-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IDL+kFNyWAdEi0eWhmkzA6WSSwk/GybvRGeNc3mbgRnsTJ6JEsXYlbsZdr/EOW4y EfI2Uvy3UhiIK04YPhp0KA== 0000893226-09-000018.txt : 20091130 0000893226-09-000018.hdr.sgml : 20091130 20091130110539 ACCESSION NUMBER: 0000893226-09-000018 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091130 DATE AS OF CHANGE: 20091130 EFFECTIVENESS DATE: 20091130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STRATEGIC MORTGAGE PORTFOLIO CENTRAL INDEX KEY: 0000893226 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-07288 FILM NUMBER: 091210981 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 0000893226 S000006875 FRANKLIN STRATEGIC MORTGAGE PORTFOLIO C000018610 CLASS A FSMIX N-CSR 1 fsmparpt1109.txt FSMP ANNUAL REPORT 9/30/09 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 811-07288 --------- FRANKLIN STRATEGIC MORTGAGE PORTFOLIO -------------------------------------------------- (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: 9/30/09 ------- Item 1. Reports to Stockholders. (GRAPHIC) SEPTEMBER 30, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" FRANKLIN CUSTODIAN FUNDS (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 SHAREHOLDER LETTER ...................................................... 1 ANNUAL REPORT Economic and Market Overview ............................................ 3 Franklin DynaTech Fund .................................................. 5 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 .................................................... 112 Notes to Financial Statements ........................................... 121 Report of Independent Registered Public Accounting Firm ................. 144 Tax Designation ......................................................... 145 Board Members and Officers .............................................. 146 Shareholder Information ................................................. 151
Shareholder Letter Dear Shareholder: During the 12-month period ended September 30, 2009, economic activity weakened before showing signs of stabilization. The slowdown began in 2008 with the U.S. subprime mortgage and credit crises and eventually spread worldwide. Despite coordinated efforts by many governments to address spreading liquidity and credit problems, deteriorating economic conditions and mounting uncertainty contributed to market woes through the period's first half. Later in the period, some indicators offered a better economic outlook, and markets rallied beginning in March 2009, erasing much of the earlier losses. At period-end, although some observers thought the worst of the economic crises was behind us, others believed significant challenges remained. We think it is important to put short-term market developments in perspective. Keep in mind that as uncertain as current conditions may be, we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us reason to be optimistic about future market stabilization and recovery. Franklin Custodian Funds' annual report goes into greater detail about prevailing conditions during the period under review. In addition, the portfolio managers discuss investment management decisions and Fund performance for the period. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Charles B. Johnson Charles B. Johnson President and Chief Executive Officer - Investment Management Franklin Custodian Funds THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF SEPTEMBER 30, 2009. 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 | Not part of the annual report Annual Report Economic and Market Overview The 12-month period under review can be divided into two halves: the first marked by the bursting of the credit and commodities' bubbles, the onset of global recession and the precipitous decline of equity markets, and the second by a sharp market rebound amid renewed optimism. Following the failure of several financial institutions in September 2008, restrictive credit and wealth deterioration stalled economic activity, marking the first global recession in nearly half a century. Equity market volatility reached record levels, and consumer confidence plummeted. Job losses mounted and U.S. unemployment rose, ending the period at 9.8%, although the pace of job losses eased somewhat toward the end of the period.(1) The Federal Reserve Board responded to the deteriorating financial and credit situations by lowering the federal funds target rate to a range of 0% to 0.25% in December 2008 to stimulate economic growth. In addition, in late July the government implemented a month-long cash-for-clunkers program, which boosted retail and auto sales. Economic activity, as measured by U.S. gross domestic product (GDP), fell at annualized rates of 5.4% in 2008's fourth quarter and 6.1% in 2009's first quarter. The decline in GDP eased in 2009's second quarter to an annualized rate of -0.7%, and GDP rose in the third quarter at an estimated annualized 3.5% rate. Commodity prices fell through early 2009 before rebounding somewhat through period-end, which contributed to a significant decline in inflation. September's inflation rate was an annualized -1.3%, while core inflation, which excludes food and energy costs, was an annualized 1.5%.(1) Most Treasury prices rose during the period, and fixed income spreads were generally wide relative to Treasury yields due to heightened market turbulence and risk aversion. Spreads for high yield bonds hit record levels. The spread between two-year and 10-year Treasury yields rose to 236 basis points (100 basis points equal one percentage point) at the end of September from 185 basis points at the beginning of the reporting period. The two-year Treasury bill yield fell from 2.00% to 0.95% over the 12-month period, while the 10-year Treasury note yield fell from 3.85% to 3.31%. (1.) Source: Bureau of Labor Statistics. Annual Report | 3 U.S. equity markets declined precipitously until March 2009 before beginning a rally fueled by low valuations, renewed optimism and aggregate corporate earnings that beat consensus expectations. Investors' optimism returned and risk aversion subsided as equity markets regained much of their losses from 2008. For the 12 months under review, the Dow Jones Industrial Average, Standard & Poor's 500 Index (S&P 500) and NASDAQ Composite Index had total returns of -7.38%, - -6.91% and +2.53%, respectively.(2) Information technology was the only sector to post positive results during the year under review, while the financials, energy and industrials sectors had the biggest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF SEPTEMBER 30, 2009. 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) 2009 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 common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report 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, 2009. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +2.71% cumulative total return for the 12 months under review. For the same period, the Fund underperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of +7.80%, and outperformed the broader Standard & Poor's 500 Index (S&P 500), which had a - -6.91% total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY When choosing equity investments for the Fund, the manager applies a "bottom-up," long-term approach, focusing on the market price of a company's securities relative to the manager's evaluation of the company's long-term earnings, asset value and cash flow potential. The manager also considers a company's price/ earnings ratio, profit margins and liquidation value. (1.) Source: (C) 2009 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, and an index is not 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 64. Annual Report | 5 PORTFOLIO BREAKDOWN* Franklin DynaTech Fund Based on Total Net Assets as of 9/30/09 (BAR CHART) Internet Software & Services 9.3% Semiconductors & Semiconductor Equipment 9.1% Computers & Peripherals 8.9% Software 8.5% Communications Equipment 7.4% Biotechnology 6.6% Energy Equipment & Services 6.4% Pharmaceuticals 5.9% Health Care Equipment & Supplies 4.4% IT Services 4.2% Internet & Catalog Retail 3.9% Chemicals 3.6% Life Sciences Tools & Services 2.9% Capital Markets 2.6% Health Care Providers & Services 2.3% Other 14.1%
* Other net assets equal -0.1% due to Fund liabilities. MANAGER'S DISCUSSION During the Fund's fiscal year, the health care sector weighed on performance, due in part to several health care equipment and supplies industry companies including Swiss ophthalmic equipment and pharmaceuticals company Alcon, implantable biomedical devices manufacturer Medtronic and surgical instrument maker Stryker.(2) Life sciences tools and services industry holding Covance, which provides drug development services, also hindered results, as did biotechnology company Celgene. In general, the health care sector underperformed the overall market in recent months as the federal government worked through details of health care reform. The materials sector detracted from Fund performance due to holdings in chemicals companies Monsanto and Sigma-Aldrich.(3) Several information technology holdings also detracted from results including thermal imaging systems manufacturer FLIR Systems and software makers Adobe Systems, Nintendo and Ubisoft Entertainment.(4) During the period, we liquidated our Medtronic, Covance, FLIR Systems and Ubisoft Entertainment positions. The Fund's performance benefited overall from the information technology sector, particularly computers and peripherals industry holding Apple, which continued to advance due to innovative products including the iPhone, iPod and Mac computers. Other sector positions that performed well were Chinese Internet and mobile phone services provider Tencent Holdings, Internet search engine Google, and semiconductor manufacturer Silicon Laboratories. The consumer discretionary sector also boosted the Fund's returns during the fiscal year, largely due to Internet retailers Amazon.com and Priceline.com, both of which benefited from improving consumer spending.(5) Other holdings that benefited performance were health care information technology provider Cerner, industrial goods manufacturer Precision Castparts, and Flowserve, which supplies pumps and valves to several industries globally. Norwegian communications equipment manufacturer Tandberg also contributed to results as it received a purchase offer from Cisco during the period. (2.) The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, health care technology, life sciences tools and services, and pharmaceuticals in the SOI. (3.) The materials sector comprises chemicals in the SOI. (4.) The information technology sector comprises communications equipment, computers and peripherals, electronic equipment and instruments, Internet software and services, IT services, semiconductors and semiconductor equipment, and software in the SOI. (5.) The consumer discretionary sector comprises Internet and catalog retail, and media in the SOI. 6 | Annual Report As managers of Franklin DynaTech Fund, at period-end we were encouraged by the relative abundance of leading science and technology companies that we believe have strong long-term growth prospects trading at what we perceive to be attractive valuations. Looking out over the longer term, we believe it is these innovative, thought-leading companies that may lead economic advancement. Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. (PHOTO OF RUPERT H. JOHNSON JR.) /s/ Rupert H. Johnson Jr. 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, 2009, 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 HOLDINGS Franklin DynaTech Fund 9/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------ ---------- Apple Inc. COMPUTERS & PERIPHERALS, U.S. 6.6% Google Inc., A INTERNET SOFTWARE & SERVICES, U.S. 4.0% Intel Corp. SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, U.S. 3.6% Teva Pharmaceutical Industries Ltd., ADR PHARMACEUTICALS, ISRAEL 2.9% Visa Inc., A IT SERVICES, U.S. 2.8% Gilead Sciences Inc. BIOTECHNOLOGY, U.S. 2.8% FMC Technologies Inc. ENERGY EQUIPMENT & SERVICES, U.S. 2.5% Hewlett-Packard Co. COMPUTERS & PERIPHERALS, U.S. 2.3% Amazon.com Inc. INTERNET & CATALOG RETAIL, U.S. 2.3% Celgene Corp. BIOTECHNOLOGY, U.S. 2.3%
Annual Report | 7 Performance Summary as of 9/30/09 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 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.67 $23.20 $24.87 DISTRIBUTIONS (10/1/08-9/30/09) Long-Term Capital Gain $1.5822
CLASS B (SYMBOL: FDNBX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.88 $21.60 $23.48 DISTRIBUTIONS (10/1/08-9/30/09) Long-Term Capital Gain $1.5822
CLASS C (SYMBOL: FDYNX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.89 $21.34 $23.23 DISTRIBUTIONS (10/1/08-9/30/09) Long-Term Capital Gain $1.5822
CLASS R (SYMBOL: N/A) CHANGE 9/30/09 12/1/08 - --------------------- ------ ------- ------- Net Asset Value (NAV) +$7.47 $23.13 $15.66
ADVISOR CLASS (SYMBOL: N/A) CHANGE 9/30/09 9/30/08 - --------------------------- ------ ------- ------- Net Asset Value (NAV) -$1.62 $23.28 $24.90 DISTRIBUTIONS (10/1/08-9/30/09) Long-Term Capital Gain $1.5822
8 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE AND AVERAGE ANNUAL TOTAL RETURNS 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) +2.71% +18.64% +19.13% Average Annual Total Return(2) -3.21% +2.26% +1.17% Value of $10,000 Investment(3) $9,679 $11,183 $11,228 Total Annual Operating Expenses(4) 0.99%
CLASS B 1-YEAR 5-YEAR INCEPTION (2/1/00) - ------- ------- ------- ------------------ Cumulative Total Return(1) +1.96% +14.28% -8.97% Average Annual Total Return(2) -1.72% +2.34% -0.97% Value of $10,000 Investment(3) $9,828 $11,228 $9,103 Total Annual Operating Expenses(4) 1.75%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- Cumulative Total Return(1) +1.89% +14.24% +10.51% Average Annual Total Return(2) +0.97% +2.70% +1.00% Value of $10,000 Investment(3) $10,097 $11,424 $11,051 Total Annual Operating Expenses(4) 1.75%
CLASS R INCEPTION (12/1/08) - ------- ------------------- Cumulative Total Return(1) +47.70% Aggregate Total Return(5) +47.70% Value of $10,000 Investment(3) $14,770 Total Annual Operating Expenses(4) 1.25%
ADVISOR CLASS(6) 1-YEAR 5-YEAR 10-YEAR - ---------------- ------- ------- ------- Cumulative Total Return(1) +2.92% +19.03% +19.52% Average Annual Total Return(2) +2.92% +3.55% +1.80% Value of $10,000 Investment(3) $10,292 $11,903 $11,952 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. Annual Report | 9 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The indexes are unmanaged. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/09 - ------- ------- 1-Year -3.21% 5-Year +2.26% 10-Year +1.17%
CLASS A (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH NASDAQ 100 DATE FUND - CLASS A S&P 500 INDEX INDEX - ------------- ----------------- ------------- ---------- 10/1/1999 $ 9,425 $10,000 $10,000 10/31/1999 $ 9,808 $10,633 $10,953 11/30/1999 $10,387 $10,849 $12,321 12/31/1999 $11,492 $11,488 $15,399 1/31/2000 $11,608 $10,911 $14,826 2/29/2000 $12,630 $10,704 $17,721 3/31/2000 $12,758 $11,751 $18,264 4/30/2000 $12,067 $11,398 $15,670 5/31/2000 $11,488 $11,164 $13,805 6/30/2000 $12,195 $11,439 $15,631 7/31/2000 $11,980 $11,260 $14,990 8/31/2000 $12,849 $11,960 $16,934 9/30/2000 $11,835 $11,328 $14,829 10/31/2000 $11,533 $11,281 $13,631 11/30/2000 $10,304 $10,391 $10,410 12/31/2000 $10,086 $10,442 $ 9,725 1/31/2001 $10,594 $10,812 $10,769 2/28/2001 $ 9,315 $ 9,827 $ 7,925 3/31/2001 $ 8,768 $ 9,204 $ 6,534 4/30/2001 $ 9,340 $ 9,919 $ 7,704 5/31/2001 $ 9,196 $ 9,986 $ 7,475 6/30/2001 $ 9,128 $ 9,743 $ 7,611 7/31/2001 $ 8,840 $ 9,647 $ 6,992 8/31/2001 $ 8,480 $ 9,043 $ 6,104 9/30/2001 $ 7,946 $ 8,313 $ 4,852 10/31/2001 $ 8,311 $ 8,471 $ 5,668 11/30/2001 $ 8,828 $ 9,121 $ 6,628 12/31/2001 $ 8,763 $ 9,201 $ 6,550 1/31/2002 $ 8,694 $ 9,067 $ 6,438 2/28/2002 $ 8,286 $ 8,892 $ 5,645 3/31/2002 $ 8,540 $ 9,226 $ 6,034 4/30/2002 $ 8,080 $ 8,667 $ 5,304 5/31/2002 $ 7,976 $ 8,603 $ 5,018 6/30/2002 $ 7,482 $ 7,990 $ 4,367 7/31/2002 $ 7,095 $ 7,367 $ 3,996 8/31/2002 $ 7,065 $ 7,416 $ 3,914 9/30/2002 $ 6,609 $ 6,610 $ 3,457 10/31/2002 $ 7,168 $ 7,192 $ 4,110 11/30/2002 $ 7,611 $ 7,615 $ 4,635 12/31/2002 $ 7,022 $ 7,167 $ 4,088 1/31/2003 $ 6,944 $ 6,980 $ 4,083 2/28/2003 $ 7,013 $ 6,875 $ 4,193 3/31/2003 $ 7,073 $ 6,942 $ 4,231 4/30/2003 $ 7,542 $ 7,514 $ 4,593 5/31/2003 $ 8,101 $ 7,909 $ 4,975 6/30/2003 $ 8,239 $ 8,010 $ 4,991 7/31/2003 $ 8,535 $ 8,152 $ 5,303 8/31/2003 $ 8,849 $ 8,310 $ 5,570 9/30/2003 $ 8,673 $ 8,222 $ 5,414 10/31/2003 $ 9,266 $ 8,687 $ 5,882 11/30/2003 $ 9,438 $ 8,764 $ 5,915 12/31/2003 $ 9,735 $ 9,223 $ 6,096 1/31/2004 $ 9,946 $ 9,393 $ 6,201 2/29/2004 $ 9,838 $ 9,523 $ 6,107 3/31/2004 $ 9,782 $ 9,380 $ 5,974 4/30/2004 $ 9,619 $ 9,232 $ 5,820 5/31/2004 $10,010 $ 9,359 $ 6,089 6/30/2004 $10,122 $ 9,541 $ 6,299 7/31/2004 $ 9,283 $ 9,225 $ 5,816 8/31/2004 $ 9,116 $ 9,263 $ 5,684 9/30/2004 $ 9,464 $ 9,363 $ 5,867 10/31/2004 $ 9,666 $ 9,506 $ 6,174 11/30/2004 $10,100 $ 9,891 $ 6,526 12/31/2004 $10,483 $10,227 $ 6,733 1/31/2005 $ 9,860 $ 9,978 $ 6,311 2/28/2005 $ 9,989 $10,188 $ 6,275 3/31/2005 $ 9,769 $10,007 $ 6,157 4/30/2005 $ 9,597 $ 9,818 $ 5,901 5/31/2005 $10,264 $10,130 $ 6,407 6/30/2005 $10,161 $10,144 $ 6,203 7/31/2005 $10,681 $10,522 $ 6,666 8/31/2005 $10,758 $10,426 $ 6,569 9/30/2005 $10,741 $10,510 $ 6,652 10/31/2005 $10,655 $10,335 $ 6,558 11/30/2005 $11,339 $10,726 $ 6,946 12/31/2005 $11,236 $10,729 $ 6,833 1/31/2006 $11,687 $11,014 $ 7,105 2/28/2006 $11,459 $11,043 $ 6,938 3/31/2006 $11,532 $11,181 $ 7,075 4/30/2006 $11,464 $11,331 $ 7,063 5/31/2006 $10,715 $11,005 $ 6,560 6/30/2006 $10,797 $11,020 $ 6,542 7/31/2006 $10,462 $11,088 $ 6,269 8/31/2006 $10,853 $11,352 $ 6,561 9/30/2006 $11,094 $11,644 $ 6,870 10/31/2006 $11,352 $12,024 $ 7,195 11/30/2006 $11,618 $12,252 $ 7,439 12/31/2006 $11,532 $12,424 $ 7,296 1/31/2007 $11,799 $12,612 $ 7,443 2/28/2007 $11,601 $12,365 $ 7,316 3/31/2007 $11,691 $12,504 $ 7,361 4/30/2007 $12,238 $13,057 $ 7,757 5/31/2007 $12,607 $13,513 $ 8,008 6/30/2007 $12,526 $13,289 $ 8,032 7/31/2007 $12,569 $12,877 $ 8,024 8/31/2007 $12,999 $13,070 $ 8,259 9/30/2007 $13,902 $13,558 $ 8,684 10/31/2007 $14,684 $13,774 $ 9,299 11/30/2007 $13,983 $13,198 $ 8,676 12/31/2007 $14,194 $13,107 $ 8,659 1/31/2008 $12,299 $12,321 $ 7,647 2/29/2008 $12,044 $11,920 $ 7,248 3/31/2008 $12,211 $11,869 $ 7,400 4/30/2008 $13,204 $12,447 $ 7,964 5/31/2008 $13,732 $12,608 $ 8,441 6/30/2008 $12,928 $11,545 $ 7,629 7/31/2008 $12,787 $11,448 $ 7,680 8/31/2008 $12,690 $11,614 $ 7,777 9/30/2008 $10,932 $10,579 $ 6,623 10/31/2008 $ 9,117 $ 8,802 $ 5,543 11/30/2008 $ 8,180 $ 8,171 $ 4,924 12/31/2008 $ 8,373 $ 8,257 $ 5,032 1/31/2009 $ 8,092 $ 7,561 $ 4,902 2/28/2009 $ 7,753 $ 6,756 $ 4,639 3/31/2009 $ 8,358 $ 7,348 $ 5,137 4/30/2009 $ 9,176 $ 8,051 $ 5,791 5/31/2009 $ 9,558 $ 8,502 $ 5,962 6/30/2009 $ 9,713 $ 8,519 $ 6,135 7/31/2009 $10,454 $ 9,163 $ 6,659 8/31/2009 $10,662 $ 9,494 $ 6,749 9/30/2009 $11,228 $ 9,848 $ 7,139 Total Returns 12.28% -1.52% -28.61%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/09 - ------- ------- 1-Year -1.72% 5-Year +2.34% Since Inception (2/1/00) -0.97%
CLASS B (2/1/00-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH NASDAQ 100 DATE FUND - CLASS B S&P 500 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 $ 7,962 $ 3,967 11/30/2003 $ 7,896 $ 8,032 $ 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 $ 8,728 $ 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 $ 9,172 $ 4,153 4/30/2005 $ 7,944 $ 8,998 $ 3,980 5/31/2005 $ 8,491 $ 9,284 $ 4,321 6/30/2005 $ 8,399 $ 9,298 $ 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 $ 9,633 $ 4,486 10/31/2005 $ 8,784 $ 9,472 $ 4,423 11/30/2005 $ 9,342 $ 9,830 $ 4,685 12/31/2005 $ 9,254 $ 9,834 $ 4,608 1/31/2006 $ 9,621 $10,094 $ 4,792 2/28/2006 $ 9,423 $10,122 $ 4,679 3/31/2006 $ 9,478 $10,248 $ 4,772 4/30/2006 $ 9,416 $10,385 $ 4,764 5/31/2006 $ 8,795 $10,086 $ 4,425 6/30/2006 $ 8,858 $10,100 $ 4,412 7/31/2006 $ 8,579 $10,162 $ 4,228 8/31/2006 $ 8,895 $10,404 $ 4,425 9/30/2006 $ 9,085 $10,672 $ 4,633 10/31/2006 $ 9,291 $11,020 $ 4,853 11/30/2006 $ 9,504 $11,230 $ 5,017 12/31/2006 $ 9,427 $11,387 $ 4,921 1/31/2007 $ 9,640 $11,559 $ 5,020 2/28/2007 $ 9,471 $11,333 $ 4,935 3/31/2007 $ 9,541 $11,460 $ 4,965 4/30/2007 $ 9,977 $11,968 $ 5,232 5/31/2007 $10,271 $12,385 $ 5,401 6/30/2007 $10,201 $12,179 $ 5,418 7/31/2007 $10,231 $11,802 $ 5,412 8/31/2007 $10,572 $11,979 $ 5,571 9/30/2007 $11,299 $12,427 $ 5,857 10/31/2007 $11,927 $12,624 $ 6,272 11/30/2007 $11,354 $12,097 $ 5,852 12/31/2007 $11,515 $12,013 $ 5,840 1/31/2008 $ 9,971 $11,292 $ 5,158 2/29/2008 $ 9,765 $10,925 $ 4,889 3/31/2008 $ 9,900 $10,878 $ 4,991 4/30/2008 $10,706 $11,408 $ 5,372 5/31/2008 $11,133 $11,556 $ 5,693 6/30/2008 $10,481 $10,581 $ 5,146 7/31/2008 $10,367 $10,493 $ 5,180 8/31/2008 $10,288 $10,644 $ 5,245 9/30/2008 $ 8,862 $ 9,696 $ 4,467 10/31/2008 $ 7,390 $ 8,067 $ 3,739 11/30/2008 $ 6,631 $ 7,489 $ 3,321 12/31/2008 $ 6,787 $ 7,568 $ 3,394 1/31/2009 $ 6,560 $ 6,930 $ 3,306 2/28/2009 $ 6,285 $ 6,192 $ 3,129 3/31/2009 $ 6,775 $ 6,735 $ 3,465 4/30/2009 $ 7,438 $ 7,379 $ 3,906 5/31/2009 $ 7,748 $ 7,792 $ 4,021 6/30/2009 $ 7,874 $ 7,808 $ 4,138 7/31/2009 $ 8,474 $ 8,398 $ 4,491 8/31/2009 $ 8,643 $ 8,701 $ 4,552 9/30/2009 $ 9,103 $ 9,026 $ 4,815 Total Returns -8.97% -9.74% -51.85%
10 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/09 - ------- ------- 1-Year +0.97% 5-Year +2.70% 10-Year +1.00%
CLASS C (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH NASDAQ 100 DATE FUND - CLASS C S&P 500 INDEX INDEX - ------------- ----------------- ------------- ---------- 10/1/1999 $10,000 $10,000 $10,000 10/31/1999 $10,398 $10,633 $10,953 11/30/1999 $11,007 $10,849 $12,321 12/31/1999 $12,170 $11,488 $15,399 1/31/2000 $12,286 $10,911 $14,826 2/29/2000 $13,361 $10,704 $17,721 3/31/2000 $13,486 $11,751 $18,264 4/30/2000 $12,750 $11,398 $15,670 5/31/2000 $12,126 $11,164 $13,805 6/30/2000 $12,871 $11,439 $15,631 7/31/2000 $12,634 $11,260 $14,990 8/31/2000 $13,540 $11,960 $16,934 9/30/2000 $12,465 $11,328 $14,829 10/31/2000 $12,139 $11,281 $13,631 11/30/2000 $10,841 $10,391 $10,410 12/31/2000 $10,599 $10,442 $ 9,725 1/31/2001 $11,129 $10,812 $10,769 2/28/2001 $ 9,779 $ 9,827 $ 7,925 3/31/2001 $ 9,204 $ 9,204 $ 6,534 4/30/2001 $ 9,797 $ 9,919 $ 7,704 5/31/2001 $ 9,639 $ 9,986 $ 7,475 6/30/2001 $ 9,562 $ 9,743 $ 7,611 7/31/2001 $ 9,254 $ 9,647 $ 6,992 8/31/2001 $ 8,869 $ 9,043 $ 6,104 9/30/2001 $ 8,307 $ 8,313 $ 4,852 10/31/2001 $ 8,683 $ 8,471 $ 5,668 11/30/2001 $ 9,217 $ 9,121 $ 6,628 12/31/2001 $ 9,140 $ 9,201 $ 6,550 1/31/2002 $ 9,067 $ 9,067 $ 6,438 2/28/2002 $ 8,639 $ 8,892 $ 5,645 3/31/2002 $ 8,894 $ 9,226 $ 6,034 4/30/2002 $ 8,411 $ 8,667 $ 5,304 5/31/2002 $ 8,297 $ 8,603 $ 5,018 6/30/2002 $ 7,777 $ 7,990 $ 4,367 7/31/2002 $ 7,371 $ 7,367 $ 3,996 8/31/2002 $ 7,334 $ 7,416 $ 3,914 9/30/2002 $ 6,855 $ 6,610 $ 3,457 10/31/2002 $ 7,435 $ 7,192 $ 4,110 11/30/2002 $ 7,886 $ 7,615 $ 4,635 12/31/2002 $ 7,275 $ 7,167 $ 4,088 1/31/2003 $ 7,188 $ 6,980 $ 4,083 2/28/2003 $ 7,257 $ 6,875 $ 4,193 3/31/2003 $ 7,311 $ 6,942 $ 4,231 4/30/2003 $ 7,795 $ 7,514 $ 4,593 5/31/2003 $ 8,365 $ 7,909 $ 4,975 6/30/2003 $ 8,502 $ 8,010 $ 4,991 7/31/2003 $ 8,803 $ 8,152 $ 5,303 8/31/2003 $ 9,122 $ 8,310 $ 5,570 9/30/2003 $ 8,935 $ 8,222 $ 5,414 10/31/2003 $ 9,542 $ 8,687 $ 5,882 11/30/2003 $ 9,711 $ 8,764 $ 5,915 12/31/2003 $10,012 $ 9,223 $ 6,096 1/31/2004 $10,221 $ 9,393 $ 6,201 2/29/2004 $10,103 $ 9,523 $ 6,107 3/31/2004 $10,039 $ 9,380 $ 5,974 4/30/2004 $ 9,866 $ 9,232 $ 5,820 5/31/2004 $10,258 $ 9,359 $ 6,089 6/30/2004 $10,367 $ 9,541 $ 6,299 7/31/2004 $ 9,501 $ 9,225 $ 5,816 8/31/2004 $ 9,327 $ 9,263 $ 5,684 9/30/2004 $ 9,674 $ 9,363 $ 5,867 10/31/2004 $ 9,875 $ 9,506 $ 6,174 11/30/2004 $10,313 $ 9,891 $ 6,526 12/31/2004 $10,691 $10,227 $ 6,733 1/31/2005 $10,057 $ 9,978 $ 6,311 2/28/2005 $10,180 $10,188 $ 6,275 3/31/2005 $ 9,948 $10,007 $ 6,157 4/30/2005 $ 9,765 $ 9,818 $ 5,901 5/31/2005 $10,440 $10,130 $ 6,407 6/30/2005 $10,326 $10,144 $ 6,203 7/31/2005 $10,851 $10,522 $ 6,666 8/31/2005 $10,919 $10,426 $ 6,569 9/30/2005 $10,901 $10,510 $ 6,652 10/31/2005 $10,805 $10,335 $ 6,558 11/30/2005 $11,489 $10,726 $ 6,946 12/31/2005 $11,380 $10,729 $ 6,833 1/31/2006 $11,827 $11,014 $ 7,105 2/28/2006 $11,590 $11,043 $ 6,938 3/31/2006 $11,658 $11,181 $ 7,075 4/30/2006 $11,581 $11,331 $ 7,063 5/31/2006 $10,819 $11,005 $ 6,560 6/30/2006 $10,892 $11,020 $ 6,542 7/31/2006 $10,550 $11,088 $ 6,269 8/31/2006 $10,937 $11,352 $ 6,561 9/30/2006 $11,175 $11,644 $ 6,870 10/31/2006 $11,425 $12,024 $ 7,195 11/30/2006 $11,685 $12,252 $ 7,439 12/31/2006 $11,594 $12,424 $ 7,296 1/31/2007 $11,850 $12,612 $ 7,443 2/28/2007 $11,649 $12,365 $ 7,316 3/31/2007 $11,731 $12,504 $ 7,361 4/30/2007 $12,269 $13,057 $ 7,757 5/31/2007 $12,630 $13,513 $ 8,008 6/30/2007 $12,543 $13,289 $ 8,032 7/31/2007 $12,579 $12,877 $ 8,024 8/31/2007 $13,004 $13,070 $ 8,259 9/30/2007 $13,893 $13,558 $ 8,684 10/31/2007 $14,668 $13,774 $ 9,299 11/30/2007 $13,961 $13,198 $ 8,676 12/31/2007 $14,157 $13,107 $ 8,659 1/31/2008 $12,261 $12,321 $ 7,647 2/29/2008 $12,000 $11,920 $ 7,248 3/31/2008 $12,158 $11,869 $ 7,400 4/30/2008 $13,139 $12,447 $ 7,964 5/31/2008 $13,657 $12,608 $ 8,441 6/30/2008 $12,849 $11,545 $ 7,629 7/31/2008 $12,700 $11,448 $ 7,680 8/31/2008 $12,597 $11,614 $ 7,777 9/30/2008 $10,846 $10,579 $ 6,623 10/31/2008 $ 9,035 $ 8,802 $ 5,543 11/30/2008 $ 8,106 $ 8,171 $ 4,924 12/31/2008 $ 8,291 $ 8,257 $ 5,032 1/31/2009 $ 8,006 $ 7,561 $ 4,902 2/28/2009 $ 7,664 $ 6,756 $ 4,639 3/31/2009 $ 8,260 $ 7,348 $ 5,137 4/30/2009 $ 9,063 $ 8,051 $ 5,791 5/31/2009 $ 9,435 $ 8,502 $ 5,962 6/30/2009 $ 9,580 $ 8,519 $ 6,135 7/31/2009 $10,305 $ 9,163 $ 6,659 8/31/2009 $10,502 $ 9,494 $ 6,749 9/30/2009 $11,051 $ 9,848 $ 7,139 Total Returns 10.51% -1.52% -28.61%
AGGREGATE TOTAL RETURN
CLASS R 9/30/09 - ------- ------- Since Inception (12/1/08) +47.70%
CLASS R (12/1/08-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH NASDAQ 100 DATE FUND - CLASS R S&P 500 INDEX INDEX - ------------- ----------------- ------------- ---------- 12/1/2008 $10,000 $10,000 $10,000 12/31/2008 $11,034 $10,106 $10,218 1/31/2009 $10,663 $ 9,255 $ 9,954 2/28/2009 $10,216 $ 8,269 $ 9,420 3/31/2009 $11,008 $ 8,994 $10,432 4/30/2009 $12,080 $ 9,854 $11,759 5/31/2009 $12,585 $10,405 $12,107 6/30/2009 $12,783 $10,426 $12,458 7/31/2009 $13,760 $11,215 $13,522 8/31/2009 $14,028 $11,620 $13,706 9/30/2009 $14,770 $12,053 $14,497 Total Returns 47.70% 20.53% 44.97%
Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(6) 9/30/09 - ---------------- ------- 1-Year +2.92% 5-Year +3.55% 10-Year +1.80%
ADVISOR CLASS (10/1/99-9/30/09)(6) (PERFORMANCE GRAPH)
FRANKLIN DYNATECH NASDAQ 100 DATE FUND - ADVISOR CLASS S&P 500 INDEX INDEX - ------------- -------------------- ------------- ---------- 10/1/1999 $10,000 $10,000 $10,000 10/31/1999 $10,407 $10,633 $10,953 11/30/1999 $11,021 $10,849 $12,321 12/31/1999 $12,193 $11,488 $15,399 1/31/2000 $12,316 $10,911 $14,826 2/29/2000 $13,400 $10,704 $17,721 3/31/2000 $13,537 $11,751 $18,264 4/30/2000 $12,803 $11,398 $15,670 5/31/2000 $12,189 $11,164 $13,805 6/30/2000 $12,939 $11,439 $15,631 7/31/2000 $12,711 $11,260 $14,990 8/31/2000 $13,633 $11,960 $16,934 9/30/2000 $12,557 $11,328 $14,829 10/31/2000 $12,237 $11,281 $13,631 11/30/2000 $10,933 $10,391 $10,410 12/31/2000 $10,701 $10,442 $ 9,725 1/31/2001 $11,240 $10,812 $10,769 2/28/2001 $ 9,883 $ 9,827 $ 7,925 3/31/2001 $ 9,303 $ 9,204 $ 6,534 4/30/2001 $ 9,910 $ 9,919 $ 7,704 5/31/2001 $ 9,757 $ 9,986 $ 7,475 6/30/2001 $ 9,685 $ 9,743 $ 7,611 7/31/2001 $ 9,380 $ 9,647 $ 6,992 8/31/2001 $ 8,998 $ 9,043 $ 6,104 9/30/2001 $ 8,431 $ 8,313 $ 4,852 10/31/2001 $ 8,818 $ 8,471 $ 5,668 11/30/2001 $ 9,366 $ 9,121 $ 6,628 12/31/2001 $ 9,298 $ 9,201 $ 6,550 1/31/2002 $ 9,225 $ 9,067 $ 6,438 2/28/2002 $ 8,791 $ 8,892 $ 5,645 3/31/2002 $ 9,061 $ 9,226 $ 6,034 4/30/2002 $ 8,572 $ 8,667 $ 5,304 5/31/2002 $ 8,463 $ 8,603 $ 5,018 6/30/2002 $ 7,938 $ 7,990 $ 4,367 7/31/2002 $ 7,528 $ 7,367 $ 3,996 8/31/2002 $ 7,496 $ 7,416 $ 3,914 9/30/2002 $ 7,012 $ 6,610 $ 3,457 10/31/2002 $ 7,605 $ 7,192 $ 4,110 11/30/2002 $ 8,075 $ 7,615 $ 4,635 12/31/2002 $ 7,450 $ 7,167 $ 4,088 1/31/2003 $ 7,368 $ 6,980 $ 4,083 2/28/2003 $ 7,441 $ 6,875 $ 4,193 3/31/2003 $ 7,505 $ 6,942 $ 4,231 4/30/2003 $ 8,002 $ 7,514 $ 4,593 5/31/2003 $ 8,595 $ 7,909 $ 4,975 6/30/2003 $ 8,741 $ 8,010 $ 4,991 7/31/2003 $ 9,056 $ 8,152 $ 5,303 8/31/2003 $ 9,389 $ 8,310 $ 5,570 9/30/2003 $ 9,202 $ 8,222 $ 5,414 10/31/2003 $ 9,832 $ 8,687 $ 5,882 11/30/2003 $10,014 $ 8,764 $ 5,915 12/31/2003 $10,329 $ 9,223 $ 6,096 1/31/2004 $10,552 $ 9,393 $ 6,201 2/29/2004 $10,438 $ 9,523 $ 6,107 3/31/2004 $10,379 $ 9,380 $ 5,974 4/30/2004 $10,206 $ 9,232 $ 5,820 5/31/2004 $10,621 $ 9,359 $ 6,089 6/30/2004 $10,740 $ 9,541 $ 6,299 7/31/2004 $ 9,850 $ 9,225 $ 5,816 8/31/2004 $ 9,672 $ 9,263 $ 5,684 9/30/2004 $10,042 $ 9,363 $ 5,867 10/31/2004 $10,256 $ 9,506 $ 6,174 11/30/2004 $10,717 $ 9,891 $ 6,526 12/31/2004 $11,123 $10,227 $ 6,733 1/31/2005 $10,461 $ 9,978 $ 6,311 2/28/2005 $10,598 $10,188 $ 6,275 3/31/2005 $10,365 $10,007 $ 6,157 4/30/2005 $10,183 $ 9,818 $ 5,901 5/31/2005 $10,890 $10,130 $ 6,407 6/30/2005 $10,781 $10,144 $ 6,203 7/31/2005 $11,333 $10,522 $ 6,666 8/31/2005 $11,415 $10,426 $ 6,569 9/30/2005 $11,397 $10,510 $ 6,652 10/31/2005 $11,305 $10,335 $ 6,558 11/30/2005 $12,031 $10,726 $ 6,946 12/31/2005 $11,921 $10,729 $ 6,833 1/31/2006 $12,400 $11,014 $ 7,105 2/28/2006 $12,158 $11,043 $ 6,938 3/31/2006 $12,236 $11,181 $ 7,075 4/30/2006 $12,163 $11,331 $ 7,063 5/31/2006 $11,369 $11,005 $ 6,560 6/30/2006 $11,456 $11,020 $ 6,542 7/31/2006 $11,100 $11,088 $ 6,269 8/31/2006 $11,515 $11,352 $ 6,561 9/30/2006 $11,771 $11,644 $ 6,870 10/31/2006 $12,044 $12,024 $ 7,195 11/30/2006 $12,327 $12,252 $ 7,439 12/31/2006 $12,236 $12,424 $ 7,296 1/31/2007 $12,519 $12,612 $ 7,443 2/28/2007 $12,309 $12,365 $ 7,316 3/31/2007 $12,405 $12,504 $ 7,361 4/30/2007 $12,984 $13,057 $ 7,757 5/31/2007 $13,377 $13,513 $ 8,008 6/30/2007 $13,290 $13,289 $ 8,032 7/31/2007 $13,335 $12,877 $ 8,024 8/31/2007 $13,792 $13,070 $ 8,259 9/30/2007 $14,750 $13,558 $ 8,684 10/31/2007 $15,580 $13,774 $ 9,299 11/30/2007 $14,836 $13,198 $ 8,676 12/31/2007 $15,059 $13,107 $ 8,659 1/31/2008 $13,049 $12,321 $ 7,647 2/29/2008 $12,779 $11,920 $ 7,248 3/31/2008 $12,956 $11,869 $ 7,400 4/30/2008 $14,010 $12,447 $ 7,964 5/31/2008 $14,574 $12,608 $ 8,441 6/30/2008 $13,721 $11,545 $ 7,629 7/31/2008 $13,576 $11,448 $ 7,680 8/31/2008 $13,474 $11,614 $ 7,777 9/30/2008 $11,613 $10,579 $ 6,623 10/31/2008 $ 9,682 $ 8,802 $ 5,543 11/30/2008 $ 8,693 $ 8,171 $ 4,924 12/31/2008 $ 8,897 $ 8,257 $ 5,032 1/31/2009 $ 8,600 $ 7,561 $ 4,902 2/28/2009 $ 8,240 $ 6,756 $ 4,639 3/31/2009 $ 8,887 $ 7,348 $ 5,137 4/30/2009 $ 9,755 $ 8,051 $ 5,791 5/31/2009 $10,166 $ 8,502 $ 5,962 6/30/2009 $10,335 $ 8,519 $ 6,135 7/31/2009 $11,126 $ 9,163 $ 6,659 8/31/2009 $11,346 $ 9,494 $ 6,749 9/30/2009 $11,952 $ 9,848 $ 7,139 Total Returns 19.52% -1.52% -28.61%
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 CAN BE PARTICULARLY SENSITIVE TO CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. 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.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (5.) Aggregate total return represents the change in value of an investment over the period shown. Since Class R shares have existed for less than one year, average annual total returns are not available. (6.) 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 and average annual total returns of Advisor Class shares were -18.38% and -13.71%. (7.) Source: (C) 2009 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 - - 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. 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 4/1/09 VALUE 9/30/09 PERIOD* 4/1/09-9/30/09 ----------------- -------------- ---------------------- CLASS A Actual $1,000 $1,343.40 $ 6.76 Hypothetical (5% return before expenses) $1,000 $1,019.30 $ 5.82 CLASS B Actual $1,000 $1,338.30 $11.21 Hypothetical (5% return before expenses) $1,000 $1,015.44 $ 9.67 CLASS C Actual $1,000 $1,337.90 $11.14 Hypothetical (5% return before expenses) $1,000 $1,015.54 $ 9.60 CLASS R Actual $1,000 $1,341.60 $ 8.22 Hypothetical (5% return before expenses) $1,000 $1,018.05 $ 7.08 ADVISOR CLASS Actual $1,000 $1,344.90 $ 5.29 Hypothetical (5% return before expenses) $1,000 $1,020.56 $ 4.56
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.15%; B: 1.91%; C: 1.90%; R: 1.40%; and Advisor: 0.90%;), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 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. PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 9/30/09 (BAR CHART) Capital Goods 22.0% Pharmaceuticals, Biotechnology & Life Sciences 16.4% Technology Hardware & Equipment 15.0% Software & Services 8.6% Transportation 7.7% Energy 4.9% Health Care Equipment & Services 4.6% Materials 3.3% Automobiles & Components 2.1% Other 15.1% Short-Term Investments & Other Net Assets 0.3%
