N-CSR 1 fcfarpt0908.txt FCF ANNUAL FILING PE 9/30/08 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 ------------------------ (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: 9/30/08 ------- ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC) SEPTEMBER 30, 2008 Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund ANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS (GRAPHIC) Not part of the annual report Contents CEO'S MESSAGE ............................................................ 1 ANNUAL REPORT Economic and Market Overview ............................................. 4 Franklin DynaTech Fund ................................................... 6 Franklin Growth Fund ..................................................... 16 Franklin Income Fund ..................................................... 25 Franklin U.S. Government Securities Fund ................................. 39 Franklin Utilities Fund .................................................. 50 Financial Highlights and Statements of Investments ....................... 59 Financial Statements ..................................................... 107 Notes to Financial Statements ............................................ 116 Report of Independent Registered Public Accounting Firm .................. 135 Tax Designation .......................................................... 136 Board Members and Officers ............................................... 137 Shareholder Information .................................................. 142
A Message from Gregory E. Johnson, President and Chief Executive Officer of Franklin Resources, Inc. October 31, 2008 Dear Shareholder: The enclosed annual report for Franklin Custodian Funds covers the year ended September 30, 2008, but I would like to add some comments on market events that occurred in October. Recent market volatility has been jarring to everyone, including those of us who have worked in financial markets for many years. Bank lending around the world has seized up, and the fallout has impacted venerable firms alongside broader stock and bond indexes. This environment is bound to provoke great concern, but it's equally important to put the latest market developments in perspective. That's why I'd like to offer a few thoughts on these events, our company's approach to investing and the strong health of our organization. A key point to recognize is that global financial turmoil is being addressed by global action. Central banks around the world have coordinated their efforts to cut interest rates and supply liquidity to frozen funding markets. A number of governments have also intervened to rescue major financial institutions or Sign up for EDELIVERY of your Shareholder Report Shareholders who are registered at franklintempleton.com can receive this report via email by selecting eDelivery options under "My Profile." Not all accounts are eligible for eDelivery. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 find an orderly way for them to be acquired. Here in the U.S., the Federal Reserve and Treasury Department have moved rapidly to establish new programs for easing money market pressures and handling troubled financial assets. The outcome of all these efforts may take a while to be realized, but I believe the latest actions here and abroad mark a significant turning point for global capital markets. It's also important to remember that as daunting as current market conditions may be, we have navigated through other periods of market volatility. U.S. stock markets recorded three bear markets during the 1960s as the nation grappled with the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in 1973 led to a deep U.S. recession and a stock market plunge of 45.1% from January 1973 through December 1974.(1) And the "Black Monday" stock market crash of 1987 remains the largest single-day percentage decline in the history of the Dow Jones Industrial Average.(2) Advice applicable throughout these upheavals remains true today. The late Sir John Templeton, writing 15 years ago, ended a list of his core investment principles with these thoughts: "Do not be fearful or negative too often.... For 100 years optimists have carried the day in U.S. stocks. Even in the dark '70s, many professional money managers -- and many individual investors too -- made money in stocks.... In this century or the next it's still 'Buy low, sell high.'"(3) Sir John knew these simple concepts were difficult to execute in the face of pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual Series portfolio managers are contending with today's challenging environment. They are using their expertise to sort through investment opportunities, avoiding those firms that have become merely cheap and identifying those firms best positioned to be eventual winners. This kind of rigorous, bottom-up, security-by-security analysis is the fundamental investment discipline practiced across our global platform. These asset management strengths are also the core of our business. Unlike financial firms that have dominated recent headlines, Franklin Templeton derives its revenue primarily from investment management, not investment banking or securities brokerage. Additionally, our assets under management are diversified by investment objective, clientele and geographic region. Diversified positioning helps our firm maintain healthy operating margins even when (1.) Source: Ned Davis Research, Inc. (2.) Source: NYSE Euronext. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. (3.) Source: "16 Rules for Investment Success" by Sir John Templeton. 2 | Not part of the annual report volatile markets reduce assets under management. It is also important to note that maintaining a strong balance sheet has been a pillar of our management strategy. We have a substantial pool of cash and investments and low levels of debt, and we are in the enviable position of not having to depend on credit to meet our operating needs. In fact, our strong franchise, sound capitalization and minimal leverage led Standard & Poor's to recently raise its credit ratings on Franklin Resources, Inc. (BEN) to the highest level currently applied to a publicly traded asset manager.(4) Franklin Templeton's six-decade growth into a premier global asset manager has given us the conviction that although conditions remain challenging, there are ample reasons to be optimistic about eventual market stabilization and recovery. Being able to take advantage of markets shaken by maximum pessimism has helped our firm develop into an organization that stretches across 29 countries and manages assets for more than 20 million shareholder accounts. In the enclosed annual report for Franklin Custodian Funds, the portfolio managers discuss market conditions, investment decisions and Fund performance during the year ended September 30, 2008. The report contains additional performance data and financial information. Our website, FRANKLINTEMPLETON.COM, offers more timely discussions, daily prices, portfolio holdings and other information. We encourage you to discuss your concerns with your financial advisor, who can review your overall portfolio, reassess your goals and help you stay focused on the long term. As times like these illustrate, all securities markets fluctuate, as do fund share prices. We are grateful for the trust you have placed in Franklin Templeton and remain focused on serving your investment needs. Sincerely, /s/ Gregory E. Johnson Gregory E. Johnson President and Chief Executive Officer Franklin Resources, Inc. THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (4.) Source: Standard & Poor's press release, 10/6/08. Not part of the annual report | 3 Annual Report Economic and Market Overview For the year ended September 30, 2008, the decelerating U.S. economy contended with a staggering financial markets crisis amid a wave of government interventions and emergency funding. In addition, high oil prices, the worst housing market contraction in decades, a severe credit crunch and rising joblessness weighed on the economy. Economic growth, as measured by gross domestic product (GDP), reported a -0.2% annualized rate for the fourth quarter of 2007. GDP edged up to 0.9% annualized in the first quarter of 2008 and improved at a 2.8% annualized pace in the second quarter, based largely on strong exports and government spending. However, GDP fell an estimated annualized 0.3% in 2008's third quarter as the subprime financial crisis deepened and spread into all aspects of the economy. The U.S. dollar declined for much of the 12 months compared with most foreign currencies, which contributed to increased export demand and aided the manufacturing sector. The greenback then rallied toward period-end, breaking a six-year downward trend as commodity prices fell, inflationary concerns abated and global economic growth began to subside. Supports to the economy included an inventory buildup, expanding government spending and a boost to household finances from a fiscal stimulus package. Although tax rebate checks lifted spending temporarily, retail sales remained weak and new vehicle sales hit a 15-year low. The U.S. labor market contracted and the unemployment rate rose from 4.7% at the beginning of the period to 6.1% in September, the highest level since September 2003.(1) Volatile oil prices soared to an all-time trading high of $145 per barrel in July 2008 but eased to $101 by period-end. Many other commodity prices -- including those for coal, natural gas, precious metals, raw materials and agricultural commodities -- also neared or surpassed all-time highs due to increased worldwide demand and investors seeking alternatives to shaky stocks and corporate bonds. These prices plummeted through much of third quarter 2008 as global demand and speculative buying subsided. For the 12 months ended September 30, 2008, inflation as measured by the core Consumer Price Index (CPI), which excludes food and energy costs, rose 2.5%; this was higher than its 2.2% 10-year average rate.(1) (1.) Source: Bureau of Labor Statistics. 4 | Annual Report Seeking to stimulate the sagging economy without stoking inflation, the Federal Reserve Board (Fed) made six cuts to its key federal funds target rate during the period, lowering it 275 basis points, from 4.75% to a four-year low of 2.00%. In this uncertain environment, LIBOR (London Interbank Offered Rate), the interest rate that banks charge each other for loans, jumped to record highs. Fixed income spreads generally widened relative to Treasury yields over the period as investors sought the relative safety of short- and intermediate-term U.S. Treasury securities. Treasury yields declined and the yield curve steepened as short-term, two- and five-year yields declined significantly, with the two-year bill yielding 2.00% at the end of September, down from 3.97% a year earlier. Over the same period, the 10-year U.S. Treasury note yield declined from 4.59% to 3.85%. U.S. stock markets endured high volatility and suffered losses during this challenging period. For the 12 months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -19.85%, the broader Standard & Poor's 500 Index (S&P 500) a -21.98% total return, and the technology-heavy NASDAQ Composite Index a -21.99% total return.(2) Consumer staples was the only sector to record positive results, while the financials, telecommunications and industrials sectors had the largest declines. In general, small-capitalization stocks performed better than large caps, and growth stocks fared better than their value counterparts. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF SEPTEMBER 30, 2008. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. (2.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Annual Report | 5 Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin DynaTech Fund covers the fiscal year ended September 30, 2008. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A had a -21.36% cumulative total return for the 12 months under review. For the same period, the Fund performed better than its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of -24.22%, and performed comparably to the broader Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 63. 6 | Annual Report products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. MANAGER'S DISCUSSION During this challenging year, many Fund holdings declined in value and hurt Fund performance. These included computer processing hardware manufacturer Apple, Internet search engine Google and computer technology firm NVIDIA. Apple's share price fell late in the reporting period after investors began questioning whether consumers would continue to buy the company's high-end products amid the current global economic slowdown. Google's shares suffered largely due to decelerating advertising revenue. NVIDIA's share price declined mainly due to expectations for slowing computer and semiconductor sales, and we sold it by period-end. The information technology sector suffered steep declines during the year under review.(2) Within the sector, the semiconductors and semiconductor equipment industry, including Intel and Varian Semiconductor Equipment, hurt performance on an absolute basis during the period. The industry can be sensitive to economic changes, and this poor performance reflected slow growth in the current global economic downturn. Most of the industries in this sector, such as Internet software and services, software, and communications equipment, also weighed on the Fund's performance. One of the most significant contributors to Fund performance during the year under review was global retail electronic payments network operator Visa, whose initial public offering in March was the largest ever recorded. Other major contributors to performance included biotechnology giant Genentech, whose shares shot up in price after drugmaker Roche offered to buy full control of the company, and drug manufacturer Millennium Pharmaceuticals, whose share price increased after it agreed to be acquired by Takeda Pharmaceuticals. These companies led biotechnology to boost Fund performance from an industry perspective. We no longer held Millennium Pharmaceuticals by period-end. PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 9/30/08 (PERFORMANCE GRAPH) Software 15.8% Biotechnology 12.2% Computers & Peripherals 7.6% Health Care Equipment & Supplies 7.3% Semiconductors & Semiconductor Equipment 6.4% Communications Equipment 5.5% Internet Software & Services 5.5% Pharmaceuticals 5.4% Chemicals 4.7% Communications Equipment 4.6% IT Services 4.5% Energy Equipment & Services 4.5% Life Sciences Tools & Services 3.7% Electronic Equipment, Instruments & Components 2.2% Other 10.0% Short-Term Investments & Other Net Assets 5.6%
(2.) The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; Internet software and services; IT services; semiconductors and semiconductor equipment; and software in the SOI. Annual Report | 7 TOP 10 HOLDINGS Franklin DynaTech Fund 9/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Genentech Inc. 4.9% BIOTECHNOLOGY Intel Corp. 4.6% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT Apple Inc. 4.1% COMPUTERS & PERIPHERALS Google Inc., A 3.6% INTERNET SOFTWARE & SERVICES Hewlett-Packard Co. 3.5% COMPUTERS & PERIPHERALS Visa Inc., A 3.4% IT SERVICES Adobe Systems Inc. 3.0% SOFTWARE Gilead Sciences Inc. 3.0% BIOTECHNOLOGY Sigma-Aldrich Corp. 2.9% CHEMICALS Celgene Corp. 2.8% BIOTECHNOLOGY
Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. (PHOTO OF RUPERT H. JOHNSON) /s/ Rupert H. Johnson Rupert H. Johnson, Jr. (PHOTO OF MATTHEW J. MOBERG) /s/ Matthew J. Moberg Matthew J. Moberg, CPA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 8 | Annual Report Performance Summary as of 9/30/08 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKDNX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$7.46 $24.87 $32.33 DISTRIBUTIONS (10/1/07-9/30/08) Long-Term Capital Gain $0.7062
CLASS B (SYMBOL: FDNBX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$7.30 $23.48 $30.78 DISTRIBUTIONS (10/1/07-9/30/08) Long-Term Capital Gain $0.7062
CLASS C (SYMBOL: FDYNX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$7.23 $23.23 $30.46 DISTRIBUTIONS (10/1/07-9/30/08) Long-Term Capital Gain $0.7062
ADVISOR CLASS (SYMBOL: N/A) CHANGE 9/30/08 5/15/08 --------------------------- ------ ------- ------- Net Asset Value (NAV) -$6.50 $24.90 $31.40
Annual Report | 9 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR ------- ------ ------- --------- Cumulative Total Return(1) -21.36% +26.05% +52.12% Average Annual Total Return(2) -25.88% +3.51% +3.67% Value of $10,000 Investment(3) $7,412 $11,880 $14,336 Total Annual Operating Expenses(4) 0.99%
INCEPTION CLASS B 1-YEAR 5-YEAR (2/1/00) ------- ------ ------- --------- Cumulative Total Return(1) -21.96% +21.31% -11.37% Average Annual Total Return(2) -25.01% +3.59% -1.38% Value of $10,000 Investment(3) $7,499 $11,931 $8,863 Total Annual Operating Expenses(4) 1.75%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------ ------- --------- Cumulative Total Return(1) -21.93% +21.39% +41.21% Average Annual Total Return(2) -22.69% +3.95% +3.51% Value of $10,000 Investment(3) $7,731 $12,139 $14,121 Total Annual Operating Expenses(4) 1.74%
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR ---------------- ------ ------- --------- Cumulative Total Return(1) -21.27% +26.20% +52.30% Average Annual Total Return(2) -21.27% +4.76% +4.30% Value of $10,000 Investment(3) $7,873 $12,620 $15,230 Total Annual Operating Expenses(4) 0.75%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 10 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The indexes are unmanaged. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS A INDEX INDEX ---------- ----------------- ------- ---------- 10/1/1998 $ 9,424 $10,000 $10,000 10/31/1998 $ 9,683 $10,813 $10,409 11/30/1998 $10,280 $11,469 $11,579 12/31/1998 $10,985 $12,130 $13,646 1/31/1999 $11,841 $12,637 $15,810 2/28/1999 $11,295 $12,244 $14,309 3/31/1999 $11,664 $12,734 $15,655 4/30/1999 $11,696 $13,227 $15,878 5/31/1999 $11,504 $12,915 $15,531 6/30/1999 $12,092 $13,632 $17,070 7/31/1999 $12,081 $13,206 $16,878 8/31/1999 $12,418 $13,141 $17,814 9/30/1999 $12,360 $12,781 $17,896 10/31/1999 $12,862 $13,589 $19,602 11/30/1999 $13,622 $13,866 $22,049 12/31/1999 $15,070 $14,682 $27,558 1/31/2000 $15,222 $13,945 $26,534 2/29/2000 $16,562 $13,681 $31,713 3/31/2000 $16,731 $15,019 $32,686 4/30/2000 $15,824 $14,567 $28,043 5/31/2000 $15,065 $14,268 $24,706 6/30/2000 $15,993 $14,620 $27,974 7/31/2000 $15,710 $14,391 $26,826 8/31/2000 $16,850 $15,285 $30,306 9/30/2000 $15,520 $14,478 $26,538 10/31/2000 $15,124 $14,417 $24,395 11/30/2000 $13,513 $13,280 $18,629 12/31/2000 $13,226 $13,345 $17,404 1/31/2001 $13,893 $13,819 $19,272 2/28/2001 $12,215 $12,559 $14,183 3/31/2001 $11,498 $11,763 $11,693 4/30/2001 $12,248 $12,677 $13,788 5/31/2001 $12,059 $12,762 $13,377 6/30/2001 $11,971 $12,452 $13,622 7/31/2001 $11,593 $12,329 $12,513 8/31/2001 $11,121 $11,557 $10,923 9/30/2001 $10,421 $10,624 $ 8,684 10/31/2001 $10,898 $10,827 $10,143 11/30/2001 $11,576 $11,657 $11,862 12/31/2001 $11,492 $11,759 $11,721 1/31/2002 $11,402 $11,588 $11,521 2/28/2002 $10,866 $11,364 $10,102 3/31/2002 $11,199 $11,792 $10,798 4/30/2002 $10,595 $11,077 $ 9,492 5/31/2002 $10,460 $10,995 $ 8,981 6/30/2002 $9,811 $10,212 $ 7,814 7/31/2002 $9,304 $ 9,416 $ 7,151 8/31/2002 $9,264 $ 9,478 $ 7,004 9/30/2002 $8,667 $ 8,448 $ 6,188 10/31/2002 $9,400 $ 9,191 $ 7,355 11/30/2002 $9,981 $ 9,732 $ 8,295 12/31/2002 $9,208 $ 9,160 $ 7,316 1/31/2003 $9,107 $ 8,920 $ 7,306 2/28/2003 $9,197 $ 8,786 $ 7,505 3/31/2003 $9,276 $ 8,871 $ 7,571 4/30/2003 $9,890 $ 9,602 $ 8,221 5/31/2003 $10,623 $10,109 $ 8,903 6/30/2003 $10,804 $10,238 $ 8,931 7/31/2003 $11,193 $10,418 $ 9,491 8/31/2003 $11,605 $10,621 $ 9,968 9/30/2003 $11,373 $10,509 $ 9,689 10/31/2003 $12,152 $11,103 $10,527 11/30/2003 $12,377 $11,201 $10,585 12/31/2003 $12,766 $11,789 $10,910 1/31/2004 $13,042 $12,005 $11,097 2/29/2004 $12,901 $12,172 $10,928 3/31/2004 $12,828 $11,989 $10,691 4/30/2004 $12,614 $11,800 $10,415 5/31/2004 $13,127 $11,962 $10,897 6/30/2004 $13,274 $12,194 $11,272 7/31/2004 $12,174 $11,790 $10,408 8/31/2004 $11,954 $11,838 $10,172 9/30/2004 $12,411 $11,965 $10,500 10/31/2004 $12,676 $12,148 $11,050 11/30/2004 $13,245 $12,641 $11,680 12/31/2004 $13,747 $13,070 $12,049 1/31/2005 $12,930 $12,752 $11,294 2/28/2005 $13,099 $13,020 $11,230 3/31/2005 $12,811 $12,789 $11,019 4/30/2005 $12,586 $12,546 $10,560 5/31/2005 $13,460 $12,946 $11,465 6/30/2005 $13,324 $12,964 $11,100 7/31/2005 $14,007 $13,446 $11,930 8/31/2005 $14,108 $13,324 $11,756 9/30/2005 $14,086 $13,432 $11,904 10/31/2005 $13,973 $13,208 $11,737 11/30/2005 $14,869 $13,707 $12,431 12/31/2005 $14,734 $13,712 $12,228 1/31/2006 $15,326 $14,075 $12,715 2/28/2006 $15,027 $14,113 $12,416 3/31/2006 $15,123 $14,289 $12,662 4/30/2006 $15,033 $14,481 $12,640 5/31/2006 $14,052 $14,064 $11,740 6/30/2006 $14,159 $14,083 $11,708 7/31/2006 $13,719 $14,170 $11,219 8/31/2006 $14,232 $14,507 $11,741 9/30/2006 $14,548 $14,881 $12,294 10/31/2006 $14,886 $15,366 $12,877 11/30/2006 $15,236 $15,658 $13,313 12/31/2006 $15,123 $15,878 $13,058 1/31/2007 $15,473 $16,118 $13,321 2/28/2007 $15,213 $15,803 $13,093 3/31/2007 $15,332 $15,979 $13,173 4/30/2007 $16,048 $16,687 $13,882 5/31/2007 $16,533 $17,269 $14,331 6/30/2007 $16,426 $16,983 $14,375 7/31/2007 $16,482 $16,456 $14,360 8/31/2007 $17,046 $16,703 $14,781 9/30/2007 $18,230 $17,327 $15,542 10/31/2007 $19,256 $17,603 $16,641 11/30/2007 $18,337 $16,867 $15,527 12/31/2007 $18,613 $16,750 $15,496 1/31/2008 $16,129 $15,745 $13,686 2/29/2008 $15,794 $15,234 $12,971 3/31/2008 $16,013 $15,168 $13,244 4/30/2008 $17,316 $15,907 $14,253 5/31/2008 $18,008 $16,113 $15,107 6/30/2008 $16,953 $14,754 $13,654 7/31/2008 $16,768 $14,630 $13,743 8/31/2008 $16,642 $14,842 $13,917 9/30/2008 $14,336 $13,519 $11,852
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08 ------- ------- 1-Year -25.88% 5-Year +3.51% 10-Year +3.67%
CLASS B (2/1/00-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS B INDEX INDEX ---------- ----------------- ------- ---------- 2/1/2000 $10,000 $10,000 $10,000 2/29/2000 $10,870 $ 9,811 $11,952 3/31/2000 $10,973 $10,770 $12,319 4/30/2000 $10,374 $10,446 $10,569 5/31/2000 $ 9,868 $10,232 $ 9,311 6/30/2000 $10,471 $10,484 $10,543 7/31/2000 $10,278 $10,320 $10,110 8/31/2000 $11,020 $10,961 $11,422 9/30/2000 $10,146 $10,383 $10,002 10/31/2000 $ 9,879 $10,339 $ 9,194 11/30/2000 $ 8,824 $ 9,524 $ 7,021 12/31/2000 $ 8,624 $ 9,570 $ 6,559 1/31/2001 $ 9,053 $ 9,910 $ 7,263 2/28/2001 $ 7,958 $ 9,006 $ 5,345 3/31/2001 $ 7,488 $ 8,436 $ 4,407 4/30/2001 $ 7,968 $ 9,091 $ 5,196 5/31/2001 $ 7,841 $ 9,152 $ 5,042 6/30/2001 $ 7,779 $ 8,929 $ 5,134 7/31/2001 $ 7,528 $ 8,842 $ 4,716 8/31/2001 $ 7,219 $ 8,288 $ 4,117 9/30/2001 $ 6,760 $ 7,619 $ 3,273 10/31/2001 $ 7,062 $ 7,764 $ 3,823 11/30/2001 $ 7,499 $ 8,360 $ 4,471 12/31/2001 $ 7,437 $ 8,433 $ 4,417 1/31/2002 $ 7,378 $ 8,310 $ 4,342 2/28/2002 $ 7,026 $ 8,150 $ 3,807 3/31/2002 $ 7,239 $ 8,456 $ 4,069 4/30/2002 $ 6,842 $ 7,943 $ 3,577 5/31/2002 $ 6,751 $ 7,885 $ 3,385 6/30/2002 $ 6,329 $ 7,323 $ 2,945 7/31/2002 $ 5,995 $ 6,752 $ 2,695 8/31/2002 $ 5,969 $ 6,797 $ 2,640 9/30/2002 $ 5,576 $ 6,058 $ 2,332 10/31/2002 $ 6,046 $ 6,591 $ 2,772 11/30/2002 $ 6,413 $ 6,979 $ 3,126 12/31/2002 $ 5,917 $ 6,569 $ 2,757 1/31/2003 $ 5,848 $ 6,397 $ 2,754 2/28/2003 $ 5,903 $ 6,301 $ 2,828 3/31/2003 $ 5,947 $ 6,362 $ 2,853 4/30/2003 $ 6,340 $ 6,886 $ 3,098 5/31/2003 $ 6,806 $ 7,249 $ 3,355 6/30/2003 $ 6,916 $ 7,342 $ 3,366 7/31/2003 $ 7,158 $ 7,471 $ 3,577 8/31/2003 $ 7,419 $ 7,617 $ 3,757 9/30/2003 $ 7,268 $ 7,536 $ 3,652 10/31/2003 $ 7,760 $ 7,963 $ 3,967 11/30/2003 $ 7,896 $ 8,033 $ 3,989 12/31/2003 $ 8,142 $ 8,454 $ 4,112 1/31/2004 $ 8,311 $ 8,609 $ 4,182 2/29/2004 $ 8,215 $ 8,729 $ 4,119 3/31/2004 $ 8,164 $ 8,597 $ 4,029 4/30/2004 $ 8,025 $ 8,462 $ 3,925 5/31/2004 $ 8,344 $ 8,578 $ 4,107 6/30/2004 $ 8,432 $ 8,745 $ 4,248 7/31/2004 $ 7,727 $ 8,455 $ 3,923 8/31/2004 $ 7,584 $ 8,489 $ 3,834 9/30/2004 $ 7,867 $ 8,581 $ 3,957 10/31/2004 $ 8,028 $ 8,712 $ 4,164 11/30/2004 $ 8,388 $ 9,065 $ 4,402 12/31/2004 $ 8,696 $ 9,373 $ 4,541 1/31/2005 $ 8,179 $ 9,145 $ 4,257 2/28/2005 $ 8,278 $ 9,337 $ 4,233 3/31/2005 $ 8,091 $ 9,171 $ 4,153 4/30/2005 $ 7,944 $ 8,997 $ 3,980 5/31/2005 $ 8,491 $ 9,284 $ 4,321 6/30/2005 $ 8,399 $ 9,297 $ 4,183 7/31/2005 $ 8,825 $ 9,643 $ 4,496 8/31/2005 $ 8,880 $ 9,555 $ 4,431 9/30/2005 $ 8,865 $ 9,632 $ 4,486 10/31/2005 $ 8,784 $ 9,471 $ 4,423 11/30/2005 $ 9,342 $ 9,830 $ 4,685 12/31/2005 $ 9,254 $ 9,833 $ 4,608 1/31/2006 $ 9,621 $10,093 $ 4,792 2/28/2006 $ 9,423 $10,121 $ 4,679 3/31/2006 $ 9,478 $10,247 $ 4,772 4/30/2006 $ 9,416 $10,384 $ 4,764 5/31/2006 $ 8,795 $10,086 $ 4,425 6/30/2006 $ 8,858 $10,099 $ 4,412 7/31/2006 $ 8,579 $10,162 $ 4,228 8/31/2006 $ 8,895 $10,403 $ 4,425 9/30/2006 $ 9,085 $10,671 $ 4,633 10/31/2006 $ 9,291 $11,019 $ 4,853 11/30/2006 $ 9,504 $11,229 $ 5,017 12/31/2006 $ 9,427 $11,386 $ 4,921 1/31/2007 $ 9,640 $11,558 $ 5,020 2/28/2007 $ 9,471 $11,332 $ 4,935 3/31/2007 $ 9,541 $11,459 $ 4,965 4/30/2007 $ 9,977 $11,967 $ 5,232 5/31/2007 $10,271 $12,384 $ 5,401 6/30/2007 $10,201 $12,179 $ 5,418 7/31/2007 $10,231 $11,801 $ 5,412 8/31/2007 $10,572 $11,978 $ 5,571 9/30/2007 $11,299 $12,426 $ 5,857 10/31/2007 $11,927 $12,624 $ 6,272 11/30/2007 $11,354 $12,096 $ 5,852 12/31/2007 $11,515 $12,012 $ 5,840 1/31/2008 $ 9,971 $11,291 $ 5,158 2/29/2008 $ 9,765 $10,924 $ 4,889 3/31/2008 $ 9,900 $10,877 $ 4,991 4/30/2008 $10,706 $11,407 $ 5,372 5/31/2008 $11,133 $11,555 $ 5,693 6/30/2008 $10,481 $10,581 $ 5,146 7/31/2008 $10,367 $10,492 $ 5,180 8/31/2008 $10,288 $10,643 $ 5,245 9/30/2008 $ 8,863 $ 9,695 $ 4,467
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08 ------- ------- 1-Year -25.01% 5-Year +3.59% Since Inception (2/1/00) -1.38%
Annual Report | 11 Performance Summary (CONTINUED) CLASS C (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH S&P 500 NASDAQ 100 DATE FUND - CLASS C INDEX INDEX ---------- ----------------- ------- ---------- 10/1/1998 $10,000 $10,000 $10,000 10/31/1998 $10,268 $10,813 $10,409 11/30/1998 $10,896 $11,469 $11,579 12/31/1998 $11,634 $12,130 $13,646 1/31/1999 $12,531 $12,637 $15,810 2/28/1999 $11,950 $12,244 $14,309 3/31/1999 $12,329 $12,734 $15,655 4/30/1999 $12,358 $13,227 $15,878 5/31/1999 $12,151 $12,915 $15,531 6/30/1999 $12,761 $13,632 $17,070 7/31/1999 $12,743 $13,206 $16,878 8/31/1999 $13,089 $13,141 $17,814 9/30/1999 $13,019 $12,781 $17,896 10/31/1999 $13,537 $13,589 $19,602 11/30/1999 $14,331 $13,866 $22,049 12/31/1999 $15,845 $14,682 $27,558 1/31/2000 $15,996 $13,945 $26,534 2/29/2000 $17,396 $13,681 $31,713 3/31/2000 $17,558 $15,019 $32,686 4/30/2000 $16,600 $14,567 $28,043 5/31/2000 $15,787 $14,268 $24,706 6/30/2000 $16,757 $14,620 $27,974 7/31/2000 $16,449 $14,391 $26,826 8/31/2000 $17,628 $15,285 $30,306 9/30/2000 $16,229 $14,478 $26,538 10/31/2000 $15,805 $14,417 $24,395 11/30/2000 $14,115 $13,280 $18,629 12/31/2000 $13,799 $13,345 $17,404 1/31/2001 $14,489 $13,819 $19,272 2/28/2001 $12,732 $12,559 $14,183 3/31/2001 $11,983 $11,763 $11,693 4/30/2001 $12,755 $12,677 $13,788 5/31/2001 $12,549 $12,762 $13,377 6/30/2001 $12,449 $12,452 $13,622 7/31/2001 $12,048 $12,329 $12,513 8/31/2001 $11,547 $11,557 $10,923 9/30/2001 $10,815 $10,624 $ 8,684 10/31/2001 $11,305 $10,827 $10,143 11/30/2001 $12,001 $11,657 $11,862 12/31/2001 $11,900 $11,759 $11,721 1/31/2002 $11,805 $11,588 $11,521 2/28/2002 $11,247 $11,364 $10,102 3/31/2002 $11,580 $11,792 $10,798 4/30/2002 $10,950 $11,077 $ 9,492 5/31/2002 $10,802 $10,995 $ 8,981 6/30/2002 $10,125 $10,212 $ 7,814 7/31/2002 $ 9,596 $ 9,416 $ 7,151 8/31/2002 $ 9,549 $ 9,478 $ 7,004 9/30/2002 $ 8,925 $ 8,448 $ 6,188 10/31/2002 $ 9,679 $ 9,191 $ 7,355 11/30/2002 $10,267 $ 9,732 $ 8,295 12/31/2002 $ 9,472 $ 9,160 $ 7,316 1/31/2003 $ 9,359 $ 8,920 $ 7,306 2/28/2003 $ 9,448 $ 8,786 $ 7,505 3/31/2003 $ 9,519 $ 8,871 $ 7,571 4/30/2003 $10,149 $ 9,602 $ 8,221 5/31/2003 $10,891 $10,109 $ 8,903 6/30/2003 $11,069 $10,238 $ 8,931 7/31/2003 $11,461 $10,418 $ 9,491 8/31/2003 $11,877 $10,621 $ 9,968 9/30/2003 $11,633 $10,509 $ 9,689 10/31/2003 $12,423 $11,103 $10,527 11/30/2003 $12,643 $11,201 $10,585 12/31/2003 $13,035 $11,789 $10,910 1/31/2004 $13,308 $12,005 $11,097 2/29/2004 $13,153 $12,172 $10,928 3/31/2004 $13,070 $11,989 $10,691 4/30/2004 $12,844 $11,800 $10,415 5/31/2004 $13,355 $11,962 $10,897 6/30/2004 $13,498 $12,194 $11,272 7/31/2004 $12,369 $11,790 $10,408 8/31/2004 $12,144 $11,838 $10,172 9/30/2004 $12,595 $11,965 $10,500 10/31/2004 $12,856 $12,148 $11,050 11/30/2004 $13,426 $12,641 $11,680 12/31/2004 $13,919 $13,070 $12,049 1/31/2005 $13,094 $12,752 $11,294 2/28/2005 $13,254 $13,020 $11,230 3/31/2005 $12,951 $12,789 $11,019 4/30/2005 $12,714 $12,546 $10,560 5/31/2005 $13,593 $12,946 $11,465 6/30/2005 $13,444 $12,964 $11,100 7/31/2005 $14,127 $13,446 $11,930 8/31/2005 $14,216 $13,324 $11,756 9/30/2005 $14,192 $13,432 $11,904 10/31/2005 $14,068 $13,208 $11,737 11/30/2005 $14,959 $13,707 $12,431 12/31/2005 $14,816 $13,712 $12,228 1/31/2006 $15,398 $14,075 $12,715 2/28/2006 $15,089 $14,113 $12,416 3/31/2006 $15,178 $14,289 $12,662 4/30/2006 $15,077 $14,481 $12,640 5/31/2006 $14,086 $14,064 $11,740 6/30/2006 $14,181 $14,083 $11,708 7/31/2006 $13,735 $14,170 $11,219 8/31/2006 $14,240 $14,507 $11,741 9/30/2006 $14,549 $14,881 $12,294 10/31/2006 $14,875 $15,366 $12,877 11/30/2006 $15,214 $15,658 $13,313 12/31/2006 $15,095 $15,878 $13,058 1/31/2007 $15,428 $16,118 $13,321 2/28/2007 $15,166 $15,803 $13,093 3/31/2007 $15,273 $15,979 $13,173 4/30/2007 $15,974 $16,687 $13,882 5/31/2007 $16,443 $17,269 $14,331 6/30/2007 $16,330 $16,983 $14,375 7/31/2007 $16,378 $16,456 $14,360 8/31/2007 $16,930 $16,703 $14,781 9/30/2007 $18,088 $17,327 $15,542 10/31/2007 $19,098 $17,603 $16,641 11/30/2007 $18,177 $16,867 $15,527 12/31/2007 $18,431 $16,750 $15,496 1/31/2008 $15,963 $15,745 $13,686 2/29/2008 $15,623 $15,234 $12,971 3/31/2008 $15,830 $15,168 $13,244 4/30/2008 $17,106 $15,907 $14,253 5/31/2008 $17,781 $16,113 $15,107 6/30/2008 $16,729 $14,754 $13,654 7/31/2008 $16,535 $14,630 $13,743 8/31/2008 $16,401 $14,842 $13,917 9/30/2008 $14,121 $13,519 $11,852
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08 ------- ------- 1-Year -22.69% 5-Year +3.95% 10-Year +3.51%
ADVISOR CLASS (10/1/98-9/30/08)(5) (PERFORMANCE GRAPH) (PLOT POINTS TO COME) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(5) 9/30/08 ---------------- ------- 1-Year -21.27% 5-Year +4.76% 10-Year +4.30%
12 | Annual Report Performance Summary (CONTINUED) ENDNOTES THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE), COULD RESULT IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICES OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) Figures are as stated in the Fund's prospectus current as of the date of this report. (5.) Effective 5/15/08, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 5/15/08, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 5/14/08, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 5/15/08 (commencement of sales), the cumulative total return of Advisor Class shares was -20.70%. (6.) Source: (C) 2008 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. Annual Report | 13 Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 14 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 4/1/08 VALUE 9/30/08 PERIOD* 4/1/08-9/30/08 ----------------- -------------- ---------------------- CLASS A Actual $1,000 $ 895.20 $4.60 Hypothetical (5% return before expenses) $1,000 $1,020.15 $4.90 CLASS B Actual $1,000 $ 891.70 $8.13 Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67 CLASS C Actual $1,000 $ 892.10 $8.14 Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.67 ADVISOR CLASS Actual (5/15/08-9/30/08) $1,000 $ 793.00 $2.49 Hypothetical (5% return before expenses) $1,000 $1,021.35 $3.69
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.97%; B: 1.72%; C: 1.72%; and Advisor Class: 0.73%), multiplied by the average account value over the period, multiplied by 183/366 (Hypothetical for all share classes; Actual for Classes A, B and C) to reflect the one-half year period. For Actual Advisor Class expenses, the multiplier is 139/366 to reflect the number of days since the class's inception. Annual Report | 15 Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. TOP 10 HOLDINGS Franklin Growth Fund 9/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Genentech Inc. 3.8% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Apple Inc. 3.4% TECHNOLOGY HARDWARE & EQUIPMENT Johnson & Johnson 3.2% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES General Dynamics Corp. 3.1% CAPITAL GOODS International Business Machines Corp. 2.9% TECHNOLOGY HARDWARE & EQUIPMENT Northrop Grumman Corp. 2.6% CAPITAL GOODS The Boeing Co. 2.6% CAPITAL GOODS 3M Co. 2.5% CAPITAL GOODS Amgen Inc. 2.4% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Lockheed Martin Corp. 2.3% CAPITAL GOODS
This annual report for Franklin Growth Fund covers the fiscal year ended September 30, 2008. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A had a -19.59% cumulative total return for the 12 months under review. The Fund performed better than its benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 18. INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION Franklin Growth Fund owned 115 companies at period-end. We continue to invest in a broad array of companies of all sizes and in varied industries. In a challenging environment for stocks, several of our holdings dragged on Fund performance during the fiscal year. Within the capital goods sector, our position in major aerospace and defense company Boeing was a primary (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 71. 16 | Annual Report detractor. Northrop-Grumman, another big defense contractor held by the Fund, also declined substantially. Some other capital goods holdings also declined in value, where Textron and 3M were particular disappointments. In the transportation sector, the airlines industry struggled and some airline holdings weighed on Fund performance during the period. Among the poorest performers were Continental Airlines, Texas-based AMR (the parent company of American Airlines) and U.K.-based British Airways. During the period under review, Fund performance was largely driven by the positive returns of holdings in the pharmaceuticals, biotechnology and life sciences sector. Among these were biotech leaders Genentech and Amgen, and diversified health care products manufacturer Johnson & Johnson. Baxter International, in the health care equipment and services sector, also aided the Fund. Other key contributors included road and rail stocks in the transportation sector. Our investments in railroad transportation operators such as Union Pacific and Arkansas Best appreciated significantly during the year under review. Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. (PHOTO OF V. JERRY PALMIERI) /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 9/30/08 (PERFORMANCE GRAPH) Capital Goods* 28.8% Pharmaceuticals, Biotechnology & Life Sciences 20.7% Technology Hardware & Equipment 12.9% Transportation 9.8% Software & Services 6.3% Health Care Equipment & Services 4.0% Automobiles & Components 2.7% Materials 2.4% Commercial & Professional Services 2.3% Media 2.2% Energy 2.2% Other 5.7%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. Annual Report | 17 Performance Summary as of 9/30/08 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKGRX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$9.19 $37.17 $46.36 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1302
CLASS B (SYMBOL: FKGBX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$8.98 $35.44 $44.42
CLASS C (SYMBOL: FRGSX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$8.89 $35.14 $44.03
CLASS R (SYMBOL: FGSRX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$9.12 $36.87 $45.99 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.0304
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$9.20 $37.25 $46.45 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.2332
18 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR ------- ------ ------- --------- Cumulative Total Return(1) -19.59% +39.80% +46.49% Average Annual Total Return(2) -24.22% +5.67% +3.28% Value of $10,000 Investment(3) $7,578 $13,176 $13,808 Total Annual Operating Expenses(4) 0.93%
INCEPTION CLASS B 1-YEAR 5-YEAR (1/1/99) ------- ------ ------- --------- Cumulative Total Return(1) -20.22% +34.65% +22.83% Average Annual Total Return(2) -23.41% +5.81% +2.13% Value of $10,000 Investment(3) $7,659 $13,265 $ 12,283 Total Annual Operating Expenses(4) 1.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------ ------- --------- Cumulative Total Return(1) -20.19% +34.64% +35.88% Average Annual Total Return(2) -20.99% +6.13% +3.11% Value of $10,000 Investment(3) $7,901 $13,464 $13,588 Total Annual Operating Expenses(4) 1.69%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) ------- ------ ------- --------- Cumulative Total Return(1) -19.78% +38.07% +17.12% Average Annual Total Return(2) -19.78% +6.66% +2.37% Value of $10,000 Investment(3) $8,022 $13,807 $11,712 Total Annual Operating Expenses(4) 1.19%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR ------------- ------ ------- --------- Cumulative Total Return(1) -19.39% +41.51% +50.11% Average Annual Total Return(2) -19.39% +7.19% +4.15% Value of $10,000 Investment(3) $8,061 $14,151 $15,011 Total Annual Operating Expenses(4) 0.69%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Annual Report | 19 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500 DATE FUND - CLASS A INDEX ---------- --------------- -------- 10/1/1998 $ 9,426 $10,000 10/31/1998 $10,007 $10,813 11/30/1998 $10,366 $11,469 12/31/1998 $10,590 $12,130 1/31/1999 $10,775 $12,637 2/28/1999 $10,660 $12,244 3/31/1999 $10,950 $12,734 4/30/1999 $11,307 $13,227 5/31/1999 $11,169 $12,915 6/30/1999 $11,637 $13,632 7/31/1999 $11,448 $13,206 8/31/1999 $11,495 $13,141 9/30/1999 $11,182 $12,781 10/31/1999 $11,364 $13,589 11/30/1999 $11,509 $13,866 12/31/1999 $11,880 $14,682 1/31/2000 $11,781 $13,945 2/29/2000 $11,505 $13,681 3/31/2000 $12,506 $15,019 4/30/2000 $12,654 $14,567 5/31/2000 $12,706 $14,268 6/30/2000 $12,885 $14,620 7/31/2000 $12,685 $14,391 8/31/2000 $13,242 $15,285 9/30/2000 $12,695 $14,478 10/31/2000 $12,864 $14,417 11/30/2000 $12,530 $13,280 12/31/2000 $12,775 $13,345 1/31/2001 $13,015 $13,819 2/28/2001 $12,363 $12,559 3/31/2001 $11,447 $11,763 4/30/2001 $12,370 $12,677 5/31/2001 $12,560 $12,762 6/30/2001 $11,983 $12,452 7/31/2001 $11,954 $12,329 8/31/2001 $11,411 $11,557 9/30/2001 $10,142 $10,624 10/31/2001 $10,481 $10,827 11/30/2001 $11,476 $11,657 12/31/2001 $11,565 $11,759 1/31/2002 $11,400 $11,588 2/28/2002 $11,319 $11,364 3/31/2002 $11,712 $11,792 4/30/2002 $10,971 $11,077 5/31/2002 $10,754 $10,995 6/30/2002 $ 9,943 $10,212 7/31/2002 $ 9,047 $ 9,416 8/31/2002 $ 9,066 $ 9,478 9/30/2002 $ 8,078 $ 8,448 10/31/2002 $ 8,640 $ 9,191 11/30/2002 $ 9,231 $ 9,732 12/31/2002 $ 8,749 $ 9,160 1/31/2003 $ 8,414 $ 8,920 2/28/2003 $ 8,223 $ 8,786 3/31/2003 $ 8,223 $ 8,871 4/30/2003 $ 8,822 $ 9,602 5/31/2003 $ 9,400 $10,109 6/30/2003 $ 9,679 $10,238 7/31/2003 $ 9,966 $10,418 8/31/2003 $10,186 $10,621 9/30/2003 $ 9,877 $10,509 10/31/2003 $10,462 $11,103 11/30/2003 $10,594 $11,201 12/31/2003 $11,201 $11,789 1/31/2004 $11,370 $12,005 2/29/2004 $11,422 $12,172 3/31/2004 $11,157 $11,989 4/30/2004 $11,164 $11,800 5/31/2004 $11,344 $11,962 6/30/2004 $11,808 $12,194 7/31/2004 $11,186 $11,790 8/31/2004 $11,090 $11,838 9/30/2004 $11,252 $11,965 10/31/2004 $11,388 $12,148 11/30/2004 $12,055 $12,641 12/31/2004 $12,467 $13,070 1/31/2005 $12,039 $12,752 2/28/2005 $12,249 $13,020 3/31/2005 $12,234 $12,789 4/30/2005 $11,943 $12,546 5/31/2005 $12,415 $12,946 6/30/2005 $12,279 $12,964 7/31/2005 $12,920 $13,446 8/31/2005 $12,872 $13,324 9/30/2005 $12,847 $13,432 10/31/2005 $12,747 $13,208 11/30/2005 $13,367 $13,707 12/31/2005 $13,508 $13,712 1/31/2006 $13,645 $14,075 2/28/2006 $13,830 $14,113 3/31/2006 $14,155 $14,289 4/30/2006 $14,266 $14,481 5/31/2006 $13,955 $14,064 6/30/2006 $13,874 $14,083 7/31/2006 $13,711 $14,170 8/31/2006 $14,037 $14,507 9/30/2006 $14,447 $14,881 10/31/2006 $15,038 $15,366 11/30/2006 $15,430 $15,658 12/31/2006 $15,421 $15,878 1/31/2007 $15,910 $16,118 2/28/2007 $15,617 $15,803 3/31/2007 $15,591 $15,979 4/30/2007 $16,221 $16,687 5/31/2007 $16,884 $17,269 6/30/2007 $16,729 $16,983 7/31/2007 $16,399 $16,456 8/31/2007 $16,577 $16,703 9/30/2007 $17,173 $17,327 10/31/2007 $17,747 $17,603 11/30/2007 $16,999 $16,867 12/31/2007 $16,520 $16,750 1/31/2008 $15,447 $15,745 2/29/2008 $15,190 $15,234 3/31/2008 $15,008 $15,168 4/30/2008 $15,699 $15,907 5/31/2008 $16,156 $16,113 6/30/2008 $14,692 $14,754 7/31/2008 $15,153 $14,630 8/31/2008 $15,473 $14,842 9/30/2008 $13,808 $13,519
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08 ------- ------- 1-Year -24.22% 5-Year +5.67% 10-Year +3.28%
