Annual
Report
September 30, 1997
Franklin Custodian Funds, Inc.
Franklin Growth Fund
Franklin Utilities Fund
Franklin Income Fund
Franklin DynaTech Fund
Franklin U.S. Government Securities Fund
CONTENTS
Shareholder's Letter 1
Fund Reports
Franklin Growth Fund 3
Franklin Utilities Fund 12
Franklin Income Fund 22
Franklin DynaTech Fund 34
Franklin U.S. Government Securities Fund 40
Financial Highlights and
Statement of Investments 50
Financial Statements 80
Notes to
Financial Statements 85
Report of Independent
Accountants 91
Tax Designation 92
SHAREHOLDER'S LETTER
Dear Shareholder:
It's a pleasure to bring you the Franklin Custodian Funds, Inc. annual report
for the period ended September 30, 1997.
UP, UP AND AWAY?
The big news over the 12-month reporting period has been the large flow of
capital into the U.S. equity markets. The Dow Jones(R) Industrial Average gained
roughly 2100 points over the one-year period, and pushed through the 8000-point
mark for the first time in July. Strong economic growth (second and third
quarter GDP posted annualized rates of 3.3% and 3.5%, respectively), combined
with the stock market's meteoric rise, prompted some degree of caution on the
part of the Federal Reserve Board (the Fed). The chief topic on Wall Street was
whether the Federal Open Market Committee would increase the federal funds rate.
To no one's surprise, the Fed nudged the rate higher in March 1997, citing
heightened inflation risk as the reason for the quarter-point increase from
5.25% to 5.50%. Although the market experienced a roughly 10% correction, stock
prices rebounded sharply. Despite such a recovery, recent reports show
relatively few signs of inflationary pressure. In fact, some economists have
dubbed the current, benign U.S. economic environment as being a "Goldilocks
Economy," as it is neither "too hot" (growing fast enough to generate higher
prices and inflation) nor "too cold" (slowing down at a rate that threatens to
throw us into recession); rather, the economy -- at this time -- appears to be
"just right."
THE TALE OF THE TORTOISE AND THE HARE
We can't promise this positive economic environment will continue. It is
important to remember, then, that markets correct -- in our opinion, it is
desirable for them to do so. Consequently, investor concern about market
volatility and its long-term direction prompts us to comment on the importance
of having your own long-term investment strategy. And when you consider your
investment strategy, are you a tortoise or a hare?
"Much like the tortoise, successful investors historically have achieved good
results through setting goals, diversifying their assets, and having patience."
We all know that familiar story: the tortoise won the race because he had a plan
and stuck to it, not allowing the hare's fast start to distract him. Much like
the tortoise, successful investors historically have achieved good results
through setting goals, diversifying their assets, and having patience. Smart
investors think like the tortoise. They know mutual fund investments are long
term, so daily market fluctuations and short-term volatility have minimal impact
on their overall investment goals. They understand that patience and discipline
are keys to successful investing. Remember, it's time -- not timing -- that
makes the difference.
We encourage you to speak with your investment representative about your
financial goals. To help reduce concern about volatility, stay focused on the
long term and diversify your investments. Mutual funds offer a level of
diversification that is almost impossible for individual investors to achieve on
their own.
Regardless of the market's direction, Franklin Templeton's disciplined
investment strategy remains the same: all of our portfolio managers are
dedicated to providing shareholders like you with careful selection, broad
diversification and constant professional supervision. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
FRANKLIN GROWTH FUND
Your Fund's Objective: Seeks capital appreciation by investing primarily in
common stocks or convertible securities believed to offer favorable
possibilities for capital appreciation.
The economy was quite positive during the 12 months ended September 30, 1997.
GDP grew at an annualized rate of 3.5% during the third quarter of 1997, and
could likely rise 2.5% to 3% by the end of the calendar year. A good business
climate combined with stock buy-backs, corporate re-structuring, and continued
corporate cost-consciousness contributed to market strength. In addition, there
was a very favorable supply-demand balance for common stocks: As the market
continued to rise, there was an increasing reluctance to sell and pay huge
capital gains taxes. Although the stock market experienced record highs
throughout the year, this meteoric rise prompted us to remain cautious in our
investment selections. Short-term investments rose from 18.8% of total net
assets on September 30, 1996, to 32.5% at the end of the fiscal year. And while
this didn't necessarily harm the fund -- the fund's Class I shares posted a
return of +20.84%, as shown in the Performance Summary on page 5 -- total
returns on short-term investments were just over 5%, and much lower than the
returns of rapidly rising stocks.
On September 30, 1997, the fund owned stocks of 92 companies in a diverse group
of industries, including transportation, health care, entertainment, aerospace,
communications, and energy and energy services. Broad diversification can help
soften the effects of market volatility because strong performance in one sector
may offset weak performance in another.
Market volatility over the year did affect the value of some of the fund's
holdings. For example, the stock of Cisco Systems, Inc., a bellwether of the
networking sector, dropped to a low for the reporting period of $46 on April
25th, reached a high of $81 on August 5th, and then declined to $73 at the close
of the period. This represented a fall of almost 40% from its high, and a bounce
of over 58% from its low. And while Cisco isn't quite living up to our
expectations at this time, it does have a dominant worldwide market share and
strong fundamentals. As such, we feel the stock has potential.
Franklin Growth Fund
Top 10 Holdings
9/30/97
Company % of Total
INDUSTRY Net Assets
- --------------------------------------------------
Schering-Plough Corp.
PHARMACEUTICALS 2.94%
Pfizer, Inc.
PHARMACEUTICALS 2.44%
Minnesota Manufacturing
& Mining, Co.
DIVERSIFIED MANUFACTURERS 2.18%
AMR Corp.
TRANSPORTATION 2.17%
Computer Sciences Corp.
DATA SERVICES 2.02%
IBM Corp.
COMPUTER HARDWARE 1.88%
UAL Corp.
TRANSPORTATION 1.88%
Bristol Meyers Squibb
PHARMACEUTICALS 1.68%
Raytheon Co.
AEROSPACE & DEFENSE 1.66%
Hewlett-Packard Co.
COMPUTER HARDWARE 1.59%
For a complete list of portfolio holdings, please see page 53 of this report.
Over the year under review, many individual companies performed well, and we saw
four newcomers to our top ten list: Hewlett-Packard, IBM, UAL, and Bristol
Meyers Squibb. While we couldn't really point to any one sector as being
exceptionally strong, the pharmaceutical sector's performance is particularly
noteworthy. Pharmaceutical stocks continued to post gains during the reporting
period, moving higher on strengthening industry fundamentals. As a result, this
sector remained one of the fund's largest on September 30, 1997, at
approximately 11.2% of total net assets. Schering-Plough Corp.'s healthy
earnings helped it remain the number one portfolio holding at the end of the
period (2.94%). And Pfizer rose to the #2 position on the top ten (from the #4
spot a year ago) on the back of increased corporate earnings growth.
Please note that this discussion reflects the strategies we employed for the
fund over 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 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.
PERFORMANCE SUMMARY
CLASS I
Franklin Growth Fund - Class I reported a cumulative total return of +20.84% for
the one-year period ended September 30, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the 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 6, the fund's Class I shares delivered a cumulative total return of more
than 235.43% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased $4.27, from
$22.82 on September 30, 1996, to $27.09 on September 30, 1997. During the
reporting period, shareholders received distributions of 22.7 cents ($0.227) per
share in dividend income and 20.2 cents ($0.202) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
The graph on page 6 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)). The S&P 500 is a broad market index that
represents stocks from a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
<TABLE>
<CAPTION>
Franklin Growth Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (3/31/48)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return1 20.84% 116.18% 235.43% 19,878.00%
Average Annual Total Return2 15.38% 15.59% 12.35% 11.19%
Value of $10,000 Investment3 $11,538 $20,638 $32,032 $1,909,176
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return4 5.92% 7.71% 31.11% 19.70% 20.84%
</TABLE>
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include 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 sales charge.
4. One-year total returns represent the change in value of an investment over
the periods ended on the specified dates and do not include the 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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
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.
CLASS II
Franklin Growth Fund - Class II reported a cumulative total return of +19.91%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. 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 8, as of September 30, 1997, the fund's Class II shares delivered a
cumulative total return of more than 63.32% since the shares became available on
May 1, 1995.
The fund's share price, as measured by net asset value, increased $4.10, from
$22.60 on September 30, 1996, to $26.70 on September 30, 1997. During the
reporting period, shareholders received distributions of 15.32 cents ($0.1532)
per share in dividend income and 20.2 cents ($0.202) per share in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
The graph on page 8 compares the performance of the fund's Class II shares since
inception, with the performance of the unmanaged Standard & Poor's(R) 500 Stock
Index (S&P 500(R)). The S&P 500 is a broad market index representing stocks from
a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Growth Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 19.91% 63.32%
Average Annual Total Return2 12.77% 21.99%
Value of $10,000 Investment3 $11,761 $16,169
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include sales charges.
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.
ADVISOR CLASS
Franklin Growth Fund - Advisor Class reported a cumulative total return of
+16.74% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased $3.89, to
$27.13 on September 30, 1997, from $23.24 at inception on January 2, 1997, the
day Advisor Class shares became available.
The graph on page 10 compares the performance of the fund's Advisor Class shares
over the past 10 years, with the performance of the unmanaged Standard &
Poor's(R) 500 Stock Index (S&P 500(R)). The S&P 500 is a broad market index that
represents stocks from a variety of industries.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Growth Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
<TABLE>
<CAPTION>
Franklin Growth Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
1-Year 5-Year 10-Year (3/31/48)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return1 20.91% 116.50% 235.90% 19,907.54%
Average Annual Total Return1 20.91% 16.71% 12.88% 11.30%
Value of $10,000 Investment2 $12,091 $21,650 $33,592 $2,000,754
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return3 5.92% 7.71% 31.11% 19.70% 20.91%
</TABLE>
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 16.74%.
1. Cumulative total return measures the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the indicated periods.
2. These figures represent the value of an hypothetical $10,000 investment in
fund over the specified dates.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
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.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN UTILITIES FUND
Your Fund's Objective: Seeks both capital appreciation and current income from a
portfolio of public utility industry securities.
Electric utility stock prices lagged the broader stock market over the 12-month
reporting period, impacting the fund's performance. Interest rates, a key driver
of electric utility stock performance, experienced volatility throughout the
year under review, with the 30-year U.S. Treasury bond's yield bouncing between
a low of 5.95% and a high of 7.15%. This type of volatility created some
uncertainty regarding electric utility stock prices and, as a result, their
prices remained relatively flat. Nevertheless, the Franklin Utilities Fund's
Class I shares turned in a one-year total return of +13.72% as shown in the
Performance Summary on page 14.
Although electric utility stock prices did not perform as impressively as the
rest of the market, they still offered attractive current income and lower
volatility than many other investments. For this reason, these securities
comprised 87% of the fund's holdings on September 30, 1997. We continue to
emphasize the attractive long-term investment characteristics and the currently
low, relative valuations of the stocks, believing that these combined factors
make electric utility stocks an appealing segment of a stock market that is
otherwise experiencing record-high valuation levels.
Deregulation is a complicated issue facing the U.S. electric utility industry.
Several significant developments in the past year have offered some
clarification: California announced a final restructuring plan, and several
other key states are close to completing plans designed to guide electric
utilities into a competitive environment. Increased concern over future
competition has had a strong impact on the price performance of some electric
utilities in the last few years, and resolution of such issues should allow
these securities' market valuations to appreciate in accordance with their
future growth prospects.
As with deregulation in any industry, regulatory changes will create winners and
losers within the electric utility industry. On a positive note, the
restructuring plans presented in most states allow for an orderly transition
that should assure the financial health of the companies involved, and should
help companies prepare for a more competitive market. Additionally, the trend
toward deregulation has encouraged industry consolidation in the form of mergers
and acquisitions, and we believe we are only at the beginning of this phase.
Chances are, there will be not only a continuation of electric
company-to-electric company merger activity, but also a convergence of gas and
electric utility companies. We feel that strong investment selections in this
area will depend on identifying those companies with strong management teams,
attractive service territories, and efficient, low-cost operations.
Although the Franklin Utilities Fund is invested primarily in domestic electric
utility stocks, the stocks and bonds of telephone and natural gas utility
companies comprised approximately 10% of the fund's total net assets on
September 30, 1997. In addition, over the past year, we have built a convertible
securities position of approximately 5.3% of total net assets. These positions
serve to diversify the portfolio to some degree and allow us to participate in
the growth of other industry segments. Also, they offer many of the same
characteristics that we look for when purchasing the securities of electric
utility companies, including consistent, predictable earnings growth and steady
demand fundamentals.
Please note that this discussion reflects the strategies we employed for the
fund over 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.
In spite of the potential for regulatory change in the industry, utilities
continue to provide services that are an essential part of everyday life, and we
believe they will continue to play an important role in a well-diversified
investment portfolio. As always, we remain committed to our long-term objective
of income and capital growth.
Franklin Utilities Fund
Top 10 Holdings
9/30/97
% of Total
Company Net Assets
- ---------------------------------------
FPL Group 4.1%
Duke Power Co. 3.9%
Southern Co. 3.9%
Pacific Gas & Electric 3.9%
New Century Energies 3.7%
TECO Energy, Inc. 3.6%
Florida Progress Corp. 3.6%
CINergy Corp. 3.5%
Dominion Resources 3.4%
ENOVA Corp. 3.2%
For a complete list of portfolio holdings, please see page 65 of this report.
PERFORMANCE SUMMARY
CLASS I
Franklin Utilities Fund - Class I reported a cumulative total return of +13.72%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the 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 15, the fund's Class I shares delivered a cumulative total return of more
than 158.89% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased 31.0 cents,
from $9.73 on September 30, 1996, to $10.04 on September 30, 1997. During the
reporting period, shareholders received distributions of 52.4 cents ($0.524) per
share in dividend income and 42.7 cents ($0.427) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $10.49 on September 30, 1997, and an
annualization of the most recent quarterly dividend of 13.1 cents ($0.131) per
share, the fund's distribution rate was 5.00%.
The graph on page 15 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Utilities Fund's had been applied to the index, its performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (9/30/48)
- --------------------------------------------------------------------------
Cumulative Total Return1 13.72% 45.14% 158.89% 11,676.39%
Average Annual Total Return2 8.91% 6.80% 9.51% 10.12%
Value of $10,000 Investment3 $10,891 $13,894 $24,797 $1,125,530
Distribution Rate4 5.00%
30-Day Standardized Yield5 4.73%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return6 18.08% -17.85% 24.19% 5.94% 13.72%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect 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 periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of the current 13.1 cent per
share quarterly dividend and the maximum offering price of $10.49 on September
30, 1997.
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, 1997.
6. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the 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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
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.
CLASS II
Franklin Utilities Fund - Class II reported a cumulative total return of +13.06%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charges. 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 17, for the period ended September 30, 1997, the fund's Class II shares
delivered a cumulative total return of more than 34.66%, since the shares became
available on May 1, 1995.
The fund's share price, as measured by net asset value, increased 30.0 cents,
from $9.72 on September 30, 1996, to $10.02 on September 30, 1997. During the
reporting period, shareholders received distributions of 47.63 cents ($0.4763)
per share in dividend income and 42.7 cents ($0.427) per share in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $10.12 on September 30, 1997 and an
annualization of a quarterly dividend of 12.67 cents ($0.1267) per share, the
fund's distribution rate was 5.00%.
The graph on page 17 compares the performance of the fund's Class II shares
since inception, with the performance or the unmanaged Standard & Poor's(R) 500
Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn'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 an index, mutual funds are
never 100% invested because they 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
Franklin Utilities Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ---------------------------------------------------------------------
Cumulative Total Return1 13.06% 34.66%
Average Annual Total Return2 10.92% 12.63%
Value of $10,000 Investment3 $11,092 $13,331
Distribution Rate4 5.00%
30-Day Standardized Yield5 4.36%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the current 12.67 cent per
share quarterly dividend and the offering price of $10.12 on September 30, 1997.
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, 1997.
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.
ADVISOR CLASS
Franklin Utilities Fund - Advisor Class reported a cumulative total return of
+9.61% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 49.0 cents,
from $9.55 on January 2, 1997, to $10.04 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 40.27
cents ($0.4027) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $10.04 on September 30, 1997 and an
annualization of September's dividend of 13.44 cents ($0.1344) per share, the
fund's distribution rate was 5.35%.
The graph on page 20 compares the performance of the fund's Advisor Class I over
the past 10 years, with the performance of the unmanaged Standard & Poor's(R)
500 Stock Index (S&P 500(R)).
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Utilities Fund's had been applied to the index, its performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Utilities Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
1-Year 5-Year 10-Year (9/30/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 13.83% 45.29% 159.15% 11,688.14%
Average Annual Total Return1 13.83% 7.76% 9.99% 10.22%
Value of $10,000 Investment2 $11,383 $14,529 $25,915 $1,178,814
Distribution Rate3 5.35%
30-Day Standardized Yield4 5.05%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return5 18.08% -17.85% 24.19% 5.94% 13.83%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 9.61%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
3. Distribution rate is based on an annualization of the current 13.44 cent per
share quarterly dividend and the fund's price of $10.04 on September 30, 1997.
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, 1997.
5. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
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.
FRANKLIN INCOME FUND
Your Fund's Objective: Seeks to maximize income while maintaining prospects for
capital appreciation through a diversified portfolio of securities.
The U.S. stock market appreciated during the year under review, driven by steady
economic growth and low inflation. The bond market, however, experienced
volatility during the period due to concerns over the possibility of higher
inflation. Many of the fund's sectors performed well over its fiscal year, with
energy, real estate, and foreign bonds leading the way. In fact, the fund's
Class I shares posted a one-year cumulative total return of +17.31%, as shown in
the performance summary on page 25.
Overall sector weightings in the portfolio did not change significantly during
the reporting period. However, we did increase the fund's stock holdings
slightly, to 40.2% of total net assets on September 30, 1997, from 37.1% a year
earlier. As of September 30, 1997, 53.0% of the fund's net assets were invested
in bonds, 40.2% in stocks, and 6.8% in cash and equivalents.
The fund's bond holdings consisted of corporate, foreign, and U.S. Treasury
bonds. Corporate bonds, which continue to represent our largest fixed-income
weighting (29.2% of total net assets), performed well over the period despite
interest rate volatility. Although corporate bond valuations were at relatively
high levels during the past twelve months, we were able to find some attractive
investments in new and existing positions. We initiated several corporate bond
positions during the period, including Del Monte (Food & Beverage), Paging
Network (Telecommunications), Tjiwi Kimia International (Paper & Forest
Products), and ICN Pharmaceuticals (Pharmaceuticals). In addition, we sold or
tendered several bond positions at levels that we believed represented full
value.
The fund's foreign bond positions performed exceptionally well during the period
due to positive economic and political developments and the overall decline in
U.S. interest rates. Over the year, we consolidated our foreign
dollar-denominated Brady bond positions by swapping out of our Ecuadorian and
Mexican Brady bonds for Brazilian Brady bonds which, along with our Argentina
Brady bonds, appeared to offer greater total return potential. We also sold the
fund's Canadian bond position in May due to valuation concerns and currency
risk.
Over the year, we added to our Treasury holdings amid weakness in March and
August, as we believed subdued inflation and prospects for a balanced budget
would allow interest rates to fall. As a result, U.S. Treasuries represented
11.4% of total net assets on September 30, 1997, up from 7.4% last year.
Most of the fund's equity sectors performed well during the period with the
energy and pharmaceutical stocks experiencing the greatest appreciation. We took
advantage of weak energy prices in February by initiating convertible positions
in Nuevo Energy and Swift Energy as we believe the long-term outlook for the
energy sector remains positive. Following significant appreciation, we sold the
fund's remaining pharmaceutical holdings, as we believed appreciation potential
for these stocks was limited at current valuations. These pharmaceutical
positions were initiated as a contrarian investment when the sector was out of
favor due to health care reform discussions in 1993 and 1994.
Utility stocks turned in a steady performance over the past twelve months -- in
line with the fund's overall return. We initiated positions in MidAmerica Energy
and Northern States Power -- both are mid-western electric and natural gas
utilities. On September 30, 1997, utility stocks comprised 21.2% of the fund's
portfolio, up from 19.9% on September 30, 1996. We increased our weighting in
these securities because we believe many of the stocks are undervalued and offer
attractive, high current income. In addition, many utility companies have made
significant progress in adapting to industry deregulation through cost cutting,
consolidation, and diversifying into related business lines that are
unregulated.
Franklin Income Fund
Portfolio Breakdown
9/30/97
% of Total
Sector Net Assets
- -------------------------------------------
Corporate Bonds 29.2%
Utilities Stocks 21.2%
U.S. Treasury
Bonds & Notes 11.4%
Foreign Bonds 8.9%
Energy/Energy Services 6.9%
Metals 2.8%
REITs 2.2%
Consumer Products 1.9%
Telecommunications Stocks 1.7%
Cable & Media Stocks 0.9%
Other Stocks 2.6%
Other Bonds 3.5%
Cash & Equivalents 6.8%
For a complete list of portfolio holdings, please see page 70 of this report.
Looking at other sectors, we purchased several new convertible positions in the
real estate sector, including Host Marriott (Lodging),Vornado Realty Trust
(REIT), and Macerich (REIT). These securities provide attractive income and
downside protection while offering equity upside potential related to positive
fundamental trends in the industry. We took advantage of strength in the
technology sector by recognizing significant gains on our Altera and Xilinx
holdings, which we purchased last year during the technology sell-off. Finally,
we sold several stock positions that no longer fit our valuation criteria.
Please note that this discussion reflects the strategies we employed for the
fund over 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.
With the stock market near all-time highs, we remain selective and continually
search for attractive investments for our shareholders. We are comfortable with
the portfolio's 6.8% cash position, and feel that it will allow us to take
advantage of investment opportunities as they arise. Of course, we continue to
follow our value-oriented approach, searching for income and growth from a
diversified mix of stocks, bonds, and cash.
PERFORMANCE SUMMARY
CLASS I
Franklin Income Fund - Class I reported a cumulative total return of +17.31% for
the one-year period ended September 30, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the 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 27, the fund's Class I shares delivered a cumulative total return of more
than 205.21% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased 19.0 cents,
from $2.30 on September 30, 1996, to $2.49 on September 30, 1997. During the
reporting period, shareholders received distributions of 18.0 cents ($0.18) per
share in dividend income and 1.0 cents ($0.010) per share in long-term capital
gains. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $2.60 on September 30, 1997, and an
annualization of September's dividend of 1.5 cents ($0.015) per share, the
fund's distribution rate was 6.92%.