This annual report for Franklin Growth Fund covers the fiscal year ended September 30, 2009. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A had a -0.71% 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 -6.91% 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 are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Franklin Growth Fund owned shares of 152 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 hindered Fund performance during the fiscal year. In particular, the industrials sector was a major detractor where holdings such as airline operator AMR, road and rail (1.) Source: (C) 2009 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, and an index is not 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 72. 16 | Annual Report company Union Pacific, aerospace and defense companies General Dynamics, Lockheed Martin and Northrop Grumman, and industrial conglomerate Textron declined in value.(2) During the year under review, Fund performance was largely driven by several holdings in the information technology and health care sectors.(3) Within information technology, computer hardware and software company Apple, information technology outsourcing services provider Computer Sciences, technology hardware and equipment manufacturer International Business Machines, the world's leading Internet search engine operator Google and networking products manufacturer Cisco Systems boosted Fund returns. Pharmaceutical giants Wyeth, Schering-Plough and Allergan and biotechnology company Genentech in the health care sector also benefited the Fund. Genentech was acquired by Roche Holdings during the period. 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 (PHOTO OF SERENA PERIN VINTON) /s/ Serena Perin Vinton Serena Perin Vinton Portfolio Management Team Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 2009, 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. (2.) The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI. (3.) The information technology sector comprises semiconductors and semiconductor equipment, software and services, and technology hardware and equipment in the SOI. The health care sector comprises health care equipment and services; and pharmaceuticals, biotechnology and life sciences in the SOI. TOP 10 HOLDINGS Franklin Growth Fund 9/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Apple Inc. 5.3% TECHNOLOGY HARDWARE & EQUIPMENT Johnson & Johnson 2.5% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES International Business Machines Corp. 2.3% TECHNOLOGY HARDWARE & EQUIPMENT General Dynamics Corp. 2.1% CAPITAL GOODS Cisco Systems Inc. 2.1% TECHNOLOGY HARDWARE & EQUIPMENT 3M Co. 2.1% CAPITAL GOODS Allergan Inc. 1.8% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES The Boeing Co. 1.8% CAPITAL GOODS Amgen Inc. 1.8% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Hewlett-Packard Co. 1.8% TECHNOLOGY HARDWARE & EQUIPMENT
Annual Report | 17 Performance Summary as of 9/30/09 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 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.69 $36.48 $37.17 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.3065
CLASS B (SYMBOL: FKGBX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.51 $34.93 $35.44
CLASS C (SYMBOL: FRGSX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.53 $34.61 $35.14 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.0224
CLASS R (SYMBOL: FGSRX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$0.50 $36.37 $36.87 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1080
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 9/30/09 9/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.72 $36.53 $37.25 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.4017
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) -0.71% +21.85% +22.61% Average Annual Total Return(2) -6.42% +2.80% +1.46% Value of $10,000 Investment(3) $9,358 $11,483 $11,555 Total Annual Operating Expenses(4) 0.89%
CLASS B 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------- ------- Cumulative Total Return(1) -1.44% +17.33% +15.51% Average Annual Total Return(2) -5.38% +2.89% +1.45% Value of $10,000 Investment(3) $9,462 $11,533 $11,551 Total Annual Operating Expenses(4) 1.64%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------- ------- Cumulative Total Return(1) -1.45% +17.35% +13.76% Average Annual Total Return(2) -2.43% +3.25% +1.30% Value of $10,000 Investment(3) $9,757 $11,735 $11,376 Total Annual Operating Expenses(4) 1.64%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------- ------ ------- ------------------ Cumulative Total Return(1) -0.98% +20.30% +15.98% Average Annual Total Return(2) -0.98% +3.77% +1.93% Value of $10,000 Investment(3) $9,902 $12,030 $11,598 Total Annual Operating Expenses(4) 1.14%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------- ------ ------- ------- Cumulative Total Return(1) -0.45% +23.36% +25.69% Average Annual Total Return(2) -0.45% +4.29% +2.31% Value of $10,000 Investment(3) $9,955 $12,336 $12,569 Total Annual Operating Expenses(4) 0.64%
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 A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/09 - ------- ------- 1-Year -6.42% 5-Year +2.80% 10-Year +1.46%
CLASS A (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND S&P 500 DATE - CLASS A INDEX - ---- ----------- ------- 10/1/1999 $ 9,424 $10,000 10/31/1999 $ 9,577 $10,633 11/30/1999 $ 9,699 $10,849 12/31/1999 $10,012 $11,488 1/31/2000 $ 9,928 $10,911 2/29/2000 $ 9,696 $10,704 3/31/2000 $10,540 $11,751 4/30/2000 $10,664 $11,398 5/31/2000 $10,708 $11,164 6/30/2000 $10,859 $11,439 7/31/2000 $10,691 $11,260 8/31/2000 $11,160 $11,960 9/30/2000 $10,699 $11,328 10/31/2000 $10,841 $11,281 11/30/2000 $10,560 $10,391 12/31/2000 $10,766 $10,442 1/31/2001 $10,969 $10,812 2/28/2001 $10,419 $ 9,827 3/31/2001 $ 9,647 $ 9,204 4/30/2001 $10,425 $ 9,919 5/31/2001 $10,585 $ 9,986 6/30/2001 $10,099 $ 9,743 7/31/2001 $10,075 $ 9,647 8/31/2001 $ 9,617 $ 9,043 9/30/2001 $ 8,547 $ 8,313 10/31/2001 $ 8,833 $ 8,471 11/30/2001 $ 9,672 $ 9,121 12/31/2001 $ 9,747 $ 9,201 1/31/2002 $ 9,607 $ 9,067 2/28/2002 $ 9,539 $ 8,892 3/31/2002 $ 9,870 $ 9,226 4/30/2002 $ 9,246 $ 8,667 5/31/2002 $ 9,063 $ 8,603 6/30/2002 $ 8,379 $ 7,990 7/31/2002 $ 7,625 $ 7,367 8/31/2002 $ 7,640 $ 7,416 9/30/2002 $ 6,808 $ 6,610 10/31/2002 $ 7,281 $ 7,192 11/30/2002 $ 7,779 $ 7,615 12/31/2002 $ 7,373 $ 7,167 1/31/2003 $ 7,091 $ 6,980 2/28/2003 $ 6,930 $ 6,875 3/31/2003 $ 6,930 $ 6,942 4/30/2003 $ 7,435 $ 7,514 5/31/2003 $ 7,922 $ 7,909 6/30/2003 $ 8,157 $ 8,010 7/31/2003 $ 8,399 $ 8,152 8/31/2003 $ 8,585 $ 8,310 9/30/2003 $ 8,324 $ 8,222 10/31/2003 $ 8,817 $ 8,687 11/30/2003 $ 8,928 $ 8,764 12/31/2003 $ 9,440 $ 9,223 1/31/2004 $ 9,582 $ 9,393 2/29/2004 $ 9,626 $ 9,523 3/31/2004 $ 9,402 $ 9,380 4/30/2004 $ 9,409 $ 9,232 5/31/2004 $ 9,561 $ 9,359 6/30/2004 $ 9,951 $ 9,541 7/31/2004 $ 9,427 $ 9,225 8/31/2004 $ 9,347 $ 9,263 9/30/2004 $ 9,483 $ 9,363 10/31/2004 $ 9,598 $ 9,506 11/30/2004 $10,159 $ 9,891 12/31/2004 $10,506 $10,227 1/31/2005 $10,146 $ 9,978 2/28/2005 $10,323 $10,188 3/31/2005 $10,311 $10,007 4/30/2005 $10,065 $ 9,818 5/31/2005 $10,463 $10,130 6/30/2005 $10,348 $10,144 7/31/2005 $10,889 $10,522 8/31/2005 $10,848 $10,426 9/30/2005 $10,827 $10,510 10/31/2005 $10,743 $10,335 11/30/2005 $11,265 $10,726 12/31/2005 $11,384 $10,729 1/31/2006 $11,499 $11,014 2/28/2006 $11,655 $11,043 3/31/2006 $11,929 $11,181 4/30/2006 $12,023 $11,331 5/31/2006 $11,761 $11,005 6/30/2006 $11,693 $11,020 7/31/2006 $11,555 $11,088 8/31/2006 $11,830 $11,352 9/30/2006 $12,175 $11,644 10/31/2006 $12,673 $12,024 11/30/2006 $13,003 $12,252 12/31/2006 $12,996 $12,424 1/31/2007 $13,408 $12,612 2/28/2007 $13,162 $12,365 3/31/2007 $13,140 $12,504 4/30/2007 $13,670 $13,057 5/31/2007 $14,229 $13,513 6/30/2007 $14,098 $13,289 7/31/2007 $13,820 $12,877 8/31/2007 $13,970 $13,070 9/30/2007 $14,473 $13,558 10/31/2007 $14,957 $13,774 11/30/2007 $14,326 $13,198 12/31/2007 $13,923 $13,107 1/31/2008 $13,018 $12,321 2/29/2008 $12,802 $11,920 3/31/2008 $12,648 $11,869 4/30/2008 $13,231 $12,447 5/31/2008 $13,616 $12,608 6/30/2008 $12,382 $11,545 7/31/2008 $12,770 $11,448 8/31/2008 $13,040 $11,614 9/30/2008 $11,637 $10,579 10/31/2008 $ 9,724 $ 8,802 11/30/2008 $ 8,920 $ 8,171 12/31/2008 $ 9,274 $ 8,257 1/31/2009 $ 8,793 $ 7,561 2/28/2009 $ 7,887 $ 6,756 3/31/2009 $ 8,464 $ 7,348 4/30/2009 $ 9,417 $ 8,051 5/31/2009 $ 9,791 $ 8,502 6/30/2009 $ 9,826 $ 8,519 7/31/2009 $10,668 $ 9,163 8/31/2009 $11,001 $ 9,494 9/30/2009 $11,555 $ 9,848
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/09 - ------- ------- 1-Year -5.38% 5-Year +2.89% 10-Year +1.45%
CLASS B (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND S&P 500 DATE - CLASS B INDEX - ---- ----------- ------- 10/1/1999 $10,000 $10,000 10/31/1999 $10,157 $10,633 11/30/1999 $10,276 $10,849 12/31/1999 $10,602 $11,488 1/31/2000 $10,503 $10,911 2/29/2000 $10,256 $10,704 3/31/2000 $11,138 $11,751 4/30/2000 $11,265 $11,398 5/31/2000 $11,305 $11,164 6/30/2000 $11,456 $11,439 7/31/2000 $11,271 $11,260 8/31/2000 $11,761 $11,960 9/30/2000 $11,268 $11,328 10/31/2000 $11,410 $11,281 11/30/2000 $11,107 $10,391 12/31/2000 $11,315 $10,442 1/31/2001 $11,523 $10,812 2/28/2001 $10,941 $ 9,827 3/31/2001 $10,121 $ 9,204 4/30/2001 $10,928 $ 9,919 5/31/2001 $11,091 $ 9,986 6/30/2001 $10,577 $ 9,743 7/31/2001 $10,541 $ 9,647 8/31/2001 $10,060 $ 9,043 9/30/2001 $ 8,931 $ 8,313 10/31/2001 $ 9,224 $ 8,471 11/30/2001 $10,102 $ 9,121 12/31/2001 $10,172 $ 9,201 1/31/2002 $10,019 $ 9,067 2/28/2002 $ 9,944 $ 8,892 3/31/2002 $10,279 $ 9,226 4/30/2002 $ 9,625 $ 8,667 5/31/2002 $ 9,429 $ 8,603 6/30/2002 $ 8,710 $ 7,990 7/31/2002 $ 7,921 $ 7,367 8/31/2002 $ 7,934 $ 7,416 9/30/2002 $ 7,065 $ 6,610 10/31/2002 $ 7,550 $ 7,192 11/30/2002 $ 8,065 $ 7,615 12/31/2002 $ 7,635 $ 7,167 1/31/2003 $ 7,342 $ 6,980 2/28/2003 $ 7,169 $ 6,875 3/31/2003 $ 7,166 $ 6,942 4/30/2003 $ 7,684 $ 7,514 5/31/2003 $ 8,179 $ 7,909 6/30/2003 $ 8,416 $ 8,010 7/31/2003 $ 8,661 $ 8,152 8/31/2003 $ 8,846 $ 8,310 9/30/2003 $ 8,573 $ 8,222 10/31/2003 $ 9,074 $ 8,687 11/30/2003 $ 9,185 $ 8,764 12/31/2003 $ 9,703 $ 9,223 1/31/2004 $ 9,843 $ 9,393 2/29/2004 $ 9,885 $ 9,523 3/31/2004 $ 9,648 $ 9,380 4/30/2004 $ 9,651 $ 9,232 5/31/2004 $ 9,801 $ 9,359 6/30/2004 $10,195 $ 9,541 7/31/2004 $ 9,648 $ 9,225 8/31/2004 $ 9,563 $ 9,263 9/30/2004 $ 9,696 $ 9,363 10/31/2004 $ 9,807 $ 9,506 11/30/2004 $10,374 $ 9,891 12/31/2004 $10,719 $10,227 1/31/2005 $10,348 $ 9,978 2/28/2005 $10,521 $10,188 3/31/2005 $10,504 $10,007 4/30/2005 $10,247 $ 9,818 5/31/2005 $10,644 $10,130 6/30/2005 $10,521 $10,144 7/31/2005 $11,061 $10,522 8/31/2005 $11,016 $10,426 9/30/2005 $10,986 $10,510 10/31/2005 $10,892 $10,335 11/30/2005 $11,416 $10,726 12/31/2005 $11,530 $10,729 1/31/2006 $11,641 $11,014 2/28/2006 $11,791 $11,043 3/31/2006 $12,061 $11,181 4/30/2006 $12,146 $11,331 5/31/2006 $11,872 $11,005 6/30/2006 $11,801 $11,020 7/31/2006 $11,654 $11,088 8/31/2006 $11,924 $11,352 9/30/2006 $12,263 $11,644 10/31/2006 $12,755 $12,024 11/30/2006 $13,081 $12,252 12/31/2006 $13,061 $12,424 1/31/2007 $13,468 $12,612 2/28/2007 $13,214 $12,365 3/31/2007 $13,182 $12,504 4/30/2007 $13,709 $13,057 5/31/2007 $14,256 $13,513 6/30/2007 $14,116 $13,289 7/31/2007 $13,833 $12,877 8/31/2007 $13,970 $13,070 9/30/2007 $14,468 $13,558 10/31/2007 $14,951 $13,774 11/30/2007 $14,320 $13,198 12/31/2007 $13,916 $13,107 1/31/2008 $13,012 $12,321 2/29/2008 $12,796 $11,920 3/31/2008 $12,642 $11,869 4/30/2008 $13,224 $12,447 5/31/2008 $13,609 $12,608 6/30/2008 $12,376 $11,545 7/31/2008 $12,764 $11,448 8/31/2008 $13,034 $11,614 9/30/2008 $11,631 $10,579 10/31/2008 $ 9,719 $ 8,802 11/30/2008 $ 8,915 $ 8,171 12/31/2008 $ 9,270 $ 8,257 1/31/2009 $ 8,789 $ 7,561 2/28/2009 $ 7,884 $ 6,756 3/31/2009 $ 8,460 $ 7,348 4/30/2009 $ 9,413 $ 8,051 5/31/2009 $ 9,786 $ 8,502 6/30/2009 $ 9,822 $ 8,519 7/31/2009 $10,664 $ 9,163 8/31/2009 $10,997 $ 9,494 9/30/2009 $11,551 $ 9,848
20 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/09 - ------- ------- 1-Year -2.43% 5-Year +3.25% 10-Year +1.30%
CLASS C (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND S&P 500 DATE - CLASS C INDEX - ---- ----------- ------- 10/1/1999 $10,000 $10,000 10/31/1999 $10,157 $10,633 11/30/1999 $10,279 $10,849 12/31/1999 $10,608 $11,488 1/31/2000 $10,508 $10,911 2/29/2000 $10,259 $10,704 3/31/2000 $11,143 $11,751 4/30/2000 $11,265 $11,398 5/31/2000 $11,305 $11,164 6/30/2000 $11,458 $11,439 7/31/2000 $11,274 $11,260 8/31/2000 $11,763 $11,960 9/30/2000 $11,271 $11,328 10/31/2000 $11,414 $11,281 11/30/2000 $11,109 $10,391 12/31/2000 $11,320 $10,442 1/31/2001 $11,523 $10,812 2/28/2001 $10,943 $ 9,827 3/31/2001 $10,122 $ 9,204 4/30/2001 $10,933 $ 9,919 5/31/2001 $11,093 $ 9,986 6/30/2001 $10,578 $ 9,743 7/31/2001 $10,542 $ 9,647 8/31/2001 $10,060 $ 9,043 9/30/2001 $ 8,935 $ 8,313 10/31/2001 $ 9,227 $ 8,471 11/30/2001 $10,100 $ 9,121 12/31/2001 $10,170 $ 9,201 1/31/2002 $10,019 $ 9,067 2/28/2002 $ 9,944 $ 8,892 3/31/2002 $10,279 $ 9,226 4/30/2002 $ 9,625 $ 8,667 5/31/2002 $ 9,428 $ 8,603 6/30/2002 $ 8,712 $ 7,990 7/31/2002 $ 7,920 $ 7,367 8/31/2002 $ 7,933 $ 7,416 9/30/2002 $ 7,066 $ 6,610 10/31/2002 $ 7,552 $ 7,192 11/30/2002 $ 8,065 $ 7,615 12/31/2002 $ 7,638 $ 7,167 1/31/2003 $ 7,342 $ 6,980 2/28/2003 $ 7,168 $ 6,875 3/31/2003 $ 7,165 $ 6,942 4/30/2003 $ 7,684 $ 7,514 5/31/2003 $ 8,180 $ 7,909 6/30/2003 $ 8,416 $ 8,010 7/31/2003 $ 8,663 $ 8,152 8/31/2003 $ 8,846 $ 8,310 9/30/2003 $ 8,574 $ 8,222 10/31/2003 $ 9,073 $ 8,687 11/30/2003 $ 9,182 $ 8,764 12/31/2003 $ 9,704 $ 9,223 1/31/2004 $ 9,842 $ 9,393 2/29/2004 $ 9,885 $ 9,523 3/31/2004 $ 9,648 $ 9,380 4/30/2004 $ 9,648 $ 9,232 5/31/2004 $ 9,799 $ 9,359 6/30/2004 $10,193 $ 9,541 7/31/2004 $ 9,648 $ 9,225 8/31/2004 $ 9,559 $ 9,263 9/30/2004 $ 9,694 $ 9,363 10/31/2004 $ 9,806 $ 9,506 11/30/2004 $10,371 $ 9,891 12/31/2004 $10,719 $10,227 1/31/2005 $10,344 $ 9,978 2/28/2005 $10,519 $10,188 3/31/2005 $10,502 $10,007 4/30/2005 $10,243 $ 9,818 5/31/2005 $10,640 $10,130 6/30/2005 $10,519 $10,144 7/31/2005 $11,061 $10,522 8/31/2005 $11,015 $10,426 9/30/2005 $10,985 $10,510 10/31/2005 $10,890 $10,335 11/30/2005 $11,412 $10,726 12/31/2005 $11,527 $10,729 1/31/2006 $11,639 $11,014 2/28/2006 $11,787 $11,043 3/31/2006 $12,059 $11,181 4/30/2006 $12,145 $11,331 5/31/2006 $11,872 $11,005 6/30/2006 $11,796 $11,020 7/31/2006 $11,652 $11,088 8/31/2006 $11,921 $11,352 9/30/2006 $12,260 $11,644 10/31/2006 $12,752 $12,024 11/30/2006 $13,078 $12,252 12/31/2006 $13,061 $12,424 1/31/2007 $13,465 $12,612 2/28/2007 $13,212 $12,365 3/31/2007 $13,183 $12,504 4/30/2007 $13,705 $13,057 5/31/2007 $14,257 $13,513 6/30/2007 $14,116 $13,289 7/31/2007 $13,830 $12,877 8/31/2007 $13,971 $13,070 9/30/2007 $14,464 $13,558 10/31/2007 $14,940 $13,774 11/30/2007 $14,300 $13,198 12/31/2007 $13,889 $13,107 1/31/2008 $12,979 $12,321 2/29/2008 $12,756 $11,920 3/31/2008 $12,591 $11,869 4/30/2008 $13,163 $12,447 5/31/2008 $13,541 $12,608 6/30/2008 $12,306 $11,545 7/31/2008 $12,683 $11,448 8/31/2008 $12,943 $11,614 9/30/2008 $11,543 $10,579 10/31/2008 $ 9,641 $ 8,802 11/30/2008 $ 8,837 $ 8,171 12/31/2008 $ 9,183 $ 8,257 1/31/2009 $ 8,700 $ 7,561 2/28/2009 $ 7,799 $ 6,756 3/31/2009 $ 8,365 $ 7,348 4/30/2009 $ 9,302 $ 8,051 5/31/2009 $ 9,663 $ 8,502 6/30/2009 $ 9,696 $ 8,519 7/31/2009 $10,518 $ 9,163 8/31/2009 $10,840 $ 9,494 9/30/2009 $11,376 $ 9,848
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/09 - ------- ------- 1-Year -0.98% 5-Year +3.77% Since Inception (1/1/02) +1.93%
CLASS R (1/1/02-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND S&P 500 DATE - 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 $10,027 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 $ 7,586 2/28/2003 $ 7,071 $ 7,472 3/31/2003 $ 7,071 $ 7,545 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 $10,024 1/31/2004 $ 9,755 $10,208 2/29/2004 $ 9,799 $10,350 3/31/2004 $ 9,571 $10,194 4/30/2004 $ 9,575 $10,034 5/31/2004 $ 9,730 $10,172 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 $10,176 10/31/2004 $ 9,755 $10,332 11/30/2004 $10,323 $10,750 12/31/2004 $10,674 $11,115 1/31/2005 $10,306 $10,844 2/28/2005 $10,483 $11,073 3/31/2005 $10,467 $10,877 4/30/2005 $10,217 $10,670 5/31/2005 $10,620 $11,010 6/30/2005 $10,499 $11,025 7/31/2005 $11,045 $11,435 8/31/2005 $11,004 $11,331 9/30/2005 $10,978 $11,423 10/31/2005 $10,889 $11,232 11/30/2005 $11,416 $11,657 12/31/2005 $11,534 $11,661 1/31/2006 $11,651 $11,970 2/28/2006 $11,804 $12,003 3/31/2006 $12,083 $12,152 4/30/2006 $12,172 $12,315 5/31/2006 $11,906 $11,961 6/30/2006 $11,836 $11,977 7/31/2006 $11,693 $12,051 8/31/2006 $11,969 $12,338 9/30/2006 $12,315 $12,655 10/31/2006 $12,813 $13,068 11/30/2006 $13,147 $13,316 12/31/2006 $13,136 $13,503 1/31/2007 $13,549 $13,707 2/28/2007 $13,295 $13,439 3/31/2007 $13,272 $13,590 4/30/2007 $13,806 $14,192 5/31/2007 $14,364 $14,687 6/30/2007 $14,231 $14,443 7/31/2007 $13,949 $13,995 8/31/2007 $14,095 $14,205 9/30/2007 $14,600 $14,736 10/31/2007 $15,086 $14,970 11/30/2007 $14,444 $14,345 12/31/2007 $14,034 $14,245 1/31/2008 $13,123 $13,391 2/29/2008 $12,900 $12,956 3/31/2008 $12,742 $12,900 4/30/2008 $13,326 $13,528 5/31/2008 $13,713 $13,703 6/30/2008 $12,468 $12,548 7/31/2008 $12,856 $12,442 8/31/2008 $13,126 $12,622 9/30/2008 $11,712 $11,498 10/31/2008 $ 9,784 $ 9,567 11/30/2008 $ 8,974 $ 8,880 12/31/2008 $ 9,330 $ 8,975 1/31/2009 $ 8,843 $ 8,218 2/28/2009 $ 7,930 $ 7,343 3/31/2009 $ 8,507 $ 7,986 4/30/2009 $ 9,464 $ 8,751 5/31/2009 $ 9,837 $ 9,240 6/30/2009 $ 9,872 $ 9,259 7/31/2009 $10,715 $ 9,959 8/31/2009 $11,046 $10,318 9/30/2009 $11,598 $10,703
Annual Report | 21 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/09 - ------------- ------- 1-Year -0.45% 5-Year +4.29% 10-Year +2.31%
ADVISOR CLASS (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN GROWTH FUND - S&P 500 DATE ADVISOR CLASS Index - ---- ------------- ------- 10/1/1999 $10,000 $10,000 10/31/1999 $10,165 $10,633 11/30/1999 $10,298 $10,849 12/31/1999 $10,633 $11,488 1/31/2000 $10,544 $10,911 2/29/2000 $10,301 $10,704 3/31/2000 $11,199 $11,751 4/30/2000 $11,332 $11,398 5/31/2000 $11,381 $11,164 6/30/2000 $11,547 $11,439 7/31/2000 $11,369 $11,260 8/31/2000 $11,870 $11,960 9/30/2000 $11,384 $11,328 10/31/2000 $11,538 $11,281 11/30/2000 $11,239 $10,391 12/31/2000 $11,459 $10,442 1/31/2001 $11,679 $10,812 2/28/2001 $11,096 $ 9,827 3/31/2001 $10,275 $ 9,204 4/30/2001 $11,106 $ 9,919 5/31/2001 $11,280 $ 9,986 6/30/2001 $10,763 $ 9,743 7/31/2001 $10,740 $ 9,647 8/31/2001 $10,256 $ 9,043 9/30/2001 $ 9,114 $ 8,313 10/31/2001 $ 9,421 $ 8,471 11/30/2001 $10,321 $ 9,121 12/31/2001 $10,401 $ 9,201 1/31/2002 $10,253 $ 9,067 2/28/2002 $10,184 $ 8,892 3/31/2002 $10,540 $ 9,226 4/30/2002 $ 9,873 $ 8,667 5/31/2002 $ 9,682 $ 8,603 6/30/2002 $ 8,952 $ 7,990 7/31/2002 $ 8,147 $ 7,367 8/31/2002 $ 8,167 $ 7,416 9/30/2002 $ 7,279 $ 6,610 10/31/2002 $ 7,787 $ 7,192 11/30/2002 $ 8,322 $ 7,615 12/31/2002 $ 7,888 $ 7,167 1/31/2003 $ 7,589 $ 6,980 2/28/2003 $ 7,417 $ 6,875 3/31/2003 $ 7,420 $ 6,942 4/30/2003 $ 7,960 $ 7,514 5/31/2003 $ 8,484 $ 7,909 6/30/2003 $ 8,736 $ 8,010 7/31/2003 $ 8,998 $ 8,152 8/31/2003 $ 9,197 $ 8,310 9/30/2003 $ 8,922 $ 8,222 10/31/2003 $ 9,452 $ 8,687 11/30/2003 $ 9,572 $ 8,764 12/31/2003 $10,125 $ 9,223 1/31/2004 $10,278 $ 9,393 2/29/2004 $10,328 $ 9,523 3/31/2004 $10,088 $ 9,380 4/30/2004 $10,098 $ 9,232 5/31/2004 $10,265 $ 9,359 6/30/2004 $10,684 $ 9,541 7/31/2004 $10,125 $ 9,225 8/31/2004 $10,039 $ 9,263 9/30/2004 $10,188 $ 9,363 10/31/2004 $10,315 $ 9,506 11/30/2004 $10,920 $ 9,891 12/31/2004 $11,293 $10,227 1/31/2005 $10,909 $ 9,978 2/28/2005 $11,102 $10,188 3/31/2005 $11,092 $10,007 4/30/2005 $10,828 $ 9,818 5/31/2005 $11,259 $10,130 6/30/2005 $11,139 $10,144 7/31/2005 $11,721 $10,522 8/31/2005 $11,684 $10,426 9/30/2005 $11,660 $10,510 10/31/2005 $11,574 $10,335 11/30/2005 $12,135 $10,726 12/31/2005 $12,269 $10,729 1/31/2006 $12,397 $11,014 2/28/2006 $12,564 $11,043 3/31/2006 $12,866 $11,181 4/30/2006 $12,967 $11,331 5/31/2006 $12,685 $11,005 6/30/2006 $12,618 $11,020 7/31/2006 $12,474 $11,088 8/31/2006 $12,773 $11,352 9/30/2006 $13,145 $11,644 10/31/2006 $13,685 $12,024 11/30/2006 $14,044 $12,252 12/31/2006 $14,038 $12,424 1/31/2007 $14,487 $12,612 2/28/2007 $14,224 $12,365 3/31/2007 $14,203 $12,504 4/30/2007 $14,780 $13,057 5/31/2007 $15,387 $13,513 6/30/2007 $15,249 $13,289 7/31/2007 $14,952 $12,877 8/31/2007 $15,117 $13,070 9/30/2007 $15,663 $13,558 10/31/2007 $16,193 $13,774 11/30/2007 $15,512 $13,198 12/31/2007 $15,076 $13,107 1/31/2008 $14,103 $12,321 2/29/2008 $13,870 $11,920 3/31/2008 $13,703 $11,869 4/30/2008 $14,341 $12,447 5/31/2008 $14,761 $12,608 6/30/2008 $13,429 $11,545 7/31/2008 $13,849 $11,448 8/31/2008 $14,147 $11,614 9/30/2008 $12,626 $10,579 10/31/2008 $10,555 $ 8,802 11/30/2008 $ 9,684 $ 8,171 12/31/2008 $10,070 $ 8,257 1/31/2009 $ 9,547 $ 7,561 2/28/2009 $ 8,566 $ 6,756 3/31/2009 $ 9,196 $ 7,348 4/30/2009 $10,232 $ 8,051 5/31/2009 $10,641 $ 8,502 6/30/2009 $10,683 $ 8,519 7/31/2009 $11,598 $ 9,163 8/31/2009 $11,966 $ 9,494 9/30/2009 $12,569 $ 9,848
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 25% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS AND ECONOMIC AS WELL AS POLITICAL UNCERTAINTY. THE PORTFOLIO INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN ONE OF THE MOST VOLATILE SECTORS OF THE MARKET. 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.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (5.) Source: (C) 2009 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 - - 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. 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 PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD* 4/1/09 9/30/09 4/1/09-9/30/09 --------- --------- -------------- CLASS A Actual $1,000 $1,365.30 $ 5.93 Hypothetical (5% return before expenses) $1,000 $1,020.05 $ 5.06 CLASS B Actual $1,000 $1,360.20 $10.35 Hypothetical (5% return before expenses) $1,000 $1,016.29 $ 8.85 CLASS C Actual $1,000 $1,360.10 $10.35 Hypothetical (5% return before expenses) $1,000 $1,016.29 $ 8.85 CLASS R Actual $1,000 $1,363.30 $ 7.41 Hypothetical (5% return before expenses) $1,000 $1,018.80 $ 6.33 ADVISOR CLASS Actual $1,000 $1,366.80 $ 4.45 Hypothetical (5% return before expenses) $1,000 $1,021.31 $ 3.80
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.00%; B: 1.75%; C: 1.75%; R: 1.25%; and Advisor: 0.75%), multiplied by the average account value over the period, multiplied by 183/365 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 by investing, under normal market conditions, in 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. We are pleased to bring you Franklin Income Fund's annual report for the fiscal year ended September 30, 2009. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +10.56% cumulative total return for the 12 months under review. The Fund - Class A outperformed its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -6.91% total return; matched the performance of its fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which returned +10.56%; and outperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which had a +2.73% 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. (1.) Source: (C) 2009 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 is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB-or higher) by Moody's, Standard & Poor's or Fitch, respectively. 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 9/30/09, there were 505 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, and an index is not representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 83. Annual Report | 25 DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/08-9/30/09
DIVIDEND PER SHARE (CENTS) ------------------------------------------------------------ ADVISOR MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R CLASS - ----- ------- ------- ---------- ------- ------- ------- October 1.25 1.09 1.16 1.16 1.19 1.27 November 1.25 1.09 1.16 1.16 1.19 1.27 December*** 2.20 2.10 2.13 2.13 2.16 2.23 January 1.25 1.15 1.18 1.18 1.21 1.28 February 1.25 1.15 1.18 1.18 1.21 1.28 March 1.25 1.14 1.20 1.19 1.20 1.27 April 1.25 1.14 1.20 1.19 1.20 1.27 May 1.25 1.14 1.20 1.19 1.20 1.27 June 1.25 1.15 1.19 1.19 1.21 1.27 July 1.25 1.15 1.19 1.19 1.21 1.27 August 1.25 1.15 1.19 1.19 1.21 1.27 September 1.25 1.10 1.16 1.17 1.19 1.27 ----- ----- ----- ----- ----- ----- TOTAL 15.95 14.55 15.14 15.12 15.38 16.22
* 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 0.95 cent per share distribution to meet excise tax requirements. INVESTMENT STRATEGY By generally performing independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION During the period under review, the global financial and credit crises and significant decline in economic activity led to severe financial market volatility. During the first half of the year, stocks plummeted as the S&P 500 declined 41.17% from September 30, 2008, to its low on March 9, 2009.1 Stocks recovered in the second half of the year and the S&P 500 gained 58.25% from March 9, 2009, through period-end.(1) 26 | Annual Report After a period of unprecedented fixed income market dislocation in the second half of 2008 -- particularly with widening investment-grade and high yield corporate bonds' credit spreads -- markets bottomed in December 2008. Then bonds began a gradual recovery process spurred in part by coordinated action from central banks and governments to support the functioning of financial markets. We increased our fixed income allocation during the Fund's fiscal year in response to what we considered attractive risk-adjusted pricing for investment-grade corporate and high yield bonds particularly when compared with other similar markets offering high current income and potential positive total return. The Fund's fixed income exposure increased from 52.8% of total net assets on September 30, 2008, to 66.4% on September 30, 2009. Its equity exposure declined from 40.9% to 30.5% during the same time. Short-term investments and other net assets (cash) declined from 6.3% to 3.1% as we sought to take advantage of what we believed were attractive market opportunities. Within fixed income, auto finance companies Ford Motor Credit Company (FMCC) and GMAC rose over the past 12 months as credit markets began to return to normal functioning and the economy responded to government stimulus measures. For example, the "Cash for Clunkers" program boosted auto sales. FMCC benefited from parent company Ford Motor's ability to manage through the downturn without seeking government rescue financing while GMAC saw former parent General Motors undergo a government-led restructuring, which could leave the car maker in a more competitive position going forward. Other large fixed income holdings that drove strong performance included high yield bond positions in Tenet Healthcare, Dynegy Holdings and Dollar General. Hospital operator Tenet Healthcare benefited from improved operating and financial performance as well as a series of capital market transactions that enabled the company to refinance near-term debt maturities and reduce total debt outstanding. Independent power producer Dynegy Holdings benefited from strong liquidity and no near-term debt maturities, while discount retailer Dollar General's bonds appreciated due to strong store performance amid the overall weak economic backdrop. Several investment-grade bond positions appreciated as that market recovered from October 2008 low prices. Strong performers included Altria Group, Allied Waste North America and Freeport-McMoRan Copper & Gold. PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 9/30/09 Consumer Discretionary Bonds 15.5% Utilities Stocks 11.3% Energy Bonds 8.9% Financials Stocks 8.5% Financials Bonds 7.8% Utilities Bonds 6.9% Health Care Bonds 6.2% Senior Floating Rate Interests 5.7% Industrials Bonds 5.4% Energy Stocks 4.2% Materials Bonds 3.5% Health Care Stocks 2.8% Information Technology Bonds 2.6% Corporate Convertible Bonds 2.0% Other Stocks 3.7% Other Bonds 1.9% Short-Term Investments & Other Net Assets 3.1%
Annual Report | 27 TOP 5 EQUITY HOLDINGS Franklin Income Fund 9/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Bank of America Corp. 2.6% FINANCIALS Wells Fargo & Co. 2.1% FINANCIALS Canadian Oil Sands Trust (Canada) 1.6% ENERGY Merck & Co. Inc. 1.5% HEALTH CARE Duke Energy Corp. 1.1% UTILITIES
TOP 5 BOND HOLDINGS* Franklin Income Fund 9/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Ford Motor Credit Co. LLC 4.1% CONSUMER DISCRETIONARY Tenet Healthcare Corp. 2.6% HEALTH CARE Dynegy Holdings Inc. 2.4% UTILITIES HCA Inc. 2.4% HEALTH CARE Chesapeake Energy Corp. 1.9% ENERGY
* Does not include convertible bonds. Despite the strong rebound in fixed income markets, several positions negatively impacted Fund results including cable company Charter Communications and publisher R.H. Donnelley. Both companies sought bankruptcy protection to deal with overleveraged corporate structures. Although the Fund's total equity exposure declined meaningfully during the year, we continued to actively look for opportunities in common stocks, preferred stocks and convertible securities that may help us meet the Fund's investment objective over the long term. Common stock and convertible holdings in several banks including JPMorgan Chase, Wells Fargo and Citigroup appreciated as credit markets stabilized and these companies took steps to ensure adequate capital reserves as part of the government's required stress test for financial institutions. Certain convertible security holdings aided Fund performance. SandRidge Energy, an oil and gas company, rose due to improved outlooks for oil and gas prices, while Vornado Realty Trust, an office property REIT, benefited from normalized access to credit for this leading office property owner. Although several utility positions helped Fund results, particularly FPL Group and PG&E, the sector as a whole lagged significantly behind the broader market advance so far in 2009. From December 31, 2008, through September 30, 2009, the S&P 500 posted a +19.26% total return while the S&P 500 Utility Index had only a +4.33% total return.2 The Fund's large weighting in the sector negatively impacted results as several holdings declined in value, including The Southern Co., Dominion Resources and FirstEnergy. (2.) Source: (C) 2009 Morningstar. See footnote 1 for a description of the S&P 500. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500. 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, 2009, 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 9/30/09 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 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $1.99 $1.98 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1595 Short-Term Capital Gain $0.0012 TOTAL $0.1607
CLASS B (SYMBOL: FBICX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $1.98 $1.97 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1455 Short-Term Capital Gain $0.0012 TOTAL $0.1467
CLASS B1 (SYMBOL: FICBX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $1.99 $1.98 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1514 Short-Term Capital Gain $0.0012 TOTAL $0.1526
CLASS C (SYMBOL: FCISX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $2.00 $1.99 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1512 Short-Term Capital Gain $0.0012 TOTAL $0.1524
CLASS R (SYMBOL: FISRX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $1.96 $1.95 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1538 Short-Term Capital Gain $0.0012 TOTAL $0.1550
30 | Annual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 9/30/09 9/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.01 $1.98 $1.97 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.1622 Short-Term Capital Gain $0.0012 TOTAL $0.1634
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) +10.56% +20.26% +96.69% Average Annual Total Return(2) +5.75% +2.84% +6.53% Value of $10,000 Investment(3) $10,575 $11,504 $18,829 Distribution Rate(4) 7.21% 30-Day Standardized Yield(5) 7.06% Total Annual Operating Expenses(6) 0.62%
INCEPTION CLASS B 1-YEAR 5-YEAR (11/1/01) - ------- ------- ------- --------- Cumulative Total Return(1) +9.70% +15.33% +57.86% Average Annual Total Return(2) +5.70% +2.60% +5.94% Value of $10,000 Investment(3) $10,570 $11,369 $15,786 Distribution Rate(4) 6.67% 30-Day Standardized Yield(5) 6.54% Total Annual Operating Expenses(6) 1.47%
CLASS B1 1-YEAR 5-YEAR 10-YEAR - -------- ------- ------- ------- Cumulative Total Return(1) +10.03% +17.28% +88.97% Average Annual Total Return(2) +6.03% +2.95% +6.57% Value of $10,000 Investment(3) $10,603 $11,564 $18,897 Distribution Rate(4) 6.99% 30-Day Standardized Yield(5) 6.92% Total Annual Operating Expenses(6) 1.12%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------- ------- ------- Cumulative Total Return(1) +9.93% +17.12% +87.27% Average Annual Total Return(2) +8.93% +3.21% +6.47% Value of $10,000 Investment(3) $10,893 $11,712 $18,727 Distribution Rate(4) 7.02% 30-Day Standardized Yield(5) 6.90% Total Annual Operating Expenses(6) 1.12%
Annual Report | 31 Performance Summary (CONTINUED) PERFORMANCE (CONTINUED)
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) - ------- ------- ------- --------- Cumulative Total Return(1) +10.31% +17.82% +58.46% Average Annual Total Return(2) +10.31% +3.33% +6.13% Value of $10,000 Investment(3) $11,031 $11,782 $15,846 Distribution Rate(4) 7.29% 30-Day Standardized Yield(5) 7.06% Total Annual Operating Expenses(6) 0.97%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------- ------- ------- -------- Cumulative Total Return(1) +10.79% +21.26% +100.21% Average Annual Total Return(2) +10.79% +3.93% +7.19% Value of $10,000 Investment(3) $11,079 $12,126 $ 20,021 Distribution Rate(4) 7.70% 30-Day Standardized Yield(5) 7.53% Total Annual Operating Expenses(6) 0.47%