CLASS B (1/1/99-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500 DATE FUND - CLASS B INDEX ---------- --------------- -------- 1/1/1999 $10,000 $10,000 1/31/1999 $10,172 $10,418 2/28/1999 $10,057 $10,094 3/31/1999 $10,324 $10,498 4/30/1999 $10,655 $10,905 5/31/1999 $10,515 $10,647 6/30/1999 $10,951 $11,238 7/31/1999 $10,766 $10,887 8/31/1999 $10,804 $10,834 9/30/1999 $10,502 $10,537 10/31/1999 $10,668 $11,203 11/30/1999 $10,792 $11,431 12/31/1999 $11,134 $12,104 1/31/2000 $11,031 $11,496 2/29/2000 $10,771 $11,279 3/31/2000 $11,698 $12,382 4/30/2000 $11,831 $12,010 5/31/2000 $11,873 $11,763 6/30/2000 $12,031 $12,053 7/31/2000 $11,837 $11,865 8/31/2000 $12,352 $12,602 9/30/2000 $11,834 $11,936 10/31/2000 $11,983 $11,886 11/30/2000 $11,665 $10,949 12/31/2000 $11,883 $11,002 1/31/2001 $12,102 $11,393 2/28/2001 $11,491 $10,354 3/31/2001 $10,630 $ 9,698 4/30/2001 $11,477 $10,452 5/31/2001 $11,648 $10,522 6/30/2001 $11,108 $10,266 7/31/2001 $11,070 $10,165 8/31/2001 $10,565 $ 9,528 9/30/2001 $ 9,380 $ 8,759 10/31/2001 $ 9,687 $ 8,926 11/30/2001 $10,609 $ 9,611 12/31/2001 $10,683 $ 9,695 1/31/2002 $10,522 $ 9,553 2/28/2002 $10,444 $ 9,369 3/31/2002 $10,796 $ 9,721 4/30/2002 $10,108 $ 9,132 5/31/2002 $ 9,903 $ 9,065 6/30/2002 $ 9,147 $ 8,419 7/31/2002 $ 8,319 $ 7,763 8/31/2002 $ 8,333 $ 7,814 9/30/2002 $ 7,420 $ 6,965 10/31/2002 $ 7,929 $ 7,578 11/30/2002 $ 8,470 $ 8,024 12/31/2002 $ 8,018 $ 7,552 1/31/2003 $ 7,710 $ 7,354 2/28/2003 $ 7,529 $ 7,244 3/31/2003 $ 7,526 $ 7,314 4/30/2003 $ 8,070 $ 7,917 5/31/2003 $ 8,590 $ 8,334 6/30/2003 $ 8,839 $ 8,440 7/31/2003 $ 9,096 $ 8,589 8/31/2003 $ 9,291 $ 8,756 9/30/2003 $ 9,003 $ 8,664 10/31/2003 $ 9,530 $ 9,154 11/30/2003 $ 9,647 $ 9,235 12/31/2003 $10,190 $ 9,719 1/31/2004 $10,338 $ 9,898 2/29/2004 $10,382 $10,035 3/31/2004 $10,132 $ 9,884 4/30/2004 $10,136 $ 9,728 5/31/2004 $10,293 $ 9,862 6/30/2004 $10,707 $10,053 7/31/2004 $10,132 $ 9,720 8/31/2004 $10,043 $ 9,759 9/30/2004 $10,184 $ 9,865 10/31/2004 $10,300 $10,016 11/30/2004 $10,895 $10,421 12/31/2004 $11,258 $10,775 1/31/2005 $10,868 $10,513 2/28/2005 $11,049 $10,734 3/31/2005 $11,032 $10,544 4/30/2005 $10,762 $10,344 5/31/2005 $11,179 $10,673 6/30/2005 $11,049 $10,688 7/31/2005 $11,617 $11,085 8/31/2005 $11,569 $10,984 9/30/2005 $11,538 $11,073 10/31/2005 $11,439 $10,889 11/30/2005 $11,990 $11,301 12/31/2005 $12,109 $11,304 1/31/2006 $12,226 $11,604 2/28/2006 $12,383 $11,635 3/31/2006 $12,667 $11,780 4/30/2006 $12,756 $11,938 5/31/2006 $12,469 $11,595 6/30/2006 $12,393 $11,611 7/31/2006 $12,239 $11,682 8/31/2006 $12,523 $11,960 9/30/2006 $12,879 $12,268 10/31/2006 $13,396 $12,668 11/30/2006 $13,738 $12,909 12/31/2006 $13,717 $13,090 1/31/2007 $14,152 $13,288 2/28/2007 $13,891 $13,028 3/31/2007 $13,868 $13,174 4/30/2007 $14,428 $13,757 5/31/2007 $15,018 $14,237 6/30/2007 $14,880 $14,001 7/31/2007 $14,587 $13,567 8/31/2007 $14,744 $13,770 9/30/2007 $15,275 $14,285 10/31/2007 $15,785 $14,512 11/30/2007 $15,119 $13,906 12/31/2007 $14,693 $13,809 1/31/2008 $13,738 $12,981 2/29/2008 $13,510 $12,559 3/31/2008 $13,348 $12,505 4/30/2008 $13,962 $13,114 5/31/2008 $14,368 $13,284 6/30/2008 $13,066 $12,164 7/31/2008 $13,477 $12,062 8/31/2008 $13,761 $12,236 9/30/2008 $12,283 $11,146
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08 ------- ------- 1-Year -23.41% 5-Year +5.81% Since Inception (1/1/99) +2.13%
20 | Annual Report Performance Summary (CONTINUED) CLASS C (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500 DATE FUND - CLASS C INDEX ---------- --------------- ------- 10/1/1998 $10,000 $10,000 10/31/1998 $10,612 $10,813 11/30/1998 $10,982 $11,469 12/31/1998 $11,215 $12,130 1/31/1999 $11,403 $12,637 2/28/1999 $11,273 $12,244 3/31/1999 $11,569 $12,734 4/30/1999 $11,941 $13,227 5/31/1999 $11,789 $12,915 6/30/1999 $12,277 $13,632 7/31/1999 $12,067 $13,206 8/31/1999 $12,111 $13,141 9/30/1999 $11,771 $12,781 10/31/1999 $11,955 $13,589 11/30/1999 $12,100 $13,866 12/31/1999 $12,486 $14,682 1/31/2000 $12,369 $13,945 2/29/2000 $12,076 $13,681 3/31/2000 $13,117 $15,019 4/30/2000 $13,260 $14,567 5/31/2000 $13,307 $14,268 6/30/2000 $13,487 $14,620 7/31/2000 $13,271 $14,391 8/31/2000 $13,846 $15,285 9/30/2000 $13,267 $14,478 10/31/2000 $13,436 $14,417 11/30/2000 $13,076 $13,280 12/31/2000 $13,325 $13,345 1/31/2001 $13,564 $13,819 2/28/2001 $12,881 $12,559 3/31/2001 $11,915 $11,763 4/30/2001 $12,869 $12,677 5/31/2001 $13,058 $12,762 6/30/2001 $12,452 $12,452 7/31/2001 $12,410 $12,329 8/31/2001 $11,842 $11,557 9/30/2001 $10,518 $10,624 10/31/2001 $10,861 $10,827 11/30/2001 $11,888 $11,657 12/31/2001 $11,972 $11,759 1/31/2002 $11,794 $11,588 2/28/2002 $11,705 $11,364 3/31/2002 $12,099 $11,792 4/30/2002 $11,330 $11,077 5/31/2002 $11,098 $10,995 6/30/2002 $10,255 $10,212 7/31/2002 $ 9,323 $ 9,416 8/31/2002 $ 9,338 $ 9,478 9/30/2002 $ 8,317 $ 8,448 10/31/2002 $ 8,890 $ 9,191 11/30/2002 $ 9,493 $ 9,732 12/31/2002 $ 8,990 $ 9,160 1/31/2003 $ 8,642 $ 8,920 2/28/2003 $ 8,437 $ 8,786 3/31/2003 $ 8,433 $ 8,871 4/30/2003 $ 9,044 $ 9,602 5/31/2003 $ 9,628 $10,109 6/30/2003 $ 9,907 $10,238 7/31/2003 $10,197 $10,418 8/31/2003 $10,413 $10,621 9/30/2003 $10,092 $10,509 10/31/2003 $10,680 $11,103 11/30/2003 $10,808 $11,201 12/31/2003 $11,423 $11,789 1/31/2004 $11,585 $12,005 2/29/2004 $11,635 $12,172 3/31/2004 $11,357 $11,989 4/30/2004 $11,357 $11,800 5/31/2004 $11,535 $11,962 6/30/2004 $11,999 $12,194 7/31/2004 $11,357 $11,790 8/31/2004 $11,252 $11,838 9/30/2004 $11,411 $11,965 10/31/2004 $11,542 $12,148 11/30/2004 $12,207 $12,641 12/31/2004 $12,617 $13,070 1/31/2005 $12,177 $12,752 2/28/2005 $12,381 $13,020 3/31/2005 $12,362 $12,789 4/30/2005 $12,057 $12,546 5/31/2005 $12,525 $12,946 6/30/2005 $12,381 $12,964 7/31/2005 $13,020 $13,446 8/31/2005 $12,965 $13,324 9/30/2005 $12,931 $13,432 10/31/2005 $12,818 $13,208 11/30/2005 $13,433 $13,707 12/31/2005 $13,569 $13,712 1/31/2006 $13,700 $14,075 2/28/2006 $13,874 $14,113 3/31/2006 $14,195 $14,289 4/30/2006 $14,296 $14,481 5/31/2006 $13,975 $14,064 6/30/2006 $13,886 $14,083 7/31/2006 $13,716 $14,170 8/31/2006 $14,033 $14,507 9/30/2006 $14,431 $14,881 10/31/2006 $15,011 $15,366 11/30/2006 $15,394 $15,658 12/31/2006 $15,374 $15,878 1/31/2007 $15,850 $16,118 2/28/2007 $15,552 $15,803 3/31/2007 $15,517 $15,979 4/30/2007 $16,132 $16,687 5/31/2007 $16,782 $17,269 6/30/2007 $16,616 $16,983 7/31/2007 $16,279 $16,456 8/31/2007 $16,445 $16,703 9/30/2007 $17,026 $17,327 10/31/2007 $17,586 $17,603 11/30/2007 $16,832 $16,867 12/31/2007 $16,349 $16,750 1/31/2008 $15,278 $15,745 2/29/2008 $15,015 $15,234 3/31/2008 $14,821 $15,168 4/30/2008 $15,494 $15,907 5/31/2008 $15,939 $16,113 6/30/2008 $14,485 $14,754 7/31/2008 $14,930 $14,630 8/31/2008 $15,235 $14,842 9/30/2008 $13,588 $13,519
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08 ------- ------- 1-Year -20.99% 5-Year +6.13% 10-Year +3.11%
CLASS R (1/1/02-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH S&P 500 DATE FUND - CLASS R INDEX ---------- --------------- ------- 1/1/2002 $10,000 $10,000 1/31/2002 $ 9,832 $ 9,854 2/28/2002 $ 9,759 $ 9,664 3/31/2002 $10,098 $10,028 4/30/2002 $ 9,455 $ 9,420 5/31/2002 $ 9,265 $ 9,350 6/30/2002 $ 8,566 $ 8,684 7/31/2002 $ 7,793 $ 8,007 8/31/2002 $ 7,806 $ 8,060 9/30/2002 $ 6,957 $ 7,184 10/31/2002 $ 7,436 $ 7,816 11/30/2002 $ 7,946 $ 8,276 12/31/2002 $ 7,528 $ 7,790 1/31/2003 $ 7,240 $ 7,585 2/28/2003 $ 7,071 $ 7,472 3/31/2003 $ 7,071 $ 7,544 4/30/2003 $ 7,586 $ 8,166 5/31/2003 $ 8,080 $ 8,596 6/30/2003 $ 8,318 $ 8,706 7/31/2003 $ 8,562 $ 8,859 8/31/2003 $ 8,750 $ 9,032 9/30/2003 $ 8,483 $ 8,936 10/31/2003 $ 8,984 $ 9,442 11/30/2003 $ 9,095 $ 9,525 12/31/2003 $ 9,613 $10,025 1/31/2004 $ 9,755 $10,209 2/29/2004 $ 9,799 $10,351 3/31/2004 $ 9,571 $10,195 4/30/2004 $ 9,575 $10,035 5/31/2004 $ 9,730 $10,172 6/30/2004 $10,123 $10,370 7/31/2004 $ 9,587 $10,026 8/31/2004 $ 9,505 $10,067 9/30/2004 $ 9,640 $10,175 10/31/2004 $ 9,755 $10,331 11/30/2004 $10,323 $10,749 12/31/2004 $10,674 $11,115 1/31/2005 $10,306 $10,844 2/28/2005 $10,483 $11,072 3/31/2005 $10,467 $10,876 4/30/2005 $10,217 $10,669 5/31/2005 $10,620 $11,009 6/30/2005 $10,499 $11,024 7/31/2005 $11,045 $11,435 8/31/2005 $11,004 $11,330 9/30/2005 $10,978 $11,422 10/31/2005 $10,889 $11,232 11/30/2005 $11,416 $11,656 12/31/2005 $11,534 $11,660 1/31/2006 $11,651 $11,969 2/28/2006 $11,804 $12,002 3/31/2006 $12,083 $12,151 4/30/2006 $12,172 $12,314 5/31/2006 $11,906 $11,960 6/30/2006 $11,836 $11,976 7/31/2006 $11,693 $12,050 8/31/2006 $11,969 $12,337 9/30/2006 $12,315 $12,655 10/31/2006 $12,813 $13,067 11/30/2006 $13,147 $13,315 12/31/2006 $13,136 $13,502 1/31/2007 $13,549 $13,706 2/28/2007 $13,295 $13,438 3/31/2007 $13,272 $13,589 4/30/2007 $13,806 $14,191 5/31/2007 $14,364 $14,686 6/30/2007 $14,231 $14,442 7/31/2007 $13,949 $13,994 8/31/2007 $14,095 $14,204 9/30/2007 $14,600 $14,735 10/31/2007 $15,086 $14,969 11/30/2007 $14,444 $14,344 12/31/2007 $14,034 $14,244 1/31/2008 $13,123 $13,390 2/29/2008 $12,900 $12,955 3/31/2008 $12,742 $12,899 4/30/2008 $13,326 $13,527 5/31/2008 $13,713 $13,702 6/30/2008 $12,468 $12,547 7/31/2008 $12,856 $12,441 8/31/2008 $13,126 $12,621 9/30/2008 $11,712 $11,497
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08 ------- ------- 1-Year -19.78% 5-Year +6.66% Since Inception (1/1/02) +2.37%
Annual Report | 21 Performance Summary (CONTINUED) ADVISOR CLASS (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND - ADVISOR S&P 500 DATE CLASS INDEX ---------- --------------- ------- 10/1/1998 $10,000 $10,000 10/31/1998 $10,618 $10,813 11/30/1998 $11,002 $11,469 12/31/1998 $11,243 $12,130 1/31/1999 $11,443 $12,637 2/28/1999 $11,321 $12,244 3/31/1999 $11,629 $12,734 4/30/1999 $12,007 $13,227 5/31/1999 $11,868 $12,915 6/30/1999 $12,368 $13,632 7/31/1999 $12,168 $13,206 8/31/1999 $12,222 $13,141 9/30/1999 $11,889 $12,781 10/31/1999 $12,086 $13,589 11/30/1999 $12,243 $13,866 12/31/1999 $12,642 $14,682 1/31/2000 $12,536 $13,945 2/29/2000 $12,247 $13,681 3/31/2000 $13,315 $15,019 4/30/2000 $13,473 $14,567 5/31/2000 $13,531 $14,268 6/30/2000 $13,729 $14,620 7/31/2000 $13,516 $14,391 8/31/2000 $14,113 $15,285 9/30/2000 $13,535 $14,478 10/31/2000 $13,718 $14,417 11/30/2000 $13,363 $13,280 12/31/2000 $13,625 $13,345 1/31/2001 $13,885 $13,819 2/28/2001 $13,193 $12,559 3/31/2001 $12,217 $11,763 4/30/2001 $13,205 $12,677 5/31/2001 $13,411 $12,762 6/30/2001 $12,796 $12,452 7/31/2001 $12,769 $12,329 8/31/2001 $12,193 $11,557 9/30/2001 $10,836 $10,624 10/31/2001 $11,202 $10,827 11/30/2001 $12,271 $11,657 12/31/2001 $12,367 $11,759 1/31/2002 $12,190 $11,588 2/28/2002 $12,108 $11,364 3/31/2002 $12,532 $11,792 4/30/2002 $11,739 $11,077 5/31/2002 $11,511 $10,995 6/30/2002 $10,644 $10,212 7/31/2002 $ 9,686 $ 9,416 8/31/2002 $ 9,710 $ 9,478 9/30/2002 $ 8,654 $ 8,448 10/31/2002 $ 9,258 $ 9,191 11/30/2002 $ 9,894 $ 9,732 12/31/2002 $ 9,378 $ 9,160 1/31/2003 $ 9,023 $ 8,920 2/28/2003 $ 8,818 $ 8,786 3/31/2003 $ 8,822 $ 8,871 4/30/2003 $ 9,465 $ 9,602 5/31/2003 $10,087 $10,109 6/30/2003 $10,387 $10,238 7/31/2003 $10,698 $10,418 8/31/2003 $10,935 $10,621 9/30/2003 $10,608 $10,509 10/31/2003 $11,238 $11,103 11/30/2003 $11,380 $11,201 12/31/2003 $12,038 $11,789 1/31/2004 $12,220 $12,005 2/29/2004 $12,279 $12,172 3/31/2004 $11,995 $11,989 4/30/2004 $12,006 $11,800 5/31/2004 $12,204 $11,962 6/30/2004 $12,702 $12,194 7/31/2004 $12,038 $11,790 8/31/2004 $11,935 $11,838 9/30/2004 $12,113 $11,965 10/31/2004 $12,263 $12,148 11/30/2004 $12,983 $12,641 12/31/2004 $13,427 $13,070 1/31/2005 $12,970 $12,752 2/28/2005 $13,200 $13,020 3/31/2005 $13,188 $12,789 4/30/2005 $12,874 $12,546 5/31/2005 $13,387 $12,946 6/30/2005 $13,244 $12,964 7/31/2005 $13,935 $13,446 8/31/2005 $13,891 $13,324 9/30/2005 $13,864 $13,432 10/31/2005 $13,760 $13,208 11/30/2005 $14,428 $13,707 12/31/2005 $14,587 $13,712 1/31/2006 $14,739 $14,075 2/28/2006 $14,938 $14,113 3/31/2006 $15,297 $14,289 4/30/2006 $15,417 $14,481 5/31/2006 $15,082 $14,064 6/30/2006 $15,002 $14,083 7/31/2006 $14,831 $14,170 8/31/2006 $15,186 $14,507 9/30/2006 $15,629 $14,881 10/31/2006 $16,271 $15,366 11/30/2006 $16,698 $15,658 12/31/2006 $16,690 $15,878 1/31/2007 $17,224 $16,118 2/28/2007 $16,911 $15,803 3/31/2007 $16,887 $15,979 4/30/2007 $17,573 $16,687 5/31/2007 $18,294 $17,269 6/30/2007 $18,130 $16,983 7/31/2007 $17,777 $16,456 8/31/2007 $17,973 $16,703 9/30/2007 $18,623 $17,327 10/31/2007 $19,252 $17,603 11/30/2007 $18,443 $16,867 12/31/2007 $17,925 $16,750 1/31/2008 $16,768 $15,745 2/29/2008 $16,490 $15,234 3/31/2008 $16,293 $15,168 4/30/2008 $17,050 $15,907 5/31/2008 $17,550 $16,113 6/30/2008 $15,966 $14,754 7/31/2008 $16,466 $14,630 8/31/2008 $16,820 $14,842 9/30/2008 $15,011 $13,519
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08 ------------- ------- 1-Year -19.39% 5-Year +7.19% 10-Year +4.15%
ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICES OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) Figures are as stated in the Fund's prospectus current as of the date of this report. (5.) Source: (C) 2008 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. 22 | Annual Report Your Fund's Expenses FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 23 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES ACCOUNT ACCOUNT PAID DURING VALUE VALUE PERIOD* 4/1/08 9/30/08 4/1/08-9/30/08 --------- --------- -------------- CLASS A Actual $1,000 $ 920.10 $4.13 Hypothetical (5% return before expenses) $1,000 $1,020.70 $4.34 CLASS B Actual $1,000 $ 916.70 $7.71 Hypothetical (5% return before expenses) $1,000 $1,016.95 $8.12 CLASS C Actual $1,000 $ 916.80 $7.72 Hypothetical (5% return before expenses) $1,000 $1,016.95 $8.12 CLASS R Actual $1,000 $ 919.20 $5.33 Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.60 ADVISOR CLASS Actual $1,000 $ 921.30 $2.93 Hypothetical (5% return before expenses) $1,000 $1,021.95 $3.08
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.86%; B: 1.61%; C: 1.61%; R: 1.11%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. 24 | Annual Report Franklin Income Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of debt and equity securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Income Fund covers the fiscal year ended September 30, 2008. PERFORMANCE OVERVIEW Franklin Income Fund - Class A had a -21.36% cumulative total return for the year under review. The Fund performed comparably with its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return; underperformed its fixed income benchmark, the Barclays Capital (BC; formerly, Lehman Brothers) U.S. Aggregate Index, which returned +3.65%; and underperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which had a -14.89% total return, for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 30. INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities (1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The BC U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. Source: Lipper Inc. The Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the 12-month period ended 9/30/08, there were 498 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these and other factors had been considered. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 81. Annual Report | 25 DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/07-9/30/08
DIVIDEND PER SHARE (CENTS) ------------------------------------------------------------------ MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS ----- ------- ------- ---------- ------- ------- ------------- October 1.20 1.01 1.09 1.09 1.12 1.24 November 1.20 1.01 1.09 1.09 1.12 1.24 December*** 1.75 1.55 1.63 1.63 1.67 1.78 January 1.20 1.00 1.08 1.08 1.12 1.23 February 1.25 1.05 1.13 1.13 1.17 1.28 March 1.25 1.08 1.15 1.15 1.18 1.28 April 1.25 1.08 1.15 1.15 1.18 1.28 May 1.25 1.08 1.15 1.15 1.18 1.28 June 1.25 1.08 1.15 1.15 1.18 1.28 July 1.25 1.08 1.15 1.15 1.18 1.28 August 1.25 1.08 1.15 1.15 1.18 1.28 September 1.25 1.09 1.16 1.16 1.19 1.27 ----- ----- ----- ----- ----- ----- TOTAL 15.35 13.19 14.08 14.08 14.47 15.72 ===== ===== ===== ===== ===== =====
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. *** Includes an additional 0.55 cent per share distribution to meet excise tax requirements. for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION The Fund's equity holdings generally underperformed its fixed income holdings. Stocks struggled with a difficult bear market, which declined more than 20% during the year under review. This was exacerbated by the -39.32% return of the S&P 500 Financials Index for the same period.(2) (2.) Source: (C) 2008 Morningstar. The S&P 500 Financials Index is market value weighted and includes all the financial stocks in the S&P 500. 26 | Annual Report As the credit crisis spread and engulfed more companies, some of the Fund's preferred stock and convertible preferred stock holdings in financial companies including Fannie Mae, Freddie Mac, Lehman Brothers Holdings and American International Group (AIG) negatively impacted results. Although the Fund avoided positions in these companies' common stocks in favor of investment-grade-rated securities higher in the capital structure, the unforeseen market distress hampered the Fund's performance. Weakness spread across equity markets beyond financials and affected several of the Fund's large positions including AT&T, which declined mostly due to renewed concerns that softening economic conditions would further pressure consumer and business spending. Although utility stocks generally outperformed the broader equity market, returns remained negative. Thus, several of the Fund's holdings lost value including Public Service Enterprise Group, American Electric Power and Ameren, mostly resulting from concerns that falling commodity and ultimately power prices would reduce earnings. Partially offsetting these declines were several of the Fund's utility holdings that delivered positive total returns including Southern Co., Dominion Resources and FirstEnergy. The Fund's fixed income holdings also suffered from the credit crunch and a substantial widening of credit spreads over the course of the Fund's fiscal year. The 10-year U.S. Treasury note's yield declined from 4.59% at the beginning of the period to a low of 3.31% on March 17, 2008. Partly due to investors' fears of increased U.S. government obligations associated with the credit crisis, the yield subsequently rose and ended the period at 3.85%. Investment-grade and high yield corporate bonds were hard hit and under-performed U.S. Treasury securities. According to the BC U.S. Corporate Investment Grade Index, investment-grade corporate bonds declined 6.78%, and their average spread to Treasuries increased from 152 basis points (bps) (100 bps equal one percentage point) to 467 bps.(3) The BC U.S. Corporate High Yield Index fell 11.24%, and high yield corporate bonds' average spread to Treasuries increased from 436 bps to 1,088 bps.(4) PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 9/30/08 (PERFORMANCE GRAPH) Corporate Straight Bonds 45.2% Utilities Stocks 18.4% Financials Stocks 5.2% Energy Stocks 5.1% Health Care Stocks 4.8% Senior Floating Rate Interests 4.7% Telecommunication Services Stocks 2.7% Information Technology Stocks 2.3% Mortgage-Backed Securities 2.0% Materials Stocks 1.3% Consumer Discretionary Stocks 0.9% Corporate Convertible Bonds 0.9% Industrials Stocks 0.2% Short-Term Investments & Other Net Assets 6.3%
(3.) Source: (C) 2008 Morningstar. The BC U.S. Corporate Investment Grade Index is the corporate component of the BC U.S. Credit Index, which includes publicly issued, SEC-registered bonds that meet specified maturity, liquidity and quality requirements. (4.) Source: (C) 2008 Morningstar. The BC U.S. Corporate High Yield Index is the corporate component of the BC U.S. High Yield Index, which includes fixed rate, non-investment-grade debt. Annual Report | 27 TOP 5 EQUITY HOLDINGS Franklin Income Fund 9/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Pfizer Inc. 2.3% HEALTH CARE The Southern Co. 2.3% UTILITIES Canadian Oil Sands Trust (Canada) 2.0% ENERGY AT&T Inc. 1.8% TELECOMMUNICATION SERVICES Dominion Resources Inc. 1.7% UTILITIES
TOP 5 BOND HOLDINGS* Franklin Income Fund 9/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Ford Motor Credit Co. LLC 3.7% CONSUMER DISCRETIONARY Tenet Healthcare Corp. 3.0% HEALTH CARE Texas Competitive Electric Holdings Co. LLC 2.5% UTILITIES GMAC LLC 2.5% FINANCIALS Dynegy Holdings Inc. 1.7% UTILITIES
* Does not include convertible bonds. Within the Fund's fixed income holdings, detractors from Fund performance were concentrated in the financial sector including investment-grade-rated positions in AIG and Lehman Brothers Holdings. These two long-standing institutions' significant exposure to the credit crunch led to a crisis of confidence regarding their viability. This culminated in Lehman's bankruptcy filing and AIG's government-sponsored bailout aimed at preventing the systemic risk associated with the company's possible bankruptcy filing. GMAC and Ford Motor Credit Company also pressured results due to concerns that the credit crisis would further curtail these companies' abilities to operate and meet debt obligations as they become due. Despite a solid revenue and earnings growth period driven by strong performance in high speed Internet, digital video and telephony, Charter Communications bonds declined in value as investors grew increasingly nervous about the company's long-term ability to manage its debt load in light of the credit markets' current state. Some positive fixed income contributors to Fund performance for the 12 months under review include hospital operator Tenet Healthcare, which benefited from favorable company-specific performance and investors' perception of solid underlying asset value from its owned and operated hospitals. Dollar General also benefited from a cyclical shift toward lower-priced retailers particularly due to fuel price increases that pressured consumers during the reporting period, as well as from the company's improved management execution. Mortgage-backed security holdings issued by Ginnie Mae, Fannie Mae and Freddie Mac also performed well despite continued mortgage market turmoil. 28 | Annual Report Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. (PHOTO OF EDWARD PERKS) /s/ Edward Perks Edward Perks, CFA (PHOTO OF CHARLES B. JOHNSON) /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 29 Performance Summary as of 9/30/08 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKINX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.76 $1.98 $2.74 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1535 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.2144
CLASS B (SYMBOL: FBICX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.76 $1.97 $2.73 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1319 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.1928
CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/08 9/30/07 ------------------------ ------ ------- ------- Net Asset Value (NAV) -$0.76 $1.98 $2.74 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1408 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.2017
CLASS C (SYMBOL: FCISX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.77 $1.99 $2.76 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1408 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.2017
30 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
CLASS R (SYMBOL: FISRX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.76 $1.95 $2.71 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1447 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.2056
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/08 9/30/07 ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.76 $1.97 $2.73 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.1572 Short-Term Capital Gain $0.0172 Long-Term Capital Gain $0.0437 TOTAL $0.2181
PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------- Cumulative Total Return(1) -21.36% +25.64% +85.05% Average Annual Total Return(2) -24.66% +3.76% +5.90% Value of $10,000 Investment(3) $ 7,534 $12,029 $17,747 Distribution Rate(4) 7.25% 30-Day Standardized Yield(5) 8.92% Total Annual Operating Expenses(6) 0.63%
INCEPTION CLASS B 1-YEAR 5-YEAR (11/1/01) ------- ------- ------- --------- Cumulative Total Return(1) -22.13% +20.47% +43.90% Average Annual Total Return(2) -25.02% +3.49% +5.41% Value of $10,000 Investment(3) $ 7,498 $11,871 $14,390 Distribution Rate(4) 6.64% 30-Day Standardized Yield(5) 8.36% Total Annual Operating Expenses(6) 1.48%
INCEPTION CLASS B1 1-YEAR 5-YEAR (1/1/99) -------- ------- ------- --------- Cumulative Total Return(1) -21.77% +22.47% +72.14% Average Annual Total Return(2) -24.66% +3.84% +5.73% Value of $10,000 Investment(3) $ 7,534 $12,071 $ 17,214 Distribution Rate(4) 7.03% 30-Day Standardized Yield(5) 8.74% Total Annual Operating Expenses(6) 1.13%
Annual Report | 31 Performance Summary (CONTINUED) PERFORMANCE (CONTINUED)
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------- Cumulative Total Return(1) -21.98% +22.35% +76.24% Average Annual Total Return(2) -22.70% +4.12% +5.83% Value of $10,000 Investment(3) $ 7,730 $12,235 $17,624 Distribution Rate(4) 6.99% 30-Day Standardized Yield(5) 8.79% Total Annual Operating Expenses(6) 1.13%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) ------- ------- ------- --------- Cumulative Total Return(1) -21.91% +23.09% +43.65% Average Annual Total Return(2) -21.91% +4.24% +5.52% Value of $10,000 Investment(3) $ 7,809 $12,309 $14,365 Distribution Rate(4) 7.32% 30-Day Standardized Yield(5) 8.99% Total Annual Operating Expenses(6) 0.98%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR ------------- ------- ------- ------- Cumulative Total Return(1) -21.33% +26.67% +87.42% Average Annual Total Return(2) -21.33% +4.84% +6.48% Value of $10,000 Investment(3) $ 7,867 $12,667 $18,742 Distribution Rate(4) 7.74% 30-Day Standardized Yield(5) 9.50% Total Annual Operating Expenses(6) 0.48%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 32 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/98-9/30/08) (PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 LEHMAN BROTHERS ALLOCATION MODERATE FUNDS DATE FUND - CLASS A INDEX U.S. AGGREGATE INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- -------------------- ------------------------- 10/1/1998 $ 9,590 $10,000 $10,000 $10,000 10/31/1998 $ 9,611 $10,813 $ 9,947 $10,346 11/30/1998 $ 9,922 $11,469 $10,004 $10,707 12/31/1998 $ 9,910 $12,130 $10,034 $11,035 1/31/1999 $ 9,762 $12,637 $10,105 $11,179 2/28/1999 $ 9,485 $12,244 $ 9,929 $10,884 3/31/1999 $ 9,635 $12,734 $ 9,984 $11,111 4/30/1999 $10,131 $13,227 $10,015 $11,478 5/31/1999 $10,196 $12,915 $ 9,928 $11,321 6/30/1999 $10,174 $13,632 $ 9,896 $11,584 7/31/1999 $10,064 $13,206 $ 9,854 $11,415 8/31/1999 $10,086 $13,141 $ 9,849 $11,302 9/30/1999 $ 9,975 $12,781 $ 9,963 $11,187 10/31/1999 $ 9,953 $13,589 $10,000 $11,477 11/30/1999 $ 9,795 $13,866 $ 9,999 $11,630 12/31/1999 $ 9,836 $14,682 $ 9,951 $12,015 1/31/2000 $ 9,906 $13,945 $ 9,919 $11,719 2/29/2000 $ 9,744 $13,681 $10,039 $11,784 3/31/2000 $ 9,908 $15,019 $10,171 $12,315 4/30/2000 $10,260 $14,567 $10,142 $12,085 5/31/2000 $10,425 $14,268 $10,137 $11,960 6/30/2000 $10,497 $14,620 $10,348 $12,192 7/31/2000 $10,616 $14,391 $10,442 $12,135 8/31/2000 $11,220 $15,285 $10,593 $12,651 9/30/2000 $11,439 $14,478 $10,660 $12,397 10/31/2000 $11,268 $14,417 $10,730 $12,328 11/30/2000 $11,193 $13,280 $10,906 $11,865 12/31/2000 $11,861 $13,345 $11,108 $12,192 1/31/2001 $11,838 $13,819 $11,290 $12,415 2/28/2001 $12,066 $12,559 $11,388 $11,946 3/31/2001 $11,887 $11,763 $11,445 $11,553 4/30/2001 $12,119 $12,677 $11,398 $12,029 5/31/2001 $12,352 $12,762 $11,467 $12,099 6/30/2001 $12,065 $12,452 $11,510 $11,950 7/31/2001 $11,933 $12,329 $11,767 $11,913 8/31/2001 $12,065 $11,557 $11,902 $11,625 9/30/2001 $11,506 $10,624 $12,041 $11,020 10/31/2001 $11,586 $10,827 $12,293 $11,236 11/30/2001 $11,829 $11,657 $12,123 $11,619 12/31/2001 $11,939 $11,759 $12,046 $11,705 1/31/2002 $12,021 $11,588 $12,144 $11,608 2/28/2002 $12,104 $11,364 $12,261 $11,535 3/31/2002 $12,467 $11,792 $12,057 $11,777 4/30/2002 $12,540 $11,077 $12,291 $11,595 5/31/2002 $12,500 $10,995 $12,396 $11,569 6/30/2002 $11,721 $10,212 $12,503 $11,126 7/31/2002 $11,166 $ 9,416 $12,654 $10,590 8/31/2002 $11,529 $ 9,478 $12,868 $10,694 9/30/2002 $11,025 $ 8,448 $13,076 $10,117 10/31/2002 $11,100 $ 9,191 $13,016 $10,454 11/30/2002 $11,706 $ 9,732 $13,013 $10,813 12/31/2002 $11,812 $ 9,160 $13,282 $10,598 1/31/2003 $11,888 $ 8,920 $13,293 $10,457 2/28/2003 $11,726 $ 8,786 $13,477 $10,393 3/31/2003 $11,986 $ 8,871 $13,467 $10,435 4/30/2003 $12,735 $ 9,602 $13,578 $10,952 5/31/2003 $13,427 $10,109 $13,831 $11,413 6/30/2003 $13,692 $10,238 $13,804 $11,508 7/31/2003 $13,525 $10,418 $13,339 $11,496 8/31/2003 $13,731 $10,621 $13,428 $11,664 9/30/2003 $14,125 $10,509 $13,783 $11,733 10/31/2003 $14,523 $11,103 $13,655 $12,067 11/30/2003 $14,732 $11,201 $13,688 $12,184 12/31/2003 $15,469 $11,789 $13,827 $12,582 1/31/2004 $15,682 $12,005 $13,938 $12,743 2/29/2004 $15,701 $12,172 $14,089 $12,898 3/31/2004 $15,720 $11,989 $14,195 $12,874 4/30/2004 $15,478 $11,800 $13,825 $12,577 5/31/2004 $15,431 $11,962 $13,770 $12,620 6/30/2004 $15,650 $12,194 $13,848 $12,797 7/31/2004 $15,737 $11,790 $13,985 $12,586 8/31/2004 $16,092 $11,838 $14,252 $12,699 9/30/2004 $16,315 $11,965 $14,291 $12,846 10/31/2004 $16,538 $12,148 $14,410 $13,004 11/30/2004 $16,899 $12,641 $14,295 $13,332 12/31/2004 $17,353 $13,070 $14,427 $13,640 1/31/2005 $17,028 $12,752 $14,518 $13,470 2/28/2005 $17,463 $13,020 $14,432 $13,650 3/31/2005 $17,130 $12,789 $14,358 $13,466 4/30/2005 $16,867 $12,546 $14,552 $13,336 5/31/2005 $17,238 $12,946 $14,710 $13,598 6/30/2005 $17,752 $12,964 $14,790 $13,712 7/31/2005 $18,127 $13,446 $14,655 $13,985 8/31/2005 $18,073 $13,324 $14,843 $14,017 9/30/2005 $18,019 $13,432 $14,690 $14,076 10/31/2005 $17,457 $13,208 $14,574 $13,851 11/30/2005 $17,403 $13,707 $14,638 $14,139 12/31/2005 $17,674 $13,712 $14,777 $14,268 1/31/2006 $18,210 $14,075 $14,778 $14,619 2/28/2006 $18,373 $14,113 $14,827 $14,629 3/31/2006 $18,463 $14,289 $14,682 $14,750 4/30/2006 $18,703 $14,481 $14,655 $14,905 5/31/2006 $18,643 $14,064 $14,640 $14,599 6/30/2006 $18,809 $14,083 $14,671 $14,607 7/31/2006 $19,282 $14,170 $14,869 $14,694 8/31/2006 $19,603 $14,507 $15,096 $14,946 9/30/2006 $19,772 $14,881 $15,229 $15,144 10/31/2006 $20,251 $15,366 $15,330 $15,475 11/30/2006 $20,810 $15,658 $15,508 $15,750 12/31/2006 $21,053 $15,878 $15,418 $15,868 1/31/2007 $21,228 $16,118 $15,411 $16,028 2/28/2007 $21,483 $15,803 $15,649 $15,995 3/31/2007 $21,740 $15,979 $15,649 $16,123 4/30/2007 $22,400 $16,687 $15,734 $16,511 5/31/2007 $22,740 $17,269 $15,615 $16,802 6/30/2007 $22,269 $16,983 $15,569 $16,629 7/31/2007 $21,713 $16,456 $15,698 $16,346 8/31/2007 $21,893 $16,703 $15,891 $16,475 9/30/2007 $22,568 $17,327 $16,011 $16,928 10/31/2007 $22,749 $17,603 $16,155 $17,218 11/30/2007 $22,185 $16,867 $16,446 $16,815 12/31/2007 $22,172 $16,750 $16,492 $16,739 1/31/2008 $21,674 $15,745 $16,769 $16,220 2/29/2008 $21,176 $15,234 $16,792 $16,000 3/31/2008 $20,937 $15,168 $16,849 $15,869 4/30/2008 $22,093 $15,907 $16,814 $16,330 5/31/2008 $22,202 $16,113 $16,691 $16,472 6/30/2008 $20,990 $14,754 $16,678 $15,680 7/31/2008 $20,569 $14,630 $16,664 $15,473 8/31/2008 $20,503 $14,842 $16,822 $15,503 9/30/2008 $17,747 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08 ------- ------- 1-Year -24.66% 5-Year +3.76% 10-Year +5.90%
CLASS B (11/1/01-9/30/08) (PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 LEHMAN BROTHERS ALLOCATION MODERATE FUNDS DATE FUND - CLASS B INDEX U.S. AGGREGATE INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- -------------------- ------------------------- 11/1/2001 $10,000 $10,000 $10,000 $10,000 11/30/2001 $10,186 $10,767 $ 9,862 $10,341 12/31/2001 $10,229 $10,861 $ 9,799 $10,418 1/31/2002 $10,344 $10,703 $ 9,879 $10,331 2/28/2002 $10,411 $10,497 $ 9,975 $10,266 3/31/2002 $10,671 $10,891 $ 9,809 $10,482 4/30/2002 $10,774 $10,231 $ 9,999 $10,319 5/31/2002 $10,731 $10,156 $10,084 $10,296 6/30/2002 $10,006 $ 9,432 $10,171 $ 9,902 7/31/2002 $ 9,571 $ 8,697 $10,294 $ 9,425 8/31/2002 $ 9,875 $ 8,754 $10,468 $ 9,517 9/30/2002 $ 9,437 $ 7,803 $10,637 $ 9,004 10/31/2002 $ 9,445 $ 8,489 $10,589 $ 9,304 11/30/2002 $ 9,955 $ 8,989 $10,586 $ 9,623 12/31/2002 $10,091 $ 8,461 $10,805 $ 9,432 1/31/2003 $10,098 $ 8,239 $10,814 $ 9,306 2/28/2003 $10,004 $ 8,115 $10,964 $ 9,249 3/31/2003 $10,167 $ 8,194 $10,955 $ 9,287 4/30/2003 $10,851 $ 8,869 $11,046 $ 9,747 5/31/2003 $11,382 $ 9,337 $11,251 $10,157 6/30/2003 $11,653 $ 9,456 $11,229 $10,242 7/31/2003 $11,502 $ 9,623 $10,852 $10,231 8/31/2003 $11,671 $ 9,810 $10,924 $10,381 9/30/2003 $11,944 $ 9,706 $11,213 $10,442 10/31/2003 $12,273 $10,256 $11,108 $10,740 11/30/2003 $12,496 $10,346 $11,135 $10,844 12/31/2003 $13,057 $10,888 $11,248 $11,197 1/31/2004 $13,228 $11,089 $11,339 $11,341 2/29/2004 $13,290 $11,243 $11,461 $11,479 3/31/2004 $13,242 $11,073 $11,547 $11,457 4/30/2004 $13,082 $10,899 $11,247 $11,194 5/31/2004 $12,979 $11,049 $11,202 $11,232 6/30/2004 $13,210 $11,263 $11,265 $11,389 7/31/2004 $13,219 $10,890 $11,377 $11,201 8/31/2004 $13,508 $10,934 $11,594 $11,302 9/30/2004 $13,687 $11,052 $11,625 $11,433 10/31/2004 $13,866 $11,221 $11,723 $11,574 11/30/2004 $14,160 $11,675 $11,629 $11,865 12/31/2004 $14,531 $12,072 $11,736 $12,139 1/31/2005 $14,306 $11,778 $11,810 $11,988 2/28/2005 $14,602 $12,025 $11,740 $12,148 3/31/2005 $14,313 $11,812 $11,680 $11,984 4/30/2005 $14,082 $11,588 $11,838 $11,869 5/31/2005 $14,381 $11,957 $11,966 $12,102 6/30/2005 $14,803 $11,974 $12,031 $12,204 7/31/2005 $15,107 $12,419 $11,922 $12,446 8/31/2005 $15,053 $12,306 $12,075 $12,475 9/30/2005 $14,996 $12,406 $11,950 $12,527 10/31/2005 $14,516 $12,199 $11,856 $12,327 11/30/2005 $14,459 $12,660 $11,908 $12,583 12/31/2005 $14,675 $12,665 $12,021 $12,698 1/31/2006 $15,111 $13,000 $12,022 $13,010 2/28/2006 $15,236 $13,035 $12,062 $13,019 3/31/2006 $15,300 $13,198 $11,944 $13,127 4/30/2006 $15,488 $13,375 $11,922 $13,265 5/31/2006 $15,427 $12,990 $11,909 $12,993 6/30/2006 $15,555 $13,008 $11,935 $13,000 7/31/2006 $15,936 $13,088 $12,096 $13,078 8/31/2006 $16,191 $13,399 $12,281 $13,301 9/30/2006 $16,320 $13,745 $12,389 $13,478 10/31/2006 $16,706 $14,193 $12,471 $13,772 11/30/2006 $17,157 $14,462 $12,615 $14,017 12/31/2006 $17,346 $14,665 $12,542 $14,122 1/31/2007 $17,479 $14,887 $12,537 $14,265 2/28/2007 $17,677 $14,596 $12,730 $14,235 3/31/2007 $17,875 $14,759 $12,731 $14,349 4/30/2007 $18,408 $15,413 $12,800 $14,695 5/31/2007 $18,675 $15,951 $12,703 $14,953 6/30/2007 $18,273 $15,686 $12,665 $14,799 7/31/2007 $17,803 $15,199 $12,771 $14,548 8/31/2007 $17,938 $15,427 $12,927 $14,663 9/30/2007 $18,479 $16,004 $13,025 $15,066 10/31/2007 $18,616 $16,259 $13,142 $15,324 11/30/2007 $18,140 $15,579 $13,379 $14,965 12/31/2007 $18,114 $15,471 $13,416 $14,898 1/31/2008 $17,691 $14,543 $13,641 $14,436 2/29/2008 $17,270 $14,071 $13,660 $14,240 3/31/2008 $17,062 $14,010 $13,707 $14,123 4/30/2008 $17,995 $14,692 $13,678 $14,534 5/31/2008 $18,071 $14,882 $13,578 $14,660 6/30/2008 $17,070 $13,628 $13,567 $13,955 7/31/2008 $16,714 $13,513 $13,556 $13,771 8/31/2008 $16,720 $13,709 $13,685 $13,797 9/30/2008 $14,390 $12,487 $13,501 $12,815
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08 ------- ------- 1-Year -25.02% 5-Year +3.49% Since Inception (11/1/01) +5.41%
Annual Report | 33 Performance Summary (CONTINUED) CLASS B1 (1/1/99-9/30/08) (PERFORMANCE GRAPH)
LEHMAN BROTHERS LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS B1 INDEX INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- --------------- ------------------------- 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $ 9,851 $10,418 $10,071 $10,131 2/28/1999 $ 9,568 $10,094 $ 9,896 $ 9,864 3/31/1999 $ 9,717 $10,498 $ 9,950 $10,069 4/30/1999 $10,213 $10,905 $ 9,982 $10,402 5/31/1999 $10,230 $10,647 $ 9,894 $10,259 6/30/1999 $10,248 $11,238 $ 9,863 $10,497 7/31/1999 $10,133 $10,887 $ 9,821 $10,344 8/31/1999 $10,150 $10,834 $ 9,816 $10,242 9/30/1999 $10,035 $10,537 $ 9,930 $10,138 10/31/1999 $10,009 $11,203 $ 9,967 $10,401 11/30/1999 $ 9,845 $11,431 $ 9,966 $10,539 12/31/1999 $ 9,883 $12,104 $ 9,918 $10,888 1/31/2000 $ 9,949 $11,496 $ 9,885 $10,620 2/29/2000 $ 9,782 $11,279 $10,005 $10,679 3/31/2000 $ 9,941 $12,382 $10,137 $11,160 4/30/2000 $10,290 $12,010 $10,108 $10,952 5/31/2000 $10,452 $11,763 $10,103 $10,839 6/30/2000 $10,519 $12,053 $10,313 $11,049 7/31/2000 $10,633 $11,865 $10,407 $10,997 8/31/2000 $11,233 $12,602 $10,558 $11,465 9/30/2000 $11,448 $11,936 $10,624 $11,234 10/31/2000 $11,271 $11,886 $10,694 $11,172 11/30/2000 $11,242 $10,949 $10,869 $10,752 12/31/2000 $11,856 $11,002 $11,071 $11,049 1/31/2001 $11,827 $11,393 $11,252 $11,251 2/28/2001 $12,051 $10,354 $11,350 $10,826 3/31/2001 $11,867 $ 9,698 $11,407 $10,470 4/30/2001 $12,093 $10,452 $11,360 $10,901 5/31/2001 $12,321 $10,522 $11,428 $10,964 6/30/2001 $12,030 $10,266 $11,471 $10,829 7/31/2001 $11,894 $10,165 $11,728 $10,796 8/31/2001 $12,021 $ 9,528 $11,862 $10,535 9/30/2001 $11,460 $ 8,759 $12,000 $ 9,987 10/31/2001 $11,535 $ 8,926 $12,251 $10,183 11/30/2001 $11,772 $ 9,611 $12,082 $10,530 12/31/2001 $11,877 $ 9,695 $12,006 $10,608 1/31/2002 $11,954 $ 9,553 $12,103 $10,520 2/28/2002 $12,031 $ 9,369 $12,220 $10,453 3/31/2002 $12,388 $ 9,721 $12,017 $10,673 4/30/2002 $12,455 $ 9,132 $12,250 $10,507 5/31/2002 $12,410 $ 9,065 $12,354 $10,484 6/30/2002 $11,630 $ 8,419 $12,461 $10,083 7/31/2002 $11,074 $ 7,763 $12,612 $ 9,597 8/31/2002 $11,429 $ 7,814 $12,825 $ 9,691 9/30/2002 $10,925 $ 6,965 $13,032 $ 9,169 10/31/2002 $10,995 $ 7,578 $12,973 $ 9,474 11/30/2002 $11,590 $ 8,024 $12,969 $ 9,799 12/31/2002 $11,690 $ 7,552 $13,237 $ 9,604 1/31/2003 $11,762 $ 7,354 $13,249 $ 9,476 2/28/2003 $11,597 $ 7,244 $13,432 $ 9,418 3/31/2003 $11,849 $ 7,314 $13,422 $ 9,457 4/30/2003 $12,583 $ 7,917 $13,532 $ 9,925 5/31/2003 $13,261 $ 8,334 $13,785 $10,343 6/30/2003 $13,517 $ 8,440 $13,757 $10,429 7/31/2003 $13,347 $ 8,589 $13,295 $10,418 8/31/2003 $13,546 $ 8,756 $13,383 $10,570 9/30/2003 $13,929 $ 8,664 $13,737 $10,633 10/31/2003 $14,314 $ 9,154 $13,609 $10,936 11/30/2003 $14,514 $ 9,235 $13,642 $11,042 12/31/2003 $15,234 $ 9,719 $13,781 $11,402 1/31/2004 $15,437 $ 9,898 $13,892 $11,548 2/29/2004 $15,514 $10,035 $14,042 $11,689 3/31/2004 $15,461 $ 9,884 $14,147 $11,666 4/30/2004 $15,215 $ 9,728 $13,779 $11,398 5/31/2004 $15,162 $ 9,862 $13,724 $11,437 6/30/2004 $15,371 $10,053 $13,801 $11,597 7/31/2004 $15,450 $ 9,720 $13,938 $11,406 8/31/2004 $15,793 $ 9,759 $14,204 $11,508 9/30/2004 $16,004 $ 9,865 $14,243 $11,642 10/31/2004 $16,217 $10,016 $14,362 $11,785 11/30/2004 $16,564 $10,421 $14,248 $12,082 12/31/2004 $17,001 $10,775 $14,379 $12,361 1/31/2005 $16,743 $10,513 $14,469 $12,207 2/28/2005 $17,093 $10,734 $14,384 $12,370 3/31/2005 $16,761 $10,544 $14,310 $12,203 4/30/2005 $16,497 $10,344 $14,503 $12,086 5/31/2005 $16,851 $10,673 $14,660 $12,323 6/30/2005 $17,347 $10,688 $14,740 $12,426 7/31/2005 $17,706 $11,085 $14,606 $12,674 8/31/2005 $17,647 $10,984 $14,793 $12,703 9/30/2005 $17,587 $11,073 $14,641 $12,756 10/31/2005 $17,032 $10,889 $14,525 $12,552 11/30/2005 $16,970 $11,301 $14,589 $12,813 12/31/2005 $17,228 $11,304 $14,728 $12,930 1/31/2006 $17,743 $11,604 $14,729 $13,248 2/28/2006 $17,896 $11,635 $14,778 $13,257 3/31/2006 $17,975 $11,780 $14,633 $13,367 4/30/2006 $18,201 $11,938 $14,606 $13,507 5/31/2006 $18,134 $11,595 $14,591 $13,231 6/30/2006 $18,288 $11,611 $14,621 $13,237 7/31/2006 $18,740 $11,682 $14,819 $13,317 8/31/2006 $19,045 $11,960 $15,046 $13,544 9/30/2006 $19,201 $12,268 $15,178 $13,724 10/31/2006 $19,733 $12,668 $15,278 $14,024 11/30/2006 $20,193 $12,909 $15,456 $14,273 12/31/2006 $20,421 $13,090 $15,366 $14,380 1/31/2007 $20,591 $13,288 $15,360 $14,526 2/28/2007 $20,838 $13,028 $15,597 $14,495 3/31/2007 $21,086 $13,174 $15,597 $14,611 4/30/2007 $21,727 $13,757 $15,681 $14,963 5/31/2007 $22,057 $14,237 $15,562 $15,226 6/30/2007 $21,600 $14,001 $15,516 $15,070 7/31/2007 $21,060 $13,567 $15,646 $14,813 8/31/2007 $21,235 $13,770 $15,838 $14,930 9/30/2007 $21,889 $14,285 $15,958 $15,341 10/31/2007 $22,064 $14,512 $16,101 $15,603 11/30/2007 $21,517 $13,906 $16,391 $15,238 12/31/2007 $21,504 $13,809 $16,437 $15,170 1/31/2008 $21,020 $12,981 $16,713 $14,699 2/29/2008 $20,537 $12,559 $16,736 $14,500 3/31/2008 $20,305 $12,505 $16,793 $14,381 4/30/2008 $21,426 $13,114 $16,758 $14,799 5/31/2008 $21,531 $13,284 $16,635 $14,928 6/30/2008 $20,355 $12,164 $16,622 $14,210 7/31/2008 $19,948 $12,062 $16,608 $14,022 8/31/2008 $19,884 $12,236 $16,766 $14,049 9/30/2008 $17,214 $11,146 $16,541 $13,049
AVERAGE ANNUAL TOTAL RETURN
CLASS B1 9/30/08 ------- ------- 1-Year -24.66% 5-Year +3.84% Since Inception (1/1/99) +5.73%
