SHAREHOLDER LETTER
Dear Shareholder:
This annual report for Franklin Custodian Funds, Inc., covers the period
ended September 30, 2000.
During the 12 months under review, the U.S. economy reached the peak of its
10-year expansion with an impressive 8.3% gross domestic product (GDP)
annualized growth rate in the fourth quarter of 1999. GDP was relatively lower
but remained strong in the first and second quarters of 2000 at annualized rates
of 4.8% and 5.6%. Although inflation was relatively tame throughout the Fund's
fiscal year, record low unemployment and increased consumer spending prompted
the Federal Reserve Board (the Fed) to raise the federal funds target rate on
four separate occasions in an attempt to ease inflationary pressures. The final
increase, on May 16, lifted the federal funds target rate 50 basis points to
6.5%. Since that time, however, the Fed has left the target rate unchanged,
following growing evidence that consumer spending and overall economic growth
were cooling at the desired speed. Indeed, GDP for the third quarter of 2000 was
2.7%. The Fed also finally admitted that productivity advances were allowing the
economy to grow without accelerated inflation. Thus, it seems likely that the
Fed will not increase rates again in 2000. However, policymakers will remain
vigilant until it is certain that the economy's growth is closer to its
estimated sustainable growth rate of 3.5%-4.0%.
The stock markets experienced considerable volatility as they generally
reflected the movement of the economy during the year under review. The fourth
quarter of 1999 was, not surprisingly, the best-performing quarter for stocks,
primarily due to strong technology sector returns. This upward trend continued
into the first quarter of 2000 as technology and telecommunication sectors drove
the market and supported growth stocks' dominance over value stocks. However, a
downward trend emerged in March and April as technology stocks battled with old
economy value stocks for market leadership. Dot-com stocks, in particular,
plummeted as investors' focus returned to fundamental concepts, such as
earnings, market share and proven management.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Shareholder Letter ........................................................ 1
Fund Reports
Franklin DynaTech Fund ................................................... 4
Franklin Growth Fund ..................................................... 12
Franklin Income Fund ..................................................... 18
Franklin U.S. Government
Securities Fund .......................................................... 26
Franklin Utilities Fund .................................................. 34
Financial Highlights &
Statements of Investments ................................................. 42
Financial Statements ...................................................... 70
Notes to
Financial Statements ...................................................... 76
Independent Auditors' Report .............................................. 84
Tax Designation ........................................................... 85
</TABLE>
<PAGE>
Franklin Custodian Funds, Inc.
Annual Report
September 30, 2000
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This line chart shows the performances for S&P 500, Dow Jones Industrial Average
(DJIA) and NASDAQ indexes for the one year period ended 9/30/00.
<TABLE>
<CAPTION>
Date S&P 500 DJIA NASDAQ
<S> <C> <C> <C>
09/30/99 1282.71 10336.95 2746.16
10/01/99 1282.81 10273.00 2736.85
10/04/99 1304.60 10401.23 2795.97
10/05/99 1301.35 10400.59 2799.67
10/06/99 1325.40 10588.34 2857.21
10/07/99 1317.64 10537.05 2860.70
10/08/99 1336.02 10649.76 2886.57
10/11/99 1335.21 10648.18 2915.95
10/12/99 1313.04 10417.06 2872.43
10/13/99 1285.55 10232.16 2801.27
10/14/99 1283.42 10286.61 2806.84
10/15/99 1247.41 10019.71 2731.83
10/18/99 1254.13 10116.28 2689.15
10/19/99 1261.32 10204.93 2688.18
10/20/99 1289.43 10392.36 2788.13
10/21/99 1283.61 10297.69 2801.95
10/22/99 1301.65 10470.25 2816.52
10/25/99 1293.63 10349.93 2815.95
10/26/99 1281.91 10302.13 2811.47
10/27/99 1296.71 10394.89 2802.52
10/28/99 1342.44 10622.53 2875.22
10/29/99 1362.93 10729.86 2966.43
11/01/99 1354.12 10648.51 2967.65
11/02/99 1347.74 10581.84 2981.63
11/03/99 1354.93 10609.06 3028.51
11/04/99 1362.64 10639.64 3055.95
11/05/99 1370.23 10704.48 3102.29
11/08/99 1377.01 10718.85 3143.97
11/09/99 1365.28 10617.32 3125.04
11/10/99 1373.46 10597.74 3155.96
11/11/99 1381.46 10595.30 3197.29
11/12/99 1396.06 10769.32 3221.15
11/15/99 1394.39 10760.75 3219.54
11/16/99 1420.03 10932.33 3295.52
11/17/99 1410.71 10883.09 3269.39
11/18/99 1424.94 11035.70 3347.11
11/19/99 1422.00 11003.89 3369.25
11/22/99 1420.94 11089.52 3392.56
11/23/99 1404.64 10995.63 3342.87
11/24/99 1417.08 11008.17 3420.50
11/26/99 1416.62 10988.91 3447.81
11/29/99 1407.83 10947.92 3421.37
11/30/99 1388.91 10877.81 3336.16
12/01/99 1397.72 10998.39 3353.71
12/02/99 1409.04 11039.06 3452.78
12/03/99 1433.30 11286.18 3520.63
12/06/99 1423.34 11225.01 3546.01
12/07/99 1409.17 11106.65 3586.92
12/08/99 1403.88 11068.12 3586.08
12/09/99 1408.11 11134.79 3594.17
12/10/99 1417.04 11224.70 3620.23
12/13/99 1415.22 11192.59 3658.15
12/14/99 1403.17 11160.17 3571.66
12/15/99 1413.33 11225.32 3621.95
12/16/99 1418.78 11244.89 3715.06
12/17/99 1421.05 11257.43 3753.06
12/20/99 1418.09 11144.27 3783.87
12/21/99 1433.43 11200.54 3911.15
12/22/99 1436.13 11203.60 3937.30
12/23/99 1458.34 11405.76 3969.44
12/27/99 1457.09 11391.08 3975.38
12/28/99 1457.66 11476.71 3972.11
12/29/99 1463.46 11484.66 4041.46
12/30/99 1464.47 11452.86 4036.87
12/31/99 1469.25 11497.12 4069.31
01/03/00 1455.22 11357.51 4131.15
01/04/00 1399.42 10997.93 3901.69
01/05/00 1402.11 11122.65 3877.54
01/06/00 1403.45 11253.26 3727.13
01/07/00 1441.47 11522.56 3882.62
01/10/00 1457.60 11572.20 4049.67
01/11/00 1438.56 11511.08 3921.19
01/12/00 1432.25 11551.10 3850.02
01/13/00 1449.68 11582.43 3957.21
01/14/00 1465.15 11722.98 4064.27
01/18/00 1455.14 11560.72 4130.81
01/19/00 1455.90 11489.36 4151.29
01/20/00 1445.57 11351.30 4189.51
01/21/00 1441.36 11251.71 4235.40
01/24/00 1401.53 11008.17 4096.08
01/25/00 1410.03 11029.89 4167.41
01/26/00 1404.09 11032.99 4069.91
01/27/00 1398.56 11028.02 4039.56
01/28/00 1360.16 10738.87 3887.07
01/31/00 1394.46 10940.53 3940.35
02/01/00 1409.28 11041.05 4051.98
02/02/00 1409.12 11003.20 4073.96
02/03/00 1424.97 11013.44 4210.98
02/04/00 1424.37 10963.80 4244.14
02/07/00 1424.24 10905.79 4321.77
02/08/00 1441.72 10957.60 4427.54
02/09/00 1411.70 10699.16 4363.24
02/10/00 1416.83 10643.63 4485.63
02/11/00 1387.12 10425.21 4395.45
02/14/00 1389.94 10519.84 4418.55
02/15/00 1402.05 10718.09 4420.77
02/16/00 1387.67 10561.41 4427.65
02/17/00 1388.25 10514.57 4548.92
02/18/00 1346.09 10219.52 4411.74
02/22/00 1352.17 10304.84 4382.12
02/23/00 1360.69 10225.73 4550.33
02/24/00 1353.43 10092.63 4617.65
02/25/00 1333.36 9862.12 4590.50
02/28/00 1348.05 10038.65 4577.85
02/29/00 1366.42 10128.31 4696.69
03/01/00 1379.19 10137.93 4784.08
03/02/00 1381.76 10164.92 4754.51
03/03/00 1409.17 10367.20 4914.79
03/06/00 1391.28 10170.50 4904.85
03/07/00 1355.62 9796.03 4847.84
03/08/00 1366.70 9856.53 4897.17
03/09/00 1401.69 10010.73 5046.86
03/10/00 1395.07 9928.82 5048.62
03/13/00 1383.62 9947.13 4907.24
03/14/00 1359.15 9811.24 4706.63
03/15/00 1392.14 10131.41 4582.62
03/16/00 1458.47 10630.60 4717.39
03/17/00 1464.47 10595.23 4798.13
03/20/00 1456.63 10680.24 4610.00
03/21/00 1493.87 10907.34 4711.68
03/22/00 1500.64 10866.70 4864.75
03/23/00 1527.35 11119.86 4940.61
03/24/00 1527.46 11112.72 4963.03
03/27/00 1523.86 11025.85 4958.56
03/28/00 1507.73 10936.11 4833.89
03/29/00 1508.52 11018.72 4644.67
03/30/00 1487.92 10980.25 4457.89
03/31/00 1498.58 10921.92 4572.83
04/03/00 1505.97 11221.93 4223.68
04/04/00 1494.73 11164.84 4148.89
04/05/00 1487.37 11033.92 4169.22
04/06/00 1501.34 11114.27 4267.56
04/07/00 1516.35 11111.48 4446.45
04/10/00 1504.46 11186.56 4188.20
04/11/00 1500.59 11287.08 4055.90
04/12/00 1467.17 11125.13 3769.63
04/13/00 1440.51 10923.55 3676.78
04/14/00 1356.56 10305.77 3321.29
04/17/00 1401.44 10582.51 3539.16
04/18/00 1441.61 10767.42 3793.57
04/19/00 1427.47 10674.96 3706.41
04/20/00 1434.54 10844.05 3643.88
04/24/00 1429.86 10906.10 3482.48
04/25/00 1477.44 11124.82 3711.23
04/26/00 1460.99 10945.50 3630.09
04/27/00 1464.92 10888.10 3774.03
04/28/00 1452.43 10733.91 3860.66
05/01/00 1468.25 10811.78 3958.08
05/02/00 1446.29 10731.12 3785.45
05/03/00 1415.10 10480.13 3707.31
05/04/00 1409.57 10412.49 3720.24
05/05/00 1432.63 10577.86 3816.82
05/08/00 1424.17 10603.63 3669.38
05/09/00 1412.14 10536.75 3585.01
05/10/00 1383.05 10367.78 3384.73
05/11/00 1407.81 10545.97 3499.58
05/12/00 1420.96 10609.37 3529.06
05/15/00 1452.36 10807.78 3607.65
05/16/00 1466.04 10934.57 3717.57
05/17/00 1447.80 10769.74 3644.96
05/18/00 1437.21 10777.28 3538.71
05/19/00 1406.95 10626.85 3390.40
05/22/00 1400.72 10542.55 3364.21
05/23/00 1373.86 10422.27 3164.55
05/24/00 1399.05 10535.35 3270.61
05/25/00 1381.52 10323.92 3205.35
05/26/00 1378.02 10299.24 3205.11
05/30/00 1422.45 10527.13 3459.48
05/31/00 1420.60 10522.33 3400.91
06/01/00 1448.81 10652.20 3582.50
06/02/00 1477.26 10794.76 3813.38
06/05/00 1467.63 10815.30 3821.76
06/06/00 1457.84 10735.57 3756.37
06/07/00 1471.36 10812.86 3839.26
06/08/00 1461.67 10668.72 3825.56
06/09/00 1456.95 10614.06 3874.84
06/12/00 1446.00 10564.21 3767.91
06/13/00 1469.44 10621.84 3851.06
06/14/00 1470.54 10687.95 3797.41
06/15/00 1478.73 10714.82 3845.74
06/16/00 1464.46 10449.30 3860.56
06/19/00 1486.00 10557.84 3989.83
06/20/00 1475.95 10435.16 4013.36
06/21/00 1479.13 10497.74 4064.01
06/22/00 1452.18 10376.12 3936.84
06/23/00 1441.48 10404.75 3845.34
06/26/00 1455.31 10542.99 3912.12
06/27/00 1450.55 10504.46 3858.96
06/28/00 1454.82 10527.79 3940.34
06/29/00 1442.39 10398.04 3877.23
06/30/00 1454.60 10447.89 3966.11
07/03/00 1469.54 10560.67 3991.93
07/05/00 1446.23 10483.60 3863.10
07/06/00 1456.67 10481.47 3960.57
07/07/00 1478.90 10635.98 4023.20
07/10/00 1475.62 10646.58 3980.29
07/11/00 1480.88 10727.19 3956.42
07/12/00 1492.92 10783.41 4099.59
07/13/00 1495.84 10788.71 4174.86
07/14/00 1509.98 10812.75 4246.18
07/17/00 1510.49 10804.27 4274.67
07/18/00 1493.74 10739.92 4177.17
07/19/00 1481.96 10696.08 4055.63
07/20/00 1495.57 10843.87 4184.56
07/21/00 1480.19 10733.56 4094.45
07/24/00 1464.29 10685.12 3981.57
07/25/00 1474.47 10699.97 4029.57
07/26/00 1452.42 10516.48 3987.72
07/27/00 1449.62 10586.13 3842.23
07/28/00 1419.89 10511.17 3663.00
07/31/00 1430.83 10521.98 3766.99
08/01/00 1438.10 10606.95 3685.52
08/02/00 1438.70 10687.53 3658.46
08/03/00 1452.56 10706.58 3759.88
08/04/00 1462.93 10767.75 3787.36
08/07/00 1479.32 10867.01 3862.99
08/08/00 1482.80 10976.89 3848.55
08/09/00 1472.87 10905.83 3853.50
08/10/00 1460.25 10908.76 3759.99
08/11/00 1471.84 11027.80 3789.47
08/14/00 1491.56 11176.14 3849.69
08/15/00 1484.43 11067.00 3851.66
08/16/00 1479.85 11008.39 3861.20
08/17/00 1496.07 11055.64 3940.87
08/18/00 1491.72 11046.48 3930.34
08/21/00 1499.48 11079.81 3953.15
08/22/00 1498.13 11139.15 3958.21
08/23/00 1505.97 11144.65 4011.01
08/24/00 1508.31 11182.74 4053.28
08/25/00 1506.45 11192.63 4042.68
08/28/00 1514.09 11252.84 4070.59
08/29/00 1509.84 11215.10 4082.17
08/30/00 1502.59 11103.01 4103.81
08/31/00 1517.68 11215.10 4206.35
09/01/00 1520.77 11238.78 4234.33
09/05/00 1507.08 11260.61 4143.18
09/06/00 1492.25 11310.64 4013.34
09/07/00 1502.51 11259.87 4098.35
09/08/00 1494.50 11220.65 3978.41
09/11/00 1489.26 11195.49 3896.35
09/12/00 1481.99 11233.23 3849.51
09/13/00 1484.91 11182.18 3893.89
09/14/00 1480.87 11087.47 3913.86
09/15/00 1465.81 10927.00 3835.23
09/18/00 1444.51 10808.52 3726.52
09/19/00 1459.90 10789.29 3865.64
09/20/00 1451.34 10687.92 3897.44
09/21/00 1449.05 10765.52 3828.87
09/22/00 1448.72 10847.37 3803.76
09/25/00 1439.03 10808.15 3741.22
09/26/00 1427.21 10631.32 3689.10
09/27/00 1426.57 10628.36 3656.30
09/28/00 1458.29 10824.06 3778.32
09/29/00 1436.51 10650.92 3672.82
% Change +11.99% +3.04% +33.74%
</TABLE>
Despite significant market volatility, the tech-heavy Nasdaq registered a strong
gain and outperformed the blue chips of the Dow Jones Industrial Average (DJIA)
and the broader S&P 500 during the year under review. Indexes do not include
reinvested dividends.
As the Fed held interest rates steady through the summer, the markets seemed to
stop worrying about interest rates and focused on the "three E's" -- energy, the
euro and earnings. While soaring energy prices reaching decade-high levels so
far have not affected inflation, they started hurting corporate profits by
driving up costs and reducing consumer spending. The free-falling euro bit into
the earnings of U.S. multinationals as they converted their European profits
back into dollars, and it hampered sales of American goods, which became
relatively more expensive in euro countries. Joint intervention by the world's
largest economies to support the euro late in September proved to be
disappointing. Worries about corporate earnings pushed stock markets down for
most of September as investors shunned companies that warned of unfavorable
profit reports.
For the year ended September 30, 2000, the Dow Jones(R) Industrial Average
increased slightly by 3.04%, but the index was down 7.36% from the beginning of
2000 and 9.14% from its high on January 14. The Nasdaq Composite Index
registered a substantial gain of 33.74% during the Fund's fiscal year, but was
down 9.74% from the beginning of the calendar year and 27.25% from its high on
March 10. A broader market measure, the Standard and Poor's 500(R) (S&P 500(R))
Composite Index was slightly less volatile with an 11.99% increase for the year
under review, a calendar year-to-date increase of 2.23%, and a decline of only
5.95% from its high on March 24.(1)
U.S. bond markets experienced an upswing after a difficult year in 1999 and a
tough start in the first quarter of 2000. Fed interest-rate increases negatively
impacted bond prices during the first half of the period, but bonds performed
better during the second half as rates declined. The yield on the 30-year
Treasury bond fell from 6.06% on
(1.) Source: Standard and Poor's Micropal. The Dow Jones Industrial Average is
a price-weighted index based on the average market price of 30 blue chip
stocks. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S.
based common stocks listed on the Nasdaq Stock Market(R). The Index is
market-value weighted and includes over 4,400 companies (as of 9/30/00). The
S&P 500 Composite Index consists of 500 domestic stocks, comprising four
broad sectors: industrials, utilities, financials and transportation. The S&P
500 serves as the standard for measuring large-cap U.S. stock market
performance. Since some industries are characterized by companies of
relatively small stock capitalization, the index is not composed of the 500
largest U.S., publicly traded companies. Indexes are unmanaged and do not
include reinvested dividends.
2
<PAGE>
September 30, 1999, to 5.89% on September 30, 2000, after climbing to a high of
6.75% on January 20, 2000. Bond yields and prices move in an inverse
relationship, so that as yields fall, the dollar value of bonds increase,
meaning bond funds in general appreciated in value. The bond market was also
bolstered by the U.S. Treasury Department's announcement in January 2000 that
due to growing budget surpluses, it would cut back on issuance and buy back the
remaining supply of 30-year bonds. This created a huge demand for long-term
Treasuries and led to an inverted yield curve, where 30-year bond yields fell
below those of intermediate- and short-term Treasuries. In mid-September, the
yield curve shifted, when the 30-year bond yield moved higher than the 10-year
note's yield, due to heavy issuance of new corporate bonds, a limited supply of
30-year Treasury bonds and the belief that the Fed was finished hiking interest
rates.
Except for a 0.1% increase in March, the Conference Board's Index of leading
U.S. economic indicators has been flat to declining since January.(2) This
confirms that economic performance was less robust in the latter half of the
reporting period. Looking forward, we anticipate continued growth but not at the
breakneck pace set during the fourth quarter of 1999. If, as a result, the
economy successfully accomplishes a desired soft landing, interest
rate-sensitive and cyclical stocks, such as retail and consumer staples, may
begin to experience less volatility.
Recent market volatility reinforces the importance of investing for the long
term, so daily market fluctuations and short-term volatility have minimal impact
on overall investment goals. We encourage you to discuss your financial goals
with your investment representative, who can address concerns about volatility
and help you diversify your investments and stay focused on the long term.
As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.
Sincerely,
/s/Charles B. Johnson
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
(2.) Source: Conference Board Press Release, "U.S. Leading Economic Indicators
Dip Slightly," 8/30/00; www.conference-board.org.
3
<PAGE>
FRANKLIN DYNATECH FUND
[FUND CATEGORY PYRAMID GRAPHIC]
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin DynaTech Fund seeks capital appreciation by
investing primarily in companies emphasizing technological development.
--------------------------------------------------------------------------------
During the year under review, U.S. economic growth, as measured by real gross
domestic product (GDP), peaked at a surprisingly strong 8.3% annualized growth
rate during the final quarter of 1999, followed by slowing, more sustainable
growth that averaged an annualized 5.2% over the first half of 2000.(1) The
robust growth during the first half of this year was tempered somewhat by
increased interest rates and higher energy costs. Despite the slowing growth
trend, consumer confidence remained strong, unemployment hovered near 30-year
lows, and technology continued to drive productivity increases.
Technology stocks posted remarkable performance figures during the first half of
the reporting period, until the threat of inflation, increased interest rates
and investor speculation took their toll on many of them. Since the technology
correction during the spring, the sector's issues have been very volatile, and
toward the end of third quarter 2000 many stocks were suffering under the weight
of earnings warnings. In this challenging environment, Franklin DynaTech Fund -
Class A shares produced a +25.57% cumulative total return for the 12 months
ended September 30, 2000. By comparison, the Fund's benchmarks, the Standard &
Poor's 500 (S&P 500) Composite Index and the Hambrecht & Quist (H&Q) Technology
Index, posted 13.28% and 62.82% total returns during the same time.(2)
(1.) Source: Bureau of Economic Analysis, 9/28/00.
(2.) Cumulative total return measures the change in value of an investment,
assuming reinvestment of any distributions, and does not include sales charges.
Source for S&P 500: Standard & Poor's Micropal. The S&P 500 Composite Index
consists of 500 domestic stocks, comprising four broad sectors: industrials,
utilities, financials and transportation. The S&P 500 serves as the standard
for measuring large-cap U.S. stock market performance. Since some industries
are characterized by companies of relatively small stock capitalization, the
index is not composed of the 500 largest U.S., publicly traded companies.
Source for H&Q Technology Index: Chase Hambrecht & Quist. The Hambrecht & Quist
Technology Index is a market-capitalization weighted index composed of the
publicly traded stocks of approximately 300 technology companies. "Technology"
is broadly defined to include companies in electronics, services and related
technology industries.
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 44.
4
<PAGE>
Corporate spending on technology, estimated to grow by more than 25% in 2000,
fueled solid earnings growth for many companies in the sector.(3) Over the past
five years, the technology sector of the S&P 500 Index has had an earnings
growth rate more than twice that of the rest of the index (20% vs. 9%).(4) As
growth in Internet traffic, e-commerce, wireless data, supply-chain management,
and more robust software applications become increasingly important drivers of
our economy, companies are likely to continue to spend on the latest information
technology advancements to remain productive and competitive. Going forward, we
expect technology spending to remain strong, although perhaps at more
sustainable levels. Earnings growth for the average technology company in the
S&P 500 is expected to be better than 60% from 1999-2000, while growth is
expected to moderate to a healthier 30%+ growth rate into 2001.(5)
During the 12 months under review, we actively purchased stocks of several
companies that fit our investment criteria -- leading companies that we believe
offer long-term growth potential. Many of our new positions were from the
technology sector, where the Fund held the majority of its equity investments on
September 30, 2000. We added three holdings that focus on data storage and
information management, an area that we feel holds excellent long-term
prospects: EMC, McData, and Veritas Software. EMC, a leading provider of data
storage solutions, is benefiting from the growth of information and the need for
corporations to access, sift and use the vast quantities of data made available
to them. McData, EMC's recent spin-off, focuses on providing director-level
switches that act as the "backbone" of a relatively new, rapidly growing storage
architecture known as storage area networks (SAN). Veritas Software, the leading
provider of storage management software, is also benefiting from the growth of
digital information. Other technology companies added to the portfolio included
Cobalt Networks, which provides a new class of hardware known as server
appliances; Nortel Networks, a leading optical subsystems producer; Speechworks,
specializing in voice-recognition software; and Oracle, the world's leading
provider of database software.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Packaged Software ........................................... 10.3%
Semiconductors .............................................. 6.0%
Telecommunications
Equipment ................................................... 4.8%
Computer Communications ..................................... 3.9%
Computer Processing
Hardware .................................................... 3.9%
Biotechnology ............................................... 3.3%
Major Pharmaceuticals ....................................... 3.1%
Electronic Equipment
& Instruments ............................................... 2.7%
Internet Software & Services ................................ 2.6%
Communication ............................................... 2.0%
Computer Peripherals ........................................ 1.3%
Electronics & Appliances .................................... 1.1%
Medical Specialties ......................................... 1.1%
Electronic Production
Equipment ................................................... 0.7%
Aerospace & Defense ......................................... 0.6%
Cable & Satellite TV ........................................ 0.5%
Information Technology
Services .................................................... 0.5%
Media Conglomerates ......................................... 0.5%
Other Sectors ............................................... 3.2%
Short-Term Investments
& Other Net Assets .......................................... 47.9%
</TABLE>
(3.) Source: Primark Decision Economics Corp.
(4.) Source: Baseline.
(5.) Source: Baseline/First Call Corp.
5
<PAGE>
TOP 10 HOLDINGS
Franklin DynaTech Fund
9/30/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
<S> <C>
Intel Corp. ....................................................... 5.0%
Semiconductors
Check Point Software
Technologies Ltd. ................................................. 3.4%
Packaged Software
Cisco Systems Inc. ................................................ 3.3%
Computer Communications
i2 Technology ..................................................... 3.2%
Packaged Software
Microsoft Corp. ................................................... 2.6%
Packaged Software
Genentech Inc. .................................................... 2.4%
Biotechnology
JDS Uniphase Corp. ................................................ 2.0%
Electronic Equipment
& Instruments
Pfizer Inc. ....................................................... 1.9%
Major Pharmaceuticals
Motorola Inc. ..................................................... 1.7%
Telecommunications
Equipment
Inktomi Corp. ..................................................... 1.3%
Internet Software & Services
</TABLE>
Other portfolio additions during the reporting period included stocks of health
technology and communications companies. For example, we added Aclara
Biosciences, a leading manufacturer of microfluidic devices used in genetic/DNA
analysis, and Sprint, whose assets include its wireless network and Internet
backbone. We believe both areas represent growth industries with favorable
long-term prospects.