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 A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/09 - ------- ------- 1-Year +5.75% 5-Year +2.84% 10-Year +6.53%
CLASS A (10/1/99-9/30/09) (PERFORMANCE GRAPH)
BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS A INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 10/1/1999 $ 9,573 $10,000 $10,000 $10,000 10/31/1999 $ 9,551 $10,633 $10,037 $10,254 11/30/1999 $ 9,400 $10,849 $10,036 $10,385 12/31/1999 $ 9,439 $11,488 $ 9,988 $10,722 1/31/2000 $ 9,506 $10,911 $ 9,955 $10,462 2/29/2000 $ 9,351 $10,704 $10,076 $10,503 3/31/2000 $ 9,508 $11,751 $10,208 $10,998 4/30/2000 $ 9,846 $11,398 $10,179 $10,801 5/31/2000 $10,005 $11,164 $10,174 $10,706 6/30/2000 $10,073 $11,439 $10,386 $10,889 7/31/2000 $10,188 $11,260 $10,480 $10,838 8/31/2000 $10,768 $11,960 $10,632 $11,294 9/30/2000 $10,978 $11,328 $10,699 $11,076 10/31/2000 $10,813 $11,281 $10,770 $11,023 11/30/2000 $10,741 $10,391 $10,946 $10,616 12/31/2000 $11,383 $10,442 $11,149 $10,903 1/31/2001 $11,360 $10,812 $11,331 $11,099 2/28/2001 $11,579 $ 9,827 $11,430 $10,689 3/31/2001 $11,407 $ 9,204 $11,487 $10,346 4/30/2001 $11,630 $ 9,919 $11,440 $10,772 5/31/2001 $11,853 $ 9,986 $11,509 $10,835 6/30/2001 $11,578 $ 9,743 $11,552 $10,695 7/31/2001 $11,452 $ 9,647 $11,811 $10,668 8/31/2001 $11,578 $ 9,043 $11,946 $10,415 9/30/2001 $11,042 $ 8,313 $12,085 $ 9,892 10/31/2001 $11,119 $ 8,471 $12,338 $10,077 11/30/2001 $11,352 $ 9,121 $12,168 $10,411 12/31/2001 $11,457 $ 9,201 $12,090 $10,491 1/31/2002 $11,536 $ 9,067 $12,188 $10,406 2/28/2002 $11,615 $ 8,892 $12,307 $10,345 3/31/2002 $11,964 $ 9,226 $12,102 $10,565 4/30/2002 $12,034 $ 8,667 $12,337 $10,404 5/31/2002 $11,995 $ 8,603 $12,442 $10,384 6/30/2002 $11,248 $ 7,990 $12,549 $ 9,988 7/31/2002 $10,715 $ 7,367 $12,701 $ 9,509 8/31/2002 $11,064 $ 7,416 $12,915 $ 9,603 9/30/2002 $10,580 $ 6,610 $13,124 $ 9,082 10/31/2002 $10,652 $ 7,192 $13,064 $ 9,388 11/30/2002 $11,233 $ 7,615 $13,061 $ 9,716 12/31/2002 $11,335 $ 7,167 $13,331 $ 9,519 1/31/2003 $11,409 $ 6,980 $13,342 $ 9,390 2/28/2003 $11,253 $ 6,875 $13,527 $ 9,328 3/31/2003 $11,502 $ 6,942 $13,516 $ 9,368 4/30/2003 $12,221 $ 7,514 $13,628 $ 9,840 5/31/2003 $12,885 $ 7,909 $13,882 $10,260 6/30/2003 $13,139 $ 8,010 $13,854 $10,353 7/31/2003 $12,979 $ 8,152 $13,389 $10,349 8/31/2003 $13,177 $ 8,310 $13,478 $10,506 9/30/2003 $13,555 $ 8,222 $13,834 $10,566 10/31/2003 $13,937 $ 8,687 $13,705 $10,874 11/30/2003 $14,138 $ 8,764 $13,738 $10,983 12/31/2003 $14,845 $ 9,223 $13,878 $11,346 1/31/2004 $15,049 $ 9,393 $13,990 $11,493 2/29/2004 $15,067 $ 9,523 $14,141 $11,634 3/31/2004 $15,086 $ 9,380 $14,247 $11,612 4/30/2004 $14,853 $ 9,232 $13,876 $11,345 5/31/2004 $14,808 $ 9,359 $13,821 $11,386 6/30/2004 $15,019 $ 9,541 $13,899 $11,549 7/31/2004 $15,102 $ 9,225 $14,037 $11,358 8/31/2004 $15,443 $ 9,263 $14,304 $11,460 9/30/2004 $15,656 $ 9,363 $14,343 $11,594 10/31/2004 $15,870 $ 9,506 $14,463 $11,739 11/30/2004 $16,217 $ 9,891 $14,348 $12,042 12/31/2004 $16,652 $10,227 $14,480 $12,320 1/31/2005 $16,341 $ 9,978 $14,571 $12,168 2/28/2005 $16,758 $10,188 $14,485 $12,334 3/31/2005 $16,439 $10,007 $14,411 $12,165 4/30/2005 $16,186 $ 9,818 $14,606 $12,045 5/31/2005 $16,542 $10,130 $14,764 $12,281 6/30/2005 $17,036 $10,144 $14,844 $12,385 7/31/2005 $17,395 $10,522 $14,709 $12,633 8/31/2005 $17,343 $10,426 $14,898 $12,665 9/30/2005 $17,292 $10,510 $14,744 $12,720 10/31/2005 $16,753 $10,335 $14,628 $12,515 11/30/2005 $16,701 $10,726 $14,692 $12,777 12/31/2005 $16,961 $10,729 $14,832 $12,896 1/31/2006 $17,475 $11,014 $14,833 $13,217 2/28/2006 $17,631 $11,043 $14,882 $13,224 3/31/2006 $17,717 $11,181 $14,736 $13,333 4/30/2006 $17,948 $11,331 $14,709 $13,477 5/31/2006 $17,890 $11,005 $14,693 $13,200 6/30/2006 $18,050 $11,020 $14,725 $13,206 7/31/2006 $18,503 $11,088 $14,924 $13,287 8/31/2006 $18,812 $11,352 $15,152 $13,513 9/30/2006 $18,974 $11,644 $15,285 $13,692 10/31/2006 $19,434 $12,024 $15,386 $13,992 11/30/2006 $19,970 $12,252 $15,565 $14,244 12/31/2006 $20,203 $12,424 $15,474 $14,351 1/31/2007 $20,371 $12,612 $15,468 $14,496 2/28/2007 $20,616 $12,365 $15,707 $14,467 3/31/2007 $20,862 $12,504 $15,707 $14,586 4/30/2007 $21,496 $13,057 $15,792 $14,937 5/31/2007 $21,822 $13,513 $15,672 $15,200 6/30/2007 $21,370 $13,289 $15,626 $15,043 7/31/2007 $20,836 $12,877 $15,756 $14,788 8/31/2007 $21,009 $13,070 $15,949 $14,905 9/30/2007 $21,657 $13,558 $16,070 $15,316 10/31/2007 $21,831 $13,774 $16,215 $15,579 11/30/2007 $21,290 $13,198 $16,506 $15,215 12/31/2007 $21,277 $13,107 $16,553 $15,149 1/31/2008 $20,799 $12,321 $16,831 $14,678 2/29/2008 $20,321 $11,920 $16,854 $14,479 3/31/2008 $20,092 $11,869 $16,911 $14,361 4/30/2008 $21,201 $12,447 $16,876 $14,778 5/31/2008 $21,305 $12,608 $16,752 $14,906 6/30/2008 $20,142 $11,545 $16,739 $14,195 7/31/2008 $19,739 $11,448 $16,725 $14,011 8/31/2008 $19,675 $11,614 $16,884 $14,036 9/30/2008 $17,030 $10,579 $16,657 $13,048 10/31/2008 $14,975 $ 8,802 $16,264 $11,463 11/30/2008 $13,776 $ 8,171 $16,794 $10,917 12/31/2008 $14,784 $ 8,257 $17,420 $11,278 1/31/2009 $14,448 $ 7,561 $17,266 $10,815 2/28/2009 $13,302 $ 6,756 $17,201 $10,181 3/31/2009 $14,053 $ 7,348 $17,440 $10,685 4/30/2009 $15,172 $ 8,051 $17,524 $11,398 5/31/2009 $16,207 $ 8,502 $17,651 $11,963 6/30/2009 $16,693 $ 8,519 $17,751 $12,011 7/31/2009 $17,744 $ 9,163 $18,038 $12,669 8/31/2009 $18,142 $ 9,494 $18,224 $12,982 9/30/2009 $18,829 $ 9,848 $18,416 $13,399
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/09 - ------- ------- 1-Year +5.70% 5-Year +2.60% Since Inception (11/1/01) +5.94%
CLASS B (11/1/01-9/30/09) (PERFORMANCE GRAPH)
BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS B INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 11/1/2001 $10,000 $10,000 $10,000 $10,000 11/30/2001 $10,186 $10,767 $ 9,862 $10,332 12/31/2001 $10,229 $10,861 $ 9,799 $10,411 1/31/2002 $10,344 $10,703 $ 9,879 $10,326 2/28/2002 $10,411 $10,496 $ 9,975 $10,266 3/31/2002 $10,671 $10,891 $ 9,809 $10,484 4/30/2002 $10,774 $10,231 $ 9,999 $10,325 5/31/2002 $10,731 $10,156 $10,084 $10,305 6/30/2002 $10,006 $ 9,432 $10,171 $ 9,911 7/31/2002 $ 9,571 $ 8,697 $10,294 $ 9,437 8/31/2002 $ 9,875 $ 8,754 $10,468 $ 9,530 9/30/2002 $ 9,437 $ 7,803 $10,637 $ 9,013 10/31/2002 $ 9,445 $ 8,489 $10,589 $ 9,316 11/30/2002 $ 9,955 $ 8,989 $10,586 $ 9,642 12/31/2002 $10,091 $ 8,461 $10,805 $ 9,447 1/31/2003 $10,098 $ 8,239 $10,814 $ 9,318 2/28/2003 $10,004 $ 8,116 $10,964 $ 9,257 3/31/2003 $10,167 $ 8,194 $10,955 $ 9,296 4/30/2003 $10,851 $ 8,869 $11,046 $ 9,765 5/31/2003 $11,382 $ 9,337 $11,251 $10,182 6/30/2003 $11,653 $ 9,456 $11,229 $10,274 7/31/2003 $11,502 $ 9,623 $10,852 $10,270 8/31/2003 $11,671 $ 9,810 $10,924 $10,426 9/30/2003 $11,944 $ 9,706 $11,213 $10,485 10/31/2003 $12,273 $10,255 $11,108 $10,791 11/30/2003 $12,496 $10,345 $11,135 $10,899 12/31/2003 $13,057 $10,888 $11,248 $11,260 1/31/2004 $13,228 $11,088 $11,339 $11,405 2/29/2004 $13,290 $11,242 $11,461 $11,545 3/31/2004 $13,242 $11,072 $11,547 $11,523 4/30/2004 $13,082 $10,899 $11,247 $11,258 5/31/2004 $12,979 $11,048 $11,202 $11,299 6/30/2004 $13,210 $11,263 $11,265 $11,460 7/31/2004 $13,219 $10,890 $11,377 $11,271 8/31/2004 $13,508 $10,934 $11,594 $11,373 9/30/2004 $13,687 $11,053 $11,625 $11,506 10/31/2004 $13,866 $11,221 $11,723 $11,650 11/30/2004 $14,160 $11,675 $11,629 $11,950 12/31/2004 $14,531 $12,073 $11,736 $12,226 1/31/2005 $14,306 $11,779 $11,810 $12,075 2/28/2005 $14,602 $12,026 $11,740 $12,240 3/31/2005 $14,313 $11,813 $11,680 $12,072 4/30/2005 $14,082 $11,589 $11,838 $11,953 5/31/2005 $14,381 $11,958 $11,966 $12,187 6/30/2005 $14,803 $11,975 $12,031 $12,291 7/31/2005 $15,107 $12,420 $11,922 $12,537 8/31/2005 $15,053 $12,307 $12,075 $12,568 9/30/2005 $14,996 $12,407 $11,950 $12,623 10/31/2005 $14,516 $12,200 $11,856 $12,420 11/30/2005 $14,459 $12,661 $11,908 $12,680 12/31/2005 $14,675 $12,666 $12,021 $12,798 1/31/2006 $15,111 $13,001 $12,022 $13,116 2/28/2006 $15,236 $13,036 $12,062 $13,123 3/31/2006 $15,300 $13,199 $11,944 $13,232 4/30/2006 $15,488 $13,376 $11,922 $13,375 5/31/2006 $15,427 $12,991 $11,909 $13,099 6/30/2006 $15,555 $13,009 $11,935 $13,106 7/31/2006 $15,936 $13,089 $12,096 $13,186 8/31/2006 $16,191 $13,400 $12,281 $13,410 9/30/2006 $16,320 $13,746 $12,389 $13,588 10/31/2006 $16,706 $14,193 $12,471 $13,886 11/30/2006 $17,157 $14,463 $12,615 $14,136 12/31/2006 $17,346 $14,666 $12,542 $14,242 1/31/2007 $17,479 $14,888 $12,537 $14,385 2/28/2007 $17,677 $14,597 $12,730 $14,357 3/31/2007 $17,875 $14,760 $12,731 $14,474 4/30/2007 $18,408 $15,414 $12,800 $14,823 5/31/2007 $18,675 $15,952 $12,703 $15,084 6/30/2007 $18,273 $15,687 $12,665 $14,929 7/31/2007 $17,803 $15,200 $12,771 $14,675 8/31/2007 $17,938 $15,428 $12,927 $14,791 9/30/2007 $18,479 $16,005 $13,025 $15,199 10/31/2007 $18,616 $16,260 $13,142 $15,460 11/30/2007 $18,140 $15,580 $13,379 $15,099 12/31/2007 $18,114 $15,472 $13,416 $15,034 1/31/2008 $17,691 $14,544 $13,641 $14,566 2/29/2008 $17,270 $14,072 $13,660 $14,368 3/31/2008 $17,062 $14,011 $13,707 $14,252 4/30/2008 $17,995 $14,693 $13,678 $14,665 5/31/2008 $18,071 $14,883 $13,578 $14,793 6/30/2008 $17,070 $13,629 $13,567 $14,087 7/31/2008 $16,714 $13,514 $13,556 $13,904 8/31/2008 $16,720 $13,710 $13,685 $13,929 9/30/2008 $14,389 $12,488 $13,501 $12,948 10/31/2008 $12,633 $10,391 $13,182 $11,375 11/30/2008 $11,679 $ 9,645 $13,612 $10,834 12/31/2008 $12,451 $ 9,748 $14,119 $11,192 1/31/2009 $12,235 $ 8,926 $13,995 $10,732 2/28/2009 $11,182 $ 7,976 $13,942 $10,103 3/31/2009 $11,807 $ 8,674 $14,136 $10,603 4/30/2009 $12,822 $ 9,505 $14,203 $11,311 5/31/2009 $13,610 $10,036 $14,306 $11,872 6/30/2009 $14,013 $10,056 $14,388 $11,919 7/31/2009 $14,969 $10,817 $14,620 $12,572 8/31/2009 $15,218 $11,207 $14,771 $12,883 9/30/2009 $15,786 $15,786 $15,786 $15,786
Annual Report | 33 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS B1 9/30/09 - -------- ------- 1-Year +6.03% 5-Year +2.95% 10-Year +6.57%
CLASS B1 (10/1/99-9/30/09) (PERFORMANCE GRAPH)
BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS B1 INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $ 9,974 $10,633 $10,037 $10,254 11/30/1999 $ 9,811 $10,849 $10,036 $10,385 12/31/1999 $ 9,849 $11,488 $ 9,988 $10,722 1/31/2000 $ 9,915 $10,911 $ 9,955 $10,462 2/29/2000 $ 9,748 $10,704 $10,076 $10,503 3/31/2000 $ 9,907 $11,751 $10,208 $10,998 4/30/2000 $10,255 $11,398 $10,179 $10,801 5/31/2000 $10,416 $11,164 $10,174 $10,706 6/30/2000 $10,482 $11,439 $10,386 $10,889 7/31/2000 $10,597 $11,260 $10,480 $10,838 8/31/2000 $11,194 $11,960 $10,632 $11,294 9/30/2000 $11,408 $11,328 $10,699 $11,076 10/31/2000 $11,232 $11,281 $10,770 $11,023 11/30/2000 $11,203 $10,391 $10,946 $10,616 12/31/2000 $11,815 $10,442 $11,149 $10,903 1/31/2001 $11,787 $10,812 $11,331 $11,099 2/28/2001 $12,009 $ 9,827 $11,430 $10,689 3/31/2001 $11,826 $ 9,204 $11,487 $10,346 4/30/2001 $12,051 $ 9,919 $11,440 $10,772 5/31/2001 $12,278 $ 9,986 $11,509 $10,835 6/30/2001 $11,988 $ 9,743 $11,552 $10,695 7/31/2001 $11,853 $ 9,647 $11,811 $10,668 8/31/2001 $11,980 $ 9,043 $11,946 $10,415 9/30/2001 $11,420 $ 8,313 $12,085 $ 9,892 10/31/2001 $11,496 $ 8,471 $12,338 $10,077 11/30/2001 $11,731 $ 9,121 $12,168 $10,411 12/31/2001 $11,836 $ 9,201 $12,090 $10,491 1/31/2002 $11,913 $ 9,067 $12,188 $10,406 2/28/2002 $11,990 $ 8,892 $12,307 $10,345 3/31/2002 $12,345 $ 9,226 $12,102 $10,565 4/30/2002 $12,412 $ 8,667 $12,337 $10,404 5/31/2002 $12,367 $ 8,603 $12,442 $10,384 6/30/2002 $11,590 $ 7,990 $12,549 $ 9,988 7/31/2002 $11,036 $ 7,367 $12,701 $ 9,509 8/31/2002 $11,389 $ 7,416 $12,915 $ 9,603 9/30/2002 $10,887 $ 6,610 $13,124 $ 9,082 10/31/2002 $10,957 $ 7,192 $13,064 $ 9,388 11/30/2002 $11,550 $ 7,615 $13,061 $ 9,716 12/31/2002 $11,650 $ 7,167 $13,331 $ 9,519 1/31/2003 $11,721 $ 6,980 $13,342 $ 9,390 2/28/2003 $11,557 $ 6,875 $13,527 $ 9,328 3/31/2003 $11,808 $ 6,942 $13,516 $ 9,368 4/30/2003 $12,540 $ 7,514 $13,628 $ 9,840 5/31/2003 $13,216 $ 7,909 $13,882 $10,260 6/30/2003 $13,471 $ 8,010 $13,854 $10,353 7/31/2003 $13,301 $ 8,152 $13,389 $10,349 8/31/2003 $13,499 $ 8,310 $13,478 $10,506 9/30/2003 $13,881 $ 8,222 $13,834 $10,566 10/31/2003 $14,264 $ 8,687 $13,705 $10,874 11/30/2003 $14,464 $ 8,764 $13,738 $10,983 12/31/2003 $15,182 $ 9,223 $13,878 $11,346 1/31/2004 $15,383 $ 9,393 $13,990 $11,493 2/29/2004 $15,460 $ 9,523 $14,141 $11,634 3/31/2004 $15,408 $ 9,380 $14,247 $11,612 4/30/2004 $15,163 $ 9,232 $13,876 $11,345 5/31/2004 $15,110 $ 9,359 $13,821 $11,386 6/30/2004 $15,318 $ 9,541 $13,899 $11,549 7/31/2004 $15,396 $ 9,225 $14,037 $11,358 8/31/2004 $15,738 $ 9,263 $14,304 $11,460 9/30/2004 $15,949 $ 9,363 $14,343 $11,594 10/31/2004 $16,161 $ 9,506 $14,463 $11,739 11/30/2004 $16,507 $ 9,891 $14,348 $12,042 12/31/2004 $16,943 $10,227 $14,480 $12,320 1/31/2005 $16,685 $ 9,978 $14,571 $12,168 2/28/2005 $17,034 $10,188 $14,485 $12,334 3/31/2005 $16,704 $10,007 $14,411 $12,165 4/30/2005 $16,440 $ 9,818 $14,606 $12,045 5/31/2005 $16,793 $10,130 $14,764 $12,281 6/30/2005 $17,287 $10,144 $14,844 $12,385 7/31/2005 $17,645 $10,522 $14,709 $12,633 8/31/2005 $17,586 $10,426 $14,898 $12,665 9/30/2005 $17,527 $10,510 $14,744 $12,720 10/31/2005 $16,973 $10,335 $14,628 $12,515 11/30/2005 $16,912 $10,726 $14,692 $12,777 12/31/2005 $17,169 $10,729 $14,832 $12,896 1/31/2006 $17,682 $11,014 $14,833 $13,217 2/28/2006 $17,834 $11,043 $14,882 $13,224 3/31/2006 $17,913 $11,181 $14,736 $13,333 4/30/2006 $18,138 $11,331 $14,709 $13,477 5/31/2006 $18,071 $11,005 $14,693 $13,200 6/30/2006 $18,225 $11,020 $14,725 $13,206 7/31/2006 $18,675 $11,088 $14,924 $13,287 8/31/2006 $18,979 $11,352 $15,152 $13,513 9/30/2006 $19,135 $11,644 $15,285 $13,692 10/31/2006 $19,665 $12,024 $15,386 $13,992 11/30/2006 $20,123 $12,252 $15,565 $14,244 12/31/2006 $20,351 $12,424 $15,474 $14,351 1/31/2007 $20,511 $12,612 $15,468 $14,496 2/28/2007 $20,749 $12,365 $15,707 $14,467 3/31/2007 $20,988 $12,504 $15,707 $14,586 4/30/2007 $21,616 $13,057 $15,792 $14,937 5/31/2007 $22,011 $13,513 $15,672 $15,200 6/30/2007 $21,470 $13,289 $15,626 $15,043 7/31/2007 $20,926 $12,877 $15,756 $14,788 8/31/2007 $21,171 $13,070 $15,949 $14,905 9/30/2007 $21,732 $13,558 $16,070 $15,316 10/31/2007 $21,906 $13,774 $16,215 $15,579 11/30/2007 $21,363 $13,198 $16,506 $15,215 12/31/2007 $21,350 $13,107 $16,553 $15,149 1/31/2008 $20,870 $12,321 $16,831 $14,678 2/29/2008 $20,390 $11,920 $16,854 $14,479 3/31/2008 $20,159 $11,869 $16,911 $14,361 4/30/2008 $21,272 $12,447 $16,876 $14,778 5/31/2008 $21,376 $12,608 $16,752 $14,906 6/30/2008 $20,209 $11,545 $16,739 $14,195 7/31/2008 $19,805 $11,448 $16,725 $14,011 8/31/2008 $19,742 $11,614 $16,884 $14,036 9/30/2008 $17,088 $10,579 $16,657 $13,048 10/31/2008 $15,026 $ 8,802 $16,264 $11,463 11/30/2008 $13,822 $ 8,171 $16,794 $10,917 12/31/2008 $14,834 $ 8,257 $17,420 $11,278 1/31/2009 $14,496 $ 7,561 $17,266 $10,815 2/28/2009 $13,346 $ 6,756 $17,201 $10,181 3/31/2009 $14,100 $ 7,348 $17,440 $10,685 4/30/2009 $15,224 $ 8,051 $17,524 $11,398 5/31/2009 $16,262 $ 8,502 $17,651 $11,963 6/30/2009 $16,750 $ 8,519 $17,751 $12,011 7/31/2009 $17,804 $ 9,163 $18,038 $12,669 8/31/2009 $18,203 $ 9,494 $18,224 $12,982 9/30/2009 $18,897 $ 9,848 $18,416 $13,399
AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/09 - ------- ------- 1-Year +8.93% 5-Year +3.21% 10-Year +6.47%
CLASS C (10/1/99-9/30/09) (PERFORMANCE GRAPH)
BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS C INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $10,018 $10,633 $10,037 $10,254 11/30/1999 $ 9,856 $10,849 $10,036 $10,385 12/31/1999 $ 9,893 $11,488 $ 9,988 $10,722 1/31/2000 $ 9,912 $10,911 $ 9,955 $10,462 2/29/2000 $ 9,791 $10,704 $10,076 $10,503 3/31/2000 $ 9,951 $11,751 $10,208 $10,998 4/30/2000 $10,299 $11,398 $10,179 $10,801 5/31/2000 $10,412 $11,164 $10,174 $10,706 6/30/2000 $10,479 $11,439 $10,386 $10,889 7/31/2000 $10,642 $11,260 $10,480 $10,838 8/31/2000 $11,240 $11,960 $10,632 $11,294 9/30/2000 $11,454 $11,328 $10,699 $11,076 10/31/2000 $11,278 $11,281 $10,770 $11,023 11/30/2000 $11,200 $10,391 $10,946 $10,616 12/31/2000 $11,860 $10,442 $11,149 $10,903 1/31/2001 $11,831 $10,812 $11,331 $11,099 2/28/2001 $12,054 $ 9,827 $11,430 $10,689 3/31/2001 $11,870 $ 9,204 $11,487 $10,346 4/30/2001 $12,096 $ 9,919 $11,440 $10,772 5/31/2001 $12,322 $ 9,986 $11,509 $10,835 6/30/2001 $12,033 $ 9,743 $11,552 $10,695 7/31/2001 $11,897 $ 9,647 $11,811 $10,668 8/31/2001 $12,024 $ 9,043 $11,946 $10,415 9/30/2001 $11,464 $ 8,313 $12,085 $ 9,892 10/31/2001 $11,538 $ 8,471 $12,338 $10,077 11/30/2001 $11,773 $ 9,121 $12,168 $10,411 12/31/2001 $11,877 $ 9,201 $12,090 $10,491 1/31/2002 $11,954 $ 9,067 $12,188 $10,406 2/28/2002 $12,031 $ 8,892 $12,307 $10,345 3/31/2002 $12,385 $ 9,226 $12,102 $10,565 4/30/2002 $12,452 $ 8,667 $12,337 $10,404 5/31/2002 $12,408 $ 8,603 $12,442 $10,384 6/30/2002 $11,633 $ 7,990 $12,549 $ 9,988 7/31/2002 $11,080 $ 7,367 $12,701 $ 9,509 8/31/2002 $11,433 $ 7,416 $12,915 $ 9,603 9/30/2002 $10,931 $ 6,610 $13,124 $ 9,082 10/31/2002 $11,001 $ 7,192 $13,064 $ 9,388 11/30/2002 $11,593 $ 7,615 $13,061 $ 9,716 12/31/2002 $11,695 $ 7,167 $13,331 $ 9,519 1/31/2003 $11,708 $ 6,980 $13,342 $ 9,390 2/28/2003 $11,603 $ 6,875 $13,527 $ 9,328 3/31/2003 $11,853 $ 6,942 $13,516 $ 9,368 4/30/2003 $12,585 $ 7,514 $13,628 $ 9,840 5/31/2003 $13,260 $ 7,909 $13,882 $10,260 6/30/2003 $13,515 $ 8,010 $13,854 $10,353 7/31/2003 $13,345 $ 8,152 $13,389 $10,349 8/31/2003 $13,542 $ 8,310 $13,478 $10,506 9/30/2003 $13,923 $ 8,222 $13,834 $10,566 10/31/2003 $14,306 $ 8,687 $13,705 $10,874 11/30/2003 $14,505 $ 8,764 $13,738 $10,983 12/31/2003 $15,222 $ 9,223 $13,878 $11,346 1/31/2004 $15,424 $ 9,393 $13,990 $11,493 2/29/2004 $15,501 $ 9,523 $14,141 $11,634 3/31/2004 $15,449 $ 9,380 $14,247 $11,612 4/30/2004 $15,269 $ 9,232 $13,876 $11,345 5/31/2004 $15,152 $ 9,359 $13,821 $11,386 6/30/2004 $15,425 $ 9,541 $13,899 $11,549 7/31/2004 $15,439 $ 9,225 $14,037 $11,358 8/31/2004 $15,780 $ 9,263 $14,304 $11,460 9/30/2004 $15,990 $ 9,363 $14,343 $11,594 10/31/2004 $16,202 $ 9,506 $14,463 $11,739 11/30/2004 $16,547 $ 9,891 $14,348 $12,042 12/31/2004 $16,982 $10,227 $14,480 $12,320 1/31/2005 $16,726 $ 9,978 $14,571 $12,168 2/28/2005 $17,074 $10,188 $14,485 $12,334 3/31/2005 $16,743 $10,007 $14,411 $12,165 4/30/2005 $16,480 $ 9,818 $14,606 $12,045 5/31/2005 $16,833 $10,130 $14,764 $12,281 6/30/2005 $17,395 $10,144 $14,844 $12,385 7/31/2005 $17,683 $10,522 $14,709 $12,633 8/31/2005 $17,624 $10,426 $14,898 $12,665 9/30/2005 $17,563 $10,510 $14,744 $12,720 10/31/2005 $17,010 $10,335 $14,628 $12,515 11/30/2005 $16,950 $10,726 $14,692 $12,777 12/31/2005 $17,206 $10,729 $14,832 $12,896 1/31/2006 $17,717 $11,014 $14,833 $13,217 2/28/2006 $17,868 $11,043 $14,882 $13,224 3/31/2006 $17,947 $11,181 $14,736 $13,333 4/30/2006 $18,173 $11,331 $14,709 $13,477 5/31/2006 $18,107 $11,005 $14,693 $13,200 6/30/2006 $18,260 $11,020 $14,725 $13,206 7/31/2006 $18,783 $11,088 $14,924 $13,287 8/31/2006 $19,086 $11,352 $15,152 $13,513 9/30/2006 $19,242 $11,644 $15,285 $13,692 10/31/2006 $19,696 $12,024 $15,386 $13,992 11/30/2006 $20,152 $12,252 $15,565 $14,244 12/31/2006 $20,455 $12,424 $15,474 $14,351 1/31/2007 $20,616 $12,612 $15,468 $14,496 2/28/2007 $20,854 $12,365 $15,707 $14,467 3/31/2007 $21,093 $12,504 $15,707 $14,586 4/30/2007 $21,641 $13,057 $15,792 $14,937 5/31/2007 $22,037 $13,513 $15,672 $15,200 6/30/2007 $21,574 $13,289 $15,626 $15,043 7/31/2007 $21,031 $12,877 $15,756 $14,788 8/31/2007 $21,194 $13,070 $15,949 $14,905 9/30/2007 $21,834 $13,558 $16,070 $15,316 10/31/2007 $21,999 $13,774 $16,215 $15,579 11/30/2007 $21,449 $13,198 $16,506 $15,215 12/31/2007 $21,345 $13,107 $16,553 $15,149 1/31/2008 $20,940 $12,321 $16,831 $14,678 2/29/2008 $20,453 $11,920 $16,854 $14,479 3/31/2008 $20,133 $11,869 $16,911 $14,361 4/30/2008 $21,314 $12,447 $16,876 $14,778 5/31/2008 $21,410 $12,608 $16,752 $14,906 6/30/2008 $20,242 $11,545 $16,739 $14,195 7/31/2008 $19,747 $11,448 $16,725 $14,011 8/31/2008 $19,760 $11,614 $16,884 $14,036 9/30/2008 $17,035 $10,579 $16,657 $13,048 10/31/2008 $14,982 $ 8,802 $16,264 $11,463 11/30/2008 $13,782 $ 8,171 $16,794 $10,917 12/31/2008 $14,777 $ 8,257 $17,420 $11,278 1/31/2009 $14,526 $ 7,561 $17,266 $10,815 2/28/2009 $13,293 $ 6,756 $17,201 $10,181 3/31/2009 $14,032 $ 7,348 $17,440 $10,685 4/30/2009 $15,227 $ 8,051 $17,524 $11,398 5/31/2009 $16,157 $ 8,502 $17,651 $11,963 6/30/2009 $16,632 $ 8,519 $17,751 $12,011 7/31/2009 $17,759 $ 9,163 $18,038 $12,669 8/31/2009 $18,055 $ 9,494 $18,224 $12,982 9/30/2009 $18,727 $ 9,848 $18,416 $13,399
34 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/09 - ------- ------- 1-Year +10.31% 5-Year +3.33% Since Inception (1/1/02) +6.13%
CLASS R (1/1/02-9/30/09) (PERFORMANCE GRAPH)
BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FRANKLIN INCOME S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE FUND - CLASS R INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,069 $ 9,854 $10,081 $ 9,919 2/28/2002 $10,136 $ 9,664 $10,179 $ 9,861 3/31/2002 $10,390 $10,027 $10,009 $10,071 4/30/2002 $10,448 $ 9,420 $10,204 $ 9,917 5/31/2002 $10,412 $ 9,350 $10,290 $ 9,899 6/30/2002 $ 9,709 $ 8,684 $10,379 $ 9,520 7/31/2002 $ 9,289 $ 8,007 $10,505 $ 9,064 8/31/2002 $ 9,590 $ 8,060 $10,682 $ 9,154 9/30/2002 $ 9,166 $ 7,184 $10,855 $ 8,657 10/31/2002 $ 9,178 $ 7,816 $10,806 $ 8,949 11/30/2002 $ 9,681 $ 8,276 $10,803 $ 9,262 12/31/2002 $ 9,817 $ 7,790 $11,026 $ 9,074 1/31/2003 $ 9,829 $ 7,586 $11,035 $ 8,951 2/28/2003 $ 9,741 $ 7,472 $11,188 $ 8,892 3/31/2003 $ 9,905 $ 7,545 $11,179 $ 8,930 4/30/2003 $10,577 $ 8,166 $11,272 $ 9,380 5/31/2003 $11,102 $ 8,596 $11,482 $ 9,780 6/30/2003 $11,319 $ 8,706 $11,459 $ 9,868 7/31/2003 $11,227 $ 8,859 $11,074 $ 9,865 8/31/2003 $11,344 $ 9,032 $11,147 $10,014 9/30/2003 $11,670 $ 8,936 $11,442 $10,072 10/31/2003 $11,997 $ 9,442 $11,336 $10,366 11/30/2003 $12,168 $ 9,525 $11,363 $10,469 12/31/2003 $12,779 $10,024 $11,478 $10,816 1/31/2004 $12,953 $10,208 $11,571 $10,955 2/29/2004 $12,966 $10,350 $11,696 $11,090 3/31/2004 $12,978 $10,194 $11,784 $11,069 4/30/2004 $12,772 $10,034 $11,477 $10,814 5/31/2004 $12,730 $10,172 $11,431 $10,853 6/30/2004 $12,908 $10,370 $11,496 $11,009 7/31/2004 $12,977 $10,026 $11,610 $10,827 8/31/2004 $13,268 $10,067 $11,831 $10,924 9/30/2004 $13,449 $10,176 $11,863 $11,052 10/31/2004 $13,631 $10,332 $11,963 $11,190 11/30/2004 $13,927 $10,750 $11,867 $11,479 12/31/2004 $14,299 $11,115 $11,976 $11,744 1/31/2005 $14,026 $10,844 $12,052 $11,599 2/28/2005 $14,383 $11,073 $11,981 $11,757 3/31/2005 $14,102 $10,877 $11,919 $11,596 4/30/2005 $13,879 $10,670 $12,080 $11,482 5/31/2005 $14,182 $11,010 $12,211 $11,707 6/30/2005 $14,605 $11,025 $12,278 $11,806 7/31/2005 $14,912 $11,435 $12,166 $12,042 8/31/2005 $14,864 $11,331 $12,322 $12,072 9/30/2005 $14,814 $11,423 $12,195 $12,125 10/31/2005 $14,344 $11,232 $12,098 $11,930 11/30/2005 $14,295 $11,657 $12,152 $12,180 12/31/2005 $14,516 $11,661 $12,267 $12,293 1/31/2006 $14,955 $11,970 $12,268 $12,599 2/28/2006 $15,087 $12,003 $12,309 $12,605 3/31/2006 $15,156 $12,152 $12,188 $12,710 4/30/2006 $15,350 $12,315 $12,166 $12,847 5/31/2006 $15,233 $11,961 $12,153 $12,582 6/30/2006 $15,366 $11,977 $12,179 $12,589 7/31/2006 $15,815 $12,051 $12,343 $12,666 8/31/2006 $16,077 $12,338 $12,532 $12,881 9/30/2006 $16,212 $12,655 $12,642 $13,052 10/31/2006 $16,603 $13,068 $12,726 $13,338 11/30/2006 $16,997 $13,316 $12,874 $13,578 12/31/2006 $17,192 $13,503 $12,799 $13,680 1/31/2007 $17,397 $13,707 $12,794 $13,818 2/28/2007 $17,536 $13,439 $12,991 $13,790 3/31/2007 $17,810 $13,590 $12,991 $13,904 4/30/2007 $18,284 $14,192 $13,061 $14,239 5/31/2007 $18,626 $14,687 $12,962 $14,489 6/30/2007 $18,232 $14,443 $12,924 $14,340 7/31/2007 $17,702 $13,995 $13,032 $14,096 8/31/2007 $17,912 $14,205 $13,192 $14,208 9/30/2007 $18,395 $14,736 $13,292 $14,600 10/31/2007 $18,607 $14,970 $13,411 $14,851 11/30/2007 $18,138 $14,345 $13,652 $14,503 12/31/2007 $18,051 $14,245 $13,691 $14,441 1/31/2008 $17,705 $13,391 $13,921 $13,992 2/29/2008 $17,219 $12,956 $13,940 $13,802 3/31/2008 $17,017 $12,900 $13,987 $13,690 4/30/2008 $17,963 $13,528 $13,958 $14,087 5/31/2008 $18,048 $13,703 $13,856 $14,209 6/30/2008 $17,046 $12,548 $13,845 $13,532 7/31/2008 $16,694 $12,442 $13,833 $13,356 8/31/2008 $16,708 $12,622 $13,965 $13,380 9/30/2008 $14,365 $11,498 $13,777 $12,438 10/31/2008 $12,674 $ 9,567 $13,452 $10,927 11/30/2008 $11,643 $ 8,880 $13,890 $10,406 12/31/2008 $12,503 $ 8,975 $14,408 $10,751 1/31/2009 $12,288 $ 8,218 $14,281 $10,309 2/28/2009 $11,228 $ 7,343 $14,227 $ 9,705 3/31/2009 $11,866 $ 7,986 $14,425 $10,185 4/30/2009 $12,897 $ 8,751 $14,494 $10,865 5/31/2009 $13,700 $ 9,240 $14,599 $11,404 6/30/2009 $14,113 $ 9,259 $14,682 $11,449 7/31/2009 $15,008 $ 9,959 $14,919 $12,077 8/31/2009 $15,345 $10,318 $15,073 $12,375 9/30/2009 $15,846 $10,703 $15,232 $12,772
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/09 - ------------- ------- 1-Year +10.79% 5-Year +3.93% 10-Year +7.19%
ADVISOR CLASS (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN INCOME BARCLAYS CAPITAL LIPPER MIXED-ASSET TARGET FUND - S&P 500 U.S. AGGREGATE ALLOCATION MODERATE FUNDS DATE ADVISOR CLASS INDEX INDEX CLASSIFICATION AVERAGE - ---- --------------- ------- ---------------- ------------------------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $10,024 $10,633 $10,037 $10,254 11/30/1999 $ 9,866 $10,849 $10,036 $10,385 12/31/1999 $ 9,909 $11,488 $ 9,988 $10,722 1/31/2000 $ 9,935 $10,911 $ 9,955 $10,462 2/29/2000 $ 9,819 $10,704 $10,076 $10,503 3/31/2000 $ 9,985 $11,751 $10,208 $10,998 4/30/2000 $10,294 $11,398 $10,179 $10,801 5/31/2000 $10,462 $11,164 $10,174 $10,706 6/30/2000 $10,535 $11,439 $10,386 $10,889 7/31/2000 $10,657 $11,260 $10,480 $10,838 8/31/2000 $11,267 $11,960 $10,632 $11,294 9/30/2000 $11,490 $11,328 $10,699 $11,076 10/31/2000 $11,318 $11,281 $10,770 $11,023 11/30/2000 $11,294 $10,391 $10,946 $10,616 12/31/2000 $11,920 $10,442 $11,149 $10,903 1/31/2001 $11,948 $10,812 $11,331 $11,099 2/28/2001 $12,181 $ 9,827 $11,430 $10,689 3/31/2001 $11,950 $ 9,204 $11,487 $10,346 4/30/2001 $12,238 $ 9,919 $11,440 $10,772 5/31/2001 $12,423 $ 9,986 $11,509 $10,835 6/30/2001 $12,135 $ 9,743 $11,552 $10,695 7/31/2001 $12,003 $ 9,647 $11,811 $10,668 8/31/2001 $12,138 $ 9,043 $11,946 $10,415 9/30/2001 $11,628 $ 8,313 $12,085 $ 9,892 10/31/2001 $11,657 $ 8,471 $12,338 $10,077 11/30/2001 $11,904 $ 9,121 $12,168 $10,411 12/31/2001 $12,016 $ 9,201 $12,090 $10,491 1/31/2002 $12,156 $ 9,067 $12,188 $10,406 2/28/2002 $12,242 $ 8,892 $12,307 $10,345 3/31/2002 $12,554 $ 9,226 $12,102 $10,565 4/30/2002 $12,687 $ 8,667 $12,337 $10,404 5/31/2002 $12,649 $ 8,603 $12,442 $10,384 6/30/2002 $11,805 $ 7,990 $12,549 $ 9,988 7/31/2002 $11,302 $ 7,367 $12,701 $ 9,509 8/31/2002 $11,613 $ 7,416 $12,915 $ 9,603 9/30/2002 $11,104 $ 6,610 $13,124 $ 9,082 10/31/2002 $11,182 $ 7,192 $13,064 $ 9,388 11/30/2002 $11,796 $ 7,615 $13,061 $ 9,716 12/31/2002 $11,905 $ 7,167 $13,331 $ 9,519 1/31/2003 $11,984 $ 6,980 $13,342 $ 9,390 2/28/2003 $11,882 $ 6,875 $13,527 $ 9,328 3/31/2003 $12,086 $ 6,942 $13,516 $ 9,368 4/30/2003 $12,846 $ 7,514 $13,628 $ 9,840 5/31/2003 $13,550 $ 7,909 $13,882 $10,260 6/30/2003 $13,820 $ 8,010 $13,854 $10,353 7/31/2003 $13,652 $ 8,152 $13,389 $10,349 8/31/2003 $13,863 $ 8,310 $13,478 $10,506 9/30/2003 $14,265 $ 8,222 $13,834 $10,566 10/31/2003 $14,670 $ 8,687 $13,705 $10,874 11/30/2003 $14,884 $ 8,764 $13,738 $10,983 12/31/2003 $15,634 $ 9,223 $13,878 $11,346 1/31/2004 $15,851 $ 9,393 $13,990 $11,493 2/29/2004 $15,939 $ 9,523 $14,141 $11,634 3/31/2004 $15,894 $ 9,380 $14,247 $11,612 4/30/2004 $15,650 $ 9,232 $13,876 $11,345 5/31/2004 $15,605 $ 9,359 $13,821 $11,386 6/30/2004 $15,829 $ 9,541 $13,899 $11,549 7/31/2004 $15,919 $ 9,225 $14,037 $11,358 8/31/2004 $16,282 $ 9,263 $14,304 $11,460 9/30/2004 $16,510 $ 9,363 $14,343 $11,594 10/31/2004 $16,739 $ 9,506 $14,463 $11,739 11/30/2004 $17,109 $ 9,891 $14,348 $12,042 12/31/2004 $17,572 $10,227 $14,480 $12,320 1/31/2005 $17,244 $ 9,978 $14,571 $12,168 2/28/2005 $17,688 $10,188 $14,485 $12,334 3/31/2005 $17,352 $10,007 $14,411 $12,165 4/30/2005 $17,086 $ 9,818 $14,606 $12,045 5/31/2005 $17,466 $10,130 $14,764 $12,281 6/30/2005 $17,991 $10,144 $14,844 $12,385 7/31/2005 $18,374 $10,522 $14,709 $12,633 8/31/2005 $18,322 $10,426 $14,898 $12,665 9/30/2005 $18,269 $10,510 $14,744 $12,720 10/31/2005 $17,700 $10,335 $14,628 $12,515 11/30/2005 $17,647 $10,726 $14,692 $12,777 12/31/2005 $17,926 $10,729 $14,832 $12,896 1/31/2006 $18,473 $11,014 $14,833 $13,217 2/28/2006 $18,642 $11,043 $14,882 $13,224 3/31/2006 $18,736 $11,181 $14,736 $13,333 4/30/2006 $18,983 $11,331 $14,709 $13,477 5/31/2006 $18,847 $11,005 $14,693 $13,200 6/30/2006 $19,019 $11,020 $14,725 $13,206 7/31/2006 $19,580 $11,088 $14,924 $13,287 8/31/2006 $19,910 $11,352 $15,152 $13,513 9/30/2006 $20,085 $11,644 $15,285 $13,692 10/31/2006 $20,576 $12,024 $15,386 $13,992 11/30/2006 $21,149 $12,252 $15,565 $14,244 12/31/2006 $21,401 $12,424 $15,474 $14,351 1/31/2007 $21,582 $12,612 $15,468 $14,496 2/28/2007 $21,844 $12,365 $15,707 $14,467 3/31/2007 $22,109 $12,504 $15,707 $14,586 4/30/2007 $22,703 $13,057 $15,792 $14,937 5/31/2007 $23,135 $13,513 $15,672 $15,200 6/30/2007 $22,656 $13,289 $15,626 $15,043 7/31/2007 $22,091 $12,877 $15,756 $14,788 8/31/2007 $22,278 $13,070 $15,949 $14,905 9/30/2007 $22,970 $13,558 $16,070 $15,316 10/31/2007 $23,159 $13,774 $16,215 $15,579 11/30/2007 $22,587 $13,198 $16,506 $15,215 12/31/2007 $22,488 $13,107 $16,553 $15,149 1/31/2008 $22,069 $12,321 $16,831 $14,678 2/29/2008 $21,563 $11,920 $16,854 $14,479 3/31/2008 $21,233 $11,869 $16,911 $14,361 4/30/2008 $22,506 $12,447 $16,876 $14,778 5/31/2008 $22,620 $12,608 $16,752 $14,906 6/30/2008 $21,383 $11,545 $16,739 $14,195 7/31/2008 $20,864 $11,448 $16,725 $14,011 8/31/2008 $20,890 $11,614 $16,884 $14,036 9/30/2008 $18,071 $10,579 $16,657 $13,048 10/31/2008 $15,880 $ 8,802 $16,264 $11,463 11/30/2008 $14,603 $ 8,171 $16,794 $10,917 12/31/2008 $15,682 $ 8,257 $17,420 $11,278 1/31/2009 $15,420 $ 7,561 $17,266 $10,815 2/28/2009 $14,104 $ 6,756 $17,201 $10,181 3/31/2009 $14,907 $ 7,348 $17,440 $10,685 4/30/2009 $16,202 $ 8,051 $17,524 $11,398 5/31/2009 $17,212 $ 8,502 $17,651 $11,963 6/30/2009 $17,733 $ 8,519 $17,751 $12,011 7/31/2009 $18,858 $ 9,163 $18,038 $12,669 8/31/2009 $19,285 $ 9,494 $18,224 $12,982 9/30/2009 $20,021 $ 9,848 $18,416 $13,399
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 MORE DRAMATICALLY OVER THE SHORTER 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 9/30/09. (5.) The 30-day standardized yield for the 30 days ended 9/30/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Sources: (C) 2009 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 is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. 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 9/30/09, there were 505 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 - - 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. 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 4/1/09 VALUE 9/30/09 PERIOD* 4/1/09-9/30/09 ----------------- -------------- ---------------------- CLASS A Actual $1,000 $1,339.90 $3.93 Hypothetical (5% return before expenses) $1,000 $1,021.71 $3.40 CLASS B Actual $1,000 $1,336.90 $8.90 Hypothetical (5% return before expenses) $1,000 $1,017.45 $7.69 CLASS B1 Actual $1,000 $1,337.10 $6.80 Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87 CLASS C Actual $1,000 $1,334.60 $6.85 Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.92 CLASS R Actual $1,000 $1,335.40 $5.97 Hypothetical (5% return before expenses) $1,000 $1,019.95 $5.16 ADVISOR CLASS Actual $1,000 $1,343.10 $3.05 Hypothetical (5% return before expenses) $1,000 $1,022.46 $2.64
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.67%; B: 1.52%; B1; 1.16%; C: 1.17%; R: 1.02%; and Advisor: 0.52%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 38 | Annual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks 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. 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 U.S. Government Securities Fund Based on Total Net Assets as of 9/30/09 (PIE CHART) GNMA 92.6% Short-Term Investments & Other Net Assets 7.4%
This annual report for Franklin U.S. Government Securities Fund covers the fiscal year ended September 30, 2009. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a cumulative total return of +8.50% for the 12 months under review. The Fund under-performed the +9.87% total return of its peers as measured by the Lipper GNMA Funds Classification Average.(2) In comparison, the Barclays Capital (BC) U.S. Government: Intermediate Index returned +6.26% for the same (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 9/30/09, there were 64 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, and an index is not 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 102. Annual Report | 39 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/08-9/30/09