CLASS C (10/1/98-9/30/08) (PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS DATE FUND - CLASS C INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- -------------------- ------------------------- 10/1/1998 $10,000 $10,000 $10,000 $10,000 10/31/1998 $10,060 $10,813 $ 9,947 $10,346 11/30/1998 $10,380 $11,469 $10,004 $10,707 12/31/1998 $10,319 $12,130 $10,034 $11,035 1/31/1999 $10,204 $12,637 $10,105 $11,179 2/28/1999 $ 9,912 $12,244 $ 9,929 $10,884 3/31/1999 $10,064 $12,734 $ 9,984 $11,111 4/30/1999 $10,575 $13,227 $10,015 $11,478 5/31/1999 $10,592 $12,915 $ 9,928 $11,321 6/30/1999 $10,611 $13,632 $ 9,896 $11,584 7/31/1999 $10,493 $13,206 $ 9,854 $11,415 8/31/1999 $10,466 $13,141 $ 9,849 $11,302 9/30/1999 $10,346 $12,781 $ 9,963 $11,187 10/31/1999 $10,365 $13,589 $10,000 $11,477 11/30/1999 $10,197 $13,866 $ 9,999 $11,630 12/31/1999 $10,235 $14,682 $ 9,951 $12,015 1/31/2000 $10,255 $13,945 $ 9,919 $11,719 2/29/2000 $10,130 $13,681 $10,039 $11,784 3/31/2000 $10,295 $15,019 $10,171 $12,315 4/30/2000 $10,655 $14,567 $10,142 $12,085 5/31/2000 $10,773 $14,268 $10,137 $11,960 6/30/2000 $10,842 $14,620 $10,348 $12,192 7/31/2000 $11,010 $14,391 $10,442 $12,135 8/31/2000 $11,629 $15,285 $10,593 $12,651 9/30/2000 $11,850 $14,478 $10,660 $12,397 10/31/2000 $11,669 $14,417 $10,730 $12,328 11/30/2000 $11,588 $13,280 $10,906 $11,865 12/31/2000 $12,271 $13,345 $11,108 $12,192 1/31/2001 $12,241 $13,819 $11,290 $12,415 2/28/2001 $12,471 $12,559 $11,388 $11,946 3/31/2001 $12,281 $11,763 $11,445 $11,553 4/30/2001 $12,515 $12,677 $11,398 $12,029 5/31/2001 $12,749 $12,762 $11,467 $12,099 6/30/2001 $12,449 $12,452 $11,510 $11,950 7/31/2001 $12,309 $12,329 $11,767 $11,913 8/31/2001 $12,440 $11,557 $11,902 $11,625 9/30/2001 $11,861 $10,624 $12,041 $11,020 10/31/2001 $11,937 $10,827 $12,293 $11,236 11/30/2001 $12,181 $11,657 $12,123 $11,619 12/31/2001 $12,288 $11,759 $12,046 $11,705 1/31/2002 $12,367 $11,588 $12,144 $11,608 2/28/2002 $12,447 $11,364 $12,261 $11,535 3/31/2002 $12,813 $11,792 $12,057 $11,777 4/30/2002 $12,883 $11,077 $12,291 $11,595 5/31/2002 $12,837 $10,995 $12,396 $11,569 6/30/2002 $12,036 $10,212 $12,503 $11,126 7/31/2002 $11,463 $ 9,416 $12,654 $10,590 8/31/2002 $11,829 $ 9,478 $12,868 $10,694 9/30/2002 $11,310 $ 8,448 $13,076 $10,117 10/31/2002 $11,382 $ 9,191 $13,016 $10,454 11/30/2002 $11,995 $ 9,732 $13,013 $10,813 12/31/2002 $12,099 $ 9,160 $13,282 $10,598 1/31/2003 $12,113 $ 8,920 $13,293 $10,457 2/28/2003 $12,005 $ 8,786 $13,477 $10,393 3/31/2003 $12,264 $ 8,871 $13,467 $10,435 4/30/2003 $13,020 $ 9,602 $13,578 $10,952 5/31/2003 $13,719 $10,109 $13,831 $11,413 6/30/2003 $13,983 $10,238 $13,804 $11,508 7/31/2003 $13,807 $10,418 $13,339 $11,496 8/31/2003 $14,010 $10,621 $13,428 $11,664 9/30/2003 $14,405 $10,509 $13,783 $11,733 10/31/2003 $14,801 $11,103 $13,655 $12,067 11/30/2003 $15,007 $11,201 $13,688 $12,184 12/31/2003 $15,749 $11,789 $13,827 $12,582 1/31/2004 $15,958 $12,005 $13,938 $12,743 2/29/2004 $16,038 $12,172 $14,089 $12,898 3/31/2004 $15,984 $11,989 $14,195 $12,874 4/30/2004 $15,797 $11,800 $13,825 $12,577 5/31/2004 $15,676 $11,962 $13,770 $12,620 6/30/2004 $15,959 $12,194 $13,848 $12,797 7/31/2004 $15,973 $11,790 $13,985 $12,586 8/31/2004 $16,326 $11,838 $14,252 $12,699 9/30/2004 $16,544 $11,965 $14,291 $12,846 10/31/2004 $16,762 $12,148 $14,410 $13,004 11/30/2004 $17,120 $12,641 $14,295 $13,332 12/31/2004 $17,570 $13,070 $14,427 $13,640 1/31/2005 $17,305 $12,752 $14,518 $13,470 2/28/2005 $17,664 $13,020 $14,432 $13,650 3/31/2005 $17,323 $12,789 $14,358 $13,466 4/30/2005 $17,050 $12,546 $14,552 $13,336 5/31/2005 $17,416 $12,946 $14,710 $13,598 6/30/2005 $17,997 $12,964 $14,790 $13,712 7/31/2005 $18,295 $13,446 $14,655 $13,985 8/31/2005 $18,234 $13,324 $14,843 $14,017 9/30/2005 $18,171 $13,432 $14,690 $14,076 10/31/2005 $17,599 $13,208 $14,574 $13,851 11/30/2005 $17,536 $13,707 $14,638 $14,139 12/31/2005 $17,801 $13,712 $14,777 $14,268 1/31/2006 $18,330 $14,075 $14,778 $14,619 2/28/2006 $18,486 $14,113 $14,827 $14,629 3/31/2006 $18,568 $14,289 $14,682 $14,750 4/30/2006 $18,802 $14,481 $14,655 $14,905 5/31/2006 $18,734 $14,064 $14,640 $14,599 6/30/2006 $18,892 $14,083 $14,671 $14,607 7/31/2006 $19,433 $14,170 $14,869 $14,694 8/31/2006 $19,747 $14,507 $15,096 $14,946 9/30/2006 $19,908 $14,881 $15,229 $15,144 10/31/2006 $20,378 $15,366 $15,330 $15,475 11/30/2006 $20,850 $15,658 $15,508 $15,750 12/31/2006 $21,163 $15,878 $15,418 $15,868 1/31/2007 $21,330 $16,118 $15,411 $16,028 2/28/2007 $21,576 $15,803 $15,649 $15,995 3/31/2007 $21,823 $15,979 $15,649 $16,123 4/30/2007 $22,391 $16,687 $15,734 $16,511 5/31/2007 $22,799 $17,269 $15,615 $16,802 6/30/2007 $22,321 $16,983 $15,569 $16,629 7/31/2007 $21,759 $16,456 $15,698 $16,346 8/31/2007 $21,928 $16,703 $15,891 $16,475 9/30/2007 $22,589 $17,327 $16,011 $16,928 10/31/2007 $22,761 $17,603 $16,155 $17,218 11/30/2007 $22,192 $16,867 $16,446 $16,815 12/31/2007 $22,084 $16,750 $16,492 $16,739 1/31/2008 $21,664 $15,745 $16,769 $16,220 2/29/2008 $21,161 $15,234 $16,792 $16,000 3/31/2008 $20,830 $15,168 $16,849 $15,869 4/30/2008 $22,052 $15,907 $16,814 $16,330 5/31/2008 $22,151 $16,113 $16,691 $16,472 6/30/2008 $20,943 $14,754 $16,678 $15,680 7/31/2008 $20,430 $14,630 $16,664 $15,473 8/31/2008 $20,444 $14,842 $16,822 $15,503 9/30/2008 $17,624 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08 ------- ------- 1-Year -22.70% 5-Year +4.12% 10-Year +5.83%
34 | Annual Report Performance Summary (CONTINUED) CLASS R (1/1/02-9/30/08) (PERFORMANCE GRAPH)
LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS DATE FUND - CLASS R INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- -------------------- ------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,069 $ 9,854 $10,081 $ 9,917 2/28/2002 $10,136 $ 9,664 $10,179 $ 9,855 3/31/2002 $10,390 $10,028 $10,009 $10,061 4/30/2002 $10,448 $ 9,420 $10,204 $ 9,906 5/31/2002 $10,412 $ 9,350 $10,290 $ 9,884 6/30/2002 $ 9,709 $ 8,684 $10,379 $ 9,505 7/31/2002 $ 9,289 $ 8,007 $10,505 $ 9,047 8/31/2002 $ 9,590 $ 8,060 $10,682 $ 9,136 9/30/2002 $ 9,166 $ 7,184 $10,855 $ 8,643 10/31/2002 $ 9,178 $ 7,816 $10,806 $ 8,931 11/30/2002 $ 9,681 $ 8,276 $10,803 $ 9,237 12/31/2002 $ 9,817 $ 7,790 $11,026 $ 9,054 1/31/2003 $ 9,829 $ 7,585 $11,035 $ 8,933 2/28/2003 $ 9,741 $ 7,472 $11,188 $ 8,879 3/31/2003 $ 9,905 $ 7,544 $11,179 $ 8,915 4/30/2003 $10,577 $ 8,166 $11,272 $ 9,356 5/31/2003 $11,102 $ 8,596 $11,482 $ 9,750 6/30/2003 $11,319 $ 8,706 $11,459 $ 9,831 7/31/2003 $11,227 $ 8,859 $11,074 $ 9,821 8/31/2003 $11,344 $ 9,032 $11,147 $ 9,965 9/30/2003 $11,670 $ 8,936 $11,442 $10,024 10/31/2003 $11,997 $ 9,442 $11,336 $10,309 11/30/2003 $12,168 $ 9,525 $11,363 $10,409 12/31/2003 $12,779 $10,025 $11,478 $10,749 1/31/2004 $12,953 $10,209 $11,571 $10,886 2/29/2004 $12,966 $10,351 $11,696 $11,019 3/31/2004 $12,978 $10,195 $11,784 $10,998 4/30/2004 $12,772 $10,035 $11,477 $10,745 5/31/2004 $12,730 $10,172 $11,431 $10,782 6/30/2004 $12,908 $10,370 $11,496 $10,933 7/31/2004 $12,977 $10,026 $11,610 $10,752 8/31/2004 $13,268 $10,067 $11,831 $10,849 9/30/2004 $13,449 $10,175 $11,863 $10,975 10/31/2004 $13,631 $10,331 $11,963 $11,110 11/30/2004 $13,927 $10,749 $11,867 $11,390 12/31/2004 $14,299 $11,115 $11,976 $11,653 1/31/2005 $14,026 $10,844 $12,052 $11,507 2/28/2005 $14,383 $11,072 $11,981 $11,661 3/31/2005 $14,102 $10,876 $11,919 $11,504 4/30/2005 $13,879 $10,669 $12,080 $11,394 5/31/2005 $14,182 $11,009 $12,211 $11,617 6/30/2005 $14,605 $11,024 $12,278 $11,714 7/31/2005 $14,912 $11,435 $12,166 $11,948 8/31/2005 $14,864 $11,330 $12,322 $11,975 9/30/2005 $14,814 $11,422 $12,195 $12,025 10/31/2005 $14,344 $11,232 $12,098 $11,833 11/30/2005 $14,295 $11,656 $12,152 $12,079 12/31/2005 $14,516 $11,660 $12,267 $12,189 1/31/2006 $14,955 $11,969 $12,268 $12,489 2/28/2006 $15,087 $12,002 $12,309 $12,498 3/31/2006 $15,156 $12,151 $12,188 $12,601 4/30/2006 $15,350 $12,314 $12,166 $12,734 5/31/2006 $15,233 $11,960 $12,153 $12,473 6/30/2006 $15,366 $11,976 $12,179 $12,479 7/31/2006 $15,815 $12,050 $12,343 $12,554 8/31/2006 $16,077 $12,337 $12,532 $12,768 9/30/2006 $16,212 $12,655 $12,642 $12,938 10/31/2006 $16,603 $13,067 $12,726 $13,220 11/30/2006 $16,997 $13,315 $12,874 $13,456 12/31/2006 $17,192 $13,502 $12,799 $13,556 1/31/2007 $17,397 $13,706 $12,794 $13,693 2/28/2007 $17,536 $13,438 $12,991 $13,665 3/31/2007 $17,810 $13,589 $12,991 $13,774 4/30/2007 $18,284 $14,191 $13,061 $14,106 5/31/2007 $18,626 $14,686 $12,962 $14,354 6/30/2007 $18,232 $14,442 $12,924 $14,206 7/31/2007 $17,702 $13,994 $13,032 $13,965 8/31/2007 $17,912 $14,204 $13,192 $14,075 9/30/2007 $18,395 $14,735 $13,292 $14,462 10/31/2007 $18,607 $14,969 $13,411 $14,709 11/30/2007 $18,138 $14,344 $13,652 $14,365 12/31/2007 $18,051 $14,244 $13,691 $14,301 1/31/2008 $17,705 $13,390 $13,921 $13,857 2/29/2008 $17,219 $12,955 $13,940 $13,669 3/31/2008 $17,017 $12,899 $13,987 $13,557 4/30/2008 $17,963 $13,527 $13,958 $13,951 5/31/2008 $18,048 $13,702 $13,856 $14,073 6/30/2008 $17,046 $12,547 $13,845 $13,396 7/31/2008 $16,694 $12,441 $13,833 $13,219 8/31/2008 $16,708 $12,621 $13,965 $13,244 9/30/2008 $14,365 $11,497 $13,777 $12,301
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08 ------- ------- 1-Year -21.91% 5-Year +4.24% Since Inception (1/1/02) +5.52%
ADVISOR CLASS (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN INCOME LIPPER MIXED-ASSET TARGET FUND - ADVISOR S&P 500 LEHMAN BROTHERS U.S. ALLOCATION MODERATE FUNDS DATE CLASS INDEX AGGREGATE INDEX CLASSIFICATION AVERAGE ---------- --------------- ------- -------------------- ------------------------- 10/1/1998 $10,000 $10,000 $10,000 $10,000 10/31/1998 $10,023 $10,813 $ 9,947 $10,346 11/30/1998 $10,349 $11,469 $10,004 $10,707 12/31/1998 $10,337 $12,130 $10,034 $11,035 1/31/1999 $10,184 $12,637 $10,105 $11,179 2/28/1999 $ 9,897 $12,244 $ 9,929 $10,884 3/31/1999 $10,055 $12,734 $ 9,984 $11,111 4/30/1999 $10,574 $13,227 $10,015 $11,478 5/31/1999 $10,597 $12,915 $ 9,928 $11,321 6/30/1999 $10,621 $13,632 $ 9,896 $11,584 7/31/1999 $10,508 $13,206 $ 9,854 $11,415 8/31/1999 $10,486 $13,141 $ 9,849 $11,302 9/30/1999 $10,371 $12,781 $ 9,963 $11,187 10/31/1999 $10,396 $13,589 $10,000 $11,477 11/30/1999 $10,233 $13,866 $ 9,999 $11,630 12/31/1999 $10,277 $14,682 $ 9,951 $12,015 1/31/2000 $10,304 $13,945 $ 9,919 $11,719 2/29/2000 $10,183 $13,681 $10,039 $11,784 3/31/2000 $10,356 $15,019 $10,171 $12,315 4/30/2000 $10,677 $14,567 $10,142 $12,085 5/31/2000 $10,850 $14,268 $10,137 $11,960 6/30/2000 $10,927 $14,620 $10,348 $12,192 7/31/2000 $11,053 $14,391 $10,442 $12,135 8/31/2000 $11,686 $15,285 $10,593 $12,651 9/30/2000 $11,916 $14,478 $10,660 $12,397 10/31/2000 $11,738 $14,417 $10,730 $12,328 11/30/2000 $11,713 $13,280 $10,906 $11,865 12/31/2000 $12,363 $13,345 $11,108 $12,192 1/31/2001 $12,392 $13,819 $11,290 $12,415 2/28/2001 $12,633 $12,559 $11,388 $11,946 3/31/2001 $12,394 $11,763 $11,445 $11,553 4/30/2001 $12,693 $12,677 $11,398 $12,029 5/31/2001 $12,884 $12,762 $11,467 $12,099 6/30/2001 $12,585 $12,452 $11,510 $11,950 7/31/2001 $12,449 $12,329 $11,767 $11,913 8/31/2001 $12,589 $11,557 $11,902 $11,625 9/30/2001 $12,060 $10,624 $12,041 $11,020 10/31/2001 $12,089 $10,827 $12,293 $11,236 11/30/2001 $12,346 $11,657 $12,123 $11,619 12/31/2001 $12,462 $11,759 $12,046 $11,705 1/31/2002 $12,608 $11,588 $12,144 $11,608 2/28/2002 $12,696 $11,364 $12,261 $11,535 3/31/2002 $13,021 $11,792 $12,057 $11,777 4/30/2002 $13,158 $11,077 $12,291 $11,595 5/31/2002 $13,118 $10,995 $12,396 $11,569 6/30/2002 $12,243 $10,212 $12,503 $11,126 7/31/2002 $11,721 $ 9,416 $12,654 $10,590 8/31/2002 $12,045 $ 9,478 $12,868 $10,694 9/30/2002 $11,516 $ 8,448 $13,076 $10,117 10/31/2002 $11,597 $ 9,191 $13,016 $10,454 11/30/2002 $12,234 $ 9,732 $13,013 $10,813 12/31/2002 $12,347 $ 9,160 $13,282 $10,598 1/31/2003 $12,429 $ 8,920 $13,293 $10,457 2/28/2003 $12,323 $ 8,786 $13,477 $10,393 3/31/2003 $12,535 $ 8,871 $13,467 $10,435 4/30/2003 $13,323 $ 9,602 $13,578 $10,952 5/31/2003 $14,053 $10,109 $13,831 $11,413 6/30/2003 $14,333 $10,238 $13,804 $11,508 7/31/2003 $14,159 $10,418 $13,339 $11,496 8/31/2003 $14,377 $10,621 $13,428 $11,664 9/30/2003 $14,795 $10,509 $13,783 $11,733 10/31/2003 $15,214 $11,103 $13,655 $12,067 11/30/2003 $15,436 $11,201 $13,688 $12,184 12/31/2003 $16,214 $11,789 $13,827 $12,582 1/31/2004 $16,439 $12,005 $13,938 $12,743 2/29/2004 $16,531 $12,172 $14,089 $12,898 3/31/2004 $16,484 $11,989 $14,195 $12,874 4/30/2004 $16,231 $11,800 $13,825 $12,577 5/31/2004 $16,184 $11,962 $13,770 $12,620 6/30/2004 $16,417 $12,194 $13,848 $12,797 7/31/2004 $16,510 $11,790 $13,985 $12,586 8/31/2004 $16,887 $11,838 $14,252 $12,699 9/30/2004 $17,123 $11,965 $14,291 $12,846 10/31/2004 $17,361 $12,148 $14,410 $13,004 11/30/2004 $17,744 $12,641 $14,295 $13,332 12/31/2004 $18,224 $13,070 $14,427 $13,640 1/31/2005 $17,884 $12,752 $14,518 $13,470 2/28/2005 $18,345 $13,020 $14,432 $13,650 3/31/2005 $17,996 $12,789 $14,358 $13,466 4/30/2005 $17,721 $12,546 $14,552 $13,336 5/31/2005 $18,114 $12,946 $14,710 $13,598 6/30/2005 $18,659 $12,964 $14,790 $13,712 7/31/2005 $19,056 $13,446 $14,655 $13,985 8/31/2005 $19,002 $13,324 $14,843 $14,017 9/30/2005 $18,947 $13,432 $14,690 $14,076 10/31/2005 $18,357 $13,208 $14,574 $13,851 11/30/2005 $18,302 $13,707 $14,638 $14,139 12/31/2005 $18,591 $13,712 $14,777 $14,268 1/31/2006 $19,159 $14,075 $14,778 $14,619 2/28/2006 $19,334 $14,113 $14,827 $14,629 3/31/2006 $19,431 $14,289 $14,682 $14,750 4/30/2006 $19,688 $14,481 $14,655 $14,905 5/31/2006 $19,547 $14,064 $14,640 $14,599 6/30/2006 $19,725 $14,083 $14,671 $14,607 7/31/2006 $20,307 $14,170 $14,869 $14,694 8/31/2006 $20,650 $14,507 $15,096 $14,946 9/30/2006 $20,831 $14,881 $15,229 $15,144 10/31/2006 $21,340 $15,366 $15,330 $15,475 11/30/2006 $21,934 $15,658 $15,508 $15,750 12/31/2006 $22,195 $15,878 $15,418 $15,868 1/31/2007 $22,383 $16,118 $15,411 $16,028 2/28/2007 $22,655 $15,803 $15,649 $15,995 3/31/2007 $22,930 $15,979 $15,649 $16,123 4/30/2007 $23,546 $16,687 $15,734 $16,511 5/31/2007 $23,994 $17,269 $15,615 $16,802 6/30/2007 $23,497 $16,983 $15,569 $16,629 7/31/2007 $22,912 $16,456 $15,698 $16,346 8/31/2007 $23,105 $16,703 $15,891 $16,475 9/30/2007 $23,823 $17,327 $16,011 $16,928 10/31/2007 $24,019 $17,603 $16,155 $17,218 11/30/2007 $23,425 $16,867 $16,446 $16,815 12/31/2007 $23,323 $16,750 $16,492 $16,739 1/31/2008 $22,889 $15,745 $16,769 $16,220 2/29/2008 $22,363 $15,234 $16,792 $16,000 3/31/2008 $22,021 $15,168 $16,849 $15,869 4/30/2008 $23,341 $15,907 $16,814 $16,330 5/31/2008 $23,459 $16,113 $16,691 $16,472 6/30/2008 $22,177 $14,754 $16,678 $15,680 7/31/2008 $21,639 $14,630 $16,664 $15,473 8/31/2008 $21,666 $14,842 $16,822 $15,503 9/30/2008 $18,742 $13,519 $16,596 $14,399
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08 ------------- ------- 1-Year -21.33% 5-Year +4.84% 10-Year +6.48%
Annual Report | 35 Performance Summary (CONTINUED) ENDNOTES THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING, LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER. THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT-GRADE SECURITIES. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE OVER THE SHORT TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 9/30/08. (5.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/08. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. (7.) Sources: (C) 2008 Morningstar; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The BC U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the 12-month period ended 9/30/08, there were 498 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. 36 | Annual Report Your Fund's Expenses FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 37 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 4/1/08 VALUE 9/30/08 PERIOD* 4/1/08-9/30/08 ------- ----------------- -------------- ---------------------- Actual $1,000 $ 847.60 $2.86 Hypothetical (5% return before expenses) $1,000 $1,021.90 $3.13 CLASS B Actual $1,000 $ 843.40 $6.77 Hypothetical (5% return before expenses) $1,000 $1,017.65 $7.41 CLASS B1 Actual $1,000 $ 845.50 $5.17 Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.65 CLASS C Actual $1,000 $ 846.10 $5.17 Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.65 CLASS R Actual $1,000 $ 844.10 $4.47 Hypothetical (5% return before expenses) $1,000 $1,020.15 $4.90 ADVISOR CLASS Actual $1,000 $ 851.10 $2.18 Hypothetical (5% return before expenses) $1,000 $1,022.65 $2.38
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.62%; B: 1.47%; B1; 1.12%; C: 1.12%; R: 0.97%; and Advisor: 0.47%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. 38 | Annual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). Since 1983, the Fund has invested substantially in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal.(1) Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 9/30/08 (PIE-CHART) GNMA ....................... 94.0% Short-Term Investments & Other Net Assets ........... 6.0%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin U.S. Government Securities Fund covers the fiscal year ended September 30, 2008. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +6.00% cumulative total return for the 12 months under review. The Fund outperformed the +5.51% total return of its peers as measured by the Lipper GNMA Funds Classification Average.(2) In comparison, the Barclays Capital (BC; formerly, Lehman Brothers) U.S. Government: Intermediate Index returned +7.52% for (1.) Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. (2.) Source: Lipper Inc. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA securities. For the 12-month period ended 9/30/08, there were 63 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 96. Annual Report | 39 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/07-9/30/08
DIVIDEND PER SHARE ------------------------------------------------------------------- ADVISOR MONTH CLASS A CLASS B CLASS C CLASS R CLASS --------- ----------- ----------- ----------- ----------- ----------- October 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents November 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents December 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents January 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents February 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents March 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents April 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents May 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents June 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents July 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents August 2.55 cents 2.26 cents 2.27 cents 2.34 cents 2.61 cents September 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents ----------- ----------- ----------- ----------- ----------- TOTAL 31.72 CENTS 28.29 CENTS 28.38 CENTS 29.31 CENTS 32.51 CENTS =========== =========== =========== =========== ===========
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. the same period.(3) The Fund's return reflects the effect of management fees and expenses, while the BC U.S. Government: Intermediate Index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 43. INVESTMENT STRATEGY We seek to invest substantially in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments may include short-term government securities and cash or cash equivalents. (3.) Source: (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The BC U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index, which covers securities issued by the U.S. government (i.e., securities in the BC U.S. Treasury and Agency Indexes), including public obligations of the U.S. Treasury with a remaining maturity of one year or more and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 40 | Annual Report MANAGER'S DISCUSSION During the 12 months under review, we were pleased with the Fund's performance versus its peers as measured by the Lipper GNMA Funds Classification Average. Increased volatility and uncertainty characterized the fixed income market environment and investors' appetite for risk declined as economic prospects worsened and credit market conditions deteriorated. Against this backdrop, GNMA mortgage-backed securities (MBS) were among the best performing sectors in the fixed income market, although they lagged the superior performance of U.S. Treasuries during the reporting period. Overall conditions were challenging due to concerns about housing market weakness, inflation, and continued financial market deleveraging and recapitalization. Although GNMA securities were not immune to the volatility, they were somewhat buffered from recent credit market disruptions due to their high degree of credit safety. While concerns swirled around Fannie Mae and Freddie Mac debt, particularly near the end of the reporting period, many investors appeared to find GNMA securities attractive due to their explicit government guarantee.(1) Based on our belief that income should continue to drive performance within the GNMA market, we focused primarily on 30-year collateral bonds rather than their 15-year counterparts, which was consistent with our investment strategy. Historically, we have allocated the Fund's assets between the two tiers of the GNMA market -- the GNMA I (comprising single-issuer pools) and GNMA II (comprising multiple-issuer pools) programs. Over the period, we slightly reduced our allocation to GNMA I securities relative to our GNMA II sector holdings. We maintained a bias toward premium coupons versus discounts, as we continued to believe the income stream from these securities should remain the same as prepayments slow. Our analysis indicated the high-quality prime mortgage market presented opportunities as spreads have widened with weakness in lower-quality market sectors. In light of many of the recent events in financial markets, we will continue to monitor changes to the regulatory landscape carefully. We believe our dedication to our long-term disciplined investment process and portfolio strategy has served shareholders well over time as we seek opportunities with strong fundamentals and valuations across the entire GNMA investment universe. Annual Report | 41 Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. (PHOTO OF ROGER A. BAYSTON) /s/ Roger A. Bayston Roger A. Bayston, CFA (PHOTO OF JACK LEMEIN) /s/ Jack Lemein Jack Lemein (PHOTO OF PAUL VARUNOK) /s/ Paul Varunok Paul Varunok Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 42 | Annual Report Performance Summary as of 9/30/08 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKUSX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.06 $6.45 $6.39 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.3172
CLASS B (SYMBOL: FUGBX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.06 $6.44 $6.38 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.2829
CLASS C (SYMBOL: FRUGX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.06 $6.42 $6.36 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.2838
CLASS R (SYMBOL: FUSRX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.06 $6.45 $6.39 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.2931
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/08 9/30/07 ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.06 $6.47 $6.41 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.3251
Annual Report | 43 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR -------------------------------------- ------ ------ --------- Cumulative Total Return(1) +6.00% +21.82% +61.30% Average Annual Total Return(2) +1.55% +3.13% +4.44% Distribution Rate(3) 4.54% 30-Day Standardized Yield(4) 4.42% Total Annual Operating Expenses(5) 0.73%
INCEPTION CLASS B 1-YEAR 5-YEAR (1/1/99) -------------------------------------- ------ ------ --------- Cumulative Total Return(1) +5.61% +18.88% +53.92% Average Annual Total Return(2) +1.61% +3.19% +4.52% Distribution Rate(3) 4.26% 30-Day Standardized Yield(4) 4.10% Total Annual Operating Expenses(5) 1.26%
CLASS C 1-YEAR 5-YEAR 10-YEAR -------------------------------------- ------ ------ --------- Cumulative Total Return(1) +5.48% +18.77% +53.07% Average Annual Total Return(2) +4.48% +3.50% +4.35% Distribution Rate(3) 4.28% 30-Day Standardized Yield(4) 4.09% Total Annual Operating Expenses(5) 1.26%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) -------------------------------------- ------ ------ --------- Cumulative Total Return(1) +5.61% +19.58% +30.93% Average Annual Total Return(2) +5.61% +3.64% +4.08% Distribution Rate(3) 4.41% 30-Day Standardized Yield(4) 4.26% Total Annual Operating Expenses(5) 1.11%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR -------------------------------------- ------ ------ --------- Cumulative Total Return(1) +6.11% +22.53% +63.36% Average Annual Total Return(2) +6.11% +4.15% +5.03% Distribution Rate(3) 4.86% 30-Day Standardized Yield(4) 4.76% Total Annual Operating Expenses(5) 0.61%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 44 | Annual Report Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. INTERMEDIATE FUNDS SECURITIES GOVERNMENT CLASSIFICATION DATE FUND - CLASS A BOND INDEX CPI AVERAGE ---------- -------------- ----------------- ------- -------------- 10/1/1998 $ 9,575 $10,000 $10,000 $10,000 10/31/1998 $ 9,530 $10,017 $10,024 $ 9,949 11/30/1998 $ 9,581 $ 9,986 $10,024 $10,003 12/31/1998 $ 9,619 $10,025 $10,018 $10,040 1/31/1999 $ 9,684 $10,069 $10,043 $10,099 2/28/1999 $ 9,624 $ 9,931 $10,055 $10,017 3/31/1999 $ 9,676 $ 9,997 $10,086 $10,079 4/30/1999 $ 9,715 $10,024 $10,159 $10,118 5/31/1999 $ 9,639 $ 9,963 $10,159 $10,050 6/30/1999 $ 9,592 $ 9,977 $10,159 $ 9,994 7/31/1999 $ 9,515 $ 9,979 $10,189 $ 9,935 8/31/1999 $ 9,523 $ 9,993 $10,214 $ 9,922 9/30/1999 $ 9,676 $10,078 $10,263 $10,075 10/31/1999 $ 9,728 $10,098 $10,281 $10,110 11/30/1999 $ 9,735 $10,105 $10,287 $10,117 12/31/1999 $ 9,698 $10,074 $10,287 $10,069 1/31/2000 $ 9,616 $10,040 $10,318 $ 9,992 2/29/2000 $ 9,728 $10,123 $10,379 $10,107 3/31/2000 $ 9,872 $10,239 $10,465 $10,259 4/30/2000 $ 9,849 $10,234 $10,471 $10,242 5/31/2000 $ 9,889 $10,262 $10,483 $10,279 6/30/2000 $10,051 $10,425 $10,538 $10,457 7/31/2000 $10,106 $10,494 $10,562 $10,503 8/31/2000 $10,256 $10,612 $10,562 $10,653 9/30/2000 $10,344 $10,704 $10,617 $10,745 10/31/2000 $10,417 $10,778 $10,636 $10,811 11/30/2000 $10,569 $10,936 $10,642 $10,969 12/31/2000 $10,722 $11,129 $10,636 $11,129 1/31/2001 $10,876 $11,277 $10,703 $11,301 2/28/2001 $10,934 $11,381 $10,746 $11,371 3/31/2001 $10,993 $11,463 $10,770 $11,437 4/30/2001 $11,004 $11,427 $10,813 $11,419 5/31/2001 $11,079 $11,474 $10,862 $11,492 6/30/2001 $11,106 $11,511 $10,880 $11,529 7/31/2001 $11,314 $11,726 $10,850 $11,757 8/31/2001 $11,391 $11,830 $10,850 $11,845 9/30/2001 $11,536 $12,082 $10,899 $12,015 10/31/2001 $11,695 $12,271 $10,862 $12,181 11/30/2001 $11,586 $12,124 $10,844 $12,053 12/31/2001 $11,544 $12,066 $10,801 $11,988 1/31/2002 $11,636 $12,118 $10,825 $12,105 2/28/2002 $11,779 $12,218 $10,868 $12,235 3/31/2002 $11,631 $12,034 $10,929 $12,082 4/30/2002 $11,845 $12,259 $10,990 $12,309 5/31/2002 $11,920 $12,344 $10,990 $12,390 6/30/2002 $12,014 $12,499 $10,996 $12,493 7/31/2002 $12,143 $12,734 $11,009 $12,640 8/31/2002 $12,255 $12,880 $11,045 $12,746 9/30/2002 $12,350 $13,101 $11,064 $12,861 10/31/2002 $12,393 $13,092 $11,082 $12,878 11/30/2002 $12,392 $12,988 $11,082 $12,871 12/31/2002 $12,535 $13,229 $11,057 $13,013 1/31/2003 $12,571 $13,199 $11,106 $13,040 2/28/2003 $12,625 $13,348 $11,192 $13,117 3/31/2003 $12,624 $13,351 $11,259 $13,109 4/30/2003 $12,660 $13,389 $11,235 $13,141 5/31/2003 $12,660 $13,599 $11,216 $13,172 6/30/2003 $12,696 $13,577 $11,229 $13,197 7/31/2003 $12,401 $13,247 $11,241 $12,914 8/31/2003 $12,493 $13,271 $11,284 $13,000 9/30/2003 $12,679 $13,559 $11,320 $13,216 10/31/2003 $12,623 $13,426 $11,308 $13,150 11/30/2003 $12,679 $13,427 $11,278 $13,189 12/31/2003 $12,758 $13,531 $11,265 $13,280 1/31/2004 $12,834 $13,605 $11,320 $13,347 2/29/2004 $12,910 $13,734 $11,381 $13,432 3/31/2004 $12,948 $13,830 $11,455 $13,478 4/30/2004 $12,736 $13,521 $11,491 $13,254 5/31/2004 $12,712 $13,478 $11,559 $13,218 6/30/2004 $12,825 $13,512 $11,595 $13,320 7/31/2004 $12,937 $13,610 $11,577 $13,420 8/31/2004 $13,109 $13,812 $11,583 $13,597 9/30/2004 $13,117 $13,817 $11,608 $13,605 10/31/2004 $13,212 $13,902 $11,669 $13,694 11/30/2004 $13,188 $13,772 $11,675 $13,650 12/31/2004 $13,243 $13,847 $11,632 $13,717 1/31/2005 $13,318 $13,865 $11,656 $13,784 2/28/2005 $13,274 $13,788 $11,724 $13,736 3/31/2005 $13,249 $13,754 $11,815 $13,703 4/30/2005 $13,366 $13,914 $11,895 $13,829 5/31/2005 $13,459 $14,025 $11,883 $13,909 6/30/2005 $13,472 $14,071 $11,889 $13,940 7/31/2005 $13,423 $13,951 $11,944 $13,881 8/31/2005 $13,538 $14,106 $12,005 $13,992 9/30/2005 $13,467 $13,998 $12,152 $13,918 10/31/2005 $13,418 $13,939 $12,176 $13,847 11/30/2005 $13,451 $13,996 $12,078 $13,883 12/31/2005 $13,610 $14,081 $12,029 $14,032 1/31/2006 $13,643 $14,080 $12,121 $14,061 2/28/2006 $13,656 $14,082 $12,145 $14,085 3/31/2006 $13,563 $14,039 $12,213 $13,998 4/30/2006 $13,512 $14,052 $12,317 $13,950 5/31/2006 $13,462 $14,056 $12,378 $13,911 6/30/2006 $13,476 $14,081 $12,402 $13,910 7/31/2006 $13,640 $14,229 $12,439 $14,086 8/31/2006 $13,826 $14,389 $12,463 $14,281 9/30/2006 $13,926 $14,493 $12,402 $14,374 10/31/2006 $14,007 $14,562 $12,335 $14,461 11/30/2006 $14,154 $14,678 $12,317 $14,587 12/31/2006 $14,112 $14,622 $12,335 $14,562 1/31/2007 $14,105 $14,624 $12,373 $14,555 2/28/2007 $14,276 $14,807 $12,439 $14,721 3/31/2007 $14,293 $14,845 $12,552 $14,749 4/30/2007 $14,376 $14,911 $12,634 $14,815 5/31/2007 $14,280 $14,826 $12,711 $14,726 6/30/2007 $14,207 $14,846 $12,735 $14,650 7/31/2007 $14,335 $15,029 $12,732 $14,765 8/31/2007 $14,487 $15,240 $12,709 $14,916 9/30/2007 $14,571 $15,345 $12,744 $15,025 10/31/2007 $14,724 $15,437 $12,771 $15,172 11/30/2007 $15,016 $15,809 $12,847 $15,460 12/31/2007 $15,009 $15,860 $12,838 $15,476 1/31/2008 $15,256 $16,234 $12,902 $15,736 2/29/2008 $15,319 $16,411 $12,940 $15,824 3/31/2008 $15,358 $16,512 $13,052 $15,849 4/30/2008 $15,328 $16,291 $13,131 $15,811 5/31/2008 $15,226 $16,145 $13,242 $15,718 6/30/2008 $15,239 $16,208 $13,375 $15,729 7/31/2008 $15,252 $16,294 $13,445 $15,723 8/31/2008 $15,384 $16,418 $13,392 $15,844 9/30/2008 $15,445 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08 ------- ------- 1-Year +1.55% 5-Year +3.13% 10-Year +4.44%
CLASS B (1/1/99-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. INTERMEDIATE FUNDS SECURITIES GOVERNMENT CLASSIFICATION DATE FUND - CLASS B BOND INDEX CPI AVERAGE ---------- -------------- ----------------- ------- -------------- 1/1/1999 $10,000 $10,000 $10,000 $10,000 1/31/1999 $10,068 $10,045 $10,024 $10,059 2/28/1999 $ 9,986 $ 9,907 $10,037 $ 9,978 3/31/1999 $10,051 $ 9,973 $10,067 $10,039 4/30/1999 $10,087 $10,000 $10,140 $10,078 5/31/1999 $10,005 $ 9,938 $10,140 $10,010 6/30/1999 $ 9,936 $ 9,953 $10,140 $ 9,954 7/31/1999 $ 9,868 $ 9,954 $10,171 $ 9,895 8/31/1999 $ 9,856 $ 9,968 $10,195 $ 9,882 9/30/1999 $10,025 $10,053 $10,244 $10,036 10/31/1999 $10,074 $10,073 $10,262 $10,070 11/30/1999 $10,062 $10,080 $10,268 $10,077 12/31/1999 $10,019 $10,049 $10,268 $10,029 1/31/2000 $ 9,946 $10,015 $10,299 $ 9,952 2/29/2000 $10,042 $10,098 $10,360 $10,067 3/31/2000 $10,186 $10,213 $10,445 $10,219 4/30/2000 $10,174 $10,209 $10,451 $10,201 5/31/2000 $10,210 $10,236 $10,464 $10,238 6/30/2000 $10,373 $10,399 $10,519 $10,416 7/31/2000 $10,410 $10,468 $10,543 $10,462 8/31/2000 $10,560 $10,585 $10,543 $10,610 9/30/2000 $10,662 $10,678 $10,598 $10,703 10/31/2000 $10,717 $10,751 $10,616 $10,768 11/30/2000 $10,869 $10,909 $10,622 $10,925 12/31/2000 $11,021 $11,101 $10,616 $11,085 1/31/2001 $11,191 $11,249 $10,683 $11,257 2/28/2001 $11,230 $11,352 $10,726 $11,326 3/31/2001 $11,302 $11,435 $10,750 $11,392 4/30/2001 $11,291 $11,398 $10,793 $11,374 5/31/2001 $11,364 $11,446 $10,842 $11,447 6/30/2001 $11,403 $11,482 $10,860 $11,483 7/31/2001 $11,595 $11,696 $10,830 $11,711 8/31/2001 $11,669 $11,800 $10,830 $11,798 9/30/2001 $11,829 $12,052 $10,879 $11,967 10/31/2001 $11,970 $12,240 $10,842 $12,132 11/30/2001 $11,871 $12,094 $10,824 $12,005 12/31/2001 $11,806 $12,036 $10,781 $11,940 1/31/2002 $11,912 $12,088 $10,805 $12,057 2/28/2002 $12,035 $12,188 $10,848 $12,186 3/31/2002 $11,879 $12,004 $10,909 $12,034 4/30/2002 $12,092 $12,229 $10,970 $12,260 5/31/2002 $12,164 $12,314 $10,970 $12,341 6/30/2002 $12,254 $12,468 $10,976 $12,443 7/31/2002 $12,381 $12,703 $10,988 $12,590 8/31/2002 $12,490 $12,848 $11,025 $12,696 9/30/2002 $12,582 $13,069 $11,043 $12,810 10/31/2002 $12,620 $13,060 $11,062 $12,827 11/30/2002 $12,614 $12,956 $11,062 $12,820 12/31/2002 $12,754 $13,196 $11,037 $12,962 1/31/2003 $12,785 $13,167 $11,086 $12,989 2/28/2003 $12,834 $13,315 $11,171 $13,065 3/31/2003 $12,828 $13,318 $11,239 $13,058 4/30/2003 $12,859 $13,356 $11,214 $13,089 5/31/2003 $12,871 $13,565 $11,196 $13,120 6/30/2003 $12,884 $13,543 $11,208 $13,145 7/31/2003 $12,578 $13,214 $11,220 $12,863 8/31/2003 $12,667 $13,238 $11,263 $12,949 9/30/2003 $12,850 $13,525 $11,300 $13,164 10/31/2003 $12,788 $13,392 $11,287 $13,098 11/30/2003 $12,839 $13,393 $11,257 $13,137 12/31/2003 $12,914 $13,498 $11,245 $13,228 1/31/2004 $12,985 $13,571 $11,300 $13,294 2/29/2004 $13,056 $13,700 $11,361 $13,379 3/31/2004 $13,089 $13,796 $11,434 $13,425 4/30/2004 $12,868 $13,487 $11,470 $13,202 5/31/2004 $12,839 $13,444 $11,538 $13,166 6/30/2004 $12,946 $13,478 $11,574 $13,267 7/31/2004 $13,054 $13,576 $11,556 $13,367 8/31/2004 $13,222 $13,777 $11,562 $13,543 9/30/2004 $13,225 $13,783 $11,586 $13,552 10/31/2004 $13,315 $13,867 $11,647 $13,640 11/30/2004 $13,285 $13,738 $11,653 $13,596 12/31/2004 $13,334 $13,813 $11,611 $13,663 1/31/2005 $13,404 $13,831 $11,635 $13,730 2/28/2005 $13,354 $13,754 $11,702 $13,681 3/31/2005 $13,323 $13,719 $11,794 $13,649 4/30/2005 $13,435 $13,880 $11,873 $13,774 5/31/2005 $13,523 $13,990 $11,861 $13,854 6/30/2005 $13,549 $14,036 $11,867 $13,885 7/31/2005 $13,474 $13,917 $11,922 $13,826 8/31/2005 $13,583 $14,071 $11,983 $13,937 9/30/2005 $13,507 $13,963 $12,129 $13,863 10/31/2005 $13,451 $13,904 $12,154 $13,792 11/30/2005 $13,478 $13,961 $12,056 $13,828 12/31/2005 $13,632 $14,046 $12,007 $13,976 1/31/2006 $13,659 $14,045 $12,099 $14,005 2/28/2006 $13,666 $14,047 $12,123 $14,029 3/31/2006 $13,567 $14,004 $12,190 $13,942 4/30/2006 $13,510 $14,017 $12,294 $13,895 5/31/2006 $13,454 $14,021 $12,355 $13,856 6/30/2006 $13,462 $14,047 $12,379 $13,855 7/31/2006 $13,620 $14,194 $12,416 $14,031 8/31/2006 $13,800 $14,353 $12,441 $14,224 9/30/2006 $13,894 $14,457 $12,379 $14,317 10/31/2006 $13,970 $14,526 $12,312 $14,404 11/30/2006 $14,111 $14,642 $12,294 $14,529 12/31/2006 $14,063 $14,586 $12,312 $14,505 1/31/2007 $14,057 $14,588 $12,350 $14,497 2/28/2007 $14,227 $14,770 $12,416 $14,663 3/31/2007 $14,243 $14,809 $12,529 $14,690 4/30/2007 $14,326 $14,874 $12,610 $14,757 5/31/2007 $14,230 $14,789 $12,688 $14,668 6/30/2007 $14,157 $14,809 $12,712 $14,592 7/31/2007 $14,286 $14,991 $12,709 $14,707 8/31/2007 $14,437 $15,203 $12,686 $14,857 9/30/2007 $14,521 $15,307 $12,721 $14,965 10/31/2007 $14,674 $15,399 $12,748 $15,112 11/30/2007 $14,964 $15,770 $12,823 $15,399 12/31/2007 $14,957 $15,821 $12,815 $15,415 1/31/2008 $15,203 $16,194 $12,879 $15,674 2/29/2008 $15,266 $16,370 $12,916 $15,761 3/31/2008 $15,306 $16,471 $13,028 $15,787 4/30/2008 $15,275 $16,251 $13,107 $15,749 5/31/2008 $15,174 $16,105 $13,217 $15,656 6/30/2008 $15,186 $16,168 $13,351 $15,667 7/31/2008 $15,200 $16,254 $13,421 $15,661 8/31/2008 $15,332 $16,378 $13,367 $15,781 9/30/2008 $15,392 $16,457 $13,349 $15,794
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08 ------- ------- 1-Year +1.61% 5-Year +3.19% Since Inception (1/1/99) +4.52%
Annual Report | 45 Performance Summary (CONTINUED) CLASS C (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN U.S. LIPPER GNMA GOVERNMENT LEHMAN BROTHERS FUNDS SECURITIES U.S. INTERMEDIATE CLASSIFICATION DATE FUND - CLASS C GOVERNMENT CPI AVERAGE ---------- -------------- ----------------- ------- -------------- 10/1/1998 $10,000 $10,000 $10,000 $10,000 10/31/1998 $ 9,933 $10,017 $10,024 $ 9,949 11/30/1998 $ 9,997 $ 9,986 $10,024 $10,003 12/31/1998 $10,031 $10,025 $10,018 $10,040 1/31/1999 $10,096 $10,069 $10,043 $10,099 2/28/1999 $10,028 $ 9,931 $10,055 $10,017 3/31/1999 $10,078 $ 9,997 $10,086 $10,079 4/30/1999 $10,113 $10,024 $10,159 $10,118 5/31/1999 $10,030 $ 9,963 $10,159 $10,050 6/30/1999 $ 9,976 $ 9,977 $10,159 $ 9,994 7/31/1999 $ 9,892 $ 9,979 $10,189 $ 9,935 8/31/1999 $ 9,895 $ 9,993 $10,214 $ 9,922 9/30/1999 $10,050 $10,078 $10,263 $10,075 10/31/1999 $10,100 $10,098 $10,281 $10,110 11/30/1999 $10,103 $10,105 $10,287 $10,117 12/31/1999 $10,060 $10,074 $10,287 $10,069 1/31/2000 $ 9,970 $10,040 $10,318 $ 9,992 2/29/2000 $10,083 $10,123 $10,379 $10,107 3/31/2000 $10,227 $10,239 $10,465 $10,259 4/30/2000 $10,199 $10,234 $10,471 $10,242 5/31/2000 $10,235 $10,262 $10,483 $10,279 6/30/2000 $10,399 $10,425 $10,538 $10,457 7/31/2000 $10,436 $10,494 $10,562 $10,503 8/31/2000 $10,587 $10,612 $10,562 $10,653 9/30/2000 $10,689 $10,704 $10,617 $10,745 10/31/2000 $10,760 $10,778 $10,636 $10,811 11/30/2000 $10,896 $10,936 $10,642 $10,969 12/31/2000 $11,050 $11,129 $10,636 $11,129 1/31/2001 $11,220 $11,277 $10,703 $11,301 2/28/2001 $11,259 $11,381 $10,746 $11,371 3/31/2001 $11,332 $11,463 $10,770 $11,437 4/30/2001 $11,338 $11,427 $10,813 $11,419 5/31/2001 $11,394 $11,474 $10,862 $11,492 6/30/2001 $11,434 $11,511 $10,880 $11,529 7/31/2001 $11,626 $11,726 $10,850 $11,757 8/31/2001 $11,701 $11,830 $10,850 $11,845 9/30/2001 $11,861 $12,082 $10,899 $12,015 10/31/2001 $12,003 $12,271 $10,862 $12,181 11/30/2001 $11,903 $12,124 $10,844 $12,053 12/31/2001 $11,838 $12,066 $10,801 $11,988 1/31/2002 $11,944 $12,118 $10,825 $12,105 2/28/2002 $12,068 $12,218 $10,868 $12,235 3/31/2002 $11,911 $12,034 $10,929 $12,082 4/30/2002 $12,125 $12,259 $10,990 $12,309 5/31/2002 $12,197 $12,344 $10,990 $12,390 6/30/2002 $12,288 $12,499 $10,996 $12,493 7/31/2002 $12,416 $12,734 $11,009 $12,640 8/31/2002 $12,526 $12,880 $11,045 $12,746 9/30/2002 $12,636 $13,101 $11,064 $12,861 10/31/2002 $12,656 $13,092 $11,082 $12,878 11/30/2002 $12,650 $12,988 $11,082 $12,871 12/31/2002 $12,791 $13,229 $11,057 $13,013 1/31/2003 $12,822 $13,199 $11,106 $13,040 2/28/2003 $12,890 $13,348 $11,192 $13,117 3/31/2003 $12,866 $13,351 $11,259 $13,109 4/30/2003 $12,898 $13,389 $11,235 $13,141 5/31/2003 $12,893 $13,599 $11,216 $13,172 6/30/2003 $12,924 $13,577 $11,229 $13,197 7/31/2003 $12,616 $13,247 $11,241 $12,914 8/31/2003 $12,704 $13,271 $11,284 $13,000 9/30/2003 $12,888 $13,559 $11,320 $13,216 10/31/2003 $12,825 $13,426 $11,308 $13,150 11/30/2003 $12,876 $13,427 $11,278 $13,189 12/31/2003 $12,951 $13,531 $11,265 $13,280 1/31/2004 $13,023 $13,605 $11,320 $13,347 2/29/2004 $13,095 $13,734 $11,381 $13,432 3/31/2004 $13,127 $13,830 $11,455 $13,478 4/30/2004 $12,905 $13,521 $11,491 $13,254 5/31/2004 $12,875 $13,478 $11,559 $13,218 6/30/2004 $13,003 $13,512 $11,595 $13,320 7/31/2004 $13,092 $13,610 $11,577 $13,420 8/31/2004 $13,261 $13,812 $11,583 $13,597 9/30/2004 $13,264 $13,817 $11,608 $13,605 10/31/2004 $13,354 $13,902 $11,669 $13,694 11/30/2004 $13,323 $13,772 $11,675 $13,650 12/31/2004 $13,373 $13,847 $11,632 $13,717 1/31/2005 $13,444 $13,865 $11,656 $13,784 2/28/2005 $13,393 $13,788 $11,724 $13,736 3/31/2005 $13,362 $13,754 $11,815 $13,703 4/30/2005 $13,474 $13,914 $11,895 $13,829 5/31/2005 $13,563 $14,025 $11,883 $13,909 6/30/2005 $13,590 $14,071 $11,889 $13,940 7/31/2005 $13,514 $13,951 $11,944 $13,881 8/31/2005 $13,624 $14,106 $12,005 $13,992 9/30/2005 $13,547 $13,998 $12,152 $13,918 10/31/2005 $13,491 $13,939 $12,176 $13,847 11/30/2005 $13,519 $13,996 $12,078 $13,883 12/31/2005 $13,673 $14,081 $12,029 $14,032 1/31/2006 $13,700 $14,080 $12,121 $14,061 2/28/2006 $13,707 $14,082 $12,145 $14,085 3/31/2006 $13,608 $14,039 $12,213 $13,998 4/30/2006 $13,550 $14,052 $12,317 $13,950 5/31/2006 $13,494 $14,056 $12,378 $13,911 6/30/2006 $13,502 $14,081 $12,402 $13,910 7/31/2006 $13,661 $14,229 $12,439 $14,086 8/31/2006 $13,843 $14,389 $12,463 $14,281 9/30/2006 $13,938 $14,493 $12,402 $14,374 10/31/2006 $14,013 $14,562 $12,335 $14,461 11/30/2006 $14,155 $14,678 $12,317 $14,587 12/31/2006 $14,107 $14,622 $12,335 $14,562 1/31/2007 $14,095 $14,624 $12,373 $14,555 2/28/2007 $14,260 $14,807 $12,439 $14,721 3/31/2007 $14,270 $14,845 $12,552 $14,749 4/30/2007 $14,347 $14,911 $12,634 $14,815 5/31/2007 $14,244 $14,826 $12,711 $14,726 6/30/2007 $14,165 $14,846 $12,735 $14,650 7/31/2007 $14,287 $15,029 $12,732 $14,765 8/31/2007 $14,433 $15,240 $12,709 $14,916 9/30/2007 $14,511 $15,345 $12,744 $15,025 10/31/2007 $14,658 $15,437 $12,771 $15,172 11/30/2007 $14,920 $15,809 $12,847 $15,460 12/31/2007 $14,906 $15,860 $12,838 $15,476 1/31/2008 $15,147 $16,234 $12,902 $15,736 2/29/2008 $15,226 $16,411 $12,940 $15,824 3/31/2008 $15,259 $16,512 $13,052 $15,849 4/30/2008 $15,222 $16,291 $13,131 $15,811 5/31/2008 $15,114 $16,145 $13,242 $15,718 6/30/2008 $15,120 $16,208 $13,375 $15,729 7/31/2008 $15,103 $16,294 $13,445 $15,723 8/31/2008 $15,252 $16,418 $13,392 $15,844 9/30/2008 $15,307 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08 ------- ------- 1-Year +4.48% 5-Year +3.50% 10-Year +4.35%
