ 17,017 $ 19,467 11/30/2001 $ 16,880 $ 18,322 $ 22,765 12/31/2001 $ 16,739 $ 18,482 $ 22,494 1/31/2002 $ 16,605 $ 18,213 $ 22,111 2/28/2002 $ 15,820 $ 17,861 $ 19,387 3/31/2002 $ 16,288 $ 18,533 $ 20,722 4/30/2002 $ 15,403 $ 17,410 $ 18,216 5/31/2002 $ 15,194 $ 17,282 $ 17,235 6/30/2002 $ 14,242 $ 16,051 $ 14,997 7/31/2002 $ 13,498 $ 14,801 $ 13,723 8/31/2002 $ 13,431 $ 14,898 $ 13,442 9/30/2002 $ 12,554 $ 13,280 $ 11,875 10/31/2002 $ 13,615 $ 14,448 $ 14,114 11/30/2002 $ 14,442 $ 15,297 $ 15,920 12/31/2002 $ 13,323 $ 14,399 $ 14,041 1/31/2003 $ 13,164 $ 14,023 $ 14,022 2/28/2003 $ 13,289 $ 13,812 $ 14,403 3/31/2003 $ 13,390 $ 13,945 $ 14,530 4/30/2003 $ 14,275 $ 15,094 $ 15,776 5/31/2003 $ 15,319 $ 15,888 $ 17,086 6/30/2003 $ 15,570 $ 16,091 $ 17,140 7/31/2003 $ 16,121 $ 16,375 $ 18,214 8/31/2003 $ 16,706 $ 16,694 $ 19,130 9/30/2003 $ 16,363 $ 16,517 $ 18,595 10/31/2003 $ 17,474 $ 17,451 $ 20,203 11/30/2003 $ 17,783 $ 17,604 $ 20,315 12/31/2003 $ 18,334 $ 18,527 $ 20,938 1/31/2004 $ 18,719 $ 18,867 $ 21,297 2/29/2004 $ 18,502 $ 19,129 $ 20,973 3/31/2004 $ 18,385 $ 18,840 $ 20,517 4/30/2004 $ 18,067 $ 18,545 $ 19,988 5/31/2004 $ 18,786 $ 18,799 $ 20,914 6/30/2004 $ 18,986 $ 19,164 $ 21,633 7/31/2004 $ 17,399 $ 18,530 $ 19,975 8/31/2004 $ 17,082 $ 18,605 $ 19,522 9/30/2004 $ 17,716 $ 18,806 $ 20,151 10/31/2004 $ 18,084 $ 19,093 $ 21,206 11/30/2004 $ 18,886 $ 19,866 $ 22,415 12/31/2004 $ 19,579 $ 20,541 $ 23,123 1/31/2005 $ 18,418 $ 20,041 $ 21,675 2/28/2005 $ 18,644 $ 20,462 $ 21,553 3/31/2005 $ 18,218 $ 20,100 $ 21,146 4/30/2005 $ 17,883 $ 19,719 $ 20,266 5/31/2005 $ 19,120 $ 20,346 $ 22,003 6/30/2005 $ 18,911 $ 20,375 $ 21,303 7/31/2005 $ 19,871 $ 21,133 $ 22,895 8/31/2005 $ 19,997 $ 20,940 $ 22,561 9/30/2005 $ 19,963 $ 21,109 $ 22,845 ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. 10 | Annual Report YOUR FUND'S EXPENSES FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 11 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05 - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,099.50 $5.42 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.90 $5.22 - ------------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,095.70 $9.35 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.14 $9.00 - ------------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,095.80 $9.30 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.19 $8.95 - -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.03%; B: 1.78%; and C: 1.77%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 12 | Annual Report FRANKLIN GROWTH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Growth Fund's annual report for the fiscal year ended September 30, 2005. PERFORMANCE OVERVIEW For the year under review, Franklin Growth Fund - Class A posted a +14.17% cumulative total return. The Fund outperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +12.25% for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 17. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2005, a maturing domestic economic expansion was driven by perceived staying power across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from personal consumption and greater business investment. Demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended September 30, 2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI). (2) With controlling inflation at the forefront of its agenda, the Federal Reserve Board raised the federal funds target rate from 1.75% to 3.75%, and said it would respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Compared with the rise in short-term interest (1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 75. Annual Report | 13 PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 9/30/05* [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Health Technology** 22.6% Electronic Technology** 20.7% Producer Manufacturing 19.5% Technology Services** 10.0% Consumer Services 5.0% Transportation 4.0% Energy Minerals 3.6% Distribution Services 3.1% Consumer Non-Durables 2.8% Commercial Services 2.6% Process Industries 1.8% Industrial Services 1.7% Health Services 1.3% Consumer Durables 1.0% Other 0.6% * Short-Term Investments & Other Net Assets = -0.3% because total liability exceeds short-term investments, cash and receivables. ** Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a one-year total return of +7.23%, while the broader S&P 500 and technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(3) INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in mature businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION The Fund was nearly fully invested and broadly diversified, with holdings in 102 companies at period-end. We did not have any particular sector strength or weakness driving Fund performance this year, but instead saw results based predominantly on individual company performances. The Fund's top performers for the 12-month reporting period were Apple Computer and EnCana. The stock of Apple Computer, one of the biggest contributors to the Fund's overall performance, rose almost 177% propelled by better-than-expected sales of the company's innovative music-related products (3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 14 | Annual Report such as the iPod, and supported by steady sales of its core computer hardware and software products. EnCana, a leading independent North American crude oil and natural gas exploration and production company, experienced robust sales growth and higher cash flow due largely to high oil and gas commodity prices. EnCana's stock price appreciated nearly 154% during the year under review. Other strong contributors to the Fund's results were offshore drilling contractor Transocean, specialty engineering manufacturer Teleflex, and Genentech, the large biotechnology firm which has seen surprisingly strong sales in its colon and breast cancer drugs. Even though the Fund posted solid gains and outperformed the S&P 500 this fiscal year, we had some holdings which held back performance. For example, some of our airline stocks fared poorly in a difficult environment, especially for large domestic carriers.(4) The recent spike in petroleum prices appeared to be the final blow that pushed already-troubled Delta Air Lines and Northwest Airlines (both sold by period-end) into bankruptcy. It has become difficult to profit under recent business conditions for these and other full-service domestic airlines -- hamstrung by high fuel costs and competitive airfares across the industry -- despite the fact that airlines remain vital to national and international travel. Also, the point-to-point newcomers (as opposed to hub-and-spoke) to the air travel industry are undercutting their larger competitors while focusing on limited aircraft types, shorter routes and specific destinations. In addition to airlines, there were several other notable detractors from Fund performance. For example, computer manufacturer Gateway saw stock price declines in excess of 45% amid heavy competition in the PC and consumer electronics market, pharmaceuticals maker Merck & Co. was down more than 13% due to a dip in revenues following the withdrawal of its Vioxx pain medication, and Eastman Kodak's share price fell about 23% as it worked toward a major shift away from its dominance in photographic film and into the emerging and highly competitive digital imaging technology realm. All three companies suffered disappointing operating results and were among our poorest-performing investments during the year under review. TOP 10 HOLDINGS Franklin Growth Fund 9/30/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Genentech Inc. 3.8% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Amgen Inc. 3.4% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Boeing Co. 3.1% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Johnson & Johnson 2.8% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- General Dynamics Corp. 2.7% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- 3M Co. 2.7% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Northrop Grumman Corp. 2.5% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Yahoo! Inc. 2.4% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Apple Computer Inc. 2.4% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Pfizer Inc. 2.3% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- (4) In the SOI, airline stocks are part of the transportation sector. Annual Report | 15 We welcome your questions and comments and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 16 | Annual Report PERFORMANCE SUMMARY AS OF 9/30/05 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKGRX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 4.25 $ 34.83 $ 30.58 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0787 - ----------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FKGBX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 3.96 $ 33.73 $ 29.77 - ----------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FRGSX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 3.92 $ 33.43 $ 29.51 - ----------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FGSRX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 4.20 $ 34.59 $ 30.39 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0149 - ----------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 4.26 $ 34.89 $ 30.63 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.1585 - -----------------------------------------------------------------------------------------------
Annual Report | 17 PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +14.17% +1.19% +113.16% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +7.59% -0.94% +7.23% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,759 $9,538 $20,093 - ----------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +13.30% -2.50% +15.38% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +9.30% -0.88% +2.14% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $10,930 $9,566 $11,538 - ----------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +13.32% -2.54% +97.69% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +12.32% -0.51% +7.05% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,232 $9,746 $19,769 - ----------------------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +13.87% +57.78% +9.78% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +12.87% +16.42% +2.53% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,287 $15,778 $10,978 - ----------------------------------------------------------------------------------------------------- ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +14.45% +2.43% +119.44% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +14.45% +0.48% +8.18% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $11,445 $10,243 $21,944 - -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 18 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - --------------------------------------- CLASS A 9/30/05 - --------------------------------------- 1-Year +7.59% - --------------------------------------- 5-Year -0.94% - --------------------------------------- 10-Year +7.23% - --------------------------------------- CLASS A (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN GROWTH DATE FUND - CLASS A S&P 500 INDEX(5) ------------------------------------------------------------ 10/1/1995 $ 9,426 $10,000 10/31/1995 $ 9,480 $ 9,964 11/30/1995 $10,015 $10,401 12/31/1995 $10,098 $10,602 1/31/1996 $10,389 $10,962 2/29/1996 $10,611 $11,064 3/31/1996 $10,651 $11,170 4/30/1996 $10,868 $11,335 5/31/1996 $11,076 $11,627 6/30/1996 $10,997 $11,671 7/31/1996 $10,429 $11,156 8/31/1996 $10,720 $11,391 9/30/1996 $11,283 $12,032 10/31/1996 $11,313 $12,364 11/30/1996 $12,024 $13,297 12/31/1996 $11,782 $13,034 1/31/1997 $12,079 $13,848 2/28/1997 $12,104 $13,957 3/31/1997 $11,802 $13,384 4/30/1997 $12,225 $14,183 5/31/1997 $12,899 $15,045 6/30/1997 $13,140 $15,719 7/31/1997 $13,663 $16,969 8/31/1997 $13,205 $16,019 9/30/1997 $13,623 $16,896 10/31/1997 $13,507 $16,332 11/30/1997 $13,814 $17,088 12/31/1997 $13,974 $17,381 1/31/1998 $14,119 $17,573 2/28/1998 $14,712 $18,840 3/31/1998 $15,032 $19,804 4/30/1998 $15,233 $20,003 5/31/1998 $15,016 $19,660 6/30/1998 $15,300 $20,458 7/31/1998 $15,243 $20,240 8/31/1998 $13,959 $17,317 9/30/1998 $14,743 $18,426 10/31/1998 $15,651 $19,924 11/30/1998 $16,213 $21,131 12/31/1998 $16,563 $22,348 1/31/1999 $16,852 $23,282 2/28/1999 $16,673 $22,558 3/31/1999 $17,126 $23,461 4/30/1999 $17,684 $24,369 5/31/1999 $17,468 $23,795 6/30/1999 $18,201 $25,114 7/31/1999 $17,906 $24,331 8/31/1999 $17,979 $24,211 9/30/1999 $17,490 $23,548 10/31/1999 $17,774 $25,037 11/30/1999 $18,000 $25,546 12/31/1999 $18,581 $27,050 1/31/2000 $18,425 $25,691 2/29/2000 $17,995 $25,205 3/31/2000 $19,560 $27,669 4/30/2000 $19,792 $26,837 5/31/2000 $19,872 $26,288 6/30/2000 $20,152 $26,936 7/31/2000 $19,840 $26,515 8/31/2000 $20,712 $28,161 9/30/2000 $19,856 $26,675 10/31/2000 $20,120 $26,562 11/30/2000 $19,598 $24,469 12/31/2000 $19,980 $24,589 1/31/2001 $20,357 $25,461 2/28/2001 $19,336 $23,141 3/31/2001 $17,904 $21,676 4/30/2001 $19,347 $23,359 5/31/2001 $19,644 $23,516 6/30/2001 $18,743 $22,944 7/31/2001 $18,697 $22,718 8/31/2001 $17,847 $21,297 9/30/2001 $15,862 $19,577 10/31/2001 $16,393 $19,951 11/30/2001 $17,950 $21,481 12/31/2001 $18,088 $21,669 1/31/2002 $17,830 $21,353 2/28/2002 $17,704 $20,941 3/31/2002 $18,318 $21,729 4/30/2002 $17,158 $20,412 5/31/2002 $16,820 $20,262 6/30/2002 $15,551 $18,819 7/31/2002 $14,150 $17,353 8/31/2002 $14,179 $17,466 9/30/2002 $12,635 $15,570 10/31/2002 $13,513 $16,939 11/30/2002 $14,437 $17,935 12/31/2002 $13,684 $16,882 1/31/2003 $13,160 $16,441 2/28/2003 $12,862 $16,193 3/31/2003 $12,862 $16,349 4/30/2003 $13,799 $17,696 5/31/2003 $14,701 $18,628 6/30/2003 $15,138 $18,866 7/31/2003 $15,587 $19,199 8/31/2003 $15,932 $19,572 9/30/2003 $15,449 $19,365 10/31/2003 $16,363 $20,460 11/30/2003 $16,570 $20,640 12/31/2003 $17,519 $21,721 1/31/2004 $17,783 $22,120 2/29/2004 $17,864 $22,427 3/31/2004 $17,450 $22,089 4/30/2004 $17,461 $21,743 5/31/2004 $17,743 $22,041 6/30/2004 $18,468 $22,469 7/31/2004 $17,496 $21,726 8/31/2004 $17,346 $21,813 9/30/2004 $17,599 $22,049 10/31/2004 $17,812 $22,386 11/30/2004 $18,854 $23,291 12/31/2004 $19,498 $24,083 1/31/2005 $18,829 $23,496 2/28/2005 $19,158 $23,991 3/31/2005 $19,135 $23,566 4/30/2005 $18,679 $23,120 5/31/2005 $19,418 $23,855 6/30/2005 $19,204 $23,889 7/31/2005 $20,208 $24,777 8/31/2005 $20,133 $24,551 9/30/2005 $20,093 $24,750 AVERAGE ANNUAL TOTAL RETURN - --------------------------------------- CLASS B 9/30/05 - --------------------------------------- 1-Year +9.30% - --------------------------------------- 5-Year -0.88% - --------------------------------------- Since Inception (1/1/99) +2.14% - --------------------------------------- CLASS B (01/01/99 - 09/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN GROWTH DATE FUND - CLASS B S&P 500 INDEX(5) ------------------------------------------------------------ 1/1/1999 $10,000 $10,000 1/31/1999 $10,172 $10,418 2/28/1999 $10,057 $10,094 3/31/1999 $10,324 $10,498 4/30/1999 $10,655 $10,905 5/31/1999 $10,515 $10,647 6/30/1999 $10,951 $11,238 7/31/1999 $10,766 $10,887 8/31/1999 $10,804 $10,834 9/30/1999 $10,502 $10,537 10/31/1999 $10,668 $11,203 11/30/1999 $10,792 $11,431 12/31/1999 $11,134 $12,104 1/31/2000 $11,031 $11,496 2/29/2000 $10,771 $11,279 3/31/2000 $11,698 $12,381 4/30/2000 $11,831 $12,009 5/31/2000 $11,873 $11,763 6/30/2000 $12,031 $12,053 7/31/2000 $11,837 $11,865 8/31/2000 $12,352 $12,601 9/30/2000 $11,834 $11,936 10/31/2000 $11,983 $11,886 11/30/2000 $11,665 $10,949 12/31/2000 $11,883 $11,003 1/31/2001 $12,102 $11,393 2/28/2001 $11,491 $10,355 3/31/2001 $10,630 $ 9,699 4/30/2001 $11,477 $10,453 5/31/2001 $11,648 $10,523 6/30/2001 $11,108 $10,267 7/31/2001 $11,070 $10,166 8/31/2001 $10,565 $ 9,530 9/30/2001 $ 9,380 $ 8,760 10/31/2001 $ 9,687 $ 8,927 11/30/2001 $10,609 $ 9,612 12/31/2001 $10,683 $ 9,696 1/31/2002 $10,522 $ 9,555 2/28/2002 $10,444 $ 9,371 3/31/2002 $10,796 $ 9,723 4/30/2002 $10,108 $ 9,134 5/31/2002 $ 9,903 $ 9,067 6/30/2002 $ 9,147 $ 8,421 7/31/2002 $ 8,319 $ 7,765 8/31/2002 $ 8,333 $ 7,816 9/30/2002 $ 7,420 $ 6,967 10/31/2002 $ 7,929 $ 7,580 11/30/2002 $ 8,470 $ 8,025 12/31/2002 $ 8,018 $ 7,554 1/31/2003 $ 7,710 $ 7,357 2/28/2003 $ 7,529 $ 7,246 3/31/2003 $ 7,526 $ 7,316 4/30/2003 $ 8,070 $ 7,919 5/31/2003 $ 8,590 $ 8,335 6/30/2003 $ 8,839 $ 8,442 7/31/2003 $ 9,096 $ 8,591 8/31/2003 $ 9,291 $ 8,758 9/30/2003 $ 9,003 $ 8,665 10/31/2003 $ 9,530 $ 9,155 11/30/2003 $ 9,647 $ 9,236 12/31/2003 $10,190 $ 9,720 1/31/2004 $10,338 $ 9,898 2/29/2004 $10,382 $10,036 3/31/2004 $10,132 $ 9,884 4/30/2004 $10,136 $ 9,729 5/31/2004 $10,293 $ 9,863 6/30/2004 $10,707 $10,054 7/31/2004 $10,132 $ 9,722 8/31/2004 $10,043 $ 9,761 9/30/2004 $10,184 $ 9,866 10/31/2004 $10,300 $10,017 11/30/2004 $10,895 $10,422 12/31/2004 $11,258 $10,777 1/31/2005 $10,868 $10,514 2/28/2005 $11,049 $10,735 3/31/2005 $11,032 $10,545 4/30/2005 $10,762 $10,345 5/31/2005 $11,179 $10,674 6/30/2005 $11,049 $10,690 7/31/2005 $11,617 $11,087 8/31/2005 $11,569 $10,986 9/30/2005 $11,538 $11,075 Annual Report | 19 PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------- CLASS C 9/30/05 - ---------------------------------------- 1-Year +12.32% - ---------------------------------------- 5-Year -0.51% - ---------------------------------------- 10-Year +7.05% - ---------------------------------------- CLASS C (10/01/95 - 09/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN GROWTH DATE FUND - CLASS C S&P 500 INDEX(5) ------------------------------------------------------------ 10/1/1995 $10,000 $10,000 10/31/1995 $10,047 $ 9,964 11/30/1995 $10,610 $10,401 12/31/1995 $10,691 $10,602 1/31/1996 $10,990 $10,962 2/29/1996 $11,221 $11,064 3/31/1996 $11,258 $11,170 4/30/1996 $11,479 $11,335 5/31/1996 $11,694 $11,627 6/30/1996 $11,605 $11,671 7/31/1996 $10,995 $11,156 8/31/1996 $11,295 $11,391 9/30/1996 $11,883 $12,032 10/31/1996 $11,910 $12,364 11/30/1996 $12,650 $13,297 12/31/1996 $12,386 $13,034 1/31/1997 $12,685 $13,848 2/28/1997 $12,706 $13,957 3/31/1997 $12,381 $13,384 4/30/1997 $12,818 $14,183 5/31/1997 $13,517 $15,045 6/30/1997 $13,757 $15,719 7/31/1997 $14,301 $16,969 8/31/1997 $13,805 $16,019 9/30/1997 $14,237 $16,896 10/31/1997 $14,109 $16,332 11/30/1997 $14,418 $17,088 12/31/1997 $14,576 $17,381 1/31/1998 $14,717 $17,573 2/28/1998 $15,326 $18,840 3/31/1998 $15,647 $19,804 4/30/1998 $15,849 $20,003 5/31/1998 $15,615 $19,660 6/30/1998 $15,898 $20,458 7/31/1998 $15,827 $20,240 8/31/1998 $14,489 $17,317 9/30/1998 $15,288 $18,426 10/31/1998 $16,224 $19,924 11/30/1998 $16,789 $21,131 12/31/1998 $17,146 $22,348 1/31/1999 $17,433 $23,282 2/28/1999 $17,234 $22,558 3/31/1999 $17,687 $23,461 4/30/1999 $18,256 $24,369 5/31/1999 $18,024 $23,795 6/30/1999 $18,769 $25,114 7/31/1999 $18,449 $24,331 8/31/1999 $18,515 $24,211 9/30/1999 $17,996 $23,548 10/31/1999 $18,278 $25,037 11/30/1999 $18,499 $25,546 12/31/1999 $19,089 $27,050 1/31/2000 $18,910 $25,691 2/29/2000 $18,462 $25,205 3/31/2000 $20,053 $27,669 4/30/2000 $20,272 $26,837 5/31/2000 $20,345 $26,288 6/30/2000 $20,620 $26,936 7/31/2000 $20,289 $26,515 8/31/2000 $21,169 $28,161 9/30/2000 $20,283 $26,675 10/31/2000 $20,541 $26,562 11/30/2000 $19,992 $24,469 12/31/2000 $20,371 $24,589 1/31/2001 $20,737 $25,461 2/28/2001 $19,692 $23,141 3/31/2001 $18,217 $21,676 4/30/2001 $19,675 $23,359 5/31/2001 $19,964 $23,516 6/30/2001 $19,037 $22,944 7/31/2001 $18,972 $22,718 8/31/2001 $18,104 $21,297 9/30/2001 $16,080 $19,577 10/31/2001 $16,605 $19,951 11/30/2001 $18,175 $21,481 12/31/2001 $18,303 $21,669 1/31/2002 $18,031 $21,353 2/28/2002 $17,895 $20,941 3/31/2002 $18,498 $21,729 4/30/2002 $17,321 $20,412 5/31/2002 $16,967 $20,262 6/30/2002 $15,678 $18,819 7/31/2002 $14,253 $17,353 8/31/2002 $14,277 $17,466 9/30/2002 $12,716 $15,570 10/31/2002 $13,591 $16,939 11/30/2002 $14,513 $17,935 12/31/2002 $13,745 $16,882 1/31/2003 $13,213 $16,441 2/28/2003 $12,899 $16,193 3/31/2003 $12,893 $16,349 4/30/2003 $13,827 $17,696 5/31/2003 $14,720 $18,628 6/30/2003 $15,146 $18,866 7/31/2003 $15,589 $19,199 8/31/2003 $15,920 $19,572 9/30/2003 $15,430 $19,365 10/31/2003 $16,328 $20,460 11/30/2003 $16,523 $20,640 12/31/2003 $17,463 $21,721 1/31/2004 $17,711 $22,120 2/29/2004 $17,788 $22,427 3/31/2004 $17,363 $22,089 4/30/2004 $17,363 $21,743 5/31/2004 $17,635 $22,041 6/30/2004 $18,344 $22,469 7/31/2004 $17,363 $21,726 8/31/2004 $17,203 $21,813 9/30/2004 $17,445 $22,049 10/31/2004 $17,646 $22,386 11/30/2004 $18,663 $23,291 12/31/2004 $19,290 $24,083 1/31/2005 $18,616 $23,496 2/28/2005 $18,929 $23,991 3/31/2005 $18,900 $23,566 4/30/2005 $18,433 $23,120 5/31/2005 $19,148 $23,855 6/30/2005 $18,929 $23,889 7/31/2005 $19,905 $24,777 8/31/2005 $19,822 $24,551 9/30/2005 $19,769 $24,750 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------- CLASS R 9/30/05 - ---------------------------------------- 1-Year +12.87% - ---------------------------------------- 3-Year +16.42% - ---------------------------------------- Since Inception (1/1/02) +2.53% - ---------------------------------------- CLASS R (10/01/95 - 09/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN GROWTH DATE FUND - CLASS R S&P 500 INDEX(5) ------------------------------------------------------------ 1/1/2002 $10,000 $10,000 1/31/2002 $ 9,832 $ 9,854 2/28/2002 $ 9,760 $ 9,664 3/31/2002 $10,098 $10,028 4/30/2002 $ 9,456 $ 9,420 5/31/2002 $ 9,266 $ 9,351 6/30/2002 $ 8,566 $ 8,685 7/31/2002 $ 7,794 $ 8,008 8/31/2002 $ 7,806 $ 8,061 9/30/2002 $ 6,958 $ 7,185 10/31/2002 $ 7,436 $ 7,817 11/30/2002 $ 7,945 $ 8,277 12/31/2002 $ 7,528 $ 7,791 1/31/2003 $ 7,239 $ 7,587 2/28/2003 $ 7,072 $ 7,473 3/31/2003 $ 7,072 $ 7,545 4/30/2003 $ 7,586 $ 8,167 5/31/2003 $ 8,081 $ 8,596 6/30/2003 $ 8,318 $ 8,706 7/31/2003 $ 8,563 $ 8,860 8/31/2003 $ 8,750 $ 9,032 9/30/2003 $ 8,483 $ 8,937 10/31/2003 $ 8,985 $ 9,442 11/30/2003 $ 9,095 $ 9,525 12/31/2003 $ 9,612 $10,024 1/31/2004 $ 9,755 $10,208 2/29/2004 $ 9,799 $10,350 3/31/2004 $ 9,572 $10,194 4/30/2004 $ 9,575 $10,034 5/31/2004 $ 9,730 $10,171 6/30/2004 $10,123 $10,369 7/31/2004 $ 9,587 $10,026 8/31/2004 $ 9,504 $10,066 9/30/2004 $ 9,641 $10,175 10/31/2004 $ 9,755 $10,331 11/30/2004 $10,323 $10,749 12/31/2004 $10,674 $11,114 1/31/2005 $10,305 $10,843 2/28/2005 $10,483 $11,071 3/31/2005 $10,468 $10,876 4/30/2005 $10,216 $10,669 5/31/2005 $10,620 $11,009 6/30/2005 $10,499 $11,024 7/31/2005 $11,045 $11,434 8/31/2005 $11,004 $11,330 9/30/2005 $10,978 $11,422 20 | Annual Report PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------- ADVISOR CLASS(4) 9/30/05 - ---------------------------------------- 1-Year +14.45% - ---------------------------------------- 5-Year +0.48% - ---------------------------------------- 10-Year +8.18% - ---------------------------------------- ADVISOR CLASS (10/01/95 - 09/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN GROWTH DATE FUND - ADVISOR CLASS S&P 500 INDEX(5) -------------------------------------------------------------- 10/1/1995 $10,000 $10,000 10/31/1995 $10,057 $ 9,964 11/30/1995 $10,624 $10,401 12/31/1995 $10,712 $10,602 1/31/1996 $11,022 $10,962 2/29/1996 $11,257 $11,064 3/31/1996 $11,299 $11,170 4/30/1996 $11,530 $11,335 5/31/1996 $11,750 $11,627 6/30/1996 $11,666 $11,671 7/31/1996 $11,064 $11,156 8/31/1996 $11,373 $11,391 9/30/1996 $11,970 $12,032 10/31/1996 $12,002 $12,364 11/30/1996 $12,756 $13,297 12/31/1996 $12,500 $13,034 1/31/1997 $12,920 $13,848 2/28/1997 $12,952 $13,957 3/31/1997 $12,636 $13,384 4/30/1997 $13,087 $14,183 5/31/1997 $13,808 $15,045 6/30/1997 $14,066 $15,719 7/31/1997 $14,631 $16,969 8/31/1997 $14,141 $16,019 9/30/1997 $14,594 $16,896 10/31/1997 $14,470 $16,332 11/30/1997 $14,808 $17,088 12/31/1997 $14,979 $17,381 1/31/1998 $15,139 $17,573 2/28/1998 $15,774 $18,840 3/31/1998 $16,123 $19,804 4/30/1998 $16,339 $20,003 5/31/1998 $16,112 $19,660 6/30/1998 $16,416 $20,458 7/31/1998 $16,361 $20,240 8/31/1998 $14,984 $17,317 9/30/1998 $15,830 $18,426 10/31/1998 $16,809 $19,924 11/30/1998 $17,417 $21,131 12/31/1998 $17,797 $22,348 1/31/1999 $18,114 $23,282 2/28/1999 $17,921 $22,558 3/31/1999 $18,408 $23,461 4/30/1999 $19,008 $24,369 5/31/1999 $18,787 $23,795 6/30/1999 $19,579 $25,114 7/31/1999 $19,262 $24,331 8/31/1999 $19,347 $24,211 9/30/1999 $18,821 $23,548 10/31/1999 $19,132 $25,037 11/30/1999 $19,381 $25,546 12/31/1999 $20,012 $27,050 1/31/2000 $19,844 $25,691 2/29/2000 $19,387 $25,205 3/31/2000 $21,078 $27,669 4/30/2000 $21,327 $26,837 5/31/2000 $21,420 $26,288 6/30/2000 $21,732 $26,936 7/31/2000 $21,397 $26,515 8/31/2000 $22,340 $28,161 9/30/2000 $21,426 $26,675 10/31/2000 $21,715 $26,562 11/30/2000 $21,154 $24,469 12/31/2000 $21,568 $24,589 1/31/2001 $21,980 $25,461 2/28/2001 $20,884 $23,141 3/31/2001 $19,339 $21,676 4/30/2001 $20,902 $23,359 5/31/2001 $21,229 $23,516 6/30/2001 $20,256 $22,944 7/31/2001 $20,214 $22,718 8/31/2001 $19,302 $21,297 9/30/2001 $17,154 $19,577 10/31/2001 $17,732 $19,951 11/30/2001 $19,425 $21,481 12/31/2001 $19,577 $21,669 1/31/2002 $19,297 $21,353 2/28/2002 $19,166 $20,941 3/31/2002 $19,838 $21,729 4/30/2002 $18,582 $20,412 5/31/2002 $18,223 $20,262 6/30/2002 $16,849 $18,819 7/31/2002 $15,333 $17,353 8/31/2002 $15,370 $17,466 9/30/2002 $13,699 $15,570 10/31/2002 $14,656 $16,939 11/30/2002 $15,663 $17,935 12/31/2002 $14,845 $16,882 1/31/2003 $14,283 $16,441 2/28/2003 $13,959 $16,193 3/31/2003 $13,966 $16,349 4/30/2003 $14,982 $17,696 5/31/2003 $15,968 $18,628 6/30/2003 $16,443 $18,866 7/31/2003 $16,936 $19,199 8/31/2003 $17,310 $19,572 9/30/2003 $16,792 $19,365 10/31/2003 $17,790 $20,460 11/30/2003 $18,015 $20,640 12/31/2003 $19,056 $21,721 1/31/2004 $19,344 $22,120 2/29/2004 $19,438 $22,427 3/31/2004 $18,988 $22,089 4/30/2004 $19,006 $21,743 5/31/2004 $19,320 $22,041 6/30/2004 $20,108 $22,469 7/31/2004 $19,056 $21,726 8/31/2004 $18,893 $21,813 9/30/2004 $19,175 $22,049 10/31/2004 $19,413 $22,386 11/30/2004 $20,553 $23,291 12/31/2004 $21,254 $24,083 1/31/2005 $20,530 $23,496 2/28/2005 $20,895 $23,991 3/31/2005 $20,877 $23,566 4/30/2005 $20,380 $23,120 5/31/2005 $21,191 $23,855 6/30/2005 $20,965 $23,889 7/31/2005 $22,059 $24,777 8/31/2005 $21,990 $24,551 9/30/2005 $21,944 $24,750 ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S INVESTMENTS IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +75.56% and +6.64%. (5) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. Annual Report | 21 YOUR FUND'S EXPENSES FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. Of course, your account value and expenses will differ from those in this illustration: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 22 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05 - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,050.00 $ 4.83 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,020.36 $ 4.76 - ---------------------------------------------------------------------------------------------------------- CLASS B - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,045.90 $ 8.72 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,016.55 $ 8.59 - ---------------------------------------------------------------------------------------------------------- CLASS C - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,046.00 $ 8.67 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,016.60 $ 8.54 - ---------------------------------------------------------------------------------------------------------- CLASS R - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,048.80 $ 6.16 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,019.05 $ 6.07 - ---------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ---------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,051.20 $ 3.60 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,021.56 $ 3.55 - ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.94%; B: 1.70%; and C: 1.69%; R: 1.20%; and Advisor: 0.70%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 23 FRANKLIN INCOME FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This annual report for Franklin Income Fund covers the fiscal year ended September 30, 2005. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +10.45% cumulative total return for the 12 months under review. The Fund underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +12.25%; outperformed the Lehman Brothers (LB) U.S. Aggregate Index, which returned +2.80%; and outperformed its peers as measured by the Lipper Income Funds Classification Average, which returned +7.76%, for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 30. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2005, a maturing domestic economic expansion was driven by perceived staying power across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from personal consumption and greater business investment. Demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates and strong economic growth in the U.S. relative to many of its major trading partners. (1) Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index represents securi- ties that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must be publicly issued, fixed rate, and have at least par amount outstanding. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Income Funds are defined as funds that seek a high level of current income through investing in income-producing stocks, bonds, and money market instruments. For the 12-month period ended 9/30/05, there were 241 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. The Fund's performance relative to the average may have differed if these and other factors had been considered. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 85. 24 | Annual Report Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended September 30, 2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(2) With controlling inflation at the forefront of its agenda, the Federal Reserve Board raised the federal funds target rate from 1.75% to 3.75%, and said it would respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Compared with the rise in short-term interest rates, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.4% to 5.1% during the reporting period.(2) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a one-year total return of +7.23%, while the broader S&P 500 and technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(3) INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. (2) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. (3) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Annual Report | 25 TOP 5 COMMON STOCK HOLDINGS Franklin Income Fund 9/30/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Merck & Co. Inc. 2.6% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Pfizer Inc. 2.1% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- FirstEnergy Corp. 1.8% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Bank of America Corp. 1.6% FINANCE - -------------------------------------------------------------------------------- Canadian Oil Sands Trust 1.6% ENERGY MINERALS - -------------------------------------------------------------------------------- TOP 5 BOND HOLDINGS Franklin Income Fund 9/30/05 - -------------------------------------------------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------------------------------------------------- General Motors Acceptance Corp. 4.0% - -------------------------------------------------------------------------------- CCH LLC 3.1% - -------------------------------------------------------------------------------- Calpine Corp. 2.7% - -------------------------------------------------------------------------------- Tenet Healthcare Corp. 2.6% - -------------------------------------------------------------------------------- Ford Motor Credit Corp. 2.2% - -------------------------------------------------------------------------------- DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/04-9/30/05
DIVIDEND PER SHARE ----------------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----------------------------------------------------------------------------------------------- October 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------------- November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------------- December 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------------- January 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents - ----------------------------------------------------------------------------------------------- February 1.25 cents 1.07 cents 1.14 cents 1.14 cents 1.18 cents 1.28 cents - ----------------------------------------------------------------------------------------------- March 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents - ----------------------------------------------------------------------------------------------- April 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents - ----------------------------------------------------------------------------------------------- May 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents - ----------------------------------------------------------------------------------------------- June 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents - ----------------------------------------------------------------------------------------------- July 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents - ----------------------------------------------------------------------------------------------- August 1.25 cents 1.10 cents 1.16 cents 1.15 cents 1.19 cents 1.28 cents - ----------------------------------------------------------------------------------------------- September 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents - ----------------------------------------------------------------------------------------------- TOTAL 15.20 CENTS 13.16 CENTS 13.99 CENTS 13.96 CENTS 14.35 CENTS 15.56 CENTS - -----------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. MANAGER'S DISCUSSION During the 12 months under review, improving company fundamentals, stable financial markets and historically low interest rates benefited high-dividend paying common stocks, convertible securities and investment and non-investment grade corporate bonds. We continued to focus our search for opportunities in these areas. As a result, government and government agency securities played a lesser role in the Fund's portfolio relative to the recent past (2000-2002) as concerns of increased inflationary pressures and subsequent higher interest rates posed greater risk to the potential for attractive total return from these securities. At the end of the reporting period, government and government agency securities comprised just 2.6% of the Fund's total net assets. The spread, or difference in yield, between U.S. Treasury securities and non-investment grade corporate bonds, as represented by the Lehman Brothers U.S. High Yield Index, tightened during the year from 3.98 percentage points to 26 | Annual Report 3.69 percentage points.(4) Improved valuations for non-investment grade corporate bonds partially offset the volatility and gradual rise in overall interest rates. Consistent with our investment strategy, we took profits in several portfolio holdings that appreciated and that, in our opinion, no longer offered attractive current yield and longer-term upside appreciation potential during the review period. Corporate bonds sold included Allegheny Energy Supply, Electronic Data Systems, Equistar Chemicals, Lyondell Chemical and Pacific Gas & Electric. However, despite corporate bonds' favorable overall performance we continued to look for investment opportunities that offered yield and long-term appreciation potential in line with our strategy. We added to and initiated new positions in several companies including General Motors Acceptance Corp., Ford Motor Credit Company, Tenet Healthcare and Allied Waste Industries. During the past year, global energy prices were broadly supported by a combination of factors including solid economic growth in the U.S. and abroad, geopolitical turmoil in several major oil and natural gas producing regions, and weather-related disruptions to production. If these trends persist in conjunction with the industry's continued dilemma of replacing depleted reserves, we believe the pricing environment for oil and related products should remain above historical averages. Portfolio positions in integrated oil companies that may benefit from this environment include Chevron Corp., BP, Royal Dutch Shell and Canadian Oil Sands Trust. During the period, we also added shares of Chesapeake Energy convertible preferred stock to the portfolio. Chesapeake is a leading producer of natural gas in North America with primary operations onshore. Its stock price appreciated in value as natural gas prices surged due in part to supply fears following significant damage to the offshore infrastructure in the Gulf of Mexico. The Fund's largest sector weighting at fiscal year-end was utilities. We found utilities attractive due to our assessment of the sector's appealing dividend yield and stable earnings growth profile. Over the past several years, many utility companies have adjusted their priorities and moved toward a back-to-basics operational philosophy, which has meant rebuilding core regulated businesses while reducing debt and repairing overstretched balance sheets. Recently, many utility companies found opportunities to invest in building additional infrastructure, further improving operational efficiency, and strengthening their environmental controls. (4) Source: Lehman Brothers Inc. The Lehman Brothers U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt. The index includes both corporate and non-corporate sectors. Annual Report | 27 PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 9/30/05 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Corporate Straight Bonds 29.8% Utilities Stocks 18.9% Health Technology Stocks 8.4% Finance Stocks 7.9% Corporate Convertible Bonds 5.3% Energy Minerals Stocks 5.2% Communications Stocks 3.2% Zero Coupon & Step-Up Bonds 2.8% U.S. Government & Agency Securities 2.6% Consumer Non-Durables Stocks 1.7% Real Estate Investment Trusts 1.5% Consumer Durables Stocks 1.3% Other 6.2% Short-Term Investments & Other Net Assets 5.2% Another driving force behind the utilities sector's remarkable performance over the past year has been its leverage to the commodity markets, in particular, natural gas. The amount and nature of exposure can vary tremendously between companies, but those that were able to generate low-cost power via coal or nuclear fuel, and sell that output in wholesale markets, generated significant gains. Pipeline and natural gas infrastructure utilities also benefited from greater asset utilization as well as from their ownership of natural gas production in most cases. The Fund increased its utilities exposure by investing in companies that provide commodity sensitivity and exposure to strong regulated utility franchises. Examples of such holdings include leading nuclear generation company Exelon, and Dominion Resources, which has significant operations in oil and gas exploration and development. Based on our investment strategy that relies on in-depth fundamental analysis, our multi-asset class approach can provide us flexibility across a wide range of potential investments. For example, our analysis of several companies has led to positions in multiple securities of the same issuer, including Host Marriott, CMS Energy, Allied Waste Industries and General Mills. The Fund had some detractors from performance. For example, many of the Fund's health technology holdings negatively impacted Fund performance. In particular, shares of major pharmaceutical companies dragged on Fund performance. Despite the near-term challenges to existing products from generic manufacturers as well as overall pressures to keep control of health care costs including the possibility of legislation to boost drug importation, we continued to find the longer-term value compelling and the dividend yield attractive in the near term. Sector positions that declined in value included Pfizer, Merck, Wyeth, Schering-Plough, Bristol-Meyers Squibb and Johnson & Johnson. Also during the period, the Fund's fixed income investments in Tenet Healthcare suffered a temporary setback after several of the company's hospitals in the Gulf Coast region suffered severe damage due to Hurricane Katrina. 28 | Annual Report Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Edward Perks Edward Perks, CFA [PHOTO OMITTED] /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 29 PERFORMANCE SUMMARY AS OF 9/30/05 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKINX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.50 $2.42 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1520 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1649 - ----------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FBICX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.49 $2.41 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1316 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1445 - ----------------------------------------------------------------------------------------------- CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.50 $2.42 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1399 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1528 - ----------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FCISX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.51 $2.43 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1396 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1525 - -----------------------------------------------------------------------------------------------
