FRANKLIN
CUSTODIAN
FUNDS, INC.
Annual Report
September 30, 1996
CONTENTS
PRESIDENT'S LETTER 1
FRANKLIN GROWTH FUND 2
seeks capital appreciation by investing primarily in common
stocks or convertible securities believed to offer favorable
possibilities for capital appreciation.
FRANKLIN DYNATECH FUND 9
seeks capital appreciation from a portfolio of
companies emphasizing technological development
in fast-growing industries or in situations management
considers undervalued.
FRANKLIN UTILITIES FUND 14
seeks both capital appreciation and current
income from a portfolio of public utility securities.
FRANKLIN INCOME FUND 21
seeks to maximize income while maintaining prospects
for capital appreciation through a diversified portfolio of securities.
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND 28
seeks high current income from a portfolio
of U.S. government securities.
STATEMENT OF INVESTMENTS 33
FINANCIAL STATEMENTS 51
REPORT OF INDEPENDENT
AUDITORS 64
(PICTURE OMITTED)
Charles B. Johnson
President
November 15, 1996
Dear Shareholder:
It is a pleasure to bring you the 48th Franklin Custodian Funds, Inc. annual
report, which covers the fiscal year ended September 30, 1996.
On September 30, 1995, the Standard & Poor's 500 Stock Index stood at 584.41. By
the end of this fiscal year, it had risen 17.61% to 687.31. During the same
time, the Dow Jones Industrial Average(R) (the Dow) advanced 22.82%, from
4789.08 to 5882.17, and long-term bond prices, as measured by 30-year U.S.
Treasuries, fell 6.88%, from 123.03 to 114.57.*
*Sources: Standard & Poor's(R); Merrill Lynch Long-Term Bond Index. Dow Jones
Industrial Average total return calculated by Wilshire Associates, Inc. Indices
are unmanaged and include reinvested dividends or interest.
The 12 months covered by this report were a reminder of how volatile financial
markets can be. On March 8, 1996, a stronger-than-expected employment report
caused the Dow to tumble 171.24 points in just one day. Recovering quickly, it
advanced to a new high of 5778.00 on May 22nd, slid to 5346.55 by July, and
rebounded to a closing price of 5882.17 on September 30, 1996.
While such volatility can be unsettling, it is important to remember that
financial markets always have been -- and always will be -- subject to
fluctuation. No one can predict the future performance of securities markets,
but history has shown that over the long term, stocks and bonds have delivered
impressive results when left to compound. For this reason, we urge you to
exercise patience, review your investment program with your investment
representative, and focus not on short-term market movements, but on long-term
investment goals.
One way to help minimize the impact of market fluctuations is to diversify your
investments. The five funds included in this report offer individual investors a
level of diversification that would be almost impossible for them to achieve on
their own. Although each fund has a distinct investment objective, all of our
managers are dedicated to providing shareholders with careful selection, broad
diversification and constant professional supervision. For specific information
about each fund, including the effects of market conditions and management
strategies upon its performance, please refer to the pages listed in the table
of contents.
As always, we appreciate your support, welcome your questions and look forward
to serving you in years to come.
Sincerely,
[GRAPHIC OMITTED]
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
FRANKLIN GROWTH FUND
During the fiscal year, the U.S. stock market benefited from a combination of
positive events. Moderate economic growth, relatively stable interest rates, low
inflation, and stronger-than-expected corporate earnings helped buoy equity
prices significantly. In fact, almost every major domestic stock index reached
record levels during this time, further encouraging new investments and pushing
share prices even higher. Within this environment, the Franklin Growth Fund
performed well. As you can see in the Performance Summary on page 5, the fund's
Class I shares delivered an impressive one-year total return of +19.70%.
The fund's holdings did not change dramatically over the course of the reporting
period, a reflection of our "buy and hold" investment strategy. As you know, we
purchase stocks in what we believe to be quality companies at bargain prices and
hold onto good companies for the long term. Our aim is not to achieve wealth
overnight, but rather to provide investors with the potential for solid growth
over time. This strategy usually results in relatively low portfolio turnover,
and helps to keep the fund's expenses low and increase after-tax total return to
shareholders.
On September 30, 1996, the fund owned stocks of 90 companies in a diverse group
of industries, including transportation, health care, energy and energy
services, aerospace, communications, and entertainment. Such broad
diversification can often help soften the effects of market volatility because
strong performance in one sector may offset weak performance in another. The
fund held a cash position of 19.2% at the end of the fiscal year for future
selective purchases.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
During the period, the fund profited from the performance of most of its
pharmaceutical and health care holdings. These companies' share prices rose as a
result of solid earnings reports and investor interest in firms that provide
basic necessities to the population and, therefore, tend to exhibit strength
even in a slow-growth environment.
The fund also benefited from the appreciable gain in share prices of Cisco
Systems, Inc., a leading provider of multi-protocol internetworking systems, and
Tiffany & Co., a manufacturer of fine jewelry and gift items. Stocks of Johnson
& Johnson Inc. and American Home Products Corp. posted impressive gains, placing
these two holdings among the fund's top ten positions. Disney (Walt) Co. became
one of our top ten holdings following its takeover of Capital Cities/ABC, Inc.,
a company whose stock we also held. During the period, we initiated positions in
Mattel, Inc. (Toy Manufacturing) and Microsoft Corp. (Computer Software), and
added to our holdings of International Flavors and Fragrances, Inc. (Chemicals),
Loctite Corp. (Chemicals), and Betzdearborn, Inc. (Environmental Protection &
Purification).
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Growth Fund
Top 10 Holdings on September 30, 1996
Based on Total Net Assets
% of Total
Company Industry Net Assets
Computer Sciences Data Processing 3.25%
Corp.
Schering-Plough Pharmaceuticals 2.60%
Corp.
Minnesota Mining & Diversified 2.44%
Manufacturing Co. Manufacturers
Pfizer, Inc. Pharmaceuticals 2.38%
AMR Corp. Transportation 2.32%
Raytheon Co. Aerospace 2.31%
Johnson & Health Care - 1.93%
Johnson, Inc. Diversified
Disney (Walt) Entertainment 1.82%
Company
American Home Health Care - 1.80%
Products Corp. Diversified
Boeing Co. Aerospace 1.78%
For a complete list of portfolio holdings, please see page 33 of this report.
This discussion reflects the strategies we employed for the fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
Looking forward, we believe that, although corporate earnings will vary by
industry sector, the economy should grow moderately and inflation should remain
under control. It is our job to adjust to all types of economic environments,
and we are confident that our value-oriented long-term approach to investing
should position the fund to perform well in the future.
We appreciate your participation in the Franklin Growth Fund and look forward to
serving your investment needs in the months and years to come.
PERFORMANCE SUMMARY
CLASS I
The Franklin Growth Fund's Class I shares provided a total return of +19.70% for
the one-year period ended September 30, 1996. Total return measures the change
in value of an investment, assuming reinvestment of dividend and capital gains
distributions, and does not include the fund's maximum initial sales charge.
We encourage shareholders to view their investments with a long-term
perspective. As you can see from the table on the page 6, the fund's Class I
shares delivered a cumulative total return of over 290% for the 10-year period
ended September 30, 1996.
As measured by net asset value, the fund's share price increased $3.46, from
$19.38 on September 30, 1995 to $22.84 on September 30, 1996. During the
reporting period, shareholders received distributions totaling 16.38 cents
($0.1638) per share in dividend income and 15.44 cents ($0.1544) per share in
capital gains, of which 15.30 cents ($0.1530) represented long-term gains and
0.14 cents ($0.0014) represented short-term gains. Of course, past performance
is not predictive of future results, and distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio.
The graph on page 6 compares the performance of the Franklin Growth Fund Class I
shares with the performance of the unmanaged Standard & Poor's 500 Stock Index
(S&P 500(R)) over the last 10 years. Of course, such unmanaged market indices
have inherent performance differentials in comparison with any fund. They don't
pay management fees to cover salaries of security analysts or portfolio
managers, or pay commissions or market spreads to buy and sell stocks. And,
unlike unmanaged indices, mutual funds are never 100% invested because of the
need to have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as the Franklin Growth Fund's had been
applied to this index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in an
index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Growth Fund
Class I
Periods ended September 30, 1996
Since
Inception
1-Year 5-Year 10-Year (3/31/48)
Cumulative
Total Return1 19.70% 89.50% 292.28% 16,447.03%
Average Annual
Total Return2 14.33% 12.60% 14.13% 11.00%
Value of $10,000
Investment3 $11,433 $18,102 $37,481 $1,581,298
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
Total Return4 5.84% 5.92% 7.71% 31.11% 19.70%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the initial sales charge. See Note
below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and reflects the current, maximum 4.5%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the initial sales charge. See Note
below.
4. Total return represents the change in value of an investment over the
one-year periods ended on the specified dates and does not include the initial
sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the offering price. Thus, actual total
returns for purchasers of shares during that period would have been different
than noted above. Effective May 1, 1994, the fund implemented a plan of
distribution under Rule 12b-1 and eliminated the sales charge on reinvested
dividends, which affects subsequent performance. All total return calculations
assume reinvestment of dividends and capital gains at net asset value and
reflect 12b-1 fees from the date of the plan's implementation. Investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
PERFORMANCE SUMMARY
CLASS II
The Franklin Growth Fund's Class II shares provided a total return of +18.83%
for the one-year period ended September 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividend and capital
gains distributions, and does not include sales charges.
As measured by net asset value, the fund's share price increased $3.29, from
$19.33 on September 30, 1995 to $22.62 on September 30, 1996. During the
reporting period, shareholders received distributions totaling 15.88 cents
($0.1588) per share in dividend income and 15.44 cents ($0.1544) per share in
capital gains, of which 15.30 cents ($0.1530) represented long-term gains and
0.14 cents ($0.0014) represented short-term gains. Of course, past performance
is not predictive of future results, and distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio.
The graph on page 8 compares the performance of the Franklin Growth Fund Class
II shares with the performance of the unmanaged Standard & Poor's 500 Stock
Index (S&P 500(R)) since the inception of these shares on May 1, 1995. Of
course, such unmanaged market indices have inherent performance differentials in
comparison with any fund. They don't pay management fees to cover salaries of
security analysts or portfolio managers, or pay commissions or market spreads to
buy and sell stocks. And, unlike unmanaged indices, mutual funds are never 100%
invested because of the need to have cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the Franklin
Growth Fund's had been applied to this index, its performance would have been
lower. Please remember that an index is simply a measure of performance, and one
cannot invest in an index directly. Past performance is not predictive of future
results.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Growth Fund
Class II
Periods ended September 30, 1996
Since
Inception
One-Year (5/1/95)
Cumulative
Total Return1 18.83% 36.32%
Average Annual
Total Return2 16.63% 22.85%
Value of $10,000
Investment3 $11,663 $13,397
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods. It includes the 1.0% initial sales
charge and the 1.0% Contingent Deferred Sales Charge, applicable to shares
redeemed within the first 18 months of investment. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include all sales charges.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares. Past performance is not predictive of future results.
FRANKLIN DYNATECH FUND
During the fiscal year ended September 30, 1996, the U.S. economy continued to
grow modestly with few signs of increasing inflation. Although these conditions
benefited the U.S. stock market, stocks experienced volatility at times,
especially within the technology sector which moved in and out of favor. For
example, due to concerns about overproduction, personal computer and
semiconductor stocks suffered a significant decline between November 1995 and
January 1996. However, consumer and business demand for these products proved to
be strong, excess inventories and supplies were absorbed, and in the spring,
technology shares rebounded. These stocks fell out of favor once again from May
to July 1996, but recovered from their depressed levels by the end of the
period.
Within this environment, the fund's Class I shares provided a one-year total
return of +12.84%, outperforming the Hambrecht & Quist Technology Index's total
return of +10.76% for the period, as discussed in the Performance Summary on
page 12. One reason for the fund's strong performance was the share price
appreciation of its largest position, Intel Corp., which rose more than 60%
during the fiscal year. Intel continued to profit from a growing personal
computer market, and its latest generation microprocessors (the Pentium and
PentiumPro) outpaced competition and fueled the company's growth. Some of our
computer software and networking holdings were also good performers. Due to
strong demand and increased market share, the fund's largest positions in these
areas (Microsoft Corp. and Cisco Systems, Inc.) were trading near all-time highs
on September 30, 1996. In times of uncertainty, industry-leading firms tend to
display lower volatility than smaller firms.
We viewed the technology sector's volatility as an opportunity to purchase
shares of high-quality companies with significant competitive advantages, and
reduced the fund's cash position, from 24.8% on September 30, 1995 to 16.6% at
the end of the reporting period. In the networking industry, we initiated
positions in Newbridge Networks Corp., Cabletron Systems, Inc., and Ascend
Communications, Inc. The specialized components these firms manufacture help
speed the flow of data across corporate networks and the Internet. We expect
demand for networking equipment to grow considerably throughout the decade as
corporations expand their communications capabilities and more individuals gain
access to the Internet. For this reason, we remain confident that new
developments should lead to substantial future growth for networking companies,
and are likely to maintain our investments in this industry.
As semiconductor industry growth slowed significantly in the early part of 1996,
we found attractive valuations in that sector. Believing that this downturn was
short-lived, we established positions in Xilinx, Inc. and Linear Technology
Corp. Xilinx is the leading maker of programmable logic devices for use in
communications, computing, and industrial markets. Linear Technology produces
analog integrated circuits used by equipment manufacturers in the U.S. and other
countries. As a result, our exposure to this industry increased from 13.8% on
September 30, 1995 to 18.0% at the end of the reporting period.
The software industry was another area where we discovered strong investment
opportunities. During the period, we initiated positions in Scopus Technology
Inc., a provider of software solutions for customer information management, and
added to our holdings of Adobe Systems, Inc., a leading developer of computer
software products.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In addition to technology stocks, we focused on health care-related stocks,
which represented 11.9% of total net assets on September 30, 1996. During the
reporting period, the fund invested in Amgen, Inc., a manufacturer of drugs
based on advanced cellular and molecular biology, and HBO & Company, a supplier
of computerized information systems to the health care industry. We also
increased our existing position in PacifiCare Health Systems, Inc., a provider
of managed care services in a number of states.
Looking forward, we are optimistic about prospects for the Franklin DynaTech
Fund. We shall continue to search for companies with superior management teams
that we believe can lead their respective fields in productivity enhancements
and technological innovations. In our opinion, such companies have the potential
to display high growth opportunities into the next century. There are, of
course, special risks involved in aggressively seeking capital appreciation,
including investment in securities of a more speculative nature, with a greater
emphasis on short-term trading profits. These risks are further discussed in the
fund's prospectus.
This discussion reflects the strategies we employed for the fund during the 12
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
We appreciate your participation in the Franklin DynaTech Fund and look forward
to serving your investment needs in the months and years to come.
Franklin DynaTech Fund
Top 10 Holdings on September 30, 1996
Based on Total Net Assets
Company Industry
Intel Corp. Semiconductor/Manufacturer
Motorola, Inc. Telecommunications
Microsoft Corp. Computer Software
Hewlett-Packard Co. Computer Hardware
Cisco Systems, Inc. Networking
Thermo Electron Corp. Precision Instruments/
Test Equipment
Compaq Computer Computer Hardware
Corp.
Toys R Us, Inc. Retail
WMX Technologies, Environmental Services
Inc.
First Data Corp. Data Services
For a complete list of portfolio holdings, please see page 36 of this report.
Performance Summary
The Franklin DynaTech Fund's Class I shares provided a total return of +12.84%
for the one-year period ended September 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividend and capital
gains distributions, and does not include the fund's initial sales charge. Since
Class II shares were offered beginning on September 16, 1996, performance
figures are not available.
We encourage shareholders to view their investments with a long-term
perspective. As you can see from the table on the following page, the fund's
Class I shares delivered a cumulative total return of more than 290% for the
10-year period ended September 30, 1996.
The fund's Class I share price, as measured by net asset value, increased $1.25,
from $12.78 on September 30, 1995 to $14.03 on September 30, 1996. The fund's
Class II share price, as measured by net asset value, increased 36 cents ($0.36)
from $13.67 on September 16, 1996 to $14.03 on September 30, 1996. During the
reporting period, Class I shareholders received distributions totaling 11.8
cents ($0.118) per share in dividend income and 22.83 cents ($0.2283) per share
in capital gains, of which 17.94 cents ($0.1794) represented long-term gains and
4.89 cents ($0.0489) represented short-term gains. Class II shares did not pay
distributions during the fifteen days from inception on September 16, 1996
through the end of the period. Of course, past performance is not predictive of
future results, and distributions will vary depending on income earned by the
fund and any profits realized from the sale of securities in the portfolio.
The graph to the right compares the performance of the Franklin DynaTech Fund's
Class I shares over the last 10 years with the performance of the unmanaged
Standard & Poor's 500 Stock Index (S&P 500(R)) and the unmanaged Hambrecht &
Quist Technology Index. Please note that the S&P 500 is a broad market index
that represents stocks from a variety of industries, not just the technology
sector. The Hambrecht & Quist Technology Index is composed of approximately 200
communications, health care, and computer hardware and software stocks, and more
closely represents the securities held by the fund.
It should be remembered that unmanaged market indices have inherent performance
differentials in comparison with any fund. They don't pay management fees to
cover salaries of security analysts or portfolio managers, or pay commissions or
market spreads to buy and sell stocks. And, unlike unmanaged indices, mutual
funds are never 100% invested because of the need to have cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as the Franklin Dynatech Fund's had been applied to these indices, their
performance would have been lower. Please remember than an index is simply a
measure of performance, and one cannot invest in an index directly. Past
performance is not predictive of future results.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin DynaTech Fund
Class I
Periods ended September 30, 1996
Since
Inception
1-Year 5-Year 10-Year (1/1/68)
Cumulative
Total Return1 12.84% 88.57% 290.83% 1,083.27%
Average Annual
Total Return2 7.78% 12.50% 14.07% 8.80%
Value of $10,000
Investment3 $10,778 $18,017 $37,292 $112,858
1. Cumulative total return represents the change in value of an investment over
the indicated periods, and does not include the initial sales charge. See Note
below.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods, and includes the maximum 4.5% initial
sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the initial sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the offering price. Thus, actual total
returns for purchasers of shares during that period would have been different
than noted above. Effective May 1, 1994, the fund eliminated the sales charge on
reinvested dividends and implemented a plan of distribution under Rule 12b-1,
which affects subsequent performance. All total return calculations assume
reinvestment of dividends and capital gains at net asset value. Investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares. Past performance is not
predictive of future results. The historical performance data shown above does
not represent the fund's Class II shares, which the fund began offering on
September 16, 1996. Class II shares are subject to different fees and expenses
than Class I shares, which will affect their performance. Please see the
prospectus for more details regarding Class I and Class II shares.
FRANKLIN UTILITIES FUND
During this fiscal year, the Franklin Utilities Fund benefited from a stable
U.S. economy, as the consumer price index and gross domestic product (GDP)
advanced at the moderate rates of approximately 2.75%. This strong and mildly
inflationary economy helped move the prices of many U.S. stocks to record high
levels. Although interest rates remained relatively stable during the year, bond
yields experienced their usual ups and downs as investors changed their
perceptions of the economy's strength. When the economy appeared soft near the
end of 1995, the yield on the benchmark 30-year U.S. Treasury bond dropped to
5.95%. But in 1996, the yield rose to 7.19% as investors began to anticipate a
recovery that might bring stronger-than-expected GDP growth and inflation.
Within this environment, the fund's Class I shares provided a one-year total
return of +5.94%, as discussed in the Performance Summary on page 17.
During the reporting period, we increased the fund's stock holdings, from 80.8%
of total net assets to 84.5%, and its corporate bond holdings, from 9.0% to
11.5%. Although the fund is invested primarily in domestic electric utility
stocks, securities of telephone and natural gas utilities comprised
approximately 13% of the portfolio on September 30, 1996. These investments
offer many of the same characteristics that we look for in electric utility
holdings, including consistent, predictable earnings growth and steady demand.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
This past fiscal year saw movement on several issues involving utility industry
deregulation. On the national level, a bill was introduced in Congress that
would allow retail consumers to choose their own utility provider beginning
December 15, 2000, instead of limiting them to the services of their local
companies. It includes a provision for the Federal Energy Regulatory Commission
to pre-empt state law if states fail to act on retail choice. The bill would
also repeal the Public Utility Holding Company Act (PUCHA), giving companies
more flexibility to compete. Congress may vote on this and other energy bills as
early as next year.
At the state level, California and Massachusetts are at the forefront of
electric company deregulation. The electric restructuring bill in California and
the pending restructuring plan in Massachusetts show a clear path to
deregulation for the generation companies and a preference for
commission-regulated, incentive rate-making for the monopolistic transmission
and distribution companies. Importantly for current investors, both states'
proposals attempt to ensure the financial health of these companies by allowing
for orderly transition periods, during which they should be able to prepare for
the more competitive market of the future.
These deregulatory trends have encouraged mergers and acquisitions within the
industry. In our opinion, this is only the beginning and, in addition to mergers
between electric companies, we expect to see mergers between electric companies
and gas companies. An example was Enron's proposed acquisition of Portland
General at a price 42% higher than its then-current stock price. For over 60
years, Portland General, an electric utility, was immune to acquisition from
outside the regulated utility circle because of vast restrictions PUCHA placed
on the electric companies. Enron, a non-regulated natural gas transportation and
exploration company, apparently anticipates repeal of PUCHA.