CLASS R (1/1/02-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. INTERMEDIATE FUNDS SECURITIES GOVERNMENT CLASSIFICATION DATE FUND - CLASS R BOND INDEX CPI AVERAGE ---------- -------------- ----------------- ------- -------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,109 $10,043 $10,023 $10,098 2/28/2002 $10,215 $10,126 $10,062 $10,206 3/31/2002 $10,098 $ 9,974 $10,119 $10,078 4/30/2002 $10,281 $10,160 $10,175 $10,268 5/31/2002 $10,343 $10,231 $10,175 $10,336 6/30/2002 $10,421 $10,359 $10,181 $10,422 7/31/2002 $10,530 $10,554 $10,192 $10,544 8/31/2002 $10,625 $10,675 $10,226 $10,633 9/30/2002 $10,704 $10,858 $10,243 $10,729 10/31/2002 $10,722 $10,851 $10,260 $10,743 11/30/2002 $10,733 $10,765 $10,260 $10,737 12/31/2002 $10,854 $10,964 $10,238 $10,855 1/31/2003 $10,866 $10,940 $10,283 $10,878 2/28/2003 $10,924 $11,063 $10,362 $10,942 3/31/2003 $10,921 $11,065 $10,424 $10,936 4/30/2003 $10,948 $11,097 $10,402 $10,962 5/31/2003 $10,945 $11,271 $10,385 $10,988 6/30/2003 $10,958 $11,252 $10,396 $11,009 7/31/2003 $10,715 $10,979 $10,407 $10,773 8/31/2003 $10,791 $10,999 $10,447 $10,845 9/30/2003 $10,948 $11,237 $10,481 $11,025 10/31/2003 $10,897 $11,127 $10,470 $10,970 11/30/2003 $10,926 $11,128 $10,441 $11,003 12/31/2003 $11,008 $11,215 $10,430 $11,078 1/31/2004 $11,053 $11,276 $10,481 $11,134 2/29/2004 $11,115 $11,383 $10,538 $11,205 3/31/2004 $11,160 $11,462 $10,606 $11,243 4/30/2004 $10,975 $11,206 $10,640 $11,057 5/31/2004 $10,950 $11,170 $10,702 $11,027 6/30/2004 $11,044 $11,199 $10,736 $11,112 7/31/2004 $11,121 $11,280 $10,719 $11,195 8/31/2004 $11,265 $11,447 $10,724 $11,343 9/30/2004 $11,286 $11,452 $10,747 $11,350 10/31/2004 $11,364 $11,522 $10,804 $11,423 11/30/2004 $11,323 $11,415 $10,809 $11,387 12/31/2004 $11,384 $11,477 $10,770 $11,443 1/31/2005 $11,445 $11,491 $10,792 $11,499 2/28/2005 $11,386 $11,427 $10,855 $11,458 3/31/2005 $11,361 $11,399 $10,939 $11,431 4/30/2005 $11,475 $11,532 $11,013 $11,536 5/31/2005 $11,534 $11,624 $11,002 $11,603 6/30/2005 $11,559 $11,662 $11,007 $11,628 7/31/2005 $11,513 $11,563 $11,058 $11,580 8/31/2005 $11,590 $11,691 $11,115 $11,672 9/30/2005 $11,544 $11,601 $11,251 $11,610 10/31/2005 $11,481 $11,552 $11,273 $11,551 11/30/2005 $11,505 $11,600 $11,183 $11,581 12/31/2005 $11,638 $11,670 $11,138 $11,705 1/31/2006 $11,663 $11,669 $11,222 $11,730 2/28/2006 $11,670 $11,671 $11,245 $11,750 3/31/2006 $11,604 $11,635 $11,307 $11,677 4/30/2006 $11,539 $11,646 $11,404 $11,637 5/31/2006 $11,510 $11,650 $11,460 $11,605 6/30/2006 $11,500 $11,671 $11,483 $11,603 7/31/2006 $11,655 $11,793 $11,517 $11,751 8/31/2006 $11,810 $11,925 $11,539 $11,913 9/30/2006 $11,892 $12,012 $11,483 $11,990 10/31/2006 $11,957 $12,069 $11,420 $12,063 11/30/2006 $12,061 $12,165 $11,404 $12,168 12/31/2006 $12,040 $12,119 $11,420 $12,148 1/31/2007 $12,031 $12,120 $11,455 $12,142 2/28/2007 $12,173 $12,272 $11,517 $12,280 3/31/2007 $12,183 $12,304 $11,622 $12,303 4/30/2007 $12,230 $12,358 $11,697 $12,359 5/31/2007 $12,164 $12,288 $11,768 $12,285 6/30/2007 $12,079 $12,304 $11,791 $12,221 7/31/2007 $12,185 $12,456 $11,788 $12,317 8/31/2007 $12,311 $12,631 $11,767 $12,443 9/30/2007 $12,398 $12,718 $11,799 $12,534 10/31/2007 $12,504 $12,794 $11,824 $12,657 11/30/2007 $12,749 $13,103 $11,895 $12,897 12/31/2007 $12,739 $13,145 $11,887 $12,910 1/31/2008 $12,944 $13,455 $11,946 $13,127 2/29/2008 $13,014 $13,601 $11,980 $13,200 3/31/2008 $13,024 $13,685 $12,084 $13,222 4/30/2008 $13,014 $13,502 $12,157 $13,190 5/31/2008 $12,923 $13,381 $12,260 $13,112 6/30/2008 $12,930 $13,433 $12,383 $13,121 7/31/2008 $12,917 $13,504 $12,448 $13,116 8/31/2008 $13,025 $13,608 $12,399 $13,217 9/30/2008 $13,093 $13,674 $12,382 $13,227
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08 ------- ------- 1-Year +5.61% 5-Year +3.64% Since Inception (1/1/02) +4.08%
46 | Annual Report Performance Summary (CONTINUED) ADVISOR CLASS (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN U.S. LEHMAN BROTHERS LIPPER GNMA GOVERNMENT U.S. INTERMEDIATE FUNDS SECURITIES FUND GOVERNMENT CLASSIFICATION DATE ADVISOR - CLASS BOND INDEX CPI AVERAGE ---------- --------------- ----------------- ------- -------------- 10/1/1998 $10,000 $10,000 $10,000 $10,000 10/31/1998 $ 9,939 $10,017 $10,024 $ 9,949 11/30/1998 $10,008 $ 9,986 $10,024 $10,003 12/31/1998 $10,048 $10,025 $10,018 $10,040 1/31/1999 $10,117 $10,069 $10,043 $10,099 2/28/1999 $10,040 $ 9,931 $10,055 $10,017 3/31/1999 $10,096 $ 9,997 $10,086 $10,079 4/30/1999 $10,152 $10,024 $10,159 $10,118 5/31/1999 $10,074 $ 9,963 $10,159 $10,050 6/30/1999 $10,010 $ 9,977 $10,159 $ 9,994 7/31/1999 $ 9,946 $ 9,979 $10,189 $ 9,935 8/31/1999 $ 9,940 $ 9,993 $10,214 $ 9,922 9/30/1999 $10,116 $10,078 $10,263 $10,075 10/31/1999 $10,171 $10,098 $10,281 $10,110 11/30/1999 $10,164 $10,105 $10,287 $10,117 12/31/1999 $10,126 $10,074 $10,287 $10,069 1/31/2000 $10,058 $10,040 $10,318 $ 9,992 2/29/2000 $10,160 $10,123 $10,379 $10,107 3/31/2000 $10,311 $10,239 $10,465 $10,259 4/30/2000 $10,304 $10,234 $10,471 $10,242 5/31/2000 $10,346 $10,262 $10,483 $10,279 6/30/2000 $10,517 $10,425 $10,538 $10,457 7/31/2000 $10,560 $10,494 $10,562 $10,503 8/31/2000 $10,717 $10,612 $10,562 $10,653 9/30/2000 $10,826 $10,704 $10,617 $10,745 10/31/2000 $10,903 $10,778 $10,636 $10,811 11/30/2000 $11,047 $10,936 $10,642 $10,969 12/31/2000 $11,224 $11,129 $10,636 $11,129 1/31/2001 $11,386 $11,277 $10,703 $11,301 2/28/2001 $11,432 $11,381 $10,746 $11,371 3/31/2001 $11,511 $11,463 $10,770 $11,437 4/30/2001 $11,523 $11,427 $10,813 $11,419 5/31/2001 $11,586 $11,474 $10,862 $11,492 6/30/2001 $11,650 $11,511 $10,880 $11,529 7/31/2001 $11,851 $11,726 $10,850 $11,757 8/31/2001 $11,933 $11,830 $10,850 $11,845 9/30/2001 $12,085 $12,082 $10,899 $12,015 10/31/2001 $12,253 $12,271 $10,862 $12,181 11/30/2001 $12,158 $12,124 $10,844 $12,053 12/31/2001 $12,098 $12,066 $10,801 $11,988 1/31/2002 $12,195 $12,118 $10,825 $12,105 2/28/2002 $12,345 $12,218 $10,868 $12,235 3/31/2002 $12,192 $12,034 $10,929 $12,082 4/30/2002 $12,417 $12,259 $10,990 $12,309 5/31/2002 $12,497 $12,344 $10,990 $12,390 6/30/2002 $12,597 $12,499 $10,996 $12,493 7/31/2002 $12,733 $12,734 $11,009 $12,640 8/31/2002 $12,851 $12,880 $11,045 $12,746 9/30/2002 $12,971 $13,101 $11,064 $12,861 10/31/2002 $12,998 $13,092 $11,082 $12,878 11/30/2002 $12,999 $12,988 $11,082 $12,871 12/31/2002 $13,150 $13,229 $11,057 $13,013 1/31/2003 $13,188 $13,199 $11,106 $13,040 2/28/2003 $13,265 $13,348 $11,192 $13,117 3/31/2003 $13,266 $13,351 $11,259 $13,109 4/30/2003 $13,286 $13,389 $11,235 $13,141 5/31/2003 $13,306 $13,599 $11,216 $13,172 6/30/2003 $13,327 $13,577 $11,229 $13,197 7/31/2003 $13,018 $13,247 $11,241 $12,914 8/31/2003 $13,117 $13,271 $11,284 $13,000 9/30/2003 $13,333 $13,559 $11,320 $13,216 10/31/2003 $13,275 $13,426 $11,308 $13,150 11/30/2003 $13,315 $13,427 $11,278 $13,189 12/31/2003 $13,400 $13,531 $11,265 $13,280 1/31/2004 $13,481 $13,605 $11,320 $13,347 2/29/2004 $13,562 $13,734 $11,381 $13,432 3/31/2004 $13,603 $13,830 $11,455 $13,478 4/30/2004 $13,382 $13,521 $11,491 $13,254 5/31/2004 $13,379 $13,478 $11,559 $13,218 6/30/2004 $13,498 $13,512 $11,595 $13,320 7/31/2004 $13,597 $13,610 $11,577 $13,420 8/31/2004 $13,779 $13,812 $11,583 $13,597 9/30/2004 $13,789 $13,817 $11,608 $13,605 10/31/2004 $13,910 $13,902 $11,669 $13,694 11/30/2004 $13,865 $13,772 $11,675 $13,650 12/31/2004 $13,946 $13,847 $11,632 $13,717 1/31/2005 $14,027 $13,865 $11,656 $13,784 2/28/2005 $13,960 $13,788 $11,724 $13,736 3/31/2005 $13,936 $13,754 $11,815 $13,703 4/30/2005 $14,060 $13,914 $11,895 $13,829 5/31/2005 $14,159 $14,025 $11,883 $13,909 6/30/2005 $14,195 $14,071 $11,889 $13,940 7/31/2005 $14,145 $13,951 $11,944 $13,881 8/31/2005 $14,246 $14,106 $12,005 $13,992 9/30/2005 $14,195 $13,998 $12,152 $13,918 10/31/2005 $14,123 $13,939 $12,176 $13,847 11/30/2005 $14,159 $13,996 $12,078 $13,883 12/31/2005 $14,328 $14,081 $12,029 $14,032 1/31/2006 $14,364 $14,080 $12,121 $14,061 2/28/2006 $14,379 $14,082 $12,145 $14,085 3/31/2006 $14,283 $14,039 $12,213 $13,998 4/30/2006 $14,231 $14,052 $12,317 $13,950 5/31/2006 $14,202 $14,056 $12,378 $13,911 6/30/2006 $14,195 $14,081 $12,402 $13,910 7/31/2006 $14,391 $14,229 $12,439 $14,086 8/31/2006 $14,589 $14,389 $12,463 $14,281 9/30/2006 $14,696 $14,493 $12,402 $14,374 10/31/2006 $14,783 $14,562 $12,335 $14,461 11/30/2006 $14,917 $14,678 $12,317 $14,587 12/31/2006 $14,897 $14,622 $12,335 $14,562 1/31/2007 $14,892 $14,624 $12,373 $14,555 2/28/2007 $15,073 $14,807 $12,439 $14,721 3/31/2007 $15,091 $14,845 $12,552 $14,749 4/30/2007 $15,156 $14,911 $12,634 $14,815 5/31/2007 $15,080 $14,826 $12,711 $14,726 6/30/2007 $14,981 $14,846 $12,735 $14,650 7/31/2007 $15,119 $15,029 $12,732 $14,765 8/31/2007 $15,281 $15,240 $12,709 $14,916 9/30/2007 $15,395 $15,345 $12,744 $15,025 10/31/2007 $15,533 $15,437 $12,771 $15,172 11/30/2007 $15,842 $15,809 $12,847 $15,460 12/31/2007 $15,836 $15,860 $12,838 $15,476 1/31/2008 $16,098 $16,234 $12,902 $15,736 2/29/2008 $16,190 $16,411 $12,940 $15,824 3/31/2008 $16,234 $16,512 $13,052 $15,849 4/30/2008 $16,203 $16,291 $13,131 $15,811 5/31/2008 $16,098 $16,145 $13,242 $15,718 6/30/2008 $16,113 $16,208 $13,375 $15,729 7/31/2008 $16,104 $16,294 $13,445 $15,723 8/31/2008 $16,245 $16,418 $13,392 $15,844 9/30/2008 $16,336 $16,498 $13,373 $15,856
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08 ------------- ------- 1-Year +6.11% 5-Year +4.15% 10-Year +5.03%
ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A Shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) Distribution rate is based on an annualization of the respective class's September dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/08. (4.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/08. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. (6.) Sources: (C) 2008 Morningstar; Lipper Inc. The BC U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index, which covers securities issued by the U.S. government (i.e., securities in the BC U.S. Treasury and Agency Indexes), including public obligations of the U.S. Treasury with a remaining maturity of one year or more and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in Government National Mortgage Association securities. For the 12-month period ended 9/30/08, there were 63 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. Annual Report | 47 Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 48 | Annual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES ACCOUNT ACCOUNT PAID DURING VALUE VALUE PERIOD* 4/1/08 9/30/08 4/1/08-9/30/08 --------- --------- -------------- CLASS A Actual $1,000 $1,005.70 $3.61 Hypothetical (5% return before expenses) $1,000 $1,021.40 $3.64 CLASS B Actual $1,000 $1,004.60 $6.21 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26 CLASS C Actual $1,000 $1,003.10 $6.21 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26 CLASS R Actual $1,000 $1,005.30 $5.46 Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.50 ADVISOR CLASS Actual $1,000 $1,006.30 $2.96 Hypothetical (5% return before expenses) $1,000 $1,022.05 $2.98
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.72%; B: 1.24%; C: 1.24%; R: 1.09%; and Advisor: 0.59%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. Annual Report | 49 Franklin Utilities Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 9/30/08 (PERFORMANCE GRAPH) Electric Utilities 51.8% Multi-Utilities 39.0% Oil, Gas & Consumable Fuels 3.0% Diversified Telecommunication Services 2.7% Gas Utilities 1.5% Independent Power Producers & Energy Traders 1.2% Water Utilities 0.5% Short-Term Investments & Other Net Assets 0.3%
This annual report for Franklin Utilities Fund covers the fiscal year ended September 30, 2008. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Utilities Fund - Class A had a -11.63% cumulative total return. The Fund performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -21.98% total return for the same period.(1) The Fund also performed better than the -14.25% total return of its narrow benchmark, the S&P 500 Utilities Index.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 52. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION In a difficult year for equities, utility stocks as a sector fared slightly better than the overall market, as they are generally considered a defensive investment. (1.) (C) 2008 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. (2.) Source: (C) 2008 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index that includes electric utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 103. 50 | Annual Report A significant detractor from performance was Constellation Energy Group, an independent power producer and energy trader. Constellation's share price dropped after independent rating agency Standard & Poor's downgraded the company's debt. We sold Constellation by period-end. Some electric utilities did not fare as well as others and were among major detractors during the review period. Entergy, which provides electricity to four southern states, and Exelon, which operates in Illinois and Pennsylvania, weighed on Fund performance. Among the most significant contributors to Fund performance during the year under review was Southern Company, one of the largest electricity distributors in the U.S. Other notable contributors included FirstEnergy, which appeared well positioned for future carbon initiatives, and Washington state-based multi-utility company Puget Energy. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. (PHOTO OF JOHN C. KOHLI) /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 9/30/08
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Entergy Corp. 6.8% ELECTRIC UTILITIES Exelon Corp. 6.0% ELECTRIC UTILITIES FirstEnergy Corp. 5.0% ELECTRIC UTILITIES Dominion Resources Inc. 4.3% MULTI-UTILITIES The Southern Co. 4.1% ELECTRIC UTILITIES PG&E Corp. 3.9% MULTI-UTILITIES FPL Group Inc. 3.7% ELECTRIC UTILITIES Sempra Energy 3.5% MULTI-UTILITIES PPL Corp. 3.2% ELECTRIC UTILITIES Public Service Enterprise Group Inc. 3.1% MULTI-UTILITIES
Annual Report | 51 Performance Summary as of 9/30/08 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKUTX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.66 $11.92 $14.58 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.4040 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $1.1391
CLASS B (SYMBOL: FRUBX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.65 $11.91 $14.56 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.3310 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $1.0661
CLASS C (SYMBOL: FRUSX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.65 $11.88 $14.53 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.3320 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $1.0671
CLASS R (SYMBOL: FRURX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.65 $11.89 $14.54 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.3532 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $1.0883
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/08 9/30/07 ----------------------- ------ ------- ------- Net Asset Value (NAV) -$2.66 $11.98 $14.64 DISTRIBUTIONS (10/1/07-9/30/08) Dividend Income $0.4248 Short-Term Capital Gain $0.0938 Long-Term Capital Gain $0.6413 TOTAL $1.1599
52 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------------------ Cumulative Total Return(1) -11.63% +75.94% +95.45% Average Annual Total Return(2) -15.40% +11.00% + 6.47% Value of $10,000 Investment(3) $ 8,460 $16,848 $18,721 Distribution Rate(4) 3.24% 30-Day Standardized Yield(5) 3.05% Total Annual Operating Expenses(6) 0.75%
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99) ------- ------- ------- ------------------ Cumulative Total Return(1) -12.04% +71.49% +84.82% Average Annual Total Return(2) -15.31% +11.13% + 6.50% Value of $10,000 Investment(3) $ 8,469 $16,949 $18,482 Distribution Rate(4) 2.83% 30-Day Standardized Yield(5) 2.66% Total Annual Operating Expenses(6) 1.26%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------------------ Cumulative Total Return(1) -12.06% +71.60% +85.81% Average Annual Total Return(2) -12.88% +11.40% + 6.39% Value of $10,000 Investment(3) $ 8,712 $17,160 $18,581 Distribution Rate(4) 2.84% 30-Day Standardized Yield(5) 2.66% Total Annual Operating Expenses(6) 1.26%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) ------- ------- ------- ------------------ Cumulative Total Return(1) -11.92% +72.95% +68.44% Average Annual Total Return(2) -11.92% +11.58% + 8.04% Value of $10,000 Investment(3) $ 8,808 $17,295 $16,844 Distribution Rate(4) 3.01% 30-Day Standardized Yield(5) 2.82% Total Annual Operating Expenses(6) 1.11%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR ------- ------- ------- ------------------ Cumulative Total Return(1) -11.45% +77.14% +98.34% Average Annual Total Return(2) -11.45% +12.12% + 7.09% Value of $10,000 Investment(3) $ 8,855 $17,714 $ 19,834 Distribution Rate(4) 3.54% 30-Day Standardized Yield(5) 3.34% Total Annual Operating Expenses(6) 0.61%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Annual Report | 53 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. CLASS A (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - CLASS A INDEX UTILITIES INDEX ---------- ------------------ ------- --------------- 10/1/1998 $ 9,578 $10,000 $10,000 10/31/1998 $ 9,401 $10,813 $ 9,809 11/30/1998 $ 9,503 $11,469 $ 9,954 12/31/1998 $ 9,738 $12,130 $10,258 1/31/1999 $ 9,219 $12,637 $ 9,809 2/28/1999 $ 8,780 $12,244 $ 9,435 3/31/1999 $ 8,630 $12,734 $ 9,286 4/30/1999 $ 9,173 $13,227 $10,081 5/31/1999 $ 9,592 $12,915 $10,717 6/30/1999 $ 9,251 $13,632 $10,342 7/31/1999 $ 9,116 $13,206 $10,215 8/31/1999 $ 9,098 $13,141 $10,319 9/30/1999 $ 8,760 $12,781 $ 9,823 10/31/1999 $ 8,916 $13,589 $ 9,965 11/30/1999 $ 8,395 $13,866 $ 9,225 12/31/1999 $ 8,277 $14,682 $ 9,316 1/31/2000 $ 8,749 $13,945 $10,327 2/29/2000 $ 8,103 $13,681 $ 9,690 3/31/2000 $ 8,379 $15,019 $10,012 4/30/2000 $ 8,877 $14,567 $10,792 5/31/2000 $ 8,994 $14,268 $11,264 6/30/2000 $ 8,590 $14,620 $10,594 7/31/2000 $ 8,946 $14,391 $11,344 8/31/2000 $ 9,895 $15,285 $12,897 9/30/2000 $10,886 $14,478 $14,082 10/31/2000 $10,836 $14,417 $13,539 11/30/2000 $11,226 $13,280 $13,384 12/31/2000 $11,721 $13,345 $14,644 1/31/2001 $10,517 $13,819 $13,221 2/28/2001 $11,134 $12,559 $13,702 3/31/2001 $11,279 $11,763 $13,609 4/30/2001 $11,749 $12,677 $14,401 5/31/2001 $11,810 $12,762 $13,942 6/30/2001 $11,215 $12,452 $12,831 7/31/2001 $10,823 $12,329 $12,240 8/31/2001 $10,967 $11,557 $11,907 9/30/2001 $10,447 $10,624 $10,528 10/31/2001 $10,458 $10,827 $10,490 11/30/2001 $10,364 $11,657 $ 9,927 12/31/2001 $10,773 $11,759 $10,186 1/31/2002 $10,640 $11,588 $ 9,600 2/28/2002 $10,607 $11,364 $ 9,388 3/31/2002 $11,213 $11,792 $10,531 4/30/2002 $11,134 $11,077 $10,335 5/31/2002 $10,865 $10,995 $ 9,417 6/30/2002 $10,383 $10,212 $ 8,749 7/31/2002 $ 9,487 $ 9,416 $ 7,526 8/31/2002 $ 9,861 $ 9,478 $ 7,808 9/30/2002 $ 9,143 $ 8,448 $ 6,800 10/31/2002 $ 9,143 $ 9,191 $ 6,676 11/30/2002 $ 9,326 $ 9,732 $ 6,852 12/31/2002 $ 9,644 $ 9,160 $ 7,131 1/31/2003 $ 9,248 $ 8,920 $ 6,913 2/28/2003 $ 8,992 $ 8,786 $ 6,585 3/31/2003 $ 9,313 $ 8,871 $ 6,908 4/30/2003 $ 9,821 $ 9,602 $ 7,505 5/31/2003 $10,684 $10,109 $ 8,288 6/30/2003 $10,720 $10,238 $ 8,382 7/31/2003 $10,230 $10,418 $ 7,841 8/31/2003 $10,242 $10,621 $ 7,990 9/30/2003 $10,640 $10,509 $ 8,346 10/31/2003 $10,834 $11,103 $ 8,434 11/30/2003 $10,943 $11,201 $ 8,443 12/31/2003 $11,506 $11,789 $ 9,010 1/31/2004 $11,701 $12,005 $ 9,201 2/29/2004 $12,007 $12,172 $ 9,381 3/31/2004 $12,093 $11,989 $ 9,476 4/30/2004 $11,735 $11,800 $ 9,127 5/31/2004 $11,871 $11,962 $ 9,211 6/30/2004 $12,060 $12,194 $ 9,355 7/31/2004 $12,185 $11,790 $ 9,509 8/31/2004 $12,672 $11,838 $ 9,900 9/30/2004 $12,811 $11,965 $ 9,985 10/31/2004 $13,341 $12,148 $10,472 11/30/2004 $13,719 $12,641 $10,913 12/31/2004 $14,168 $13,070 $11,201 1/31/2005 $14,296 $12,752 $11,430 2/28/2005 $14,411 $13,020 $11,677 3/31/2005 $14,450 $12,789 $11,808 4/30/2005 $14,772 $12,546 $12,176 5/31/2005 $15,043 $12,946 $12,198 6/30/2005 $15,706 $12,964 $12,909 7/31/2005 $15,953 $13,446 $13,198 8/31/2005 $16,096 $13,324 $13,318 9/30/2005 $16,503 $13,432 $13,849 10/31/2005 $15,559 $13,208 $12,973 11/30/2005 $15,598 $13,707 $12,946 12/31/2005 $15,691 $13,712 $13,091 1/31/2006 $16,104 $14,075 $13,412 2/28/2006 $16,370 $14,113 $13,562 3/31/2006 $15,848 $14,289 $12,939 4/30/2006 $16,023 $14,481 $13,145 5/31/2006 $16,211 $14,064 $13,353 6/30/2006 $16,563 $14,083 $13,675 7/31/2006 $17,309 $14,170 $14,347 8/31/2006 $17,756 $14,507 $14,755 9/30/2006 $17,607 $14,881 $14,510 10/31/2006 $18,522 $15,366 $15,295 11/30/2006 $19,151 $15,658 $15,660 12/31/2006 $19,439 $15,878 $15,838 1/31/2007 $19,410 $16,118 $15,792 2/28/2007 $20,136 $15,803 $16,626 3/31/2007 $20,954 $15,979 $17,309 4/30/2007 $21,613 $16,687 $18,037 5/31/2007 $21,799 $17,269 $18,163 6/30/2007 $20,763 $16,983 $17,243 7/31/2007 $20,012 $16,456 $16,597 8/31/2007 $20,488 $16,703 $16,977 9/30/2007 $21,185 $17,327 $17,580 10/31/2007 $22,507 $17,603 $18,753 11/30/2007 $22,522 $16,867 $18,858 12/31/2007 $22,631 $16,750 $18,907 1/31/2008 $21,096 $15,745 $17,614 2/29/2008 $20,067 $15,234 $16,749 3/31/2008 $20,300 $15,168 $17,028 4/30/2008 $21,336 $15,907 $17,928 5/31/2008 $22,017 $16,113 $18,529 6/30/2008 $21,553 $14,754 $18,386 7/31/2008 $20,649 $14,630 $17,257 8/31/2008 $20,571 $14,842 $17,015 9/30/2008 $18,721 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/08 ------- ------- 1-Year -15.40% 5-Year +11.00% 10-Year +6.47%
CLASS B (1/1/99-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - CLASS B INDEX UTILITIES INDEX ---------- ------------------ ------- --------------- 1/1/1999 $10,000 $10,000 $10,000 1/31/1999 $ 9,468 $10,418 $ 9,562 2/28/1999 $ 9,016 $10,094 $ 9,198 3/31/1999 $ 8,859 $10,498 $ 9,053 4/30/1999 $ 9,416 $10,905 $ 9,827 5/31/1999 $ 9,845 $10,647 $10,447 6/30/1999 $ 9,487 $11,238 $10,081 7/31/1999 $ 9,339 $10,887 $ 9,958 8/31/1999 $ 9,321 $10,834 $10,060 9/30/1999 $ 8,964 $10,537 $ 9,576 10/31/1999 $ 9,133 $11,203 $ 9,714 11/30/1999 $ 8,600 $11,431 $ 8,993 12/31/1999 $ 8,479 $12,104 $ 9,082 1/31/2000 $ 8,961 $11,496 $10,067 2/29/2000 $ 8,282 $11,279 $ 9,446 3/31/2000 $ 8,572 $12,382 $ 9,761 4/30/2000 $ 9,071 $12,010 $10,520 5/31/2000 $ 9,190 $11,763 $10,981 6/30/2000 $ 8,768 $12,053 $10,327 7/31/2000 $ 9,131 $11,865 $11,059 8/31/2000 $10,088 $12,602 $12,573 9/30/2000 $11,097 $11,936 $13,728 10/31/2000 $11,035 $11,886 $13,198 11/30/2000 $11,433 $10,949 $13,047 12/31/2000 $11,932 $11,002 $14,275 1/31/2001 $10,708 $11,393 $12,888 2/28/2001 $11,325 $10,354 $13,357 3/31/2001 $11,468 $ 9,698 $13,267 4/30/2001 $11,936 $10,452 $14,039 5/31/2001 $11,998 $10,522 $13,592 6/30/2001 $11,390 $10,266 $12,508 7/31/2001 $10,982 $10,165 $11,932 8/31/2001 $11,128 $ 9,528 $11,607 9/30/2001 $10,588 $ 8,759 $10,263 10/31/2001 $10,599 $ 8,926 $10,227 11/30/2001 $10,504 $ 9,611 $ 9,678 12/31/2001 $10,916 $ 9,695 $ 9,930 1/31/2002 $10,770 $ 9,553 $ 9,358 2/28/2002 $10,737 $ 9,369 $ 9,152 3/31/2002 $11,336 $ 9,721 $10,266 4/30/2002 $11,257 $ 9,132 $10,075 5/31/2002 $10,985 $ 9,065 $ 9,180 6/30/2002 $10,498 $ 8,419 $ 8,528 7/31/2002 $ 9,570 $ 7,763 $ 7,336 8/31/2002 $ 9,948 $ 7,814 $ 7,612 9/30/2002 $ 9,225 $ 6,965 $ 6,628 10/31/2002 $ 9,225 $ 7,578 $ 6,508 11/30/2002 $ 9,410 $ 8,024 $ 6,680 12/31/2002 $ 9,719 $ 7,552 $ 6,952 1/31/2003 $ 9,320 $ 7,354 $ 6,739 2/28/2003 $ 9,062 $ 7,244 $ 6,419 3/31/2003 $ 9,375 $ 7,314 $ 6,734 4/30/2003 $ 9,875 $ 7,917 $ 7,317 5/31/2003 $10,743 $ 8,334 $ 8,080 6/30/2003 $10,782 $ 8,440 $ 8,171 7/31/2003 $10,289 $ 8,589 $ 7,643 8/31/2003 $10,289 $ 8,756 $ 7,789 9/30/2003 $10,690 $ 8,664 $ 8,136 10/31/2003 $10,873 $ 9,154 $ 8,222 11/30/2003 $10,982 $ 9,235 $ 8,231 12/31/2003 $11,533 $ 9,719 $ 8,783 1/31/2004 $11,730 $ 9,898 $ 8,969 2/29/2004 $12,036 $10,035 $ 9,145 3/31/2004 $12,122 $ 9,884 $ 9,237 4/30/2004 $11,750 $ 9,728 $ 8,897 5/31/2004 $11,874 $ 9,862 $ 8,980 6/30/2004 $12,061 $10,053 $ 9,120 7/31/2004 $12,186 $ 9,720 $ 9,270 8/31/2004 $12,674 $ 9,759 $ 9,651 9/30/2004 $12,798 $ 9,865 $ 9,734 10/31/2004 $13,327 $10,016 $10,209 11/30/2004 $13,693 $10,421 $10,639 12/31/2004 $14,146 $10,775 $10,920 1/31/2005 $14,261 $10,513 $11,143 2/28/2005 $14,375 $10,734 $11,383 3/31/2005 $14,408 $10,544 $11,511 4/30/2005 $14,716 $10,344 $11,870 5/31/2005 $14,973 $10,673 $11,892 6/30/2005 $15,635 $10,688 $12,584 7/31/2005 $15,881 $11,085 $12,866 8/31/2005 $16,010 $10,984 $12,983 9/30/2005 $16,395 $11,073 $13,501 10/31/2005 $15,469 $10,889 $12,647 11/30/2005 $15,495 $11,301 $12,621 12/31/2005 $15,580 $11,304 $12,761 1/31/2006 $15,991 $11,604 $13,075 2/28/2006 $16,243 $11,635 $13,220 3/31/2006 $15,717 $11,780 $12,614 4/30/2006 $15,890 $11,938 $12,814 5/31/2006 $16,063 $11,595 $13,018 6/30/2006 $16,393 $11,611 $13,331 7/31/2006 $17,132 $11,682 $13,986 8/31/2006 $17,575 $11,960 $14,384 9/30/2006 $17,419 $12,268 $14,145 10/31/2006 $18,312 $12,668 $14,910 11/30/2006 $18,934 $12,909 $15,266 12/31/2006 $19,195 $13,090 $15,440 1/31/2007 $19,166 $13,288 $15,394 2/28/2007 $19,883 $13,028 $16,208 3/31/2007 $20,690 $13,174 $16,874 4/30/2007 $21,342 $13,757 $17,584 5/31/2007 $21,526 $14,237 $17,706 6/30/2007 $20,501 $14,001 $16,809 7/31/2007 $19,761 $13,567 $16,179 8/31/2007 $20,231 $13,770 $16,550 9/30/2007 $20,919 $14,285 $17,137 10/31/2007 $22,224 $14,512 $18,281 11/30/2007 $22,238 $13,906 $18,384 12/31/2007 $22,344 $13,809 $18,431 1/31/2008 $20,829 $12,981 $17,171 2/29/2008 $19,813 $12,559 $16,328 3/31/2008 $20,043 $12,505 $16,600 4/30/2008 $21,067 $13,114 $17,477 5/31/2008 $21,739 $13,284 $18,063 6/30/2008 $21,280 $12,164 $17,923 7/31/2008 $20,389 $12,062 $16,822 8/31/2008 $20,311 $12,236 $16,587 9/30/2008 $18,482 $11,146 $14,695
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/08 ------- ------- 1-Year -15.31% 5-Year +11.13% Since Inception (1/1/99) +6.50%
54 | Annual Report Performance Summary (CONTINUED) CLASS C (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - CLASS C INDEX UTILITIES INDEX ---------- ------------------ ------- --------------- 10/1/1998 $10,000 $10,000 $10,000 10/31/1998 $ 9,806 $10,813 $ 9,809 11/30/1998 $ 9,903 $11,469 $ 9,954 12/31/1998 $10,146 $12,130 $10,258 1/31/1999 $ 9,605 $12,637 $ 9,809 2/28/1999 $ 9,147 $12,244 $ 9,435 3/31/1999 $ 8,989 $12,734 $ 9,286 4/30/1999 $ 9,545 $13,227 $10,081 5/31/1999 $ 9,981 $12,915 $10,717 6/30/1999 $ 9,616 $13,632 $10,342 7/31/1999 $ 9,466 $13,206 $10,215 8/31/1999 $ 9,447 $13,141 $10,319 9/30/1999 $ 9,094 $12,781 $ 9,823 10/31/1999 $ 9,255 $13,589 $ 9,965 11/30/1999 $ 8,704 $13,866 $ 9,225 12/31/1999 $ 8,579 $14,682 $ 9,316 1/31/2000 $ 9,068 $13,945 $10,327 2/29/2000 $ 8,389 $13,681 $ 9,690 3/31/2000 $ 8,682 $15,019 $10,012 4/30/2000 $ 9,188 $14,567 $10,792 5/31/2000 $ 9,310 $14,268 $11,264 6/30/2000 $ 8,881 $14,620 $10,594 7/31/2000 $ 9,249 $14,391 $11,344 8/31/2000 $10,221 $15,285 $12,897 9/30/2000 $11,244 $14,478 $14,082 10/31/2000 $11,182 $14,417 $13,539 11/30/2000 $11,585 $13,280 $13,384 12/31/2000 $12,091 $13,345 $14,644 1/31/2001 $10,849 $13,819 $13,221 2/28/2001 $11,475 $12,559 $13,702 3/31/2001 $11,621 $11,763 $13,609 4/30/2001 $12,095 $12,677 $14,401 5/31/2001 $12,158 $12,762 $13,942 6/30/2001 $11,541 $12,452 $12,831 7/31/2001 $11,127 $12,329 $12,240 8/31/2001 $11,276 $11,557 $11,907 9/30/2001 $10,738 $10,624 $10,528 10/31/2001 $10,749 $10,827 $10,490 11/30/2001 $10,642 $11,657 $ 9,927 12/31/2001 $11,059 $11,759 $10,186 1/31/2002 $10,923 $11,588 $ 9,600 2/28/2002 $10,889 $11,364 $ 9,388 3/31/2002 $11,497 $11,792 $10,531 4/30/2002 $11,405 $11,077 $10,335 5/31/2002 $11,129 $10,995 $ 9,417 6/30/2002 $10,634 $10,212 $ 8,749 7/31/2002 $ 9,704 $ 9,416 $ 7,526 8/31/2002 $10,088 $ 9,478 $ 7,808 9/30/2002 $ 9,353 $ 8,448 $ 6,800 10/31/2002 $ 9,341 $ 9,191 $ 6,676 11/30/2002 $ 9,541 $ 9,732 $ 6,852 12/31/2002 $ 9,855 $ 9,160 $ 7,131 1/31/2003 $ 9,450 $ 8,920 $ 6,913 2/28/2003 $ 9,188 $ 8,786 $ 6,585 3/31/2003 $ 9,507 $ 8,871 $ 6,908 4/30/2003 $10,014 $ 9,602 $ 7,505 5/31/2003 $10,896 $10,109 $ 8,288 6/30/2003 $10,924 $10,238 $ 8,382 7/31/2003 $10,424 $10,418 $ 7,841 8/31/2003 $10,436 $10,621 $ 7,990 9/30/2003 $10,829 $10,509 $ 8,346 10/31/2003 $11,014 $11,103 $ 8,434 11/30/2003 $11,137 $11,201 $ 8,443 12/31/2003 $11,685 $11,789 $ 9,010 1/31/2004 $11,884 $12,005 $ 9,201 2/29/2004 $12,196 $12,172 $ 9,381 3/31/2004 $12,283 $11,989 $ 9,476 4/30/2004 $11,918 $11,800 $ 9,127 5/31/2004 $12,031 $11,962 $ 9,211 6/30/2004 $12,221 $12,194 $ 9,355 7/31/2004 $12,348 $11,790 $ 9,509 8/31/2004 $12,843 $11,838 $ 9,900 9/30/2004 $12,969 $11,965 $ 9,985 10/31/2004 $13,507 $12,148 $10,472 11/30/2004 $13,878 $12,641 $10,913 12/31/2004 $14,338 $13,070 $11,201 1/31/2005 $14,454 $12,752 $11,430 2/28/2005 $14,571 $13,020 $11,677 3/31/2005 $14,603 $12,789 $11,808 4/30/2005 $14,917 $12,546 $12,176 5/31/2005 $15,178 $12,946 $12,198 6/30/2005 $15,849 $12,964 $12,909 7/31/2005 $16,086 $13,446 $13,198 8/31/2005 $16,230 $13,324 $13,318 9/30/2005 $16,621 $13,432 $13,849 10/31/2005 $15,668 $13,208 $12,973 11/30/2005 $15,707 $13,707 $12,946 12/31/2005 $15,795 $13,712 $13,091 1/31/2006 $16,199 $14,075 $13,412 2/28/2006 $16,468 $14,113 $13,562 3/31/2006 $15,934 $14,289 $12,939 4/30/2006 $16,110 $14,481 $13,145 5/31/2006 $16,272 $14,064 $13,353 6/30/2006 $16,622 $14,083 $13,675 7/31/2006 $17,372 $14,170 $14,347 8/31/2006 $17,809 $14,507 $14,755 9/30/2006 $17,650 $14,881 $14,510 10/31/2006 $18,557 $15,366 $15,295 11/30/2006 $19,189 $15,658 $15,660 12/31/2006 $19,455 $15,878 $15,838 1/31/2007 $19,426 $16,118 $15,792 2/28/2007 $20,155 $15,803 $16,626 3/31/2007 $20,952 $15,979 $17,309 4/30/2007 $21,613 $16,687 $18,037 5/31/2007 $21,786 $17,269 $18,163 6/30/2007 $20,748 $16,983 $17,243 7/31/2007 $19,982 $16,456 $16,597 8/31/2007 $20,459 $16,703 $16,977 9/30/2007 $21,131 $17,327 $17,580 10/31/2007 $22,455 $17,603 $18,753 11/30/2007 $22,455 $16,867 $18,858 12/31/2007 $22,547 $16,750 $18,907 1/31/2008 $21,013 $15,745 $17,614 2/29/2008 $19,984 $15,234 $16,749 3/31/2008 $20,206 $15,168 $17,028 4/30/2008 $21,226 $15,907 $17,928 5/31/2008 $21,890 $16,113 $18,529 6/30/2008 $21,415 $14,754 $18,386 7/31/2008 $20,513 $14,630 $17,257 8/31/2008 $20,436 $14,842 $17,015 9/30/2008 $18,581 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/08 ------- ------- 1-Year -12.88% 5-Year +11.40% 10-Year +6.39%
CLASS R (1/1/02-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - CLASS R INDEX UTILITIES INDEX ---------- ------------------ ------- --------------- 1/1/2002 $10,000 $10,000 $10,000 1/31/2002 $ 9,796 $ 9,854 $ 9,424 2/28/2002 $ 9,766 $ 9,664 $ 9,216 3/31/2002 $10,304 $10,028 $10,338 4/30/2002 $10,231 $ 9,420 $10,146 5/31/2002 $ 9,984 $ 9,350 $ 9,245 6/30/2002 $ 9,543 $ 8,684 $ 8,588 7/31/2002 $ 8,720 $ 8,007 $ 7,388 8/31/2002 $ 9,053 $ 8,060 $ 7,666 9/30/2002 $ 8,399 $ 7,184 $ 6,675 10/31/2002 $ 8,399 $ 7,816 $ 6,554 11/30/2002 $ 8,568 $ 8,276 $ 6,727 12/31/2002 $ 8,852 $ 7,790 $ 7,001 1/31/2003 $ 8,489 $ 7,585 $ 6,786 2/28/2003 $ 8,254 $ 7,472 $ 6,465 3/31/2003 $ 8,546 $ 7,544 $ 6,781 4/30/2003 $ 9,001 $ 8,166 $ 7,368 5/31/2003 $ 9,794 $ 8,596 $ 8,137 6/30/2003 $ 9,819 $ 8,706 $ 8,229 7/31/2003 $ 9,369 $ 8,859 $ 7,697 8/31/2003 $ 9,380 $ 9,032 $ 7,844 9/30/2003 $ 9,739 $ 8,936 $ 8,194 10/31/2003 $ 9,917 $ 9,442 $ 8,280 11/30/2003 $10,017 $ 9,525 $ 8,289 12/31/2003 $10,524 $10,025 $ 8,845 1/31/2004 $10,692 $10,209 $ 9,032 2/29/2004 $10,971 $10,351 $ 9,209 3/31/2004 $11,053 $10,195 $ 9,302 4/30/2004 $10,725 $10,035 $ 8,960 5/31/2004 $10,838 $10,172 $ 9,043 6/30/2004 $11,013 $10,370 $ 9,184 7/31/2004 $11,127 $10,026 $ 9,335 8/31/2004 $11,572 $10,067 $ 9,719 9/30/2004 $11,690 $10,175 $ 9,802 10/31/2004 $12,174 $10,331 $10,280 11/30/2004 $12,508 $10,749 $10,714 12/31/2004 $12,922 $11,115 $10,996 1/31/2005 $13,028 $10,844 $11,221 2/28/2005 $13,133 $11,072 $11,463 3/31/2005 $13,163 $10,876 $11,592 4/30/2005 $13,458 $10,669 $11,953 5/31/2005 $13,693 $11,009 $11,975 6/30/2005 $14,300 $11,024 $12,672 7/31/2005 $14,513 $11,435 $12,956 8/31/2005 $14,644 $11,330 $13,075 9/30/2005 $15,003 $11,422 $13,596 10/31/2005 $14,144 $11,232 $12,736 11/30/2005 $14,168 $11,656 $12,710 12/31/2005 $14,254 $11,660 $12,851 1/31/2006 $14,618 $11,969 $13,167 2/28/2006 $14,861 $12,002 $13,313 3/31/2006 $14,387 $12,151 $12,703 4/30/2006 $14,545 $12,314 $12,904 5/31/2006 $14,704 $11,960 $13,109 6/30/2006 $15,012 $11,976 $13,425 7/31/2006 $15,690 $12,050 $14,085 8/31/2006 $16,084 $12,337 $14,485 9/30/2006 $15,947 $12,655 $14,245 10/31/2006 $16,778 $13,067 $15,015 11/30/2006 $17,348 $13,315 $15,374 12/31/2006 $17,584 $13,502 $15,548 1/31/2007 $17,559 $13,706 $15,503 2/28/2007 $18,217 $13,438 $16,322 3/31/2007 $18,944 $13,589 $16,993 4/30/2007 $19,541 $14,191 $17,707 5/31/2007 $19,698 $14,686 $17,831 6/30/2007 $18,754 $14,442 $16,928 7/31/2007 $18,074 $13,994 $16,293 8/31/2007 $18,506 $14,204 $16,666 9/30/2007 $19,124 $14,735 $17,258 10/31/2007 $20,320 $14,969 $18,410 11/30/2007 $20,320 $14,344 $18,513 12/31/2007 $20,412 $14,244 $18,561 1/31/2008 $19,024 $13,390 $17,292 2/29/2008 $18,093 $12,955 $16,443 3/31/2008 $18,288 $12,899 $16,717 4/30/2008 $19,224 $13,527 $17,600 5/31/2008 $19,825 $13,702 $18,190 6/30/2008 $19,403 $12,547 $18,050 7/31/2008 $18,586 $12,441 $16,941 8/31/2008 $18,516 $12,621 $16,704 9/30/2008 $16,844 $11,497 $14,798
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/08 ------- ------- 1-Year -11.92% 5-Year +11.58% Since Inception (1/1/02) +8.04%
Annual Report | 55 Performance Summary (CONTINUED) ADVISOR CLASS (10/1/98-9/30/08) (PERFORMANCE GRAPH)
FRANKLIN UTILITIES S&P 500 S&P 500 DATE FUND - ADVISOR CLASS INDEX UTILITIES INDEX ---------- -------------------- ------- --------------- 10/1/1998 $10,000 $10,000 $10,000 10/31/1998 $ 9,816 $10,813 $ 9,809 11/30/1998 $ 9,921 $11,469 $ 9,954 12/31/1998 $10,160 $12,130 $10,258 1/31/1999 $ 9,629 $12,637 $ 9,809 2/28/1999 $ 9,172 $12,244 $ 9,435 3/31/1999 $ 9,019 $12,734 $ 9,286 4/30/1999 $ 9,585 $13,227 $10,081 5/31/1999 $10,021 $12,915 $10,717 6/30/1999 $ 9,669 $13,632 $10,342 7/31/1999 $ 9,519 $13,206 $10,215 8/31/1999 $ 9,510 $13,141 $10,319 9/30/1999 $ 9,152 $12,781 $ 9,823 10/31/1999 $ 9,323 $13,589 $ 9,965 11/30/1999 $ 8,771 $13,866 $ 9,225 12/31/1999 $ 8,661 $14,682 $ 9,316 1/31/2000 $ 9,153 $13,945 $10,327 2/29/2000 $ 8,470 $13,681 $ 9,690 3/31/2000 $ 8,770 $15,019 $10,012 4/30/2000 $ 9,290 $14,567 $10,792 5/31/2000 $ 9,412 $14,268 $11,264 6/30/2000 $ 8,984 $14,620 $10,594 7/31/2000 $ 9,365 $14,391 $11,344 8/31/2000 $10,356 $15,285 $12,897 9/30/2000 $11,394 $14,478 $14,082 10/31/2000 $11,342 $14,417 $13,539 11/30/2000 $11,759 $13,280 $13,384 12/31/2000 $12,269 $13,345 $14,644 1/31/2001 $11,013 $13,819 $13,221 2/28/2001 $11,657 $12,559 $13,702 3/31/2001 $11,812 $11,763 $13,609 4/30/2001 $12,302 $12,677 $14,401 5/31/2001 $12,377 $12,762 $13,942 6/30/2001 $11,749 $12,452 $12,831 7/31/2001 $11,339 $12,329 $12,240 8/31/2001 $11,490 $11,557 $11,907 9/30/2001 $10,951 $10,624 $10,528 10/31/2001 $10,962 $10,827 $10,490 11/30/2001 $10,864 $11,657 $ 9,927 12/31/2001 $11,295 $11,759 $10,186 1/31/2002 $11,157 $11,588 $ 9,600 2/28/2002 $11,133 $11,364 $ 9,388 3/31/2002 $11,759 $11,792 $10,531 4/30/2002 $11,677 $11,077 $10,335 5/31/2002 $11,407 $10,995 $ 9,417 6/30/2002 $10,895 $10,212 $ 8,749 7/31/2002 $ 9,947 $ 9,416 $ 7,526 8/31/2002 $10,350 $ 9,478 $ 7,808 9/30/2002 $ 9,602 $ 8,448 $ 6,800 10/31/2002 $ 9,602 $ 9,191 $ 6,676 11/30/2002 $ 9,806 $ 9,732 $ 6,852 12/31/2002 $10,130 $ 9,160 $ 7,131 1/31/2003 $ 9,715 $ 8,920 $ 6,913 2/28/2003 $ 9,447 $ 8,786 $ 6,585 3/31/2003 $ 9,786 $ 8,871 $ 6,908 4/30/2003 $10,318 $ 9,602 $ 7,505 5/31/2003 $11,234 $10,109 $ 8,288 6/30/2003 $11,275 $10,238 $ 8,382 7/31/2003 $10,762 $10,418 $ 7,841 8/31/2003 $10,774 $10,621 $ 7,990 9/30/2003 $11,196 $10,509 $ 8,346 10/31/2003 $11,386 $11,103 $ 8,434 11/30/2003 $11,513 $11,201 $ 8,443 12/31/2003 $12,094 $11,789 $ 9,010 1/31/2004 $12,299 $12,005 $ 9,201 2/29/2004 $12,632 $12,172 $ 9,381 3/31/2004 $12,727 $11,989 $ 9,476 4/30/2004 $12,352 $11,800 $ 9,127 5/31/2004 $12,481 $11,962 $ 9,211 6/30/2004 $12,684 $12,194 $ 9,355 7/31/2004 $12,828 $11,790 $ 9,509 8/31/2004 $13,338 $11,838 $ 9,900 9/30/2004 $13,489 $11,965 $ 9,985 10/31/2004 $14,045 $12,148 $10,472 11/30/2004 $14,441 $12,641 $10,913 12/31/2004 $14,923 $13,070 $11,201 1/31/2005 $15,057 $12,752 $11,430 2/28/2005 $15,191 $13,020 $11,677 3/31/2005 $15,224 $12,789 $11,808 4/30/2005 $15,576 $12,546 $12,176 5/31/2005 $15,847 $12,946 $12,198 6/30/2005 $16,563 $12,964 $12,909 7/31/2005 $16,822 $13,446 $13,198 8/31/2005 $16,972 $13,324 $13,318 9/30/2005 $17,402 $13,432 $13,849 10/31/2005 $16,410 $13,208 $12,973 11/30/2005 $16,452 $13,707 $12,946 12/31/2005 $16,555 $13,712 $13,091 1/31/2006 $16,990 $14,075 $13,412 2/28/2006 $17,270 $14,113 $13,562 3/31/2006 $16,726 $14,289 $12,939 4/30/2006 $16,910 $14,481 $13,145 5/31/2006 $17,108 $14,064 $13,353 6/30/2006 $17,485 $14,083 $13,675 7/31/2006 $18,268 $14,170 $14,347 8/31/2006 $18,753 $14,507 $14,755 9/30/2006 $18,599 $14,881 $14,510 10/31/2006 $19,561 $15,366 $15,295 11/30/2006 $20,236 $15,658 $15,660 12/31/2006 $20,524 $15,878 $15,838 1/31/2007 $20,509 $16,118 $15,792 2/28/2007 $21,272 $15,803 $16,626 3/31/2007 $22,140 $15,979 $17,309 4/30/2007 $22,849 $16,687 $18,037 5/31/2007 $23,030 $17,269 $18,163 6/30/2007 $21,946 $16,983 $17,243 7/31/2007 $21,157 $16,456 $16,597 8/31/2007 $21,673 $16,703 $16,977 9/30/2007 $22,398 $17,327 $17,580 10/31/2007 $23,806 $17,603 $18,753 11/30/2007 $23,836 $16,867 $18,858 12/31/2007 $23,945 $16,750 $18,907 1/31/2008 $22,312 $15,745 $17,614 2/29/2008 $21,245 $15,234 $16,749 3/31/2008 $21,481 $15,168 $17,028 4/30/2008 $22,590 $15,907 $17,928 5/31/2008 $23,307 $16,113 $18,529 6/30/2008 $22,809 $14,754 $18,386 7/31/2008 $21,857 $14,630 $17,257 8/31/2008 $21,791 $14,842 $17,015 9/30/2008 $19,834 $13,519 $15,074
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/08 ------------- ------- 1-Year -11.45% 5-Year +12.12% 10-Year +7.09%
ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES' PRICES, AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) Cumulative total return represents the change in value of an investment over the periods indicated. (2.) Average annual total return represents the average annual change in value of an investment over the periods indicated. (3.) These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. (4.) Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 9/30/08. (5.) Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 9/30/08. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. (7.) Source: (C) 2008 Morningstar. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500. 56 | Annual Report Your Fund's Expenses FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: - Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Annual Report | 57 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ENDING EXPENSES ACCOUNT ACCOUNT PAID DURING VALUE VALUE PERIOD* 4/1/08 9/30/08 4/1/08-9/30/08 --------- --------- -------------- CLASS A Actual $1,000 $ 922.20 $3.56 Hypothetical (5% return before expenses) $1,000 $1,021.30 $3.74 CLASS B Actual $1,000 $ 919.80 $6.00 Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.31 CLASS C Actual $1,000 $ 919.60 $6.00 Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.31 CLASS R Actual $1,000 $ 921.10 $5.28 Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.55 ADVISOR CLASS Actual $1,000 $ 923.30 $2.88 Hypothetical (5% return before expenses) $1,000 $1,022.00 $3.03
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.74%; B: 1.25%; C: 1.25%; R: 1.10%; and Advisor: 0.60%), multiplied by the average account value over the period, multiplied by 183/366 to reflect the one-half year period. 58 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .................... (0.08) (0.08) (0.05) (0.01) (0.09) Net realized and unrealized gains (losses) ......... (6.67) 6.61 0.87 2.98 1.93 -------- -------- -------- -------- -------- Total from investment operations ...................... (6.75) 6.53 0.82 2.97 1.84 -------- -------- -------- -------- -------- Less distributions from net realized gains ............ (0.71) -- -- -- -- -------- -------- -------- -------- -------- Redemption fees(c, d) ................................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .......................... $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01 ======== ======== ======== ======== ======== Total return(e) ....................................... (21.36)% 25.31% 3.28% 13.49% 9.12% RATIOS TO AVERAGE NET ASSETS Expenses(f) ........................................... 0.97% 0.99% 0.97% 1.00% 0.97% Net investment income (loss) .......................... (0.26)% (0.30)% (0.20)% (0.02)% (0.41)% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................... $388,843 $553,347 $590,633 $628,732 $640,120 Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 59 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .................... (0.29) (0.28) (0.23) (0.18) (0.25) Net realized and unrealized gains (losses) ......... (6.30) 6.31 0.83 2.90 1.89 -------- -------- -------- -------- -------- Total from investment operations ...................... (6.59) 6.03 0.60 2.72 1.64 -------- -------- -------- -------- -------- Less distributions from net realized gains ............ (0.71) -- -- -- -- -------- -------- -------- -------- -------- Redemption fees(c, d) ................................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .......................... $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43 ======== ======== ======== ======== ======== Total return(e) ....................................... (21.96)% 24.36% 2.48% 12.69% 8.29% RATIOS TO AVERAGE NET ASSETS Expenses(f) ........................................... 1.73% 1.75% 1.72% 1.74% 1.72% Net investment income (loss) .......................... (1.02)% (1.06)% (0.95)% (0.76)% (1.16)% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................... $ 10,704 $ 16,625 $ 18,718 $ 19,497 $ 18,824 Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 60 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .................... (0.28) (0.28) (0.23) (0.17) (0.25) Net realized and unrealized gains (losses) ......... (6.24) 6.24 0.83 2.86 1.87 -------- -------- -------- -------- -------- Total from investment operations ...................... (6.52) 5.96 0.60 2.69 1.62 -------- -------- -------- -------- -------- Less distributions from net realized gains ............ (0.71) -- -- -- -- -------- -------- -------- -------- -------- Redemption fees(c, d) ................................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .......................... $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21 ======== ======== ======== ======== ======== Total return(e) ....................................... (21.93)% 24.33% 2.51% 12.68% 8.27% RATIOS TO AVERAGE NET ASSETS Expenses(f) ........................................... 1.73% 1.74% 1.71% 1.74% 1.72% Net investment income (loss) .......................... (1.02)% (1.05)% (0.94)% (0.76)% (1.16)% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................... $ 53,289 $ 70,413 $ 69,069 $ 73,587 $ 75,642 Portfolio turnover rate ............................... 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 61 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