DIVIDEND PER SHARE ------------------------------------------------------------------- ADVISOR MONTH CLASS A CLASS B CLASS C CLASS R CLASS - ----- ----------- ----------- ----------- ----------- ----------- October 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents November 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents December 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents January 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents February 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents March 2.55 cents 2.26 cents 2.27 cents 2.35 cents 2.62 cents April 2.39 cents 2.10 cents 2.11 cents 2.19 cents 2.46 cents May 2.39 cents 2.10 cents 2.11 cents 2.19 cents 2.46 cents June 2.39 cents 2.11 cents 2.12 cents 2.19 cents 2.46 cents July 2.39 cents 2.11 cents 2.12 cents 2.19 cents 2.46 cents August 2.39 cents 2.11 cents 2.12 cents 2.19 cents 2.46 cents September 2.39 cents 2.10 cents 2.13 cents 2.20 cents 2.47 cents ----------- ----------- ----------- ----------- ----------- TOTAL 29.64 CENTS 26.28 CENTS 26.40 CENTS 27.32 CENTS 30.55 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. 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 currently invest the Fund's assets predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments may include short-term government securities and cash or cash equivalents. (3.) Source: (C) 2009 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. The index includes public obligations of the U.S. Treasury with at least one year to final maturity 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, and an index is not representative of the Fund's portfolio. 40 | Annual Report MANAGER'S DISCUSSION During the first half of the 12-month reporting period, economic conditions continued to deteriorate, but the second half ended on a more favorable and optimistic tone as certain economic data indicated the recession was ending. In the ongoing effort to stabilize financial markets and restore confidence to investors, the U.S. Treasury and the Federal Reserve Board (Fed) announced several new initiatives aimed at increasing credit availability and reducing mortgage rates. Many observers, however, faced with the prospects of a lengthy housing market rebound, ongoing deleveraging and rising unemployment, harbored concerns about the strength of the economy. Ginnie Mae (GNMA) mortgage-backed securities (MBS) remained relatively attractive in this environment as the GNMA current coupon yielded 4.25% at period-end, an income opportunity over both 5- and 10-year Treasuries, which yielded 2.31% and 3.31%. The MBS market's positive performance began with the announcement of the Fed's Agency Mortgage-Backed Securities Purchase Program in late 2008 and continued during the reporting period. Although this program boosted agency MBS markets, investors started to focus on how the program will end, which created less favorable technical conditions. Prepayment risk for higher coupon MBS remained restrained due to declining home price appreciation, loss of home equity and tighter underwriting standards. During the period, GNMA MBS outperformed comparable high credit-quality U.S. Treasuries, but lagged their conventional Fannie Mae and Freddie Mac MBS counterparts. Within the sector, lower coupon GNMAs (4.5% and 5.0%) outperformed their higher coupon (6.0% and 6.5%) counterparts. Franklin U.S. Government Securities Fund takes a consistent and disciplined approach and invests in GNMA mortgage pass-throughs, which remained the only MBS backed by the full faith and credit of the U.S. government.(1) The Fund took a collateral intensive research approach to uncover opportunities across the GNMA universe. We believe our experience and continual investment in new technologies can help us identify specified pools and individual securities that offer strong cash flow fundamentals and valuations. Over the period, performance was mixed between GNMA I securities (comprising single-issuer pools) and the GNMA II sector (comprising multiple-issuer pools). We decreased the Fund's allocation to GNMA II securities, as we felt GNMA Is offered better value on a historical price spread basis. We increased the portfolio's allocation to some higher coupon MBS (5.0% through 6.5%) and reduced some lower coupon MBS (4.5%). Our heaviest allocation was in coupons within the 5.0% through 6.0% range. 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, 2009, 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 9/30/09 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 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.24 $6.69 $6.45 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.2964
CLASS B (SYMBOL: FUGBX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.24 $6.68 $6.44 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.2628
CLASS C (SYMBOL: FRUGX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.24 $6.66 $6.42 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.2640
CLASS R (SYMBOL: FUSRX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) +$0.24 $6.69 $6.45 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.2732
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 9/30/09 9/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.24 $6.71 $6.47 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.3055
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) +8.50% +27.76% +73.19% Average Annual Total Return(2) +3.83% +4.10% +5.19% Distribution Rate(3) 4.10% 30-Day Standardized Yield(4) 3.70% Total Annual Operating Expenses(5) 0.74%
CLASS B 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) +7.79% +24.51% +65.94% Average Annual Total Return(2) +3.79% +4.14% +5.19% Distribution Rate(3) 3.77% 30-Day Standardized Yield(4) 3.35% Total Annual Operating Expenses(5) 1.26%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------ ------- Cumulative Total Return(1) +8.01% +24.65% +64.50% Average Annual Total Return(2) +7.01% +4.50% +5.10% Distribution Rate(3) 3.84% 30-Day Standardized Yield(4) 3.34% Total Annual Operating Expenses(5) 1.26%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) - ------- ------ ------ --------- Cumulative Total Return(1) +8.12% +25.44% +41.57% Average Annual Total Return(2) +8.12% +4.64% +4.59% Distribution Rate(3) 3.95% 30-Day Standardized Yield(4) 3.50% Total Annual Operating Expenses(5) 1.11%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------- ------ ------ ------- Cumulative Total Return(1) +8.63% +28.70% +75.42% Average Annual Total Return(2) +8.63% +5.18% +5.78% Distribution Rate(3) 4.42% 30-Day Standardized Yield(4) 4.00% 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 A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/09 - ------- ------- 1-Year +3.83% 5-Year +4.10% 10-Year +5.19%
CLASS A (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN U.S. BARCLAYS CAPITAL GOVERNMENT SECURITIES LIPPER GNMA FUNDS U.S INTERMEDIATE DATE FUND - CLASS A CLASSIFICATION AVERAGE GOVERNMENT INDEX CPI - ---- --------------------- ---------------------- ---------------- ------- 10/1/1999 $ 9,580 $10,000 $10,000 $10,000 10/31/1999 $ 9,631 $10,034 $10,020 $10,018 11/30/1999 $ 9,639 $10,041 $10,027 $10,024 12/31/1999 $ 9,602 $ 9,994 $ 9,995 $10,024 1/31/2000 $ 9,521 $ 9,917 $ 9,962 $10,054 2/29/2000 $ 9,632 $10,031 $10,044 $10,113 3/31/2000 $ 9,774 $10,182 $10,159 $10,197 4/30/2000 $ 9,751 $10,165 $10,155 $10,203 5/31/2000 $ 9,791 $10,202 $10,182 $10,214 6/30/2000 $ 9,951 $10,379 $10,344 $10,268 7/31/2000 $10,006 $10,425 $10,412 $10,292 8/31/2000 $10,155 $10,573 $10,529 $10,292 9/30/2000 $10,242 $10,665 $10,621 $10,345 10/31/2000 $10,314 $10,730 $10,694 $10,363 11/30/2000 $10,464 $10,887 $10,851 $10,369 12/31/2000 $10,616 $11,046 $11,042 $10,363 1/31/2001 $10,768 $11,217 $11,189 $10,429 2/28/2001 $10,826 $11,286 $11,292 $10,471 3/31/2001 $10,884 $11,352 $11,374 $10,494 4/30/2001 $10,895 $11,334 $11,338 $10,536 5/31/2001 $10,970 $11,406 $11,385 $10,584 6/30/2001 $10,996 $11,443 $11,421 $10,602 7/31/2001 $11,202 $11,669 $11,634 $10,572 8/31/2001 $11,279 $11,757 $11,738 $10,572 9/30/2001 $11,422 $11,925 $11,988 $10,619 10/31/2001 $11,579 $12,089 $12,175 $10,584 11/30/2001 $11,472 $11,962 $12,030 $10,566 12/31/2001 $11,430 $11,898 $11,972 $10,524 1/31/2002 $11,521 $12,014 $12,023 $10,548 2/28/2002 $11,662 $12,143 $12,123 $10,590 3/31/2002 $11,516 $11,991 $11,940 $10,649 4/30/2002 $11,728 $12,217 $12,164 $10,709 5/31/2002 $11,803 $12,297 $12,248 $10,709 6/30/2002 $11,895 $12,399 $12,402 $10,715 7/31/2002 $12,023 $12,546 $12,635 $10,727 8/31/2002 $12,134 $12,651 $12,780 $10,762 9/30/2002 $12,228 $12,765 $12,999 $10,780 10/31/2002 $12,270 $12,781 $12,990 $10,798 11/30/2002 $12,270 $12,775 $12,888 $10,798 12/31/2002 $12,411 $12,916 $13,126 $10,774 1/31/2003 $12,447 $12,943 $13,097 $10,822 2/28/2003 $12,500 $13,019 $13,245 $10,905 3/31/2003 $12,499 $13,011 $13,247 $10,971 4/30/2003 $12,535 $13,043 $13,285 $10,947 5/31/2003 $12,535 $13,074 $13,493 $10,929 6/30/2003 $12,571 $13,099 $13,471 $10,941 7/31/2003 $12,278 $12,816 $13,144 $10,953 8/31/2003 $12,370 $12,903 $13,168 $10,995 9/30/2003 $12,554 $13,117 $13,453 $11,030 10/31/2003 $12,498 $13,051 $13,321 $11,018 11/30/2003 $12,553 $13,091 $13,322 $10,989 12/31/2003 $12,632 $13,181 $13,426 $10,977 1/31/2004 $12,707 $13,247 $13,499 $11,030 2/29/2004 $12,782 $13,332 $13,628 $11,090 3/31/2004 $12,820 $13,377 $13,722 $11,161 4/30/2004 $12,610 $13,155 $13,416 $11,197 5/31/2004 $12,587 $13,119 $13,373 $11,263 6/30/2004 $12,698 $13,220 $13,407 $11,298 7/31/2004 $12,809 $13,321 $13,504 $11,281 8/31/2004 $12,979 $13,497 $13,704 $11,286 9/30/2004 $12,988 $13,505 $13,710 $11,310 10/31/2004 $13,081 $13,593 $13,794 $11,370 11/30/2004 $13,057 $13,548 $13,665 $11,376 12/31/2004 $13,112 $13,614 $13,740 $11,334 1/31/2005 $13,187 $13,681 $13,757 $11,358 2/28/2005 $13,143 $13,633 $13,681 $11,423 3/31/2005 $13,118 $13,600 $13,647 $11,513 4/30/2005 $13,234 $13,725 $13,806 $11,590 5/31/2005 $13,326 $13,805 $13,916 $11,578 6/30/2005 $13,338 $13,835 $13,962 $11,584 7/31/2005 $13,290 $13,777 $13,843 $11,638 8/31/2005 $13,404 $13,886 $13,996 $11,697 9/30/2005 $13,334 $13,812 $13,889 $11,840 10/31/2005 $13,285 $13,742 $13,830 $11,864 11/30/2005 $13,318 $13,778 $13,887 $11,769 12/31/2005 $13,475 $13,924 $13,971 $11,721 1/31/2006 $13,509 $13,953 $13,970 $11,811 2/28/2006 $13,521 $13,977 $13,973 $11,834 3/31/2006 $13,429 $13,890 $13,930 $11,900 4/30/2006 $13,379 $13,843 $13,943 $12,001 5/31/2006 $13,329 $13,804 $13,947 $12,061 6/30/2006 $13,342 $13,803 $13,972 $12,085 7/31/2006 $13,505 $13,978 $14,118 $12,120 8/31/2006 $13,689 $14,171 $14,277 $12,144 9/30/2006 $13,788 $14,263 $14,380 $12,085 10/31/2006 $13,868 $14,350 $14,448 $12,019 11/30/2006 $14,014 $14,475 $14,564 $12,001 12/31/2006 $13,972 $14,450 $14,508 $12,019 1/31/2007 $13,966 $14,443 $14,510 $12,056 2/28/2007 $14,135 $14,606 $14,692 $12,120 3/31/2007 $14,151 $14,634 $14,730 $12,231 4/30/2007 $14,234 $14,700 $14,795 $12,310 5/31/2007 $14,139 $14,612 $14,711 $12,385 6/30/2007 $14,066 $14,536 $14,731 $12,409 7/31/2007 $14,193 $14,651 $14,912 $12,406 8/31/2007 $14,344 $14,798 $15,122 $12,383 9/30/2007 $14,427 $14,907 $15,225 $12,418 10/31/2007 $14,579 $15,053 $15,317 $12,444 11/30/2007 $14,867 $15,337 $15,686 $12,518 12/31/2007 $14,860 $15,352 $15,737 $12,510 1/31/2008 $15,105 $15,610 $16,108 $12,572 2/29/2008 $15,167 $15,698 $16,283 $12,608 3/31/2008 $15,206 $15,723 $16,384 $12,718 4/30/2008 $15,176 $15,685 $16,165 $12,795 5/31/2008 $15,075 $15,593 $16,020 $12,902 6/30/2008 $15,088 $15,604 $16,082 $13,032 7/31/2008 $15,101 $15,596 $16,167 $13,101 8/31/2008 $15,232 $15,716 $16,291 $13,049 9/30/2008 $15,293 $15,728 $16,370 $13,031 10/31/2008 $15,091 $15,433 $16,429 $12,899 11/30/2008 $15,606 $15,811 $16,992 $12,652 12/31/2008 $15,883 $16,151 $17,378 $12,521 1/31/2009 $15,872 $16,204 $17,159 $12,576 2/28/2009 $15,982 $16,324 $17,128 $12,638 3/31/2009 $16,214 $16,590 $17,365 $12,669 4/30/2009 $16,223 $16,675 $17,240 $12,700 5/31/2009 $16,257 $16,753 $17,162 $12,737 6/30/2009 $16,218 $16,790 $17,115 $12,847 7/31/2009 $16,375 $16,995 $17,189 $12,826 8/31/2009 $16,509 $17,153 $17,298 $12,855 9/30/2009 $16,593 $17,280 $17,394 $12,863
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/09 - ------- ------- 1-Year +3.79% 5-Year +4.14% 10-Year +5.19%
CLASS B (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN U.S. BARCLAYS CAPITAL GOVERNMENT SECURITIES LIPPER GNMA FUNDS U.S INTERMEDIATE DATE FUND - CLASS B CLASSIFICATION AVERAGE GOVERNMENT INDEX CPI - ---- --------------------- ---------------------- ---------------- ------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $10,049 $10,034 $10,020 $10,018 11/30/1999 $10,037 $10,041 $10,027 $10,024 12/31/1999 $ 9,994 $ 9,994 $ 9,995 $10,024 1/31/2000 $ 9,921 $ 9,917 $ 9,962 $10,054 2/29/2000 $10,017 $10,031 $10,044 $10,113 3/31/2000 $10,160 $10,182 $10,159 $10,197 4/30/2000 $10,148 $10,165 $10,155 $10,203 5/31/2000 $10,184 $10,202 $10,182 $10,214 6/30/2000 $10,347 $10,379 $10,344 $10,268 7/31/2000 $10,384 $10,425 $10,412 $10,292 8/31/2000 $10,533 $10,573 $10,529 $10,292 9/30/2000 $10,635 $10,665 $10,621 $10,345 10/31/2000 $10,690 $10,730 $10,694 $10,363 11/30/2000 $10,841 $10,887 $10,851 $10,369 12/31/2000 $10,994 $11,046 $11,042 $10,363 1/31/2001 $11,163 $11,217 $11,189 $10,429 2/28/2001 $11,201 $11,286 $11,292 $10,471 3/31/2001 $11,273 $11,352 $11,374 $10,494 4/30/2001 $11,262 $11,334 $11,338 $10,536 5/31/2001 $11,335 $11,406 $11,385 $10,584 6/30/2001 $11,374 $11,443 $11,421 $10,602 7/31/2001 $11,566 $11,669 $11,634 $10,572 8/31/2001 $11,639 $11,757 $11,738 $10,572 9/30/2001 $11,799 $11,925 $11,988 $10,619 10/31/2001 $11,940 $12,089 $12,175 $10,584 11/30/2001 $11,841 $11,962 $12,030 $10,566 12/31/2001 $11,776 $11,898 $11,972 $10,524 1/31/2002 $11,881 $12,014 $12,023 $10,548 2/28/2002 $12,005 $12,143 $12,123 $10,590 3/31/2002 $11,849 $11,991 $11,940 $10,649 4/30/2002 $12,061 $12,217 $12,164 $10,709 5/31/2002 $12,133 $12,297 $12,248 $10,709 6/30/2002 $12,223 $12,399 $12,402 $10,715 7/31/2002 $12,350 $12,546 $12,635 $10,727 8/31/2002 $12,459 $12,651 $12,780 $10,762 9/30/2002 $12,550 $12,765 $12,999 $10,780 10/31/2002 $12,588 $12,781 $12,990 $10,798 11/30/2002 $12,582 $12,775 $12,888 $10,798 12/31/2002 $12,722 $12,916 $13,126 $10,774 1/31/2003 $12,753 $12,943 $13,097 $10,822 2/28/2003 $12,802 $13,019 $13,245 $10,905 3/31/2003 $12,795 $13,011 $13,247 $10,971 4/30/2003 $12,826 $13,043 $13,285 $10,947 5/31/2003 $12,839 $13,074 $13,493 $10,929 6/30/2003 $12,852 $13,099 $13,471 $10,941 7/31/2003 $12,547 $12,816 $13,144 $10,953 8/31/2003 $12,635 $12,903 $13,168 $10,995 9/30/2003 $12,818 $13,117 $13,453 $11,030 10/31/2003 $12,755 $13,051 $13,321 $11,018 11/30/2003 $12,807 $13,091 $13,322 $10,989 12/31/2003 $12,881 $13,181 $13,426 $10,977 1/31/2004 $12,952 $13,247 $13,499 $11,030 2/29/2004 $13,023 $13,332 $13,628 $11,090 3/31/2004 $13,056 $13,377 $13,722 $11,161 4/30/2004 $12,836 $13,155 $13,416 $11,197 5/31/2004 $12,806 $13,119 $13,373 $11,263 6/30/2004 $12,914 $13,220 $13,407 $11,298 7/31/2004 $13,021 $13,321 $13,504 $11,281 8/31/2004 $13,189 $13,497 $13,704 $11,286 9/30/2004 $13,192 $13,505 $13,710 $11,310 10/31/2004 $13,281 $13,593 $13,794 $11,370 11/30/2004 $13,251 $13,548 $13,665 $11,376 12/31/2004 $13,301 $13,614 $13,740 $11,334 1/31/2005 $13,371 $13,681 $13,757 $11,358 2/28/2005 $13,320 $13,633 $13,681 $11,423 3/31/2005 $13,289 $13,600 $13,647 $11,513 4/30/2005 $13,401 $13,725 $13,806 $11,590 5/31/2005 $13,489 $13,805 $13,916 $11,578 6/30/2005 $13,515 $13,835 $13,962 $11,584 7/31/2005 $13,440 $13,777 $13,843 $11,638 8/31/2005 $13,549 $13,886 $13,996 $11,697 9/30/2005 $13,473 $13,812 $13,889 $11,840 10/31/2005 $13,417 $13,742 $13,830 $11,864 11/30/2005 $13,444 $13,778 $13,887 $11,769 12/31/2005 $13,597 $13,924 $13,971 $11,721 1/31/2006 $13,625 $13,953 $13,970 $11,811 2/28/2006 $13,632 $13,977 $13,973 $11,834 3/31/2006 $13,533 $13,890 $13,930 $11,900 4/30/2006 $13,476 $13,843 $13,943 $12,001 5/31/2006 $13,420 $13,804 $13,947 $12,061 6/30/2006 $13,428 $13,803 $13,972 $12,085 7/31/2006 $13,585 $13,978 $14,118 $12,120 8/31/2006 $13,765 $14,171 $14,277 $12,144 9/30/2006 $13,859 $14,263 $14,380 $12,085 10/31/2006 $13,935 $14,350 $14,448 $12,019 11/30/2006 $14,075 $14,475 $14,564 $12,001 12/31/2006 $14,027 $14,450 $14,508 $12,019 1/31/2007 $14,037 $14,443 $14,510 $12,056 2/28/2007 $14,179 $14,606 $14,692 $12,120 3/31/2007 $14,189 $14,634 $14,730 $12,231 4/30/2007 $14,265 $14,700 $14,795 $12,310 5/31/2007 $14,163 $14,612 $14,711 $12,385 6/30/2007 $14,084 $14,536 $14,731 $12,409 7/31/2007 $14,206 $14,651 $14,912 $12,406 8/31/2007 $14,351 $14,798 $15,122 $12,383 9/30/2007 $14,428 $14,907 $15,225 $12,418 10/31/2007 $14,579 $15,053 $15,317 $12,444 11/30/2007 $14,868 $15,337 $15,686 $12,518 12/31/2007 $14,861 $15,352 $15,737 $12,510 1/31/2008 $15,106 $15,610 $16,108 $12,572 2/29/2008 $15,168 $15,698 $16,283 $12,608 3/31/2008 $15,207 $15,723 $16,384 $12,718 4/30/2008 $15,177 $15,685 $16,165 $12,795 5/31/2008 $15,077 $15,593 $16,020 $12,902 6/30/2008 $15,089 $15,604 $16,082 $13,032 7/31/2008 $15,102 $15,596 $16,167 $13,101 8/31/2008 $15,234 $15,716 $16,291 $13,049 9/30/2008 $15,295 $15,728 $16,370 $13,031 10/31/2008 $15,093 $15,433 $16,429 $12,899 11/30/2008 $15,607 $15,811 $16,992 $12,652 12/31/2008 $15,884 $16,151 $17,378 $12,521 1/31/2009 $15,873 $16,204 $17,159 $12,576 2/28/2009 $15,982 $16,324 $17,128 $12,638 3/31/2009 $16,214 $16,590 $17,365 $12,669 4/30/2009 $16,224 $16,675 $17,240 $12,700 5/31/2009 $16,258 $16,753 $17,162 $12,737 6/30/2009 $16,219 $16,790 $17,115 $12,847 7/31/2009 $16,376 $16,995 $17,189 $12,826 8/31/2009 $16,509 $17,153 $17,298 $12,855 9/30/2009 $16,594 $17,280 $17,394 $12,863
Annual Report | 45 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/09 - ------- ------- 1-Year +7.01% 5-Year +4.50% 10-Year +5.10%
CLASS C (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN U.S. BARCLAYS CAPITAL GOVERNMENT SECURITIES LIPPER GNMA FUNDS U.S INTERMEDIATE DATE FUND - CLASS C CLASSIFICATION AVERAGE GOVERNMENT INDEX CPI - ---- --------------------- ---------------------- ---------------- ------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $10,049 $10,034 $10,020 $10,018 11/30/1999 $10,052 $10,041 $10,027 $10,024 12/31/1999 $10,009 $ 9,994 $ 9,995 $10,024 1/31/2000 $ 9,920 $ 9,917 $ 9,962 $10,054 2/29/2000 $10,032 $10,031 $10,044 $10,113 3/31/2000 $10,176 $10,182 $10,159 $10,197 4/30/2000 $10,147 $10,165 $10,155 $10,203 5/31/2000 $10,184 $10,202 $10,182 $10,214 6/30/2000 $10,347 $10,379 $10,344 $10,268 7/31/2000 $10,384 $10,425 $10,412 $10,292 8/31/2000 $10,534 $10,573 $10,529 $10,292 9/30/2000 $10,636 $10,665 $10,621 $10,345 10/31/2000 $10,706 $10,730 $10,694 $10,363 11/30/2000 $10,842 $10,887 $10,851 $10,369 12/31/2000 $10,994 $11,046 $11,042 $10,363 1/31/2001 $11,164 $11,217 $11,189 $10,429 2/28/2001 $11,203 $11,286 $11,292 $10,471 3/31/2001 $11,275 $11,352 $11,374 $10,494 4/30/2001 $11,281 $11,334 $11,338 $10,536 5/31/2001 $11,337 $11,406 $11,385 $10,584 6/30/2001 $11,376 $11,443 $11,421 $10,602 7/31/2001 $11,568 $11,669 $11,634 $10,572 8/31/2001 $11,642 $11,757 $11,738 $10,572 9/30/2001 $11,802 $11,925 $11,988 $10,619 10/31/2001 $11,943 $12,089 $12,175 $10,584 11/30/2001 $11,844 $11,962 $12,030 $10,566 12/31/2001 $11,778 $11,898 $11,972 $10,524 1/31/2002 $11,884 $12,014 $12,023 $10,548 2/28/2002 $12,007 $12,143 $12,123 $10,590 3/31/2002 $11,851 $11,991 $11,940 $10,649 4/30/2002 $12,064 $12,217 $12,164 $10,709 5/31/2002 $12,136 $12,297 $12,248 $10,709 6/30/2002 $12,227 $12,399 $12,402 $10,715 7/31/2002 $12,354 $12,546 $12,635 $10,727 8/31/2002 $12,463 $12,651 $12,780 $10,762 9/30/2002 $12,573 $12,765 $12,999 $10,780 10/31/2002 $12,592 $12,781 $12,990 $10,798 11/30/2002 $12,587 $12,775 $12,888 $10,798 12/31/2002 $12,727 $12,916 $13,126 $10,774 1/31/2003 $12,758 $12,943 $13,097 $10,822 2/28/2003 $12,826 $13,019 $13,245 $10,905 3/31/2003 $12,802 $13,011 $13,247 $10,971 4/30/2003 $12,833 $13,043 $13,285 $10,947 5/31/2003 $12,828 $13,074 $13,493 $10,929 6/30/2003 $12,859 $13,099 $13,471 $10,941 7/31/2003 $12,553 $12,816 $13,144 $10,953 8/31/2003 $12,640 $12,903 $13,168 $10,995 9/30/2003 $12,824 $13,117 $13,453 $11,030 10/31/2003 $12,760 $13,051 $13,321 $11,018 11/30/2003 $12,811 $13,091 $13,322 $10,989 12/31/2003 $12,886 $13,181 $13,426 $10,977 1/31/2004 $12,958 $13,247 $13,499 $11,030 2/29/2004 $13,029 $13,332 $13,628 $11,090 3/31/2004 $13,061 $13,377 $13,722 $11,161 4/30/2004 $12,841 $13,155 $13,416 $11,197 5/31/2004 $12,811 $13,119 $13,373 $11,263 6/30/2004 $12,938 $13,220 $13,407 $11,298 7/31/2004 $13,026 $13,321 $13,504 $11,281 8/31/2004 $13,194 $13,497 $13,704 $11,286 9/30/2004 $13,197 $13,505 $13,710 $11,310 10/31/2004 $13,287 $13,593 $13,794 $11,370 11/30/2004 $13,257 $13,548 $13,665 $11,376 12/31/2004 $13,306 $13,614 $13,740 $11,334 1/31/2005 $13,376 $13,681 $13,757 $11,358 2/28/2005 $13,325 $13,633 $13,681 $11,423 3/31/2005 $13,295 $13,600 $13,647 $11,513 4/30/2005 $13,407 $13,725 $13,806 $11,590 5/31/2005 $13,495 $13,805 $13,916 $11,578 6/30/2005 $13,522 $13,835 $13,962 $11,584 7/31/2005 $13,446 $13,777 $13,843 $11,638 8/31/2005 $13,556 $13,886 $13,996 $11,697 9/30/2005 $13,479 $13,812 $13,889 $11,840 10/31/2005 $13,424 $13,742 $13,830 $11,864 11/30/2005 $13,451 $13,778 $13,887 $11,769 12/31/2005 $13,604 $13,924 $13,971 $11,721 1/31/2006 $13,632 $13,953 $13,970 $11,811 2/28/2006 $13,638 $13,977 $13,973 $11,834 3/31/2006 $13,539 $13,890 $13,930 $11,900 4/30/2006 $13,482 $13,843 $13,943 $12,001 5/31/2006 $13,426 $13,804 $13,947 $12,061 6/30/2006 $13,434 $13,803 $13,972 $12,085 7/31/2006 $13,592 $13,978 $14,118 $12,120 8/31/2006 $13,773 $14,171 $14,277 $12,144 9/30/2006 $13,868 $14,263 $14,380 $12,085 10/31/2006 $13,943 $14,350 $14,448 $12,019 11/30/2006 $14,084 $14,475 $14,564 $12,001 12/31/2006 $14,036 $14,450 $14,508 $12,019 1/31/2007 $14,024 $14,443 $14,510 $12,056 2/28/2007 $14,189 $14,606 $14,692 $12,120 3/31/2007 $14,198 $14,634 $14,730 $12,231 4/30/2007 $14,275 $14,700 $14,795 $12,310 5/31/2007 $14,172 $14,612 $14,711 $12,385 6/30/2007 $14,093 $14,536 $14,731 $12,409 7/31/2007 $14,216 $14,651 $14,912 $12,406 8/31/2007 $14,361 $14,798 $15,122 $12,383 9/30/2007 $14,438 $14,907 $15,225 $12,418 10/31/2007 $14,584 $15,053 $15,317 $12,444 11/30/2007 $14,845 $15,337 $15,686 $12,518 12/31/2007 $14,832 $15,352 $15,737 $12,510 1/31/2008 $15,071 $15,610 $16,108 $12,572 2/29/2008 $15,150 $15,698 $16,283 $12,608 3/31/2008 $15,183 $15,723 $16,384 $12,718 4/30/2008 $15,146 $15,685 $16,165 $12,795 5/31/2008 $15,038 $15,593 $16,020 $12,902 6/30/2008 $15,045 $15,604 $16,082 $13,032 7/31/2008 $15,027 $15,596 $16,167 $13,101 8/31/2008 $15,176 $15,716 $16,291 $13,049 9/30/2008 $15,230 $15,728 $16,370 $13,031 10/31/2008 $15,022 $15,433 $16,429 $12,899 11/30/2008 $15,531 $15,811 $16,992 $12,652 12/31/2008 $15,777 $16,151 $17,378 $12,521 1/31/2009 $15,760 $16,204 $17,159 $12,576 2/28/2009 $15,863 $16,324 $17,128 $12,638 3/31/2009 $16,088 $16,590 $17,365 $12,669 4/30/2009 $16,090 $16,675 $17,240 $12,700 5/31/2009 $16,117 $16,753 $17,162 $12,737 6/30/2009 $16,072 $16,790 $17,115 $12,847 7/31/2009 $16,246 $16,995 $17,189 $12,826 8/31/2009 $16,348 $17,153 $17,298 $12,855 9/30/2009 $16,450 $17,280 $17,394 $12,863
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/09 - ------- ------- 1-Year +8.12% 5-Year +4.64% Since Inception (1/1/02) +4.59%
CLASS R (1/1/02-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN U.S. BARCLAYS CAPITAL GOVERNMENT SECURITIES LIPPER GNMA FUNDS U.S INTERMEDIATE DATE FUND - CLASS R CLASSIFICATION AVERAGE GOVERNMENT INDEX CPI - ---- --------------------- ---------------------- ---------------- ------- 1/1/2002 $10,000 $10,000 $10,000 $10,000 1/31/2002 $10,109 $10,098 $10,043 $10,023 2/28/2002 $10,215 $10,206 $10,126 $10,062 3/31/2002 $10,098 $10,078 $ 9,974 $10,119 4/30/2002 $10,281 $10,268 $10,160 $10,175 5/31/2002 $10,343 $10,336 $10,231 $10,175 6/30/2002 $10,421 $10,422 $10,359 $10,181 7/31/2002 $10,530 $10,544 $10,554 $10,192 8/31/2002 $10,625 $10,633 $10,675 $10,226 9/30/2002 $10,704 $10,729 $10,858 $10,243 10/31/2002 $10,722 $10,743 $10,851 $10,260 11/30/2002 $10,733 $10,737 $10,765 $10,260 12/31/2002 $10,854 $10,855 $10,964 $10,238 1/31/2003 $10,866 $10,878 $10,940 $10,283 2/28/2003 $10,924 $10,942 $11,063 $10,362 3/31/2003 $10,921 $10,936 $11,065 $10,424 4/30/2003 $10,948 $10,962 $11,097 $10,402 5/31/2003 $10,945 $10,988 $11,271 $10,385 6/30/2003 $10,958 $11,009 $11,252 $10,396 7/31/2003 $10,715 $10,771 $10,979 $10,407 8/31/2003 $10,791 $10,845 $10,999 $10,447 9/30/2003 $10,948 $11,025 $11,237 $10,481 10/31/2003 $10,897 $10,970 $11,127 $10,470 11/30/2003 $10,926 $11,003 $11,128 $10,441 12/31/2003 $11,008 $11,078 $11,215 $10,430 1/31/2004 $11,053 $11,134 $11,276 $10,481 2/29/2004 $11,115 $11,205 $11,383 $10,538 3/31/2004 $11,160 $11,243 $11,462 $10,606 4/30/2004 $10,975 $11,057 $11,206 $10,640 5/31/2004 $10,950 $11,027 $11,170 $10,702 6/30/2004 $11,044 $11,112 $11,199 $10,736 7/31/2004 $11,121 $11,196 $11,280 $10,719 8/31/2004 $11,265 $11,344 $11,447 $10,724 9/30/2004 $11,286 $11,351 $11,452 $10,747 10/31/2004 $11,364 $11,424 $11,522 $10,804 11/30/2004 $11,323 $11,387 $11,415 $10,809 12/31/2004 $11,384 $11,443 $11,477 $10,770 1/31/2005 $11,445 $11,499 $11,491 $10,792 2/28/2005 $11,386 $11,458 $11,427 $10,855 3/31/2005 $11,361 $11,431 $11,399 $10,939 4/30/2005 $11,475 $11,536 $11,532 $11,013 5/31/2005 $11,534 $11,603 $11,624 $11,002 6/30/2005 $11,559 $11,628 $11,662 $11,007 7/31/2005 $11,513 $11,580 $11,563 $11,058 8/31/2005 $11,590 $11,671 $11,691 $11,115 9/30/2005 $11,544 $11,609 $11,601 $11,251 10/31/2005 $11,481 $11,550 $11,552 $11,273 11/30/2005 $11,505 $11,580 $11,600 $11,183 12/31/2005 $11,638 $11,703 $11,670 $11,138 1/31/2006 $11,663 $11,727 $11,669 $11,222 2/28/2006 $11,670 $11,747 $11,671 $11,245 3/31/2006 $11,604 $11,674 $11,635 $11,307 4/30/2006 $11,539 $11,635 $11,646 $11,404 5/31/2006 $11,510 $11,602 $11,650 $11,460 6/30/2006 $11,500 $11,601 $11,671 $11,483 7/31/2006 $11,655 $11,748 $11,793 $11,517 8/31/2006 $11,810 $11,911 $11,925 $11,539 9/30/2006 $11,892 $11,988 $12,012 $11,483 10/31/2006 $11,957 $12,061 $12,069 $11,420 11/30/2006 $12,061 $12,166 $12,165 $11,404 12/31/2006 $12,040 $12,145 $12,119 $11,420 1/31/2007 $12,031 $12,139 $12,120 $11,455 2/28/2007 $12,173 $12,276 $12,272 $11,517 3/31/2007 $12,183 $12,300 $12,304 $11,622 4/30/2007 $12,230 $12,355 $12,358 $11,697 5/31/2007 $12,164 $12,281 $12,288 $11,768 6/30/2007 $12,079 $12,217 $12,304 $11,791 7/31/2007 $12,185 $12,314 $12,456 $11,788 8/31/2007 $12,311 $12,438 $12,631 $11,767 9/30/2007 $12,398 $12,529 $12,718 $11,799 10/31/2007 $12,504 $12,652 $12,794 $11,824 11/30/2007 $12,749 $12,891 $13,103 $11,895 12/31/2007 $12,739 $12,904 $13,145 $11,887 1/31/2008 $12,944 $13,120 $13,455 $11,946 2/29/2008 $13,014 $13,194 $13,601 $11,980 3/31/2008 $13,024 $13,215 $13,685 $12,084 4/30/2008 $13,014 $13,183 $13,502 $12,157 5/31/2008 $12,923 $13,105 $13,381 $12,260 6/30/2008 $12,930 $13,115 $13,433 $12,383 7/31/2008 $12,917 $13,108 $13,504 $12,448 8/31/2008 $13,025 $13,209 $13,608 $12,399 9/30/2008 $13,093 $13,220 $13,674 $12,382 10/31/2008 $12,917 $12,971 $13,723 $12,257 11/30/2008 $13,355 $13,289 $14,194 $12,022 12/31/2008 $13,567 $13,575 $14,516 $11,897 1/31/2009 $13,553 $13,619 $14,333 $11,949 2/28/2009 $13,643 $13,720 $14,307 $12,009 3/31/2009 $13,837 $13,944 $14,505 $12,038 4/30/2009 $13,841 $14,015 $14,400 $12,068 5/31/2009 $13,866 $14,081 $14,335 $12,103 6/30/2009 $13,828 $14,112 $14,296 $12,207 7/31/2009 $13,979 $14,284 $14,358 $12,187 8/31/2009 $14,068 $14,417 $14,449 $12,215 9/30/2009 $14,157 $14,523 $14,529 $12,222
46 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/09 - ------------- ------- 1-Year +8.63% 5-Year +5.18% 10-Year +5.78%
ADVISOR CLASS (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN U.S. BARCLAYS CAPITAL GOVERNMENT SECURITIES LIPPER GNMA FUNDS U.S INTERMEDIATE DATE FUND - ADVISOR CLASS CLASSIFICATION AVERAGE GOVERNMENT INDEX CPI - ---- --------------------- ---------------------- ---------------- ------- 10/1/1999 $10,000 $10,000 $10,000 $10,000 10/31/1999 $10,054 $10,034 $10,020 $10,018 11/30/1999 $10,048 $10,041 $10,027 $10,024 12/31/1999 $10,010 $ 9,994 $ 9,995 $10,024 1/31/2000 $ 9,942 $ 9,917 $ 9,962 $10,054 2/29/2000 $10,044 $10,031 $10,044 $10,113 3/31/2000 $10,193 $10,182 $10,159 $10,197 4/30/2000 $10,186 $10,165 $10,155 $10,203 5/31/2000 $10,228 $10,202 $10,182 $10,214 6/30/2000 $10,396 $10,379 $10,344 $10,268 7/31/2000 $10,439 $10,425 $10,412 $10,292 8/31/2000 $10,594 $10,573 $10,529 $10,292 9/30/2000 $10,702 $10,665 $10,621 $10,345 10/31/2000 $10,778 $10,730 $10,694 $10,363 11/30/2000 $10,920 $10,887 $10,851 $10,369 12/31/2000 $11,096 $11,046 $11,042 $10,363 1/31/2001 $11,256 $11,217 $11,189 $10,429 2/28/2001 $11,300 $11,286 $11,292 $10,471 3/31/2001 $11,379 $11,352 $11,374 $10,494 4/30/2001 $11,391 $11,334 $11,338 $10,536 5/31/2001 $11,453 $11,406 $11,385 $10,584 6/30/2001 $11,516 $11,443 $11,421 $10,602 7/31/2001 $11,715 $11,669 $11,634 $10,572 8/31/2001 $11,796 $11,757 $11,738 $10,572 9/30/2001 $11,946 $11,925 $11,988 $10,619 10/31/2001 $12,112 $12,089 $12,175 $10,584 11/30/2001 $12,018 $11,962 $12,030 $10,566 12/31/2001 $11,959 $11,898 $11,972 $10,524 1/31/2002 $12,055 $12,014 $12,023 $10,548 2/28/2002 $12,204 $12,143 $12,123 $10,590 3/31/2002 $12,052 $11,991 $11,940 $10,649 4/30/2002 $12,274 $12,217 $12,164 $10,709 5/31/2002 $12,354 $12,297 $12,248 $10,709 6/30/2002 $12,452 $12,399 $12,402 $10,715 7/31/2002 $12,587 $12,546 $12,635 $10,727 8/31/2002 $12,704 $12,651 $12,780 $10,762 9/30/2002 $12,822 $12,765 $12,999 $10,780 10/31/2002 $12,848 $12,781 $12,990 $10,798 11/30/2002 $12,849 $12,775 $12,888 $10,798 12/31/2002 $12,999 $12,916 $13,126 $10,774 1/31/2003 $13,037 $12,943 $13,097 $10,822 2/28/2003 $13,113 $13,019 $13,245 $10,905 3/31/2003 $13,114 $13,011 $13,247 $10,971 4/30/2003 $13,134 $13,043 $13,285 $10,947 5/31/2003 $13,154 $13,074 $13,493 $10,929 6/30/2003 $13,174 $13,099 $13,471 $10,941 7/31/2003 $12,869 $12,816 $13,144 $10,953 8/31/2003 $12,966 $12,903 $13,168 $10,995 9/30/2003 $13,180 $13,117 $13,453 $11,030 10/31/2003 $13,122 $13,051 $13,321 $11,018 11/30/2003 $13,162 $13,091 $13,322 $10,989 12/31/2003 $13,246 $13,181 $13,426 $10,977 1/31/2004 $13,326 $13,247 $13,499 $11,030 2/29/2004 $13,406 $13,332 $13,628 $11,090 3/31/2004 $13,447 $13,377 $13,722 $11,161 4/30/2004 $13,228 $13,155 $13,416 $11,197 5/31/2004 $13,226 $13,119 $13,373 $11,263 6/30/2004 $13,343 $13,220 $13,407 $11,298 7/31/2004 $13,441 $13,321 $13,504 $11,281 8/31/2004 $13,621 $13,497 $13,704 $11,286 9/30/2004 $13,631 $13,505 $13,710 $11,310 10/31/2004 $13,750 $13,593 $13,794 $11,370 11/30/2004 $13,706 $13,548 $13,665 $11,376 12/31/2004 $13,786 $13,614 $13,740 $11,334 1/31/2005 $13,866 $13,681 $13,757 $11,358 2/28/2005 $13,800 $13,633 $13,681 $11,423 3/31/2005 $13,776 $13,600 $13,647 $11,513 4/30/2005 $13,898 $13,725 $13,806 $11,590 5/31/2005 $13,997 $13,805 $13,916 $11,578 6/30/2005 $14,032 $13,835 $13,962 $11,584 7/31/2005 $13,983 $13,777 $13,843 $11,638 8/31/2005 $14,082 $13,886 $13,996 $11,697 9/30/2005 $14,032 $13,812 $13,889 $11,840 10/31/2005 $13,961 $13,742 $13,830 $11,864 11/30/2005 $13,997 $13,778 $13,887 $11,769 12/31/2005 $14,163 $13,924 $13,971 $11,721 1/31/2006 $14,199 $13,953 $13,970 $11,811 2/28/2006 $14,214 $13,977 $13,973 $11,834 3/31/2006 $14,119 $13,890 $13,930 $11,900 4/30/2006 $14,067 $13,843 $13,943 $12,001 5/31/2006 $14,039 $13,804 $13,947 $12,061 6/30/2006 $14,032 $13,803 $13,972 $12,085 7/31/2006 $14,226 $13,978 $14,118 $12,120 8/31/2006 $14,422 $14,171 $14,277 $12,144 9/30/2006 $14,528 $14,263 $14,380 $12,085 10/31/2006 $14,614 $14,350 $14,448 $12,019 11/30/2006 $14,746 $14,475 $14,564 $12,001 12/31/2006 $14,726 $14,450 $14,508 $12,019 1/31/2007 $14,721 $14,443 $14,510 $12,056 2/28/2007 $14,900 $14,606 $14,692 $12,120 3/31/2007 $14,918 $14,634 $14,730 $12,231 4/30/2007 $14,982 $14,700 $14,795 $12,310 5/31/2007 $14,907 $14,612 $14,711 $12,385 6/30/2007 $14,809 $14,536 $14,731 $12,409 7/31/2007 $14,945 $14,651 $14,912 $12,406 8/31/2007 $15,105 $14,798 $15,122 $12,383 9/30/2007 $15,218 $14,907 $15,225 $12,418 10/31/2007 $15,355 $15,053 $15,317 $12,444 11/30/2007 $15,660 $15,337 $15,686 $12,518 12/31/2007 $15,654 $15,352 $15,737 $12,510 1/31/2008 $15,913 $15,610 $16,108 $12,572 2/29/2008 $16,004 $15,698 $16,283 $12,608 3/31/2008 $16,047 $15,723 $16,384 $12,718 4/30/2008 $16,018 $15,685 $16,165 $12,795 5/31/2008 $15,914 $15,593 $16,020 $12,902 6/30/2008 $15,928 $15,604 $16,082 $13,032 7/31/2008 $15,919 $15,596 $16,167 $13,101 8/31/2008 $16,058 $15,716 $16,291 $13,049 9/30/2008 $16,149 $15,728 $16,370 $13,031 10/31/2008 $15,938 $15,433 $16,429 $12,899 11/30/2008 $16,482 $15,811 $16,992 $12,652 12/31/2008 $16,751 $16,151 $17,378 $12,521 1/31/2009 $16,741 $16,204 $17,159 $12,576 2/28/2009 $16,859 $16,324 $17,128 $12,638 3/31/2009 $17,105 $16,590 $17,365 $12,669 4/30/2009 $17,143 $16,675 $17,240 $12,700 5/31/2009 $17,155 $16,753 $17,162 $12,737 6/30/2009 $17,141 $16,790 $17,115 $12,847 7/31/2009 $17,309 $16,995 $17,189 $12,826 8/31/2009 $17,451 $17,153 $17,298 $12,855 9/30/2009 $17,542 $17,280 $17,394 $12,863
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 9/30/09. (4.) The 30-day standardized yield for the 30 days ended 9/30/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (5.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (6.) Sources: (C) 2009 Morningstar; Lipper Inc. The BC U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index. The index includes public obligations of the U.S. Treasury with at least one year to final maturity 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 9/30/09, there were 64 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 - - 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. 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.