The changing regulatory environment has prompted us to focus on utility
companies with low production costs, strong entrepreneurial management teams,
and service territories located in regions with positive demographic trends.
Over the last several years, these utilities have produced higher returns than
those of their peers, and we believe they are well-positioned to handle
increased competition.
Franklin Utilities Fund
Top Ten Holdings on 9/30/96
Based on Total Net Assets
% of Total
Company Net Assets
Florida Progress Corp. 4.22%
SCANA Corp. 4.15%
Entergy Corp. 3.94%
Central & SouthWest Corp. 3.93%
Texas Utilities Co. 3.92%
Southern Co. 3.70%
Pacific Gas & Electric Co. 3.69%
Allegheny Power System, Inc. 3.66%
FPL Group, Inc. 3.48%
U.S. West Communications Group 3.40%
For a complete list of portfolio holdings, please see page 39 of this report.
It is important to note that this discussion reflects the strategies we employed
for the fund during the past fiscal year, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies, and our evaluations, conclusions and decisions
regarding portfolio holdings, may change as new circumstances arise. Although
past performance of a specific investment or sector cannot guarantee future
performance, such information can be useful in analyzing securities we purchase
or sell for the fund.
Looking forward, we believe that the services utility companies provide will
continue to be an essential part of everyday life, and that utility stocks will
continue to play an important role in a well-diversified investment portfolio.
We thank you for your participation in the fund and, as always, welcome your
comments and suggestions.
Performance Summary
CLASS I
The Franklin Utilities Fund Class I shares produced a total return of +5.94% for
the one-year period ended September 30, 1996. Total return represents the change
in value of an investment, assuming reinvestment of dividend and capital gains
distributions, and does not include the fund's initial sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage our
shareholders to view their investments in a similar manner. As you can see from
the table on page 18, the fund delivered a total return of more than 129% for
the 10-year period ended September 30, 1996.
The fund's share price, as measured by net asset value, decreased by 2 cents,
from $9.75 on September 30, 1995 to $9.73 on September 30, 1996. During the
reporting period, shareholders received distributions of 52.4 cents ($0.524) per
share in income dividends and 7.19 cents ($0.0719) per share in capital gains,
of which 0.57 cents ($0.0057) represented short-term gains and 6.62 cents
($0.0662) represented long-term gains.
Based on the maximum offering price of $10.16 on September 30, 1996, and the
most recent, annualized quarterly dividend of 13.10 cents ($0.1310) per share,
the fund's distribution rate was 5.16%. Of course past performance does not
guarantee future results, and distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio.
The graph on page 18 compares the performance of the Franklin Utilities Fund
Class I shares with the performance of the unmanaged Standard & Poor's 500 Stock
Index (S&P 500(R)) over the last 10 years. Of course, such unmanaged market
indices have inherent performance differentials in comparison with any fund.
They don't pay management fees to cover salaries of security analysts or
portfolio managers, or pay commissions or market spreads to buy and sell stocks.
And, unlike unmanaged indices, mutual funds are never 100% invested because of
the need to have cash on hand to redeem shares. In addition, the performance
shown for the fund includes the maximum initial sales charge, all fund expenses
and account fees. If operating expenses such as the Franklin Utilities Fund's
had been applied to this index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in an index directly. Past performance is not predictive of future results.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund
Class I
Periods ended September 30, 1996
Since
Inception
1-Year 5-Year 10-Year (9/30/48)
Cumulative
Total Return1 5.94% 48.27% 129.54% 10,255.58%
Average Annual
Total Return2 1.47% 7.26% 8.20% 10.05%
Value of $10,000
Investment3 $10,147 $14,199 $21,990 $989,737
30-Day Standardized Yield4 5.52%
Distribution Rate5 5.16%
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
Total Return6 16.17% 18.08% -17.85% 24.19% 5.94%
1. Cumulative total return represents the change in value of an investment over
the specified periods and does not include the initial sales charge. See Note
below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the sales charges. See
Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the initial sales charge.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996.
5. Distribution rate is based on an annualization of the fund's most recent
13.10 cents per share quarterly dividend and the maximum offering price of
$10.16 on September 30, 1996.
6. Total return represents the change in value of an investment over the
one-year periods ended on the specified dates and does not include the initial
sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the public offering price. Thus, actual
total returns for purchasers of shares during that period would have been
somewhat different than noted above. Effective May 1, 1994, the fund implemented
a plan of distribution under Rule 12b-1 and eliminated the sales charge on
reinvested dividends, which affects subse- quent performance. All total return
calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, and you may have a gain or loss when you sell your shares. Past
performance is not predictive of future results.
Performance Summary
CLASS II
The Franklin Utilities Fund Class II shares reported a total return of +5.39%
for the one-year period ended September 30, 1996. Total return measures the
change in value of an investment, assuming reinvestment of dividend and capital
gains distributions, and does not include any sales charges.
The fund's share price, as measured by net asset value, decreased by 3 cents,
from $9.75 on September 30, 1995 to $9.72 on September 30, 1996. During the
reporting period, shareholders received distributions of 48.14 cents ($0.4814)
per share in income dividends and 7.19 cents ($0.0719) per share in capital
gains, of which 0.57 cents ($0.0057) represented short-term gains and 6.62 cents
($0.0662) represented long-term gains.
Based on the offering price of $9.82 on September 30, 1996, and the most recent,
annualized quarterly dividend of 11.86 cents ($0.1186) per share, the fund's
distribution rate was 4.83%. Of course past performance does not guarantee
future results, and distributions will vary depending on income earned by the
fund and any profits realized from the sale of securities in the portfolio.
The graph on page 20 compares the performance of the Franklin Utilities Fund
Class II shares with the performance of the unmanaged Standard & Poor's 500
Stock Index (S&P 500(R)) since the inception of these shares on May 1, 1995. Of
course, such unmanaged market indices have inherent performance differentials in
comparison with any fund. They don't pay management fees to cover salaries of
security analysts or portfolio managers, or pay commissions or market spreads to
buy and sell stocks. And, unlike unmanaged indices, mutual funds are never 100%
invested because of the need to have cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the Franklin
Utilities Fund's had been applied to this index, its performance would have been
lower. Please remember that an index is simply a measure of performance, and one
cannot invest in an index directly. Past performance is not predictive of future
results.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund
Class II
Periods ended September 30, 1996
Since
Inception
One-Year (5/1/95)
Cumulative
Total Return1 5.39% 19.11%
Average Annual
Total Return2 3.34% 11.63%
Value of $10,000
Investment3 $10,334 $11,692
30-Day Standardized Yield4 5.19%
Distribution Rate5 4.83%
1. Cumulative total return represents the change in value of an investment over
the specified periods and does not include the sales charges. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified period. It includes the 1.0% initial sales
charge and the 1.0% Contingent Deferred Sales Charge (CDSC), applicable to
shares redeemed within the first 18 months of investment. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the initial sales charge.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996.
5. Distribution rate is based on an annualization of the fund's most recent
11.86 cents per share quarterly dividend and the maximum offering price of $9.82
on September 30, 1996.
Note: All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares. Past performance is not predictive of future results.
FRANKLIN INCOME FUND
Driven by low inflation and healthy corporate earnings, the U.S. stock market
performed well during the year under review. The domestic bond market did not
fare as well. Although it rallied during the first four months of the fiscal
year, it began to experience weakness in February due to indications of
accelerating economic growth. However, several of the fund's sectors performed
well over the period despite rising interest rates. In fact, the fund's Class I
shares posted a one-year total return of +9.43%, as shown in the Performance
Summary on page 24.
As you know, we have the flexibility to adjust the portfolio's mix of stocks,
bonds and cash depending on market conditions and investment opportunities. The
rise in interest rates during the period provided us with several opportunities
to invest the majority of our cash position in securities that we felt offered
good value. On September 30, 1996, 37.1% of the fund's total net assets were
invested in stocks, 54.4% in bonds, and the remaining 8.5% in cash, down from
22% a year earlier.*
*The fund may invest a substantial amount of its assets in lower-rated bonds,
which entails a greater degree of credit risk than that of investment-grade
bonds. These and other risks are discussed in the fund's prospectus.
The fund's fixed-income holdings consisted of U.S. Treasury, corporate, and
foreign bonds. As indications of stronger U.S. economic growth led to rising
long-term interest rates, we increased our U.S. Treasury exposure from 3.1% to
7.4% of total net assets. Similarly, we took advantage of the bond market
sell-off in February and initiated positions in Brazilian and Ecuadorian Brady
bonds. Dollar-denominated, collateralized Brady bonds continued to represent a
majority of the fund's foreign bond holdings.
Corporate bonds, which continued to represent our largest fixed-income
weighting, delivered a relatively solid performance over the period despite a
rise in interest rates. A stronger economy often results in rising interest
rates, which is typically considered negative for bonds. However, in the case of
corporate bonds, increased interest rate risk may be offset by the issuing
corporations' stronger revenues, operating cash flow and, consequently, higher
credit ratings. This highlights the benefit of including corporate bonds in the
fund's portfolio. We utilized extensive credit research provided by our analysts
in seeking bonds with attractive yields and capital appreciation potential, and
initiated several new positions during the period. These included Collins &
Aikman (Automotive), Packaging Resources (Consumer Products), and Smith's Food &
Drug (Food Retail).
As a result of our value-oriented approach, we occasionally invest in securities
of companies that are also attractive to potential acquirers and partners.
During the period, several of the fund's corporate bond holdings benefited from
announced mergers and acquisitions, including Motor Wheel Corp. and Pace
Industries. These bonds experienced significant appreciation based on the
generally held belief that the combined entities would be stronger on a
competitive and financial basis.
Several of the fund's equity positions performed well during the period. The
fund's pharmaceutical stocks rose significantly, but believing that their
appreciation potential was limited, we reduced our exposure to this sector from
4% to 1.9% of total net assets. Due to rising oil and natural gas prices during
the period, energy stocks also increased in value. Several of our energy
positions, including Athabasca Oil Sands Trust and Canadian Oil Sands Trust, as
well as the convertible preferred stocks of Enron Oil & Gas and Devon Financing
Trust, were beneficiaries of this increase.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
After benefiting from declining interest rates in the first six months of the
period, prices of utility stocks began to retreat in February as interest rates
began to rise. We took this opportunity to add to several existing holdings and
initiated positions in Peco Energy and Western Resources. By September 30, our
utility exposure had increased to 19.9% of total net assets.
During the period, we added to our holdings in the technology sector with
purchases of Altera Corp. and Xilinx, Inc. convertible bonds. We invested in
this sector for the first time in several years as weakness in technology stock
prices caused valuations to return to what we believe were more attractive
levels. We also initiated positions in other convertible securities, most
notably Exide Corp. (Automotive), FelCor Suite Hotels, Inc. (REIT), and Nortel
(Telecommunications -- Argentina). Finally, we reduced several convertible stock
and bond positions with limited total return potential.
Please note that this discussion reflects the strategies we employed for the
fund during the one-year reporting period, and includes our opinions as of the
close of the period. Since economic and market conditions are constantly
changing, our strategies and our evaluations, conclusions and decisions
regarding portfolio holdings may change as new circumstances arise.
Although past performance of a specific investment or sector cannot guarantee
future performance, such information can be useful in analyzing securities we
purchase or sell for the fund.
Looking forward, we will continue to follow our value-oriented approach as we
seek income and growth from a diversified mix of stocks, bonds, and cash. We are
comfortable with the fund's 8.5% cash position on September 30, 1996, and feel
that it should provide us with the ability to take advantage of investment
opportunities as they arise.
We appreciate your participation in the Franklin Income Fund and look forward to
serving your investment needs in the months and years to come.
Performance Summary
CLASS I
Franklin Income Fund Class I shares provided a total return of +9.43% for the
one-year period ended September 30, 1996. Total return measures the change in
value of an investment, assuming reinvestment of dividend and capital gains
distributions, and does not include the fund's maximum initial sales charge.
We encourage shareholders to view their investments with a long-term
perspective. As you can see from the table on the following page, the fund's
shares delivered a cumulative total return of +184.90% for the 10-year period
ended September 30, 1996.
The price of the fund's shares, as measured by net asset value, ended the period
where it began -- at $2.30. During the reporting period, shareholders received
distributions totaling 18 cents ($0.18) per share in dividend income, and 2.7
cents ($0.027) per share in long-term capital gains. Based on the maximum
offering price of $2.40 on September 30, 1996 and an annualization of the
September 1996 dividend of 1.5 cents ($0.015) per share, the fund's distribution
rate was 7.50%. Of course, past performance is not predictive of future results.
The graph to the right compares the performance of the Franklin Income Fund
Class I shares over the last 10 years with the performance of two unmanaged
indices, the Standard & Poor's 500 Stock Index (S&P 500(R)) and the Lehman
Brothers Government/Corporate Bond Index. It also compares the fund's
performance with the average performance of 22 other income funds, as measured
by Lipper Analytical Services, Inc. As the graph illustrates, the fund's
performance has closely followed that of the indices. Of course, such unmanaged
indices have inherent performance differentials in comparison with any fund.
They don't pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Also, unlike indices, mutual funds are never fully invested because
they must have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum sales charge, all fund expenses and account
fees. If the fund's costs had been applied to the index, the index's performance
would have been lower. Please remember that an index is simply a measure of
performance and cannot be invested in directly.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund
Class I
Periods ended September 30, 1996
Since
Inception
1-Year 5-Year 10-Year (8/31/48)
Cumulative
Total Return1 9.43% 74.82% 184.90% 17,682.87%
Average Annual
Total Return2 4.87% 10.88% 10.56% 11.28%
Value of
$10,000
Investment3 $10,487 $16,757 $27,277 $1,704,194
Distribution Rate4 7.50%
30-Day Standardized Yield5 7.62%
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
Total Return6 19.24% 19.13% -1.35% 14.00% 9.43%
1. Cumulative total returns represent the change in value of an investment over
the periods indicated and do not include sales charges. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and reflects the current, maximum 4.25%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the maximum 4.25% initial sales
charge.
4. Distribution rate is based on an annualization of the fund's September
dividend of 1.5 cents per share and the offering price of $2.40 on September 30,
1996.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996. High yields reflect
the higher credit risks associated with certain lower rated securities in the
fund's portfolio and, in some cases, the lower market prices for these
instruments.
6. Total return represents the change in value of an investment over the
one-year periods ended on the specified dates and does not include the initial
sales charge.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge, with dividends reinvested at the offering price. Thus, actual total
returns for purchasers of shares during that period would have been different
than noted above. Effective May 1, 1994, the fund implemented a plan of
distribution under Rule 12b-1 and eliminated the sales charge on reinvested
dividends, which affects subsequent performance. All total return calculations
assume reinvestment of dividends and capital gains at net asset value and
reflect 12b-1 fees from the date of the plan's implementation. Investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares. Past performance is not predictive of
future results.
Performance Summary
CLASS II
Franklin Income Fund Class II shares provided a total return of +8.86% for the
one-year period ended September 30, 1996. Total return measures the change in
value of an investment, assuming reinvestment of dividend and capital gains
distributions, and does not include sales charges.
The price of the fund's shares, as measured by net asset value, ended the period
where it began -- at $2.30. During the reporting period, Class II shareholders
received distributions totaling 16.8 cents ($0.168) per share in dividend income
and 2.7 cents ($0.027) per share in long-term capital gains. Based on the
offering price of $2.32 on September 30, 1996 and an annualization of the
September 1996 dividend of 1.4 cents ($0.014) per share, the fund's distribution
rate was 7.24%. Of course, past performance is not predictive of future results,
and distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio.
The graph to the right compares the performance of the Franklin Income Fund
Class II shares since inception, with the performance of two unmanaged indices,
the Standard & Poor's 500 Stock Index (S&P 500(R)) and the Lehman Brothers
Government/Corporate Bond Index. It also compares the fund's performance with
the average performance of 22 other income funds, as measured by Lipper
Analytical Services, Inc. As you can see, the fund outperformed the Lehman
Brothers index and the Lipper Income Funds average. Of course, unmanaged market
indices have inherent performance differentials in comparison with any fund.
They don't pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Also, unlike indices, mutual funds are never fully invested because
they must have cash on hand to redeem shares. In addition, the performance shown
for the fund includes the maximum sales charge, all fund expenses and account
fees. If the fund's costs had been applied to the index, the index's performance
would have been lower. Please remember that an index is simply a measure of
performance and cannot be invested in directly.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund
Class II
Periods ended September 30, 1996
Since
Inception
One-Year (5/1/95)
Cumulative
Total Return1 8.86% 19.15%
Average Annual
Total Return2 6.93% 11.73%
Value of $10,000
Investment3 $10,693 $11,707
Distribution Rate4 7.24%
30-Day Standardized Yield5 7.36%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the initial sales charge. See Note
below.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods. It includes the 1.0% initial sales
charge and the 1.0% Contingent Deferred Sales Charge (CDSC), applicable to
shares redeemed within the first 18 months of investment. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the sales charges.
4. Distribution rate is based on an annualization of the fund's September
dividend of 1.4 cents per share and the offering price of $2.32 on September 30,
1996.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996. High yields reflect
the higher credit risks associated with certain lower rated securities in the
fund's portfolio and, in some cases, the lower market prices for these
instruments.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal value will fluctuate
with market conditions, and you may have a gain or loss when you sell your
shares. Past performance is not predictive of future results.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
With interest rates on the rise for eight of the reporting period's twelve
months, U.S. mortgage securities performed well, in terms of total return, in
comparison to other federal government bonds. As fewer people refinanced
mortgages in the higher interest-rate environment, investors were attracted to
the mortgage security market, increasing the returns of these securities
relative to U.S. Treasury bonds.
We employ a consistent, disciplined and conservative approach to investing in
the Government National Mortgage Association (GNMA or Ginnie Mae) market. Over
the reporting period, the mortgage market became increasingly divided into
subsets based on the seasoning of the underlying mortgage pools. These pools,
with varying degrees of risk exposure to interest rate movement and housing
cycles, exhibit different prepayment patterns. The emergence of these subsets
provided us with increased opportunities to add quality securities to the fund.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Our investment approach, which utilized low portfolio turnover, added value to
the fund's shares by reducing unnecessary transaction costs which are ultimately
borne by shareholders. During the reporting period, we made purchases across
several coupon and program sectors of the GNMA market. Compared to a year ago,
current coupon purchases in both the GNMA I and II programs slightly reduced the
portfolio's "barbelled" position among coupon sectors. We also reduced our
premium coupon holdings over the period. However, interest rate exposure
increased over the year for the GNMA market and the fund due to lower
prepayments experienced by mortgage passthrough securities over that time.
The chart to the left illustrates the fund's risk/return profile relative to 10-
and 30-year U.S. Treasuries and one-year certificates of deposit. Using
volatility as a measure of risk, the fund's risk-adjusted return performed
better than that of 10-year U.S. Treasuries.
We have always employed a consistent, disciplined approach to investing in the
mortgage securities market and will continue to do so. Looking forward, we
anticipate that GNMA Securities should continue to provide you with an
attractive investment alternative.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
We appreciate your participation in the Franklin U.S. Government Securities Fund
and welcome your comments or suggestions.
Performance Summary
CLASS I
Your fund's share price, as measured by net asset value, decreased 15 cents from
$6.87 on September 30, 1995, to $6.72 on September 30, 1996.
The fund continued to meet its investment objective of providing high current
income to shareholders, and during the reporting period your shares paid monthly
income distributions totaling 49.2 cents ($0.492) per share. Based on an
annualization of the current monthly dividend of 4.1 cents ($0.041) per share
and the maximum offering price of $7.02 on September 30, 1996, your fund's
distribution rate was 7.01%. Dividends will vary based on the earnings of the
portfolio, and past distributions are not indicative of future results.
The graph to the right compares the performance of the Franklin U.S. Government
Securities Fund Class I with the Consumer Price Index (CPI) and the Lehman
Brothers Intermediate U.S. Government Bond Index over the past 10 years. As the
graph illustrates, the fund's performance has closely followed that of the
Lehman BrothersIntermediate U.S. Government Bond Index. Of course, such
unmanaged market indices have inherent performance differentials in comparison
with any fund. They don't pay management fees to cover salaries of securities
analysts and portfolio managers, or pay commissions or market spreads to buy and
sell securities. Also, unlike indices, mutual funds are never fully invested
because they must have cash on hand to redeem shares. In addition, the
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If the fund's costs had been applied to the
index, the index's performance would have been lower. Please remember that an
index is simply a measure of performance and cannot be invested in directly.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities
Fund
Class I
Periods ended September 30, 1996
Since
Inception
1-Year 5-Year 10-Year (2/1/77)
Cumulative
Total Return1 5.15% 37.80% 118.27% 572.23%
Average Annual
Total Return2 0.75% 5.69% 7.65% 7.33%
Distribution Rate3 7.01%
30-Day Standardized Yield4 6.81%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges. See note below.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflects the current, maximum 4.25%
initial sales charge. See note below.
3. Distribution rate is based on an annualization of the current 4.1 cent per
share monthly dividend and the maximum offering price of $7.02 on September 30,
1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat different than noted above. Effective May 1, 1994, the
fund eliminated the sales charge on reinvested dividends and implemented a plan
of distribution under the Rule 12b-1, which affects subsequent performance. All
total return calculations assume reinvestment of dividends and capital gains at
net asset value and reflect 12b-1 fees from the date of the plan's
implementation. Your investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
Performance Summary
CLASS II
Your fund's share price, as measured by net asset value, decreased 15 cents from
$6.85 on September 30, 1995, to $6.70 on September 30, 1996.