The graph on page 26 compares the performance of the fund's Class I shares with
the performance of two unmanaged indices, the Standard & Poor's(R) 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.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Income Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
Franklin Income Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (8/31/48)
- ----------------------------------------------------------------------------
Cumulative Total Return1 17.31% 72.00% 205.21% 20,761.68%
Average Annual Total Return2 12.43% 10.49% 11.31% 11.40%
Value of $10,000 Investment3 $11,243 $16,468 $29,206 $1,999,246
Distribution Rate4 6.92%
30-Day Standardized Yield5 6.45%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return6 19.13% -1.35% 14.00% 9.43% 17.31%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect 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 periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of the current 1.5 cent per
share monthly dividend and the maximum offering price of $2.60 on September 30,
1997.
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, 1997. 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 returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the 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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
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.
CLASS II
Franklin Income Fund - Class II reported a cumulative total return of +16.72%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charges. 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 29, the fund's Class II shares delivered a cumulative total return of more
than 38.13% since the shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, increased 19.0 cents,
from $2.30 on September 30, 1996, to $2.49 on September 30, 1997. During the
reporting period, Class II shareholders received distributions of 16.82 cents
($0.1682) per share in dividend income and 1.0 cents ($0.010) per share in
long-term capital gains. Distributions will vary depending on income earned by
the fund and any profits realized from the sale of securities in the portfolio.
Past distributions are not indicative of future trends.
Based on the offering price of $2.52 on September 30, 1997, and an annualization
of September's dividend of 1.40 cents ($0.0140) per share, plus a 12b-1
differential adjustment of .05 cents ($0.0005), the fund's distribution rate was
6.69%.
The graph on page 29 compares the performance of the fund's Class II shares
since inception, with the performance of two unmanaged indices, the Standard &
Poor's(R) 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.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Income Fund's had been applied to the index, their performance would
have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 16.72% 38.13%
Average Annual Total Return2 14.73% 13.86%
Value of $10,000 Investment3 $11,473 $13,686
Distribution Rate4 6.69%
30-Day Standardized Yield5 6.16%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the current 1.45 cent per
share monthly dividend, which includes a 12b-1 differential adjustment, and the
offering price of $2.52 on September 30, 1997.
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, 1997. 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.
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.
ADVISOR CLASS
Franklin Income Fund - Advisor Class reported a cumulative total return of
+12.31% for the period from January 2, 1997 (commencement of sales), through
September 30, 1997. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 14.0 cents,
from $2.34 on January 2, 1997, to $2.48 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 13.74
cents ($0.1374) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $2.48 on September 30, 1997 and an
annualization of September's dividend of 1.53 cents ($0.0153) per share, the
fund's distribution rate was 7.40%.
The graph on page 32 compares the performance of the fund's Advisor Class shares
with the performance of two unmanaged indices, the Standard & Poor's(R) 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.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin Income Fund's had been applied to the index, its performance would have
been lower. Please remember that an index is simply a measure of performance,
and one cannot invest in it directly.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Income Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
- -----------------------------------------------------------------------------
1-Year 5-Year 10-Year (8/31/48)
Cumulative Total Return1 16.99% 71.51% 204.36% 20,703.29%
Average Annual Total Return1 16.99% 11.39% 11.77% 11.49%
Value of $10,000 Investment2 $11,699 $17,151 $30,436 $2,080,329
Distribution Rate3 7.40%
30-Day Standardized Yield4 6.88%
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return5 19.13% -1.35% 14.00% 9.43% 16.99%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 12.31%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
3. Distribution rate is based on an annualization of the current 1.53 cent per
share monthly dividend and the fund's price of $2.48 on September 30, 1997.
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, 1997.
5. Total returns represent the change in value of an investment over the
one-year periods ended on the specified dates and do not include the sales
charge.
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.
FRANKLIN DYNATECH FUND
Your Fund's Objective: Seeks capital appreciation by investing primarily in
companies emphasizing technological development .
Franklin DynaTech Fund
Portfolio Breakdown
9/30/97
% of Total
Sector Net Assets
- ---------------------------------------
Semiconductor
Manufacturers 14.1%
Computer Hardware 9.0%
Computer Software 7.8%
Telecommunications 6.3%
Pharmaceuticals 4.0%
Networking 3.9%
Medical Services 3.4%
Retail 2.7%
Precision Instruments/
Test Equipment 2.1%
Environmental Services 2.1%
Business Services 1.7%
Other 4.9%
Short-Term Obligations
& Other Net Assets 38.0%
For a complete list of portfolio holdings, please see page 59 of this report.
During the 12-month reporting period, the economy showed healthy growth with
relatively little inflationary pressure -- creating an excellent environment for
owning stocks. Particularly, large capitalization (large cap) stocks seemed to
be the favored group with investors. Within this environment, the Franklin
DynaTech Fund's Class I shares provided a cumulative total return of +35.63% for
the one-year period ended September 30, 1997, as discussed in the performance
summary on page 36. Over this same period of time, the Hambrecht & Quist
Technology Index produced a return of 49.10%.
Some of our large cap holdings contributed to the fund's total return for the
year, including Compaq Computer, Intel, Microsoft, and Warner-Lambert. Other
holdings that factored into the positive total return were Lucent Technologies,
Newbridge Networks, Schlumberger, Linear Technology, and Xilinx. We purchased a
few of these companies during our previous fiscal year (ended September 30,
1996), when the market corrected; however, a majority of these companies have
been in the portfolio for a number of years -- supporting the benefit of a "buy
and hold" strategy.
Our strategy involves constantly searching the vast spectrum of companies for
the next "diamond in the rough." We look for companies that have, in our
opinion, compelling valuations, a potential for leadership positioning, and a
niche or unique product offering. We also search for opportunities in exciting
growth areas such as semiconductors, computer software and hardware, networking
and data services. When any of these requirements cannot be met and we are
unable to invest, the portfolio's cash position may increase, allowing us to
have the resources available to take advantage of opportunities when they do
arise.
Over the one-year period, we found opportunities in selective companies with
unique market positions. For example, we purchased shares in U.S. Filter
Corporation, a company whose product and services are employed in water
filtration and purification processes. It is an industry leader in the growing
trend worldwide for better water quality, ranging from industrial to municipal
water treatment systems. Another unique company we purchased, AES Corporation,
operates unregulated power generation plants, fueled mainly by coal and natural
gas. AES should benefit from the increased demand for electricity, especially in
emerging market countries where they are the leading independent power producer.
In the technology sector, we purchased shares of Parametric Technology. This
company has a global leadership position in software products that automate the
design -- often called mechanical computer-aided design (MCAD) -- for the
engineering and manufacturing industries. Currently, Parametric has no debt on
its balance sheet and is expected to grow more than 30% in revenues and earnings
into the year 2000.
Based on declining fundamentals and/or excessive valuations, we also sold a
number of holdings over the period. We sold Broderbund Software and Forrester
Research due to rich valuations compared with other companies in their
industries. Another of our holdings we sold was Electronic Data Systems because
it experienced deteriorating fundamentals in its outsourcing business which
negatively impacted the profit margins on certain contracts.
Please note that this discussion reflects the strategies we employed for the
fund over 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 remain cautiously optimistic due to excessive valuations we
believe the market is currently exhibiting. As market opportunities present
themselves, we are committed to our investment criteria of seeking companies
that exemplify strong leadership potential, technological developments, and
productivity enhancements.
Franklin DynaTech Fund
Top 10 Holdings
9/30/97
Company % of Total
INDUSTRY Net Assets
- ------------------------------------------
Intel Corp.
SEMICONDUCTOR/
MANUFACTURER 13.5%
Microsoft Corp.
COMPUTER SOFTWARE 6.2%
Motorola, Inc.
TELECOMMUNICATIONS 5.3%
Compaq Computer Corp.
COMPUTER HARDWARE 4.9%
Hewlett-Packard Co.
COMPUTER HARDWARE 3.6%
Cisco Systems Inc.
NETWORKING 2.3%
Warner-Lambert Co.
PHARMACEUTICALS 2.1%
Toys Us, Inc.
RETAIL 2.0%
Thermo Electron Corp.
PRECISION INSTRUMENTS/
TEST EQUIPMENT 1.8%
Waste Management, Inc.
ENVIRONMENTAL SERVICES 1.5%
For a complete list of portfolio holdings, please see page 59 of this report.
PERFORMANCE SUMMARY
CLASS I
Franklin DynaTech Fund - Class I reported a cumulative total return of +35.63%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the 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 37, the fund's Class I shares delivered a cumulative total return of more
than 256.62% for the 10-year period ended September 30, 1997.
The fund's share price, as measured by net asset value, increased $4.45, from
$14.03 on September 30, 1996, to $18.48 on September 30, 1997. During the
reporting period, shareholders received distributions of 5.5 cents ($0.055) per
share in dividend income and 39.9 cents ($0.399) per share in capital gains, of
which .33 cents ($0.0033) represented short-term gains and 39.57 cents ($0.3957)
represented long-term gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.
The graph on page 37 compares the performance of the fund's Class I shares over
the past 10 years, with the performance of the Standard & Poor's(R) 500 Stock
Index (S&P 500(R)) and the Hambrecht & Quist Technology Index. Please note, 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.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin DynaTech Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin DynaTech Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (1/1/68)
- --------------------------------------------------------------------------------
Cumulative Total Return1 35.63% 138.12% 256.62% 1504.83%
Average Annual Total Return2 29.53% 17.87% 13.04% 9.61%
Value of $10,000 Investment3 $12,953 $22,750 $34,074 $153,066
9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
Total Return4 14.41% 2.94% 32.10% 12.84% 35.63%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include 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 sales charge.
4. One-year total returns represent the change in value of an investment over
the one-year periods ended on the specified dates and do not include the 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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
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.
CLASS II
Franklin DynaTech Fund - Class II reported a cumulative total return of +34.32%
for the one-year period ended September 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. 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 39, the fund's Class II shares delivered a cumulative total return of more
than 37.86% since the shares became available on September 16, 1996.
The fund's share price, as measured by net asset value, increased $4.27, from
$14.03 on September 30, 1996, to $18.30 on September 30, 1997. During the
reporting period, shareholders received distributions of 5.63 cents ($0.0563)
per share in dividend income and 39.9 cents ($0.399) per share in capital gains,
of which .33 cents ($0.0033) represented short-term gains and 39.57 cents
($0.3957) represented long-term gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio. Past distributions are not indicative of future trends.
The graph on page 39 compares the performance of the fund's Class II shares over
the period since inception,with the performance of the Standard & Poor's(R) 500
Stock Index (S&P 500(R)) and the Hambrecht & Quist Technology Index. Please note
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.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin DynaTech Fund's had been applied to either index, their performance
would have been lower. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin DynaTech Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (9/16/96)
- ------------------------------------------------------------------------
Cumulative Total Return1 34.32% 37.86%
Average Annual Total Return2 32.01% 33.99%
Value of $10,000 Investment3 $13,201 $13,547
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and include the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicableeto shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include sales charges.
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.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective: Seeks high current income from a portfolio of U.S.
government securities.
During the 12-month reporting period, economic conditions in the U.S. were
extremely favorable for investors. Economic growth in the fourth quarter of 1996
began on a slow note, but by the end of the year and into the first quarter of
1997, it increased. Interest rates -- which had declined between the third and
fourth quarters of 1996 -- reversed course and nudged higher. Investors feared
that tight labor markets, combined with strong growth, would continue to push
wages higher. This increase could eventually be passed on to consumers in the
form of higher prices.
To no one's surprise, the Federal Reserve Board (the Fed) bumped the federal
funds rate to 5.50% from 5.25% at its Open Market Committee Meeting in March,
citing heightened inflation risk as the reason for the quarter-point increase.
Through this pre-emptive strike, the Fed hoped to slow economic growth and
inflationary pressures. Second quarter growth did decline relative to the first
quarter's; however, early indications are that the economy is regaining momentum
on the back of strong consumer spending during the third quarter of 1997.
The most remarkable aspect of the current economic expansion is that inflation,
despite the strong growth, has not accelerated. This, combined with a rapidly
declining U.S. budget deficit, allowed interest rates to shift lower during the
past twelve months. In addition, interest rate volatility declined during the
period as well. These phenomena led to strong performance from the Government
National Mortgage Association (GNMA) pass-through sector, which offers yield
spread and income advantages over U.S. Treasury securities.
The chart to the right illustrates the fund's volatility 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 Treasuries.
Over the 12 months under review, we continued our strategy of investing the
fund's assets in high credit quality, GNMA mortgage pass-through securities. Our
disciplined approach of remaining fully invested, while reducing transaction
costs, has allowed shareholders to participate in the favorable market
conditions of the past year. Throughout the fiscal period, we have invested
portfolio cashflows across a variety of GNMA programs and coupons to help
diversify the fund's exposure to GNMA market risks. In addition, the portfolio's
large exposure to seasoned GNMA pass-through bonds works to insulate the
portfolio from increased prepayment risks that generally result from lower
market interest rates.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Please note that this discussion reflects the strategies we employed for the
fund over 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.
For the remainder of 1997, we anticipate that interest-rate volatility should
remain relatively subdued, which will continue to benefit mortgage pass-through
securities. However, overall yield levels may move to the higher end of their
recent trading range if consumer activity and economic growth continue their
rebound in the second half of 1997.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
CLASS I
Franklin U.S. Government Securities Fund - Class I reported a cumulative total
return of +10.08% for the one-year period ended September 30, 1997. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of all distributions, and does not include the 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 44, the fund's Class I shares delivered a cumulative
total return of more than 134.13%, for the 10-year period ended September 30,
1997.
The fund's share price, as measured by net asset value, increased 17.0 cents,
from $6.72 on September 30, 1996, to $6.89 on September 30, 1997. During the
reporting period, shareholders received distributions of 48.2 cents ($0.482) per
share in dividend income. Distributions will vary depending on income earned by
the fund and any profits realized from the sale of securities in the portfolio.
Past distributions are not indicative of future trends.
Based on the maximum offering price of $7.20 on September 30, 1997 and an
annualization of September's dividend of 3.9 cents ($0.039) per share, the
fund's distribution rate was 6.50%. A comparable rate based on the redemption
value (or net asset value price) on the same day was 6.79%.
The graph on page 44 compares the performance of the fund's Class I shares over
the past 10 years with the Consumer Price Index (CPI) and the Lehman Brothers
Intermediate U.S. Government Bond Index. As the graph illustrates, the fund's
performance has closely followed that of the Lehman Brother's index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Class I
Periods ended 9/30/97
Since
Inception
1-Year 5-Year 10-Year (2/1/77)
- ----------------------------------------------------------------------------
Cumulative Total Return1 10.08% 37.28% 134.13% 640.01%
Average Annual Total Return2 5.38% 5.63% 8.42% 7.43%
Distribution Rate3 6.50%
30-Day Standardized Yield4 6.36%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 3.9 cent per
share monthly dividend and the maximum offering price of $7.20 on September 30,
1997.
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, 1997.
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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
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.
CLASS II
Franklin U.S. Government Securities Fund - Class II reported a cumulative total
return of +9.48% for the one-year period ended September 30, 1997. Cumulative
total return measures the change in value of an investment, assuming
reinvestment of all distributions, and does not include the sales charges. 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 46, as of September 30, 1997, the fund's Class II shares
delivered a cumulative total return of 20.92% since the shares became available
on May 1, 1995.
The fund's share price, as measured by net asset value, increased 17.0 cents,
from $6.70 on September 30, 1996, to $6.87 on September 30, 1997. During the
reporting period, shareholders received distributions of 44.33 cents ($0.4433)
per share in dividend income. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio. Past distributions are not indicative of future trends.
Based on the offering price of $6.94 on September 30, 1997 and an annualization
of September's dividend of 3.57 cents ($0.0357) per share, plus a 12b-1
differential adjustment of .09 cents ($0.0009), the fund's distribution rate was
6.19%.
The graph on page 46 compares the performance of the fund's Class II shares with
the Lehman Brothers Intermediate U.S. Government Bond Index. As the graph
illustrates, the fund's performance has closely followed that of the Lehman
Brothers Index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Class II
Periods ended 9/30/97
Since
Inception
1-Year (5/1/95)
- ------------------------------------------------------------------------
Cumulative Total Return1 9.48% 20.92%
Average Annual Total Return2 7.36% 7.71%
Distribution Rate3 6.19%
30-Day Standardized Yield4 6.04%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of the current 3.66 cent per
share monthly dividend, which includes a 12b-1 differential adjustment, and the
offering price of $6.94 on September 30, 1997.
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, 1997.
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.
ADVISOR CLASS
Franklin U.S. Government Securities Fund - Advisor Class reported a cumulative
total return of +7.68% for the period from January 2, 1997 (commencement of
sales), through September 30, 1997. Cumulative total return measures the change
in value of an investment, assuming reinvestment of all distributions.
The fund's share price, as measured by net asset value, increased 14.0 cents,
from $6.76 on January 2, 1997, to $6.90 on September 30, 1997. During the
reporting period, Advisor Class shareholders received distributions of 36.31
cents ($0.3631) per share in dividend income. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the portfolio. Past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $6.90 on September 30, 1997 and an
annualization of September's dividend of 3.95 cents ($0.0395) per share, the
fund's distribution rate was 6.87%.
The graph on page 48 compares the performance of the fund's Advisor Class shares
over the past 10 years with the Consumer Price Index (CPI) and the Lehman
Brothers Intermediate U.S. Government Bond Index. As the graph illustrates, the
fund's performance has closely followed that of the Lehman Brother's index.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell stocks. Unlike an index, mutual funds are
never 100% invested because they 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
Franklin U.S. Government Securities Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin U.S. Government Securities Fund -- Advisor Class
Periods ended 9/30/97
Since
Inception
of the Fund
- --------------------------------------------------------------------------------
1-Year 5-Year 10-Year (2/1/77)
Cumulative Total Return1 10.30% 37.55% 134.60% 641.50%
Average Annual Total Return1 10.30% 6.58% 8.90% 7.60%
Distribution Rate2 6.87%
30-Day Standardized Yield3 6.75%
Effective January 2, 1997, the fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges nor Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of Class I expenses, including
Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures reflect
actual Advisor Class performance including the deduction of all charges and fees
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 7.68%.
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. Average annual total
returns represent the average annual change in value of an investment over the
specified periods.
2. Distribution rate is based on an annualization of the current 3.95 cent per
share monthly dividend and the fund's price of $6.90 on September 30, 1997.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended September 30, 1997.