EXPENSES PAID DURING BEGINNING ACCOUNT ENDING ACCOUNT PERIOD* VALUE 4/1/09 VALUE 9/30/09 4/1/09-9/30/09 ----------------- -------------- -------------- CLASS A Actual $1,000 $1,023.40 $3.75 Hypothetical (5% return before expenses) $1,000 $1,021.36 $3.75 CLASS B Actual $1,000 $1,020.80 $6.28 Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.28 CLASS C Actual $1,000 $1,022.50 $6.34 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.33 CLASS R Actual $1,000 $1,023.10 $5.58 Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.57 ADVISOR CLASS Actual $1,000 $1,025.50 $3.05 Hypothetical (5% return before expenses) $1,000 $1,022.06 $3.04
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.74%; B: 1.24%; C: 1.25%; R: 1.10%; and Advisor: 0.60%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. Annual Report | 49 Franklin Utilities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 9/30/09 (BAR CHART) Electric Utilities 49.9% Multi-Utilities 36.5% Independent Power Producers & Energy Traders 3.9% Oil, Gas & Consumable Fuels 3.0% Diversified Telecommunication Services 2.7% Water Utilities 1.3% Gas Utilities 0.4% Short-Term Investments & Other Net Assets 2.3%
This annual report for Franklin Utilities Fund covers the fiscal year ended September 30, 2009. PERFORMANCE OVERVIEW Franklin Utilities Fund - Class A had a -5.20% cumulative total return for the 12 months under review. The Fund performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -6.91% total return for the same period.(1) The Fund also performed better than the -7.06% 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 and gas sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION As investors' risk appetite increased during the period's latter half, investors moved out of more defensive investments, such as utilities, and into more cyclical sectors. Largely as a result, utilities stocks underperformed most other sectors during the Fund's fiscal year. (1.) Source: (C) 2009 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) 2009 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index that includes utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, and an index is not 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 109. 50 | Annual Report Some of the Fund's largest detractors from performance were electric utilities FirstEnergy, which serves a region including Ohio, Pennsylvania and New Jersey, and Exelon, which operates in northern Illinois and southeastern Pennsylvania. Other electric utility holdings that hurt results were Entergy and Pepco Holdings. Declining electricity prices caused a potential hindrance to these companies' profitability as they sell some power at market-based pricing. Another under-performer was The Southern Co., whose Georgia service territory experienced a significant economic downturn, which caused Southern's operations to weaken. Several holdings posted gains during the fiscal year, which helped mitigate the Fund's losses from other securities. Among the most significant contributors to performance were Constellation Energy Group, a Baltimore-based utility company, FPL Group, a Florida-based electric utility, and NV Energy, an electric utility company serving parts of California and Nevada. Constellation's share price increased following negotiations conducted in late 2008 to shore up the company's balance sheet. The company's credit quality was severely impacted in 2008 as its energy marketing business required significant capital contributions to maintain its viability. FPL benefited from increased interest in renewable energy, as it is the country's largest operator of wind-powered generation. NV Energy's share price increased as the company maneuvered through regulatory proceedings allowing for recovery of recent capital investments. 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, 2009, 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 9/30/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------- ---------- Exelon Corp. ELECTRIC UTILITIES 4.8% Entergy Corp. ELECTRIC UTILITIES 4.2% PG&E Corp. MULTI-UTILITIES 4.1% Sempra Energy MULTI-UTILITIES 4.1% The Southern Co. ELECTRIC UTILITIES 4.0% PPL Corp. ELECTRIC UTILITIES 3.8% FirstEnergy Corp. ELECTRIC UTILITIES 3.8% FPL Group Inc. ELECTRIC UTILITIES 3.7% American Electric Power Company Inc. ELECTRIC UTILITIES 3.3% Public Service Enterprise Group Inc. MULTI-UTILITIES 3.2%
Annual Report | 51 Performance Summary as of 9/30/09 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 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.18 $10.74 $11.92 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.4240 Long-Term Capital Gain $0.0773 TOTAL $0.5013
CLASS B (SYMBOL: FRUBX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.17 $10.74 $11.91 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.3691 Long-Term Capital Gain $0.0773 TOTAL $0.4464
CLASS C (SYMBOL: FRUSX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.17 $10.71 $11.88 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.3713 Long-Term Capital Gain $0.0773 TOTAL $0.4486
CLASS R (SYMBOL: FRURX) CHANGE 9/30/09 9/30/08 - ----------------------- ------ ------- ------- Net Asset Value (NAV) -$1.18 $10.71 $11.89 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.3874 Long-Term Capital Gain $0.0773 TOTAL $0.4647
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 9/30/09 9/30/08 - ----------------------------- ------ ------- ------- Net Asset Value (NAV) -$1.19 $10.79 $11.98 DISTRIBUTIONS (10/1/08-9/30/09) Dividend Income $0.4391 Long-Term Capital Gain $0.0773 TOTAL $0.5164
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) -5.20% +38.52% +102.58% Average Annual Total Return(2) -9.24% +5.81% +6.85% Value of $10,000 Investment(3) $9,076 $13,265 $ 19,389 Distribution Rate(4) 3.74% 30-Day Standardized Yield(5) 3.59% Total Annual Operating Expenses(6) 0.74%
CLASS B 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------- --------- Cumulative Total Return(1) -5.65% +35.16% +94.76% Average Annual Total Return(2) -9.26% +5.89% +6.89% Value of $10,000 Investment(3) $9,074 $13,316 $ 19,476 Distribution Rate(4) 3.40% 30-Day Standardized Yield(5) 3.24% Total Annual Operating Expenses(6) 1.24%
CLASS C 1-YEAR 5-YEAR 10-YEAR - ------- ------ ------- --------- Cumulative Total Return(1) -5.64% +35.20% +92.80% Average Annual Total Return(2) -6.55% +6.22% +6.79% Value of $10,000 Investment(3) $9,345 $13,520 $ 19,280 Distribution Rate(4) 3.42% 30-Day Standardized Yield(5) 3.24% Total Annual Operating Expenses(6) 1.24%
INCEPTION CLASS R 1-YEAR 5-YEAR (1/1/02) - ------- ------ ------- --------- Cumulative Total Return(1) -5.57% +36.07% +59.06% Average Annual Total Return(2) -5.57% +6.35% +6.18% Value of $10,000 Investment(3) $9,443 $13,607 $ 15,906 Distribution Rate(4) 3.58% 30-Day Standardized Yield(5) 3.40% Total Annual Operating Expenses(6) 1.09%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR - ------------- ------ ------- --------- Cumulative Total Return(1) -5.12% +39.50% +105.63% Average Annual Total Return(2) -5.12% +6.89% +7.48% Value of $10,000 Investment(3) $9,488 $13,950 $ 20,563 Distribution Rate(4) 4.03% 30-Day Standardized Yield(5) 3.90% Total Annual Operating Expenses(6) 0.59%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT franklintempleton.com OR CALL (800) 342-5236. Annual Report | 53 Performance Summary (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes any current, applicable, maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. They differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index. AVERAGE ANNUAL TOTAL RETURN
CLASS A 9/30/09 - ------- ------- 1-Year -9.24% 5-Year +5.81% 10-Year +6.85%
CLASS A (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN S&P 500 UTILITIES S&P 500 UTILITIES DATE FUND - CLASS A INDEX INDEX - ---------- -------------- ------- --------- 10/1/1999 $ 9,571 $10,000 $10,000 10/31/1999 $ 9,741 $10,633 $10,144 11/30/1999 $ 9,172 $10,849 $ 9,391 12/31/1999 $ 9,042 $11,488 $ 9,484 1/31/2000 $ 9,558 $10,911 $10,513 2/29/2000 $ 8,853 $10,704 $ 9,864 3/31/2000 $ 9,154 $11,751 $10,193 4/30/2000 $ 9,698 $11,398 $10,986 5/31/2000 $ 9,826 $11,164 $11,467 6/30/2000 $ 9,385 $11,439 $10,784 7/31/2000 $ 9,774 $11,260 $11,548 8/31/2000 $10,811 $11,960 $13,129 9/30/2000 $11,894 $11,328 $14,335 10/31/2000 $11,839 $11,281 $13,783 11/30/2000 $12,265 $10,391 $13,625 12/31/2000 $12,805 $10,442 $14,907 1/31/2001 $11,491 $10,812 $13,459 2/28/2001 $12,165 $ 9,827 $13,948 3/31/2001 $12,323 $ 9,204 $13,854 4/30/2001 $12,836 $ 9,919 $14,661 5/31/2001 $12,903 $ 9,986 $14,193 6/30/2001 $12,253 $ 9,743 $13,062 7/31/2001 $11,824 $ 9,647 $12,460 8/31/2001 $11,982 $ 9,043 $12,121 9/30/2001 $11,414 $ 8,313 $10,718 10/31/2001 $11,425 $ 8,471 $10,679 11/30/2001 $11,323 $ 9,121 $10,106 12/31/2001 $11,770 $ 9,201 $10,370 1/31/2002 $11,625 $ 9,067 $ 9,772 2/28/2002 $11,588 $ 8,892 $ 9,557 3/31/2002 $12,250 $ 9,226 $10,720 4/30/2002 $12,164 $ 8,667 $10,521 5/31/2002 $11,871 $ 8,603 $ 9,587 6/30/2002 $11,343 $ 7,990 $ 8,906 7/31/2002 $10,365 $ 7,367 $ 7,661 8/31/2002 $10,774 $ 7,416 $ 7,949 9/30/2002 $ 9,989 $ 6,610 $ 6,922 10/31/2002 $ 9,989 $ 7,192 $ 6,796 11/30/2002 $10,189 $ 7,615 $ 6,976 12/31/2002 $10,537 $ 7,167 $ 7,259 1/31/2003 $10,104 $ 6,980 $ 7,037 2/28/2003 $ 9,824 $ 6,875 $ 6,704 3/31/2003 $10,174 $ 6,942 $ 7,032 4/30/2003 $10,730 $ 7,514 $ 7,640 5/31/2003 $11,672 $ 7,909 $ 8,437 6/30/2003 $11,712 $ 8,010 $ 8,533 7/31/2003 $11,176 $ 8,152 $ 7,982 8/31/2003 $11,189 $ 8,310 $ 8,134 9/30/2003 $11,625 $ 8,222 $ 8,496 10/31/2003 $11,836 $ 8,687 $ 8,586 11/30/2003 $11,955 $ 8,764 $ 8,595 12/31/2003 $12,570 $ 9,223 $ 9,172 1/31/2004 $12,784 $ 9,393 $ 9,366 2/29/2004 $13,118 $ 9,523 $ 9,550 3/31/2004 $13,212 $ 9,380 $ 9,646 4/30/2004 $12,821 $ 9,232 $ 9,291 5/31/2004 $12,970 $ 9,359 $ 9,377 6/30/2004 $13,176 $ 9,541 $ 9,523 7/31/2004 $13,312 $ 9,225 $ 9,680 8/31/2004 $13,844 $ 9,263 $10,078 9/30/2004 $13,997 $ 9,363 $10,164 10/31/2004 $14,575 $ 9,506 $10,660 11/30/2004 $14,988 $ 9,891 $11,110 12/31/2004 $15,479 $10,227 $11,403 1/31/2005 $15,619 $ 9,978 $11,636 2/28/2005 $15,744 $10,188 $11,887 3/31/2005 $15,787 $10,007 $12,021 4/30/2005 $16,139 $ 9,818 $12,395 5/31/2005 $16,435 $10,130 $12,418 6/30/2005 $17,160 $10,144 $13,141 7/31/2005 $17,430 $10,522 $13,435 8/31/2005 $17,586 $10,426 $13,558 9/30/2005 $18,030 $10,510 $14,099 10/31/2005 $16,998 $10,335 $13,206 11/30/2005 $17,041 $10,726 $13,179 12/31/2005 $17,142 $10,729 $13,326 1/31/2006 $17,594 $11,014 $13,653 2/28/2006 $17,885 $11,043 $13,806 3/31/2006 $17,314 $11,181 $13,172 4/30/2006 $17,505 $11,331 $13,381 5/31/2006 $17,711 $11,005 $13,594 6/30/2006 $18,096 $11,020 $13,921 7/31/2006 $18,910 $11,088 $14,605 8/31/2006 $19,399 $11,352 $15,021 9/30/2006 $19,236 $11,644 $14,771 10/31/2006 $20,236 $12,024 $15,570 11/30/2006 $20,923 $12,252 $15,942 12/31/2006 $21,237 $12,424 $16,123 1/31/2007 $21,206 $12,612 $16,076 2/28/2007 $21,999 $12,365 $16,926 3/31/2007 $22,893 $12,504 $17,621 4/30/2007 $23,613 $13,057 $18,362 5/31/2007 $23,817 $13,513 $18,490 6/30/2007 $22,684 $13,289 $17,553 7/31/2007 $21,864 $12,877 $16,895 8/31/2007 $22,384 $13,070 $17,282 9/30/2007 $23,145 $13,558 $17,896 10/31/2007 $24,590 $13,774 $19,091 11/30/2007 $24,606 $13,198 $19,198 12/31/2007 $24,725 $13,107 $19,247 1/31/2008 $23,047 $12,321 $17,931 2/29/2008 $21,924 $11,920 $17,051 3/31/2008 $22,178 $11,869 $17,335 4/30/2008 $23,310 $12,447 $18,250 5/31/2008 $24,054 $12,608 $18,863 6/30/2008 $23,547 $11,545 $18,717 7/31/2008 $22,559 $11,448 $17,567 8/31/2008 $22,474 $11,614 $17,321 9/30/2008 $20,453 $10,579 $15,345 10/31/2008 $18,137 $ 8,802 $13,550 11/30/2008 $18,634 $ 8,171 $13,964 12/31/2008 $18,396 $ 8,257 $13,669 1/31/2009 $18,203 $ 7,561 $13,580 2/28/2009 $16,035 $ 6,756 $11,895 3/31/2009 $16,433 $ 7,348 $12,194 4/30/2009 $16,752 $ 8,051 $12,271 5/31/2009 $17,335 $ 8,502 $12,729 6/30/2009 $18,251 $ 8,519 $13,435 7/31/2009 $19,001 $ 9,163 $13,956 8/31/2009 $19,234 $ 9,494 $14,066 9/30/2009 $19,389 $ 9,848 $14,262
AVERAGE ANNUAL TOTAL RETURN
CLASS B 9/30/09 - ------- ------- 1-Year -9.26% 5-Year +5.89% 10-Year +6.89%
CLASS B (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN S&P 500 UTILITIES S&P 500 UTILITIES DATE FUND - CLASS B INDEX INDEX - ---------- -------------- ------- --------- 10/1/1999 $10,000 $10,000 $10,000 10/31/1999 $10,188 $10,633 $10,144 11/30/1999 $ 9,593 $10,849 $ 9,391 12/31/1999 $ 9,458 $11,488 $ 9,484 1/31/2000 $ 9,997 $10,911 $10,513 2/29/2000 $ 9,239 $10,704 $ 9,864 3/31/2000 $ 9,563 $11,751 $10,193 4/30/2000 $10,119 $11,398 $10,986 5/31/2000 $10,252 $11,164 $11,467 6/30/2000 $ 9,781 $11,439 $10,784 7/31/2000 $10,186 $11,260 $11,548 8/31/2000 $11,254 $11,960 $13,129 9/30/2000 $12,379 $11,328 $14,335 10/31/2000 $12,310 $11,281 $13,783 11/30/2000 $12,753 $10,391 $13,625 12/31/2000 $13,310 $10,442 $14,907 1/31/2001 $11,945 $10,812 $13,459 2/28/2001 $12,633 $ 9,827 $13,948 3/31/2001 $12,793 $ 9,204 $13,854 4/30/2001 $13,314 $ 9,919 $14,661 5/31/2001 $13,384 $ 9,986 $14,193 6/30/2001 $12,706 $ 9,743 $13,062 7/31/2001 $12,250 $ 9,647 $12,460 8/31/2001 $12,414 $ 9,043 $12,121 9/30/2001 $11,812 $ 8,313 $10,718 10/31/2001 $11,823 $ 8,471 $10,679 11/30/2001 $11,717 $ 9,121 $10,106 12/31/2001 $12,177 $ 9,201 $10,370 1/31/2002 $12,015 $ 9,067 $ 9,772 2/28/2002 $11,977 $ 8,892 $ 9,557 3/31/2002 $12,646 $ 9,226 $10,720 4/30/2002 $12,557 $ 8,667 $10,521 5/31/2002 $12,254 $ 8,603 $ 9,587 6/30/2002 $11,710 $ 7,990 $ 8,906 7/31/2002 $10,676 $ 7,367 $ 7,661 8/31/2002 $11,098 $ 7,416 $ 7,949 9/30/2002 $10,290 $ 6,610 $ 6,922 10/31/2002 $10,290 $ 7,192 $ 6,796 11/30/2002 $10,497 $ 7,615 $ 6,976 12/31/2002 $10,842 $ 7,167 $ 7,259 1/31/2003 $10,397 $ 6,980 $ 7,037 2/28/2003 $10,109 $ 6,875 $ 6,704 3/31/2003 $10,458 $ 6,942 $ 7,032 4/30/2003 $11,016 $ 7,514 $ 7,640 5/31/2003 $11,985 $ 7,909 $ 8,437 6/30/2003 $12,027 $ 8,010 $ 8,533 7/31/2003 $11,478 $ 8,152 $ 7,982 8/31/2003 $11,478 $ 8,310 $ 8,134 9/30/2003 $11,926 $ 8,222 $ 8,496 10/31/2003 $12,129 $ 8,687 $ 8,586 11/30/2003 $12,251 $ 8,764 $ 8,595 12/31/2003 $12,866 $ 9,223 $ 9,172 1/31/2004 $13,085 $ 9,393 $ 9,366 2/29/2004 $13,427 $ 9,523 $ 9,550 3/31/2004 $13,522 $ 9,380 $ 9,646 4/30/2004 $13,108 $ 9,232 $ 9,291 5/31/2004 $13,246 $ 9,359 $ 9,377 6/30/2004 $13,455 $ 9,541 $ 9,523 7/31/2004 $13,594 $ 9,225 $ 9,680 8/31/2004 $14,138 $ 9,263 $10,078 9/30/2004 $14,276 $ 9,363 $10,164 10/31/2004 $14,867 $ 9,506 $10,660 11/30/2004 $15,275 $ 9,891 $11,110 12/31/2004 $15,780 $10,227 $11,403 1/31/2005 $15,908 $ 9,978 $11,636 2/28/2005 $16,036 $10,188 $11,887 3/31/2005 $16,072 $10,007 $12,021 4/30/2005 $16,416 $ 9,818 $12,395 5/31/2005 $16,703 $10,130 $12,418 6/30/2005 $17,441 $10,144 $13,141 7/31/2005 $17,716 $10,522 $13,435 8/31/2005 $17,860 $10,426 $13,558 9/30/2005 $18,289 $10,510 $14,099 10/31/2005 $17,256 $10,335 $13,206 11/30/2005 $17,285 $10,726 $13,179 12/31/2005 $17,380 $10,729 $13,326 1/31/2006 $17,838 $11,014 $13,653 2/28/2006 $18,119 $11,043 $13,806 3/31/2006 $17,532 $11,181 $13,172 4/30/2006 $17,726 $11,331 $13,381 5/31/2006 $17,919 $11,005 $13,594 6/30/2006 $18,287 $11,020 $13,921 7/31/2006 $19,111 $11,088 $14,605 8/31/2006 $19,606 $11,352 $15,021 9/30/2006 $19,431 $11,644 $14,771 10/31/2006 $20,427 $12,024 $15,570 11/30/2006 $21,121 $12,252 $15,942 12/31/2006 $21,413 $12,424 $16,123 1/31/2007 $21,381 $12,612 $16,076 2/28/2007 $22,182 $12,365 $16,926 3/31/2007 $23,056 $12,504 $17,621 4/30/2007 $23,782 $13,057 $18,362 5/31/2007 $23,972 $13,513 $18,490 6/30/2007 $22,831 $13,289 $17,553 7/31/2007 $21,990 $12,877 $16,895 8/31/2007 $22,514 $13,070 $17,282 9/30/2007 $23,251 $13,558 $17,896 10/31/2007 $24,702 $13,774 $19,091 11/30/2007 $24,717 $13,198 $19,198 12/31/2007 $24,835 $13,107 $19,247 1/31/2008 $23,151 $12,321 $17,931 2/29/2008 $22,022 $11,920 $17,051 3/31/2008 $22,277 $11,869 $17,335 4/30/2008 $23,416 $12,447 $18,250 5/31/2008 $24,162 $12,608 $18,863 6/30/2008 $23,653 $11,545 $18,717 7/31/2008 $22,662 $11,448 $17,567 8/31/2008 $22,575 $11,614 $17,321 9/30/2008 $20,546 $10,579 $15,345 10/31/2008 $18,218 $ 8,802 $13,550 11/30/2008 $18,717 $ 8,171 $13,964 12/31/2008 $18,478 $ 8,257 $13,669 1/31/2009 $18,284 $ 7,561 $13,580 2/28/2009 $16,106 $ 6,756 $11,895 3/31/2009 $16,506 $ 7,348 $12,194 4/30/2009 $16,826 $ 8,051 $12,271 5/31/2009 $17,411 $ 8,502 $12,729 6/30/2009 $18,331 $ 8,519 $13,435 7/31/2009 $19,084 $ 9,163 $13,956 8/31/2009 $19,317 $ 9,494 $14,066 9/30/2009 $19,476 $ 9,848 $14,262
54 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 9/30/09 - ------- ------- 1-Year -6.55% 5-Year +6.22% 10-Year +6.79%
CLASS C (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN S&P 500 UTILITIES S&P 500 UTILITIES DATE FUND - CLASS C INDEX INDEX - ---------- -------------- ------- --------- 10/1/1999 $10,000 $10,000 $10,000 10/31/1999 $10,177 $10,633 $10,144 11/30/1999 $ 9,572 $10,849 $ 9,391 12/31/1999 $ 9,434 $11,488 $ 9,484 1/31/2000 $ 9,972 $10,911 $10,513 2/29/2000 $ 9,225 $10,704 $ 9,864 3/31/2000 $ 9,548 $11,751 $10,193 4/30/2000 $10,104 $11,398 $10,986 5/31/2000 $10,238 $11,164 $11,467 6/30/2000 $ 9,766 $11,439 $10,784 7/31/2000 $10,171 $11,260 $11,548 8/31/2000 $11,240 $11,960 $13,129 9/30/2000 $12,365 $11,328 $14,335 10/31/2000 $12,297 $11,281 $13,783 11/30/2000 $12,740 $10,391 $13,625 12/31/2000 $13,297 $10,442 $14,907 1/31/2001 $11,930 $10,812 $13,459 2/28/2001 $12,619 $ 9,827 $13,948 3/31/2001 $12,780 $ 9,204 $13,854 4/30/2001 $13,301 $ 9,919 $14,661 5/31/2001 $13,370 $ 9,986 $14,193 6/30/2001 $12,692 $ 9,743 $13,062 7/31/2001 $12,236 $ 9,647 $12,460 8/31/2001 $12,400 $ 9,043 $12,121 9/30/2001 $11,809 $ 8,313 $10,718 10/31/2001 $11,820 $ 8,471 $10,679 11/30/2001 $11,703 $ 9,121 $10,106 12/31/2001 $12,162 $ 9,201 $10,370 1/31/2002 $12,012 $ 9,067 $ 9,772 2/28/2002 $11,974 $ 8,892 $ 9,557 3/31/2002 $12,643 $ 9,226 $10,720 4/30/2002 $12,542 $ 8,667 $10,521 5/31/2002 $12,238 $ 8,603 $ 9,587 6/30/2002 $11,694 $ 7,990 $ 8,906 7/31/2002 $10,671 $ 7,367 $ 7,661 8/31/2002 $11,093 $ 7,416 $ 7,949 9/30/2002 $10,285 $ 6,610 $ 6,922 10/31/2002 $10,272 $ 7,192 $ 6,796 11/30/2002 $10,492 $ 7,615 $ 6,976 12/31/2002 $10,837 $ 7,167 $ 7,259 1/31/2003 $10,392 $ 6,980 $ 7,037 2/28/2003 $10,104 $ 6,875 $ 6,704 3/31/2003 $10,455 $ 6,942 $ 7,032 4/30/2003 $11,013 $ 7,514 $ 7,640 5/31/2003 $11,982 $ 7,909 $ 8,437 6/30/2003 $12,013 $ 8,010 $ 8,533 7/31/2003 $11,463 $ 8,152 $ 7,982 8/31/2003 $11,476 $ 8,310 $ 8,134 9/30/2003 $11,908 $ 8,222 $ 8,496 10/31/2003 $12,112 $ 8,687 $ 8,586 11/30/2003 $12,248 $ 8,764 $ 8,595 12/31/2003 $12,850 $ 9,223 $ 9,172 1/31/2004 $13,069 $ 9,393 $ 9,366 2/29/2004 $13,411 $ 9,523 $ 9,550 3/31/2004 $13,507 $ 9,380 $ 9,646 4/30/2004 $13,106 $ 9,232 $ 9,291 5/31/2004 $13,231 $ 9,359 $ 9,377 6/30/2004 $13,439 $ 9,541 $ 9,523 7/31/2004 $13,579 $ 9,225 $ 9,680 8/31/2004 $14,123 $ 9,263 $10,078 9/30/2004 $14,262 $ 9,363 $10,164 10/31/2004 $14,853 $ 9,506 $10,660 11/30/2004 $15,261 $ 9,891 $11,110 12/31/2004 $15,767 $10,227 $11,403 1/31/2005 $15,895 $ 9,978 $11,636 2/28/2005 $16,023 $10,188 $11,887 3/31/2005 $16,059 $10,007 $12,021 4/30/2005 $16,403 $ 9,818 $12,395 5/31/2005 $16,690 $10,130 $12,418 6/30/2005 $17,429 $10,144 $13,141 7/31/2005 $17,689 $10,522 $13,435 8/31/2005 $17,848 $10,426 $13,558 9/30/2005 $18,278 $10,510 $14,099 10/31/2005 $17,229 $10,335 $13,206 11/30/2005 $17,273 $10,726 $13,179 12/31/2005 $17,370 $10,729 $13,326 1/31/2006 $17,813 $11,014 $13,653 2/28/2006 $18,109 $11,043 $13,806 3/31/2006 $17,522 $11,181 $13,172 4/30/2006 $17,716 $11,331 $13,381 5/31/2006 $17,895 $11,005 $13,594 6/30/2006 $18,279 $11,020 $13,921 7/31/2006 $19,104 $11,088 $14,605 8/31/2006 $19,584 $11,352 $15,021 9/30/2006 $19,410 $11,644 $14,771 10/31/2006 $20,407 $12,024 $15,570 11/30/2006 $21,102 $12,252 $15,942 12/31/2006 $21,394 $12,424 $16,123 1/31/2007 $21,362 $12,612 $16,076 2/28/2007 $22,164 $12,365 $16,926 3/31/2007 $23,041 $12,504 $17,621 4/30/2007 $23,768 $13,057 $18,362 5/31/2007 $23,958 $13,513 $18,490 6/30/2007 $22,816 $13,289 $17,553 7/31/2007 $21,974 $12,877 $16,895 8/31/2007 $22,498 $13,070 $17,282 9/30/2007 $23,238 $13,558 $17,896 10/31/2007 $24,693 $13,774 $19,091 11/30/2007 $24,693 $13,198 $19,198 12/31/2007 $24,795 $13,107 $19,247 1/31/2008 $23,107 $12,321 $17,931 2/29/2008 $21,976 $11,920 $17,051 3/31/2008 $22,221 $11,869 $17,335 4/30/2008 $23,342 $12,447 $18,250 5/31/2008 $24,072 $12,608 $18,863 6/30/2008 $23,549 $11,545 $18,717 7/31/2008 $22,558 $11,448 $17,567 8/31/2008 $22,473 $11,614 $17,321 9/30/2008 $20,435 $10,579 $15,345 10/31/2008 $18,113 $ 8,802 $13,550 11/30/2008 $18,594 $ 8,171 $13,964 12/31/2008 $18,347 $ 8,257 $13,669 1/31/2009 $18,155 $ 7,561 $13,580 2/28/2009 $16,001 $ 6,756 $11,895 3/31/2009 $16,374 $ 7,348 $12,194 4/30/2009 $16,674 $ 8,051 $12,271 5/31/2009 $17,258 $ 8,502 $12,729 6/30/2009 $18,169 $ 8,519 $13,435 7/31/2009 $18,919 $ 9,163 $13,956 8/31/2009 $19,115 $ 9,494 $14,066 9/30/2009 $19,280 $ 9,848 $14,262
AVERAGE ANNUAL TOTAL RETURN
CLASS R 9/30/09 - ------- ------- 1-Year -5.57% 5-Year +6.35% Since Inception (1/1/02) +6.18%
CLASS R (1/1/02-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN S&P 500 UTILITIES S&P 500 UTILITIES DATE FUND - CLASS R INDEX 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 $10,027 $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 $ 7,586 $ 6,786 2/28/2003 $ 8,254 $ 7,472 $ 6,465 3/31/2003 $ 8,546 $ 7,545 $ 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 $10,024 $ 8,845 1/31/2004 $10,692 $10,208 $ 9,032 2/29/2004 $10,971 $10,350 $ 9,209 3/31/2004 $11,053 $10,194 $ 9,302 4/30/2004 $10,725 $10,034 $ 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 $10,176 $ 9,802 10/31/2004 $12,174 $10,332 $10,280 11/30/2004 $12,508 $10,750 $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 $11,073 $11,463 3/31/2005 $13,163 $10,877 $11,592 4/30/2005 $13,458 $10,670 $11,953 5/31/2005 $13,693 $11,010 $11,975 6/30/2005 $14,300 $11,025 $12,672 7/31/2005 $14,513 $11,435 $12,956 8/31/2005 $14,644 $11,331 $13,075 9/30/2005 $15,003 $11,423 $13,596 10/31/2005 $14,144 $11,232 $12,736 11/30/2005 $14,168 $11,657 $12,710 12/31/2005 $14,254 $11,661 $12,851 1/31/2006 $14,618 $11,970 $13,167 2/28/2006 $14,861 $12,003 $13,313 3/31/2006 $14,387 $12,152 $12,703 4/30/2006 $14,545 $12,315 $12,904 5/31/2006 $14,704 $11,961 $13,109 6/30/2006 $15,012 $11,977 $13,425 7/31/2006 $15,690 $12,051 $14,085 8/31/2006 $16,084 $12,338 $14,485 9/30/2006 $15,947 $12,655 $14,245 10/31/2006 $16,778 $13,068 $15,015 11/30/2006 $17,348 $13,316 $15,374 12/31/2006 $17,584 $13,503 $15,548 1/31/2007 $17,559 $13,707 $15,503 2/28/2007 $18,217 $13,439 $16,322 3/31/2007 $18,944 $13,590 $16,993 4/30/2007 $19,541 $14,192 $17,707 5/31/2007 $19,698 $14,687 $17,831 6/30/2007 $18,754 $14,443 $16,928 7/31/2007 $18,074 $13,995 $16,293 8/31/2007 $18,506 $14,205 $16,666 9/30/2007 $19,124 $14,736 $17,258 10/31/2007 $20,320 $14,970 $18,410 11/30/2007 $20,320 $14,345 $18,513 12/31/2007 $20,412 $14,245 $18,561 1/31/2008 $19,024 $13,391 $17,292 2/29/2008 $18,093 $12,956 $16,443 3/31/2008 $18,288 $12,900 $16,717 4/30/2008 $19,224 $13,528 $17,600 5/31/2008 $19,825 $13,703 $18,190 6/30/2008 $19,403 $12,548 $18,050 7/31/2008 $18,586 $12,442 $16,941 8/31/2008 $18,516 $12,622 $16,704 9/30/2008 $16,844 $11,498 $14,798 10/31/2008 $14,932 $ 9,567 $13,067 11/30/2008 $15,329 $ 8,880 $13,466 12/31/2008 $15,131 $ 8,975 $13,182 1/31/2009 $14,973 $ 8,218 $13,096 2/28/2009 $13,184 $ 7,343 $11,471 3/31/2009 $13,513 $ 7,986 $11,759 4/30/2009 $13,760 $ 8,751 $11,833 5/31/2009 $14,241 $ 9,240 $12,275 6/30/2009 $14,998 $ 9,259 $12,956 7/31/2009 $15,601 $ 9,959 $13,459 8/31/2009 $15,777 $10,318 $13,565 9/30/2009 $15,906 $10,703 $13,753
Annual Report | 55 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 9/30/09 - ------------- ------- 1-Year -5.12% 5-Year +6.89% 10-Year +7.48%
ADVISOR CLASS (10/1/99-9/30/09) (PERFORMANCE GRAPH)
FRANKLIN S&P 500 UTILITIES FUND - S&P 500 UTILITIES DATE ADVISOR CLASS INDEX INDEX - ---------- ---------------- ------- --------- 10/1/1999 $10,000 $10,000 $10,000 10/31/1999 $10,187 $10,633 $10,144 11/30/1999 $ 9,584 $10,849 $ 9,391 12/31/1999 $ 9,463 $11,488 $ 9,484 1/31/2000 $10,001 $10,911 $10,513 2/29/2000 $ 9,255 $10,704 $ 9,864 3/31/2000 $ 9,583 $11,751 $10,193 4/30/2000 $10,151 $11,398 $10,986 5/31/2000 $10,284 $11,164 $11,467 6/30/2000 $ 9,816 $11,439 $10,784 7/31/2000 $10,233 $11,260 $11,548 8/31/2000 $11,315 $11,960 $13,129 9/30/2000 $12,450 $11,328 $14,335 10/31/2000 $12,393 $11,281 $13,783 11/30/2000 $12,849 $10,391 $13,625 12/31/2000 $13,406 $10,442 $14,907 1/31/2001 $12,033 $10,812 $13,459 2/28/2001 $12,737 $ 9,827 $13,948 3/31/2001 $12,906 $ 9,204 $13,854 4/30/2001 $13,442 $ 9,919 $14,661 5/31/2001 $13,524 $ 9,986 $14,193 6/30/2001 $12,837 $ 9,743 $13,062 7/31/2001 $12,390 $ 9,647 $12,460 8/31/2001 $12,555 $ 9,043 $12,121 9/30/2001 $11,966 $ 8,313 $10,718 10/31/2001 $11,978 $ 8,471 $10,679 11/30/2001 $11,870 $ 9,121 $10,106 12/31/2001 $12,342 $ 9,201 $10,370 1/31/2002 $12,190 $ 9,067 $ 9,772 2/28/2002 $12,165 $ 8,892 $ 9,557 3/31/2002 $12,848 $ 9,226 $10,720 4/30/2002 $12,759 $ 8,667 $10,521 5/31/2002 $12,464 $ 8,603 $ 9,587 6/30/2002 $11,905 $ 7,990 $ 8,906 7/31/2002 $10,868 $ 7,367 $ 7,661 8/31/2002 $11,309 $ 7,416 $ 7,949 9/30/2002 $10,491 $ 6,610 $ 6,922 10/31/2002 $10,491 $ 7,192 $ 6,796 11/30/2002 $10,715 $ 7,615 $ 6,976 12/31/2002 $11,069 $ 7,167 $ 7,259 1/31/2003 $10,616 $ 6,980 $ 7,037 2/28/2003 $10,323 $ 6,875 $ 6,704 3/31/2003 $10,693 $ 6,942 $ 7,032 4/30/2003 $11,275 $ 7,514 $ 7,640 5/31/2003 $12,275 $ 7,909 $ 8,437 6/30/2003 $12,320 $ 8,010 $ 8,533 7/31/2003 $11,759 $ 8,152 $ 7,982 8/31/2003 $11,773 $ 8,310 $ 8,134 9/30/2003 $12,234 $ 8,222 $ 8,496 10/31/2003 $12,441 $ 8,687 $ 8,586 11/30/2003 $12,580 $ 8,764 $ 8,595 12/31/2003 $13,215 $ 9,223 $ 9,172 1/31/2004 $13,439 $ 9,393 $ 9,366 2/29/2004 $13,803 $ 9,523 $ 9,550 3/31/2004 $13,907 $ 9,380 $ 9,646 4/30/2004 $13,496 $ 9,232 $ 9,291 5/31/2004 $13,638 $ 9,359 $ 9,377 6/30/2004 $13,859 $ 9,541 $ 9,523 7/31/2004 $14,016 $ 9,225 $ 9,680 8/31/2004 $14,574 $ 9,263 $10,078 9/30/2004 $14,739 $ 9,363 $10,164 10/31/2004 $15,346 $ 9,506 $10,660 11/30/2004 $15,780 $ 9,891 $11,110 12/31/2004 $16,306 $10,227 $11,403 1/31/2005 $16,452 $ 9,978 $11,636 2/28/2005 $16,599 $10,188 $11,887 3/31/2005 $16,635 $10,007 $12,021 4/30/2005 $17,020 $ 9,818 $12,395 5/31/2005 $17,315 $10,130 $12,418 6/30/2005 $18,097 $10,144 $13,141 7/31/2005 $18,381 $10,522 $13,435 8/31/2005 $18,545 $10,426 $13,558 9/30/2005 $19,014 $10,510 $14,099 10/31/2005 $17,931 $10,335 $13,206 11/30/2005 $17,976 $10,726 $13,179 12/31/2005 $18,090 $10,729 $13,326 1/31/2006 $18,564 $11,014 $13,653 2/28/2006 $18,870 $11,043 $13,806 3/31/2006 $18,276 $11,181 $13,172 4/30/2006 $18,477 $11,331 $13,381 5/31/2006 $18,693 $11,005 $13,594 6/30/2006 $19,105 $11,020 $13,921 7/31/2006 $19,961 $11,088 $14,605 8/31/2006 $20,491 $11,352 $15,021 9/30/2006 $20,322 $11,644 $14,771 10/31/2006 $21,374 $12,024 $15,570 11/30/2006 $22,111 $12,252 $15,942 12/31/2006 $22,425 $12,424 $16,123 1/31/2007 $22,409 $12,612 $16,076 2/28/2007 $23,243 $12,365 $16,926 3/31/2007 $24,191 $12,504 $17,621 4/30/2007 $24,966 $13,057 $18,362 5/31/2007 $25,164 $13,513 $18,490 6/30/2007 $23,980 $13,289 $17,553 7/31/2007 $23,117 $12,877 $16,895 8/31/2007 $23,681 $13,070 $17,282 9/30/2007 $24,474 $13,558 $17,896 10/31/2007 $26,012 $13,774 $19,091 11/30/2007 $26,045 $13,198 $19,198 12/31/2007 $26,164 $13,107 $19,247 1/31/2008 $24,379 $12,321 $17,931 2/29/2008 $23,213 $11,920 $17,051 3/31/2008 $23,472 $11,869 $17,335 4/30/2008 $24,683 $12,447 $18,250 5/31/2008 $25,467 $12,608 $18,863 6/30/2008 $24,923 $11,545 $18,717 7/31/2008 $23,882 $11,448 $17,567 8/31/2008 $23,811 $11,614 $17,321 9/30/2008 $21,671 $10,579 $15,345 10/31/2008 $19,211 $ 8,802 $13,550 11/30/2008 $19,736 $ 8,171 $13,964 12/31/2008 $19,492 $ 8,257 $13,669 1/31/2009 $19,289 $ 7,561 $13,580 2/28/2009 $17,002 $ 6,756 $11,895 3/31/2009 $17,430 $ 7,348 $12,194 4/30/2009 $17,747 $ 8,051 $12,271 5/31/2009 $18,382 $ 8,502 $12,729 6/30/2009 $19,354 $ 8,519 $13,435 7/31/2009 $20,165 $ 9,163 $13,956 8/31/2009 $20,391 $ 9,494 $14,066 9/30/2009 $20,563 $ 9,848 $14,262
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 9/30/09. (5.) The 30-day standardized yield for the 30 days ended 9/30/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Source: (C) 2009 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 - - 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. 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 PAID ACCOUNT ACCOUNT DURING VALUE VALUE PERIOD* 4/1/09 9/30/09 4/1/09-9/30/09 --------- --------- -------------- CLASS A Actual $1,000 $1,179.90 $4.48 Hypothetical (5% return before expenses) $1,000 $1,020.96 $4.15 CLASS B Actual $1,000 $1,176.90 $7.15 Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.63 CLASS C Actual $1,000 $1,177.60 $7.15 Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.63 CLASS R Actual $1,000 $1,177.20 $6.33 Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.87 ADVISOR CLASS Actual $1,000 $1,179.70 $3.61 Hypothetical (5% return before expenses) $1,000 $1,021.76 $3.35
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.82%; B: 1.31%; C: 1.31%; R: 1.16%; and Advisor: 0.66%), multiplied by the average account value over the period, multiplied by 183/365 to reflect the one-half year period. 58 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .. (0.06) (0.08) (0.08) (0.05) (0.01) Net realized and unrealized gains (losses) ...................... (0.03) (6.67) 6.61 0.87 2.98 -------- -------- -------- -------- -------- Total from investment operations .... (0.09) (6.75) 6.53 0.82 2.97 -------- -------- -------- -------- -------- Less distributions from net realized gains ............................ (1.58) (0.71) -- -- -- -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 23.20 $ 24.87 $ 32.33 $ 25.80 $ 24.98 ======== ======== ======== ======== ======== Total return(e) ..................... 2.71% (21.36)% 25.31% 3.28% 13.49% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.16% 0.97% 0.99% 0.97% 1.00% Net investment income (loss) ........ (0.34)% (0.26)% (0.30)% (0.20)% (0.02)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $503,472 $388,843 $553,347 $590,633 $628,732 Portfolio turnover rate ............. 46.05% 41.01% 18.03% 18.61% 17.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .. (0.19) (0.29) (0.28) (0.23) (0.18) Net realized and unrealized gains (losses) ...................... (0.11) (6.30) 6.31 0.83 2.90 ------- ------- ------- ------- ------- Total from investment operations .... (0.30) (6.59) 6.03 0.60 2.72 ------- ------- ------- ------- ------- Less distributions from net realized gains ............................ (1.58) (0.71) -- -- -- ------- ------- ------- ------- ------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year ........ $ 21.60 $ 23.48 $ 30.78 $ 24.75 $ 24.15 ======= ======= ======= ======= ======= Total return(e) ..................... 1.96% (21.96)% 24.36% 2.48% 12.69% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.91% 1.73% 1.75% 1.72% 1.74% Net investment income (loss) ........ (1.09)% (1.02)% (1.06)% (0.95)% (0.76)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $13,682 $10,704 $16,625 $18,718 $19,497 Portfolio turnover rate ............. 46.05% 41.01% 18.03% 18.61% 17.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income (loss)(b) .. (0.19) (0.28) (0.28) (0.23) (0.17) Net realized and unrealized gains (losses) ...................... (0.12) (6.24) 6.24 0.83 2.86 ------- ------- ------- ------- ------- Total from investment operations .... (0.31) (6.52) 5.96 0.60 2.69 ------- ------- ------- ------- ------- Less distributions from net realized gains ............................ (1.58) (0.71) -- -- -- ------- ------- ------- ------- ------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year ........ $ 21.34 $ 23.23 $ 30.46 $ 24.50 $ 23.90 ======= ======= ======= ======= ======= Total return(e) ..................... 1.89% (21.93)% 24.33% 2.51% 12.68% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.91% 1.73% 1.74% 1.71% 1.74% Net investment income (loss) ........ (1.09)% (1.02)% (1.05)% (0.94)% (0.76)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $83,435 $53,289 $70,413 $69,069 $73,587 Portfolio turnover rate ............. 46.05% 41.01% 18.03% 18.61% 17.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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, CLASS R 2009(a) - ------- ------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $15.66 ------ Income from investment operations(b): Net investment income (loss)(c) .. (0.09) Net realized and unrealized gains (losses) ...................... 7.56 ------ Total from investment operations .... 7.47 ------ Net asset value, end of period ...... $23.13 ====== Total return(d) ..................... 47.70% RATIOS TO AVERAGE NET ASSETS(e) Expenses(f) ......................... 1.41% Net investment income (loss) ........ (0.59)% SUPPLEMENTAL DATA Net assets, end of period (000's) ... $6,345 Portfolio turnover rate ............. 46.05%
(a) For the period December 1, 2008 (effective date) to September 30, 2009. (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) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. (f) 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 FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
YEAR ENDED SEPTEMBER 30, ------------------------ ADVISOR CLASS 2009 2008(a) - ------------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $24.90 $ 31.40 ------ ------- Income from investment operations(b): Net investment income (loss)(c) .. (0.02) (0.01) Net realized and unrealized gains (losses) ...................... (0.02) (6.49) ------ ------- Total from investment operations .... (0.04) (6.50) ------ ------- Less distributions from net realized gains ............................ (1.58) -- ------ ------- Redemption fees(d) .................. -- --(e) ------ ------- Net asset value, end of year ........ $23.28 $ 24.90 ====== ======= Total return(f) ..................... 2.92% (20.70)% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ......................... 0.91% 0.73% Net investment income (loss) ........ (0.09)% (0.02)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $8,208 $ 1,938 Portfolio turnover rate ............. 46.05% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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. Annual Report | 63 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------------- ---------------- COMMON STOCKS 100.1% AEROSPACE & DEFENSE 1.7% Precision Castparts Corp. .................................. United States 100,000 $ 10,187,000 ---------------- AIR FREIGHT & LOGISTICS 1.4% C.H. Robinson Worldwide Inc. ............................... United States 150,000 8,662,500 ---------------- BIOTECHNOLOGY 6.6% (a) Amgen Inc. ................................................. United States 50,000 3,011,500 (a) Celgene Corp. .............................................. United States 250,000 13,975,000 (a) Gilead Sciences Inc. ....................................... United States 369,600 17,215,968 (a) Myriad Genetics Inc. ....................................... United States 175,000 4,795,000 (b) Talecris Biotherapeutics Holdings Corp. .................... United States 93,300 1,866,000 ---------------- 40,863,468 ---------------- CAPITAL MARKETS 2.6% The Goldman Sachs Group Inc. ............................... United States 55,000 10,139,250 Invesco Ltd. ............................................... United States 250,000 5,690,000 ---------------- 15,829,250 ---------------- CHEMICALS 3.6% Monsanto Co. ............................................... United States 125,000 9,675,000 Sigma-Aldrich Corp. ........................................ United States 225,000 12,145,500 ---------------- 21,820,500 ---------------- COMMERCIAL BANKS 0.2% Industrial and Commercial Bank of China Ltd., H ............ China 2,000,000 1,507,097 ---------------- COMMERCIAL SERVICES & SUPPLIES 0.8% (a) Stericycle Inc. ............................................ United States 100,000 4,845,000 ---------------- COMMUNICATIONS EQUIPMENT 7.4% (a) Cisco Systems Inc. ......................................... United States 500,000 11,770,000 (a) Juniper Networks Inc. ...................................... United States 60,000 1,621,200 QUALCOMM Inc. .............................................. United States 310,000 13,943,800 (a) Research In Motion Ltd. .................................... Canada 120,000 8,106,000 Tandberg ASA ............................................... Norway 400,000 9,574,247 ZTE Corp., H ............................................... China 100,000 527,742 ---------------- 45,542,989 ---------------- COMPUTERS & PERIPHERALS 8.9% (a) Apple Inc. ................................................. United States 220,000 40,781,400 Hewlett-Packard Co. ........................................ United States 300,000 14,163,000 ---------------- 54,944,400 ---------------- CONSUMER FINANCE 0.6% American Express Co. ....................................... United States 100,000 3,390,000 ---------------- DIVERSIFIED FINANCIAL SERVICES 1.0% CME Group Inc. ............................................. United States 20,000 6,163,800 ---------------- ELECTRICAL EQUIPMENT 0.2% (a) A123 System Inc. ........................................... United States 63,100 1,345,292 ---------------- ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 0.9% (a) Dolby Laboratories Inc., A ................................. United States 150,000 5,728,500 ----------------
64 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) ENERGY EQUIPMENT & SERVICES 6.4% (a) FMC Technologies Inc. ...................................... United States 300,000 $ 15,672,000 (a) National Oilwell Varco Inc. ................................ United States 200,000 8,626,000 Schlumberger Ltd. .......................................... United States 200,000 11,920,000 (a) Weatherford International Ltd. ............................. United States 150,000 3,109,500 ---------------- 39,327,500 ---------------- HEALTH CARE EQUIPMENT & SUPPLIES 4.4% Alcon Inc. ................................................. Switzerland 50,000 6,933,500 Baxter International Inc. .................................. United States 100,000 5,701,000 (a) Edwards Lifesciences Corp. ................................. United States 30,000 2,097,300 (a) Intuitive Surgical Inc. .................................... United States 20,000 5,245,000 Stryker Corp. .............................................. United States 150,000 6,814,500 ---------------- 26,791,300 ---------------- HEALTH CARE PROVIDERS & SERVICES 2.3% (a) Express Scripts Inc. ....................................... United States 150,000 11,637,000 (a) VCA Antech Inc. ............................................ United States 100,000 2,689,000 ---------------- 14,326,000 ---------------- HEALTH CARE TECHNOLOGY 1.8% (a) Cerner Corp. ............................................... United States 150,000 11,220,000 ---------------- INDUSTRIAL CONGLOMERATES 1.3% General Electric Co. ....................................... United States 500,000 8,210,000 ---------------- INTERNET & CATALOG RETAIL 3.9% (a) Amazon.com Inc. ............................................ United States 150,000 14,004,000 (a) Priceline.com Inc. ......................................... United States 60,000 9,949,200 ---------------- 23,953,200 ---------------- INTERNET SOFTWARE & SERVICES 9.3% (a) Baidu Inc., ADR ............................................ China 25,000 9,776,250 (a) Google Inc., A ............................................. United States 50,200 24,891,670 (a) MercadoLibre Inc. .......................................... Argentina 100,000 3,846,000 (a) NetEase.com Inc., ADR ...................................... China 25,000 1,142,000 (a) Sohu.com Inc. .............................................. China 100,000 6,878,000 Tencent Holdings Ltd. ...................................... China 650,000 10,576,129 ---------------- 57,110,049 ---------------- IT SERVICES 4.2% MasterCard Inc., A ......................................... United States 42,000 8,490,300 Visa Inc., A ............................................... United States 250,000 17,277,500 ---------------- 25,767,800 ---------------- LIFE SCIENCES TOOLS & SERVICES 2.9% (a) Illumina Inc. .............................................. United States 100,000 4,250,000 (a) Thermo Fisher Scientific Inc. .............................. United States 125,000 5,458,750 (a) Waters Corp. ............................................... United States 150,000 8,379,000 ---------------- 18,087,750 ---------------- MACHINERY 1.6% Flowserve Corp. ............................................ United States 100,000 9,854,000 ----------------
Annual Report | 65 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) OIL, GAS & CONSUMABLE FUELS 0.8% Petroleo Brasileiro SA, ADR ................................ Brazil 100,000 $ 4,590,000 ---------------- PHARMACEUTICALS 5.9% Allergan Inc. .............................................. United States 100,000 5,676,000 Johnson & Johnson .......................................... United States 75,000 4,566,750 Roche Holding AG ........................................... Switzerland 50,000 8,079,298 Teva Pharmaceutical Industries Ltd., ADR ................... Israel 350,000 17,696,000 ---------------- 36,018,048 ---------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 9.1% (a) Hittite Microwave Corp. .................................... United States 100,000 3,678,000 Intel Corp. ................................................ United States 1,125,000 22,016,250 (a) Lam Research Corp. ......................................... United States 200,000 6,832,000 Microchip Technology Inc. .................................. United States 175,000 4,637,500 (a) Netlogic Microsystems Inc. ................................. United States 125,000 5,625,000 (a) NVIDIA Corp. ............................................... United States 125,000 1,878,750 Power Integrations Inc. .................................... United States 100,000 3,333,000 (a) Silicon Laboratories Inc. .................................. United States 175,000 8,113,000 ---------------- 56,113,500 ---------------- SOFTWARE 8.5% (a) Activision Blizzard Inc. ................................... United States 500,000 6,195,000 (a) Adobe Systems Inc. ......................................... United States 400,000 13,216,000 (a) ANSYS Inc. ................................................. United States 150,000 5,620,500 (a) Autodesk Inc. .............................................. United States 175,000 4,165,000 (a) Concur Technologies Inc. ................................... United States 125,000 4,970,000 FactSet Research Systems Inc. .............................. United States 10,000 662,400 Microsoft Corp. ............................................ United States 250,000 6,472,500 Oracle Corp. ............................................... United States 250,000 5,210,000 (a) Salesforce.com Inc. ........................................ United States 100,000 5,693,000 ---------------- 52,204,400 ---------------- WIRELESS TELECOMMUNICATION SERVICES 1.8% America Movil SAB de CV, L, ADR ............................ Mexico 47,600 2,086,308 (a) American Tower Corp., A .................................... United States 250,000 9,100,000 ---------------- 11,186,308 ---------------- TOTAL COMMON STOCKS (COST $357,160,889) .................... 615,589,651 OTHER ASSETS, LESS LIABILITIES (0.1)% ...................... (447,159) ---------------- NET ASSETS 100.0% .......................................... $ 615,142,492 ================
See Abbreviations on page 143. (a) Non-income producing. (b) Security purchased on a delayed delivery basis. See Note 1(d). The accompanying notes are an integral part of these financial statements. 66 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ......... 0.29 0.24 0.16 0.12 0.13 Net realized and unrealized gains (losses) ...................... (0.67) (9.30) 7.21 4.21 4.20 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (0.38) (9.06) 7.37 4.33 4.33 ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income ................ (0.31) (0.13) (0.11) (0.06) (0.08) ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........ $ 36.48 $ 37.17 $ 46.36 $ 39.10 $ 34.83 ========== ========== ========== ========== ========== Total return(e) ..................... (0.71)% (19.59)% 18.87% 12.46% 14.17% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.00% 0.89% 0.93% 0.91% 0.94% Net investment income ............... 0.95% 0.56% 0.37% 0.34% 0.40% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $2,173,714 $1,708,612 $2,123,419 $1,695,802 $1,567,675 Portfolio turnover rate ............. 3.92% 5.64% 0.37% 2.21% 1.16%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 B 2009 2008 2007 2006 2005 - ------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .. 0.07 (0.08) (0.16) (0.15) (0.11) Net realized and unrealized gains (losses) ...................... (0.58) (8.90) 6.93 4.07 4.07 ------- ------- -------- -------- -------- Total from investment operations .... (0.51) (8.98) 6.77 3.92 3.96 ------- ------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ------- ------- -------- -------- -------- Net asset value, end of year ........ $ 34.93 $ 35.44 $ 44.42 $ 37.65 $ 33.73 ======= ======= ======== ======== ======== Total return(e) ..................... (1.44)% (20.22)% 17.98% 11.62% 13.30% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.75% 1.64% 1.69% 1.67% 1.69% Net investment income (loss) ........ 0.20% (0.19)% (0.39)% (0.42)% (0.35)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $87,790 $89,779 $138,640 $122,871 $123,926 Portfolio turnover rate ............. 3.92% 5.64% 0.37% 2.21% 1.16%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 C 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .. 0.06 (0.08) (0.16) (0.15) (0.11) Net realized and unrealized gains (losses) ...................... (0.57) (8.81) 6.87 4.04 4.03 -------- -------- -------- -------- -------- Total from investment operations .... (0.51) (8.89) 6.71 3.89 3.92 -------- -------- -------- -------- -------- Less distributions from net investment income ................ (0.02) -- -- -- -- -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 34.61 $ 35.14 $ 44.03 $ 37.32 $ 33.43 ======== ======== ======== ======== ======== Total return(e) ..................... (1.45)% (20.19)% 17.98% 11.60% 13.32% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.75% 1.64% 1.69% 1.66% 1.69% Net investment income (loss) ........ 0.20% (0.19)% (0.39)% (0.41)% (0.35)% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $315,305 $255,425 $340,671 $273,512 $270,538 Portfolio turnover rate ............. 3.92% 5.64% 0.37% 2.21% 1.16%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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, ------------------------------------------------------ CLASS R 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ......... 0.20 0.14 0.04 0.02 0.05 Net realized and unrealized gains (losses) ...................... (0.59) (9.23) 7.16 4.19 4.16 ------- ------- ------- ------- ------- Total from investment operations .... (0.39) (9.09) 7.20 4.21 4.21 ------- ------- ------- ------- ------- Less distributions from net investment income ................ (0.11) (0.03) (0.01) --(c) (0.01) ------- ------- ------- ------- ------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ------- ------- ------- ------- ------- Net asset value, end of year ........ $ 36.37 $ 36.87 $ 45.99 $ 38.80 $ 34.59 ======= ======= ======= ======= ======= Total return(e) ..................... (0.98)% (19.78)% 18.55% 12.18% 13.87% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.25% 1.14% 1.19% 1.17% 1.19% Net investment income ............... 0.70% 0.31% 0.11% 0.08% 0.15% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $65,113 $30,175 $53,134 $37,804 $27,818 Portfolio turnover rate ............. 3.92% 5.64% 0.37% 2.21% 1.16%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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. 70 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 37.25 $ 46.45 $ 39.17 $ 34.89 $ 30.63 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.36 0.34 0.27 0.22 0.21 Net realized and unrealized gains (losses) ...................... (0.68) (9.31) 7.21 4.21 4.21 -------- -------- -------- -------- -------- Total from investment operations .... (0.32) (8.97) 7.48 4.43 4.42 -------- -------- -------- -------- -------- Less distributions from net investment income ................ (0.40) (0.23) (0.20) (0.15) (0.16) -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 36.53 $ 37.25 $ 46.45 $ 39.17 $ 34.89 ======== ======== ======== ======== ======== Total return ........................ (0.45)% (19.39)% 19.16% 12.73% 14.45% RATIOS TO AVERAGE NET ASSETS Expenses(e) ......................... 0.75% 0.64% 0.69% 0.67% 0.69% Net investment income ............... 1.20% 0.81% 0.61% 0.58% 0.65% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $430,926 $256,988 $363,221 $274,603 $221,752 Portfolio turnover rate ............. 3.92% 5.64% 0.37% 2.21% 1.16%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. Annual Report | 71 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009
FRANKLIN GROWTH FUND SHARES VALUE -------------------- ------------------- ---------------- COMMON STOCKS 99.5% AUTOMOBILES & COMPONENTS 2.1% (a) Ford Motor Co. .............................................................. 1,100,000 $ 7,931,000 Harley-Davidson Inc. ........................................................ 838,096 19,276,208 Johnson Controls Inc. ....................................................... 1,400,000 35,784,000 Toyota Motor Corp., ADR (Japan) ............................................. 30,000 2,357,100 ---------------- 65,348,308 ---------------- BANKS 0.5% Wells Fargo & Co. ........................................................... 505,600 14,247,808 ---------------- CAPITAL GOODS 21.8% 3M Co. ...................................................................... 855,000 63,099,000 ABB Ltd., ADR (Switzerland) ................................................. 850,000 17,034,000 The Boeing Co. .............................................................. 1,045,000 56,586,750 Caterpillar Inc. ............................................................ 200,000 10,266,000 Danaher Corp. ............................................................... 275,000 18,513,000 Deere & Co. ................................................................. 100,000 4,292,000 Emerson Electric Co. ........................................................ 1,000,000 40,080,000 General Dynamics Corp. ...................................................... 1,000,000 64,600,000 General Electric Co. ........................................................ 370,000 6,075,400 Illinois Tool Works Inc. .................................................... 1,000,000 42,710,000 Ingersoll-Rand PLC. ......................................................... 1,002,000 30,731,340 Lockheed Martin Corp. ....................................................... 500,000 39,040,000 Northrop Grumman Corp. ...................................................... 1,000,000 51,750,000 Pall Corp. .................................................................. 500,000 16,140,000 Precision Castparts Corp. ................................................... 240,000 24,448,800 Raytheon Co. ................................................................ 600,000 28,782,000 Rockwell Collins Inc. ....................................................... 350,000 17,780,000 (a) SunPower Corp., A ........................................................... 2,000 59,780 (a) SunPower Corp., B ........................................................... 48,000 1,211,040 Textron Inc. ................................................................ 1,050,000 19,929,000 (a) Thomas & Betts Corp. ........................................................ 500,000 15,040,000 United Technologies Corp. ................................................... 850,000 51,790,500 W.W. Grainger Inc. .......................................................... 550,000 49,148,000 ---------------- 669,106,610 ---------------- COMMERCIAL & PROFESSIONAL SERVICES 1.5% Avery Dennison Corp. ........................................................ 462,000 16,636,620 Dun & Bradstreet Corp. ...................................................... 122,000 9,189,040 Equifax Inc. ................................................................ 400,000 11,656,000 Robert Half International Inc. .............................................. 150,000 3,753,000 (a) Stericycle Inc. ............................................................. 100,000 4,845,000 ---------------- 46,079,660 ---------------- CONSUMER DURABLES & APPAREL 1.3% NIKE Inc., B ................................................................ 75,000 4,852,500 VF Corp. .................................................................... 500,000 36,215,000 ---------------- 41,067,500 ----------------
72 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) CONSUMER SERVICES 1.4% Carnival Corp. .............................................................. 1,065,000 $ 35,443,200 (a) Interval Leisure Group Inc. ................................................. 60,020 749,050 Starwood Hotels & Resorts Worldwide Inc. .................................... 250,000 8,257,500 ---------------- 44,449,750 ---------------- DIVERSIFIED FINANCIALS 1.4% American Express Co. ........................................................ 242,300 8,213,970 BlackRock Inc. .............................................................. 100,000 21,682,000 JPMorgan Chase & Co. ........................................................ 334,300 14,649,026 ---------------- 44,544,996 ---------------- ENERGY 4.9% BP PLC, ADR (United Kingdom) ................................................ 350,200 18,641,146 ConocoPhillips .............................................................. 35,000 1,580,600 Devon Energy Corp. .......................................................... 290,000 19,525,700 Exxon Mobil Corp. ........................................................... 70,000 4,802,700 (a) FMC Technologies Inc. ....................................................... 337,400 17,625,776 Halliburton Co. ............................................................. 600,000 16,272,000 (a) National Oilwell Varco Inc. ................................................. 175,000 7,547,750 Occidental Petroleum Corp. .................................................. 200,000 15,680,000 Peabody Energy Corp. ........................................................ 350,000 13,027,000 Royal Dutch Shell PLC, A, ADR (Netherlands) ................................. 280,000 16,013,200 Schlumberger Ltd. ........................................................... 309,100 18,422,360 (a) Transocean Ltd. ............................................................. 15,222 1,301,938 ---------------- 150,440,170 ---------------- FOOD & STAPLES RETAILING 0.6% CVS Caremark Corp. .......................................................... 503,200 17,984,368 ---------------- FOOD, BEVERAGE & TOBACCO 1.4% Bunge Ltd. .................................................................. 211,500 13,242,015 (a) Hansen Natural Corp. ........................................................ 300,000 11,022,000 PepsiCo Inc. ................................................................ 300,000 17,598,000 ---------------- 41,862,015 ---------------- HEALTH CARE EQUIPMENT & SERVICES 4.6% Baxter International Inc. ................................................... 400,000 22,804,000 Cardinal Health Inc. ........................................................ 300,000 8,040,000 (a) CareFusion Corp. ............................................................ 150,000 3,270,000 Covidien PLC ................................................................ 350,000 15,141,000 (a) Edwards Lifesciences Corp. .................................................. 50,000 3,495,500 IMS Health Inc. ............................................................. 500,000 7,675,000 (a) Intuitive Surgical Inc. ..................................................... 34,000 8,916,500 (a) Medco Health Solutions Inc. ................................................. 96,480 5,336,309 Medtronic Inc. .............................................................. 60,000 2,208,000 Quest Diagnostics Inc. ...................................................... 500,000 26,095,000 Teleflex Inc. ............................................................... 500,000 24,155,000 (a) Varian Medical Systems Inc. ................................................. 300,000 12,639,000 (a) Zimmer Holdings Inc. ........................................................ 64,000 3,420,800 ---------------- 143,196,109 ----------------