The fund continued to meet its investment objective of providing high current
income to shareholders, and during the reporting period your shares paid monthly
income distributions totaling 45.18 cents ($0.4518) per share. Based on an
annualization of the September dividend of 3.78 cents ($0.0378) per share and
the maximum offering price of $6.77 on September 30, 1996, your fund's
distribution rate was 6.74%.* Dividends will vary based on the earnings of the
portfolio, and past distributions are not indicative of future results.
*The distribution rate includes the addition of an adjustment of +.0027 cents to
reconcile the 12b-1 fee differential between Class I and Class II shares.
The graph on the following page compares the performance of the Franklin U.S.
Government Securities Fund Class II with the Lehman Brothers Intermediate U.S.
Government Bond Index since the fund's inception on May 5, 1995. The fund's
performance has closely followed that of the Lehman Brothers Intermediate U.S.
Government Bond Index. Of course, such unmanaged market indices have inherent
performance differentials in comparison with any fund. They don't pay management
fees to cover salaries of securities analysts and portfolio managers, or pay
commissions or market spreads to buy and sell securities. Also, unlike indices,
mutual funds are never fully invested because they must have cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum sales charge, all fund expenses and account fees. If the fund's costs
had been applied to the index, the index's performance would have been lower.
Please remember that an index is simply a measure of performance and cannot be
invested in directly.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund
Class II
Periods ended September 30, 1996
Since
Inception
1-Year (5/01/95)
Cumulative
Total Return1 4.55% 11.13%
Average Annual
Total Return2 2.52% 6.24%
Distribution Rate3 6.74%
30-Day Standardized Yield4 6.48%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and does not include the initial sales charge. See note
below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods. It includes the 1.0% initial sales
charge and the 1.0% Contingent Deferred Sales Charge applicable to shares
redeemed within the first 18 months of investment.
3. Distribution rate is based on an annualization of the September 3.78 cent per
share monthly dividend and the maximum offering price of $6.77 on September 30,
1996. It also includes the addition of an adjustment of +.0027 cents per share
to reconcile the 12b-1 fee differential between Class I and Class II shares.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1996.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Your investment return and principal value will
fluctuate with market conditions, and you may have a gain or loss when you sell
your shares. Past performance is not predictive of future results.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
Franklin Custodian Funds, Inc., September 30, 1996
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS Growth Fund (NOTE1)
Common Stocks & Warrants 80.8%
<S> <C> <C>
Aerospace 7.4%
200,000 Boeing Co. ........................................................................... $ 18,900,000
162,600 Lockheed Martin Corp. ................................................................ 14,654,325
442,000 Raytheon Co. ......................................................................... 24,586,250
50,000 Rockwell International Corp. ......................................................... 2,818,750
120,000 Thiokol Corp. ........................................................................ 5,625,000
100,000 United Technologies Corp. ............................................................ 12,012,500
-------------
78,596,825
-------------
Auto Parts .4%
90,000 Genuine Parts Co. .................................................................... 3,937,500
-------------
Biotechnology 2.2%
200,000a Amgen, Inc. .......................................................................... 12,625,000
200,000a Genentech, Inc. ...................................................................... 10,575,000
20,000a Immunex Corp. ........................................................................ 260,000
8,000a Therapeutic Discovery Corp. .......................................................... 75,000
-------------
23,535,000
-------------
Business Services 4.1%
110,000 Avery Dennison Corp. ................................................................. 6,105,000
244,000 Dun & Bradstreet Corp. ............................................................... 14,548,500
400,000 Equifax, Inc. ........................................................................ 10,550,000
250,000 Kelly Services, Inc., Class A ........................................................ 7,093,750
345,300 a,e,fProgramming & Systems, Inc....................................................... 6,906
200,000 Wallace Computer Services, Inc. ...................................................... 5,650,000
-------------
43,954,156
-------------
Chemicals 4.9%
200,000 Air Products & Chemicals, Inc. ....................................................... 11,650,000
25,000 Eastman Chemical Co. ................................................................. 1,459,375
200,000 International Flavors and Fragrances, Inc. ........................................... 8,725,000
200,000 Loctite Corp. ........................................................................ 9,050,000
116,000 Mallinckrodt Group, Inc. ............................................................. 4,828,500
200,000 NCH Corp. ............................................................................ 11,075,000
100,000 Sigma-Aldrich Corp. .................................................................. 5,700,000
-------------
52,487,875
-------------
Communications & Entertainment 2.7%
300,000 American Greetings Corp., Class A .................................................... 8,587,500
304,932 Disney (Walt) Co. .................................................................... 19,325,065
100,000a Intervisual Books, Inc. .............................................................. 200,000
10,000a King World Productions, Inc. ......................................................... 368,750
-------------
28,481,315
-------------
Computer Hardware 3.3%
360,000 Hewlett-Packard Co. .................................................................. 17,550,000
140,000 International Business Machines Corp. ................................................ 17,430,000
-------------
34,980,000
-------------
Computer Software .1%
10,000a Microsoft Corp. ...................................................................... 1,318,750
-------------
Data Services 4.9%
400,000 Automatic Data Processing, Inc. ...................................................... 17,450,000
450,000a Computer Sciences Corp. .............................................................. 34,593,750
-------------
52,043,750
-------------
Diversified Manufacturers 3.1%
372,000 Minnesota Mining & Manufacturing Co. ................................................. 25,993,500
100,000 National Service Industries, Inc. .................................................... 3,500,000
66,600 Teleflex, Inc. ....................................................................... 3,305,025
-------------
32,798,525
-------------
Electronics & Electrical Equipment 3.8%
400,000 AMP, Inc. ............................................................................ $ 15,500,000
40,000 Emerson Electric Co. ................................................................. 3,605,000
37,200 aImation Corp. ....................................................................... 911,400
75,000 Molex, Inc. .......................................................................... 2,793,750
75,000 Molex, Inc., Class A ................................................................. 2,531,250
200,000 Raychem Corp. ........................................................................ 15,000,000
-------------
40,341,400
-------------
Energy/Energy Services 3.7%
90,000 Atlantic Richfield Co. ............................................................... 11,475,000
300,000 Coastal Co. .......................................................................... 12,375,000
40,000 Murphy Oil Corp. ..................................................................... 1,930,000
70,000 Royal Dutch Petroleum Co., New York Shares ........................................... 10,928,750
30,000 Schlumberger, Ltd. ................................................................... 2,535,000
-------------
39,243,750
-------------
Environmental Services 6.3%
200,000 Betzdearborn, Inc. ................................................................... 10,500,000
165,000 Browning-Ferris Industries, Inc. ..................................................... 4,125,000
230,000 aIonics, Inc. ........................................................................ 10,838,750
400,000 Millipore Corp. ...................................................................... 15,800,000
256,500 aOsmonics, Inc. ...................................................................... 5,065,875
209,100 Pall Corp. ........................................................................... 5,907,075
210,000 WMX Technologies, Inc. ............................................................... 6,903,750
270,000 Wheelabrator Technology, Inc. ........................................................ 4,117,500
163,500 Zurn Industries, Inc. ................................................................ 3,658,313
-------------
66,916,263
-------------
Food/Confectionery 1.2%
258,200 Hershey Foods Corp. .................................................................. 12,974,550
-------------
Health Care - Diversified 7.4%
200,000 Abbott Laboratories................................................................... 9,850,000
200,000 Allergan, Inc. ....................................................................... 7,625,000
100,000 aAlza Corp., Class A ................................................................. 2,687,500
8,000 aAlza Corp., warrants................................................................. 1,125
250,000 Baxter International, Inc. ........................................................... 11,687,500
200,000 aForest Laboratories, Inc., Class A .................................................. 7,225,000
400,000 Johnson & Johnson, Inc. .............................................................. 20,500,000
75,625 aMedPartners, Inc. ................................................................... 1,720,469
33,000 Nature's Sunshine Products, Inc. ..................................................... 577,500
200,000 aPerrigo Co. ......................................................................... 1,975,000
98,000 aRespironics, Inc. ................................................................... 2,376,500
300,000 U.S. Surgical Corp. .................................................................. 12,750,000
-------------
78,975,594
-------------
Imaging/Photography 1.6%
200,000 Eastman Kodak Co. .................................................................... 15,700,000
38,000 Polaroid Corp. ....................................................................... 1,672,000
-------------
17,372,000
-------------
Media & Broadcasting 1.8%
100,000 Silver King Communications............................................................ 2,350,000
300,000 Time Warner, Inc. .................................................................... 11,587,500
200,000 Turner Broadcasting Systems, Class A.................................................. 5,700,000
-------------
19,637,500
-------------
Networking 2.3%
225,000 aCabletron Systems, Inc. ............................................................. $ 15,384,375
125,000 aCisco Systems, Inc. ................................................................. 7,757,813
118,500 aNetwork Computing Devices............................................................ 733,218
-------------
23,875,406
-------------
Pharmaceuticals 10.8%
300,000 American Home Products Corp. ......................................................... 19,125,000
160,000 Bristol-Myers Squibb Co. ............................................................. 15,420,000
200,000 Lilly (Eli) & Co. .................................................................... 12,900,000
200,000 Merck & Co., Inc. .................................................................... 14,075,000
320,000 Pfizer, Inc. ......................................................................... 25,320,000
450,000 Schering-Plough Corp. ................................................................ 27,675,000
-------------
114,515,000
-------------
Retail 2.0%
471,800 Tiffany & Co. ........................................................................ 18,872,000
58,218 Weis Markets, Inc. ................................................................... 1,833,867
-------------
20,705,867
-------------
Toy Manufacturing .5%
200,000 Mattel, Inc. ......................................................................... 5,175,000
-------------
Transportation 6.4%
310,000 aAMR Corp. ........................................................................... 24,683,750
250,000 Delta Air Lines, Inc. ................................................................ 18,000,000
350,000 aUAL Corp. ........................................................................... 16,450,000
120,000 Union Pacific Corp. .................................................................. 8,790,000
-------------
67,923,750
-------------
Total Long Term Investments (Cost $443,510,006) ...................................... 859,789,776
-------------
FACE
AMOUNT
jReceivables from Repurchase Agreements 18.8%
$200,707,761 Joint Repurchase Agreement, 5.687%, 10/01/96, (Maturity Value $200,081,474) (Cost $200,049,871)
Aubrey G. Lanston & Co., Inc., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 6.00%, 09/30/98
Bear, Stearns & Co., Inc., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Bills, 02/27/97
U.S. Treasury Notes, 5.75% - 5.875%, 08/15/98 - 10/31/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 4.75% - 8.50%, 07/15/97 - 08/15/01
Fuji Securities, Inc., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 5.75% - 6.75%, 05/31/97 - 04/30/00
Lehman Brothers, Inc., (Maturity Value $27,446,123)
Collateral: U.S. Treasury Notes, 5.125% - 8.00%, 02/28/98 - 06/30/01
The Nikko Securities Co. International, Inc., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 5.375% - 6.50%, 11/30/97 - 05/31/01
SBC Warburg, Inc., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 6.00%, 05/31/98
UBS Securities, L.L.C., (Maturity Value $24,662,193)
Collateral: U.S. Treasury Notes, 5.75% - 7.375%, 07/31/97 - 11/15/97.................. 200,049,871
-------------
Total Investments (Cost $643,559,877)99.6% ........................................... 1,059,839,647
Other Assets and Liabilities, Net.4% ................................................. 4,063,573
-------------
Net Assets 100.0%..................................................................... $1,063,903,220
=============
At September 30, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$643,559,877 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost..................................... $ 420,983,484
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value..................................... (4,703,714)
-------------
Net unrealized appreciation........................................................... $ 416,279,770
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
aNon-income producing
eSee Note 8 regarding holdings of 5% voting securities fTrading suspended.
jFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
Franklin Custodian Funds, Inc., September 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES DynaTech Fund (NOTE1)
Common Stocks 83.4%
Biotechnology .6%
<S> <C> <C>
10,000 aAmgen, Inc. ............................................................................. $ 631,250
-------------
Business Services 3.3%
15,000 Electronic Data Systems Corp. ............................................................ 920,625
20,000 Equifax, Inc. ............................................................................ 527,500
25,000 First Data Corp. ......................................................................... 2,040,625
-------------
3,488,750
-------------
Computer Hardware 9.5%
50,000 aCompaq Computer Corp. ................................................................... 3,206,250
100,000 Hewlett-Packard Co. ...................................................................... 4,875,000
40,000 aKomag, Inc. ............................................................................. 840,000
25,000 aLexmark International Group, Inc., Class A............................................... 509,375
20,000 aSilicon Graphics, Inc. .................................................................. 442,500
10,000 aVisioneer, Inc. ......................................................................... 56,250
-------------
9,929,375
-------------
Computer Software 10.5%
20,000 Adobe Systems, Inc. ...................................................................... 745,000
30,000 aBroderbund Software, Inc. ............................................................... 870,000
10,000 aComputer Sciences Corp. ................................................................. 768,750
5,000 aDialogic Corp. .......................................................................... 177,500
10,000 aElectronic Arts, Inc. ................................................................... 373,750
15,000 aFractal Design Corp. .................................................................... 161,250
25,000 aIntuit, Inc. ............................................................................ 787,500
45,000 aMicrosoft Corp. ......................................................................... 5,934,375
22,500 aOracle Corp. ............................................................................ 957,656
7,500 aScopus Technology, Inc. ................................................................. 226,875
-------------
11,002,656
-------------
Energy/Energy Services 1.2%
15,000 Schlumberger, Ltd. ....................................................................... 1,267,500
-------------
Environmental Services3.0%
20,000 Browning-Ferris Industries, Inc. ......................................................... 500,000
80,000 WMX Technologies, Inc. ................................................................... 2,630,000
-------------
3,130,000
-------------
Financial Services .1%
3,600 Associates First Capital Corp. ........................................................... 147,600
-------------
Lodging .1%
10,000 aHost Marriott Corp. ..................................................................... 145,000
-------------
Media & Broadcasting 1.5%
24,875 Liberty Media Group, Class A.............................................................. 712,047
20,000 News Corp., Ltd., Sponsored ADR .......................................................... 417,500
10,000 Time Warner, Inc. ........................................................................ 386,250
-------------
1,515,797
-------------
Medical Services 5.8%
20,000 Bard (C.R.), Inc. ........................................................................ 622,500
15,000 Columbia/HCA Healthcare Corp. ............................................................ 853,125
15,000 HBO & Co. ................................................................................ 1,001,250
10,000 Medtronic, Inc. .......................................................................... 641,250
15,000 aPacifiCare Health Systems, Inc., Class B................................................. 1,297,500
30,000 United Healthcare Corp. .................................................................. 1,248,750
20,000 aVentritex, Inc. ......................................................................... 350,000
-------------
6,014,375
-------------
Networking 6.7%
20,000 a3Com Corp. .............................................................................. $ 1,201,250
5,000 aAscend Communications, Inc. ............................................................. 330,625
15,000 aCabletron Systems, Inc. ................................................................. 1,025,625
60,000 aCisco Systems, Inc. ..................................................................... 3,723,750
1,500 aInternational Network Services........................................................... 52,688
10,000 aNewbridge Networks Corp. ................................................................ 637,500
-------------
6,971,438
-------------
Pharmaceuticals 4.1%
15,000 Merck & Co., Inc. ........................................................................ 1,055,625
20,000 Schering-Plough Corp. .................................................................... 1,230,000
30,000 Warner-Lambert Co. ....................................................................... 1,980,000
-------------
4,265,625
-------------
Precision Instruments/Test Equipment 3.7%
84,375 aThermo Electron Corp. ................................................................... 3,417,188
13,800 aWaters Corp. ............................................................................ 451,950
-------------
3,869,138
-------------
Retail 4.9%
15,000 Estee Lauder Cos., Class A................................................................ 673,125
10,000 aFederated Department Stores, Inc. ....................................................... 335,000
10,000 Home Depot, Inc. ......................................................................... 568,750
10,000 aSaks Holdings, Inc. ..................................................................... 350,000
108,000 aToys R Us, Inc. ......................................................................... 3,145,500
-------------
5,072,375
-------------
Semiconductor/Manufacturer 18.0%
190,000 Intel Corp. .............................................................................. 18,133,125
10,000 Linear Technology Corp. .................................................................. 368,750
10,000 aXilinx, Inc. ............................................................................ 340,000
-------------
18,841,875
-------------
Specialty Pharmaceuticals 1.4%
25,000 aNoven Pharmaceuticals, Inc. ............................................................. 315,624
20,000 Sigma-Aldrich Corp. ...................................................................... 1,140,000
-------------
1,455,624
-------------
Telecommunications 8.7%
1,500 a,kAdvanced Fibre Communications.......................................................... 37,500
10,000 aAirTouch Communications.................................................................. 276,250
25,000 AT&T Corp. ............................................................................... 1,306,250
140,000 Motorola, Inc. ........................................................................... 7,227,500
10,000 aUnited States Satellite Broadcasting Co., Inc. .......................................... 232,500
-------------
9,080,000
-------------
Transportation .3%
10,000 Air Express International Corp. .......................................................... 282,500
-------------
Total Long Term Investments (Cost $33,742,838) ........................................... 87,110,878
-------------
jReceivables from Repurchase Agreements16.8%
$17,667,805 Joint Repurchase Agreement, 5.687%, 10/01/96 (Maturity Value $17,612,885) (Cost $17,610,103)
Aubrey G. Lanston & Co., Inc., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 6.00%, 09/30/98
Bear, Stearns & Co., Inc., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Bills, 02/27/97
U.S. Treasury Notes, 5.75% - 5.875%, 08/15/98 - 10/31/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 4.75% - 8.50%, 07/15/97 - 08/15/01
Fuji Securities, Inc., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 5.75% - 6.75%, 05/31/97 - 04/30/00
Lehman Brothers, Inc., (Maturity Value $2,416,046)
Collateral: U.S. Treasury Notes, 5.125% - 8.00%, 02/28/98 - 06/30/01
The Nikko Securities Co. International, Inc., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 5.375% - 6.50%, 11/30/97 - 05/31/01
SBC Warburg, Inc., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 6.00%, 05/31/98
UBS Securities, L.L.C., (Maturity Value $2,170,977)
Collateral: U.S. Treasury Notes, 5.75% - 7.375%, 07/31/97 - 11/15/97.................... $ 17,610,103
-------------
Total Investments (Cost $51,352,941)100.2% ............................................... 104,720,981
Liabilities in Excess of Other Assets(.2)%................................................ (212,819)
-------------
Net Assets 100.0%......................................................................... $104,508,162
=============
At September 30, 1996, the net unrealized appreciation based on
the cost of investment for income tax purposes
of $51,352,941 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost...................................... $ 54,597,810
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value...................................... (1,229,770)
-------------
Net unrealized appreciation............................................................... $ 53,368,040
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
aNon-income producing.
jFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
kSee Note 1(i) regarding securities purchased on a when-issued basis.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
Franklin Custodian Funds, Inc., September 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES Utilities Fund (NOTE1)
Long-Term Investments 96.0%
Common Stocks 83.4%
<S> <C> <C>
350,000 AGL Resources, Inc....................................................................... $ 6,693,750
403,200 aAirTouch Communications, Inc. .......................................................... 11,138,400
3,058,900 Allegheny Power System, Inc. ............................................................ 88,708,100
1,826,100 American Electric Power Co., Inc. ....................................................... 74,185,313
250,000 AT&T Corp. .............................................................................. 13,062,500
3,658,000 Central & South West Corp. .............................................................. 95,108,000
2,353,300 CINergy Corp. ........................................................................... 72,658,138
1,006,690 CIPSCO, Inc. ............................................................................ 35,863,331
2,359,800 Delmarva Power & Light Co. .............................................................. 48,375,900
1,983,950 Dominion Resources, Inc. ................................................................ 74,894,113
1,500,000 Duke Power Co. .......................................................................... 69,937,500
1,120,800 Edison International..................................................................... 20,034,300
2,705,600 Enova Corp. ............................................................................. 59,861,400
3,534,000 Entergy Corp. ........................................................................... 95,418,000
3,005,175 Florida Progress Corp. .................................................................. 102,175,950
1,951,000 FPL Group, Inc. ......................................................................... 84,380,750
1,387,000 GPU, Inc................................................................................. 42,650,250
1,864,100 GTE Corp. ............................................................................... 71,534,838
1,188,480 Hawaiian Electric Industries, Inc. ...................................................... 40,556,880
802,200 MidAmerican Energy Co. .................................................................. 12,734,925
28,000 Montana Power Co. ....................................................................... 598,500
661,700 Nevada Power Co. ........................................................................ 13,482,138
1,270,450 New England Electric System.............................................................. 39,542,756
220,000 New Jersey Resources Corp. .............................................................. 6,160,000
1,160,300 NIPSCO Industries, Inc. ................................................................. 41,480,725
560,800 Pacific Enterprises...................................................................... 16,964,200
4,110,000 Pacific Gas & Electric Co. .............................................................. 89,392,500
1,845,900 PacifiCorp............................................................................... 38,071,688
190,000 PanEnergy Corp. ......................................................................... 6,578,750
668,485 Pinnacle West Capital Corp. ............................................................. 19,803,868
561,800 Public Service Co. of Colorado........................................................... 19,943,900
333,300 Public Service Enterprise Group, Inc..................................................... 8,915,775
1,389,500 Puget Sound Power & Light Co. ........................................................... 31,263,750
182,100 SBC Communications....................................................................... 8,763,563
3,833,300 SCANA Corp. ............................................................................. 100,624,125
350,000 Sierra Pacific Resources................................................................. 9,056,250
525,110 SIGCORP, Inc............................................................................. 17,919,379
3,963,500 Southern Co. ............................................................................ 89,674,188
1,249,100 Southwestern Public Service Co. ......................................................... 40,595,750
3,197,400 TECO Energy, Inc. ....................................................................... 75,938,250
88,300 Telefonos de Mexico, ADR ................................................................ 2,836,638
2,400,050 Texas Utilities Co. ..................................................................... 95,101,981
2,768,900 US West Communications Group............................................................. 82,374,775
806,200 Western Resources, Inc................................................................... 23,480,575
793,200 Wisconsin Energy Corp. .................................................................. 21,416,400
-------------
Total Common Stocks (Cost $1,917,592,608) ............................................... 2,019,952,762
-------------
Preferred Stocks 1.1%
650,000 Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Cost $26,560,622).......................... 26,243,750
-------------
FACE
AMOUNT
Corporate Bonds 11.5%
$9,900,000 Alabama Power Co., 8.75%, 12/01/21 ...................................................... 10,429,064
4,950,000 Alabama Power Co., 8.50%, 05/01/22 ...................................................... 5,107,608
10,500,000 Arizona Public Service Co., 10.25%, 05/15/20 ............................................ 11,576,071
14,500,000 Arizona Public Service Co., 9.00%, 12/15/21 ............................................. 15,462,972
10,000,000 Cincinnati Gas & Electric Co., 8.50%, 09/01/22 .......................................... 10,348,569
2,000,000 Commonwealth Edison Co., 8.875%, 10/01/21 ............................................... 2,063,468
5,000,000 Commonwealth Edison Co., 8.50%, 07/15/22 ................................................ 5,026,120
10,000,000 Commonwealth Edison Co., 8.375%, 09/15/22 ............................................... 9,926,768
5,000,000 Duquesne Light Co., 8.375%, 05/15/24 .................................................... 5,061,645
Corporate Bonds (cont.)