We eliminated a few positions during the reporting period for a variety of
reasons. Within the technology sector, we sold Marvell Technologies and Nuance
Communications, two stocks purchased at their initial public offerings (IPOs, or
a company's first public stock sale) which subsequently traded to what we
assessed as extremely high valuations. In the communications sector, we sold our
holdings in AT&T and Sprint PCS. AT&T was sold due to our uncertainty
surrounding the company's long distance business, while we believed Sprint PCS
appreciated to the point where it had become fully valued.
As you can see, we were very busy putting the Fund's cash reserves to work this
year; however, as new money entered the Fund at a fast rate, our cash reserves
remained substantial, at 47.9% of total net assets on September 30, 2000. The
advantageous cash position should continue providing enough flexibility to add
to existing positions and make new investments for your portfolio as we seek to
take advantage of the market volatility which has been especially apparent in
"new economy" stocks lately.
6
<PAGE>
Looking forward, we believe the world will benefit further from advancements in
technology, and that technology infrastructure and services spending, Internet
usage, e-commerce, wireless communications and software development will
continue to grow at a rapid pace. However, given the fact that valuations for
many technology stocks remain high by historic standards, and that the rate of
growth for these companies will continue to fluctuate, we expect ongoing market
volatility.
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
/s/ Robert R. Dean, CFA
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
This discussion reflects our views, opinions and portfolio holdings as of
September 30, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
7
<PAGE>
FRANKLIN DYNATECH FUND
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 9/30/00
One-year and aggregate total returns represent the change in value of an
investment for the period indicated and do not include sales charges.
Distributions will vary based on earnings of the Fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of operating expenses for each class. Past distributions are not
indicative of future trends. All total returns include reinvested distributions
at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +25.57%
Net Asset Value (NAV) $28.60 (9/30/00) $23.11 (9/30/99)
Change in NAV +$5.49
Distributions (10/1/99 - 9/30/00) Dividend Income $0.3694
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
Aggregate Total Return +1.46%
Net Asset Value (NAV) $28.46 (9/30/00) $28.05 (2/1/00)
Change in NAV +$0.41
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
One-Year Total Return +24.65%
Net Asset Value (NAV) $27.95 (9/30/00) $22.64 (9/30/99)
Change in NAV +$5.31
Distributions (10/1/99 - 9/30/00) Dividend Income $0.2391
</TABLE>
Past performance does not guarantee future results.
8
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (1/1/68)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +25.57% +159.77% +470.11% +2623.72%
Average Annual Total Return(2) +18.35% +19.61% +18.32% +10.42%
Value of $10,000 Investment(3) $11,835 $24,483 $53,755 $256,550
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (2/1/00)
<S> <C>
Cumulative Total Return(1) +1.46%
Aggregate Total Return(2) -2.54%
Value of $10,000 Investment(3) $9,746
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (9/16/96)
<S> <C> <C> <C>
Cumulative Total Return(1) +24.65% +65.58% +128.27%
Average Annual Total Return(2) +22.40% +17.92% +22.37%
Value of $10,000 Investment(3) $12,240 $16,397 $22,596
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class. Since Class B shares have
existed for less than one year, aggregate total return for that class represents
total return since inception, including the maximum sales charge.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
9
<PAGE>
FRANKLIN DYNATECH FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged indexes
differ from the Fund in composition, do not pay management fees or expenses and
include reinvested dividends.
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS A
<S> <C>
1-Year +18.35%
5-Year +19.61%
10-Year +18.32%
Since Inception (1/1/68) +10.42%
</TABLE>
GRAPHIC MATERIAL (2)
This graph compares the performance of Franklin DynaTech Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the Hambrecht & Quist Technology Index from 10/1/90-9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN DYNATECH S&P 500 H&Q TECHNOLOGY
FUND - CLASS A INDEX
<S> <C> <C> <C>
10/01/1990 $9,422 $10,000 $10,000
10/31/1990 $9,339 $9,957 $9,546
11/30/1990 $9,812 $10,600 $10,467
12/31/1990 $10,059 $10,896 $11,291
01/31/1991 $11,071 $11,371 $13,052
02/28/1991 $11,797 $12,184 $14,159
03/31/1991 $11,869 $12,479 $14,751
04/30/1991 $11,926 $12,509 $14,779
05/31/1991 $12,567 $13,048 $15,372
06/30/1991 $11,755 $12,450 $13,899
07/31/1991 $12,353 $13,031 $14,609
08/31/1991 $12,738 $13,339 $15,017
09/30/1991 $12,382 $13,117 $14,316
10/31/1991 $12,538 $13,292 $14,958
11/30/1991 $12,296 $12,757 $14,411
12/31/1991 $13,623 $14,216 $16,411
01/31/1992 $13,940 $13,952 $17,695
02/29/1992 $14,013 $14,132 $18,659
03/31/1992 $13,464 $13,856 $17,343
04/30/1992 $13,464 $14,263 $16,953
05/31/1992 $13,363 $14,333 $16,824
06/30/1992 $13,176 $14,120 $15,652
07/31/1992 $13,551 $14,697 $16,466
08/31/1992 $13,219 $14,396 $15,730
09/30/1992 $13,291 $14,564 $16,433
10/31/1992 $13,392 $14,614 $17,379
11/30/1992 $13,825 $15,111 $18,613
12/31/1992 $14,187 $15,297 $19,477
01/31/1993 $14,394 $15,425 $21,099
02/28/1993 $14,231 $15,635 $20,378
03/31/1993 $14,512 $15,965 $20,693
04/30/1993 $14,217 $15,578 $19,466
05/31/1993 $14,926 $15,994 $21,497
06/30/1993 $14,734 $16,041 $21,222
07/31/1993 $14,438 $15,977 $20,003
08/31/1993 $15,015 $16,582 $21,282
09/30/1993 $15,207 $16,454 $21,671
10/31/1993 $15,266 $16,795 $22,042
11/30/1993 $15,044 $16,636 $22,366
12/31/1993 $15,241 $16,837 $22,867
01/31/1994 $15,622 $17,409 $24,278
02/28/1994 $15,575 $16,937 $25,079
03/31/1994 $15,145 $16,199 $23,707
04/30/1994 $14,907 $16,406 $23,098
05/31/1994 $15,114 $16,675 $23,165
06/30/1994 $14,557 $16,267 $21,687
07/31/1994 $15,018 $16,800 $22,496
08/31/1994 $15,924 $17,489 $24,810
09/30/1994 $15,654 $17,063 $24,731
10/31/1994 $16,306 $17,446 $26,996
11/30/1994 $16,004 $16,811 $26,764
12/31/1994 $16,035 $17,060 $27,463
01/31/1995 $16,181 $17,502 $27,062
02/28/1995 $16,617 $18,185 $29,408
03/31/1995 $16,990 $18,721 $30,755
04/30/1995 $17,685 $19,271 $33,059
05/31/1995 $18,203 $20,042 $34,242
06/30/1995 $19,627 $20,507 $38,365
07/31/1995 $20,517 $21,188 $41,867
08/31/1995 $20,290 $21,241 $42,349
09/30/1995 $20,679 $22,137 $43,361
10/31/1995 $21,083 $22,058 $43,968
11/30/1995 $20,792 $23,026 $43,427
12/31/1995 $20,225 $23,471 $41,065
01/31/1996 $20,241 $24,269 $41,673
02/29/1996 $20,956 $24,494 $43,760
03/31/1996 $20,541 $24,729 $41,857
04/30/1996 $22,221 $25,093 $47,641
05/31/1996 $23,019 $25,740 $48,361
06/30/1996 $22,287 $25,838 $44,835
07/31/1996 $20,956 $24,696 $40,226
08/31/1996 $21,722 $25,217 $42,660
09/30/1996 $23,335 $26,637 $47,591
10/31/1996 $23,767 $27,372 $46,911
11/30/1996 $26,046 $29,441 $52,442
12/31/1996 $26,048 $28,858 $51,031
01/31/1997 $27,983 $30,662 $56,496
02/28/1997 $26,408 $30,901 $51,881
03/31/1997 $25,740 $29,631 $48,638
04/30/1997 $26,887 $31,400 $50,438
05/31/1997 $28,394 $33,312 $58,029
06/30/1997 $28,651 $34,805 $58,545
07/31/1997 $31,443 $37,575 $67,965
08/31/1997 $30,878 $35,471 $68,162
09/30/1997 $31,648 $37,415 $70,957
10/31/1997 $30,090 $36,165 $63,379
11/30/1997 $30,415 $37,840 $62,719
12/31/1997 $29,857 $38,491 $59,834
01/31/1998 $30,881 $38,918 $63,670
02/28/1998 $32,252 $41,724 $71,240
03/31/1998 $32,399 $43,860 $72,444
04/30/1998 $33,020 $44,303 $75,262
05/31/1998 $31,850 $43,541 $69,768
06/30/1998 $33,404 $45,309 $74,163
07/31/1998 $33,569 $44,824 $73,229
08/31/1998 $30,497 $38,342 $57,594
09/30/1998 $32,618 $40,800 $65,928
10/31/1998 $33,514 $44,117 $71,486
11/30/1998 $35,580 $46,791 $79,986
12/31/1998 $38,021 $49,486 $93,064
01/31/1999 $40,982 $51,554 $105,795
02/28/1999 $39,094 $49,951 $94,073
03/31/1999 $40,371 $51,949 $101,354
04/30/1999 $40,482 $53,960 $105,175
05/31/1999 $39,816 $52,686 $106,616
06/30/1999 $41,852 $55,610 $120,028
07/31/1999 $41,815 $53,875 $118,384
08/31/1999 $42,981 $53,606 $124,149
09/30/1999 $42,778 $52,137 $126,979
10/31/1999 $44,518 $55,437 $140,300
11/30/1999 $47,146 $56,563 $164,010
12/31/1999 $52,159 $59,894 $207,834
01/31/2000 $52,685 $56,887 $198,835
02/29/2000 $57,324 $55,812 $254,150
03/31/2000 $57,906 $61,271 $234,454
04/30/2000 $54,770 $59,426 $209,133
05/31/2000 $52,140 $58,208 $183,870
06/30/2000 $55,352 $59,640 $210,567
07/31/2000 $54,375 $58,710 $197,091
08/31/2000 $58,320 $62,356 $231,818
09/30/2000 $53,755 $59,063 $206,713
</TABLE>
AGGREGATE TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS B
<S> <C>
Since Inception (2/1/00) -2.54%
</TABLE>
GRAPHIC MATERIAL (3)
This graph compares the performance of Franklin DynaTech Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the Hambrecht & Quist Technology Index from 2/1/00-9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN DYNATECH S&P 500 H&Q TECHNOLOGY
FUND - CLASS B INDEX
<S> <C> <C> <C>
02/01/2000 $10,000 $10,000 $10,000
02/29/2000 $10,870 $9,811 $12,782
03/31/2000 $10,973 $10,771 $11,791
04/30/2000 $10,374 $10,446 $10,518
05/31/2000 $9,868 $10,232 $9,247
06/30/2000 $10,471 $10,484 $10,590
07/31/2000 $10,278 $10,320 $9,912
08/31/2000 $11,020 $10,961 $11,659
09/30/2000 $9,746 $10,382 $10,396
</TABLE>
Past performance does not guarantee future results.
10
<PAGE>
GRAPHIC MATERIAL (4)
This graph compares the performance of Franklin DynaTech Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the Hambrecht & Quist Technology Index from 9/16/96-9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN DYNATECH S&P 500 H&Q TECHNOLOGY
FUND - CLASS C INDEX
<S> <C> <C> <C>
09/16/1996 $9,899 $10,000 $10,000
09/30/1996 $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
01/31/1997 $12,155 $11,814 $12,511
02/28/1997 $11,461 $11,906 $11,489
03/31/1997 $11,163 $11,417 $10,771
04/30/1997 $11,648 $12,098 $11,169
05/31/1997 $12,289 $12,835 $12,850
06/30/1997 $12,386 $13,410 $12,965
07/31/1997 $13,587 $14,478 $15,051
08/31/1997 $13,326 $13,667 $15,094
09/30/1997 $13,646 $14,416 $15,713
10/31/1997 $12,968 $13,934 $14,035
11/30/1997 $13,095 $14,579 $13,889
12/31/1997 $12,843 $14,830 $13,250
01/31/1998 $13,256 $14,995 $14,099
02/28/1998 $13,836 $16,076 $15,776
03/31/1998 $13,892 $16,899 $16,043
04/30/1998 $14,154 $17,070 $16,667
05/31/1998 $13,638 $16,776 $15,450
06/30/1998 $14,297 $17,457 $16,423
07/31/1998 $14,352 $17,270 $16,216
08/31/1998 $13,034 $14,773 $12,754
09/30/1998 $13,923 $15,720 $14,600
10/31/1998 $14,297 $16,998 $15,830
11/30/1998 $15,170 $18,028 $17,713
12/31/1998 $16,198 $19,067 $20,609
01/31/1999 $17,447 $19,864 $23,428
02/28/1999 $16,638 $19,246 $20,832
03/31/1999 $17,167 $20,016 $22,445
04/30/1999 $17,207 $20,790 $23,291
05/31/1999 $16,919 $20,300 $23,610
06/30/1999 $17,767 $21,426 $26,580
07/31/1999 $17,743 $20,758 $26,216
08/31/1999 $18,224 $20,654 $27,492
09/30/1999 $18,128 $20,088 $28,119
10/31/1999 $18,848 $21,360 $31,069
11/30/1999 $19,953 $21,793 $36,320
12/31/1999 $22,062 $23,077 $46,024
01/31/2000 $22,272 $21,918 $44,031
02/29/2000 $24,221 $21,504 $56,281
03/31/2000 $24,447 $23,607 $51,919
04/30/2000 $23,113 $22,897 $46,312
05/31/2000 $21,981 $22,427 $40,717
06/30/2000 $23,331 $22,979 $46,630
07/31/2000 $22,903 $22,620 $43,645
08/31/2000 $24,544 $24,025 $51,336
09/30/2000 $22,596 $22,757 $45,776
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS C
<S> <C>
1-Year +22.40%
3-Year +17.92%
Since Inception (9/16/96) +22.37%
</TABLE>
*Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for
measuring large-cap U.S. stock market performance. Since some industries are
characterized by companies of relatively small stock capitalization, the
index is not composed of the 500 largest U.S., publicly traded companies.
**Source: Chase Hambrecht & Quist. The Hambrecht & Quist Technology Index is
a market-capitalization weighted index composed of the publicly traded stocks
of approximately 300 technology companies. "Technology" is broadly defined to
include companies in electronics, services and related technology industries.
Past performance does not guarantee future results.
11
<PAGE>
FRANKLIN GROWTH FUND
[FUND CATEGORY PYRAMID GRAPHIC]
PORTFOLIO BREAKDOWN
Franklin Growth Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Electronic Technology 20.9%
Health Technology 19.0%
Producer Manufacturing 10.2%
Transportation 8.0%
Consumer Services 4.9%
Technology Services 4.8%
Process Industries 4.7%
Commercial Services 3.4%
Consumer Non-Durables 1.9%
Utilities 1.7%
Energy Minerals 1.5%
Industrial Services 1.4%
Consumer Durables 1.4%
Health Services 1.0%
Retail Trade 0.3%
Finance 0.1%
Short-Term Investments
& Other Net Assets 14.8%
</TABLE>
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Growth Fund seeks capital appreciation by investing
primarily in common stocks or convertible securities believed to offer favorable
possibilities for capital appreciation.
--------------------------------------------------------------------------------
During the year under review, the U.S. continued to experience strong economic
growth. For example, first quarter 2000 annualized gross domestic product (GDP)
increased 4.8%, while GDP rose a vigorous 5.6% in the second quarter.
Unemployment fell from 4.2% to 3.9%, while inflation, as measured by the
Consumer Price Index, increased from 2.6% to 3.5% with U.S. crude oil prices up
more than 25%. Given these conditions, the Federal Open Market Committee (FOMC)
raised the federal funds target rate four times during the reporting period,
with the last increase occurring in May, when they brought it to 6.5%. The
FOMC's decision to hold short-term rates steady at their June and August
meetings, combined with slower GDP growth in the third quarter of 2000,
suggested that the economy could be feeling the impact of the rate increases and
slowing to a more sustainable pace. Within this environment, Franklin Growth
Fund's Class A shares posted a +13.53% one-year cumulative total return for the
period ended September 30, 2000, as shown in the Performance Summary on page 14,
compared with 4.40% for the Dow Jones Industrial Average (the Dow) and 13.28%
for the Standard & Poor's 500 (S&P 500) Composite Index.(1)
Despite the steadily advancing economic climate, the average stock was not
nearly as strong. Equity markets continued what began in early 1998 -- fewer
strongly performing stocks and more stocks declining in value. In our
estimation, many stocks' prices became more reasonable during the reporting
period, rekindling our interest in the markets. During the year under review,
the Fund's equity holdings increased from about 69% of total net assets at the
beginning of the period to approximately 85% at the end.
During the period, we attempted to take advantage of what we viewed as
exceptional value in several market sectors, and we initiated or added to
several positions. New to
(1.) Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 50.
12
<PAGE>
the Fund are General Dynamics, Northrop Grumman, Robert Half International and
Tootsie Roll. We also added to existing Fund holdings AMR, Boeing,
Lockheed-Martin and Raytheon, among others.
Declining sector strength characterized the overall equity markets during the 12
months under review. Therefore, we did not significantly change the Fund's
sector allocations. We maintained significant weightings in technology-related
companies, as they presented attractive investment opportunities, but such
companies face special risks. It is important to note that technology company
securities historically have been more volatile than other securities,
especially over the short term. However, the Fund had a number of outstanding
individual stock performers. Some of the Fund's largest percentage gainers for
the year under review were Immunex (200%), Sun Microsystems (151%), Anadarko
Petroleum (118%) and Cisco Systems (61%).
By the end of September 2000, the price-to-earnings ratios of the Dow, S&P 500
and S&P Industrials were 21.22, 28.64 and 31.87, respectively. Although the
indexes were still close to historical highs, each of these ratios is lower than
it was a year earlier. Thus, many stocks seemed reasonably priced, with some of
them outright cheap. Looking forward, we are optimistic about Franklin Growth
Fund's prospects. Our long-term investment outlook is always positive. Although
the past few months of the period were not particularly strong ones, such times
create opportunities, and we have been in position to try to take advantage of
them. Thinking in terms of the big picture -- an improving world market and
increasing productivity -- one cannot help but be very optimistic about the
future.
/s/ V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
TOP 10 HOLDINGS
Franklin Growth Fund
9/30/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Sun Microsystems Inc. 3.6%
Electronic Technology
Pfizer Inc. 3.3%
Health Technology
Schering-Plough Corp. 3.2%
Health Technology
Tyco International Ltd. 2.9%
Producer Manufacturing
Cisco Systems Inc. 2.9%
Electronic Technology
Time Warner Inc. 2.7%
Consumer Services
Computer Sciences Corp. 2.6%
Technology Services
International Business
Machines Corp. 2.4%
Electronic Technology
Amgen Inc. 2.2%
Health Technology
Automatic Data
Processing Inc. 2.1%
Technology Services
</TABLE>
This discussion reflects our views, opinions and portfolio holdings as of
September 30, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
13
<PAGE>
FRANKLIN GROWTH FUND
PERFORMANCE SUMMARY AS OF 9/30/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available
to a limited class of investors.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +13.53%
Net Asset Value (NAV) $36.91 (9/30/00) $33.21 (9/30/99)
Change in NAV +$3.70
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4543
Long-Term Capital Gain $0.2637
---------------------------------
Total $0.7180
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
One-Year Total Return +12.68%
Net Asset Value (NAV) $36.54 (9/30/00) $33.03 (9/30/99)
Change in NAV +$3.51
Distributions (10/1/99 - 9/30/00) Dividend Income $0.3521
Long-Term Capital Gain $0.2637
---------------------------------
Total $0.6158
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
One-Year Total Return +12.71%
Net Asset Value (NAV) $36.19 (9/30/00) $32.58 (9/30/99)
Change in NAV +$3.61
Distributions (10/1/99 - 9/30/00) Dividend Income $0.2189
Long-Term Capital Gain $0.2637
---------------------------------
Total $0.4826
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C> <C>
One-Year Total Return +13.84%
Net Asset Value (NAV) $36.99 (9/30/00) $33.27 (9/30/99)
Change in NAV +$3.72
Distributions (10/1/99 - 9/30/00) Dividend Income $0.5340
Long-Term Capital Gain $0.2637
---------------------------------
Total $0.7977
</TABLE>
Franklin Growth Fund paid distributions derived from long-term capital gains of
26.37 cents ($0.2637) per share in December 1999. The Fund hereby designates
such distributions as capital gain dividends per Internal Revenue Code Section
852 (b)(3).
Past performance does not guarantee future results.
14
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/31/48)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +13.53% +110.65% +329.40% +28,981.19%
Average Annual Total Return(2) +6.99% +14.70% +15.01% +11.29%
Value of $10,000 Investment(3) $10,699 $19,856 $40,479 $2,744,283
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +12.68% +18.34%
Average Annual Total Return(2) +8.68% +7.97%
Value of $10,000 Investment(3) $10,868 $11,434
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +12.71% +102.83% +132.69%
Average Annual Total Return(2) +10.59% +14.96% +16.65%
Value of $10,000 Investment(3) $11,059 $20,076 $23,036
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR (3/31/48)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +13.84% +114.24% +336.71% +29,475.68%
Average Annual Total Return(2) +13.84% +16.46% +15.88% +11.45%
Value of $10,000 Investment(3) $11,384 $21,424 $43,671 $2,957,568
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges nor Rule 12b-1 plans. Performance quotations for this
class reflect the following methods of calculation: (a) For periods prior to
1/2/97, a restated figure is used based upon the Fund's Class A performance,
excluding the effect of Class A's maximum initial sales charge and including the
effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an
actual Advisor Class figure is used reflecting a deduction of all charges and
fees applicable to that class. Since 1/2/97 (commencement of sales), the
cumulative and average annual total returns of Advisor Class shares were +71.39%
and +15.46%.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
15
<PAGE>
FRANKLIN GROWTH FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the Fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +6.99%
5-Year +14.70%
10-Year +15.01%
Since Inception (3/31/48) +11.29%
</TABLE>
GRAPHIC MATERIAL (5)
This graph compares the performance of Franklin Growth Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
from 10/1/90-9/30/00.
<TABLE>
<CAPTION>
DATE S&P 500
---- FRANKLIN GROWTH -------
FUND - CLASS A
--------------
<S> <C> <C>
10/01/1990 $9,427 $10,000
10/31/1990 $9,427 $9,957
11/30/1990 $9,982 $10,600
12/31/1990 $10,342 $10,896
01/31/1991 $10,947 $11,371
02/28/1991 $11,705 $12,184
03/31/1991 $11,804 $12,479
04/30/1991 $11,868 $12,509
05/31/1991 $12,301 $13,048
06/30/1991 $11,777 $12,450
07/31/1991 $12,183 $13,031
08/31/1991 $12,346 $13,339
09/30/1991 $12,138 $13,117
10/31/1991 $12,400 $13,292
11/30/1991 $11,985 $12,757
12/31/1991 $13,109 $14,216
01/31/1992 $12,978 $13,952
02/29/1992 $13,203 $14,132
03/31/1992 $12,875 $13,856
04/30/1992 $12,931 $14,263
05/31/1992 $12,856 $14,333
06/30/1992 $12,593 $14,120
07/31/1992 $12,903 $14,697
08/31/1992 $12,622 $14,396
09/30/1992 $12,847 $14,564
10/31/1992 $13,006 $14,614
11/30/1992 $13,315 $15,111
12/31/1992 $13,493 $15,297
01/31/1993 $13,349 $15,425
02/28/1993 $13,168 $15,635
03/31/1993 $13,369 $15,965
04/30/1993 $13,407 $15,578
05/31/1993 $13,741 $15,994
06/30/1993 $13,455 $16,041
07/31/1993 $13,292 $15,977
08/31/1993 $13,751 $16,582
09/30/1993 $13,607 $16,454
10/31/1993 $14,027 $16,795
11/30/1993 $14,056 $16,636
12/31/1993 $14,451 $16,837
01/31/1994 $14,657 $17,409
02/28/1994 $14,216 $16,937
03/31/1994 $13,511 $16,199
04/30/1994 $13,795 $16,406
05/31/1994 $14,030 $16,675
06/30/1994 $13,922 $16,267
07/31/1994 $14,314 $16,800
08/31/1994 $15,049 $17,489
09/30/1994 $14,657 $17,063
10/31/1994 $14,961 $17,446
11/30/1994 $14,569 $16,811
12/31/1994 $14,873 $17,060
01/31/1995 $15,101 $17,502
02/28/1995 $15,716 $18,185
03/31/1995 $16,271 $18,721
04/30/1995 $16,737 $19,271
05/31/1995 $17,104 $20,042
06/30/1995 $17,768 $20,507
07/31/1995 $18,651 $21,188
08/31/1995 $18,621 $21,241
09/30/1995 $19,216 $22,137
10/31/1995 $19,325 $22,058
11/30/1995 $20,416 $23,026
12/31/1995 $20,585 $23,471
01/31/1996 $21,179 $24,269
02/29/1996 $21,632 $24,494
03/31/1996 $21,713 $24,729
04/30/1996 $22,156 $25,093
05/31/1996 $22,579 $25,740
06/30/1996 $22,418 $25,838
07/31/1996 $21,260 $24,696
08/31/1996 $21,854 $25,217
09/30/1996 $23,002 $26,637
10/31/1996 $23,062 $27,372
11/30/1996 $24,513 $29,441
12/31/1996 $24,019 $28,858
01/31/1997 $24,624 $30,662
02/28/1997 $24,675 $30,901
03/31/1997 $24,060 $29,631
04/30/1997 $24,921 $31,400
05/31/1997 $26,295 $33,312
06/30/1997 $26,787 $34,805
07/31/1997 $27,853 $37,575
08/31/1997 $26,921 $35,471
09/30/1997 $27,771 $37,415
10/31/1997 $27,536 $36,165
11/30/1997 $28,161 $37,840
12/31/1997 $28,488 $38,491
01/31/1998 $28,782 $38,918
02/28/1998 $29,992 $41,724
03/31/1998 $30,644 $43,860
04/30/1998 $31,054 $44,303
05/31/1998 $30,612 $43,541
06/30/1998 $31,191 $45,309
07/31/1998 $31,075 $44,824
08/31/1998 $28,456 $38,342
09/30/1998 $30,055 $40,800
10/31/1998 $31,906 $44,117
11/30/1998 $33,052 $46,791
12/31/1998 $33,765 $49,486
01/31/1999 $34,355 $51,554
02/28/1999 $33,990 $49,951
03/31/1999 $34,913 $51,949
04/30/1999 $36,051 $53,960
05/31/1999 $35,611 $52,686
06/30/1999 $37,103 $55,610
07/31/1999 $36,502 $53,875
08/31/1999 $36,653 $53,606
09/30/1999 $35,654 $52,137
10/31/1999 $36,234 $55,437
11/30/1999 $36,695 $56,563
12/31/1999 $37,880 $59,894
01/31/2000 $37,562 $56,887
02/29/2000 $36,684 $55,812
03/31/2000 $39,876 $61,271
04/30/2000 $40,347 $59,426
05/31/2000 $40,512 $58,208
06/30/2000 $41,082 $59,640
07/31/2000 $40,446 $58,710
08/31/2000 $42,223 $62,356
09/30/2000 $40,479 $59,063
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
<S> <C>
1-Year +8.68%
Since Inception (1/1/99) +7.97%
</TABLE>
GRAPHIC MATERIAL (6)
This graph compares the performance of Franklin Growth Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
from 1/1/99-9/30/00.