PERIOD ENDED SEPTEMBER 30, ADVISOR CLASS 2008(a) ------------- ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 31.40 ------- Income from investment operations(b): Net investment income (loss)(c) ............................. (0.01) Net realized and unrealized gains (losses) .................. (6.49) ------- Total from investment operations ............................... (6.50) ------- Redemption fees(d, e) .......................................... -- ------- Net asset value, end of period ................................. $ 24.90 ======= Total return(f) ................................................ (20.70)% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) .................................................... 0.73% Net investment income (loss) ................................... (0.02)% SUPPLEMENTAL DATA Net assets, end of period (000's) .............................. $ 1,938 Portfolio turnover rate ........................................ 41.01%
(a) For the period May 15, 2008 (effective date) to September 30, 2008. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Amount rounds to less than $0.01 per share. (e) Effective September 1, 2008, the redemption fee was eliminated. (f) Total return is not annualized for periods less than one year. (g) Ratios are annualized for periods less than one year. (h) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 62 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------- --------------- COMMON STOCKS 94.4% AIR FREIGHT & LOGISTICS 1.7% C.H. Robinson Worldwide Inc. ....................... United States 150,000 $ 7,644,000 --------------- BIOTECHNOLOGY 12.2% (a) Celgene Corp. ...................................... United States 200,000 12,656,000 (a) Genentech Inc. ..................................... United States 250,000 22,170,000 (a) Gilead Sciences Inc. ............................... United States 300,000 13,674,000 (a) Myriad Genetics Inc. ............................... United States 70,000 4,541,600 (a) OSI Pharmaceuticals Inc. ........................... United States 50,000 2,464,500 --------------- 55,506,100 --------------- CAPITAL MARKETS 0.6% The Goldman Sachs Group Inc. ....................... United States 20,000 2,560,000 --------------- CHEMICALS 4.6% Monsanto Co. ....................................... United States 80,000 7,918,400 Sigma-Aldrich Corp. ................................ United States 250,000 13,105,000 --------------- 21,023,400 --------------- COMMERCIAL SERVICES & SUPPLIES 1.4% (a) Stericycle Inc. .................................... United States 110,000 6,480,100 --------------- COMMUNICATIONS EQUIPMENT 5.5% (a) Cisco Systems Inc. ................................. United States 450,000 10,152,000 QUALCOMM Inc. ...................................... United States 225,000 9,668,250 (a) Research In Motion Ltd. ............................ Canada 75,000 5,122,500 --------------- 24,942,750 --------------- COMPUTERS & PERIPHERALS 7.6% (a) Apple Inc. ......................................... United States 165,000 18,753,900 Hewlett-Packard Co. ................................ United States 340,000 15,721,600 --------------- 34,475,500 --------------- ELECTRICAL EQUIPMENT 1.4% ABB Ltd., ADR ...................................... Switzerland 100,000 1,940,000 (a) Energy Conversion Devices Inc. ..................... United States 35,000 2,038,750 (a) SunPower Corp., A .................................. United States 35,000 2,482,550 --------------- 6,461,300 --------------- ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 2.2% (a) Dolby Laboratories Inc., A ......................... United States 100,000 3,519,000 (a) FLIR Systems Inc. .................................. United States 170,000 6,531,400 --------------- 10,050,400 --------------- ENERGY EQUIPMENT & SERVICES 4.5% (a) FMC Technologies Inc. .............................. United States 180,000 8,379,000 Schlumberger Ltd. .................................. United States 125,000 9,761,250 (a) Weatherford International Ltd. ..................... United States 100,000 2,514,000 --------------- 20,654,250 --------------- HEALTH CARE EQUIPMENT & SUPPLIES 7.3% Alcon Inc. ......................................... Switzerland 75,000 12,113,250 (a) Intuitive Surgical Inc. ............................ United States 15,000 3,614,700
Annual Report | 63 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------- --------------- COMMON STOCKS (CONTINUED) HEALTH CARE EQUIPMENT & SUPPLIES (CONTINUED) Medtronic Inc. ..................................... United States 125,000 $ 6,262,500 Stryker Corp. ...................................... United States 180,000 11,214,000 --------------- 33,204,450 --------------- HEALTH CARE PROVIDERS & SERVICES 1.9% (a) Express Scripts Inc. ............................... United States 80,000 5,905,600 (a) VCA Antech Inc. .................................... United States 100,000 2,947,000 --------------- 8,852,600 --------------- INTERNET & CATALOG RETAIL 1.4% (a) Amazon.com Inc. .................................... United States 85,000 6,184,600 --------------- INTERNET SOFTWARE & SERVICES 5.4% (a) Baidu.com Inc., ADR ................................ China 15,000 3,723,450 (a) Google Inc., A ..................................... United States 41,000 16,421,320 (a) MercadoLibre Inc. .................................. Argentina 80,000 1,628,000 (a) Sohu.com Inc. ...................................... China 50,000 2,787,500 --------------- 24,560,270 --------------- IT SERVICES 4.5% MasterCard Inc., A ................................. United States 30,000 5,319,900 Visa Inc., A ....................................... United States 250,000 15,347,500 --------------- 20,667,400 --------------- LIFE SCIENCES TOOLS & SERVICES 3.7% (a) Covance Inc. ....................................... United States 60,000 5,304,600 (a) Illumina Inc. ...................................... United States 65,000 2,634,450 (a) Waters Corp. ....................................... United States 150,000 8,727,000 --------------- 16,666,050 --------------- MACHINERY 0.1% (a) John Bean Technologies ............................. United States 38,880 492,221 --------------- PHARMACEUTICALS 4.7% Johnson & Johnson .................................. United States 100,000 6,928,000 Novo-Nordisk AS, ADR ............................... Denmark 80,000 4,096,000 Teva Pharmaceutical Industries Ltd., ADR ........... Israel 225,000 10,302,750 --------------- 21,326,750 --------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 6.4% Intel Corp. ........................................ United States 1,125,000 21,071,250 (a) Lam Research Corp. ................................. United States 100,000 3,149,000 (a) Varian Semi conductor Equipment Associates Inc. .... United States 200,000 5,024,000 --------------- 29,244,250 --------------- SOFTWARE 15.8% (a) Activision Blizzard Inc. ........................... United States 560,000 8,640,800 (a) Adobe Systems Inc. ................................. United States 350,000 13,814,500 (a) ANSYS Inc. ......................................... United States 150,000 5,680,500 (a) Autodesk Inc. ...................................... United States 120,000 4,026,000 (a) Concur Technologies Inc. ........................... United States 150,000 5,739,000 (a) Electronic Arts Inc. ............................... United States 130,000 4,808,700
64 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------- --------------- COMMON STOCKS (CONTINUED) SOFTWARE (CONTINUED) FactSet Research Systems Inc. ...................... United States 20,000 $ 1,045,000 Microsoft Corp. .................................... United States 250,000 6,672,500 Nintendo Co. Ltd., ADR ............................. Japan 160,000 8,457,600 (a) Salesforce.com Inc. ................................ United States 125,000 6,050,000 (a) UbiSoft Entertainment SA ........................... France 100,000 6,864,696 --------------- 71,799,296 --------------- WIRELESS TELECOMMUNICATION SERVICES 1.5% (a) American Tower Corp., A ............................ United States 185,000 6,654,450 --------------- TOTAL COMMON STOCKS (COST $251,742,286) ............ 429,450,137 --------------- SHORT TERM INVESTMENTS 7.5% MONEY MARKET FUNDS (COST $21,757,500) 4.8% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.98% ................................ United States 21,757,500 21,757,500 ---------------
PRINCIPAL AMOUNT ------------- REPURCHASE AGREEMENTS (COST $12,228,168) 2.7% (c) Joint Repurchase Agreement, 1.347%, 10/01/08 (Maturity Value $12,228,626) .................... United States $ 12,228,168 12,228,168 ABN AMRO Bank, NV, New York Branch (Maturity Value $1,934,691) Banc of America Securities LLC (Maturity Value $1,509,012) Barclays Capital Inc. (Maturity Value $1,954,012) BNP Paribas Securities Corp. (Maturity Value $1,895,926) Credit Suisse Securities (USA) LLC (Maturity Value $386,914) Deutsche Bank Securities Inc. (Maturity Value $717,453) Dresdner Kleinwort Securities LLC (Maturity Value $1,451,049) Greenwich Capital Markets Inc. (Maturity Value $1,992,655) UBS Securities LLC (Maturity Value $386,914) Collateralized by U.S. Government Agency Securities, 2.20% - 7.25%, 11/07/08 - 4/24/13; (d) U.S. Government Agency Discount Notes, 12/30/08 and U.S. Treasury Notes, 1.875 - 4.875%, 1/15/09 - 7/31/13 --------------- TOTAL INVESTMENTS (COST $285,727,954) 101.9% ....... 463,435,805 OTHER ASSETS, LESS LIABILITIES (1.9)% .............. (8,661,671) --------------- NET ASSETS 100.0% .................................. $ 454,774,134 ===============
See Selected Portfolio Abbreviations on page 106. (a) Non-income producing for the twelve months ended September 30, 2008. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (c) See Note 1(c) regarding joint repurchase agreement. (d) The security is traded on a discount basis with no stated coupon rate. The accompanying notes are an integral part of these financial statements. Annual Report | 65 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) .................... 0.24 0.16 0.12 0.13 0.06 Net realized and unrealized gains (losses) .. (9.30) 7.21 4.21 4.20 3.68 ---------- ---------- ---------- ---------- ---------- Total from investment operations ............... (9.06) 7.37 4.33 4.33 3.74 ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income .. (0.13) (0.11) (0.06) (0.08) (0.03) ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) .......................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ................... $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58 ========== ========== ========== ========== ========== Total return(e) ................................ (19.59)% 18.87% 12.46% 14.17% 13.92% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 0.89% 0.93% 0.91% 0.94% 0.98% Net investment income .......................... 0.56% 0.37% 0.34% 0.40% 0.20% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $1,708,612 $2,123,419 $1,695,802 $1,567,675 $1,531,871 Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 66 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............. (0.08) (0.16) (0.15) (0.11) (0.16) Net realized and unrealized gains (losses) .. (8.90) 6.93 4.07 4.07 3.61 ------- -------- -------- -------- -------- Total from investment operations ............... (8.98) 6.77 3.92 3.96 3.45 ------- -------- -------- -------- -------- Redemption fees(c, d) .......................... -- -- -- -- -- ------- -------- -------- -------- -------- Net asset value, end of year ................... $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77 ======= ======== ======== ======== ======== Total return(e) ................................ (20.22)% 17.98% 11.62% 13.30% 13.11% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.64% 1.69% 1.67% 1.69% 1.73% Net investment income (loss) ................... (0.19)% (0.39)% (0.42)% (0.35)% (0.55)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $89,779 $138,640 $122,871 $123,926 $121,986 Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 67 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09 Income from investment operations(a): Net investment income (loss)(b) ............. (0.08) (0.16) (0.15) (0.11) (0.16) Net realized and unrealized gains (losses) .. (8.81) 6.87 4.04 4.03 3.58 -------- -------- -------- -------- -------- Total from investment operations ............... (8.89) 6.71 3.89 3.92 3.42 -------- -------- -------- -------- -------- Redemption fees(c, d) .......................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51 ======== ======== ======== ======== ======== Total return(e) ................................ (20.19)% 17.98% 11.60% 13.32% 13.11% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.64% 1.69% 1.66% 1.69% 1.73% Net investment income (loss) ................... (0.19)% (0.39)% (0.41)% (0.35)% (0.55)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $255,425 $340,671 $273,512 $270,538 $270,131 Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 68 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------- CLASS R 2008 2007 2006 2005 2004 ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) ............. 0.14 0.04 0.02 0.05 (0.02) Net realized and unrealized gains (losses) .. (9.23) 7.16 4.19 4.16 3.67 ------- ------- ------- ------- ------- Total from investment operations ............... (9.09) 7.20 4.21 4.21 3.65 ------- ------- ------- ------- ------- Less distributions from net investment income .. (0.03) (0.01) --(c) (0.01) -- ------- ------- ------- ------- ------- Redemption fees(c, d) .......................... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of year ................... $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39 ======= ======= ======= ======= ======= Total return(e) ................................ (19.78)% 18.55% 12.18% 13.87% 13.65% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.14% 1.19% 1.17% 1.19% 1.23% Net investment income (loss) ................... 0.31% 0.11% 0.08% 0.15% (0.05)% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $30,175 $53,134 $37,804 $27,818 $20,060 Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 69 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 ------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................... 0.34 0.27 0.22 0.21 0.14 Net realized and unrealized gains (losses) .. (9.31) 7.21 4.21 4.21 3.67 -------- -------- -------- -------- -------- Total from investment operations ............... (8.97) 7.48 4.43 4.42 3.81 -------- -------- -------- -------- -------- Less distributions from net investment income .. (0.23) (0.20) (0.15) (0.16) (0.09) -------- -------- -------- -------- -------- Redemption fees(c, d) .......................... -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 37.25 $ 46.45 $ 39.17 $ 34.89 $30.63 ======== ======== ======== ======== ======== Total return ................................... (19.39)% 19.16% 12.73% 14.45% 14.19% RATIOS TO AVERAGE NET ASSETS Expenses(e) .................................... 0.64% 0.69% 0.67% 0.69% 0.73% Net investment income .......................... 0.81% 0.61% 0.58% 0.65% 0.45% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $256,988 $363,221 $274,603 $221,752 $133,332 Portfolio turnover rate ........................ 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 70 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN GROWTH FUND SHARES VALUE -------------------- --------- -------------- COMMON STOCKS 100.0% AUTOMOBILES & COMPONENTS 2.7% (a) Ford Motor Co. ..................................... 1,100,000 $ 5,720,000 General Motors Corp. ............................... 400,000 3,780,000 Harley-Davidson Inc. ............................... 500,000 18,650,000 Johnson Controls Inc. .............................. 1,200,000 36,396,000 -------------- 64,546,000 -------------- BANKS 0.0%(b) (a) Tree. Com, Inc. .................................... 10,003 48,214 -------------- CAPITAL GOODS 28.8% 3M Co. ............................................. 855,000 58,405,050 The Boeing Co. ..................................... 1,045,000 59,930,750 Emerson Electric Co. ............................... 1,000,000 40,790,000 General Dynamics Corp. ............................. 1,000,000 73,620,000 General Electric Co. ............................... 70,000 1,785,000 Illinois Tool Works Inc. ........................... 1,000,000 44,450,000 Ingersoll-Rand Co. Ltd., A ......................... 1,002,000 31,232,340 Lockheed Martin Corp. .............................. 500,000 54,835,000 Northrop Grumman Corp. ............................. 1,000,000 60,540,000 Pall Corp. ......................................... 500,000 17,195,000 Raytheon Co. ....................................... 600,000 32,106,000 Rockwell Collins Inc. .............................. 100,000 4,809,000 (a) SunPower Corp., A .................................. 2,000 141,860 Teleflex Inc. ...................................... 500,000 31,745,000 Textron Inc. ....................................... 1,050,000 30,744,000 (a) Thomas & Betts Corp. ............................... 500,000 19,535,000 Tyco International Ltd. ............................ 387,513 13,570,705 United Technologies Corp. .......................... 850,000 51,051,000 W.W. Grainger Inc. ................................. 550,000 47,833,500 -------------- 674,319,205 -------------- COMMERCIAL & PROFESSIONAL SERVICES 2.3% Avery Dennison Corp. ............................... 462,000 20,549,760 Dun & Bradstreet Corp. ............................. 122,000 11,511,920 Equifax Inc. ....................................... 400,000 13,780,000 Robert Half International Inc. ..................... 300,000 7,425,000 -------------- 53,266,680 -------------- CONSUMER DURABLES & APPAREL 1.6% VF Corp. ........................................... 500,000 38,655,000 -------------- CONSUMER SERVICES 0.9% Carnival Corp. ..................................... 565,000 19,972,750 (a) Interval Leisure Group Inc. ........................ 60,020 624,208 -------------- 20,596,958 -------------- DIVERSIFIED FINANCIALS 0.8% Moody's Corp. ...................................... 538,000 18,292,000 --------------
Annual Report | 71 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- --------- -------------- COMMON STOCKS (CONTINUED) ENERGY 2.2% BP PLC, ADR (United Kingdom) ....................... 350,200 $ 17,569,534 ConocoPhillips ..................................... 35,000 2,563,750 Devon Energy Corp. ................................. 50,000 4,560,000 Exxon Mobil Corp. .................................. 70,000 5,436,200 Royal Dutch Shell PLC, A, ADR (Netherlands) ........ 280,000 16,522,800 Schlumberger Ltd. .................................. 40,000 3,123,600 (a) Transocean Inc. .................................... 15,222 1,671,985 -------------- 51,447,869 -------------- HEALTH CARE EQUIPMENT & SERVICES 4.0% (a) Advanced Medical Optics Inc. ....................... 88,888 1,580,429 Baxter International Inc. .......................... 400,000 26,252,000 Cardinal Health Inc. ............................... 300,000 14,784,000 (a) Edwards Lifesciences Corp. ......................... 50,000 2,888,000 (a) Hospira Inc. ....................................... 40,000 1,528,000 IMS Health Inc. .................................... 500,000 9,455,000 (a) Intuitive Surgical Inc. ............................ 1,000 240,980 (a) Medco Health Solutions Inc. ........................ 96,480 4,341,600 Medtronic Inc. ..................................... 60,000 3,006,000 Quest Diagnostics Inc. ............................. 500,000 25,835,000 (a) Zimmer Holdings Inc. ............................... 64,000 4,131,840 -------------- 94,042,849 -------------- HOUSEHOLD & PERSONAL PRODUCTS 0.1% The Procter & Gamble Co. ........................... 35,000 2,439,150 -------------- MATERIALS 2.4% Air Products and Chemicals Inc. .................... 500,000 34,245,000 Sigma-Aldrich Corp. ................................ 400,000 20,968,000 -------------- 55,213,000 -------------- MEDIA 2.2% Time Warner Inc. ................................... 1,350,000 17,698,500 The Walt Disney Co. ................................ 1,130,000 34,679,700 -------------- 52,378,200 -------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 20.7% Abbott Laboratories ................................ 400,000 23,032,000 Allergan Inc. ...................................... 800,000 41,200,000 (a) Amgen Inc. ......................................... 932,000 55,239,640 (a) Biogen Idec Inc. ................................... 400,000 20,116,000 (a) Celgene Corp. ...................................... 25,000 1,582,000 (a) Dionex Corp. ....................................... 250,000 15,887,500 Eli Lilly and Co. .................................. 400,000 17,612,000 (a) Genentech Inc. ..................................... 1,000,000 88,680,000 Johnson & Johnson .................................. 1,081,000 74,891,680 Merck & Co. Inc. ................................... 500,000 15,780,000 (a) Millipore Corp. .................................... 400,000 27,520,000 Pfizer Inc. ........................................ 2,170,000 40,014,800
72 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- --------- -------------- COMMON STOCKS (CONTINUED) PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES (CONTINUED) Roche Holding AG, ADR (Switzerland) ................ 40,000 $ 3,102,000 Schering-Plough Corp. .............................. 500,000 9,235,000 (a) Waters Corp. ....................................... 500,000 29,090,000 Wyeth .............................................. 600,000 22,164,000 -------------- 485,146,620 -------------- RETAILING 0.8% (a) Expedia Inc. ....................................... 300,100 4,534,511 Genuine Parts Co. .................................. 300,400 12,079,084 (a) HSN Inc. ........................................... 60,020 660,820 (a) Ticketmaster ....................................... 60,020 644,015 -------------- 17,918,430 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.2% Intel Corp. ........................................ 900,000 16,857,000 Texas Instruments Inc. ............................. 515,000 11,072,500 (a) Verigy Ltd. (Singapore) ............................ 48,974 797,297 -------------- 28,726,797 -------------- SOFTWARE & SERVICES 6.3% Automatic Data Processing Inc. ..................... 700,000 29,925,000 (a) Computer Sciences Corp. ............................ 1,000,000 40,190,000 (a) Google Inc., A ..................................... 27,000 10,814,040 (a) IAC/InterActiveCorp. ............................... 150,050 2,595,865 Microsoft Corp. .................................... 975,000 26,022,750 (a) Oracle Corp. ....................................... 500,000 10,155,000 (a) Yahoo! Inc. ........................................ 1,600,000 27,680,000 -------------- 147,382,655 -------------- TECHNOLOGY HARDWARE & EQUIPMENT 12.9% (a) Agilent Technologies Inc. .......................... 400,000 11,864,000 (a) Apple Inc. ......................................... 700,000 79,562,000 (a) Cisco Systems Inc. ................................. 1,545,000 34,855,200 (a) Dell Inc. .......................................... 500,000 8,240,000 (a) EMC Corp. .......................................... 1,000,000 11,960,000 Hewlett-Packard Co. ................................ 1,156,250 53,465,000 International Business Machines Corp. .............. 580,000 67,836,800 (a) Logitech International SA (Switzerland) ............ 150,000 3,498,000 (a) Mettler-Toledo International Inc. .................. 50,000 4,900,000 Molex Inc. ......................................... 146,483 3,288,543 Molex Inc., A ...................................... 146,483 3,048,311 QUALCOMM Inc. ...................................... 110,000 4,726,700 (a) Sun Microsystems Inc. .............................. 400,000 3,040,000 Tyco Electronics Ltd. .............................. 387,513 10,718,610 -------------- 301,003,164 -------------- TELECOMMUNICATION SERVICES 0.2% (a) American Tower Corp., A ............................ 115,000 4,136,550 --------------
Annual Report | 73 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- --------- -------------- COMMON STOCKS (CONTINUED) TRANSPORTATION 9.8% Air France-KLM, ADR (France) ....................... 550,000 $ 12,600,500 (a) Alaska Air Group Inc. .............................. 500,000 10,195,000 (a) AMR Corp. .......................................... 2,000,000 19,640,000 Arkansas Best Corp. ................................ 500,000 16,845,000 British Airways PLC, ADR (United Kingdom) .......... 500,000 15,062,500 Canadian National Railway Co. (Canada) ............ 500,000 23,915,000 Canadian Pacific Railway Ltd. (Canada) ............ 500,000 26,930,000 (a) Continental Airlines Inc., B ...................... 1,000,000 16,680,000 Expeditors International of Washington Inc. ........ 80,000 2,787,200 Forward Air Corp. .................................. 500,000 13,615,000 Heartland Express Inc. ............................. 500,000 7,760,000 Southwest Airlines Co. ............................. 65,200 946,052 Union Pacific Corp. ................................ 600,000 42,696,000 Werner Enterprises Inc. ............................ 500,000 10,855,000 (a) YRC Worldwide Inc. ................................. 700,000 8,372,000 -------------- 228,899,252 -------------- UTILITIES 0.1% Public Service Enterprise Group Inc. ............... 100,000 3,279,000 -------------- TOTAL COMMON STOCKS (COST $1,077,802,405) .......... 2,341,737,593 -------------- SHORT TERM INVESTMENTS (COST $1,560,596) 0.1% MONEY MARKET FUNDS 0.1% (c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.98% ................................ 1,560,596 1,560,596 -------------- TOTAL INVESTMENTS (COST $1,079,363,001) 100.1% ..... 2,343,298,189 OTHER ASSETS, LESS LIABILITIES (0.1)% .............. (2,318,965) -------------- NET ASSETS 100.0% .................................. $2,340,979,224 ==============
See Selected Portfolio Abbreviations on page 106. (a) Non-income producing for the twelve months ended September 30, 2008. (b) Rounds to less than 0.1% of net assets. (c) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. 74 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 ------- ----------- ----------- ----------- ---------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 ----------- ----------- ----------- ----------- ----------- Income from investment operations(a): Net investment income(b) ...................... 0.16 0.14 0.14 0.14 0.12 Net realized and unrealized gains (losses) .... (0.71) 0.21 0.09 0.10 0.22 ----------- ----------- ----------- ----------- ----------- Total from investment operations ................. (0.55) 0.35 0.23 0.24 0.34 ----------- ----------- ----------- ----------- ----------- Less distributions from: Net investment income ......................... (0.15) (0.14) (0.15) (0.15) (0.16) Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01) ----------- ----------- ----------- ----------- ----------- Total distributions .............................. (0.21) (0.18) (0.16) (0.16) (0.17) ----------- ----------- ----------- ----------- ----------- Redemption fees(c, d) ............................ -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net asset value, end of year ..................... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 =========== =========== =========== =========== =========== Total return(e) .................................. (21.36)% 14.14% 9.73% 10.45% 15.50% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 0.62%(f) 0.63%(f) 0.64%(g) 0.65%(g) 0.68%(f) Net investment income ............................ 6.44% 5.31% 5.61% 5.54% 5.11% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $26,892,973 $35,476,603 $26,641,398 $21,934,575 $14,743,190 Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 p er share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 75 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ...................... 0.14 0.12 0.12 0.11 0.10 Net realized and unrealized gains (losses) .... (0.71) 0.21 0.08 0.11 0.22 ---------- ---------- ---------- ---------- ---------- Total from investment operations ................. (0.57) 0.33 0.20 0.22 0.32 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ......................... (0.13) (0.12) (0.12) (0.13) (0.14) Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- ---------- Total distributions .............................. (0.19) (0.16) (0.13) (0.14) (0.15) ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) ............................ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ..................... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ========== ========== ========== ========== ========== Total return(e) .................................. (22.13)% 13.23% 8.83% 9.57% 14.59% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.47%(f) 1.48%(f) 1.49%(g) 1.50%(g) 1.53%(f) Net investment income ............................ 5.59% 4.46% 4.76% 4.69% 4.26% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $2,428,765 $3,745,636 $3,743,374 $3,922,396 $3,486,880 Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 76 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ CLASS B1 2008 2007 2006 2005 2004 -------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ..................... 0.15 0.13 0.13 0.12 0.11 Net realized and unrealized gains (losses) (0.71) 0.21 0.08 0.11 0.21 -------- -------- -------- -------- -------- Total from investment operations ................ (0.56) 0.34 0.21 0.23 0.32 -------- -------- -------- -------- -------- Less distributions from: Net investment income ........................ (0.14) (0.13) (0.13) (0.14) (0.14) Net realized gains ........................... (0.06) (0.04) (0.01) (0.01) (0.01) -------- -------- -------- -------- -------- Total distributions ............................. (0.20) (0.17) (0.14) (0.15) (0.15) -------- -------- -------- -------- -------- Redemption fees(c,d) ............................ -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .................... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ======== ======== ======== ======== ======== Total return(e) ................................. (21.77)% 13.57% 9.17% 9.90% 14.90% RATIOS TO AVERAGE NET ASSETS Expenses ........................................ 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) 1.18%(f) Net investment income ........................... 5.94% 4.81% 5.11% 5.04% 4.61% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $224,713 $397,224 $459,302 $493,063 $511,471 Portfolio turnover rate 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 77 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- ----------- ----------- ----------- ----------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26 ----------- ----------- ----------- ----------- ---------- Income from investment operations(a): Net investment income(b) ...................... 0.15 0.13 0.13 0.13 0.11 Net realized and unrealized gains (losses) .... (0.72) 0.21 0.09 0.10 0.21 ----------- ----------- ----------- ----------- ---------- Total from investment operations ................. (0.57) 0.34 0.22 0.23 0.32 ----------- ----------- ----------- ----------- ---------- Less distributions from: Net investment income ......................... (0.14) (0.13) (0.13) (0.14) (0.14) Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01) ----------- ----------- ----------- ----------- ---------- Total distributions .............................. (0.20) (0.17) (0.14) (0.15) (0.15) ----------- ----------- ----------- ----------- ---------- Redemption fees(c, d) ............................ -- -- -- -- -- ----------- ----------- ----------- ----------- ---------- Net asset value, end of year ..................... $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43 =========== =========== =========== =========== ========== Total return(e) .................................. (21.98)% 13.47% 9.56% 9.84% 14.85% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) 1.18%(f) Net investment income ............................ 5.94% 4.81% 5.11% 5.04% 4.61% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $12,433,143 $16,203,796 $12,138,969 $10,113,365 $6,616,891 Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 78 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23 -------- -------- -------- -------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.15 0.13 0.13 0.13 0.11 Net realized and unrealized gains (losses) .... (0.71) 0.20 0.09 0.10 0.22 -------- -------- -------- -------- ------- Total from investment operations ................. (0.56) 0.33 0.22 0.23 0.33 -------- -------- -------- -------- ------- Less distributions from: Net investment income ......................... (0.14) (0.13) (0.14) (0.14) (0.15) Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01) -------- -------- -------- -------- ------- Total distributions .............................. (0.20) (0.17) (0.15) (0.15) (0.16) -------- -------- -------- -------- ------- Redemption fees(c, d) ............................ -- -- -- -- -- -------- -------- -------- -------- ------- Net asset value, end of year ..................... $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40 ======== ======== ======== ======== ======= Total return(e) .................................. (21.91)% 13.47% 9.43% 10.15% 15.25% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 0.97%(f) 0.98%(f) 0.99%(g) 1.00%(g) 1.03%(f) Net investment income ............................ 6.09% 4.96% 5.26% 5.19% 4.76% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $267,956 $286,670 $183,609 $122,222 $73,165 Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 79 \ Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------------------ ADVISOR CLASS 2008 2007 2006 2005 2004 ------------- ---------- ---------- ---------- ---------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 ---------- ---------- ---------- ---------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.16 0.15 0.14 0.14 0.12 Net realized and unrealized gains (losses) .... (0.70) 0.21 0.09 0.11 0.22 ---------- ---------- ---------- ---------- -------- Total from investment operations ................. (0.54) 0.36 0.23 0.25 0.34 ---------- ---------- ---------- ---------- -------- Less distributions from: Net investment income ......................... (0.16) (0.15) (0.15) (0.16) (0.16) Net realized gains ............................ (0.06) (0.04) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- -------- Total distributions .............................. (0.22) (0.19) (0.16) (0.17) (0.17) ---------- ---------- ---------- ---------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- ---------- ---------- ---------- ---------- -------- Net asset value, end of year ..................... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ========== ========== ========== ========== ======== Total return ..................................... (21.33)% 14.36% 9.94% 10.65% 15.74% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 0.47%(e) 0.48%(e) 0.49%(f) 0.50%(f) 0.53%(e) Net investment income ............................ 6.59% 5.46% 5.76% 5.69% 5.26% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $4,259,806 $6,195,966 $3,786,643 $2,280,318 $901,149 Portfolio turnover rate .......................... 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 80 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------- --------------- COMMON STOCKS 36.2% ENERGY 4.8% (a) Canadian Oil Sands Trust ........................... Canada 25,000,000 $ 910,243,765 Chevron Corp. ...................................... United States 7,000,000 577,360,000 ConocoPhillips ..................................... United States 5,750,000 421,187,500 Spectra Energy Corp. ............................... United States 13,000,000 309,400,000 --------------- 2,218,191,265 --------------- FINANCIALS 3.2% Bank of America Corp. .............................. United States 20,000,000 700,000,000 Duke Realty Corp. .................................. United States 3,163,800 77,766,204 HSBC Holdings PLC .................................. United Kingdom 35,000,000 566,175,447 iStar Financial Inc. ............................... United States 5,213,500 13,555,100 Wells Fargo & Co. .................................. United States 4,000,000 150,120,000 --------------- 1,507,616,751 --------------- HEALTH CARE 4.6% Bristol-Myers Squibb Co. ........................... United States 14,000,000 291,900,000 Merck & Co. Inc. ................................... United States 20,000,000 631,200,000 Pfizer Inc. ........................................ United States 58,080,000 1,070,995,200 Schering-Plough Corp. .............................. United States 7,938,467 146,623,485 --------------- 2,140,718,685 --------------- INDUSTRIALS 0.2% 3M Co. ............................................. United States 783,568 53,525,530 General Electric Co. ............................... United States 2,400,000 61,200,000 --------------- 114,725,530 --------------- INFORMATION TECHNOLOGY 1.8% Intel Corp. ........................................ United States 36,213,400 678,276,982 Microchip Technology Inc. .......................... United States 5,000,000 147,150,000 --------------- 825,426,982 --------------- MATERIALS 0.7% AngloGold Ashanti Ltd., ADR ........................ South Africa 2,884,064 66,621,879 Barrick Gold Corp. ................................. Canada 298,200 10,955,868 The Dow Chemical Co. ............................... United States 7,181,222 228,219,235 --------------- 305,796,982 --------------- TELECOMMUNICATION SERVICES 2.7% AT&T Inc. .......................................... United States 30,000,000 837,600,000 Verizon Communications Inc. ........................ United States 11,000,000 352,990,000 Vodafone Group PLC ................................. United Kingdom 30,000,000 66,245,455 --------------- 1,256,835,455 --------------- UTILITIES 18.2% (a) AGL Resources Inc. ................................. United States 4,000,000 125,520,000 (a) Ameren Corp. ....................................... United States 12,500,000 487,875,000 American Electric Power Co. Inc. ................... United States 8,633,800 319,709,614 Atmos Energy Corp. ................................. United States 4,000,000 106,480,000 CenterPoint Energy Inc. ............................ United States 6,000,000 87,420,000 Consolidated Edison Inc. ........................... United States 12,000,000 515,520,000