19,000,000 Enron Corp., 7.00%, 08/15/23 ............................................................. $ 17,208,469
2,448,000 Gulf States Utilities Co., 9.72%, 07/01/98 .............................................. 2,496,588
11,000,000 cHidro Electrica Alicuras, 8.375%, 03/15/99 ............................................. 10,670,000
10,000,000 Illinois Power Co., 8.00%, 02/15/23 ..................................................... 9,939,409
15,000,000 Long Island Lighting Co., 9.75%, 05/01/21 ............................................... 15,000,000
10,000,000 Louisiana Power & Light Co., 8.50%, 07/01/22 ............................................ 10,098,430
13,576,819 Midland CoGeneration Venture, 10.33%, 07/23/02........................................... 14,323,544
7,500,000 Niagara Mohawk Power Corp., 9.50%, 03/01/21 ............................................. 7,181,624
5,000,000 Niagara Mohawk Power Corp., 8.75%, 04/01/22 ............................................. 4,550,113
3,000,000 Northwest Pipeline Corp., 7.125%, 12/01/25............................................... 2,745,143
8,000,000 Ohio Edison Co., 8.75%, 06/15/22 ........................................................ 8,040,591
10,000,000 Pacific Bell, 7.75%, 09/15/32............................................................ 9,713,910
10,000,000 Pacific Bell, 7.50%, 02/01/33............................................................ 9,537,500
20,000,000 Panhandle Eastern Co., 7.20%, 08/15/24 .................................................. 18,085,497
15,000,000 Philadelphia Electric Co., 8.75%, 04/01/22 .............................................. 15,441,867
4,000,000 Philadelphia Electric Co., 7.75%, 03/01/23 .............................................. 3,877,771
10,000,000 Texas Utilities Co., 8.75%, 11/01/23 .................................................... 10,447,110
10,000,000 Texas Utilities Co., 8.50%, 08/01/24 .................................................... 10,245,340
10,000,000 Texas Utilities Co., 7.375%, 10/01/25 ................................................... 9,269,870
16,000,000 US West Communications Group, 6.875%, 09/15/33........................................... 13,979,520
-------------
Total Corporate Bonds (Cost $278,624,096) ............................................... 277,854,581
-------------
Total Long Term Investments (Cost $2,222,777,326) ....................................... 2,324,051,093
-------------
jReceivables from Repurchase Agreement1.3%
32,084,656 Joint Repurchase Agreement, 5.687%, 10/01/96 (Maturity Value
$31,983,870) (Cost $31,978,818)
Aubrey G. Lanston & Co., Inc., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 6.00%, 09/30/98
Bear, Stearns & Co., Inc., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Bills, 02/27/97
U.S. Treasury Notes, 5.75% - 5.875%, 08/15/98 - 10/31/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 4.75% - 8.50%, 07/15/97 - 08/15/01
Fuji Securities, Inc., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 5.75% - 6.75%, 05/31/97 - 04/30/00
Lehman Brothers, Inc., (Maturity Value $4,387,378)
Collateral: U.S. Treasury Notes, 5.125% - 8.00%, 02/28/98 - 06/30/01
The Nikko Securities Co. International, Inc., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 5.375% - 6.50%, 11/30/97 - 05/31/01
SBC Warburg, Inc., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 6.00%, 05/31/98
UBS Securities, L.L.C., (Maturity Value $3,942,356)
Collateral: U.S. Treasury Notes, 5.75% - 7.375%, 07/31/97 - 11/15/97..................... 31,978,818
-------------
Total Investments (Cost $2,254,756,144) 97.3% ........................................... 2,356,029,911
Other Assets and Liabilities, Net2.7%.................................................... 64,186,033
-------------
Net Assets 100.0%........................................................................ $2,420,215,944
=============
At September 30, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of $2,254,758,544
was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost..................................... $ 191,419,512
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value.................................................... (90,148,145)
-------------
Net unrealized appreciation.............................................................. $ 101,271,367
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. -Limited Liability Corp.
MEDS - Mandatorially Exchangeable Debt Security aNon-income producing.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
jFace amount for repurchase agreements is for the underlying collateral.
See Note 1(h) regarding joint repurchase agreement.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
Franklin Custodian Funds, Inc., September 30, 1996
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS Income Fund (NOTE1)
Common Stocks 27.8%
Apparel/Textiles .2%
<S> <C> <C>
2,097,121 a,bBibb Co. ........................................................................... $ 17,587,500
-------------
Computer/Technology .1%
1,233,882 a,eAnacomp, Inc. ...................................................................... 10,179,527
-------------
Conglomerates .3%
1,900,000 Hanson, Plc., Sponsored ADR............................................................ 23,512,500
-------------
Consumer Products 1.3%
33,652 aGillett Holdings, Inc., Class 2 ...................................................... 1,278,776
1,000,000 Philip Morris Cos., Inc. .............................................................. 89,750,000
498,750 a,cSpecialty Foods Corp. .............................................................. 249,375
-------------
91,278,151
-------------
Energy/Energy Services 1.7%
2,870,000 hAthabasca Oil Sands Trust, (Canada)................................................... 35,188,870
150,000 Atlantic Richfield Co. ................................................................ 19,125,000
3,500,000 c,hCanadian Oil Sands Trust, (Canada).................................................. 46,125,326
625,000 Ultramar Corp. ........................................................................ 18,906,250
-------------
119,345,446
-------------
Home Builders.1%
230,948 aNVR, Inc. ............................................................................ 2,179,572
165,744 aWalter Industries, Inc., Class A...................................................... 2,133,954
-------------
4,313,526
-------------
Metals 1.3%
700,000 Driefontein Consolidated Mines, Ltd., ADR ............................................. 7,557,830
2,525,000 Free State Consolidated Gold Mines, Ltd., ADR ......................................... 24,303,125
2,300,000 Hartebeestfontein Gold Mining Co., Ltd., ADR .......................................... 5,577,040
1,184,200 Impala Platinum Holdings, Ltd., ADR ................................................... 14,683,369
460,000 Kinross Mines, Ltd., ADR .............................................................. 3,782,212
938,947 Rustenburg Platinum Holdings, Ltd., ADR ............................................... 14,798,755
300,000 Samancor, Ltd., ADR ................................................................... 3,769,440
187,500 St. Helena Gold Mines, Ltd., ADR ...................................................... 1,148,438
1,236,000 Vaal Reefs Exploration & Mining Co., Ltd., ADR ........................................ 9,888,000
312,000 Western Deep Levels, Ltd., ADR ........................................................ 9,672,000
-------------
95,180,209
-------------
Pharmaceuticals 1.9%
700,000 American Home Products Corp. .......................................................... 44,625,000
350,000 Bristol-Myers Squibb Co. .............................................................. 33,731,250
500,000 Merck & Co., Inc. ..................................................................... 35,187,500
500,000 Pharmacia & Upjohn, Inc. .............................................................. 20,625,000
-------------
134,168,750
-------------
Real Estate Investment Trusts .3%
600,000 Meditrust Corp. ....................................................................... 20,775,000
-------------
Telecommunication .7%
1,700,000 US West Communications Group........................................................... 50,575,000
-------------
Utilities 19.9%
2,200,000 American Electric Power Co., Inc. ..................................................... 89,375,000
3,600,000 Central & South West Corp. ............................................................ 93,600,000
2,400,000 CINergy Corp. ......................................................................... 74,100,000
2,800,000 Delmarva Power & Light Co. ............................................................ 57,400,000
1,800,000 Dominion Resources, Inc. .............................................................. 67,950,000
3,100,000 Edison International................................................................... 55,412,500
2,400,000 Enova Corp. ........................................................................... 53,100,000
2,450,000 Entergy Corp. ......................................................................... 66,150,000
2,000,000 Florida Progress Corp. ................................................................ 68,000,000
1,400,000 FPL Group, Inc. ....................................................................... 60,550,000
1,700,000 GPU, Inc. ............................................................................. 52,275,000
610,000 Hawaiian Electric Industries, Inc. .................................................... $ 20,816,250
1,700,000 Houston Industries, Inc. .............................................................. 37,612,500
1,800,000 Long Island Lighting Co. .............................................................. 30,825,000
825,000 Nevada Power Co. ...................................................................... 16,809,375
1,900,000 New England Electric System ........................................................... 59,137,500
1,500,000 New York State Electric & Gas Corp. ................................................... 33,000,000
2,100,000 Ohio Edison Co. ....................................................................... 40,687,500
3,200,000 Pacific Gas & Electric Co. ............................................................ 69,600,000
525,000 PacifiCorp............................................................................. 10,828,125
1,800,000 PECO Energy Co. ....................................................................... 42,750,000
1,100,000 Potomac Electric Power Co. ............................................................ 27,912,500
1,900,000 Public Service Enterprise Group, Inc. ................................................. 50,825,000
650,000 SCANA Corp. ........................................................................... 17,062,500
2,500,000 Southern Co. .......................................................................... 56,562,500
1,900,000 Southwestern Public Service Co. ....................................................... 61,750,000
1,750,000 Texas Utilities Co. ................................................................... 69,343,750
1,100,000 Western Resources, Inc. ............................................................... 32,037,500
-------------
1,415,472,500
-------------
Total Common Stocks (Cost $1,795,930,134) ............................................. 1,982,388,109
-------------
Preferred Stocks 9.1%
Apparel/Textiles .1%
150,000 Fieldcrest Cannon, Inc., $3.00 cvt. pfd., Series A .................................... 5,812,500
-------------
Automotive .2%
514,125 Harvard Industries, Inc., 14.25% pfd., PIK ............................................ 11,310,750
-------------
Cable Systems .8%
1,300,000 Cablevision Systems Corp., 8.50% cvt. pfd., Series I................................... 32,012,500
260,605 Cablevision Systems Corp., 11.125% pfd., PIK, Series L................................. 25,474,221
-------------
57,486,721
-------------
Consumer Products .3%
75,000 Pantry Pride, Inc., $14.875 pfd., Series B ............................................ 7,528,125
3,000,000 RJR Nabisco Holding Corp., $0.835 cvt. pfd., Series A ................................. 16,125,000
-------------
23,653,125
-------------
Energy/Energy Services 3.1%
600,000 cDevon Financing Trust, $3.25 cvt. pfd. ............................................... 31,500,000
1,100,000 Enron Corp., 6.25%, cvt. pfd. ......................................................... 26,125,000
300,000 Gerrity Oil & Gas Corp., $1.50 cvt. pfd. .............................................. 4,200,000
1,100,000 cMcDermott International, Inc., $2.875 cvt. pfd., Series C ............................ 44,000,000
675,000 Noble Drilling Corp., $1.50 cvt. pfd. ................................................. 24,721,875
490,000 cOccidental Petroleum Corp., $3.875 cvt. pfd. ......................................... 27,807,500
675,000 cParker & Parsley Capital, 6.25% cvt. pfd. ............................................ 36,618,750
400,000 Santa Fe Energy Resources, Inc., 7.00% cvt. pfd. ...................................... 9,200,000
1,200,000 Santa Fe Energy Resources, Inc., 8.25% cvt. pfd. ...................................... 15,000,000
178,900 Snyder Oil Corp., $1.50 cvt. exch. pfd. ............................................... 3,578,000
-------------
222,751,125
-------------
Metals 2.1%
562,000 Amax Gold, Inc., $3.75 cvt. pfd., Series B ............................................ 29,505,000
283,000 Armco, Inc., $3.625 cum. cvt. pfd., Series A .......................................... 12,522,750
114,200 Armco, Inc., $4.50 cvt. pfd., Series B ................................................ 5,267,475
222,200 Battle Mountain Gold Co., $3.25 cvt. pfd. ............................................. 11,026,675
940,000 Coeur D'Alene Mines Corp., 7.00% cvt. pfd. ............................................ 15,392,500
120,000 Cyprus Minerals, $4.00 cvt. pfd., Series A ............................................ 6,255,000
400,000 Freeport-McMoran Copper & Gold, Inc., $1.75 cvt. pfd. ................................. 12,200,000
450,000 cFreeport-McMoran, Inc., 4.375% cvt. exch. pfd. ....................................... 25,706,250
400,000 Freeport-McMoran, Inc., 8.75% cvt. pfd. ............................................... 13,350,000
375,000 Hecla Mining Co., $3.50 cvt. pfd., Series B ........................................... 17,531,250
-------------
148,756,900
-------------
Media & Broadcasting .5%
31,453 cTime Warner, Inc., 10.25% pfd., Series K.............................................. $ 33,183,830
-------------
Real Estate Investment Trusts1.3%
1,800,000 FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A .................................. 46,800,000
800,000 Security Capital Industrial Trust, 7.00%, cvt. pfd. ................................... 19,600,000
1,040,000 Security Capital Pacific Trust, $1.75 cvt. pfd., Series A.............................. 27,170,000
-------------
93,570,000
-------------
Telecommunications .7%
504,000 Nortel, Inc., pfd., Series B .......................................................... 6,048,000
1,050,000 Nortel Inversora, SA, 10.00% cvt. pfd. ................................................ 42,393,750
-------------
48,441,750
-------------
Total Preferred Stocks (Cost $642,578,955) ............................................ 644,966,701
-------------
Partnership Units .2%
500,000 BP Prudhoe Bay Royalty Trust........................................................... 8,562,500
300,000 Freeport-McMoRan Resource, Ltd., depository units ..................................... 5,662,500
59,258 a,bZale Corp., Ltd. ................................................................... 28,444
-------------
Total Partnership Units (Cost $19,282,667) ............................................ 14,253,444
-------------
Warrants
1,281,869 a,bBoardwalk Casino, Inc. (Cost $2,643,855)............................................ 2,814,343
-------------
Miscellaneous
571,298 aMiscellaneous Securities (Cost $43,214)............................................... 642,873
-------------
Total Common Stocks, Preferred Stocks, Partnership Units, Warrants
and Miscellaneous (Cost $2,460,478,825)............................................... 2,645,065,470
-------------
FACE
AMOUNT
Corporate Bonds 33.0%
Apparel/Textiles 1.8%
$50,000,000 Consoltex Group, Inc., senior sub. notes, Series B, 11.00%, 10/01/03 .................. 49,250,000
6,000,000 dForstmann Textiles, Inc., S.F., senior sub. deb., 14.75%, 04/15/99 ................... 2,730,000
35,000,000 Hartmarx Corp., senior sub. notes, 10.875%, 01/15/02 .................................. 34,125,000
13,000,000 Polysindo International Finance Co., secured notes, 11.375%, 06/15/06.................. 13,633,750
25,000,000 Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05............................ 25,125,000
-------------
124,863,750
-------------
Automotive 1.5%
35,000,000 Collins & Aikman Corp., senior sub. notes., 11.50%, 04/15/06........................... 37,056,250
27,000,000 cExide Corp., cvt. sub. notes, 2.90%, 12/15/05 ........................................ 16,335,000
4,000,000 Exide Corp., senior notes, 10.75%, 12/15/02 ........................................... 4,190,000
50,000,000 Harvard Industries, Inc., senior notes, 11.125%, 08/01/05.............................. 47,125,000
-------------
104,706,250
-------------
Biotechnology .2%
16,500,000 Centocor, Inc., Eurobond cvt. sub. deb., 6.75%, 10/16/01 .............................. 15,427,500
-------------
Building Products .5%
5,000,000 American Standard, Inc., S.F., senior sub. deb., 9.25%, 12/01/16 ...................... 5,137,500
30,000,000 Inter-City Products Corp. senior notes, 9.75%, 03/01/00................................ 29,175,000
-------------
34,312,500
-------------
Cable Systems 1.6%
2,000,000 Cablevision Industries Corp., senior notes, 10.75%, 01/30/02 .......................... 2,140,000
30,000,000 Cablevision Systems Corp., senior sub. deb., 9.875%, 04/01/23 ......................... 28,537,500
30,000,000 Continental Cablevision, Inc., senior sub. deb., 9.50%, 08/01/13 ...................... 33,164,369
35,000,000 Helicon Group L.P. Corp., senior secured notes, 9.00%, 11/01/03 ....................... 35,525,000
16,000,000 Storer Communication, Inc., sub. deb., 10.00%, 05/15/03 ............................... 16,240,000
-------------
115,606,869
-------------
Chemicals 1.1%
$29,000,000 Applied Extrusion Technology, senior unsecured notes, 11.50%, 04/01/02 ................ $ 29,978,750
16,000,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.75%, 06/15/03 .................. 17,560,000
8,900,000 Uniroyal Chemical Co., Inc., senior sub. notes, 10.50%, 05/01/02 ...................... 9,511,875
20,000,000 Uniroyal Chemical Co., Inc., senior sub. notes, 11.00%, 05/01/03 ...................... 21,150,000
-------------
78,200,625
-------------
Computer/Technology 1.4%
23,100,000 cAltera Corp., cvt. sub. notes, 5.75%, 06/15/02........................................ 27,575,625
21,343,000 Anacomp, Inc., senior sub. notes, PIK, 13.00%, 06/04/02 ............................... 20,809,425
18,000,000 Conner Peripherals, Inc., cvt. sub. deb., 6.75%, 03/01/01 ............................. 19,080,000
11,750,000 Maxtor Corp., cvt. sub. deb., 5.75%, 03/01/12 ......................................... 8,048,750
26,000,000 cXilinx, Inc., cvt. sub. notes, 5.25%, 11/01/02........................................ 24,927,500
-------------
100,441,300
-------------
Conglomerates
1,596,000 Coltec Industries, Inc., S.F., senior sub. deb., 11.25%, 12/01/15 ..................... 1,669,815
-------------
Consumer Products 1.9%
5,000,000 E&S Holdings Corp., senior sub. notes, 10.375%, 10/01/06............................... 5,106,250
18,000,000 Mafco, Inc., senior sub. deb., 11.875%, 11/15/02 ...................................... 19,530,000
38,500,000 Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 ..................... 37,537,500
30,000,000 Revlon Consumer Products Corp., senior sub. notes, Series B, 10.50%, 02/15/03 ......... 31,275,000
35,000,000 RJR Nabisco, Inc., senior sub. notes, 9.25%, 08/15/13 ................................. 34,606,250
8,650,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 ....................................... 8,693,250
-------------
136,748,250
-------------
Containers & Packaging 1.1%
30,000,000 Calmar, Inc., senior sub notes, 11.50%, 08/15/05....................................... 30,750,000
28,000,000 Packaging Resources, Inc., senior notes, 11.625%, 05/01/03............................. 28,770,000
15,000,000 cPrintpack, Inc., senior sub. notes, 10.625%, 08/15/06................................. 15,450,000
-------------
74,970,000
-------------
Energy/Energy Services 2.6%
10,000,000 Energy Ventures, senior notes, 10.25%, 03/15/04 ....................................... 10,675,000
15,000,000 Falcon Drilling, senior sub. notes, 12.50%, 03/15/05................................... 16,762,500
40,000,000 Gerrity Oil & Gas Corp., senior sub. notes, 11.75%, 07/15/04........................... 42,850,000
19,000,000 Global Marine, Inc., senior secured notes, 12.75%, 12/15/99............................ 20,615,000