30 | Annual Report PERFORMANCE SUMMARY (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- ----------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FISRX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.48 $2.40 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1435 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1564 - ----------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.08 $2.49 $2.41 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.1556 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0129 - ----------------------------------------------------------------------------------------------- TOTAL $0.1685 - -----------------------------------------------------------------------------------------------
Franklin Income Fund paid distributions derived from long-term capital gains of 1.29 cents per share in December 2004. The Fund designates such distributions as capital gain dividends per Internal Revenue Code Section 852 (b)(3). Annual Report | 31 PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------ CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +10.45% +57.52% +146.58% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +5.64% +8.60% +8.98% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,564 $15,109 $23,631 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 5.75% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 5.02% - ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 3-YEAR INCEPTION (11/1/01) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +9.57% +58.92% +49.97% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +5.57% +15.96% +10.34% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,557 $15,592 $14,697 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 5.11% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 4.39% - ------------------------------------------------------------------------------------------------------ CLASS B1 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +9.90% +53.67% +75.91% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +5.90% +8.69% +8.73% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,590 $15,167 $17,591 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 5.47% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 4.74% - ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +9.84% +53.34% +134.81% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +8.84% +8.93% +8.91% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,884 $15,334 $23,481 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 5.45% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 4.75% - ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +10.15% +61.62% +48.15% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +9.15% +17.35% +11.07% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $10,915 $16,162 $14,815 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 5.66% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 4.89% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +10.65% +59.01% +151.54% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +10.65% +9.72% +9.66% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment(3) $11,065 $15,901 $25,154 - ------------------------------------------------------------------------------------------------------ Distribution Rate(4) 6.17% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(5) 5.40% - ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 32 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS A 9/30/05 - ----------------------------------------- 1-Year +5.64% - ----------------------------------------- 5-Year +8.60% - ----------------------------------------- 10-Year +8.98% - ----------------------------------------- CLASS A (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME LEHMAN BROTHERS FUNDS FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION DATE FUND - CLASS A INDEX(7) INDEX(7) AVG.(7) ----------------------------------------------------------------------------- 10/1/1995 $ 9,583 $10,000 $10,000 $10,000 10/31/1995 $ 9,604 $ 9,964 $10,130 $ 9,993 11/30/1995 $ 9,752 $10,401 $10,282 $10,241 12/31/1995 $ 9,975 $10,602 $10,426 $10,431 1/31/1996 $10,256 $10,962 $10,495 $10,628 2/29/1996 $10,060 $11,064 $10,313 $10,573 3/31/1996 $10,037 $11,170 $10,241 $10,585 4/30/1996 $10,015 $11,335 $10,184 $10,606 5/31/1996 $10,126 $11,627 $10,163 $10,686 6/30/1996 $10,327 $11,671 $10,299 $10,778 7/31/1996 $10,169 $11,156 $10,328 $10,561 8/31/1996 $10,328 $11,391 $10,310 $10,682 9/30/1996 $10,487 $12,032 $10,490 $10,926 10/31/1996 $10,694 $12,364 $10,722 $11,183 11/30/1996 $10,948 $13,297 $10,906 $11,561 12/31/1996 $11,017 $13,034 $10,805 $11,527 1/31/1997 $11,182 $13,848 $10,838 $11,724 2/28/1997 $11,300 $13,957 $10,865 $11,805 3/31/1997 $11,038 $13,384 $10,744 $11,582 4/30/1997 $11,110 $14,183 $10,905 $11,753 5/31/1997 $11,471 $15,045 $11,008 $12,122 6/30/1997 $11,689 $15,719 $11,139 $12,405 7/31/1997 $12,006 $16,969 $11,439 $12,886 8/31/1997 $11,933 $16,019 $11,342 $12,675 9/30/1997 $12,303 $16,896 $11,509 $13,079 10/31/1997 $12,129 $16,332 $11,676 $12,972 11/30/1997 $12,503 $17,088 $11,730 $13,191 12/31/1997 $12,873 $17,381 $11,848 $13,410 1/31/1998 $12,745 $17,573 $12,000 $13,456 2/28/1998 $12,925 $18,840 $11,991 $13,781 3/31/1998 $13,314 $19,804 $12,032 $14,101 4/30/1998 $13,132 $20,003 $12,095 $14,109 5/31/1998 $13,001 $19,660 $12,210 $14,057 6/30/1998 $13,027 $20,458 $12,313 $14,165 7/31/1998 $12,788 $20,240 $12,339 $14,021 8/31/1998 $11,960 $17,317 $12,540 $13,267 9/30/1998 $12,577 $18,426 $12,834 $13,678 10/31/1998 $12,605 $19,924 $12,766 $13,954 11/30/1998 $13,013 $21,131 $12,838 $14,279 12/31/1998 $12,996 $22,348 $12,877 $14,519 1/31/1999 $12,802 $23,282 $12,969 $14,590 2/28/1999 $12,440 $22,558 $12,742 $14,294 3/31/1999 $12,636 $23,461 $12,813 $14,487 4/30/1999 $13,286 $24,369 $12,854 $14,910 5/31/1999 $13,371 $23,795 $12,741 $14,783 6/30/1999 $13,343 $25,114 $12,701 $14,955 7/31/1999 $13,199 $24,331 $12,646 $14,799 8/31/1999 $13,228 $24,211 $12,640 $14,675 9/30/1999 $13,082 $23,548 $12,787 $14,549 10/31/1999 $13,053 $25,037 $12,834 $14,789 11/30/1999 $12,846 $25,546 $12,833 $14,832 12/31/1999 $12,900 $27,050 $12,771 $15,080 1/31/2000 $12,992 $25,691 $12,729 $14,837 2/29/2000 $12,779 $25,205 $12,883 $14,804 3/31/2000 $12,993 $27,669 $13,053 $15,337 4/30/2000 $13,456 $26,837 $13,016 $15,168 5/31/2000 $13,672 $26,288 $13,010 $15,152 6/30/2000 $13,766 $26,936 $13,280 $15,305 7/31/2000 $13,923 $26,515 $13,401 $15,305 8/31/2000 $14,715 $28,161 $13,595 $15,811 9/30/2000 $15,002 $26,675 $13,681 $15,702 10/31/2000 $14,777 $26,562 $13,771 $15,661 11/30/2000 $14,680 $24,469 $13,996 $15,322 12/31/2000 $15,556 $24,589 $14,256 $15,746 1/31/2001 $15,525 $25,461 $14,489 $16,015 2/28/2001 $15,824 $23,141 $14,615 $15,732 3/31/2001 $15,589 $21,676 $14,689 $15,452 4/30/2001 $15,894 $23,359 $14,628 $15,881 5/31/2001 $16,199 $23,516 $14,716 $15,980 6/30/2001 $15,823 $22,944 $14,771 $15,841 7/31/2001 $15,650 $22,718 $15,102 $15,887 8/31/2001 $15,823 $21,297 $15,275 $15,712 9/30/2001 $15,090 $19,577 $15,453 $15,187 10/31/2001 $15,195 $19,951 $15,776 $15,391 11/30/2001 $15,513 $21,481 $15,558 $15,675 12/31/2001 $15,657 $21,669 $15,460 $15,735 1/31/2002 $15,765 $21,353 $15,585 $15,672 2/28/2002 $15,874 $20,941 $15,736 $15,661 3/31/2002 $16,350 $21,729 $15,474 $15,901 4/30/2002 $16,446 $20,412 $15,774 $15,839 5/31/2002 $16,393 $20,262 $15,908 $15,856 6/30/2002 $15,371 $18,819 $16,046 $15,395 7/31/2002 $14,643 $17,353 $16,239 $14,839 8/31/2002 $15,120 $17,466 $16,514 $15,012 9/30/2002 $14,459 $15,570 $16,781 $14,443 10/31/2002 $14,558 $16,939 $16,705 $14,725 11/30/2002 $15,352 $17,935 $16,700 $15,124 12/31/2002 $15,491 $16,882 $17,045 $15,039 1/31/2003 $15,591 $16,441 $17,060 $14,921 2/28/2003 $15,378 $16,193 $17,296 $14,879 3/31/2003 $15,719 $16,349 $17,282 $14,925 4/30/2003 $16,701 $17,696 $17,425 $15,535 5/31/2003 $17,610 $18,628 $17,750 $16,092 6/30/2003 $17,957 $18,866 $17,715 $16,214 7/31/2003 $17,737 $19,199 $17,119 $16,122 8/31/2003 $18,007 $19,572 $17,233 $16,288 9/30/2003 $18,525 $19,365 $17,689 $16,465 10/31/2003 $19,046 $20,460 $17,524 $16,803 11/30/2003 $19,321 $20,640 $17,566 $16,956 12/31/2003 $20,287 $21,721 $17,745 $17,454 1/31/2004 $20,566 $22,120 $17,887 $17,639 2/29/2004 $20,592 $22,427 $18,081 $17,835 3/31/2004 $20,617 $22,089 $18,216 $17,819 4/30/2004 $20,298 $21,743 $17,742 $17,448 5/31/2004 $20,238 $22,041 $17,671 $17,471 6/30/2004 $20,525 $22,469 $17,771 $17,660 7/31/2004 $20,638 $21,726 $17,947 $17,532 8/31/2004 $21,104 $21,813 $18,290 $17,732 9/30/2004 $21,396 $22,049 $18,339 $17,890 10/31/2004 $21,689 $22,386 $18,493 $18,099 11/30/2004 $22,163 $23,291 $18,346 $18,427 12/31/2004 $22,757 $24,083 $18,514 $18,784 1/31/2005 $22,332 $23,496 $18,631 $18,619 2/28/2005 $22,902 $23,991 $18,521 $18,800 3/31/2005 $22,466 $23,566 $18,426 $18,584 4/30/2005 $22,121 $23,120 $18,675 $18,511 5/31/2005 $22,607 $23,855 $18,877 $18,779 6/30/2005 $23,281 $23,889 $18,980 $18,939 7/31/2005 $23,772 $24,777 $18,807 $19,176 8/31/2005 $23,702 $24,551 $19,048 $19,237 9/30/2005 $23,631 $24,750 $18,852 $19,260 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS B 9/30/05 - ----------------------------------------- 1-Year +5.57% - ----------------------------------------- 3-Year +15.96% - ----------------------------------------- Since Inception (11/1/01) +10.34% - ----------------------------------------- CLASS B (11/1/01 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME LEHMAN BROTHERS FUNDS FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION DATE FUND - CLASS B INDEX(7) INDEX(7) AVG.(7) ------------------------------------------------------------------------------ 11/1/2001 $10,000 $10,000 $10,000 $10,000 11/30/2001 $10,186 $10,767 $ 9,862 $10,185 12/31/2001 $10,229 $10,861 $ 9,799 $10,224 1/31/2002 $10,344 $10,703 $ 9,879 $10,183 2/28/2002 $10,411 $10,496 $ 9,975 $10,176 3/31/2002 $10,671 $10,891 $ 9,809 $10,331 4/30/2002 $10,774 $10,231 $ 9,999 $10,291 5/31/2002 $10,731 $10,156 $10,084 $10,302 6/30/2002 $10,006 $ 9,433 $10,171 $10,003 7/31/2002 $ 9,571 $ 8,698 $10,294 $ 9,642 8/31/2002 $ 9,875 $ 8,755 $10,468 $ 9,754 9/30/2002 $ 9,437 $ 7,804 $10,637 $ 9,385 10/31/2002 $ 9,445 $ 8,490 $10,589 $ 9,568 11/30/2002 $ 9,955 $ 8,990 $10,586 $ 9,827 12/31/2002 $10,091 $ 8,462 $10,804 $ 9,772 1/31/2003 $10,098 $ 8,241 $10,814 $ 9,695 2/28/2003 $10,004 $ 8,117 $10,963 $ 9,668 3/31/2003 $10,167 $ 8,195 $10,955 $ 9,697 4/30/2003 $10,851 $ 8,870 $11,045 $10,094 5/31/2003 $11,382 $ 9,337 $11,251 $10,455 6/30/2003 $11,653 $ 9,456 $11,229 $10,535 7/31/2003 $11,502 $ 9,623 $10,851 $10,475 8/31/2003 $11,671 $ 9,810 $10,923 $10,583 9/30/2003 $11,944 $ 9,706 $11,213 $10,698 10/31/2003 $12,273 $10,255 $11,108 $10,917 11/30/2003 $12,496 $10,345 $11,135 $11,017 12/31/2003 $13,057 $10,887 $11,248 $11,341 1/31/2004 $13,228 $11,087 $11,338 $11,461 2/29/2004 $13,290 $11,241 $11,461 $11,588 3/31/2004 $13,242 $11,072 $11,547 $11,578 4/30/2004 $13,082 $10,898 $11,247 $11,337 5/31/2004 $12,979 $11,048 $11,201 $11,352 6/30/2004 $13,210 $11,262 $11,265 $11,474 7/31/2004 $13,219 $10,890 $11,376 $11,392 8/31/2004 $13,508 $10,933 $11,593 $11,521 9/30/2004 $13,687 $11,052 $11,625 $11,624 10/31/2004 $13,866 $11,220 $11,722 $11,760 11/30/2004 $14,160 $11,674 $11,629 $11,973 12/31/2004 $14,531 $12,071 $11,736 $12,205 1/31/2005 $14,306 $11,777 $11,810 $12,098 2/28/2005 $14,602 $12,025 $11,740 $12,215 3/31/2005 $14,313 $11,812 $11,680 $12,075 4/30/2005 $14,082 $11,588 $11,838 $12,028 5/31/2005 $14,381 $11,957 $11,966 $12,202 6/30/2005 $14,803 $11,974 $12,031 $12,306 7/31/2005 $15,107 $12,419 $11,921 $12,459 8/31/2005 $15,053 $12,306 $12,074 $12,499 9/30/2005 $14,697 $12,405 $11,950 $12,514 Annual Report | 33 PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS B1 9/30/05 - ----------------------------------------- 1-Year +5.90% - ----------------------------------------- 5-Year +8.69% - ----------------------------------------- Since Inception (1/1/99) +8.73% - ----------------------------------------- CLASS B1 (1/1/99 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME LEHMAN BROTHERS FUNDS FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION DATE FUND - CLASS B1 INDEX(7) INDEX(7) AVG.(7) ------------------------------------------------------------------------------ 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $ 9,851 $10,418 $10,071 $10,049 2/28/1999 $ 9,568 $10,094 $ 9,896 $ 9,845 3/31/1999 $ 9,717 $10,498 $ 9,950 $ 9,978 4/30/1999 $10,213 $10,905 $ 9,982 $10,269 5/31/1999 $10,230 $10,647 $ 9,894 $10,182 6/30/1999 $10,248 $11,238 $ 9,863 $10,300 7/31/1999 $10,133 $10,887 $ 9,821 $10,193 8/31/1999 $10,150 $10,834 $ 9,816 $10,107 9/30/1999 $10,035 $10,537 $ 9,930 $10,020 10/31/1999 $10,009 $11,203 $ 9,967 $10,186 11/30/1999 $ 9,845 $11,431 $ 9,966 $10,215 12/31/1999 $ 9,883 $12,104 $ 9,918 $10,386 1/31/2000 $ 9,949 $11,496 $ 9,885 $10,219 2/29/2000 $ 9,782 $11,279 $10,005 $10,196 3/31/2000 $ 9,941 $12,381 $10,137 $10,563 4/30/2000 $10,290 $12,009 $10,108 $10,447 5/31/2000 $10,452 $11,763 $10,103 $10,436 6/30/2000 $10,519 $12,053 $10,313 $10,541 7/31/2000 $10,633 $11,865 $10,407 $10,541 8/31/2000 $11,233 $12,601 $10,558 $10,890 9/30/2000 $11,448 $11,936 $10,624 $10,815 10/31/2000 $11,271 $11,886 $10,694 $10,787 11/30/2000 $11,242 $10,949 $10,869 $10,553 12/31/2000 $11,856 $11,003 $11,071 $10,845 1/31/2001 $11,827 $11,393 $11,252 $11,030 2/28/2001 $12,051 $10,355 $11,350 $10,835 3/31/2001 $11,867 $ 9,699 $11,407 $10,642 4/30/2001 $12,093 $10,453 $11,360 $10,938 5/31/2001 $12,321 $10,523 $11,428 $11,006 6/30/2001 $12,030 $10,267 $11,471 $10,910 7/31/2001 $11,894 $10,166 $11,728 $10,942 8/31/2001 $12,021 $ 9,530 $11,862 $10,821 9/30/2001 $11,460 $ 8,760 $12,000 $10,460 10/31/2001 $11,535 $ 8,927 $12,251 $10,600 11/30/2001 $11,772 $ 9,612 $12,082 $10,796 12/31/2001 $11,877 $ 9,696 $12,006 $10,837 1/31/2002 $11,954 $ 9,555 $12,103 $10,794 2/28/2002 $12,031 $ 9,371 $12,220 $10,786 3/31/2002 $12,388 $ 9,723 $12,017 $10,951 4/30/2002 $12,455 $ 9,134 $12,250 $10,909 5/31/2002 $12,410 $ 9,067 $12,354 $10,921 6/30/2002 $11,630 $ 8,421 $12,461 $10,603 7/31/2002 $11,074 $ 7,765 $12,611 $10,220 8/31/2002 $11,429 $ 7,816 $12,824 $10,340 9/30/2002 $10,925 $ 6,967 $13,032 $9,948 10/31/2002 $10,995 $ 7,580 $12,972 $10,142 11/30/2002 $11,590 $ 8,025 $12,969 $10,417 12/31/2002 $11,690 $ 7,554 $13,237 $10,358 1/31/2003 $11,762 $ 7,357 $13,248 $10,276 2/28/2003 $11,597 $ 7,246 $13,431 $10,248 3/31/2003 $11,849 $ 7,316 $13,421 $10,279 4/30/2003 $12,583 $ 7,919 $13,532 $10,700 5/31/2003 $13,261 $ 8,335 $13,784 $11,083 6/30/2003 $13,517 $ 8,442 $13,757 $11,167 7/31/2003 $13,347 $ 8,591 $13,294 $11,104 8/31/2003 $13,546 $ 8,758 $13,383 $11,218 9/30/2003 $13,929 $ 8,665 $13,737 $11,340 10/31/2003 $14,314 $ 9,155 $13,609 $11,573 11/30/2003 $14,514 $ 9,236 $13,641 $11,678 12/31/2003 $15,234 $ 9,720 $13,780 $12,021 1/31/2004 $15,437 $ 9,898 $13,891 $12,149 2/29/2004 $15,514 $10,036 $14,041 $12,284 3/31/2004 $15,461 $ 9,884 $14,147 $12,273 4/30/2004 $15,215 $ 9,729 $13,778 $12,017 5/31/2004 $15,162 $ 9,863 $13,723 $12,033 6/30/2004 $15,371 $10,054 $13,801 $12,163 7/31/2004 $15,450 $ 9,722 $13,938 $12,075 8/31/2004 $15,793 $ 9,761 $14,203 $12,213 9/30/2004 $16,004 $ 9,866 $14,242 $12,322 10/31/2004 $16,217 $10,017 $14,361 $12,466 11/30/2004 $16,564 $10,422 $14,247 $12,691 12/31/2004 $17,001 $10,777 $14,378 $12,938 1/31/2005 $16,743 $10,514 $14,468 $12,824 2/28/2005 $17,093 $10,735 $14,383 $12,948 3/31/2005 $16,761 $10,545 $14,309 $12,799 4/30/2005 $16,497 $10,345 $14,503 $12,749 5/31/2005 $16,851 $10,674 $14,660 $12,934 6/30/2005 $17,347 $10,690 $14,739 $13,044 7/31/2005 $17,706 $11,087 $14,605 $13,207 8/31/2005 $17,647 $10,986 $14,793 $13,249 9/30/2005 $17,591 $11,075 $14,640 $13,265 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS C 9/30/05 - ----------------------------------------- 1-Year +8.84% - ----------------------------------------- 5-Year +8.93% - ----------------------------------------- 10-Year +8.91% - ----------------------------------------- CLASS C (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME LEHMAN BROTHERS FUNDS FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION DATE FUND - CLASS C INDEX(7) INDEX(7) AVG.(7) ------------------------------------------------------------------------------ 10/1/1995 $10,000 $10,000 $10,000 $10,000 10/31/1995 $10,017 $ 9,964 $10,130 $ 9,993 11/30/1995 $10,167 $10,401 $10,282 $10,241 12/31/1995 $10,395 $10,602 $10,426 $10,431 1/31/1996 $10,683 $10,962 $10,495 $10,628 2/29/1996 $10,520 $11,064 $10,313 $10,573 3/31/1996 $10,492 $11,170 $10,241 $10,585 4/30/1996 $10,418 $11,335 $10,184 $10,606 5/31/1996 $10,529 $11,627 $10,163 $10,686 6/30/1996 $10,734 $11,671 $10,299 $10,778 7/31/1996 $10,565 $11,156 $10,328 $10,561 8/31/1996 $10,725 $11,391 $10,310 $10,682 9/30/1996 $10,886 $12,032 $10,490 $10,926 10/31/1996 $11,095 $12,364 $10,722 $11,183 11/30/1996 $11,401 $13,297 $10,906 $11,561 12/31/1996 $11,421 $13,034 $10,805 $11,527 1/31/1997 $11,587 $13,848 $10,838 $11,724 2/28/1997 $11,753 $13,957 $10,865 $11,805 3/31/1997 $11,477 $13,384 $10,744 $11,582 4/30/1997 $11,497 $14,183 $10,905 $11,753 5/31/1997 $11,865 $15,045 $11,008 $12,122 6/30/1997 $12,135 $15,719 $11,139 $12,405 7/31/1997 $12,458 $16,969 $11,439 $12,886 8/31/1997 $12,377 $16,019 $11,342 $12,675 9/30/1997 $12,706 $16,896 $11,509 $13,079 10/31/1997 $12,572 $16,332 $11,676 $12,972 11/30/1997 $12,901 $17,088 $11,730 $13,191 12/31/1997 $13,278 $17,381 $11,848 $13,410 1/31/1998 $13,140 $17,573 $12,000 $13,456 2/28/1998 $13,320 $18,840 $11,991 $13,781 3/31/1998 $13,714 $19,804 $12,032 $14,101 4/30/1998 $13,574 $20,003 $12,095 $14,109 5/31/1998 $13,380 $19,660 $12,210 $14,057 6/30/1998 $13,456 $20,458 $12,313 $14,165 7/31/1998 $13,204 $20,240 $12,339 $14,021 8/31/1998 $12,347 $17,317 $12,540 $13,267 9/30/1998 $12,922 $18,426 $12,834 $13,678 10/31/1998 $13,000 $19,924 $12,766 $13,954 11/30/1998 $13,414 $21,131 $12,838 $14,279 12/31/1998 $13,335 $22,348 $12,877 $14,519 1/31/1999 $13,186 $23,282 $12,969 $14,590 2/28/1999 $12,809 $22,558 $12,742 $14,294 3/31/1999 $13,005 $23,461 $12,813 $14,487 4/30/1999 $13,665 $24,369 $12,854 $14,910 5/31/1999 $13,688 $23,795 $12,741 $14,783 6/30/1999 $13,712 $25,114 $12,701 $14,955 7/31/1999 $13,559 $24,331 $12,646 $14,799 8/31/1999 $13,524 $24,211 $12,640 $14,675 9/30/1999 $13,370 $23,548 $12,787 $14,549 10/31/1999 $13,394 $25,037 $12,834 $14,789 11/30/1999 $13,177 $25,546 $12,833 $14,832 12/31/1999 $13,227 $27,050 $12,771 $15,080 1/31/2000 $13,252 $25,691 $12,729 $14,837 2/29/2000 $13,091 $25,205 $12,883 $14,804 3/31/2000 $13,304 $27,669 $13,053 $15,337 4/30/2000 $13,769 $26,837 $13,016 $15,168 5/31/2000 $13,921 $26,288 $13,010 $15,152 6/30/2000 $14,010 $26,936 $13,280 $15,305 7/31/2000 $14,228 $26,515 $13,401 $15,305 8/31/2000 $15,027 $28,161 $13,595 $15,811 9/30/2000 $15,313 $26,675 $13,681 $15,702 10/31/2000 $15,079 $26,562 $13,771 $15,661 11/30/2000 $14,974 $24,469 $13,996 $15,322 12/31/2000 $15,857 $24,589 $14,256 $15,746 1/31/2001 $15,818 $25,461 $14,489 $16,015 2/28/2001 $16,116 $23,141 $14,615 $15,732 3/31/2001 $15,870 $21,676 $14,689 $15,452 4/30/2001 $16,172 $23,359 $14,628 $15,881 5/31/2001 $16,475 $23,516 $14,716 $15,980 6/30/2001 $16,087 $22,944 $14,771 $15,841 7/31/2001 $15,907 $22,718 $15,102 $15,887 8/31/2001 $16,076 $21,297 $15,275 $15,712 9/30/2001 $15,327 $19,577 $15,453 $15,187 10/31/2001 $15,426 $19,951 $15,776 $15,391 11/30/2001 $15,741 $21,481 $15,558 $15,675 12/31/2001 $15,879 $21,669 $15,460 $15,735 1/31/2002 $15,981 $21,353 $15,585 $15,672 2/28/2002 $16,085 $20,941 $15,736 $15,661 3/31/2002 $16,558 $21,729 $15,474 $15,901 4/30/2002 $16,648 $20,412 $15,774 $15,839 5/31/2002 $16,589 $20,262 $15,908 $15,856 6/30/2002 $15,553 $18,819 $16,046 $15,395 7/31/2002 $14,813 $17,353 $16,239 $14,839 8/31/2002 $15,286 $17,466 $16,514 $15,012 9/30/2002 $14,615 $15,570 $16,781 $14,443 10/31/2002 $14,708 $16,939 $16,705 $14,725 11/30/2002 $15,500 $17,935 $16,700 $15,124 12/31/2002 $15,635 $16,882 $17,045 $15,039 1/31/2003 $15,653 $16,441 $17,060 $14,921 2/28/2003 $15,513 $16,193 $17,296 $14,879 3/31/2003 $15,847 $16,349 $17,282 $14,925 4/30/2003 $16,825 $17,696 $17,425 $15,535 5/31/2003 $17,728 $18,628 $17,750 $16,092 6/30/2003 $18,069 $18,866 $17,715 $16,214 7/31/2003 $17,842 $19,199 $17,119 $16,122 8/31/2003 $18,105 $19,572 $17,233 $16,288 9/30/2003 $18,615 $19,365 $17,689 $16,465 10/31/2003 $19,127 $20,460 $17,524 $16,803 11/30/2003 $19,393 $20,640 $17,566 $16,956 12/31/2003 $20,351 $21,721 $17,745 $17,454 1/31/2004 $20,622 $22,120 $17,887 $17,639 2/29/2004 $20,725 $22,427 $18,081 $17,835 3/31/2004 $20,655 $22,089 $18,216 $17,819 4/30/2004 $20,414 $21,743 $17,742 $17,448 5/31/2004 $20,258 $22,041 $17,671 $17,471 6/30/2004 $20,623 $22,469 $17,771 $17,660 7/31/2004 $20,642 $21,726 $17,947 $17,532 8/31/2004 $21,098 $21,813 $18,290 $17,732 9/30/2004 $21,379 $22,049 $18,339 $17,890 10/31/2004 $21,661 $22,386 $18,493 $18,099 11/30/2004 $22,123 $23,291 $18,346 $18,427 12/31/2004 $22,704 $24,083 $18,514 $18,784 1/31/2005 $22,362 $23,496 $18,631 $18,619 2/28/2005 $22,827 $23,991 $18,521 $18,800 3/31/2005 $22,385 $23,566 $18,426 $18,584 4/30/2005 $22,033 $23,120 $18,675 $18,511 5/31/2005 $22,506 $23,855 $18,877 $18,779 6/30/2005 $23,257 $23,889 $18,980 $18,939 7/31/2005 $23,641 $24,777 $18,807 $19,176 8/31/2005 $23,562 $24,551 $19,048 $19,237 9/30/2005 $23,481 $24,750 $18,852 $19,260 34 | Annual Report PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS R 9/30/05 - ----------------------------------------- 1-Year +9.15% - ----------------------------------------- 3-Year +17.35% - ----------------------------------------- Since Inception (1/1/02) +11.07% - ----------------------------------------- CLASS R (1/1/02 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME LEHMAN BROTHERS FUNDS FRANKLIN INCOME S&P 500 U.S. AGGREGATE CLASSIFICATION DATE FUND - CLASS R INDEX(7) INDEX(7) AVG.(7) ------------------------------------------------------------------------------ 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,069 $ 9,854 $10,081 $ 9,960 2/28/2002 $10,136 $ 9,664 $10,179 $ 9,953 3/31/2002 $10,390 $10,028 $10,009 $10,105 4/30/2002 $10,448 $ 9,420 $10,203 $10,066 5/31/2002 $10,412 $ 9,351 $10,290 $10,077 6/30/2002 $ 9,709 $ 8,685 $10,379 $ 9,784 7/31/2002 $ 9,289 $ 8,008 $10,504 $ 9,431 8/31/2002 $ 9,590 $ 8,061 $10,682 $ 9,541 9/30/2002 $ 9,166 $ 7,185 $10,855 $ 9,179 10/31/2002 $ 9,178 $ 7,817 $10,805 $ 9,358 11/30/2002 $ 9,681 $ 8,277 $10,802 $ 9,612 12/31/2002 $ 9,817 $ 7,791 $11,025 $ 9,558 1/31/2003 $ 9,829 $ 7,587 $11,035 $ 9,483 2/28/2003 $ 9,741 $ 7,473 $11,188 $ 9,456 3/31/2003 $ 9,905 $ 7,545 $11,179 $ 9,485 4/30/2003 $10,577 $ 8,167 $11,271 $ 9,873 5/31/2003 $11,102 $ 8,596 $11,481 $10,227 6/30/2003 $11,319 $ 8,706 $11,459 $10,304 7/31/2003 $11,227 $ 8,860 $11,073 $10,246 8/31/2003 $11,344 $ 9,032 $11,147 $10,351 9/30/2003 $11,670 $ 8,937 $11,442 $10,464 10/31/2003 $11,997 $ 9,442 $11,335 $10,679 11/30/2003 $12,168 $ 9,525 $11,362 $10,776 12/31/2003 $12,779 $10,024 $11,478 $11,093 1/31/2004 $12,953 $10,208 $11,570 $11,210 2/29/2004 $12,966 $10,350 $11,696 $11,335 3/31/2004 $12,978 $10,194 $11,783 $11,324 4/30/2004 $12,772 $10,034 $11,477 $11,089 5/31/2004 $12,730 $10,171 $11,431 $11,103 6/30/2004 $12,908 $10,369 $11,495 $11,223 7/31/2004 $12,977 $10,026 $11,609 $11,142 8/31/2004 $13,268 $10,066 $11,831 $11,269 9/30/2004 $13,449 $10,175 $11,863 $11,370 10/31/2004 $13,631 $10,331 $11,962 $11,503 11/30/2004 $13,927 $10,749 $11,867 $11,711 12/31/2004 $14,299 $11,114 $11,976 $11,938 1/31/2005 $14,026 $10,843 $12,051 $11,833 2/28/2005 $14,383 $11,071 $11,980 $11,948 3/31/2005 $14,102 $10,876 $11,919 $11,810 4/30/2005 $13,879 $10,669 $12,080 $11,764 5/31/2005 $14,182 $11,009 $12,211 $11,935 6/30/2005 $14,605 $11,024 $12,277 $12,036 7/31/2005 $14,912 $11,434 $12,165 $12,187 8/31/2005 $14,864 $11,330 $12,321 $12,226 9/30/2005 $14,815 $11,422 $12,194 $12,241 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- ADVISOR CLASS(6) 9/30/05 - ----------------------------------------- 1-Year +10.65% - ----------------------------------------- 5-Year +9.72% - ----------------------------------------- 10-Year +9.66% ADVISOR CLASS (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] LIPPER INCOME FRANKLIN INCOME LEHMAN BROTHERS FUNDS FUND - ADVISOR S&P 500 U.S. AGGREGATE CLASSIFICATION DATE CLASS INDEX(7) INDEX(7) AVG.(7) ------------------------------------------------------------------------------ 10/1/1995 $10,000 $10,000 $10,000 $10,000 10/31/1995 $10,022 $ 9,964 $10,130 $ 9,993 11/30/1995 $10,176 $10,401 $10,282 $10,241 12/31/1995 $10,409 $10,602 $10,426 $10,431 1/31/1996 $10,702 $10,962 $10,495 $10,628 2/29/1996 $10,497 $11,064 $10,313 $10,573 3/31/1996 $10,474 $11,170 $10,241 $10,585 4/30/1996 $10,450 $11,335 $10,184 $10,606 5/31/1996 $10,566 $11,627 $10,163 $10,686 6/30/1996 $10,776 $11,671 $10,299 $10,778 7/31/1996 $10,612 $11,156 $10,328 $10,561 8/31/1996 $10,777 $11,391 $10,310 $10,682 9/30/1996 $10,943 $12,032 $10,490 $10,926 10/31/1996 $11,159 $12,364 $10,722 $11,183 11/30/1996 $11,424 $13,297 $10,906 $11,561 12/31/1996 $11,496 $13,034 $10,805 $11,527 1/31/1997 $11,718 $13,848 $10,838 $11,724 2/28/1997 $11,893 $13,957 $10,865 $11,805 3/31/1997 $11,620 $13,384 $10,744 $11,582 4/30/1997 $11,698 $14,183 $10,905 $11,753 5/31/1997 $12,028 $15,045 $11,008 $12,122 6/30/1997 $12,311 $15,719 $11,139 $12,405 7/31/1997 $12,647 $16,969 $11,439 $12,886 8/31/1997 $12,571 $16,019 $11,342 $12,675 9/30/1997 $12,911 $16,896 $11,509 $13,079 10/31/1997 $12,781 $16,332 $11,676 $12,972 11/30/1997 $13,125 $17,088 $11,730 $13,191 12/31/1997 $13,571 $17,381 $11,848 $13,410 1/31/1998 $13,384 $17,573 $12,000 $13,456 2/28/1998 $13,576 $18,840 $11,991 $13,781 3/31/1998 $13,986 $19,804 $12,032 $14,101 4/30/1998 $13,851 $20,003 $12,095 $14,109 5/31/1998 $13,659 $19,660 $12,210 $14,057 6/30/1998 $13,744 $20,458 $12,313 $14,165 7/31/1998 $13,493 $20,240 $12,339 $14,021 8/31/1998 $12,621 $17,317 $12,540 $13,267 9/30/1998 $13,275 $18,426 $12,834 $13,678 10/31/1998 $13,305 $19,924 $12,766 $13,954 11/30/1998 $13,738 $21,131 $12,838 $14,279 12/31/1998 $13,723 $22,348 $12,877 $14,519 1/31/1999 $13,519 $23,282 $12,969 $14,590 2/28/1999 $13,138 $22,558 $12,742 $14,294 3/31/1999 $13,348 $23,461 $12,813 $14,487 4/30/1999 $14,036 $24,369 $12,854 $14,910 5/31/1999 $14,068 $23,795 $12,741 $14,783 6/30/1999 $14,100 $25,114 $12,701 $14,955 7/31/1999 $13,949 $24,331 $12,646 $14,799 8/31/1999 $13,920 $24,211 $12,640 $14,675 9/30/1999 $13,768 $23,548 $12,787 $14,549 10/31/1999 $13,800 $25,037 $12,834 $14,789 11/30/1999 $13,584 $25,546 $12,833 $14,832 12/31/1999 $13,643 $27,050 $12,771 $15,080 1/31/2000 $13,678 $25,691 $12,729 $14,837 2/29/2000 $13,518 $25,205 $12,883 $14,804 3/31/2000 $13,747 $27,669 $13,053 $15,337 4/30/2000 $14,173 $26,837 $13,016 $15,168 5/31/2000 $14,404 $26,288 $13,010 $15,152 6/30/2000 $14,504 $26,936 $13,280 $15,305 7/31/2000 $14,673 $26,515 $13,401 $15,305 8/31/2000 $15,513 $28,161 $13,595 $15,811 9/30/2000 $15,818 $26,675 $13,681 $15,702 10/31/2000 $15,582 $26,562 $13,771 $15,661 11/30/2000 $15,549 $24,469 $13,996 $15,322 12/31/2000 $16,411 $24,589 $14,256 $15,746 1/31/2001 $16,451 $25,461 $14,489 $16,015 2/28/2001 $16,771 $23,141 $14,615 $15,732 3/31/2001 $16,453 $21,676 $14,689 $15,452 4/30/2001 $16,849 $23,359 $14,628 $15,881 5/31/2001 $17,103 $23,516 $14,716 $15,980 6/30/2001 $16,707 $22,944 $14,771 $15,841 7/31/2001 $16,525 $22,718 $15,102 $15,887 8/31/2001 $16,712 $21,297 $15,275 $15,712 9/30/2001 $16,009 $19,577 $15,453 $15,187 10/31/2001 $16,048 $19,951 $15,776 $15,391 11/30/2001 $16,389 $21,481 $15,558 $15,675 12/31/2001 $16,544 $21,669 $15,460 $15,735 1/31/2002 $16,736 $21,353 $15,585 $15,672 2/28/2002 $16,854 $20,941 $15,736 $15,661 3/31/2002 $17,285 $21,729 $15,474 $15,901 4/30/2002 $17,467 $20,412 $15,774 $15,839 5/31/2002 $17,415 $20,262 $15,908 $15,856 6/30/2002 $16,252 $18,819 $16,046 $15,395 7/31/2002 $15,560 $17,353 $16,239 $14,839 8/31/2002 $15,989 $17,466 $16,514 $15,012 9/30/2002 $15,288 $15,570 $16,781 $14,443 10/31/2002 $15,395 $16,939 $16,705 $14,725 11/30/2002 $16,240 $17,935 $16,700 $15,124 12/31/2002 $16,390 $16,882 $17,045 $15,039 1/31/2003 $16,499 $16,441 $17,060 $14,921 2/28/2003 $16,359 $16,193 $17,296 $14,879 3/31/2003 $16,639 $16,349 $17,282 $14,925 4/30/2003 $17,686 $17,696 $17,425 $15,535 5/31/2003 $18,654 $18,628 $17,750 $16,092 6/30/2003 $19,027 $18,866 $17,715 $16,214 7/31/2003 $18,796 $19,199 $17,119 $16,122 8/31/2003 $19,086 $19,572 $17,233 $16,288 9/30/2003 $19,640 $19,365 $17,689 $16,465 10/31/2003 $20,196 $20,460 $17,524 $16,803 11/30/2003 $20,492 $20,640 $17,566 $16,956 12/31/2003 $21,524 $21,721 $17,745 $17,454 1/31/2004 $21,823 $22,120 $17,887 $17,639 2/29/2004 $21,944 $22,427 $18,081 $17,835 3/31/2004 $21,883 $22,089 $18,216 $17,819 4/30/2004 $21,546 $21,743 $17,742 $17,448 5/31/2004 $21,484 $22,041 $17,671 $17,471 6/30/2004 $21,794 $22,469 $17,771 $17,660 7/31/2004 $21,917 $21,726 $17,947 $17,532 8/31/2004 $22,417 $21,813 $18,290 $17,732 9/30/2004 $22,731 $22,049 $18,339 $17,890 10/31/2004 $23,046 $22,386 $18,493 $18,099 11/30/2004 $23,555 $23,291 $18,346 $18,427 12/31/2004 $24,192 $24,083 $18,514 $18,784 1/31/2005 $23,741 $23,496 $18,631 $18,619 2/28/2005 $24,352 $23,991 $18,521 $18,800 3/31/2005 $23,890 $23,566 $18,426 $18,584 4/30/2005 $23,524 $23,120 $18,675 $18,511 5/31/2005 $24,047 $23,855 $18,877 $18,779 6/30/2005 $24,770 $23,889 $18,980 $18,939 7/31/2005 $25,297 $24,777 $18,807 $19,176 8/31/2005 $25,225 $24,551 $19,048 $19,237 9/30/2005 $25,154 $24,750 $18,852 $19,260 Annual Report | 35 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Distribution rate is based on an annualization of respective class's September dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 9/30/05. (5) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/05. (6) Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +118.80% and +9.36%. (7) Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The Lipper Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Income Funds are defined as funds that normally seek a high level of current income through investing in income-producing stocks, bonds and money-market instruments. For the 12-month period ended 9/30/05, there were 241 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. The Fund's performance relative to the average may have differed if these or other factors had been considered. 36 | Annual Report YOUR FUND'S EXPENSES FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 37 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05 - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,051.90 $3.34 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.81 $3.29 - ------------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,047.70 $7.70 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.55 $7.59 - ------------------------------------------------------------------------------------------------------------- CLASS B1 - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,049.30 $5.96 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87 - ------------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,049.00 $5.96 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87 - ------------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,050.50 $5.19 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.00 $5.11 - ------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,052.80 $2.62 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.51 $2.59 - -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.65%; B: 1.50%; B1; 1.16%; C: 1.16%; R: 1.01%; and Advisor: 0.51%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 38 | Annual Report FRANKLIN U.S. GOVERNMENT SECURITIES FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). - -------------------------------------------------------------------------------- Since 1983, the Fund has invested predominantly in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal.(1) Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 9/30/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] GNMA ......................... 95.5% Short-Term Investments & Other Net Assets ............. 4.5% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin U.S. Government Securities Fund's annual report for the fiscal year ended September 30, 2005. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +2.67% cumulative total return for the 12 months under review. The Fund outperformed the Lehman Brothers (LB) U.S. Government: Intermediate Index, which returned (1) Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 100. Annual Report | 39 FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (10/00-9/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A CHART IN THE PRINTED MATERIAL.] RISK RETURN ----------------------- FRANKLIN US GOVERNMENT SECURITIES FUND - CLASS A 2.70% 5.42% 1-YEAR TREASURY BILL * 0.99% 2.93% 10-YEAR TREASURY NOTE * 8.33% 6.81% 30-YEAR TREASURY BOND * 12.84% 9.41% THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER. * Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. +1.31%.(2) In comparison, the Lipper GNMA Funds Classification Average returned +2.29% for the same period.(2) The Fund's return reflects the effect of management fees and expenses, while the index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 44. (2) Source: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government: Intermediate Index includes securities issued by U.S. Treasury or Agency. These include public obligations of the U.S. Treasury with remaining maturity of one year or more and publicly issued debt of U.S. governmental agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. All issues included must have one to ten years to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 12-month period ended 9/30/05, the Lipper GNMA Funds Classification Average consisted of 61 funds. Lipper calculations do not include sales charges. The Fund's performance relative to the average may have differed if these or other factors had been considered. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 40 | Annual Report ECONOMIC AND MARKET OVERVIEW Overall domestic economic growth remained healthy during the reporting period. More than two-thirds of U.S. gross domestic product (GDP) is generated by consumer spending and almost one-fifth by business spending. Since consumer spending relies on consumers' ability to remain gainfully employed, many analysts study the employment picture for indications of consumer spending. Over the past year, nonfarm payroll data, as well as other indexes, showed growing employment. This along with other factors helped consumer spending increase 6.7% (not adjusted for inflation) in September 2005 compared with the same month a year earlier, which supported U.S. economic growth.(3) Business spending also rose during the reporting period, contributing to economic growth. Nonresidential investment spending rose in each of the past year's four quarters, resulting in 7.8% growth for the year under review.(3) Historically low interest rates continued to allow many companies easy access to capital, and ample cash also helped some companies to support their spending plans. Productivity continued to grow, which helped businesses generate more goods and services without substantially raising inflation. Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite rising commodity prices, inflation remained relatively contained for the 12 months ended September 30, 2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(4) This increase was below the core CPI's 10-year average of 2.2%.(4) However, acknowledging the economy's strength as well as potential inflationary pressure from high energy prices, the Federal Reserve Board raised the federal funds target rate to 3.75% from 1.75% during the 12-month period and indicated possible "measured" increases would follow. The Fed also noted in its most recent statement that there would be some temporary economic effects due to hurricane impacts, but there was some debate about the long-term effects. During the period, the yield curve flattened, as short- and intermediate-term Treasury yields rose and longer-term yields fell. (3) Source: Bureau of Economic Analysis. (4) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Annual Report | 41 YIELD COMPARISON 9/30/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] Franklin U.S. Government Securities Fund - Class A* 4.07% 10-Year Treasury Note* 4.34% Lipper GNMA Funds Classification Average* 3.74% Lipper Money Market Funds Classification Average* 2.85% * Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 9/30/05. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Classification Average is an average of the monthly SEC yields of 62 funds in the Lipper GNMA Funds classification for the 30 days ended 9/30/05. The Lipper Money Market Funds Classification Average is an average of the monthly SEC yields of 319 funds in the Lipper Money Market Funds classification for the 30 days ended 9/30/05. Lipper averages do not include sales charges. DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/04-9/30/05
- ------------------------------------------------------------------------------------------ DIVIDEND PER SHARE ------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - ------------------------------------------------------------------------------------------ October 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents - ------------------------------------------------------------------------------------------ November 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents - ------------------------------------------------------------------------------------------ December 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - ------------------------------------------------------------------------------------------ January 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - ------------------------------------------------------------------------------------------ February 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents - ------------------------------------------------------------------------------------------ March 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.84 cents - ------------------------------------------------------------------------------------------ April 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.85 cents - ------------------------------------------------------------------------------------------ May 2.60 cents 2.31 cents 2.31 cents 2.40 cents 2.67 cents - ------------------------------------------------------------------------------------------ June 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents - ------------------------------------------------------------------------------------------ July 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents - ------------------------------------------------------------------------------------------ August 2.60 cents 2.31 cents 2.32 cents 2.40 cents 2.67 cents - ------------------------------------------------------------------------------------------ September 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents - ------------------------------------------------------------------------------------------ TOTAL 32.46 CENTS 28.97 CENTS 28.98 CENTS 29.99 CENTS 33.29 CENTS - ------------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. INVESTMENT STRATEGY We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash or cash equivalents. MANAGER'S DISCUSSION Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, agency debentures, investment grade and high yield corporate bonds, and large- and small-capitalization stocks. These time periods include various credit, prepayment, economic and interest rate cycles. In the GNMA sector, we used our proprietary research models to uncover areas of the markets where we believed prepayment risk may have offered value. As the mortgage-backed securities (MBS) market has evolved, we believe technical research tools have increased in importance. Consistent with our investment 42 | Annual Report strategy, we found value in the specified pool market rather than the To Be Announced (TBA) MBS market.(5) We focused some of our research on the specified pool market, paying attention to such factors as geographic dispersion and weighted average coupon differentials of the underlying mortgage pools. We also looked at the price difference between securities in the GNMA I and GNMA II programs and found what we believed were attractively priced securities. Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ Jack Lemein Jack Lemein [PHOTO OMITTED] /s/ Roger A. Bayston Roger A. Bayston, CFA Portfolio Management Team Franklin U.S. Government Securities Fund (5) A specified pool consists of previously identified mortgage pools. A TBA security consists of generic mortgage pools to be determined at the settlement date. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 43 PERFORMANCE SUMMARY AS OF 9/30/05 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUSX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.15 $6.53 $6.68 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.3246 - ----------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FUGBX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.15 $6.52 $6.67 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.2897 - ----------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUGX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.15 $6.50 $6.65 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.2898 - ----------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FUSRX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.15 $6.53 $6.68 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.2999 - ----------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.14 $6.55 $6.69 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.3329 - -----------------------------------------------------------------------------------------------