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.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin Growth Fund
Class I
------------------------------------------------------
Year Ended September 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $22.82 $19.38 $14.96 $14.25 $13.70
------------------------------------------------------
Income from investment operations:
Net investment income .36 .22 .17 .19 .23
Net realized and unrealized gains 4.34 3.53 4.43 .90 .58
------------------------------------------------------
Total from investment operations 4.70 3.75 4.60 1.09 .81
------------------------------------------------------
Less distributions:
Dividends from net investment income (.23) (.16) (.14) (.30) (.19)
Distributions from net realized gains (.20) (.15) (.04) (.08) (.07)
------------------------------------------------------
Total distributions (.43) (.31) (.18) (.38) (.26)
------------------------------------------------------
Net asset value, end of year $27.09 $22.82 $19.38 $14.96 $14.25
======================================================
Total return* 20.84% 19.60% 31.11% 7.63% 5.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,435,561 $1,020,486 $712,866 $516,620 $560,824
Ratio to average net assets:
Expenses .89% .87% .90% .77% .64%
Net investment income 1.60% 1.16% 1.08% 1.23% 1.64%
Portfolio turnover rate 1.77% 2.03% 1.39% 6.52% 1.70%
Average commission rate paid** $.0568 $.0543 -- -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
<TABLE>
<CAPTION>
Class II
---------------------------------
Year Ended September 30,
---------------------------------
1997 1996 1995****
---------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $22.60 $19.33 $16.88
---------------------------------
Income from investment operations:
Net investment income .20 .12 .02
Net realized and unrealized gains 4.25 3.46 2.43
---------------------------------
Total from investment operations 4.45 3.58 2.45
---------------------------------
Less distributions:
Dividends from net investment income (.15) (.16) --
Distributions from net realized gains (.20) (.15) --
---------------------------------
Total distributions (.35) (.31) --
---------------------------------
Net asset value, end of year $26.70 $22.60 $19.33
=================================
Total return* 19.91% 18.73% 14.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $117,218 $43,417 $4,161
Ratio to average net assets:
Expenses 1.66% 1.63% 1.79%**
Net investment income .85% .40% .37%**
Portfolio turnover rate 1.77% 2.03% 1.39%
Average commission rate paid*** $.0568 $.0543 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
Advisor Class
-------------
1997****
-------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $23.24
-------------
Income from investment operations:
Net investment income .25
Net realized and unrealized gains 3.64
-------------
Total from investment operations 3.89
-------------
Net asset value, end of period $27.13
=============
Total return* 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $25,823
Ratio to average net assets:
Expenses .66%**
Net investment income 1.93%**
Portfolio turnover rate 1.77%
Average commission rate paid*** $.0568
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, September 30, 1997
SHARES/
Growth Fund WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks & Warrants 67.5%
Aerospace & Defense 6.0%
<S> <C> <C>
Boeing Co. 404,200 $ 22,003,638
Lockheed Martin Corp. 162,600 17,337,225
Raytheon Co. 442,000 26,133,250
Rockwell International Corp. 50,000 3,146,875
Thiokol Corp. 120,000 10,320,000
United Technologies Corp. 200,000 16,200,000
-------------
95,140,988
-------------
Auto Parts .3%
Genuine Parts Co. 135,000 4,159,688
-------------
Biotechnology 1.4%
aAmgen, Inc. 200,000 9,587,500
aGenentech, Inc. 200,000 11,625,000
aImmunex Corp. 20,000 1,345,000
aTherapeutic Discovery Corp. 8,000 97,500
-------------
22,655,000
-------------
Business Services 3.5%
Avery Dennison Corp. 220,000 8,800,000
aChoicePoint, Inc. 40,000 1,495,000
Cognizant Corp. 244,000 9,943,000
Dun & Bradstreet Corp. 244,000 6,923,500
Equifax, Inc. 400,000 12,575,000
Kelly Services, Inc., Class A 250,000 8,375,000
a,e,gProgramming & Systems, Inc. 345,300 6,906
Wallace Computer Services, Inc. 200,000 7,375,000
-------------
55,493,406
-------------
Chemicals 3.7%
Air Products & Chemicals, Inc. 200,000 16,587,500
Eastman Chemical Co. 25,000 1,550,000
International Flavors and Fragrances, Inc. 300,000 14,700,000
Mallinckrodt Group, Inc. 116,000 4,176,000
NCH Corp. 200,000 14,200,000
Sigma-Aldrich Corp. 200,000 6,587,500
-------------
57,801,000
-------------
Communications & Entertainment 2.4%
aACNielsen Corp. 81,333 1,951,992
American Greetings Corp., Class A 300,000 11,062,500
Disney (Walt) Co. 304,932 24,585,143
aIntervisual Books, Inc. 100,000 168,750
aKing World Productions, Inc. 10,000 432,500
-------------
38,200,885
-------------
Computer Hardware 3.5%
Hewlett-Packard Co. 360,000 25,042,500
International Business Machines Corp. 280,000 29,662,500
-------------
54,705,000
-------------
Computer Software .2%
aMicrosoft Corp. 20,000 2,646,250
-------------
Data Services 3.3%
Automatic Data Processing, Inc. 400,000 20,000,000
aComputer Sciences Corp. 450,000 31,837,500
-------------
51,837,500
-------------
Diversified Manufacturers 2.8%
Deltic Timber Corp. 11,428 $ 373,553
Minnesota Mining & Manufacturing Co. 372,000 34,410,000
National Service Industries, Inc. 100,000 4,393,750
Teleflex, Inc. 139,200 4,819,800
-------------
43,997,103
-------------
Electronics & Electrical Equipment 3.3%
AMP, Inc. 400,000 21,425,000
Emerson Electric Co. 80,000 4,610,000
aImation Corp. 37,200 992,775
Molex, Inc. 93,750 4,160,156
Molex, Inc., Class A 93,750 3,820,313
Raychem Corp. 200,000 16,900,000
-------------
51,908,244
-------------
Energy/Energy Services 3.8%
Atlantic Richfield Co. 180,000 15,378,750
Coastal Co. 300,000 18,375,000
Murphy Oil Corp. 40,000 2,285,000
Royal Dutch Petroleum Co., New York Shares 280,000 15,540,000
Schlumberger, Ltd. 60,000 5,051,250
Union Pacific Resources Group, Inc. 101,633 2,661,514
-------------
59,291,514
-------------
Environmental Services 4.7%
Betzdearborn, Inc. 200,000 13,675,000
Browning-Ferris Industries, Inc. 165,000 6,280,313
aIonics, Inc. 230,000 10,191,875
Millipore Corp. 400,000 19,650,000
aOsmonics, Inc. 256,500 4,216,219
Pall Corp. 382,000 8,236,875
Waste Management, Inc. 210,000 7,336,875
Wheelabrator Technology, Inc. 270,000 4,320,000
-------------
73,907,157
-------------
Food/Confectionery .9%
Hershey Foods Corp. 258,200 14,588,300
-------------
Health Care - Diversified 5.1%
Abbott Laboratories 200,000 12,787,500
Allegiance Corp 50,000 1,550,000
Allergan, Inc. 200,000 7,237,500
aAlza Corp., Class A 100,000 2,900,000
aAlza Corp., warrants 8,000 1,500
Baxter International, Inc. 250,000 13,062,500
Johnson & Johnson, Inc. 400,000 23,050,000
aMedPartners, Inc. 75,625 1,621,211
Nature's Sunshine Products, Inc. 33,000 779,625
aPerrigo Co. 200,000 3,150,000
aRespironics, Inc. 98,000 2,695,000
U.S. Surgical Corp. 400,000 11,675,000
-------------
80,509,836
-------------
Imaging/Photography .9%
Eastman Kodak Co. 200,000 12,987,500
Polaroid Corp. 38,000 1,945,125
-------------
14,932,625
-------------
Media & Broadcasting 1.8%
aHSN, Inc. 100,000 $ 4,062,500
Time Warner, Inc. 450,000 24,384,375
-------------
28,446,875
-------------
Networking 1.6%
aCabletron Systems, Inc. 500,000 16,000,000
aCisco Systems, Inc. 135,000 9,863,437
-------------
25,863,437
-------------
Pharmaceuticals 11.2%
American Home Products Corp. 300,000 21,900,000
Bristol-Myers Squibb Co. 320,000 26,480,000
Lilly (Eli) & Co. 200,000 24,087,500
Merck & Co., Inc. 200,000 19,987,500
Pfizer, Inc. 640,000 38,440,000
Schering-Plough Corp. 900,000 46,350,000
-------------
177,245,000
-------------
Real Estate - Diversified
a,bFRM Nexus 115,100 115
-------------
Retail .5%
Tiffany & Co. 123,900 5,265,750
Weis Markets, Inc. 58,218 2,037,630
-------------
7,303,380
-------------
Toy Manufacturing .6%
Mattel, Inc. 300,000 9,937,500
-------------
Transportation 6.0%
aAMR Corp. 310,000 34,313,124
Delta Air Lines, Inc. 250,000 23,546,874
aUAL Corp. 350,000 29,618,750
Union Pacific Corp. 120,000 7,515,000
-------------
94,993,748
-------------
Total Long Term Investments (Cost $433,324,038) 1,065,564,551
-------------
fRepurchase Agreements 32.5%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $513,654,651)(Cost $513,568,914) $513,568,914 $ 513,568,914
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $39,075,895)
BA Securities, Inc., (Maturity Value $39,075,895)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $44,743,911)
Bear, Stearns & Co., Inc., (Maturity Value $39,075,895)
CIBC Wood Gundy Securities Corp., (Maturity Value $39,075,895)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $39,075,895)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $39,075,895)
Fuji Securities, Inc., (Maturity Value $39,075,895)
Lehman Brothers, Inc., (Maturity Value $39,075,895)
Sanwa Securities (USA) Co., L.P., (Maturity Value $39,075,895)
SBC Warburg, Inc., (Maturity Value $39,075,895)
The Nikko Securities Co. International, Inc., (Maturity Value $39,075,895)
UBS Securities, L.L.C., (Maturity Value $39,075,895)
Total Investments (Cost $946,892,952) 100.0% 1,579,133,465
Other Assets, less Liabilities (531,953)
-------------
Net Assets 100.0% $1,578,601,512
=============
aNon-income producing.
bSee Note 6 regarding restricted securities.
eThe Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5%
or more of the outstanding voting securities. Investments in "affiliated companies" at 9/30/97 were $6,906.
fSee Note 1(f) regarding joint repurchase agreement.
gTrading suspended.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin DynaTech Fund
Class I
-----------------------------------------------------------------
Year Ended September 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $14.03 $12.78 $9.85 $10.29 $9.21
Income from investment operations:
Net investment income .10 .06 .12 .07 .10
Net realized and unrealized gains 4.81 1.54 2.99 .21 1.21
Total from investment operations 4.91 1.60 3.11 .28 1.31
Less distributions:
Dividends from net investment income (.06) (.12) (.05) (.12) (.12)
Distributions from net realized gains (.40) (.23) (.13) (.60) (.11)
Total distributions (.46) (.35) (.18) (.72) (.23)
Net asset value, end of year $18.48 $14.03 $12.78 $9.85 $10.29
Total return* 35.63% 12.84% 32.10% 2.89% 14.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $188,102 $104,508 $92,987 $67,413 $71,469
Ratio to average net assets:
Expenses 1.04% 1.05% 1.01% 1.00% .81%
Net investment income .75% .43% 1.11% .69% 1.03%
Portfolio turnover rate 5.59% 11.94% 9.83% 9.73% 26.56%
Average commission rate paid** $.0536 $.0551 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
Class II
--------------------------------
Year Ended September 30,
--------------------------------
1997 1996****
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $14.03 $13.57
--------------------------------
Income from investment operations:
Net investment income .07 --
Net realized and unrealized gains 4.66 .46
--------------------------------
Total from investment operations 4.73 .46
--------------------------------
Less distributions:
Dividends from net investment income (.06) --
Distributions from net realized gains (.40) --
--------------------------------
Total distributions (.46) --
--------------------------------
Net asset value, end of year $18.30 $14.03
================================
Total return* 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $3,386 $ --
Ratio to average net assets:
Expenses 1.82% 1.85%**
Net investment income .25% (.14%)**
Portfolio turnover rate 5.59% 11.94%
Average commission rate paid*** $.0536 $.0551
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period September 16, 1996 (effective date) to September 30, 1996.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
DynaTech Fund SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks 62.0%
Biotechnology .3%
<S> <C> <C>
aAmgen, Inc. 10,000 $ 479,375
-------------
Business Services 1.7%
aChoicePoint, Inc. 2,000 74,750
Cognizant Corp. 10,000 407,500
Equifax, Inc. 20,000 628,750
First Data Corp. 50,000 1,878,125
aSABRE Group Holdings, Inc. 11,800 422,588
-------------
3,411,713
-------------
Chemicals .8%
Sigma-Aldrich Corp. 50,000 1,646,874
-------------
Computer Hardware 9.0%
aCompaq Computer Corp. 125,000 9,343,750
Hewlett-Packard Co. 100,000 6,956,250
aKomag, Inc. 45,000 916,875
-------------
17,216,875
-------------
Computer Software 7.8%
Adobe Systems, Inc. 20,000 1,007,500
aElectronic Arts, Inc. 10,000 386,250
aIntuit, Inc. 25,000 800,000
aMetaCreations Corp. 11,235 165,716
aMicrosoft Corp. 90,000 11,908,125
aNetscape Communications Corp. 200 7,200
aParametric Technology Co. 10,000 441,250
aScopus Technology, Inc. 11,250 178,594
-------------
14,894,635
-------------
Data Services .3%
aComputer Sciences Corp. 10,000 707,500
-------------
Energy/Energy Services 1.8%
aAES Corp. 20,000 875,000
Schlumberger, Ltd. 30,000 2,525,625
-------------
3,400,625
-------------
Environmental Services 2.1%
Browning-Ferris Industries, Inc. 20,000 761,250
aUS Filter Corp. 10,000 430,625
Waste Management, Inc. 80,000 2,795,000
-------------
3,986,875
-------------
Financial Services .1%
Associates First Capital Corp. 3,600 224,100
-------------
Lodging .1%
aHost Marriott Corp. 10,000 227,500
-------------
Media & Broadcasting 1.1%
Liberty Media Group, Class A 37,312 1,117,028
News Corp., Ltd., Sponsored ADR 20,000 408,750
Time Warner, Inc. 10,000 541,875
-------------
2,067,653
-------------
Medical Services 3.4%
Bard (C.R.), Inc. 20,000 678,750
Columbia/HCA Healthcare Corp. 22,500 646,875
HBO & Co. 30,000 1,132,500
Medtronic, Inc. 20,000 940,000
Mentor Corp. 5,000 158,750
Medical Services (cont.)
aPacifiCare Health Systems, Inc., Class B 15,000 $ 1,021,875
aSt. Jude Medical, Inc. 10,000 350,625
United Healthcare Corp. 30,000 1,500,000
-------------
6,429,375
Networking 3.9% -------------
a3Com Corp. 20,000 1,025,000
aAscend Communications, Inc. 5,000 161,875
aCisco Systems, Inc. 60,000 4,383,750
aInternational Network Services 35,000 717,500
aNewbridge Networks Corp. 20,000 1,197,500
-------------
7,485,625
-------------
Pharmaceuticals 4.0%
Merck & Co., Inc. 15,000 1,499,063
Schering-Plough Corp. 40,000 2,060,000
Warner-Lambert Co. 30,000 4,048,125
-------------
7,607,188
-------------
Precision Instruments/Test Equipment 2.1%
aThermo Electron Corp. 84,375 3,375,000
aWaters Corp. 13,800 609,788
-------------
3,984,788
-------------
Retail 2.7%
Estee Lauder Cos., Class A 20,000 925,000
aFederated Department Stores, Inc. 10,000 431,250
aToys R Us, Inc. 108,000 3,834,000
-------------
5,190,250
-------------
Semiconductor/Manufacturer 14.1%
Intel Corp. 280,000 25,847,500
Linear Technology Corp. 10,000 687,500
aXilinx, Inc. 10,000 506,250
-------------
27,041,250
-------------
Specialty Pharmaceuticals .1%
aNoven Pharmaceuticals, Inc. 23,000 161,000
-------------
Telecommunications 6.3%
aAirTouch Communications, Inc. 20,000 708,750
AT&T Corp. 15,000 664,687
Lucent Technologies, Inc. 8,102 659,300
Motorola, Inc. 140,000 10,062,500
-------------
12,095,237
-------------
Transportation .3%
Air Express International Corp. 15,000 547,500
-------------
Total Long Term Investments (Cost $31,963,323) 118,805,938
-------------
fRepurchase Agreements 37.6%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $71,953,228)(Cost $71,941,218) $71,941,218 $ 71,941,218
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $5,473,788)
BA Securities, Inc., (Maturity Value $5,473,788)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $6,267,772)
Bear, Stearns & Co., Inc., (Maturity Value $5,473,788)
CIBC Wood Gundy Securities Corp., (Maturity Value $5,473,788)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $5,473,788)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $5,473,788)
Fuji Securities, Inc., (Maturity Value $5,473,788)
Lehman Brothers, Inc., (Maturity Value $5,473,788)
Sanwa Securities (USA) Co., L.P., (Maturity Value $5,473,788)
SBC Warburg, Inc., (Maturity Value $5,473,788)
The Nikko Securities Co. International, Inc., (Maturity Value $5,473,788)
UBS Securities, L.L.C., (Maturity Value $5,473,788)
Total Investments (Cost $103,904,541) 99.6% 190,747,156
Other Assets, less Liabilities .4% 740,189
-------------
Net Assets 100.0% $191,487,345
=============
aNon-income producing.
fSee Note 1(f) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin Utilities Fund
Class I
---------------------------------------------------------------
Year Ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.73 $9.75 $8.33 $10.78 $ 9.63
---------------------------------------------------------------
Income from investment operations:
Net investment income .53 .54 .53 .55 .53
Net realized and unrealized gains (losses) .73 .03 1.42 (2.44) 1.17
---------------------------------------------------------------
Total from investment operations 1.26 .57 1.95 (1.89) 1.70
---------------------------------------------------------------
Less distributions:
Dividends from net investment income (.52) (.52) (.52) (.52) (.55)
Distributions from net realized gains (.43) (.07) (.01) (.04) --
---------------------------------------------------------------
Total distributions (.95) (.59) (.53) (.56) (.55)
---------------------------------------------------------------
Net asset value, end of year $10.04 $9.73 $9.75 $ 8.33 $10.78
===============================================================
Total return* 13.72% 5.94% 24.19% (17.94%) 17.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $1,953,273 $2,400,561 $2,765,976 $2,572,508 $3,626,774
Ratio to average net assets:
Expenses .75% .71% .73% .64% .55%
Net investment income 5.26% 5.24% 5.88% 5.76% 5.30%
Portfolio turnover rate 7.24% 17.05% 5.55% 6.34% 7.81%
Average commission rate paid** $.0505 $.0486 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
<TABLE>
<CAPTION>
Class II
-------------------------------------
Year Ended September 30,
-------------------------------------
1997 1996 1995****
-------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $ 9.72 $9.75 $8.89
Income from investment operations:
Net investment income .45 .46 .23
Net realized and unrealized gains .76 .06 .88
Total from investment operations 1.21 .52 1.11
Less distributions:
Dividends from net investment income (.48) (.48) (.25)
Distributions from net realized gains (.43) (.07) --
Total distributions (.91) (.55) (.25)
Net asset value, end of year $10.02 $9.72 $9.75
Total return* 13.06% 5.39% 13.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $21,906 $19,655 $8,369
Ratio to average net assets:
Expenses 1.27% 1.23% 1.21%**
Net investment income 4.78% 4.86% 5.15%**
Portfolio turnover rate 7.24% 17.05% 5.55%
Average commission rate paid*** $.0505 $.0486 --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
</TABLE>
Advisor Class
---------------------
1997****
---------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 9.55
---------------------
Income from investment operations:
Net investment income .36
Net realized and unrealized gains .53
---------------------
Total from investment operations .89
Less distributions: ---------------------
Dividends from net investment income (.40)
---------------------
Net asset value, end of period $10.04
=====================
Total return* 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $8,719
Ratio to average net assets:
Expenses .62%**
Net investment income 5.33%**
Portfolio turnover rate 7.24%
Average commission rate paid*** $.0505
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
Utilities Fund SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks 78.5%
<S> <C> <C>
AGL Resources, Inc. 350,000 $ 6,628,125
aAirTouch Communications, Inc. 203,200 7,200,900
Allegheny Energy, Inc. 1,800,000 54,450,000
American Electric Power Co., Inc. 1,276,100 58,062,550
AT&T Corp. 150,000 6,646,875
Central & South West Corp. 2,178,100 48,326,594
CINergy Corp. 2,059,800 68,874,563
Delmarva Power & Light Co. 2,359,800 44,541,225
Dominion Resources, Inc. 1,783,950 67,567,106
Duke Power Co. 1,585,000 78,358,438
Edison International 1,120,800 28,300,200
Enova Corp. 2,505,600 63,266,400
Entergy Corp. 1,875,400 48,877,613
Florida Progress Corp. 2,135,175 70,460,775
FPL Group, Inc. 1,601,000 82,051,250
GPU, Inc. 937,000 33,614,875
GTE Corp. 800,000 36,300,000
Hawaiian Electric Industries, Inc. 1,188,480 44,493,720
MidAmerican Energy Co. 2,059,800 35,531,550
Montana Power Co. 28,000 745,500
Nevada Power Co. 661,700 14,557,400
New Century Energies, Inc. 1,748,445 72,669,745
New Jersey Resources Corp. 245,500 7,948,063
NIPSCO Industries, Inc. 1,010,300 42,558,888
Northern States Power Co. 342,100 17,019,475
OGE Energy Corp. 444,300 20,965,406
Pacific Enterprises 560,800 18,997,100
PG&E Corp. 3,328,000 77,168,000
PacifiCorp 1,695,900 37,945,763
Pinnacle West Capital Corp. 518,485 17,434,058
Puget Sound Power & Light Co. 900,000 23,962,500
SBC Communications 182,100 11,176,388
SCANA Corp. 2,398,500 60,112,406
Sierra Pacific Resources 350,000 11,221,875
SIGCORP, Inc. 787,665 20,085,458
Southern Co. 3,463,500 78,145,219
TECO Energy, Inc. 2,900,400 71,059,800
Texas Utilities Co. 1,162,750 41,859,000
Western Resources, Inc. 806,200 27,662,738
-------------
Total Common Stocks (Cost $1,375,936,243) 1,556,847,541
-------------
Preferred Stocks 5.3%
AES Trust I, Series A, 5.375%, 3/31/27, cvt. pfd. 400,000 27,300,000
bCMS Energy Trust I, 7.75%, cvt. pfd. 705,000 38,360,601
MCN Financing III, 8.00%, 5/16/00, cvt. pfd. 108,400 5,860,375
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS 650,000 35,100,000
-------------
Total Preferred Stocks (Cost $87,231,042) 106,620,976
-------------
PRINCIPAL
AMOUNT
-----------
Corporate Bonds 13.6%
<S> <C> <C>
Alabama Power Co., 8.75%, 12/01/21 $ 9,900,000 10,314,482
Alabama Power Co., 8.50%, 5/01/22 4,950,000 5,259,073
Arizona Public Service Co., 10.25%, 5/15/20 10,500,000 11,547,835
Arizona Public Service Co., 9.00%, 12/15/21 14,500,000 15,950,173
Cincinnati Gas & Electric Co., 8.50%, 9/01/22 10,000,000 10,639,850
Commonwealth Edison Co., 8.875%, 10/01/21 2,000,000 2,115,166
Commonwealth Edison Co., 8.50%, 7/15/22 5,000,000 5,301,794
Commonwealth Edison Co., 8.375%, 9/15/22 10,000,000 10,422,060
Duquesne Light Co., 8.375%, 5/15/24 $ 5,000,000 $ 5,277,689
Enron Corp., 7.00%, 8/15/23 19,000,000 18,350,313
Gulf States Utilities Co., 9.72%, 7/01/98 1,185,000 1,206,192
Illinois Power Co., 8.00%, 2/15/23 10,000,000 10,240,749
Itron, Inc., cvt., 144A, 6.75%, 3/31/04 10,000,000 12,450,000
Long Island Lighting Co., 9.75%, 5/01/21 10,000,000 10,337,849
Louisiana Power & Light Co., 8.50%, 7/01/22 10,000,000 10,236,378
Midland CoGeneration Venture, 10.33%, 7/23/02 11,831,875 13,223,836
Niagara Mohawk Power Corp., 9.50%, 3/01/21 7,500,000 8,005,634
Niagara Mohawk Power Corp., 8.75%, 4/01/22 5,000,000 5,299,400
Northwest Pipeline Corp., 7.125%, 12/01/25 3,000,000 2,903,628
Ohio Edison Co., 8.75%, 6/15/22 8,000,000 8,441,111
Pacific Bell, 7.75%, 9/15/32 10,000,000 10,332,599
Pacific Bell, 7.50%, 2/01/33 10,000,000 10,115,659
Panhandle Eastern Co., 7.20%, 8/15/24 20,000,000 19,087,180
Philadelphia Electric Co., 8.75%, 4/01/22 15,000,000 15,857,143
Texas Utilities Co., 8.75%, 11/01/23 10,000,000 11,055,769
Texas Utilities Co., 8.50%, 8/01/24 10,000,000 10,852,339
US West Communications Group, 6.875%, 9/15/33 16,000,000 14,912,958
-------------
Total Corporate Bonds (Cost $255,913,519) 269,736,859
-------------
Total Long Term Investments (Cost $1,719,080,804) 1,933,205,376
-------------
fRepurchase Agreements 1.1%
Joint Repurchase Agreement, 6.010%, 10/01/97
(Maturity Value $21,787,124) (Cost $21,783,487) 21,783,487 21,783,487
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $1,655,821)
BA Securities, Inc., (Maturity Value $1,655,821)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $1,917,272)
Bear, Stearns & Co., Inc., (Maturity Value $1,655,821)
CIBC Wood Gundy Securities Corp., (Maturity Value $1,655,821)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,655,821)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $1,655,821)
Fuji Securities, Inc., (Maturity Value $1,655,821)
Lehman Brothers, Inc., (Maturity Value $1,655,821)
Sanwa Securities (USA) Co., L.P., (Maturity Value $1,655,821)
SBC Warburg, Inc., (Maturity Value $1,655,821)
The Nikko Securities Co. International, Inc., (Maturity Value $1,655,821)
UBS Securities, L.L.C., (Maturity Value $1,655,821)
Total Investments (Cost $1,740,864,291) 98.5% 1,954,988,863
Other Assets, less Liabilities 1.5% 28,909,798
-------------
Net Assets 100.0% $1,983,898,661
=============
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
aNon-income producing.
bSee Note 6 regarding restricted securities.
fSee Note 1(f) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin Income Fund
Class I
----------------------------------------------------------------
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $2.30 $2.30 $2.22 $2.46 $2.25
----------------------------------------------------------------
Income from investment operations:
Net investment income .18 .19 .18 .17 .18
Net realized and unrealized gains (losses) .20 .02 .11 (.20) .23
----------------------------------------------------------------
Total from investment operations .38 .21 .29 (.03) .41
----------------------------------------------------------------
Less distributions:
Dividends from net investment income (.18) (.18) (.18) (.18) (.19)
Distributions from net realized gains (.01) (.03) (.03) (.03) (.01)
----------------------------------------------------------------
Total distributions (.19) (.21) (.21) (.21) (.20)
----------------------------------------------------------------
Net asset value, end of year $2.49 $2.30 $2.30 $2.22 $2.46
================================================================
Total return* 17.31% 9.43% 14.00% (1.52%) 18.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $7,738,746 $6,780,153 $5,885,788 $4,891,505 $3,935,444
Ratio to average net assets:
Expenses .72% .70% .71% .64% .54%
Net investment income 7.45% 8.27% 8.26% 7.37% 7.84%
Portfolio turnover rate 16.15% 25.29% 58.64% 23.37% 25.41%
Average commission rate paid** $.0498 $.0518 -- -- --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
</TABLE>
<TABLE>
<CAPTION>
Class II
------------------------------------------
Year Ended September 30,
------------------------------------------
1997 1996 1995****
------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $2.30 $2.30 $2.18
------------------------------------------
Income from investment operations:
Net investment income .16 .17 .08
Net realized and unrealized gains .21 .03 .11
------------------------------------------
Total from investment operations .37 .20 .19
------------------------------------------
Less distributions:
Dividends from net investment income (.17) (.17) (.07)
Distributions from net realized gains (.01) (.03) --
------------------------------------------
Total distributions (.18) (.20) (.07)
------------------------------------------
Net asset value, end of year $2.49 $2.30 $2.30
==========================================
Total return* 16.72% 8.86% 8.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $695,355 $343,314 $65,822
Ratio to average net assets:
Expenses 1.22% 1.21% 1.23%**
Net investment income 6.96% 7.84% 7.89%**
Portfolio turnover rate 16.15% 25.29% 58.64%
Average commission rate paid*** $.0498 $.0518 --
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30, 1996 disclosure of average commission rate was not
required.