5,000,000 Mesa Operating Co., 10.625%, 07/01/06.................................................. 5,281,250
43,500,000 Oryx Energy Co., cvt. sub. deb., 7.50%, 05/15/14 ...................................... 40,455,000
8,000,000 Plains Resources, Inc., senior sub. notes, 10.25%, 03/15/06............................ 8,380,000
35,000,000 Snyder Oil Corp., cvt. sub. notes, 7.00%, 05/15/01 .................................... 32,550,000
6,969,000 Tesoro Petroleum Corp., S.F., sub. deb., 12.75%, 03/15/01 ............................. 7,125,803
-------------
184,694,553
-------------
Entertainment .2%
12,000,000 AMF Group, Inc., Series B, 10.875%, 03/15/06........................................... 12,390,000
-------------
Financial Services .1%
10,000,000 First Nationwide Holdings, Inc., senior sub. notes, 10.625%, 10/01/03.................. 10,462,500
-------------
Food & Beverages 2.6%
2,980,000 Chock Full O'Nuts Corp., S.F., cvt. sub. deb., 8.00%, 09/15/06 ........................ 2,845,900
45,000,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 02/01/05......................... 44,325,000
37,830,530 Del Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 .................................... 35,939,004
21,000,000 Doane Products Co., senior notes, 10.625%, 03/01/06.................................... 21,708,750
6,600,000 Dr Pepper Bottling Co. of Texas, senior sub. notes, 10.25%, 02/15/00 .................. 6,814,500
32,500,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 ............................ 32,987,500
25,000,000 Specialty Foods Corp., senior sub. notes, Series B, 11.25%, 08/15/03 .................. 20,500,000
20,000,000 Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 08/15/01 ............. 18,500,000
-------------
183,620,654
-------------
Food Chains 3.0%
$18,000,000 Americold Corp., senior sub. notes, 12.875%, 05/01/08 ................................. $ 18,585,000
33,000,000 Americold Corp., senior sub. notes, Series B, 11.50%, 03/01/05 ........................ 34,650,000
35,000,000 Bruno's, Inc., senior sub. notes, 10.50%, 08/01/05..................................... 36,050,000
33,000,000 Grand Union Capital Corp., senior notes, 12.00% 09/01/04............................... 33,453,750
40,000,000 Ralphs Grocery Co., senior sub notes, 11.00%, 06/15/05................................. 40,450,000
48,000,000 Smith's Food & Drug, senior sub. notes, 11.25%, 05/15/07............................... 51,360,000
-------------
214,548,750
-------------
Gaming & Leisure 1.9%
38,000,000 Aztar Corp., senior sub. notes, 11.00%, 10/01/02....................................... 38,665,000
40,000,000 bBoardwalk Casino, Inc., first mortgage bonds, 16.50%, 03/31/05 ....................... 40,072,000
8,000,000 cEldorado Resorts, L.L.C., senior sub. notes, 10.50%, 08/15/06......................... 8,280,000
11,000,000 Harveys Casino Resorts, senior sub. notes, 10.625%, 06/01/06........................... 11,495,000
35,000,000 Rio Hotel & Casino, Inc., senior sub. notes, 10.625%, 07/15/05......................... 36,662,500
-------------
135,174,500
-------------
Health Care 1.0%
22,000,000 cDade International, Inc., senior sub. notes, 11.125%, 05/01/06........................ 23,430,000
8,100,000 Grancare, Inc., cvt. sub. deb., 6.50%, 01/15/03 ....................................... 8,343,000
15,000,000 cMedical Care International, Inc., cvt. sub. deb., 6.75%, 10/01/06 .................... 15,150,000
16,300,000 OrNda Healthcorp., Inc., senior sub. notes, 12.25%, 05/15/02 .......................... 17,665,125
10,000,000 Sola Group, Ltd., senior sub. notes, 6.00%, 12/15/03 .................................. 9,250,000
-------------
73,838,125
-------------
Industrial Products 1.5%
18,500,000 Nortek, Inc., senior sub. notes, 9.875%, 03/01/04...................................... 18,037,500
41,000,000 RBX Corp., senior sub. notes, Series B, 11.25%, 10/15/05.............................. 38,540,000
30,000,000 RHI Holdings, Inc., senior sub. deb., 11.875%, 03/01/99 ............................... 30,187,500
14,500,000 Thermadyne Industries, Inc., notes, 10.75%, 11/01/03 .................................. 14,590,625
7,393,000 Thermadyne Industries, Inc., senior notes, 10.25%, 05/01/02 ........................... 7,448,448
-------------
108,804,073
-------------
Media & Broadcasting .2%
12,250,000 Benedek Broadcasting, senior notes, 11.875%, 03/01/05.................................. 13,475,000
-------------
Metals 2.1%
7,000,000 Armco Steel, Inc., senior notes, 11.375%, 10/15/99..................................... 7,306,250
5,000,000 Armco Steel, Inc., senior notes, 9.375%, 11/01/00...................................... 5,025,000
30,000,000 Ashanti Capital, Ltd., cvt. notes, 5.50%, 03/15/03..................................... 27,150,000
900,000 Coeur D' Alene Mines Corp., cvt. senior sub. deb., 6.00%, 06/10/02 .................... 783,000
20,000,000 Coeur D' Alene Mines Corp., cvt. sub. deb., 6.375%, 01/31/04 .......................... 17,750,000
13,020,000 FMC Corp., Eurobonds, cvt. senior sub. deb., 6.75%, 01/16/05........................... 12,141,150
34,000,000 Jorgensen, Earle M. Co., senior notes, 10.75%, 03/01/00 ............................... 34,850,000
40,000,000 Republic Engineered Steel Co., first mortgage, 9.875%, 12/15/01........................ 38,500,000
4,805,000 UCAR Global Enterprises, senior sub. notes, 12.00%, 01/15/05........................... 5,513,738
-------------
149,019,138
-------------
Paper & Forest Products 1.4%
6,000,000 cFour M Corp., senior notes, 12.00%, 06/01/06.......................................... 6,420,000
45,000,000 Rapp International Finance, secured notes, 13.25%, 12/15/05............................ 49,387,500
45,000,000 Riverwood International, senior sub. notes, 10.875%, 04/01/08.......................... 44,550,000
-------------
100,357,500
-------------
Pollution Contro l.3%
21,000,000 Air & Water Technology Corp., cvt. sub. deb., 8.00%, 05/15/15 ......................... 18,532,500
-------------
Publishing .2%
12,500,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 ................................ 13,328,125
-------------
Railroads .6%
500,000 Missouri Pacific Railroad Co., gen. mortgage, Series A, 4.75%, 01/01/20 ............... 308,063
500,000 Missouri Pacific Railroad Co., gen. mortgage, Series B, 4.75%, 01/01/30 ............... 291,250
$ 1,200,000 Missouri Pacific Railroad Co., income deb., 5.00%, 01/01/45 ........................... $ 682,656
37,500,000 Southern Pacific Rail Corp., senior notes, 9.375%, 08/15/05 ........................... 40,827,186
-------------
42,109,155
-------------
Real Estate Development .1%
10,000,000 Rouse Co., cvt. sub. deb., 5.75%, 07/23/02............................................. 9,937,500
-------------
Restaurants .3%
40,000,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 .............................. 24,200,000
-------------
Retail .7%
9,000,000 Drug Emporium, Inc., cvt. sub. deb., 7.75%, 10/01/14 .................................. 7,143,750
41,000,000 Levitz Furniture Co., senior sub. notes, 13.375%, 10/15/98 ............................ 39,360,000
-------------
46,503,750
-------------
Telecommunications .4%
25,000,000 CommNet Cellular, Inc., sub. notes, 11.25%, 07/01/05 .................................. 26,500,000
-------------
Utilities 2.7%
975,837,500 gESCOM, E168, utility deb., (South Africa), 11.00%, 06/01/08........................... 164,923,313
7,204,963 Midland CoGeneration Venture, deb. notes, Series C-91, 10.33%, 07/23/02 ............... 7,601,236
13,964,727 Midland CoGeneration Venture, S.F., sub. deb., Series C, 10.33%, 07/23/02 ............. 14,732,788
6,000,000 Texas-New Mexico Power Co., secured deb., 10.75%, 09/15/03 ............................ 6,297,611
-------------
193,554,948
-------------
Total Corporate Bonds (Cost $2,329,364,881) ........................................... 2,347,997,630
-------------
U.S. Government Securities 7.4%
430,000,000 U.S Treasury Bonds, 6.25% - 7.125%, 2/15/23 - 08/15/23................................. 398,718,750
128,000,000 U.S. Treasury Notes, 6.00% - 6.375%,12/31/97 - 08/15/02 ............................... 127,271,864
Total U.S. Government Securities (Cost $545,377,405) .................................. 525,990,614
Foreign Government Securities 10.5%
50,000,000 gGovernment of Canada, first coupon deb., 8.00%, 06/01/23 ............................. 38,012,555
520,000,000 Republic of Argentina, FRN, 5.25%, 03/31/23 ........................................... 304,200,000
180,000,000 Republic of Brazil, 5.00%, 04/15/24.................................................... 107,437,500
109,427,500 Republic of Brazil, FRN, Series A, 6.6875%, 01/01/01................................... 105,597,538
140,000,000 Republic of Ecuador, 3.25%, 02/28/25................................................... 56,525,000
255,000,000 gRepublic of South Africa, 12.00%, 02/28/05 ........................................... 47,846,577
130,000,000 United Mexican States, Series B, 6.25%, 12/31/19 ...................................... 90,025,000
-------------
Total Foreign Government Agencies (Cost $711,936,126) ................................. 749,644,170
-------------
Zero Coupon/Step-up Bonds 3.3%
30,000,000 AMF Group, Inc., senior disc. notes, Series B, zero coupon
to 03/15/01 (original accretion rate 12.25%), 2.25% thereafter, 03/15/06.............. 17,850,000
65,000,000 Bell & Howell Co., senior deb., zero coupon to 03/01/00\
(original accretion rate 11.50%), 11.50% thereafter, 03/01/05 ........................ 45,825,000
11,000,000 Dr Pepper Bottling Holdings Co., S.F., senior sub. disc. notes,
zero coupon to 02/15/98 (original accretion rate 11.625%), 11.625%
thereafter, 02/15/03 ................................................................. 9,707,500
9,000,000 Exide Corp., senior sub. deb., zero coupon to 12/15/97
(original accretion rate 12.25%), 12.25% thereafter, 12/15/04 ....................... 8,145,000
50,000,000 Food 4 Less, Inc., senior disc. deb., zero coupon to 06/15/00,
(original accretion rate 13.625%), 13.625% thereafter, 07/15/05...................... 28,750,000
7,000,000 L.F.C. Holding, senior deb., zero coupon to 06/15/97
(original accretion rate 15.00%), 15.00% thereafter, 06/15/02......................... 5,250,000
71,750,000 Marcus Cable Co., senior disc. notes, zero coupon to 06/15/00, (original
accretion rate 14.25%), 14.25% thereafter, 12/15/05.................................. 48,790,000
15,000,000 Mesa Operating Co., company guaranteed, zero coupon to 07/01/01,
(original accretion rate 11.625%), 11.625% thereafter, 07/01/06...................... 9,675,000
40,000,000 Revlon Worldwide Corp., senior secured disc. notes, Series B
(original accretion rate 12.00%), 0.00%, 03/15/98 .................................... 35,250,000
$33,250,000 Specialty Foods Corp., senior secured disc. deb., Series B, zero
coupon to 08/15/99, (original accretion
rate 13.00%), 13.00% thereafter, 08/15/05 ............................................ $ 14,131,250
12,000,000 Uniroyal Chemical Co., Inc., senior notes, zero coupon to 05/01/98
(original accretion rate 12.00%), 12.00% thereafter, 05/01/05 ....................... 10,380,000
-------------
Total Zero Coupon/Step-up Bonds (Cost $235,840,458) ................................... 233,753,750
-------------
Total Long Term Investments (Cost $6,282,997,695) ..................................... 6,502,451,634
-------------
jReceivables from Repurchase Agreements7.1%
$506,619,788 Joint Repurchase Agreement, 5.687%, 10/01/96, (Maturity Value $505,037,201) (Cost $504,957,431)
Aubrey G. Lanston & Co., Inc., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 6.00%, 09/30/98
Bear, Stearns & Co., Inc., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Bills, 02/27/97
U.S. Treasury Notes, 5.75% - 5.875%, 08/15/98 - 10/31/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 4.75% - 8.50%, 07/15/97 - 08/15/01
Fuji Securities, Inc., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 5.75% - 6.75%, 05/31/97 - 04/30/00
Lehman Brothers, Inc., (Maturity Value $69,278,339)
Collateral: U.S. Treasury Notes, 5.125% - 8.00%, 02/28/98 - 06/30/01
The Nikko Securities Co. International, Inc., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 5.375% - 6.50%, 11/30/97 - 05/31/01
SBC Warburg, Inc., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 6.00%, 05/31/98
UBS Securities, L.L.C., (Maturity Value $62,251,266)
Collateral: U.S. Treasury Notes, 5.75% - 7.375%, 07/31/97 - 11/15/97................... 504,957,431
-------------
Total Investments (Cost $6,787,955,126)98.4% .......................................... 7,007,409,065
Other Assets and Liabilities, Net1.6% ................................................. 116,058,189
-------------
Net Assets100.0%....................................................................... $7,123,467,254
=============
At September 30, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$6,787,955,126 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost............................................ $ 460,713,688
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value...................................... (241,259,749)
-------------
Net unrealized appreciation............................................................ $ 219,453,939
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
L.L.C. -Limited Liability Corp.
L.P. - Limited Partnership
PIK - Payment-in-Kind
S.F. - Sinking Fund
aNon-income producing.
bSee Note 6 regarding restricted securities.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dSee Note 7 regarding defaulted securities.
eSee Note 8 regarding holdings of 5% voting securities.
gFace amount is stated in foreign currency and value is stated in U.S. dollars.
hSecurities traded in foreign currency and value is stated in U.S. dollars.
jFace amount for repurchase agreements is for the underlying collateral. See
Note 1( h) regarding joint repurchase agreement.
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
Franklin Custodian Funds, Inc., September 30, 1996
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. Government Securities Fund (NOTE1)
Government National Mortgage Association (GNMA)97.4%
<C> <C> <C>
$ 23,199,976 GNMA I, SF, 6.00%, 09/15/23 - 11/15/23................................................ $ 21,082,978
1,182,313,033 GNMA I, SF, 6.50%, 03/15/03 - 3/15/24................................................. 1,106,201,632
31,952,677 GNMA PL, 6.50%, 05/15/24.............................................................. 29,735,960
71,455,279 GNMA II, 6.50%, 06/20/24 - 05/20/26................................................... 66,498,070
36,374,724 GNMA PL, 6.75%, 01/15/34.............................................................. 34,368,437
3,801,492 GNMA I, SF, 6.75%, 03/15/26 - 05/15/26................................................ 3,610,825
337,716,326 GNMA II, 7.00%, 03/20/24 - 06/20/26................................................... 323,891,219
9,015,709 GNMA PL, 7.00%, 09/15/35 ............................................................. 8,646,633
2,111,092,999 GNMA I, SF, 7.00%, 04/15/16 - 06/15/26................................................ 2,035,226,562
8,941,196 GNMA SF, 7.25%, 10/15/25 - 01/15/26................................................... 8,731,642
35,454,244 GNMA PL, 7.375%, 04/15/29............................................................. 34,667,620
21,209,808 GNMA PL, 7.425%, 07/15/29............................................................. 20,792,250
1,578,657,215 GNMA I, SF, 7.50%, 06/15/05 - 09/15/26................................................ 1,561,391,375
392,084,007 GNMA II, 7.50%, 10/20/22 - 08/20/26................................................... 385,835,349
5,746,456 GNMA PL, 7.75%, 10/15/12.............................................................. 5,718,620
1,377,431,609 GNMA I, SF, 8.00%, 10/15/07 - 05/15/26................................................ 1,392,927,715
100,221,443 kGNMA II, 8.00%, 08/20/16 - 09/20/26.................................................. 100,844,703
47,860,108 GNMA PL, 8.00%, 04/15/22 - 05/15/32................................................... 47,919,934
8,213,958 GNMA I, GPM, 8.25%, 03/15/17 - 11/15/17............................................... 8,301,232
24,740,214 GNMA PL, 8.25%, 12/15/20 - 02/15/28................................................... 25,003,080
338,332,920 GNMA I, SF, 8.50%, 05/15/16 - 11/15/24................................................ 348,482,908
65,308,933 GNMA II, 8.50%, 04/20/16 - 06/20/25................................................... 66,860,021
1,508,015 GNMA I, GPM, 8.75%, 03/20/17 - 07/20/17............................................... 1,551,371
432,270,136 GNMA I, SF, 9.00%, 10/15/04 - 07/15/23................................................ 453,883,643
14,585,184 GNMA II, 9.00%, 02/20/20 - 11/20/21................................................... 15,223,287
6,094,092 GNMA I, GPM, 9.25%, 05/15/16 - 01/15/17............................................... 6,407,365
239,285,280 GNMA I, SF, 9.50%, 05/15/09 - 02/15/23................................................ 257,007,454
26,846,812 GNMA II, 9.50%, 09/20/15 - 04/20/25................................................... 28,633,817
7,512,593 GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13.............................................. 8,122,992
291,452,085 GNMA I, SF, 10.00%, 04/15/12 - 04/15/25............................................... 318,411,403
36,786,571 GNMA II, 10.00%, 08/20/13 - 03/20/21.................................................. 39,821,464
4,804,704 GNMA I, GPM, 10.25%, 02/15/16 - 02/15/21.............................................. 5,201,842
208,945,437 GNMA I, SF, 10.50%, 08/15/00 - 10/15/21............................................... 230,688,918
57,493,281 GNMA II, 10.50%, 09/20/13 - 03/20/21.................................................. 62,901,270
1,109,548 GNMA I, SF, 10.50%, 12/15/09 - 10/15/21............................................... 1,166,412
14,619,186 GNMA I, GPM, 11.00%, 12/15/09 - 03/15/11.............................................. 16,186,188
178,283,514 GNMA I, SF, 11.00%, 01/15/01 - 05/15/21............................................... 199,621,904
16,922,605 GNMA II, 11.00%, 07/20/13 - 01/20/21.................................................. 18,778,812
6,838,580 GNMA I, GPM, 11.25%, 06/15/13 - 01/15/16.............................................. 7,631,431
2,942,879 GNMA I, GPM, 11.50%, 03/15/10 - 01/20/14.............................................. 3,291,430
37,333,796 GNMA I, SF, 11.50%, 02/15/13 - 12/15/17............................................... 42,455,544
2,477,808 GNMA II, 11.50%, 08/20/13 - 04/20/18.................................................. 2,792,957
1,683,323 GNMA I, GPM, 11.75%, 07/15/13 - 12/15/15.............................................. 1,896,895
764,843 GNMA I, GPM, 12.00%, 10/15/10 - 03/15/13.............................................. 867,381
173,214,831 GNMA I, SF, 12.00%, 05/15/11 - 08/15/19............................................... 199,467,784
8,066,227 GNMA II, 12.00%, 09/20/13 - 02/20/16.................................................. 9,208,107
1,329,102 GNMA I, GPM, 12.50%, 04/15/10 - 10/15/12.............................................. 1,519,747
151,426,415 GNMA I, SF, 12.50%, 01/15/10 - 08/15/18............................................... 176,175,240
6,726,696 GNMA II, 12.50%, 09/20/13 - 11/20/15.................................................. 7,758,827
99,301 GNMA I, GPM, 12.75%, 11/15/13 - 06/15/15.............................................. 113,918
139,833,530 GNMA I, SF, 13.00%, 07/15/10 - 01/15/16 .............................................. 163,736,389
4,210,293 GNMA II, 13.00%, 10/20/13 - 09/20/15.................................................. 4,887,891
-------------
Total Long Term Investments (Cost $10,027,527,474) ................................... 9,922,150,448
-------------
iShort Term Investments2.1%
$221,925,000 U.S. Treasury Bills, 4.99% - 5.23%, 10/03/96 - 02/06/97 (Cost $219,515,714)........... $ 219,538,383
Total Investments (Cost $10,247,043,188)99.5%......................................... 10,141,688,831
Other Assets and Liabilities, Net.5%.................................................. 45,451,424
-------------
Net Assets100.0%...................................................................... $10,187,140,255
=============
At September 30, 1996, the net unrealized depreciation based on the
cost of investments for income tax purposes
of $10,247,043,188 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost .......................................... $ 109,285,156
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value........................................... (214,639,513)
-------------
Net unrealized depreciation .......................................................... $ (105,354,357)
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
I - Original SF Program
II - Programs consisting of different types of mortgages GPM - Graduated Payment
Mortgage PL - Project Loan SF - Single Family
iSecurities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
kSee Note 1(i) regarding securities purchased on a when-issued basis.
FINANCIAL STATEMENTS
Franklin Custodian Funds, Inc.