Annual Report | 73 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) HOUSEHOLD & PERSONAL PRODUCTS 0.6% The Procter & Gamble Co. .................................................... 335,000 $ 19,403,200 ---------------- INSURANCE 1.1% Aflac Inc. .................................................................. 333,300 14,245,242 (a) Berkshire Hathaway Inc., A 184 18,584,000 ---------------- 32,829,242 ---------------- MATERIALS 3.3% Air Products and Chemicals Inc. ............................................. 500,000 38,790,000 Ecolab Inc. ................................................................. 353,700 16,351,551 Goldcorp Inc. (Canada) ...................................................... 275,000 11,101,750 Martin Marietta Materials Inc. .............................................. 90,000 8,286,300 Praxair Inc. ................................................................ 60,000 4,901,400 Sigma-Aldrich Corp. ......................................................... 400,000 21,592,000 ---------------- 101,023,001 ---------------- MEDIA 1.5% The Walt Disney Co. ......................................................... 1,687,290 46,332,983 ---------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 16.4% Abbott Laboratories ......................................................... 400,000 19,788,000 Allergan Inc. ............................................................... 997,300 56,606,748 (a) Amgen Inc. .................................................................. 932,000 56,134,360 (a) Biogen Idec Inc. ............................................................ 400,000 20,208,000 (a) Celgene Corp. ............................................................... 324,400 18,133,960 (a) Covance Inc. ................................................................ 200,000 10,830,000 (a) Dionex Corp. ................................................................ 250,000 16,242,500 Eli Lilly and Co. ........................................................... 400,000 13,212,000 (a) Gilead Sciences Inc. ........................................................ 250,000 11,645,000 Johnson & Johnson ........................................................... 1,261,010 76,782,899 Merck & Co. Inc. ............................................................ 500,000 15,815,000 (a) Mettler-Toledo International Inc. ........................................... 50,000 4,529,500 (a) Millipore Corp. ............................................................. 400,000 28,132,000 (a) Onyx Pharmaceuticals Inc. ................................................... 26,418 791,747 Pfizer Inc. ................................................................. 2,170,000 35,913,500 Pharmaceutical Product Development Inc. ..................................... 200,000 4,388,000 Roche Holding AG, ADR (Switzerland) ......................................... 530,000 21,518,000 Schering-Plough Corp. ....................................................... 500,000 14,125,000 (b) Talecris Biotherapeutics Holdings Corp. ..................................... 460,000 9,200,000 Teva Pharmaceutical Industries Ltd., ADR (Israel) ........................... 275,000 13,904,000 (a) Waters Corp. ................................................................ 500,000 27,930,000 Wyeth ....................................................................... 600,000 29,148,000 ---------------- 504,978,214 ---------------- RETAILING 0.6% (a) Expedia Inc. ................................................................ 300,100 7,187,395 (a) HSN Inc. .................................................................... 60,020 977,125 Lowe's Cos. Inc. ............................................................ 400,000 8,376,000 (a) Ticketmaster Entertainment Inc. ............................................. 60,020 701,634 ---------------- 17,242,154 ----------------
74 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.7% Intel Corp. ................................................................. 750,000 $ 14,677,500 Texas Instruments Inc. ...................................................... 250,000 5,922,500 ---------------- 20,600,000 ---------------- SOFTWARE & SERVICES 8.6% (a) Activision Blizzard Inc. .................................................... 900,000 11,151,000 (a) Adobe Systems Inc. .......................................................... 527,900 17,441,816 (a) Autodesk Inc. ............................................................... 800,000 19,040,000 Automatic Data Processing Inc. .............................................. 700,000 27,510,000 (a) Computer Sciences Corp. ..................................................... 1,000,000 52,710,000 (a) Google Inc., A .............................................................. 76,300 37,833,355 (a) IAC/InterActiveCorp ......................................................... 150,050 3,029,509 MasterCard Inc., A .......................................................... 80,000 16,172,000 Microsoft Corp. ............................................................. 325,000 8,414,250 Oracle Corp. ................................................................ 500,000 10,420,000 Paychex Inc. ................................................................ 425,000 12,346,250 Visa Inc., A ................................................................ 291,900 20,173,209 (a) Yahoo! Inc. ................................................................. 1,600,000 28,496,000 ---------------- 264,737,389 ---------------- TECHNOLOGY HARDWARE & EQUIPMENT 15.0% (a) Agilent Technologies Inc. ................................................... 1,250,000 34,787,500 (a) Apple Inc. .................................................................. 875,000 162,198,750 (a) Cisco Systems Inc. .......................................................... 2,695,000 63,440,300 (a) EMC Corp. ................................................................... 1,000,000 17,040,000 (a) FLIR Systems Inc. ........................................................... 350,000 9,789,500 Hewlett-Packard Co. ......................................................... 1,156,250 54,586,563 International Business Machines Corp. ....................................... 580,000 69,373,800 (a) Logitech International SA (Switzerland) ..................................... 150,000 2,757,000 Molex Inc. .................................................................. 71,483 1,492,565 Molex Inc., A ............................................................... 133,100 2,500,949 QUALCOMM Inc. ............................................................... 660,000 29,686,800 (a) Research In Motion Ltd. (Canada) ............................................ 200,000 13,510,000 ---------------- 461,163,727 ---------------- TELECOMMUNICATION SERVICES 1.2% America Movil SAB de CV, L, ADR (Mexico) .................................... 259,300 11,365,119 (a) American Tower Corp., A ..................................................... 715,000 26,026,000 ---------------- 37,391,119 ---------------- TRANSPORTATION 7.7% (a) Air France-KLM, ADR (France) ................................................ 550,000 9,960,500 (a) Alaska Air Group Inc. ....................................................... 500,000 13,395,000 (a) AMR Corp. ................................................................... 2,000,000 15,900,000 Arkansas Best Corp. ......................................................... 500,000 14,970,000 (a) British Airways PLC, ADR (United Kingdom) ................................... 500,000 17,715,000 C.H. Robinson Worldwide Inc. ................................................ 267,300 15,436,575 Canadian National Railway Co. (Canada) ...................................... 500,000 24,495,000 Canadian Pacific Railway Ltd. (Canada) ...................................... 500,000 23,375,000
Annual Report | 75 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE -------------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) TRANSPORTATION (CONTINUED) (a) Continental Airlines Inc., B ................................................ 1,000,000 $ 16,440,000 Expeditors International of Washington Inc. ................................. 404,200 14,207,630 Forward Air Corp. ........................................................... 495,333 11,466,959 Heartland Express Inc. ...................................................... 500,000 7,200,000 (a) Ryanair Holdings PLC, ADR (Ireland) ......................................... 239,200 6,946,368 Southwest Airlines Co. ...................................................... 65,200 625,920 Union Pacific Corp. ......................................................... 600,000 35,010,000 Werner Enterprises Inc. ..................................................... 462,000 8,607,060 ---------------- 235,751,012 ---------------- UTILITIES 1.3% American Water Works Co. Inc. ............................................... 700,000 13,958,000 FPL Group Inc. .............................................................. 200,000 11,046,000 International Power PLC (United Kingdom) .................................... 3,058,904 14,131,138 ---------------- 39,135,138 ---------------- TOTAL COMMON STOCKS (COST $1,754,852,162) ................................... 3,058,914,473 ----------------
PRINCIPAL AMOUNT ------------------- CONVERTIBLE BONDS (COST $4,144,568) 0.2% CAPITAL GOODS 0.2% SunPower Corp., cvt., senior bond, 1.25%, 2/15/27 ........................... $ 5,825,000 5,140,563 ---------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,758,996,730) ....... 3,064,055,036 ----------------
SHARES ------------------- SHORT TERM INVESTMENTS (COST $23,763,290) 0.8% MONEY MARKET FUNDS 0.8% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................. 23,763,290 23,763,290 ---------------- TOTAL INVESTMENTS (COST $1,782,760,020) 100.5% .............................. 3,087,818,326 OTHER ASSETS, LESS LIABILITIES (0.5)% ....................................... (14,970,652) ---------------- NET ASSETS 100.0% ........................................................... $ 3,072,847,674 ================
See Abbreviations on page 143. (a) Non-income producing. (b) Security purchased on a delayed delivery basis. See Note 1(d). (c) See Note 7 regarding investments in the 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. 76 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ----------- ----------- ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ----------- ----------- ----------- ----------- ----------- Income from investment operations(a): Net investment income(b) ......... 0.13 0.16 0.14 0.14 0.14 Net realized and unrealized gains (losses) ...................... 0.04 (0.71) 0.21 0.09 0.10 ----------- ----------- ----------- ----------- ----------- Total from investment operations .... 0.17 (0.55) 0.35 0.23 0.24 ----------- ----------- ----------- ----------- ----------- Less distributions from: Net investment income ............ (0.16) (0.15) (0.14) (0.15) (0.15) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) ----------- ----------- ----------- ----------- ----------- Total distributions ................. (0.16) (0.21) (0.18) (0.16) (0.16) ----------- ----------- ----------- ----------- ----------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year ........ $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 =========== =========== =========== =========== =========== Total return(e) ..................... 10.56% (21.36)% 14.14% 9.73% 10.45% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 0.68%(f) 0.62%(f) 0.63%(f) 0.64%(g) 0.65%(g) Net investment income ............... 7.93% 6.44% 5.31% 5.61% 5.54% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $27,773,006 $26,892,973 $35,476,603 $26,641,398 $21,934,575 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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 B 2009 2008 2007 2006 2005 - ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ......... 0.12 0.14 0.12 0.12 0.11 Net realized and unrealized gains (losses) ...................... 0.04 (0.71) 0.21 0.08 0.11 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... 0.16 (0.57) 0.33 0.20 0.22 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ............ (0.15) (0.13) (0.12) (0.12) (0.13) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) ---------- ---------- ---------- ---------- ---------- Total distributions ................. (0.15) (0.19) (0.16) (0.13) (0.14) ---------- ---------- ---------- ---------- ---------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........ $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 ========== ========== ========== ========== ========== Total return(e) ..................... 9.70% (22.13)% 13.23% 8.83% 9.57% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 1.53%(f) 1.47%(f) 1.48%(f) 1.49%(g) 1.50%(g) Net investment income ............... 7.08% 5.59% 4.46% 4.76% 4.69% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $2,051,280 $2,428,765 $3,745,636 $3,743,374 $3,922,396 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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 B1 2009 2008 2007 2006 2005 - -------- ------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.13 0.15 0.13 0.13 0.12 Net realized and unrealized gains (losses) ...................... 0.03 (0.71) 0.21 0.08 0.11 ------- -------- -------- -------- -------- Total from investment operations .... 0.16 (0.56) 0.34 0.21 0.23 ------- -------- -------- -------- -------- Less distributions from: Net investment income ............ (0.15) (0.14) (0.13) (0.13) (0.14) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) ------- -------- -------- -------- -------- Total distributions ................. (0.15) (0.20) (0.17) (0.14) (0.15) ------- -------- -------- -------- -------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ------- -------- -------- -------- -------- Net asset value, end of year ........ $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 ======= ======== ======== ======== ======== Total return(e) ..................... 10.03% (21.77)% 13.57% 9.17% 9.90% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 1.17%(f) 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) Net investment income ............... 7.44% 5.94% 4.81% 5.11% 5.04% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $68,825 $224,713 $397,224 $459,302 $493,063 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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, --------------------------------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- ----------- ----------- ----------- ----------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43 ----------- ----------- ----------- ----------- ----------- Income from investment operations(a): Net investment income(b) ......... 0.13 0.15 0.13 0.13 0.13 Net realized and unrealized gains (losses) ...................... 0.03 (0.72) 0.21 0.09 0.10 ----------- ----------- ----------- ----------- ----------- Total from investment operations .... 0.16 (0.57) 0.34 0.22 0.23 ----------- ----------- ----------- ----------- ----------- Less distributions from: Net investment income ............ (0.15) (0.14) (0.13) (0.13) (0.14) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) ----------- ----------- ----------- ----------- ----------- Total distributions ................. (0.15) (0.20) (0.17) (0.14) (0.15) ----------- ----------- ----------- ----------- ----------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ----------- ----------- ----------- ----------- ----------- Net asset value, end of year ........ $ 2.00 $ 1.99 $ 2.76 $ 2.59 $ 2.51 =========== =========== =========== =========== =========== Total return(e) ..................... 9.93% (21.98)% 13.47% 9.56% 9.84% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 1.18%(f) 1.12%(f) 1.13%(f) 1.14%(g) 1.15%(g) Net investment income ............... 7.43% 5.94% 4.81% 5.11% 5.04% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $13,054,203 $12,443,143 $16,203,796 $12,138,969 $10,113,365 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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. 80 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ CLASS R 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.13 0.15 0.13 0.13 0.13 Net realized and unrealized gains (losses) ...................... 0.03 (0.71) 0.20 0.09 0.10 -------- -------- -------- -------- -------- Total from investment operations .... 0.16 (0.56) 0.33 0.22 0.23 -------- -------- -------- -------- -------- Less distributions from: Net investment income ............ (0.15) (0.14) (0.13) (0.14) (0.14) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) -------- -------- -------- -------- -------- Total distributions ................. (0.15) (0.20) (0.17) (0.15) (0.15) -------- -------- -------- -------- -------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 1.96 $ 1.95 $ 2.71 $ 2.55 $ 2.48 ======== ======== ======== ======== ======== Total return(e) ..................... 10.31% (21.91)% 13.47% 9.43% 10.15% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 1.03%(f) 0.97%(f) 0.98%(f) 0.99%(g) 1.00%(g) Net investment income ............... 7.58% 6.09% 4.96% 5.26% 5.19% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $315,298 $267,956 $286,670 $183,609 $122,222 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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 | 81 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ......... 0.14 0.16 0.15 0.14 0.14 Net realized and unrealized gains (losses) ...................... 0.03 (0.70) 0.21 0.09 0.11 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... 0.17 (0.54) 0.36 0.23 0.25 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ............ (0.16) (0.16) (0.15) (0.15) (0.16) Net realized gains ............... --(c) (0.06) (0.04) (0.01) (0.01) ---------- ---------- ---------- ---------- ---------- Total distributions ................. (0.16) (0.22) (0.19) (0.16) (0.17) ---------- ---------- ---------- ---------- ---------- Redemption fees(d) .................. -- --(c) --(c) --(c) --(c) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........ $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 ========== ========== ========== ========== ========== Total return ........................ 10.79% (21.33)% 14.36% 9.94% 10.65% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 0.53%(e) 0.47%(e) 0.48%(e) 0.49%(f) 0.50%(f) Net investment income ............... 8.08% 6.59% 5.46% 5.76% 5.69% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $4,183,925 $4,259,806 $6,195,966 $3,786,643 $2,280,318 Portfolio turnover rate ............. 51.36% 39.92% 25.45% 28.35% 28.51%
(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. 82 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------------- ---------------- COMMON STOCKS 23.8% CONSUMER STAPLES 0.3% Diageo PLC ................................................. United Kingdom 10,000,000 $ 153,403,202 ---------------- ENERGY 2.8% (a) Canadian Oil Sands Trust ................................... Canada 25,847,400 742,776,085 ConocoPhillips ............................................. United States 8,000,000 361,280,000 Spectra Energy Corp. ....................................... United States 12,500,000 236,750,000 ---------------- 1,340,806,085 ---------------- FINANCIALS 5.4% Bank of America Corp. ...................................... United States 46,000,000 778,320,000 (b) Barclays PLC ............................................... United Kingdom 15,000,000 88,686,226 Citigroup Inc. ............................................. United States 25,000,000 121,000,000 (a,b) Colony Financial Inc. ...................................... United States 1,250,000 24,437,500 Duke Realty Corp. .......................................... United States 5,000,000 60,050,000 HSBC Holdings PLC .......................................... United Kingdom 35,000,000 400,334,419 (a,b) iStar Financial Inc. ....................................... United States 5,213,500 15,849,040 JPMorgan Chase & Co. ....................................... United States 10,000,000 438,200,000 Legg Mason Inc. ............................................ United States 2,331,262 72,339,060 Wells Fargo & Co. .......................................... United States 20,000,000 563,600,000 ---------------- 2,562,816,245 ---------------- HEALTH CARE 2.3% Abbott Laboratories ........................................ United States 1,500,000 74,205,000 Johnson & Johnson .......................................... United States 5,000,000 304,450,000 Merck & Co. Inc. ........................................... United States 23,000,000 727,490,000 ---------------- 1,106,145,000 ---------------- MATERIALS 0.5% AngloGold Ashanti Ltd., ADR ................................ South Africa 2,884,064 117,554,449 Newmont Mining Corp. ....................................... United States 2,000,000 88,040,000 ---------------- 205,594,449 ---------------- TELECOMMUNICATION SERVICES 1.3% AT&T Inc. .................................................. United States 15,000,000 405,150,000 Verizon Communications Inc. ................................ United States 4,360,074 131,979,440 Vodafone Group PLC ......................................... United Kingdom 30,000,000 67,209,778 ---------------- 604,339,218 ---------------- UTILITIES 11.2% AGL Resources Inc. ......................................... United States 3,000,000 105,810,000 (a) Ameren Corp. ............................................... United States 12,100,000 305,888,000 American Electric Power Co. Inc. ........................... United States 10,000,000 309,900,000 CenterPoint Energy Inc. .................................... United States 6,000,000 74,580,000 Consolidated Edison Inc. ................................... United States 5,300,000 216,982,000 Dominion Resources Inc. .................................... United States 10,500,000 362,250,000 DTE Energy Co. ............................................. United States 4,300,000 151,102,000 Duke Energy Corp. .......................................... United States 33,500,000 527,290,000 FirstEnergy Corp. .......................................... United States 3,000,000 137,160,000 FPL Group Inc. ............................................. United States 6,000,000 331,380,000 NiSource Inc. .............................................. United States 2,900,000 40,281,000 PG&E Corp. ................................................. United States 10,200,000 412,998,000
Annual Report | 83 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) UTILITIES (CONTINUED) Pinnacle West Capital Corp. ................................ United States 4,800,000 $ 157,536,000 Portland General Electric Co. .............................. United States 2,950,000 58,174,000 PPL Corp. .................................................. United States 1,000,000 30,340,000 Progress Energy Inc. ....................................... United States 9,400,000 367,164,000 Public Service Enterprise Group Inc. ....................... United States 15,000,000 471,600,000 Sempra Energy .............................................. United States 5,900,000 293,879,000 The Southern Co. ........................................... United States 14,516,704 459,744,016 TECO Energy Inc. ........................................... United States 10,000,000 140,800,000 Xcel Energy Inc. United States 19,000,000 365,560,000 ---------------- 5,320,418,016 ---------------- TOTAL COMMON STOCKS (COST $10,768,096,788) ................. 11,293,522,215 ---------------- CONVERTIBLE PREFERRED STOCKS 3.0% CONSUMER DISCRETIONARY 0.1% (b) General Motors Corp., 6.25%, cvt. pfd., C .................. United States 11,000,000 35,750,000 ---------------- ENERGY 0.2% (c) SandRidge Energy Inc., 8.50%, cvt. pfd., 144A .............. United States 550,000 99,000,000 ---------------- FINANCIALS 2.1% Bank of America Corp., 7.25%, cvt. pfd., L ................. United States 562,000 477,694,380 (b) Fannie Mae, 5.375%, cvt. pfd. .............................. United States 4,700 28,787,500 (b) Fannie Mae, 8.75%, cvt. pfd. ............................... United States 3,239,000 7,773,600 (b) Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ............. United States 3,000,000 36,690,000 (b) Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P ......... United States 1,000,650 6,053,932 (b) Lehman Brothers Holdings Inc., 8.75%, cvt. pfd., Q ......... United States 550,000 2,805,000 Wells Fargo & Co., 7.50%, cvt. pfd., A ..................... United States 463,516 413,919,788 ---------------- 973,724,200 ---------------- HEALTH CARE 0.5% Tenet Healthcare Corp., 7.00%, cvt. pfd. ................... United States 250,000 256,250,000 ---------------- UTILITIES 0.1% FPL Group Inc., 8.375%, cvt. pfd. .......................... United States 865,000 43,301,900 ---------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,604,733,259) ................................... 1,408,026,100 ---------------- (d) EQUITY-LINKED SECURITIES 3.3% CONSUMER DISCRETIONARY 0.1% (c) Morgan Stanley into Comcast Corp., 10.00%, 144A ............ United States 3,000,000 51,345,000 ---------------- ENERGY 1.2% Credit Suisse into Halliburtun Co., 12.00%, 3(A)2 .......... United States 4,000,000 94,063,600 Credit Suisse into Weatherford International Ltd.,11.00%, 3(A)2 ................................................... United States 6,315,000 131,499,139 (c) Deutsche Bank AG into ConocoPhilips, 12.00%, 144A .......... United States 2,200,000 101,112,000 (c) The Goldman Sachs Group Inc. into Devon Energy Corp., 10.55%, 144A ............................................ United States 1,600,000 93,600,000 (c) The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A .................................................... United States 3,600,000 149,261,760 ---------------- 569,536,499 ----------------
84 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE -------------------- -------------- ------------------- ---------------- (d) EQUITY LINKED SECURITIES (CONTINUED) FINANCIALS 0.6% Barclays Bank PLC into Citigroup Inc., 17.00% .............. United States 21,506,000 $ 99,142,660 (c) JPMorgan Chase & Co., into Wells Fargo & Co., 10.00%, 144A .................................................... United States 3,575,000 101,588,988 (c) Morgan Stanley into Bank of America Corp., 8.00%, 144A ..... United States 5,685,000 98,533,557 ---------------- 299,265,205 ---------------- INFORMATION TECHNOLOGY 0.8% Credit Suisse into Texas Instruments Corp.,13.50%, 3(A)2 ... United States 5,650,000 116,451,585 (c) The Goldman Sachs Group Inc. into Intel Corp., 10.00%, 144A .................................................... United States 7,500,000 135,030,000 (c) Morgan Stanley into Intel Corp.,12.00%, 144A ............... United States 6,350,000 117,974,745 ---------------- 369,456,330 ---------------- MATERIALS 0.6% Deutsche Bank AG into Newmont Mining Corp., 12.00% ......... United States 1,600,000 72,404,160 (c) The Goldman Sachs Group Inc. into Barrick Gold Corp., 12.5%, 144A ............................................. United States 5,000,000 201,805,000 ---------------- 274,209,160 ---------------- TOTAL EQUITY-LINKED SECURITIES (COST $1,460,851,215) ................................... 1,563,812,194 ---------------- PREFERRED STOCKS 0.4% FINANCIALS 0.4% (b) Fannie Mae, 6.75%, pfd. .................................... United States 3,000,000 4,710,000 (b) Fannie Mae, 7.625%, pfd., R ................................ United States 2,399,400 3,959,010 (b) Fannie Mae, 8.25%, pfd. .................................... United States 11,784,000 18,972,240 (b) Freddie Mac, 8.375%, pfd., Z ............................... United States 16,608,000 30,060,480 (c) Preferred Blocker Inc., 7.00%, pfd., 144A .................. United States 267,636 155,655,438 ---------------- TOTAL PREFERRED STOCKS (COST $928,695,780) ................. 213,357,168 ----------------
PRINCIPAL AMOUNT(e) ------------------- (f,g) SENIOR FLOATING RATE INTERESTS 5.7% CONSUMER DISCRETIONARY 1.6% Clear Channel Communications Inc., Term Loan B, 3.896%, 11/13/15 ................................................ United States 635,000,000 483,658,545 Dex Media West LLC, Term Loan B, 7.00%, 10/24/14 ........... United States 9,416,463 8,098,158 (h) Harrah's Operating Co. Inc., Incremental Term Loan, 3.25%, 10/01/16 ................................................ United States 75,000,000 74,274,000 (i) Idearc Inc., Term Loan A, 5.75%, 11/17/13 ............................ United States 43,684,879 18,857,321 Term Loan B, 4.25%, 11/17/14 ............................ United States 24,146,182 10,349,319 Jarden Corp., Term Loan B-3, 2.783%, 1/24/12 ............... United States 94,675,548 93,644,247 R.H. Donnelley Inc., Term Loan D-2, 6.75%, 6/30/11 ......... United States 50,201,148 42,963,147 Univision Communications Inc., Initial Term Loan, 4.50%, 9/29/14 ................................................. United States 20,000,000 16,987,500 ---------------- 748,832,237 ---------------- HEALTH CARE 0.3% Bausch and Lomb Inc., Delayed Draw Term Loan, 3.496% - 3.533%, 4/28/15 ........ United States 8,315,392 7,960,807 Parent Term Loan, 3.533%, 4/28/15 ....................... United States 34,242,000 32,781,853
Annual Report | 85 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- (f,g) SENIOR FLOATING RATE INTERESTS (CONTINUED) HEALTH CARE (CONTINUED) HCA Inc., Term Loan A-1, 1.783%, 11/19/12 ......................... United States 61,200,717 $ 57,398,623 Term Loan B-1, 2.533%, 11/18/13 ......................... United States 56,515,435 53,417,711 ---------------- 151,558,994 ---------------- INDUSTRIALS 0.7% Allison Transmission Inc., Term Loan B, 3.00%, 8/07/14 ..... United States 173,180,254 151,821,414 Altegrity Inc., Term Loan B, 3.292%, 2/21/15 ............... United States 107,794,486 100,949,536 Ceva Group PLC, Dollar Pre-Refunded L/C Commitment, 3.283%, 8/01/12 ..... United States 13,684,211 11,243,864 EGL Term Loans, 3.246%, 8/01/12 ......................... United States 113,698,684 95,554,307 ---------------- 359,569,121 ---------------- INFORMATION TECHNOLOGY 1.9% First Data Corp., Term Loan B-2, 3.033% - 3.036%, 9/24/14 ................. United States 245,000,000 211,547,945 Term Loan B-3, 3.033% - 3.036%, 9/24/14 ................. United States 328,447,368 283,373,550 Freescale Semiconductor Inc., Incremental Term Loan, 12.50%, 12/15/14 ................. United States 354,421,746 357,965,964 Term Loan, 2.011%, 12/01/13 ............................. United States 77,431,762 62,393,042 ---------------- 915,280,501 ---------------- MATERIALS 0.3% Novelis Corp., U.S. Term Loan, 2.25% - 2.29%, 7/07/14 ...... United States 133,541,280 122,810,303 ---------------- UTILITIES 0.9% Texas Competitive Electric Holdings Co. LLC, Term Loan B-1, 3.754% - 3.783%, 10/10/14 ................ United States 172,115,896 136,660,021 Term Loan B-2, 3.754% - 3.783%, 10/10/14 ................ United States 100,685,407 79,969,385 Term Loan B-3, 3.754% - 3.783%, 10/10/14 ................ United States 269,500,000 212,905,000 ---------------- 429,534,406 ---------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $3,420,035,428) ................................... 2,727,585,562 ---------------- CORPORATE BONDS 58.7% CONSUMER DISCRETIONARY 15.5% Cablevision Systems Corp., senior note, (c) 144A, 8.625%, 9/15/17 ............................... United States 98,325,000 102,012,188 B, 8.00%, 4/15/12 ....................................... United States 450,000,000 471,375,000 CBS Corp., senior note, 8.20%, 5/15/14 .......................................... United States 15,000,000 16,351,575 8.875%, 5/15/19 ......................................... United States 100,000,000 110,475,000 (i,j) CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ......................................... United States 375,000,000 7,500,000 9.92%, 4/01/14 .......................................... United States 117,380,000 1,320,642 11.75%, 5/15/14 ......................................... United States 342,000,000 5,130,000 (i,j) CCH I LLC, senior secured note, 11.00%, 10/01/15 ........... United States 767,000,000 145,730,000 (i,j) CCH II LLC, senior note, 10.25%, 9/15/10 ................... United States 310,000,000 350,300,000 (i,j) CCO Holdings LLC, senior note, 8.75%, 11/15/13 ............. United States 80,000,000 81,600,000 (c) Cinemark USA Inc., senior note, 144A, 8.625%, 6/15/19 ...... United States 25,000,000 25,968,750
86 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) (c) CSC Holdings Inc., senior note, 144A, 8.50%, 4/15/14 ....... United States 67,300,000 $ 71,001,500 (i,j) Dex Media Inc., senior disc. note, 9.00%, 11/15/13 ...................... United States 290,000,000 50,750,000 senior note, B, 8.00%, 11/15/13 ......................... United States 95,600,000 16,730,000 (i,j) Dex Media West Finance, senior note, B, 8.50%, 8/15/10 .......................... United States 106,500,000 91,590,000 senior sub. note, 9.875%, 8/15/13 ....................... United States 114,100,000 20,823,250 DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ......... United States 126,600,000 136,095,000 (c) DISH DBS Corp., senior note, 144A, 7.875%, 9/01/19 ......... United States 200,000,000 203,000,000 Dollar General Corp., senior note, 10.625%, 7/15/15 ........................... United States 470,000,000 521,700,000 (k) senior sub. note, PIK, 11.875%, 7/15/17 ............. United States 200,000,000 226,000,000 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ........................................ United States 55,000,000 56,237,500 7.75%, 5/31/15 .......................................... United States 133,000,000 136,325,000 7.125%, 2/01/16 ......................................... United States 265,000,000 264,337,500 Ford Motor Credit Co. LLC, 7.375%, 2/01/11 ......................................... United States 405,000,000 403,987,500 8.00%, 6/01/14 .......................................... United States 400,000,000 384,909,200 senior note, 9.75%, 9/15/10 ............................. United States 203,000,000 207,489,751 senior note, 9.875%, 8/10/11 ............................ United States 75,000,000 76,875,000 senior note, 7.25%, 10/25/11 ............................ United States 185,000,000 179,786,515 senior note, 7.50%, 8/01/12 ............................. United States 285,000,000 273,863,055 senior note, 8.70%, 10/01/14 ............................ United States 20,000,000 19,618,180 senior note, 12.00%, 5/15/15 ............................ United States 120,000,000 133,200,000 (f) senior note, FRN, 5.549%, 6/15/11 ................... United States 190,000,000 182,875,000 (f) senior note, FRN, 3.26%, 1/13/12 .................... United States 80,000,000 72,200,000 (i) General Motors Corp., senior deb., 8.375%, 7/15/33 ......... United States 510,000,000 85,425,000 (c) Harrah's Operating Co. Inc., senior secured note, 144A, 11.25%, 6/01/17 ......................................... United States 50,000,000 50,750,000 (c) Harrah's Operating Escrow, senior secured note, 144A, 11.25%, 6/01/17 ......................................... United States 100,000,000 103,250,000 Host Hotels & Resorts LP, senior note, (c) 144A, 9.00%, 5/15/17 ................................ United States 125,750,000 133,923,750 K, 7.125%, 11/01/13 ..................................... United States 85,500,000 84,858,750 M, 7.00%, 8/15/12 ....................................... United States 15,500,000 15,713,125 O, 6.375%, 3/15/15 ...................................... United States 240,000,000 228,600,000 Q, 6.75%, 6/01/16 ....................................... United States 193,200,000 184,506,000 S, 6.875%, 11/01/14 ..................................... United States 110,000,000 108,075,000 Jarden Corp., senior note, 8.00%, 5/01/16 .................. United States 34,000,000 35,020,000 KB Home, senior note, 6.375%, 8/15/11 ......................................... United States 8,346,000 8,471,190 5.75%, 2/01/14 .......................................... United States 75,000,000 72,375,000 6.25%, 6/15/15 .......................................... United States 90,000,000 86,400,000 9.10%, 9/15/17 .......................................... United States 49,000,000 52,920,000 7.25%, 6/15/18 .......................................... United States 70,500,000 69,090,000 Lamar Media Corp., senior note, 9.75%, 4/01/14 ............. United States 30,000,000 32,625,000 (c) Limited Brands Inc., senior note, 144A, 8.50%, 6/15/19 ..... United States 40,000,000 41,914,480
Annual Report | 87 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) MGM MIRAGE, senior note, 8.50%, 9/15/10 ............................. United States 50,000,000 $ 49,875,000 senior note, 6.75%, 4/01/13 ............................. United States 70,000,000 57,750,000 (c) senior note, 144A, 11.375%, 3/01/18 ................. United States 25,000,000 23,625,000 (c) senior secured note, 144A, 13.00%, 11/15/13 ......... United States 70,000,000 80,500,000 Pinnacle Entertainment Inc., senior sub. note, 7.50%, 6/15/15 ................................................. United States 10,702,000 9,524,780 (c) QVC Inc., senior secured note, 144A, 7.50%, 10/01/19 ....... United States 43,800,000 44,073,750 (i) R.H. Donnelley Corp., senior disc. note, A-1, 6.875%, 1/15/13 ................. United States 142,000,000 8,875,000 senior disc. note, A-2, 6.875%, 1/15/13 ................. United States 209,450,000 13,090,625 senior note, 6.875%, 1/15/13 ............................ United States 55,000,000 3,437,500 senior note, 8.875%, 10/15/17 ........................... United States 501,500,000 31,343,750 senior note, A-3, 8.875%, 1/15/16 ....................... United States 213,100,000 13,318,750 (c) Regal Cinemas Corp., senior note, 144A, 8.625%, 7/15/19 .... United States 21,400,000 22,256,000 Starwood Hotels & Resorts Worldwide Inc., senior note, 7.875%, 10/15/14 ........................................ United States 65,000,000 68,412,500 (c) Univision Communications Inc., (k) senior note, 144A, PIK, 10.50%, 3/15/15 ............. United States 278,912,500 216,157,187 senior secured note, 144A, 12.00%, 7/01/14 .............. United States 26,500,000 28,818,750 (c) UPC Holding BV, senior note, 144A, 9.875%, 4/15/18 ......... Netherlands 12,200,000 12,871,000 Visant Holding Corp., senior note, 8.75%, 12/01/13 ......... United States 50,000,000 51,125,000 (c) Wendy's/Arby's Group Inc., senior note, 144A, 10.00%, 7/15/16 ................................................. United States 37,500,000 40,031,250 (c) WMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16 ................................................. United States 42,700,000 45,262,000 Wyndham Worldwide Corp., senior note, 9.875%, 5/01/14 ......................................... United States 75,000,000 80,690,025 6.00%, 12/01/16 ......................................... United States 21,727,000 19,597,950 ---------------- 7,361,710,218 ---------------- CONSUMER STAPLES 0.8% (c) Alliance One International Inc., senior note, 144A, 10.00%, 7/15/16 ................................................. United States 33,100,000 34,341,250 Altria Group Inc., senior note, 8.50%, 11/10/13 ............ United States 30,000,000 34,838,070 (c) Dole Food Co. Inc., senior secured note, 144A, 8.00%, 10/01/16 ................................................ United States 30,000,000 30,262,500 (c) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 ........... United States 144,500,000 156,060,000 SUPERVALU Inc., senior note, 8.00%, 5/01/16 ................ United States 108,500,000 112,840,000 Tyson Foods Inc., senior note, 10.50%, 3/01/14 ............. United States 20,000,000 22,750,000 ---------------- 391,091,820 ---------------- ENERGY 8.9% Berry Petroleum Co., senior note, 10.25%, 6/01/14 .......... United States 15,300,000 16,409,250 Bill Barrett Corp., senior note, 9.875%, 7/17/16 ........... United States 15,000,000 15,862,500 Callon Petroleum Co., senior note, 9.75%, 12/08/10 ......... United States 110,000,000 43,450,000 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ......................................... United States 55,000,000 54,931,250 9.50%, 2/15/15 .......................................... United States 220,000,000 232,650,000 6.50%, 8/15/17 .......................................... United States 175,000,000 161,437,500 6.25%, 1/15/18 .......................................... United States 150,000,000 135,000,000
88 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) Chesapeake Energy Corp., senior note, (continued) 7.25%, 12/15/18 ......................................... United States 175,000,000 $ 166,250,000 6.875%, 11/15/20 ........................................ United States 144,250,000 129,103,750 El Paso Corp., senior note, 12.00%, 12/12/13 ........................................ United States 176,600,000 202,207,000 7.25%, 4/01/18 .......................................... United States 50,000,000 49,441,800 MTN, 7.75%, 1/15/32 ..................................... United States 250,000,000 230,345,500 Encore Acquisition Co., senior sub. note, 9.50%, 5/01/16 ... United States 20,000,000 21,200,000 Forest Oil Corp., senior note, 7.25%, 6/15/19 .......................................... United States 41,000,000 38,540,000 (c) 144A, 8.50%, 2/15/14 ................................ United States 100,000,000 101,250,000 (c) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ..... United States 35,000,000 35,962,500 Mariner Energy Inc., senior note, 7.50%, 4/15/13 .......................................... United States 46,500,000 45,105,000 11.75%, 6/30/16 ......................................... United States 25,800,000 27,831,750 8.00%, 5/15/17 .......................................... United States 36,600,000 33,672,000 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ......................................... United States 128,000,000 126,080,000 7.125%, 5/15/18 ......................................... United States 12,600,000 12,631,500 OPTI Canada Inc., senior note, 7.875%, 12/15/14 ............ Canada 75,000,000 57,750,000 Penn Virginia Corp., senior note, 10.375%, 6/15/16 ......... United States 20,000,000 21,600,000 Petrohawk Energy Corp., senior note, 9.125%, 7/15/13 ......................................... United States 85,000,000 87,762,500 7.875%, 6/01/15 ......................................... United States 135,000,000 133,650,000 (c) 144A, 10.50%, 8/01/14 ...................................... United States 129,050,000 139,374,000 (c) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 .......................................... Switzerland 89,800,000 83,289,500 7.00%, 5/01/17 .......................................... Switzerland 32,000,000 29,120,000 9.375%, 9/15/19 ......................................... Bermuda 60,840,000 59,319,000 Pioneer Natural Resources Co., 6.65%, 3/15/17 .......................................... United States 25,000,000 23,921,100 senior bond, 6.875%, 5/01/18 ............................ United States 110,000,000 105,550,940 Plains Exploration & Production Co., senior note, 10.00%, 3/01/16 ............................ United States 80,000,000 86,600,000 senior bond, 8.625%, 10/15/19 ........................... United States 50,000,000 50,875,000 senior note, 7.75%, 6/15/15 ............................. United States 95,500,000 95,261,250 Pride International Inc., senior note, 8.50%, 6/15/19 ...... United States 80,000,000 88,400,000 Quicksilver Resources Inc., senior note, 11.75%, 1/01/16 ......................................... United States 36,800,000 40,756,000 9.125%, 8/15/19 ......................................... United States 90,000,000 89,887,500 Range Resources Corp., senior sub. note, 8.00%, 5/15/19 .... United States 40,000,000 41,200,000 Sabine Pass LNG LP, senior secured note, 7.25%, 11/30/13 ......................................... United States 105,000,000 94,237,500 7.50%, 11/30/16 ......................................... United States 280,000,000 240,450,000 SandRidge Energy Inc., senior note, (c) 144A, 9.875%, 5/15/16 ............................... United States 106,300,000 111,349,250 (c) 144A, 8.00%, 6/01/18 ................................ United States 81,205,000 78,565,837 (f) FRN, 4.222%, 4/01/14 ................................ United States 25,480,000 22,730,020 (k) PIK, 8.625%, 4/01/15 ................................ United States 10,170,000 10,131,862
Annual Report | 89 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) SEACOR Holdings Inc., senior note, 7.375%, 10/01/19 ........ United States 35,000,000 $ 35,218,610 SESI LLC, senior note, 6.875%, 6/01/14 ..................... United States 117,000,000 112,320,000 Tesoro Corp., senior note, 6.50%, 6/01/17 .......................................... United States 16,000,000 14,560,000 9.75%, 6/01/19 .......................................... United States 41,400,000 43,263,000 (c) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 ....... United States 153,000,000 139,995,000 Weatherford International Ltd., senior bond, 9.875%, 3/01/39 ............................ United States 30,000,000 40,331,970 senior note, 9.625%, 3/01/19 ............................ United States 30,000,000 37,616,400 (c) Western Refining Inc., (f) senior note, 144A, FRN, 10.75%, 6/15/14 ............. United States 25,000,000 23,625,000 senior secured note, 144A, 11.25%, 6/15/17 .............. United States 15,000,000 14,175,000 (c) Woodside Finance Ltd., 144A, 8.75%, 3/01/19 .................................... Australia 27,100,000 32,009,355 senior note, 144A, 8.125%, 3/01/14 ...................... Australia 41,700,000 46,862,794 ---------------- 4,211,119,688 ---------------- FINANCIALS 7.8% Aflac Inc., senior note, 8.50%, 5/15/19 .................... United States 60,000,000 71,504,824 American Express Co., senior note, 7.00%, 3/19/18 .......... United States 90,000,000 99,166,770 American Express Credit Corp., senior note, C, 7.30%, 8/20/13 ................................................. United States 115,000,000 127,685,880 (l) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ............................................... United States 100,000,000 89,029,000 Capital One Capital V, pfd., 10.25%, 8/15/39 ............... United States 24,000,000 26,586,888 (c) CB Richard Ellis Services Inc., senior sub. note, 144A, 11.625%, 6/15/17 ........................................ United States 35,000,000 37,362,500 Duke Realty LP, senior note, 6.25%, 5/15/13 .......................................... United States 24,000,000 23,840,712 5.95%, 2/15/17 .......................................... United States 37,500,000 33,939,917 6.50%, 1/15/18 .......................................... United States 35,500,000 33,018,638 8.25%, 8/15/19 .......................................... United States 59,400,000 62,125,331 (c,h) FelCor Lodging Trust Inc., senior secured note, 144A, 10.00%, 10/01/14 ........................................ United States 109,750,000 106,731,875 Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ................................................. United States 42,250,000 34,433,750 (c) GMAC LLC, senior note, 144A, 7.75%, 1/19/10 .......................................... United States 115,000,000 115,287,500 7.25%, 3/02/11 .......................................... United States 148,000,000 143,930,000 6.875%, 9/15/11 ......................................... United States 310,000,000 296,050,000 6.875%, 8/28/12 ......................................... United States 170,000,000 158,100,000 HCP Inc., senior note, 5.65%, 12/15/13 ......................................... United States 500,000 495,305 6.30%, 9/15/16 .......................................... United States 23,000,000 22,173,886 6.00%, 1/30/17 .......................................... United States 33,325,000 31,180,103 5.625%, 5/01/17 ......................................... United States 15,040,000 13,788,557 6.70%, 1/30/18 .......................................... United States 70,500,000 69,146,905 G, 5.625%, 2/28/13 ...................................... United States 25,615,000 25,357,006 (a) iStar Financial Inc., 8.625%, 6/01/13 ......................................... United States 169,100,000 108,224,000 (c) senior secured note, 144A, 10.00%, 6/15/14 ............. United States 54,850,000 45,114,125
90 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) FINANCIALS (CONTINUED) (l) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ............................................... United States 865,000,000 $ 833,078,905 (i) Lehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 .......................................... United States 286,300,000 50,102,500 I, 7.50%, 1/21/09 ....................................... United States 900,000,000 55,930,500 (c) 144A, 7.50%, 12/03/08 ............................... United States 400,000,000 40,739,500 (c,f) Liberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 ................................................. United States 100,000,000 96,628,278 Merrill Lynch & Co. Inc., 6.875%, 4/25/18 .................. United States 48,000,000 50,563,152 Morgan Stanley, 5.05%, 1/21/11 ............................. United States 88,000,000 91,055,360 Morgan Stanley Dean Witter & Co., 6.60%, 4/01/12 .......................................... United States 25,000,000 27,182,875 5.30%, 3/01/13 .......................................... United States 100,000,000 104,897,300 Simon Property Group LP, senior note, 10.35%, 4/01/19 ...... United States 30,000,000 37,453,006 (l) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ........... United States 44,500,000 39,382,500 (l) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ............. United States 449,600,000 469,832,000 ---------------- 3,671,119,348 ---------------- HEALTH CARE 6.2% (c) Apria Healthcare Group Inc., senior secured note, 144A, 11.25%, 11/01/14 ........................................ United States 50,000,000 54,000,000 12.375%, 11/01/14 ....................................... United States 25,000,000 26,812,500 Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 ................................................. United States 353,500,000 363,221,250 DaVita Inc., senior note, 6.625%, 3/15/13 ............................ United States 49,100,000 48,854,500 senior sub. note, 7.25%, 3/15/15 ........................ United States 52,000,000 51,740,000 HCA Inc., 6.75%, 7/15/13 .......................................... United States 62,320,000 59,983,000 6.375%, 1/15/15 ......................................... United States 158,750,000 142,081,250 senior note, 6.50%, 2/15/16 ............................. United States 188,104,000 167,882,820 senior secured note, 9.25%, 11/15/16 .................... United States 300,000,000 310,875,000 (c) senior secured note, 144A, 8.50%, 4/15/19 ........... United States 160,000,000 168,000,000 (c) senior secured note, 144A, 7.875%, 2/15/20 .......... United States 160,550,000 161,553,437 Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ............................ United States 430,000,000 427,850,000 (c) senior note, 144A, 9.00%, 05/01/15 .................. United States 300,000,000 315,000,000 (c) senior note, 144A, 10.00%, 5/01/18 .................. United States 300,000,000 332,250,000 (f) senior note, FRN, 9.25%, 2/01/15 .................... United States 115,000,000 120,606,250 (c) senior secured note, 144A, 8.875%, 7/01/19 .......... United States 30,000,000 31,950,000 (f,k) US Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 ................................................. United States 87,311,473 76,397,539 US Oncology Inc., senior note, 10.75%, 8/15/14 ............................ United States 15,000,000 15,750,000 (c) senior secured note, 144A, 9.125%, 8/15/17 .......... United States 40,000,000 42,300,000 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 24,975,500 ---------------- 2,942,083,046 ----------------
Annual Report | 91 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) INDUSTRIALS 5.4% Allied Waste North America Inc., senior note, B, 7.375%, 4/15/14 ......................... United States 175,000,000 $ 182,306,425 senior note, B, 7.125%, 5/15/16 ......................... United States 72,500,000 76,588,420 senior secured note, 6.125%, 2/15/14 .................... United States 21,500,000 22,054,851 senior secured note, 6.875%, 6/01/17 .................... United States 65,000,000 68,770,130 (c) Altegrity Inc., senior note, 144A, 10.50%, 11/01/15 ........ United States 20,600,000 17,510,000 (c,h) American Airlines Inc., senior secured note, 144A, 10.50%, 10/15/12 ................................................ United States 67,500,000 69,525,000 Browning-Ferris Industries Inc., 7.40%, 9/15/35 ............ United States 50,000,000 57,532,550 (c) Case New Holland Inc., senior note, 144A, 7.75%, 9/01/13 ... United States 201,050,000 201,050,000 (c) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ...................... United Kingdom 100,000,000 89,500,000 (h) senior secured note, 144A, 11.625%, 10/01/16 ........... United Kingdom 11,800,000 11,460,986 (c) Delta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 .......................................... United States 83,150,000 84,813,000 11.75%, 3/15/15 ......................................... United States 130,000,000 124,150,000 Hertz Corp., senior note, 8.875%, 1/01/14 ............................ United States 440,000,000 446,600,000 senior sub. note, 10.50%, 1/01/16 ....................... United States 140,000,000 146,300,000 Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 ................................................. United States 23,100,000 27,331,573 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 ................................................. United States 168,400,000 162,506,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ................................................. United States 128,000,000 130,560,000 Nortek Inc., senior note, 10.00%, 12/01/13 ................. United States 40,000,000 41,000,000 RBS Global & Rexnord Corp., (c) 144A, 9.50%, 8/01/14 ................................ United States 98,206,000 95,750,850 senior note, 9.50%, 8/01/14 ............................. United States 173,274,000 168,942,150 senior sub. note, 11.75%, 8/01/16 ....................... United States 97,000,000 88,270,000 (c) RSC Equipment Rental Inc., senior secured note, 144A, 10.00%, 7/15/17 ......................................... United States 30,000,000 32,400,000 Terex Corp., senior sub. note, 8.00%, 11/15/17 ............. United States 185,000,000 170,662,500 (c,h) Transdigm Inc., senior sub. note, 144A, 7.75%, 7/15/14 ..... United States 50,000,000 48,562,500 ---------------- 2,564,146,935 ---------------- INFORMATION TECHNOLOGY 2.6% Ceridian Corp., senior note, 11.50%, 11/15/15 .............. United States 75,000,000 67,593,750 First Data Corp., senior note, 9.875%, 9/24/15 ............. United States 270,000,000 250,762,500 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ................................................ Singapore 75,000,000 72,562,500 Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ........................................ United States 126,685,000 97,547,450 10.125%, 12/15/16 ....................................... United States 162,500,000 108,875,000 Jabil Circuit Inc., senior note, 7.75%, 7/15/16 .......................................... United States 45,400,000 46,308,000 8.25%, 3/15/18 .......................................... United States 5,000,000 5,100,000 Lucent Technologies Inc., 6.45%, 3/15/29 ................... United States 180,000,000 137,925,000 (i) Nortel Networks Ltd., senior note, 10.75%, 7/15/16 ......... Canada 77,100,000 44,332,500 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .......................................... United States 150,000,000 143,250,000 8.125%, 3/01/16 ......................................... United States 100,000,000 94,000,000