****For the period May 1, 1995 (effective date) to September 30, 1995.
</TABLE>
<TABLE>
<CAPTION>
Advisor Class
----------------
1997****
----------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C>
Net asset value, beginning of period $2.34
----------------
Income from investment operations:
Net investment income .14
Net realized and unrealized gains .14
----------------
Total from investment operations .28
----------------
Less distributions:
Dividends from net investment income (.14)
----------------
Net asset value, end of period $2.48
================
Total return* 12.31%
Ratios/Supplemental Data
Net assets, end of period (000's) $13,318
Ratio to average net assets:
Expenses .57%**
Net investment income 7.58%**
Portfolio turnover rate 16.15%
Average commission rate paid*** $.0498
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
SHARES/
Income Fund WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
a,b,fCommon Stocks 28.4%
Apparel/Textiles .2%
<S> <C> <C>
a,b,eBibb Co. 2,097,122 $ 15,728,415
-------------
Automotive .1%
General Motors Corp. ............................................................ 100,000 6,693,750
-------------
Computer/Technology .2%
a,e Anacomp, Inc. ................................................................... 1,233,882 19,125,171
-------------
Consumer Products 1.8%
Philip Morris Cos., Inc. ........................................................ 3,300,000 137,156,250
RJR Nabisco Holdings Corp. ...................................................... 600,000 20,625,000
-------------
................................................................................. 157,781,250
-------------
Energy/Energy Services 2.8%
Athabasca Oil Sands Trust, (Canada).............................................. 2,700,000 52,759,182
Atlantic Richfield Co. .......................................................... 300,000 25,631,250
Canadian Oil Sands Trust, (Canada), 144A......................................... 2,300,000 46,607,563
Energy Group, Plc., Sponsored ADR................................................ 237,500 9,885,938
Monterey Resources, Inc.......................................................... 812,540 17,063,340
Pioneer Natural Resources Co. ................................................... 1,200,015 50,250,628
aSanta Fe Energy Resources, Inc................................................... 1,122,805 14,035,063
Ultramar Diamond Shamrock Corp. ................................................. 625,000 20,195,313
-------------
............................................................................... 236,428,277
-------------
Metals 1.0%
Anglo American Platinum Corp., Ltd., ADR......................................... 943,691 16,350,862
Driefontein Consolidated, Ltd., Sponsored ADR ................................... 700,000 5,162,500
Free State Consolidated Gold Mines, Ltd., ADR ................................... 2,525,000 15,386,845
Freeport-McMoRan Copper & Gold, Inc., Class A.................................... 408,329 11,254,568
Impala Platinum Holdings, Ltd., ADR ............................................. 1,184,200 13,784,562
Samancor, Ltd., ADR ............................................................. 300,000 2,252,970
St. Helena Gold Mines, Ltd., ADR ................................................ 187,500 773,438
Vaal Reefs Exploration & Mining Co., Ltd., ADR .................................. 1,500,000 8,062,500
Western Deep Levels, Ltd., ADR .................................................. 350,000 8,968,750
-------------
............................................................................... 81,996,995
-------------
Real Estate Investment Trusts .3%
Meditrust Corp. ................................................................. 600,000 24,900,000
-------------
Telecommunications .8%
US West Communications Group .................................................... 1,700,000 65,450,000
-------------
Utilities 21.2%
American Electric Power Co., Inc. ............................................... 2,200,000 100,100,000
Central & South West Corp. ...................................................... 3,800,000 84,312,500
CINergy Corp. ................................................................... 2,400,000 80,250,000
Delmarva Power & Light Co. ...................................................... 2,800,000 52,850,000
Dominion Resources, Inc. ........................................................ 2,400,000 90,900,000
Edison International ............................................................ 3,100,000 78,275,000
Enova Corp. ..................................................................... 3,000,000 75,750,000
Entergy Corp. ................................................................... 3,500,000 91,218,750
Florida Progress Corp. .......................................................... 2,700,000 89,100,000
FPL Group, Inc. ................................................................. 1,400,000 71,750,000
GPU, Inc......................................................................... 1,700,000 60,987,500
Hawaiian Electric Industries, Inc. .............................................. 610,000 22,836,875
Houston Industries, Inc. ........................................................ 1,900,000 41,325,000
Long Island Lighting Co. ........................................................ 1,800,000 46,125,000
MidAmerican Energy Holdings Co. ................................................. 1,776,600 30,646,350
Nevada Power Co. ................................................................ 825,000 18,150,000
New Century Energies, Inc........................................................ 1,805,000 75,020,313
New England Electric System ..................................................... 1,900,000 74,575,000
New York State Electric & Gas Corp. ............................................. 1,000,000 26,875,000
Utilities (cont.)
Northern States Power Co. ....................................................... 949,600 $ 47,242,600
Ohio Edison Co. ................................................................. 2,100,000 49,218,750
PacifiCorp ...................................................................... 525,000 11,746,875
PECO Energy Co. ................................................................. 3,000,000 70,312,500
PG&E Corp. ...................................................................... 3,200,000 74,200,000
Potomac Electric Power Co. ...................................................... 1,600,000 36,400,000
Public Service Enterprise Group, Inc. ........................................... 2,350,000 60,512,500
SCANA Corp. ..................................................................... 800,000 20,050,000
Southern Co. .................................................................... 2,700,000 60,918,750
Texas Utilities Co. ............................................................. 2,400,000 86,400,000
Western Resources, Inc........................................................... 1,900,000 65,193,750
-------------
............................................................................... 1,793,243,013
-------------
Total Common Stocks (Cost $2,030,817,301) ....................................... 2,401,346,871
-------------
Preferred Stocks 11.6%
Apparel/Textiles .3%
Fieldcrest Cannon, Inc., $3.00 cvt. pfd., Series A .............................. 400,000 23,600,000
-------------
Cable Systems .4%
Cablevision Systems Corp., 8.50% cvt. pfd., Series I............................. 1,300,000 38,025,000
-------------
Consumer Products .1%
Pantry Pride, Inc., $14.875 pfd., Series B ...................................... 75,000 7,621,875
-------------
Energy/Energy Services 4.1%
bCMS Energy Trust I, 7.75% cvt. pfd............................................... 1,600,000 87,059,520
Devon Financing Trust, $3.25 cvt. pfd., 144A..................................... 600,000 48,375,000
Enron Corp., 6.25% cvt. pfd...................................................... 2,150,000 48,240,625
McDermott International, Inc., $2.875 cvt. pfd., Series C, 144A ................. 1,100,000 61,325,000
Nuevo Energy Co., 5.75% cvt. pfd., Series A...................................... 1,200,000 61,500,000
Occidental Petroleum Corp., $3.875 cvt. pfd., 144A............................... 490,000 28,787,500
Patina Oil & Gas Corp., 7.125% cvt. pfd.......................................... 158,100 5,118,488
Snyder Oil Corp., $1.50 cvt. exch. pfd. ......................................... 178,900 4,942,113
-------------
................................................................................ 345,348,246
-------------
Lodging .9%
Host Marriott Corp., 6.75% cvt. pfd., 144A....................................... 1,100,000 74,800,000
-------------
Metals 1.8%
Amax Gold, Inc., $3.75 cvt. pfd., Series B ...................................... 650,000 35,100,000
Armco, Inc., $3.625 cum. cvt. pfd., Series A .................................... 300,000 15,262,500
Armco, Inc., $4.50 cvt. pfd., Class B ........................................... 114,200 5,781,375
Battle Mountain Gold Co., $3.25 cvt. pfd. ....................................... 295,000 14,879,063
Coeur D'Alene Mines Corp., 7.00% cvt. pfd........................................ 600,000 11,137,500
Cyprus Minerals, $4.00 cvt. pfd., Series A ...................................... 120,000 6,615,000
Freeport-McMoRan, Inc., 4.375% cvt. exch. pfd., 144A ............................ 450,000 29,250,000
Freeport-McMoRan, Inc., 8.75% cvt. pfd. ......................................... 400,000 12,200,000
Hecla Mining Co., $3.50 cvt. pfd., Series B ..................................... 375,000 18,234,375
-------------
............................................................................... 148,459,813
-------------
Media & Broadcasting .5%
Time Warner, Inc., 10.25% pfd., Series M......................................... 34,800 39,715,500
-------------
Paper & Forest Products .7%
Asia Pulp & Paper Co., Ltd., 12.00% pfd.......................................... 60,000,000 61,200,000
-------------
Real Estate Investment Trusts 1.9%
FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A ............................ 1,800,000 58,500,000
Security Capital Industrial Trust, 7.00% cvt. pfd................................ 800,000 24,200,000
Security Capital Pacific Trust, $1.75 cvt. pfd., Series A........................ 1,040,000 33,085,000
Vornado Realty Trust, 6.50%, cvt. pfd., Series A................................. 700,000 43,750,000
-------------
............................................................................... 159,535,000
-------------
Telecommunications .9%
Nortel Inversora, SA, 10.00% cvt. pfd............................................ 1,200,000 $ 64,800,000
Nortel Inversora, SA, ADR, cvt. pfd., Series B................................... 504,000 14,049,000
-------------
............................................................................... 78,849,000
-------------
Total Preferred Stocks (Cost $835,940,260) ..................................... 977,154,434
-------------
Partnership Units .2%
BP Prudhoe Bay Royalty Trust .................................................... 500,000 9,000,000
Freeport-McMoRan Resource Partners, Ltd., depository units ...................... 300,000 3,843,750
a,bJewel Recovery, L.P. ............................................................ 59,258 28,444
-------------
Total Partnership Units (Cost $18,730,667) ...................................... 12,872,194
-------------
Warrants
a,bBoardwalk Casino, Inc............................................................ 1,281,869 1,874,092
aSecurity Capital Group .......................................................... 121,476 971,808
-------------
Total Warrants (Cost $2,643,855) ................................................ 2,845,900
-------------
Total Common Stocks, Preferred Stocks, Partnership Units, and Warrants (Cost $2,88 8,132,083) 3,394,219,399
-------------
PRINCIPAL
AMOUNT*
------------
Corporate Bonds 29.2%
Apparel/Textiles 1.6%
<S> <C> <C>
Consoltex Group, Inc., senior sub. notes, Series B, 11.00%, 10/01/03 ................ $ 50,000,000 52,500,000
Hartmarx Corp., senior sub. notes, 10.875%, 1/15/02 ................................. 35,000,000 35,875,000
Polysindo International Finance Co., secured notes, 11.375%, 6/15/06 ................ 13,000,000 14,137,500
Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ......................... 25,000,000 26,500,000
The William Carter Co., senior sub. notes, Series A, 10.375%, 12/01/06 .............. 6,000,000 6,300,000
-------------
135,312,500
-------------
Automotive 1.0%
Collins & Aikman Corp., senior sub. notes., 11.50%, 4/15/06 ......................... 35,000,000 40,206,250
Exide Corp., cvt. sub. notes, 144A, 2.90%, 12/15/05 ................................. 30,000,000 18,937,500
Exide Corp., senior notes, 10.75%, 12/15/02 ......................................... 4,000,000 4,250,000
cHarvard Industries, Inc., senior notes, 11.125%, 8/01/05 ........................... 50,000,000 19,750,000
-------------
83,143,750
-------------
Biotechnology .2%
Centocor, Inc., Eurobonds, cvt. sub. deb., 6.75%, 10/16/01 .......................... 16,500,000 16,665,000
-------------
Building Products .4%
American Standard, Inc., S.F., senior sub. deb., 9.25%, 12/01/16 .................... 5,000,000 5,250,000
Inter-City Products Corp., senior notes, 9.75%, 3/01/00 ............................. 30,000,000 30,900,000
-------------
36,150,000
-------------
Cable Systems 1.3%
Cablevision Systems Corp., senior sub. deb., 9.875%, 4/01/23 ........................ 40,000,000 43,200,000
Continental Cablevision, Inc., senior sub. deb., 9.50%, 8/01/13 ..................... 30,000,000 35,183,519
Helicon Group, L.P. Corp., senior notes, Series B, 11.00%, 11/01/03 ................. 35,000,000 37,012,500
-------------
115,396,019
-------------
Chemicals .7%
Applied Extrusion Technology, senior notes, Series B, 11.50%, 4/01/02 ............... 29,000,000 30,885,000
Uniroyal Chemical Co., senior notes, 10.50%, 5/01/02 ................................ 8,900,000 9,745,500
Uniroyal Chemical Co., senior sub. notes, 11.00%, 5/01/03 ........................... 20,000,000 21,600,000
-------------
62,230,500
-------------
Computer/Technology 1.2%
Acclaim Entertainment, Inc., cvt. sub. notes, 10.00%, 3/01/02 ....................... 29,000,000 32,770,000
Anacomp, Inc., senior sub. notes, Series B, 10.875%, 4/01/04 ........................ 60,000,000 63,300,000
Maxtor Corp., cvt. sub. deb., 5.75%, 3/01/12 ........................................ 11,750,000 8,166,250
-------------
104,236,250
-------------
Consumer Products 1.9%
E&S Holdings Corp., senior sub. notes, Series B, 10.375%, 10/01/06 .................. $ 20,000,000 $ 19,550,000
Mafco, Inc., senior sub. deb., 11.875%, 11/15/02 .................................... 18,000,000 19,260,000
Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 ................... 38,500,000 39,270,000
Revlon Consumer Products Corp., senior sub. notes, Series B, 10.50%, 2/15/03 ........ 30,000,000 31,950,000
RJR Nabisco, Inc., notes, 9.25%, 8/15/13 ............................................ 35,000,000 38,097,390
Sealy Corp., senior sub. notes, 10.25%, 5/01/03 ..................................... 8,650,000 9,125,750
-------------
157,253,140
-------------
Containers & Packaging 1.0%
Calmar, Inc., senior sub notes, Series B, 11.50%, 8/15/05 ........................... 30,000,000 32,100,000
Packaging Resources, Inc., senior notes, 11.625%, 5/01/03 ........................... 28,000,000 29,190,000
Printpack, Inc., senior sub. notes, Series B, 10.625%, 8/15/06 ...................... 15,000,000 16,275,000
U.S. Can Corp., company guaranteed, Series B, 10.125%, 10/15/06 ..................... 6,000,000 6,405,000
-------------
83,970,000
-------------
Electrical Equipment .1%
Trans-Lux Corp., cvt. sub. notes, 7.50%, 12/01/06 ................................... 8,000,000 9,600,000
-------------
Energy/Energy Services 2.6%
Bellwether Exploration Co., senior sub. notes, 10.875%, 4/01/07 ..................... 12,000,000 12,975,000
Energy Ventures, senior notes, 10.25%, 3/15/04 ...................................... 10,000,000 10,850,000
Falcon Drilling, senior sub. notes, 12.50%, 3/15/05 ................................. 15,000,000 17,306,250
Gerrity Oil & Gas Corp., senior sub. notes, 11.75%, 7/15/04 ......................... 40,000,000 43,800,000
Global Marine, Inc., senior secured notes, 12.75%, 12/15/99 ......................... 19,000,000 19,570,000
Mesa Operating Co., company guaranteed, unsecured senior sub. notes, 10.625%, 7/01/06 5,000,000 5,781,250
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 ..................................... 45,000,000 45,393,750
Plains Resources, Inc., senior sub. notes, 10.25%, 3/15/06 .......................... 8,000,000 8,640,000
Swift Energy Co., cvt. sub. notes, 6.25%,11/15/06 ................................... 50,000,000 54,375,000
-------------
218,691,250
-------------
Entertainment .2%
AMF Group, Inc., Series B, 10.875%, 3/15/06 ......................................... 12,000,000 13,350,000
-------------
Financial Services .1%
First Nationwide Holdings, Inc., senior sub. notes, 10.625%, 10/01/03 ............... 10,000,000 11,075,000
-------------
Food & Beverages 2.9%
Chock Full O'Nuts Corp., S.F., cvt. sub. deb., 8.00%, 9/15/06 ....................... 3,902,000 4,360,485
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 ....................... 45,000,000 50,175,000
Del Monte Corp., senior sub. notes, Series B, 12.25%, 4/15/07 ....................... 46,000,000 50,140,000
Doane Products Co., senior notes, 10.625%, 3/01/06 .................................. 21,000,000 22,575,000
Dr. Pepper Bottling Co. of Texas, senior sub. notes, 10.25%, 2/15/00 ................ 6,600,000 6,963,000
International Home Foods, company guaranteed, senior sub. notes, 10.375%, 11/01/06 .. 30,000,000 33,300,000
PMI Acquisition Corp., senior sub. notes, 10.25%, 9/01/03 ........................... 32,500,000 34,531,250
Specialty Foods Corp., senior sub. notes, Series B, 11.25%, 8/15/03 ................. 25,000,000 22,875,000
Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 8/15/01 ............ 20,000,000 19,800,000
-------------
244,719,735
-------------
Food Chains 1.8%
Americold Corp., senior sub. notes, 12.875%, 5/01/08 ................................ 18,000,000 20,700,000
Americold Corp., senior sub. notes, Series B, 11.50%, 3/01/05 ....................... 33,000,000 35,805,000
Bruno's, Inc., senior sub. notes, 10.50%, 8/01/05 ................................... 60,000,000 36,000,000
Grand Union Capital Corp., senior notes, 12.00%, 9/01/04 ............................ 33,000,000 15,345,000
Ralphs Grocery Co., senior sub notes, 11.00%, 6/15/05 ............................... 40,000,000 44,000,000
-------------
151,850,000
-------------
Gaming & Leisure 1.4%
Aztar Corp., senior sub. notes, 11.00%, 10/01/02 .................................... 60,000,000 62,100,000
Eldorado Resorts, L.L.C., senior sub. notes, 10.50%, 8/15/06 ........................ 8,000,000 8,800,000
Harveys Casino Resorts, senior sub. notes, 10.625%, 6/01/06 ......................... 11,000,000 12,100,000
Rio Hotel & Casino, Inc., senior sub. notes, 10.625%, 7/15/05 ....................... 35,000,000 38,237,500
-------------
121,237,500
-------------
Health Care .6%
Dade International, Inc., senior sub. notes, 11.125%, 5/01/06 ....................... $ 22,000,000 $ 24,777,500
Medical Care International, Inc., cvt. sub. deb., 144A, 6.75%, 10/01/06 ............. 15,000,000 14,100,000
Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98, 9.625% thereafter,
12/15/03 ........................................................................... 10,000,000 9,900,000
-------------
48,777,500
-------------
Industrial Products 1.4%
Nortek, Inc., senior sub. notes, 9.875%, 3/01/04 .................................... 18,500,000 19,124,375
RBX Corp., senior sub. notes, Series B, 11.25%, 10/15/05 ............................ 60,000,000 53,100,000
RHI Holdings, Inc., senior sub. deb., 11.875%, 3/01/99 .............................. 21,849,000 21,794,378
Thermadyne Industries, Inc., senior sub. notes, 10.25%, 5/01/02 ..................... 7,393,000 7,725,685
Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ........................... 14,500,000 15,587,500
-------------
117,331,938
-------------
Media & Broadcasting .2%
Benedek Broadcasting, senior notes, 11.875%, 3/01/05 ................................ 12,250,000 13,811,875
-------------
Metals 2.2%
Armco Steel, Inc., senior notes, 11.375%, 10/15/99 .................................. 7,000,000 7,210,000
Armco Steel, Inc., senior notes, 9.375%, 11/01/00 ................................... 5,000,000 5,175,000
Ashanti Capital, Ltd., cvt. notes, 5.50%, 3/15/03 ................................... 48,000,000 39,360,000
Coeur D' Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 ................... 900,000 774,000
Coeur D' Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ......................... 20,000,000 18,750,000
FMC Corp., Eurobonds, cvt. senior sub. deb., 6.75%, 1/16/05 ......................... 13,020,000 12,694,500
Jorgensen, Earle M. Co., senior notes, 10.75%, 3/01/00 .............................. 50,000,000 51,250,000
Republic Engineered Steel Co., first mortgage, 9.875%, 12/15/01 ..................... 50,000,000 48,625,000
UCAR Global Enterprises, senior sub. notes, Series B, 12.00%, 1/15/05 ............... 4,805,000 5,483,706
-------------
189,322,206
-------------
Paper & Forest Products 1.7%
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 ............................... 30,000,000 32,325,000
Riverwood International, senior sub. notes, 10.875%, 4/01/08 ........................ 60,000,000 60,225,000
Tjiwi Kimia International, company guaranteed, senior unsecured notes, 144A, 10.00%,
8/01/04 ............................................................................ 50,000,000 49,437,500
-------------
141,987,500
-------------
Pharmaceuticals .5%
ICN Pharmaceuticals, Inc., senior notes, 144A, 9.25%, 8/15/05 ....................... 37,000,000 39,035,000
-------------
Pollution Control .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 ........................ 21,000,000 16,721,250
-------------
Publishing .2%
Bell & Howell Co., senior sub. notes, Series B, 10.75%, 10/01/02 .................... 12,500,000 13,125,000
-------------
Real Estate Development .1%
Rouse Co., cvt. sub. deb., 5.75%, 7/23/02 ........................................... 10,000,000 11,100,000
-------------
Real Estate Investment Trusts .6%
Macerich Co., cvt. sub. notes, 144A, 7.25%, 12/15/02 ................................ 50,000,000 49,562,500
-------------
Retail .1%
Drug Emporium, Inc., cvt. sub. deb., 7.75%, 10/01/14 ................................ 9,000,000 7,875,000
-------------
Telecommunications .6%
CommNet Cellular, Inc., sub. notes, 11.25%, 7/01/05 ................................. 25,000,000 28,875,000
Paging Network, senior sub. notes, 10.125%, 8/01/07 ................................. 25,000,000 26,187,500
-------------
55,062,500
-------------
Utilities 2.4%
ESCOM, E168, utility deb., 11.00%, 6/01/08 .......................................... 975,837,500 ZAR 172,700,519
Midland CoGeneration Venture, deb. notes, Series C-91, 10.33%, 7/23/02 .............. 6,278,954 7,017,642
Midland CoGeneration Venture, S.F., sub. deb., Series C, 10.33%, 7/23/02 ............ 12,169,929 13,601,660
Texas-New Mexico Power Co., secured deb., 10.75%, 9/15/03 ........................... 6,000,000 6,535,104
-------------
199,854,925
-------------
Total Corporate Bonds (Cost $2,426,897,205) ......................................... 2,468,447,838
-------------
U.S. Government Securities 11.4%....................................................