Statements of Assets and Liabilities
September 30, 1996
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------- --------- ----------- ----------- ------------
Assets:
Investments in securities:
<S> <C> <C> <C> <C> <C>
At identified cost...................... $ 443,510,006 $ 33,742,838 $2,222,777,326 $6,502,451,634 $10,247,043,188
========== ========= =========== =========== ============
At value................................ 859,789,776 87,110,878 2,324,051,093 6,282,997,695 10,141,688,831
Receivables from repurchase agreements,
at value and cost...................... 200,049,871 17,610,103 31,978,818 504,957,431 --
Cash................................... 551,219 -- -- -- 2,839
Receivables:
Dividends and interest.................. 936,522 67,732 15,368,522 103,982,830 66,241,844
Investment securities sold.............. 1,844,290 -- 53,835,981 11,866,105 --
Capital shares sold..................... 1,799,336 72,901 1,229,128 18,250,632 4,983,817
---------- --------- ----------- ----------- ------------
Total assets............................ 1,064,971,014 104,861,614 2,426,463,542 7,141,508,632 10,212,917,331
---------- --------- ----------- ----------- ------------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery....................... -- -- -- 6,471,347 --
When-issued basis (Note 1)............. -- 37,500 -- -- 9,979,554
Capital shares repurchased.............. 119,657 212,425 4,532,902 6,320,953 9,471,122
Management fees......................... 419,750 54,019 929,411 2,692,447 3,842,161
Distribution fees....................... 417,305 33,453 552,775 1,850,298 1,414,922
Shareholder servicing costs............. 86,000 11,513 180,000 377,554 470,548
Accrued expenses and other liabilities. 25,082 4,542 52,510 328,779 598,769
---------- --------- ----------- ----------- ------------
Total liabilities....................... 1,067,794 353,452 6,247,598 18,041,378 25,777,076
---------- --------- ----------- ----------- ------------
Net assets, at value.................... $1,063,903,220 $104,508,162 $2,420,215,944 $7,123,467,254 $10,187,140,255
========== ========= =========== =========== ============
Net assets consist of:
Undistributed net investment income.... $ 10,212,504 $ 403,922 $ 9,384,835 $ 34,315,598 $ 17,291,457
Net unrealized appreciation (depreciation)
on investments and translation of
assets and liabilities denominated in
foreign currencies..................... 416,279,770 53,368,040 101,273,767 219,284,679 (105,354,357)
Undistributed net realized gain (loss)
from investments and foreign
currency transactions.................. 9,795,215 3,012,745 101,323,800 30,949,499 (455,164,836)
Class I capital shares................. 587,280,073 47,723,256 2,188,530,550 6,497,768,849 10,673,470,797
Class II capital shares................ 40,335,658 199 19,702,992 341,148,629 56,897,194
---------- --------- ----------- ----------- ------------
Net assets, at value.................... $1,063,903,220 $104,508,162 $2,420,215,944 $7,123,467,254 $10,187,140,255
========== ========= =========== =========== ============
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------- --------- ----------- ----------- ------------
Class I Shares:
Net assets, at value................... $1,020,486,413 $104,507,959 $2,400,561,437 $6,780,153,179 $10,129,483,446
========== ========= =========== =========== ============
Shares outstanding..................... 44,715,467 7,446,627 246,652,238 2,943,970,959 1,507,740,610
========== ========= =========== =========== ============
Net asset value per share*............. $22.82 $14.03 $9.73 $2.30 $6.72
========== ========= =========== =========== ============
Maximum offering price per share (100/95.5,
100/95.5, 100/95.75, 100/95.75, 100/95.75
of net asset value per share, respectively) $23.90 $14.69 $10.16 $2.40
$7.02
========== ========= =========== =========== ============
Class II Shares:
Net assets, at value................... $ 43,416,807 $ 203 $ 19,654,507 $ 343,314,075 $ 57,656,809
========== ========= =========== =========== ============
Shares outstanding..................... 1,921,082 14 2,021,886 148,995,814 8,605,785
========== ========= =========== =========== ============
Net asset value per share*............. $22.60 $14.03** $9.72 $2.30 $6.70
========== ========= =========== =========== ============
Maximum offering price per share
(100/99 of net asset value per share).. $22.83 $14.17 $9.82 $2.32 $6.77
========== ========= =========== =========== ============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
**Net assets divided by outstanding shares does not equal net asset value per
share due to rounding.
Statements of Operations
for the year ended September 30, 1996
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
--------- -------- ---------- ---------- -----------
Investment income:
<S> <C> <C> <C> <C> <C>
Dividends...................................... $ 11,629,101 $ 429,838 $131,680,612 $146,871,610 $ --
Interest (Note 1).............................. 6,475,631 992,708 28,843,573 421,912,949 832,970,491
--------- -------- ---------- ---------- -----------
18,104,732 1,422,546 160,524,185 568,784,559 832,970,491
--------- -------- ---------- ---------- -----------
Expenses:
Management fees (Note 5)....................... 4,329,460 601,568 12,335,820 30,075,761 48,138,799
Distribution fees - Class I (Note 5)........... 1,884,330 192,077 3,408,511 8,873,905 8,546,103
Distribution fees - Class II (Note 5).......... 195,343 -- 98,353 1,327,522 228,981
Shareholder servicing costs (Note 5)........... 982,018 133,426 2,204,406 3,921,527 5,540,310
Reports to shareholders........................ 349,660 46,195 1,009,260 1,693,355 2,145,587
Custodian fees................................. 31,593 3,425 109,000 783,682 425,873
Registration and filing fees................... 66,928 23,072 49,329 198,340 72,510
Professional fees.............................. 18,958 3,253 57,175 82,293 264,472
Directors' fees and expenses (Note 5).......... 5,255 1,043 15,293 35,704 56,003
Other.......................................... 27,636 5,443 77,854 166,983 239,772
--------- -------- ---------- ---------- -----------
Total expenses.................................. 7,891,181 1,009,502 19,365,001 47,159,072 65,658,410
--------- -------- ---------- ---------- -----------
Net investment income.......................... 10,213,551 413,044 141,159,184 521,625,487 767,312,081
--------- -------- ---------- ---------- -----------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) from:
Investments.................................. 13,376,673 3,012,745 101,323,796 56,682,095 (50,886,927)
Foreign currency transactions................ -- -- -- (2,231,197) --
Net unrealized appreciation (depreciation) on:
Investments.................................... 131,354,444 8,557,033 (76,822,756) 12,985,315 (183,394,082)
Translation of assets and liabilities
denominated in foreign currencies.............. -- -- -- (245,981) --
--------- -------- ---------- ---------- -----------
Net realized and unrealized gain (loss) on investments
and foreign currencies......................... 144,731,117 11,569,778 24,501,040 67,190,232 (234,281,009)
--------- -------- ---------- ---------- -----------
Net increase in net assets resulting from operations $154,944,668 $11,982,822 $165,660,224 $588,815,719
$533,031,072
========= ======== ========== ========== ===========
Statements of Changes in Net Assets
for the years ended September 30, 1996 and 1995
Growth Fund DynaTech Fund Utilities Fund
----------------------- --------------------- -----------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ---------- --------- ----------- -----------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income.... $ 10,213,551 $ 6,365,342 $ 413,044 $ 856,910 $ 141,159,184 $ 154,801,327
Net realized gain from
security transactions..... 13,376,673 2,390,493 3,012,745 1,652,070 101,323,796 19,981,831
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies........ 131,354,444 156,404,122 8,557,033 19,366,149 (76,822,756) 398,271,409
----------- ---------- ---------- --------- ----------- -----------
Net increase in net
assets resulting
from operations........... 154,944,668 165,159,957 11,982,822 21,875,129 165,660,224 573,054,567
Distributions to shareholders
from:
Undistributed net investment
income:
Class I.................. (6,279,423) (4,752,106) (854,965) (337,856) (138,119,821) (154,359,654)
Class II................. (57,905) -- -- -- (747,247) (100,164)
Net realized capital gain:
Class I.................. (5,915,536) (1,478,440) (1,652,070) (896,402) (19,902,855) (1,914,525)
Class II................. (56,415) -- -- -- (78,972) --
Increase (decrease) in net assets
from capital share transactions
(Note 2).................. 204,241,737 41,477,162 2,045,737 4,933,183 (360,939,808) (214,844,085)
----------- ---------- ---------- --------- ----------- -----------
Net increase (decrease)
in net assets............ 346,877,126 200,406,573 11,521,524 25,574,054 (354,128,479) 201,836,139
Net assets:
Beginning of year......... 717,026,094 516,619,521 92,986,638 67,412,584 2,774,344,423 2,572,508,284
----------- ---------- ---------- --------- ----------- -----------
End of year............... $1,063,903,220 $717,026,094 $104,508,162 $92,986,638 $2,420,215,944 $2,774,344,423
=========== ========== ========== ========= =========== ===========
Undistributed net investment income included in net assets:
Beginning of year.......... $ 6,336,281 $ 4,733,342 $ 845,843 $ 326,789 $ 7,091,302 $ 6,749,793
=========== ========== ========== ========= =========== ===========
End of year................ $ 10,212,504 $ 6,336,281 $ 403,922 $ 845,843 $ 9,384,835 $ 7,091,302
=========== ========== ========== ========= =========== ===========
Income Fund U.S. Government Securities Fund
----------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income (Note 1).................. $ 521,625,487 $ 429,152,388 $ 767,312,081 $ 836,543,555
Net realized gain (loss) from security transactions
and foreign currency transactions (Note 1)....... 54,450,898 34,267,583 (50,886,927) (57,944,614)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.... 12,739,334 247,694,923 (183,394,082) 636,365,221
----------- ----------- ------------ ------------
Net increase in net assets resulting from operations 588,815,719 711,114,894 533,031,072
1,414,964,162
Distributions to shareholders:
From undistributed net investment income:
Class I......................................... (496,461,082) (424,364,184) (772,347,077) (818,027,564)
Class II........................................ (14,090,940) (658,851) (2,259,432) (102,491)
From net realized capital gain:
Class I......................................... (70,836,803) (62,309,280) -- --
Class II........................................ (1,197,351) -- --
Increase (decrease) in net assets from capital share
transactions (Note 2)............................ 1,165,627,354 836,323,234 (684,584,180) (1,152,281,674)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets............. 1,171,856,897 1,060,105,813 (926,159,617) (555,447,567)
Net assets:
Beginning of year................................ 5,951,610,357 4,891,504,544 11,113,299,872 11,668,747,439
----------- ----------- ------------ ------------
End of year...................................... $7,123,467,254 $5,951,610,357 $10,187,140,255 $11,113,299,872
=========== =========== ============ ============
Undistributed net investment income included in net assets:
Beginning of year................................ $ 1,820,982 $ 8,679,566 $ 24,585,885 $ 6,172,385
=========== =========== ============ ============
End of year...................................... $ 34,315,598 $ 1,820,982 $ 17,291,457 $ 24,585,885
=========== =========== ============ ============
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Franklin Custodian Funds, Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Corporation) is an open-end, diversified
management investment company (mutual fund), registered under the Investment
Company Act of 1940, as amended. The Corporation's shares are offered in five
different Series (the Funds) with each Fund, in effect, representing a separate
fund and each of the Funds maintaining a totally separate investment portfolio.
The investment objectives of the Funds are as follows:
Capital Growth Growth and Income Current Income
- ----------- ----------- -----------------------
Growth Fund Utilities Fund U.S. Government Securities Fund
DynaTech Fund Income Fund
The Funds offer two classes of shares, Class I and Class II. Class I shares are
sold with a higher front-end sales charge than Class II shares. Each class of
shares may be subject to a contingent deferred sales charge and has the same
rights, except with respect to the effect of the respective sales charges, the
distribution fees borne by each class, voting rights on matters affecting a
single class and the exchange privilege of each class.
The offering of Class II shares began September 16, 1996 for the DynaTech Fund
and May 1, 1995 for the other Funds. All previously outstanding shares became
Class I shares.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no recent sale price, within the range of the most recent quoted bid
and asked prices. Other securities are valued based on a variety of factors,
including yield, risk, maturity, trade activity and recent developments related
to the securities. The Funds may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions, under procedures approved by the Board of Directors (the Board).
Securities for which market quotations are not available are valued in
accordance with procedures established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. That value is converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
The fair value of securities restricted as to resale are determined following
procedures established by the Board.
b. Income Taxes:
The Funds intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to shareholders which will be sufficient to relieve the
Funds from income and excise taxes. Each Fund is treated as a separate entity in
the determination of compliance with the Internal Revenue Code.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Original issue discount is amortized as required by the Internal Revenue Code.
Realized and unrealized gains or losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative portion of net assets of each class.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions - see Note 7.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale and foreign currency
transactions.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles 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 expense during
the reporting period. Actual results could differ from those estimates.
f. Expense Allocation:
Common expenses incurred by the Corporation are allocated among the Funds based
on the ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
g. Foreign Currency Translation:
The accounting records of the Funds are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends and interest, and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arises
from changes in the value of assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
h. Repurchase Agreements:
The Funds, except the U.S. Government Securities Fund, may enter into a joint
repurchase agreement whereby their uninvested cash balances are deposited into a
joint cash account to be used to invest in one or more repurchase agreements
with government securities dealers recognized by the Federal Reserve Board
and/or member banks of the Federal Reserve System. The value and face amount of
the joint repurchase agreement are allocated to the Fund based on its pro-rata
interest. A repurchase agreement is accounted for as a loan by the Fund to the
seller, collateralized by underlying U.S. government 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%. At September 30, 1996,
all outstanding repurchase agreements held by the Funds had been entered into on
that date.
i. Securities Purchased on a When-Issued or Delayed Delivery Basis:
The Funds may purchase securities on a when-issued or 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. These
securities are identified on the accompanying Statement of Investments in
Securities and Net Assets.
2. CAPITAL STOCK
At September 30, 1996, there were 14 billion shares of capital stock authorized.
The shares of $.01 par value capital stock were allocated to the Funds as
follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech FundUtilities Fund Income Fund Securities Fund
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Class I........................................ 250,000,000 250,000,000 400,000,000 3,600,000,000 2,500,000,000
Class II....................................... 250,000,000 250,000,000 400,000,000 3,600,000,000 2,500,000,000
Transactions in each of the Fund's shares for the year ended September 30, 1996 and 1995 were as follows:
Growth Fund DynaTech Fund Utilities Fund
-------------------- ------------------- ---------------------
Class I Shares: Shares Amount Shares Amount Shares Amount
-------- ---------- -------- --------- --------- ----------
1996
<S> <C> <C> <C> <C> <C> <C>
Shares sold........................ 14,573,392 $309,789,082 3,079,877 $39,604,883 21,426,300 $215,939,345
Shares issued in reinvestment
of distributions.................. 540,805 10,967,608 177,727 2,205,599 11,952,242 118,303,241
Shares redeemed.................... (7,187,477) (152,895,280) (3,085,060) (39,764,944) (70,389,767) (706,923,314)
-------- ---------- -------- --------- --------- ----------
Net increase (decrease)............ 7,926,720 $167,861,410 172,544 $ 2,045,538 (37,011,225) $(372,680,728)
======== ========== ======== ========= ========= ==========
1995
Shares sold........................ 8,141,407 $135,982,519 2,713,802 $30,766,303 44,589,208 $392,675,656
Shares issued in reinvestment
of distributions.................. 376,366 5,532,585 109,288 1,078,651 12,895,110 114,654,996
Shares redeemed.................... (6,256,752) (103,993,273) (2,395,735) (26,911,771) (82,691,074) (730,136,809)
-------- ---------- -------- --------- --------- ----------
Net increase (decrease)............ 2,261,021 $ 37,521,831 427,355 $ 4,933,183 (25,206,756) $(222,806,157)
======== ========== ======== ========= ========= ==========
Class II Shares:
1996+
Shares sold........................ 1,925,516 $ 41,102,731 14 $ 199 1,459,417 $ 14,693,105
Shares issued in reinvestment
of distributions.................. 4,957 100,242 -- -- 67,296 663,744
Shares redeemed.................... (224,665) (4,822,646) -- -- (363,584) (3,615,929)
-------- ---------- -------- --------- --------- ----------
Net increase....................... 1,705,808 $ 36,380,327 14 $ 199 1,163,129 $ 11,740,920
======== ========== ======== ========= ========= ==========
1995*
Shares sold........................ 233,454 $ 4,286,079 859,907 $ 7,973,029
Shares issued in reinvestment
of distributions.................. -- -- 8,744 80,958
Shares redeemed.................... (18,180) (330,748) (9,894) (91,915)
-------- ---------- --------- ----------
Net increase....................... 215,274 $ 3,955,331 858,757 $ 7,962,072
======== ========== ========= ==========
Income Fund U.S. Government Securities Fund
--------------------- -----------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Class I Shares:
1996
<S> <C> <C> <C> <C>
Shares sold............................................. 642,104,925 $1,473,287,913 85,184,579 $ 579,402,859
Shares issued in reinvestment of distributions ......... 150,894,313 344,863,416 51,937,467 352,406,036
Shares redeemed......................................... (405,681,073) (929,200,372) (245,065,339) (1,663,170,694)
---------- ------------ ---------- ------------
Net increase (decrease)................................. 387,318,165 $ 888,950,957 (107,943,293) $ (731,361,799)
========== ============ ========== ============
1995
Shares sold............................................. 583,098,728 $1,274,109,225 79,866,189 $ 530,154,088
Shares issues in reinvestment of distributions.......... 135,535,586 293,424,537 54,489,699 359,042,632
Shares redeemed......................................... (365,297,824) (795,682,760) (312,000,457) (2,053,095,659)
---------- ------------ ---------- ------------
Net increase (decrease)................................. 353,336,490 $ 771,851,002 (177,644,569) $(1,163,898,939)
========== ============ ========== ============
Income Fund U.S. Government Securities Fund
--------------------- -----------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Class II Shares:
1996
Shares sold............................................. 126,159,539 $ 289,827,410 7,668,930 $ 51,954,655
Shares issued in reinvestment of distributions ......... 4,108,044 9,379,710 212,412 1,428,321
Shares redeemed......................................... (9,852,944) (22,530,723) (982,730) (6,605,357)
---------- ------------ ---------- ------------
Net increase............................................ 120,414,639 $ 276,676,397 6,898,612 $ 46,777,619
========== ============ ========== ============
1995*
Shares sold............................................. 29,016,628 $ 65,457,754 1,732,757 $ 11,791,414
Shares issues in reinvestment of distributions.......... 169,489 381,668 8,234 55,942
Shares redeemed......................................... (604,942) (1,367,190) (33,818) (230,091)
---------- ------------ ---------- ------------
Net increase............................................ 28,581,175 $ 64,472,232 1,707,173 $ 11,617,265
========== ============ ========== ============
*For the period May 1, 1995 to September 30, 1995.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At September 30, 1996, for tax purposes, the Funds had accumulated net realized
gains or capital loss carryovers as follows:
Growth Fund DynaTech FundUtilities Fund Income Fund
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Accumulated net realized gains.................................. $9,795,215 $3,012,745 $101,326,200 $30,949,499
======== ========= ========= ========
U.S. Government
Securities Fund
---------
Capital loss carryovers
<S> <C> <C>
Expiring in:1997........................................................................................ $ 92,974,800
1998........................................................................................ 74,910,973
1999........................................................................................ 67,082,683
2002........................................................................................ 111,364,839
2003........................................................................................ 3,698,366
2004........................................................................................ 57,539,179
---------
$407,570,840
=========
</TABLE>
From November 1, 1995 through September 30, 1996, the U.S. Government Securities
Fund incurred approximately $47,593,996 of realized capital losses. As permitted
by Tax regulations, the U.S. Government Securities Fund intends to elect to
defer these losses and treat them as having arisen in the year ended September
30, 1997.
The U.S. Government Securities Fund had capital loss carryovers of $266,310,966
which expired at September 30, 1996 and were reclassified to paid-in capital
pursuant to Statement of Position (SOP) 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial statement purposes at September 30,
1996 by $2,400 in the Utilities Fund.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended September 30, 1996, were
as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech FundUtilities Fund Income Fund Securities Fund
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Purchases.................................. $58,628,245 $14,778,072 $435,055,271 $3,696,321,585 $ 835,541,261
Sales...................................... $15,654,062 $ 9,304,239 $628,087,325 $1,456,344,898 $1,479,073,986
</TABLE>
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers),
provides investment advice, administrative services, office space and facilities
to each Fund, and receives fees computed monthly based on the net assets of each
Fund on the last day of the month as follows:
Annualized Fee Rate Month End Net Assets
------------ -----------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
Fees are further reduced on net assets over $12.5 billion. The terms of the
management agreement provide that annual aggregate expenses of each Fund be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations, and administrative interpretations of the states in which
each Fund's shares are registered. For the year ended September 30, 1996, the
Funds' expenses did not exceed these limitations.
b. Shareholder Services Agreement:
Under the terms of a shareholder service agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Funds pay costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Funds for
the year ended September 30, 1996, aggregated $12,781,687, of which $11,756,731
was paid to Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Funds reimburse Franklin/Templeton
Distributors, Inc. (Distributors), in an amount up to a maximum of 0.15% per
annum for Class I and 0.65% per annum for Class II, of the average daily net
assets of such class of the Income, Utilities and U.S. Government Securities
Funds and up to a maximum of 0.25% per annum for Class I and 1.00% per annum for
Class II, of the average daily net assets of such class of the Growth and
DynaTech Funds, for costs incurred in the promotion, offering and marketing of
the Funds' shares. The Plans do not permit nor require payments of excess costs
after termination. Fees incurred by the Funds under the Plans aggregated
$24,755,125 for the year ended September 30, 1996.