Annual Report | 81 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------- --------------- COMMON STOCKS (CONTINUED) UTILITIES (CONTINUED) Dominion Resources Inc. ............................ United States 18,000,000 $ 770,040,000 DTE Energy Co. ..................................... United States 5,270,400 211,448,448 Duke Energy Corp. .................................. United States 35,000,000 610,050,000 FirstEnergy Corp. .................................. United States 9,000,000 602,910,000 FPL Group Inc. ..................................... United States 7,000,000 352,100,000 Hawaiian Electric Industries Inc. .................. United States 1,720,000 49,897,200 NiSource Inc. ...................................... United States 4,500,000 66,420,000 (a) PG&E Corp. ......................................... United States 20,000,000 749,000,000 (a) Pinnacle West Capital Corp. ........................ United States 5,500,000 189,255,000 Portland General Electric Co. ...................... United States 3,100,000 73,346,000 Progress Energy Inc. ............................... United States 9,000,000 388,170,000 Public Service Enterprise Group Inc. ............... United States 20,000,000 655,800,000 (a) Puget Energy Inc. .................................. United States 7,500,000 200,250,000 Sempra Energy ...................................... United States 6,379,600 321,978,412 The Southern Co. ................................... United States 28,385,300 1,069,841,957 TECO Energy Inc. ................................... United States 9,500,000 149,435,000 Xcel Energy Inc. ................................... United States 18,544,750 370,709,552 --------------- 8,473,176,183 --------------- TOTAL COMMON STOCKS (COST $15,704,888,054) 16,842,487,833 --------------- CONVERTIBLE PREFERRED STOCKS 2.4% CONSUMER DISCRETIONARY 0.2% General Motors Corp., 6.25%, cvt. pfd. ............. United States 11,000,000 88,000,000 --------------- FINANCIALS 1.8% American International Group Inc., 8.50%, cvt. pfd. ............................................ United States 5,200,000 44,668,000 Bank of America Corp., 7.25%, cvt. pfd., L ......... United States 399,000 334,362,000 Citigroup Inc., 6.50%, cvt. pfd. ................... United States 3,800,000 155,800,000 Fannie Mae, 5.375%, cvt. pfd. ...................... United States 4,700 16,450,000 Fannie Mae, 8.75%, cvt. pfd. ....................... United States 3,239,000 8,097,500 Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ..... United States 3,000,000 36,750,000 Legg Mason Inc., 7.00%, cvt. pfd. .................. United States 2,625,000 91,875,000 Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P ......................................... United States 1,000,650 1,000,650 Lehman Brothers Holdings Inc., 8.75%, cvt. pfd., Q ......................................... United States 550,000 275,000 Wachovia Corp., 7.50%, cvt. pfd., L ................ United States 300,000 115,500,000 Washington Mutual Inc., 7.75%, cvt. pfd., R ........ United States 445,220 124,661 --------------- 804,902,811 --------------- HEALTH CARE 0.2% Schering-Plough Corp., 6.00%, cvt. pfd. ............ United States 500,000 86,506,813 --------------- UTILITIES 0.2% CMS Energy Trust I, 7.75%, cvt. pfd. ............... United States 1,711,000 76,315,049 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,385,213,241) ........................... 1,055,724,673 ---------------
82 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------- --------------- EQUITY LINKED SECURITIES 2.1% CONSUMER DISCRETIONARY 0.7% Citigroup into Comcast Corp., 8.50% ................ United States 15,000,000 $ 291,343,500 (b) The Goldman Sachs Group Inc. into Comcast Corp., 5.00%, 144A ..................................... United States 2,800,000 52,468,747 --------------- 343,812,247 --------------- ENERGY 0.3% (b) The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A ..................................... United States 3,825,000 151,408,762 --------------- INFORMATION TECHNOLOGY 0.5% (b) Morgan Stanley into Texas Instruments Inc., 7.50% 144A ............................................ United States 10,900,000 246,659,370 --------------- MATERIALS 0.6% (b) The Goldman Sachs Group Inc. into Barrick Gold Corp., 10.00%, 144A ............................. United States 8,282,800 292,855,664 --------------- TOTAL EQUITY LINKED SECURITIES (COST $1,253,289,737) 1,034,736,043 --------------- PREFERRED STOCKS 0.2% FINANCIALS 0.2% Fannie Mae, 6.75%, pfd. ............................ United States 3,000,000 5,400,000 Fannie Mae, 7.625%, pfd., R ........................ United States 2,399,400 4,318,920 Fannie Mae, 8.25%, pfd. ............................ United States 11,784,000 25,689,120 Freddie Mac, 8.375%, pfd., Z ....................... United States 16,608,000 27,071,040 --------------- TOTAL PREFERRED STOCKS (COST $833,682,537) ......... 62,479,080 ---------------
PRINCIPAL AMOUNT(c) ------------- (d, e) SENIOR FLOATING RATE INTERESTS 4.7% CONSUMER DISCRETIONARY 1.4% Clear Channel Communications Inc., Term Loan B, 7.359%, 11/13/15 ................................ United States 635,000,000 521,228,955 Idearc Inc., (f) Term Loan A, 5.50%, 11/17/13 ................ United States 45,000,000 28,718,250 Term Loan B, 5.71% - 5.77%, 11/17/14 ........ United States 24,936,548 14,213,833 Jarden Corp., Term Loan B-3, 6.262%, 1/24/12 ....... United States 123,437,661 111,865,380 --------------- 676,026,418 --------------- HEALTH CARE 0.1% Bausch and Lomb Inc., (g) Delayed Draw Term Loan, 7.012%, 4/28/15 ..... United States 5,268,000 4,903,628 Parent Term Loan B, 7.012%, 4/28/15 ......... United States 34,856,600 32,445,673 --------------- 37,349,301 --------------- INDUSTRIALS 0.5% Allison Transmission Inc., Term Loan B, 5.22% - 5.57%, 8/07/14 .................................. United States 160,786,341 133,624,865 U.S. Investigations Services Inc., Term Loan B, 5.954%, 2/21/15 ................................. United States 108,897,243 95,012,845 --------------- 228,637,710 ---------------
Annual Report | 83 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE -------------------- -------------- ------------- --------------- (d, e) SENIOR FLOATING RATE INTERESTS (CONTINUED) INFORMATION TECHNOLOGY 1.1% First Data Corp., Term Loan B-2, 5.926% - 6.512%, 9/24/14 ......... United States 247,500,000 $ 212,643,832 Term Loan B-3, 5.948% - 6.512%, 9/24/14 ......... United States 331,798,871 285,070,641 --------------- 497,714,473 --------------- MATERIALS 0.2% (h) Berry Plastics Holding Corp., Senior Unsecured Term Loan, PIK, 9.791%, 6/15/14 ...................... United States 148,501,346 89,843,315 --------------- TRANSPORTATION 0.2% Ceva Group PLC, Dollar Pre-Refunded L/C Commitment, 6.762%, 8/01/12 ...................................... United States 13,684,211 12,332,895 EGL Term Loans, 6.188%, 8/01/12 ................. United States 114,861,842 101,652,730 --------------- 113,985,625 --------------- UTILITIES 1.2% Texas Competitive Electric Holdings Co. LLC, Term Loan B-1, 5.989% - 7.262%, 10/10/14 ........ United States 149,248,120 126,456,738 Term Loan B-2, 5.989% - 7.262%, 10/10/14 ........ United States 247,499,999 210,065,624 Term Loan B-3, 5.989% - 7.262%, 10/10/14 ........ United States 272,250,000 230,683,142 --------------- 567,205,504 --------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $2,470,189,625) ........................... 2,210,762,346 --------------- CORPORATE BONDS 45.2% CONSUMER DISCRETIONARY 15.0% Beazer Homes USA Inc., senior note, 6.875%, 7/15/15 ................................. United States 59,000,000 36,875,000 8.125%, 6/15/16 ................................. United States 14,900,000 9,536,000 Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ......................................... United States 490,000,000 463,050,000 CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ................................. United States 375,000,000 159,375,000 9.92%, 4/01/14 .................................. United States 117,380,000 44,017,500 11.75%, 5/15/14 ................................. United States 342,000,000 133,380,000 CCH I LLC, senior secured note, 11.00%, 10/01/15 ... United States 755,000,000 502,075,000 CCH II LLC, senior note, 10.25%, 9/15/10 ........... United States 235,000,000 212,675,000 D.R. Horton Inc., 5.625%, 1/15/16 ................................. United States 35,000,000 26,075,000 senior note, 6.50%, 4/15/16 ..................... United States 50,000,000 38,250,000 Dex Media Inc., B, 8.00%, 11/15/13 .............................. United States 25,000,000 11,625,000 senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ......................... United States 285,000,000 132,525,000 (b) DIRECTV Holdings LLC, senior note, 144A, 7.625%, 5/15/16 ......................................... United States 300,000,000 273,000,000 Dollar General Corp., senior note, 10.625%, 7/15/15 ................... United States 600,000,000 594,000,000 (h) senior sub. note, PIK, 11.875%, 7/15/17 ......... United States 205,000,000 190,650,000 EchoStar DBS Corp., senior note, 7.75%, 5/31/15 .................................. United States 110,000,000 93,775,000 7.125%, 2/01/16 ................................. United States 240,000,000 193,800,000
84 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE -------------------- -------------- ------------- --------------- CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) Ford Motor Co., 7.45%, 7/16/31 ..................... United States 600,000,000 $ 261,000,000 Ford Motor Credit Co. LLC, 7.375%, 10/28/09 ................................ United States 840,000,000 675,494,400 7.875%, 6/15/10 ................................. United States 550,000,000 420,039,950 7.375%, 2/01/11 ................................. United States 450,000,000 299,214,000 7.00%, 10/01/13 ................................. United States 100,000,000 61,512,700 senior note, 9.75%, 9/15/10 ..................... United States 145,000,000 104,033,875 senior note, 9.875%, 8/10/11 .................... United States 75,000,000 51,814,350 senior note, 7.25%, 10/25/11 .................... United States 155,000,000 98,729,885 General Motors Corp., senior deb., 8.375%, 7/15/33 ......................................... United States 510,000,000 206,550,000 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ................................ United States 80,600,000 70,122,000 O, 6.375%, 3/15/15 .............................. United States 219,000,000 179,032,500 Q, 6.75%, 6/01/16 ............................... United States 165,000,000 135,712,500 K. Hovnanian Enterprises Inc., senior note, 7.50%, 5/15/16 ......................................... United States 30,100,000 17,608,500 KB Home, senior note, 6.375%, 8/15/11 ................................. United States 40,000,000 36,400,000 5.75%, 2/01/14 .................................. United States 75,000,000 60,750,000 6.25%, 6/15/15 .................................. United States 90,000,000 73,800,000 7.25%, 6/15/18 .................................. United States 70,500,000 58,162,500 Liberty Media Corp., senior note, 5.70%, 5/15/13 ... United States 130,400,000 109,095,509 MGM MIRAGE, senior note, 6.75%, 4/01/13 .................................. United States 70,000,000 54,950,000 6.625%, 7/15/15 ................................. United States 120,000,000 84,000,000 7.625%, 1/15/17 ................................. United States 250,000,000 181,250,000 R.H. Donnelley Corp., senior disc. note, A-1, 6.875%, 1/15/13 ......... United States 127,000,000 50,165,000 senior disc. note, A-2, 6.875%, 1/15/13 ......... United States 195,000,000 77,025,000 senior note, 6.875%, 1/15/13 .................... United States 55,000,000 21,725,000 senior note, 8.875%, 10/15/17 ................... United States 501,500,000 173,017,500 senior note, A-3, 8.875%, 1/15/16 ............... United States 193,100,000 66,619,500 (b, h) Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ............................. United States 357,000,000 167,790,000 Visant Holding Corp., senior note, 8.75%, 12/01/13 ........................................ United States 50,000,000 46,125,000 --------------- 6,956,423,169 --------------- CONSUMER STAPLES 0.0%(i) Dole Food Co. Inc., senior note, 8.625%, 5/01/09 ... United States 3,050,000 2,928,000 --------------- ENERGY 5.1% Callon Petroleum Co., senior note, 9.75%, 12/08/10 ........................................ United States 110,000,000 103,400,000 Chesapeake Energy Corp., senior note, 6.50%, 8/15/17 .................................. United States 150,400,000 132,352,000 6.25%, 1/15/18 .................................. United States 150,000,000 129,000,000 7.25%, 12/15/18 ................................. United States 160,000,000 148,000,000 6.875%, 11/15/20 ................................ United States 135,000,000 116,100,000 El Paso Corp., senior note, MTN, 7.75%, 1/15/32 .... United States 250,000,000 210,065,250 El Paso Natural Gas Co., senior note, 7.25%, 4/01/18 ......................................... United States 50,000,000 46,750,000
Annual Report | 85 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(c) VALUE -------------------- -------------- ------------- --------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) Mariner Energy Inc., senior note, 7.50%, 4/15/13 .................................. United States 45,000,000 $ 40,050,000 8.00%, 5/15/17 .................................. United States 25,000,000 21,250,000 Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 ........... United States 380,000,000 336,300,000 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ................................. United States 115,000,000 102,925,000 OPTI Canada Inc., senior note, 7.875%, 12/15/14 .... Canada 140,000,000 124,600,000 Petrohawk Energy Corp., senior note, 9.125%, 7/15/13 ................................. United States 50,000,000 47,250,000 (b) 144A, 7.875%, 6/01/15 ........................... United States 73,500,000 64,312,500 (b) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ......................................... Switzerland 22,000,000 18,700,000 Pioneer Natural Resources Co., senior bond, 6.875%, 5/01/18 ................................. United States 110,000,000 98,424,150 Plains Exploration & Production Co., senior note, 7.75%, 6/15/15 .................................. United States 75,000,000 69,375,000 Sabine Pass LNG LP, senior secured note, 7.25%, 11/30/13 ................................. United States 95,000,000 75,525,000 7.50%, 11/30/16 ................................. United States 390,000,000 306,150,000 Sesi LLC, senior note, 6.875%, 6/01/14 ............. United States 110,000,000 96,250,000 (b) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 ......................................... United States 100,000,000 80,500,000 --------------- 2,367,278,900 --------------- FINANCIALS 5.5% American Express Co., senior note, 7.00%, 3/19/18 .. United States 90,000,000 79,563,330 American Express Credit Corp., C, 7.30%, 8/20/13 ... United States 150,000,000 144,824,250 (b) American International Group Inc., 144A, 8.25%, 8/15/18 ............................ United States 175,000,000 101,808,875 (d) junior sub. deb., 144A, FRN, 8.175%, 5/15/58 .... United States 600,000,000 96,133,800 (j) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ....................................... United States 25,000,000 20,229,750 GMAC LLC, 5.625%, 5/15/09 ................................. United States 235,000,000 167,931,940 7.75%, 1/19/10 .................................. United States 600,000,000 359,368,200 7.25%, 3/02/11 .................................. United States 225,000,000 106,487,100 6.875%, 9/15/11 ................................. United States 800,000,000 357,497,600 6.875%, 8/28/12 ................................. United States 300,400,000 119,488,606 6.75%, 12/01/14 ................................. United States 125,000,000 48,025,625 iStar Financial Inc., 8.625%, 6/01/13 ................................. United States 160,000,000 83,265,920 senior note, 5.95%, 10/15/13 .................... United States 20,000,000 10,409,660 (j) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, perpetual ....................................... United States 405,000,000 341,873,055 (k) Lehman Brothers Holdings Inc., senior note, 7.50%, 12/03/08 ................................. United States 400,000,000 35,860,000 7.50%, 1/21/09 .................................. United States 900,000,000 51,030,000 6.20%, 9/26/14 .................................. United States 326,000,000 42,380,000 6.875%, 5/02/18 ................................. United States 104,900,000 13,637,000 7.00%, 9/27/27 .................................. United States 100,000,000 13,000,000 (b, d) Liberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 ............................ United States 100,000,000 72,120,700 Merrill Lynch & Co. Inc., 6.875%, 4/25/18 .......... United States 48,000,000 42,539,184 (b) Residential Capital LLC, junior note, 144A, 9.625%, 5/15/15 ................................. United States 49,429,000 12,110,105
86 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE -------------------- -------------- ------------- --------------- CORPORATE BONDS (CONTINUED) FINANCIALS (CONTINUED) (j) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ... United States 44,500,000 $ 38,835,150 (j) Wells Fargo Capital XV, 9.75%, Perpetual ........... United States 210,000,000 203,895,930 --------------- 2,562,315,780 --------------- HEALTH CARE 5.2% Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 ................................. United States 370,000,000 353,350,000 DaVita Inc., senior note, 6.625%, 3/15/13 .................... United States 140,000,000 133,700,000 senior sub. note, 7.25%, 3/15/15 ................ United States 80,000,000 76,400,000 HCA Inc., 6.375%, 1/15/15 ................................. United States 125,000,000 99,062,500 senior note, 6.50%, 2/15/16 ..................... United States 150,000,000 119,625,000 senior secured note, 9.25%, 11/15/16 ............ United States 132,900,000 129,577,500 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ................................ United States 540,000,000 500,850,000 6.50%, 6/01/12 .................................. United States 265,000,000 246,450,000 7.375%, 2/01/13 ................................. United States 380,000,000 347,700,000 (d) FRN, 9.25%, 2/01/15 ............................. United States 330,000,000 313,500,000 (d, h) U.S. Oncology Holdings Inc., senior note, PIK, FRN, 8.334%, 3/15/12 ................................. United States 75,232,814 58,305,431 Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to 10/01/09, 11.25% thereafter, 10/01/15 ........................................ United States 23,900,000 20,793,000 --------------- 2,399,313,431 --------------- INDUSTRIALS 3.7% Allied Waste North America Inc., senior note, B, 7.375%, 4/15/14 ................. United States 190,000,000 185,725,000 senior note, B, 7.125%, 5/15/16 ................. United States 79,000,000 74,062,500 senior secured note, 6.125%, 2/15/14 ............ United States 205,000,000 189,625,000 senior secured note, 6.875%, 6/01/17 ............ United States 106,450,000 99,530,750 Browning-Ferris Industries Inc., 7.40%, 9/15/35 .... United States 100,000,000 88,500,000 Hertz Corp., senior note, 8.875%, 1/01/14 .................... United States 290,300,000 251,835,250 senior sub. note, 10.50%, 1/01/16 ............... United States 25,000,000 21,000,000 johnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 ................................. United States 158,000,000 154,050,000 johnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ......................................... United States 125,000,000 125,312,500 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ......................................... United States 15,600,000 14,196,000 (b) Nortek Inc., senior note, 144A, 10.00%, 12/01/13 ... United States 100,000,000 88,500,000 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ..................... United States 85,000,000 80,325,000 senior sub. note, 11.75%, 8/01/16 ............... United States 83,200,000 79,040,000 (b, d, h) Rexnord Holdings Inc., senior note, 144A, PIK, FRN, 9.81%, 3/01/13 .................................. United States 89,220,363 68,699,679 Terex Corp., senior sub. note, 8.00%, 11/15/17 ..... United States 185,000,000 169,275,000 (b) U.S. Investigations Services Inc., senior note, 144A, 10.50%, 11/01/15 .......................... United States 50,000,000 44,750,000 --------------- 1,734,426,679 ---------------
Annual Report | 87 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE -------------------- -------------- ------------- --------------- CORPORATE BONDS (CONTINUED) INFORMATION TECHNOLOGY 3.7% (b) Ceridian Corp., senior note, 144A, 11.25%, 11/15/15 ........................................ United States 80,000,000 $ 66,200,000 (b) First Data Corp., senior note, 144A, 9.875%, 9/24/15 ......................................... United States 275,000,000 216,218,750 Fiserv Inc., senior note, 6.80%, 11/20/17 .......... United States 50,000,000 48,332,850 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ................................. Singapore 100,000,000 85,000,000 Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ................................ United States 437,400,000 303,993,000 (l) 10.125%, 12/15/16 ............................... United States 630,000,000 406,350,000 Lucent Technologies Inc., 6.45%, 3/15/29 ........... United States 180,000,000 110,700,000 (b) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 ......................................... Canada 77,100,000 47,609,250 NXP BV/NXP Funding LLC, senior note, 9.50%, 10/15/15 ........................................ Netherlands 50,000,000 25,875,000 Qwest Capital Funding Inc., 7.25%, 2/15/11 ......... United States 26,600,000 25,004,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .................................. United States 150,000,000 132,000,000 8.125%, 3/01/16 ................................. United States 100,000,000 85,500,000 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 .................... United States 59,300,000 53,666,500 (b) senior note, 144A, 10.625%, 5/15/15 ............. United States 55,000,000 51,975,000 senior sub. note, 10.25%, 8/15/15 ............... United States 100,000,000 87,250,000 --------------- 1,745,674,350 --------------- MATERIALS 1.3% Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 ................................. United States 75,000,000 73,985,325 (b) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 ................................. United Kingdom 175,000,000 EUR 131,086,861 jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 ........................................ United States 200,000,000 168,000,000 Nalco Co., senior note, 7.75%, 11/15/11 ............ United States 5,000,000 4,925,000 Novelis Inc., senior note, 7.25%, 2/15/15 .......... Canada 190,000,000 166,250,000 Stone Container Corp., senior note, 8.00%, 3/15/17 ......................................... United States 68,000,000 53,380,000 --------------- 597,627,186 --------------- TELECOMMUNICATION SERVICES 0.2% (b) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ......................................... Jamaica 140,000,000 117,950,000 --------------- TRANSPORTATION 0.2% (b) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ......................................... United Kingdom 100,000,000 96,500,000 --------------- UTILITIES 5.3% Aquila Inc., senior note, 14.875%, 7/01/12 ......... United States 43,450,000 48,106,406 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ................................. United States 300,000,000 274,500,000 8.75%, 2/15/12 .................................. United States 275,000,000 261,250,000 8.375%, 5/01/16 ................................. United States 210,000,000 183,750,000 7.75%, 6/01/19 .................................. United States 90,000,000 72,450,000 Energy Future Holdings Corp., senior note, (b) 144A, 10.875%, 11/01/17 ............................ United States 187,500,000 170,156,250 (b, h) 144A, PIK, 11.25%, 11/01/17 ........................ United States 243,700,000 207,145,000 P, 5.55%, 11/15/14 ................................. United States 300,000,000 225,269,100
88 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
PRINCIPAL FRANKLIN INCOME FUND COUNTRY AMOUNT(C) VALUE -------------------- -------------- ------------- --------------- CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) (b) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ......................................... Netherlands 80,000,000 $ 80,400,000 PNM Resources Inc., senior note, 9.25%, 5/15/15 .... United States 31,700,000 31,383,000 Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 .................................. United States 52,400,000 49,509,092 Reliant Energy Inc., senior note, 7.625%, 6/15/14 ................................. United States 150,000,000 113,250,000 7.875%, 6/15/17 ................................. United States 153,100,000 114,059,500 (b) Texas Competitive Electric Holdings Co LLC, senior note, 144A, 10.25%, 11/01/15 .................... United States 353,025,000 320,370,188 (h) 144A, PIK, 10.50%, 11/01/16 ..................... United States 150,000,000 127,875,000 B, 144A, 10.25%, 11/01/15 ....................... United States 186,900,000 169,611,750 --------------- 2,449,085,286 --------------- TOTAL CORPORATE BONDS (COST $27,891,660,955) ....... 21,029,522,781 --------------- CONVERTIBLE BONDS 0.9% FINANCIALS 0.3% (d) iStar Financial Inc., cvt., senior note, FRN, 3.291%, 10/01/12 ................................ United States 250,000,000 135,000,000 --------------- HEALTH CARE 0.2% (b) Mylan Inc., 144A, cvt., 3.75%, 9/15/15 ............. United States 80,000,000 79,000,000 --------------- INFORMATION TECHNOLOGY 0.4% (b) Advanced Micro Devices Inc., cvt., senior note, 144A, 5.75%, 8/15/12 ............................ United States 325,000,000 186,875,000 --------------- TOTAL CONVERTIBLE BONDS (COST $640,286,205) ........ 400,875,000 --------------- MORTGAGE-BACKED SECURITIES 2.0% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 0.8% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ....... United States 390,638,250 381,610,183 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.8% FNMA 30 Year, 5.50%, 2/01/35 - 7/01/37 ............. United States 374,786,768 374,244,413 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4% GNMA I SF 30 Year, 5.00%, 4/15/33 - 5/15/34 ........ United States 196,144,979 192,845,886 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $942,876,169) ............................. 948,700,482 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $54,122,086,523) .......................... 43,585,288,238 --------------- SHORT TERM INVESTMENTS 5.9% U.S. GOVERNMENT AND AGENCY SECURITIES (COST $591,954,931) 1.2% (m) FHLB, 10/01/08 - 10/09/08 .......................... United States 592,068,000 592,048,992 --------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS AND REPURCHASE AGREEMENTS (COST $54,714,041,454) .... 44,177,337,230 ---------------
Annual Report | 89 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------- --------------- SHORT TERM INVESTMENTS (CONTINUED) MONEY MARKET FUNDS (COST $268,661,516) 0.6% (n) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.98% ................................ United States 268,661,516 $ 268,661,516 --------------- INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1% MONEY MARKET FUNDS (COST $29,080,893) 0.1% (o) Bank of New York Institutional Cash Reserve Fund, 2.18% ........................................... United States 29,080,893 28,790,084 --------------- PRINCIPAL AMOUNT(C) ------------- REPURCHASE AGREEMENTS (COST $1,864,985,975) 4.0% (p) Joint Repurchase Agreement, 1.347%, 10/01/08 ....... 1,864,985,975 1,864,985,975 (Maturity Value $1,865,055,763) ABN AMRO Bank, NV, New York Branch (Maturity Value $295,070,472) Banc of America Securities LLC (Maturity Value $230,147,881) Barclays Capital Inc. (Maturity Value $298,017,260) BNP Paribas Securities Corp. (Maturity Value $289,158,245) Credit Suisse Securities (USA) LLC (Maturity Value $59,010,364) Deutsche Bank Securities Inc. (Maturity Value $109,422,822) Dresdner Kleinwort Securities LLC (Maturity Value $221,307,518) Greenwich Capital Markets Inc. (Maturity Value $303,910,837) UBS Securities LLC (Maturity Value $59,010,364) Collateralized by U.S. Government Agency Securities, 2.20% - 7.25%, 11/07/08 - 4/24/13; (m)U.S. Government Agency Discount Notes, 12/30/08 and U.S. Treasury Notes, 1.875 - 4.875%, 1/15/09 - 7/31/13 --------------- TOTAL INVESTMENTS (COST $56,876,769,838) 99.6% ..... 46,339,774,805 OTHER ASSETS, LESS LIABILITIES 0.4% ................ 167,580,506 --------------- NET ASSETS 100.0% .................................. $46,507,355,311 ===============
See Currency and Selected Portfolio Abbreviations on page 106. (a) See Note 10 regarding holdings of 5% voting securities. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Trustees. At September 30, 2008, the aggregate value of these securities was $3,936,651,251, representing 8.46% of net assets. (c) The principal amount is stated in U.S. dollars unless otherwise indicated. (d) The coupon rate shown represents the rate at period end. (e) See Note 1(g) regarding senior floating rate interests. (f) Security purchased on a delayed delivery basis. See Note 1(d). (g) See Note 9 regarding unfunded loan commitments. (h) Income may be received in additional securities and/or cash. (i) Rounds to less than 0.1% of net assets. (j) Perpetual bond with no stated maturity date. (k) See Note 8 regarding defaulted securities. (l) A portion or all of the security is on loan at September 30, 2008. See Note 1(f). (m) The security is traded on a discount basis with no stated coupon rate. (n) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (o) The rate shown is the annualized seven-day yield at period end. (p) See Note 1(c) regarding joint repurchase agreements. The accompanying notes are an integral part of these financial statements. 90 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- CLASS A 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ...................... 0.30 0.31 0.30 0.28 0.27 Net realized and unrealized gains (losses) .... 0.08 (0.02) (0.09) (0.11) (0.04) ---------- ---------- ---------- ---------- ---------- Total from investment operations ................. 0.38 0.29 0.21 0.17 0.23 ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income .... (0.32) (0.33) (0.31) (0.32) (0.36) ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) ............................ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ..................... $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ========== ========== ========== ========== ========== Total return(e) .................................. 6.00% 4.63% 3.40% 2.67% 3.46% RATIOS TO AVERAGE NET ASSETS Expenses(f) ...................................... 0.72% 0.72% 0.72% 0.72% 0.70% Net investment income ............................ 4.64% 4.78% 4.64% 4.29% 4.09% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $5,353,961 $5,073,449 $5,291,117 $5,901,449 $6,420,381 Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 91 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.27 0.27 0.26 0.25 0.24 Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05) -------- -------- -------- -------- -------- Total from investment operations ................. 0.34 0.26 0.18 0.14 0.19 -------- -------- -------- -------- -------- Less distributions from net investment income .... (0.28) (0.30) (0.28) (0.29) (0.32) -------- -------- -------- -------- -------- Redemption fees(c,d) ............................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67 ======== ======== ======== ======== ======== Total return(e) .................................. 5.61% 4.10% 2.87% 2.13% 2.92% RATIOS TO AVERAGE NET ASSETS Expenses(f) ...................................... 1.24% 1.25% 1.24% 1.25% 1.23% Net investment income ............................ 4.12% 4.25% 4.12% 3.76% 3.56% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $284,649 $316,720 $388,807 $478,788 $568,276 Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 92 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.27 0.27 0.26 0.25 0.24 Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05) -------- -------- -------- -------- -------- Total from investment operations ................. 0.34 0.26 0.18 0.14 0.19 -------- -------- -------- -------- -------- Less distributions from net investment income .... (0.28) (0.30) (0.28) (0.29) (0.32) -------- -------- -------- -------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65 ======== ======== ======== ======== ======== Total return(e) .................................. 5.48% 4.12% 2.88% 2.14% 2.91% RATIOS TO AVERAGE NET ASSETS Expenses(f) ...................................... 1.24% 1.25% 1.23% 1.25% 1.23% Net investment income ............................ 4.12% 4.25% 4.13% 3.76% 3.56% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $610,148 $418,951 $424,462 $508,539 $597,451 Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 93 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 -------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.28 0.28 0.27 0.26 0.25 Net realized and unrealized gains (losses) .... 0.07 (0.01) (0.08) (0.11) (0.05) -------- ------- ------- ------- ------- Total from investment operations ................. 0.35 0.27 0.19 0.15 0.20 -------- ------- ------- ------- ------- Less distributions from net investment income .... (0.29) (0.31) (0.29) (0.30) (0.33) -------- ------- ------- ------- ------- Redemption fees(c, d) ............................ -- -- -- -- -- -------- ------- ------- ------- ------- Net asset value, end of year ..................... $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ======== ======= ======= ======= ======= Total return(e) .................................. 5.61% 4.25% 3.01% 2.29% 3.08% RATIOS TO AVERAGE NET ASSETS Expenses(f) ...................................... 1.09% 1.10% 1.09% 1.10% 1.08% Net investment income ............................ 4.27% 4.40% 4.27% 3.91% 3.71% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $104,648 $74,537 $71,104 $65,790 $59,431 Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 94 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------- ADVISOR CLASS 2008 2007 2006 2005 2004 ------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.31 0.31 0.31 0.29 0.28 Net realized and unrealized gains (losses) .... 0.08 (0.01) (0.09) (0.10) (0.06) -------- -------- -------- -------- -------- Total from investment operations ................. 0.39 0.30 0.22 0.19 0.22 -------- -------- -------- -------- -------- Less distributions from net investment income .... (0.33) (0.34) (0.32) (0.33) (0.36) -------- -------- -------- -------- -------- Redemption fees(c, d) -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69 ======== ======== ======== ======== ======== Total return ..................................... 6.11% 4.75% 3.53% 2.95% 3.42% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 0.59% 0.60% 0.59% 0.60% 0.58% Net investment income ............................ 4.77% 4.90% 4.77% 4.41% 4.21% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $612,026 $470,751 $387,239 $334,681 $340,279 Portfolio turnover rate .......................... 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 95 FRANKLIN CUSTODIAN FUNDS STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------- ---------------- -------------- MORTGAGE-BACKED SECURITIES 94.0% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 94.0% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 105,993 $ 115,723 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 232,073 254,457 GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 .................... 79,686 82,924 GNMA GP 30 Year, 10.25%, 5/15/20 ............................... 10,211 11,735 GNMA GP 30 Year, 11.00%, 1/15/10 - 12/15/10 .................... 193,181 205,739 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 205,253 233,306 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ..................... 32,046 36,132 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 32,029 36,255 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 11,321 12,506 GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 ..................... 18,039 19,476 GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 4,811 5,606 GNMA I SF 15 Year, 6.50%, 5/15/18 .............................. 1,332,741 1,398,826 GNMA I SF 15 Year, 7.00%, 10/15/09 ............................. 58,716 59,014 (a) GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/36 .................... 629,818,688 619,123,923 GNMA I SF 30 Year, 5.50%, 5/15/28 - 8/15/38 .................... 1,152,291,323 1,156,387,423 (a) GNMA I SF 30 Year, 5.50%, 10/15/37 ............................. 75,000,000 75,082,050 (a) GNMA I SF 30 Year, 6.00%, 10/15/23 - 9/15/38 ................... 1,458,260,023 1,483,249,866 GNMA I SF 30 Year, 6.00%, 3/15/38 .............................. 70,282,035 71,438,028 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 .................... 387,574,361 398,509,618 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 69,110 72,513 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 .................... 190,243,161 200,722,510 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 585,706 628,484 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 46,697,705 50,376,933 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 414,816 450,965 GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................... 36,611,609 40,076,246 GNMA I SF 30 Year, 8.25%, 3/15/27 .............................. 36,991 40,527 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 8,002,101 8,834,075 GNMA I SF 30 Year, 9.00%, 12/15/08 - 7/15/23 ................... 10,074,577 11,065,694 GNMA I SF 30 Year, 9.50%, 5/15/09 - 8/15/22 .................... 6,046,942 6,730,963 GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ................... 7,936,285 9,061,750 GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 .................. 5,980,343 6,866,764 GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 .................. 4,635,885 5,243,778 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................... 1,221,917 1,391,969 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 5,937,640 6,880,277 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 4,721,707 5,401,049 GNMA I SF 30 Year, 13.00%, 8/15/10 - 9/15/15 ................... 5,117,412 5,900,096 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 42,159 45,862 GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 13,208 14,841 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 37,161,527 35,337,002 GNMA II SF 30 Year, 5.00%, 7/20/33 - 7/20/38 ................... 351,295,721 343,521,418 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 183,951,359 180,105,944 GNMA II SF 30 Year, 5.50%, 6/20/34 - 8/20/38 ................... 650,402,539 649,836,484 GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 131,316,603 131,242,946 GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 77,762,616 77,699,384 GNMA II SF 30 Year, 5.50%, 6/20/38 ............................. 112,315,617 112,180,183 GNMA II SF 30 Year, 6.00%, 10/20/23 - 10/20/37 ................. 490,549,633 497,819,784 GNMA II SF 30 Year, 6.00%, 1/20/38 ............................. 73,915,489 75,004,573 GNMA II SF 30 Year, 6.00%, 7/20/38 ............................. 73,795,789 74,883,109
96 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------- ---------------- -------------- MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 6.00%, 8/20/38 ............................. $ 79,888,707 $81,065,802 GNMA II SF 30 Year, 6.50%, 6/20/24 - 3/20/34 ................... 65,131,148 66,953,362 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................... 34,922,587 36,523,516 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .................. 6,394,868 6,875,203 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................... 3,048,761 3,330,152 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................... 1,596,085 1,754,921 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 .................. 484,677 530,886 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ................... 305,653 341,101 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 .................. 612,238 698,701 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 .................. 1,649,323 1,881,419 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 .................. 269,473 311,410 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 .................. 137,898 157,625 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 .................. 271,495 313,833 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ................ 202,232 233,805 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ................. 212,715 250,155 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,550,072,650) ......... 6,544,920,621 --------------
SHARES ---------------- SHORT TERM INVESTMENTS 7.1% MONEY MARKET FUNDS (COST $268,656,075) 3.9% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.98% ............................................ 268,656,075 268,656,075 --------------
PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENTS (COST $225,485,000) 3.2% (c) Barclays Capital Inc., 0.20%, 10/01/08 (Maturity Value $225,486,253) Collateralized by U.S. Treasury Note, 4.00%, 8/31/09 .............................................. $ 225,485,000 225,485,000 -------------- TOTAL INVESTMENTS (COST $7,044,213,725) 101.1% ................. 7,039,061,696 OTHER ASSETS, LESS LIABILITIES (1.1)% .......................... (73,630,644) -------------- NET ASSETS 100.0% .............................................. $6,965,431,052 ==============