<TABLE>
<CAPTION>
DATE S&P 500
---- FRANKLIN GROWTH -------
FUND - CLASS B
--------------
<S> <C> <C>
01/01/1999 $10,000 $10,000
01/30/1999 $10,172 $10,418
02/28/1999 $10,057 $10,094
03/31/1999 $10,324 $10,498
04/30/1999 $10,655 $10,904
05/31/1999 $10,515 $10,647
06/30/1999 $10,951 $11,238
07/31/1999 $10,766 $10,887
08/31/1999 $10,804 $10,833
09/30/1999 $10,502 $10,536
10/31/1999 $10,668 $11,203
11/30/1999 $10,792 $11,430
12/31/1999 $11,134 $12,103
01/31/2000 $11,031 $11,496
02/29/2000 $10,771 $11,278
03/31/2000 $11,698 $12,381
04/30/2000 $11,831 $12,009
05/31/2000 $11,873 $11,763
06/30/2000 $12,031 $12,052
07/31/2000 $11,837 $11,864
08/31/2000 $12,352 $12,601
09/30/2000 $11,434 $11,935
</TABLE>
Past performance does not guarantee future results.
16
<PAGE>
GRAPHIC MATERIAL (7)
This graph compares the performance of Franklin Growth Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
from 5/1/95-9/30/00.
<TABLE>
<CAPTION>
FRANKLIN GROWTH
DATE FUND - CLASS C S&P 500
---- --------------- -------
<S> <C> <C>
05/01/1995 $9,900 $10,000
05/31/1995 $10,135 $10,400
06/30/1995 $10,517 $10,641
07/31/1995 $11,040 $10,995
08/31/1995 $11,011 $11,022
09/30/1995 $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
01/31/1996 $12,482 $12,593
02/29/1996 $12,744 $12,710
03/31/1996 $12,786 $12,832
04/30/1996 $13,037 $13,021
05/31/1996 $13,281 $13,357
06/30/1996 $13,180 $13,407
07/31/1996 $12,488 $12,815
08/31/1996 $12,828 $13,085
09/30/1996 $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
01/31/1997 $14,407 $15,911
02/28/1997 $14,431 $16,035
03/31/1997 $14,061 $15,376
04/30/1997 $14,558 $16,294
05/31/1997 $15,351 $17,286
06/30/1997 $15,624 $18,060
07/31/1997 $16,242 $19,498
08/31/1997 $15,678 $18,406
09/30/1997 $16,169 $19,415
10/31/1997 $16,024 $18,766
11/30/1997 $16,375 $19,635
12/31/1997 $16,554 $19,973
01/31/1998 $16,715 $20,195
02/28/1998 $17,407 $21,651
03/31/1998 $17,771 $22,759
04/30/1998 $18,000 $22,989
05/31/1998 $17,734 $22,594
06/30/1998 $18,055 $23,511
07/31/1998 $17,975 $23,259
08/31/1998 $16,455 $19,896
09/30/1998 $17,363 $21,171
10/31/1998 $18,426 $22,893
11/30/1998 $19,068 $24,280
12/31/1998 $19,473 $25,678
01/31/1999 $19,799 $26,752
02/28/1999 $19,573 $25,920
03/31/1999 $20,087 $26,956
04/30/1999 $20,734 $28,000
05/31/1999 $20,470 $27,339
06/30/1999 $21,317 $28,856
07/31/1999 $20,953 $27,956
08/31/1999 $21,028 $27,816
09/30/1999 $20,439 $27,054
10/31/1999 $20,759 $28,766
11/30/1999 $21,010 $29,350
12/31/1999 $21,680 $31,079
01/31/2000 $21,477 $29,519
02/29/2000 $20,967 $28,961
03/31/2000 $22,775 $31,794
04/30/2000 $23,023 $30,837
05/31/2000 $23,106 $30,204
06/30/2000 $23,418 $30,947
07/31/2000 $23,043 $30,465
08/31/2000 $24,042 $32,356
09/30/2000 $23,036 $30,648
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C>
1-Year +10.59%
5-Year +14.96%
Since Inception (5/1/95) +16.65%
</TABLE>
GRAPHIC MATERIAL (8)
This graph compares the performance of Franklin Growth Fund - Advisor Class,
tracking the growth in value of a $10,000 investment, to that of the S&P 500
from 10/1/90-9/30/00.
<TABLE>
<CAPTION>
FRANKLIN GROWTH
FUND - ADVISOR
DATE CLASS S&P 500
---- --------------- -------
<S> <C> <C>
10/01/1990 $10,000 $10,000
10/31/1990 $10,000 $9,957
11/30/1990 $10,589 $10,600
12/31/1990 $10,971 $10,896
01/31/1991 $11,613 $11,371
02/28/1991 $12,412 $12,184
03/31/1991 $12,517 $12,479
04/30/1991 $12,589 $12,509
05/31/1991 $13,049 $13,048
06/30/1991 $12,489 $12,450
07/31/1991 $12,924 $13,031
08/31/1991 $13,097 $13,339
09/30/1991 $12,876 $13,117
10/31/1991 $13,154 $13,292
11/30/1991 $12,714 $12,757
12/31/1991 $13,902 $14,216
01/31/1992 $13,767 $13,952
02/29/1992 $14,006 $14,132
03/31/1992 $13,658 $13,856
04/30/1992 $13,718 $14,263
05/31/1992 $13,638 $14,333
06/30/1992 $13,359 $14,120
07/31/1992 $13,688 $14,697
08/31/1992 $13,389 $14,396
09/30/1992 $13,628 $14,564
10/31/1992 $13,797 $14,614
11/30/1992 $14,125 $15,111
12/31/1992 $14,313 $15,297
01/31/1993 $14,162 $15,425
02/28/1993 $13,969 $15,635
03/31/1993 $14,182 $15,965
04/30/1993 $14,222 $15,578
05/31/1993 $14,577 $15,994
06/30/1993 $14,273 $16,041
07/31/1993 $14,101 $15,977
08/31/1993 $14,587 $16,582
09/30/1993 $14,435 $16,454
10/31/1993 $14,881 $16,795
11/30/1993 $14,911 $16,636
12/31/1993 $15,330 $16,837
01/31/1994 $15,548 $17,409
02/28/1994 $15,081 $16,937
03/31/1994 $14,332 $16,199
04/30/1994 $14,634 $16,406
05/31/1994 $14,883 $16,675
06/30/1994 $14,769 $16,267
07/31/1994 $15,185 $16,800
08/31/1994 $15,964 $17,489
09/30/1994 $15,548 $17,063
10/31/1994 $15,871 $17,446
11/30/1994 $15,455 $16,811
12/31/1994 $15,778 $17,060
01/31/1995 $16,020 $17,502
02/28/1995 $16,672 $18,185
03/31/1995 $17,261 $18,721
04/30/1995 $17,755 $19,271
05/31/1995 $18,144 $20,042
06/30/1995 $18,849 $20,507
07/31/1995 $19,785 $21,188
08/31/1995 $19,754 $21,241
09/30/1995 $20,385 $22,137
10/31/1995 $20,501 $22,058
11/30/1995 $21,658 $23,026
12/31/1995 $21,837 $23,471
01/31/1996 $22,467 $24,269
02/29/1996 $22,948 $24,494
03/31/1996 $23,034 $24,729
04/30/1996 $23,504 $25,093
05/31/1996 $23,952 $25,740
06/30/1996 $23,782 $25,838
07/31/1996 $22,553 $24,696
08/31/1996 $23,183 $25,217
09/30/1996 $24,401 $26,637
10/31/1996 $24,465 $27,372
11/30/1996 $26,004 $29,441
12/31/1996 $25,480 $28,858
01/31/1997 $26,122 $30,662
02/28/1997 $26,187 $30,901
03/31/1997 $25,546 $29,631
04/30/1997 $26,459 $31,400
05/31/1997 $27,916 $33,312
06/30/1997 $28,438 $34,805
07/31/1997 $29,580 $37,575
08/31/1997 $28,591 $35,471
09/30/1997 $29,504 $37,415
10/31/1997 $29,254 $36,165
11/30/1997 $29,939 $37,840
12/31/1997 $30,283 $38,491
01/31/1998 $30,607 $38,918
02/28/1998 $31,893 $41,724
03/31/1998 $32,597 $43,860
04/30/1998 $33,033 $44,303
05/31/1998 $32,575 $43,541
06/30/1998 $33,189 $45,309
07/31/1998 $33,078 $44,824
08/31/1998 $30,294 $38,342
09/30/1998 $32,004 $40,800
10/31/1998 $33,983 $44,117
11/30/1998 $35,213 $46,791
12/31/1998 $35,981 $49,486
01/31/1999 $36,622 $51,554
02/28/1999 $36,233 $49,951
03/31/1999 $37,217 $51,949
04/30/1999 $38,429 $53,960
05/31/1999 $37,983 $52,686
06/30/1999 $39,584 $55,610
07/31/1999 $38,944 $53,875
08/31/1999 $39,115 $53,606
09/30/1999 $38,051 $52,137
10/31/1999 $38,680 $55,437
11/30/1999 $39,184 $56,563
12/31/1999 $40,460 $59,894
01/31/2000 $40,120 $56,887
02/29/2000 $39,195 $55,812
03/31/2000 $42,615 $61,271
04/30/2000 $43,118 $59,426
05/31/2000 $43,306 $58,208
06/30/2000 $43,938 $59,640
07/31/2000 $43,259 $58,710
08/31/2000 $45,168 $62,356
09/30/2000 $43,671 $59,063
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
ADVISOR CLASS**
--------------------------------------------------------------------------------
<S> <C>
1-Year +13.84%
5-Year +16.46%
10-Year +15.88%
Since Inception (3/31/48) +11.45%
</TABLE>
*Source: Standard and Poor's Micropal. The S&P 500 Composite Index consists
of 500 domestic stocks, comprising four broad sectors: industrials,
utilities, financials and transportation. The S&P 500 serves as the standard
for measuring large-cap U.S. stock market performance. Since some industries
are characterized by companies of relatively small stock capitalization, the
index is not composed of the 500 largest U.S., publicly traded companies.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges nor Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class.
Past performance does not guarantee future results.
17
<PAGE>
FRANKLIN INCOME FUND
[FUND CATEGORY PYRAMID GRAPHIC]
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Income Fund seeks to maximize income while
maintaining prospects for capital appreciation through a diversified portfolio
of securities.
--------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Income Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Utilities Stocks(*) 25.1%
Corporate Straight Bonds 19.9%
Foreign Government Bonds 11.2%
Energy Mineral Stocks 6.8%
Consumer
Non-Durable Stocks 6.7%
Zero Coupon/Step-Up Bonds 5.6%
Corporate Convertible Bonds 5.4%
Real Estate Stocks 5.3%
U.S. Government Securities 3.7%
Other Stocks 3.1%
Non-Energy Mineral Stocks 2.3%
Short-Term Investments
and Other Net Assets 4.9%
</TABLE>
The U.S. stock market experienced significant volatility during the year under
review, as investors attempted to interpret the potential economic impact from
higher energy prices and the Federal Reserve Board's interest-rate increases.
Partially as a result of these factors, gross domestic product (GDP) slowed to
an annualized rate of 2.7% in the third quarter of 2000, down from a high of
8.3% in the fourth quarter of 1999 and 5.6% in the second quarter of 2000. One
primary aspect of the market volatility was an investor rotation from
technology-driven, high valuation investments to value-oriented sectors during
the latter half of the Fund's fiscal year. The U.S. Treasury market also
fluctuated during the period as the economy transitioned to a slower growth
environment. After 10-year Treasury note yields reached 6.75% in mid-January
2000, they fell precipitously only to bounce again before settling at 5.80% at
the end of the reporting period.
Performance of the Fund's bond sectors was mixed in this environment of
interest-rate volatility and a changing economic climate. Following a trend that
began in early 2000, corporate bond yield spreads to Treasury bonds (a common
valuation measurement) continued to widen due in large part to economic
uncertainty and cash outflows from dedicated fixed income mutual funds. At the
end of the period, high yield corporate spreads to Treasuries were at the
highest level since the capital markets' "flight to quality" in the fall of
1998, making high yield corporate bonds more attractive investment prospects
relative to other fixed income investments. Given our generally sanguine
fundamental outlook and wider yield spreads, we took the opportunity to initiate
several positions during the period. Continuing our focus on the
*The Fund may invest a significant portion of its assets in a single sector,
such as utilities. Overweighting this, or any, sector means that its good or
disappointing performance will have a significant impact on the Fund.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 56.
18
<PAGE>
communications sectors, we invested in issues from Spectrasite Holdings, a
wireless communications tower company; Dobson Communications, a cellular
telephone service provider; and Echostar Communications, a direct broadcast
satellite company. We believed these companies' long-term growth prospects,
combined with appreciation potential from stock offerings and merger and
acquisition activity, boded well for their credit outlook and total-return
potential.
The foreign bond sector performed well during the period, as issuing countries
benefited from economic and political reforms. Our Latin American and Russian
bond positions, which experienced positive fundamental developments, led the
group's strong performance. During the period, the Latin American region
continued to benefit from improving economic fundamentals and renewed investor
confidence in several countries. Brazil, which represented the Fund's largest
foreign bond holding at period's end, stayed focused on implementing fiscal and
monetary reforms which led to inflation stabilization and lower interest rates.
The Fund's Russian bonds performed very well as the government made a relatively
smooth transition to a new President, Vladimir Putin, earlier this year. As a
result of this strength and lingering reform implementation concerns, we sold
the Fund's Russian bond positions at a considerable profit.
After reaching extreme levels during the period, the divergence in stock
performance between growth- and value-oriented sectors reversed, leading to
stronger performances from previously depressed sectors and directly benefiting
the Fund. An increasing number of earnings warnings from high-profile technology
companies during the summer and fall magnified this reversal. Among the Fund's
largest stock sectors, utility, energy and real estate performed extremely well
in this environment, leading to overall strong performance for the Fund. Utility
stocks, our largest holding, benefited from a combination of solid earnings
growth, a favorable supply/demand balance for electricity, rapid earnings growth
from non-regulated assets and declining interest rates in the latter half of the
period. In addition, utility stocks' defensive nature attracted many investors
that had previously migrated to higher growth sectors. Although we are still
positive on the sector's outlook, we took the opportunity to scale back several
utility holdings which appeared fully valued.
TOP 5 STOCK HOLDINGS
Franklin Income Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Philip Morris Cos. Inc. 6.0%
Florida Progress Corp. 1.9%
American Electric
Power Co. Inc. 1.9%
Entergy Corp. 1.8%
PECO Energy Co. 1.7%
</TABLE>
TOP 5 BOND HOLDINGS
Franklin Income Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Republic of Brazil, L, FRN,
7.375%, 4/15/06 2.6%
U.S. Treasury Note,
5.875%, 11/15/04 2.4%
Republic of Brazil,
11.00%, 8/17/40 2.1%
Republic of Argentina,
11.75%, 6/15/15 1.7%
Republic of Argentina, L-GP,
step coupon, 6.00%, 3/31/23 1.6%
</TABLE>
19
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Income Fund
10/1/99 - 9/30/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
----------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 1.5 cents 1.41 cents 1.41 cents 1.53 cents
November 1.5 cents 1.41 cents 1.41 cents 1.53 cents
December 1.5 cents 1.41 cents 1.40 cents 1.53 cents
January 1.5 cents 1.41 cents 1.40 cents 1.53 cents
February 1.5 cents 1.41 cents 1.40 cents 1.52 cents
March 1.5 cents 1.41 cents 1.41 cents 1.53 cents
April 1.5 cents 1.41 cents 1.41 cents 1.53 cents
May 1.5 cents 1.41 cents 1.41 cents 1.52 cents
June 1.5 cents 1.40 cents 1.41 cents 1.53 cents
July 1.5 cents 1.40 cents 1.41 cents 1.53 cents
August 1.5 cents 1.40 cents 1.41 cents 1.53 cents
September 1.5 cents 1.41 cents 1.41 cents 1.53 cents
--------------------------------------------------------------------------------
TOTAL 18.0 CENTS 16.89 CENTS 16.89 CENTS 18.34 CENTS
</TABLE>
The Fund's energy positions experienced strong share price appreciation during
the 12 months under review, as such companies benefited from rising oil and gas
prices. Although share price appreciation allowed us to take profits on a
selective basis, energy remained our second-largest stock weighting as of
September 30, 2000. We believe many companies are still attractive investments
and we recently initiated a position in Petroleo Brasileiro (Petrobras), Latin
America's largest energy company. The real estate sector also benefited from an
investor rotation into safe-haven stocks. We believe this sector looks
attractive given many companies' solid growth prospects and still relatively low
valuations. Taking advantage of temporary weakness during the period, we added
to two existing positions and initiated a convertible bond position in a leading
office real estate investment trust, Equity Office Properties.
20
<PAGE>
As we look forward to the Fund's next fiscal year, wider spreads in the
corporate bond market and increasingly attractive valuations in the equity
markets are presenting many appealing investment opportunities. As always, we
remain committed to our value-oriented approach and will continually search for
new investments across asset classes and industries.
/s/ Charles B. Johnson
Charles B. Johnson
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
/s/ Frederick G. Fromm
Frederick G. Fromm, CFA
Portfolio Management Team
Franklin Income Fund
This discussion reflects our views, opinions and portfolio holdings as of
September 30, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
21
<PAGE>
FRANKLIN INCOME FUND
PERFORMANCE SUMMARY AS OF 9/30/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available
to a limited class of investors.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return +14.68%
Net Asset Value (NAV) $2.35 (9/30/00) $2.24 (9/30/99)
Change in NAV +$0.11
Distributions (10/1/99 - 9/30/00) Dividend Income $0.1800
Long-Term Capital Gain $0.0140
--------------------------------
Total $0.1940
</TABLE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return +14.09%
Net Asset Value (NAV) $2.35 (9/30/00) $2.24 (9/30/99)
Change in NAV +$0.11
Distributions (10/1/99 - 9/30/00) Dividend Income $0.1689
Long-Term Capital Gain $0.0140
--------------------------------
Total $0.1829
</TABLE>
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return +14.54%
Net Asset Value (NAV) $2.36 (9/30/00) $2.24 (9/30/99)
Change in NAV +$0.12
Distributions (10/1/99 - 9/30/00) Dividend Income $0.1689
Long-Term Capital Gain $0.0140
--------------------------------
Total $0.1829
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return +14.90%
Net Asset Value (NAV) $2.34 (9/30/00) $2.23 (9/30/99)
Change in NAV +$0.11
Distributions (10/1/99 - 9/30/00) Dividend Income $0.1834
Long-Term Capital Gain $0.0140
--------------------------------
Total $0.1974
</TABLE>
Franklin Income Fund paid distributions derived from long-term capital gains of
1.40 cents ($0.0140) per share in December 1999. The Fund hereby designates such
distributions as capital gain dividends per Internal Revenue
Past performance does not guarantee future results.
22
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (8/31/48)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +14.68% +56.55% +233.17% +25,359.04%
Average Annual Total Return(2) +9.78% +8.45% +12.29% +11.13%
Value of $10,000 Investment(3) $10,978 $15,002 $31,869 $2,439,826
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +14.09% +14.47%
Average Annual Total Return(2) +10.09% +5.87%
Value of $10,000 Investment(3) $11,009 $11,049
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +14.54% +53.13% +66.08%
Average Annual Total Return(2) +12.53% +8.71% +9.63%
Value of $10,000 Investment(3) $11,253 $15,181 $16,457
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR (8/31/48)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +14.90% +58.19% +236.68% +25,627.04%
Average Annual Total Return(2) +14.90% +9.61% +12.91% +11.24%
Value of $10,000 Investment(3) $11,490 $15,819 $33,668 $2,572,704
</TABLE>
<TABLE>
<CAPTION>
SHARE CLASS A B C ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distribution Rate(5) 7.35% 7.20% 7.11% 7.85%
30-Day Standardized Yield(6) 7.44% 7.27% 7.20% 7.92%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges nor Rule 12b-1 plans. Performance quotations for this
class reflect the following methods of calculation: (a) For periods prior to
1/2/97, a restated figure is used based upon the Fund's Class A performance,
excluding the effect of Class A's maximum initial sales charge and including the
effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an
actual Advisor Class figure is used reflecting a deduction of all charges and
fees applicable to that class. Since 1/2/97 (commencement of sales), the
cumulative and average annual total returns of Advisor Class shares were +37.60%
and +8.89%.
(5.) Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (net asset value for Class B
and Advisor Class) per share on 9/30/00.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/00.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Since markets can go down as well as up, 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 does not guarantee future results.
23
<PAGE>
FRANKLIN INCOME FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged indexes
differ from the Fund in composition, do not pay management fees or expenses and
include reinvested dividends. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +9.78%
5-Year +8.45%
10-Year +12.29%
Since Inception (8/31/48) +11.13%
</TABLE>
GRAPHIC MATERIAL (9)
The following line graph compares the performance of Franklin Income Fund -
Class A shares to that of the S&P 500 Index, Lehman Brothers Government/Credit
Bond Index and Lipper Income Average, based on a $10,000 investment from 10/1/90
to 9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN
INCOME FUND - LB LIPPER
CLASS A S&P 500 GOV'T./CREDIT INCOME AVG.