U.S. Treasury Bonds, 6.25% - 7.125%, 2/15/23 - 8/15/23 .............................. $831,000,000 $ 834,087,562
U.S. Treasury Notes, 6.00% - 6.375%, 12/31/97 - 8/15/02 ............................. 128,000,000 129,758,233
-------------
Total U.S. Government Securities (Cost $928,239,501) ................................ 963,845,795
-------------
Foreign Government Securities 8.9%
Republic of Argentina, FRN, 5.50%, 3/31/23 .......................................... 520,000,000 393,120,000
Republic of Brazil, 5.25%, 4/15/24 .................................................. 200,000,000 147,750,000
Republic of Brazil, FRN deb., 6.875%, 4/15/06 ....................................... 64,350,000 60,328,126
Republic of Brazil, FRN, Series A, 6.8125%, 1/01/01 ................................. 47,296,250 46,894,233
Republic of South Africa, 12.00%, 2/28/05 ........................................... 515,000,000 ZAR 100,789,938
-------------
Total Foreign Government Securities (Cost $617,371,329) ............................. 748,882,297
-------------
hZero Coupon/Step-up Bonds 3.5%
AMF Group, Inc., senior disc. notes, Series B, zero coupon to 3/15/01 (original accretion rate 12.25%), 12.25% thereafter,
3/15/06............................................................................. 38,000,000 28,880,000
Bell & Howell Co., senior deb., zero coupon to 3/01/00 (original accretion rate 11.50%), 11.50%, thereafter, 3/01/05
65,000,000 54,925,000
Dr Pepper Bottling Holdings Co., S.F., senior sub. disc. notes, zero coupon to 2/15/98 (original accretion rate 11.625%),
11.625% thereafter, 2/15/03 ......................................................... 11,000,000 11,165,000
Food 4 Less, Inc., senior disc. deb., zero coupon to 6/15/00, (original accretion rate 13.625%), 13.625% thereafter,
7/15/05.............................................................................. 50,000,000 40,750,000
Marcus Cable Co., senior disc. notes, zero coupon to 6/15/00, (original accretion rate 14.25%), 14.25% thereafter, 12/15/05
75,000,000 62,812,500
Mesa Operating Co., company guaranteed, unsecured senior sub. notes, zero coupon to 7/01/01, (original accretion rate
11.625%), 11.625% thereafter, 7/01/06................................................ 15,000,000 12,000,000
Revlon Worldwide Corp., senior disc. notes, Series B, (original accretion rate 10.75%), 0.00%, 3/15/01
50,000,000 36,375,000
Revlon Worldwide Corp., senior secured disc. notes, Series B (original accretion rate 12.00%), 0.00%, 3/15/98
40,000,000 38,999,640
Uniroyal Chemical Co. Investors, discount notes, zero coupon to 5/01/98, (original accretion rate 12.00%),
12.00% thereafter, 5/01/05 .......................................................... 12,000,000 11,520,000
-------------
Total Zero Coupon/Step-up Bonds (Cost $268,792,356) 297,427,140
-------------
Total Long Term Investments (Cost $7,129,432,474) 7,872,822,469
-------------
fRepurchase Agreements 5.2%
Joint Repurchase Agreement, 6.010%, 10/01/97, (Maturity Value $435,757,846)
(Cost $435,685,111) .................................................................. 435,685,111 435,685,111
-------------
Collateralized by U.S. Treasury Bills & Notes
Aubrey G. Lanston & Co., Inc., (Maturity Value $33,117,596)
BA Securities, Inc., (Maturity Value $33,117,596)
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $38,346,694)
Bear, Stearns & Co., Inc., (Maturity Value $33,117,596)
CIBC Wood Gundy Securities Corp., (Maturity Value $33,117,596)
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $33,117,596)
Dresdner Kleinwort Benson North America, L.L.C., (Maturity Value $33,117,596)
Fuji Securities, Inc., (Maturity Value $33,117,596)
Lehman Brothers, Inc., (Maturity Value $33,117,596)
Sanwa Securities (USA) Co., L.P., (Maturity Value $33,117,596)
SBC Warburg, Inc., (Maturity Value $33,117,596)
The Nikko Securities Co. International, Inc., (Maturity Value $33,117,596)
UBS Securities, L.L.C., (Maturity Value $33,117,596)
Total Investments (Cost $7,565,117,585) 98.4% 8,308,507,580
Other Assets, less Liabilities 1.6% 138,911,657
-------------
Net Assets 100.0% $8,447,419,237
=============
CURRENCY ABBREVIATIONS: ZAR - South African Rand
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 6 regarding restricted securities.
cSee Note 7 regarding defaulted securities.
eThe Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5%
or more of the outstanding voting securities. Investments in "affiliated companies" at 9/30/97 were $34,853,586.
fSee Note 1(f) regarding joint repurchase agreement.
hZero coupon/step-up bonds. The current effective yield may vary. The original accretion rate will remain constant.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Franklin U.S. Government Securities Fund
Class I
----------------------------------------------------------------
Year Ended September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $6.72 $6.87 $6.51 $7.20 $7.26
----------------------------------------------------------------
Income from investment operations:
Net investment income .48 .49 .50 .50 .56
Net realized and unrealized gains (losses) .17 (.15) .35 (.68) (.06)
----------------------------------------------------------------
Total from investment operations .65 .34 .85 (.18) .50
----------------------------------------------------------------
Less distributions:
Dividends from net investment income (.48) (.49) (.49) (.51) (.56)
----------------------------------------------------------------
Net asset value, end of year $6.89 $6.72 $6.87 $6.51 $7.20
================================================================
Total return* 10.08% 5.15% 13.56% (2.75%) 6.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $9,350,751 $10,129,483 $11,101,605 $11,668,747 $14,268,516
Ratio to average net assets:
Expenses .64% .61% .61% .55% .52%
Net investment income 7.01% 7.18% 7.50% 7.37% 7.71%
Portfolio turnover rate** 1.74% 8.01% 5.48% 18.28% 43.10%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized. Prior to May 1,
1994, dividends from net investment income were reinvested at the offering price.
**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.
</TABLE>
<TABLE>
<CAPTION>
Class II
-------------------------------
Year Ended September 30,
-------------------------------
1997 1996 1995***
-------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $6.70 $6.85 $6.67
-------------------------------
Income from investment operations:
Net investment income .44 .45 .21
Net realized and unrealized gains (losses) .17 (.15) .16
-------------------------------
Total from investment operations .61 .30 .37
-------------------------------
Less distributions:
Dividends from net investment income (.44) (.45) (.19)
-------------------------------
Net asset value, end of year $6.87 $6.70 $6.85
===============================
Total return* 9.48% 4.55% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $120,818 $57,657 $11,695
Ratio to average net assets:
Expenses 1.20% 1.17% 1.18%**
Net investment income 6.44% 6.80% 6.48%**
Portfolio turnover rate**** 1.74% 8.01% 5.48%
*Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized.
**Annualized
***For the period May 1, 1995 (effective date) to September 30, 1995.
****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.
</TABLE>
Advisor Class
--------------------
1997***
--------------------
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $6.76
--------------------
Income from investment operations:
Net investment income .38
Net realized and unrealized gains .12
--------------------
Total from investment operations .50
--------------------
Less distributions:
Dividends from net investment income (.36)
--------------------
Net asset value, end of period $6.90
====================
Total return* 7.68%
Ratios/Supplemental Data
Net assets, end of period (000's) $14,469
Ratio to average net assets:
Expenses .56%**
Net investment income 7.01%**
Portfolio turnover rate**** 1.74%
*Total return is not annualized.
**Annualized
***For the period January 2, 1997 (effective date) to September 30, 1997.
****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.
See notes to financial statements.
<TABLE>
<CAPTION>
Statement of Investments, September 30, 1997
PRINCIPAL
U.S. Government Securities Fund AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association (GNMA) 96.2%
<S> <C> <C>
GNMA I, SF, 6.00%, 9/15/23 - 11/15/23 $ 22,074,854 $ 21,183,910
GNMA I, SF, 6.50%, 3/15/03 - 3/15/24 1,092,073,836 1,072,839,335
GNMA PL, 6.50%, 5/15/24 31,543,580 30,492,861
GNMA II, 6.50%, 6/20/24 - 5/20/26 68,369,075 66,678,681
GNMA PL, 6.75%, 1/15/34 36,165,053 35,556,754
GNMA I, SF, 6.75%, 3/15/26 - 5/15/26 3,638,886 3,591,689
GNMA II, 7.00%, 3/20/24 - 1/20/27 361,599,298 360,721,829
GNMA PL, 7.00%, 9/15/35 8,972,828 8,952,818
GNMA I, SF, 7.00%, 4/15/16 - 12/15/26 1,947,488,993 1,957,194,527
GNMA SF, 7.25%, 10/15/25 - 1/15/26 8,453,141 8,507,038
GNMA PL, 7.375%, 4/15/29 35,197,401 35,420,199
GNMA PL, 7.425%, 7/15/29 21,060,952 21,350,540
GNMA I, SF, 7.50%, 6/15/05 - 9/15/27 1,427,246,695 1,460,906,630
GNMA II, 7.50%, 10/20/22 - 2/20/27 399,840,629 406,046,213
GNMA PL, 7.75%, 10/15/12 5,563,384 5,891,011
GNMA I, SF, 8.00%, 10/15/07 - 5/15/26 1,212,728,959 1,264,106,310
GNMA II, 8.00%, 8/20/16 - 10/20/26 92,723,709 95,960,711
GNMA PL, 8.00%, 4/15/22 - 5/15/32 47,421,733 49,079,673
GNMA I, GPM, 8.25%, 3/15/17 - 11/15/17 7,257,348 7,619,997
GNMA PL, 8.25%, 12/15/20 - 2/15/28 24,501,491 25,169,614
GNMA I, SF, 8.50%, 5/15/16 - 11/15/24 288,787,583 305,521,461
GNMA II, 8.50%, 4/20/16 - 6/20/25 55,583,113 58,723,875
GNMA I, GPM, 8.75%, 3/20/17 - 7/20/17 1,203,395 1,282,302
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 349,371,808 378,212,840
GNMA II, 9.00%, 11/17/20 - 11/20/21 18,816,641 20,254,966
GNMA I, GPM, 9.25%, 5/15/16 - 1/15/17 5,447,035 5,869,291
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 189,286,077 206,041,045
GNMA II, 9.50%, 9/20/15 - 4/20/25 18,847,438 20,364,468
GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13 6,122,668 6,698,217
GNMA I, SF, 10.00%, 4/15/12 - 4/15/25 228,602,882 251,232,858
GNMA II, 10.00%, 8/20/15 - 3/20/21 27,896,102 30,358,976
GNMA I, GPM, 10.25%, 2/15/16 - 2/15/21 2,963,121 3,249,058
GNMA I, SF, 10.50%, 8/15/00 - 10/15/21 162,633,641 180,806,169
GNMA II, 10.50%, 10/20/13 - 3/20/21 43,751,757 47,971,676
GNMA I, GPM, 11.00%, 12/15/09 - 3/15/11 10,995,013 12,265,801
GNMA I, SF, 11.00%, 1/15/01 - 5/15/21 136,944,687 154,094,584
GNMA II, 11.00%, 1/20/15 - 1/20/21 12,677,536 13,982,908
GNMA I, GPM, 11.25%, 6/15/13 - 1/15/16 5,340,480 6,056,499
GNMA I, GPM, 11.50%, 3/15/10 - 6/15/13 2,035,766 2,319,575
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 28,933,813 33,230,430
GNMA II, GPM, 11.50%, 7/20/13 - 1/20/14 200,135 227,145
GNMA II, 11.50%, 10/20/13 - 4/20/18 2,001,752 2,289,805
GNMA I, GPM, 11.75%, 7/15/13 - 12/15/15 1,100,108 1,259,028
GNMA I, GPM, 12.00%, 10/15/10 - 3/15/13 573,880 659,811
GNMA I, SF, 12.00%, 5/15/11 - 8/15/19 135,158,860 156,901,538
GNMA II, 12.00%, 9/20/13 - 2/20/16 6,336,343 7,331,195
GNMA I, GPM, 12.50%, 4/15/10 - 10/15/12 1,020,236 1,180,410
GNMA I, SF, 12.50%, 1/15/10 - 8/15/18 117,995,423 137,948,490
GNMA II, 12.50%, 9/20/13 - 11/20/15 5,327,791 6,259,020
GNMA I, GPM, 12.75%, 11/15/13 - 6/15/15 61,085 71,515
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 110,563,204 130,897,073
GNMA II, 13.00%, 11/20/13 - 9/20/15 3,371,681 4,019,709
-------------
Total Long Term Investments (Cost $8,945,001,786) 9,124,852,078
-------------
dShort Term Investments 3.5%
U.S. Treasury Bills, 5.20% - 5.385%, 10/16/97 - 12/18/97 (Cost $330,270,612) 330,355,770
-------------
Total Investments (Cost $9,275,272,398) 99.7% 9,455,207,848
Other Assets, less Liabilities .3% 30,830,707
-------------
Net Assets 100.0% $9,486,038,555
=============
dSecurities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Statements
Statements of Assets and Liabilities
September 30, 1997
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-------------------------------------------------------------------------------
Assets
Investments in securities:
<S> <C> <C> <C> <C> <C>
Cost $ 433,324,038 $ 31,963,323 $1,719,080,804 $7,129,432,474 $9,275,272,398
===============================================================================
Value 1,065,564,551 118,805,938 1,933,205,376 7,872,822,469 9,455,207,848
Repurchase agreements, at value and cost 513,568,914 71,941,218 21,783,487 435,685,111 --
Cash 520,401 268,120 -- 953,208 25,678
Receivables:
Investment securities sold -- 474,321 25,659,026 28,780,521 --
Capital shares sold 1,863,355 510,771 293,257 10,775,726 6,063,947
Dividends and interest 911,926 69,010 11,098,550 116,430,808 58,123,502
Other assets 44,235 -- -- -- --
-------------------------------------------------------------------------------
Total assets 1,582,473,382 192,069,378 1,992,039,696 8,465,447,843 9,519,420,975
-------------------------------------------------------------------------------
Liabilities
Payables:
Investment securities purchased 780,632 -- 39,690 879,535 --
Capital shares redeemed 519,698 119,888 2,911,972 3,101,173 10,723,287
To affiliates 1,557,135 187,480 1,474,481 6,403,110 5,902,063
To shareholders 976,951 150,552 3,646,246 7,303,888 16,476,455
Other liabilities 37,454 124,113 68,646 340,900 280,615
-------------------------------------------------------------------------------
Total liabilites 3,871,870 582,033 8,141,035 18,028,606 33,382,420
-------------------------------------------------------------------------------
Net assets, at value $1,578,601,512 $191,487,345 $1,983,898,661 $8,447,419,237 $9,486,038,555
===============================================================================
Net assets consist of:
Undistributed net investment income $ 19,890,444 $ 1,031,642 $ 8,991,193 $ 69,436,365 $ 7,036,041
Net unrealized appreciation 632,240,513 86,842,615 214,124,572 743,299,655 179,935,450
Accumulated net realized gain (loss) 14,022,601 6,947,409 49,733,605 92,009,348 (391,695,649)
Capital shares 912,447,954 96,665,679 1,711,049,291 7,542,673,869 9,690,762,713
-------------------------------------------------------------------------------
Net assets, at value $1,578,601,512 $191,487,345 $1,983,898,661 $8,447,419,237 $9,486,038,555
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
Class I:
<S> <C> <C> <C> <C> <C>
Net assets, at value $1,435,560,588 $188,101,718 $1,953,272,944 $7,738,746,176 $9,350,751,451
---------------------------------------------------------------------------------
Shares outstanding 52,996,093 10,177,494 194,534,988 3,106,620,788 1,357,281,977
---------------------------------------------------------------------------------
Net asset value per share* $27.09 $18.48 $10.04 $2.49 $6.89
---------------------------------------------------------------------------------
Maximum offering price per share (NAV / 95.50%,
NAV / 95.50%, NAV / 95.75%, NAV / 95.75%,
NAV / 95.75%, respectively) $28.37 $19.35 $10.49 $2.60 $7.20
---------------------------------------------------------------------------------
Class II:
Net assets, at value $ 117,217,991 $ 3,385,627 $ 21,906,391 $ 695,354,981 $ 120,817,740
---------------------------------------------------------------------------------
Shares outstanding 4,391,009 184,978 2,185,554 278,951,410 17,586,866
---------------------------------------------------------------------------------
Net asset value per share* $26.70 $18.30 $10.02 $2.49 $6.87
---------------------------------------------------------------------------------
Maximum offering price per share (NAV / 99%) $26.97 $18.48 $10.12 $2.52
---------------------------------------------------------------------------------
$6.94
Advisor Class:
Net assets, at value $ 25,822,933 -- $ 8,719,326 $ 13,318,080 $ 14,469,364
---------------------------------------------------------------------------------
Shares outstanding 951,931 -- 868,767 5,366,210 2,097,990
---------------------------------------------------------------------------------
Net asset value and maximum
offering price per share $27.13 -- $10.04 $2.48 $6.90
---------------------------------------------------------------------------------
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
for the year ended September 30, 1997
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
Investment income:
<S> <C> <C> <C> <C> <C>
Dividends $ 12,800,457 $ 455,107 $108,058,105 $ 178,110,067 $--
Interest 20,234,726 2,060,661 23,367,984 454,852,746 753,095,315
---------------------------------------------------------------------------------
Total investment income 33,035,183 2,515,768 131,426,089 632,962,813 753,095,315
---------------------------------------------------------------------------------
Expenses:
Management fees (Note 5) 6,295,304 840,480 9,987,693 35,364,027 44,411,776
Distribution fees (Note 5)
Class I 2,834,842 302,229 2,770,430 10,521,856 8,581,200
Class II 882,927 11,669 141,957 3,355,689 560,866
Transfer agent fees (Note 5) 1,870,864 223,924 2,747,071 6,044,086 6,601,725
Custodian fees 13,393 1,340 22,117 553,545 98,364
Reports to shareholders 408,393 57,076 683,112 1,528,428 2,398,393
Registration and filing fees 136,852 29,358 103,228 329,335 117,909
Professional fees (Note 5) 22,800 2,514 35,878 157,555 187,992
Directors' fees and expenses 7,662 1,446 12,502 40,882 49,872
Other 30,906 2,496 55,779 157,753 227,010
---------------------------------------------------------------------------------
Total expenses 12,503,943 1,472,532 16,559,767 58,053,156 63,235,107
---------------------------------------------------------------------------------
Net investment income 20,531,240 1,043,236 114,866,322 574,909,657 689,860,208
---------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 14,065,272 6,949,626 49,829,022 134,145,372 (29,505,613)
Foreign currency transactions -- -- -- (228,340) --
---------------------------------------------------------------------------------
Net realized gain (loss) 14,065,272 6,949,626 49,829,022 133,917,032 (29,505,613)
Net unrealized appreciation on:
Investments 215,960,743 33,474,575 112,850,805 523,936,056 285,289,807
Translation of assets and liabilities denominated in
foreign currencies -- -- -- 78,920 --
---------------------------------------------------------------------------------
Net unrealized appreciation 215,960,743 33,474,575 112,850,805 524,014,976 285,289,807
---------------------------------------------------------------------------------
Net realized and unrealized gains 230,026,015 40,424,201 162,679,827 657,932,008 255,784,194
---------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $250,557,255 $41,467,437 $277,546,149 $1,232,841,665 $945,644,402
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
for the years ended September 30, 1997 and 1996
Growth Fund DynaTech Fund Utilities Fund
----------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------------------------------------
Increase (decrease) in
net assets:
Operations:
Net investment
<S> <C> <C> <C> <C> <C> <C>
income $ 20,531,240 $ 10,213,551 $ 1,043,236 $ 413,044 $ 114,866,322 $ 141,159,184
Net realized gain from
investments 14,065,272 13,376,673 6,949,626 3,012,745 49,829,022 101,323,796
Net unrealized appre-
ciation (depreciation)
on investments 215,960,743 131,354,444 33,474,575 8,557,033 112,850,805 (76,822,756)
----------------------------------------------------------------------------------------------
Net increase in net
assets resulting
from operations 250,557,255 154,944,668 41,467,437 11,982,822 277,546,149 165,660,224
Distributions to shareholders
from:
Net investment income:
Class I (10,432,896) (6,279,423) (415,339) (854,965) (113,914,994) (138,119,821)
Class II (420,404) (57,905) (177) -- (1,067,340) (747,247)
Advisor Class -- -- -- -- (277,630) --
Net realized gains:
Class I (9,283,568) (5,915,536) (3,013,708) (1,652,070) (100,515,956) (19,902,855)
Class II (554,318) (56,415) (1,254) -- (903,261) (78,972)
Capital share transactions
(Note 2):
Class I 202,804,236 167,861,410 45,863,685 2,045,538 (507,188,024) (372,680,729)
Class II 58,785,996 36,380,327 3,078,539 199 1,602,454 11,740,921
Advisor Class 23,241,991 -- -- -- 8,401,319 --
----------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets 514,698,292 346,877,126 86,979,183 11,521,524 (436,317,283) (354,128,479)
Net assets:
Beginning of year 1,063,903,220 717,026,094 104,508,162 92,986,638 2,420,215,944 2,774,344,423
----------------------------------------------------------------------------------------------
End of year $1,578,601,512 $1,063,903,220 $191,487,345 $104,508,162 $1,983,898,661 $2,420,215,944
----------------------------------------------------------------------------------------------
Ending undistributed net
investment income included
in net assets $ 19,890,444 $ 10,212,504 $ 1,031,642 $ 403,922 $ 8,991,193 $ 9,384,835
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income Fund U.S. Government Securities Fund
-------------------------------------------------------------------
1997 1996 1997 1996
-------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income $ 574,909,657 $ 521,625,487 $ 689,860,208 $ 767,312,081
Net realized gain (loss) from investments and foreign currency
transactions 133,917,032 54,450,898 (29,505,613) (50,886,927)
Net unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign
currencies 524,014,976 12,739,334 285,289,807 (183,394,082)
-------------------------------------------------------------------
Net increase in net assets resulting from operations 1,232,841,665 588,815,719 945,644,402 533,031,072
Distributions to shareholders from:
Net investment income:
Class I (545,342,618) (496,461,082) (694,284,790) (772,347,077)
Class II (35,350,218) (14,090,940) (5,467,178) (2,259,432)
Advisor Class (498,714) -- (363,656) --
Net realized gains:
Class I (29,741,890) (70,836,803) -- --
Class II (1,712,633) (1,197,351) -- --
Capital share transactions (Note 2):
Class I 382,416,473 888,950,957 (1,021,750,769) (731,361,799)
Class II 308,632,125 276,676,397 60,845,500 46,777,619
Advisor Class 12,707,793 -- 14,274,791 --
-------------------------------------------------------------------
Net increase (decrease) in net assets 1,323,951,983 1,171,856,897 (701,101,700) (926,159,617)
Net assets:
Beginning of year 7,123,467,254 5,951,610,357 10,187,140,255 11,113,299,872
-------------------------------------------------------------------
End of year $8,447,419,237 $7,123,467,254 $ 9,486,038,555 $10,187,140,255
-------------------------------------------------------------------
Ending undistributed net investment income included
in net assets $ 69,436,365 $ 34,315,598 $ 7,036,041 $ 17,291,457
===================================================================
</TABLE>
See notes to financial statements.