44 | Annual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------ CLASS A 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +2.67% +30.20% +76.50% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) -1.74% +4.52% +5.39% - ------------------------------------------------------------------------------------------------------ Distribution Rate(3) 4.57% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(4) 4.07% - ------------------------------------------------------------------------------------------------------ CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +2.13% +26.68% +35.07% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) -1.78% +4.52% +4.56% - ------------------------------------------------------------------------------------------------------ Distribution Rate(3) 4.25% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(4) 3.72% - ------------------------------------------------------------------------------------------------------ CLASS C 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +2.14% +26.74% +67.23% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +1.16% +4.85% +5.28% - ------------------------------------------------------------------------------------------------------ Distribution Rate(3) 4.26% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(4) 3.72% - ------------------------------------------------------------------------------------------------------ CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +2.29% +7.86% +15.44% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +1.31% +2.55% +3.91% - ------------------------------------------------------------------------------------------------------ Distribution Rate(3) 4.39% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(4) 3.88% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return(1) +2.95% +31.12% +79.19% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return(2) +2.95% +5.57% +6.01% - ------------------------------------------------------------------------------------------------------ Distribution Rate(3) 4.89% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield(4) 4.37% - ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 45 PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS A 9/30/05 - ----------------------------------------- 1-Year -1.74% - ----------------------------------------- 5-Year +4.52% - ----------------------------------------- 10-Year +5.39% - ----------------------------------------- CLASS A (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. GOVERNMENT: FUNDS SECURITIES FUND - INTERMEDIATE CLASSIFICATION DATE CLASS A INDEX(6) AVERAGE(6) CPI(6) - -------------------------------------------------------------------------------- 10/1/1995 $ 9,582 $10,000 $10,000 $10,000 10/31/1995 $ 9,681 $10,110 $10,095 $10,033 11/30/1995 $ 9,781 $10,233 $10,221 $10,026 12/31/1995 $ 9,896 $10,334 $10,352 $10,020 1/31/1996 $ 9,955 $10,421 $10,412 $10,078 2/29/1996 $ 9,870 $10,311 $10,281 $10,111 3/31/1996 $ 9,828 $10,264 $10,239 $10,163 4/30/1996 $ 9,785 $10,234 $10,197 $10,202 5/31/1996 $ 9,758 $10,229 $10,156 $10,222 6/30/1996 $ 9,877 $10,332 $10,266 $10,228 7/31/1996 $ 9,908 $10,364 $10,302 $10,248 8/31/1996 $ 9,909 $10,376 $10,297 $10,268 9/30/1996 $10,075 $10,510 $10,460 $10,300 10/31/1996 $10,257 $10,683 $10,670 $10,333 11/30/1996 $10,411 $10,812 $10,832 $10,352 12/31/1996 $10,351 $10,753 $10,757 $10,352 1/31/1997 $10,414 $10,795 $10,826 $10,385 2/28/1997 $10,447 $10,812 $10,847 $10,418 3/31/1997 $10,417 $10,751 $10,738 $10,444 4/30/1997 $10,574 $10,872 $10,901 $10,457 5/31/1997 $10,667 $10,957 $10,999 $10,450 6/30/1997 $10,792 $11,051 $11,126 $10,463 7/31/1997 $10,997 $11,254 $11,352 $10,477 8/31/1997 $10,964 $11,211 $11,310 $10,496 9/30/1997 $11,091 $11,333 $11,461 $10,522 10/31/1997 $11,202 $11,465 $11,576 $10,548 11/30/1997 $11,217 $11,490 $11,603 $10,542 12/31/1997 $11,330 $11,584 $11,715 $10,529 1/31/1998 $11,443 $11,735 $11,833 $10,548 2/28/1998 $11,442 $11,723 $11,847 $10,568 3/31/1998 $11,490 $11,759 $11,887 $10,587 4/30/1998 $11,572 $11,815 $11,950 $10,607 5/31/1998 $11,651 $11,897 $12,043 $10,627 6/30/1998 $11,697 $11,977 $12,097 $10,640 7/31/1998 $11,760 $12,023 $12,145 $10,653 8/31/1998 $11,874 $12,250 $12,267 $10,666 9/30/1998 $12,024 $12,536 $12,425 $10,679 10/31/1998 $11,967 $12,557 $12,364 $10,705 11/30/1998 $12,031 $12,518 $12,433 $10,705 12/31/1998 $12,079 $12,567 $12,478 $10,698 1/31/1999 $12,161 $12,623 $12,550 $10,725 2/28/1999 $12,085 $12,450 $12,452 $10,738 3/31/1999 $12,151 $12,532 $12,531 $10,770 4/30/1999 $12,199 $12,566 $12,578 $10,849 5/31/1999 $12,104 $12,489 $12,493 $10,849 6/30/1999 $12,045 $12,507 $12,424 $10,849 7/31/1999 $11,949 $12,509 $12,350 $10,881 8/31/1999 $11,958 $12,527 $12,332 $10,907 9/30/1999 $12,150 $12,634 $12,525 $10,960 10/31/1999 $12,215 $12,659 $12,567 $10,979 11/30/1999 $12,224 $12,668 $12,575 $10,986 12/31/1999 $12,178 $12,628 $12,515 $10,986 1/31/2000 $12,075 $12,586 $12,416 $11,018 2/29/2000 $12,216 $12,690 $12,558 $11,084 3/31/2000 $12,396 $12,835 $12,749 $11,175 4/30/2000 $12,367 $12,830 $12,728 $11,181 5/31/2000 $12,417 $12,864 $12,771 $11,195 6/30/2000 $12,621 $13,068 $12,993 $11,253 7/31/2000 $12,691 $13,155 $13,046 $11,279 8/31/2000 $12,879 $13,303 $13,230 $11,279 9/30/2000 $12,989 $13,419 $13,345 $11,338 10/31/2000 $13,081 $13,511 $13,426 $11,358 11/30/2000 $13,272 $13,709 $13,624 $11,364 12/31/2000 $13,464 $13,951 $13,822 $11,358 1/31/2001 $13,657 $14,136 $14,035 $11,430 2/28/2001 $13,730 $14,266 $14,122 $11,475 3/31/2001 $13,804 $14,370 $14,204 $11,501 4/30/2001 $13,818 $14,324 $14,177 $11,547 5/31/2001 $13,913 $14,384 $14,269 $11,599 6/30/2001 $13,946 $14,429 $14,317 $11,619 7/31/2001 $14,208 $14,699 $14,595 $11,586 8/31/2001 $14,305 $14,829 $14,704 $11,586 9/30/2001 $14,486 $15,146 $14,913 $11,638 10/31/2001 $14,686 $15,382 $15,116 $11,599 11/30/2001 $14,549 $15,198 $14,956 $11,580 12/31/2001 $14,497 $15,125 $14,875 $11,534 1/31/2002 $14,612 $15,190 $15,019 $11,560 2/28/2002 $14,791 $15,316 $15,179 $11,606 3/31/2002 $14,606 $15,085 $14,989 $11,671 4/30/2002 $14,874 $15,367 $15,269 $11,736 5/31/2002 $14,969 $15,475 $15,370 $11,736 6/30/2002 $15,087 $15,668 $15,497 $11,743 7/31/2002 $15,249 $15,963 $15,679 $11,756 8/31/2002 $15,389 $16,146 $15,807 $11,795 9/30/2002 $15,509 $16,423 $15,950 $11,815 10/31/2002 $15,562 $16,412 $15,967 $11,834 11/30/2002 $15,561 $16,282 $15,958 $11,834 12/31/2002 $15,741 $16,583 $16,133 $11,808 1/31/2003 $15,786 $16,546 $16,165 $11,860 2/28/2003 $15,853 $16,733 $16,261 $11,952 3/31/2003 $15,853 $16,736 $16,249 $12,023 4/30/2003 $15,898 $16,784 $16,288 $11,997 5/31/2003 $15,897 $17,047 $16,329 $11,978 6/30/2003 $15,943 $17,019 $16,360 $11,991 7/31/2003 $15,572 $16,606 $16,008 $12,004 8/31/2003 $15,688 $16,636 $16,116 $12,050 9/30/2003 $15,922 $16,997 $16,385 $12,089 10/31/2003 $15,851 $16,830 $16,303 $12,076 11/30/2003 $15,921 $16,831 $16,352 $12,043 12/31/2003 $16,021 $16,962 $16,465 $12,030 1/31/2004 $16,116 $17,054 $16,545 $12,089 2/29/2004 $16,211 $17,217 $16,653 $12,154 3/31/2004 $16,259 $17,336 $16,708 $12,232 4/30/2004 $15,993 $16,949 $16,427 $12,272 5/31/2004 $15,963 $16,895 $16,381 $12,343 6/30/2004 $16,104 $16,938 $16,504 $12,383 7/31/2004 $16,245 $17,060 $16,629 $12,363 8/31/2004 $16,461 $17,314 $16,847 $12,369 9/30/2004 $16,472 $17,320 $16,854 $12,396 10/31/2004 $16,590 $17,426 $16,964 $12,461 11/30/2004 $16,560 $17,264 $16,908 $12,467 12/31/2004 $16,629 $17,358 $16,992 $12,422 1/31/2005 $16,724 $17,380 $17,075 $12,448 2/28/2005 $16,668 $17,283 $17,016 $12,520 3/31/2005 $16,638 $17,241 $16,975 $12,617 4/30/2005 $16,784 $17,442 $17,131 $12,702 5/31/2005 $16,901 $17,581 $17,230 $12,689 6/30/2005 $16,917 $17,638 $17,268 $12,696 7/31/2005 $16,855 $17,488 $17,196 $12,755 8/31/2005 $17,000 $17,682 $17,331 $12,820 9/30/2005 $16,912 $17,546 $17,240 $12,977 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS B 9/30/05 - ----------------------------------------- 1-Year -1.78% - ----------------------------------------- 5-Year +4.52% - ----------------------------------------- Since Inception (1/1/99) +4.56% - ----------------------------------------- CLASS B (1/1/99 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. GOVERNMENT: FUNDS SECURITIES FUND - INTERMEDIATE CLASSIFICATION DATE CLASS B INDEX(6) AVERAGE(6) CPI(6) - ------------------------------------------------------------------------------- 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $10,068 $10,045 $10,058 $10,024 2/28/1999 $ 9,986 $ 9,907 $ 9,980 $10,037 3/31/1999 $10,051 $ 9,973 $10,042 $10,067 4/30/1999 $10,087 $10,000 $10,081 $10,140 5/31/1999 $10,005 $ 9,938 $10,012 $10,140 6/30/1999 $ 9,936 $ 9,953 $ 9,957 $10,140 7/31/1999 $ 9,868 $ 9,954 $ 9,897 $10,171 8/31/1999 $ 9,856 $ 9,968 $ 9,883 $10,195 9/30/1999 $10,025 $10,053 $10,038 $10,244 10/31/1999 $10,074 $10,073 $10,072 $10,262 11/30/1999 $10,062 $10,080 $10,078 $10,268 12/31/1999 $10,019 $10,049 $10,029 $10,268 1/31/2000 $ 9,946 $10,015 $ 9,950 $10,299 2/29/2000 $10,042 $10,098 $10,065 $10,360 3/31/2000 $10,186 $10,213 $10,218 $10,445 4/30/2000 $10,174 $10,209 $10,200 $10,451 5/31/2000 $10,210 $10,236 $10,235 $10,464 6/30/2000 $10,373 $10,399 $10,413 $10,519 7/31/2000 $10,410 $10,468 $10,456 $10,543 8/31/2000 $10,560 $10,585 $10,603 $10,543 9/30/2000 $10,662 $10,678 $10,695 $10,598 10/31/2000 $10,717 $10,751 $10,759 $10,616 11/30/2000 $10,869 $10,909 $10,919 $10,622 12/31/2000 $11,021 $11,101 $11,077 $10,616 1/31/2001 $11,191 $11,249 $11,248 $10,683 2/28/2001 $11,230 $11,352 $11,317 $10,726 3/31/2001 $11,302 $11,434 $11,383 $10,750 4/30/2001 $11,291 $11,398 $11,361 $10,793 5/31/2001 $11,364 $11,446 $11,435 $10,842 6/30/2001 $11,403 $11,482 $11,474 $10,860 7/31/2001 $11,595 $11,696 $11,697 $10,830 8/31/2001 $11,669 $11,800 $11,784 $10,830 9/30/2001 $11,829 $12,052 $11,952 $10,879 10/31/2001 $11,970 $12,240 $12,114 $10,842 11/30/2001 $11,871 $12,094 $11,986 $10,824 12/31/2001 $11,806 $12,035 $11,921 $10,781 1/31/2002 $11,912 $12,087 $12,037 $10,805 2/28/2002 $12,035 $12,187 $12,164 $10,848 3/31/2002 $11,879 $12,004 $12,012 $10,909 4/30/2002 $12,092 $12,228 $12,237 $10,970 5/31/2002 $12,164 $12,314 $12,318 $10,970 6/30/2002 $12,254 $12,468 $12,420 $10,976 7/31/2002 $12,381 $12,703 $12,565 $10,988 8/31/2002 $12,490 $12,848 $12,668 $11,025 9/30/2002 $12,582 $13,068 $12,782 $11,043 10/31/2002 $12,620 $13,059 $12,796 $11,062 11/30/2002 $12,614 $12,956 $12,789 $11,062 12/31/2002 $12,754 $13,196 $12,929 $11,037 1/31/2003 $12,785 $13,166 $12,955 $11,086 2/28/2003 $12,834 $13,315 $13,032 $11,171 3/31/2003 $12,828 $13,318 $13,023 $11,239 4/30/2003 $12,859 $13,355 $13,054 $11,214 5/31/2003 $12,871 $13,565 $13,086 $11,196 6/30/2003 $12,884 $13,543 $13,111 $11,208 7/31/2003 $12,578 $13,214 $12,829 $11,220 8/31/2003 $12,667 $13,238 $12,915 $11,263 9/30/2003 $12,850 $13,525 $13,131 $11,300 10/31/2003 $12,788 $13,392 $13,065 $11,287 11/30/2003 $12,839 $13,393 $13,105 $11,257 12/31/2003 $12,914 $13,497 $13,195 $11,245 1/31/2004 $12,985 $13,571 $13,260 $11,300 2/29/2004 $13,056 $13,700 $13,346 $11,361 3/31/2004 $13,089 $13,795 $13,390 $11,434 4/30/2004 $12,868 $13,487 $13,165 $11,470 5/31/2004 $12,839 $13,444 $13,128 $11,538 6/30/2004 $12,946 $13,478 $13,227 $11,574 7/31/2004 $13,054 $13,575 $13,327 $11,556 8/31/2004 $13,222 $13,777 $13,502 $11,562 9/30/2004 $13,225 $13,782 $13,507 $11,586 10/31/2004 $13,315 $13,867 $13,595 $11,647 11/30/2004 $13,285 $13,738 $13,550 $11,653 12/31/2004 $13,334 $13,812 $13,618 $11,611 1/31/2005 $13,404 $13,830 $13,684 $11,635 2/28/2005 $13,354 $13,753 $13,637 $11,702 3/31/2005 $13,323 $13,719 $13,604 $11,794 4/30/2005 $13,435 $13,879 $13,729 $11,873 5/31/2005 $13,523 $13,990 $13,809 $11,861 6/30/2005 $13,549 $14,036 $13,839 $11,867 7/31/2005 $13,474 $13,916 $13,781 $11,922 8/31/2005 $13,583 $14,070 $13,890 $11,983 9/30/2005 $13,507 $13,962 $13,816 $12,129 46 | Annual Report PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS C 9/30/05 - ----------------------------------------- 1-Year +1.16% - ----------------------------------------- 5-Year +4.85% - ----------------------------------------- 10-Year +5.28% - ----------------------------------------- CLASS C (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. GOVERNMENT: FUNDS SECURITIES FUND - INTERMEDIATE CLASSIFICATION CLASS C INDEX(6) AVERAGE(6) CPI(6) - ------------------------------------------------------------------------------- 10/1/1995 $10,000 $10,000 $10,000 $10,000 10/31/1995 $10,098 $10,110 $10,095 $10,033 11/30/1995 $10,197 $10,233 $10,221 $10,026 12/31/1995 $10,311 $10,334 $10,352 $10,020 1/31/1996 $10,381 $10,421 $10,412 $10,078 2/29/1996 $10,287 $10,311 $10,281 $10,111 3/31/1996 $10,223 $10,264 $10,239 $10,163 4/30/1996 $10,189 $10,234 $10,197 $10,202 5/31/1996 $10,155 $10,229 $10,156 $10,222 6/30/1996 $10,259 $10,332 $10,266 $10,228 7/31/1996 $10,286 $10,364 $10,302 $10,248 8/31/1996 $10,298 $10,376 $10,297 $10,268 9/30/1996 $10,455 $10,510 $10,460 $10,300 10/31/1996 $10,639 $10,683 $10,670 $10,333 11/30/1996 $10,809 $10,812 $10,832 $10,352 12/31/1996 $10,727 $10,753 $10,757 $10,352 1/31/1997 $10,803 $10,795 $10,826 $10,385 2/28/1997 $10,815 $10,812 $10,847 $10,418 3/31/1997 $10,779 $10,751 $10,738 $10,444 4/30/1997 $10,937 $10,872 $10,901 $10,457 5/31/1997 $11,044 $10,957 $10,999 $10,450 6/30/1997 $11,168 $11,051 $11,126 $10,463 7/31/1997 $11,375 $11,254 $11,352 $10,477 8/31/1997 $11,318 $11,211 $11,310 $10,496 9/30/1997 $11,446 $11,333 $11,461 $10,522 10/31/1997 $11,556 $11,465 $11,576 $10,548 11/30/1997 $11,566 $11,490 $11,603 $10,542 12/31/1997 $11,677 $11,584 $11,715 $10,529 1/31/1998 $11,789 $11,735 $11,833 $10,548 2/28/1998 $11,781 $11,723 $11,847 $10,568 3/31/1998 $11,826 $11,759 $11,887 $10,587 4/30/1998 $11,905 $11,815 $11,950 $10,607 5/31/1998 $11,981 $11,897 $12,043 $10,627 6/30/1998 $12,023 $11,977 $12,097 $10,640 7/31/1998 $12,082 $12,023 $12,145 $10,653 8/31/1998 $12,195 $12,250 $12,267 $10,666 9/30/1998 $12,344 $12,536 $12,425 $10,679 10/31/1998 $12,262 $12,557 $12,364 $10,705 11/30/1998 $12,340 $12,518 $12,433 $10,705 12/31/1998 $12,383 $12,567 $12,478 $10,698 1/31/1999 $12,462 $12,623 $12,550 $10,725 2/28/1999 $12,378 $12,450 $12,452 $10,738 3/31/1999 $12,440 $12,532 $12,531 $10,770 4/30/1999 $12,484 $12,566 $12,578 $10,849 5/31/1999 $12,381 $12,489 $12,493 $10,849 6/30/1999 $12,315 $12,507 $12,424 $10,849 7/31/1999 $12,211 $12,509 $12,350 $10,881 8/31/1999 $12,215 $12,527 $12,332 $10,907 9/30/1999 $12,406 $12,634 $12,525 $10,960 10/31/1999 $12,467 $12,659 $12,567 $10,979 11/30/1999 $12,471 $12,668 $12,575 $10,986 12/31/1999 $12,418 $12,628 $12,515 $10,986 1/31/2000 $12,307 $12,586 $12,416 $11,018 2/29/2000 $12,446 $12,690 $12,558 $11,084 3/31/2000 $12,624 $12,835 $12,749 $11,175 4/30/2000 $12,589 $12,830 $12,728 $11,181 5/31/2000 $12,634 $12,864 $12,771 $11,195 6/30/2000 $12,837 $13,068 $12,993 $11,253 7/31/2000 $12,882 $13,155 $13,046 $11,279 8/31/2000 $13,068 $13,303 $13,230 $11,279 9/30/2000 $13,195 $13,419 $13,345 $11,338 10/31/2000 $13,282 $13,511 $13,426 $11,358 11/30/2000 $13,450 $13,709 $13,624 $11,364 12/31/2000 $13,640 $13,951 $13,822 $11,358 1/31/2001 $13,850 $14,136 $14,035 $11,430 2/28/2001 $13,898 $14,266 $14,122 $11,475 3/31/2001 $13,988 $14,370 $14,204 $11,501 4/30/2001 $13,995 $14,324 $14,177 $11,547 5/31/2001 $14,065 $14,384 $14,269 $11,599 6/30/2001 $14,114 $14,429 $14,317 $11,619 7/31/2001 $14,352 $14,699 $14,595 $11,586 8/31/2001 $14,443 $14,829 $14,704 $11,586 9/30/2001 $14,642 $15,146 $14,913 $11,638 10/31/2001 $14,817 $15,382 $15,116 $11,599 11/30/2001 $14,693 $15,198 $14,956 $11,580 12/31/2001 $14,612 $15,125 $14,875 $11,534 1/31/2002 $14,743 $15,190 $15,019 $11,560 2/28/2002 $14,896 $15,316 $15,179 $11,606 3/31/2002 $14,702 $15,085 $14,989 $11,671 4/30/2002 $14,967 $15,367 $15,269 $11,736 5/31/2002 $15,056 $15,475 $15,370 $11,736 6/30/2002 $15,169 $15,668 $15,497 $11,743 7/31/2002 $15,326 $15,963 $15,679 $11,756 8/31/2002 $15,462 $16,146 $15,807 $11,795 9/30/2002 $15,598 $16,423 $15,950 $11,815 10/31/2002 $15,622 $16,412 $15,967 $11,834 11/30/2002 $15,616 $16,282 $15,958 $11,834 12/31/2002 $15,789 $16,583 $16,133 $11,808 1/31/2003 $15,828 $16,546 $16,165 $11,860 2/28/2003 $15,912 $16,733 $16,261 $11,952 3/31/2003 $15,882 $16,736 $16,249 $12,023 4/30/2003 $15,921 $16,784 $16,288 $11,997 5/31/2003 $15,915 $17,047 $16,329 $11,978 6/30/2003 $15,953 $17,019 $16,360 $11,991 7/31/2003 $15,573 $16,606 $16,008 $12,004 8/31/2003 $15,682 $16,636 $16,116 $12,050 9/30/2003 $15,909 $16,997 $16,385 $12,089 10/31/2003 $15,831 $16,830 $16,303 $12,076 11/30/2003 $15,894 $16,831 $16,352 $12,043 12/31/2003 $15,987 $16,962 $16,465 $12,030 1/31/2004 $16,075 $17,054 $16,545 $12,089 2/29/2004 $16,164 $17,217 $16,653 $12,154 3/31/2004 $16,204 $17,336 $16,708 $12,232 4/30/2004 $15,930 $16,949 $16,427 $12,272 5/31/2004 $15,893 $16,895 $16,381 $12,343 6/30/2004 $16,051 $16,938 $16,504 $12,383 7/31/2004 $16,161 $17,060 $16,629 $12,363 8/31/2004 $16,369 $17,314 $16,847 $12,369 9/30/2004 $16,373 $17,320 $16,854 $12,396 10/31/2004 $16,484 $17,426 $16,964 $12,461 11/30/2004 $16,446 $17,264 $16,908 $12,467 12/31/2004 $16,508 $17,358 $16,992 $12,422 1/31/2005 $16,595 $17,380 $17,075 $12,448 2/28/2005 $16,532 $17,283 $17,016 $12,520 3/31/2005 $16,494 $17,241 $16,975 $12,617 4/30/2005 $16,633 $17,442 $17,131 $12,702 5/31/2005 $16,742 $17,581 $17,230 $12,689 6/30/2005 $16,775 $17,638 $17,268 $12,696 7/31/2005 $16,681 $17,488 $17,196 $12,755 8/31/2005 $16,818 $17,682 $17,331 $12,820 9/30/2005 $16,723 $17,546 $17,240 $12,977 AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- CLASS R 9/30/05 - ----------------------------------------- 1-Year +1.31% - ----------------------------------------- 3-Year +2.55% - ----------------------------------------- Since Inception (1/1/02) +3.91% - ----------------------------------------- CLASS R (1/1/02 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. GOVERNMENT: FUNDS SECURITIES FUND - INTERMEDIATE CLASSIFICATION DATE CLASS R INDEX(6) AVERAGE(6) CPI(6) - ------------------------------------------------------------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,109 $10,043 $10,097 $10,023 2/28/2002 $10,215 $10,126 $10,204 $10,062 3/31/2002 $10,098 $ 9,974 $10,076 $10,119 4/30/2002 $10,281 $10,160 $10,265 $10,175 5/31/2002 $10,343 $10,231 $10,333 $10,175 6/30/2002 $10,421 $10,359 $10,418 $10,181 7/31/2002 $10,530 $10,554 $10,540 $10,192 8/31/2002 $10,625 $10,675 $10,627 $10,226 9/30/2002 $10,704 $10,858 $10,722 $10,243 10/31/2002 $10,722 $10,851 $10,734 $10,260 11/30/2002 $10,733 $10,765 $10,728 $10,260 12/31/2002 $10,854 $10,964 $10,846 $10,238 1/31/2003 $10,866 $10,940 $10,867 $10,283 2/28/2003 $10,924 $11,063 $10,932 $10,362 3/31/2003 $10,921 $11,066 $10,924 $10,424 4/30/2003 $10,948 $11,097 $10,950 $10,402 5/31/2003 $10,945 $11,271 $10,977 $10,385 6/30/2003 $10,958 $11,252 $10,998 $10,396 7/31/2003 $10,715 $10,979 $10,762 $10,407 8/31/2003 $10,791 $10,999 $10,834 $10,447 9/30/2003 $10,948 $11,237 $11,015 $10,481 10/31/2003 $10,897 $11,127 $10,960 $10,470 11/30/2003 $10,926 $11,128 $10,993 $10,441 12/31/2003 $11,008 $11,215 $11,069 $10,430 1/31/2004 $11,053 $11,276 $11,123 $10,481 2/29/2004 $11,115 $11,383 $11,195 $10,538 3/31/2004 $11,160 $11,462 $11,232 $10,606 4/30/2004 $10,975 $11,206 $11,043 $10,640 5/31/2004 $10,950 $11,170 $11,012 $10,702 6/30/2004 $11,044 $11,198 $11,095 $10,736 7/31/2004 $11,121 $11,280 $11,179 $10,719 8/31/2004 $11,265 $11,447 $11,326 $10,724 9/30/2004 $11,286 $11,452 $11,330 $10,747 10/31/2004 $11,364 $11,522 $11,404 $10,804 11/30/2004 $11,323 $11,414 $11,366 $10,809 12/31/2004 $11,384 $11,476 $11,423 $10,770 1/31/2005 $11,445 $11,491 $11,479 $10,792 2/28/2005 $11,386 $11,427 $11,439 $10,855 3/31/2005 $11,361 $11,399 $11,412 $10,939 4/30/2005 $11,475 $11,532 $11,517 $11,013 5/31/2005 $11,534 $11,624 $11,583 $11,002 6/30/2005 $11,559 $11,662 $11,609 $11,007 7/31/2005 $11,513 $11,562 $11,560 $11,058 8/31/2005 $11,590 $11,691 $11,651 $11,115 9/30/2005 $11,544 $11,601 $11,590 $11,251 Annual Report | 47 PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ----------------------------------------- ADVISOR CLASS(5) 9/30/05 - ----------------------------------------- 1-Year +2.95% - ----------------------------------------- 5-Year +5.57% - ----------------------------------------- 10-Year +6.01% - ----------------------------------------- ADVISOR CLASS (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. GOVERNMENT: FUNDS SECURITIES FUND - INTERMEDIATE CLASSIFICATION DATE ADVISOR CLASS INDEX(6) AVERAGE(6) CPI(6) - -------------------------------------------------------------------------------- 10/1/1995 $10,000 $10,000 $10,000 $10,000 10/31/1995 $10,104 $10,110 $10,095 $10,033 11/30/1995 $10,208 $10,233 $10,221 $10,026 12/31/1995 $10,328 $10,334 $10,352 $10,020 1/31/1996 $10,389 $10,421 $10,412 $10,078 2/29/1996 $10,301 $10,311 $10,281 $10,111 3/31/1996 $10,257 $10,264 $10,239 $10,163 4/30/1996 $10,213 $10,234 $10,197 $10,202 5/31/1996 $10,184 $10,229 $10,156 $10,222 6/30/1996 $10,308 $10,332 $10,266 $10,228 7/31/1996 $10,340 $10,364 $10,302 $10,248 8/31/1996 $10,342 $10,376 $10,297 $10,268 9/30/1996 $10,515 $10,510 $10,460 $10,300 10/31/1996 $10,705 $10,683 $10,670 $10,333 11/30/1996 $10,865 $10,812 $10,832 $10,352 12/31/1996 $10,803 $10,753 $10,757 $10,352 1/31/1997 $10,918 $10,795 $10,826 $10,385 2/28/1997 $10,937 $10,812 $10,847 $10,418 3/31/1997 $10,905 $10,751 $10,738 $10,444 4/30/1997 $11,088 $10,872 $10,901 $10,457 5/31/1997 $11,186 $10,957 $10,999 $10,450 6/30/1997 $11,318 $11,051 $11,126 $10,463 7/31/1997 $11,533 $11,254 $11,352 $10,477 8/31/1997 $11,482 $11,211 $11,310 $10,496 9/30/1997 $11,634 $11,333 $11,461 $10,522 10/31/1997 $11,735 $11,465 $11,576 $10,548 11/30/1997 $11,768 $11,490 $11,603 $10,542 12/31/1997 $11,887 $11,584 $11,715 $10,529 1/31/1998 $11,990 $11,735 $11,833 $10,548 2/28/1998 $12,006 $11,723 $11,847 $10,568 3/31/1998 $12,058 $11,759 $11,887 $10,587 4/30/1998 $12,127 $11,815 $11,950 $10,607 5/31/1998 $12,228 $11,897 $12,043 $10,627 6/30/1998 $12,278 $11,977 $12,097 $10,640 7/31/1998 $12,327 $12,023 $12,145 $10,653 8/31/1998 $12,447 $12,250 $12,267 $10,666 9/30/1998 $12,624 $12,536 $12,425 $10,679 10/31/1998 $12,546 $12,557 $12,364 $10,705 11/30/1998 $12,633 $12,518 $12,433 $10,705 12/31/1998 $12,684 $12,567 $12,478 $10,698 1/31/1999 $12,771 $12,623 $12,550 $10,725 2/28/1999 $12,675 $12,450 $12,452 $10,738 3/31/1999 $12,745 $12,532 $12,531 $10,770 4/30/1999 $12,815 $12,566 $12,578 $10,849 5/31/1999 $12,717 $12,489 $12,493 $10,849 6/30/1999 $12,637 $12,507 $12,424 $10,849 7/31/1999 $12,555 $12,509 $12,350 $10,881 8/31/1999 $12,547 $12,527 $12,332 $10,907 9/30/1999 $12,770 $12,634 $12,525 $10,960 10/31/1999 $12,839 $12,659 $12,567 $10,979 11/30/1999 $12,831 $12,668 $12,575 $10,986 12/31/1999 $12,783 $12,628 $12,515 $10,986 1/31/2000 $12,697 $12,586 $12,416 $11,018 2/29/2000 $12,826 $12,690 $12,558 $11,084 3/31/2000 $13,016 $12,835 $12,749 $11,175 4/30/2000 $13,007 $12,830 $12,728 $11,181 5/31/2000 $13,061 $12,864 $12,771 $11,195 6/30/2000 $13,276 $13,068 $12,993 $11,253 7/31/2000 $13,330 $13,155 $13,046 $11,279 8/31/2000 $13,528 $13,303 $13,230 $11,279 9/30/2000 $13,667 $13,419 $13,345 $11,338 10/31/2000 $13,764 $13,511 $13,426 $11,358 11/30/2000 $13,945 $13,709 $13,624 $11,364 12/31/2000 $14,169 $13,951 $13,822 $11,358 1/31/2001 $14,374 $14,136 $14,035 $11,430 2/28/2001 $14,431 $14,266 $14,122 $11,475 3/31/2001 $14,530 $14,370 $14,204 $11,501 4/30/2001 $14,546 $14,324 $14,177 $11,547 5/31/2001 $14,625 $14,384 $14,269 $11,599 6/30/2001 $14,703 $14,429 $14,317 $11,619 7/31/2001 $14,958 $14,699 $14,595 $11,586 8/31/2001 $15,061 $14,829 $14,704 $11,586 9/30/2001 $15,252 $15,146 $14,913 $11,638 10/31/2001 $15,465 $15,382 $15,116 $11,599 11/30/2001 $15,345 $15,198 $14,956 $11,580 12/31/2001 $15,268 $15,125 $14,875 $11,534 1/31/2002 $15,391 $15,190 $15,019 $11,560 2/28/2002 $15,581 $15,316 $15,179 $11,606 3/31/2002 $15,388 $15,085 $14,989 $11,671 4/30/2002 $15,672 $15,367 $15,269 $11,736 5/31/2002 $15,773 $15,475 $15,370 $11,736 6/30/2002 $15,898 $15,668 $15,497 $11,743 7/31/2002 $16,071 $15,963 $15,679 $11,756 8/31/2002 $16,220 $16,146 $15,807 $11,795 9/30/2002 $16,371 $16,423 $15,950 $11,815 10/31/2002 $16,405 $16,412 $15,967 $11,834 11/30/2002 $16,406 $16,282 $15,958 $11,834 12/31/2002 $16,596 $16,583 $16,133 $11,808 1/31/2003 $16,646 $16,546 $16,165 $11,860 2/28/2003 $16,742 $16,733 $16,261 $11,952 3/31/2003 $16,743 $16,736 $16,249 $12,023 4/30/2003 $16,769 $16,784 $16,288 $11,997 5/31/2003 $16,794 $17,047 $16,329 $11,978 6/30/2003 $16,820 $17,019 $16,360 $11,991 7/31/2003 $16,431 $16,606 $16,008 $12,004 8/31/2003 $16,554 $16,636 $16,116 $12,050 9/30/2003 $16,827 $16,997 $16,385 $12,089 10/31/2003 $16,755 $16,830 $16,303 $12,076 11/30/2003 $16,805 $16,831 $16,352 $12,043 12/31/2003 $16,912 $16,962 $16,465 $12,030 1/31/2004 $17,015 $17,054 $16,545 $12,089 2/29/2004 $17,117 $17,217 $16,653 $12,154 3/31/2004 $17,169 $17,336 $16,708 $12,232 4/30/2004 $16,890 $16,949 $16,427 $12,272 5/31/2004 $16,886 $16,895 $16,381 $12,343 6/30/2004 $17,037 $16,938 $16,504 $12,383 7/31/2004 $17,161 $17,060 $16,629 $12,363 8/31/2004 $17,391 $17,314 $16,847 $12,369 9/30/2004 $17,403 $17,320 $16,854 $12,396 10/31/2004 $17,556 $17,426 $16,964 $12,461 11/30/2004 $17,500 $17,264 $16,908 $12,467 12/31/2004 $17,601 $17,358 $16,992 $12,422 1/31/2005 $17,704 $17,380 $17,075 $12,448 2/28/2005 $17,619 $17,283 $17,016 $12,520 3/31/2005 $17,588 $17,241 $16,975 $12,617 4/30/2005 $17,745 $17,442 $17,131 $12,702 5/31/2005 $17,875 $17,581 $17,230 $12,689 6/30/2005 $17,920 $17,638 $17,268 $12,696 7/31/2005 $17,857 $17,488 $17,196 $12,755 8/31/2005 $17,985 $17,682 $17,331 $12,820 9/30/2005 $17,919 $17,546 $17,240 $12,977 48 | Annual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. THUS, AS THE PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. (3) Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/05. (4) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/05. (5) Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +65.87% and +5.95%. (6) Sources: Standard & Poor's Micropal; Lipper Inc. The LB U.S. Government: Intermediate Index includes securities issued by U.S. Treasury or Agency. These include public obligations of the U.S. Treasury with remaining maturity of one year or more and publicly issued debt of U.S. governmental agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. All issues included must have one to ten years to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 12-month period ended 9/30/05, the Lipper GNMA Funds Classification Average consisted of 61 mutual funds. The Lipper average does not include sales charges or expense subsidization by a fund's manager. Fund performance relative to the average may have differed if these or other factors had been considered. Annual Report | 49 YOUR FUND'S EXPENSES FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 50 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.50 $3.69 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.41 $3.70 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,013.80 $6.36 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.38 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,013.90 $6.36 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.38 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,016.20 $5.61 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.62 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,018.60 $3.09 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.01 $3.09 - -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.73%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 51 FRANKLIN UTILITIES FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility industry securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Utilities Fund's annual report for the fiscal year ended September 30, 2005. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Utilities Fund - Class A posted a +28.81% cumulative total return. The Fund outperformed its broad benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned +12.25% for the same period.(1) The Fund underperformed its narrow benchmark, the S&P 500 Utilities Index, which returned +38.67%.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 56. ECONOMIC AND MARKET OVERVIEW During the 12 months ended September 30, 2005, a maturing domestic economic expansion was driven by perceived staying power across most industries, sectors and regions. Gross domestic product (GDP) rose during the period, benefiting primarily from personal consumption and greater business investment. Demand for imported goods and materials fueled a widening trade gap. The U.S. dollar rallied in 2005 driven largely by rising short-term domestic interest rates and strong economic growth in the U.S. relative to many of its major trading partners. Oil prices increased substantially during the period amid concerns about potential long-term supply limitations in the face of expected strong global demand growth, especially from China and India. Despite these rising commodity prices, inflation remained relatively contained for the 12 months ended September 30, 2005, as measured by the 2.0% rise for the core Consumer Price Index (CPI).(3) (1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. (2) Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500 Index. (3) Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 107. 52 | Annual Report With controlling inflation at the forefront of its agenda, the Federal Reserve Board raised the federal funds target rate from 1.75% to 3.75%, and said it would respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Although short-term interest rates rose, long-term interest rates remained relatively stable, supporting overall robust housing and commercial real estate activity, which contributed to economic growth. Many businesses enjoyed their widest profit margins on record, propelled largely by productivity gains. The labor market firmed as employment increased and the unemployment rate dropped from 5.4% to 5.1% during the reporting period.(3) Personal income rose, and hiring rebounded in many industries, bolstered by healthy business spending and solid business confidence. However, late in the period consumer sentiment fell amid concerns about rising energy costs. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a one-year total return of +7.23%, while the broader S&P 500 and technology-heavy NASDAQ Composite Index returned +12.25% and +14.19%.(4) Over the past several years, many utility companies have adjusted their priorities and moved toward a back-to-basics operational philosophy. This strategy shift was driven, in large part, by events such as the California energy crisis, the Enron collapse, and expensive marketing and trading failures. For many utility companies, back-to-basics has meant rebuilding core regulated businesses while reducing debt and repairing overstretched balance sheets. Recently, many utility companies found opportunities to invest in building additional infrastructure, further improving operational efficiency, and strengthening their environmental controls, which are viewed by regulators as long-term gains for utility customers and shareholders alike. Improved fundamentals followed these developments, along with strong stock performance. Another driving force behind the utility sector's remarkable performance over the past year has been its leverage to the commodity markets, in particular, natural gas. The amount and nature of exposure can vary tremendously between companies, but those that were able to generate low-cost power via coal or nuclear fuel, and sell that output in wholesale markets, generated significant gains. Pipeline and natural gas infrastructure utilities have also benefited from greater asset utilization as well as from their ownership of natural gas production in most cases. (4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Annual Report | 53 PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 9/30/05 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Electric Utilities ........................... 83.9% Gas Distributors ............................. 11.2% Major Telecommunications ..................... 3.2% Oil & Gas Pipelines .......................... 1.1% Short-Term Investments & Other Net Assets .... 0.6% The utility sector also benefited from a variety of other factors during the 12-month period. Companies continued to implement dividend hikes that helped them remain competitive with other sources of income; state regulators promoted healthy utilities, especially those that invested in greater reliability and service for their customers; and merger and acquisition activity accelerated this year in advance of the anticipated passage of the federal energy bill, which contains a provision to rescind outdated merger and acquisition restraints. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION Over the past year, the Fund maintained a solid weighting in electric utility companies that, in addition to their regulated franchises, have commodity-sensitive wholesale generating subsidiaries. Strong contributors to the Fund's 12-month total return included TXU, Edison International and Exelon, all of which fit this profile. TXU demonstrated extreme sensitivity to natural gas prices because its low-cost generation portfolio lies within the competitive Texas market, which is highly dependent on natural gas-fired generation and has limited interconnectivity with other U.S. power-producing regions. Edison International and Exelon also own vibrant wholesale generation in the Midwest and Mid-Atlantic regions of the U.S. in addition to serving their franchise utility customers. We have an interest in Exelon's merger with Public Service Enterprise Group, which was announced at the end of 2004 and appeared on track to close in the first half of 2006. A beneficiary of consolidation was the Fund's position in Scottish Power, which rose significantly since the May 2005 announcement that Scottish Power had agreed to sell its U.S.-based Pacificorp subsidiary to MidAmerican Energy. 54 | Annual Report Fund holdings that detracted from our 12-month performance included our major telecommunications investments, which represented 3.2% of the Fund's total net assets at period-end. Investments in Verizon Communications and SBC Communications failed to keep pace with the industry. Also hurting Fund performance was our investment in KeySpan, a gas distribution utility company operating in the Northeast U.S. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 9/30/05 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Dominion Resources Inc. 5.1% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Exelon Corp. 4.6% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Entergy Corp. 4.4% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- FirstEnergy Corp. 4.1% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- FPL Group Inc. 3.9% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 3.8% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Edison International 3.5% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Cinergy Corp. 3.1% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- American Electric Power Co. Inc. 3.1% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Southern Co. 3.0% ELECTRIC UTILITIES, U.S. - -------------------------------------------------------------------------------- Annual Report | 55 PERFORMANCE SUMMARY AS OF 9/30/05 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUTX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.43 $12.59 $10.16 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.4442 - ----------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FRUBX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.42 $12.57 $10.15 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.3882 - ----------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUSX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.42 $12.55 $10.13 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.3880 - ----------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FRURX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.42 $12.57 $10.15 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.4092 - ----------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/05 9/30/04 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.44 $12.64 $10.20 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/04-9/30/05) - ----------------------------------------------------------------------------------------------- Dividend Income $0.4620 - -----------------------------------------------------------------------------------------------