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/01/1990 $9,565 $10,000 $10,000 $10,000
10/31/1990 $9,076 $9,957 $10,070 $9,967
11/30/1990 $9,382 $10,600 $10,138 $10,368
12/31/1990 $9,439 $10,896 $10,205 $10,592
01/31/1991 $9,663 $11,371 $10,272 $10,852
02/28/1991 $10,664 $12,184 $10,338 $11,381
03/31/1991 $11,012 $12,479 $10,406 $11,593
04/30/1991 $11,418 $12,509 $10,472 $11,722
05/31/1991 $11,685 $13,048 $10,539 $11,961
06/30/1991 $11,685 $12,450 $10,608 $11,705
07/31/1991 $12,162 $13,031 $10,676 $12,085
08/31/1991 $12,498 $13,339 $10,741 $12,400
09/30/1991 $12,743 $13,117 $10,804 $12,538
10/31/1991 $13,111 $13,292 $10,866 $12,724
11/30/1991 $13,133 $12,757 $10,927 $12,558
12/31/1991 $13,323 $14,216 $10,983 $13,265
01/31/1992 $13,765 $13,952 $11,044 $13,244
02/29/1992 $14,150 $14,132 $11,105 $13,453
03/31/1992 $14,214 $13,856 $11,169 $13,295
04/30/1992 $14,473 $14,263 $11,233 $13,551
05/31/1992 $14,800 $14,333 $11,294 $13,766
06/30/1992 $14,932 $14,120 $11,354 $13,719
07/31/1992 $15,263 $14,697 $11,411 $14,154
08/31/1992 $15,263 $14,396 $11,467 $14,093
09/30/1992 $15,195 $14,564 $11,521 $14,217
10/31/1992 $15,060 $14,614 $11,580 $14,125
11/30/1992 $15,145 $15,111 $11,641 $14,333
12/31/1992 $15,353 $15,297 $11,700 $14,559
01/31/1993 $15,840 $15,425 $11,757 $14,802
02/28/1993 $16,227 $15,635 $11,811 $15,115
03/31/1993 $16,582 $15,965 $11,865 $15,439
04/30/1993 $16,761 $15,578 $11,918 $15,418
05/31/1993 $17,011 $15,994 $11,974 $15,615
06/30/1993 $17,336 $16,041 $12,027 $15,789
07/31/1993 $17,735 $15,977 $12,081 $15,915
08/31/1993 $17,919 $16,582 $12,132 $16,335
09/30/1993 $18,102 $16,454 $12,183 $16,363
10/31/1993 $18,435 $16,795 $12,235 $16,464
11/30/1993 $18,251 $16,636 $12,290 $16,224
12/31/1993 $18,660 $16,837 $12,346 $16,464
01/31/1994 $18,850 $17,409 $12,399 $16,783
02/28/1994 $18,429 $16,937 $12,458 $16,354
03/31/1994 $17,696 $16,199 $12,523 $15,809
04/30/1994 $17,657 $16,406 $12,592 $15,876
05/31/1994 $17,540 $16,675 $12,662 $15,918
06/30/1994 $17,421 $16,267 $12,735 $15,737
07/31/1994 $17,699 $16,800 $12,806 $16,067
08/31/1994 $17,978 $17,489 $12,878 $16,363
09/30/1994 $17,857 $17,063 $12,955 $16,109
10/31/1994 $17,899 $17,446 $13,034 $16,171
11/30/1994 $17,695 $16,811 $13,117 $15,797
12/31/1994 $17,470 $17,060 $13,203 $15,846
01/31/1995 $17,680 $17,502 $13,284 $16,144
02/28/1995 $17,975 $18,185 $13,363 $16,554
03/31/1995 $18,188 $18,721 $13,442 $16,807
04/30/1995 $18,659 $19,271 $13,520 $17,132
05/31/1995 $19,305 $20,042 $13,590 $17,688
06/30/1995 $19,521 $20,507 $13,659 $17,879
07/31/1995 $19,739 $21,188 $13,732 $18,169
08/31/1995 $19,959 $21,241 $13,803 $18,325
09/30/1995 $20,357 $22,137 $13,873 $18,769
10/31/1995 $20,402 $22,058 $13,943 $18,694
11/30/1995 $20,715 $23,026 $14,007 $19,234
12/31/1995 $21,190 $23,471 $14,073 $19,596
01/31/1996 $21,786 $24,269 $14,137 $19,948
02/29/1996 $21,369 $24,494 $14,208 $19,898
03/31/1996 $21,322 $24,729 $14,282 $19,964
04/30/1996 $21,274 $25,093 $14,359 $20,030
05/31/1996 $21,510 $25,740 $14,438 $20,194
06/30/1996 $21,937 $25,838 $14,516 $20,342
07/31/1996 $21,603 $24,696 $14,596 $19,906
08/31/1996 $21,938 $25,217 $14,678 $20,207
09/30/1996 $22,278 $26,637 $14,757 $20,716
10/31/1996 $22,716 $27,372 $14,832 $21,133
11/30/1996 $23,255 $29,441 $14,906 $21,855
12/31/1996 $23,404 $28,858 $14,984 $21,748
01/31/1997 $23,753 $30,662 $15,063 $22,138
02/28/1997 $24,004 $30,901 $15,143 $22,264
03/31/1997 $23,448 $29,631 $15,228 $21,832
04/30/1997 $23,600 $31,400 $15,312 $22,155
05/31/1997 $24,368 $33,312 $15,394 $22,882
06/30/1997 $24,831 $34,805 $15,476 $23,449
07/31/1997 $25,505 $37,575 $15,553 $24,408
08/31/1997 $25,348 $35,471 $15,634 $23,991
09/30/1997 $26,135 $37,415 $15,714 $24,785
10/31/1997 $25,764 $36,165 $15,791 $24,510
11/30/1997 $26,560 $37,840 $15,870 $24,882
12/31/1997 $27,347 $38,491 $15,948 $25,290
01/31/1998 $27,074 $38,918 $16,023 $25,361
02/28/1998 $27,457 $41,724 $16,101 $26,023
03/31/1998 $28,283 $43,860 $16,180 $26,622
04/30/1998 $27,896 $44,303 $16,259 $26,691
05/31/1998 $27,617 $43,541 $16,337 $26,560
06/30/1998 $27,672 $45,309 $16,416 $26,735
07/31/1998 $27,164 $44,824 $16,495 $26,452
08/31/1998 $25,406 $38,342 $16,570 $24,894
09/30/1998 $26,717 $40,800 $16,638 $25,656
10/31/1998 $26,776 $44,117 $16,710 $26,223
11/30/1998 $27,642 $46,791 $16,788 $26,876
12/31/1998 $27,607 $49,486 $16,862 $27,354
01/31/1999 $27,195 $51,554 $16,935 $27,504
02/28/1999 $26,425 $49,951 $17,016 $26,976
03/31/1999 $26,843 $51,949 $17,096 $27,424
04/30/1999 $28,224 $53,960 $17,178 $28,236
05/31/1999 $28,404 $52,686 $17,264 $27,942
06/30/1999 $28,344 $55,610 $17,352 $28,283
07/31/1999 $28,038 $53,875 $17,442 $27,969
08/31/1999 $28,100 $53,606 $17,535 $27,745
09/30/1999 $27,790 $52,137 $17,628 $27,496
10/31/1999 $27,728 $55,437 $17,721 $27,991
11/30/1999 $27,288 $56,563 $17,799 $28,083
12/31/1999 $27,403 $59,894 $17,899 $28,608
01/31/2000 $27,598 $56,887 $18,003 $28,130
02/29/2000 $27,146 $55,812 $18,105 $28,043
03/31/2000 $27,601 $61,271 $18,207 $29,050
04/30/2000 $28,583 $59,426 $18,312 $28,748
05/31/2000 $29,044 $58,208 $18,420 $28,722
06/30/2000 $29,243 $59,640 $18,525 $29,015
07/31/2000 $29,576 $58,710 $18,629 $29,085
08/31/2000 $31,259 $62,356 $18,731 $30,114
09/30/2000 $31,869 $59,063 $18,834 $29,955
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
<S> <C>
1-Year +10.09%
Since Inception (1/1/99) +5.87%
</TABLE>
GRAPHIC MATERIAL (10)
The following line graph compares the performance of Franklin Income Fund -
Class B shares to that of the S&P 500 Index, Lehman Brothers Government/Credit
Bond Index and Lipper Income Average, based on a $10,000 investment from 1/1/99
to 9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN INCOME LB LIPPER
FUND - CLASS B S&P 500 GOV'T./CREDIT INCOME AVG.
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
01/01/1999 $10,000 $10,000 $10,000 $10,000
01/31/1999 $9,851 $10,418 $10,043 $10,055
02/28/1999 $9,568 $10,094 $10,091 $9,862
03/31/1999 $9,715 $10,498 $10,139 $10,026
04/30/1999 $10,212 $10,904 $10,187 $10,322
05/31/1999 $10,229 $10,647 $10,238 $10,215
06/30/1999 $10,247 $11,238 $10,290 $10,340
07/31/1999 $10,132 $10,887 $10,344 $10,225
08/31/1999 $10,150 $10,833 $10,399 $10,143
09/30/1999 $10,034 $10,536 $10,454 $10,052
10/31/1999 $10,007 $11,203 $10,509 $10,233
11/30/1999 $9,844 $11,430 $10,556 $10,267
12/31/1999 $9,882 $12,103 $10,615 $10,459
01/31/2000 $9,947 $11,496 $10,676 $10,284
02/29/2000 $9,780 $11,278 $10,737 $10,252
03/31/2000 $9,940 $12,381 $10,797 $10,620
04/30/2000 $10,289 $12,009 $10,860 $10,510
05/31/2000 $10,451 $11,763 $10,924 $10,500
06/30/2000 $10,518 $12,052 $10,986 $10,607
07/31/2000 $10,633 $11,864 $11,048 $10,633
08/31/2000 $11,232 $12,601 $11,108 $11,009
09/30/2000 $11,049 $11,935 $11,170 $10,951
</TABLE>
Past performance does not guarantee future results.
24
<PAGE>
GRAPHIC MATERIAL (11)
The following line graph compares the performance of Franklin Income Fund -
Class C shares to that of the S&P 500 Index, Lehman Brothers Government/Credit
Bond Index and Lipper Income Average, based on a $10,000 investment from 5/1/95
to 9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN INCOME LB LIPPER
FUND - CLASS C S&P 500 GOV'T./CORP. INCOME AVG.
------------------------------------------------------------------
<S> <C> <C> <C> <C>
05/01/1995 $9,909 $10,000 $10,000 $10,000
05/31/1995 $10,228 $10,400 $10,052 $10,325
06/30/1995 $10,338 $10,641 $10,103 $10,437
07/31/1995 $10,449 $10,995 $10,157 $10,606
08/31/1995 $10,561 $11,022 $10,210 $10,697
09/30/1995 $10,771 $11,487 $10,262 $10,956
10/31/1995 $10,790 $11,446 $10,313 $10,912
11/30/1995 $10,951 $11,948 $10,360 $11,227
12/31/1995 $11,197 $12,179 $10,409 $11,438
01/31/1996 $11,507 $12,593 $10,457 $11,644
02/29/1996 $11,331 $12,710 $10,509 $11,615
03/31/1996 $11,301 $12,832 $10,564 $11,653
04/30/1996 $11,222 $13,021 $10,621 $11,692
05/31/1996 $11,341 $13,357 $10,679 $11,788
06/30/1996 $11,562 $13,407 $10,737 $11,874
07/31/1996 $11,380 $12,815 $10,796 $11,620
08/31/1996 $11,552 $13,085 $10,857 $11,795
09/30/1996 $11,725 $13,822 $10,915 $12,092
10/31/1996 $11,951 $14,203 $10,971 $12,335
11/30/1996 $12,281 $15,277 $11,026 $12,757
12/31/1996 $12,302 $14,975 $11,083 $12,695
01/31/1997 $12,480 $15,911 $11,142 $12,922
02/28/1997 $12,660 $16,035 $11,201 $12,996
03/31/1997 $12,363 $15,376 $11,264 $12,744
04/30/1997 $12,384 $16,294 $11,326 $12,932
05/31/1997 $12,780 $17,286 $11,387 $13,356
06/30/1997 $13,071 $18,060 $11,447 $13,688
07/31/1997 $13,419 $19,498 $11,504 $14,247
08/31/1997 $13,332 $18,406 $11,564 $14,004
09/30/1997 $13,686 $19,415 $11,623 $14,467
10/31/1997 $13,542 $18,766 $11,680 $14,307
11/30/1997 $13,897 $19,635 $11,738 $14,524
12/31/1997 $14,302 $19,973 $11,796 $14,762
01/31/1998 $14,153 $20,195 $11,851 $14,804
02/28/1998 $14,347 $21,651 $11,909 $15,190
03/31/1998 $14,772 $22,759 $11,968 $15,539
04/30/1998 $14,622 $22,989 $12,026 $15,580
05/31/1998 $14,413 $22,594 $12,084 $15,503
06/30/1998 $14,494 $23,511 $12,142 $15,606
07/31/1998 $14,223 $23,259 $12,200 $15,440
08/31/1998 $13,300 $19,896 $12,257 $14,531
09/30/1998 $13,919 $21,171 $12,307 $14,976
10/31/1998 $14,003 $22,893 $12,360 $15,307
11/30/1998 $14,448 $24,280 $12,418 $15,688
12/31/1998 $14,363 $25,678 $12,473 $15,967
01/31/1999 $14,204 $26,752 $12,526 $16,055
02/28/1999 $13,797 $25,920 $12,586 $15,746
03/31/1999 $14,008 $26,956 $12,645 $16,008
04/30/1999 $14,719 $28,000 $12,706 $16,482
05/31/1999 $14,744 $27,339 $12,770 $16,310
06/30/1999 $14,770 $28,856 $12,835 $16,509
07/31/1999 $14,605 $27,956 $12,902 $16,326
08/31/1999 $14,568 $27,816 $12,970 $16,195
09/30/1999 $14,401 $27,054 $13,039 $16,050
10/31/1999 $14,427 $28,766 $13,108 $16,339
11/30/1999 $14,194 $29,350 $13,165 $16,392
12/31/1999 $14,247 $31,079 $13,239 $16,699
01/31/2000 $14,275 $29,519 $13,316 $16,420
02/29/2000 $14,101 $28,961 $13,392 $16,369
03/31/2000 $14,330 $31,794 $13,467 $16,957
04/30/2000 $14,831 $30,837 $13,545 $16,781
05/31/2000 $14,995 $30,204 $13,625 $16,765
06/30/2000 $15,091 $30,947 $13,703 $16,936
07/31/2000 $15,325 $30,465 $13,779 $16,977
08/31/2000 $16,187 $32,356 $13,855 $17,578
09/30/2000 $16,457 $30,648 $13,931 $17,485
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C>
1-Year +12.53%
5-Year +8.71%
Since Inception (5/1/95) +9.63%
</TABLE>
GRAPHIC MATERIAL (12)
The following line graph compares the performance of Franklin Income Fund -
Advisor Class shares to that of the S&P 500 Index, Lehman Brothers
Government/Credit Bond Index and Lipper Income Average, based on a $10,000
investment from 10/1/90 to 9/30/00.
<TABLE>
<CAPTION>
DATE FRANKLIN INCOME LB LIPPER
FUND - ADVISOR CLASS S&P 500 GOV'T./CORP. INCOME AVG.
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/01/1990 $10,000 $10,000 $10,000 $10,000
10/31/1990 $9,489 $9,957 $10,070 $9,967
11/30/1990 $9,809 $10,600 $10,138 $10,368
12/31/1990 $9,868 $10,896 $10,205 $10,592
01/31/1991 $10,102 $11,371 $10,272 $10,852
02/28/1991 $11,149 $12,184 $10,338 $11,381
03/31/1991 $11,512 $12,479 $10,406 $11,593
04/30/1991 $11,937 $12,509 $10,472 $11,722
05/31/1991 $12,216 $13,048 $10,539 $11,961
06/30/1991 $12,216 $12,450 $10,608 $11,705
07/31/1991 $12,715 $13,031 $10,676 $12,085
08/31/1991 $13,066 $13,339 $10,741 $12,400
09/30/1991 $13,322 $13,117 $10,804 $12,538
10/31/1991 $13,707 $13,292 $10,866 $12,724
11/30/1991 $13,730 $12,757 $10,927 $12,558
12/31/1991 $13,928 $14,216 $10,983 $13,265
01/31/1992 $14,391 $13,952 $11,044 $13,244
02/29/1992 $14,793 $14,132 $11,105 $13,453
03/31/1992 $14,860 $13,856 $11,169 $13,295
04/30/1992 $15,130 $14,263 $11,233 $13,551
05/31/1992 $15,473 $14,333 $11,294 $13,766
06/30/1992 $15,611 $14,120 $11,354 $13,719
07/31/1992 $15,956 $14,697 $11,411 $14,154
08/31/1992 $15,956 $14,396 $11,467 $14,093
09/30/1992 $15,886 $14,564 $11,521 $14,217
10/31/1992 $15,745 $14,614 $11,580 $14,125
11/30/1992 $15,833 $15,111 $11,641 $14,333
12/31/1992 $16,051 $15,297 $11,700 $14,559
01/31/1993 $16,560 $15,425 $11,757 $14,802
02/28/1993 $16,965 $15,635 $11,811 $15,115
03/31/1993 $17,335 $15,965 $11,865 $15,439
04/30/1993 $17,522 $15,578 $11,918 $15,418
05/31/1993 $17,784 $15,994 $11,974 $15,615
06/30/1993 $18,124 $16,041 $12,027 $15,789
07/31/1993 $18,541 $15,977 $12,081 $15,915
08/31/1993 $18,733 $16,582 $12,132 $16,335
09/30/1993 $18,925 $16,454 $12,183 $16,363
10/31/1993 $19,273 $16,795 $12,235 $16,464
11/30/1993 $19,080 $16,636 $12,290 $16,224
12/31/1993 $19,508 $16,837 $12,346 $16,464
01/31/1994 $19,707 $17,409 $12,399 $16,783
02/28/1994 $19,266 $16,937 $12,458 $16,354
03/31/1994 $18,500 $16,199 $12,523 $15,809
04/30/1994 $18,460 $16,406 $12,592 $15,876
05/31/1994 $18,338 $16,675 $12,662 $15,918
06/30/1994 $18,213 $16,267 $12,735 $15,737
07/31/1994 $18,503 $16,800 $12,806 $16,067
08/31/1994 $18,795 $17,489 $12,878 $16,363
09/30/1994 $18,669 $17,063 $12,955 $16,109
10/31/1994 $18,712 $17,446 $13,034 $16,171
11/30/1994 $18,499 $16,811 $13,117 $15,797
12/31/1994 $18,264 $17,060 $13,203 $15,846
01/31/1995 $18,484 $17,502 $13,284 $16,144
02/28/1995 $18,792 $18,185 $13,363 $16,554
03/31/1995 $19,015 $18,721 $13,442 $16,807
04/30/1995 $19,507 $19,271 $13,520 $17,132
05/31/1995 $20,182 $20,042 $13,590 $17,688
06/30/1995 $20,409 $20,507 $13,659 $17,879
07/31/1995 $20,637 $21,188 $13,732 $18,169
08/31/1995 $20,867 $21,241 $13,803 $18,325
09/30/1995 $21,283 $22,137 $13,873 $18,769
10/31/1995 $21,329 $22,058 $13,943 $18,694
11/30/1995 $21,657 $23,026 $14,007 $19,234
12/31/1995 $22,153 $23,471 $14,073 $19,596
01/31/1996 $22,776 $24,269 $14,137 $19,948
02/29/1996 $22,341 $24,494 $14,208 $19,898
03/31/1996 $22,291 $24,729 $14,282 $19,964
04/30/1996 $22,241 $25,093 $14,359 $20,030
05/31/1996 $22,487 $25,740 $14,438 $20,194
06/30/1996 $22,935 $25,838 $14,516 $20,342
07/31/1996 $22,584 $24,696 $14,596 $19,906
08/31/1996 $22,936 $25,217 $14,678 $20,207
09/30/1996 $23,290 $26,637 $14,757 $20,716
10/31/1996 $23,749 $27,372 $14,832 $21,133
11/30/1996 $24,313 $29,441 $14,906 $21,855
12/31/1996 $24,467 $28,858 $14,984 $21,748
01/31/1997 $24,729 $30,662 $15,063 $22,138
02/28/1997 $25,100 $30,901 $15,143 $22,264
03/31/1997 $24,522 $29,631 $15,228 $21,832
04/30/1997 $24,685 $31,400 $15,312 $22,155
05/31/1997 $25,385 $33,312 $15,394 $22,882
06/30/1997 $25,980 $34,805 $15,476 $23,449
07/31/1997 $26,689 $37,575 $15,553 $24,408
08/31/1997 $26,529 $35,471 $15,634 $23,991
09/30/1997 $27,246 $37,415 $15,714 $24,785
10/31/1997 $26,972 $36,165 $15,791 $24,510
11/30/1997 $27,697 $37,840 $15,870 $24,882
12/31/1997 $28,638 $38,491 $15,948 $25,290
01/31/1998 $28,244 $38,918 $16,023 $25,361
02/28/1998 $28,648 $41,724 $16,101 $26,023
03/31/1998 $29,516 $43,860 $16,180 $26,622
04/30/1998 $29,230 $44,303 $16,259 $26,691
05/31/1998 $28,825 $43,541 $16,337 $26,560
06/30/1998 $29,004 $45,309 $16,416 $26,735
07/31/1998 $28,475 $44,824 $16,495 $26,452
08/31/1998 $26,635 $38,342 $16,570 $24,894
09/30/1998 $28,014 $40,800 $16,638 $25,656
10/31/1998 $28,079 $44,117 $16,710 $26,223
11/30/1998 $28,992 $46,791 $16,788 $26,876
12/31/1998 $28,959 $49,486 $16,862 $27,354
01/31/1999 $28,530 $51,554 $16,935 $27,504
02/28/1999 $27,726 $49,951 $17,016 $26,976
03/31/1999 $28,168 $51,949 $17,096 $27,424
04/30/1999 $29,621 $53,960 $17,178 $28,236
05/31/1999 $29,687 $52,686 $17,264 $27,942
06/30/1999 $29,755 $55,610 $17,352 $28,283
07/31/1999 $29,437 $53,875 $17,442 $27,969
08/31/1999 $29,377 $53,606 $17,535 $27,745
09/30/1999 $29,054 $52,137 $17,628 $27,496
10/31/1999 $29,124 $55,437 $17,721 $27,991
11/30/1999 $28,666 $56,563 $17,799 $28,083
12/31/1999 $28,791 $59,894 $17,899 $28,608
01/31/2000 $28,865 $56,887 $18,003 $28,130
02/29/2000 $28,528 $55,812 $18,105 $28,043
03/31/2000 $29,011 $61,271 $18,207 $29,050
04/30/2000 $29,910 $59,426 $18,312 $28,748
05/31/2000 $30,397 $58,208 $18,420 $28,722
06/30/2000 $30,610 $59,640 $18,525 $29,015
07/31/2000 $30,964 $58,710 $18,629 $29,085
08/31/2000 $32,737 $62,356 $18,731 $30,114
09/30/2000 $33,668 $59,063 $18,834 $29,955
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
ADVISOR CLASS**
--------------------------------------------------------------------------------
<S> <C>
1-Year +14.90%
5-Year +9.61%
10-Year +12.91%
Since Inception (8/31/48) +11.24%
</TABLE>
*Source: Standard and Poor's Micropal. The S&P 500 Composite Index consists
of 500 domestic stocks, comprising four broad sectors: industrials,
utilities, financials and transportation. The S&P 500 serves as the standard
for measuring large-cap U.S. stock market performance. Since some industries
are characterized by companies of relatively small stock capitalization, the
index is not composed of the 500 largest U.S., publicly traded companies.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges nor Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class.
Past performance does not guarantee future results.
25
<PAGE>
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
[PYRAMID GRAPHIC]
Since 1983, the Fund has invested primarily in Ginnie Mae securities, which
carry a guarantee backed by the full faith and credit of the U.S. government as
to the timely payment of interest and principal.(1) Issued by the Government
National Mortgage Association (GNMA), Ginnie Maes have been among the highest
yielding U.S. government obligations available.
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin U.S. Government Securities Fund seeks high,
current income from a portfolio of U.S. government securities.
--------------------------------------------------------------------------------
It's a pleasure to bring you Franklin U.S. Government Securities Fund's annual
report for the period ended September 30, 2000. For the year under review,
Government National Mortgage Association (GNMA) securities experienced a
favorable environment with excellent results for your Fund.
[FRANKLIN U.S. GOVERNMENT SECURITIES FUND--CLASS A vs. COMPARABLE INVESTMENTS*
Risk vs. Return (10/95--9/00) GRAPHIC]
GRAPHIC MATERIAL (13)
This point graph compares the average annual total return measured against risk
from 10/95 to 9/00 for Franklin U.S. Government Securities Fund - Class A vs.
comparable investments.
<TABLE>
<CAPTION>
Risk Return
---- ------
<S> <C> <C>
1-Year Treasury Bill 0.64% 5.53%
10-Year Treasury Note 6.38% 6.59%
30-Year Treasury Bond 9.58% 7.94%
Franklin U.S. Government Securities Fund - Class A 2.60% 6.27%
</TABLE>
*Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged.
Investors cannot invest directly in an index. Average annual total return
represents the average annual change in value of an investment over the period
indicated. These figures assume reinvestment of distributions and do not include
sales charges. Risk is measured by the annualized standard deviation of monthly
total returns. In general, the higher the standard deviation, the greater the
volatility. The Fund's Class A shares' average annual total return does not
include the current, maximum 4.25% sales charge. The value of Treasuries, if
held to maturity, is fixed; principal is guaranteed and interest is fixed. The
Fund's investment return and share price will fluctuate with market conditions,
and you may have a gain or loss when you sell your shares. Past performance does
not guarantee future results.
(1.) U.S. government securities owned by the Fund, but not shares of the Fund,
are guaranteed by the U.S. government as to timely payment of principal and
interest. The Fund's yield and share price are not guaranteed and will vary
with market conditions.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 64.
26
<PAGE>
During the 12 months under review, the U.S. economy continued to strengthen and
the Federal Reserve Board (the Fed) raised short-term interest rates four times.
However, following growing evidence that the economy was slowing and that
inflation was not accelerating, the Fed left rates unchanged after the last
increase on May 16.
As short-term interest rates increased during the first eight months of the
period, mortgage rates rose accordingly, a positive event for mortgage-backed
pass-through securities, the Fund's principal investments. This type of
situation usually means slower prepayments and lower prepayment risk, as higher
mortgage rates reduce the incentive for homeowners to refinance their mortgages.
Following the last rate hike by the Fed in May, mortgage rates steadily declined
and prepayments due to refinancing increased. Fortunately, the decrease in rates
was gradual and homeowner refinancing was moderate and predictable. In addition,
seasonal factors peaked in August, and prepayments due to summer homeowner
relocations should drop off in the near term. According to the Federal Home Loan
Mortgage Corporation, the conforming 30-year fixed mortgage rate rose slightly,
from 7.70% on October 1, 1999, to 7.88% on September 30, 2000, peaking at 8.64%
on May 19, 2000.
As a result of the Fed's tightening during most of the period, short- and
intermediate-term Treasury yields rose substantially. However, expectations of a
reduced supply of longer-term Treasuries resulted in falling yields and an
inverted yield curve beginning in January, where shorter-term yields were higher
than longer-term yields.
GNMA pass-throughs performed extremely well during the Fund's fiscal year with a
beneficial effect on the Fund. GNMAs outperformed the 30-year Treasury bond
beginning in April due to superior yield and lower interest-rate risk. GNMAs
also had stronger returns than Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC) pass-throughs, and other agency
debt. Investors looked to GNMAs as the closest substitute for long-term Treasury
bonds whose supply is dwindling. GNMAs are also considered more creditworthy
than FNMAs and FHLMCs, which only have implied federal government support. GNMAs
also offered a more stable investment alternative to equities, which experienced
significant volatility during the period under review. Largely as a result of
GNMAs' stellar performance, Franklin U.S. Government Securities Fund - Class A
had a one-year cumulative total return of +6.90% compared with the 6.21% return
of the Lehman Brothers Intermediate U.S. Government Bond Index.(2)
YIELD COMPARISON
9/30/00
<TABLE>
<S> <C>
FRANKLIN U.S. GOVERNMENT SECURITIES FUND--CLASS A 6.19%
GINNIE MAE FUNDS AVERAGE* 6.06%
MONEY MARKET FUNDS AVERAGE* 5.93%
10-YEAR TREASURY NOTE* 5.80%
</TABLE>
*Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government
Securities Fund--Class A shares' yield, calculated as required by the SEC, is
based on earnings of the Fund's portfolio for the 30 days ended September 30,
2000. The value of Treasuries, if held to maturity, is fixed; principal is
guaranteed and interest is fixed. Money funds attempt to maintain a stable net
asset value of $1.00 per share, while shares of Franklin U.S. Government
Securities Fund will fluctuate with market conditions. Lipper averages do not
include sales charges.
(2.) Cumulative total return measures the change in value of an investment,
assuming reinvestment of distributions, and does not include the sales charge.
The index is unmanaged and includes reinvested interest. One cannot invest
directly in an index.