92 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ............................ United States 35,000,000 $ 35,525,000 (c) senior note, 144A, 10.625%, 5/15/15 ................. United States 55,000,000 58,575,000 senior sub. note, 10.25%, 8/15/15 ....................... United States 85,000,000 87,125,000 ---------------- 1,249,481,700 ---------------- MATERIALS 3.5% (c) Anglo American Capital PLC, 144A, 9.375%, 4/08/19 ................................... United Kingdom 56,900,000 69,247,641 senior note, 144A, 9.375%, 4/08/14 ...................... United Kingdom 75,000,000 87,456,900 ArcelorMittal, senior note, 9.85%, 6/01/19 ................. Luxembourg 50,000,000 59,141,751 (c) Ashland Inc., senior note, 144A, 9.125%, 6/01/17 ........... United States 35,000,000 37,537,500 Ball Corp., senior note, 7.125%, 9/01/16 ......................................... United States 15,400,000 15,785,000 7.375%, 9/01/19 ......................................... United States 14,800,000 15,096,000 Boise Cascade LLC, senior sub. note, 7.125%, 10/15/14 ...... United States 15,000,000 12,000,000 Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 .......................................... United States 82,400,000 87,749,655 8.375%, 4/01/17 ......................................... United States 110,000,000 117,175,630 Huntsman International LLC, (c) senior note, 144A, 5.50%, 6/30/16 ................... United States 56,000,000 47,880,000 senior sub. note, 7.875%, 11/15/14 ...................... United States 10,000,000 9,350,000 (c) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 ................................................. United Kingdom 180,000,000 EUR 128,387,022 (c) Nalco Co., senior note, 144A, 8.25%, 5/15/17 ............... United States 34,650,000 36,555,750 Nalco Finance Holdings, senior note, 9.00%, 2/01/14 ........ United States 380,000,000 394,250,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ......................................... United States 60,000,000 39,900,000 (c) 144A, 11.375%, 12/31/14 ............................. United States 35,150,000 34,710,625 Owens-Brockway Glass Container Inc., senior note, 7.375%, 5/15/16 ................................................. United States 51,850,000 52,887,000 Rio Tinto Finance USA Ltd., senior note, 8.95%, 5/01/14 .......................................... Australia 50,000,000 59,077,250 9.00%, 5/01/19 .......................................... Australia 35,000,000 43,101,351 (c) Sealed Air Corp., senior note, 144A, 7.875%, 6/15/17 ....... United States 25,000,000 26,404,800 Teck Resources Ltd., senior note, 9.75%, 5/15/14 ............................. Canada 81,900,000 90,499,500 senior secured note, 10.25%, 5/15/16 .................... Canada 81,300,000 92,275,500 senior secured note, 10.75%, 5/15/19 .................... Canada 71,675,000 83,680,563 ---------------- 1,640,149,438 ---------------- TELECOMMUNICATION SERVICES 1.1% (c) CC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 ................................................. United States 72,250,000 75,140,000 Crown Castle International Corp., senior note, 9.00%, 1/15/15 ................................................. United States 55,000,000 57,887,500 (c) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ..... Jamaica 65,000,000 60,775,000 (c) Qwest Corp., senior note, 144A, 8.375%, 5/01/16 ............ United States 87,750,000 91,260,000 Virgin Media Finance PLC, senior note, 1, 9.50%, 8/15/16 ... United Kingdom 74,800,000 79,101,000
Annual Report | 93 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES (CONTINUED) (c) Wind Acquisition Finance SA, senior note, 144A, 11.75%, 7/15/17 ................................................. Italy 68,500,000 $ 77,233,750 (c,h) Windstream Corp., senior note, 144A, 7.875%, 11/01/17 ...... United States 70,750,000 69,710,683 ---------------- 511,107,933 ---------------- UTILITIES 6.9% The AES Corp., senior note, 8.00%, 10/15/17 ................ United States 61,000,000 61,686,250 (a) Ameren Corp., senior note, 8.875%, 5/15/14 ................. United States 58,200,000 65,494,555 Aquila Inc., senior note, 11.875%, 7/01/12 ................. United States 53,500,000 61,825,403 Arizona Public Service Co., senior note, 8.75%, 3/01/19 .... United States 55,000,000 66,719,730 (c) Calpine Construction Finance, senior secured note, 144A, 8.00%, 6/01/16 .......................................... United States 100,000,000 103,000,000 CMS Energy Corp., senior note, 8.75%, 6/15/19 .............. United States 71,850,000 78,537,726 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ......................................... United States 353,020,000 360,080,400 8.75%, 2/15/12 .......................................... United States 341,905,000 350,452,625 7.50%, 6/01/15 .......................................... United States 128,000,000 119,040,000 8.375%, 5/01/16 ......................................... United States 243,700,000 229,078,000 7.75%, 6/01/19 .......................................... United States 105,000,000 90,037,500 Energy Future Holdings Corp., senior note, 10.875%, 11/01/17 ....................................... United States 187,500,000 142,500,000 P, 5.55%, 11/15/14 ...................................... United States 378,260,000 260,086,280 (k) PIK, 12.00%, 11/01/17 ............................... United States 320,000,000 212,800,000 (c) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ..... Netherlands 80,000,000 82,800,000 Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 ................................................. United States 55,000,000 55,571,725 Reliant Energy Inc., senior note, 7.625%, 6/15/14 ......................................... United States 150,000,000 147,937,500 7.875%, 6/15/17 ......................................... United States 153,100,000 150,229,375 Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 ..................................... United States 445,000,000 322,625,000 B, 10.25%, 11/01/15 ..................................... United States 242,900,000 176,102,500 (k) PIK, 10.50%, 11/01/16 ............................... United States 221,937,500 149,807,813 ---------------- 3,286,412,382 ---------------- TOTAL CORPORATE BONDS (COST $29,955,201,053) ............... 27,828,422,508 ---------------- CONVERTIBLE BONDS 2.0% CONSUMER DISCRETIONARY 0.4% (c) Host Hotels & Resorts LP, cvt., senior note, 144A, 2.625%, 4/15/12 ................................................. United States 120,956,000 111,733,105 (c) Host Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 .. United States 89,033,000 89,478,165 ---------------- 201,211,270 ---------------- FINANCIALS 0.9% (a,f) iStar Financial Inc., cvt., senior note, FRN, 1.097%, 10/01/12 ................................................ United States 250,000,000 126,250,000 Vornado Realty Trust, cvt., senior bond, 3.625%, 11/15/26 ........................................ United States 75,000,000 73,218,750 2.85%, 4/01/27 .......................................... United States 222,500,000 212,765,625 ---------------- 412,234,375 ----------------
94 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(e) VALUE -------------------- -------------- ------------------- ---------------- CONVERTIBLE BONDS (CONTINUED) INFORMATION TECHNOLOGY 0.6% (c) Advanced Micro Devices Inc., cvt., senior note, 144A, 5.75%, 8/15/12 ................................................. United States 325,000,000 $ 274,218,750 UTILITIES 0.1% CMS Energy Corp., cvt., senior note, 5.50%, 6/15/29 ........ United States 50,000,000 57,437,500 ---------------- TOTAL CONVERTIBLE BONDS (COST $1,015,319,025) .............. 945,101,895 ---------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $51,152,932,548) .................................. 45,979,827,642 ---------------- SHORT TERM INVESTMENTS 3.1% U.S. GOVERNMENT AND AGENCY SECURITIES (COST $309,999,991) 0.6% (m) FHLB, 10/01/09 ............................................. 310,000,000 310,000,000 ---------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS AND REPURCHASE AGREEMENTS (COST $51,462,932,539) ............ 46,289,827,642 ----------------
SHARES ------------------- MONEY MARKET FUNDS 0.6% (b) Bank of New York Institutional Cash Reserve Fund, Series B ................................................ United States 451,668 361,334 (n) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................................................... United States 269,928,515 269,928,515 ---------------- TOTAL MONEY MARKET FUNDS (COST $270,380,182) ............... 270,289,849 ----------------
PRINCIPAL AMOUNT ------------------- REPURCHASE AGREEMENTS (COST $906,056,891) 1.9% (o) Joint Repurchase Agreement, 0.029%, 10/01/09 ............... United States $ 906,056,891 906,056,891 (Maturity Value $906,057,617) Banc of America Securities LLC (Maturity Value $114,253,866) Barclays Capital Inc. (Maturity Value $134,241,497) BNP Paribas Securities Corp. (Maturity Value $228,498,669) Credit Suisse Securities (USA) LLC (Maturity Value $142,812,802) Deutsche Bank Securities Inc. (Maturity Value $86,320,109) HSBC Securities (USA) Inc. (Maturity Value $85,685,869) Morgan Stanley & Co. Inc. (Maturity Value $85,685,869) UBS Securities LLC (Maturity Value $28,558,936) Collateralized by U.S. Government Agency Securities, 0.50% - 5.00%, 3/19/09 - 2/13/17; (m)U.S. Government Agency Discount Notes, 12/31/09 - 4/26/10; (m)U.S. Treasury Bills, 6/10/20; and U.S. Treasury Notes, 1.50% - 4.125%, 7/15/10 - 8/31/14 ---------------- TOTAL SHORT TERM INVESTMENTS (COST $1,486,437,064) ................................... 1,486,346,740 ---------------- TOTAL INVESTMENTS (COST $52,639,369,612) 100.0% ............ 47,466,174,382 OTHER ASSETS, LESS LIABILITIES (0.0)%(p) ................... (19,637,554) ---------------- NET ASSETS 100.0% .......................................... $ 47,446,536,828 ================
Annual Report | 95 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED) FRANKLIN INCOME FUND See Abbreviations on page 143. (a) See Note 10 regarding holdings of 5% voting securities. (b) Non-income producing. (c) 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 Trust's Board of Trustees. At September 30, 2009, the aggregate value of these securities was $8,174,519,821, representing 17.23% of net assets. (d) See Note 1(f) regarding equity-linked securities. (e) The principal amount is stated in U.S. dollars unless otherwise indicated. (f) The coupon rate shown represents the rate at period end. (g) See Note 1(h) regarding senior floating rate interests. (h) Security purchased on a delayed delivery basis. See Note 1(d). (i) See Note 8 regarding defaulted securities. (j) See Note 12 regarding other considerations. (k) Income may be received in additional securities and/or cash. (l) Perpetual security with no stated maturity date. (m) The security is traded on a discount basis with no stated coupon rate. (n) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (o) See Note 1(c) regarding joint repurchase agreement. (p) Rounds to less than 0.1% of net assets. The accompanying notes are an integral part of these financial statements. 96 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ---------- ---------- ---------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ......... 0.27 0.30 0.31 0.30 0.28 Net realized and unrealized gains (losses) ...................... 0.27 0.08 (0.02) (0.09) (0.11) ---------- ---------- ---------- ---------- ---------- Total from investment operations .... 0.54 0.38 0.29 0.21 0.17 ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income ................ (0.30) (0.32) (0.33) (0.31) (0.32) ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........ $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 ========== ========== ========== ========== ========== Total return(e) ..................... 8.50% 6.00% 4.63% 3.40% 2.67% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 0.73% 0.72% 0.72% 0.72% 0.72% Net investment income ............... 4.11% 4.64% 4.78% 4.64% 4.29% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $6,275,792 $5,353,961 $5,073,449 $5,291,117 $5,901,449 Portfolio turnover rate ............. 34.74% 21.66% 12.34% 20.54% 29.14%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 | 97 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.24 0.27 0.27 0.26 0.25 Net realized and unrealized gains (losses) ...................... 0.26 0.07 (0.01) (0.08) (0.11) -------- -------- -------- -------- -------- Total from investment operations .... 0.50 0.34 0.26 0.18 0.14 -------- -------- -------- -------- -------- Less distributions from net investment income ................ (0.26) (0.28) (0.30) (0.28) (0.29) -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 6.68 $ 6.44 $ 6.38 $ 6.42 $ 6.52 ======== ======== ======== ======== ======== Total return(e) ..................... 7.79% 5.61% 4.10% 2.87% 2.13% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.24% 1.24% 1.25% 1.24% 1.25% Net investment income ............... 3.60% 4.12% 4.25% 4.12% 3.76% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $230,575 $284,649 $316,720 $388,807 $478,788 Portfolio turnover rate ............. 34.74% 21.66% 12.34% 20.54% 29.14%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- ---------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65 ---------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.23 0.27 0.27 0.26 0.25 Net realized and unrealized gains (losses) ...................... 0.27 0.07 (0.01) (0.08) (0.11) ---------- -------- -------- -------- -------- Total from investment operations .... 0.50 0.34 0.26 0.18 0.14 ---------- -------- -------- -------- -------- Less distributions from net investment income ................ (0.26) (0.28) (0.30) (0.28) (0.29) ---------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ---------- -------- -------- -------- -------- Net asset value, end of year ........ $ 6.66 $ 6.42 $ 6.36 $ 6.40 $ 6.50 ========== ======== ======== ======== ======== Total return(e) ..................... 8.01% 5.48% 4.12% 2.88% 2.14% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.24% 1.24% 1.25% 1.23% 1.25% Net investment income ............... 3.60% 4.12% 4.25% 4.13% 3.76% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $1,464,614 $610,148 $418,951 $424,462 $508,539 Portfolio turnover rate ............. 34.74% 21.66% 12.34% 20.54% 29.14%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- CLASS R 2009 2008 2007 2006 2005 - ------- -------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 -------- -------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ......... 0.25 0.28 0.28 0.27 0.26 Net realized and unrealized gains (losses) ...................... 0.26 0.07 (0.01) (0.08) (0.11) -------- -------- ------- ------- ------- Total from investment operations .... 0.51 0.35 0.27 0.19 0.15 -------- -------- ------- ------- ------- Less distributions from net investment income ................ (0.27) (0.29) (0.31) (0.29) (0.30) -------- -------- ------- ------- ------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- ------- ------- ------- Net asset value, end of year ........ $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 ======== ======== ======= ======= ======= Total return(e) ..................... 8.12% 5.61% 4.25% 3.01% 2.29% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.09% 1.09% 1.10% 1.09% 1.10% Net investment income ............... 3.75% 4.27% 4.40% 4.27% 3.91% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $138,548 $104,648 $74,537 $71,104 $65,790 Portfolio turnover rate ............. 34.74% 21.66% 12.34% 20.54% 29.14%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.28 0.31 0.31 0.31 0.29 Net realized and unrealized gains (losses) ...................... 0.27 0.08 (0.01) (0.09) (0.10) -------- -------- -------- -------- -------- Total from investment operations .... 0.55 0.39 0.30 0.22 0.19 -------- -------- -------- -------- -------- Less distributions from net investment income ................ (0.31) (0.33) (0.34) (0.32) (0.33) -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 6.71 $ 6.47 $ 6.41 $ 6.45 $ 6.55 ======== ======== ======== ======== ======== Total return ........................ 8.63% 6.11% 4.75% 3.53% 2.95% RATIOS TO AVERAGE NET ASSETS Expenses(e) ......................... 0.59% 0.59% 0.60% 0.59% 0.60% Net investment income ............... 4.25% 4.77% 4.90% 4.77% 4.41% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $863,951 $612,026 $470,751 $387,239 $334,681 Portfolio turnover rate ............. 34.74% 21.66% 12.34% 20.54% 29.14%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) 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 STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------- ------------------- ---------------- MORTGAGE-BACKED SECURITIES 92.6% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 92.6% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 .................................. $ 96,046 $ 105,191 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 .................................. 210,951 232,450 GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 ................................. 6,529 6,595 GNMA GP 30 Year, 11.00%, 1/15/10 - 11/15/10 ................................. 63,946 65,831 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 .................................. 166,065 185,230 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 .................................. 24,286 26,919 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 .................................. 26,624 29,412 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 ................................. 7,527 8,141 GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 .................................. 3,998 4,147 GNMA GP 30 Year, 12.75%, 5/15/14 ............................................ 4,046 4,646 GNMA I SF 15 Year, 6.50%, 5/15/18 ........................................... 947,624 1,020,485 GNMA I SF 30 Year, 4.50%, 3/15/39 ........................................... 112,359,480 114,290,658 GNMA I SF 30 Year, 4.50%, 1/15/39 - 6/15/39 ................................. 764,146,355 777,267,028 GNMA I SF 30 Year, 5.00%, 8/15/39 ........................................... 187,189,656 194,121,366 GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/39 ................................. 1,157,383,587 1,203,462,716 GNMA I SF 30 Year, 5.50%, 2/15/39 ........................................... 167,612,097 176,228,406 GNMA I SF 30 Year, 5.50%, 5/15/28 - 6/15/39 ................................. 1,531,989,084 1,614,700,547 GNMA I SF 30 Year, 6.00%, 11/15/38 .......................................... 89,063,381 94,325,875 GNMA I SF 30 Year, 6.00%, 10/15/23 - 2/15/39 ................................ 1,208,132,805 1,282,191,739 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 ................................. 301,024,291 322,818,996 GNMA I SF 30 Year, 6.75%, 3/15/26 ........................................... 39,395 43,101 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 ................................. 159,653,071 175,973,472 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................................ 526,091 584,373 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/33 ................................. 51,410,136 57,165,312 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 ................................. 389,142 435,199 GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................................ 30,748,682 34,484,619 GNMA I SF 30 Year, 8.25%, 3/15/27 ........................................... 36,145 41,225 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................................ 6,839,624 7,732,692 GNMA I SF 30 Year, 9.00%, 9/15/13 - 7/15/23 ................................. 8,293,864 9,285,919 GNMA I SF 30 Year, 9.50%, 10/15/09 - 8/15/22 ................................ 4,937,758 5,576,826 GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ................................ 6,784,420 7,608,218 GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 ............................... 4,948,359 5,550,783 GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 ............................... 3,275,637 3,638,528 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................................ 936,736 1,043,215 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................................ 4,515,495 5,073,595 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................................ 3,032,669 3,411,823 GNMA I SF 30 Year, 13.00%, 1/15/11 - 9/15/15 ................................ 3,477,666 3,924,436 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................................ 38,497 42,413 GNMA II GP 30 Year, 11.50%, 8/20/13 ......................................... 10,992 12,151 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 ............................... 33,480,593 34,109,585 GNMA II SF 30 Year, 5.00%, 9/20/33 .......................................... 160,896,482 167,744,554 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................................ 244,620,181 254,572,285 GNMA II SF 30 Year, 5.50%, 12/20/34 ......................................... 107,179,112 113,243,704 GNMA II SF 30 Year, 5.50%, 6/20/38 .......................................... 91,453,271 96,251,910 GNMA II SF 30 Year, 5.50%, 6/20/34 - 3/20/39 ................................ 539,644,298 569,512,178 GNMA II SF 30 Year, 6.00%, 10/20/23 - 12/20/38 .............................. 683,607,096 726,537,204 GNMA II SF 30 Year, 6.50%, 11/20/38 ......................................... 98,600,462 104,838,318 GNMA II SF 30 Year, 6.50%, 6/20/24 - 1/20/39 ................................ 89,222,911 95,716,560 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................................ 29,031,823 31,825,069
102 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (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, 7.50%, 10/20/22 - 4/20/32 ............................... $ 5,383,708 $ 6,001,659 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................................ 2,620,735 2,944,990 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................................ 1,306,000 1,466,223 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 ............................... 440,953 495,866 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ................................ 256,253 290,536 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ............................... 539,541 604,318 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ............................... 1,383,268 1,541,495 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ............................... 218,089 243,724 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ............................... 117,528 130,628 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ............................... 195,366 218,596 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ............................. 128,841 146,216 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 .............................. 158,462 182,372 ---------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $8,010,231,955) ...................... 8,311,342,268 ----------------
SHARES ------------------- SHORT TERM INVESTMENTS 6.7% MONEY MARKET FUNDS (COST $269,928,515) 3.0% (a) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................. 269,928,515 269,928,515 ----------------
PRINCIPAL AMOUNT ------------------- REPURCHASE AGREEMENTS (COST $330,020,000) 3.7% (b) Barclays Capital Inc., 0.02%, 10/01/09 (Maturity Value $330,020,183) Collateralized by U.S. Treasury Notes, 1.25%, 11/30/10 ................... $ 330,020,000 330,020,000 ---------------- TOTAL INVESTMENTS (COST $8,610,180,470) 99.3% ............................... 8,911,290,783 OTHER ASSETS, LESS LIABILITIES 0.7% ......................................... 62,190,345 ---------------- NET ASSETS 100.0% ........................................................... $ 8,973,481,128 ================
See Abbreviations on page 143. (a) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (b) See Note 1(c) regarding repurchase agreements. The accompanying notes are an integral part of these financial statements. Annual Report | 103 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 - ------- ---------- ---------- --------- ---------- ---------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16 ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ......... 0.43 0.41 0.40 0.43 0.45 Net realized and unrealized gains (losses) ...................... (1.11) (1.93) 2.16 0.37 2.42 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (0.68) (1.52) 2.56 0.80 2.87 ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income ............ (0.42) (0.40) (0.40) (0.41) (0.44) Net realized gains ............... (0.08) (0.74) (0.47) (0.09) -- ---------- ---------- ---------- ---------- ---------- Total distributions ................. (0.50) (1.14) (0.87) (0.50) (0.44) ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ........ $ 10.74 $ 11.92 $ 14.58 $ 12.89 $ 12.59 ========== ========== ========== ========== ========== Total return(e) ..................... (5.20)% (11.63)% 20.32% 6.69% 28.81% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 0.80% 0.74% 0.75% 0.76% 0.78% Net investment income ............... 4.29% 2.92% 2.83% 3.54% 3.92% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $1,543,060 $1,769,397 $2,157,614 $1,926,732 $1,986,034 Portfolio turnover rate ............. 15.49% 8.32% 10.84% 7.97% 13.53%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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. 104 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 - ------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.38 0.33 0.33 0.37 0.39 Net realized and unrealized gains (losses) ...................... (1.10) (1.91) 2.15 0.38 2.42 ------- ------- -------- -------- -------- Total from investment operations .... (0.72) (1.58) 2.48 0.75 2.81 ------- ------- -------- -------- -------- Less distributions from: Net investment income ............ (0.37) (0.33) (0.33) (0.35) (0.39) Net realized gains ............... (0.08) (0.74) (0.47) (0.09) -- ------- ------- -------- -------- -------- Total distributions ................. (0.45) (1.07) (0.80) (0.44) (0.39) ------- ------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ------- ------- -------- -------- -------- Net asset value, end of year ........ $ 10.74 $ 11.91 $ 14.56 $ 12.88 $ 12.57 ======= ======= ======== ======== ======== Total return(e) ..................... (5.65)% (12.04)% 19.66% 6.25% 28.11% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.30% 1.24% 1.26% 1.26% 1.28% Net investment income ............... 3.79% 2.42% 2.32% 3.04% 3.42% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $64,176 $92,695 $127,587 $133,824 $154,277 Portfolio turnover rate ............. 15.49% 8.32% 10.84% 7.97% 13.53%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 | 105 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 - ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.38 0.33 0.33 0.37 0.39 Net realized and unrealized gains (losses) ...................... (1.10) (1.91) 2.15 0.37 2.42 -------- -------- -------- -------- -------- Total from investment operations .... (0.72) (1.58) 2.48 0.74 2.81 -------- -------- -------- -------- -------- Less distributions from: Net investment income ............ (0.37) (0.33) (0.33) (0.35) (0.39) Net realized gains ............... (0.08) (0.74) (0.47) (0.09) -- -------- -------- -------- -------- -------- Total distributions ................. (0.45) (1.07) (0.80) (0.44) (0.39) -------- -------- -------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ........ $ 10.71 $ 11.88 $ 14.53 $ 12.85 $ 12.55 ======== ======== ======== ======== ======== Total return(e) ..................... (5.64)% (12.06)% 19.72% 6.19% 28.16% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.30% 1.24% 1.26% 1.25% 1.28% Net investment income ............... 3.79% 2.42% 2.32% 3.05% 3.42% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $300,544 $339,247 $424,977 $391,509 $435,714 Portfolio turnover rate ............. 15.49% 8.32% 10.84% 7.97% 13.53%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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. 106 | Annual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, -------------------------------------------------- CLASS R 2009 2008 2007 2006 2005 - ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 11.89 $ 14.54 $ 12.86 $ 12.57 $ 10.15 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ......... 0.40 0.36 0.35 0.39 0.43 Net realized and unrealized gains (losses) ...................... (1.11) (1.92) 2.16 0.36 2.40 ------- ------- ------- ------- ------- Total from investment operations .... (0.71) (1.56) 2.51 0.75 2.83 ------- ------- ------- ------- ------- Less distributions from: Net investment income ............ (0.39) (0.35) (0.36) (0.37) (0.41) Net realized gains ............... (0.08) (0.74) (0.47) (0.09) -- ------- ------- ------- ------- ------- Total distributions ................. (0.47) (1.09) (0.83) (0.46) (0.41) ------- ------- ------- ------- ------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year ........ $ 10.71 $ 11.89 $ 14.54 $ 12.86 $ 12.57 ======= ======= ======= ======= ======= Total return(e) ..................... (5.57)% (11.92)% 19.92% 6.29% 28.35% RATIOS TO AVERAGE NET ASSETS Expenses(f) ......................... 1.15% 1.09% 1.11% 1.11% 1.13% Net investment income ............... 3.94% 2.57% 2.47% 3.19% 3.57% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $37,795 $36,596 $41,845 $27,736 $14,649 Portfolio turnover rate ............. 15.49% 8.32% 10.84% 7.97% 13.53%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 | 107 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005 - ------------- -------- ------- ------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .. $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20 -------- ------- ------- -------- -------- Income from investment operations(a): Net investment income(b) ......... 0.45 0.42 0.42 0.45 0.48 Net realized and unrealized gains (losses) ...................... (1.12) (1.92) 2.17 0.38 2.42 -------- ------- ------- -------- -------- Total from investment operations .... (0.67) (1.50) 2.59 0.83 2.90 -------- ------- ------- -------- -------- Less distributions from: Net investment income ............ (0.44) (0.42) (0.43) (0.43) (0.46) Net realized gains ............... (0.08) (0.74) (0.47) (0.09) -- -------- ------- ------- -------- -------- Total distributions ................. (0.52) (1.16) (0.90) (0.52) (0.46) -------- ------- ------- -------- -------- Redemption fees(c) .................. -- --(d) --(d) --(d) --(d) -------- ------- ------- -------- -------- Net asset value, end of year ........ $ 10.79 $ 11.98 $ 14.64 $ 12.95 $ 12.64 ======== ======= ======= ======== ======== Total return ........................ (5.12)% (11.45)% 20.43% 6.88% 29.00% RATIOS TO AVERAGE NET ASSETS Expenses(e) ......................... 0.65% 0.59% 0.61% 0.61% 0.63% Net investment income ............... 4.44% 3.07% 2.97% 3.69% 4.07% SUPPLEMENTAL DATA Net assets, end of year (000's) ..... $124,454 $58,817 $86,823 $103,041 $110,249 Portfolio turnover rate ............. 15.49% 8.32% 10.84% 7.97% 13.53%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Benefit of expense reduction rounds to less than 0.01%. The accompanying notes are an integral part of these financial statements. 108 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------------- ---------------- COMMON STOCKS 94.0% DIVERSIFIED TELECOMMUNICATION SERVICES 2.7% AT&T Inc. .................................................. United States 1,200,000 $ 32,412,000 Verizon Communications Inc. ................................ United States 800,000 24,216,000 ---------------- 56,628,000 ---------------- ELECTRIC UTILITIES 48.0% Allegheny Energy Inc. ...................................... United States 1,000,000 26,520,000 American Electric Power Co. Inc. ........................... United States 2,200,000 68,178,000 Cleco Corp. ................................................ United States 1,000,000 25,080,000 Duke Energy Corp. .......................................... United States 3,800,000 59,812,000 Edison International ....................................... United States 1,800,000 60,444,000 Entergy Corp. .............................................. United States 1,100,000 87,846,000 Exelon Corp. ............................................... United States 2,000,000 99,240,000 FirstEnergy Corp. .......................................... United States 1,700,000 77,724,000 FPL Group Inc. ............................................. United States 1,400,000 77,322,000 Great Plains Energy Inc. ................................... United States 767,400 13,774,830 Hawaiian Electric Industries Inc. .......................... United States 600,000 10,872,000 Northeast Utilities ........................................ United States 600,000 14,244,000 NV Energy Inc. ............................................. United States 5,000,000 57,950,000 Pepco Holdings Inc. ........................................ United States 1,000,000 14,880,000 Pinnacle West Capital Corp. ................................ United States 600,000 19,692,000 PNM Resources Inc. ......................................... United States 855,720 9,994,810 Portland General Electric Co. .............................. United States 1,500,000 29,580,000 PPL Corp. .................................................. United States 2,600,000 78,884,000 Progress Energy Inc. ....................................... United States 1,500,000 58,590,000 The Southern Co. ........................................... United States 2,600,000 82,342,000 Westar Energy Inc. ......................................... United States 1,080,600 21,082,506 ---------------- 994,052,146 ---------------- GAS UTILITIES 0.4% Southwest Gas Corp. ........................................ United States 300,000 7,674,000 ---------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.7% Constellation Energy Group ................................. United States 1,700,000 55,029,000 ---------------- MULTI-UTILITIES 35.9% Alliant Energy Corp. ....................................... United States 1,200,000 33,420,000 Ameren Corp. ............................................... United States 1,350,000 34,128,000 CenterPoint Energy Inc. .................................... United States 3,121,100 38,795,273 CMS Energy Corp. ........................................... United States 1,000,000 13,400,000 Consolidated Edison Inc. ................................... United States 800,000 32,752,000 Dominion Resources Inc. .................................... United States 1,500,000 51,750,000 DTE Energy Co. ............................................. United States 500,000 17,570,000 GDF Suez ................................................... France 700,000 31,078,438 National Grid PLC .......................................... United Kingdom 4,987,755 48,100,056 NiSource Inc. .............................................. United States 1,500,000 20,835,000 PG&E Corp. ................................................. United States 2,100,000 85,029,000 Public Service Enterprise Group Inc. ....................... United States 2,100,000 66,024,000 RWE AG ..................................................... Germany 300,000 27,951,062 SCANA Corp. ................................................ United States 775,000 27,047,500 Sempra Energy .............................................. United States 1,700,000 84,677,000
Annual Report | 109 Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------------- ---------------- COMMON STOCKS (CONTINUED) MULTI-UTILITIES (CONTINUED) TECO Energy Inc. ........................................... United States 700,000 $ 9,856,000 United Utilities Group PLC ................................. United Kingdom 2,960,189 21,593,518 Vectren Corp. .............................................. United States 600,000 13,824,000 Wisconsin Energy Corp. ..................................... United States 800,000 36,136,000 Xcel Energy Inc. ........................................... United States 2,600,000 50,024,000 ---------------- 743,990,847 ---------------- OIL, GAS & CONSUMABLE FUELS 3.0% Spectra Energy Corp. ....................................... United States 2,197,600 41,622,544 The Williams Cos. Inc. ..................................... United States 1,105,190 19,749,745 ---------------- 61,372,289 ---------------- WATER UTILITIES 1.3% American Water Works Co. Inc. .............................. United States 1,400,000 27,916,000 ---------------- TOTAL COMMON STOCKS (COST $1,553,762,688) .................. 1,946,662,282 ----------------
PRINCIPAL AMOUNT ------------------- CORPORATE BONDS 3.7% ELECTRIC UTILITIES 1.9% MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ................................................. United States $ 25,000,000 32,910,225 Northeast Generation Co., senior secured note, B-1, 8.812%, 10/15/26 ................................................ United States 7,218,750 6,406,663 ---------------- 39,316,888 ---------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2% Energy Future Holdings Corp., senior note, P, 5.55%, 11/15/14 ...................................... United States 32,300,000 22,209,028 R, 6.55%, 11/15/34 ...................................... United States 5,700,000 2,592,787 ---------------- 24,801,815 ---------------- MULTI-UTILITIES 0.6% Aquila Inc., senior note, 9.95%, 2/01/11 .......................................... United States 6,000,000 6,307,782 8.27%, 11/15/21 ......................................... United States 6,100,000 6,094,504 ---------------- 12,402,286 ---------------- TOTAL CORPORATE BONDS (COST $77,506,993) ................... 76,520,989 ---------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,631,269,681) ................................... 2,023,183,271 ----------------
110 | Annual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2009 (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE ----------------------- -------------- ------------------- ---------------- SHORT TERM INVESTMENTS (COST $38,378,710) 1.9% MONEY MARKET FUNDS 1.9% (a) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................................................... United States 38,378,710 $ 38,378,710 ---------------- TOTAL INVESTMENTS (COST $1,669,648,391) 99.6% .............. 2,061,561,981 OTHER ASSETS, LESS LIABILITIES 0.4% ........................ 8,467,998 ---------------- NET ASSETS 100.0% .......................................... $ 2,070,029,979 ================
(a) See Note 7 regarding investments in the 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 | 111 Franklin Custodian Funds FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES September 30, 2009
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- -------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................... $357,160,889 $1,758,996,730 $50,189,231,436 Cost - Non-controlled affiliated issuers (Note 10) .... -- -- 1,274,152,770 Cost - Sweep Money Fund (Note 7) ...................... -- 23,763,290 269,928,515 Cost - Repurchase agreements .......................... -- -- 906,056,891 ------------ -------------- --------------- Total cost of investments ............................. $357,160,889 $1,782,760,020 $52,639,369,612 ============ ============== =============== Value - Unaffiliated issuers .......................... $615,589,651 $3,064,055,036 $44,856,155,671 Value - Non-controlled affiliated issuers (Note 10) ... -- -- 1,434,033,305 Value - Sweep Money Fund (Note 7) ..................... -- 23,763,290 269,928,515 Value - Repurchase agreements ......................... -- -- 906,056,891 ------------ -------------- --------------- Total value of investments ............................ 615,589,651 3,087,818,326 47,466,174,382 Cash ..................................................... -- 100,179 9,781,993 Receivables: Investment securities sold ............................ 6,371,068 -- 12,474,250 Capital shares sold ................................... 544,301 3,676,583 126,776,722 Dividends and interest ................................ 388,359 2,439,965 632,461,153 Other assets ............................................. 392 372,832 29,138 ------------ -------------- --------------- Total assets ....................................... 622,893,771 3,094,407,885 48,247,697,638 ------------ -------------- --------------- Liabilities: Payables: Investment securities purchased ....................... 1,772,700 12,154,795 669,962,523 Capital shares redeemed ............................... 780,246 5,733,648 83,654,756 Affiliates ............................................ 708,697 3,065,981 39,869,586 Allocator Funds (Note 11) ............................. -- 32,284 240,665 Unaffiliated transfer agent fees ...................... 99,980 353,056 5,002,832 Funds advanced by custodian .............................. 4,321,427 -- -- Accrued expenses and other liabilities ................... 68,229 220,447 2,430,448 ------------ -------------- --------------- Total liabilities .................................. 7,751,279 21,560,211 801,160,810 ------------ -------------- --------------- Net assets, at value ............................ $615,142,492 $3,072,847,674 $47,446,536,828 ============ ============== =============== Net assets consist of: Paid-in capital .......................................... $437,917,559 $1,885,579,915 $57,887,357,824 Undistributed net investment income (loss) ............... -- 12,735,382 -- Distributions in excess of net investment income ......... -- -- (293,103,420) Net unrealized appreciation (depreciation) ............... 258,435,046 1,305,058,677 (5,173,388,123) Accumulated net realized gain (loss) ..................... (81,210,113) (130,526,300) (4,974,329,453) ------------ -------------- --------------- Net assets, at value ............................ $615,142,492 $3,072,847,674 $47,446,536,828 ============ ============== ===============
The accompanying notes are an integral part of these financial statements. 112 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2009
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- -------------- --------------- CLASS A: Net assets, at value ..................................... $503,472,319 $2,173,714,147 $27,773,005,958 ------------ -------------- --------------- Shares outstanding ....................................... 21,704,520 59,584,056 13,976,201,310 ------------ -------------- --------------- Net asset value per share(a) ............................. $ 23.20 $ 36.48 $ 1.99 ------------ -------------- --------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ...... $ 24.62 $ 38.71 $ 2.08 ------------ -------------- --------------- CLASS B: Net assets, at value ..................................... $ 13,681,845 $ 87,789,658 $ 2,051,279,546 ------------ -------------- --------------- Shares outstanding ....................................... 633,479 2,512,961 1,036,951,759 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) .. $ 21.60 $ 34.93 $ 1.98 ------------ -------------- --------------- CLASS B1: Net assets, at value ..................................... -- -- $ 68,825,024 ------------ -------------- --------------- Shares outstanding ....................................... -- -- 34,637,234 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) .. -- -- $ 1.99 ------------ -------------- --------------- CLASS C: Net assets, at value ..................................... $ 83,435,039 $ 315,305,450 $13,054,203,262 ------------ -------------- --------------- Shares outstanding ....................................... 3,909,046 9,111,131 6,519,997,050 ------------ -------------- --------------- Net asset value and maximum offering price per share(a) .. $ 21.34 $ 34.61 $ 2.00 ------------ -------------- --------------- CLASS R: Net assets, at value ..................................... $ 6,344,896 $ 65,112,783 $ 315,297,612 ------------ -------------- --------------- Shares outstanding ....................................... 274,297 1,790,276 160,536,949 ------------ -------------- --------------- Net asset value and maximum offering price per share ..... $ 23.13 $ 36.37 $ 1.96 ------------ -------------- --------------- ADVISOR CLASS: Net assets, at value ..................................... $ 8,208,393 $ 430,925,636 $ 4,183,925,426 ------------ -------------- --------------- Shares outstanding ....................................... 352,591 11,797,872 2,116,859,447 ------------ -------------- --------------- Net asset value and maximum offering price per share ..... $ 23.28 $ 36.53 $ 1.98 ------------ -------------- ---------------
(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. Annual Report | 113 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2009
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................... $8,010,231,955 $1,631,269,681 Cost - Sweep Money Fund (Note 7) ...................... 269,928,515 38,378,710 Cost - Repurchase agreements .......................... 330,020,000 -- -------------- -------------- Total cost of investments ............................. $8,610,180,470 $1,669,648,391 ============== ============== Value - Unaffiliated issuers .......................... $8,311,342,268 $2,023,183,271 Value - Sweep Money Fund (Note 7) ..................... 269,928,515 38,378,710 Value - Repurchase agreements ......................... 330,020,000 -- -------------- -------------- Total value of investments ............................ 8,911,290,783 2,061,561,981 Cash ..................................................... 2,570 -- Receivables: Investment securities sold ............................ 1,171,710 3,227,407 Capital shares sold ................................... 49,508,981 3,602,845 Dividends and interest ................................ 35,351,730 7,089,096 Other assets ............................................. 6,009 1,556 -------------- -------------- Total assets ....................................... 8,997,331,783 2,075,482,885 -------------- -------------- Liabilities: Payables: Capital shares redeemed ............................... 15,365,627 3,289,879 Affiliates ............................................ 6,908,429 1,695,442 Allocator Funds (Note 11) ............................. 25,130 -- Unaffiliated transfer agent fees ...................... 1,027,805 282,737 Accrued expenses and other liabilities ................... 523,664 184,848 -------------- -------------- Total liabilities .................................. 23,850,655 5,452,906 -------------- -------------- Net assets, at value ............................ $8,973,481,128 $2,070,029,979 ============== ============== Net assets consist of: Paid-in capital .......................................... $9,049,489,178 $1,640,904,962 Undistributed net investment income ...................... 2,451,318 9,424,658 Net unrealized appreciation (depreciation) ............... 301,110,313 391,938,665 Accumulated net realized gain (loss) ..................... (379,569,681) 27,761,694 -------------- -------------- Net assets, at value ............................ $8,973,481,128 $2,070,029,979 ============== ==============
The accompanying notes are an integral part of these financial statements. 114 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) September 30, 2009
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- CLASS A: Net assets, at value ..................................... $6,275,792,138 $1,543,060,221 -------------- -------------- Shares outstanding ....................................... 937,618,858 143,670,463 -------------- -------------- Net asset value per share(a) ............................. $ 6.69 $ 10.74 -------------- -------------- Maximum offering price per share (net asset value per share / 95.75%) ....................................... $ 6.99 $ 11.22 -------------- -------------- CLASS B: Net assets, at value ..................................... $ 230,575,004 $ 64,176,298 -------------- -------------- Shares outstanding ....................................... 34,502,328 5,976,756 -------------- -------------- Net asset value and maximum offering price per share(a) .. $ 6.68 $ 10.74 -------------- -------------- CLASS C: Net assets, at value ..................................... $1,464,614,329 $ 300,543,667 -------------- -------------- Shares outstanding ....................................... 220,039,543 28,071,931 -------------- -------------- Net asset value and maximum offering price per share(a) .. $ 6.66 $ 10.71 -------------- -------------- CLASS R: Net assets, at value ..................................... $ 138,548,237 $ 37,795,393 -------------- -------------- Shares outstanding ....................................... 20,718,388 3,527,886 -------------- -------------- Net asset value and maximum offering price per share ..... $ 6.69 $ 10.71 -------------- -------------- ADVISOR CLASS: Net assets, at value ..................................... $ 863,951,420 $ 124,454,400 -------------- -------------- Shares outstanding ....................................... 128,743,908 11,529,995 -------------- -------------- Net asset value and maximum offering price per share .. $ 6.71 $ 10.79 -------------- --------------
(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. Annual Report | 115 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended September 30, 2009
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ----------- --------------- Investment income: Dividends: Unaffiliated issuers .................................. $ 3,983,102 $42,074,382 $ 601,657,137 Non-controlled affiliated issuers (Note 10) ........... -- -- 85,716,598 Sweep Money Fund (Note 7) ............................. 58,680 26,450 878,847 Interest: Unaffiliated issuers .................................. 991 369,450 2,638,125,462 Non-controlled affiliated issuers (Note 10) ........... -- -- 23,885,429 Income from securities loaned ............................ -- -- 126,217 ------------ ----------- --------------- Total investment income ......................... 4,042,773 42,470,282 3,350,389,690 ------------ ----------- --------------- Expenses: Management fees (Note 3a) ................................ 2,438,021 10,043,480 154,587,133 Distribution fees: (Note 3c) Class A ............................................... 988,278 3,873,497 34,060,658 Class B ............................................... 124,667 717,334 18,626,075 Class B1 .............................................. -- -- 872,974 Class C ............................................... 650,549 2,298,522 68,370,970 Class R ............................................... 21,542 191,943 1,255,611 Transfer agent fees (Note 3e) ............................ 1,596,062 5,275,869 42,203,321 Special servicing agreement fees (Note 11) ............... -- 179,844 1,255,659 Custodian fees (Note 4) .................................. 6,489 32,266 659,658 Reports to shareholders .................................. 140,801 446,422 4,563,502 Registration and filing fees ............................. 94,748 124,584 823,741 Professional fees ........................................ 66,260 64,211 551,215 Trustees' fees and expenses .............................. 4,099 28,933 320,888 Other .................................................... 114,981 158,575 1,097,415 ------------ ----------- --------------- Total expenses .................................. 6,246,497 23,435,480 329,248,820 Expense reductions (Note 4) ..................... (273) (623) (44,913) ------------ ----------- --------------- Net expenses ................................. 6,246,224 23,434,857 329,203,907 ------------ ----------- --------------- Net investment income (loss) .............. (2,203,451) 19,035,425 3,021,185,783 ------------ ----------- --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ............................... (59,172,321) 18,506,599 (4,668,830,585) Non-controlled affiliated issuers (Note 10) ........ -- -- (21,316,715) Realized gain distributions from REITs ................ -- -- 9,156,789 Written options ....................................... -- -- 742,674 Foreign currency transactions ......................... 132,070 437,749 1,246,385 ------------ ----------- --------------- Net realized gain (loss) .................. (59,040,251) 18,944,348 (4,679,001,452) ------------ ----------- --------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................... 117,987,659 50,707,225 5,364,130,813 Translation of other assets and liabilities denominated in foreign currencies .............................. 6,283 371 (37,801) ------------ ----------- --------------- Net change in unrealized appreciation (depreciation) ......................... 117,993,942 50,707,596 5,364,093,012 ------------ ----------- --------------- Net realized and unrealized gain (loss) ..................... 58,953,691 69,651,944 685,091,560 ------------ ----------- --------------- Net increase (decrease) in net assets resulting from operations ............................................... $ 56,750,240 $88,687,369 $ 3,706,277,343 ============ =========== ===============
The accompanying notes are an integral part of these financial statements. 116 | Annual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended September 30, 2009