56 | Annual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------- CLASS A 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +28.81% +51.59% +152.63% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +23.35% +7.74% +9.24% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $12,335 $ 14,519 $ 24,196 - ----------------------------------------------------------------------------------------------------- Distribution Rate(4) 3.07% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 3.04% - ----------------------------------------------------------------------------------------------------- CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +28.11% +47.73% +63.91% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +24.11% +7.82% +7.60% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $12,411 $ 14,573 $ 16,391 - ----------------------------------------------------------------------------------------------------- Distribution Rate(4) 2.72% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 2.68% - ----------------------------------------------------------------------------------------------------- CLASS C 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +28.16% +47.81% +140.11% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +27.16% +8.13% +9.15% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $12,716 $14,781 $24,011 - ----------------------------------------------------------------------------------------------------- Distribution Rate(4) 2.74% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 2.68% - ----------------------------------------------------------------------------------------------------- CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +28.35% +78.63% +50.03% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +27.35% +21.33% +11.45% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $12,735 $17,863 $15,003 - ----------------------------------------------------------------------------------------------------- Distribution Rate(4) 2.93% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 2.83% - ----------------------------------------------------------------------------------------------------- Advisor Class(6) 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +29.00% +52.73% +158.60% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return(2) +29.00% +8.84% +9.97% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment(3) $12,900 $15,273 $25,860 - ----------------------------------------------------------------------------------------------------- Distribution Rate(4) 3.26% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield(5) 3.33% - -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Annual Report | 57 PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS A 9/30/05 - ---------------------------------------------- 1-Year +23.35% - ---------------------------------------------- 5-Year +7.74% - ---------------------------------------------- 10-Year +9.24% - ---------------------------------------------- CLASS A (10/1/95 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND CLASS - A INDEX(7) UTILITIES INDEX(7) ------------------------------------------------------------------------------ 10/1/1995 $ 9,578 $10,000 $10,000 10/31/1995 $ 9,774 $ 9,964 $10,146 11/30/1995 $ 9,931 $10,401 $10,259 12/31/1995 $10,415 $10,602 $10,856 1/31/1996 $10,585 $10,962 $11,068 2/29/1996 $10,315 $11,064 $10,726 3/31/1996 $10,305 $11,170 $10,644 4/30/1996 $ 9,960 $11,335 $10,428 5/31/1996 $10,071 $11,627 $10,585 6/30/1996 $10,608 $11,671 $11,165 7/31/1996 $10,022 $11,156 $10,451 8/31/1996 $10,166 $11,391 $10,685 9/30/1996 $10,147 $12,032 $10,781 10/31/1996 $10,480 $12,364 $11,320 11/30/1996 $10,626 $13,297 $11,549 12/31/1996 $10,626 $13,034 $11,473 1/31/1997 $10,681 $13,848 $11,533 2/28/1997 $10,770 $13,957 $11,450 3/31/1997 $10,469 $13,384 $11,080 4/30/1997 $10,390 $14,183 $10,892 5/31/1997 $10,715 $15,045 $11,375 6/30/1997 $11,068 $15,719 $11,718 7/31/1997 $11,329 $16,969 $11,974 8/31/1997 $11,079 $16,019 $11,749 9/30/1997 $11,539 $16,896 $12,248 10/31/1997 $11,596 $16,332 $12,364 11/30/1997 $12,366 $17,088 $13,294 12/31/1997 $13,272 $17,381 $14,302 1/31/1998 $12,759 $17,573 $13,721 2/28/1998 $12,962 $18,840 $14,186 3/31/1998 $13,772 $19,804 $15,109 4/30/1998 $13,277 $20,003 $14,760 5/31/1998 $13,108 $19,660 $14,706 6/30/1998 $13,423 $20,458 $15,269 7/31/1998 $12,935 $20,240 $14,497 8/31/1998 $13,375 $17,317 $14,836 9/30/1998 $14,044 $18,426 $16,010 10/31/1998 $13,784 $19,924 $15,704 11/30/1998 $13,932 $21,131 $15,936 12/31/1998 $14,277 $22,348 $16,423 1/31/1999 $13,517 $23,282 $15,705 2/28/1999 $12,873 $22,558 $15,106 3/31/1999 $12,653 $23,461 $14,867 4/30/1999 $13,449 $24,369 $16,140 5/31/1999 $14,063 $23,795 $17,159 6/30/1999 $13,564 $25,114 $16,557 7/31/1999 $13,365 $24,331 $16,354 8/31/1999 $13,339 $24,211 $16,522 9/30/1999 $12,844 $23,548 $15,727 10/31/1999 $13,072 $25,037 $15,954 11/30/1999 $12,308 $25,546 $14,770 12/31/1999 $12,135 $27,050 $14,915 1/31/2000 $12,827 $25,691 $16,534 2/29/2000 $11,881 $25,205 $15,514 3/31/2000 $12,285 $27,669 $16,030 4/30/2000 $13,015 $26,837 $17,278 5/31/2000 $13,187 $26,288 $18,034 6/30/2000 $12,595 $26,936 $16,961 7/31/2000 $13,117 $26,515 $18,163 8/31/2000 $14,508 $28,161 $20,649 9/30/2000 $15,961 $26,675 $22,545 10/31/2000 $15,888 $26,562 $21,677 11/30/2000 $16,459 $24,469 $21,428 12/31/2000 $17,185 $24,589 $23,446 1/31/2001 $15,420 $25,461 $21,167 2/28/2001 $16,325 $23,141 $21,937 3/31/2001 $16,537 $21,676 $21,789 4/30/2001 $17,226 $23,359 $23,057 5/31/2001 $17,316 $23,516 $22,322 6/30/2001 $16,443 $22,944 $20,543 7/31/2001 $15,868 $22,718 $19,596 8/31/2001 $16,080 $21,297 $19,064 9/30/2001 $15,318 $19,577 $16,856 10/31/2001 $15,333 $19,951 $16,796 11/30/2001 $15,195 $21,481 $15,894 12/31/2001 $15,795 $21,669 $16,309 1/31/2002 $15,600 $21,353 $15,370 2/28/2002 $15,552 $20,941 $15,031 3/31/2002 $16,440 $21,729 $16,860 4/30/2002 $16,325 $20,412 $16,547 5/31/2002 $15,930 $20,262 $15,078 6/30/2002 $15,223 $18,819 $14,007 7/31/2002 $13,910 $17,353 $12,049 8/31/2002 $14,458 $17,466 $12,502 9/30/2002 $13,405 $15,570 $10,887 10/31/2002 $13,405 $16,939 $10,689 11/30/2002 $13,674 $17,935 $10,971 12/31/2002 $14,140 $16,882 $11,417 1/31/2003 $13,559 $16,441 $11,068 2/28/2003 $13,184 $16,193 $10,543 3/31/2003 $13,654 $16,349 $11,060 4/30/2003 $14,399 $17,696 $12,017 5/31/2003 $15,664 $18,628 $13,270 6/30/2003 $15,717 $18,866 $13,421 7/31/2003 $14,999 $19,199 $12,545 8/31/2003 $15,016 $19,572 $12,784 9/30/2003 $15,601 $19,365 $13,354 10/31/2003 $15,884 $20,460 $13,495 11/30/2003 $16,044 $20,640 $13,509 12/31/2003 $16,869 $21,721 $14,415 1/31/2004 $17,156 $22,120 $14,721 2/29/2004 $17,604 $22,427 $15,009 3/31/2004 $17,731 $22,089 $15,159 4/30/2004 $17,206 $21,743 $14,600 5/31/2004 $17,405 $22,041 $14,735 6/30/2004 $17,682 $22,469 $14,963 7/31/2004 $17,865 $21,726 $15,209 8/31/2004 $18,579 $21,813 $15,833 9/30/2004 $18,783 $22,049 $15,970 10/31/2004 $19,560 $22,386 $16,749 11/30/2004 $20,115 $23,291 $17,455 12/31/2004 $20,773 $24,083 $17,915 1/31/2005 $20,960 $23,496 $18,281 2/28/2005 $21,129 $23,991 $18,676 3/31/2005 $21,187 $23,566 $18,887 4/30/2005 $21,659 $23,120 $19,478 5/31/2005 $22,056 $23,855 $19,509 6/30/2005 $23,028 $23,889 $20,646 7/31/2005 $23,390 $24,777 $21,109 8/31/2005 $23,600 $24,551 $21,297 9/30/2005 $24,196 $24,750 $22,146 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS B 9/30/05 - ---------------------------------------------- 1-Year +24.11% - ---------------------------------------------- 5-Year +7.82% - ---------------------------------------------- Since Inception (1/1/99) +7.60% - ---------------------------------------------- CLASS B (1/1/99 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND CLASS - B INDEX(7) UTILITIES INDEX(7) ------------------------------------------------------------------------------ 1/1/1999 $10,000 $10,000 $10,000 1/31/1999 $ 9,468 $10,418 $ 9,562 2/28/1999 $ 9,016 $10,094 $ 9,198 3/31/1999 $ 8,859 $10,498 $ 9,052 4/30/1999 $ 9,416 $10,905 $ 9,827 5/31/1999 $ 9,845 $10,647 $10,448 6/30/1999 $ 9,487 $11,238 $10,081 7/31/1999 $ 9,339 $10,887 $ 9,958 8/31/1999 $ 9,321 $10,834 $10,060 9/30/1999 $ 8,964 $10,537 $ 9,576 10/31/1999 $ 9,133 $11,203 $ 9,714 11/30/1999 $ 8,600 $11,431 $ 8,993 12/31/1999 $ 8,479 $12,104 $ 9,082 1/31/2000 $ 8,961 $11,496 $10,067 2/29/2000 $ 8,282 $11,279 $ 9,446 3/31/2000 $ 8,572 $12,381 $ 9,760 4/30/2000 $ 9,071 $12,009 $10,520 5/31/2000 $ 9,190 $11,763 $10,981 6/30/2000 $ 8,768 $12,053 $10,327 7/31/2000 $ 9,131 $11,865 $11,059 8/31/2000 $10,088 $12,601 $12,573 9/30/2000 $11,097 $11,936 $13,727 10/31/2000 $11,035 $11,886 $13,199 11/30/2000 $11,433 $10,949 $13,047 12/31/2000 $11,932 $11,003 $14,276 1/31/2001 $10,708 $11,393 $12,888 2/28/2001 $11,325 $10,355 $13,357 3/31/2001 $11,468 $ 9,699 $13,267 4/30/2001 $11,936 $10,453 $14,039 5/31/2001 $11,998 $10,523 $13,591 6/30/2001 $11,390 $10,267 $12,508 7/31/2001 $10,982 $10,166 $11,932 8/31/2001 $11,128 $ 9,530 $11,607 9/30/2001 $10,588 $ 8,760 $10,263 10/31/2001 $10,599 $ 8,927 $10,227 11/30/2001 $10,504 $ 9,612 $ 9,677 12/31/2001 $10,916 $ 9,696 $ 9,930 1/31/2002 $10,770 $ 9,555 $ 9,358 2/28/2002 $10,737 $ 9,371 $ 9,152 3/31/2002 $11,336 $ 9,723 $10,266 4/30/2002 $11,257 $ 9,134 $10,075 5/31/2002 $10,985 $ 9,067 $ 9,181 6/30/2002 $10,498 $ 8,421 $ 8,529 7/31/2002 $ 9,570 $ 7,765 $ 7,336 8/31/2002 $ 9,948 $ 7,816 $ 7,612 9/30/2002 $ 9,225 $ 6,967 $ 6,629 10/31/2002 $ 9,225 $ 7,580 $ 6,508 11/30/2002 $ 9,410 $ 8,025 $ 6,680 12/31/2002 $ 9,719 $ 7,554 $ 6,952 1/31/2003 $ 9,320 $ 7,357 $ 6,739 2/28/2003 $ 9,062 $ 7,246 $ 6,420 3/31/2003 $ 9,375 $ 7,316 $ 6,734 4/30/2003 $ 9,875 $ 7,919 $ 7,317 5/31/2003 $10,743 $ 8,335 $ 8,080 6/30/2003 $10,782 $ 8,442 $ 8,172 7/31/2003 $10,289 $ 8,591 $ 7,638 8/31/2003 $10,289 $ 8,758 $ 7,784 9/30/2003 $10,690 $ 8,665 $ 8,131 10/31/2003 $10,873 $ 9,155 $ 8,217 11/30/2003 $10,982 $ 9,236 $ 8,225 12/31/2003 $11,533 $ 9,720 $ 8,777 1/31/2004 $11,730 $ 9,898 $ 8,963 2/29/2004 $12,036 $10,036 $ 9,139 3/31/2004 $12,122 $ 9,884 $ 9,230 4/30/2004 $11,750 $ 9,729 $ 8,890 5/31/2004 $11,874 $ 9,863 $ 8,972 6/30/2004 $12,061 $10,054 $ 9,111 7/31/2004 $12,186 $ 9,722 $ 9,261 8/31/2004 $12,674 $ 9,761 $ 9,641 9/30/2004 $12,798 $ 9,866 $ 9,724 10/31/2004 $13,327 $10,017 $10,198 11/30/2004 $13,693 $10,422 $10,628 12/31/2004 $14,146 $10,777 $10,908 1/31/2005 $14,261 $10,514 $11,131 2/28/2005 $14,375 $10,735 $11,371 3/31/2005 $14,408 $10,545 $11,500 4/30/2005 $14,716 $10,345 $11,860 5/31/2005 $14,973 $10,674 $11,879 6/30/2005 $15,635 $10,690 $12,571 7/31/2005 $15,881 $11,087 $12,853 8/31/2005 $16,010 $10,986 $12,967 9/30/2005 $16,391 $11,075 $13,484 58 | Annual Report PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS C 9/30/05 - ---------------------------------------------- 1-Year +27.16% - ---------------------------------------------- 5-Year +8.13% - ---------------------------------------------- 10-Year +9.15% - ---------------------------------------------- CLASS C (10/1/95-9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - CLASS C INDEX(7) UTILITIES INDEX(7) ------------------------------------------------------------------------------ 10/1/1995 $10,000 $10,000 $10,000 10/31/1995 $10,195 $ 9,964 $10,146 11/30/1995 $10,349 $10,401 $10,259 12/31/1995 $10,860 $10,602 $10,856 1/31/1996 $11,017 $10,962 $11,068 2/29/1996 $10,745 $11,064 $10,726 3/31/1996 $10,731 $11,170 $10,644 4/30/1996 $10,371 $11,335 $10,428 5/31/1996 $10,477 $11,627 $10,585 6/30/1996 $11,022 $11,671 $11,165 7/31/1996 $10,411 $11,156 $10,451 8/31/1996 $10,561 $11,391 $10,685 9/30/1996 $10,539 $12,032 $10,781 10/31/1996 $10,875 $12,364 $11,320 11/30/1996 $11,027 $13,297 $11,549 12/31/1996 $11,023 $13,034 $11,473 1/31/1997 $11,081 $13,848 $11,533 2/28/1997 $11,161 $13,957 $11,450 3/31/1997 $10,838 $13,384 $11,080 4/30/1997 $10,757 $14,183 $10,892 5/31/1997 $11,081 $15,045 $11,375 6/30/1997 $11,445 $15,719 $11,718 7/31/1997 $11,715 $16,969 $11,974 8/31/1997 $11,445 $16,019 $11,749 9/30/1997 $11,916 $16,896 $12,248 10/31/1997 $11,975 $16,332 $12,364 11/30/1997 $12,760 $17,088 $13,294 12/31/1997 $13,693 $17,381 $14,302 1/31/1998 $13,164 $17,573 $13,721 2/28/1998 $13,361 $18,840 $14,186 3/31/1998 $14,190 $19,804 $15,109 4/30/1998 $13,680 $20,003 $14,760 5/31/1998 $13,493 $19,660 $14,706 6/30/1998 $13,813 $20,458 $15,269 7/31/1998 $13,310 $20,240 $14,497 8/31/1998 $13,750 $17,317 $14,836 9/30/1998 $14,447 $18,426 $16,010 10/31/1998 $14,167 $19,924 $15,704 11/30/1998 $14,307 $21,131 $15,936 12/31/1998 $14,657 $22,348 $16,423 1/31/1999 $13,876 $23,282 $15,705 2/28/1999 $13,214 $22,558 $15,106 3/31/1999 $12,986 $23,461 $14,867 4/30/1999 $13,790 $24,369 $16,140 5/31/1999 $14,420 $23,795 $17,159 6/30/1999 $13,892 $25,114 $16,557 7/31/1999 $13,675 $24,331 $16,354 8/31/1999 $13,648 $24,211 $16,522 9/30/1999 $13,137 $23,548 $15,727 10/31/1999 $13,370 $25,037 $15,954 11/30/1999 $12,575 $25,546 $14,770 12/31/1999 $12,393 $27,050 $14,915 1/31/2000 $13,101 $25,691 $16,534 2/29/2000 $12,119 $25,205 $15,514 3/31/2000 $12,543 $27,669 $16,030 4/30/2000 $13,274 $26,837 $17,278 5/31/2000 $13,450 $26,288 $18,034 6/30/2000 $12,830 $26,936 $16,961 7/31/2000 $13,362 $26,515 $18,163 8/31/2000 $14,766 $28,161 $20,649 9/30/2000 $16,244 $26,675 $22,545 10/31/2000 $16,155 $26,562 $21,677 11/30/2000 $16,737 $24,469 $21,428 12/31/2000 $17,468 $24,589 $23,446 1/31/2001 $15,673 $25,461 $21,167 2/28/2001 $16,578 $23,141 $21,937 3/31/2001 $16,789 $21,676 $21,789 4/30/2001 $17,474 $23,359 $23,057 5/31/2001 $17,565 $23,516 $22,322 6/30/2001 $16,673 $22,944 $20,543 7/31/2001 $16,075 $22,718 $19,596 8/31/2001 $16,290 $21,297 $19,064 9/30/2001 $15,513 $19,577 $16,856 10/31/2001 $15,529 $19,951 $16,796 11/30/2001 $15,374 $21,481 $15,894 12/31/2001 $15,977 $21,669 $16,309 1/31/2002 $15,780 $21,353 $15,370 2/28/2002 $15,731 $20,941 $15,031 3/31/2002 $16,609 $21,729 $16,860 4/30/2002 $16,476 $20,412 $16,547 5/31/2002 $16,078 $20,262 $15,078 6/30/2002 $15,363 $18,819 $14,007 7/31/2002 $14,019 $17,353 $12,049 8/31/2002 $14,573 $17,466 $12,502 9/30/2002 $13,512 $15,570 $10,887 10/31/2002 $13,495 $16,939 $10,689 11/30/2002 $13,784 $17,935 $10,971 12/31/2002 $14,237 $16,882 $11,417 1/31/2003 $13,652 $16,441 $11,068 2/28/2003 $13,273 $16,193 $10,543 3/31/2003 $13,735 $16,349 $11,060 4/30/2003 $14,467 $17,696 $12,017 5/31/2003 $15,741 $18,628 $13,270 6/30/2003 $15,782 $18,866 $13,421 7/31/2003 $15,059 $19,199 $12,545 8/31/2003 $15,077 $19,572 $12,784 9/30/2003 $15,644 $19,365 $13,354 10/31/2003 $15,912 $20,460 $13,495 11/30/2003 $16,090 $20,640 $13,509 12/31/2003 $16,881 $21,721 $14,415 1/31/2004 $17,169 $22,120 $14,721 2/29/2004 $17,619 $22,427 $15,009 3/31/2004 $17,744 $22,089 $15,159 4/30/2004 $17,218 $21,743 $14,600 5/31/2004 $17,381 $22,041 $14,735 6/30/2004 $17,656 $22,469 $14,963 7/31/2004 $17,839 $21,726 $15,209 8/31/2004 $18,554 $21,813 $15,833 9/30/2004 $18,736 $22,049 $15,970 10/31/2004 $19,513 $22,386 $16,749 11/30/2004 $20,049 $23,291 $17,455 12/31/2004 $20,713 $24,083 $17,915 1/31/2005 $20,882 $23,496 $18,281 2/28/2005 $21,050 $23,991 $18,676 3/31/2005 $21,097 $23,566 $18,887 4/30/2005 $21,550 $23,120 $19,478 5/31/2005 $21,927 $23,855 $19,509 6/30/2005 $22,897 $23,889 $20,646 7/31/2005 $23,239 $24,777 $21,109 8/31/2005 $23,448 $24,551 $21,297 9/30/2005 $24,011 $24,750 $22,146 AVERAGE ANNUAL TOTAL RETURN - ---------------------------------------------- CLASS R 9/30/05 - ---------------------------------------------- 1-Year +27.35% - ---------------------------------------------- 3-Year +21.33% - ---------------------------------------------- Since Inception (1/1/02) +11.45% - ---------------------------------------------- CLASS R (1/1/02 - 9/30/05) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND CLASS - R INDEX(7) UTILITIES INDEX(7) ------------------------------------------------------------------------------ 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,796 $ 9,854 $ 9,424 2/28/2002 $ 9,766 $ 9,664 $ 9,216 3/31/2002 $10,303 $10,028 $10,338 4/30/2002 $10,231 $ 9,420 $10,146 5/31/2002 $ 9,984 $ 9,351 $ 9,245 6/30/2002 $ 9,542 $ 8,685 $ 8,589 7/31/2002 $ 8,719 $ 8,008 $ 7,388 8/31/2002 $ 9,052 $ 8,061 $ 7,666 9/30/2002 $ 8,399 $ 7,185 $ 6,675 10/31/2002 $ 8,399 $ 7,817 $ 6,554 11/30/2002 $ 8,568 $ 8,277 $ 6,727 12/31/2002 $ 8,852 $ 7,791 $ 7,001 1/31/2003 $ 8,488 $ 7,587 $ 6,786 2/28/2003 $ 8,253 $ 7,473 $ 6,465 3/31/2003 $ 8,546 $ 7,545 $ 6,781 4/30/2003 $ 9,002 $ 8,167 $ 7,368 5/31/2003 $ 9,793 $ 8,596 $ 8,137 6/30/2003 $ 9,819 $ 8,706 $ 8,229 7/31/2003 $ 9,369 $ 8,860 $ 7,692 8/31/2003 $ 9,381 $ 9,032 $ 7,839 9/30/2003 $ 9,739 $ 8,937 $ 8,188 10/31/2003 $ 9,916 $ 9,442 $ 8,275 11/30/2003 $10,016 $ 9,525 $ 8,283 12/31/2003 $10,523 $10,024 $ 8,839 1/31/2004 $10,691 $10,208 $ 9,026 2/29/2004 $10,972 $10,350 $ 9,203 3/31/2004 $11,053 $10,194 $ 9,295 4/30/2004 $10,725 $10,034 $ 8,952 5/31/2004 $10,837 $10,171 $ 9,035 6/30/2004 $11,012 $10,369 $ 9,175 7/31/2004 $11,126 $10,026 $ 9,326 8/31/2004 $11,571 $10,066 $ 9,708 9/30/2004 $11,690 $10,175 $ 9,792 10/31/2004 $12,173 $10,331 $10,270 11/30/2004 $12,508 $10,749 $10,703 12/31/2004 $12,922 $11,114 $10,985 1/31/2005 $13,027 $10,843 $11,209 2/28/2005 $13,132 $11,071 $11,451 3/31/2005 $13,163 $10,876 $11,581 4/30/2005 $13,457 $10,669 $11,943 5/31/2005 $13,692 $11,009 $11,962 6/30/2005 $14,300 $11,024 $12,659 7/31/2005 $14,513 $11,434 $12,943 8/31/2005 $14,644 $11,330 $13,058 9/30/2005 $15,003 $11,422 $13,579 Annual Report | 59 PERFORMANCE SUMMARY (CONTINUED) AVERAGE ANNUAL TOTAL RETURN - --------------------------------------------- ADVISORY CLASS(6) 9/30/05 - --------------------------------------------- 1-Year +29.00% - --------------------------------------------- 5-Year +8.84% - --------------------------------------------- 10-Year +9.97% - --------------------------------------------- ADVISOR CLASS (10/1/95 - 9/30/05)(6) [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.] FRANKLIN UTILITIES FUND - ADVISOR S&P 500 S&P 500 DATE CLASS INDEX(7) UTILITIES INDEX(7) ------------------------------------------------------------------------------ 10/1/1995 $10,000 $10,000 $10,000 10/31/1995 $10,205 $ 9,964 $10,146 11/30/1995 $10,369 $10,401 $10,259 12/31/1995 $10,874 $10,602 $10,856 1/31/1996 $11,052 $10,962 $11,068 2/29/1996 $10,769 $11,064 $10,726 3/31/1996 $10,759 $11,170 $10,644 4/30/1996 $10,399 $11,335 $10,428 5/31/1996 $10,516 $11,627 $10,585 6/30/1996 $11,076 $11,671 $11,165 7/31/1996 $10,464 $11,156 $10,451 8/31/1996 $10,614 $11,391 $10,685 9/30/1996 $10,594 $12,032 $10,781 10/31/1996 $10,943 $12,364 $11,320 11/30/1996 $11,095 $13,297 $11,549 12/31/1996 $11,095 $13,034 $11,473 1/31/1997 $11,246 $13,848 $11,533 2/28/1997 $11,340 $13,957 $11,450 3/31/1997 $11,026 $13,384 $11,080 4/30/1997 $10,943 $14,183 $10,892 5/31/1997 $11,285 $15,045 $11,375 6/30/1997 $11,660 $15,719 $11,718 7/31/1997 $11,936 $16,969 $11,974 8/31/1997 $11,660 $16,019 $11,749 9/30/1997 $12,162 $16,896 $12,248 10/31/1997 $12,210 $16,332 $12,364 11/30/1997 $13,022 $17,088 $13,294 12/31/1997 $13,993 $17,381 $14,302 1/31/1998 $13,452 $17,573 $13,721 2/28/1998 $13,666 $18,840 $14,186 3/31/1998 $14,524 $19,804 $15,109 4/30/1998 $14,015 $20,003 $14,760 5/31/1998 $13,824 $19,660 $14,706 6/30/1998 $14,162 $20,458 $15,269 7/31/1998 $13,647 $20,240 $14,497 8/31/1998 $14,098 $17,317 $14,836 9/30/1998 $14,861 $18,426 $16,010 10/31/1998 $14,587 $19,924 $15,704 11/30/1998 $14,743 $21,131 $15,936 12/31/1998 $15,099 $22,348 $16,423 1/31/1999 $14,310 $23,282 $15,705 2/28/1999 $13,630 $22,558 $15,106 3/31/1999 $13,403 $23,461 $14,867 4/30/1999 $14,244 $24,369 $16,140 5/31/1999 $14,891 $23,795 $17,159 6/30/1999 $14,370 $25,114 $16,557 7/31/1999 $14,146 $24,331 $16,354 8/31/1999 $14,132 $24,211 $16,522 9/30/1999 $13,601 $23,548 $15,727 10/31/1999 $13,856 $25,037 $15,954 11/30/1999 $13,035 $25,546 $14,770 12/31/1999 $12,870 $27,050 $14,915 1/31/2000 $13,602 $25,691 $16,534 2/29/2000 $12,587 $25,205 $15,514 3/31/2000 $13,034 $27,669 $16,030 4/30/2000 $13,806 $26,837 $17,278 5/31/2000 $13,988 $26,288 $18,034 6/30/2000 $13,350 $26,936 $16,961 7/31/2000 $13,918 $26,515 $18,163 8/31/2000 $15,389 $28,161 $20,649 9/30/2000 $16,932 $26,675 $22,545 10/31/2000 $16,855 $26,562 $21,677 11/30/2000 $17,475 $24,469 $21,428 12/31/2000 $18,233 $24,589 $23,446 1/31/2001 $16,366 $25,461 $21,167 2/28/2001 $17,323 $23,141 $21,937 3/31/2001 $17,553 $21,676 $21,789 4/30/2001 $18,283 $23,359 $23,057 5/31/2001 $18,394 $23,516 $22,322 6/30/2001 $17,460 $22,944 $20,543 7/31/2001 $16,851 $22,718 $19,596 8/31/2001 $17,076 $21,297 $19,064 9/30/2001 $16,274 $19,577 $16,856 10/31/2001 $16,290 $19,951 $16,796 11/30/2001 $16,145 $21,481 $15,894 12/31/2001 $16,786 $21,669 $16,309 1/31/2002 $16,579 $21,353 $15,370 2/28/2002 $16,545 $20,941 $15,031 3/31/2002 $17,475 $21,729 $16,860 4/30/2002 $17,353 $20,412 $16,547 5/31/2002 $16,953 $20,262 $15,078 6/30/2002 $16,191 $18,819 $14,007 7/31/2002 $14,781 $17,353 $12,049 8/31/2002 $15,380 $17,466 $12,502 9/30/2002 $14,269 $15,570 $10,887 10/31/2002 $14,269 $16,939 $10,689 11/30/2002 $14,573 $17,935 $10,971 12/31/2002 $15,054 $16,882 $11,417 1/31/2003 $14,438 $16,441 $11,068 2/28/2003 $14,039 $16,193 $10,543 3/31/2003 $14,543 $16,349 $11,060 4/30/2003 $15,334 $17,696 $12,017 5/31/2003 $16,694 $18,628 $13,270 6/30/2003 $16,756 $18,866 $13,421 7/31/2003 $15,993 $19,199 $12,545 8/31/2003 $16,012 $19,572 $12,784 9/30/2003 $16,639 $19,365 $13,354 10/31/2003 $16,921 $20,460 $13,495 11/30/2003 $17,109 $20,640 $13,509 12/31/2003 $17,973 $21,721 $14,415 1/31/2004 $18,278 $22,120 $14,721 2/29/2004 $18,773 $22,427 $15,009 3/31/2004 $18,914 $22,089 $15,159 4/30/2004 $18,356 $21,743 $14,600 5/31/2004 $18,548 $22,041 $14,735 6/30/2004 $18,849 $22,469 $14,963 7/31/2004 $19,063 $21,726 $15,209 8/31/2004 $19,821 $21,813 $15,833 9/30/2004 $20,046 $22,049 $15,970 10/31/2004 $20,871 $22,386 $16,749 11/30/2004 $21,461 $23,291 $17,455 12/31/2004 $22,177 $24,083 $17,915 1/31/2005 $22,376 $23,496 $18,281 2/28/2005 $22,575 $23,991 $18,676 3/31/2005 $22,625 $23,566 $18,887 4/30/2005 $23,147 $23,120 $19,478 5/31/2005 $23,550 $23,855 $19,509 6/30/2005 $24,613 $23,889 $20,646 7/31/2005 $24,999 $24,777 $21,109 8/31/2005 $25,223 $24,551 $21,297 9/30/2005 $25,860 $24,750 $22,146 ENDNOTES IN ADDITION TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1) Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. (2) Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. (3) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. (4) Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/05. (5) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/05. (6) Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +133.08% and +10.16%. (7) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500 Index. 60 | Annual Report YOUR FUND'S EXPENSES FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 61 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 3/31/05 VALUE 9/30/05 PERIOD* 3/31/05-9/30/05 - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,142.00 $4.13 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.21 $3.90 - ------------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,137.90 $6.81 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.43 - ------------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,138.20 $6.81 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.43 - ------------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,138.80 $6.01 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.67 - ------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,143.00 $3.33 - ------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.96 $3.14 - -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.77%; B: 1.27%; C: 1.27%; R: 1.12%; and Advisor: 0.62%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 62 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60 ----------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ..................... (0.01) (0.09) (0.06) 0.03 0.44 Net realized and unrealized gains (losses) .......... 2.98 1.93 4.86 (3.11) (9.70) ----------------------------------------------------------------------- Total from investment operations ..................... 2.97 1.84 4.80 (3.08) (9.26) ----------------------------------------------------------------------- Less distributions from: Net investment income ............................... -- -- -- (0.29) (0.58) Tax return of capital ............................... -- -- -- (0.02) -- ----------------------------------------------------------------------- Total distributions .................................. -- -- -- (0.31) (0.58) ----------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ......................... $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 ======================================================================= Total return(b) ...................................... 13.49% 9.12% 31.23% (16.83)% (32.86)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $628,732 $640,120 $558,687 $413,309 $530,074 Ratios to average net assets: Expenses ............................................ 1.00% 0.97% 1.04% 1.00% 0.95% Net investment income (loss) ........................ (0.02)% (0.41)% (0.40)% 0.13% 1.93% Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge. (c) Amount is less than $0.01 per share. Annual Report | See notes to financial statements. | 63 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45 ----------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a)...................... (0.18) (0.25) (0.25) (0.12) 0.25 Net realized and unrealized gains (losses) .......... 2.90 1.89 4.84 (3.08) (9.62) ----------------------------------------------------------------------- Total from investment operations ..................... 2.72 1.64 4.59 (3.20) (9.37) ----------------------------------------------------------------------- Less distributions from: Net investment income ............................... -- -- -- (0.16) (0.51) Tax return of capital ............................... -- -- -- (0.01) -- ----------------------------------------------------------------------- Total distributions .................................. -- -- -- (0.17) (0.51) ----------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ......................... $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 ======================================================================= Total return(b) ...................................... 12.69% 8.29% 30.20% (17.51)% (33.37)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 19,497 $ 18,824 $ 10,406 $ 5,066 $ 5,473 Ratios to average net assets: Expenses ............................................ 1.74% 1.72% 1.79% 1.75% 1.70% Net investment income (loss) ........................ (0.76)% (1.16)% (1.15)% (.62)% 1.13% Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. 64 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) ........ Net asset value, beginning of year ................... $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95 ----------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a)...................... (0.17) (0.25) (0.25) (0.11) 0.27 Net realized and unrealized gains (losses) .......... 2.86 1.87 4.80 (3.05) (9.50) ----------------------------------------------------------------------- Total from investment operations ..................... 2.69 1.62 4.55 (3.16) (9.23) ----------------------------------------------------------------------- Less distributions from: Net investment income ............................... -- -- -- (0.13) (0.38) Tax return of capital ............................... -- -- -- (0.01) -- ----------------------------------------------------------------------- Total distributions .................................. -- -- -- (0.14) (0.38) ----------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ......................... $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 ======================================================================= Total return(b) ...................................... 12.68% 8.27% 30.25% (17.48)% (33.36)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 73,587 $ 75,642 $ 66,952 $ 51,809 $ 77,204 Ratios to average net assets: Expenses ............................................ 1.74% 1.72% 1.79% 1.74% 1.70% Net investment income (loss) ........................ (0.76)% (1.16)% (1.15)% (0.61)% 1.19% Portfolio turnover rate .............................. 17.26% 14.93% 13.68% 8.11% 4.07%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. Annual Report | See notes to financial statements. | 65 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 99.6% AEROSPACE & DEFENSE 0.5% Rockwell Collins Inc. ............................................ United States 75,000 $ 3,624,000 -------------- AIR FREIGHT/COURIERS 2.7% C.H. Robinson Worldwide Inc. ..................................... United States 150,000 9,618,000 United Parcel Service Inc., B .................................... United States 140,000 9,678,200 -------------- 19,296,200 -------------- BIOTECHNOLOGY 10.8% (a) Amgen Inc. ....................................................... United States 300,000 23,901,000 (a) Biogen Idec Inc. ................................................. United States 100,000 3,948,000 (a) Charles River Laboratories International Inc. .................... United States 140,000 6,106,800 (a) Genentech Inc. .................................................. United States 300,000 25,263,000 (a) Gilead Sciences Inc. ............................................. United States 150,000 7,314,000 (a) Invitrogen Corp. ................................................. United States 150,000 11,284,500 -------------- 77,817,300 -------------- BROADCASTING 0.1% (a) XM Satellite Radio Holdings Inc., A .............................. United States 25,000 897,750 -------------- CABLE/SATELLITE TELEVISION 1.1% (a) Comcast Corp., A ................................................. United States 175,000 5,036,500 Liberty Global Inc. .............................................. United States 15,000 406,200 (a) Liberty Global Inc., C ........................................... United States 15,000 386,250 (a) Liberty Media Corp., A ........................................... United States 300,000 2,415,000 -------------- 8,243,950 -------------- CASINOS/GAMING 0.7% International Game Technology .................................... United States 200,000 5,400,000 -------------- CHEMICALS: SPECIALTY 1.1% Sigma-Aldrich Corp. .............................................. United States 125,000 8,007,500 -------------- COMPUTER COMMUNICATIONS 1.2% (a) Cisco Systems Inc. ............................................... United States 500,000 8,965,000 -------------- COMPUTER PROCESSING HARDWARE 3.9% (a) Apple Computer Inc. .............................................. United States 150,000 8,041,500 (a) Dell Inc. ........................................................ United States 250,000 8,550,000 Hewlett-Packard Co. .............................................. United States 400,000 11,680,000 -------------- 28,271,500 -------------- DATA PROCESSING SERVICES 2.8% First Data Corp. ................................................. United States 225,000 9,000,000 Paychex Inc. ..................................................... United States 300,000 11,124,000 -------------- 20,124,000 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 3.6% (a) Agilent Technologies Inc. ........................................ United States 300,000 9,825,000 (a) Dolby Laboratories Inc., A ....................................... United States 100,000 1,600,000 Rockwell Automation Inc. ......................................... United States 277,500 14,679,750 -------------- 26,104,750 --------------
66 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) ELECTRONIC PRODUCTION EQUIPMENT 3.6% Applied Materials Inc. ........................................... United States 450,000 $ 7,632,000 KLA-Tencor Corp. ................................................. United States 200,000 9,752,000 (a) Lam Research Corp. ............................................... United States 150,000 4,570,500 (a) Varian Semiconductor Equipment Associates Inc. ................... United States 100,000 4,237,000 -------------- 26,191,500 -------------- ELECTRONICS/APPLIANCE STORES 1.1% Best Buy Co. Inc. ................................................ United States 187,500 8,161,875 -------------- FINANCIAL CONGLOMERATES 0.3% Citigroup Inc. ................................................... United States 50,000 2,276,000 -------------- FINANCIAL PUBLISHING/SERVICES 1.7% Moody's Corp. .................................................... United States 240,000 12,259,200 -------------- HOSPITAL/NURSING MANAGEMENT 1.1% (a) United Surgical Partners International Inc. ...................... United States 200,000 7,822,000 -------------- INFORMATION TECHNOLOGY SERVICES 1.8% (a) Cognizant Technology Solutions Corp., A .......................... United States 150,000 6,988,500 Infosys Technologies Ltd., ADR ................................... India 80,000 5,942,400 -------------- 12,930,900 -------------- INSURANCE BROKERS/SERVICES 0.6% (a) ChoicePoint Inc. ................................................. United States 100,000 4,317,000 -------------- INTERNET SOFTWARE/SERVICES 6.2% (a) Google Inc., A ................................................... United States 71,600 22,658,536 (b) VistaPrint Ltd. .................................................. Bermuda 112,800 1,720,200 (a) Yahoo! Inc. ...................................................... United States 600,000 20,304,000 -------------- 44,682,736 -------------- INVESTMENT BANKS/BROKERS 0.5% (a),(c) Archipelago Holdings Inc. ........................................ United States 100,000 3,985,000 -------------- MAJOR PHARMACEUTICALS 2.4% Johnson & Johnson ................................................ United States 150,000 9,492,000 Pfizer Inc. ...................................................... United States 300,000 7,491,000 -------------- 16,983,000 -------------- MANAGED HEALTH CARE 4.7% (a) Caremark Rx Inc. ................................................. United States 225,000 11,234,250 UnitedHealth Group Inc. .......................................... United States 400,000 22,480,000 -------------- 33,714,250 -------------- MEDIA CONGLOMERATES 1.1% (a) Discovery Holding Co., A ......................................... United States 30,000 433,200 News Corp. Ltd., B ............................................... United States 300,000 4,950,000 Time Warner Inc. ................................................. United States 150,000 2,716,500 -------------- 8099,700 --------------
Annual Report | 67 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MEDICAL SPECIALTIES 9.8% Alcon Inc. ........................................................... Switzerland 150,000 $ 19,182,000 Medtronic Inc. ....................................................... United States 275,000 14,745,500 Stryker Corp. ........................................................ United States 280,000 13,840,400 (a) Varian Medical Systems Inc. .......................................... United States 125,000 4,938,750 (a) Waters Corp. ......................................................... United States 200,000 8,320,000 (a) Zimmer Holdings Inc. ................................................. United States 140,000 9,644,600 -------------- 70,671,250 -------------- MEDICAL/NURSING SERVICES 1.1% (a) VCA Antech Inc. ...................................................... United States 300,000 7,656,000 -------------- MOVIES/ENTERTAINMENT 1.2% (a) Pixar ................................................................ United States 190,000 8,456,900 -------------- OILFIELD SERVICES/EQUIPMENT 2.3% (a) FMC Technologies Inc. ................................................ United States 25,000 1,052,750 (a) National-Oilwell Varco Inc. .......................................... United States 40,000 2,632,000 Schlumberger Ltd. .................................................... United States 150,000 12,657,000 -------------- 16,341,750 -------------- OTHER CONSUMER SERVICES 1.1% (a) eBay Inc. ............................................................ United States 200,000 8,240,000 -------------- OTHER PHARMACEUTICALS 1.4% Teva Pharmaceutical Industries Ltd., ADR ............................. Israel 300,000 10,026,000 -------------- PACKAGED SOFTWARE 9.0% Adobe Systems Inc. ................................................... United States 475,000 14,178,750 Autodesk Inc. ........................................................ United States 300,000 13,932,000 Microsoft Corp. ...................................................... United States 950,000 24,443,500 (a) NAVTEQ Corp. ......................................................... United States 200,000 9,990,000 SAP AG, ADR .......................................................... Germany 50,000 2,166,500 -------------- 64,710,750 -------------- RECREATIONAL PRODUCTS 2.0% (a) Electronic Arts Inc. ................................................. United States 250,000 14,222,500 -------------- SAVINGS BANKS 0.8% Golden West Financial Corp. .......................................... United States 100,000 5,939,000 -------------- SEMICONDUCTORS 11.3% Analog Devices Inc. .................................................. United States 310,000 11,513,400 Intel Corp. .......................................................... United States 1,150,000 28,347,500 (a) International Rectifier Corp. ........................................ United States 180,000 8,114,400 Linear Technology Corp. .............................................. United States 400,000 15,036,000 (a) Marvell Technology Group Ltd. ........................................ Bermuda 110,000 5,072,100 Microchip Technology Inc. ............................................ United States 150,000 4,518,000 Xilinx Inc. .......................................................... United States 320,000 8,912,000 -------------- 81,513,400 --------------
68 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONT.) SERVICES TO THE HEALTH INDUSTRY 1.5% (a) Pharmaceutical Product Development Inc. ...................... United States 175,000 $ 10,064,250 (b) WebMD Health Corp., A ........................................ United States 33,200 818,347 -------------- 10,882,597 -------------- TELECOMMUNICATIONS EQUIPMENT 4.5% (a) Corning Inc. ................................................. United States 150,000 2,899,500 Motorola Inc. ................................................ United States 680,750 15,037,768 Nokia Corp., ADR ............................................. Finland 315,000 5,326,650 QUALCOMM Inc. ................................................ United States 200,000 8,950,000 -------------- 32,213,918 -------------- TOTAL COMMON STOCKS (COST $446,591,251) ...................... 719,049,176 -------------- SHORT TERM INVESTMENTS 1.4% MONEY FUND (COST $5,713,444) 0.8% (d) Franklin Institutional Fiduciary Trust Money Market Portfolio .................................................. United States 5,713,444 5,713,444 -------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENTS 0.6% (e),(f) Banc of America Securities LLC, 3.92%, 10/03/05 (Maturity Value $400,175) Collateralized by U.S. Government Agency Securities,5.00%, 7/01/35 ........................... United States $ 400,044 400,044 (e),(f) Barclays Capital Inc., 3.90%, 10/03/05 (Maturity Value $525,228) Collateralized by U.S. Agency Securities, 5.00%, 6/01/35 ............................................. United States 525,057 525,057 (e),(f) Bear Stearns & Co. Inc., 3.85%, 10/03/05 (Maturity Value 472,201) Collateralized by U.S. Treasury Agency Securities, 2.00% - 8.25%, 3/22/06 - 8/25/05 ........................... United States 472,050 472,050 (e),(f) Citigroup Global Markets Inc., 3.81%, 10/03/05 (Maturity Value $500,213) Collateralized by U.S. Government Agency Securities, 0.00% - 13.25%, 10/5/05 - 4/15/32 .............. United States 500,053 500,053 (e),(f) Deutsche Bank Securities Inc., 3.83%, 10/03/05 (Maturity Value $500,213) Collateralized by U.S. Government Agency Securities, 2.75% - 5.55%, 12/01/06 - 9/01/20 .............. United States 500,053 500,053 (e),(f) JP Morgan Securities, 3.83%, 10/03/05 (Maturity Value $562,239) Collateralized by U.S. Agency Securities, 5.00% - 6.00%, 3/01/34 - 4/01/35 ........................... United States 562,060 562,060 (e),(f) JP Morgan Securities, 3.90%, 10/03/05 (Maturity Value $600,260) Collateralized by U.S. Government Agency Securities, 0.00% - 8.875%, 12/15/05 - 2/22/28 ............. United States 600,065 600,065 (e),(f) Morgan Stanley & Co. Inc., 3.91%, 10/03/05 (Maturity Value $541,235) Collateralized by U.S. Agency Securities, 5.00%, 9/01/33 - 7/01/35 ................................... United States 541,059 541,059 -------------- TOTAL REPURCHASE AGREEMENTS (COST $4,100,441) ................ 4,100,441 -------------- TOTAL INVESTMENTS (COST $456,405,136) 101.0% ................. 728,863,061 OTHER ASSETS, LESS LIABILITIES (1.0)% ........................ (7,047,094) -------------- NET ASSETS 100.0% ............................................ $ 721,815,967 ==============