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Company) is registered under the Investment
Company Act of 1940 as an open-end, diversified investment company, consisting
of five series (the Funds). The Funds and their investment policies are:
Capital Growth Growth and Income Current Income
- -------------------------------------------------------------------------
Growth Fund Utilities Fund U.S. Government Securities Fund
DynaTech Fund Income Fund
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Company are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. Other expenses
are charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. Accounting Estimates:
The preparation of 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.
e. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gains or losses from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. Repurchase Agreement:
The Funds, except the U.S. Government Securities Fund, may enter into a joint
repurchase agreement whereby their uninvested cash balance is deposited into a
joint cash account to be used to invest in one or more repurchase agreements.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest. A repurchase agreement is accounted for
as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At September 30, 1997,
all outstanding repurchase agreements held by the Funds had been entered into on
that date.
2. CAPITAL STOCK
Effective September 16, 1996, the Dynatech Fund offered two classes of shares:
Class I and Class II. Outstanding shares before that date were designated as
Class I shares. Effective January 2, 1997, the Funds, except the Dynatech Fund,
offered Advisor Class shares to qualified investors. The shares have the same
rights except for their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
At September 30, 1997, there were 19 billion shares authorized ($0.01 par
value), allocated to the Funds as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class I 250,000,000 250,000,000 400,000,000 4,600,000,000 2,500,000,000
Class II 250,000,000 250,000,000 400,000,000 3,600,000,000 2,500,000,000
Advisor Class 1,000,000,000 -- 1,000,000,000 1,000,000,000 1,000,000,000
</TABLE>
Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
Growth Fund DynaTech Fund
------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------
Class I Shares
1997
<S> <C> <C> <C> <C>
Shares sold 19,647,652 $ 486,355,148 7,207,685 $118,420,191
Shares issued in reinvestment of distributions 742,458 17,759,635 199,095 3,046,165
Shares redeemed (12,109,484) (301,310,547) (4,675,913) (75,602,671)
------------------------------------------------------------
Net increase 8,280,626 $ 202,804,236 2,730,867 $ 45,863,685
------------------------------------------------------------
1996
Shares sold 14,573,392 $ 309,789,082 3,079,877 $ 39,604,883
Shares issued in reinvestment of distributions 540,805 10,967,608 177,727 2,205,599
Shares redeemed (7,187,477) (152,895,280) (3,085,060) (39,764,944)
------------------------------------------------------------
Net increase 7,926,720 $ 167,861,410 172,544 $ 2,045,538
------------------------------------------------------------
Class II Shares
1997
Shares sold 3,570,458 $ 86,687,120 275,202 $ 4,648,946
Shares issued in reinvestment of distributions 38,528 914,269 94 1,430
Shares redeemed (1,139,059) (28,815,393) (90,332) (1,571,837)
------------------------------------------------------------
Net increase 2,469,927 $ 58,785,996 184,964 $ 3,078,539
------------------------------------------------------------
1996+
Shares sold 1,925,516 $ 41,102,731 14 $ 199
Shares issued in reinvestment of distributions 4,957 100,242 -- --
Shares redeemed (224,665) (4,822,646) -- --
------------------------------------------------------------
Net increase 1,705,808 $ 36,380,327 14 $ 199
------------------------------------------------------------
</TABLE>
2. CAPITAL STOCK (cont.)
<TABLE>
<CAPTION>
Growth Fund
----------------------------
Shares Amount
----------------------------
Advisor Class Shares
1997++
<S> <C> <C>
Shares sold 1,309,960 $ 32,540,802
Shares issued in reinvestment of distributions -- --
Shares redeemed (358,029) (9,298,811)
----------------------------
Net increase 951,931 $ 23,241,991
============================
Utilities Fund Income Fund U.S. Government Securities Fund
----------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
Class I Shares
1997
<S> <C> <C> <C> <C> <C> <C>
Shares sold 12,100,694 $ 117,393,777 538,060,045 $ 1,275,083,285 78,194,660 $ 530,758,896
Shares issued in
reinvestment of
distributions 17,222,762 165,255,047 145,251,547 342,526,929 47,930,052 324,058,840
Shares redeemed (81,440,706) (789,836,848) (520,661,763) (1,235,193,741) (276,583,345) (1,876,568,505)
----------------------------------------------------------------------------------------------------------
Net increase
(decrease) (52,117,250) $(507,188,024) 162,649,829 $ 382,416,473 (150,458,633) $(1,021,750,769)
==========================================================================================================
1996
Shares sold 21,426,300 $ 215,939,345 642,104,925 $1,473,287,913 85,184,579 $ 579,402,859
Shares issued in
reinvestment of
distributions 11,952,242 118,303,240 150,894,313 344,863,416 51,937,467 352,406,036
Shares redeemed (70,389,767) (706,923,314) (405,681,073) (929,200,372) (245,065,339) (1,663,170,694)
----------------------------------------------------------------------------------------------------------
Net increase
(decrease) (37,011,225) $(372,680,729) 387,318,165 $ 888,950,957 (107,943,293) $ (731,361,799)
==========================================================================================================
Class II Shares:
1997
Shares sold 853,797 $ 8,267,730 151,188,247 $ 359,348,533 11,765,224 $ 79,728,970
Shares issued in
reinvestment of
distributions 164,131 1,574,635 9,605,212 22,720,777 527,102 3,558,535
Shares redeemed (854,260) (8,239,911) (30,837,863) (73,437,185) (3,311,245) (22,442,005)
----------------------------------------------------------------------------------------------------------
Net increase 163,668 $ 1,602,454 129,955,596 $ 308,632,125 8,981,081 $ 60,845,500
==========================================================================================================
1996
Shares sold 1,459,417 $ 14,693,105 126,159,539 $ 289,827,410 7,668,930 $ 51,954,655
Shares issued in
reinvestment of
distributions 67,296 663,744 4,108,044 9,379,710 212,412 1,428,321
Shares redeemed (363,584) (3,615,929) (9,852,944) (22,530,723) (982,730) (6,605,357)
----------------------------------------------------------------------------------------------------------
Net increase 1,163,129 $ 11,740,920 120,414,639 $ 276,676,397 6,898,612 $ 46,777,619
==========================================================================================================
Advisor Class Shares
1997++
Shares sold 1,303,704 $ 12,598,164 $ 5,630,896 $ 13,341,229 2,433,391 $ 16,553,387
Shares issued in
reinvestment of
distributions 23,787 228,226 198,471 470,649 40,139 272,353
Shares redeemed (458,724) (4,425,071) (463,157) (1,104,085) (375,540) (2,550,949)
----------------------------------------------------------------------------------------------------------
Net increase 868,767 $ 8,401,319 5,366,210 $ 12,707,793 2,097,990 $ 14,274,791
==========================================================================================================
</TABLE>
+For the period September 16, 1996 to September 30, 1996 for the DynaTech Fund.
++For the period January 2, 1997 to September 30, 1997 for the Advisor Class of
shares.
3. INCOME TAXES
At September 30, 1997, the U.S. Government Securities Fund had tax basis capital
losses which may be carried over to offset future capital gains. Such losses
expire as follows:
U.S. Government
Securities Fund
-------------------
Capital loss carryovers expiring in: 1998 $ 74,910,973
1999 67,082,683
2002 111,364,839
2003 3,698,366
2004 57,539,178
2005 50,163,272
------------------
$364,759,311
==================
At September 30, 1997, the U.S. Government Securities Fund has deferred capital
losses occurring subsequent to October 31, 1996 of $26,936,338. For tax
purposes, such losses will be reflected in the year ending September 30, 1998.
At September 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes were as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost $946,892,952 $103,904,541 $1,740,866,691 $7,565,117,585 $9,275,272,398
=======================================================================================
Unrealized appreciation 636,362,182 87,927,057 276,918,447 952,185,112 228,149,762
Unrealized depreciation (4,121,669) (1,084,442) (62,796,275) (208,795,117) (48,214,312)
---------------------------------------------------------------------------------------
Net unrealized appreciation $632,240,513 $ 86,842,615 $ 214,122,172 $ 743,389,995 $ 179,935,450
=======================================================================================
</TABLE>
On September 30, 1997, the U.S. Government Securities Fund had expired capital
loss carryovers of $92,974,800, which were reclassified to paid-in capital.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatment of wash sales and foreign currency
transactions.
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $16,813,002 $ 5,686,527 $154,865,918 $1,818,477,788 $ 166,498,741
Sales $41,064,242 $14,415,668 $708,395,259 $1,163,969,287 $1,223,668,692
</TABLE>
5. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers and/or directors
of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
5. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds 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 Income, Utilities and U.S. Government Securities Funds reimburse
Distributors up to 0.15% and 0.65% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares. The Growth and DynaTech Funds reimburse Distributors up to 0.25% and
1.00% per year of the average daily net assets of Class I and Class II,
respectively, for costs incurred in marketing the Funds' shares.
Distributors received (paid) net commissions on sales of the Funds shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) $(638,760) $6,197 $ 3,400 $(2,163,815) $(540,705)
Contingent deferred sales charges $ 47,529 $1,344 $19,661 $ 293,033 $ 56,854
</TABLE>
During the year ended September 30, 1997, legal fees of $74,098 were paid to a
law firm in which an officer of the Company is a partner.
6. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held in the Funds at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Shares/
Warrants Issuer Acquisition Date Cost Value
-------------------------------------------------------------------------------------------------------------------------
Income Fund
<S> <C> <C> <C>
2,097,122 Bibb Co. 9/27/96 $29,681,742 $ 15,728,415
1,281,869 Boardwalk Casino, Inc., Warrants 4/12/95 2,643,855 1,874,092
1,600,000 CMS Energy Trust I, 7.75%, cvt. pfd. 6/18/97 80,000,000 87,059,520
59,258 Jewel Recovery, L.P. 7/30/93 42,074 28,444
-------------
Total Restricted Securities Held in the Income Fund (1.24% of Net Assets) $104,690,471
=============
Utilities Fund
705,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.93% of Net Assets) 6/18/97 35,250,000 $ 38,360,601
=============
Growth Fund
115,100 FRM Nexus (0.00% of Net Assets) 8/1/89 421,013 $ 115
=============
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 37.2% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. At September 30, 1997, the
Income Fund held one defaulted security with a value of $19,750,000 representing
0.2% of the Fund's net assets. For information as to specific securities, see
the accompanying Statement of Investments.
7. CREDIT RISK AND DEFAULTED SECURITIES (cont.)
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide estimates for losses on interest receivable.
The Utilities Fund has investments in excess of 10% of its total net assets in
the Utilities industry. Such concentration may subject the Funds more
significantly to economic changes occurring within that industry.
8. OTHER CONSIDERATIONS
Advisers, as the Funds' manager, may serve as a member of various credit
committees, representing credit interests in certain corporate restructuring
negotiations. Currently, the manager serves on the credit committees for Harvard
Industries. As a result of this involvement, Advisers may be in possession of
certain material non-public information. The Funds' manager has not nor does it
intend to sell any of its holdings in these securities while in possession of
this information.
Report of Independent Accountants
To the Shareholders and Board of Directors
of Franklin Custodian Funds:
We have audited the accompanying statements of assets and liabilities of the
five Funds comprising the Franklin Custodian Funds, Inc. including each Fund's
statement of investments, as of September 30, 1997, 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, 1997, by correspondence with the custodian. 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 the
five Funds comprising the Franklin Custodian Funds, Inc. as of September 30,
1997, 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 their
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
October 28, 1997
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the ordinary income dividends as income qualifying the dividends received
deduction for the fiscal year ended September 30, 1997 as follows:
Growth Fund 100.00% DynaTech Fund 100.00%
Utilities Fund 91.13% Income Fund 25.98%
Franklin Custodian Funds Annual Report September 30, 1997
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Class I shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $9,550 $10,000
10/31/1987 $8,525 $7,846
11/30/1987 $7,918 $7,199
12/31/1987 $8,650 $7,747
1/31/1988 $8,798 $8,074
2/29/1988 $9,268 $8,450
3/31/1988 $9,062 $8,189
4/30/1988 $9,086 $8,280
5/31/1988 $9,005 $8,351
6/30/1988 $9,479 $8,734
7/31/1988 $9,335 $8,701
8/31/1988 $8,904 $8,405
9/30/1988 $9,244 $8,763
10/31/1988 $9,345 $9,007
11/30/1988 $9,263 $8,878
12/31/1988 $9,440 $9,033
1/31/1989 $10,054 $9,695
2/28/1989 $9,823 $9,453
3/31/1989 $9,917 $9,673
4/30/1989 $10,432 $10,175
5/31/1989 $10,658 $10,588
6/30/1989 $10,545 $10,527
7/31/1989 $11,394 $11,478
8/31/1989 $11,817 $11,703
9/30/1989 $11,753 $11,655
10/31/1989 $11,345 $11,384
11/30/1989 $11,483 $11,617
12/31/1989 $11,686 $11,895
1/31/1990 $11,158 $11,097
2/28/1990 $11,315 $11,240
3/31/1990 $11,681 $11,538
4/30/1990 $11,610 $11,251
5/31/1990 $12,465 $12,348
6/30/1990 $12,459 $12,265
7/31/1990 $12,363 $12,226
8/31/1990 $11,275 $11,121
9/30/1990 $10,873 $10,579
10/31/1990 $10,873 $10,534
11/30/1990 $11,514 $11,214
12/31/1990 $11,929 $11,527
1/31/1991 $12,626 $12,030
2/28/1991 $13,495 $12,890
3/31/1991 $13,610 $13,202
4/30/1991 $13,688 $13,233
5/31/1991 $14,188 $13,804
6/30/1991 $13,579 $13,171
7/31/1991 $14,052 $13,785
8/31/1991 $14,240 $14,112
9/30/1991 $14,000 $13,876
10/31/1991 $14,302 $14,062
11/30/1991 $13,823 $13,496
12/31/1991 $15,115 $15,039
1/31/1992 $14,969 $14,760
2/29/1992 $15,228 $14,950
3/31/1992 $14,850 $14,659
4/30/1992 $14,915 $15,090
5/31/1992 $14,828 $15,163
6/30/1992 $14,525 $14,938
7/31/1992 $14,882 $15,548
8/31/1992 $14,558 $15,230
9/30/1992 $14,817 $15,408
10/31/1992 $15,001 $15,460
11/30/1992 $15,358 $15,986
12/31/1992 $15,563 $16,183
1/31/1993 $15,397 $16,319
2/28/1993 $15,188 $16,540
3/31/1993 $15,420 $16,889
4/30/1993 $15,464 $16,481
5/31/1993 $15,849 $16,921
6/30/1993 $15,519 $16,970
7/31/1993 $15,331 $16,902
8/31/1993 $15,860 $17,543
9/30/1993 $15,695 $17,407
10/31/1993 $16,179 $17,768
11/30/1993 $16,213 $17,599
12/31/1993 $16,668 $17,812
1/31/1994 $16,905 $18,418
2/28/1994 $16,397 $17,918
3/31/1994 $15,583 $17,137
4/30/1994 $15,911 $17,357
5/31/1994 $16,182 $17,641
6/30/1994 $16,058 $17,209
7/31/1994 $16,510 $17,773
8/31/1994 $17,357 $18,502
9/30/1994 $16,905 $18,051
10/31/1994 $17,256 $18,457
11/30/1994 $16,804 $17,785