27
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin U.S. Government Securities Fund
10/1/99 - 9/30/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-----------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 3.50 cents 3.20 cents 3.20 cents 3.56 cents
November 3.50 cents 3.20 cents 3.20 cents 3.56 cents
December 3.50 cents 3.22 cents 3.22 cents 3.56 cents
January 3.50 cents 3.22 cents 3.22 cents 3.58 cents
February 3.50 cents 3.22 cents 3.22 cents 3.55 cents
March 3.50 cents 3.22 cents 3.20 cents 3.56 cents
April 3.50 cents 3.22 cents 3.20 cents 3.56 cents
May 3.60 cents 3.32 cents 3.30 cents 3.66 cents
June 3.60 cents 3.32 cents 3.32 cents 3.66 cents
July 3.60 cents 3.32 cents 3.32 cents 3.66 cents
August 3.65 cents 3.37 cents 3.37 cents 3.71 cents
September 3.65 cents 3.36 cents 3.35 cents 3.71 cents
TOTAL 42.60 CENTS 39.19 CENTS 39.12 CENTS 43.33 CENTS
</TABLE>
During the first five months of the period, we sold GNMA II pass-throughs,
seeking to take advantage of their strong price performance, which made them
less attractive relative to GNMA I securities. Using the proceeds, we added to
our position in higher-coupon GNMA I pass-throughs, thereby increasing the
Fund's income. From March through June, prices of GNMA II pass-throughs declined
in comparison to GNMA Is, but from July onward, GNMA II prices moved closer to
GNMA Is and were only marginally more attractive. We will be watching GNMA IIs
closely to take advantage of any substantial price declines to shift our
exposure back to these types of pass-through securities.
28
<PAGE>
Going forward, we believe that the chances of additional near-term Fed
tightening have been reduced substantially, since the economy seems to be
growing at a non-inflationary rate. Franklin U.S. Government Securities Fund
will continue to invest primarily in GNMA pass-through securities as we seek to
achieve our goal of providing high, current income for the Fund's shareholders.
/s/ Jack Lemein
Jack Lemein
/s/ Roger A. Bayston
Roger A. Bayston
/s/ T. Anthony Coffey
T. Anthony Coffey
Portfolio Management Team
Franklin U.S. Government Securities Fund
GNMA I AND GNMA II
GNMA I securities consist of underlying mortgages that conform to the Government
National Mortgage Association's traditional standards for pooling mortgages;
they generally come from a single issuer and are limited to a relatively narrow
range of interest rates. Alternatively, GNMA II securities are composed of
mortgages from multiple issuers and, therefore, tend to be more geographically
diverse, and the underlying mortgages have a wider range of interest rates than
GNMA I securities.
This discussion reflects our views, opinions and portfolio holdings as of
September 30, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any industry, security or the Fund.
Our strategies and the Fund's portfolio composition will change depending on
market and economic conditions. Although historical performance is no guarantee
of future results, these insights may help you understand our investment and
management philosophy.
29
<PAGE>
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------------------
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund eliminated the sales charge
on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a
limited class of investors.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 9/30/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
One-Year Total Return +6.90%
Net Asset Value (NAV) $6.63 (9/30/00) $6.62 (9/30/99)
Change in NAV +$0.01
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4260
CLASS B
One-Year Total Return +6.35%
Net Asset Value (NAV) $6.63 (9/30/00) $6.62 (9/30/99)
Change in NAV +$0.01
Distributions (10/1/99 - 9/30/00) Dividend Income $0.3919
CLASS C
One-Year Total Return +6.36%
Net Asset Value (NAV) $6.61 (9/30/00) $6.60 (9/30/99)
Change in NAV +$0.01
Distributions (10/1/99 - 9/30/00) Dividend Income $0.3912
ADVISOR CLASS
One-Year Total Return +7.02%
Net Asset Value (NAV) $6.64 (9/30/00) $6.63 (9/30/99)
Change in NAV +$0.01
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4333
</TABLE>
Past performance does not guarantee future results.
30
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (5/31/70)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.90% +35.56% +103.25% +766.67%
Average Annual Total Return(2) +2.42% +5.37% +6.89% +7.23%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.35% +6.62%
Average Annual Total Return(2) +2.35% +1.58%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.36% +31.95% +39.42%
Average Annual Total Return(2) +4.25% +5.49% +6.12%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(3) 1-YEAR 5-YEAR 10-YEAR (5/31/70)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +7.02% +36.66% +104.89% +773.68%
Average Annual Total Return(2) +7.02% +6.45% +7.44% +7.41%
</TABLE>
<TABLE>
<CAPTION>
SHARE CLASS A B C ADVISOR
<S> <C> <C> <C> <C>
Distribution Rate(4) 6.33% 6.08% 6.02% 6.70%
30-Day Standardized Yield(5) 6.19% 5.93% 5.87% 6.57%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges nor Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class. Since 1/2/97 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +26.50% and +6.47%.
4. Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (net asset value for Class B
and Advisor Class) per share on 9/30/00.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/00.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
--------------------------------------------------------------------------------
Bond prices, and thus the Fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
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 does not guarantee future results.
31
<PAGE>
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the Fund in composition, does not pay management fees or expenses and
includes reinvested interest. One cannot invest directly in an index. The
Consumer Price Index (CPI) is a commonly used measure of inflation.
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS A
<S> <C>
---------------------------------------
1-Year +2.42%
5-Year +5.37%
10-Year +6.89%
Since Inception (5/31/70) +7.23%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
<S> <C>
1-Year +2.35%
Since Inception (1/1/99) +1.58%
</TABLE>
GRAPHIC MATERIAL (14)
This graph compares the performance of Franklin U.S. Government Securities Fund
- Class A, tracking the growth in value of a $10,000 investment, to that of the
Lehman Brothers Intermediate U.S. Government Bond Index and CPI from
10/1/90-9/30/00.
<TABLE>
<CAPTION>
FRANKLIN U.S. LEHMAN
GOVERNMENT BROTHERS
SECURITIES INTERMEDIATE
FUND U.S. GOVT.
- CLASS A BOND INDEX CPI
-----------------------------------------
<S> <C> <C> <C>
10/01/1990 $9,581 $10,000 $10,000
10/31/1990 $9,688 $10,139 $10,060
11/30/1990 $9,867 $10,292 $10,082
12/31/1990 $10,004 $10,434 $10,082
01/31/1991 $10,141 $10,542 $10,143
02/28/1991 $10,193 $10,606 $10,158
03/31/1991 $10,276 $10,664 $10,173
04/30/1991 $10,370 $10,774 $10,188
05/31/1991 $10,465 $10,834 $10,219
06/30/1991 $10,516 $10,843 $10,249
07/31/1991 $10,674 $10,960 $10,264
08/31/1991 $10,801 $11,168 $10,294
09/30/1991 $10,961 $11,358 $10,339
10/31/1991 $11,106 $11,488 $10,354
11/30/1991 $11,170 $11,622 $10,385
12/31/1991 $11,375 $11,905 $10,392
01/31/1992 $11,298 $11,790 $10,407
02/29/1992 $11,379 $11,827 $10,445
03/31/1992 $11,349 $11,780 $10,498
04/30/1992 $11,431 $11,886 $10,513
05/31/1992 $11,605 $12,063 $10,528
06/30/1992 $11,747 $12,236 $10,565
07/31/1992 $11,857 $12,471 $10,588
08/31/1992 $12,017 $12,599 $10,617
09/30/1992 $12,112 $12,772 $10,647
10/31/1992 $12,023 $12,619 $10,684
11/30/1992 $12,069 $12,567 $10,699
12/31/1992 $12,217 $12,729 $10,692
01/31/1993 $12,382 $12,966 $10,744
02/28/1993 $12,515 $13,157 $10,782
03/31/1993 $12,579 $13,206 $10,819
04/30/1993 $12,644 $13,309 $10,850
05/31/1993 $12,708 $13,273 $10,865
06/30/1993 $12,844 $13,465 $10,880
07/31/1993 $12,910 $13,492 $10,880
08/31/1993 $12,977 $13,693 $10,911
09/30/1993 $12,984 $13,749 $10,934
10/31/1993 $13,009 $13,782 $10,978
11/30/1993 $12,962 $13,713 $10,986
12/31/1993 $13,061 $13,769 $10,986
01/31/1994 $13,180 $13,906 $11,016
02/28/1994 $13,057 $13,715 $11,053
03/31/1994 $12,691 $13,515 $11,091
04/30/1994 $12,605 $13,427 $11,106
05/31/1994 $12,613 $13,437 $11,114
06/30/1994 $12,555 $13,439 $11,152
07/31/1994 $12,785 $13,615 $11,182
08/31/1994 $12,824 $13,655 $11,227
09/30/1994 $12,649 $13,541 $11,257
10/31/1994 $12,610 $13,544 $11,265
11/30/1994 $12,591 $13,483 $11,279
12/31/1994 $12,709 $13,528 $11,279
01/31/1995 $12,968 $13,748 $11,325
02/28/1995 $13,289 $14,014 $11,370
03/31/1995 $13,350 $14,091 $11,407
04/30/1995 $13,532 $14,254 $11,445
05/31/1995 $13,983 $14,656 $11,468
06/30/1995 $14,067 $14,750 $11,491
07/31/1995 $14,089 $14,757 $11,491
08/31/1995 $14,237 $14,880 $11,521
09/30/1995 $14,364 $14,979 $11,544
10/31/1995 $14,514 $15,144 $11,582
11/30/1995 $14,664 $15,329 $11,574
12/31/1995 $14,836 $15,481 $11,566
01/31/1996 $14,924 $15,611 $11,634
02/29/1996 $14,796 $15,445 $11,671
03/31/1996 $14,733 $15,374 $11,732
04/30/1996 $14,670 $15,330 $11,778
05/31/1996 $14,628 $15,322 $11,800
06/30/1996 $14,807 $15,478 $11,807
07/31/1996 $14,853 $15,526 $11,829
08/31/1996 $14,855 $15,543 $11,852
09/30/1996 $15,104 $15,744 $11,890
10/31/1996 $15,378 $16,002 $11,928
11/30/1996 $15,607 $16,196 $11,951
12/31/1996 $15,518 $16,108 $11,951
01/31/1997 $15,613 $16,169 $11,989
02/28/1997 $15,661 $16,195 $12,026
03/31/1997 $15,616 $16,103 $12,056
04/30/1997 $15,853 $16,285 $12,071
05/31/1997 $15,992 $16,412 $12,063
06/30/1997 $16,179 $16,553 $12,078
07/31/1997 $16,487 $16,859 $12,092
08/31/1997 $16,437 $16,795 $12,115
09/30/1997 $16,627 $16,978 $12,146
10/31/1997 $16,794 $17,177 $12,176
11/30/1997 $16,816 $17,215 $12,169
12/31/1997 $16,986 $17,354 $12,154
01/31/1998 $17,155 $17,580 $12,177
02/28/1998 $17,153 $17,560 $12,200
03/31/1998 $17,226 $17,615 $12,223
04/30/1998 $17,348 $17,699 $12,245
05/31/1998 $17,467 $17,822 $12,267
06/30/1998 $17,536 $17,941 $12,282
07/31/1998 $17,630 $18,009 $12,297
08/31/1998 $17,802 $18,350 $12,312
09/30/1998 $18,026 $18,777 $12,326
10/31/1998 $17,940 $18,809 $12,356
11/30/1998 $18,037 $18,751 $12,356
12/31/1998 $18,108 $18,824 $12,349
01/31/1999 $18,231 $18,909 $12,378
02/28/1999 $18,117 $18,650 $12,393
03/31/1999 $18,216 $18,773 $12,430
04/30/1999 $18,289 $18,823 $12,521
05/31/1999 $18,146 $18,708 $12,521
06/30/1999 $18,057 $18,735 $12,521
07/31/1999 $17,913 $18,737 $12,559
08/31/1999 $17,927 $18,763 $12,589
09/30/1999 $18,215 $18,924 $12,649
10/31/1999 $18,312 $18,962 $12,672
11/30/1999 $18,326 $18,975 $12,680
12/31/1999 $18,257 $18,916 $12,680
01/31/2000 $18,102 $18,852 $12,718
02/29/2000 $18,314 $19,009 $12,793
03/31/2000 $18,584 $19,225 $12,897
04/30/2000 $18,541 $19,218 $12,905
05/31/2000 $18,616 $19,269 $12,921
06/30/2000 $18,921 $19,576 $12,988
07/31/2000 $19,025 $19,705 $13,018
08/31/2000 $19,307 $19,926 $13,018
09/30/2000 $19,473 $20,099 $13,085
</TABLE>
GRAPHIC MATERIAL (15)
This graph compares the performance of Franklin U.S. Government Securities Fund
- Class B, tracking the growth in value of a $10,000 investment, to that of the
Lehman Brothers Intermediate U.S. Government Bond Index from 1/1/99-9/30/00.
<TABLE>
<CAPTION>
LEHMAN
FRANKLIN U.S. BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND U.S. GOVT.
- CLASS B BOND INDEX CPI
-------------------------------------------
<S> <C> <C> <C>
01/01/1999 $10,000 $10,000 $10,000
01/31/1999 $10,068 $10,045 $10,024
02/28/1999 $9,986 $9,907 $10,036
03/31/1999 $10,051 $9,973 $10,066
04/30/1999 $10,087 $10,000 $10,140
05/31/1999 $10,005 $9,939 $10,140
06/30/1999 $9,936 $9,953 $10,140
07/31/1999 $9,868 $9,954 $10,170
08/31/1999 $9,856 $9,968 $10,194
09/30/1999 $10,025 $10,053 $10,243
10/31/1999 $10,074 $10,073 $10,262
11/30/1999 $10,062 $10,080 $10,268
12/31/1999 $10,019 $10,049 $10,268
01/31/2000 $9,946 $10,015 $10,299
02/29/2000 $10,042 $10,098 $10,360
03/31/2000 $10,186 $10,213 $10,444
04/30/2000 $10,174 $10,209 $10,451
05/31/2000 $10,210 $10,237 $10,463
06/30/2000 $10,373 $10,399 $10,518
07/31/2000 $10,410 $10,468 $10,542
08/31/2000 $10,560 $10,585 $10,542
09/30/2000 $10,279 $10,677 $10,597
</TABLE>
Past performance does not guarantee future results.
32
<PAGE>
GRAPHIC MATERIAL (16)
This graph compares the performance of Franklin U.S. Government Securities Fund
- Class C, tracking the growth in value of a $10,000 investment, to that of the
Lehman Brothers Intermediate U.S. Government Bond Index and CPI from
5/1/95-9/30/00.
<TABLE>
<CAPTION>
LEHMAN
FRANKLIN U.S. BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND U.S. GOVT.
- CLASS C BOND INDEX CPI
-------------------------------------------
<S> <C> <C> <C>
05/01/1995 $9,896 $10,000 $10,000
05/31/1995 $10,194 $10,282 $10,020
06/30/1995 $10,249 $10,348 $10,040
07/31/1995 $10,260 $10,353 $10,040
08/31/1995 $10,362 $10,439 $10,066
09/30/1995 $10,454 $10,509 $10,086
10/31/1995 $10,557 $10,624 $10,120
11/30/1995 $10,661 $10,754 $10,112
12/31/1995 $10,780 $10,861 $10,105
01/31/1996 $10,853 $10,952 $10,165
02/29/1996 $10,754 $10,836 $10,198
03/31/1996 $10,687 $10,786 $10,251
04/30/1996 $10,652 $10,755 $10,291
05/31/1996 $10,616 $10,749 $10,310
06/30/1996 $10,725 $10,859 $10,316
07/31/1996 $10,754 $10,892 $10,336
08/31/1996 $10,766 $10,904 $10,356
09/30/1996 $10,930 $11,045 $10,389
10/31/1996 $11,123 $11,226 $10,422
11/30/1996 $11,301 $11,362 $10,442
12/31/1996 $11,214 $11,301 $10,442
01/31/1997 $11,294 $11,344 $10,475
02/28/1997 $11,307 $11,362 $10,508
03/31/1997 $11,269 $11,297 $10,534
04/30/1997 $11,434 $11,425 $10,547
05/31/1997 $11,546 $11,514 $10,540
06/30/1997 $11,675 $11,613 $10,553
07/31/1997 $11,892 $11,828 $10,565
08/31/1997 $11,833 $11,783 $10,586
09/30/1997 $11,966 $11,911 $10,612
10/31/1997 $12,081 $12,051 $10,639
11/30/1997 $12,091 $12,077 $10,632
12/31/1997 $12,208 $12,175 $10,619
01/31/1998 $12,324 $12,333 $10,640
02/28/1998 $12,317 $12,320 $10,660
03/31/1998 $12,363 $12,358 $10,680
04/30/1998 $12,446 $12,417 $10,699
05/31/1998 $12,526 $12,503 $10,719
06/30/1998 $12,569 $12,587 $10,731
07/31/1998 $12,632 $12,634 $10,744
08/31/1998 $12,749 $12,873 $10,757
09/30/1998 $12,905 $13,173 $10,770
10/31/1998 $12,819 $13,196 $10,796
11/30/1998 $12,901 $13,155 $10,796
12/31/1998 $12,946 $13,206 $10,789
01/31/1999 $13,028 $13,265 $10,815
02/28/1999 $12,941 $13,084 $10,828
03/31/1999 $13,006 $13,170 $10,861
04/30/1999 $13,051 $13,206 $10,940
05/31/1999 $12,943 $13,125 $10,940
06/30/1999 $12,874 $13,143 $10,940
07/31/1999 $12,765 $13,145 $10,973
08/31/1999 $12,770 $13,163 $10,999
09/30/1999 $12,970 $13,276 $11,052
10/31/1999 $13,033 $13,303 $11,072
11/30/1999 $13,037 $13,312 $11,079
12/31/1999 $12,982 $13,271 $11,079
01/31/2000 $12,867 $13,226 $11,112
02/29/2000 $13,012 $13,335 $11,177
03/31/2000 $13,198 $13,488 $11,269
04/30/2000 $13,161 $13,482 $11,276
05/31/2000 $13,208 $13,519 $11,289
06/30/2000 $13,420 $13,733 $11,348
07/31/2000 $13,468 $13,824 $11,374
08/31/2000 $13,662 $13,979 $11,374
09/30/2000 $13,797 $14,101 $11,433
</TABLE>
GRAPHIC MATERIAL (17)
This graph compares the performance of Franklin U.S. Government Securities Fund
- Advisor Class, tracking the growth in value of a $10,000 investment, to that
of the Lehman Brothers Intermediate U.S. Government Bond Index and CPI from
10/1/90-9/30/00.
<TABLE>
<CAPTION>
LEHMAN
FRANKLIN U.S. BROTHERS
GOVERNMENT INTERMEDIATE
SECURITIES FUND U.S. GOVT.
- ADVISOR CLASS BOND INDEX CPI
-------------------------------------------
<S> <C> <C> <C>
10/01/1990 $10,000 $10,000 $10,000
10/31/1990 $10,111 $10,139 $10,060
11/30/1990 $10,298 $10,292 $10,082
12/31/1990 $10,441 $10,434 $10,082
01/31/1991 $10,585 $10,542 $10,143
02/28/1991 $10,639 $10,606 $10,158
03/31/1991 $10,725 $10,664 $10,173
04/30/1991 $10,824 $10,774 $10,188
05/31/1991 $10,923 $10,834 $10,219
06/30/1991 $10,976 $10,843 $10,249
07/31/1991 $11,140 $10,960 $10,264
08/31/1991 $11,274 $11,168 $10,294
09/30/1991 $11,440 $11,358 $10,339
10/31/1991 $11,592 $11,488 $10,354
11/30/1991 $11,658 $11,622 $10,385
12/31/1991 $11,873 $11,905 $10,392
01/31/1992 $11,792 $11,790 $10,407
02/29/1992 $11,877 $11,827 $10,445
03/31/1992 $11,845 $11,780 $10,498
04/30/1992 $11,931 $11,886 $10,513
05/31/1992 $12,112 $12,063 $10,528
06/30/1992 $12,261 $12,236 $10,565
07/31/1992 $12,375 $12,471 $10,588
08/31/1992 $12,543 $12,599 $10,617
09/30/1992 $12,642 $12,772 $10,647
10/31/1992 $12,549 $12,619 $10,684
11/30/1992 $12,597 $12,567 $10,699
12/31/1992 $12,751 $12,729 $10,692
01/31/1993 $12,924 $12,966 $10,744
02/28/1993 $13,062 $13,157 $10,782
03/31/1993 $13,129 $13,206 $10,819
04/30/1993 $13,197 $13,309 $10,850
05/31/1993 $13,264 $13,273 $10,865
06/30/1993 $13,406 $13,465 $10,880
07/31/1993 $13,475 $13,492 $10,880
08/31/1993 $13,544 $13,693 $10,911
09/30/1993 $13,552 $13,749 $10,934
10/31/1993 $13,578 $13,782 $10,978
11/30/1993 $13,529 $13,713 $10,986
12/31/1993 $13,633 $13,769 $10,986
01/31/1994 $13,756 $13,906 $11,016
02/28/1994 $13,628 $13,715 $11,053
03/31/1994 $13,246 $13,515 $11,091
04/30/1994 $13,156 $13,427 $11,106
05/31/1994 $13,164 $13,437 $11,114
06/30/1994 $13,104 $13,439 $11,152
07/31/1994 $13,345 $13,615 $11,182
08/31/1994 $13,385 $13,655 $11,227
09/30/1994 $13,202 $13,541 $11,257
10/31/1994 $13,162 $13,544 $11,265
11/30/1994 $13,142 $13,483 $11,279
12/31/1994 $13,265 $13,528 $11,279
01/31/1995 $13,535 $13,748 $11,325
02/28/1995 $13,870 $14,014 $11,370
03/31/1995 $13,933 $14,091 $11,407
04/30/1995 $14,123 $14,254 $11,445
05/31/1995 $14,594 $14,656 $11,468
06/30/1995 $14,682 $14,750 $11,491
07/31/1995 $14,705 $14,757 $11,491
08/31/1995 $14,860 $14,880 $11,521
09/30/1995 $14,992 $14,979 $11,544
10/31/1995 $15,148 $15,144 $11,582
11/30/1995 $15,305 $15,329 $11,574
12/31/1995 $15,485 $15,481 $11,566
01/31/1996 $15,576 $15,611 $11,634
02/29/1996 $15,443 $15,445 $11,671
03/31/1996 $15,377 $15,374 $11,732
04/30/1996 $15,311 $15,330 $11,778
05/31/1996 $15,268 $15,322 $11,800
06/30/1996 $15,454 $15,478 $11,807
07/31/1996 $15,503 $15,526 $11,829
08/31/1996 $15,505 $15,543 $11,852
09/30/1996 $15,765 $15,744 $11,890
10/31/1996 $16,050 $16,002 $11,928
11/30/1996 $16,290 $16,196 $11,951
12/31/1996 $16,197 $16,108 $11,951
01/31/1997 $16,369 $16,169 $11,989
02/28/1997 $16,397 $16,195 $12,026
03/31/1997 $16,351 $16,103 $12,056
04/30/1997 $16,624 $16,285 $12,071
05/31/1997 $16,770 $16,412 $12,063
06/30/1997 $16,968 $16,553 $12,078
07/31/1997 $17,292 $16,859 $12,092
08/31/1997 $17,216 $16,795 $12,115
09/30/1997 $17,441 $16,978 $12,146
10/31/1997 $17,593 $17,177 $12,176
11/30/1997 $17,642 $17,215 $12,169
12/31/1997 $17,821 $17,354 $12,154
01/31/1998 $17,974 $17,580 $12,177
02/28/1998 $17,999 $17,560 $12,200
03/31/1998 $18,076 $17,615 $12,223
04/30/1998 $18,181 $17,699 $12,245
05/31/1998 $18,334 $17,822 $12,267
06/30/1998 $18,407 $17,941 $12,282
07/31/1998 $18,481 $18,009 $12,297
08/31/1998 $18,662 $18,350 $12,312
09/30/1998 $18,925 $18,777 $12,326
10/31/1998 $18,810 $18,809 $12,356
11/30/1998 $18,939 $18,751 $12,356
12/31/1998 $19,015 $18,824 $12,349
01/31/1999 $19,146 $18,909 $12,378
02/28/1999 $19,001 $18,650 $12,393
03/31/1999 $19,107 $18,773 $12,430
04/30/1999 $19,212 $18,823 $12,521
05/31/1999 $19,064 $18,708 $12,521
06/30/1999 $18,944 $18,735 $12,521
07/31/1999 $18,823 $18,737 $12,559
08/31/1999 $18,810 $18,763 $12,589
09/30/1999 $19,145 $18,924 $12,649
10/31/1999 $19,248 $18,962 $12,672
11/30/1999 $19,235 $18,975 $12,680
12/31/1999 $19,164 $18,916 $12,680
01/31/2000 $19,033 $18,852 $12,718
02/29/2000 $19,227 $19,009 $12,793
03/31/2000 $19,512 $19,225 $12,897
04/30/2000 $19,498 $19,218 $12,905
05/31/2000 $19,578 $19,269 $12,921
06/30/2000 $19,901 $19,576 $12,988
07/31/2000 $19,983 $19,705 $13,018
08/31/2000 $20,281 $19,926 $13,018
09/30/2000 $20,489 $20,099 $13,085
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS C
---------------------------------------
<S> <C>
1-Year +4.25%
5-Year +5.49%
Since Inception (5/1/95) +6.12%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
ADVISOR CLASS**
---------------------------------------
<S> <C>
1-Year +7.02%
5-Year +6.45%
10-Year +7.44%
Since Inception (5/31/70) +7.41%
</TABLE>
*Source: Standard and Poor's Micropal. The Lehman Brothers Intermediate U.S.
Government Bond Index includes fixed-rate debt issues rated investment grade or
higher by Moody's, S&P, or Fitch, in that order. All issues have at least one
year to maturity and an outstanding par value of at least $100 million for U.S.
government issues. All returns are market value weighted inclusive of accrued
interest. The index includes issues of the U.S. Government or any agency
thereof. It includes only issues with a remaining term to maturity of less than
ten years. Total return includes price appreciation/depreciation and income as a
percentage of the original investment. The total return index is rebalanced
monthly by market capitalization.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges nor Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class.
Past performance does not guarantee future results.
33
<PAGE>
[FUND CATEGORY PYRAMID GRAPHIC]
FRANKLIN UTILITIES FUND
--------------------------------------------------------------------------------
Your Fund's Goal: Franklin Utilities Fund seeks both capital appreciation and
current income from a portfolio of public utility industry securities.