See Selected Portfolio Abbreviations on page 109. (a) Non-income producing. (b) See Note 1(d) regarding securities purchased on a when-issued or delayed delivery basis. (c) A portion or all of the security is on loan as of September 30, 2005. See Note 1(f). (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (e) See Note 1(c) regarding repurchase agreements. (f) Investments from cash collateral received for loaned securities. See Note 1(f). Annual Report | See notes to financial statements. | 69 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ......................... 0.13 0.06 0.08 0.07 0.23 Net realized and unrealized gains (losses) ....... 4.20 3.68 4.81 (5.65) (7.26) ------------------------------------------------------------------------- Total from investment operations .................. 4.33 3.74 4.89 (5.58) (7.03) ------------------------------------------------------------------------- Less distributions from: Net investment income ............................ (0.08) (0.03) (0.04) (0.16) (0.40) Net realized gains ............................... -- -- -- (0.05) (1.67) ------------------------------------------------------------------------- Total distributions ............................... (0.08) (0.03) (0.04) (0.21) (2.07) ------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ...................... $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 ========================================================================= Total return(b).................................... 14.17% 13.92% 22.27% (20.35)% (20.12)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 1,567,675 $ 1,531,871 $ 1,433,742 $ 1,249,745 $ 1,657,387 Ratios to average net assets: Expenses ......................................... 0.94% 0.98% 1.06% 0.96% 0.91% Net investment income ............................ 0.40% 0.20% 0.31% 0.24% 0.69% Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge. (c) Amount is less than $0.01 per share. 70 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................. (0.11) (0.16) (0.11) (0.14) (0.03) Net realized and unrealized gains (losses) ....... 4.07 3.61 4.73 (5.57) (7.18) ------------------------------------------------------------------------- Total from investment operations .................. 3.96 3.45 4.62 (5.71) (7.21) ------------------------------------------------------------------------- Less distributions from: Net investment income ............................ -- -- -- -- (0.20) Net realized gains ............................... -- -- -- (0.05) (1.67) ------------------------------------------------------------------------- Total distributions ............................... -- -- -- (0.05) (1.87) ------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ...................... $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 ========================================================================= Total return(b) ................................... 13.30% 13.11% 21.29% (20.90)% (20.74)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 123,926 $ 121,986 $ 103,499 $ 75,141 $ 66,095 Ratios to average net assets: Expenses ......................................... 1.69% 1.73% 1.81% 1.71% 1.66% Net investment income (loss) ..................... (0.35)% (0.55)% (0.44)% (0.51)% (0.10)% Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. Annual Report | See notes to financial statements. | 71 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) .................. (0.11) (0.16) (0.11) (0.14) (0.02) Net realized and unrealized gains (losses) ....... 4.03 3.58 4.69 (5.54) (7.13) ------------------------------------------------------------------------- Total from investment operations .................. 3.92 3.42 4.58 (5.68) (7.15) ------------------------------------------------------------------------- Less distributions from: Net investment income ............................ -- -- -- -- (0.13) Net realized gains ............................... -- -- -- (0.05) (1.67) ------------------------------------------------------------------------- Total distributions ............................... -- -- -- (0.05) (1.80) ------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ...................... $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 ========================================================================= Total return(b).................................... 13.32% 13.11% 21.29% (20.92)% (20.72)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 270,538 $ 270,131 $ 259,169 $ 232,307 $ 310,650 Ratios to average net assets: Expenses ......................................... 1.69% 1.73% 1.82% 1.70% 1.66% Net investment income (loss) ..................... (0.35)% (0.55)% (0.45)% (0.51)% (0.06)% Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. 72 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2005 2004 2003 2002(d) ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $ 30.39 $ 26.74 $ 21.98 $ 31.59 ------------------------------------------------------------- Income from investment operations: Net investment income (loss)(a) ................................. 0.05 (0.02) -- -- Net realized and unrealized gains (losses) ...................... 4.16 3.67 4.81 (9.61) ------------------------------------------------------------- Total from investment operations ................................. 4.21 3.65 4.81 (9.61) ------------------------------------------------------------- Less distributions from net investment income .................... (0.01) -- (0.05) -- ------------------------------------------------------------- Redemption fees .................................................. --(c) --(c) -- -- ------------------------------------------------------------- Net asset value, end of year ..................................... $ 34.59 $ 30.39 $ 26.74 $ 21.98 ============================================================= Total return(b) .................................................. 13.87% 13.65% 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $ 27,818 $ 20,060 $ 14,755 $ 2,788 Ratios to average net assets: Expenses ........................................................ 1.19% 1.23% 1.31% 1.21%(e) Net investment income (loss) .................................... 0.15% (0.05)% 0.06% 0.02%(e) Portfolio turnover rate .......................................... 1.16% 1.56% 5.12% 2.16%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) For the period January 1, 2002 (effective date) to September 30, 2002. (e) Annualized. Annual Report | See notes to financial statements. | 73 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2005 2004 2003 2002 2001 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99 -------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ......................... 0.21 0.14 0.14 0.14 0.31 Net realized and unrealized gains (losses) ....... 4.21 3.67 4.82 (5.65) (7.28) -------------------------------------------------------------------------- Total from investment operations .................. 4.42 3.81 4.96 (5.51) (6.97) -------------------------------------------------------------------------- Less distributions from: Net investment income ............................ (0.16) (0.09) (0.11) (0.24) (0.49) Net realized gains ............................... -- -- -- (0.05) (1.67) -------------------------------------------------------------------------- Total distributions ............................... (0.16) (0.09) (0.11) (0.29) (2.16) -------------------------------------------------------------------------- Redemption fees ................................... --(b) --(b) -- -- -- -------------------------------------------------------------------------- Net asset value, end of year ...................... $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 ========================================================================== Total return ...................................... 14.45% 14.19% 22.58% (20.14)% (19.94)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 221,752 $ 133,332 $ 41,216 $ 27,431 $ 32,498 Ratios to average net assets: Expenses ......................................... 0.69% 0.73% 0.81% 0.71% 0.66% Net investment income ............................ 0.65% 0.45% 0.56% 0.49% 0.94% Portfolio turnover rate ........................... 1.16% 1.56% 5.12% 2.16% 0.29%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. 74 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 100.3% COMMERCIAL SERVICES 2.6% (a) Dun & Bradstreet Corp. ............................................. United States 122,000 $ 8,036,140 Equifax Inc. ....................................................... United States 400,000 13,976,000 Moody's Corp. ...................................................... United States 488,000 24,927,040 Robert Half International Inc. ..................................... United States 300,000 10,677,000 ------------- 57,616,180 ------------- CONSUMER DURABLES 1.0% Eastman Kodak Co. .................................................. United States 500,000 12,165,000 Harley-Davidson Inc. ............................................... United States 200,000 9,688,000 ------------- 21,853,000 ------------- CONSUMER NON-DURABLES 2.8% International Flavors & Fragrances Inc. ............................ United States 100,000 3,564,000 The Hershey Co. .................................................... United States 516,400 29,078,484 Tootsie Roll Industries Inc. ....................................... United States 22,487 713,962 V.F. Corp. ......................................................... United States 500,000 28,985,000 ------------- 62,341,446 ------------- CONSUMER SERVICES 5.0% Carnival Corp. ..................................................... United States 500,000 24,990,000 Clear Channel Communications Inc. .................................. United States 500,000 16,445,000 (a) Expedia Inc. ....................................................... United States 300,100 5,944,981 Fairmont Hotels & Resorts Inc. ..................................... Canada 125,000 4,177,500 Time Warner Inc. ................................................... United States 1,350,000 24,448,500 Viacom Inc., A ..................................................... United States 200,000 6,644,000 Viacom Inc., B ..................................................... United States 100,000 3,301,000 The Walt Disney Co. ................................................ United States 1,000,000 24,130,000 ------------- 110,080,981 ------------- DISTRIBUTION SERVICES 3.1% Cardinal Health Inc. ............................................... United States 300,000 19,032,000 Genuine Parts Co. .................................................. United States 400,000 17,160,000 W.W. Grainger Inc. ................................................. United States 500,000 31,460,000 ------------- 67,652,000 ------------- ELECTRONIC TECHNOLOGY 20.7% (a) Agilent Technologies Inc. .......................................... United States 400,000 13,100,000 (a) Apple Computer Inc. ................................................ United States 1,000,000 53,610,000 Boeing Co. ......................................................... United States 1,000,000 67,950,000 (a) Cisco Systems Inc. ................................................. United States 1,350,000 24,205,500 (a) Conexant Systems Inc. .............................................. United States 300,000 537,000 (a) Dell Inc. .......................................................... United States 500,000 17,100,000 (a) Dionex Corp. ....................................................... United States 250,000 13,562,500 (a) EMC Corp. .......................................................... United States 1,000,000 12,940,000 (a) Entegris Inc. ...................................................... United States 376,307 4,252,269 (a) Gateway Inc. ....................................................... United States 500,000 1,350,000 General Dynamics Corp. ............................................. United States 500,000 59,775,000 Hewlett-Packard Co. ................................................ United States 1,116,250 32,594,500 Intel Corp. ........................................................ United States 800,000 19,720,000
Annual Report | 75 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) Lockheed Martin Corp. .............................................. United States 500,000 $ 30,520,000 (a) Micrel Inc. ........................................................ United States 25,000 280,750 (a) Mindspeed Technologies Inc. ........................................ United States 100,000 241,000 Northrop Grumman Corp. ............................................. United States 1,000,000 54,350,000 Raytheon Co. ....................................................... United States 600,000 22,812,000 Rockwell Collins Inc. .............................................. United States 100,000 4,832,000 (a) Sun Microsystems Inc. .............................................. United States 1,600,000 6,272,000 Texas Instruments Inc. ............................................. United States 515,000 17,458,500 ------------- 457,463,019 ------------- ENERGY MINERALS 3.6% BP PLC, ADR ........................................................ United Kingdom 295,200 20,914,920 EnCana Corp. ....................................................... Canada 684,000 39,884,040 Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 280,000 18,379,200 ------------- 79,178,160 ------------- FINANCE 0.3% (a) ChoicePoint Inc. ................................................... United States 160,000 6,907,200 ------------- HEALTH SERVICES 1.3% (a) Caremark Rx Inc. ................................................... United States 75,625 3,775,956 IMS Health Inc. .................................................... United States 500,000 12,585,000 (a) Medco Health Solutions Inc. ........................................ United States 48,240 2,644,999 Quest Diagnostics Inc. ............................................. United States 200,000 10,108,000 ------------- 29,113,955 ------------- HEALTH TECHNOLOGY 22.6% Abbott Laboratories. ............................................... United States 400,000 16,960,000 (a) Advanced Medical Optics Inc. ....................................... United States 88,888 3,373,300 Allergan Inc. ...................................................... United States 400,000 36,648,000 (a) Amgen Inc. ......................................................... United States 932,000 74,252,440 Baxter International Inc. .......................................... United States 400,000 15,948,000 (a) Biogen Idec Inc. ................................................... United States 400,000 15,792,000 Bristol-Myers Squibb Co. ........................................... United States 300,000 7,218,000 (a) Edwards Lifesciences Corp. ......................................... United States 50,000 2,220,500 Eli Lilly & Co. .................................................... United States 400,000 21,408,000 (a) Genentech Inc. ..................................................... United States 1,000,000 84,210,000 (a) Hospira Inc. ....................................................... United States 40,000 1,638,800 Johnson & Johnson. ................................................. United States 996,000 63,026,880 Merck & Co. Inc. ................................................... United States 500,000 13,605,000 (a) Millipore Corp. .................................................... United States 400,000 25,156,000 Pall Corp. ......................................................... United States 500,000 13,750,000 Pfizer Inc. ........................................................ United States 2,000,000 49,940,000 Schering-Plough Corp. .............................................. United States 100,000 2,105,000 (a) Waters Corp. ....................................................... United States 500,000 20,800,000 Wyeth .............................................................. United States 600,000 27,762,000 (a) Zimmer Holdings Inc. ............................................... United States 64,000 4,408,960 ------------- 500,222,880 -------------
76 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) INDUSTRIAL SERVICES 1.7% Schlumberger Ltd. .................................................. United States 400,000 $ 33,752,000 (a) Transocean Inc. .................................................... United States 77,440 4,747,846 ------------- 38,499,846 ------------- PROCESS INDUSTRIES 1.8% Air Products & Chemicals Inc. ...................................... United States 500,000 27,570,000 Sigma-Aldrich Corp. ................................................ United States 200,000 12,812,000 ------------- 40,382,000 ------------- PRODUCER MANUFACTURING 19.5% 3M Co. ............................................................. United States 800,000 58,688,000 American Power Conversion Corp. .................................... United States 500,000 12,950,000 Avery Dennison Corp. ............................................... United States 462,000 24,204,180 Deere & Co. ........................................................ United States 200,000 12,240,000 Emerson Electric Co. ............................................... United States 500,000 35,900,000 Illinois Tool Works Inc. ........................................... United States 500,000 41,165,000 Ingersoll Rand Co., A .............................................. United States 1,002,000 38,306,460 Johnson Controls Inc. .............................................. United States 400,000 24,820,000 Molex Inc. ......................................................... United States 146,483 3,908,167 Molex Inc., A ...................................................... United States 146,483 3,766,078 Teleflex Inc. ...................................................... United States 500,000 35,250,000 Textron Inc. ....................................................... United States 525,000 37,653,000 (a) Thomas & Betts Corp. ............................................... United States 500,000 17,205,000 Tyco International Ltd. ............................................ United States 1,550,052 43,168,948 United Technologies Corp. .......................................... United States 800,000 41,472,000 ------------- 430,696,833 ------------- RETAIL TRADE 0.3% (a) IAC/InterActiveCorp ................................................ United States 300,100 7,607,535 ------------- TECHNOLOGY SERVICES 10.0% Automatic Data Processing Inc. ..................................... United States 800,000 34,432,000 Certegy Inc. ....................................................... United States 200,000 8,004,000 (a) Computer Sciences Corp. ............................................ United States 1,000,000 47,310,000 International Business Machines Corp. .............................. United States 560,000 44,923,200 Microsoft Corp. .................................................... United States 1,000,000 25,730,000 (a) Oracle Corp. ....................................................... United States 500,000 6,195,000 (a) Yahoo! Inc. ........................................................ United States 1,600,000 54,144,000 ------------- 220,738,200 -------------
Annual Report | 77 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) TRANSPORTATION 4.0% Air France-KLM, ADR ................................................ France 550,000 $ 9,267,500 (a) Air France-KLM, ADR, wts., 11/05/07 ................................ France 500,000 200,000 (a) Alaska Air Group Inc. .............................................. United States 500,000 14,530,000 (a) AMR Corp. .......................................................... United States 1,080,000 12,074,400 (a) British Airways PLC, ADR ........................................... United Kingdom 500,000 25,860,000 (a) Continental Airlines Inc., B ....................................... United States 500,000 4,830,000 Southwest Airlines Co. ............................................. United States 65,200 968,220 Union Pacific Corp. ................................................ United States 8300,000 21,510,000 -------------- 89,240,120 -------------- TOTAL COMMON STOCKS AND WARRANTS (COST $907,096,664) ............... 2,219,593,355 -------------- SHORT TERM INVESTMENT (COST $5,629,829) 0.3% MONEY FUND 0.3% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio ...... United States 5,629,829 5,629,829 -------------- TOTAL INVESTMENTS (COST $912,726,493) 100.6% ....................... 2,225,223,184 OTHER ASSETS, LESS LIABILITIES (0.6)% .............................. (13,514,105) -------------- NET ASSETS 100.0% .................................................. $2,211,709,079 ==============
See Selected Portfolio Abbreviations on page 109. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 78 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
--------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2005 2004 2003 2002 2001 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.14 0.12 0.14 0.14 0.17 Net realized and unrealized gains (losses) ..... 0.10 0.22 0.38 (0.21) (0.15) --------------------------------------------------------------------------- Total from investment operations .................. 0.24 0.34 0.52 (0.07) 0.02 --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.15) (0.16) (0.16) (0.17) (0.18) Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03) --------------------------------------------------------------------------- Total distributions ............................... (0.16) (0.17) (0.17) (0.19) (0.21) --------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- --------------------------------------------------------------------------- Net asset value, end of year ...................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 =========================================================================== Total return(b) ................................... 10.45% 15.50% 28.12% (4.18)% 0.58% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $21,934,575 $14,743,190 $ 9,640,156 $ 6,001,117 $ 5,960,990 Ratios to average net assets: Expenses ....................................... 0.65%(d) 0.68% 0.73% 0.72% 0.73% Net investment income .......................... 5.54% 5.11% 6.63% 6.67% 7.54% Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Expenses net of waiver rounds to the same ratio. Annual Report | See notes to financial statements. | 79 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
----------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2005 2004 2003 2002(e) ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.41 $ 2.24 $ 1.90 $ 2.15 ----------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.11 0.10 0.12 0.11 Net realized and unrealized gains (losses) ..... 0.11 0.22 0.37 (0.21) ----------------------------------------------------------- Total from investment operations .................. 0.22 0.32 0.49 (0.10) ----------------------------------------------------------- Less distributions from: Net investment income .......................... (0.13) (0.14) (0.14) (0.13) Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) ----------------------------------------------------------- Total distributions ............................... (0.14) (0.15) (0.15) (0.15) ----------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- ----------------------------------------------------------- Net asset value, end of year ...................... $ 2.49 $ 2.41 $ 2.24 $ 1.90 =========================================================== Total return(b) ................................... 9.57% 14.59% 26.58% (5.63)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 3,922,396 $ 3,486,880 $ 2,083,783 $ 558,580 Ratios to average net assets: Expenses ....................................... 1.50%(d) 1.53% 1.58% 1.57%(f) Net investment income .......................... 4.69% 4.26% 5.78% 6.01%(f) Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Expenses net of waiver rounds to the same ratio. (e) For the period November 1, 2001 (effective date) to September 30, 2002. (f) Annualized. 80 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B1 2005 2004 2003 2002 2001 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.12 0.11 0.13 0.13 0.16 Net realized and unrealized gains (losses) ..... 0.11 0.21 0.38 (0.22) (0.14) --------------------------------------------------------------------------- Total from investment operations .................. 0.23 0.32 0.51 (0.09) 0.02 --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.14) (0.14) (0.15) (0.16) (0.17) Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03) --------------------------------------------------------------------------- Total distributions ............................... (0.15) (0.15) (0.16) (0.18) (0.20) --------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- --------------------------------------------------------------------------- Net asset value, end of year ...................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 =========================================================================== Total return(b) ................................... 9.90% 14.90% 27.51% (4.66)% 0.10% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 493,063 $ 511,471 $ 495,004 $ 430,226 $ 446,245 Ratios to average net assets: Expenses ....................................... 1.15%(d) 1.18% 1.23% 1.22% 1.23% Net investment income .......................... 5.04% 4.61% 6.13% 6.15% 7.02% Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Expenses net of waiver rounds to the same ratio. Annual Report | See notes to financial statements. | 81 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2005 2004 2003 2002 2001 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.13 0.11 0.13 0.13 0.16 Net realized and unrealized gains (losses) ..... 0.10 0.21 0.38 (0.21) (0.15) --------------------------------------------------------------------------- Total from investment operations .................. 0.23 0.32 0.51 (0.08) 0.01 --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.14) (0.14) (0.15) (0.16) (0.17) Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03) --------------------------------------------------------------------------- Total distributions ............................... (0.15) (0.15) (0.16) (0.18) (0.20) --------------------------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- -- --------------------------------------------------------------------------- Net asset value, end of year ...................... $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 =========================================================================== Total return(b) ................................... 9.84% 14.85% 27.37% (4.64)% 0.09% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $10,113,365 $ 6,616,891 $ 3,764,372 $ 1,545,377 $ 1,080,315 Ratios to average net assets: Expenses ....................................... 1.15%(d) 1.18% 1.24% 1.21% 1.23% Net investment income .......................... 5.04% 4.61% 6.12% 6.21% 7.04% Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Expenses net of waiver rounds to the same ratio. 82 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
----------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2005 2004 2003 2002(e) ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.40 $ 2.23 $ 1.89 $ 2.18 ----------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.13 0.11 0.13 0.10 Net realized and unrealized gains (losses) ..... 0.10 0.22 0.37 (0.27) ----------------------------------------------------------- Total from investment operations .................. 0.23 0.33 0.50 (0.17) ----------------------------------------------------------- Less distributions from: Net investment income .......................... (0.14) (0.15) (0.15) (0.12) Net realized gains ............................. (0.01) (0.01) (0.01) -- ----------------------------------------------------------- Total distributions ............................... (0.15) (0.16) (0.16) (0.12) ----------------------------------------------------------- Redemption fees ................................... --(c) --(c) -- -- ----------------------------------------------------------- Net asset value, end of year ...................... $ 2.48 $ 2.40 $ 2.23 $ 1.89 =========================================================== Total return(b) ................................... 10.15% 15.25% 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 122,222 $ 73,165 $ 36,417 $ 6,350 Ratios to average net assets: Expenses ....................................... 1.00%(d) 1.03% 1.08% 1.07%(f) Net investment income .......................... 5.19% 4.76% 6.28% 6.77%(f) Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) Expenses net of waiver rounds to the same ratio. (e) For the period January 1, 2002 (effective date) to September 30, 2002. (f) Annualized. Annual Report | See notes to financial statements. | 83 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2005 2004 2003 2002 2001 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................ $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34 --------------------------------------------------------------------------- Income from investment operations: Net investment income(a) ....................... 0.14 0.12 0.14 0.14 0.18 Net realized and unrealized gains (losses) ..... 0.11 0.22 0.38 (0.22) (0.15) --------------------------------------------------------------------------- Total from investment operations .................. 0.25 0.34 0.52 (0.08) 0.03 --------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.16) (0.16) (0.16) (0.17) (0.18) Net realized gains ............................. (0.01) (0.01) (0.01) (0.02) (0.03) --------------------------------------------------------------------------- Total distributions ............................... (0.17) (0.17) (0.17) (0.19) (0.21) --------------------------------------------------------------------------- Redemption fees ................................... --(b) --(b) -- -- -- --------------------------------------------------------------------------- Net asset value, end of year ...................... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 =========================================================================== Total return ...................................... 10.65% 15.74% 28.47% (4.50)% 1.21% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................... $ 2,280,318 $ 901,149 $ 95,009 $ 30,737 $ 22,737 Ratios to average net assets: Expenses ....................................... 0.50%(c) 0.53% 0.58% 0.57% 0.58% Net investment income .......................... 5.69% 5.26% 6.78% 6.85% 7.69% Portfolio turnover rate ........................... 28.51% 31.90% 48.36% 51.16% 28.13%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. (c) Expenses net of waiver rounds to the same ratio. 84 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- ------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS 43.3% COMMERCIAL SERVICES 0.2% Dex Media Inc. .............................................. United States 3,200,000 $ 88,928,000 -------------- COMMUNICATIONS 3.2% Alltel Corp. ................................................ United States 2,125,200 138,371,772 AT&T Corp. .................................................. United States 5,000,000 99,000,000 BellSouth Corp. ............................................. United States 18,000,000 473,400,000 SBC Communications Inc. ..................................... United States 15,000,000 359,550,000 Verizon Communications Inc. ................................. United States 5,500,000 179,795,000 -------------- 1,250,116,772 -------------- CONSUMER NON-DURABLES 1.4% Altria Group Inc. ........................................... United States 600,000 44,226,000 General Mills Inc. .......................................... United States 10,000,000 482,000,000 -------------- 526,226,000 -------------- CONSUMER SERVICES 0.0%(a) Marriott International Inc., A .............................. United States 1,052 66,276 -------------- ELECTRIC UTILITIES 16.8% Alliant Energy Corp. ........................................ United States 5,027,770 146,458,940 Ameren Corp. ................................................ United States 8,770,000 469,107,300 American Electric Power Co. Inc. ............................ United States 8,633,800 342,761,860 (b),(c) Aquila Inc. ................................................. United States 25,000,000 99,000,000 CenterPoint Energy Inc. ..................................... United States 5,540,200 82,382,774 Cinergy Corp. ............................................... United States 8,024,500 356,368,045 Consolidated Edison Inc. .................................... United States 3,500,000 169,925,000 Dominion Resources Inc. ..................................... United States 6,023,400 518,855,676 DTE Energy Co. .............................................. United States 5,270,000 241,682,200 Duke Energy Corp. ........................................... United States 6,460,100 188,441,117 Energy East Corp. ........................................... United States 4,530,000 114,110,700 Entergy Corp. ............................................... United States 4,000,000 297,280,000 Exelon Corp. ................................................ United States 4,000,000 213,760,000 FirstEnergy Corp. ........................................... United States 13,500,000 703,620,000 FPL Group Inc. .............................................. United States 4,038,000 192,208,800 Hawaiian Electric Industries Inc. ........................... United States 1,720,000 47,953,600 NSTAR ....................................................... United States 31,000 896,520 Pepco Holdings Inc. ......................................... United States 5,520,500 128,462,035 PG&E Corp. .................................................. United States 9,500,000 372,875,000 Pinnacle West Capital Corp. ................................. United States 4,024,000 177,377,920 PPL Corp. ................................................... United States 4,300,400 139,031,932 Progress Energy Inc. ........................................ United States 7,700,000 344,575,000 Public Service Enterprise Group Inc. ........................ United States 6,023,560 387,676,322 Puget Energy Inc. ........................................... United States 4,137,000 97,136,760 Southern Co. ................................................ United States 12,743,000 455,689,680 TECO Energy Inc. ............................................ United States 9,000,000 162,180,000 TXU Corp. ................................................... United States 20,400 2,302,752 Xcel Energy Inc. ............................................ United States 4,500,000 88,245,000 -------------- 6,540,364,933 --------------
Annual Report | 85 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS (CONT.) ELECTRONIC TECHNOLOGY 0.1% (b) Solectron Corp. ................................................. United States 5,000,000 $ 19,550,000 -------------- ENERGY MINERALS 4.5% BP PLC, ADR ..................................................... United Kingdom 3,500,000 247,975,000 (b) Callon Petroleum Co., wts., 12/08/10 ............................ United States 1,537,500 16,143,750 (c) Canadian Oil Sands Trust ........................................ Canada 5,600,000 619,196,006 Chevron Corp. ................................................... United States 7,000,000 453,110,000 Royal Dutch Shell PLC, A, ADR ................................... United Kingdom 6,000,000 393,840,000 (b) Yukos Corp., ADR ................................................ Russia 2,158,000 9,818,900 -------------- 1,740,083,656 -------------- FINANCE 5.7% Bank of America Corp. ........................................... United States 15,000,000 631,500,000 Comerica Inc. ................................................... United States 4,000,000 235,600,000 Fifth Third Bancorp. ............................................ United States 7,149,700 262,608,481 Freddie Mac ..................................................... United States 5,500,000 310,530,000 JPMorgan Chase & Co. ............................................ United States 12,000,000 407,160,000 Marsh & McLennan Cos. Inc. ...................................... United States 3,000,000 91,170,000 MBNA Corp. ...................................................... United States 10,000,000 246,400,000 Montpelier Re Holdings Ltd. ..................................... Bermuda 1,800,000 44,730,000 -------------- 2,229,698,481 -------------- GAS UTILITIES 1.9% Atmos Energy Corp. .............................................. United States 2,235,000 63,138,750 KeySpan Corp. ................................................... United States 5,000,000 183,900,000 NiSource Inc. ................................................... United States 5,057,000 122,632,250 ONEOK Inc. ...................................................... United States 3,996,700 135,967,734 Sempra Energy ................................................... United States 5,164,000 243,017,840 -------------- 748,656,574 -------------- HEALTH TECHNOLOGY 7.4% Bristol-Myers Squibb Co. ........................................ United States 17,000,000 409,020,000 Eli Lilly & Co. ................................................. United States 4,000,000 214,080,000 Johnson & Johnson ............................................... United States 2,000,000 126,560,000 Merck & Co. Inc. ................................................ United States 36,500,000 993,165,000 Pfizer Inc. ..................................................... United States 33,000,000 824,010,000 Wyeth ........................................................... United States 6,500,000 300,755,000 -------------- 2,867,590,000 -------------- NON-ENERGY MINERALS 0.8% AngloGold Ashanti Ltd., ADR ..................................... South Africa 2,250,000 95,490,000 Barrick Gold Corp. .............................................. Canada 4,000,000 116,200,000 Southern Peru Copper Corp. ...................................... United States 1,650,600 92,367,576 -------------- 304,057,576 -------------- PROCESS INDUSTRIES 0.6% Dow Chemical Co. ................................................ United States 3,000,000 125,010,000 Lyondell Chemical Co. ........................................... United States 3,000,000 85,860,000 -------------- 210,870,000 --------------
86 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) REAL ESTATE INVESTMENT TRUSTS 0.6% Developers Diversified Reality Corp. ..................... United States 3,500,000 $ 163,450,000 Glenborough Realty Trust Inc. ............................ United States 1,250,000 24,000,000 iStar Financial Inc. ..................................... United States 1,432,400 57,911,932 --------------- 245,361,932 --------------- TECHNOLOGY SERVICES 0.1% Electronic Data Systems Corp. ............................ United States 1,686,000 37,833,840 --------------- TOTAL COMMON STOCKS AND WARRANTS (COST $14,268,903,559) .. 16,809,404,040 --------------- PREFERRED STOCK (COST $57,833,250) 0.0%(a) PROCESS INDUSTRIES 0.0%(a) (d),(e),(f) Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ...... Indonesia 75,000,000 847,500 --------------- CONVERTIBLE PREFERRED STOCKS 9.9% CONSUMER DURABLES 1.3% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ........ United States 14,200,000 517,590,000 --------------- CONSUMER NON-DURABLES 0.3% Lehman Brothers Holdings Inc. into General Mills, 6.25%, cvt. pfd. ............................................. United States 4,750,000 125,281,250 --------------- ELECTRIC UTILITIES 0.2% CMS Energy Trust I, 7.75%, cvt. pfd. ..................... United States 1,508,000 75,777,000 --------------- ELECTRONIC TECHNOLOGY 1.1% (g) Citigroup Funding Inc. into ALTR 7.00%, cvt. pfd. ........ United States 5,000,000 93,125,000 Citigroup Global Markets Holdings into Motorola Inc., 7.60%, cvt. pfd. ...................................... United States 4,300,000 86,008,600 Goldman Sachs Group into Applied Materials Inc., 7.35%, cvt. pfd. ............................................. United States 5,500,000 93,417,500 Morgan Stanley into Intel Corp., 6.50%, cvt. pfd. ........ United States 5,000,000 116,325,000 (h) Morgan Stanley into Network Appliance Inc., 7.25%, cvt. pfd., 144A ............................................ United States 2,000,000 44,890,000 --------------- 433,766,100 --------------- (h) ENERGY MINERALS 0.7% Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A .......... United States 1,750,000 287,875,000 --------------- FINANCE 2.2% Fannie Mae, 5.375%, cvt. pfd. ............................ United States 7,100 652,134,148 Metlife Inc., 6.375%, cvt. pfd. .......................... United States 6,400,000 180,800,000 --------------- 832,934,148 --------------- HEALTH TECHNOLOGY 1.0% Goldman Sachs Group into Wyeth, 6.25%, cvt. pfd. ......... United States 2,210,000 102,311,950 Morgan Stanley into Biogen Idec Inc., 8.50%, cvt. pfd. ... United States 1,600,000 59,032,000 Morgan Stanley into Forest Laboratories Inc., 6.25%, cvt. pfd. ............................................. United States 1,360,000 53,985,200 Schering-Plough Corp., 6.00%, cvt. pfd. .................. United States 3,170,000 171,909,100 --------------- 387,238,250 ---------------
Annual Report | 87 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (CONT.) INDUSTRIAL SERVICES 1.0% Allied Waste Industries Inc., 6.25%, cvt. pfd. .................... United States 2,450,000 $ 119,584,500 (h) El Paso Corp., 4.99%, cvt. pfd., 144A ............................. United States 215,000 264,764,760 --------------- 384,349,260 --------------- NON-ENERGY MINERALS 0.8% Freeport-McMoRan Copper & Gold Inc., 5.50%, cvt. pfd. ............. United States 155,000 171,585,000 Lehman Brothers Holdings Inc. into Alcoa Inc., 6.50%, cvt. pfd. ... United States 4,600,000 117,806,000 --------------- 289,391,000 --------------- PROCESS INDUSTRIES 0.2% Lehman Brothers Holdings Inc. into Lyondell Chemical, 8.00%, cvt. pfd. ...................................................... United States 3,000,000 87,465,000 --------------- PRODUCER MANUFACTURING 0.2% Goldman Sachs Group into Tyco International Ltd., 7.00%, cvt. pfd. ...................................................... United States 3,000,000 84,663,000 --------------- REAL ESTATE INVESTMENT TRUSTS 0.9% Felcor Lodging Trust., 7.80%, cvt. pfd., A ........................ United States 3,000,000 73,890,000 Glenborough Reality Trust Inc., 7.75%, cvt. pfd., A ............... United States 1,333,594 33,499,881 Host Marriot Corp., 6.75%, cvt. pfd. .............................. United States 2,400,000 132,600,000 Lexington Corporate Properties Trust, 6.50%, cvt. pfd. ............ United States 1,200,000 60,000,000 Simon Property Group Inc., 6.00%, cvt., pfd. ...................... United States 799,980 50,478,738 --------------- 350,468,619 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,763,521,843) .......... 3,856,798,627 --------------- ------------------- PRINCIPAL AMOUNT(i) ------------------- BONDS 29.8% ALTERNATIVE POWER GENERATION 4.3% Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 ........ Canada 600,000,000 361,500,000 Calpine Corp., senior note, 7.875%, 4/01/08 ................................... United States 101,818,000 60,581,710 senior note, 8.625%, 8/15/10 ................................... United States 221,000,000 117,130,000 senior note, 8.50%, 2/15/11 .................................... United States 85,000,000 45,475,000 (h) senior secured note, 144A, 8.50%, 7/15/10 ...................... United States 325,000,000 233,187,500 (h) senior secured note, 144A, 9.875%, 12/01/11 ................... United States 20,000,000 14,700,000 (h) senior secured note, 144A, 8.75%, 7/15/13 ...................... United States 135,000,000 95,850,000 Dynegy Holdings Inc., (h) secured note, 144A, 9.875%, 7/15/10 ............................ United States 100,000,000 109,500,000 senior note, 6.875%, 4/01/11 ................................... United States 310,000,000 304,575,000 senior note, 8.75%, 2/15/12 .................................... United States 225,500,000 245,795,000 (h) senior secured note, 144A, 10.125%, 7/15/13 .................... United States 95,000,000 106,400,000 --------------- 1,694,694,210 ---------------
88 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - ------------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) COMMUNICATIONS 2.7% Qwest Capital Funding, 7.00%, 8/03/09 .............................................. United States 300,000,000 $ 294,750,000 7.25%, 2/15/11 .............................................. United States 360,000,000 344,700,000 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 .............................................. United States 100,000,000 95,500,000 (h)144A, 7.50%, 2/15/14 ......................................... United States 155,000,000 148,025,000 Qwest Corp., 6.875%, 9/15/33 .................................... United States 75,000,000 65,437,500 Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 .. United States 50,600,000 51,485,500 Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ......... United States 43,000,000 44,505,000 --------------- 1,044,403,000 --------------- CONSUMER DURABLES 1.4% Ford Motor Co., 7.45%, 7/16/31 .................................. United States 400,000,000 314,000,000 General Motors Corp., senior deb., 8.375%, 7/15/33 .............. United States 275,000,000 215,875,000 --------------- 529,875,000 --------------- CONSUMER SERVICES 3.3% (d)Adelphia Communications Corp., 7.875%, 5/01/09 ............................................. United States 23,600,000 17,228,000 senior note, 10.875%, 10/01/10. ............................. United States 35,600,000 26,700,000 Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ....... United States 235,000,000 229,125,000 (h)CCH I LLC, senior note, 144A, 9.92%, 4/01/14 ........................... United States 107,379,061 79,460,505 senior secured note, 144A, 11.00%, 10/01/15 ................. United States 797,919,484 781,961,094 CCH II LLC, senior note, 10.25%, 9/15/10 ........................ United States 600,000 618,000 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 ............. United States 110,000,000 108,625,000 DIRECTV Holdings LLC, senior note, 8.375%, 3/15/13 ............................................. United States 320,000 350,800 (h)144A, 6.375%, 6/15/15 ........................................ United States 300,000 299,250 Six Flags Inc., senior note, 9.625%, 6/01/14 .................... United States 60,000,000 59,400,000 --------------- 1,303,767,649 --------------- ELECTRIC UTILITIES 1.7% Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ................. United States 35,000,000 38,500,000 (c)Aquila Inc., senior note, 14.875%, 7/01/12 ....................... United States 95,400,000 130,698,000 CMS Energy Corp., senior note, 7.75%, 8/01/10 ................... United States 30,000,000 32,400,000 TXU Corp., 5.55%, 11/15/14 ............................................. United States 210,000,000 200,408,670 6.55%, 11/15/34 ............................................. United States 140,000,000 130,634,280 senior note, Q, 6.50%, 11/15/24 ............................. United States 130,000,000 122,431,270 --------------- 655,072,220 --------------- ELECTRONIC TECHNOLOGY 0.6% Lucent Technologies, 6.45%, 3/15/29 ............................. United States 180,000,000 158,400,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 ............. United States 77,000,000 73,535,000 --------------- 231,935,000 ---------------