See Selected Portfolio Abbreviations on page 106. (a) A portion or all of the security purchased on a TBA basis. See Note 1(d). (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (c) See Note 1(c) regarding repurchase agreements. The accompanying notes are an integral part of these financial statements. Annual Report | 97 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ CLASS A 2008 2007 2006 2005 2004 ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) .................... 0.41 0.40 0.43 0.45 0.43 Net realized and unrealized gains (losses) .. (1.93) 2.16 0.37 2.42 1.33 ---------- ---------- ---------- ---------- ---------- Total from investment operations ............... (1.52) 2.56 0.80 2.87 1.76 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ....................... (0.40) (0.40) (0.41) (0.44) (0.40) Net realized gains .......................... (0.74) (0.47) (0.09) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions ............................ (1.14) (0.87) (0.50) (0.44) (0.40) ---------- ---------- ---------- ---------- ---------- Redemption fees(c, d) .......................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ................... $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16 ========== ========== ========== ========== ========== Total returne(e) ............................... (11.63)% 20.32% 6.69% 28.81% 20.40% RATIOS TO AVERAGE NET ASSETS Expenses ....................................... 0.74%(f) 0.75%(f) 0.76%(f) 0.78%(f) 0.80% Net investment income .......................... 2.92% 2.83% 3.54% 3.92% 4.49% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $1,769,397 $2,157,614 $1,926,732 $1,986,034 $1,450,832 Portfolio turnover rate ........................ 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 98 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------- CLASS B 2008 2007 2006 2005 2004 ------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.33 0.33 0.37 0.39 0.38 Net realized and unrealized gains (losses) .... (1.91) 2.15 0.38 2.42 1.33 ------- -------- -------- -------- -------- Total from investment operations ................. (1.58) 2.48 0.75 2.81 1.71 ------- -------- -------- -------- -------- Less distributions from: Net investment income ......................... (0.33) (0.33) (0.35) (0.39) (0.36) Net realized gains ............................ (0.74) (0.47) (0.09) -- -- ------- -------- -------- -------- -------- Total distributions .............................. (1.07) (0.80) (0.44) (0.39) (0.36) ------- -------- -------- -------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- ------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15 ======= ======== ======== ======== ======== Total return(e) .................................. (12.04)% 19.66% 6.25% 28.11% 19.71% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.24%(f) 1.26%(f) 1.26%(f) 1.28%(f) 1.30% Net investment income ............................ 2.42% 2.32% 3.04% 3.42% 3.99% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $92,695 $127,587 $133,824 $154,277 $127,105 Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 99 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------- CLASS C 2008 2007 2006 2005 2004 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ...................... 0.33 0.33 0.37 0.39 0.38 Net realized and unrealized gains (losses) .... (1.91) 2.15 0.37 2.42 1.33 -------- -------- -------- -------- -------- Total from investment operations ................. (1.58) 2.48 0.74 2.81 1.71 -------- -------- -------- -------- -------- Less distributions from: Net investment income ......................... (0.33) (0.33) (0.35) (0.39) (0.36) Net realized gains ............................ (0.74) (0.47) (0.09) -- -- -------- -------- -------- -------- -------- Total distributions .............................. (1.07) (0.80) (0.44) (0.39) (0.36) -------- -------- -------- -------- -------- Redemption fees(c, d) ............................ -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year ..................... $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13 ======== ======== ======== ======== ======== Total return(e) .................................. (12.06)% 19.72% 6.19% 28.16% 19.76% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.24%(f) 1.26%(f) 1.25%f 1.28%(f) 1.30% Net investment income ............................ 2.42% 2.32% 3.05% 3.42% 3.99% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $339,247 $424,977 $391,509 $435,714 $283,747 Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 100 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------- CLASS R 2008 2007 2006 2005 2004 ------- ------- ------- ------- ------- ------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 14.54 $ 12.86 $ 12.57 $ 10.15 $ 8.79 ------- ------- ------- ------- ------ Income from investment operations(a): Net investment income(b) ...................... 0.36 0.35 0.39 0.43 0.39 Net realized and unrealized gains (losses) .... (1.92) 2.16 0.36 2.40 1.34 ------- ------- ------- ------- ------ Total from investment operations ................. (1.56) 2.51 0.75 2.83 1.73 ------- ------- ------- ------- ------ Less distributions from: Net investment income ......................... (0.35) (0.36) (0.37) (0.41) (0.37) Net realized gains ............................ (0.74) (0.47) (0.09) -- -- ------- ------- ------- ------- ------ Total distributions .............................. (1.09) (0.83) (0.46) (0.41) (0.37) ------- ------- ------- ------- ------ Redemption fees(c, d) ............................ -- -- -- -- -- ------- ------- ------- ------- ------ Net asset value, end of year ..................... $ 11.89 $ 14.54 $ 12.86 $ 12.57 $10.15 ======= ======= ======= ======= ====== Total return(e) .................................. (11.92)% 19.92% 6.29% 28.35% 20.02% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 1.09%(f) 1.11%(f) 1.11%(f) 1.13%(f) 1.15% Net investment income ............................ 2.57% 2.47% 3.19% 3.57% 4.14% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $36,596 $41,845 $27,736 $14,649 $1,590 Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 101 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ ADVISOR CLASS 2008 2007 2006 2005 2004 ------------- ------- ------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84 ------- ------- -------- -------- ------- Income from investment operations(a): Net investment income(b) ...................... 0.42 0.42 0.45 0.48 0.44 Net realized and unrealized gains (losses) .... (1.92) 2.17 0.38 2.42 1.34 ------- ------- -------- -------- ------- Total from investment operations ................. (1.50) 2.59 0.83 2.90 1.78 ------- ------- -------- -------- ------- Less distributions from: Net investment income ......................... (0.42) (0.43) (0.43) (0.46) (0.42) Net realized gains ............................ (0.74) (0.47) (0.09) -- -- ------- ------- -------- -------- ------- Total distributions .............................. (1.16) (0.90) (0.52) (0.46) (0.42) ------- ------- -------- -------- ------- Redemption fees(c, d) ............................ -- -- -- -- -- ------- ------- -------- -------- ------- Net asset value, end of year ..................... $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20 ======= ======= ======== ======== ======= Total return ..................................... (11.45)% 20.43% 6.88% 29.00% 20.48% RATIOS TO AVERAGE NET ASSETS Expenses ......................................... 0.59%(e) 0.61%(e) 0.61%(e) 0.63%(e) 0.65% Net investment income ............................ 3.07% 2.97% 3.69% 4.07% 4.64% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $58,817 $86,823 $103,041 $110,249 $51,586 Portfolio turnover rate .......................... 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 102 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------- --------------- COMMON STOCKS 95.9% DIVERSIFIED TELECOMMUNICATION SERVICES 2.7% AT&T Inc. .......................................... United States 1,200,000 $ 33,504,000 Verizon Communications Inc. ........................ United States 900,000 28,881,000 --------------- 62,385,000 --------------- ELECTRIC UTILITIES 49.7% Allegheny Energy Inc. .............................. United States 300,000 11,031,000 American Electric Power Co. Inc. ................... United States 1,300,000 48,139,000 Cleco Corp. ........................................ United States 1,000,000 25,250,000 Duke Energy Corp. .................................. United States 3,800,000 66,234,000 Edison International ............................... United States 1,759,000 70,184,100 Entergy Corp. ...................................... United States 1,750,000 155,767,500 Exelon Corp. ....................................... United States 2,200,000 137,764,000 FirstEnergy Corp. .................................. United States 1,700,000 113,883,000 FPL Group Inc. ..................................... United States 1,700,000 85,510,000 Hawaiian Electric Industries Inc. .................. United States 400,000 11,604,000 Northeast Utilities ................................ United States 1,000,000 25,650,000 Pepco Holdings Inc. ................................ United States 1,300,000 29,783,000 Pinnacle West Capital Corp. ........................ United States 800,000 27,528,000 Portland General Electric Co. ...................... United States 1,200,000 28,392,000 PPL Corp. .......................................... United States 2,000,000 74,040,000 Progress Energy Inc. ............................... United States 1,400,000 60,382,000 Sierra Pacific Resources ........................... United States 4,500,000 43,110,000 The Southern Co. ................................... United States 2,500,000 94,225,000 UIL Holdings Corp. ................................. United States 230,400 7,909,632 Westar Energy Inc. ................................. United States 1,080,600 24,897,024 --------------- 1,141,283,256 --------------- GAS UTILITIES 1.5% AGL Resources Inc. ................................. United States 800,000 25,104,000 Southwest Gas Corp. ................................ United States 300,000 9,078,000 --------------- 34,182,000 --------------- MULTI-UTILITIES 38.5% Alliant Energy Corp. ............................... United States 1,200,000 38,652,000 Ameren Corp. ....................................... United States 1,200,000 46,836,000 CenterPoint Energy Inc. ............................ United States 1,700,000 24,769,000 CMS Energy Corp. ................................... United States 300,000 3,741,000 Consolidated Edison Inc. ........................... United States 800,000 34,368,000 Dominion Resources Inc. ............................ United States 2,300,000 98,394,000 DTE Energy Co. ..................................... United States 500,000 20,060,000 GDF Suez ........................................... France 700,000 35,941,186 Integrys Energy Group Inc. ......................... United States 700,000 34,958,000 National Grid PLC .................................. United Kingdom 4,987,755 63,302,955 PG&E Corp. ......................................... United States 2,400,000 89,880,000 PNM Resources Inc. ................................. United States 855,720 8,762,573 Public Service Enterprise Group Inc. ............... United States 2,200,000 72,138,000 Puget Energy Inc. .................................. United States 1,725,000 46,057,500 RWE AG ............................................. Germany 300,000 28,675,581
Annual Report | 103 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------- --------------- COMMON STOCKS (CONTINUED) MULTI-UTILITIES (CONTINUED) SCANA Corp. ........................................ United States 900,000 $ 35,037,000 Sempra Energy ...................................... United States 1,600,000 80,752,000 United Utilities Group PLC ......................... United Kingdom 960,189 11,914,574 Vectren Corp. ...................................... United States 600,000 16,710,000 Wisconsin Energy Corp. ............................. United States 1,000,000 44,900,000 Xcel Energy Inc. ................................... United States 2,400,000 47,976,000 --------------- 883,825,369 --------------- OIL, GAS & CONSUMABLE FUELS 3.0% Spectra Energy Corp. ............................... United States 1,900,000 45,220,000 The Williams Cos. Inc. ............................. United States 1,000,000 23,650,000 --------------- 68,870,000 --------------- WATER UTILITIES 0.5% American Water Works Co. Inc. ...................... United States 500,000 10,750,000 --------------- TOTAL COMMON STOCKS (COST $1,557,072,533) .......... 2,201,295,625 --------------- CONVERTIBLE PREFERRED STOCKS (COST $13,497,475) 0.5% ELECTRIC UTILITIES 0.5% CMS Energy Trust I, 7.75%, cvt. pfd. ............... United States 270,050 12,044,932 --------------- Principal Amount(a) ------------- CORPORATE BONDS 3.3% ELECTRIC UTILITIES 1.6% MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 .................................. United States $ 25,000,000 27,529,500 Northeast Generation Co., senior secured note, B-1, 8.812%, 10/15/26 ................................ United States 7,356,445 8,074,699 --------------- 35,604,199 --------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2% Energy Future Holdings Corp., senior note, P, 5.55%, 11/15/14 .............................. United States 32,300,000 24,253,973 R, 6.55%, 11/15/34 .............................. United States 5,700,000 3,524,128 --------------- 27,778,101 --------------- MULTI-UTILITIES 0.5% Aquila Inc., senior note, 9.95%, 2/01/11 .................................. United States 6,000,000 6,217,380 8.27%, 11/15/21 ................................. United States 6,100,000 5,961,225 --------------- 12,178,605 --------------- TOTAL CORPORATE BONDS (COST $76,949,936) ........... 75,560,905 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,647,519,944) ........................... 2,288,901,462 ---------------
104 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------- --------------- SHORT TERM INVESTMENT (COST $2,283,674) 0.1% MONEY MARKET FUND 0.1% (b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.98% ................................ United States 2,283,674 $ 2,283,674 --------------- TOTAL INVESTMENTS (COST $1,649,803,618) 99.8% ...... 2,291,185,136 OTHER ASSETS, LESS LIABILITIES 0.2% ................ 5,567,551 --------------- NET ASSETS 100.0% .................................. $ 2,296,752,687 ===============
(a) The principal amount is stated in U.S. dollars unless otherwise indicated. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. The accompanying notes are an integral part of these financial statements. Annual Report | 105 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2008 CURRENCY ABBREVIATIONS EUR - Euro SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLB - Federal Home Loan Bank FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GP - Graduated Payment MTN - Medium Term Note PIK - Payment-In-Kind SF - Single Family The accompanying notes are an integral part of these financial statements. 106 | Annual Report FRANKLIN CUSTODIAN FUNDS FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES September 30, 2008
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------ -------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................. $251,742,286 $1,077,802,405 $52,876,329,339 Cost - Non-controlled affiliated issuers (Note 10) ....... -- -- 1,866,793,008 Cost - Sweep Money Fund (Note 7) ......................... 21,757,500 1,560,596 268,661,516 Cost - Repurchase agreements ............................. 12,228,168 -- 1,864,985,975 ------------ -------------- --------------- Total cost of investments ................................ $285,727,954 $1,079,363,001 $56,876,769,838 ------------ -------------- --------------- Value - Unaffiliated issuers ............................. $429,450,137 $2,341,737,593 $41,543,983,549 Value - Non-controlled affiilated issuers (Note 10) ...... -- -- 2,662,143,765 Value - Sweep Money Fund (Note 7) ........................ 21,757,500 1,560,596 268,661,516 Value - Repurchase agreements ............................ 12,228,168 -- 1,864,985,975 ------------ -------------- --------------- Total value of investments(a) ............................ 463,435,805 2,343,298,189 46,339,774,805 Cash ........................................................ -- 92,078 11,636,794 Receivables: Investment securities sold ............................... -- 1,358,440 729,144,737 Capital shares sold ...................................... 380,224 2,109,578 63,311,100 Dividends and interest ................................... 134,721 2,286,558 679,490,375 ------------ -------------- --------------- Total assets .......................................... 463,950,750 2,349,144,843 47,823,357,811 ------------ -------------- --------------- Liabilities: Payables: Investment Securities purchased .......................... 7,816,581 -- 1,023,109,049 Capital shares redeemed .................................. 656,151 4,952,662 212,372,950 Affiliates ............................................... 547,435 2,547,815 43,073,921 Unaffiliated transfer agent fees ......................... 84,706 432,365 5,115,983 Payable upon return of securities loaned .................... -- -- 29,080,893 Unrealized depreciation on unfunded loan commitments (Note 9) -- -- 234,796 Accrued expenses and other liabiilties ...................... 71,743 232,777 3,014,908 ------------ -------------- --------------- Total liabilities ..................................... 9,176,616 8,165,619 1,316,002,500 ------------ -------------- --------------- Net assets, at value ............................... $454,774,134 $2,340,979,224 $46,507,355,311 ------------ -------------- --------------- Net assets consist of: Paid-in capital ............................................. $249,241,823 $1,083,490,921 $57,059,155,974 Undistributed net investment income ......................... -- 10,241,399 151,244,134 Net unrealized appreciation (depreciation) .................. 177,707,851 1,263,935,188 (10,537,481,135) Accumulated net realized gain (loss) ........................ 27,824,460 (16,688,284) (165,563,662) ------------ -------------- --------------- Net assets, at value ............................... $454,774,134 $2,340,979,224 $46,507,355,311 ------------ -------------- ---------------
(a) The Franklin Income Fund includes $27,124,727 of securities loaned. The accompanying notes are an integral part of these financial statements. Annual Report | 107 FRANKLIN CUSTODIAN FUNDS FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2008
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------ -------------- --------------- CLASS A: Net assets, at value ................................................ $388,843,211 $1,708,612,045 $26,892,972,557 ------------ -------------- --------------- Shares outstanding .................................................. 15,632,510 45,967,776 13,612,330,541 ------------ -------------- --------------- Net asset value per share(a) ........................................ $ 24.87 $ 37.17 $ 1.98 ------------ -------------- --------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ................................. $ 26.39 $ 39.44 $ 2.07 ------------ -------------- --------------- CLASS B: Net assets, at value ................................................ $ 10,703,816 $ 89,778,767 $ 2,428,765,169 ------------ -------------- --------------- Shares outstanding .................................................. 455,933 2,532,916 1,234,208,794 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) ............. $ 23.48 $ 35.44 $ 1.97 ------------ -------------- --------------- CLASS B1: Net assets, at value ................................................ -- -- $ 224,712,648 ------------ -------------- --------------- Shares outstanding .................................................. -- -- 113,663,654 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) ............. -- -- $ 1.98 ------------ -------------- --------------- CLASS C: Net assets, at value ................................................ $ 53,289,341 $ 255,425,099 $12,433,142,763 ------------ -------------- --------------- Shares outstanding .................................................. 2,294,150 7,268,101 6,249,871,016 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) ............. $ 23.23 $ 35.14 $ 1.99 ------------ -------------- --------------- CLASS R: Net assets, at value ................................................ -- $ 30,175,455 $ 267,955,857 ------------ -------------- --------------- Shares outstanding .................................................. -- 818,448 137,082,084 ------------ -------------- --------------- Net asset value and maximum offering price per share ................ -- $ 36.87 $ 1.95 ------------ -------------- --------------- ADVISOR CLASS: Net assets, at value ................................................ $ 1,937,766 $ 256,987,858 $ 4,259,806,317 ------------ -------------- --------------- Shares outstanding .................................................. 77,829 6,898,141 2,166,945,698 ------------ -------------- --------------- Net asset value and maximum offering price per share ................ $ 24.90 $ 37.25 $ 1.97 ------------ -------------- ---------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 108 | Annual Report FRANKLIN CUSTODIAN FUNDS FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2008
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........... $ 6,550,072,650 $ 1,647,519,944 Cost - Sweep Money Fund (Note 7) ...... 268,656,075 2,283,674 Cost - Repurchase agreements .......... 225,485,000 -- --------------- --------------- Total cost of investments ............. $ 7,044,213,725 $ 1,649,803,618 --------------- --------------- Value - Unaffiliated issuers .......... $ 6,544,920,621 $ 2,288,901,462 Value - Sweep Money Fund (Note 7) ..... 268,656,075 2,283,674 Value - Repurchase agreements ......... 225,485,000 -- --------------- --------------- Total value of investments ............ 7,039,061,696 2,291,185,136 Cash ..................................... 3,618 -- Receivables: Investment securities sold ............ -- 5,012,592 Capital shares sold ................... 51,645,997 2,083,560 Dividends and interest ................ 29,560,732 6,750,901 --------------- --------------- Total assets ....................... 7,120,272,043 2,305,032,189 --------------- --------------- Liabilities: Payables: Investment Securities purchased ....... 150,132,813 -- Capital shares redeemed ............... -- 5,808,087 Affiliates ............................ 3,531,786 1,960,331 Unaffiliated transfer agent fees ...... 811,317 308,167 Accrued expenses and other liabiilties ... 365,075 202,917 --------------- --------------- Total liabilities .................. 154,840,991 8,279,502 --------------- --------------- Net assets, at value ............ $ 6,965,431,052 $ 2,296,752,687 --------------- --------------- Net assets consist of: Paid-in capital .......................... $ 7,375,477,253 $ 1,633,844,922 Undistributed net investment income ...... 3,642,998 6,193,982 Net unrealized appreciation (depreciation) (5,152,029) 641,371,032 Accumulated net realized gain (loss) ..... (408,537,170) 15,342,751 --------------- --------------- Net assets, at value ............ $ 6,965,431,052 $ 2,296,752,687 --------------- ---------------
The accompanying notes are an integral part of these financial statements. Annual Report | 109 FRANKLIN CUSTODIAN FUNDS FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2008
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- CLASS A: Net assets, at value ................................................ $5,353,960,509 $1,769,397,237 --------------- -------------- Shares outstanding .................................................. 829,532,460 148,425,313 --------------- -------------- Net asset value per share(a) ........................................ $ 6.45 $ 11.92 --------------- -------------- Maximum offering price per share (net asset value per share / 95.75%) $ 6.74 $ 12.45 --------------- -------------- CLASS B: Net assets, at value ................................................ $ 284,648,740 $ 92,695,069 --------------- -------------- Shares outstanding .................................................. 44,169,507 7,782,031 --------------- -------------- Net asset value and maximum offering price per share(a) ............. $ 6.44 $ 11.91 --------------- -------------- CLASS C: Net assets, at value ................................................ $ 610,147,602 $ 339,246,835 --------------- -------------- Shares outstanding .................................................. 95,025,071 28,553,925 --------------- -------------- Net asset value and maximum offering price per share(a) ............. $ 6.42 $ 11.88 --------------- -------------- CLASS R: Net assets, at value ................................................ $ 104,648,407 $ 36,596,226 --------------- -------------- Shares outstanding .................................................. 16,227,029 3,078,013 --------------- -------------- Net asset value and maximum offering price per share ................ $ 6.45 $ 11.89 --------------- -------------- ADVISOR CLASS: Net assets, at value ................................................ $ 612,025,794 $ 58,817,320 --------------- -------------- Shares outstanding .................................................. 94,587,567 4,910,563 --------------- -------------- Net asset value and maximum offering price per share ................ $ 6.47 $ 11.98 --------------- --------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. The accompanying notes are an integral part of these financial statements. 110 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended September 30, 2008
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------- ---------------- Investment income: Dividends: Unaffiliated issuers ..................................................... $ 3,653,727 $ 39,462,563 $ 1,164,911,091 Non-controlled affiliated issuers (Note 10) .............................. -- -- 181,060,531 Sweep Money Fund (Note 7) ................................................ 331,038 828,060 6,579,761 Interest .................................................................... 10,276 -- 2,758,067,928 Income from Securities loaned ............................................... 42,842 -- 3,041,178 ------------- ------------- ---------------- Total investment income ............................................... 4,037,883 40,290,623 4,113,660,489 ------------- ------------- ---------------- Expenses: Management fees (Note 3a) ................................................... 2,755,024 12,544,223 219,689,327 Distribution fees: (Note 3c) Class A .................................................................. 1,190,877 4,865,049 50,223,685 Class B .................................................................. 145,709 1,160,677 32,557,482 Class B1 ................................................................. -- -- 2,092,799 Class C .................................................................. 652,161 3,053,322 99,231,862 Class R .................................................................. -- 294,059 1,497,520 Transfer agent fees (Note 3e) ............................................... 1,135,236 4,528,767 42,660,610 Custodian fees (Note 4) ..................................................... 13,114 53,202 1,252,200 Reports to shareholders ..................................................... 86,463 396,386 5,112,111 Registration and filing fees ................................................ 93,265 161,600 1,059,141 Professional fees ........................................................... 32,615 56,575 530,022 Trustees' fees and expenses ................................................. 3,438 16,704 317,614 Other ....................................................................... 31,675 41,683 1,411,825 ------------- ------------- ---------------- Total expenses ........................................................ 6,139,577 27,172,247 457,636,198 Expense reductions (Note 4) ........................................... (443) (195) (565,564) ------------- ------------- ---------------- Net expenses ....................................................... 6,139,134 27,172,052 457,070,634 ------------- ------------- ---------------- Net investment income (loss) .................................... (2,101,251) 13,118,571 3,656,589,855 ------------- ------------- ---------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers .................................................. 43,424,048 93,114,666 (208,344,666) Non-controlled affiliated issuers (Note 10) ........................... -- -- 130,968,043 Realized gain distributions from REITs ................................... -- -- 4,014,297 Foreign currency transactions ............................................ (40,773) 3,793 172,944 ------------- ------------- ---------------- Net realized gain (loss) ........................................ 43,383,275 93,118,459 (73,189,382) ------------- ------------- ---------------- Net change in unrealized appreciation (depreciation) on: Investments .............................................................. (169,942,555) (703,968,727) (16,753,477,846) Translation of other assets and liabilities denominated in foreign currencies ............................................................ -- -- (340,310) ------------- ------------- ---------------- Net change in unrealized appreciation (depreciation) ............ (169,942,555) (703,968,727) (16,753,818,156) ------------- ------------- ---------------- Net realized and unrealized gain (loss) ..................................... (126,559,280) (610,850,268) (16,827,007,538) ------------- ------------- ---------------- Net increase (decrease) in net assets resulting from operations ............. $(128,660,531) $(597,731,697) $(13,170,417,683) ============= ============= ================
The accompanying notes are an integral part of these financial statements. Annual Report | 111 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended September 30, 2008
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------ ------------- Investment income: Dividends: Unaffiliated issuers ........................................................ $ -- $ 92,993,759 Sweep Money Fund (Note 7) ................................................... 6,532,256 778,899 Interest ....................................................................... 350,685,853 6,739,863 ------------ ------------- Total investment income .................................................. 357,218,109 100,512,521 ------------ ------------- Expenses: Management fees (Note 3a) ...................................................... 29,639,832 12,462,430 Distribution fees: (Note 3c) Class A ..................................................................... 7,030,144 3,063,384 Class B ..................................................................... 1,945,274 765,707 Class C ..................................................................... 3,230,384 2,648,265 Class R ..................................................................... 441,045 213,711 Transfer agent fees (Note 3e) .................................................. 8,426,391 3,125,123 Custodian fees (Note 4) ........................................................ 115,560 83,866 Reports to shareholders ........................................................ 537,561 288,905 Registration and filing fees ................................................... 238,166 153,415 Professional fees .............................................................. 86,501 24,642 Trustees' fees and expenses .................................................... 38,425 16,324 Other .......................................................................... 379,422 70,324 ------------ ------------- Total expenses ........................................................... 52,108,705 22,916,096 Expense reductions (Note 4) .............................................. (29,554) (14,191) ------------ ------------- Net expenses .......................................................... 52,079,151 22,901,905 ------------ ------------- Net investment income .............................................. 305,138,958 77,610,616 ------------ ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................................. (4,950,231) 55,038,209 Foreign currency transactions ............................................... -- 188,661 ------------ ------------- Net realized gain (loss) ........................................... (4,950,231) 55,226,870 ------------ ------------- Net change in unrealized appreciation (depreciation) on: Investments ................................................................. 74,540,856 (444,636,557) Translation of other assets and liabiilties denominated in foreign currencies -- (11,188) ------------ ------------- Net change in unrealized appreciation (depreciation) ............... 74,540,856 (444,647,745) ------------ ------------- Net realized and unrealized gain (loss) ........................................... 69,590,625 (389,420,875) ------------ ------------- Net increase (decrease) in net assets resulting from operations ................... $374,729,583 $(311,810,259) ============ =============
The accompanying notes are an integral part of these financial statements. 112 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, ----------------------------- ------------------------------- 2008 2007 2008 2007 ------------- ------------- -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................... $ (2,101,251) $ (2,484,227) $ 13,118,571 $ 7,383,921 Net realized gain (loss) from investments and foreign currency transactions ............................... 43,383,275 54,267,988 93,118,459 8,027,309 Net change in unrealized appreciation (depreciation) on investments ......................................... (169,942,555) 88,303,700 (703,968,727) 436,966,418 ------------- ------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations ....................................... (128,660,531) 140,087,461 (597,731,697) 452,377,648 ------------- ------------- -------------- -------------- Distributions to shareholders from: Net investment income: Class A ............................................. -- -- (6,070,923) (4,596,420) Class R ............................................. -- -- (37,603) (7,075) Advisor Class ....................................... -- -- (1,821,203) (1,417,769) Net realized gains: Class A ............................................. (11,692,397) -- -- -- Class B ............................................. (381,099) -- -- -- Class C ............................................. (1,631,082) -- -- -- ------------- ------------- -------------- -------------- Total distributions to shareholders .................... (13,704,578) -- (7,929,729) (6,021,264) ------------- ------------- -------------- -------------- Capital share transactions: (Note 2) Class A ............................................. (43,399,423) (159,197,616) 15,676,618 111,946,191 Class B ............................................. (2,207,134) (5,690,695) (23,505,949) (5,331,820) Class C ............................................. (13,103) (13,236,699) (17,756,728) 18,194,989 Class R ............................................. -- -- (9,619,605) 8,345,533 Advisor Class ....................................... 2,370,407 -- (37,246,106) 34,972,750 ------------- ------------- -------------- -------------- Total Capital share transactions ....................... (43,249,253) (178,125,010) (72,451,770) 168,127,643 ------------- ------------- -------------- -------------- Redemption fees ........................................ 2,715 3,893 7,384 8,351 ------------- ------------- -------------- -------------- Net increase (decrease) in net assets ............... (185,611,647) (38,033,656) (678,105,812) 614,492,378 Net assets: Beginning of year ...................................... 640,385,781 678,419,437 3,019,085,036 2,404,592,658 ------------- ------------- -------------- -------------- End of year ............................................ $ 454,774,134 $ 640,385,781 $2,340,979,224 $3,019,085,036 ============= ============= ============== ============== Undistributed net investment income included in net assets: End of year ............................................ $ -- $ -- $ 10,241,399 $ 5,085,267 ============= ============= ============== ==============
The accompanying notes are an integral part of these financial statements. Annual Report | 113 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, ---------------------------------- ------------------------------- 2008 2007 2008 2007 ---------------- --------------- -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ................................ $ 3,656,589,855 $ 2,885,381,172 $ 305,138,958 $ 301,720,105 Net realized gain (loss) from investments, realized gain distributions from REITs, and foreign currency transactions ...................................... (73,189,382) 1,473,778,958 (4,950,231) (2,097,105) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ..... (16,753,818,156) 2,517,987,350 74,540,856 (10,362,317) ---------------- --------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations ............................. (13,170,417,683) 6,877,147,480 374,729,583 289,260,683 ---------------- --------------- -------------- -------------- Distributions to shareholders from: Net investment income: Class A ........................................... (2,070,078,091) (1,687,207,815) (255,332,116) (264,748,989) Class B ........................................... (175,223,876) (173,469,301) (13,147,734) (16,375,700) Class B1 .......................................... (18,498,215) (21,754,097) -- -- Class C ........................................... (864,273,614) (694,869,015) (21,546,227) (19,237,012) Class R ........................................... (17,491,311) (11,742,767) (3,921,392) (3,515,272) Advisor Class ..................................... (358,190,789) (280,791,335) (27,206,570) (22,110,321) Net realized gains: Class A ........................................... (800,081,992) (420,454,280) -- -- Class B ........................................... (82,519,889) (56,272,957) -- -- Class B1 .......................................... (8,423,689) (6,844,643) -- -- Class C ........................................... (363,101,410) (190,856,659) -- -- Class R ........................................... (6,753,197) (2,957,517) -- -- Advisor Class ..................................... (142,671,699) (62,928,530) -- -- ---------------- --------------- -------------- -------------- Total distributions to shareholders ..................... (4,907,307,772) (3,610,148,916) (321,154,039) (325,987,294) ---------------- --------------- -------------- -------------- Capital share transactions: (Note 2) Class A ........................................... 1,818,347,709 6,982,490,371 236,684,954 (188,222,491) Class B ........................................... (326,601,311) (237,976,392) (35,014,568) (69,804,640) Class B1 .......................................... (76,335,994) (91,477,067) -- -- Class C ........................................... 1,004,888,472 3,211,521,930 189,199,415 (3,037,771) Class R ........................................... 78,037,080 89,672,613 29,664,847 3,854,638 Advisor Class ..................................... (219,327,033) 2,131,138,371 136,835,144 85,580,325 ---------------- --------------- -------------- -------------- Total Capital share transactions ........................ 2,279,008,923 12,085,369,826 557,369,792 (171,629,939) ---------------- --------------- -------------- -------------- Redemption fees ......................................... 176,722 231,167 78,148 35,787 ---------------- --------------- -------------- -------------- Net increase (decrease) in net assets .......... (15,798,539,810) 15,352,599,557 611,023,484 (208,320,763) Net assets: Beginning of year .................................... 62,305,895,121 46,953,295,564 6,354,407,568 6,562,728,331 ---------------- --------------- -------------- -------------- End of year .......................................... $ 46,507,355,311 $62,305,895,121 $6,965,431,052 $6,354,407,568 ================ =============== ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year .......................................... $ 151,244,134 $ (9,898,818) $ 3,642,998 $ 4,662,479 ================ =============== ============== ==============