--------------------------------------------------------------------------------
It was an exciting year for Franklin Utilities Fund. We experienced two
different market environments in the electric utilities industry, as
dramatically improved equity performance during the second half of the Fund's
fiscal year contrasted sharply with lackluster returns in the first half. Two
catalysts in particular provided the fuel for electric utilities' strong
performance in the latter portion of the period. First, because of deregulation,
electric utility companies generated higher earnings growth rates. Earnings per
share for the S&P Electrical Utilities Index through the 12 months ended June
30, 2000, were 14.3% higher than the prior reporting period, a substantial jump
for such companies.(1) This surprise earnings growth attracted the attention of
many investors just as they were shifting focus away from technology industries.
Second, declining interest rates had a positive impact on many of the Fund's
holdings. For example, the yield on the 10-year Treasury note, which peaked at
6.79% in January, closed the Fund's fiscal year 99 basis points lower at 5.80%.
Due to lower rates and a big positive turnaround in the sector from March 10
through September 30, the Fund's Class A shares finished the year with a +24.27%
cumulative total return as shown in the Performance Summary beginning on page
38, easily surpassing the benchmark Standard & Poor's 500 (S&P 500) Index, which
posted a 13.28% return.(2)
1. Source: Standard & Poor's Micropal. The Standard & Poor's Electrical
Utilities Index is a capitalization-weighted index of all stocks designed to
measure the performance of the electric power utilities company sector of the
Standard & Poor's 500 Index.
2. Source: Standard & Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest U.S., publicly traded companies. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 68.
34
<PAGE>
We did not change the Fund's asset class weightings significantly during the
past year. We continued to focus on individual companies as we sought to take
advantage of developing industry themes. The one dominant industry theme during
the period was the strong economic returns achieved by companies with excess
generating capacity. Each of our top 10 holdings at the end of the reporting
period was a leader in electricity generation that followed a strategy of
building and acquiring new generating power plants outside the umbrella of
regulation. Given the strong U.S. economic climate during the 1990s and the lack
of new capacity built during the decade, a significant supply and demand
disequilibrium exists in the country that we feel will not be resolved for at
least two to three years. We believe the result of this situation is that
superior returns could continue for Fund holdings such as Duke Energy, FPL
Group, Dominion Resources, PECO Energy, Entergy, TECO Energy, AES Corporation
and Reliant Energy. Given the strong earnings growth among pure generation
companies, several integrated utilities also started along the path of
separating their unregulated growth engines from their regulated operations.
Fund positions that already have initiated such activities include Xcel Energy,
Southern Company, Reliant Energy and Constellation Energy.
[PORTFOLIO BREAKDOWN PIE CHART]
Franklin Utilities Fund
Based on Total Net Assets
9/30/00
<TABLE>
<S> <C>
Utilities Stocks 82.7%
Convertible Securities 8.0%
Utilities Bonds 7.5%
Short-Term Investments & Other Net Assets 1.8%
</TABLE>
35
<PAGE>
TOP 10 HOLDINGS
Franklin Utilities Fund
9/30/00
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
---------------------------------------------------------
<S> <C>
Duke Energy Corp. 7.5%
FPL Group Inc. 6.1%
Southern Co. 5.6%
PECO Energy Co. 4.8%
Dominion Resources Inc. 4.3%
Unicom Corp. 4.0%
Entergy Corp. 4.0%
Reliant Energy Inc. 2.9%
Constellation Energy Group Inc. 2.7%
TECO Energy Inc. 2.3%
</TABLE>
During the period, Franklin Utilities Fund maintained the same total return
strategy that it has followed since its creation in 1948. A pioneer in the field
of utilities funds, we consider ourselves unique today because we remain
steadfastly dedicated to the electric utilities industry. We closed out the
Fund's fiscal year with 93% of the Fund's total net assets invested in electric
utilities securities, with the remainder of the Fund dedicated to
telecommunications and gas utility investments. Yet, we remain open to the
possibilities these sectors can provide. Given the sell-off in the securities of
telecommunications services companies, we initiated positions in AT&T and
Verizon Communications. We also reduced the portfolio's bond weighting during
the fiscal year from 13.8% of total net assets on September 30, 1999, to 7.5% at
the end of the period, as we took advantage of very high dividend yield
opportunities offered by electric utilities stocks early in the year.
36
<PAGE>
Going forward, we continue to believe electric utilities companies are
attractively valued relative to the overall equities market. On September 30,
2000, the S&P Electrical Utilities Index was trading at just 54% of the relative
value of the S&P 500 Index, based on a price/earnings ratio of projected 2000
earnings.(3) However, in our opinion this relative valuation does not accurately
represent the industry's increasing growth prospects relative to the S&P 500
Index. Consequently, we feel the Fund is strongly positioned to benefit from the
increased earnings growth prospects that the electric industry now offers and
remain optimistic regarding the Fund's future potential performance.
/s/ Sally Edwards Haff
Sally Edwards Haff
Portfolio Manager
Franklin Utilities Fund
(3.) Source: PaineWebber, 10/9/00.
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
September 30, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. Our strategies and the Fund's portfolio composition will change
depending on market and economic conditions. Although historical performance is
no guarantee of future results, these insights may help you understand our
investment and management philosophy.
--------------------------------------------------------------------------------
37
<PAGE>
FRANKLIN UTILITIES FUND
--------------------------------------------------------------------------------
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C: Subject to 1% initial sales charge and 1% CDSC for shares redeemed
within 18 months of investment. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a
limited class of investors.
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 9/30/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +24.27%
Net Asset Value (NAV) $10.89 (9/30/00) $9.59 (9/30/99)
Change in NAV +$1.30
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4480
Long-Term Capital Gain $0.3640
----------------------------------
Total $0.8120
<CAPTION>
CLASS B
<S> <C> <C>
One-Year Total Return +23.79%
Net Asset Value (NAV) $10.90 (9/30/00) $9.59 (9/30/99)
Change in NAV +$1.31
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4055
Long-Term Capital Gain $0.3640
----------------------------------
Total $0.7695
<CAPTION>
CLASS C
<S> <C> <C>
One-Year Total Return +23.65%
Net Asset Value (NAV) $10.88 (9/30/00) $9.58 (9/30/99)
Change in NAV +$1.30
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4011
Long-Term Capital Gain $0.3640
----------------------------------
Total $0.7651
<CAPTION>
ADVISOR CLASS
<S> <C> <C>
One-Year Total Return +24.50%
Net Asset Value (NAV) $10.92 (9/30/00) $9.61 (9/30/99)
Change in NAV +$1.31
Distributions (10/1/99 - 9/30/00) Dividend Income $0.4613
Long-Term Capital Gain $0.3640
----------------------------------
Total $0.8253
</TABLE>
Franklin Utilities Fund paid distributions derived from long-term capital gains
of 36.40 cents ($0.3640) per share in December 1999. The Fund hereby designates
such distributions as capital gain dividends per Internal Revenue Code Section
852 (b)(3).
Past performance does not guarantee future results.
38
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (9/30/48)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +24.27% +66.65% +195.08% +16,191.49%
Average Annual Total Return(2) +18.94% +9.80% +10.95% +10.19%
Value of $10,000 Investment(3) $11,894 $15,961 $28,261 $1,557,064
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +23.79% +10.95%
Average Annual Total Return(2) +19.79% +3.96%
Value of $10,000 Investment(3) $11,979 $10,702
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +23.65% +62.44% +83.59%
Average Annual Total Return(2) +21.38% +9.97% +11.65%
Value of $10,000 Investment(3) $12,138 $16,080 $18,174
<CAPTION>
INCEPTION
ADVISOR CLASS(4) 1-YEAR 5-YEAR 10-YEAR (9/30/48)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +24.50% +69.32% +199.79% +16,451.97%
Average Annual Total Return(2) +24.50% +11.11% +11.60% +10.32%
Value of $10,000 Investment(3) $12,450 $16,932 $29,979 $1,655,197
<CAPTION>
SHARE CLASS A B C ADVISOR
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distribution Rate(5) 3.94% 3.71% 3.67% 4.23%
30-Day Standardized Yield(6) 3.77% 3.46% 3.42% 4.08%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges nor Rule 12b-1 plans. Performance quotations for this
class reflect the following methods of calculation: (a) For periods prior to
1/2/97, a restated figure is used based upon the Fund's Class A performance,
excluding the effect of Class A's maximum initial sales charge and including the
effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an
actual Advisor Class figure is used reflecting a deduction of all charges and
fees applicable to that class. Since 1/2/97 (commencement of sales), the
cumulative and average annual total returns of Advisor Class shares were +52.61%
and +11.94%.
(5.) Distribution rate is based on an annualization of the respective class's
September dividend and the maximum offering price (net asset value for Class B
and Advisor Class) per share on 9/30/00.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 9/30/00.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
--------------------------------------------------------------------------------
Since markets can go down as well as up, 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 does not guarantee future results.
39
<PAGE>
FRANKLIN UTILITIES FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), Fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the Fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
<S> <C>
1-Year +18.94%
5-Year +9.80%
10-Year +10.95%
Since Inception (9/30/48) +10.19%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
<S> <C>
1-Year +19.79%
Since Inception (1/1/99) +3.96%
</TABLE>
GRAPHIC MATERIAL (18)
The following line graph compares the performance of Franklin Utilities Fund -
Class A shares to that of the S&P 500 Index, based on a $10,000 investment from
10/1/90 to 9/30/00.
<TABLE>
<CAPTION>
FRANKLIN UTILITIES
DATE FUND - CLASS A S&P 500
--------------------------------------------
<S> <C> <C>
10/01/1990 $9,577 $10,000
10/31/1990 $10,243 $9,957
11/30/1990 $10,435 $10,600
12/31/1990 $10,578 $10,896
01/31/1991 $10,473 $11,371
02/28/1991 $10,865 $12,184
03/31/1991 $11,020 $12,479
04/30/1991 $11,113 $12,509
05/31/1991 $11,073 $13,048
06/30/1991 $10,987 $12,450
07/31/1991 $11,393 $13,031
08/31/1991 $11,690 $13,339
09/30/1991 $12,117 $13,117
10/31/1991 $12,268 $13,292
11/30/1991 $12,529 $12,757
12/31/1991 $13,135 $14,216
01/31/1992 $12,604 $13,952
02/29/1992 $12,576 $14,132
03/31/1992 $12,519 $13,856
04/30/1992 $12,832 $14,263
05/31/1992 $13,158 $14,333
06/30/1992 $13,329 $14,120
07/31/1992 $14,035 $14,697
08/31/1992 $13,992 $14,396
09/30/1992 $14,076 $14,564
10/31/1992 $13,930 $14,614
11/30/1992 $13,945 $15,111
12/31/1992 $14,328 $15,297
01/31/1993 $14,595 $15,425
02/28/1993 $15,381 $15,635
03/31/1993 $15,498 $15,965
04/30/1993 $15,498 $15,578
05/31/1993 $15,483 $15,994
06/30/1993 $15,860 $16,041
07/31/1993 $16,195 $15,977
08/31/1993 $16,683 $16,582
09/30/1993 $16,622 $16,454
10/31/1993 $16,529 $16,795
11/30/1993 $15,774 $16,636
12/31/1993 $15,979 $16,837
01/31/1994 $15,665 $17,409
02/28/1994 $14,897 $16,937
03/31/1994 $14,389 $16,199
04/30/1994 $14,596 $16,406
05/31/1994 $13,785 $16,675
06/30/1994 $13,332 $16,267
07/31/1994 $13,930 $16,800
08/31/1994 $14,010 $17,489
09/30/1994 $13,655 $17,063
10/31/1994 $13,901 $17,446
11/30/1994 $14,065 $16,811
12/31/1994 $14,111 $17,060
01/31/1995 $14,944 $17,502
02/28/1995 $14,928 $18,185
03/31/1995 $14,712 $18,721
04/30/1995 $15,034 $19,271
05/31/1995 $15,896 $20,042
06/30/1995 $15,898 $20,507
07/31/1995 $15,847 $21,188
08/31/1995 $16,087 $21,241
09/30/1995 $16,958 $22,137
10/31/1995 $17,306 $22,058
11/30/1995 $17,584 $23,026
12/31/1995 $18,440 $23,471
01/31/1996 $18,742 $24,269
02/29/1996 $18,263 $24,494
03/31/1996 $18,246 $24,729
04/30/1996 $17,635 $25,093
05/31/1996 $17,832 $25,740
06/30/1996 $18,782 $25,838
07/31/1996 $17,744 $24,696
08/31/1996 $17,999 $25,217
09/30/1996 $17,966 $26,637
10/31/1996 $18,557 $27,372
11/30/1996 $18,815 $29,441
12/31/1996 $18,815 $28,858
01/31/1997 $18,912 $30,662
02/28/1997 $19,069 $30,901
03/31/1997 $18,536 $29,631
04/30/1997 $18,397 $31,400
05/31/1997 $18,972 $33,312
06/30/1997 $19,597 $34,805
07/31/1997 $20,058 $37,575
08/31/1997 $19,617 $35,471
09/30/1997 $20,431 $37,415
10/31/1997 $20,532 $36,165
11/30/1997 $21,896 $37,840
12/31/1997 $23,500 $38,491
01/31/1998 $22,592 $38,918
02/28/1998 $22,951 $41,724
03/31/1998 $24,385 $43,860
04/30/1998 $23,508 $44,303
05/31/1998 $23,209 $43,541
06/30/1998 $23,767 $45,309
07/31/1998 $22,902 $44,824
08/31/1998 $23,681 $38,342
09/30/1998 $24,866 $40,800
10/31/1998 $24,406 $44,117
11/30/1998 $24,669 $46,791
12/31/1998 $25,279 $49,486
01/31/1999 $23,933 $51,554
02/28/1999 $22,792 $49,951
03/31/1999 $22,403 $51,949
04/30/1999 $23,813 $53,960
05/31/1999 $24,900 $52,686
06/30/1999 $24,016 $55,610
07/31/1999 $23,664 $53,875
08/31/1999 $23,618 $53,606
09/30/1999 $22,742 $52,137
10/31/1999 $23,145 $55,437
11/30/1999 $21,793 $56,563
12/31/1999 $21,486 $59,894
01/31/2000 $22,712 $56,887
02/29/2000 $21,036 $55,812
03/31/2000 $21,751 $61,271
04/30/2000 $23,044 $59,426
05/31/2000 $23,348 $58,208
06/30/2000 $22,300 $59,640
07/31/2000 $23,224 $58,710
08/31/2000 $25,688 $62,356
09/30/2000 $28,261 $59,063
</TABLE>
GRAPHIC MATERIAL (19)
The following line graph compares the performance of Franklin Utilities Fund -
Class B shares to that of the S&P 500 Index, based on a $10,000 investment from
1/1/99 to 9/30/00.
<TABLE>
<CAPTION>
FRANKLIN UTILITIES
DATE FUND - CLASS B S&P 500
---------------------------------------------
<S> <C> <C>
01/01/1999 $10,000 $10,000
01/31/1999 $9,468 $10,418
02/28/1999 $9,016 $10,094
03/31/1999 $8,859 $10,498
04/30/1999 $9,416 $10,904
05/31/1999 $9,845 $10,647
06/30/1999 $9,487 $11,238
07/31/1999 $9,339 $10,887
08/31/1999 $9,321 $10,833
09/30/1999 $8,964 $10,536
10/31/1999 $9,133 $11,203
11/30/1999 $8,600 $11,430
12/31/1999 $8,479 $12,103
01/31/2000 $8,961 $11,496
02/29/2000 $8,282 $11,278
03/31/2000 $8,572 $12,381
04/30/2000 $9,071 $12,009
05/31/2000 $9,190 $11,763
06/30/2000 $8,768 $12,052
07/31/2000 $9,131 $11,864
08/31/2000 $10,088 $12,601
09/30/2000 $10,702 $11,935
</TABLE>
Past performance does not guarantee future results.
40
<PAGE>
GRAPHIC MATERIAL (20)
The following line graph compares the performance of Franklin Utilities Fund -
Class C shares to that of the S&P 500 Index, based on a $10,000 investment from
5/1/95 to 9/30/00.
<TABLE>
<CAPTION>
FRANKLIN UTILITIES
DATE FUND - CLASS C S&P 500
------------------------------------------------
<S> <C> <C>
05/01/1995 $9,899 $10,000
05/31/1995 $10,492 $10,400
06/30/1995 $10,500 $10,641
07/31/1995 $10,454 $10,995
08/31/1995 $10,613 $11,022
09/30/1995 $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
01/31/1996 $12,325 $12,593
02/29/1996 $12,021 $12,710
03/31/1996 $12,005 $12,832
04/30/1996 $11,603 $13,021
05/31/1996 $11,721 $13,357
06/30/1996 $12,331 $13,407
07/31/1996 $11,648 $12,815
08/31/1996 $11,816 $13,085
09/30/1996 $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
01/31/1997 $12,397 $15,911
02/28/1997 $12,487 $16,035
03/31/1997 $12,125 $15,376
04/30/1997 $12,034 $16,294
05/31/1997 $12,398 $17,286
06/30/1997 $12,804 $18,060
07/31/1997 $13,106 $19,498
08/31/1997 $12,804 $18,406
09/30/1997 $13,331 $19,415
10/31/1997 $13,397 $18,766
11/30/1997 $14,275 $19,635
12/31/1997 $15,320 $19,973
01/31/1998 $14,727 $20,195
02/28/1998 $14,948 $21,651
03/31/1998 $15,875 $22,759
04/30/1998 $15,304 $22,989
05/31/1998 $15,096 $22,594
06/30/1998 $15,454 $23,511
07/31/1998 $14,891 $23,259
08/31/1998 $15,383 $19,896
09/30/1998 $16,163 $21,171
10/31/1998 $15,849 $22,893
11/30/1998 $16,006 $24,280
12/31/1998 $16,398 $25,678
01/31/1999 $15,524 $26,752
02/28/1999 $14,784 $25,920
03/31/1999 $14,528 $26,956
04/30/1999 $15,428 $28,000
05/31/1999 $16,132 $27,339
06/30/1999 $15,542 $28,856
07/31/1999 $15,299 $27,956
08/31/1999 $15,269 $27,816
09/30/1999 $14,698 $27,054
10/31/1999 $14,958 $28,766
11/30/1999 $14,069 $29,350
12/31/1999 $13,865 $31,079
01/31/2000 $14,657 $29,519
02/29/2000 $13,558 $28,961
03/31/2000 $14,033 $31,794
04/30/2000 $14,851 $30,837
05/31/2000 $15,047 $30,204
06/30/2000 $14,353 $30,947
07/31/2000 $14,949 $30,465
08/31/2000 $16,520 $32,356
09/30/2000 $18,174 $30,648
</TABLE>
GRAPHIC MATERIAL (21)
The following line graph compares the performance of Franklin Utilities Fund -
Advisor Class shares to that of the S&P 500 Index, based on a $10,000 investment
from 10/1/90 to 9/30/00.
<TABLE>
<CAPTION>
FRANKLIN UTILITIES
DATE FUND - ADVISOR CLASS S&P 500
---------------------------------------------
<S> <C> <C>
10/01/1990 $10,000 $10,000
10/31/1990 $10,695 $9,957
11/30/1990 $10,896 $10,600
12/31/1990 $11,044 $10,896
01/31/1991 $10,935 $11,371
02/28/1991 $11,344 $12,184
03/31/1991 $11,506 $12,479
04/30/1991 $11,603 $12,509
05/31/1991 $11,561 $13,048
06/30/1991 $11,472 $12,450
07/31/1991 $11,895 $13,031
08/31/1991 $12,206 $13,339
09/30/1991 $12,651 $13,117
10/31/1991 $12,809 $13,292
11/30/1991 $13,082 $12,757
12/31/1991 $13,715 $14,216
01/31/1992 $13,160 $13,952
02/29/1992 $13,131 $14,132
03/31/1992 $13,072 $13,856
04/30/1992 $13,398 $14,263
05/31/1992 $13,739 $14,333
06/30/1992 $13,917 $14,120
07/31/1992 $14,654 $14,697
08/31/1992 $14,609 $14,396
09/30/1992 $14,697 $14,564
10/31/1992 $14,545 $14,614
11/30/1992 $14,560 $15,111
12/31/1992 $14,960 $15,297
01/31/1993 $15,239 $15,425
02/28/1993 $16,060 $15,635
03/31/1993 $16,182 $15,965
04/30/1993 $16,182 $15,578
05/31/1993 $16,166 $15,994
06/30/1993 $16,560 $16,041
07/31/1993 $16,910 $15,977
08/31/1993 $17,419 $16,582
09/30/1993 $17,355 $16,454
10/31/1993 $17,258 $16,795
11/30/1993 $16,470 $16,636
12/31/1993 $16,684 $16,837
01/31/1994 $16,357 $17,409
02/28/1994 $15,554 $16,937
03/31/1994 $15,024 $16,199
04/30/1994 $15,240 $16,406
05/31/1994 $14,393 $16,675
06/30/1994 $13,921 $16,267
07/31/1994 $14,544 $16,800
08/31/1994 $14,629 $17,489
09/30/1994 $14,257 $17,063
10/31/1994 $14,514 $17,446
11/30/1994 $14,685 $16,811
12/31/1994 $14,734 $17,060
01/31/1995 $15,604 $17,502
02/28/1995 $15,586 $18,185
03/31/1995 $15,361 $18,721
04/30/1995 $15,697 $19,271
05/31/1995 $16,597 $20,042
06/30/1995 $16,600 $20,507
07/31/1995 $16,546 $21,188
08/31/1995 $16,797 $21,241
09/30/1995 $17,706 $22,137
10/31/1995 $18,069 $22,058
11/30/1995 $18,360 $23,026
12/31/1995 $19,254 $23,471
01/31/1996 $19,569 $24,269
02/29/1996 $19,069 $24,494
03/31/1996 $19,051 $24,729
04/30/1996 $18,413 $25,093
05/31/1996 $18,619 $25,740
06/30/1996 $19,611 $25,838
07/31/1996 $18,527 $24,696
08/31/1996 $18,793 $25,217
09/30/1996 $18,758 $26,637
10/31/1996 $19,375 $27,372
11/30/1996 $19,645 $29,441
12/31/1996 $19,645 $28,858
01/31/1997 $19,747 $30,662
02/28/1997 $19,910 $30,901
03/31/1997 $19,360 $29,631
04/30/1997 $19,215 $31,400
05/31/1997 $19,815 $33,312
06/30/1997 $20,474 $34,805
07/31/1997 $20,957 $37,575
08/31/1997 $20,474 $35,471
09/30/1997 $21,353 $37,415
10/31/1997 $21,438 $36,165
11/30/1997 $22,863 $37,840
12/31/1997 $24,569 $38,491
01/31/1998 $23,620 $38,918
02/28/1998 $23,995 $41,724
03/31/1998 $25,503 $43,860
04/30/1998 $24,609 $44,303
05/31/1998 $24,274 $43,541
06/30/1998 $24,866 $45,309
07/31/1998 $23,961 $44,824
08/31/1998 $24,753 $38,342
09/30/1998 $26,093 $40,800
10/31/1998 $25,612 $44,117
11/30/1998 $25,887 $46,791
12/31/1998 $26,512 $49,486
01/31/1999 $25,126 $51,554
02/28/1999 $23,932 $49,951
03/31/1999 $23,533 $51,949
04/30/1999 $25,010 $53,960
05/31/1999 $26,148 $52,686
06/30/1999 $25,231 $55,610
07/31/1999 $24,839 $53,875
08/31/1999 $24,814 $53,606
09/30/1999 $23,880 $52,137
10/31/1999 $24,328 $55,437
11/30/1999 $22,886 $56,563
12/31/1999 $22,598 $59,894
01/31/2000 $23,883 $56,887
02/29/2000 $22,100 $55,812
03/31/2000 $22,885 $61,271
04/30/2000 $24,241 $59,426
05/31/2000 $24,560 $58,208
06/30/2000 $23,442 $59,640
07/31/2000 $24,438 $58,710
08/31/2000 $27,021 $62,356
09/30/2000 $29,979 $59,063
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
---------------------------------------------
<S> <C>
CLASS C
1-Year +21.38%
5-Year +9.97%
Since Inception (5/1/95) +11.65%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
9/30/00
ADVISOR CLASS**
---------------------------------------------
<S> <C>
1-Year +24.50%
5-Year +11.11%
10-Year +11.60%
Since Inception (9/30/48) +10.32%
</TABLE>
*Source: Standard and Poor's Micropal. The S&P 500 Composite Index consists of
500 domestic stocks, comprising four broad sectors: industrials, utilities,
financials and transportation. The S&P 500 serves as the standard for measuring
large-cap U.S. stock market performance. Since some industries are characterized
by companies of relatively small stock capitalization, the index is not composed
of the 500 largest U.S., publicly traded companies.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges nor Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class.
Past performance does not guarantee future results.
41
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN DYNATECH FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
CLASS A 2000(g) 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 23.11 $ 17.84 $ 18.48 $ 14.03 $ 12.78
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c).................... .56 .37 .27 .10 .06
Net realized and unrealized gains .......... 5.30 5.14 .23 4.81 1.54
--------------------------------------------------------------------------------
Total from investment operations ............ 5.86 5.51 .50 4.91 1.60
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.37) (.24) (.17) (.06) (.12)
Net realized gains ......................... -- -- (.97) (.40) (.23)
--------------------------------------------------------------------------------
Total distributions ......................... (.37) (.24) (1.14) (.46) (.35)
--------------------------------------------------------------------------------
Net asset value, end of year ................ $ 28.60 $ 23.11 $ 17.84 $ 18.48 $ 14.03
================================================================================
Total return(a) ............................. 25.57% 31.15% 3.06% 35.63% 12.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 809,140 $ 499,471 $ 215,864 $ 188,102 $ 104,508
Ratios to average net assets:
Expenses ................................... .94% 1.00% 1.02% 1.04% 1.05%
Net investment income ...................... 1.98% 1.70% 1.55% .75% .43%
Portfolio turnover rate ..................... 5.45% 6.49% 10.84% 5.59% 11.94%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C>
Net asset value, beginning of year .......... $ 28.05
---------
Income from investment operations:
Net investment income ...................... .28
Net realized and unrealized gains .......... .12
---------
Total from investment operations ............ .40
---------
Net asset value, end of year ................ $ 28.45
=========
Total return(a) ............................. 1.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 4,749
Ratios to average net assets:
Expenses ................................... 1.73%(b)
Net investment income ...................... 1.43%(b)
Portfolio turnover rate ..................... 5.45%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(g) For the period February 1, 2000 (effective date) to September 30, 2000 for
Class B.