Annual Report | 89 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - ------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) ENERGY MINERALS 0.5% Callon Petroleum Co., senior note, 9.75%, 12/08/10 ..... United States 117,500,000 $ 123,375,000 Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 ... United States 20,000,000 19,700,000 Mission Resources Corp., senior note, 9.875%, 4/01/11 .. United States 10,000,000 11,000,000 Sonat Inc., senior note, 7.625%, 7/15/11 ............... United States 35,000,000 35,700,000 -------------- 189,775,000 -------------- FINANCE 6.2% Ford Motor Credit Co., 7.875%, 6/15/10 ..................................... United States 250,000,000 243,511,250 7.375%, 2/01/11 ..................................... United States 370,000,000 354,287,580 7.00%, 10/01/13 ..................................... United States 170,000,000 157,884,610 senior note, 7.25%, 10/25/11 ........................ United States 100,000,000 95,031,900 General Motors Acceptance Corp., 7.75%, 1/19/10 ...................................... United States 420,000,000 407,472,240 6.875%, 9/15/11 ..................................... United States 800,000,000 728,548,800 6.875%, 8/28/12 ..................................... United States 215,400,000 193,028,987 6.75%, 12/01/14 ..................................... United States 245,000,000 213,458,945 -------------- 2,393,224,312 -------------- HEALTH SERVICES 3.3% DaVita Inc., senior note, 6.625%, 3/15/13 ........................ United States 23,600,000 24,013,000 senior sub. note, 7.25%, 3/15/15 .................... United States 37,400,000 38,101,250 HCA Inc., 6.375%, 1/15/15 .............................. United States 70,000,000 69,604,570 HealthSouth Corp., senior note, 7.625%, 6/01/12 ........ United States 135,000,000 126,900,000 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 .................................... United States 500,000,000 468,750,000 6.50%, 6/01/12 ...................................... United States 225,000,000 210,937,500 7.375%, 2/01/13 ..................................... United States 350,000,000 333,375,000 -------------- 1,271,681,320 -------------- INDUSTRIAL SERVICES 3.1% Allied Waste North America Inc., senior note, 7.875%, 4/15/13 ........................ United States 600,000 615,000 senior note, B, 7.375%, 4/15/14 ..................... United States 170,000,000 160,650,000 (h) senior note, 144A, 7.25%, 3/15/15 ................... United States 146,000,000 144,540,000 senior secured note, 6.50%, 11/15/10 ................ United States 110,000,000 107,387,500 senior secured note, 6.125%, 2/15/14 ................ United States 135,000,000 126,900,000 Allied Waste Industries Inc., 7.40%, 9/15/35 ........... United States 30,000,000 26,475,000 El Paso Corp., (h) 144A, 7.625%, 8/16/07 ............................... United States 70,000,000 71,575,000 senior note, 7.75%, 1/15/32 ......................... United States 250,000,000 253,125,000 El Paso Energy, senior note, 6.75%, 5/15/09 ............ United States 215,000,000 213,925,000 El Paso Production Holdings, 7.75%, 6/01/13 ............ United States 87,500,000 91,875,000 -------------- 1,197,067,500 -------------- NON-ENERGY MINERALS 0.2% (h) Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ........ Canada 65,000,000 61,750,000 --------------
90 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - ---------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) PROCESS INDUSTRIES 1.0% Abitibi-Consolidated Inc., senior note, 8.375%, 4/01/15 .. Canada 70,600,000 $ 69,717,500 Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 .... United States 40,000,000 37,800,000 Nalco Co., senior sub. note, 8.875%, 11/15/13 ............ United States 500,000 515,625 NewPage Corp., senior secured note, 10.00%, 5/01/12 ...... United States 110,000,000 104,225,000 (e),(f),(j) Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%, 4/29/15 ............................................... Indonesia 113,073 26,403 4/29/18 ............................................... Indonesia 294,012 68,652 Rhodia SA, senior note, 10.25%, 6/01/10 .................. France 170,600,000 181,262,500 (e),(f),(j) Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 4.675%, 4/29/15 ............................................... Indonesia 12,883,549 3,946,231 4/29/18 ............................................... Indonesia 33,160,560 10,157,079 -------------- 407,718,990 -------------- PRODUCER MANUFACTURING 0.7% Case New Holland Inc., senior note, 6.00%, 6/01/09 ....... United States 200,000,000 193,000,000 Dana Corp., 7.00%, 3/01/29 ............................... United States 50,000,000 38,325,900 (h) Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ......... United Kingdom 51,100,000 51,036,125 -------------- 282,362,025 -------------- REAL ESTATE INVESTMENT TRUSTS 0.5% Host Marriott LP, senior note, 9.25%, 10/01/07 ....................................... United States 500,000 529,375 7.125%, 11/01/13 ...................................... United States 50,000,000 51,312,500 6.375%, 3/15/15 ....................................... United States 87,000,000 84,825,000 MeriStar Hospitality Corp., 9.125%, 1/15/11 .............. United States 64,500,000 68,692,500 -------------- 205,359,375 -------------- TECHNOLOGY SERVICES 0.3% (h) Sungard Data Systems Inc., senior note, 144A, 9.125%, 8/15/13 .................... United States 59,300,000 61,746,125 senior sub. note, 144A, 10.25%, 8/15/15 ............... United States 59,900,000 60,948,250 -------------- 122,694,375 -------------- TOTAL BONDS (COST $11,585,599,999) ....................... 11,591,379,976 -------------- CONVERTIBLE BONDS 5.3% ALTERNATIVE POWER GENERATION 1.1% Calpine Corp., cvt., senior note, 4.75%, 11/15/23 .......................... United States 102,200,000 56,210,000 sub. note, 7.75%, 6/01/15 ............................. United States 450,000,000 383,400,000 -------------- 439,610,000 -------------- CONSUMER SERVICES 0.3% (d) Adelphia Communications Corp., cvt., junior sub. note, 6.00%, 2/15/06 ........................................ United States 75,000,000 2,625,000 Echostar Communications Corp., cvt., sub. note, 5.75%, 5/15/08 ............................................... United States 25,500,000 25,372,500 Six Flags Inc., cvt., 4.50%, 5/15/15 ..................... United States 67,500,000 85,050,000 -------------- 113,047,500 --------------
Annual Report | 91 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - --------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS (CONT.) ELECTRIC UTILITIES 0.3% CMS Energy Corp, cvt., senior note, 2.875%, 12/01/24 ...... United States 79,000,000 $ 102,055,360 ------------- ELECTRONIC TECHNOLOGY 1.8% Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 .... United States 270,000,000 261,900,000 Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 .. Canada 400,000,000 378,500,000 SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ......... United States 66,000,000 63,855,000 ------------- 704,255,000 ------------- FINANCE 0.4% Bank of America into Analog Devices Inc., cvt., 7.25%, 9/27/06 ................................................ United States 152,520,000 149,698,380 ------------- HEALTH TECHNOLOGY 0.3% Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%, 7/01/08 ................................................ United States 112,000,000 102,200,000 ------------- INDUSTRIAL SERVICES 0.2% Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ................................................ United States 100,000,000 95,875,000 ------------- REAL ESTATE INVESTMENT TRUSTS 0.7% (h) Host Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 ................................................ United States 140,000,000 154,175,000 Meristar Hospitality Corp., cvt., sub. note, 9.50%, 4/01/10 ................................................ United States 95,000,000 123,500,000 ------------- 277,675,000 ------------- TECHNOLOGY SERVICES 0.2% (h) BearingPoint Inc., cvt., senior sub. note, 144A, 5.00%, 4/15/25 ................................................ United States 50,000,000 68,250,000 ------------- TOTAL CONVERTIBLE BONDS (COST $2,031,327,485) ............. 2,052,666,240 ------------- ZERO COUPON/STEP-UP BONDS 2.8% ALTERNATIVE POWER GENERATION 0.1% Calpine Corp, cvt., senior note, zero cpn. to 9/30/09, 6.00% thereafter, 9/30/14 .............................. United States 48,000,000 30,360,000 ------------- COMMERCIAL SERVICES 0.3% JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 ............ United States 150,000,000 111,750,000 ------------- CONSUMER SERVICES 1.4% (h) CCH I LLC, senior note, 144A, zero cpn. to 5/15/06, 13.50% thereafter, 1/15/14 ............................. United States 329,000,000 273,070,000 11.75% thereafter, 5/15/14 ............................. United States 114,000,000 82,080,000 Dex Media Inc., senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ................................ United States 50,000,000 39,625,000 zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ...... United States 210,000,000 166,425,000 ------------- 561,200,000 ------------- FINANCE 0.7% Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00%thereafter, 2/01/14 ............................... United States 380,000,000 282,150,000 -------------
92 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - ------------------------------------------------------------------------------------------------------------------------- ZERO COUPON/STEP-UP BONDS (CONT.) INDUSTRIAL SERVICES 0.1% Hanover Compressor Co., sub. note, zero cpn., 3/31/07 ...... United States 36,000,000 $ 32,580,000 -------------- PROCESS INDUSTRIES 0.0%(a) (e,f) Pindo Deli Finance Mauritius Ltd., zero cpn., 4/29/25 ...... Indonesia 607,466 141,843 (e,f) Tjiwi Kimia Finance Mauritius, secured note, zero cpn., 4/29/25 .................................................. Indonesia 42,601,657 13,048,888 -------------- 13,190,731 -------------- PRODUCER MANUFACTURING 0.2% (h) Polymer Holdings LLC, senior disc. note, 144A, zero cpn. to 7/15/09,12.00% thereafter, 7/15/14 ....................... United States 100,000,000 72,375,000 -------------- TOTAL ZERO COUPON/STEP-UP BONDS (COST $1,108,692,184)....... 1,103,605,731 -------------- MUNICIPAL BOND SECURITIES 1.1% California State GO, 5.00%, 2/01/26 .......................................... United States 10,450,000 10,881,585 5.25%, 11/01/26 ......................................... United States 25,000,000 26,745,250 5.25%, 11/01/27 ......................................... United States 20,400,000 21,795,360 5.25%, 2/01/28 .......................................... United States 24,600,000 26,204,166 5.00%, 2/01/32 .......................................... United States 65,250,000 67,595,085 5.00%, 2/01/33 .......................................... United States 126,650,000 130,976,389 Refunding, 5.25%, 2/01/33 ............................... United States 28,500,000 30,275,550 Various Purpose, 5.25%, 11/01/28 ........................ United States 25,000,000 26,674,750 Various Purpose, 5.25%, 11/01/29 ........................ United States 22,500,000 23,991,525 Various Purpose, 5.50%, 11/01/33 ........................ United States 55,300,000 60,772,488 -------------- TOTAL MUNICIPAL BOND SECURITIES (COST $391,654,995) ........ 425,912,148 -------------- MORTGAGE-BACKED SECURITIES 2.6% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.4% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ............... United States 539,063,791 528,752,567 -------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.2% GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ................ United States 463,942,078 459,704,932 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $988,131,069) ....... 988,457,499 -------------- TOTAL LONG TERM INVESTMENTS (COST $34,195,664,384) ......... 36,829,071,761 -------------- ---------- SHARES ---------- SHORT TERM INVESTMENTS 4.5% MONEY FUND (COST $167,074,435) 0.4% (k) Franklin Institutional Fiduciary Trust Money Market Portfolio ............................................... United States 167,074,435 167,074,435 --------------
Annual Report | 93 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(i) VALUE - ------------------------------------------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT (COST $1,592,482,555) 4.1% (l) Joint Repurchase Agreement, 3.668%, 10/03/05 (Maturity Value $1,592,969,324) ..................................... United States 1,592,482,555 $ 1,592,482,555 ABN AMRO Bank, N.V., New York Branch (Maturity Value $149,691,327) Banc of America Securities LLC (Maturity Value $149,691,327) Barclays Capital Inc. (Maturity Value $149,691,327) Bear, Stearns & Co. Inc. (Maturity Value $95,052,480) BNP Paribas Securities Corp. (Maturity Value $149,691,327) Deutsche Bank Securities Inc. (Maturity Value $71,301,309) Goldman, Sachs & Co. (Maturity Value $149,691,327) Greenwich Capital Markets Inc. (Maturity Value $90,289,501) Lehman Brothers Inc. (Maturity Value $134,032,439) Merrill Lynch Government Securities Inc. (Maturity Value $149,691,327) Morgan Stanley & Co. Inc. (Maturity Value $149,691,327) UBS Securities LLC (Maturity Value $154,454,306) Collateralized by U.S. Government Agency Securities, 1.875 - 7.25%, 2/15/06 - 8/16/10; (m)U.S. Government Agency Discount Notes, 10/7/05 - 9/22/08; and U.S. Treasury Notes, 2.50 - 6.875%, 5/15/06 - 7/15/10 --------------- TOTAL INVESTMENTS (COST $35,955,221,374) 99.3% ............................ 38,588,628,751 OTHER ASSETS, LESS LIABILITIES 0.7% ....................................... 277,311,358 --------------- NET ASSETS 100.0% ......................................................... $38,865,940,109 ===============
See Selected Portfolio Abbreviations on page 109. (a) Rounds to less than 0.05% of net assets. (b) Non-income producing. (c) See Note 10 regarding holdings of 5% voting securities. (d) See Note 8 regarding defaulted securities. (e) See Note 11 regarding other considerations. (f) See Note 9 regarding restricted and illiquid securities. (g) See Note 1(d) regarding securities purchased on a when-issued or delayed delivery basis. (h) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under the guidelines approved by the Fund's Board of Directors. At September 30, 2005, the value of these securities was $3,268,458,609, representing 8.41% of net assets. (i) The principal amount is stated in U.S. dollars unless otherwise indicated. (j) The coupon rate shown represents the rate at period end. (k) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (l) See Note 1(c) regarding joint repurchase agreement. (m) A portion or all of the security is traded on a discount basis with no stated coupon rate. 94 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .......................... 0.28 0.27 0.28 0.38 0.41(d) Net realized and unrealized gains (losses) ........ (0.11) (0.04) (0.10) 0.09 0.33(d) ------------------------------------------------------------------------- Total from investment operations ..................... 0.17 0.23 0.18 0.47 0.74 ------------------------------------------------------------------------- Less distributions from net investment income ........ (0.32) (0.36) (0.36) (0.41) (0.44) ------------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ......................... $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 ========================================================================= Total return(b) ...................................... 2.67% 3.46% 2.66% 7.06% 11.52% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $5,901,449 $6,420,381 $7,286,317 $7,726,914 $7,197,334 Ratios to average net assets: Expenses .......................................... 0.72% 0.70% 0.70% 0.69% 0.68% Net investment income ............................. 4.29% 4.09% 4.11% 5.48% 6.12%(d) Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................. $ (0.008) Net realized and unrealized gains (losses) per share ........ 0.008 Ratio of net investment income to average net assets ........ (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. Annual Report | See notes to financial statements. | 95 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .......................... 0.25 0.24 0.25 0.34 0.37(d) Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.10) 0.09 0.33(d) ------------------------------------------------------------------------- Total from investment operations ..................... 0.14 0.19 0.15 0.43 0.70 ------------------------------------------------------------------------- Less distributions from net investment income ........ (0.29) (0.32) (0.33) (0.38) (0.40) ------------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ......................... $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 ========================================================================= Total return(b) ...................................... 2.13% 2.92% 2.13% 6.37% 10.94% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 478,788 $ 568,276 $ 678,814 $ 559,966 $ 225,517 Ratios to average net assets: Expenses .......................................... 1.25% 1.23% 1.23% 1.22% 1.22% Net investment income ............................. 3.76% 3.56% 3.58% 4.95% 5.51%(d) Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................. $ (0.008) Net realized and unrealized gains (losses) per share ........ 0.008 Ratio of net investment income to average net assets ........ (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. 96 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .......................... 0.25 0.24 0.25 0.34 0.37(d) Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.11) 0.10 0.33(d) ------------------------------------------------------------------------- Total from investment operations ..................... 0.14 0.19 0.14 0.44 0.70 ------------------------------------------------------------------------- Less distributions from net investment income ........ (0.29) (0.32) (0.33) (0.38) (0.40) ------------------------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ......................... $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 ========================================================================= Total return(b) ...................................... 2.14% 2.91% 2.00% 6.53% 10.96% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 508,539 $ 597,451 $ 814,635 $ 803,049 $ 422,114 Ratios to average net assets: Expenses .......................................... 1.25% 1.23% 1.23% 1.21% 1.22% Net investment income ............................. 3.76% 3.56% 3.58% 4.96% 5.55%(d) Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. (d) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................. $ (0.008) Net realized and unrealized gains (losses) per share ........ 0.008 Ratio of net investment income to average net assets ........ (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. Annual Report | See notes to financial statements. | 97 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2005 2004 2003 2002(d) ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 6.68 $ 6.81 $ 6.99 $ 6.81 ----------------------------------------------------------- Income from investment operations: Net investment income(a) .......................... 0.26 0.25 0.25 0.25 Net realized and unrealized gains (losses) ........ (0.11) (0.05) (0.09) 0.22 ----------------------------------------------------------- Total from investment operations ..................... 0.15 0.20 0.16 0.47 ----------------------------------------------------------- Less distributions from net investment income ........ (0.30) (0.33) (0.34) (0.29) ----------------------------------------------------------- Redemption fees ...................................... --(c) --(c) -- -- ----------------------------------------------------------- Net asset value, end of year ......................... $ 6.53 $ 6.68 $ 6.81 $ 6.99 =========================================================== Total return(b)....................................... 2.29% 3.08% 2.29% 7.03% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 65,790 $ 59,431 $ 54,042 $ 14,042 Ratios to average net assets: Expenses .......................................... 1.10% 1.08% 1.08% 1.07%(e) Net investment income ............................. 3.91% 3.71% 3.73% 5.10%(e) Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) For the period January 1, 2002 (effective date) to September 30, 2002. (e) Annualized. 98 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2005 2004 2003 2002 2001 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64 ------------------------------------------------------------------------- Income from investment operations: Net investment income(a) .......................... 0.29 0.28 0.29 0.38 0.43(c) Net realized and unrealized gains (losses) ........ (0.10) (0.06) (0.10) 0.11 0.32(c) ------------------------------------------------------------------------- Total from investment operations ..................... 0.19 0.22 0.19 0.49 0.75 ------------------------------------------------------------------------- Less distributions from net investment income ........ (0.33) (0.36) (0.37) (0.42) (0.45) ------------------------------------------------------------------------- Redemption fees ...................................... --(b) --(b) -- -- -- ------------------------------------------------------------------------- Net asset value, end of year ......................... $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 ========================================================================= Total return ......................................... 2.95% 3.42% 2.79% 7.33% 11.63% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $ 334,681 $ 340,279 $ 308,411 $ 198,437 $ 19,960 Ratios to average net assets: Expenses .......................................... 0.60% 0.58% 0.58% 0.57% 0.57% Net investment income ............................. 4.41% 4.21% 4.23% 5.60% 6.30%(c) Portfolio turnover rate .............................. 29.14% 41.45% 66.96% 44.62% 19.18%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. (c) Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ............................. $ (0.008) Net realized and unrealized gains (losses) per share ........ 0.008 Ratio of net investment income to average net assets ........ (0.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. Annual Report | See notes to financial statements. | 99 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- -------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 95.5% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 95.5% GNMA I GP 30 Year, 8.25%, 3/15/17 - 10/15/17 .................................. $ 271,493 $ 293,164 GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 .................................. 447,411 488,777 GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ................................. 455,123 488,562 GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 .................................. 13,179 14,759 GNMA I GP 30 Year, 11.00%, 12/15/09 - 1/15/11 ................................. 978,672 1,061,634 GNMA I GP 30 Year, 11.25%, 6/15/13 - 1/15/16 .................................. 387,271 426,298 GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 .................................. 66,199 73,168 GNMA I GP 30 Year, 11.75%, 7/15/13 - 9/15/15 .................................. 62,179 69,984 GNMA I GP 30 Year, 12.00%, 3/15/11 - 1/15/13 .................................. 32,778 36,670 GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 .................................. 92,401 102,062 GNMA I GP 30 Year, 12.75%, 5/15/14 ............................................ 6,379 7,128 GNMA I SF 15 Year, 6.50%, 5/15/18 - 11/15/28 .................................. 5,541,713 5,770,726 (a) GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/35 ................................... 752,977,239 746,264,964 GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 ................................... 1,588,636,374 1,605,174,905 GNMA I SF 30 Year, 6.00%, 10/15/23 - 5/15/35 .................................. 742,857,676 761,436,799 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 ................................... 513,643,451 535,296,565 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ................................... 103,515 108,546 GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 .................................. 355,569,921 374,835,175 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 .................................. 843,119 893,145 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 ................................... 96,708,228 103,165,781 GNMA I SF 30 Year, 7.70%, 12/15/20 - 1/15/22 .................................. 867,432 922,417 GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 .................................. 73,463,278 78,687,380 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 .................................. 153,926 166,589 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 .................................. 15,332,785 16,785,017 GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 .................................. 20,013,505 21,880,967 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ................................... 12,741,990 14,049,774 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 .................................. 14,793,419 16,612,044 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................................ 11,649,066 13,127,817 GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ................................. 11,343,118 12,478,893 GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 ................................. 2,658,612 2,956,582 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 .................................. 12,728,230 14,446,149 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 .................................. 11,653,729 13,033,818 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 .................................. 13,031,205 14,667,022 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 .................................. 81,353 87,912 GNMA II GP 30 Year, 11.50%, 8/20/13 ........................................... 18,467 20,341 (a) GNMA II SF 30 Year, 4.50%, 10/01/35 ........................................... 42,395,046 40,513,766 GNMA II SF 30 Year, 5.00%, 7/20/33 - 6/20/35 .................................. 211,006,239 208,422,351 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................................ 381,376,218 376,929,379 GNMA II SF 30 Year, 5.00%, 10/20/33 ........................................... 80,395,811 79,458,112 GNMA II SF 30 Year, 5.00%, 11/20/33 ........................................... 76,301,096 75,411,157 GNMA II SF 30 Year, 5.50%, 6/20/34 ............................................ 103,068,211 103,915,561 GNMA II SF 30 Year, 5.50%, 7/20/34 - 8/20/35 .................................. 253,768,590 255,862,639 GNMA II SF 30 Year, 5.50%, 12/20/34 ........................................... 235,788,978 237,727,459 GNMA II SF 30 Year, 5.50%, 1/20/35 ............................................ 73,550,216 74,159,274 GNMA II SF 30 Year, 5.50%, 2/20/35 ............................................ 155,702,739 156,992,090 GNMA II SF 30 Year, 5.50%, 6/20/35 ............................................ 84,715,349 85,416,864
100 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONT.) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONT.) GNMA II SF 30 Year, 6.00%, 10/20/23 - 7/20/35 ................................. $ 359,792,712 $ 367,487,618 GNMA II SF 30 Year, 6.00%, 6/20/34 ............................................ 83,389,838 85,200,298 GNMA II SF 30 Year, 6.00%, 9/20/34 ............................................ 106,748,255 109,063,028 GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 .................................. 194,887,412 201,973,905 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 .................................. 106,059,451 111,051,769 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ................................. 13,199,707 13,995,034 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 .................................. 6,328,287 6,751,763 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 .................................. 2,949,162 3,214,889 GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ................................. 1,040,666 1,134,489 GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 .................................. 647,394 716,357 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ................................. 1,204,553 1,348,912 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ................................. 3,287,993 3,688,890 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ................................. 531,107 585,626 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ................................. 265,600 294,859 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ................................. 581,671 655,481 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ............................... 468,326 524,519 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ................................ 418,787 471,648 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,934,242,298) ........................ 6,958,899,271 -------------- ---------------- SHARES ---------------- SHORT TERM INVESTMENTS 5.0% MONEY FUND (COST $167,072,584) 2.3% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio ................. 167,072,584 167,072,584 -------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENT (COST $201,590,000) 2.7% (c) Barclays Capital Inc., 3.20%, 10/03/05 (Maturity Value $201,643,757) Collateralized by U.S. Treasury Notes, 3.125%, 1/31/07 ..................... $ 201,590,000 201,590,000 -------------- TOTAL INVESTMENTS (COST $7,302,904,882) 100.5% ................................ 7,327,561,855 OTHER ASSETS, LESS LIABILITIES (0.5)% ......................................... (38,313,390) -------------- NET ASSETS 100.0% ............................................................. $7,289,248,465 ==============
See Selected Portfolio Abbreviations on page 109. (a) See Note 1(d) regarding security purchased on a to-be-announced basis. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. (c) See Note 1(c) regarding repurchase agreement. Annual Report | See notes to financial statements. | 101 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS A 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89 ----------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............................. 0.45 0.43 0.42 0.46 0.46 Net realized and unrealized gains (losses) ........... 2.42 1.33 0.85 (1.60) (0.86) ----------------------------------------------------------------------- Total from investment operations ........................ 2.87 1.76 1.27 (1.14) (0.40) ----------------------------------------------------------------------- Less distributions from: Net investment income ................................ (0.44) (0.40) (0.43) (0.45) (0.45) Net realized gains ................................... -- -- -- (0.47) (0.02) ----------------------------------------------------------------------- Total distributions ..................................... (0.44) (0.40) (0.43) (0.92) (0.47) ----------------------------------------------------------------------- Redemption fees ......................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ............................ $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 ======================================================================= Total return(b) ......................................... 28.81% 20.40% 16.38% (12.49)% (4.03)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 1,986,034 $ 1,450,832 $ 1,259,886 $ 1,090,216 $ 1,349,027 Ratios to average net assets: Expenses ............................................. 0.78% 0.80% 0.83% 0.80% 0.79% Net investment income ................................ 3.92% 4.49% 5.00% 4.87% 4.26% Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding. (b) Total return does not reflect sales commissions or the contingent deferred sales charge. (c) Amount is less than $0.01 per share. 102 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS B 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90 ----------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............................. 0.39 0.38 0.37 0.41 0.41 Net realized and unrealized gains (losses) ........... 2.42 1.33 0.85 (1.58) (0.87) ----------------------------------------------------------------------- Total from investment operations ........................ 2.81 1.71 1.22 (1.17) (0.46) ----------------------------------------------------------------------- Less distributions from: Net investment income ................................ (0.39) (0.36) (0.39) (0.41) (0.40) Net realized gains ................................... -- -- -- (0.47) (0.02) ----------------------------------------------------------------------- Total distributions ..................................... (0.39) (0.36) (0.39) (0.88) (0.42) ----------------------------------------------------------------------- Redemption fees ......................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ............................ $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 ======================================================================= Total return(b) ......................................... 28.11% 19.71% 15.88% (12.88)% (4.58)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 154,277 $ 127,105 $ 95,321 $ 32,802 $ 15,212 Ratios to average net assets: Expenses ............................................. 1.28% 1.30% 1.34% 1.31% 1.30% Net investment income ................................ 3.42% 3.99% 4.49% 4.44% 3.74% Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. Annual Report | See notes to financial statements. | 103 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS C 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88 ----------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............................. 0.39 0.38 0.36 0.41 0.41 Net realized and unrealized gains (losses) ........... 2.42 1.33 0.86 (1.59) (0.87) ----------------------------------------------------------------------- Total from investment operations ........................ 2.81 1.71 1.22 (1.18) (0.46) ----------------------------------------------------------------------- Less distributions from: Net investment income ................................ (0.39) (0.36) (0.39) (0.41) (0.39) Net realized gains ................................... -- -- -- (0.47) (0.02) ----------------------------------------------------------------------- Total distributions ..................................... (0.39) (0.36) (0.39) (0.88) (0.41) ----------------------------------------------------------------------- Redemption fees ......................................... --(c) --(c) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ............................ $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 ======================================================================= Total return(b) ......................................... 28.16% 19.76% 15.77% (12.90)% (4.50)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 435,714 $ 283,747 $ 222,030 $ 67,428 $ 44,985 Ratios to average net assets: Expenses ............................................. 1.28% 1.30% 1.34% 1.29% 1.30% Net investment income ................................ 3.42% 3.99% 4.49% 4.43% 3.76% Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge. (c) Amount is less than $0.01 per share. 104 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
---------------------------------------------------- YEAR ENDED SEPTEMBER 30, CLASS R 2005 2004 2003 2002(d) ---------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................... $ 10.15 $ 8.79 $ 7.96 $ 9.81 ---------------------------------------------------- Income from investment operations: Net investment income(a) .......................................... 0.43 0.39 0.37 0.32 Net realized and unrealized gains (losses) ........................ 2.40 1.34 0.86 (1.85) ---------------------------------------------------- Total from investment operations ..................................... 2.83 1.73 1.23 (1.53) ---------------------------------------------------- Less distributions from net investment income ........................ (0.41) (0.37) (0.40) (0.32) ---------------------------------------------------- Redemption fees ...................................................... --(c) --(c) -- -- ---------------------------------------------------- Net asset value, end of year ......................................... $ 12.57 $ 10.15 $ 8.79 $ 7.96 ==================================================== Total return(b) ...................................................... 28.35% 20.02% 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ...................................... $ 14,649 $ 1,590 $ 1,142 $ 142 Ratios to average net assets: Expenses .......................................................... 1.13% 1.15% 1.19% 1.16%(e) Net investment income ............................................. 3.57% 4.14% 4.64% 4.82%(e) Portfolio turnover rate .............................................. 13.53% 16.13% 25.81% 30.60%
(a) Based on average daily shares outstanding. (b) Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. (c) Amount is less than $0.01 per share. (d) For the period January 1, 2002 (effective date) to September 30, 2002. (e) Annualized. Annual Report | See notes to financial statements. | 105 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ADVISOR CLASS 2005 2004 2003 2002 2001 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $ 10.20 $ 8.84 $ 7.99 $ 10.05 $ 10.92 ----------------------------------------------------------------------- Income from investment operations: Net investment income(a) ............................. 0.48 0.44 0.42 0.47 0.48 Net realized and unrealized gains (losses) ........... 2.42 1.34 0.87 (1.60) (0.87) ----------------------------------------------------------------------- Total from investment operations ........................ 2.90 1.78 1.29 (1.13) (0.39) ----------------------------------------------------------------------- Less distributions from: Net investment income ................................ (0.46) (0.42) (0.44) (0.46) (0.46) Net realized gains ................................... -- -- -- (0.47) (0.02) ----------------------------------------------------------------------- Total distributions ..................................... (0.46) (0.42) (0.44) (0.93) (0.48) ----------------------------------------------------------------------- Redemption fees ......................................... --(b) --(b) -- -- -- ----------------------------------------------------------------------- Net asset value, end of year ............................ $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05 ======================================================================= Total return ............................................ 29.00% 20.48% 16.61% (12.32)% (3.89)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $ 110,249 $ 51,586 $ 47,167 $ 15,664 $ 8,829 Ratios to average net assets: Expenses ............................................. 0.63% 0.65% 0.69% 0.66% 0.65% Net investment income ................................ 4.07% 4.64% 5.14% 5.07% 4.39% Portfolio turnover rate ................................. 13.53% 16.13% 25.81% 30.60% 34.03%
(a) Based on average daily shares outstanding. (b) Amount is less than $0.01 per share. 106 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005