In its capacity as underwriter for the shares of the Funds, Distributors
receives commissions on sales of the Funds' capital stock. Commissions are
deducted form the gross proceeds received from the sale of the capital stock of
the Funds, and as such are not expenses of the Funds. Distributors may also make
payments, out of its own resources, to the dealers for certain sales of the
Funds' shares. Commissions received by Distributors, the amounts paid to other
dealers, and applicable contingent deferred sales charges for the year ended
September 30, 1996, were as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech FundUtilities Fund Income Fund Securities Fund
------- --------- -------- --------- ---------
Class I
<S> <C> <C> <C> <C> <C>
Total commissions received........................ $4,460,999 $285,073 $3,759,514 $44,188,995 $12,612,378
Paid to other dealers............................. $4,062,236 $256,380 $3,628,541 $42,383,014 $12,067,431
Contingent deferred sales charges................. $-- $-- $-- $ 3,885 $ 486
Class II+
Total commissions received........................ $ 374,571 $-- $ 154,144 $ 2,617,728 $ 547,978
Paid to other dealers............................. $ 723,307 $-- $ 287,072 $ 5,742,911 $ 1,024,752
Contingent deferred sales charges................. $ 7,930 $-- $ 11,237 $ 132,943 $ 22,745
</TABLE>
+For the period September 16, 1996 to September 30, 1996 for the DynaTech Fund.
d. Other Affiliated Parties and Transactions:
During the year ended September 30, 1996, legal fees of $69,679 were incurred to
a law firm in which Brian E. Lorenz, Secretary of the Corporation, is a partner.
Such fees were allocated to each fund as described in Note 1.
Certain officers and directors of the Corporation are also officers and/or
directors of Distributors, Advisers, and Investor Services, all wholly-owned
subsidiaries of Franklin Resources, Inc.
6. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities Exchange Commission pursuant to the Securities Act of 1933. The Funds
may purchase restricted securities through a private offering and they cannot be
sold without prior registration under the Securities Act of 1933 unless such
sale is pursuant to an exemption therefrom. Subsequent costs of registration of
such securities are borne by the issuer. A secondary market exists for certain
privately placed securities. The Funds' restricted securities are currently
valued as disclosed in Note 1. At September 30, 1996, the Income Fund held
restricted securities with a value aggregating $60,502,287 representing .8% of
the Fund's net assets. Such securities are:
<TABLE>
<CAPTION>
Face Amount Security Acquisition Date Cost Value
-------- --------------------------------------------- ------------ --------- ---------
<C> <C> <C> <C> <C> <C>
$40,000,000 Boardwalk Casino, Inc., First Mortgage Bonds, 16.50%, 03/31/05 4/12/95 $37,356,145 $40,072,000
Shares
--------
<S> <C> <C> <C> <C>
2,097,121 Bibb Co. ................................................... 9/27/96 29,681,691 17,587,500
1,281,869 Boardwalk Casino, Inc., Warrants............................ 4/12/95 2,643,855 2,814,343
59,258 Zale Corp., Ltd., Partnership Units......................... 7/30/93 42,074 28,444
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 45.8% of its portfolio invested in lower rated and
comparable quality unrated high yield securities. Investments in
high yield securities are accompanied by a greater degree of credit risk and
such lower rated quality securities tend to be more sensitive to economic
conditions than higher rated securities. The risk of loss due to default by the
issuer may be significantly greater for the holders
of high yield securities, because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. At September 30, 1996,
the Income Fund held one defaulted security with a value aggregating $2,730,000,
representing .04% of the Fund's net assets. For information as to the specific
security, see the accompanying Statement of Investments in Securities and Net
Assets.
For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due to
unpaid interest income on defaulted bonds for the current reporting period.
There are certain credit risks due to the manner in which certain Funds are
invested, which may subject the Funds more significantly to economic changes
occurring in certain industries, sectors or counties as follows:
The Utilities Fund has investments in excess of 10% of net assets in
the Utilities Industry. The Income Fund has investments in excess of
10% of net assets in various foreign government agencies.
8. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
Investments in portfolio companies, 5% or more of whose outstanding voting
securities are held by any of the Funds, are defined in the Investment Company
Act of 1940 as affiliated companies. The Growth Fund and the Income Fund had
investments in such affiliated companies at September 30, 1996, with a value in
the amount of $6,906 and $10,179,527, respectively.
9. SUBSEQUENT EVENTS
On September 17, 1996 and October 18, 1996, the Board of Directors declared
distributions as follows:
<TABLE>
<CAPTION>
From Undistributed
Fund Record Date Payment Date Net Investment Income
- -------------------------------------------------------------- -------- --------- ---------------
<S> <C> <C> <C>
U.S. Government Securities Fund - Class I............................... 9/30 10/15 $0.0410
U.S. Government Securities Fund - Class II.............................. 9/30 10/15 0.0378
U.S. Government Securities Fund - Class I............................... 10/31 11/15 0.0410
U.S. Government Securities Fund - Class II.............................. 10/31 11/15 0.0378
Income Fund - Class I................................................... 9/30 10/15 0.0150
Income Fund - Class II.................................................. 9/30 10/15 0.0140
Income Fund - Class I................................................... 10/31 11/15 0.0150
Income Fund - Class II.................................................. 10/31 11/15 0.0140
</TABLE>
10. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period by
Fund are as follows:
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
--------------------------------------------------- -------------------------------
Net Distri- Ratio of Ratio of
Realized & Distri- butions Net Net Expenses Net In-
Year Net Asset Net Unrealized Total butions From Asset Assets to vestment Average
Ended Value at Invest- Gain From From Net Realized Total Value at at End Average Income toPortfolio Com-
SeptemberBeginning ment (Loss) onInvestmentInvestment CapitalDistri- End of Total of Period Net Average Turnover mission
30, of Period IncomeSecuritiesOperations Income Gains butions Period Return***(in 000's)Assets Net Assets Rate Rate****
Growth Fund:**
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $13.45 $.229 $ .524 $ .753 $(.353) $(.150)$(.503) $13.70 5.73% $ 532,971 .66% 2.06% .81% --
1993 13.70 .232 .575 .807 (.189) (.068) (.257) 14.25 5.87 560,824 .64 1.64 1.70 --
1994 14.25 .190 .899 1.089 (.297) (.082) (.379) 14.96 7.63 516,620 .77 1.23 6.52 --
1995 14.96 .170 4.427 4.597 (.135) (.042) (.177) 19.38 31.11 712,866 .90 1.08 1.39 --
1996 19.38 .220 3.538 3.758 (.164) (.154) (.318) 22.82 19.60 1,020,486 .87 1.16 2.03 .0543
Class II Shares:
1995+ 16.88 .023 2.427 2.450 -- -- -- 19.33 14.72 4,161 1.79+++ 0.37+++ 1.39 --
1996 19.33 .120 3.463 3.583 (.159) (.154) (.313) 22.60 18.73 43,417 1.63 0.40 2.03 .0543
DynaTech Fund:**
Class I Shares:
1992 8.68 .120 .522 .642 (.112) -- (.112) 9.21 7.29 64,595 .81 1.42 10.70 --
1993 9.21 .102 1.207 1.309 (.117) (.112) (.229) 10.29 14.36 71,469 .81 1.03 26.56 --
1994 10.29 .070 .210 .280 (.124) (.596) (.720) 9.85 2.89 67,413 1.00 .69 9.73 --
1995 9.85 .118 2.991 3.109 (.049) (.130) (.179) 12.78 32.10 92,987 1.01 1.11 9.83 --
1996 12.78 .060 1.536 1.596 (.118) (.228) (.346) 14.03 12.84 104,508 1.05 0.43 11.94 .0551
Class II Shares:++
1996 13.57 .004 .460 .464 -- -- -- 14.03 3.39 -- 1.85+++ (.14)+++ 11.94 .0551
Utilities Fund:
Class I Shares:
1992 8.81 .530 .849 1.379 (.559) -- (.559) 9.63 15.89 2,191,095 .57 5.90 1.39x --
1993 9.63 .534 1.161 1.695 (.545) -- (.545) 10.78 17.83 3,626,774 .55 5.30 7.81 --
1994 10.78 .550 (2.436) (1.886) (.524) (.040) (.564) 8.33 (17.94) 2,572,508 .64 5.76 6.34 --
1995 8.33 .527 1.424 1.951 (.524) (.007) (.531) 9.75 24.19 2,765,976 .73 5.88 5.55 --
1996 9.75 .537 .039 .576 (.524) (.072) (.596) 9.73 5.94 2,400,561 .71 5.24 17.05 .0486
Class II Shares:
1995+ 8.89 .228 .880 1.108 (.248) -- (.248) 9.75 13.01 8,369 1.21+++ 5.15+++ 5.55 --
1996 9.75 .462 .061 .523 (.481) (.072) (.553) 9.72 5.39 19,655 1.23 4.86 17.05 .0486
Income Fund:
Class I Shares:
1992 2.08 .190 .194 .384 (.205) (.009) (.214) 2.25 18.80 2,483,501 .55 9.11 23.30 --
1993 2.25 .180 .227 .407 (.185) (.012) (.197) 2.46 18.76 3,935,444 .54 7.84 25.41 --
1994 2.46 .170 (.201) (.031) (.180) (.029) (.209) 2.22 (1.52) 4,891,505 .64 7.37 23.37 --
1995 2.22 .180 .108 .288 (.180) (.028) (.208) 2.30 14.00 5,885,788 .71 8.26 58.64 --
1996 2.30 .190 .017 .207 (.180) (.027) (.207) 2.30 9.43 6,780,153 .70 8.27 25.29 .0518
Class II Shares:
1995+ 2.18 .079 .113 .192 (.072) -- (.072) 2.30 8.96 65,822 1.23+++ 7.89+++ 58.64 --
1996 2.30 .170 .025 .195 (.168) (.027) (.195) 2.30 8.86 343,314 1.21 7.84 25.29 .0518
U.S. Government Securities Fund:*
Class I Shares:
1992 7.14 .609 .106 .715 (.595) -- (.595) 7.26 10.14 13,617,157 .53 8.46 38.75 --
1993 7.26 .557 (.056) .501 (.561) -- (.561) 7.20 6.86 14,268,516 .52 7.71 43.10 --
1994 7.20 .500 (.678) (.178) (.512) -- (.512) 6.51 (2.75) 11,668,747 .55 7.37 18.28 --
1995 6.51 .497 .348 .845 (.485) -- (.485) 6.87 13.56 11,101,605 .61 7.50 5.48 --
1996 6.87 .488 (.146) .342 (.492) -- (.492) 6.72 5.15 10,129,483 .61 7.18 8.01 --
Class II Shares:
1995+ 6.67 .206 .167 .373 (.193) -- (.193) 6.85 5.66 11,695 1.18+++ 6.48+++ 5.48 --
1996 6.85 .454 (.152) .302 (.452) -- (.452) 6.70 4.55 57,657 1.17 6.80 8.01 --
</TABLE>
+For the period May 1, 1995 (effective date) to September 30, 1995.
++For the period September 16, 1996 (effective date) to September 30, 1996.
+++Annualized
*Maturity of U.S. government issues and the reinvestment of the proceeds thereof
are considered as purchases and sales of securities in computing the portfolio
turnover rate.
**Data prior to 1992 has been adjusted to reflect a two-for-one
stock split in the form of a 100% stock dividend to shareholders of record
effective on the beginning of business on June 1, 1992.
***Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains at net asset value. Prior to May 1, 1994, dividends
were reinvested at the maximum offering price, and capital gains at net asset
value. Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan for Class I shares, the sales charge on reinvested dividends
was eliminated. The total return may differ from that reported in the Manager's
Discussion due to differences between net asset values quoted and net asset
values calculated for financial reporting purposes.
****Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
Under IRC 854(b)(2) of the Internal Revenue Code, the Funds hereby designate the
following percentage amounts of their ordinary income dividends paid by the
Funds as income qualifying for the dividends received deduction for the year
ended September 30, 1996.
Growth Fund 99.86% DynaTech Fund 15.26% Utilities Fund 81.37% Income Fund24.17%
The amounts reported above are estimated percentages and should be used for
information purposes only.
Franklin Custodian Funds Annual Report 9/30/96.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the asset allocation of the fund's
securities as a percentage of the fund's total net assets.
Asset Allocation on September 30, 1996
Equity 80.8%
Short-Term Obligations & 19.2%
Other Net Assets
GRAPHIC MATERIAL (2)
This chart shows in pie format the portfolio breakdown of the fund's securities
as a percentage of the fund's total net assets.
Portfolio Breakdown on September 30, 1996
Health Care -- Diversified 9.2%
Pharmaceuticals 9.0%
Aerospace 7.4%
Data Processing 6.5%
Transportation 6.4%
Environmental Protection & 6.3%
Purification
Electronics & Electrical Equipment 5.4%
Chemicals 4.9%
Communications & Entertainment 4.5%
Business Services 4.1%
Other Industries 17.1%
Short-Term Obligations & 19.2%
Other Net Assets
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the S&P 500 Stock Index, based on a $10,000 investment from
10/1/86 to 9/30/96.
Period Ending Fund Index
10/1/86 $9,555 $10,000
10/31/86 $10,045 $10,577
11/30/86 $10,274 $10,834
12/31/86 $10,182 $10,558
1/31/87 $11,342 $11,980
2/28/87 $11,901 $12,453
3/31/87 $12,102 $12,813
4/30/87 $12,095 $12,699
5/31/87 $12,310 $12,809
6/30/87 $12,790 $13,456
7/31/87 $13,212 $14,139
8/31/87 $13,504 $14,666
9/30/87 $13,491 $14,345
10/31/87 $12,043 $11,255
11/30/87 $11,186 $10,327
12/31/87 $12,220 $11,113
1/31/88 $12,430 $11,581
2/29/88 $13,094 $12,121
3/31/88 $12,802 $11,746
4/30/88 $12,836 $11,877
5/31/88 $12,721 $11,979
6/30/88 $13,392 $12,529
7/31/88 $13,188 $12,481
8/31/88 $12,579 $12,057
9/30/88 $13,060 $12,570
10/31/88 $13,202 $12,920
11/30/88 $13,087 $12,735
12/31/88 $13,337 $12,958
1/31/89 $14,204 $13,907
2/28/89 $13,878 $13,560
3/31/89 $14,010 $13,876
4/30/89 $14,738 $14,596
5/31/89 $15,057 $15,188
6/30/89 $14,897 $15,101
7/31/89 $16,097 $16,465
8/31/89 $16,694 $16,787
9/30/89 $16,604 $16,718
10/31/89 $16,028 $16,331
11/30/89 $16,222 $16,664
12/31/89 $16,510 $17,064
1/31/90 $15,763 $15,919
2/28/90 $15,985 $16,124
3/31/90 $16,503 $16,551
4/30/90 $16,402 $16,139
5/31/90 $17,609 $17,713
6/30/90 $17,602 $17,594
7/31/90 $17,465 $17,538
8/31/90 $15,928 $15,952
9/30/90 $15,360 $15,175
10/31/90 $15,360 $15,110
11/30/90 $16,266 $16,086
12/31/90 $16,852 $16,535
1/31/91 $17,838 $17,256
2/28/91 $19,066 $18,490
3/31/91 $19,227 $18,937
4/30/91 $19,338 $18,983
5/31/91 $20,043 $19,801
6/30/91 $19,183 $18,894
7/31/91 $19,852 $19,775
8/31/91 $20,117 $20,243
9/30/91 $19,779 $19,905
10/31/91 $20,205 $20,172
11/30/91 $19,529 $19,359
12/31/91 $21,353 $21,574
1/31/92 $21,147 $21,172
2/29/92 $21,514 $21,445
3/31/92 $20,979 $21,027
4/30/92 $21,071 $21,645
5/31/92 $20,949 $21,752
6/30/92 $20,521 $21,427
7/31/92 $21,025 $22,304
8/31/92 $20,567 $21,847
9/30/92 $20,933 $22,102
10/31/92 $21,193 $22,177
11/30/92 $21,697 $22,931
12/31/92 $21,986 $23,213
1/31/93 $21,753 $23,408
2/28/93 $21,457 $23,727
3/31/93 $21,784 $24,227
4/30/93 $21,846 $23,641
5/31/93 $22,391 $24,272
6/30/93 $21,924 $24,343
7/31/93 $21,659 $24,245
8/31/93 $22,406 $25,164
9/30/93 $22,173 $24,970
10/31/93 $22,857 $25,487
11/30/93 $22,904 $25,245
12/31/93 $23,548 $25,551
1/31/94 $23,883 $26,419
2/28/94 $23,165 $25,703
3/31/94 $22,015 $24,583
4/30/94 $22,478 $24,897
5/31/94 $22,861 $25,306
6/30/94 $22,686 $24,686
7/31/94 $23,324 $25,495
8/31/94 $24,522 $26,541
9/30/94 $23,883 $25,893
10/31/94 $24,378 $26,476
11/30/94 $23,739 $25,512
12/31/94 $24,235 $25,890
1/31/95 $24,607 $26,560
2/28/95 $25,609 $27,596
3/31/95 $26,513 $28,410
4/30/95 $27,273 $29,245
5/31/95 $27,871 $30,415
6/30/95 $28,953 $31,121
7/31/95 $30,391 $32,154
8/31/95 $30,343 $32,234
9/30/95 $31,312 $33,595
10/31/95 $31,490 $33,474
11/30/95 $33,267 $34,943
12/31/95 $33,543 $35,618
1/31/96 $34,511 $36,829
2/29/96 $35,249 $37,171
3/31/96 $35,381 $37,528
4/30/96 $36,103 $38,080
5/31/96 $36,792 $39,062
6/30/96 $36,529 $39,211
7/31/96 $34,642 $37,478
8/31/96 $35,610 $38,268
9/30/96 $37,481 $40,423
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the S&P 500 Stock Index, based on a $10,000 investment from
5/1/95 to 9/30/96.
Period Ending Fund Index
5/1/95 $9,900 $10,000
5/31/95 $10,135 $10,400
6/30/95 $10,517 $10,641
7/31/95 $11,040 $10,995
8/31/95 $11,011 $11,022
9/30/95 $11,357 $11,487
10/31/95 $11,410 $11,446
11/30/95 $12,051 $11,948
12/31/95 $12,142 $12,179
1/31/96 $12,482 $12,593
2/29/96 $12,744 $12,710
3/31/96 $12,786 $12,832
4/30/96 $13,037 $13,021
5/31/96 $13,281 $13,357
6/30/96 $13,180 $13,407
7/31/96 $12,488 $12,815
8/31/96 $12,828 $13,085
9/30/96 $13,397 $13,822
GRAPHIC MATERIAL (5)
This chart shows in pie format the portfolio breakdown of the fund's securities
as a percentage of the fund's total net assets.
Portfolio Breakdown on September 30, 1996
Semiconductor/Manufacturer 18.0%
Computer Software 10.5%
Computer Hardware 9.5%
Telecommunications 8.7%
Networking 6.7%
Medical Services 5.8%
Retail 4.9%
Precision Instruments/Test Equipment 4.9%
Pharmaceutical Manufacturers 4.7%
Other Industries 9.7%
Short-Term Obligations & 16.6%
Other Net Assets
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the fund's
Shares with the S&P 500 Stock Index and the Hambrecht & Quist Technology Index,
based on a $10,000 investment from 10/1/86 to 9/30/96.