42
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN DYNATECH FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
CLASS C 2000 1999 1998 1997 1996(d)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 22.64 $ 17.53 $ 18.30 $ 14.03 $ 13.57
----------------------------------------------------------------------------
Income from investment operations:
Net investment income(c).................... .34 .22 .15 .07 --
Net realized and unrealized gains .......... 5.21 5.05 .17 4.66 .46
----------------------------------------------------------------------------
Total from investment operations ............ 5.55 5.27 .32 4.73 .46
----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.24) (.16) (.12) (.06) --
Net realized gains ......................... -- -- (.97) (.40) --
Total distributions ......................... (.24) (.16) (1.09) (.46) --
----------------------------------------------------------------------------
Net asset value, end of year ................ $ 27.95 $ 22.64 $ 17.53 $ 18.30 $ 14.03
============================================================================
Total return(a) ............................. 24.65% 30.20% 2.03% 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 126,313 $ 73,890 $ 12,358 $ 3,386 $ --
Ratios to average net assets:
Expenses ................................... 1.69% 1.75% 1.79% 1.82% 1.85%(b)
Net investment income ...................... 1.23% 1.00% .81% .25% (.14%)(b)
Portfolio turnover rate ..................... 5.45% 6.49% 10.84% 5.59% 11.94%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(d) For the period September 16, 1996 (effective date) to September 30, 1996.
See notes to financial statements.
43
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 52.1%
AEROSPACE & DEFENSE .6%
(a) General Motors Corp., H .................................................. 150,000 $ 5,577,000
------------
AIR FREIGHT/COURIERS .2%
C.H. Robinson Worldwide Inc. ............................................. 20,000 1,127,188
United Parcel Service Inc., B ............................................ 20,000 1,127,500
------------
2,254,688
------------
BIOTECHNOLOGY 3.3%
(a) Aclara Biosciences Inc. .................................................. 28,000 850,500
(a) Affymetrix Inc. .......................................................... 2,200 109,725
(a) Amgen Inc. ............................................................... 90,000 6,284,531
(a) Chiron Corp. ............................................................. 30,000 1,350,000
(a) Genentech Inc. ........................................................... 121,600 22,579,600
------------
31,174,356
------------
BROADCASTING .3%
(a) Clear Channel Communications Inc. ........................................ 20,000 1,130,000
(a) Entercom Communications Corp. ............................................ 60,000 1,796,250
------------
2,926,250
------------
CABLE/SATELLITE TV .5%
AT&T Corp. - Liberty Media Group, A ...................................... 260,000 4,680,000
(a) NDS Group PLC, ADR (United Kingdom) ...................................... 3,500 269,500
------------
4,949,500
------------
CHEMICALS: SPECIALTY .1%
Sigma-Aldrich Corp. ...................................................... 30,000 990,000
------------
COMMUNICATIONS 2.0%
(a) Global Crossing Ltd. (Bermuda) ........................................... 82,000 2,542,000
(a) Nextel Communications Inc., A ............................................ 80,000 3,740,000
(a) Qwest Communications International Inc. .................................. 50,000 2,403,125
Sprint Corp. (FON Group) ................................................. 80,000 2,345,000
(a) TeleCorp PCS Inc. ........................................................ 27,600 524,400
Vodaphone AirTouch PLC, ADR (United Kingdom) ............................. 70,000 2,590,000
(a) Worldcom Inc. ............................................................ 120,000 4,556,250
------------
18,700,775
------------
COMPUTER COMMUNICATIONS 3.9%
(a) Cisco Systems Inc. ....................................................... 560,000 30,940,000
(a) Cobalt Networks Inc. ..................................................... 27,500 1,591,563
(a) McDATA Corp., B .......................................................... 33,000 4,055,391
------------
36,586,954
------------
COMPUTER PERIPHERALS 1.3%
(a) EMC Corp. ................................................................ 100,000 9,912,500
Symbol Technologies Inc. ................................................. 67,500 2,425,781
------------
12,338,281
------------
COMPUTER PROCESSING HARDWARE 3.9%
(a) Apple Computer Inc. ...................................................... 60,000 1,545,000
Compaq Computer Corp. .................................................... 200,000 5,516,000
Hewlett-Packard Co. ...................................................... 100,000 9,700,000
International Business Machines Corp. .................................... 70,000 7,875,000
(a) NCR Corp. ................................................................ 20,000 756,250
(a) Sun Microsystems Inc. .................................................... 100,000 11,675,000
------------
37,067,250
------------
CONTRACT DRILLING
Transocean Sedco Forex Inc. .............................................. 5,808 340,494
------------
</TABLE>
44
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
DATA PROCESSING SERVICES .3%
First Data Corp. ......................................................... 70,000 $ 2,734,375
------------
DISTRIBUTION SERVICES .1%
McKesson HBOC Inc. ....................................................... 43,000 1,314,188
------------
ELECTRONIC COMPONENTS .1%
(a) Stratos Lightwave Inc. ................................................... 31,400 1,012,650
------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 2.7%
(a) Agilent Technologies Inc. ................................................ 128,140 6,270,851
(a) JDS Uniphase Corp. ....................................................... 200,000 18,937,500
------------
25,208,351
------------
ELECTRONIC PRODUCTION EQUIPMENT .7%
(a) Applied Materials Inc. ................................................... 80,000 4,745,000
Taiwan Semiconductor Manufacturing Co. Ltd., ADR (Taiwan) ................ 68,388 1,393,406
------------
6,138,406
------------
ELECTRONICS/APPLIANCES 1.1%
Sony Corp., ADR (Japan) .................................................. 100,000 10,093,750
------------
FINANCIAL CONGLOMERATES .4%
Citigroup Inc. ........................................................... 66,666 3,604,131
------------
FINANCIAL PUBLISHING/SERVICES .1%
Equifax Inc. ............................................................. 20,000 538,750
------------
HOUSEHOLD/PERSONAL CARE .2%
Estee Lauder Cos. Inc., A ................................................ 40,000 1,465,000
------------
INFORMATION TECHNOLOGY SERVICES .5%
(a) Computer Sciences Corp. .................................................. 30,000 2,227,500
(a) Equant NV (Netherlands) .................................................. 50,000 1,834,375
------------
4,061,875
------------
INSURANCE BROKERS/SERVICES
(a) Choicepoint Inc. ......................................................... 4,000 183,500
------------
INTERNET RETAIL .1%
(a) Amazon.com Inc. .......................................................... 24,000 922,500
------------
INTERNET SOFTWARE/SERVICES 2.6%
(a) Allaire Corp. ............................................................ 45,000 382,500
(a) America Online Inc. ...................................................... 90,000 4,837,500
(a) China.com Corp., A (Hong Kong) ........................................... 2,400 31,950
(a) Inktomi Corp. ............................................................ 110,000 12,540,000
(a) Intertrust Technologies Corp. ............................................ 6,800 82,025
(a) Liberate Technologies Inc. ............................................... 42,400 1,226,950
(a) OpenTV Corp., A .......................................................... 2,600 86,450
(a) Proxicom Inc. ............................................................ 9,800 191,100
(a) Realnetworks Inc. ........................................................ 37,200 1,478,700
(a) SonicWALL Inc. ........................................................... 41,600 1,185,600
(a) VeriSign Inc. ............................................................ 10,000 2,025,625
(a) VerticalNet Inc. ......................................................... 7,200 252,900
(a) Vignette Corp. ........................................................... 13,200 394,350
(a) Websense Inc. ............................................................ 2,200 52,388
------------
24,768,038
------------
INVESTMENT BANKS/BROKERS .1%
(a) E*TRADE Group Inc. ....................................................... 80,000 1,315,000
------------
MANAGED HEALTH CARE .3%
UnitedHealth Group Inc. .................................................. 30,000 2,962,500
------------
</TABLE>
45
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
MEDIA CONGLOMERATES .5%
News Corp. Ltd., ADR (Australia) ......................................... 20,000 $ 1,121,250
Time Warner Inc. ......................................................... 40,000 3,130,000
------------
4,251,250
------------
MEDICAL SPECIALTIES 1.1%
(a) Inhale Therapeutic Systems Inc. .......................................... 80,000 4,510,000
Medtronic Inc. ........................................................... 110,000 5,699,375
------------
10,209,375
------------
OILFIELD SERVICES/EQUIPMENT .3%
Schlumberger Ltd. ........................................................ 30,000 2,469,375
------------
OTHER CONSUMER SERVICES .3%
(a) eBay Inc. ................................................................ 45,000 3,088,125
------------
PACKAGED SOFTWARE 10.3%
(a) Check Point Software Technologies Ltd. (Israel) .......................... 200,000 31,500,000
(a) i2 Technologies Inc. ..................................................... 160,000 29,930,000
(a) Intuit Inc. .............................................................. 90,000 5,130,000
(a) Microsoft Corp. .......................................................... 400,000 24,125,000
(a) Oracle Corp. ............................................................. 30,000 2,362,500
(a) Speechworks International Inc. ........................................... 14,400 892,800
(a) VERITAS Software Corp. ................................................... 20,000 2,840,000
------------
96,780,300
------------
PHARMACEUTICALS: MAJOR 3.1%
Bristol-Myers Squibb Co. ................................................. 50,000 2,856,250
Johnson & Johnson ........................................................ 12,780 1,200,521
Merck & Co. Inc. ......................................................... 30,000 2,233,125
Pfizer Inc. .............................................................. 397,500 17,862,656
Schering-Plough Corp. .................................................... 100,000 4,650,000
------------
28,802,552
------------
RECREATIONAL PRODUCTS .3%
(a) Electronic Arts Inc. ..................................................... 60,000 2,962,500
------------
SEMICONDUCTORS 6.0%
(a) Broadcom Corp., A ........................................................ 3,200 780,000
Intel Corp. .............................................................. 1,120,000 46,550,000
Linear Technology Corp. .................................................. 80,000 5,180,000
(a) Xilinx Inc. .............................................................. 45,000 3,853,125
------------
56,363,125
------------
TELECOMMUNICATIONS EQUIPMENT 4.8%
Corning Inc. ............................................................. 37,700 11,196,900
Lucent Technologies Inc. ................................................. 160,000 4,890,000
Motorola Inc. ............................................................ 555,750 15,699,937
Nokia Corp., ADR (Finland) ............................................... 235,000 9,355,937
Nortel Networks Corp. (Canada) ........................................... 70,000 4,169,374
------------
45,312,148
------------
TOTAL COMMON STOCKS (COST $185,207,637) .................................. 489,467,312
------------
</TABLE>
46
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
DYNATECH FUND AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(d) REPURCHASE AGREEMENT 49.7%
Joint Repurchase, 6.515%, 10/02/00 ( Maturity Value $467,473,882)
(COST $467,220,220) ..................................................... $467,220,220 $467,220,220
Barclays Capital Inc. (Maturity Value $43,564,630)
Bear, Stearns & Co., Inc. (Maturity Value $29,043,085)
Chase Securities Inc. (Maturity Value $43,564,630)
Deutsche Bank Govt. Securities (Maturity Value $43,564,630)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $43,564,630)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $43,564,630)
Goldman, Sachs & Co. (Maturity Value $17,306,042)
Lehman Brothers Inc. (Maturity Value $43,564,630)
Nesbitt Burns Securities Inc. (Maturity Value $43,564,630)
Paribas Corporation (Maturity Value $43,564,630)
Societe Generale (Maturity Value $29,043,085)
UBS Warburg (Maturity Value $43,564,630)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $652,427,857) 101.8% ............................. 956,687,532
OTHER ASSETS, LESS LIABILITIES (1.8%) .................................... (16,485,434)
------------
NET ASSETS 100.0% ........................................................ $940,202,098
============
</TABLE>
(a) Non-income producing.
(d) See note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
47
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
CLASS A 2000 1999(f) 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 33.21 $ 28.58 $ 27.09 $ 22.82 $ 19.38
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .45 .39 .49 .36 .22
Net realized and unrealized gains .......... 3.96 4.89 1.71 4.34 3.53
-------------------------------------------------------------------------------
Total from investment operations ............ 4.41 5.28 2.20 4.70 3.75
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.45) (.44) (.47) (.23) (.16)
Net realized gains ......................... (.26) (.21) (.24) (.20) (.15)
-------------------------------------------------------------------------------
Total distributions ......................... (.71) (.65) (.71) (.43) (.31)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 36.91 $ 33.21 $ 28.58 $ 27.09 $ 22.82
===============================================================================
Total return(a) ............................. 13.53% 18.63% 8.22% 20.84% 19.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $2,149,928 $2,119,740 $1,635,780 $1,435,561 $1,020,486
Ratios to average net assets:
Expenses ................................... .93% .89% .88% .89% .87%
Net investment income ...................... 1.27% 1.19% 1.78% 1.60% 1.16%
Portfolio turnover rate ..................... 8.12% 3.74% .58% 1.77% 2.03%
<CAPTION>
CLASS B
---------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 33.03 $ 31.45
---------- ----------
Income from investment operations:
Net investment income(c).................... .16 .14
Net realized and unrealized gains .......... 3.96 1.44
---------- ----------
Total from investment operations ............ 4.12 1.58
---------- ----------
Less distributions from:
Net investment income ...................... (.35) --
Net realized gains ......................... (.26) --
---------- ----------
Total distributions ......................... (.61) --
---------- ----------
Net asset value, end of year ................ $ 36.54 $ 33.03
========== ==========
Total return(a) ............................. 12.68% 5.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 38,353 $ 17,271
Ratios to average net assets:
Expenses ................................... 1.68% 1.65%(b)
Net investment income ...................... .45% .57%(b)
Portfolio turnover rate ..................... 8.12% 3.74%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(f) For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
48
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
CLASS C 2000 1999 1998 1997(e) 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 32.58 $ 28.11 $ 26.70 $ 22.60 $ 19.33
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .18 .14 .29 .20 .12
Net realized and unrealized gains .......... 3.91 4.81 1.66 4.25 3.46
----------------------------------------------------------------------------------
Total from investment operations ............ 4.09 4.95 1.95 4.45 3.58
----------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.22) (.27) (.30) (.15) (.16)
Net realized gains ......................... (.26) (.21) (.24) (.20) (.15)
----------------------------------------------------------------------------------
Total distributions ......................... (.48) (.48) (.54) (.35) (.31)
----------------------------------------------------------------------------------
Net asset value, end of year ................ $ 36.19 $ 32.58 $ 28.11 $ 26.70 $ 22.60
==================================================================================
Total return(a) ............................. 12.71% 17.71% 7.39% 19.91% 18.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 374,483 $ 362,216 $ 189,572 $ 117,218 $ 43,417
Ratios to average net assets:
Expenses ................................... 1.68% 1.65% 1.65% 1.66% 1.63%
Net investment income ...................... .52% .45% 1.02% .85% .40%
Portfolio turnover rate ..................... 8.12% 3.74% .58% 1.77% 2.03%
<CAPTION>
ADVISOR CLASS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 33.27 $ 28.63 $ 27.13 $ 23.24
--------------------------------------------------------------
Income from investment operations:
Net investment income(c).................... .54 .46 .57 .25
Net realized and unrealized gains .......... 3.97 4.90 1.69 3.64
--------------------------------------------------------------
Total from investment operations ............ 4.51 5.36 2.26 3.89
--------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.53) (.51) (.52) --
Net realized gains ......................... (.26) (.21) (.24) --
--------------------------------------------------------------
Total distributions ......................... (.79) (.72) (.76) --
--------------------------------------------------------------
Net asset value, end of year ................ $ 36.99 $ 33.27 $ 28.63 $ 27.13
==============================================================
Total return(a) ............................. 13.84% 18.89% 8.47% 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 39,442 $ 35,461 $ 41,871 $ 25,823
Ratios to average net assets:
Expenses ................................... .68% .65% .65% .66%(b)
Net investment income ...................... 1.51% 1.41% 2.01% 1.93%(b)
Portfolio turnover rate ..................... 8.12% 3.74% .58% 1.77%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(e) For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
See notes to financial statements.
49
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GROWTH FUND SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 85.2%
COMMERCIAL SERVICES 3.4%
(a) ACNielsen Corp. ............................................................ 81,333 $ 1,936,742
Dun & Bradstreet Corp. ..................................................... 244,000 8,402,750
Equifax Inc. ............................................................... 400,000 10,775,000
(a) Gartner Group Inc., B ...................................................... 63,537 690,965
Kelly Services Inc., A ..................................................... 300,000 7,087,500
(a) Programming & Systems Inc. ................................................. 345,300 6,906
(a) R. H. Donnelley Corp. ...................................................... 48,800 1,030,900
R. R. Donnelley & Sons Co. ................................................. 256,000 6,288,000
(a) Robert Half International Inc. ............................................. 300,000 10,406,250
Sabre Holdings Corp., A .................................................... 722,652 20,911,742
W.W. Grainger, Inc. ........................................................ 500,000 13,156,250
Wallace Computer Services Inc. ............................................. 500,000 7,625,000
--------------
88,318,005
--------------
CONSUMER DURABLES 1.4%
Eastman Kodak Co. .......................................................... 200,000 8,175,000
Genuine Parts Co. .......................................................... 369,000 7,034,063
Hasbro Inc. ................................................................ 600,000 6,862,500
Mattel Inc. ................................................................ 1,000,000 11,187,500
Polaroid Corp. ............................................................. 200,000 2,687,500
--------------
35,946,563
--------------
CONSUMER NON-DURABLES 1.9%
American Greetings Corp., A ................................................ 900,000 15,750,000
Hershey Foods Corp. ........................................................ 258,200 13,975,075
International Flavors & Fragrances Inc. .................................... 412,600 7,529,950
Tootsie Roll Industries Inc. ............................................... 19,400 761,450
V. F. Corp. ................................................................ 500,000 12,343,750
--------------
50,360,225
--------------
CONSUMER SERVICES 4.9%
Carnival Corp. ............................................................. 300,000 7,387,500
(a) Intervisual Books Inc. ..................................................... 85,000 154,063
Time Warner Inc. ........................................................... 900,000 70,425,000
(a) USA Networks Inc. .......................................................... 600,200 13,166,888
(a) Viacom Inc., B ............................................................. 17,577 1,028,255
The Walt Disney Co. ........................................................ 914,796 34,990,947
--------------
127,152,653
--------------
ELECTRONIC TECHNOLOGY 20.9%
(a) Agilent Technologies Inc. .................................................. 152,560 7,465,905
(a) Apple Computer Inc. ........................................................ 400,000 10,300,000
Boeing Co. ................................................................. 800,000 50,400,000
(a) Cisco Systems Inc. ......................................................... 1,350,000 74,587,500
Compaq Computer Corp. ...................................................... 175,000 4,826,500
(a) Conexant Systems Inc. ...................................................... 100,000 4,187,500
(a) Dell Computer Corp. ........................................................ 40,000 1,232,500
(a) Dionex Corp. ............................................................... 200,000 5,525,000
General Dynamics Corp. ..................................................... 500,000 31,406,250
Hewlett-Packard Co. ........................................................ 400,000 38,800,000
Intel Corp. ................................................................ 800,000 33,250,000
International Business Machines Corp. ...................................... 560,000 63,000,000
Lockheed Martin Corp. ...................................................... 500,000 16,480,000
Lucent Technologies Inc. ................................................... 500,000 15,281,250
Northrop Grumman Corp. ..................................................... 500,000 45,437,500
Raytheon Co., B ............................................................ 600,000 17,062,500
Rockwell International Corp. ............................................... 100,000 3,025,000
</TABLE>
50
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
GROWTH FUND SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
(a) Sun Microsystems Inc. ...................................................... 800,000 $ 93,400,000
United Technologies Corp. .................................................. 400,000 27,700,000
--------------
543,367,405
--------------
ENERGY MINERALS 1.5%
Anadarko Petroleum Corp. ................................................... 46,243 3,073,310
BP Amoco PLC, ADR (United Kingdom) ......................................... 295,200 15,645,600
Murphy Oil Corp. ........................................................... 40,000 2,592,500
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) ......................... 280,000 16,782,500
--------------
38,093,910
--------------
FINANCE .1%
(a) ChoicePoint Inc. ........................................................... 80,000 3,670,000
--------------
HEALTH SERVICES 1.0%
Cardinal Heath Inc. ........................................................ 157,500 13,889,531
(a) Caremark RX Inc. ........................................................... 75,625 850,781
IMS Health Inc. ............................................................ 488,000 10,126,000
(a) SYNAVANT Inc. .............................................................. 24,400 163,175
--------------
25,029,487
--------------
HEALTH TECHNOLOGY 19.0%
Abbott Laboratories ........................................................ 400,000 19,025,000
Allergan Inc. .............................................................. 400,000 33,775,000
(a) Allergan Specialty Therapeutics Inc., A .................................... 10,000 225,000
(a) ALZA Corp. ................................................................. 100,000 8,650,000
American Home Products Corp. ............................................... 600,000 33,937,500
(a) Amgen Inc. ................................................................. 800,000 55,862,500
Baxter International Inc. .................................................. 250,000 19,953,125
Bristol-Myers Squibb Co. ................................................... 640,000 36,560,000
Crescendo Pharmaceuticals Corp., A ......................................... 5,000 102,500
(a) Edwards Lifesciences Corp. ................................................. 50,000 1,090,625
(a) Immunex Corp. .............................................................. 240,000 10,440,000
Johnson & Johnson .......................................................... 400,000 37,575,000
Lilly (Eli) & Co. .......................................................... 400,000 32,450,000
Mallinckrodt Inc. .......................................................... 116,000 5,292,500
Merck & Co. Inc. ........................................................... 400,000 29,775,000
Pfizer Inc. ................................................................ 1,920,000 86,280,000
Schering-Plough Corp. ...................................................... 1,800,000 83,700,000
--------------
494,693,750
--------------
INDUSTRIAL SERVICES 1.4%
Schlumberger Ltd. .......................................................... 400,000 32,925,000
Transocean Sedco Forex Inc. ................................................ 77,440 4,539,920
--------------
37,464,920
--------------
NON-ENERGY MINERALS
Deltic Timber Corp. ........................................................ 11,428 193,562
--------------
PROCESS INDUSTRIES 4.7%
Air Products & Chemicals Inc. .............................................. 500,000 18,000,000
Canadian Pacific Ltd. (Canada) ............................................. 500,000 13,000,000
Eastman Chemical Co. ....................................................... 25,000 923,438
(a) Ionics Inc. ................................................................ 400,000 8,525,000
Millipore Corp. ............................................................ 400,000 19,375,000
National Service Industries Inc. ........................................... 500,000 9,781,250
NCH Corp. .................................................................. 200,000 7,062,500
Pall Corp. ................................................................. 500,000 9,968,750
RPM Inc. ................................................................... 500,000 4,531,250
</TABLE>
51
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
GROWTH FUND SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PROCESS INDUSTRIES (CONT.)
Sigma-Aldrich Corp. ........................................................ 200,000 $ 6,600,000
Textron Inc. ............................................................... 525,000 24,215,625
--------------
121,982,813
--------------
PRODUCER MANUFACTURING 10.2%
(a) American Power Conversion Corp. ............................................ 500,000 9,593,750
ArvinMeritor Inc. .......................................................... 12,499 183,579
Avery Dennison Corp. ....................................................... 220,000 10,202,500
Caterpillar Inc. ........................................................... 200,000 6,750,000
Deere & Co. ................................................................ 300,000 9,975,000
Emerson Electric Co. ....................................................... 500,000 33,500,000
Illinois Tool Works Inc. ................................................... 161,500 9,023,813
Ingersoll-Rand Co. ......................................................... 437,500 14,820,313
Minnesota Mining & Manufacturing Co. ....................................... 400,000 36,450,000
Molex Inc. ................................................................. 146,483 7,974,168
Molex Inc., A .............................................................. 146,483 6,069,889
(a) Osmonics Inc. .............................................................. 300,000 2,400,000
Pitney Bowes Inc. .......................................................... 500,000 19,718,750
Teleflex Inc. .............................................................. 500,000 17,187,500
Thomas & Betts Corp. ....................................................... 300,000 5,231,250
Tyco International Ltd. (Bermuda) .......................................... 1,441,198 74,780,161
--------------
263,860,673
--------------
RETAIL TRADE .3%
Albertson's Inc. ........................................................... 235,000 4,935,000
Tiffany & Co. .............................................................. 30,000 1,156,875
Weis Markets Inc. .......................................................... 58,218 2,310,527
--------------
8,402,402
--------------
TECHNOLOGY SERVICES 4.8%
Automatic Data Processing Inc. ............................................. 800,000 53,500,000
(a) Computer Sciences Corp. .................................................... 900,000 66,825,000
(a) Microsoft Corp. ............................................................ 90,000 5,428,125
--------------
125,753,125
--------------
TRANSPORTATION 8.0%
(a) Alaska Air Group Inc. ...................................................... 500,000 12,000,000
(a) AMR Corp. .................................................................. 1,000,000 32,687,500
British Airways PLC, ADR (United Kingdom) .................................. 200,000 8,550,000
(a) Continental Airlines Inc., B ............................................... 500,000 22,718,750
Delta Air Lines Inc. ....................................................... 1,000,000 44,375,000
KLM Royal Dutch Airlines, N.Y. shs. (Netherlands) .......................... 500,001 9,343,769
(a) Northwest Airlines Corp. ................................................... 500,000 12,281,250
Providence & Worcester Railroad Co. ........................................ 85,000 600,310
UAL Corp. .................................................................. 900,000 37,800,000
Union Pacific Corp. ........................................................ 300,000 11,662,500
(a) US Airways Group Inc. ...................................................... 500,000 15,218,750
--------------
207,237,829
--------------
UTILITIES 1.7%
Coastal Corp. .............................................................. 600,000 44,475,000
--------------
TOTAL COMMON STOCKS (COST $1,006,194,094) .................................. 2,216,002,322
--------------
</TABLE>
52
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GROWTH FUND AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(d) REPURCHASE AGREEMENT 15.0%
Joint Repurchase Agreement, 6.515%, 10/02/00 (Maturity Value $390,445,558)
(COST $390,233,694) ........................................................ $390,233,694 $ 390,233,694
Barclays Capital Inc. (Maturity Value $36,386,238)
Bear, Stearns & Co., Inc. (Maturity Value $24,257,491)
Chase Securities Inc. (Maturity Value $36,386,238)
Deutsche Bank Govt. Securities (Maturity Value $36,386,238)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $36,386,238)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $36,386,238)
Goldman, Sachs & Co. (Maturity Value $14,454,434)
Lehman Brothers Inc. (Maturity Value $36,386,238)
Nesbitt Burns Securities Inc. (Maturity Value $36,386,238)
Paribas Corporation (Maturity Value $36,386,238)
Societe Generale (Maturity Value $24,257,491)
UBS Warburg (Maturity Value $36,386,238)
Collateralized by U.S. Treasury Bills and Notes
--------------
TOTAL INVESTMENTS (COST $1,396,427,788) 100.2% ............................. 2,606,236,016
OTHER ASSETS, LESS LIABILITIES (.2%) ....................................... (4,030,308)
--------------
NET ASSETS 100.0% .......................................................... $2,602,205,708
==============
</TABLE>
(a) Non-income producing.