12/31/1994 $17,155 $18,048
1/31/1995 $17,418 $18,516
2/28/1995 $18,127 $19,238
3/31/1995 $18,767 $19,805
4/30/1995 $19,305 $20,388
5/31/1995 $19,728 $21,203
6/30/1995 $20,494 $21,695
7/31/1995 $21,512 $22,415
8/31/1995 $21,478 $22,471
9/30/1995 $22,164 $23,420
10/31/1995 $22,290 $23,335
11/30/1995 $23,548 $24,360
12/31/1995 $23,743 $24,830
1/31/1996 $24,428 $25,674
2/29/1996 $24,951 $25,913
3/31/1996 $25,044 $26,162
4/30/1996 $25,555 $26,546
5/31/1996 $26,043 $27,231
6/30/1996 $25,857 $27,335
7/31/1996 $24,521 $26,126
8/31/1996 $25,207 $26,678
9/30/1996 $26,531 $28,180
10/31/1996 $26,601 $28,957
11/30/1996 $28,273 $31,146
12/31/1996 $27,704 $30,530
1/31/1997 $28,402 $32,438
2/28/1997 $28,461 $32,691
3/31/1997 $27,752 $31,347
4/30/1997 $28,745 $33,219
5/31/1997 $30,329 $35,242
6/30/1997 $30,897 $36,821
7/31/1997 $32,127 $39,752
8/31/1997 $31,051 $37,525
9/30/1997 $32,032 $39,582
</TABLE>
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Class II shares to that of the S&P 500, based on a $10,000
investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
5/1/1995 $9,900 $10,000
5/31/1995 $10,135 $10,400
6/30/1995 $10,517 $10,641
7/31/1995 $11,040 $10,995
8/31/1995 $11,011 $11,022
9/30/1995 $11,357 $11,487
10/31/1995 $11,410 $11,446
11/30/1995 $12,051 $11,948
12/31/1995 $12,142 $12,179
1/31/1996 $12,482 $12,593
2/29/1996 $12,744 $12,710
3/31/1996 $12,786 $12,832
4/30/1996 $13,037 $13,021
5/31/1996 $13,281 $13,357
6/30/1996 $13,180 $13,407
7/31/1996 $12,488 $12,815
8/31/1996 $12,828 $13,085
9/30/1996 $13,496 $13,822
10/31/1996 $13,526 $14,203
11/30/1996 $14,367 $15,277
12/31/1996 $14,068 $14,975
1/31/1997 $14,407 $15,911
2/28/1997 $14,431 $16,035
3/31/1997 $14,061 $15,376
4/30/1997 $14,558 $16,294
5/31/1997 $15,351 $17,286
6/30/1997 $15,624 $18,060
7/31/1997 $16,242 $19,498
8/31/1997 $15,678 $18,406
9/30/1997 $16,169 $19,415
</TABLE>
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the Franklin
Growth Fund - Advisor Class shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $10,000 $10,000
10/31/1987 $8,927 $7,846
11/30/1987 $8,292 $7,199
12/31/1987 $9,058 $7,747
1/31/1988 $9,213 $8,074
2/29/1988 $9,705 $8,450
3/31/1988 $9,489 $8,189
4/30/1988 $9,515 $8,280
5/31/1988 $9,429 $8,351
6/30/1988 $9,926 $8,734
7/31/1988 $9,776 $8,701
8/31/1988 $9,324 $8,405
9/30/1988 $9,680 $8,763
10/31/1988 $9,786 $9,007
11/30/1988 $9,700 $8,878
12/31/1988 $9,886 $9,033
1/31/1989 $10,528 $9,695
2/28/1989 $10,287 $9,453
3/31/1989 $10,384 $9,673
4/30/1989 $10,924 $10,175
5/31/1989 $11,161 $10,588
6/30/1989 $11,042 $10,527
7/31/1989 $11,932 $11,478
8/31/1989 $12,374 $11,703
9/30/1989 $12,307 $11,655
10/31/1989 $11,880 $11,384
11/30/1989 $12,024 $11,617
12/31/1989 $12,238 $11,895
1/31/1990 $11,684 $11,097
2/28/1990 $11,849 $11,240
3/31/1990 $12,232 $11,538
4/30/1990 $12,158 $11,251
5/31/1990 $13,052 $12,348
6/30/1990 $13,047 $12,265
7/31/1990 $12,946 $12,226
8/31/1990 $11,806 $11,121
9/30/1990 $11,386 $10,579
10/31/1990 $11,386 $10,534
11/30/1990 $12,057 $11,214
12/31/1990 $12,491 $11,527
1/31/1991 $13,222 $12,030
2/28/1991 $14,132 $12,890
3/31/1991 $14,252 $13,202
4/30/1991 $14,334 $13,233
5/31/1991 $14,857 $13,804
6/30/1991 $14,219 $13,171
7/31/1991 $14,715 $13,785
8/31/1991 $14,911 $14,112
9/30/1991 $14,661 $13,876
10/31/1991 $14,977 $14,062
11/30/1991 $14,475 $13,496
12/31/1991 $15,828 $15,039
1/31/1992 $15,675 $14,760
2/29/1992 $15,947 $14,950
3/31/1992 $15,550 $14,659
4/30/1992 $15,618 $15,090
5/31/1992 $15,528 $15,163
6/30/1992 $15,210 $14,938
7/31/1992 $15,584 $15,548
8/31/1992 $15,244 $15,230
9/30/1992 $15,516 $15,408
10/31/1992 $15,709 $15,460
11/30/1992 $16,083 $15,986
12/31/1992 $16,297 $16,183
1/31/1993 $16,124 $16,319
2/28/1993 $15,905 $16,540
3/31/1993 $16,147 $16,889
4/30/1993 $16,193 $16,481
5/31/1993 $16,597 $16,921
6/30/1993 $16,251 $16,970
7/31/1993 $16,054 $16,902
8/31/1993 $16,608 $17,543
9/30/1993 $16,435 $17,407
10/31/1993 $16,943 $17,768
11/30/1993 $16,977 $17,599
12/31/1993 $17,454 $17,812
1/31/1994 $17,703 $18,418
2/28/1994 $17,170 $17,918
3/31/1994 $16,318 $17,137
4/30/1994 $16,661 $17,357
5/31/1994 $16,945 $17,641
6/30/1994 $16,815 $17,209
7/31/1994 $17,289 $17,773
8/31/1994 $18,176 $18,502
9/30/1994 $17,703 $18,051
10/31/1994 $18,070 $18,457
11/30/1994 $17,596 $17,785
12/31/1994 $17,964 $18,048
1/31/1995 $18,239 $18,516
2/28/1995 $18,982 $19,238
3/31/1995 $19,652 $19,805
4/30/1995 $20,215 $20,388
5/31/1995 $20,658 $21,203
6/30/1995 $21,461 $21,695
7/31/1995 $22,527 $22,415
8/31/1995 $22,491 $22,471
9/30/1995 $23,209 $23,420
10/31/1995 $23,341 $23,335
11/30/1995 $24,658 $24,360
12/31/1995 $24,863 $24,830
1/31/1996 $25,580 $25,674
2/29/1996 $26,128 $25,913
3/31/1996 $26,225 $26,162
4/30/1996 $26,760 $26,546
5/31/1996 $27,271 $27,231
6/30/1996 $27,077 $27,335
7/31/1996 $25,678 $26,126
8/31/1996 $26,395 $26,678
9/30/1996 $27,782 $28,180
10/31/1996 $27,855 $28,957
11/30/1996 $29,607 $31,146
12/31/1996 $29,011 $30,530
1/31/1997 $29,742 $32,438
2/28/1997 $29,816 $32,691
3/31/1997 $29,086 $31,347
4/30/1997 $30,126 $33,219
5/31/1997 $31,785 $35,242
6/30/1997 $32,379 $36,821
7/31/1997 $33,679 $39,752
8/31/1997 $32,553 $37,525
9/30/1997 $33,592 $39,582
</TABLE>
GRAPHIC MATERIAL (4)
This chart shows in pie format the fund's portfolio breakdown by type of
security as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown
<S> <C>
Utilities Stocks 78.5%
Utilities Bonds 13.6%
Convertible Securities 5.3%
Short-term Obligations & Other Net Assets 2.6%
</TABLE>
GRAPHIC MATERIAL (5)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Class I shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $9,578 $10,000
10/31/1987 $9,318 $7,846
11/30/1987 $9,057 $7,199
12/31/1987 $9,104 $7,747
1/31/1988 $10,041 $8,074
2/29/1988 $9,775 $8,450
3/31/1988 $9,454 $8,189
4/30/1988 $9,415 $8,280
5/31/1988 $9,750 $8,351
6/30/1988 $9,919 $8,734
7/31/1988 $9,827 $8,701
8/31/1988 $9,775 $8,405
9/30/1988 $9,995 $8,763
10/31/1988 $10,169 $9,007
11/30/1988 $10,062 $8,878
12/31/1988 $10,163 $9,033
1/31/1989 $10,314 $9,695
2/28/1989 $10,122 $9,453
3/31/1989 $10,129 $9,673
4/30/1989 $10,394 $10,175
5/31/1989 $10,895 $10,588
6/30/1989 $11,167 $10,527
7/31/1989 $11,876 $11,478
8/31/1989 $11,649 $11,703
9/30/1989 $11,700 $11,655
10/31/1989 $11,844 $11,384
11/30/1989 $12,191 $11,617
12/31/1989 $12,789 $11,895
1/31/1990 $12,186 $11,097
2/28/1990 $12,259 $11,240
3/31/1990 $12,162 $11,538
4/30/1990 $11,608 $11,251
5/31/1990 $12,192 $12,348
6/30/1990 $12,289 $12,265
7/31/1990 $12,396 $12,226
8/31/1990 $11,679 $11,121
9/30/1990 $11,624 $10,579
10/31/1990 $12,432 $10,534
11/30/1990 $12,665 $11,214
12/31/1990 $12,838 $11,527
1/31/1991 $12,711 $12,030
2/28/1991 $13,186 $12,890
3/31/1991 $13,375 $13,202
4/30/1991 $13,487 $13,233
5/31/1991 $13,439 $13,804
6/30/1991 $13,335 $13,171
7/31/1991 $13,827 $13,785
8/31/1991 $14,188 $14,112
9/30/1991 $14,706 $13,876
10/31/1991 $14,889 $14,062
11/30/1991 $15,207 $13,496
12/31/1991 $15,942 $15,039
1/31/1992 $15,298 $14,760
2/29/1992 $15,264 $14,950
3/31/1992 $15,195 $14,659
4/30/1992 $15,574 $15,090
5/31/1992 $15,970 $15,163
6/30/1992 $16,177 $14,938
7/31/1992 $17,034 $15,548
8/31/1992 $16,982 $15,230
9/30/1992 $17,084 $15,408
10/31/1992 $16,907 $15,460
11/30/1992 $16,925 $15,986
12/31/1992 $17,390 $16,183
1/31/1993 $17,714 $16,319
2/28/1993 $18,668 $16,540
3/31/1993 $18,810 $16,889
4/30/1993 $18,810 $16,481
5/31/1993 $18,792 $16,921
6/30/1993 $19,249 $16,970
7/31/1993 $19,656 $16,902
8/31/1993 $20,248 $17,543
9/30/1993 $20,174 $17,407
10/31/1993 $20,061 $17,768
11/30/1993 $19,144 $17,599
12/31/1993 $19,394 $17,812
1/31/1994 $19,013 $18,418
2/28/1994 $18,081 $17,918
3/31/1994 $17,464 $17,137
4/30/1994 $17,715 $17,357
5/31/1994 $16,731 $17,641
6/30/1994 $16,182 $17,209
7/31/1994 $16,906 $17,773
8/31/1994 $17,004 $18,502
9/30/1994 $16,573 $18,051
10/31/1994 $16,871 $18,457
11/30/1994 $17,070 $17,785
12/31/1994 $17,127 $18,048
1/31/1995 $18,138 $18,516
2/28/1995 $18,118 $19,238
3/31/1995 $17,856 $19,805
4/30/1995 $18,246 $20,388
5/31/1995 $19,293 $21,203
6/30/1995 $19,296 $21,695
7/31/1995 $19,233 $22,415
8/31/1995 $19,525 $22,471
9/30/1995 $20,582 $23,420
10/31/1995 $21,004 $23,335
11/30/1995 $21,342 $24,360
12/31/1995 $22,381 $24,830
1/31/1996 $22,747 $25,674
2/29/1996 $22,166 $25,913
3/31/1996 $22,145 $26,162
4/30/1996 $21,403 $26,546
5/31/1996 $21,643 $27,231
6/30/1996 $22,796 $27,335
7/31/1996 $21,536 $26,126
8/31/1996 $21,846 $26,678
9/30/1996 $21,805 $28,180
10/31/1996 $22,522 $28,957
11/30/1996 $22,836 $31,146
12/31/1996 $22,835 $30,530
1/31/1997 $22,954 $32,438
2/28/1997 $23,144 $32,691
3/31/1997 $22,497 $31,347
4/30/1997 $22,329 $33,219
5/31/1997 $23,026 $35,242
6/30/1997 $23,784 $36,821
7/31/1997 $24,345 $39,752
8/31/1997 $23,809 $37,525
9/30/1997 $24,797 $39,582
</TABLE>
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Class II shares to that of the S&P 500, based on a $10,000
investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
5/1/1995 $9,899 $10,000
5/31/1995 $10,492 $10,400
6/30/1995 $10,500 $10,641
7/31/1995 $10,454 $10,995
8/31/1995 $10,613 $11,022
9/30/1995 $11,188 $11,487
10/31/1995 $11,406 $11,446
11/30/1995 $11,578 $11,948
12/31/1995 $12,150 $12,179
1/31/1996 $12,325 $12,593
2/29/1996 $12,021 $12,710
3/31/1996 $12,005 $12,832
4/30/1996 $11,603 $13,021
5/31/1996 $11,721 $13,357
6/30/1996 $12,331 $13,407
7/31/1996 $11,648 $12,815
8/31/1996 $11,816 $13,085
9/30/1996 $11,791 $13,822
10/31/1996 $12,167 $14,203
11/30/1996 $12,337 $15,277
12/31/1996 $12,333 $14,975
1/31/1997 $12,397 $15,911
2/28/1997 $12,487 $16,035
3/31/1997 $12,125 $15,376
4/30/1997 $12,034 $16,294
5/31/1997 $12,398 $17,286
6/30/1997 $12,804 $18,060
7/31/1997 $13,106 $19,498
8/31/1997 $12,804 $18,406
9/30/1997 $13,331 $19,415
</TABLE>
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of the Franklin
Utilities Fund - Advisor Class shares to that of the S&P 500, based on a $10,000
investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
10/1/1987 $10,000 $10,000
10/30/1987 $9,728 $7,846
11/30/1987 $9,456 $7,199
12/31/1987 $9,505 $7,747
1/29/1988 $10,483 $8,074
2/29/1988 $10,205 $8,450
3/31/1988 $9,870 $8,189
4/29/1988 $9,830 $8,280
5/31/1988 $10,180 $8,351
6/30/1988 $10,356 $8,734
7/29/1988 $10,260 $8,701
8/31/1988 $10,205 $8,405
9/30/1988 $10,435 $8,763
10/31/1988 $10,617 $9,007
11/30/1988 $10,505 $8,878
12/30/1988 $10,611 $9,033
1/31/1989 $10,768 $9,695
2/28/1989 $10,568 $9,453
3/31/1989 $10,575 $9,673
4/28/1989 $10,851 $10,175
5/31/1989 $11,375 $10,588
6/30/1989 $11,659 $10,527
7/31/1989 $12,399 $11,478
8/31/1989 $12,162 $11,703
9/29/1989 $12,215 $11,655
10/31/1989 $12,366 $11,384
11/30/1989 $12,728 $11,617
12/29/1989 $13,352 $11,895
1/31/1990 $12,722 $11,097
2/28/1990 $12,799 $11,240
3/30/1990 $12,697 $11,538
4/30/1990 $12,119 $11,251
5/31/1990 $12,729 $12,348
6/29/1990 $12,830 $12,265
7/31/1990 $12,942 $12,226
8/31/1990 $12,194 $11,121
9/28/1990 $12,136 $10,579
10/31/1990 $12,980 $10,534
11/30/1990 $13,223 $11,214
12/31/1990 $13,403 $11,527
1/31/1991 $13,271 $12,030
2/28/1991 $13,767 $12,890
3/29/1991 $13,964 $13,202
4/30/1991 $14,081 $13,233
5/31/1991 $14,031 $13,804
6/28/1991 $13,922 $13,171
7/31/1991 $14,436 $13,785
8/30/1991 $14,813 $14,112
9/30/1991 $15,354 $13,876
10/31/1991 $15,545 $14,062
11/29/1991 $15,876 $13,496
12/31/1991 $16,644 $15,039
1/31/1992 $15,971 $14,760
2/28/1992 $15,936 $14,950
3/31/1992 $15,864 $14,659
4/30/1992 $16,260 $15,090
5/29/1992 $16,673 $15,163
6/30/1992 $16,890 $14,938
7/31/1992 $17,784 $15,548
8/31/1992 $17,729 $15,230
9/30/1992 $17,837 $15,408
10/30/1992 $17,651 $15,460
11/30/1992 $17,670 $15,986
12/31/1992 $18,156 $16,183
1/29/1993 $18,494 $16,319
2/26/1993 $19,490 $16,540
3/31/1993 $19,639 $16,889
4/30/1993 $19,639 $16,481
5/31/1993 $19,620 $16,921
6/30/1993 $20,097 $16,970
7/30/1993 $20,522 $16,902
8/31/1993 $21,140 $17,543
9/30/1993 $21,062 $17,407
10/29/1993 $20,945 $17,768
11/30/1993 $19,988 $17,599
12/31/1993 $20,248 $17,812
1/31/1994 $19,850 $18,418
2/28/1994 $18,877 $17,918
3/31/1994 $18,233 $17,137
4/29/1994 $18,495 $17,357
5/31/1994 $17,467 $17,641
6/30/1994 $16,894 $17,209
7/29/1994 $17,651 $17,773
8/31/1994 $17,753 $18,502
9/30/1994 $17,303 $18,051
10/31/1994 $17,614 $18,457
11/30/1994 $17,822 $17,785
12/30/1994 $17,881 $18,048
1/31/1995 $18,937 $18,516
2/28/1995 $18,916 $19,238
3/31/1995 $18,643 $19,805
4/28/1995 $19,050 $20,388
5/31/1995 $20,143 $21,203
6/30/1995 $20,146 $21,695
7/31/1995 $20,080 $22,415
8/31/1995 $20,385 $22,471
9/29/1995 $21,488 $23,420
10/31/1995 $21,929 $23,335
11/30/1995 $22,282 $24,360
12/29/1995 $23,367 $24,830
1/31/1996 $23,749 $25,674
2/29/1996 $23,142 $25,913
3/29/1996 $23,120 $26,162
4/30/1996 $22,346 $26,546
5/31/1996 $22,596 $27,231
6/28/1996 $23,800 $27,335
7/31/1996 $22,484 $26,126
8/30/1996 $22,808 $26,678
9/30/1996 $22,765 $28,180
10/31/1996 $23,514 $28,957
11/29/1996 $23,842 $31,146
12/31/1996 $23,841 $30,530
1/31/1997 $23,965 $32,438
2/28/1997 $24,163 $32,691
3/31/1997 $23,496 $31,347
4/30/1997 $23,320 $33,219
5/30/1997 $24,048 $35,242
6/30/1997 $24,848 $36,821
7/31/1997 $25,434 $39,752
8/29/1997 $24,848 $37,525
9/30/1997 $25,915 $39,582
</TABLE>
GRAPHIC MATERIAL (8)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Class I shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
10/1/1987 $9,569 $10,000 $10,000 $10,000
12/31/1987 $9,432 $7,747 $10,584 $9,371
3/31/1988 $9,901 $8,188 $10,963 $9,875
6/30/1988 $10,114 $8,733 $11,071 $10,125
9/30/1988 $10,185 $8,763 $11,278 $10,284
12/31/1988 $10,262 $9,034 $11,387 $10,406
3/31/1989 $10,586 $9,674 $11,511 $10,753
6/30/1989 $11,186 $10,528 $12,436 $11,345
9/30/1989 $11,370 $11,656 $12,553 $11,798
12/31/1989 $11,562 $11,896 $13,006 $11,958
3/31/1990 $11,307 $11,538 $12,858 $11,767
6/30/1990 $11,692 $12,264 $13,321 $12,123
9/30/1990 $10,689 $10,579 $13,401 $11,465
12/31/1990 $10,548 $11,526 $14,084 $11,975
3/31/1991 $12,306 $13,201 $14,463 $13,013
6/30/1991 $13,058 $13,171 $14,682 $13,244
9/30/1991 $14,241 $13,876 $15,526 $14,156
12/31/1991 $14,888 $15,038 $16,353 $14,936
3/31/1992 $15,884 $14,658 $16,108 $15,092
6/30/1992 $16,687 $14,936 $16,762 $15,539
9/30/1992 $16,981 $15,407 $17,580 $16,089
12/31/1992 $17,157 $16,182 $17,592 $16,401
3/31/1993 $18,530 $16,889 $18,412 $17,241
6/30/1993 $19,373 $16,972 $18,966 $17,627
9/30/1993 $20,229 $17,410 $19,596 $18,198
12/31/1993 $20,852 $17,813 $19,539 $18,388
3/31/1994 $19,775 $17,138 $18,924 $17,823
6/30/1994 $19,468 $17,210 $18,689 $17,745
9/30/1994 $19,956 $18,052 $18,783 $18,107
12/31/1994 $19,523 $18,048 $18,852 $17,859
3/31/1995 $20,325 $19,806 $19,791 $18,853
6/30/1995 $21,815 $21,698 $21,073 $19,986
9/30/1995 $22,750 $23,423 $21,476 $20,928
12/31/1995 $23,680 $24,833 $22,477 $21,868
3/31/1996 $23,827 $26,166 $21,951 $22,287
6/30/1996 $24,515 $27,341 $22,054 $22,693
9/30/1996 $24,895 $28,186 $22,444 $23,138
12/31/1996 $26,154 $30,537 $23,131 $24,230
3/31/1997 $26,203 $31,355 $22,932 $24,218
6/30/1997 $27,749 $36,830 $23,764 $26,121
9/30/1997 $29,206 $39,582 $24,599 $27,694
</TABLE>
GRAPHIC MATERIAL (9)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Class II shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
5/1/1995 $9,909 $10,000 $10,000 $10,000
6/30/1995 $10,338 $10,641 $10,502 $10,403
9/30/1995 $10,771 $11,487 $10,703 $10,893
12/31/1995 $11,197 $12,178 $11,201 $11,382
3/31/1996 $11,301 $12,832 $10,939 $11,601
6/30/1996 $11,561 $13,409 $10,991 $11,812
9/30/1996 $11,725 $13,823 $11,185 $12,043
12/31/1996 $12,302 $14,976 $11,527 $12,612
3/31/1997 $12,362 $15,377 $11,428 $12,605
6/30/1997 $13,071 $18,062 $11,843 $13,596
9/30/1997 $13,686 $19,415 $12,259 $14,415
</TABLE>
GRAPHIC MATERIAL (10)
The following line graph hypothetically compares the performance of the Franklin
Income Fund - Advisor Class shares to that of the S&P 500, Lehman Brothers
Intermediate Government Bond Index, and the Lipper Income Average, based on a
$10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index Index
<S> <C> <C> <C> <C>
10/1/1987 $10,000 $10,000 $10,000 $10,000
12/31/1987 $9,856 $7,747 $10,584 $9,371
3/31/1988 $10,347 $8,188 $10,963 $9,875