Period Ending Fund Index Index
10/1/86 $9,542 $10,000 $10,000
10/31/86 $10,010 $10,577 $10,484
11/30/86 $10,219 $10,834 $10,872
12/31/86 $9,910 $10,558 $10,417
1/31/87 $11,679 $11,980 $12,923
2/28/87 $12,640 $12,453 $14,192
3/31/87 $12,730 $12,813 $14,308
4/30/87 $12,901 $12,699 $14,954
5/31/87 $12,790 $12,809 $14,954
6/30/87 $13,071 $13,456 $14,672
7/31/87 $13,652 $14,139 $14,598
8/31/87 $14,373 $14,666 $16,104
9/30/87 $14,183 $14,345 $16,289
10/31/87 $11,278 $11,255 $11,433
11/30/87 $10,347 $10,327 $10,300
12/31/87 $11,268 $11,113 $12,015
1/31/88 $11,455 $11,581 $11,600
2/29/88 $12,261 $12,121 $12,569
3/31/88 $11,959 $11,746 $11,896
4/30/88 $12,180 $11,877 $12,158
5/31/88 $12,080 $11,979 $11,839
6/30/88 $12,986 $12,529 $12,754
7/31/88 $12,402 $12,481 $11,909
8/31/88 $11,616 $12,057 $10,925
9/30/88 $11,858 $12,570 $11,310
10/31/88 $11,697 $12,920 $10,995
11/30/88 $11,304 $12,735 $10,570
12/31/88 $11,999 $12,958 $11,301
1/31/89 $12,897 $13,907 $12,098
2/28/89 $12,634 $13,560 $11,764
3/31/89 $12,685 $13,876 $11,388
4/30/89 $13,486 $14,596 $12,194
5/31/89 $14,388 $15,188 $12,962
6/30/89 $14,074 $15,101 $11,991
7/31/89 $15,007 $16,465 $12,501
8/31/89 $15,179 $16,787 $12,721
9/30/89 $15,463 $16,718 $12,599
10/31/89 $15,077 $16,331 $12,274
11/30/89 $15,351 $16,664 $11,678
12/31/89 $15,569 $17,064 $12,259
1/31/90 $15,102 $15,919 $11,687
2/28/90 $15,258 $16,124 $12,134
3/31/90 $15,914 $16,551 $12,653
4/30/90 $15,859 $16,139 $12,223
5/31/90 $17,749 $17,713 $13,912
6/30/90 $17,938 $17,594 $13,734
7/31/90 $17,527 $17,538 $12,649
8/31/90 $15,881 $15,952 $11,085
9/30/90 $15,058 $15,175 $9,935
10/31/90 $14,913 $15,110 $9,545
11/30/90 $15,670 $16,086 $10,440
12/31/90 $16,064 $16,535 $11,206
1/31/91 $17,681 $17,256 $12,850
2/28/91 $18,854 $18,490 $13,931
3/31/91 $18,968 $18,937 $14,542
4/30/91 $19,047 $18,983 $14,550
5/31/91 $20,083 $19,801 $15,117
6/30/91 $18,785 $18,894 $13,816
7/31/91 $19,730 $19,775 $14,562
8/31/91 $20,356 $20,243 $14,977
9/30/91 $19,776 $19,905 $14,400
10/31/91 $20,038 $20,172 $15,091
11/30/91 $19,639 $19,359 $14,596
12/31/91 $21,760 $21,574 $16,567
1/31/92 $22,267 $21,172 $17,535
2/29/92 $22,394 $21,445 $18,275
3/31/92 $21,518 $21,027 $17,118
4/30/92 $21,506 $21,645 $16,718
5/31/92 $21,356 $21,752 $16,706
6/30/92 $21,056 $21,427 $15,700
7/31/92 $21,656 $22,304 $16,430
8/31/92 $21,125 $21,847 $15,790
9/30/92 $21,241 $22,102 $16,369
10/31/92 $21,402 $22,177 $17,216
11/30/92 $22,094 $22,931 $18,340
12/31/92 $22,673 $23,213 $19,056
1/31/93 $23,003 $23,408 $19,862
2/28/93 $22,744 $23,727 $18,575
3/31/93 $23,192 $24,227 $18,778
4/30/93 $22,720 $23,641 $17,715
5/31/93 $23,854 $24,272 $19,315
6/30/93 $23,547 $24,343 $19,182
7/31/93 $23,074 $24,245 $18,207
8/31/93 $23,995 $25,164 $19,175
9/30/93 $24,302 $24,970 $19,523
10/31/93 $24,397 $25,487 $20,058
11/30/93 $24,043 $25,245 $20,315
12/31/93 $24,357 $25,551 $20,795
1/31/94 $24,966 $26,419 $22,021
2/28/94 $24,890 $25,703 $22,277
3/31/94 $24,204 $24,583 $20,984
4/30/94 $23,823 $24,897 $20,564
5/31/94 $24,154 $25,306 $20,689
6/30/94 $23,265 $24,686 $19,461
7/31/94 $24,001 $25,495 $20,198
8/31/94 $25,449 $26,541 $22,221
9/30/94 $25,017 $25,893 $22,202
10/31/94 $26,058 $26,476 $23,772
11/30/94 $25,576 $25,512 $23,604
12/31/94 $25,626 $25,890 $24,137
1/31/95 $25,859 $26,560 $24,027
2/28/95 $26,557 $27,596 $25,829
3/31/95 $27,152 $28,410 $26,865
4/30/95 $28,264 $29,245 $28,571
5/31/95 $29,091 $30,415 $29,417
6/30/95 $31,367 $31,121 $32,590
7/31/95 $32,789 $32,154 $35,414
8/31/95 $32,427 $32,234 $36,086
9/30/95 $33,047 $33,595 $37,113
10/31/95 $33,694 $33,474 $37,590
11/30/95 $33,228 $34,943 $37,378
12/31/95 $32,322 $35,618 $36,241
1/31/96 $32,348 $36,829 $37,047
2/29/96 $33,491 $37,171 $38,460
3/31/96 $32,827 $37,528 $36,965
4/30/96 $35,511 $38,080 $40,997
5/31/96 $36,787 $39,062 $41,568
6/30/96 $35,618 $39,211 $38,663
7/31/96 $33,491 $37,478 $34,985
8/31/96 $34,714 $38,268 $35,005
9/30/96 $37,292 $40,423 $35,044
GRAPHIC MATERIAL (7)
This chart shows in pie format the portfolio breakdown of the fund's securities
as a percentage of the fund's total net assets.
Portfolio Breakdown on September 30, 1996
Stocks 84.5%
Corporate Bonds 11.5%
Short-Term Obligations & 4.0%
Other Net Assets
GRAPHIC MATERIAL (8)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the S&P 500 Stock Index, based on a $10,000 investment from
10/1/86 to 9/30/96.
Period Ending Fund Index
10/1/86 $9,580 $10,000
10/31/86 $10,058 $10,577
11/30/86 $10,070 $10,834
12/31/86 $9,714 $10,558
1/31/87 $10,439 $11,980
2/28/87 $10,201 $12,453
3/31/87 $9,960 $12,813
4/30/87 $9,610 $12,699
5/31/87 $9,465 $12,809
6/30/87 $9,734 $13,456
7/31/87 $9,537 $14,139
8/31/87 $9,844 $14,666
9/30/87 $9,659 $14,345
10/31/87 $9,397 $11,255
11/30/87 $9,134 $10,327
12/31/87 $9,181 $11,113
1/31/88 $10,126 $11,581
2/29/88 $9,858 $12,121
3/31/88 $9,534 $11,746
4/30/88 $9,495 $11,877
5/31/88 $9,833 $11,979
6/30/88 $10,004 $12,529
7/31/88 $9,911 $12,481
8/31/88 $9,858 $12,057
9/30/88 $10,080 $12,570
10/31/88 $10,255 $12,920
11/30/88 $10,147 $12,735
12/31/88 $10,249 $12,958
1/31/89 $10,401 $13,907
2/28/89 $10,208 $13,560
3/31/89 $10,215 $13,876
4/30/89 $10,482 $14,596
5/31/89 $10,988 $15,188
6/30/89 $11,262 $15,101
7/31/89 $11,977 $16,465
8/31/89 $11,748 $16,787
9/30/89 $11,799 $16,718
10/31/89 $11,945 $16,331
11/30/89 $12,294 $16,664
12/31/89 $12,897 $17,064
1/31/90 $12,289 $15,919
2/28/90 $12,363 $16,124
3/31/90 $12,265 $16,551
4/30/90 $11,706 $16,139
5/31/90 $12,295 $17,713
6/30/90 $12,393 $17,594
7/31/90 $12,501 $17,538
8/31/90 $11,778 $15,952
9/30/90 $11,723 $15,175
10/31/90 $12,538 $15,110
11/30/90 $12,773 $16,086
12/31/90 $12,947 $16,535
1/31/91 $12,819 $17,256
2/28/91 $13,298 $18,490
3/31/91 $13,488 $18,937
4/30/91 $13,602 $18,983
5/31/91 $13,553 $19,801
6/30/91 $13,448 $18,894
7/31/91 $13,945 $19,775
8/31/91 $14,308 $20,243
9/30/91 $14,831 $19,905
10/31/91 $15,016 $20,172
11/30/91 $15,336 $19,359
12/31/91 $16,077 $21,574
1/31/92 $15,427 $21,172
2/29/92 $15,393 $21,445
3/31/92 $15,324 $21,027
4/30/92 $15,706 $21,645
5/31/92 $16,106 $21,752
6/30/92 $16,314 $21,427
7/31/92 $17,179 $22,304
8/31/92 $17,126 $21,847
9/30/92 $17,229 $22,102
10/31/92 $17,050 $22,177
11/30/92 $17,068 $22,931
12/31/92 $17,538 $23,213
1/31/93 $17,864 $23,408
2/28/93 $18,827 $23,727
3/31/93 $18,970 $24,227
4/30/93 $18,970 $23,641
5/31/93 $18,952 $24,272
6/30/93 $19,413 $24,343
7/31/93 $19,823 $24,245
8/31/93 $20,420 $25,164
9/30/93 $20,345 $24,970
10/31/93 $20,232 $25,487
11/30/93 $19,307 $25,245
12/31/93 $19,558 $25,551
1/31/94 $19,174 $26,419
2/28/94 $18,234 $25,703
3/31/94 $17,612 $24,583
4/30/94 $17,865 $24,897
5/31/94 $16,872 $25,306
6/30/94 $16,319 $24,686
7/31/94 $17,050 $25,495
8/31/94 $17,149 $26,541
9/30/94 $16,714 $25,893
10/31/94 $17,014 $26,476
11/30/94 $17,215 $25,512
12/31/94 $17,272 $25,890
1/31/95 $18,292 $26,560
2/28/95 $18,272 $27,596
3/31/95 $18,008 $28,410
4/30/95 $18,401 $29,245
5/31/95 $19,457 $30,415
6/30/95 $19,459 $31,121
7/31/95 $19,396 $32,154
8/31/95 $19,690 $32,234
9/30/95 $20,757 $33,595
10/31/95 $21,182 $33,474
11/30/95 $21,523 $34,943
12/31/95 $22,571 $35,618
1/31/96 $22,940 $36,829
2/29/96 $22,354 $37,171
3/31/96 $22,333 $37,528
4/30/96 $21,585 $38,080
5/31/96 $21,827 $39,062
6/30/96 $22,990 $39,211
7/31/96 $21,719 $37,478
8/31/96 $22,031 $38,268
9/30/96 $21,990 $40,423
GRAPHIC MATERIAL (9)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the S&P 500 Stock Index, based on a $10,000 investment from
5/1/95 to 9/30/96.
Period Ending Fund Index
5/1/95 $9,899 $10,000
5/31/95 $10,492 $10,400
6/30/95 $10,500 $10,641
7/31/95 $10,454 $10,995
8/31/95 $10,613 $11,022
9/30/95 $11,188 $11,487
10/31/95 $11,406 $11,446
11/30/95 $11,578 $11,948
12/31/95 $12,150 $12,179
1/31/96 $12,325 $12,593
2/29/96 $12,021 $12,710
3/31/96 $12,005 $12,832
4/30/96 $11,603 $13,021
5/31/96 $11,721 $13,357
6/30/96 $12,331 $13,407
7/31/96 $11,648 $12,815
8/31/96 $11,816 $13,085
9/30/96 $11,692 $13,822
GRAPHIC MATERIAL (10)
This chart shows in pie format the portfolio breakdown of the fund's securities
as a percentage of the fund's total net assets.
Portfolio Breakdown on September 30, 1996
Corporate Bonds 34.2%
Utilities Stocks 19.9%
Foreign Bonds 12.8%
U.S. Treasury Bonds & Notes 7.4%
Oil & Gas Stocks 4.8%
Gold Stocks 3.4%
Pharmaceutical Stocks 1.9%
Consumer Goods Stocks 1.6%
REITs 1.6%
Telecommunication Services Stocks 1.4%
Cable & Media Stocks 1.3%
Other Stocks 1.2%
Cash & Equivalents 8.5%
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the S&P 500 Stock Index, the Lehman Brothers
Government/Corporate Bond Index, and the Lipper Income Funds Average, based on a
$10,000 investment from 10/1/86 to 9/30/96.
Period Ending Fund Index Index Index
10/1/86 $9,574 $10,000 $10,000 $10,000
12/31/86 $9,854 $10,557 $10,307 $10,380
3/31/87 $10,855 $12,811 $10,460 $11,176
6/30/87 $10,607 $13,454 $10,262 $11,118
9/30/87 $10,485 $14,342 $9,962 $11,147
12/31/87 $10,334 $11,111 $10,544 $10,446
3/31/88 $10,848 $11,743 $10,921 $11,008
6/30/88 $11,082 $12,525 $11,030 $11,286
9/30/88 $11,159 $12,568 $11,236 $11,463
12/31/88 $11,244 $12,956 $11,344 $11,600
3/31/89 $11,599 $13,875 $11,467 $11,986
6/30/89 $12,257 $15,100 $12,389 $12,647
9/30/89 $12,458 $16,717 $12,506 $13,151
12/31/89 $12,668 $17,061 $12,957 $13,330
3/31/90 $12,389 $16,548 $12,810 $13,117
6/30/90 $12,811 $17,588 $13,271 $13,513
9/30/90 $11,712 $15,172 $13,350 $12,781
12/31/90 $11,557 $16,531 $14,031 $13,348
3/31/91 $13,483 $18,933 $14,409 $14,505
6/30/91 $14,308 $18,890 $14,626 $14,763
9/30/91 $15,603 $19,900 $15,467 $15,779
12/31/91 $16,313 $21,568 $16,292 $16,649
3/31/92 $17,404 $21,022 $16,047 $16,823
6/30/92 $18,283 $21,422 $16,699 $17,321
9/30/92 $18,605 $22,096 $17,514 $17,935
12/31/92 $18,799 $23,208 $17,526 $18,282
3/31/93 $20,303 $24,222 $18,343 $19,219
6/30/93 $21,227 $24,341 $18,895 $19,649
9/30/93 $22,165 $24,969 $19,522 $20,286
12/31/93 $22,847 $25,548 $19,465 $20,497
3/31/94 $21,667 $24,580 $18,852 $19,867
6/30/94 $21,331 $24,683 $18,618 $19,780
9/30/94 $21,865 $25,890 $18,712 $20,183
12/31/94 $21,391 $25,885 $18,781 $19,907
3/31/95 $22,270 $28,406 $19,716 $21,016
6/30/95 $23,903 $31,119 $20,994 $22,279
9/30/95 $24,926 $33,593 $21,395 $23,328
12/31/95 $25,946 $35,615 $22,392 $24,376
3/31/96 $26,107 $37,528 $21,868 $24,844
6/30/96 $26,861 $39,213 $21,970 $25,296
9/30/96 $27,277 $40,423 $22,359 $25,792
GRAPHIC MATERIAL (12)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the S&P 500 Stock Index, the Lehman Brothers
Government/Corporate Bond Index, and the Lipper Income Funds Average, based on a
$10,000 investment from 5/1/95 to 9/30/96.
Period Ending Fund Index Index Index
5/1/95 $9,909 $10,000 $10,000 $10,000
6/30/95 $10,410 $10,641 $10,502 $10,403
9/30/95 $10,846 $11,487 $10,703 $10,893
12/31/95 $11,275 $12,178 $11,201 $11,382
3/31/96 $11,379 $12,832 $10,939 $11,601
6/30/96 $11,642 $13,409 $10,991 $11,812
9/30/96 $11,707 $13,822 $11,185 $12,043
GRAPHIC MATERIAL (13)
This point graph demonstrates the risk vs. return rate of the fund against the
Merrill Lynch 10-Year Treasury, Merrill Lynch 20-Year Treasury and the average
one-year Certificate of Deposit.
Risk vs. Return (10/90 - 9/96)
-------------------------
ML10YR 7.20 6.97
ML30YR 8.33 9.87
USG 6.68 3.40
CDS 1 YR $U 4.41 0.31
-------------------------
GRAPHIC MATERIAL (14)
This bar chart demonstrates the yield comparison between the fund (6.81%), the
average GNMA fund (6.22%), a 1-Year CD (5.39%), and the average Money Market
Fund (4.66%).
GRAPHIC MATERIAL (15)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the Lehman Brothers Intermediate U.S. Government Bond Index
and the Consumer Price Index, based on a $10,000 investment from 10/1/86 to
9/30/96.
Period Ending Fund Index Index
10/1/86 9574 10000 10000
Oct-86 9,665 10,126 10,009
Nov-86 9,802 10,223 10,018
Dec-86 9,855 10,250 10,027
Jan-87 9,975 10,342 10,090
Feb-87 10,069 10,394 10,127
Mar-87 10,096 10,371 10,172
Apr-87 9,822 10,187 10,227
May-87 9,809 10,165 10,263
Jun-87 9,977 10,285 10,299
Jul-87 10,016 10,307 10,326
Aug-87 10,027 10,281 10,380
Sep-87 9,825 10,152 10,434
Oct-87 10,038 10,455 10,461
Nov-87 10,181 10,517 10,471
Dec-87 10,280 10,619 10,471
Jan-88 10,602 10,883 10,498
Feb-88 10,689 10,998 10,525
Mar-88 10,671 10,952 10,571
Apr-88 10,668 10,933 10,625
May-88 10,649 10,881 10,662
Jun-88 10,877 11,058 10,707
Jul-88 10,843 11,025 10,752
Aug-88 10,840 11,039 10,798
Sep-88 11,025 11,230 10,870
Oct-88 11,213 11,385 10,906
Nov-88 11,114 11,287 10,915
Dec-88 11,046 11,299 10,933
Jan-89 11,190 11,412 10,988
Feb-89 11,170 11,362 11,033
Mar-89 11,167 11,415 11,097
Apr-89 11,364 11,645 11,169
May-89 11,631 11,870 11,233
Jun-89 11,917 12,173 11,260
Jul-89 12,068 12,420 11,287
Aug-89 12,012 12,252 11,305
Sep-89 12,061 12,311 11,341
Oct-89 12,251 12,570 11,395
Nov-89 12,390 12,694 11,423
Dec-89 12,493 12,731 11,441
Jan-90 12,436 12,652 11,559
Feb-90 12,505 12,699 11,613
Mar-90 12,538 12,714 11,677
Apr-90 12,516 12,672 11,696
May-90 12,811 12,943 11,722
Jun-90 12,954 13,114 11,786
Jul-90 13,193 13,298 11,831
Aug-90 13,166 13,250 11,939
Sep-90 13,255 13,368 12,040
Oct-90 13,403 13,554 12,112
Nov-90 13,650 13,758 12,139
Dec-90 13,840 13,948 12,139
Jan-91 14,031 14,092 12,211
Feb-91 14,102 14,178 12,230
Mar-91 14,216 14,256 12,248
Apr-91 14,347 14,403 12,266
May-91 14,478 14,483 12,303
Jun-91 14,549 14,495 12,339
Jul-91 14,767 14,651 12,357
Aug-91 14,943 14,930 12,393
Sep-91 15,164 15,184 12,448
Oct-91 15,365 15,357 12,466
Nov-91 15,453 15,536 12,503
Dec-91 15,738 15,914 12,511
Jan-92 15,631 15,761 12,530
Feb-92 15,743 15,810 12,575
Mar-92 15,701 15,747 12,639
Apr-92 15,815 15,888 12,657
May-92 16,055 16,125 12,675
Jun-92 16,252 16,357 12,720
Jul-92 16,404 16,671 12,747
Aug-92 16,626 16,841 12,783
Sep-92 16,757 17,074 12,819
Oct-92 16,634 16,869 12,864
Nov-92 16,697 16,800 12,882
Dec-92 16,902 17,017 12,873
Jan-93 17,131 17,333 12,936
Feb-93 17,314 17,588 12,981
Mar-93 17,403 17,653 13,026
Apr-93 17,492 17,791 13,063
May-93 17,582 17,743 13,081
Jun-93 17,770 18,000 13,099
Jul-93 17,861 18,036 13,099
Aug-93 17,953 18,305 13,136
Sep-93 17,963 18,380 13,164
Oct-93 17,998 18,424 13,218
Nov-93 17,933 18,333 13,227
Dec-93 18,070 18,409 13,227
Jan-94 18,234 18,591 13,263
Feb-94 18,064 18,336 13,308
Mar-94 17,557 18,068 13,353
Apr-94 17,439 17,951 13,372
May-94 17,450 17,964 13,381
Jun-94 17,370 17,967 13,426
Jul-94 17,689 18,203 13,463
Aug-94 17,742 18,255 13,517
Sep-94 17,500 18,104 13,553
Oct-94 17,446 18,107 13,563
Nov-94 17,420 18,028 13,580
Dec-94 17,583 18,087 13,580
Jan-95 17,942 18,382 13,634
Feb-95 18,385 18,737 13,689
Mar-95 18,469 18,840 13,734
Apr-95 18,721 19,058 13,780
May-95 19,345 19,596 13,807
Jun-95 19,461 19,721 13,835
Jul-95 19,492 19,731 13,835
Aug-95 19,697 19,893 13,871
Sep-95 19,873 20,026 13,898
Oct-95 20,079 20,247 13,944
Nov-95 20,287 20,494 13,935
Dec-95 20,525 20,696 13,925
Jan-96 20,647 20,870 14,007
Feb-96 20,471 20,649 14,052
Mar-96 20,383 20,554 14,125
Apr-96 20,295 20,495 14,180
May-96 20,238 20,484 14,207
Jun-96 20,485 20,693 14,215
Jul-96 20,549 20,757 14,242
Aug-96 20,552 20,780 14,269
Sep-96 20,897 21,048 14,315
TOTAL RETURN 108.97% 110.48% 43.15%
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the Lehman Brothers Intermediate U.S. Government Bond Index
and the Consumer Price Index, based on a $10,000 investment from 5/1/95 to
9/30/96.
Period Ending Fund Index Index
5/1/95 9896 10000 10,000
5/31/95 10,257 10,282 10,020
6/30/95 10,313 10,348 10,040
7/31/95 10,323 10,353 10,040
8/31/95 10,426 10,438 10,066
9/30/95 10,519 10,508 10,086
10/31/95 10,623 10,623 10,120
11/30/95 10,726 10,753 10,112
12/31/95 10,847 10,859 10,105
1/31/96 10,920 10,951 10,165
2/29/96 10,821 10,835 10,198
3/31/96 10,753 10,785 10,251
4/30/96 10,718 10,753 10,291
5/31/96 10,682 10,748 10,310
6/30/96 10,791 10,858 10,316
7/31/96 10,820 10,891 10,336
8/31/96 10,832 10,903 10,356
9/30/96 10,898 11,044 10,389
TOTAL RETURN 8.98% 10.44% 3.89%
REPORT OF INDEPENDENT AUDITORS
Franklin Custodian Funds, Inc.
To the Shareholders and Board of Directors
of Franklin Custodian Funds:
We have audited the accompanying statements of assets and liabilities of each of
the Funds comprising the Franklin Custodian Funds, Inc., including each Fund's
statement of investments in securities and net assets, as of September 30, 1996,
and the related statements of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds comprising the Franklin Custodian Funds as of September 30, 1996,
the results of their operations for the year then ended, the changes in 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 generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
November 4, 1996