- ------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.4% ELECTRIC UTILITIES 77.9% Alliant Energy Corp. .................................. United States 1,700,000 $ 49,521,000 Ameren Corp. .......................................... United States 1,129,441 60,413,799 American Electric Power Co. Inc. ...................... United States 2,106,309 83,620,467 CenterPoint Energy Inc. ............................... United States 1,262,800 18,777,836 Central Vermont Public Service Corp. .................. United States 169,200 2,961,000 Cinergy Corp. ......................................... United States 1,900,000 84,379,000 Consolidated Edison Inc. .............................. United States 700,000 33,985,000 Dominion Resources Inc. ............................... United States 1,600,000 137,824,000 DTE Energy Co. ........................................ United States 400,000 18,344,000 Duke Energy Corp. ..................................... United States 1,215,400 35,453,218 Edison International .................................. United States 2,000,000 94,560,000 Energy East Corp. ..................................... United States 800,000 20,152,000 Entergy Corp. ......................................... United States 1,600,000 118,912,000 Exelon Corp. .......................................... United States 2,300,000 122,912,000 FirstEnergy Corp. ..................................... United States 2,100,000 109,452,000 FPL Group Inc. ........................................ United States 2,200,000 104,720,000 Hawaiian Electric Industries Inc. ..................... United States 400,000 11,152,000 ITC Holdings Corp. .................................... United States 150,900 4,373,082 National Grid PLC ..................................... United Kingdom 4,987,755 46,790,437 Northeast Utilities ................................... United States 1,400,000 27,930,000 Pepco Holdings Inc. ................................... United States 1,788,700 41,623,049 PG&E Corp. ............................................ United States 1,800,000 70,650,000 Pinnacle West Capital Corp. ........................... United States 1,200,000 52,896,000 PPL Corp. ............................................. United States 2,400,000 77,592,000 Progress Energy Inc. .................................. United States 1,600,000 71,600,000 Public Service Enterprise Group Inc. .................. United States 1,600,000 102,976,000 Puget Energy Inc. ..................................... United States 1,725,000 40,503,000 Scottish & Southern Energy PLC ........................ United Kingdom 1,500,000 27,243,872 Scottish Power PLC .................................... United Kingdom 6,000,000 60,465,526 (a) Sierra Pacific Resources .............................. United States 3,472,473 51,566,224 Southern Co. .......................................... United States 2,300,000 82,248,000 TXU Corp. ............................................. United States 500,000 56,440,000 United Utilities PLC .................................. United Kingdom 6,500,000 75,074,943 Westar Energy Inc. .................................... United States 900,000 21,717,000 Wisconsin Energy Corp. ................................ United States 1,100,000 43,912,000 Xcel Energy Inc. ...................................... United States 2,082,200 40,831,942 -------------- 2,103,572,395 -------------- GAS DISTRIBUTORS 11.2% AGL Resources Inc. .................................... United States 1,100,000 40,821,000 Atmos Energy Corp. .................................... United States 1,000,000 28,250,000 Gaz de France ......................................... France 421,100 14,083,240 KeySpan Corp. ......................................... United States 1,000,000 36,780,000 NiSource Inc. ......................................... United States 2,800,000 67,900,000 ONEOK Inc. ............................................ United States 500,000 17,010,000 Questar Corp. ......................................... United States 303,600 26,753,232 Sempra Energy ......................................... United States 1,000,000 47,060,000 Vectren Corp. ......................................... United States 845,000 23,955,750 -------------- 302,613,222 --------------
Annual Report | 107 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MAJOR TELECOMMUNICATIONS 3.2% SBC Communications Inc. .......................................... United States 1,900,000 $ 45,543,000 Verizon Communications Inc. ...................................... United States 1,300,000 42,497,000 --------------- 88,040,000 --------------- OIL & GAS PIPELINES 1.1% Kinder Morgan Inc. ............................................... United States 300,000 28,848,000 --------------- TOTAL COMMON STOCKS (COST $1,738,524,184) ........................ . 2,523,073,617 --------------- CONVERTIBLE PREFERRED STOCKS 1.3% ELECTRIC UTILITIES 1.3% CMS Energy Trust I, 7.75%, cvt. pfd. ............................. United States 260,000 13,065,000 PNM Resources Inc., 6.75%, cvt. pfd. ............................. United States 400,000 20,900,000 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,520) ............ 33,965,000 --------------- ---------------- PRINCIPAL AMOUNT ---------------- BONDS 4.7% ELECTRIC UTILITIES 4.7% CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .................. United States $ 25,000,000 32,317,700 CMS Energy Corp., senior note, 9.875%, 10/15/07 .................. United States 8,500,000 9,286,250 FirstEnergy Corp., senior note, 7.375%, 11/15/31 ................. United States 10,000,000 11,765,600 Northeast Generation Co., senior note, 8.812%, 10/15/26 .......... United States 7,500,000 8,460,098 PPL Capital Funding, 8.375%, 6/15/07 ............................. United States 15,000,000 15,847,365 TXU Corp., senior note, 6.55%, 11/15/34 .......................... United States 40,000,000 37,324,080 Utilicorp United Inc., senior note, 9.95%, 2/01/11 ................................................. United States 6,000,000 6,765,000 8.27%, 11/15/21 ................................................ United States 6,100,000 6,183,875 ------------- TOTAL BONDS (COST $117,172,319) .................................. 127,949,968 ------------- TOTAL LONG TERM INVESTMENTS (COST $1,889,137,023) ................ 2,684,988,585 ------------- --------------- SHARES --------------- SHORT TERM INVESTMENT (COST $7,987,222) 0.3% (b) MONEY FUND 0.3% Franklin Institutional Fiduciary Trust Money Market Portfolio .... United States 7,987,222 7,987,222 --------------- TOTAL INVESTMENTS (COST $1,897,124,245) 99.7% .................... 2,692,975,807 OTHER ASSETS, LESS LIABILITIES 0.3% .............................. 7,946,430 --------------- NET ASSETS 100.0% ................................................ $ 2,700,922,237 ===============
See Selected Portfolio Abbreviations on page 109. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 108 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2005 (CONTINUED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corporation FRN - Floating Rate Note GNMA - Government National Mortgage Association GO - General Obligation GP - Graduated Payment SF - Single Family Annual Report | See notes to financial statements. | 109 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES September 30, 2005
------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ....................................... $ 446,591,251 $ 907,096,664 $33,986,139,735 Cost - Non-controlled affiliated issuers (Note 10) -- -- 209,524,649 Cost - Sweep Money Fund (Note 7) .................................. 5,713,444 5,629,829 167,074,435 Cost - Repurchase agreements ...................................... 4,100,441 -- 1,592,482,555 ------------------------------------------------------- Total cost of investments ......................................... $ 456,405,136 $ 912,726,493 $35,955,221,374 ======================================================= Value - Unaffiliated issuers(a).................................... $ 719,049,176 $ 2,219,593,355 $35,980,177,755 Value - Non-controlled affiliated issuers (Note 10)................ -- -- 848,894,006 Value - Sweep Money Fund (Note 7) ................................. 5,713,444 5,629,829 167,074,435 Value - Repurchase agreements ..................................... 4,100,441 -- 1,592,482,555 ------------------------------------------------------- Total value of investments ........................................ 728,863,061 2,225,223,184 38,588,628,751 Cash ................................................................. -- 43,605 -- Receivables: Investment securities sold ........................................ -- -- 135,265,438 Capital shares sold ............................................... 1,298,615 1,859,005 190,750,992 Dividends and interest ............................................ 226,530 1,772,579 313,641,658 ------------------------------------------------------- Total assets ................................................... 730,388,206 2,228,898,373 39,228,286,839 ------------------------------------------------------- Liabilities: Payables: Investment securities purchased ................................... 1,934,600 -- 256,028,716 Capital shares redeemed ........................................... 1,551,728 14,270,193 53,886,665 Affiliates ........................................................ 779,533 2,357,126 34,693,543 Funds advanced by custodian .......................................... -- -- 2,234,375 Payable upon return of securities loaned ............................. 4,100,441 -- -- Deferred sales proceeds (Note 11) .................................... -- -- 10,909,154 Accrued expenses and other liabilities ............................... 205,937 561,975 4,594,277 ------------------------------------------------------- Total liabilities .............................................. 8,572,239 17,189,294 362,346,730 ------------------------------------------------------- Net assets, at value ....................................... $ 721,815,967 $ 2,211,709,079 $38,865,940,109 ======================================================= Net assets consist of: Paid-in capital ...................................................... $ 542,721,868 $ 1,108,917,690 $36,014,010,482 Undistributed net investment income .................................. -- 2,307,104 145,660,727 Net unrealized appreciation (depreciation) ........................... 272,457,925 1,312,496,691 2,633,407,377 Accumulated net realized gain (loss) ................................. (93,363,826) (212,012,406) 72,861,523 ------------------------------------------------------- Net assets, at value ....................................... $ 721,815,967 $ 2,211,709,079 $38,865,940,109 =======================================================
110 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2005
------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------------- CLASS A: Net assets, at value ................................................. $ 628,731,861 $ 1,567,674,691 $21,934,575,391 ======================================================= Shares outstanding ................................................... 25,164,599 45,012,785 8,784,219,014 ======================================================= Net asset value per share(b) ......................................... $ 24.98 $ 34.83 $ 2.50 ======================================================= Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) .................. $ 26.50 $ 36.95 $ 2.61 ======================================================= CLASS B: Net assets, at value ................................................. $ 19,497,181 $ 123,925,658 $ 3,922,395,880 ======================================================= Shares outstanding ................................................... 807,358 3,674,383 1,576,347,794 ======================================================= Net asset value and maximum offering price per share(b) .............. $ 24.15 $ 33.73 $ 2.49 ======================================================= CLASS B1: Net assets, at value ................................................. -- -- $ 493,063,052 ======================================================= Shares outstanding ................................................... -- -- 197,423,308 ======================================================= Net asset value and maximum offering price per share(b) .............. -- -- $ 2.50 ======================================================= CLASS C: Net assets, at value ................................................. $ 73,586,925 $ 270,538,230 $10,113,365,406 ======================================================= Shares outstanding ................................................... 3,079,112 8,091,582 4,027,843,884 ======================================================= Net asset value and maximum offering price per share(b) .............. $ 23.90 $ 33.43 $ 2.51 ======================================================= CLASS R: Net assets, at value ................................................. -- $ 27,818,419 $ 122,222,078 ======================================================= Shares outstanding ................................................... -- 804,301 49,363,932 ======================================================= Net asset value and maximum offering price per share(b) .............. -- $ 34.59 $ 2.48 ======================================================= ADVISOR CLASS: Net assets, at value ................................................. -- $ 221,752,081 $ 2,280,318,302 ======================================================= Shares outstanding ................................................... -- 6,356,069 917,113,991 ======================================================= Net asset value and maximum offering price per share(b) .............. -- $ 34.89 $ 2.49 =======================================================
(a) The Franklin DynaTech Fund includes $3,985,000 of securities loaned. (b) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | See notes to financial statements. | 111 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2005
-------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND -------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................................. $ 6,934,242,298 $ 1,889,137,023 Cost - Sweep Money Fund (Note 7) ......................................... 167,072,584 7,987,222 Cost - Repurchase agreements ............................................. 201,590,000 -- -------------------------------------- Total cost of investments ................................................ $ 7,302,904,882 $ 1,897,124,245 ====================================== Value - Unaffiliated issuers ............................................. $ 6,958,899,271 $ 2,684,988,585 Value - Sweep Money Fund (Note 7) ........................................ 167,072,584 7,987,222 Value - Repurchase agreements ............................................ 201,590,000 -- -------------------------------------- Total value of investments ............................................... 7,327,561,855 2,692,975,807 Receivables: Investment securities sold ............................................... 49,793,468 58,299 Capital shares sold ...................................................... 5,404,587 9,240,825 Dividends and interest ................................................... 32,195,673 6,068,494 -------------------------------------- Total assets .......................................................... 7,414,955,583 2,708,343,425 -------------------------------------- Liabilities: Payables: Investment securities purchased .......................................... 94,756,100 -- Capital shares redeemed .................................................. 24,150,418 4,725,877 Affiliates ............................................................... 5,335,900 2,226,862 Accrued expenses and other liabilities ................................... 1,464,700 468,449 -------------------------------------- Total liabilities ..................................................... 125,707,118 7,421,188 -------------------------------------- Net assets, at value ............................................... $ 7,289,248,465 $ 2,700,922,237 ====================================== Net assets consist of: Paid-in capital ............................................................. $ 7,671,154,985 $ 1,892,109,453 Undistributed net investment income ......................................... 949,733 6,871,929 Net unrealized appreciation (depreciation) .................................. 24,656,973 795,851,562 Accumulated net realized gain (loss) ........................................ (407,513,226) 6,089,293 -------------------------------------- Net assets, at value ............................................... $ 7,289,248,465 $ 2,700,922,237 ======================================
112 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2005
-------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND -------------------------------------- CLASS A: Net assets, at value ........................................................ $ 5,901,449,480 $ 1,986,033,672 ====================================== Shares outstanding .......................................................... 903,489,041 157,797,966 ====================================== Net asset value per share(a) ................................................ $ 6.53 $ 12.59 ====================================== Maximum offering price per share (net asset value per share / 95.75%) ....... $ 6.82 $ 13.15 ====================================== CLASS B: Net assets, at value ........................................................ $ 478,788,494 $ 154,276,666 ====================================== Shares outstanding .......................................................... 73,400,564 12,268,604 ====================================== Net asset value and maximum offering price per share(a) ..................... $ 6.52 $ 12.57 ====================================== CLASS C: Net assets, at value ........................................................ $ 508,539,186 $ 435,714,336 ====================================== Shares outstanding .......................................................... 78,201,196 34,716,544 ====================================== Net asset value and maximum offering price per share(a) ..................... $ 6.50 $ 12.55 ====================================== CLASS R: Net assets, at value ........................................................ $ 65,789,870 $ 14,648,548 ====================================== Shares outstanding .......................................................... 10,079,805 1,165,785 ====================================== Net asset value and maximum offering price per share(a) ..................... $ 6.53 $ 12.57 ====================================== ADVISOR CLASS: Net assets, at value ........................................................ $ 334,681,435 $ 110,249,015 ====================================== Shares outstanding .......................................................... 51,129,872 8,725,547 ====================================== Net asset value and maximum offering price per share(a) ..................... $ 6.55 $ 12.64 ======================================
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Annual Report | See notes to financial statements. | 113 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended September 30, 2005
------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------------- Investment income: Dividends: Unaffiliated issuers .............................................. $ 6,787,716 $ 29,124,025 $ 788,093,935 Non-controlled affiliated issuers (Note 10) ....................... -- -- 7,200,154 Sweep Money Fund (Note 7) ......................................... 157,146 78,779 4,086,555 Interest: Unaffiliated issuers .............................................. -- -- 1,208,447,716 Non-controlled affiliated issuers (Note 10) ....................... -- -- 17,063,936 Income from securities loaned - net .................................. 98,961 -- 124,691 Other income (Note 13) ............................................... 27,651 104,408 679,468 ------------------------------------------------------- Total investment income ........................................ 7,071,474 29,307,212 2,025,696,455 ------------------------------------------------------- Expenses: Management fees (Note 3a) ............................................ 3,470,695 10,099,817 133,282,748 Distribution fees: (Note 3c) Class A ........................................................... 1,569,123 3,929,055 27,170,455 Class B ........................................................... 194,764 1,256,761 38,676,586 Class B1 .......................................................... -- -- 3,291,640 Class C ........................................................... 745,727 2,736,525 54,349,278 Class R ........................................................... -- 119,377 498,117 Transfer agent fees (Note 3e) ........................................ 1,549,813 4,192,841 24,253,184 Custodian fees (Note 4) .............................................. 21,144 55,223 757,039 Reports to shareholders .............................................. 269,098 559,460 3,494,707 Registration and filing fees ......................................... 51,954 81,004 1,796,378 Professional fees (Note 3g) .......................................... 28,215 49,978 326,780 Directors' fees and expenses ......................................... 2,933 8,798 124,193 Other ................................................................ 28,158 70,679 877,647 ------------------------------------------------------- Total expenses ................................................. 7,931,624 23,159,518 288,898,752 Expense reductions (Note 4) .................................... (5) (303) (46,156) Expenses waived/paid by affiliate (Note 3f) .................... -- -- (40,849) ------------------------------------------------------- Net expenses ................................................. 7,931,619 23,159,215 288,811,747 ------------------------------------------------------- Net investment income (loss) ............................... (860,145) 6,147,997 1,736,884,708 ------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ........................................... (901,292) 33,743,139 383,688,354 Non-controlled affiliated issuers (Note 10) .................... -- -- 24,527,475 Foreign currency transactions ..................................... (3,804) (4,880) 508,375 ------------------------------------------------------- Net realized gain (loss) ................................... (905,096) 33,738,259 408,724,204 ------------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments ....................................................... 93,542,036 244,117,335 893,534,147 Translation of assets and liabilities denominated in foreign currencies ..................................................... -- -- (111) ------------------------------------------------------- Net change in unrealized appreciation (depreciation) ....... 93,542,036 244,117,335 893,534,036 ------------------------------------------------------- Net realized and unrealized gain (loss) ................................. 92,636,940 277,855,594 1,302,258,240 ------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ......... $ 91,776,795 $ 284,003,591 $ 3,039,142,948 =======================================================
114 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended September 30, 2005
-------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND -------------------------------------- Investment income: Dividends: Unaffiliated issuers ..................................................... $ -- $ 97,620,143 Sweep Money Fund (Note 7) ................................................ 3,967,130 262,952 Interest .................................................................... 377,056,999 9,533,650 Income from securities loaned - net ......................................... -- 36,498 Other income (Note 13) ...................................................... -- 52,932 -------------------------------------- Total investment income ............................................... 381,024,129 107,506,175 -------------------------------------- Expenses: Management fees (Note 3a) ................................................... 33,766,656 10,685,551 Distribution fees: (Note 3c) Class A .................................................................. 7,620,591 2,540,362 Class B .................................................................. 3,400,433 927,191 Class C .................................................................. 3,558,091 2,327,991 Class R .................................................................. 312,327 29,828 Transfer agent fees (Note 3e) ............................................... 9,499,318 2,833,512 Custodian fees (Note 4) ..................................................... 148,761 69,670 Reports to shareholders ..................................................... 1,506,332 490,205 Registration and filing fees ................................................ 166,694 143,470 Professional fees (Note 3g) ................................................. 98,834 53,372 Directors' fees and expenses ................................................ 31,369 8,730 Other ....................................................................... 370,640 68,503 -------------------------------------- Total expenses ........................................................ 60,480,046 20,178,385 Expense reductions (Note 4) ........................................... (19,518) (1,922) -------------------------------------- Net expenses ........................................................ 60,460,528 20,176,463 -------------------------------------- Net investment income ............................................ 320,563,601 87,329,712 -------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .............................................................. 3,270,275 86,966,351 Foreign currency transactions ............................................ -- (369,187) -------------------------------------- Net realized gain (loss) ......................................... 3,270,275 86,597,164 -------------------------------------- Net change in unrealized appreciation (depreciation) on investments ......... (126,557,362) 395,798,703 -------------------------------------- Net realized and unrealized gain (loss) ........................................ (123,287,087) 482,395,867 -------------------------------------- Net increase (decrease) in net assets resulting from operations ................ $ 197,276,514 $ 569,725,579 ======================================
Annual Report | See notes to financial statements. | 115 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, 2005 2004 2005 2004 ------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................... $ (860,145) $ (3,634,884) $ 6,147,997 $ 1,223,391 Net realized gain (loss) from investments and foreign currency transactions ............... (905,096) (14,029,079) 33,738,259 6,262,419 Net change in unrealized appreciation (depreciation) on investments ............... 93,542,036 73,445,772 244,117,335 247,296,583 ------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............. 91,776,795 55,781,809 284,003,591 254,782,393 ------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................... -- -- (3,882,872) (1,532,029) Class R ..................................... -- -- (10,415) -- Advisor Class ............................... -- -- (732,270) (173,053) ------------------------------------------------------------------------- Total distributions to shareholders ............... -- -- (4,625,557) (1,705,082) ------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ..................................... (91,991,179) 31,657,014 (168,604,093) (98,948,884) Class B ..................................... (1,613,902) 7,768,447 (13,722,938) 4,780,418 Class C ..................................... (10,942,390) 3,332,636 (33,781,675) (22,857,255) Class R ..................................... -- -- 4,768,742 3,224,209 Advisor Class ............................... -- -- 66,279,985 85,716,783 ------------------------------------------------------------------------- Total capital share transactions .................. (104,547,471) 42,758,097 (145,059,979) (28,084,729) ------------------------------------------------------------------------- Redemption fees ................................... 1,039 691 11,358 6,295 ------------------------------------------------------------------------- Net increase (decrease) in net assets ... (12,769,637) 98,540,597 134,329,413 224,998,877 Net assets: Beginning of year ................................. 734,585,604 636,045,007 2,077,379,666 1,852,380,789 ------------------------------------------------------------------------- End of year ....................................... $ 721,815,967 $ 734,585,604 $ 2,211,709,079 $ 2,077,379,666 ========================================================================= Undistributed net investment income included in net assets: End of year .................................... $ -- $ -- $ 2,307,104 $ 782,484 =========================================================================
116 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
------------------------------------------------------------------------- FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, 2005 2004 2005 2004 ------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .......................... $ 1,736,884,708 $ 1,044,441,688 $ 320,563,601 $ 339,860,811 Net realized gain (loss) from investments and foreign currency transactions ........... 408,724,204 451,159,295 3,270,275 2,260,202 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ........... 893,534,036 1,332,443,859 (126,557,362) (71,149,291) ------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations .............. 3,039,142,948 2,828,044,842 197,276,514 270,971,722 ------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................... (1,104,437,012) (798,349,922) (302,745,166) (364,404,705) Class B ..................................... (206,484,397) (162,621,962) (23,185,787) (29,981,316) Class B1 .................................... (28,826,258) (31,263,684) -- -- Class C ..................................... (461,493,148) (316,248,066) (24,272,966) (33,894,559) Class R ..................................... (5,706,119) (3,457,009) (2,810,550) (2,762,490) Advisor Class ............................... (95,145,372) (28,902,829) (15,327,999) (17,122,309) Net realized gains: Class A ..................................... (84,143,096) (55,088,598) -- -- Class B ..................................... (19,751,225) (12,569,134) -- -- Class B1 .................................... (2,705,174) (2,636,974) -- -- Class C ..................................... (37,975,944) (22,715,500) -- -- Class R ..................................... (432,526) (216,288) -- -- Advisor Class ............................... (5,808,100) (943,590) -- -- ------------------------------------------------------------------------- Total distributions to shareholders ............... (2,052,908,371) (1,435,013,556) (368,342,468) (448,165,379) ------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ..................................... 6,640,381,449 4,294,278,432 (380,358,442) (724,886,754) Class B ..................................... 317,307,812 1,219,777,152 (77,684,862) (97,262,940) Class B1 .................................... (34,777,479) (19,911,534) -- -- Class C ..................................... 3,242,801,825 2,514,302,239 (76,479,175) (201,426,271) Class R ..................................... 46,237,588 33,450,501 7,779,886 6,444,739 Advisor Class ............................... 1,334,835,525 783,062,664 1,208,804 37,919,958 ------------------------------------------------------------------------- Total capital share transactions .................. 11,546,786,720 8,824,959,454 (525,533,789) (979,211,268) ------------------------------------------------------------------------- Redemption fees ................................... 173,429 13,225 31,088 3,103 ------------------------------------------------------------------------- Net increase (decrease) in net assets ....... 12,533,194,726 10,218,003,965 (696,568,655) (1,156,401,822) Net assets: Beginning of year .............................. 26,332,745,383 16,114,741,418 7,985,817,120 9,142,218,942 ------------------------------------------------------------------------- End of year .................................... $38,865,940,109 $26,332,745,383 $ 7,289,248,465 $ 7,985,817,120 ========================================================================= Undistributed net investment income included in net assets: End of year ................................. $ 145,660,727 $ 52,657,223 $ 949,733 $ 113,851 =========================================================================
Annual Report | See notes to financial statements. | 117 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------- FRANKLIN UTILITIES FUND -------------------------------------- YEAR ENDED SEPTEMBER 30, 2005 2004 -------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................................................ $ 87,329,712 $ 77,992,985 Net realized gain (loss) from investments and foreign currency transactions .. 86,597,164 17,758,493 Net change in unrealized appreciation (depreciation) on investments .......... 395,798,703 229,110,659 -------------------------------------- Net increase (decrease) in net assets resulting from operations ........ 569,725,579 324,862,137 -------------------------------------- Distributions to shareholders from: Net investment income: Class A ................................................................... (65,898,832) (57,157,619) Class B ................................................................... (4,861,315) (4,239,501) Class C ................................................................... (12,160,417) (9,771,431) Class R ................................................................... (210,458) (51,170) Advisor Class ............................................................. (3,309,596) (2,242,376) -------------------------------------- Total distributions to shareholders ............................................ (86,440,618) (73,462,097) -------------------------------------- Capital share transactions: (Note 2) Class A ................................................................... 175,567,341 (1,380,506) Class B ................................................................... (3,086,774) 15,905,081 Class C ................................................................... 76,710,176 25,559,310 Class R ................................................................... 11,865,292 262,939 Advisor Class ............................................................. 41,716,286 (2,434,692) -------------------------------------- Total capital share transactions ............................................... 302,772,321 37,912,132 -------------------------------------- Redemption fees ................................................................ 4,687 1,274 -------------------------------------- Net increase (decrease) in net assets .................................. 786,061,969 289,313,446 Net assets: Beginning of year .............................................................. 1,914,860,268 1,625,546,822 -------------------------------------- End of year .................................................................... $ 2,700,922,237 $ 1,914,860,268 ====================================== Undistributed net investment income included in net assets: End of year .................................................................... $ 6,871,929 $ 5,174,244 --------------------------------------
118 | See notes to financial statements. | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company, consisting of five series (the Funds). The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, and other mortgage-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Funds. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. Annual Report | 119 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS Certain Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. Certain Funds may enter into repurchase agreements which are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the Fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the Funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are valued at cost. At September 30, 2005, all repurchase agreements held by the Funds had been entered into on that date. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. 120 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. F. SECURITIES LENDING The Franklin DynaTech Fund, Franklin Income Fund and Franklin Utilities Fund loan securities to certain brokers through a securities lending agent for which they received cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short-term instruments as noted in the Statement of Investments. The Funds receive interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The Funds bear the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the Funds in the case of default of any securities borrower. At September 30, 2005, the Franklin Income Fund and Franklin Utilities Fund had no securities on loan. G. INCOME TAXES No provision has been made for U.S. income taxes because each Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with generally accepted accounting principles. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they will reverse in subsequent periods. Common expenses incurred by the Custodian Funds are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Custodian Funds. Fund specific expenses are charged directly to the fund that incurred the expense. Annual Report | 121 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. J. REDEMPTION FEES A short-term trading redemption fee will be imposed, with some exceptions, on any Fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the Funds and accounted for as an addition to paid-in capital. K. GUARANTEES AND INDEMNIFICATIONS Under the Custodian Funds' organizational documents, their officers and directors are indemnified by the Custodian Funds against certain liabilities arising out of the performance of their duties to the Custodian Funds. Additionally, in the normal course of business, the Custodian Funds enter into contracts with service providers that contain general indemnification clauses. The Custodian Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Custodian Funds that have not yet occurred. However, based on experience, the Custodian Funds expect the risk of loss to be remote. 2. CAPITAL STOCK The classes of shares offered within each of the Funds are indicated below. Effective March 1, 2005, Class B shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
- ------------------------------------------------------------------------------------------------------------ CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ------------------------------------------------------------------------------------------------------------ Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
122 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED) At September 30, 2005, there were 44.2 billion shares authorized ($0.01 par value), allocated to the Funds as follows (in millions):
-------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------------------------------------------------------------- Class A ............................................. 250 250 15,200 2,500 400 Class B ............................................. 500 750 2,000 1,000 750 Class B1 ............................................ -- -- 1,000 -- -- Class C ............................................. 250 250 7,200 2,500 400 Class R ............................................. -- 1,000 1,000 1,000 1,000 Advisor Class ....................................... -- 1,000 2,000 1,000 1,000
Transactions in the Funds' shares were as follows:
------------------------------------------------------------------------ FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2005 Shares sold ............................. 5,939,499 $ 140,943,371 4,972,706 $ 165,487,177 Shares issued in reinvestment of distributions ...................... -- -- 106,686 3,548,371 Shares redeemed ......................... (9,857,258) (232,934,550) (10,153,867) (337,639,641) ------------------------------------------------------------------------- Net increase (decrease) ................. (3,917,759) $ (91,991,179) (5,074,475) $ (168,604,093) ========================================================================= Year ended September 30, 2004 Shares sold ............................. 9,014,383 $ 201,786,839 6,395,481 $ 193,229,695 Shares issued in reinvestment of distributions ...................... -- -- 47,975 1,399,446 Shares redeemed ......................... (7,626,280) (170,129,825) (9,722,445) (293,578,025) ------------------------------------------------------------------------- Net increase (decrease) ................. 1,388,103 $ 31,657,014 (3,278,989) $ (98,948,884) ========================================================================= CLASS B SHARES: Year ended September 30, 2005 Shares sold ............................. 133,963 $ 3,049,030 242,741 $ 7,743,683 Shares redeemed ......................... (204,804) (4,662,932) (666,084) (21,466,621) ------------------------------------------------------------------------- Net increase (decrease) ................. (70,841) $ (1,613,902) (423,343) $ (13,722,938) ========================================================================= Year ended September 30, 2004 Shares sold ............................. 463,560 $ 10,173,910 731,263 $ 21,476,065 Shares redeemed ......................... (111,081) (2,405,463) (565,876) (16,695,647) ------------------------------------------------------------------------- Net increase (decrease) ................. 352,479 $ 7,768,447 165,387 $ 4,780,418 ========================================================================= CLASS C SHARES: Year ended September 30, 2005 Shares sold ............................. 482,114 $ 10,909,830 886,979 $ 28,487,942 Shares redeemed ......................... (969,317) (21,852,220) (1,948,771) (62,269,617) ------------------------------------------------------------------------- Net increase (decrease) ................. (487,203) $ (10,942,390) (1,061,792) $ (33,781,675) ========================================================================= Year ended September 30, 2004 Shares sold ............................. 917,943 $ 19,881,973 1,305,882 $ 38,083,688 Shares redeemed ......................... (769,633) (16,549,337) (2,084,652) (60,940,943) ------------------------------------------------------------------------- Net increase (decrease) ................. 148,310 $ 3,332,636 (778,770) $ (22,857,255) =========================================================================