6/30/1988 $10,570 $8,733 $11,071 $10,125
9/30/1988 $10,644 $8,763 $11,278 $10,284
12/31/1988 $10,724 $9,034 $11,387 $10,406
3/31/1989 $11,063 $9,674 $11,511 $10,753
6/30/1989 $11,690 $10,528 $12,436 $11,345
9/30/1989 $11,882 $11,656 $12,553 $11,798
12/31/1989 $12,083 $11,896 $13,006 $11,958
3/31/1990 $11,817 $11,538 $12,858 $11,767
6/30/1990 $12,219 $12,264 $13,321 $12,123
9/30/1990 $11,171 $10,579 $13,401 $11,465
12/31/1990 $11,023 $11,526 $14,084 $11,975
3/31/1991 $12,860 $13,201 $14,463 $13,013
6/30/1991 $13,646 $13,171 $14,682 $13,244
9/30/1991 $14,882 $13,876 $15,526 $14,156
12/31/1991 $15,559 $15,038 $16,353 $14,936
3/31/1992 $16,600 $14,658 $16,108 $15,092
6/30/1992 $17,438 $14,936 $16,762 $15,539
9/30/1992 $17,745 $15,407 $17,580 $16,089
12/31/1992 $17,930 $16,182 $17,592 $16,401
3/31/1993 $19,365 $16,889 $18,412 $17,241
6/30/1993 $20,246 $16,972 $18,966 $17,627
9/30/1993 $21,141 $17,410 $19,596 $18,198
12/31/1993 $21,791 $17,813 $19,539 $18,388
3/31/1994 $20,666 $17,138 $18,924 $17,823
6/30/1994 $20,345 $17,210 $18,689 $17,745
9/30/1994 $20,855 $18,052 $18,783 $18,107
12/31/1994 $20,402 $18,048 $18,852 $17,859
3/31/1995 $21,241 $19,806 $19,791 $18,853
6/30/1995 $22,798 $21,698 $21,073 $19,986
9/30/1995 $23,774 $23,423 $21,476 $20,928
12/31/1995 $24,746 $24,833 $22,477 $21,868
3/31/1996 $24,901 $26,166 $21,951 $22,287
6/30/1996 $25,619 $27,341 $22,054 $22,693
9/30/1996 $26,017 $28,186 $22,444 $23,138
12/31/1996 $27,332 $30,537 $23,131 $24,230
3/31/1997 $27,392 $31,355 $22,932 $24,218
6/30/1997 $29,022 $36,830 $23,764 $26,121
9/30/1997 $30,436 $39,582 $24,599 $27,694
</TABLE>
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of the Franklin
DynaTech Fund - Class I shares to that of the S&P 500, and the H&Q Technology
Index, based on a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
10/1/1987 $9,548 $10,000 $10,000
10/31/1987 $7,593 $7,846 $6,946
11/30/1987 $6,966 $7,199 $6,222
12/31/1987 $7,586 $7,747 $7,294
1/31/1988 $7,712 $8,074 $7,013
2/29/1988 $8,254 $8,450 $7,623
3/31/1988 $8,051 $8,189 $7,191
4/30/1988 $8,200 $8,280 $7,378
5/31/1988 $8,132 $8,351 $7,190
6/30/1988 $8,743 $8,734 $7,766
7/31/1988 $8,349 $8,701 $7,230
8/31/1988 $7,820 $8,405 $6,611
9/30/1988 $7,983 $8,763 $6,863
10/31/1988 $7,875 $9,007 $6,661
11/30/1988 $7,610 $8,878 $6,392
12/31/1988 $8,078 $9,033 $6,849
1/31/1989 $8,683 $9,695 $7,339
2/28/1989 $8,506 $9,453 $7,120
3/31/1989 $8,540 $9,673 $6,873
4/30/1989 $9,079 $10,175 $7,366
5/31/1989 $9,686 $10,588 $7,841
6/30/1989 $9,475 $10,527 $7,238
7/31/1989 $10,103 $11,478 $7,543
8/31/1989 $10,219 $11,703 $7,678
9/30/1989 $10,410 $11,655 $7,588
10/31/1989 $10,151 $11,384 $7,371
11/30/1989 $10,335 $11,617 $7,338
12/31/1989 $10,482 $11,895 $7,345
1/31/1990 $10,167 $11,097 $6,987
2/28/1990 $10,272 $11,240 $7,252
3/31/1990 $10,714 $11,538 $7,576
4/30/1990 $10,677 $11,251 $7,290
5/31/1990 $11,949 $12,348 $8,340
6/30/1990 $12,077 $12,265 $8,202
7/31/1990 $11,800 $12,226 $7,504
8/31/1990 $10,692 $11,121 $6,475
9/30/1990 $10,137 $10,579 $5,779
10/31/1990 $10,040 $10,534 $5,517
11/30/1990 $10,549 $11,214 $6,049
12/31/1990 $10,815 $11,527 $6,525
1/31/1991 $11,903 $12,030 $7,543
2/28/1991 $12,693 $12,890 $8,183
3/31/1991 $12,770 $13,202 $8,525
4/30/1991 $12,823 $13,233 $8,542
5/31/1991 $13,521 $13,804 $8,884
6/30/1991 $12,647 $13,171 $8,033
7/31/1991 $13,283 $13,785 $8,444
8/31/1991 $13,705 $14,112 $8,679
9/30/1991 $13,314 $13,876 $8,274
10/31/1991 $13,490 $14,062 $8,645
11/30/1991 $13,222 $13,496 $8,329
12/31/1991 $14,649 $15,039 $9,485
1/31/1992 $14,991 $14,760 $10,226
2/29/1992 $15,076 $14,950 $10,784
3/31/1992 $14,486 $14,659 $10,024
4/30/1992 $14,479 $15,090 $9,799
5/31/1992 $14,378 $15,163 $9,724
6/30/1992 $14,176 $14,938 $9,046
7/31/1992 $14,579 $15,548 $9,517
8/31/1992 $14,222 $15,230 $9,091
9/30/1992 $14,300 $15,408 $9,498
10/31/1992 $14,409 $15,460 $10,045
11/30/1992 $14,874 $15,986 $10,757
12/31/1992 $15,264 $16,183 $11,257
1/31/1993 $15,487 $16,319 $12,195
2/28/1993 $15,312 $16,540 $11,779
3/31/1993 $15,614 $16,889 $11,961
4/30/1993 $15,296 $16,481 $11,251
5/31/1993 $16,059 $16,921 $12,425
6/30/1993 $15,852 $16,970 $12,266
7/31/1993 $15,534 $16,902 $11,562
8/31/1993 $16,155 $17,543 $12,301
9/30/1993 $16,361 $17,407 $12,526
10/31/1993 $16,425 $17,768 $12,741
11/30/1993 $16,186 $17,599 $12,928
12/31/1993 $16,398 $17,812 $13,217
1/31/1994 $16,808 $18,418 $14,033
2/28/1994 $16,757 $17,918 $14,497
3/31/1994 $16,295 $17,137 $13,704
4/30/1994 $16,039 $17,357 $13,352
5/31/1994 $16,261 $17,641 $13,391
6/30/1994 $15,663 $17,209 $12,537
7/31/1994 $16,158 $17,773 $13,005
8/31/1994 $17,133 $18,502 $14,343
9/30/1994 $16,842 $18,051 $14,296
10/31/1994 $17,543 $18,457 $15,606
11/30/1994 $17,219 $17,785 $15,472
12/31/1994 $17,252 $18,048 $15,877
1/31/1995 $17,409 $18,516 $15,645
2/28/1995 $17,879 $19,238 $17,001
3/31/1995 $18,279 $19,805 $17,779
4/30/1995 $19,028 $20,388 $19,111
5/31/1995 $19,585 $21,203 $19,795
6/30/1995 $21,117 $21,695 $22,179
7/31/1995 $22,075 $22,415 $24,204
8/31/1995 $21,831 $22,471 $24,481
9/30/1995 $22,249 $23,420 $25,065
10/31/1995 $22,684 $23,335 $25,417
11/30/1995 $22,371 $24,360 $25,105
12/31/1995 $21,760 $24,830 $23,740
1/31/1996 $21,778 $25,674 $24,091
2/29/1996 $22,547 $25,913 $25,298
3/31/1996 $22,100 $26,162 $24,197
4/30/1996 $23,907 $26,546 $27,541
5/31/1996 $24,766 $27,231 $27,956
6/30/1996 $23,979 $27,335 $25,920
7/31/1996 $22,547 $26,126 $23,256
8/31/1996 $23,371 $26,678 $24,664
9/30/1996 $25,106 $28,180 $27,515
10/31/1996 $25,572 $28,957 $27,122
11/30/1996 $28,023 $31,146 $30,319
12/31/1996 $28,026 $30,530 $29,505
1/31/1997 $30,108 $32,438 $32,665
2/28/1997 $28,412 $32,691 $29,997
3/31/1997 $27,694 $31,347 $28,124
4/30/1997 $28,928 $33,219 $29,164
5/31/1997 $30,550 $35,242 $33,554
6/30/1997 $30,826 $36,821 $33,851
7/31/1997 $33,830 $39,752 $39,296
8/31/1997 $33,222 $37,525 $39,408
9/30/1997 $34,074 $39,582 $41,024
</TABLE>
GRAPHIC MATERIAL (12)
The following line graph hypothetically compares the performance of the Franklin
DynaTech Fund - Class II shares to that of the S&P 500, and the H&Q Technology
Index, based on a $10,000 investment from 9/16/96 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
9/16/1996 $9,899 $10,000 $10,000
9/30/1996 $10,159 $10,263 $10,539
10/31/1996 $10,333 $10,546 $10,388
11/30/1996 $11,318 $11,344 $11,613
12/31/1996 $11,312 $11,119 $11,301
1/31/1997 $12,155 $11,814 $12,511
2/28/1997 $11,461 $11,906 $11,490
3/31/1997 $11,163 $11,417 $10,772
4/30/1997 $11,648 $12,098 $11,171
5/31/1997 $12,289 $12,835 $12,852
6/30/1997 $12,386 $13,410 $12,966
7/31/1997 $13,587 $14,478 $15,051
8/31/1997 $13,326 $13,667 $15,094
9/30/1997 $13,547 $14,416 $15,713
</TABLE>
GRAPHIC MATERIAL (13)
This point graph demonstrates the fund's Class I shares volatility risk vs.
return in comparison with the risk/return factors of the 1-year CD, Merrill
Lynch 10-Year Treasury, and the Merrill Lynch 30-Year Treasury, from 10/92 to
9/97.
<TABLE>
<CAPTION>
Franklin U.S. Government Securities Fund vs. Comparable
Investments
<S> <C> <C>
RISK RETURN
---------------------------
ML10YR 6.84 6.12
ML30YR 10.30 7.77
CD 1 YR. 0.32 4.76
USG FUND 3.46 6.54
---------------------------
</TABLE>
GRAPHIC MATERIAL (14)
This bar chart shows the comparison between the fund's yield of 6.36%, the
average ginnie mae fund yield of 5.94%, a one-year CD yield of 5.83%, and the
average money market fund yield of 5.02%.
GRAPHIC MATERIAL (15)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Class I shares to that of the Lehman Brothers
Intermediate Government Bond Index and the Consumer Price Index (CPI), based on
a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
10/1/1987 9582 10000 10000
Oct-87 9,789 10,298 10,026
Nov-87 9,928 10,360 10,035
Dec-87 10,026 10,460 10,035
Jan-88 10,340 10,720 10,061
Feb-88 10,424 10,833 10,087
Mar-88 10,406 10,788 10,131
Apr-88 10,403 10,769 10,183
May-88 10,386 10,718 10,218
Jun-88 10,608 10,892 10,262
Jul-88 10,574 10,860 10,305
Aug-88 10,571 10,874 10,348
Sep-88 10,752 11,062 10,418
Oct-88 10,935 11,215 10,452
Nov-88 10,838 11,118 10,460
Dec-88 10,772 11,129 10,478
Jan-89 10,913 11,241 10,531
Feb-89 10,893 11,191 10,574
Mar-89 10,890 11,244 10,635
Apr-89 11,082 11,471 10,704
May-89 11,343 11,692 10,765
Jun-89 11,621 11,990 10,791
Jul-89 11,769 12,234 10,817
Aug-89 11,715 12,069 10,834
Sep-89 11,762 12,127 10,869
Oct-89 11,947 12,381 10,921
Nov-89 12,083 12,504 10,947
Dec-89 12,184 12,540 10,965
Jan-90 12,127 12,462 11,078
Feb-90 12,195 12,509 11,130
Mar-90 12,228 12,524 11,191
Apr-90 12,206 12,482 11,209
May-90 12,494 12,749 11,235
Jun-90 12,633 12,918 11,295
Jul-90 12,866 13,098 11,338
Aug-90 12,840 13,051 11,443
Sep-90 12,927 13,167 11,539
Oct-90 13,071 13,350 11,608
Nov-90 13,312 13,552 11,633
Dec-90 13,497 13,739 11,633
Jan-91 13,683 13,881 11,703
Feb-91 13,753 13,965 11,721
Mar-91 13,864 14,042 11,738
Apr-91 13,991 14,187 11,756
May-91 14,120 14,266 11,791
Jun-91 14,189 14,278 11,825
Jul-91 14,401 14,432 11,843
Aug-91 14,573 14,706 11,878
Sep-91 14,788 14,956 11,930
Oct-91 14,984 15,126 11,948
Nov-91 15,071 15,303 11,982
Dec-91 15,348 15,675 11,991
Jan-92 15,243 15,525 12,009
Feb-92 15,353 15,573 12,052
Mar-92 15,312 15,511 12,113
Apr-92 15,423 15,650 12,130
May-92 15,657 15,883 12,147
Jun-92 15,849 16,112 12,191
Jul-92 15,997 16,422 12,217
Aug-92 16,214 16,589 12,251
Sep-92 16,342 16,818 12,285
Oct-92 16,222 16,616 12,328
Nov-92 16,283 16,548 12,345
Dec-92 16,483 16,762 12,337
Jan-93 16,706 17,073 12,397
Feb-93 16,885 17,324 12,441
Mar-93 16,972 17,388 12,484
Apr-93 17,059 17,524 12,519
May-93 17,146 17,477 12,537
Jun-93 17,330 17,730 12,554
Jul-93 17,419 17,766 12,554
Aug-93 17,508 18,030 12,589
Sep-93 17,518 18,104 12,616
Oct-93 17,552 18,148 12,668
Nov-93 17,489 18,059 12,676
Dec-93 17,623 18,133 12,676
Jan-94 17,782 18,312 12,711
Feb-94 17,617 18,061 12,754
Mar-94 17,122 17,798 12,797
Apr-94 17,007 17,682 12,815
May-94 17,017 17,694 12,824
Jun-94 16,940 17,698 12,868
Jul-94 17,250 17,930 12,902
Aug-94 17,302 17,982 12,954
Sep-94 17,066 17,832 12,989
Oct-94 17,014 17,836 12,998
Nov-94 16,988 17,758 13,015
Dec-94 17,148 17,816 13,015
Jan-95 17,497 18,107 13,067
Feb-95 17,930 18,456 13,119
Mar-95 18,011 18,558 13,163
Apr-95 18,257 18,773 13,206
May-95 18,866 19,302 13,233
Jun-95 18,979 19,426 13,259
Jul-95 19,009 19,435 13,259
Aug-95 19,209 19,595 13,293
Sep-95 19,381 19,726 13,320
Oct-95 19,582 19,943 13,364
Nov-95 19,784 20,186 13,355
Dec-95 20,017 20,386 13,345
Jan-96 20,135 20,557 13,424
Feb-96 19,963 20,340 13,467
Mar-96 19,878 20,246 13,537
Apr-96 19,793 20,187 13,590
May-96 19,736 20,177 13,616
Jun-96 19,977 20,383 13,624
Jul-96 20,040 20,446 13,650
Aug-96 20,042 20,469 13,676
Sep-96 20,379 20,733 13,719
Oct-96 20,748 21,073 13,763
Nov-96 21,058 21,328 13,789
Dec-96 20,937 21,213 13,789
Jan-97 21,065 21,293 13,834
Feb-97 21,130 21,327 13,876
Mar-97 21,070 21,206 13,911
Apr-97 21,389 21,445 13,929
May-97 21,576 21,613 13,921
Jun-97 21,829 21,798 13,938
Jul-97 22,244 22,200 13,954
Aug-97 22,176 22,115 13,981
Sep-97 22,434 22,356 14,016
TOTAL RETURN 124.34% 123.56% 40.16%
</TABLE>
GRAPHIC MATERIAL (16)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Class II shares to that of the Lehman Brothers
Intermediate Government Bond Index and the Consumer Price Index (CPI), based on
a $10,000 investment from 5/1/95 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
5/1/1995 9896 10000 10,000
5/31/1995 10,194 10,282 10,020
6/30/1995 10,249 10,348 10,040
7/31/1995 10,260 10,353 10,040
8/31/1995 10,362 10,438 10,066
9/30/1995 10,454 10,508 10,086
10/31/1995 10,557 10,623 10,120
11/30/1995 10,661 10,753 10,112
12/31/1995 10,780 10,859 10,105
1/31/1996 10,853 10,951 10,165
2/29/1996 10,754 10,835 10,198
3/31/1996 10,687 10,785 10,251
4/30/1996 10,652 10,753 10,291
5/31/1996 10,616 10,748 10,310
6/30/1996 10,725 10,858 10,316
7/31/1996 10,754 10,891 10,336
8/31/1996 10,766 10,903 10,356
9/30/1996 10,930 11,044 10,389
10/31/1996 11,123 11,225 10,422
11/30/1996 11,301 11,361 10,442
12/31/1996 11,214 11,300 10,442
1/31/1997 11,294 11,343 10,475
2/28/1997 11,307 11,361 10,508
3/31/1997 11,269 11,296 10,534
4/30/1997 11,434 11,424 10,548
5/31/1997 11,546 11,513 10,541
6/30/1997 11,675 11,612 10,554
7/31/1997 11,892 11,825 10,567
8/31/1997 11,833 11,780 10,587
9/30/1997 11,966 11,909 10,613
TOTAL RETURN 19.66% 19.09% 6.13%
</TABLE>
GRAPHIC MATERIAL (17)
The following line graph hypothetically compares the performance of the Franklin
U.S. Government Securities Fund - Advisor Class shares to that of the Lehman
Brothers Intermediate Government Bond Index and the Consumer Price Index (CPI),
based on a $10,000 investment from 10/1/87 to 9/30/97.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
Oct 1-87 10000 10000 10000
Oct-87 10217 10,298 10,026
Nov-87 10362 10,360 10,035
Dec-87 10463 10,460 10,035
Jan-88 10791 10,720 10,061
Feb-88 10879 10,833 10,087
Mar-88 10861 10,788 10,131
Apr-88 10858 10,769 10,183
May-88 10839 10,718 10,218
Jun-88 11071 10,892 10,262
Jul-88 11036 10,860 10,305
Aug-88 11033 10,874 10,348
Sep-88 11222 11,062 10,418
Oct-88 11413 11,215 10,452
Nov-88 11312 11,118 10,460
Dec-88 11243 11,129 10,478
Jan-89 11389 11,241 10,531
Feb-89 11369 11,191 10,574
Mar-89 11365 11,244 10,635
Apr-89 11566 11,471 10,704
May-89 11838 11,692 10,765
Jun-89 12129 11,990 10,791
Jul-89 12283 12,234 10,817
Aug-89 12226 12,069 10,834
Sep-89 12276 12,127 10,869
Oct-89 12469 12,381 10,921
Nov-89 12610 12,504 10,947
Dec-89 12716 12,540 10,965
Jan-90 12657 12,462 11,078
Feb-90 12728 12,509 11,130
Mar-90 12761 12,524 11,191
Apr-90 12739 12,482 11,209
May-90 13040 12,749 11,235
Jun-90 13185 12,918 11,295
Jul-90 13428 13,098 11,338
Aug-90 13401 13,051 11,443
Sep-90 13491 13,167 11,539
Oct-90 13642 13,350 11,608
Nov-90 13893 13,552 11,633
Dec-90 14086 13,739 11,633
Jan-91 14281 13,881 11,703
Feb-91 14353 13,965 11,721
Mar-91 14469 14,042 11,738
Apr-91 14602 14,187 11,756
May-91 14736 14,266 11,791
Jun-91 14808 14,278 11,825
Jul-91 15030 14,432 11,843
Aug-91 15210 14,706 11,878
Sep-91 15434 14,956 11,930
Oct-91 15639 15,126 11,948
Nov-91 15729 15,303 11,982
Dec-91 16018 15,675 11,991
Jan-92 15909 15,525 12,009
Feb-92 16023 15,573 12,052
Mar-92 15981 15,511 12,113
Apr-92 16096 15,650 12,130
May-92 16341 15,883 12,147
Jun-92 16541 16,112 12,191
Jul-92 16696 16,422 12,217
Aug-92 16922 16,589 12,251
Sep-92 17056 16,818 12,285
Oct-92 16930 16,616 12,328
Nov-92 16995 16,548 12,345
Dec-92 17203 16,762 12,337
Jan-93 17436 17,073 12,397
Feb-93 17623 17,324 12,441
Mar-93 17713 17,388 12,484
Apr-93 17804 17,524 12,519
May-93 17895 17,477 12,537
Jun-93 18087 17,730 12,554
Jul-93 18179 17,766 12,554
Aug-93 18273 18,030 12,589
Sep-93 18283 18,104 12,616
Oct-93 18319 18,148 12,668
Nov-93 18252 18,059 12,676
Dec-93 18392 18,133 12,676
Jan-94 18559 18,312 12,711
Feb-94 18386 18,061 12,754
Mar-94 17870 17,798 12,797
Apr-94 17749 17,682 12,815
May-94 17760 17,694 12,824
Jun-94 17680 17,698 12,868
Jul-94 18004 17,930 12,902
Aug-94 18058 17,982 12,954
Sep-94 17811 17,832 12,989
Oct-94 17757 17,836 12,998
Nov-94 17730 17,758 13,015
Dec-94 17897 17,816 13,015
Jan-95 18261 18,107 13,067
Feb-95 18713 18,456 13,119
Mar-95 18798 18,558 13,163
Apr-95 19054 18,773 13,206
May-95 19689 19,302 13,233
Jun-95 19808 19,426 13,259
Jul-95 19839 19,435 13,259
Aug-95 20047 19,595 13,293
Sep-95 20227 19,726 13,320
Oct-95 20437 19,943 13,364
Nov-95 20648 20,186 13,355
Dec-95 20891 20,386 13,345
Jan-96 21014 20,557 13,424
Feb-96 20835 20,340 13,467
Mar-96 20746 20,246 13,537
Apr-96 20657 20,187 13,590
May-96 20598 20,177 13,616
Jun-96 20850 20,383 13,624
Jul-96 20915 20,446 13,650
Aug-96 20918 20,469 13,676
Sep-96 21269 20,733 13,719
Oct-96 21654 21,073 13,763
Nov-96 21977 21,328 13,789
Dec-96 21852 21,213 13,789
Jan-97 22017 21,293 13,834
Feb-97 22054 21,327 13,876
Mar-97 21993 21,206 13,911
Apr-97 22361 21,445 13,929
May-97 22558 21,613 13,921
Jun-97 22824 21,798 13,938
Jul-97 23259 22,200 13,954
Aug-97 23156 22,115 13,981
Sep-97 23460 22,356 14,016
TOTAL RETURN 134.60% 123.56% 40.16%
</TABLE>