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Investment income: Dividends: Unaffiliated issuers .................................. $ -- $ 90,154,712 Sweep Money Fund (Note 7) ............................. 929,103 48,725 Interest ................................................. 390,847,149 6,603,751 ------------ ------------- Total investment income ............................ 391,776,252 96,807,188 ------------ ------------- Expenses: Management fees (Note 3a) ................................ 36,146,029 8,828,381 Distribution fees: (Note 3c) Class A ............................................... 8,200,746 2,135,713 Class B ............................................... 1,768,888 441,074 Class C ............................................... 6,573,306 1,827,613 Class R ............................................... 624,150 159,797 Transfer agent fees (Note 3e) ............................ 9,611,066 2,969,977 Special servicing agreement fees (Note 11) ............... 117,698 448 Custodian fees (Note 4) .................................. 117,473 40,895 Reports to shareholders .................................. 656,413 293,112 Registration and filing fees ............................. 338,605 124,203 Professional fees ........................................ 151,456 56,367 Trustees' fees and expenses .............................. 62,108 16,173 Other .................................................... 488,563 103,708 ------------ ------------- Total expenses ..................................... 64,856,501 16,997,461 Expense reductions (Note 4) ........................ (26,719) (863) ------------ ------------- Net expenses .................................... 64,829,782 16,996,598 ------------ ------------- Net investment income ........................ 326,946,470 79,810,590 ------------ ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................... 8,947,805 28,107,856 Foreign currency transactions ......................... -- (98,256) ------------ ------------- Net realized gain (loss) ..................... 8,947,805 28,009,600 ------------ ------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................... 306,262,342 (249,467,928) Translation of other assets and liabilities denominated in foreign currencies .............................. -- 35,561 ------------ ------------- Net change in unrealized appreciation (depreciation) ............................ 306,262,342 (249,432,367) ------------ ------------- Net realized and unrealized gain (loss) ..................... 315,210,147 (221,422,767) ------------ ------------- Net increase (decrease) in net assets resulting from operations ............................................... $642,156,617 $(141,612,177) ============ =============
The accompanying notes are an integral part of these financial statements. Annual Report | 117 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, ---------------------------- ------------------------------- 2009 2008 2009 2008 ------------ ------------- -------------- -------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .......................... $ (2,203,451) $ (2,101,251) $ 19,035,425 $ 13,118,571 Net realized gain (loss) from investments and foreign currency transactions ...................... (59,040,251) 43,383,275 18,944,348 93,118,459 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ................................. 117,993,942 (169,942,555) 50,707,596 (703,968,727) ------------ ------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations .................... 56,750,240 (128,660,531) 88,687,369 (597,731,697) ------------ ------------- -------------- -------------- Distributions to shareholders from: Net investment income: Class A ............................................ -- -- (13,937,611) (6,070,923) Class C ............................................ -- -- (158,739) -- Class R ............................................ -- -- (93,243) (37,603) Advisor Class ...................................... -- -- (2,842,374) (1,821,203) Net realized gains: Class A ............................................ (23,817,251) (11,692,397) -- -- Class B ............................................ (674,313) (381,099) -- -- Class C ............................................ (3,500,844) (1,631,082) -- -- Advisor Class ...................................... (211,314) -- -- -- ------------ ------------- -------------- -------------- Total distributions to shareholders ...................... (28,203,722) (13,704,578) (17,031,967) (7,929,729) ------------ ------------- -------------- -------------- Capital share transactions: (Note 2) Class A ............................................ 95,693,757 (43,399,423) 423,439,580 15,676,618 Class B ............................................ 2,223,304 (2,207,134) 64,703 (23,505,949) Class C ............................................ 24,245,692 (13,103) 55,014,386 (17,756,728) Class R ............................................ 4,561,511 -- 30,600,261 (9,619,605) Advisor Class ...................................... 5,097,576 2,370,407 151,094,118 (37,246,106) ------------ ------------- -------------- -------------- Total capital share transactions ......................... 131,821,840 (43,249,253) 660,213,048 (72,451,770) ------------ ------------- -------------- -------------- Redemption fees .......................................... -- 2,715 -- 7,384 ------------ ------------- -------------- -------------- Net increase (decrease) in net assets ........... 160,368,358 (185,611,647) 731,868,450 (678,105,812) Net assets: Beginning of year ........................................ 454,774,134 640,385,781 2,340,979,224 3,019,085,036 ------------ ------------- -------------- -------------- End of year .............................................. $615,142,492 $ 454,774,134 $3,072,847,674 $2,340,979,224 ============ ============= ============== ============== Undistributed net investment income included in net assets: End of year ........................................... $ -- $ -- $ 12,735,382 $ 10,241,399 ============ ============= ============== ==============
The accompanying notes are an integral part of these financial statements. 118 | Annual Report 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, ---------------------------------- ------------------------------- 2009 2008 2009 2008 --------------- ---------------- -------------- --------------- Increase (decrease) in net assets: Operations: Net investment income ................................. $ 3,021,185,783 $ 3,656,589,855 $ 326,946,470 $ 305,138,958 Net realized gain (loss) from investments, written options and foreign currency transactions ....................................... (4,679,001,452) (73,189,382) 8,947,805 (4,950,231) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .................. 5,364,093,012 (16,753,818,156) 306,262,342 74,540,856 --------------- ---------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations .................... 3,706,277,343 (13,170,417,683) 642,156,617 374,729,583 --------------- ---------------- -------------- -------------- Distributions to shareholders from: Net investment income: Class A ............................................ (2,122,519,292) (2,070,078,091) (266,824,581) (255,332,116) Class B ............................................ (162,039,544) (175,223,876) (10,979,232) (13,147,734) Class B1 ........................................... (12,892,120) (18,498,215) -- -- Class C ............................................ (924,754,117) (864,273,614) (39,006,086) (21,546,227) Class R ............................................ (22,649,572) (17,491,311) (5,108,595) (3,921,392) Advisor Class ...................................... (322,719,140) (358,190,789) (32,473,805) (27,206,570) Net realized gains: Class A ............................................ (15,591,600) (800,081,992) -- -- Class B ............................................ (1,384,690) (82,519,889) -- -- Class B1 ........................................... (124,160) (8,423,689) -- -- Class C ............................................ (7,179,957) (363,101,410) -- -- Class R ............................................ (166,198) (6,753,197) -- -- Advisor Class ...................................... (2,449,031) (142,671,699) -- -- --------------- ---------------- -------------- -------------- Total distributions to shareholders ...................... (3,594,469,421) (4,907,307,772) (354,392,299) (321,154,039) --------------- ---------------- -------------- -------------- Capital share transactions: (Note 2) Class A ..................................................... 729,974,966 1,818,347,709 707,313,300 236,684,954 Class B ..................................................... (324,408,642) (326,601,311) (64,174,344) (35,014,568) Class B1 .................................................... (136,813,461) (76,335,994) -- -- Class C ..................................................... 543,188,709 1,004,888,472 820,560,727 189,199,415 Class R ..................................................... 40,235,428 78,037,080 29,529,703 29,664,847 Advisor Class ............................................... (24,803,405) (219,327,033) 227,056,372 136,835,144 --------------- ---------------- -------------- -------------- Total capital share transactions ............................ 827,373,595 2,279,008,923 1,720,285,758 557,369,792 --------------- ---------------- -------------- -------------- Redemption fees ............................................. -- 176,722 -- 78,148 --------------- ---------------- -------------- -------------- Net increase (decrease) in net assets ........ 939,181,517 (15,798,539,810) 2,008,050,076 611,023,484 Net assets: Beginning of year ........................................ 46,507,355,311 62,305,895,121 6,965,431,052 6,354,407,568 =============== ================ ============== ============== End of year .............................................. $47,446,536,828 $ 46,507,355,311 $8,973,481,128 $6,965,431,052 =============== ================ ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ........................................... $ (293,103,420) $ 151,244,134 $ 2,451,318 $ 3,642,998 =============== ================ ============== ==============
The accompanying notes are an integral part of these financial statements. Annual Report | 119 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN UTILITIES FUND YEAR ENDED SEPTEMBER 30, -------------------------------- 2009 2008 --------------- -------------- Increase (decrease) in net assets: Operations: Net investment income ................................. $ 79,810,590 $ 77,610,616 Net realized gain (loss) from investments and foreign currency transactions .............................. 28,009,600 55,226,870 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ...... (249,432,367) (444,647,745) -------------- -------------- Net increase (decrease) in net assets resulting from operations .............................. (141,612,177) (311,810,259) -------------- -------------- Distributions to shareholders from: Net investment income: Class A ............................................ (60,897,517) (60,642,671) Class B ............................................ (2,457,137) (2,772,274) Class C ............................................ (10,325,076) (9,718,344) Class R ............................................ (1,233,300) (1,082,816) Advisor Class ...................................... (2,775,441) (2,496,434) Net realized gains: Class A ............................................ (11,143,330) (107,493,008) Class B ............................................ (556,682) (6,261,449) Class C ............................................ (2,138,465) (21,133,249) Class R ............................................ (236,227) (2,175,474) Advisor Class ...................................... (407,396) (4,410,835) -------------- -------------- Total distributions to shareholders ...................... (92,170,571) (218,186,554) -------------- -------------- Capital share transactions: (Note 2) Class A ............................................ (47,298,609) 15,831,422 Class B ............................................ (18,007,546) (12,918,491) Class C ............................................ (4,044,700) (7,376,287) Class R ............................................ 4,676,850 3,080,978 Advisor Class ...................................... 71,734,045 (10,722,085) -------------- -------------- Total capital share transactions ......................... 7,060,040 (12,104,463) -------------- -------------- Redemption fees .......................................... -- 8,502 -------------- -------------- Net increase (decrease) in net assets ........... (226,722,708) (542,092,774) Net assets: Beginning of year ........................................ 2,296,752,687 2,838,845,461 -------------- -------------- End of year .............................................. $2,070,029,979 $2,296,752,687 ============== ============== Undistributed net investment income included in net assets: End of year .............................................. $ 9,424,658 $ 6,193,982 ============== ==============
The accompanying notes are an integral part of these financial statements. 120 | Annual Report 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 an open-end investment company, consisting of five funds (Funds). The classes of shares offered within each of the Funds are indicated below. Effective December 1, 2008, the Franklin DynaTech Fund began offering a new class of shares, Class R. 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 C, CLASS R CLASS A, CLASS B, CLASS B1, & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ---------------------------------------- -------------------------------- Franklin DynaTech Fund Franklin Income Fund Franklin Growth Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value. Short term investments are valued at cost. Corporate debt securities, government securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Funds' 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. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Funds may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information Annual Report | 121 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) with respect to bond and note transactions, to assist in determining a current market value for each security. The Funds' pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value. Foreign equity 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 equity 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 security is determined. The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, 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 Funds' 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. 122 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS 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, 2009. Repurchase agreements are valued at cost. D. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS The Funds may purchase securities on a delayed delivery 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. DERIVATIVE FINANCIAL INSTRUMENTS The Funds may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the Annual Report | 123 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Funds to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Derivatives are marked to market daily based upon quotations from market makers or the Funds' independent pricing services and the Fund's net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations. The Franklin Income Fund purchases or writes option contracts in order to manage equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of a particular security, currency or index at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the security is adjusted by any premium paid or received. Upon expiration of an option, any premium paid or received is recorded as a realized loss or gain. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss. See Note 9 regarding other derivative information. F. EQUITY-LINKED SECURITIES The Franklin Income Fund may invest in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Income received from equity linked securities is recorded as realized gains in the Statement of Operations and may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guarantee of a return of principal with equity linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the Fund. G. SECURITIES LENDING The Franklin Income Fund participates in a principal based security lending program. The fund receives 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 the close of fund business each day; any additional collateral required due to changes in security values is 124 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. SECURITIES LENDING (CONTINUED) delivered to the fund on the next business day. The collateral is invested in a non-registered money fund (BNY Institutional Cash Reserve Fund or ICRF), managed by the fund's custodian on the fund's behalf. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the fund. At September 30, 2009, the Funds had no securities on loan. In September of 2008, the Bank of New York Mellon (BNYM) advised the fund that the ICRF had exposure to certain defaulted debt obligations of Lehman Brothers Holdings, Inc. and that they had created a separate sleeve (Series B) of the ICRF to hold these securities apart from the main investments. Each investor in the ICRF was allocated its pro-rata portion of Series B. The fund's position in Series B is disclosed on the Statement of Investments at fair value and any unrealized loss attributable to the position is included in net assets. H. 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. I. 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, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. J. 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. Annual Report | 125 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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. 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, not including 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. K. 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. L. 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. M. 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. 126 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At September 30, 2009, 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, 2009 Shares sold ................. 2,782,002 $ 53,411,677 12,015,889 $ 359,509,553 Shares issued on merger (Note 13) ................ 7,598,915 126,195,671 14,593,037 451,362,637 Shares issued in reinvestment of distributions ......... 1,359,432 21,288,705 486,462 12,711,248 Shares redeemed ............. (5,668,339) (105,202,296) (13,479,108) (400,143,858) ---------- ------------- ----------- ------------- Net increase (decrease) ..... 6,072,010 $ 95,693,757 13,616,280 $ 423,439,580 ========== ============= =========== ============= 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 ========== ============= =========== ============= CLASS B SHARES: Year ended September 30, 2009 Shares sold ................. 68,034 $ 1,166,470 269,458 $ 7,369,648 Shares issued on merger (Note 13) ................ 471,140 7,329,289 897,036 26,650,945 Shares issued in reinvestment of distributions ......... 39,296 576,475 -- -- Shares redeemed ............. (400,924) (6,848,930) (1,186,449) (33,955,890) ---------- ------------- ----------- ------------- Net increase (decrease) ..... 177,546 $ 2,223,304 (19,955) $ 64,703 ========== ============= =========== ============= 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) ========== ============= =========== ============= CLASS C SHARES: Year ended September 30, 2009 Shares sold ................. 610,534 $ 10,952,317 1,769,875 $ 50,036,992 Shares issued on merger (Note 13) ................ 1,986,027 30,539,237 2,280,868 67,125,954 Shares issued in reinvestment of distributions ......... 219,790 3,186,956 5,806 144,797 Shares redeemed ............. (1,201,455) (20,432,818) (2,213,519) (62,293,357) ---------- ------------- ----------- ------------- Net increase (decrease) ..... 1,614,896 $ 24,245,692 1,843,030 $ 55,014,386 ========== ============= =========== ============= 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) ========== ============= =========== =============
Annual Report | 127 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ---------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT -------- ----------- ---------- ------------- CLASS R SHARES: Year ended September 30, 2009(a) Shares sold ................. 105,135 $ 1,878,341 2,050,622 $ 61,397,829 Shares issued on merger (Note 13) ................ 269,510 4,473,861 308,381 9,519,723 Shares issued in reinvestment of distributions ......... -- -- 3,545 92,515 Shares redeemed ............. (100,348) (1,790,691) (1,390,720) (40,409,806) -------- ----------- ---------- ------------- Net increase (decrease) ..... 274,297 $ 4,561,511 971,828 $ 30,600,261 ======== =========== ========== ============= 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) ========== ============= ADVISOR CLASS SHARES: Year ended September 30, 2009 Shares sold ................. 193,916 $ 3,835,277 1,828,858 $ 54,651,357 Shares issued on merger (Note 13) ................ 99,151 1,649,870 4,691,275 145,148,039 Shares issued in reinvestment of distributions ......... 13,467 211,295 102,244 2,668,575 Shares redeemed ............. (31,772) (598,866) (1,722,646) (51,373,853) -------- ----------- ---------- ------------- Net increase (decrease) ..... 274,762 $ 5,097,576 4,899,731 $ 151,094,118 ======== =========== ========== ============= Year ended September 30, 2008(b) 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) ======== =========== ========== =============
(a) For the period December 1, 2008 (effective date) to September 30, 2009, for Franklin DynaTech Fund. (b) For the period May 15, 2008 (effective date) to September 30, 2008, for Franklin DynaTech Fund.
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------- ------------------------------ SHARES AMOUNT SHARES AMOUNT -------------- --------------- ------------ --------------- CLASS A SHARES: Year ended September 30, 2009 Shares sold ................. 3,194,615,875 $ 5,446,582,263 327,684,616 $ 2,154,557,471 Shares issued in reinvestment of distributions ......... 929,761,078 1,563,293,948 28,818,237 189,352,370 Shares redeemed ............. (3,760,506,184) (6,279,901,245) (248,416,455) (1,636,596,541) -------------- --------------- ------------ --------------- Net increase (decrease) ..... 363,870,769 $ 729,974,966 108,086,398 $ 707,313,300 ============== =============== ============ =============== 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 ============== =============== ============ ===============
128 | 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, 2009 Shares sold ................. 34,580,449 $ 58,074,216 8,056,168 $ 52,523,598 Shares issued in reinvestment of distributions ......... 63,807,057 106,531,528 1,218,659 7,988,052 Shares redeemed ............. (295,644,541) (489,014,386) (18,942,006) (124,685,994) -------------- --------------- ----------- -------------- Net increase (decrease) ..... (197,257,035) $ (324,408,642) (9,667,179) $ (64,174,344) ============== =============== =========== ============== 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) ============== =============== =========== ============== CLASS B1 SHARES: Year ended September 30, 2009 Shares sold ................. 616,259 $ 1,006,991 Shares issued in reinvestment of distributions ......... 4,478,768 7,437,357 Shares redeemed ............. (84,121,447) (145,257,809) -------------- --------------- Net increase (decrease) ..... (79,026,420) (136,813,461) ============== =============== 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) ============== =============== CLASS C SHARES: Year ended September 30, 2009 Shares sold ................. 1,490,228,499 $ 2,568,269,575 177,348,206 $1,163,765,108 Shares issued in reinvestment of distributions ......... 372,417,014 631,594,234 4,298,963 28,151,041 Shares redeemed ............. (1,592,519,479) (2,656,675,100) (56,632,697) (371,355,422) -------------- --------------- ----------- -------------- Net increase (decrease) ..... 270,126,034 $ 543,188,709 125,014,472 $ 820,560,727 ============== =============== =========== ============== 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 ============== =============== =========== ==============
Annual Report | 129 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, 2009 Shares sold ................. 68,996,085 $ 115,848,208 13,507,302 $ 88,919,423 Shares issued in reinvestment of distributions ......... 12,725,193 21,140,911 758,236 4,977,846 Shares redeemed ............. (58,266,413) (96,753,691) (9,774,179) (64,367,566) ------------ --------------- ----------- ------------- Net increase (decrease) ..... 23,454,865 $ 40,235,428 4,491,359 $ 29,529,703 ============ =============== =========== ============= 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 ============ =============== =========== ============= ADVISOR CLASS SHARES: Year ended September 30, 2009 Shares sold ................. 537,139,078 $ 923,014,317 56,386,916 $ 373,566,694 Shares issued in reinvestment of distributions ......... 185,103,308 309,081,671 4,110,288 27,061,258 Shares redeemed ............. (772,328,637) (1,256,899,393) (26,340,863) (173,571,580) ------------ --------------- ----------- ------------- Net increase (decrease) ..... (50,086,251) $ (24,803,405) 34,156,341 $ 227,056,372 ============ =============== =========== ============= 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 ============ =============== =========== =============
FRANKLIN UTILITIES FUND --------------------------- SHARES AMOUNT ----------- ------------- CLASS A SHARES: Year ended September 30, 2009 Shares sold ................. 21,564,244 $ 217,252,356 Shares issued in reinvestment of distributions ......... 5,861,644 57,450,592 Shares redeemed ............. (32,180,738) (322,001,557) ----------- ------------- Net increase (decrease) ..... (4,754,850) $ (47,298,609) =========== ============= 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 =========== =============
130 | 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, 2009 Shares sold ................. 320,985 $ 3,200,510 Shares issued in reinvestment of distributions ......... 184,409 1,806,989 Shares redeemed ............. (2,310,669) (23,015,045) ---------- ------------ Net increase (decrease) ..... (1,805,275) $(18,007,546) ========== ============ 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) ========== ============ CLASS C SHARES: Year ended September 30, 2009 Shares sold ................. 6,347,474 $ 64,084,256 Shares issued in reinvestment of distributions ......... 738,883 7,227,247 Shares redeemed ............. (7,568,351) (75,356,203) ---------- ------------ Net increase (decrease) ..... (481,994) $ (4,044,700) ========== ============ 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) ========== ============ CLASS R SHARES: Year ended September 30, 2009 Shares sold ................. 1,545,267 $ 15,712,097 Shares issued in reinvestment of distributions ......... 147,603 1,446,259 Shares redeemed ............. (1,242,997) (12,481,506) ---------- ------------ Net increase (decrease) ..... 449,873 $ 4,676,850 ========== ============ 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 ========== ============ ADVISOR CLASS SHARES: Year ended September 30, 2009 Shares sold ................. 8,908,323 $ 94,646,702 Shares issued in reinvestment of distributions ......... 267,630 2,655,239 Shares redeemed ............. (2,556,521) (25,567,896) ---------- ------------ Net increase (decrease) ..... 6,619,432 $ 71,734,045 ========== ============ 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) ========== ============
Annual Report | 131 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 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
The Franklin DynaTech Fund, the Franklin Growth Fund and the Franklin U.S. Government Securities 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% In excess of $50 billion
132 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) Under a subadvisory agreement, Investment Advisory, an affiliate of Advisers, provides subadvisory services to the Franklin Growth Fund and receives from Advisers fees based on the average monthly net assets of the fund. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers 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% 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% 0.50%
Annual Report | 133 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) 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 ............................................ $78,545 $673,118 $13,045,271 Contingent deferred sales charges retained ................... $ 7,768 $ 37,146 $ 1,976,431
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------- --------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ............................................ $2,889,031 $265,757 Contingent deferred sales charges retained ................... $ 473,655 $ 58,556
E. TRANSFER AGENT FEES For the year ended September 30, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------- ---------- ----------- Transfer agent fees .. $1,124,107 $3,606,155 $22,261,872
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- ---------- Transfer agent fees .. $5,920,729 $1,863,270
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, 2009, the custodian fees were reduced as noted in the Statements of Operations. 134 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2009, the capital loss carryforwards were as follows:
FRANKLIN FRANKLIN DYNATECH FRANKLIN FRANKLIN U.S. GOVERNMENT FUND GROWTH FUND INCOME FUND SECURITIES FUND ----------- ------------ ------------ --------------- Capital loss carryforwards expiring in: 2010 ............................... $ 7,950,525 $ -- $ -- $ 11,768,551 2011 ............................... 3,784,201 -- -- 33,556,845 2012 ............................... -- -- -- 129,102,166 2013 ............................... -- -- -- 74,283,298 2014 ............................... -- -- -- 47,763,112 2015 ............................... -- -- -- 28,034,940 2016 ............................... 9,095,484 120,221,975 -- 20,514,778 2017 ............................... 34,738,251 -- 589,874,490 18,668,917 ----------- ------------ ------------ ------------ $55,568,461(a) $120,221,975(b) $589,874,490 $363,692,607 =========== ============ ============ ============
(a) Includes $46,198,980 from the merged Franklin Global Communications Fund, Franklin Global Healthcare Fund and Franklin Technology Fund, which may be carried over to offset future capital gains, subject to certain limitations. (b) Includes $123,319,972 from the merged Franklin Capital Growth Fund, which may be carried over to offset future capital gains, subject to certain limitations. During the year ended September 30, 2009, the Franklin Growth Fund utilized $19,786,282 of capital loss carryforwards. On September 30, 2009, the Franklin DynaTech Fund and the Franklin U.S. Government Securities Fund had expired capital loss carryforwards of $134,438,159 and $46,256,951, respectively, 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, 2009, deferred losses were as follows:
FRANKLIN FRANKLIN DYNATECH FRANKLIN U.S. GOVERNMENT FRANKLIN FUND INCOME FUND SECURITIES FUND UTILITIES FUND ----------- -------------- --------------- -------------- Realized capital losses ... $25,202,354 $4,348,665,283 $15,877,074 $ -- Realized currency losses .. $ -- $ -- $ -- $85,988
The tax character of distributions paid during the years ended September 30, 2009 and 2008, was as follows:
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------- ------------------------ 2009 2008 2009 2008 ----------- ----------- ----------- ---------- Distributions paid from: Ordinary income ......... $ -- $ -- $17,031,967 $7,929,729 Long term capital gain .. 28,203,722 13,704,578 -- -- ----------- ----------- ----------- ---------- $28,203,722 $13,704,578 $17,031,967 $7,929,729 =========== =========== =========== ==========
Annual Report | 135 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------- --------------------------- 2009 2008 2009 2008 -------------- -------------- ------------ ------------ Distributions paid from: Ordinary income ......... $3,594,469,421 $3,900,167,557 $354,392,299 $321,154,039 Long term capital gain .. -- 1,007,140,215 -- -- -------------- -------------- ------------ ------------ $3,594,469,421 $4,907,307,772 $354,392,299 $321,154,039 ============== ============== ============ ============
FRANKLIN UTILITIES FUND -------------------------- 2009 2008 ----------- ------------ Distributions paid from: Ordinary income ......... $77,688,471 $ 94,770,295 Long term capital gain .. 14,482,100 123,416,259 ----------- ------------ $92,170,571 $218,186,554 =========== ============
At September 30, 2009, the cost of investments and 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 ........................... $357,594,287 $1,793,064,345 $52,775,364,954 ============ ============== =============== Unrealized appreciation ....................... $261,050,147 $1,405,134,914 $ 4,384,849,699 Unrealized depreciation ....................... (3,054,783) (110,380,933) (9,694,040,271) ------------ -------------- --------------- Net unrealized appreciation (depreciation) .... $257,995,364 $1,294,753,981 $(5,309,190,572) ============ ============== =============== Distributable earnings - undistributed ordinary income ..................................... $ -- $ 12,735,383 $ 30,396,017 ============ ============== ===============
FRANKLIN U.S. GOVERNMENT SECURITIES FRANKLIN FUND UTILITIES FUND --------------- -------------- Cost of investments ......................... $8,610,180,470 $1,667,550,127 ============== ============== Unrealized appreciation ..................... $ 302,059,033 $ 490,498,932 Unrealized depreciation ..................... (948,720) (96,487,078) -------------- -------------- Net unrealized appreciation (depreciation) .. $ 301,110,313 $ 394,011,854 ============== ============== Undistributed ordinary income ............... $ 2,451,318 $ 5,835,683 Undistributed long term capital gains ....... -- 29,338,767 -------------- -------------- Distributable earnings ...................... $ 2,451,318 $ 35,174,450 ============== ==============
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. 136 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses, payments-in-kind and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended September 30, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------ --------------- Purchases .. $221,443,769 $ 85,858,823 $21,181,236,239 Sales ...... $239,381,275 $220,979,343 $19,764,595,494
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- ------------ Purchases .. $4,142,491,138 $297,591,220 Sales ...... $2,671,770,169 $342,644,092
Transactions in options written during the year ended September 30, 2009, were as follows:
NUMBER OF PREMIUMS CONTRACTS RECEIVED --------- --------- FRANKLIN INCOME FUND Options outstanding at September 30, 2008 .. -- $ -- Options written ............................ 25,000 742,674 Options expired ............................ (25,000) (742,674) Options exercised .......................... -- -- Options closed ............................. -- -- ------- --------- Options outstanding at September 30, 2009 .. -- $ -- ------- ---------
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the 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. 8. CREDIT RISK AND DEFAULTED SECURITIES At September 30, 2009, the Franklin Income Fund had 55.2% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. Annual Report | 137 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED) 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, 2009, the aggregate value of these securities was $1,147,276,157, representing 2.42% 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. OTHER DERIVATIVE INFORMATION For the period ended September 30, 2009, the effect of derivative contracts on the Franklin Income Fund's Statement of Operations was as follows:
REALIZED GAIN UNREALIZED AVERAGE (LOSS) APPRECIATION NOTIONAL FOR THE YEAR (DEPRECIATION) AMOUNT DERIVATIVE CONTRACTS STATEMENT OF ENDED FOR THE YEAR ENDED OUTSTANDING NOT ACCOUNTED FOR AS OPERATIONS SEPTEMBER 30, SEPTEMBER 30, DURING THE HEDGING INSTRUMENTS LOCATIONS 2009 2009 YEAR(a) - -------------------- ------------------------ ------------- ------------------ ----------- Net realized gain (loss) Equity contracts from written options $742,674 $-- $1,758
(a) Notional amount represents the U.S. dollar equivalent based on the foreign exchange rate at the time of contract entry. See Note 1(e) regarding derivative financial instruments. 138 | 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, 2009, were as shown below.
NUMBER OF NUMBER OF SHARES/ SHARES/ REALIZED PRINCIPAL HELD PRINCIPAL VALUE CAPITAL AT BEGINNING GROSS GROSS HELD AT 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. ........... 4,000,000 -- 1,000,000 3,000,000 $ --(a) $ 6,238,000 $ (9,467,938) Ameren Corp .................. 12,500,000 500,000 900,000 12,100,000 305,888,000 21,836,000 (27,087,256) Ameren Corp., senior note, 8.875%, 5/15/14 ........... -- 68,200,000 10,000,000 58,200,000 65,494,555 1,936,969 799,569 Canadian Oil Sands Trust ..... 25,000,000 847,400 -- 25,847,400 742,776,085 23,766,468 -- Colony Financial Inc. ........ -- 1,250,000 -- 1,250,000 24,437,500 -- -- iStar Financial Inc. ......... 5,213,500 -- -- 5,213,500 15,849,040 -- -- iStar Financial Inc., 8.625%, 6/01/13 ........... 160,000,000 9,100,000 -- 169,100,000 108,224,000 14,059,445 -- iStar Financial Inc., cvt., senior note, FRN, 1.097%, 10/01/12 .......... 250,000,000 -- -- 250,000,000 126,250,000 5,804,376 -- iStar Financial Inc., senior secured note, 144A, 10.00%, 6/15/14 ..... -- 54,850,000 -- 54,850,000 45,114,125 2,084,639 -- PG&E Corp. ................... 20,000,000 200,000 10,000,000 10,200,000 --(a) 19,037,592 (35,287,883) Pinnacle West Capital Corp ...................... 5,500,000 -- 700,000 4,800,000 --(a) 10,972,500 (11,853,461) Puget Energy Inc. ............ 7,500,000 -- 7,500,000 -- --(a) 3,866,038 61,580,254 -------------- ------------ ------------ TOTAL AFFILIATED SECURITIES (3.02% of Net Assets) .. $1,434,033,305 $109,602,027 $(21,316,715) ============== ============ ============
(a) As of September 30, 2009, no longer an affiliate. 11. SPECIAL SERVICING AGREEMENT On May 1, 2009, the Funds, which are eligible underlying investments of one or more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds), entered into a Special Servicing Agreement (SSA) with the Allocator Funds and certain service providers of the Funds and the Allocator Funds. Under the SSA, the Funds pay a portion of the Allocator Funds' expenses, (other than any asset allocation, administrative and distribution fees), to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Funds from the investment in the Funds by the Allocator Funds. The Allocator Funds and the Funds are either managed by Advisers or administered by FT Services. For the year ended September 30, 2009, the funds were held by one or more of the Allocator Funds and were allocated expenses as noted in Annual Report | 139 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. SPECIAL SERVICING AGREEMENT (CONTINUED) the Statements of Operations. At September 30, 2009, one or more of the Allocator Funds owned a percentage of the funds' outstanding shares as follows:
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND - ----------- ----------- --------------- -------------- 7.39% 5.80% 2.59% 1.81%
12. OTHER CONSIDERATIONS From time to time, officers, directors or employees of the Franklin Income Fund's Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors' committees which, pursuant to the funds' policies and requirements of applicable securities laws, could prevent the funds from trading in the securities of such company for limited or extended periods of time. 13. MERGER On December 3, 2008, the Franklin DynaTech Fund acquired the net assets of the Franklin Global Communications Fund, the Franklin Global Health Care Fund, and the Franklin Technology Fund pursuant to a plan of reorganization approved by the Franklin Global Communications Fund's, the Franklin Global Health Care Fund's, and the Franklin Technology Fund's shareholders. The merger was accomplished by a tax free exchange, and the net assets acquired and shares issued were as follows:
SHARES ISSUED UNREALIZED BY FRANKLIN APPRECIATION FUND NAME NET ASSETS DYNATECH FUND (DEPRECIATION) - --------- ------------ ------------- -------------- Franklin Global Communications Fund .. $ 47,740,803 2,914,752 $(18,325,185) Franklin Global Health Care Fund ..... 89,644,203 5,503,466 (8,804,887) Franklin Technology Fund ............. 32,802,922 2,006,525 (10,136,675) ------------ ---------- ------------ Total ................................ $170,187,928 10,424,743 $(37,266,747) ============ ========== ============
The combined net assets of the Franklin Growth Fund immediately after the merger were $475,468,843. On May 6, 2009, the Franklin Growth Fund acquired the net assets of the Franklin Capital Growth Fund pursuant to a plan of reorganization approved by the Franklin Capital Growth Fund's shareholders. The merger was accomplished by a tax-free exchange of 22,770,597 shares of the Franklin Growth Fund for the net assets of the Franklin Capital Growth Fund which aggregate $699,807,298, including $(9,584,107) of unrealized appreciation (depreciation). The combined net assets of the Franklin Growth Fund immediately after the merger were $2,586,155,713. 140 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the year ended September 30, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Commitment fees .. $873 $3,844 $65,142 $13,433 $3,480
15. FAIR VALUE MEASUREMENTS The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds' own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 -- quoted prices in active markets for identical securities - Level 2 -- other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 -- significant unobservable inputs (including the fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. Annual Report | 141 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of September 30, 2009, in valuing the funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL --------------- --------------- ------- --------------- FRANKLIN DYNATECH FUND ASSETS: Investments in Securities: Equity Investments(a) ................. $ 615,589,651 $ -- $-- $ 615,589,651 FRANKLIN GROWTH FUND ASSETS: Investments in Securities: Equity Investments(a) ................. $ 3,058,914,473 $ -- $-- $ 3,058,914,473 Convertible Bonds ..................... -- 5,140,563 -- 5,140,563 Short Term Investments ................ 23,763,290 -- -- 23,763,290 --------------- --------------- --- --------------- Total Investments in Securities .... $ 3,082,677,763 $ 5,140,563 $-- $ 3,087,818,326 =============== =============== === =============== FRANKLIN INCOME FUND ASSETS: Investments in Securities: Equity Investments:(b) Consumer Discretionary ................ $ 35,750,000 $ 51,345,000 $-- $ 87,095,000 Energy ................................ 1,340,806,085 668,536,499 -- 2,009,342,584 Financials ............................ 3,554,876,075 494,286,743 -- 4,049,162,818 Health Care ........................... 1,106,145,000 256,250,000 -- 1,362,395,000 Information Technology ................ -- 369,456,330 -- 369,456,330 Materials ............................. 205,594,449 274,209,160 -- 479,803,609 Utilities ............................. 5,320,418,016 43,301,900 -- 5,363,719,916 Other Equity Investments(a) ........... 757,742,420 -- -- 757,742,420 Senior Floating Rate Interests ........ -- 2,727,585,562 -- 2,727,585,562 Corporate Bonds ....................... -- 27,828,422,508 -- 27,828,422,508 Convertible Bonds ..................... -- 945,101,895 -- 945,101,895 Short Term Investments ................ 579,928,515 906,418,225 -- 1,486,346,740 --------------- --------------- --- --------------- Total Investments in Securities .... $12,901,260,560 $34,564,913,822 $-- $47,466,174,382 =============== =============== === ===============
142 | Annual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------- -------------- ------- -------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND ASSETS: Investments in Securities: Mortgage-Backed Securities ............ $ -- $8,311,342,268 $-- $8,311,342,268 Short Term Investments ........... 269,928,515 330,020,000 -- 599,948,515 -------------- -------------- --- -------------- Total Investments in Securities ...... $ 269,928,515 $8,641,362,268 $-- $8,911,290,783 ============== ============== === ============== FRANKLIN UTILITIES FUND ASSETS: Investments in Securities: Equity Investments(a) .... $1,946,662,282 $ -- $-- $1,946,662,282 Corporate Bonds .......... -- 76,520,989 -- 76,520,989 Short Term Investments ........... 38,378,710 -- -- 38,378,710 -------------- -------------- --- -------------- Total Investments in Securities ...... $1,985,040,992 $ 76,520,989 $-- $2,061,561,981 ============== ============== === ==============
(a) For detailed industry descriptions, see the accompanying Statements of Investments. (b) Includes common and preferred stock as well as other equity investments. 16. SUBSEQUENT EVENTS The Funds have evaluated subsequent events through November 16, 2009, the issuance date of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS CURRENCY EUR - Euro SELECTED PORTFOLIO ADR - American Depository Receipt FHLB - Federal Home Loan Bank FRN - Floating Rate Note GP - Graduated Payment MTN - Medium Term Note PIK - Payment-In-Kind SF - Single Family Annual Report | 143 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, (hereafter referred to as the "Funds") at September 30, 2009, 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, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California November 16, 2009 144 | Annual Report 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, 2009:
FRANKLIN FRANKLIN DYNATECH FUND UTILITIES FUND - ------------- -------------- $28,203,722 $14,482,099
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, 2009: FRANKLIN INCOME FUND - ----------- $24,482,792 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, 2009:
FRANKLIN FRANKLIN FRANKLIN GROWTH FUND INCOME FUND UTILITIES FUND - ----------- ----------- -------------- 100% 16.34% 100.00%
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, 2009:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND UTILITIES FUND - ------------- ----------- ------------ -------------- $4,093,495 $42,483,252 $609,834,198 $90,187,044
Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. 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, 2009:
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND - ----------- -------------- --------------- -------------- $181,689 $2,636,574,413 $352,121,192 $6,081,387
Annual Report | 145 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 134 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 111 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement Systems (CALPERS) (1971-2008); 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 111 ICO Global Communications (Holdings) One Franklin Parkway Limited (satellite company). San Mateo, CA 94403-1906 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 134 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). - ------------------------------------------------------------------------------------------------------------------------------------
146 | 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 - ------------------------------------------------------------------------------------------------------------------------------------ FRANK W.T. LAHAYE (1929) Trustee Since 2007 111 None One Franklin Parkway 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 134 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas). San Mateo, CA 94403-1906 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 142 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 111 None One Franklin Parkway Independent 2007 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 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). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 147 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 134 None One Franklin Parkway President, 1969, President San Mateo, CA 94403-1906 Chief since 1984, Chief Executive Executive Officer - Officer - Investment Investment Management Management since 2002 and and Chairman Chairman of the of the Board Board since 2007 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 41 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (1940) Trustee and Trustee since 52 None One Franklin Parkway Vice President 1983 and Vice San Mateo, CA 94403-1906 President since 1982 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 43 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 Vice President 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 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - ------------------------------------------------------------------------------------------------------------------------------------ LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 45 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). - ------------------------------------------------------------------------------------------------------------------------------------
148 | 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 - ------------------------------------------------------------------------------------------------------------------------------------ GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). - ------------------------------------------------------------------------------------------------------------------------------------ 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, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ STEVEN J. GRAY (1955) Vice President Since August 2009 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; Vice President, Franklin Templeton Distributors, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Vice President Since August 2009 Not Applicable Not Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 45 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 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 149
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice 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 45 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). - ------------------------------------------------------------------------------------------------------------------------------------
* 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 2007. 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. 150 | Annual Report Franklin Custodian Funds SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Trust's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust'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 Trust'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 Trust 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. Annual Report | 151 This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A 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. 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 Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International 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 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(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) 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(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM 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 Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (1.) The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. (2.) 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. (3.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) 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. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR EDELIVERY Log onto franklintempleton.com and click "My Profile" 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 A2009 11/09 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 expert is 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 $27,163 for the fiscal year ended September 30, 2009 and $38,402 for the fiscal year ended September 30, 2008. (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 $2,762 for the fiscal year ended September 30, 2009 and $4,000 for the fiscal year ended September 30, 2008. The services for which these fees were paid included tax compliance and advice. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended September 30, 2009 and $152 for the fiscal year ended September 30, 2008. 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 $0 for the fiscal year ended September 30, 2009 and $283,925 for the fiscal year ended September 30, 2008. 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 $2,762 for the fiscal year ended September 30, 2009 and $288,077 for the fiscal year ended September 30, 2008. (h) The registrant's audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. Item 5. Audit Committee of Listed Registrants. N/A Item 6. Schedule of Investments. N/A Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A Item 10. Submission of Matters to a Vote of Security Holders. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of 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 Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, 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 STRATEGIC MORTGAGE PORTFOLIO By /s/LAURA F. FERGERSON --------------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date November 25, 2009 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/LAURA F. FERGERSON --------------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date November 25, 2009 By /s/GASTON GARDEY ---------------------------- Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date November 25, 2009 EX-99.CODE ETH 2 ncsr_code1208.txt REVISED CODE OF ETHIC 12/08 Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 22, 2008 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. Johnson President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Code of Ethics Administration within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Code of Ethics Administration, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Preclear-Code of Ethics (internal address); lpreclear@frk.com (external address) - ------------------------------------------------------------------------------ COVERED OFFICER'S NAME: - ------------------------------------------------------------------------------ TITLE: - ------------------------------------------------------------------------------ DEPARTMENT: - ------------------------------------------------------------------------------ LOCATION: - ------------------------------------------------------------------------------ CERTIFICATION FOR YEAR ENDING: - ------------------------------------------------------------------------------ TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1. Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2. Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3. Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4. Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5. See Part X. EX-99.CERT 3 fsmp302cert.txt SECTION 302 CERTIFICATION Exhibit 12(a)(2) I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 11/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration Exhibit 12(a)(2) I, Gaston Gardey, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 11/25/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 fsmp906cert.txt SECTION 906 CERTIFICATION Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Executive Officer of the FRANKLIN CUSTODIAN FUNDS (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 11/25/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Gaston Gardey, Chief Financial Officer of the FRANKLIN CUSTODIAN FUNDS (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 9/30/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 11/25/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----