The accompanying notes are an integral part of these financial statements. 114 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN UTILITIES FUND YEAR ENDED SEPTEMBER 30, ------------------------------- 2008 2007 -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ................................................. $ 77,610,616 $ 77,162,851 Net realized gain (loss) from investments and foreign currency transactions ....................................................... 55,226,870 122,861,109 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ......................................................... (444,647,745) 304,461,563 -------------- -------------- Net increase (decrease) in net assets resulting from operations (311,810,259) 504,485,523 -------------- -------------- Distributions to shareholders from: Net investment income: Class A ............................................................ (60,642,671) (60,045,625) Class B ............................................................ (2,772,274) (3,213,589) Class C ............................................................ (9,718,344) (10,097,373) Class R ............................................................ (1,082,816) (958,675) Advisor Class ...................................................... (2,496,434) (2,754,192) Net realized gains: Class A ............................................................ (107,493,008) (68,750,277) Class B ............................................................ (6,261,449) (4,691,564) Class C ............................................................ (21,133,249) (14,079,324) Class R ............................................................ (2,175,474) (1,073,396) Advisor Class ...................................................... (4,410,835) (2,861,866) -------------- -------------- Total distributions to shareholders ...................................... (218,186,554) (168,525,881) -------------- -------------- Capital share transactions: (Note 2) Class A ............................................................... 15,831,422 (21,840,975) Class B ............................................................... (12,918,491) (23,358,533) Class C ............................................................... (7,376,287) (17,678,674) Class R ............................................................... 3,080,978 10,467,103 Advisor Class ......................................................... (10,722,085) (27,554,529) -------------- -------------- Total Capital share transactions ......................................... (12,104,463) (79,965,608) -------------- -------------- Redemption fees .......................................................... 8,502 10,165 -------------- -------------- Net increase (decrease) in net assets ........................... (542,092,774) 256,004,199 Net assets: Beginning of year ........................................................ 2,838,845,461 2,582,841,262 -------------- -------------- End of year .............................................................. $2,296,752,687 $2,838,845,461 ============== ============== Undistributed net investment income included in net assets: End of year .............................................................. $ 6,193,982 $ 5,263,467 ============== ==============
The accompanying notes are an integral part of these financial statements. Annual Report | 115 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as a diversified, open-end investment company, consisting of five funds (Funds). The classes of shares offered within each of the Funds are indicated below. Effective May 15, 2008, the Franklin DynaTech Fund began offering a new class of shares, Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A, CLASS B, CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, CLASS C & ADVISOR CLASS CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS ----------------------- ---------------------------------------- -------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. 116 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. Annual Report | 117 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The Funds may also enter into joint repurchase agreements whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. All repurchase agreements held by the Funds at year end had been entered into on September 30, 2008. Repurchase agreements are valued at cost. D. SECURITIES PURCHASED ON A DELAYED DELIVERY AND TBA BASIS The Funds may purchase securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. F. SECURITIES LENDING Certain funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at 118 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. SECURITIES LENDING (CONTINUED) the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in short-term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. G. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the fund invests are generally readily marketable, but may be subject to some restrictions on resale. H. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of September 30, 2008, and have determined that no provision for income tax is required in the Funds' financial statements. I. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. Annual Report | 119 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. J. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. K. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the Funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. L. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 120 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At September 30, 2008, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND --------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ---------- ------------- CLASS A SHARES: Year ended September 30, 2008 Shares sold ........................ 2,459,851 $ 74,264,719 8,827,142 $ 378,328,625 Shares issued in reinvestment of distributions ................ 327,827 10,398,720 122,947 5,584,261 Shares redeemed .................... (4,271,990) (128,062,862) (8,782,747) (368,236,268) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (1,484,312) $ (43,399,423) 167,342 $ 15,676,618 ========== ============= ========== ============= Year ended September 30, 2007 Shares sold ........................ 2,290,315 $ 65,251,876 7,116,058 $ 308,077,143 Shares issued on merger (Note 12) .. -- -- 3,043,797 137,823,135 Shares issued in reinvestment of distributions ................ -- -- 101,412 4,209,599 Shares redeemed .................... (8,062,352) (224,449,492) (7,830,995) (338,163,686) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (5,772,037) $(159,197,616) 2,430,272 $ 111,946,191 ========== ============= ========== ============= CLASS B SHARES: Year ended September 30, 2008 Shares sold ........................ 52,403 $ 1,544,828 125,600 $ 5,153,957 Shares issued in reinvestment of distributions ................ 11,458 345,223 -- -- Shares redeemed .................... (148,078) (4,097,185) (714,091) (28,659,906) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (84,217) $ (2,207,134) (588,491) $ (23,505,949) ========== ============= ========== ============= Year ended September 30, 2007 Shares sold ........................ 35,535 $ 983,338 126,580 $ 5,254,130 Shares issued on merger (Note 12) .. -- -- 417,038 18,128,654 Shares redeemed .................... (251,520) (6,674,033) (685,999) (28,714,604) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (215,985) $ (5,690,695) (142,381) $ (5,331,820) ========== ============= ========== ============= CLASS C SHARES: Year ended September 30, 2008 Shares sold ........................ 463,723 $ 13,055,269 1,049,876 $ 42,650,882 Shares issued in reinvestment of distributions ................ 49,809 1,484,796 -- -- Shares redeemed .................... (531,022) (14,553,168) (1,518,464) (60,407,610) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (17,490) $ (13,103) (468,588) $ (17,756,728) ========== ============= ========== ============= Year ended September 30, 2007 Shares sold ........................ 309,370 $ 8,310,379 908,813 $ 37,554,639 Shares issued on merger (Note 12) .. -- -- 716,864 30,896,850 Shares redeemed .................... (816,939) (21,547,078) (1,217,586) (50,256,500) ---------- ------------- ---------- ------------- Net increase (decrease) ............ (507,569) $ (13,236,699) 408,091 $ 18,194,989 ========== ============= ========== =============
Annual Report | 121 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FRANKLIN GROWTH FUND(a) FUND ------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ------ ---------- ---------- ------------ CLASS R SHARES: Year ended September 30, 2008 Shares sold ........................ 1,405,234 $ 60,391,562 Shares issued in reinvestment of distributions ................ 831 37,532 Shares redeemed .................... (1,742,886) (70,048,699) ---------- ------------ Net increase (decrease) ............ (336,821) $ (9,619,605) ========== ============ Year ended September 30, 2007 Shares sold ........................ 673,616 $ 29,574,369 Shares issued on merger (Note 12) .. 111,203 4,998,560 Shares issued in reinvestment of distributions ................ 170 7,025 Shares redeemed .................... (604,060) (26,234,421) ---------- ------------ Net increase (decrease) ............ 180,929 $ 8,345,533 ========== ============ ADVISOR CLASS SHARES: Year ended September 30, 2008 Shares sold ........................ 77,884 $2,371,991 435,026 $ 18,614,125 Shares issued in reinvestment of distributions ................ -- -- 35,629 1,618,617 Shares redeemed .................... (55) (1,584) (1,391,576) (57,478,848) ------ ---------- ---------- ------------ Net increase (decrease) ............ 77,829 $2,370,407 (920,921) $(37,246,106) ====== ========== ========== ============ Year ended September 30, 2007 Shares sold ........................ 1,295,736 $ 56,171,819 Shares issued in reinvestment of distributions ................ 30,693 1,273,761 Shares redeemed .................... (517,639) (22,472,830) ---------- ------------ Net increase (decrease) ............ 808,790 $ 34,972,750 ========== ============
(a) For the period May 15, 2008 (effective date) to September 30, 2008, for Advisor Class.
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT -------------- --------------- ------------ -------------- CLASS A SHARES: Year ended September 30, 2008 Shares sold ........................ 2,544,696,021 $ 6,300,808,165 163,998,702 $1,063,757,904 Shares issued in reinvestment of distributions ................ 861,810,845 2,170,625,893 26,672,832 172,606,574 Shares redeemed .................... (2,750,408,371) (6,653,086,349) (154,570,818) (999,679,524) -------------- --------------- ------------ -------------- Net increase (decrease) ............ 656,098,495 $ 1,818,347,709 36,100,716 $ 236,684,954 ============== =============== ============ ============== Year ended September 30, 2007 Shares sold ........................ 3,628,482,534 $ 9,782,378,082 89,570,006 $ 572,054,399 Shares issued in reinvestment of distributions ................ 571,568,447 1,528,060,841 27,176,503 173,586,391 Shares redeemed .................... (1,607,011,948) (4,327,948,552) (146,074,856) (933,863,281) -------------- --------------- ------------ -------------- Net increase (decrease) ............ 2,593,039,033 $ 6,982,490,371 (29,328,347) $ (188,222,491) ============== =============== ============ ==============
122 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT -------------- --------------- ----------- ------------- CLASS B SHARES: Year ended September 30, 2008 Shares sold ........................ 27,100,787 $ 66,950,743 5,348,092 $ 34,672,758 Shares issued in reinvestment of distributions ................ 69,806,922 176,086,346 1,444,414 9,335,318 Shares redeemed .................... (235,941,388) (569,638,400) (12,232,414) (79,022,644) -------------- --------------- ----------- ------------- Net increase (decrease) ............ (139,033,679) $ (326,601,311) (5,439,908) $ (35,014,568) ============== =============== =========== ============= Year ended September 30, 2007 Shares sold ........................ 26,283,586 $ 70,278,655 3,616,339 $ 23,020,104 Shares issued in reinvestment of distributions ................ 57,504,745 152,858,061 1,811,967 11,565,622 Shares redeemed .................... (171,972,882) (461,113,108) (16,362,133) (104,390,366) -------------- --------------- ----------- ------------- Net increase (decrease) ............ (88,184,551) $ (237,976,392) (10,933,827) $ (69,804,640) ============== =============== =========== ============= CLASS B1 SHARES: Year ended September 30, 2008 Shares sold ........................ 822,057 $ 2,065,334 Shares issued in reinvestment of distributions ................ 6,648,942 16,876,257 Shares redeemed .................... (38,805,221) (95,277,585) -------------- --------------- Net increase (decrease) ............ (31,334,222) $ (76,335,994) ============== =============== Year ended September 30, 2007 Shares sold ........................ 899,431 $ 2,413,953 Shares issued in reinvestment of distributions ................ 6,473,282 17,262,644 Shares redeemed .................... (40,982,281) (111,153,664) -------------- --------------- Net increase (decrease) ............ (33,609,568) $ (91,477,067) ============== =============== CLASS C SHARES: Year ended September 30, 2008 Shares sold ........................ 1,222,445,500 $ 3,049,617,623 48,720,410 $ 314,954,793 Shares issued in reinvestment of distributions ................ 334,651,278 849,748,929 2,414,820 15,553,869 Shares redeemed .................... (1,188,226,292) (2,894,478,080) (21,953,511) (141,309,247) -------------- --------------- ----------- ------------- Net increase (decrease) ............ 368,870,486 $ 1,004,888,472 29,181,719 $ 189,199,415 ============== =============== =========== ============= Year ended September 30, 2007 Shares sold ........................ 1,644,870,588 $ 4,457,040,035 15,412,013 $ 97,975,806 Shares issued in reinvestment of distributions ................ 222,758,383 598,767,427 2,096,225 13,330,712 Shares redeemed .................... (680,795,624) (1,844,285,532) (17,971,749) (114,344,289) -------------- --------------- ----------- ------------- Net increase (decrease) ............ 1,186,833,347 $ 3,211,521,930 (463,511) $ (3,037,771) ============== =============== =========== =============
Annual Report | 123 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------ ------------------------- SHARES AMOUNT SHARES AMOUNT ------------ --------------- ---------- ------------ CLASS R SHARES: Year ended September 30, 2008 Shares sold ........................ 58,875,986 $ 144,210,207 9,784,662 $ 63,518,662 Shares issued in reinvestment of distributions ................ 8,993,345 22,370,464 589,231 3,808,045 Shares redeemed .................... (36,526,510) (88,543,591) (5,812,499) (37,661,860) ------------ --------------- ---------- ------------ Net increase (decrease) ............ 31,342,821 $ 78,037,080 4,561,394 $ 29,664,847 ============ =============== ========== ============ Year ended September 30, 2007 Shares sold ........................ 53,585,214 $ 142,909,679 4,541,307 $ 28,992,426 Shares issued in reinvestment of distributions ................ 5,151,276 13,638,691 540,550 3,451,439 Shares redeemed .................... (25,079,906) (66,875,757) (4,480,075) (28,589,227) ------------ --------------- ---------- ------------ Net increase (decrease) ............ 33,656,584 $ 89,672,613 601,782 $ 3,854,638 ============ =============== ========== ============ ADVISOR CLASS SHARES: Year ended September 30, 2008 Shares sold ........................ 150,837,000 $ 385,467,201 23,046,973 $149,358,584 Shares issued in reinvestment of distributions ................ 194,550,584 488,488,071 3,926,708 25,461,308 Shares redeemed .................... (451,931,098) (1,093,282,305) (5,837,483) (37,984,748) ------------ --------------- ---------- ------------ Net increase (decrease) ............ (106,543,514) $ (219,327,033) 21,136,198 $136,835,144 ============ =============== ========== ============ Year ended September 30, 2007 Shares sold ........................ 769,652,986 $ 2,071,994,710 12,993,585 $ 83,208,714 Shares issued in reinvestment of distributions ................ 125,446,877 334,084,120 3,251,900 20,807,294 Shares redeemed .................... (101,321,041) (274,940,459) (2,877,041) (18,435,683) ------------ --------------- ---------- ------------ Net increase (decrease) ............ 793,778,822 $ 2,131,138,371 13,368,444 $ 85,580,325 ============ =============== ========== ============
FRANKLIN UTILITIES FUND -------------------------- SHARES AMOUNT ----------- ------------ CLASS A SHARES: Year ended September 30, 2008 Shares sold ....................................... 16,043,525 $ 225,313,039 Shares issued in reinvestment of distributions .... 9,557,544 137,168,657 Shares redeemed ................................... (25,172,402) (346,650,274) ----------- ------------- Net increase (decrease) ........................... 428,667 $ 15,831,422 =========== ============= Year ended September 30, 2007 Shares sold ....................................... 16,452,979 $ 234,790,574 Shares issued in reinvestment of distributions .... 7,413,021 102,543,663 Shares redeemed ................................... (25,346,996) (359,175,212) ----------- ------------- Net increase (decrease) ........................... (1,480,996) $ (21,840,975) =========== =============
124 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN UTILITIES FUND -------------------------- SHARES AMOUNT ----------- ------------ CLASS B SHARES: Year ended September 30, 2008 Shares sold ....................................... 520,447 $ 7,346,138 Shares issued in reinvestment of distributions .... 385,638 5,555,107 Shares redeemed ................................... (1,884,233) (25,819,736) ----------- ------------ Net increase (decrease) ........................... (978,148) $(12,918,491) =========== ============ Year ended September 30, 2007 Shares sold ....................................... 350,265 $ 4,952,986 Shares issued in reinvestment of distributions .... 336,830 4,638,541 Shares redeemed ................................... (2,318,432) (32,950,060) ----------- ------------ Net increase (decrease) ........................... (1,631,337) $(23,358,533) =========== ============ CLASS C SHARES: Year ended September 30, 2008 Shares sold ....................................... 4,526,897 $ 63,185,313 Shares issued in reinvestment of distributions .... 1,256,000 18,036,872 Shares redeemed ................................... (6,474,947) (88,598,472) ----------- ------------ Net increase (decrease) ........................... (692,050) $ (7,376,287) =========== ============ Year ended September 30, 2007 Shares sold ....................................... 4,165,031 $ 59,095,738 Shares issued in reinvestment of distributions .... 944,817 12,995,547 Shares redeemed ................................... (6,325,289) (89,769,959) ----------- ------------ Net increase (decrease) ........................... (1,215,441) $(17,678,674) =========== ============ CLASS R SHARES: Year ended September 30, 2008 Shares sold ....................................... 1,413,654 $ 19,831,591 Shares issued in reinvestment of distributions .... 223,864 3,206,653 Shares redeemed ................................... (1,437,674) (19,957,266) ----------- ------------ Net increase (decrease) ........................... 199,844 $ 3,080,978 =========== ============ Year ended September 30, 2007 Shares sold ....................................... 1,804,789 $ 25,896,475 Shares issued in reinvestment of distributions .... 144,680 2,003,404 Shares redeemed ................................... (1,227,664) (17,432,776) ----------- ------------ Net increase (decrease) ........................... 721,805 $ 10,467,103 =========== ============ ADVISOR CLASS SHARES: Year ended September 30, 2008 Shares sold ....................................... 2,965,799 $ 43,092,338 Shares issued in reinvestment of distributions .... 392,475 5,664,728 Shares redeemed ................................... (4,378,036) (59,479,151) ----------- ------------ Net increase (decrease) ........................... (1,019,762) $(10,722,085) =========== ============ Year ended September 30, 2007 Shares sold ....................................... 2,917,605 $ 42,109,228 Shares issued in reinvestment of distributions .... 339,912 4,731,472 Shares redeemed ................................... (5,286,535) (74,395,229) ----------- ------------ Net increase (decrease) ........................... (2,029,018) $(27,554,529) =========== ============
Annual Report | 125 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION ---------- ----------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES Effective January 1, 2008, the Franklin Income Fund and the Franklin Utilities Fund pay an investment management fee to Advisers based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS ------------------- ---------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% Over $50 billion, up to and including $65 billion 0.345% Over $65 billion, up to and including $80 billion 0.340% In excess of $80 billion
Effective January 1, 2008, the Franklin DynaTech Fund and the Franklin U.S. Government Securities Fund pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS ------------------- ---------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
126 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) Prior to January 1, 2008, the Funds, except Franklin Growth Fund, paid fees to Advisers, and the Franklin Growth Fund paid fees to Investment Advisory, based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS ---------- ---------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
B. ADMINISTRATIVE FEES Under an agreement with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Reimbursement Plans: Class A................ 0.25% 0.25% 0.15% 0.15% 0.15%
Annual Report | 127 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED)
FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Compensation Plans: Class B................ 1.00% 1.00% 1.00% 0.65% 0.65% Class B1............... -- -- 0.65% -- -- Class C................ 1.00% 1.00% 0.65% 0.65% 0.65% Class R................ -- 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the year:
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------- -------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers......... $71,001 $852,127 $15,139,949 Contingent deferred sales charges retained..... $17,911 $100,295 $ 6,537,928
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------- --------- Sales charges retained net of commissions paid to unaffiliated broker/dealers......... $1,047,801 $365,618 Contingent deferred sales charges retained..... $ 421,134 $107,434
E. TRANSFER AGENT FEES For the year ended September 30, 2008, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------- ---------- ----------- Transfer agent fees..... $822,856 $3,360,973 $22,820,164
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- ---------- Transfer agent fees..... $5,433,324 $1,962,749
128 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the year ended September 30, 2008, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES GROWTH FUND FUND ----------- --------------- Capital loss carryforwards expiring in: 2009................................ $ -- $ 46,256,951 2010................................ -- 11,768,551 2011................................ -- 33,556,845 2012................................ 16,688,284 129,102,166 2013................................ -- 74,283,298 2014................................ -- 47,763,112 2015................................ -- 28,034,940 2016................................ -- 20,514,778 ----------- ------------ $16,688,284 $391,280,641 =========== ============
During the year ended September 30, 2008, the Franklin DynaTech Fund and Franklin Growth Fund utilized $1,854,237 and $93,093,955, respectively, of capital loss carryforwards. On September 30, 2008, the Franklin U.S. Government Securities Fund had expired capital loss carryforwards of $21,105,846, which were reclassified to paid-in capital. For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2008, the Franklin Income Fund and the Franklin U.S. Government Securities Fund deferred realized capital losses of $178,431,115 and $17,256,529, respectively. At September 30, 2008, the Franklin DynaTech Fund deferred realized currency losses of $40,773. Annual Report | 129 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended September 30, 2008 and 2007, was as follows:
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ---------------------- ----------------------- 2008 2007 2008 2007 ----------- ---- ---------- ---------- Distributions paid from: Ordinary income ............ $ -- $-- $7,929,729 $6,021,264 Long term Capital gain ..... 13,704,578 -- -- -- ----------- --- ---------- ---------- $13,704,578 $-- $7,929,729 $6,021,264 =========== === ========== ==========
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------- --------------------------- 2008 2007 2008 2007 -------------- -------------- ------------ ------------ Distributions paid from: Ordinary income ............ $3,900,167,557 $3,235,233,816 $321,154,039 $325,987,294 Long term Capital gain ..... 1,007,140,215 374,915,100 -- -- -------------- -------------- ------------ ------------ $4,907,307,772 $3,610,148,916 $321,154,039 $325,987,294 ============== ============== ============ ============
FRANKLIN UTILITIES FUND --------------------------- 2008 2007 ------------ ------------ Distributions paid from: Ordinary income ............ $ 94,770,295 $ 95,172,967 Long term Capital gain ..... 123,416,259 73,352,914 ------------ ------------ $218,186,554 $168,525,881 ============ ============
At September 30, 2008, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- -------------- ---------------- Cost of investments .......................... $286,065,155 $1,081,960,404 $ 56,884,278,227 ============ ============== ================ Unrealized appreciation ...................... $192,241,695 $1,320,387,049 $ 2,473,631,624 Unrealized depreciation ...................... (14,871,045) (59,049,264) (13,018,135,046) ------------ -------------- ---------------- Net unrealized appreciation (depreciation) ... $177,370,650 $1,261,337,785 $(10,544,503,422) ============ ============== ================ Undistributed ordinary income ................ $ -- $ 10,241,400 $ 185,725,899 Undistributed long term Capital gains ........ 28,202,434 -- -- ------------ -------------- ---------------- Distributable earnings ....................... $ 28,202,434 $ 10,241,400 $ 185,725,899 ============ ============== ================
130 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- -------------- Cost of investments .......................... $7,044,213,725 $1,646,273,702 ============== ============== Unrealized appreciation ...................... $ 50,664,344 $ 688,632,028 Unrealized depreciation ...................... (55,816,373) (43,720,594) -------------- -------------- Net unrealized appreciation (depreciation) ... $ (5,152,029) $ 644,911,434 ============== ============== Undistributed ordinary income ................ $ 3,642,998 $ 2,532,958 Undistributed long term Capital gains ........ -- 15,430,261 -------------- -------------- Distributable earnings ....................... $ 3,642,998 $ 17,963,219 ============== ==============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses, payments-in-kind and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended September 30, 2008, were as follows:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------ --------------- Purchases .................................... $229,394,596 $155,068,895 $24,045,725,745 Sales ........................................ $314,740,070 $198,285,740 $22,133,582,573
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Purchases .................................... $1,770,209,077 $225,630,496 Sales ........................................ $1,379,123,108 $351,183,675
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. Annual Report | 131 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 46.2% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At September 30, 2008, the aggregate value of these securities was $155,907,000, representing 0.34% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 9. UNFUNDED LOAN COMMITMENTS The Franklin Income Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The fund is obligated to fund these loan commitments at the borrowers' discretion. Funded portions of credit agreements are presented on the Statement of Investments. At September 30, 2008, unfunded commitments were as follows:
UNFUNDED BORROWER COMMITMENT -------- ---------- FRANKLIN INCOME FUND Bausch and Lomb Inc., Delayed Draw Term Loan ................................. $3,512,000
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized gain or loss is included in the Statement of Assets and Liabilities and Statement of Operations. 132 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund for the year ended September 30, 2008, were as shown below.
NUMBER OF NUMBER OF SHARES SHARES REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSS) -------------- ---------- --------- ---------- ---------- -------------- ------------ ------------ FRANKLIN INCOME FUND NON-CONTROLLED AFFILIATES AGL Resources Inc. ................ 500,000 3,500,000 -- 4,000,000 $ 125,520,000 $ 3,145,000 $ -- Ameren Corp ....................... 12,500,000 -- -- 12,500,000 487,875,000 31,750,000 -- Canadian Oil Sands Trust .......... 25,770,600 -- 770,600 25,000,000 910,243,765 74,975,531 29,276,549 PG&E Corp. ........................ 12,000,000 8,000,000 -- 20,000,000 749,000,000 26,940,000 -- Pinnacle West Capital Corp. ....... 5,500,000 -- -- 5,500,000 189,255,000 11,550,000 -- Public Service Enterprise Group Inc. ..................... 13,500,000 -- 3,500,000 20,000,000(a) --(b) 25,200,000 101,691,494 Puget Energy Inc. ................. 7,500,000 -- -- 7,500,000 200,250,000 7,500,000 -- -------------- ------------ ------------ TOTAL AFFILIATED SECURITIES (5.72% of Net Assets) ....... $2,662,143,765 $181,060,531 $130,968,043 ============== ============ ============
(a) Reflects a 2:1 stock split during the period. (b) As of September 30, 2008, no longer an affiliate. 11. UPCOMING MERGERS On July 10, 2008, the Board of Trustees for the Franklin Custodian Funds approved a proposal to merge the Franklin Global Communications Fund, the Franklin Global Health Care Fund, and the Franklin Technology Fund into the Franklin DynaTech Fund, subject to approval by the shareholders of the Franklin Global Communications Fund, the Franklin Global Health Care Fund, and the Franklin Technology Fund. 12. MERGER On June 15, 2007, the Franklin Growth Fund acquired the net assets of the Franklin Blue Chip Fund pursuant to a plan of reorganization approved by the Franklin Blue Chip Fund's shareholders. The merger was accomplished by a tax-free exchange of 3,043,797 Class A shares, 417,038 Class B shares, 716,864 Class C shares, and 111,203 Class R shares of the Franklin Growth Fund (valued at $45.28, $43.47, $43.10 and $44.95, respectively) for the net assets of the Franklin Blue Chip Fund which aggregate $191,847,199 and includes $49,120,531 of unrealized appreciation (depreciation). The combined net assets of the Franklin Growth Fund immediately after the merger were $2,955,373,004. Annual Report | 133 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. REORGANIZATION TO A DELAWARE STATUTORY TRUST On October 17, 2006, the Board of Trustees approved an Agreement and Plan of Reorganization (Agreement) whereby the Franklin Custodian Funds, Inc. would be reorganized and its domicile changed from a Maryland corporation to a Delaware statutory trust. In connection with these changes, the Trust's name was also changed to Franklin Custodian Funds, formerly known as the Franklin Custodian Funds, Inc. On April 11, 2007, shareholders of the Franklin Custodian Funds approved the agreement. The reorganization became effective on February 1, 2008. 14. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust believes the adoption of SFAS 157 will not have a material impact on its financial statements. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Funds are currently evaluating the impact, if any, of applying the various provisions of SFAS 161. 134 | Annual Report Franklin Custodian Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN CUSTODIAN FUNDS In our opinion, the accompanying statements of assets and liabilities, including the statements of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin DynaTech Fund, Franklin Growth Fund, Franklin Income Fund, Franklin U.S. Government Securities Fund and Franklin Utilities Fund, separate portfolios of Franklin Custodian Funds, formerly Franklin Custodian Funds, Inc., (hereafter referred to as the "Funds") at September 30, 2008, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2008 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California November 19, 2008 Annual Report | 135 Franklin Custodian Funds TAX DESIGNATION (UNAUDITED) Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds designate the maximum amount allowable but no less than the following amounts as long term capital gain dividends for the fiscal year ended September 30, 2008:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND INCOME FUND UTILITIES FUND ------------- -------------- -------------- $13,704,578 $1,007,140,215 $123,416,259
Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as short term capital gain dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30, 2008:
FRANKLIN FRANKLIN INCOME FUND UTILITIES FUND ------------ -------------- $396,411,663 $17,983,826
Under Section 854(b)(2) of the Code, the Funds designate the following percentage amounts of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended September 30, 2008.
FRANKLIN FRANKLIN FRANKLIN GROWTH FUND INCOME FUND UTILITIES FUND ----------- ----------- -------------- 100% 23.58% 86.81%
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended September 30, 2008.
FRANKLIN FRANKLIN FRANKLIN GROWTH FUND INCOME FUND UTILITIES FUND ----------- ------------ -------------- $39,713,360 $978,458,233 $91,279,054
Distributions, including qualified dividend income, paid during calendar year 2008 will be reported to shareholders on Form 1099-DIV in January 2009. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 871(k)(1)(C) of the Code, the Funds designate the maximum amount allowable but no less than the following amounts as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year ended September 30, 2008.
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND ----------- -------------- --------------- -------------- $274,156 $2,551,645,846 $318,538,221 $7,512,021
136 | Annual Report Franklin Custodian Funds BOARD MEMBERS AND OFFICERS The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------ ----------------------- ----------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1976 144 Bar-S Foods (meat packing company). One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). ROBERT F. CARLSON (1928) Trustee Since 2007 122 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior President, Board of Administration, California Public member and Employees Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global energy One Franklin Parkway company) and ICO Global San Mateo, CA 94403-1906 Communications (Holdings) Limited (satellite company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone holding company) (1988-1994). EDITH E. HOLIDAY (1952) Trustee Since 1998 144 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), H.J. Heinz San Mateo, CA 94403-1906 Company (processed foods and allied products), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 137
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------ ----------------------- ----------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 2007 122 Center for Creative Land Recycling One Franklin Parkway (brownfield redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). FRANK A. OLSON (1932) Trustee Since 2005 144 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas) and Sentient San Mateo, CA 94403-1906 Jet (private jet service). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer (1977- 1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). LARRY D. THOMPSON (1945) Trustee Since 2007 144 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). JOHN B. WILSON (1959) Lead Trustee since 122 None One Franklin Parkway Independent 2007 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since January 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).
138 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------ ----------------------- ----------------------------------- **CHARLES B. JOHNSON (1933) Trustee, Trustee since 144 None One Franklin Parkway President and 1969, President San Mateo, CA 94403-1906 Chief since 1984 and Executive Chief Executive Officer - Officer - Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. **RUPERT H. JOHNSON, JR. (1940) Trustee and Since 1983 56 None One Franklin Parkway Vice President San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments. JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable One Franklin Parkway Compliance Officer since 2004 San Mateo, CA 94403-1906 Officer and and Vice President Vice President - AML - AML Compliance since Compliance 2006 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable One Franklin Parkway Chief Financial 2004, Chief San Mateo, CA 94403-1906 Officer and Financial Officer Chief and Chief Accounting Accounting Officer Officer since February 2008 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
Annual Report | 139
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------ ----------------------- ----------------------------------- JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable 500 East Broward Blvd. 2008 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director of some of the other subsidiaries of Franklin Resources, Inc.; and of 46 of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin Templeton Investments. CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
140 | Annual Report
NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------ ----------------------- ----------------------------------- GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable 500 East Broward Blvd. President and 2008 Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004). * We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers. ** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Fund under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor. Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL (800) DIAL BEN / (800) 342-5236 TO REQUEST THE SAI. Annual Report | 141 Franklin Custodian Funds SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 142 | Annual Report This page intentionally left blank. This page intentionally left blank. Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON FUNDS VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(4) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund(2) Franklin Small Cap Growth Fund(3) Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund(1) Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund(1) Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(5) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(5) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(5) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-/INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan(7) Arizona Minnesota(7) California(8) Missouri Colorado New Jersey Connecticut New York(8) Florida North Carolina Georgia Ohio(7) Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts(7) Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to Franklin Growth Opportunities Fund. The fund's investment goal and strategy remained the same. (3.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to Franklin Small Cap Growth Fund. The fund's investment goal and strategy remained the same. (4.) The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. (5.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (6.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (7.) The fund invests primarily in insured municipal securities. (8.) These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. (9.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 11/08 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN TEMPLETON INVESTMENTS One Franklin Parkway San Mateo, CA 94403-1906 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 INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF A2008 11/08 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are John B. Wilson and he is independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $354,500 for the fiscal year ended September 30, 2008 and $327,491 for the fiscal year ended September 30, 2007. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended September 30, 2008 and $46,000 for the fiscal year ended September 30, 2007. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $54,268 for the fiscal year ended September 30, 2008 and $0 for the fiscal year ended September 30, 2007. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $229,809 for the fiscal year ended September 30, 2008 and $0 for the fiscal year ended September 30, 2007. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $284,077 for the fiscal year ended September 30, 2008 and $46,000 for the fiscal year ended September 30, 2007. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date November 25, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Executive Officer - Finance and Administration Date November 25, 2008 By /S/LAURA F. FERGERSON --------------------- Laura F. Fergerson Chief Financial Officer and Chief Accounting Officer Date November 25, 2008