Annual Report | 123 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------------- FRANKLIN GROWTH FUND ------------------------------------- SHARES AMOUNT ------------------------------------- CLASS R SHARES: Year ended September 30, 2005 Shares sold ................................................................... 301,713 $ 9,964,493 Shares issued in reinvestment of distributions ................................ 313 10,387 Shares redeemed ............................................................... (157,760) (5,206,138) ------------------------------------- Net increase (decrease) ....................................................... 144,266 $ 4,768,742 ===================================== Year ended September 30, 2004 Shares sold ................................................................... 254,043 $ 7,608,802 Shares redeemed ............................................................... (145,872) (4,384,593) ------------------------------------- Net increase (decrease) ....................................................... 108,171 $ 3,224,209 ===================================== ADVISOR CLASS SHARES: Year ended September 30, 2005 Shares sold ................................................................... 2,738,052 $ 91,354,618 Shares issued in reinvestment of distributions ................................ 21,696 721,407 Shares redeemed ............................................................... (756,109) (25,796,040) ------------------------------------- Net increase (decrease) ....................................................... 2,003,639 $ 66,279,985 ===================================== Year ended September 30, 2004 Shares sold ................................................................... 2,942,725 $ 89,412,412 Shares issued in reinvestment of distributions ................................ 5,745 167,517 Shares redeemed ............................................................... (127,887) (3,863,146) ------------------------------------- Net increase (decrease) ....................................................... 2,820,583 $ 85,716,783 =====================================
-------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------- CLASS A SHARES: Year ended September 30, 2005 Shares sold ................................ 3,233,548,786 $ 7,991,126,134 80,655,804 $ 532,927,988 Shares issued on merger (Note 12) ................................ 22,580,678 57,129,115 -- -- Shares issued in reinvestment of distributions ......................... 310,204,492 763,747,314 29,003,758 191,550,552 Shares redeemed ............................ (879,645,185) (2,171,621,114) (167,123,344) (1,104,836,982) -------------------------------------------------------------------------- Net increase (decrease) .................... 2,686,688,771 $ 6,640,381,449 (57,463,782) $ (380,358,442) ========================================================================== Year ended September 30, 2004 Shares sold ................................ 2,247,241,860 $ 5,316,264,931 86,401,010 $ 578,723,039 Shares issued in reinvestment of distributions. ........................ 226,682,607 533,294,345 33,946,772 226,702,288 Shares redeemed ............................ (658,551,288) (1,555,280,844) (228,919,042) (1,530,312,081) -------------------------------------------------------------------------- Net increase (decrease) .................... 1,815,373,179 $ 4,294,278,432 (108,571,260) $ (724,886,754) ========================================================================== CLASS B SHARES: Year ended September 30, 2005 Shares sold ................................ 216,067,791 $ 530,027,930 2,734,327 $ 18,126,694 Shares issued in reinvestment of distributions ......................... 58,417,660 143,410,552 2,446,399 16,142,982 Shares redeemed ............................ (144,791,444) (356,130,670) (16,950,873) (111,954,538) -------------------------------------------------------------------------- Net increase (decrease) .................... 129,694,007 $ 317,307,812 (11,770,147) $ (77,684,862) ==========================================================================
124 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------- CLASS B SHARES: (CONTINUED) Year ended September 30, 2004 Shares sold ................................ 580,969,805 $ 1,367,704,171 8,827,015 $ 59,118,085 Shares issued in reinvestment of distributions ........................ 43,346,237 108,838,135 3,121,214 20,832,270 Shares redeemed ............................ (109,027,856) (256,765,154) (26,551,545) (177,213,295) -------------------------------------------------------------------------- Net increase (decrease) .................... 515,288,186 $ 1,219,777,152 (14,603,316) $ (97,262,940) ========================================================================== CLASS B1 SHARES: Year ended September 30, 2005 Shares sold ................................ 2,378,752 $ 5,860,213 Shares issued in reinvestment of distributions ........................ 7,165,232 17,644,463 Shares redeemed ............................ (23,606,754) (58,282,155) --------------------------------- Net increase (decrease) .................... (14,062,770) $ (34,777,479) ================================= Year ended September 30, 2004 Shares sold ................................ 6,809,085 $ 16,060,956 Shares issued in reinvestment of distributions ........................ 8,043,400 18,919,939 Shares redeemed ............................ (23,231,386) (54,892,429) --------------------------------- Net increase (decrease) .................... (8,378,901) $ (19,911,534) ================================= CLASS C SHARES: Year ended September 30, 2005 Shares sold ................................ 1,587,994,257 $ 3,945,015,780 11,343,153 $ 74,643,597 Shares issued in reinvestment of distributions ........................ 128,622,410 318,755,436 2,413,285 15,876,049 Shares redeemed ............................ (411,346,115) (1,020,969,391) (25,359,338) (166,998,821) -------------------------------------------------------------------------- Net increase (decrease) .................... 1,305,270,552 $ 3,242,801,825 (11,602,900) $ (76,479,175) ========================================================================== Year ended September 30, 2004 Shares sold ................................ 1,255,981,744 $ 2,984,372,367 14,861,247 $ 99,281,128 Shares issued in reinvestment of distributions ........................ 91,955,343 217,651,704 3,312,543 22,050,949 Shares redeemed ............................ (289,468,688) (687,721,832) (48,451,915) (322,758,348) -------------------------------------------------------------------------- Net increase (decrease) .................... 1,058,468,399 $ 2,514,302,239 (30,278,125) $ (201,426,271) ========================================================================== CLASS R SHARES: Year ended September 30, 2005 Shares sold ................................ 26,352,002 $ 64,518,265 4,180,818 $ 27,602,806 Shares issued in reinvestment of distributions ........................ 2,379,605 5,812,421 421,527 2,782,416 Shares redeemed ............................ (9,872,431) (24,093,098) (3,423,452) (22,605,336) -------------------------------------------------------------------------- Net increase (decrease) .................... 18,859,176 $ 46,237,588 1,178,893 $ 7,779,886 ========================================================================== Year ended September 30, 2004 Shares sold ................................ 19,381,084 $ 45,663,790 3,748,305 $ 25,113,231 Shares issued in reinvestment of distributions ........................ 1,500,196 3,505,433 413,848 2,748,659 Shares redeemed ............................ (6,682,743) (15,718,722) (3,195,508) (21,417,151) -------------------------------------------------------------------------- Net increase (decrease) .................... 14,198,537 $ 33,450,501 964,645 $ 6,444,739 ==========================================================================
Annual Report | 125 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------------- ADVISOR CLASS SHARES: Year ended September 30, 2005 Shares sold ................................ 525,718,339 $ 1,292,792,031 13,517,268 $ 89,567,508 Shares issued in reinvestment of distributions ........................ 38,816,130 95,287,128 1,992,298 13,178,931 Shares redeemed ............................ (21,661,227) (53,243,634) (15,208,235) (101,537,635) -------------------------------------------------------------------------- Net increase (decrease) .................... 542,873,242 $ 1,334,835,525 301,331 $ 1,208,804 ========================================================================== Year ended September 30, 2004 Shares sold ................................ 335,191,629 $ 790,679,833 10,246,929 $ 68,640,458 Shares issued in reinvestment of distributions ........................ 11,426,569 26,885,121 2,127,795 14,230,250 Shares redeemed ............................ (14,744,719) (34,502,290) (6,731,932) (44,950,750) -------------------------------------------------------------------------- Net increase (decrease) .................... 331,873,479 $ 783,062,664 5,642,792 $ 37,919,958 ==========================================================================
------------------------------------- FRANKLIN UTILITIES FUND ------------------------------------- SHARES AMOUNT ------------------------------------- CLASS A SHARES: Year ended September 30, 2005 Shares sold ................................................................... 34,569,804 $ 400,170,506 Shares issued in reinvestment of distributions ................................ 4,305,025 49,165,990 Shares redeemed ............................................................... (23,851,552) (273,769,155) ------------------------------------- Net increase (decrease) ....................................................... 15,023,277 $ 175,567,341 ===================================== Year ended September 30, 2004 Shares sold ................................................................... 18,406,095 $ 176,356,055 Shares issued in reinvestment of distributions ................................ 4,465,126 42,773,250 Shares redeemed ............................................................... (23,203,973) (220,509,811) ------------------------------------- Net increase (decrease) ....................................................... (332,752) $ (1,380,506) ===================================== CLASS B SHARES: Year ended September 30, 2005 Shares sold ................................................................... 1,759,896 $ 19,743,236 Shares issued in reinvestment of distributions ................................ 224,565 2,562,564 Shares redeemed ............................................................... (2,233,960) (25,392,574) ------------------------------------- Net increase (decrease) ....................................................... (249,499) $ (3,086,774) ===================================== Year ended September 30, 2004 Shares sold ................................................................... 3,179,780 $ 30,167,433 Shares issued in reinvestment of distributions ................................ 230,148 2,206,595 Shares redeemed ............................................................... (1,725,148) (16,468,947) ------------------------------------- Net increase (decrease) ....................................................... 1,684,780 $ 15,905,081 ===================================== CLASS C SHARES: Year ended September 30, 2005 Shares sold ................................................................... 12,226,563 $ 139,657,945 Shares issued in reinvestment of distributions ................................ 495,205 5,658,566 Shares redeemed ............................................................... (6,002,579) (68,606,335) ------------------------------------- Net increase (decrease) ....................................................... 6,719,189 $ 76,710,176 =====================================
126 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
--------------------------- FRANKLIN UTILITIES FUND --------------------------- SHARES AMOUNT --------------------------- CLASS C SHARES: (CONTINUED) Year ended September 30, 2004 Shares sold ............................................................. 9,181,623 $ 87,063,153 Shares issued in reinvestment of distributions .......................... 515,325 4,924,301 Shares redeemed ......................................................... (6,976,972) (66,428,144) --------------------------- Net increase (decrease) ................................................. 2,719,976 $ 25,559,310 =========================== CLASS R SHARES: Year ended September 30, 2005 Shares sold ............................................................. 1,167,612 $ 13,713,510 Shares issued in reinvestment of distributions .......................... 17,357 204,087 Shares redeemed ......................................................... (175,789) (2,052,305) --------------------------- Net increase (decrease) ................................................. 1,009,180 $ 11,865,292 =========================== Year ended September 30, 2004 Shares sold ............................................................. 91,198 $ 872,504 Shares issued in reinvestment of distributions .......................... 5,281 50,695 Shares redeemed ......................................................... (69,748) (660,260) --------------------------- Net increase (decrease) ................................................. 26,731 $ 262,939 =========================== ADVISOR CLASS SHARES: Year ended September 30, 2005 Shares sold ............................................................. 5,741,424 $ 65,649,487 Shares issued in reinvestment of distributions .......................... 243,650 2,814,290 Shares redeemed ......................................................... (2,316,860) (26,747,491) --------------------------- Net increase (decrease) ................................................. 3,668,214 $ 41,716,286 =========================== Year ended September 30, 2004 Shares sold ............................................................. 3,628,361 $ 34,881,431 Shares issued in reinvestment of distributions .......................... 159,863 1,540,703 Shares redeemed ......................................................... (4,069,192) (38,856,826) --------------------------- Net increase (decrease) ................................................. (280,968) $ (2,434,692) ===========================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Custodian Funds are also officers and/or directors of the following subsidiaries:
- -------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------------------- Franklin Advisers Inc. (Advisers) Investment manager Franklin Investment Advisory Services Inc. (Investment Advisory) Investment manager Franklin Templeton Services LLC (FT Services) Administrative manager Franklin Templeton Distributors Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
Annual Report | 127 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Funds, except the Franklin Growth Fund, pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the Funds as follows: - ----------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ----------------------------------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20.0 billion 0.360% In excess of $20 billion B. ADMINISTRATIVE FEES Under an agreement with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets of each of the Funds, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Funds' Board of Directors has adopted distribution plans for each share class, with the exception of Advisor class, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the sale and distribution of each Fund's shares up to a certain percentage per year of their average daily net assets as follows:
------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ------------------------------------------------------------ Class A .................................... 0.25% 0.25% 0.15% 0.15% 0.15%
Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. 128 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) Under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the sale and distribution of each Fund's shares up to a certain percentage per year of their average daily net assets of each class as follows:
------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ------------------------------------------------------------ Class B ..................................... 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 .................................... -- -- 0.65% -- -- Class C ..................................... 1.00% 1.00% 0.65% 0.65% 0.65% Class R ..................................... -- 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
-------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------- Net sales charges received(a) ..................................... $ 130,196 $ 402,985 $ 24,481,717 Contingent deferred sales charges retained ........................ $ 81,129 $ 289,985 $ 7,831,556
----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Net sales charges received(a) .............................................. $ 711,575 $ 525,245 Contingent deferred sales charges retained ................................. $ 1,235,116 $ 236,658
(a) Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were retained by Investor Services:
-------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------- Transfer agent fees ............................................... $1,183,332 $3,616,592 $ 14,782,855
------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Transfer agent fees ........................................................ $ 6,751,943 $ 1,907,961
Annual Report | 129 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Effective May 1, 2005, Advisers agreed in advance to voluntarily waive a portion of management fees for the Franklin Income Fund, as noted in the Statement of Operations, in the form of additional breakpoints based on month-end net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion G. OTHER AFFILIATED TRANSACTIONS Included in professional fees are legal fees of $157,706 that were paid to a law firm in which a partner is an officer of the Custodian Funds. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended September 30, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At September 30, 2005, the Funds had tax basis capital losses which may be carried over to offset future capital gains, if any. During the year ended September 30, 2005, the Franklin Growth Fund and the Franklin Utilities Fund utilized $33,743,139 and $62,723,916, respectively, of capital loss carryforwards. At September 30, 2005, the Franklin Income Fund had $9,351,401 of tax basis capital losses from the merged Franklin Multi-Income Trust which may be carried over to offset future capital gains, subject to certain limitations. During the year ended September 30, 2005, the fund utilized $368,131 of such capital loss carryforwards. 130 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At September 30, 2005, the capital loss carryforwards were as follows:
------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT DYNATECH GROWTH INCOME SECURITIES FUND FUND FUND FUND ------------------------------------------------------------- Capital loss carryforwards expiring in: 2006 ......................................... $ -- $ -- $ -- $ 28,279,472 2007 ......................................... 677,592 -- -- 18,954,412 2008 ......................................... 394,928 -- -- 21,105,846 2009 ......................................... 1,170,048 -- -- 46,256,951 2010 ......................................... 6,843,771 -- 4,507,154 11,768,551 2011 ......................................... 47,180,600 172,953,217 4,348,077 33,556,845 2012 ......................................... 21,838,085 39,052,129 496,170 129,102,166 2013 ......................................... 14,781,620 -- -- 74,283,298 ------------------------------------------------------------- $ 92,886,644 $ 212,005,346 $ 9,351,401 $ 363,307,541 =============================================================
For tax purposes, realized capital losses, realized currency losses, and ordinary income losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2005, the Franklin U.S. Government Securities Fund deferred realized capital losses of $44,205,685. At September 30, 2005, the Franklin DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund deferred realized currency losses of $3,804, $7,060 and $369,187, respectively. At September 30, 2005, the Franklin Income Fund and Franklin Utilities Fund deferred ordinary income losses of $11,931,281 and $4,624,565, respectively. On September 30, 2005, the Franklin U.S. Government Securities Fund had expired capital loss carryovers of $50,054,906, which were reclassified to paid-in capital. The tax character of distributions paid during the years ended September 30, 2005 and 2004, was as follows:
----------------------------------------------------------------- FRANKLIN GROWTH FUND FRANKLIN INCOME FUND ----------------------------------------------------------------- 2005 2004 2005 2004 ----------------------------------------------------------------- Distributions paid from: Ordinary income .............................. $ 4,625,557 $ 1,705,082 $ 1,902,092,306 $ 1,340,843,472 Long term capital gain ....................... -- -- 150,816,065 94,170,084 ----------------------------------------------------------------- $ 4,625,557 $ 1,705,082 $ 2,052,908,371 $ 1,435,013,556 =================================================================
----------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND FRANKLIN UTILITIES FUND ----------------------------------------------------------------- 2005 2004 2005 2004 ----------------------------------------------------------------- Distributions paid from ordinary income ............................. $ 368,342,468 $ 448,165,379 $ 86,440,618 $ 73,462,097
Annual Report | 131 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At September 30, 2005, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
----------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ----------------------------------------------------------- Cost of investments ................................... $ 456,878,514 $ 912,726,493 $ 35,958,958,925 =========================================================== Unrealized appreciation ............................... $ 284,594,738 $ 1,329,580,592 $ 4,156,270,822 Unrealized depreciation ............................... (12,610,191) (17,083,901) (1,526,600,996) ----------------------------------------------------------- Net unrealized appreciation (depreciation) ............ $ 271,984,547 $ 1,312,496,691 $ 2,629,669,826 =========================================================== Undistributed ordinary income ......................... $ -- $ 2,307,104 $ 160,237,327 Undistributed long term capital gains ................. -- -- 89,284,658 ----------------------------------------------------------- Distributable earnings ................................ $ -- $ 2,307,104 $ 249,521,985 =========================================================== -------------------------------------- U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND -------------------------------------- Cost of investments ..................................................... $ 7,302,904,882 $ 1,899,645,711 ====================================== Unrealized appreciation ................................................. $ 71,058,942 $ 822,588,837 Unrealized depreciation ................................................. (46,401,969) (29,258,741) -------------------------------------- Net unrealized appreciation (depreciation) .............................. $ 24,656,973 $ 793,330,096 ====================================== Undistributed ordinary income ........................................... $ 949,733 $ 7,684,872 Undistributed long term capital gains ................................... -- 13,029,665 -------------------------------------- Distributable earnings .................................................. $ 949,733 $ 20,714,537 ======================================
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. 132 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended September 30, 2005, were as follows:
---------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------------------------------- Purchases ............................................. $ 123,324,029 $ 25,214,568 $21,386,639,101 Sales ................................................. $ 198,888,224 $ 159,176,208 $ 8,503,843,830 ------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------------- Purchases ............................................................... $ 2,144,049,038 $ 617,539,957 Sales ................................................................... $ 573,807,169 $ 308,345,484
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 41.6% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At September 30, 2005, the value of these securities was $47,400,500, representing 0.12% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. For information as to specific securities, see the accompanying Statement of Investments. 9. RESTRICTED AND ILLIQUID SECURITIES At September 30, 2005, investments in securities included issues that are restricted and illiquid. Restricted securities are often purchased in private placement transactions, and cannot be sold Annual Report | 133 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. RESTRICTED AND ILLIQUID SECURITIES (CONTINUED) without prior registration under the Securities Act of 1933, unless the sale is pursuant to an exemption under the 1933 Act. The Fund has registration rights for all restricted securities held at period end. The issuer generally incurs all registration costs. A security may be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At September 30, 2005, the Franklin Income Fund held investments in restricted and illiquid securities, valued in accordance with procedures approved by the fund's Board of Directors as reflecting fair value, as follows:
- --------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT/ ACQUISITION SHARES ISSUER DATE COST VALUE - --------------------------------------------------------------------------------------------------------- 75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ............................... 7/18/00 $57,833,250 $847,500 $ 607,466 Pindo Deli Finance Mauritius Ltd., zero cpn., 4/29/25 ................................. 4/30/05 141,151 141,843 $ 113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%, 4/29/15 ......................... 4/30/05 26,274 26,403 $ 294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 4.675%, 4/29/18 ......................... 4/30/05 68,317 68,652 $42,601,657 Tjiwi Kimia Finance Mauritius, secured note, zero cpn., 4/29/25 ...................... 4/30/05 12,984,985 13,048,888 $12,883,549 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 4.675%, 4/29/15 .............. 4/30/05 3,926,906 3,946,231 $33,160,560 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 4.675%, 4/29/18 .............. 4/30/05 10,107,339 10,157,079 ------------ TOTAL RESTRICTED SECURITIES (0.07% of Net Assets) ............................................................ $ 28,236,596 ============
10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund at September 30, 2005 were as shown below.
- ---------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT/ PRINCIPAL SHARES AMOUNT/ HELD AT SHARES VALUE REALIZED BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSS) - ---------------------------------------------------------------------------------------------------------------------------------- Aquila Inc. ...................... -- 30,328,830 5,328,830 25,000,000 $ 99,000,00 $ -- $ 2,662,282 Aquila Inc., senior note, 14.875%, 7/01/12 ....................... $97,500,000 400,000 2,500,000 95,400,000 130,698,000 14,340,905 1,066,622 Canadian Oil Sands Trust ......... 6,000,000 -- 400,000 5,600,000 619,196,006 7,200,154 4,979,247 Mission Resources Corp. .......... 3,330,000 -- 3,330,000 -- -- -- 12,827,824 Mission Resources Corp., senior note, 9.875%, 4/01/11 .. $40,000,000 -- 30,000,000 10,000,000 (a) 2,723,031 2,991,500 ----------------------------------------- TOTAL AFFILIATED SECURITIES (2.2% of Net Assets) ..... $848,894,006 $24,264,090 $24,527,475 =========================================
(a) As of September 30, 2005, no longer an affiliate. 134 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. OTHER CONSIDERATIONS Subject to certain terms and conditions, the Franklin Income Fund has agreed to sell its holdings in Asia Pulp & Paper Co. Ltd., Pindo Deli Finance Mauritius Ltd. and Tjiwi Kimia Finance Mauritius in November 2006. Until the completion of the sale, the transaction is being accounted for as a secured borrowing with a pledge of collateral and any preliminary sales proceeds received are deferred until the completion of the transaction. 12. ACQUISITIONS/MERGERS On August 4, 2005, the Franklin Income Fund acquired the net assets of the Franklin Multi-Income Trust pursuant to a plan of reorganization approved by the Franklin Multi-Income Trust's shareholders. The merger was accomplished by a tax-free exchange of 22,580,678 Class A shares of the Fund (valued at $2.53 for the net assets of the Franklin Multi-Income Trust which aggregated $57,129,115, including $13,521,127 of unrealized appreciation (depreciation). The merger was accounted for as a pooling-of-interests without restatement for financial reporting purposes. The combined net assets of the Fund immediately after the merger were $37,481,139,819. 13. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds and are recorded as other income in the current period. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC continues to develop the plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. Annual Report | 135 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. REGULATORY MATTERS (CONTINUED) In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices described above. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Funds, it is committed to making the Funds or their shareholders whole, as appropriate. 136 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS, INC. In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of each of Franklin DynaTech Fund, Franklin Growth Fund, Franklin Income Fund, Franklin U.S. Government Securities Fund and Franklin Utilities Fund, portfolios of Franklin Custodian Funds, Inc. (hereafter referred to as the "Funds") at September 30, 2005, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2005, by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California November 10, 2005 Annual Report | 137 FRANKLIN CUSTODIAN FUNDS, INC. TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as capital gain dividends for the fiscal year ended September 30, 2005: ------------------------------------ FRANKLIN FRANKLIN INCOME UTILITIES FUND FUND ------------------------------------ $ 143,988,403 $ 13,029,665 Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following maximum amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended September 30, 2005. ----------------------------------------------- FRANKLIN FRANKLIN FRANKLIN GROWTH INCOME UTILITIES FUND FUND FUND ----------------------------------------------- $ 29,277,583 $ 551,347,735 $ 87,442,179 In January 2006, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2005. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 854(b)(2) of the Code, the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended September 30, 2005. ----------------------------------------------- FRANKLIN FRANKLIN FRANKLIN GROWTH INCOME UTILITIES FUND FUND FUND ----------------------------------------------- 100% 27.97% 81.79% 138 | Annual Report FRANKLIN CUSTODIAN FUNDS, INC. BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (1932) Director Since 1976 141 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ----------------------------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO (1932) Director Since 1982 142 None One Franklin Parkway San Mateo, CA 94403-1906 - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)). - ----------------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (1952) Director Since 1998 137 Director, Amerada Hess Corporation One Franklin Parkway (exploration and refining of oil and San Mateo, CA 94403-1906 gas), H.J. Heinz Company (processed foods and allied products), RTI International Metals, Inc.(manufacture and distribution of titanium), Canadian National Railway (railroad), and White Mountains Insurance Group, Ltd.(holding company). - ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 139
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (1928) Director Since 1992 141 Director, Martek Biosciences One Franklin Parkway Corporation, MedImmune, Inc. San Mateo, CA 94403-1906 (biotechnology), and Overstock.com (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002), White Mountains Insurance Group, Ltd. (holding com- pany) (1987-2004) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company) (2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (1932) Director Since June 101 Director, White Mountains Insurance One Franklin Parkway 2005 Group, Ltd. (holding company), Amerada San Mateo, CA 94403-1906 Hess Corporation (exploration and refining of oil and gas) and Sentient Jet (private jet service); and FORMERLY, Director, Becton Dickinson and Company (medical technology), Cooper Industries, Inc. (electrical products and tools and hardware), Health Net, Inc. (formerly, Foundation Health) (integrated managed care), The Hertz Corporation, Pacific Southwest Airlines, The RCA Corporation, Unicom (formerly, Commonwealth Edison) and UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
140 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (1933) Director, Director since 141 None One Franklin Parkway President 1969, President San Mateo, CA 94403-1906 and Chief since 1984 and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (1940) Director Since 1983 125 None One Franklin Parkway and Vice San Mateo, CA 94403-1906 President - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (1945) Vice Since 1987 Not Applicable Not Applicable One Franklin Parkway President San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 141
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003). - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable 500 East Broward Blvd. President Suite 2100 and Chief Fort Lauderdale, Executive FL 33394-3091 Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (1937) Vice President Since 2002 Not Applicable Not Applicable 600 Fifth Avenue - AML Rockefeller Center Compliance New York, NY 10020-1032 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton Institutional Suisse SA, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
142 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (1937) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, General Counsel, Franklin Resources, Inc.; Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable One Franklin Parkway 2005 San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Senior Vice President, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments; and formerly, Partner, Shearman & Sterling, LLP (2004-2005); and general Counsel, Investment Company Institute (ICI) (1997-2004). - ------------------------------------------------------------------------------------------------------------------------------------ GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable 500 East Broward Blvd. Officer and Suite 2100 Chief Accounting Fort Lauderdale, Officer FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). - ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson and Rupert H. Johnson are considered to be interested persons of the Funds under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Funds' advisers and distributor. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF EDITH E. HOLIDAY AND HARRIS J. ASHTON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MS. HOLIDAY AND MR. ASHTON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR BUSINESS BACKGROUND AND EXPERIENCE. MS. HOLIDAY, WHO CURRENTLY SERVES AS A DIRECTOR AND TRUSTEE OF VARIOUS COMPANIES AND TRUSTS, INCLUDING H.J. HEINZ COMPANY WHERE SHE IS AUDIT COMMITTEE CHAIRPERSON, IS CHAIRPERSON OF THE FUND'S AUDIT COMMITTEE, AND FORMERLY SERVED AS ASSISTANT TO THE PRESIDENT OF THE UNITED STATES AND SECRETARY OF THE CABINET (1990-1993); GENERAL COUNSEL TO THE UNITED STATES TREASURY DEPARTMENT (1989-1999); AND ASSISTANT SECRETARY FOR PUBLIC AFFAIRS AND PUBLIC LIAISON-UNITED STATES TREASURY DEPARTMENT (1988-1989). MR. ASHTON, WHO IS CURRENTLY A DIRECTOR OF BUSINESS AND NON-PROFIT ORGANIZATIONS, SERVED AS CHIEF EXECUTIVE OFFICER OF GENERAL HOST CORPORATION, A NEW YORK STOCK EXCHANGE LISTED COMPANY FROM 1967 TO 1998, AND WAS A DIRECTOR OF RBC HOLDINGS, INC., A BANK HOLDING COMPANY UNTIL 2002. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MS. HOLIDAY AND MR. ASHTON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MS. HOLIDAY AND MR. ASHTON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. Annual Report | 143 FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 144 | Annual Report LITERATURE REQUEST LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II(1) VALUE Franklin Balance Sheet Investment Fund(2) Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(2) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(3) Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(4) Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund(4) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(4) Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME(5) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(6) LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(7) Colorado Connecticut Florida(7) Georgia Kentucky Louisiana Maryland Massachusetts(6) Michigan(6) Minnesota(6) Missouri New Jersey New York(7) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1) The fund is closed to new investors. Existing shareholders can continue adding to their accounts. (2) The fund is only open to existing shareholders and select retirement plans. (3) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (4) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (5) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (6) Portfolio of insured municipal securities. (7) These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). (8) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/05 Not part of the annual report [LOGO](R) FRANKLIN(R) TEMPLETON(R) One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS, INC. INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF A2005 11/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Edith E. Holiday and Harris J. Ashton and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $241,951 for the fiscal year ended September 30, 2005 and $273,501 for the fiscal year ended September 30, 2004. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements were $0 for the fiscal year ended September 30, 2005 and $48,579 for the fiscal year ended September 30, 2004. The services for which these fees were paid included attestation services. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $19,591 for the fiscal year ended September 30, 2005 and $0 for the fiscal year ended September 30, 2004. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended September 30, 2005 and $23,814 for the fiscal year ended September 30, 2004. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $4,500 for the fiscal year ended September 30, 2005 and $136,186 for the fiscal year ended September 30, 2004. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and the review of the ICI transfer agent survey. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii)pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $24,091 for the fiscal year ended September 30, 2005 and $208,579 for the fiscal year ended September 30, 2004. (h) The registrant's audit committee of the board of trustees has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a) (1) Code of Ethics (a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date November 21, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date November 21, 2005 By /s/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date November 21, 2005 EX-99.CODE ETH 2 ncsr-code704.txt Exhibit (a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. - ----------------- 3 Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. - --------------------- 5 See Part X. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed EX-99.CERT 3 gambill302.txt Exhibit (a)(2) CERTIFICATIONS I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 21, 2005 /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS, INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 21, 2005 /s/GALEN G. VETTER Chief Financial Officer EX-99.77Q2 4 gambill906.txt Exhibit (b) CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the FRANKLIN CUSTODIAN FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: November 21, 2005 /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the FRANKLIN CUSTODIAN FUNDS, INC. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/05 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: November 21, 2005 /s/GALEN G. VETTER Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----