(d) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
53
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
CLASS A 2000 1999(f) 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.23 $ 2.34 $ 2.49 $ 2.30 $ 2.30
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .18 .17 .17 .18 .19
Net realized and unrealized gains (losses) . .13 (.09) (.11) .20 .02
---------------------------------------------------------------------------------
Total from investment operations ............ .31 .08 .06 .38 .21
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.18) (.18) (.18) (.18) (.18)
Net realized gains ......................... (.01) (.01) (.03) (.01) (.03)
---------------------------------------------------------------------------------
Total distributions ......................... (.19) (.19) (.21) (.19) (.21)
---------------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.35 $ 2.23 $ 2.34 $ 2.49 $ 2.30
=================================================================================
Total return(a) ............................. 14.68% 4.02% 2.23% 17.31% 9.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $6,083,135 $6,776,804 $7,704,983 $7,738,746 $6,780,153
Ratios to average net assets:
Expenses ................................... .76% .73% .72% .72% .70%
Net investment income ...................... 8.01% 7.46% 6.83% 7.45% 8.27%
Portfolio turnover rate ..................... 24.41% 17.35% 22.01% 16.15% 25.29%
<CAPTION>
CLASS B
----------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.24 $ 2.36
---------------------------
Income from investment operations:
Net investment income(c) ................... .17 .12
Net realized and unrealized gains (losses) . .12 (.11)
---------------------------
Total from investment operations ............ .29 .01
---------------------------
Less distributions from:
Net investment income ...................... (.17) (.13)
Net realized gains ......................... (.01) --
---------------------------
Total distributions ......................... (.18) (.13)
Net asset value, end of year ................ $ 2.35 $ 2.24
===========================
Total return(a) ............................. 14.09% .34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 140,711 $ 83,031
Ratios to average net assets:
Expenses ................................... 1.26% 1.23%(b)
Net investment income ...................... 7.49% 7.22%(b)
Portfolio turnover rate ..................... 24.41% 17.35%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(f) For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
54
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN INCOME FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
CLASS C 2000 1999 1998 1997(e) 1996
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.24 $ 2.34 $ 2.49 $ 2.30 $ 2.30
----------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .17 .16 .16 .16 .17
Net realized and unrealized gains (losses) . .13 (.08) (.11) .21 .03
----------------------------------------------------------------------------
Total from investment operations ............ .30 .08 .05 .37 .20
----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.17) (.17) (.17) (.17) (.17)
Net realized gains ......................... (.01) (.01) (.03) (.01) (.03)
----------------------------------------------------------------------------
Total distributions ......................... (.18) (.18) (.20) (.18) (.20)
----------------------------------------------------------------------------
Net asset value, end of year ................ $ 2.36 $ 2.24 $ 2.34 $ 2.49 $ 2.30
============================================================================
Total return(a) ............................. 14.54% 3.46% 1.70% 16.72% 8.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 872,662 $ 997,438 $ 1,014,634 $ 695,355 $ 343,314
Ratios to average net assets:
Expenses ................................... 1.26% 1.23% 1.22% 1.22% 1.21%
Net investment income ...................... 7.51% 6.97% 6.35% 6.96% 7.84%
Portfolio turnover rate ..................... 24.41% 17.35% 22.01% 16.15% 25.29%
<CAPTION>
ADVISOR CLASS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 2.23 $ 2.34 $ 2.48 $ 2.34
----------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .18 .17 .17 .14
Net realized and unrealized gains (losses) . .12 (.09) (.10) .14
----------------------------------------------------------
Total from investment operations ............ .30 .08 .07 .28
----------------------------------------------------------
Less distributions from:
Net investment income ...................... (.18) (.18) (.18) (.14)
Net realized gains ......................... (.01) (.01) (.03) --
----------------------------------------------------------
Total distributions ......................... (.19) (.19) (.21) (.14)
----------------------------------------------------------
Net asset value, end of year ................ $ 2.34 $ 2.23 $ 2.34 $ 2.48
==========================================================
Total return(a) ............................. 14.90% 3.71% 2.82% 12.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 21,220 $ 23,891 $ 21,851 $ 13,318
Ratios to average net assets:
Expenses ................................... .61% .58% .57% .57%(b)
Net investment income ...................... 8.16% 7.60% 7.02% 7.58%(b)
Portfolio turnover rate ..................... 24.41% 17.35% 22.01% 16.15%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(e) For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
See notes to financial statements.
55
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
INCOME FUND COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 37.4%
CONSUMER DURABLES .5%
General Motors Corp. .............................................. United States 520,000 $ 33,800,000
--------------
CONSUMER NON-DURABLES 6.7%
Nabisco Group Holdings Corp. ...................................... United States 600,000 17,100,000
Philip Morris Cos. Inc. ........................................... United States 14,500,000 426,843,750
R.J. Reynolds Tobacco Holdings Inc. ............................... United States 933,500 30,105,375
--------------
474,049,125
--------------
ENERGY MINERALS 3.4%
Athabasca Oil Sands Trust ......................................... Canada 2,700,000 55,988,303
BP Prudhoe Bay Royalty Trust ...................................... United States 500,000 6,937,500
Canadian Oil Sands Trust Units .................................... Canada 2,400,000 49,926,891
Chesapeake Energy Corp. ........................................... United States 6,100,000 43,843,750
EOG Resources Inc. ................................................ United States 731,800 28,448,725
Petroleo Brasileiro SA (Petrobras), ADR ........................... Brazil 1,360,000 40,885,000
Ultramar Diamond Shamrock Corp. ................................... United States 625,000 15,859,375
--------------
241,889,544
--------------
NON-ENERGY MINERALS 1.9%
Anglo American Platinum Corp. Ltd., ADR ........................... South Africa 943,691 33,501,031
AngloGold Ltd., ADR ............................................... South Africa 2,320,000 42,630,000
De Beers Consolidated Mines AG, ADR ............................... South Africa 400,000 11,075,000
Impala Platinum Holdings Ltd., ADR ................................ South Africa 1,184,200 50,032,450
--------------
137,238,481
--------------
PROCESS INDUSTRIES
(a) Dan River Inc., A ................................................. United States 209,700 904,331
--------------
REAL ESTATE .2%
Liberty Property Trust ............................................ United States 300,000 8,250,000
MeriStar Hospitality Corp. ........................................ United States 112,500 2,278,125
--------------
10,528,125
--------------
TELECOMMUNICATIONS .5%
Telecom Argentina Stet-France Telecom, SA, B, ADR ................. Argentina 1,700,000 36,762,500
--------------
UTILITIES 24.2%
American Electric Power Co. Inc. .................................. United States 3,500,000 136,937,500
Cinergy Corp. ..................................................... United States 2,000,000 66,125,000
Conectiv Inc. ..................................................... United States 100,000 1,787,500
Dominion Resources Inc. ........................................... United States 1,100,000 63,868,750
DTE Energy Co. .................................................... United States 400,000 15,300,000
Edison International .............................................. United States 1,550,000 29,934,375
Energy East Corp. ................................................. United States 1,900,000 42,987,500
Entergy Corp. ..................................................... United States 3,400,000 126,650,000
FirstEnergy Corp. ................................................. United States 1,400,000 37,712,500
Florida Progress Corp. ............................................ United States 2,620,000 138,696,250
FPL Group Inc. .................................................... United States 1,400,000 92,050,000
GPU Inc. .......................................................... United States 1,700,000 55,143,750
Hawaiian Electric Industries Inc. ................................. United States 800,000 27,900,000
KeySpan Corp. ..................................................... United States 950,000 38,118,750
PECO Energy Co. ................................................... United States 2,000,000 121,125,000
PG&E Corp. ........................................................ United States 2,627,500 63,552,656
Potomac Electric Power Co. ........................................ United States 1,900,000 47,856,250
Public Service Enterprise Group Inc. .............................. United States 2,350,000 105,015,626
Reliant Energy Inc. ............................................... United States 2,000,000 93,000,000
Sempra Energy ..................................................... United States 1,900,000 39,543,750
Sierra Pacific Resources .......................................... United States 1,300,000 23,400,000
Southern Co. ...................................................... United States 2,700,000 87,581,250
TXU Corp. ......................................................... United States 2,600,000 103,025,000
</TABLE>
56
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
INCOME FUND COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES (CONT.)
Western Resources Inc. ............................................ United States 2,200,000 $ 47,575,000
Xcel Energy Inc. .................................................. United States 4,300,000 118,250,000
--------------
1,723,136,405
--------------
MISCELLANEOUS
(e,f) Continucare Corp. ................................................. United States 3,591,463 2,020,198
International Wireless Communications Holdings Inc. ............... United States 652,652 391,591
--------------
2,411,789
--------------
TOTAL COMMON STOCKS (COST $1,932,216,929) 2,660,720,300
--------------
PREFERRED STOCKS .7%
NON-ENERGY MINERALS .1%
Freeport-McMoran Copper & Gold Inc., cum. variable pfd., Gold ..... United States 400,000 7,075,000
--------------
PROCESS INDUSTRIES .5%
Asia Pulp & Paper Co. Ltd., 12.00% ................................ Indonesia 100,000,000 38,250,000
--------------
TELECOMMUNICATIONS .1%
Nortel Inversora SA, B, ADR ....................................... Argentina 524,000 7,827,250
--------------
TOTAL PREFERRED STOCKS (COST $104,707,445) 53,152,250
CONVERTIBLE PREFERRED STOCKS 11.1%
ENERGY MINERALS 3.4%
Enron Corp., 7.00%, cvt. pfd. ..................................... United States 1,087,700 38,681,331
Kerr-McGee Corp., 5.50%, cvt. pfd. (exchangeable into Devon
Energy Corp. common) ............................................ United States 1,391,500 75,619,328
Lomak Financing Trust, 5.75%, cvt. pfd. ........................... United States 1,500,000 36,093,750
Newfield Financial Trust I, 6.50%, cvt. pfd. ...................... United States 726,400 50,848,000
Nuevo Financing I, 5.75%, cvt. pfd., A ............................ United States 1,450,000 39,965,625
--------------
241,208,034
--------------
INDUSTRIAL SERVICES .8%
Weatherford International Inc., 5.00%, cvt. pfd., 144A ............ United States 1,200,000 55,800,000
--------------
NON-ENERGY MINERALS .2%
Battle Mountain Gold Co., $3.25, cvt. pfd. ........................ United States 295,000 9,200,313
Hecla Mining Co., 7.00%, cvt. pfd., B ............................. United States 375,000 3,609,375
Kinam Gold Inc., $3.75, cvt. pfd., B .............................. Canada 650,000 5,118,750
--------------
17,928,438
--------------
PROCESS INDUSTRIES .1%
Georgia-Pacific Corp., (Georgia-Pac Grp), 7.50%, cvt. pfd. ........ United States 300,000 8,850,000
--------------
REAL ESTATE 5.2%
Apartment Investment & Management Co., 8.00%, cvt. pfd., K ........ United States 1,700,000 47,175,000
Archstone Communities Trust, $1.75, cvt. pfd., A .................. United States 1,040,000 34,937,500
Felcor Lodging Trust Inc., $1.95, cvt. pfd., A .................... United States 2,100,000 39,900,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ................ United States 3,400,000 57,800,000
Host Marriott Corp., 6.75%, cvt. pfd. ............................. United States 1,300,000 49,237,500
Innkeepers USA Trust, 8.625%, cvt. pfd., A ........................ United States 2,000,000 37,750,000
Prologis Trust, 7.00%, cvt. pfd., B ............................... United States 800,000 24,600,000
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A ............. United States 1,850,000 43,243,750
Vornado Realty Trust, 6.50%, cvt. pfd., A ......................... United States 618,000 32,329,125
--------------
366,972,875
--------------
TRANSPORTATION .5%
Union Pacific Capital Trust, 6.25%, cvt. pfd. ..................... United States 900,000 36,562,500
--------------
UTILITIES .9%
CMS Energy Trust I, 7.75%, cvt. pfd. .............................. United States 1,600,000 63,500,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $897,983,690) ............ 790,821,847
--------------
</TABLE>
57
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS 19.9%
CONSUMER DURABLES .2%
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ........ United States $ 32,000,000 $ 12,960,000
--------------
CONSUMER NON-DURABLES 2.6%
Compania de Alimentos Fargo SA, senior note, 13.25%, 8/01/08 ...... Argentina 28,100,000 22,550,250
Doane Pet Care Co., senior sub. note, 9.75%, 5/15/07 .............. United States 15,381,000 13,458,375
Evenflo Company Inc., senior note, B, 11.75%, 8/15/06 ............. United States 28,000,000 27,300,000
Hartmarx Corp., senior sub. note, 10.875%, 1/15/02 ................ United States 29,000,000 28,565,000
Playtex Family Products Corp., senior sub. note, 9.00%, 12/15/03 .. United States 38,500,000 38,307,500
Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 . United States 60,900,000 35,017,500
SFC New Holdings Inc., senior note, 11.25%, 8/15/01 ............... United States 10,163,000 9,985,147
The William Carter Co., senior sub. note, A, 10.375%, 12/01/06 .... United States 6,000,000 5,827,500
--------------
181,011,272
--------------
CONSUMER SERVICES 4.4%
Adelphia Communications Corp., senior unsecured note, 7.875%,
5/01/09 ......................................................... United States 23,600,000 20,001,000
Adelphia Communications Corp., senior unsecured note, 10.875%,
10/01/10 ........................................................ United States 12,000,000 11,820,000
(b) AMF Bowling Worldwide Inc., senior sub. note, B, 10.875%, 3/15/06 . United States 17,000,000 3,825,000
Cablevision SA, 13.75%, 5/01/09 ................................... Argentina 11,500,000 10,263,750
Coast Hotel & Casino Inc., senior sub. note, 9.50%, 4/01/09 ....... United States 14,000,000 13,860,000
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 .............. United States 40,000,000 41,000,000
EchoStar Broadband Corp., senior note, 144A, 10.375%, 10/01/07 .... United States 40,250,000 40,250,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ........... United States 8,000,000 7,960,000
Harveys Casinos Resorts, senior sub. note, 10.625%, 6/01/06 ....... United States 11,000,000 11,508,750
Lone Cypress Co., sub. note, 144A, 11.50%, 8/01/09 ................ United States 65,930,373 65,600,721
NTL Communications Corp., senior note, 144A, 11.875%, 10/01/10 .... United Kingdom 18,600,000 18,228,000
Protection One Alarm Monitoring Inc., senior sub. note, 144A,
8.125%, 1/15/09 ................................................. United States 28,000,000 15,680,000
Station Casinos Inc., senior sub. note, 144A, 9.875%, 7/01/10 ..... United States 24,100,000 24,341,000
Venetian Casino/Las Vegas Sands, mortgage note, 12.25%, 11/15/04 .. United States 30,000,000 30,900,000
--------------
315,238,221
--------------
ELECTRONIC TECHNOLOGY .2%
(b) Anacomp Inc., senior sub. note, B, 10.875%, 4/01/04 ............... United States 60,000,000 12,900,000
--------------
ENERGY MINERALS 2.8%
Bellwether Exploration Co., senior sub. note, 10.875%, 4/01/07 .... United States 39,000,000 37,830,000
Chesapeake Energy Corp., senior note, B, 7.875%, 3/15/04 .......... United States 5,000,000 4,700,000
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 ..... Mexico 90,000,000 97,425,000
Denbury Management Inc., senior unsecured sub. note, 9.00%, 3/01/08 United States 41,000,000 37,925,000
Mesa Operating Co., 10.625%, 7/01/06 .............................. United States 4,800,000 4,464,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 ..... United States 10,800,000 10,530,000
Plains Resources Inc., senior sub. note, B, 10.25%, 3/15/06 ....... United States 8,000,000 8,160,000
--------------
201,034,000
--------------
FINANCE .4%
Sovereign Bancorp Inc., senior unsecured note, 10.50%, 11/15/06 ... United States 25,200,000 25,767,000
--------------
HEALTH TECHNOLOGY .6%
Dade International Inc., B, 11.125%, 5/01/06 ...................... United States 22,000,000 6,270,000
ICN Pharmaceuticals Inc., senior note, B, 9.25%, 8/15/05 .......... United States 37,000,000 36,907,500
--------------
43,177,500
--------------
INDUSTRIAL SERVICES 1.0%
Allied Waste North America Inc., B, 10.00%, 8/01/09 ............... United States 37,000,000 32,375,000
First Wave Marine Inc., senior note, 11.00%, 2/01/08 .............. United States 10,000,000 5,750,000
Great Lakes Dredge & Dock Corp., 11.25%, 8/15/08 .................. United States 10,000,000 9,875,000
R&B Falcon Corp., senior note, B, 6.50%, 4/15/03 .................. United States 22,000,000 21,120,000
--------------
69,120,000
--------------
</TABLE>
58
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
PROCESS INDUSTRIES 3.8%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 ..... United States $ 25,000,000 $ 25,000,000
Consoltex Group Inc., senior sub. note, B, 11.00%, 10/01/03 ....... United States 50,000,000 36,625,000
Four M Corp., senior note, B, 12.00%, 6/01/06 ..................... United States 30,000,000 29,550,000
(b) Packaging Resources Inc., senior note, 11.625%, 5/01/03 ........... United States 42,000,000 29,610,000
Printpack Inc., senior sub. note, B, 10.625%, 8/15/06 ............. United States 50,000,000 48,750,000
(b) RBX Corp., senior sub. note, B, 11.25%, 10/15/05 .................. United States 60,000,000 6,300,000
Riverwood International, senior sub. note, 10.875%, 4/01/08 ....... United States 50,000,000 46,250,000
Tjiwi Kimia Finance Mauritius, senior unsecured note, 10.00%,
8/01/04 ......................................................... Indonesia 87,000,000 51,330,000
--------------
273,415,000
--------------
PRODUCER MANUFACTURING 1.4%
Collins & Aikman Products, senior sub. note, 11.50%, 4/15/06 ...... United States 35,000,000 33,775,000
Nortek Inc., senior sub. note, 9.875%, 3/01/04 .................... United States 18,500,000 17,991,250
Outsourcing Services Group Inc., senior sub. note, 144A, 10.875%,
3/01/06 ......................................................... United States 22,000,000 18,370,000
Thermadyne Industries Inc., sub. note, 10.75%, 11/01/03 ........... United States 14,500,000 13,448,750
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 . Canada 30,000,000 18,750,000
--------------
102,335,000
--------------
TECHNOLOGY SERVICES .3%
PSINet Inc., senior note, 10.50%, 12/01/06 ........................ United States 34,000,000 22,270,000
--------------
TELECOMMUNICATIONS 2.2%
Dobson Communications Corp., senior note, 10.875%, 7/01/10 ........ United States 34,500,000 33,896,250
Global Crossing Holdings Ltd., senior note, 9.50%, 11/15/09 ....... Bermuda 10,000,000 9,950,610
Metrocall Inc., senior sub. note, 11.00%, 9/15/08 ................. United States 32,000,000 21,600,000
Nextlink Communications Inc., senior unsecured note, 10.75%, 6/01/09 United States 46,000,000 42,780,000
Voicestream Wireless Corp., senior note, 10.375%, 11/15/09 ........ United States 16,000,000 17,360,000
Williams Communications Group Inc., senior unsecured note, 10.875%,
10/01/09 ........................................................ United States 35,200,000 32,560,000
--------------
158,146,860
--------------
TOTAL BONDS (COST $1,681,327,717) 1,417,374,853
--------------
CONVERTIBLE BONDS 5.5%
ELECTRONIC TECHNOLOGY .1%
Trans-Lux Corp., cvt. sub. note, 7.50%, 12/01/06 .................. United States 8,000,000 6,400,000
--------------
ENERGY MINERALS 1.2%
Kerr McGee Corp., cvt., 7.50%, 5/15/14 ............................ United States 26,889,000 26,485,665
Swift Energy Co., cvt. sub. note, 6.25%, 11/15/06 ................. United States 42,400,000 55,650,000
--------------
82,135,665
--------------
INDUSTRIAL SERVICES .6%
Key Energy Services Inc., cvt., 5.00%, 9/15/04 .................... United States 31,800,000 25,960,566
Parker Drilling Co., cvt. sub. note, 5.50%, 8/01/04 ............... United States 13,500,000 11,508,750
--------------
37,469,316
--------------
NON-ENERGY MINERALS 1.1%
Ashanti Capital Ltd., cvt., 5.50%, 3/15/03 ........................ Ghana 50,000,000 31,250,000
Coeur d'Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 .. United States 900,000 543,938
Coeur d'Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ........ United States 20,000,000 7,425,000
Trizec Hahn Corp., cvt. senior deb., 3.00%, 1/29/21 (exchangeable
into Barrick Gold Corp. common) ................................. Canada 70,000,000 40,687,500
--------------
79,906,438
--------------
PRODUCER MANUFACTURING .3%
Exide Corp., cvt. senior sub. note, 144A, 2.90%, 12/15/05 ......... United States 50,000,000 23,500,000
--------------
REAL ESTATE 2.2%
Equity Office Properties Trust, cvt., 144A, 7.25%, 11/15/08 ....... United States 44,500,000 45,390,000
Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02 ............... United States 65,000,000 57,200,000
Meristar Hospitality Corp., cvt. sub. note, 4.75%, 10/15/04 ....... United States 70,000,000 55,037,500
--------------
157,627,500
--------------
</TABLE>
59
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE BONDS (CONT.)
MISCELLANEOUS
Continucare Corp., cvt., sub. note, 144A, 7.00%, 10/31/02 ......... United States $ 2,317,073 $ 440,244
--------------
TOTAL CONVERTIBLE BONDS (COST $429,084,671) 387,479,163
--------------
FOREIGN GOVERNMENT AND AGENCY BONDS 11.2%
ESCOM, E168, utility deb., 11.00%, 6/01/08 ........................ South Africa 240,000,000 ZAR 28,832,572
Republic of Argentina, L, 6.00%, 3/31/23 .......................... Argentina 173,000,000 117,423,750
Republic of Argentina, 11.75%, 6/15/15 ............................ Argentina 134,404,000 123,114,064
Republic of Brazil, 11.00%, 8/17/40 ............................... Brazil 190,846,000 152,438,243
Republic of Brazil, L, FRN, 7.375%, 4/15/06 ....................... Brazil 197,160,000 185,823,300
Republic of Bulgaria, FRN, 7.75%, 7/28/11 ......................... Bulgaria 60,000,000 45,900,000
Republic of Korea, 8.875%, 4/15/08 ................................ South Korea 60,000,000 63,037,800
Republic of South Africa, 12.00%, 2/28/05 ......................... South Africa 200,000,000 ZAR 27,011,336
Republic of Turkey, 12.375%, 6/15/09 .............................. Turkey 50,000,000 51,437,500
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY BONDS (COST $813,809,897) 795,018,565
--------------
U.S. GOVERNMENT AND AGENCY SECURITIES 3.7%
FHLMC, 6.875%, 1/15/05 ............................................ United States 90,000,000 91,157,400
U.S. Treasury Note, 5.875%, 11/15/04 .............................. United States 173,000,000 172,891,875
--------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $256,724,116) 264,049,275
--------------
ZERO COUPON/STEP-UP BONDS 5.6%
AMF Bowling Worldwide Inc., senior disc. note, zero cpn. to 3/15/01,
12.25% thereafter, 3/15/06 ...................................... United States 26,294,000 5,127,330
APP Finance VI Mauritius Ltd., cvt., 11/18/12 ..................... Indonesia 150,000,000 19,125,000
Charter Communications Holdings LLC, senior disc. note, zero cpn. to
4/01/04, 9.92% thereafter, 4/01/11 .............................. United States 60,000,000 35,400,000
Crown Castle International Corp., senior disc. note, zero cpn. to
8/01/04, 11.25% thereafter, 8/01/11 ............................. United States 50,000,000 32,750,000
Huntsman ICI Chemicals LLC, senior disc. note, 12/31/09 ........... United States 75,000,000 25,500,000
Level 3 Communications Inc., zero cpn to 12/01/03,10.50% thereafter,
senior disc. notes, 2/01/08 ..................................... United States 50,000,000 29,375,000
Loral Space and Communications Ltd., senior disc. note, zero cpn.
to 1/15/02, 12.50% thereafter, 1/15/07 ........................... United States 5,500,000 1,897,500
Mesa Operating Co., senior unsecured sub. note, zero cpn. to
7/01/01, 11.625% thereafter, 7/01/06 ............................ United States 15,000,000 12,300,000
Microcell Telecommunications Inc., senior disc. note, zero cpn. to
6/01/04, 12.00% thereafter, 6/01/09 ............................. Canada 50,000,000 36,125,000
Nextel Communications Inc., senior disc. note, zero cpn. to
2/15/03, 9.95% thereafter, 12/15/08 ............................. United States 90,000,000 69,750,000
Nextel International Inc., senior disc. note, zero cpn. to
4/15/03, 12.125% thereafter, 4/15/08 ............................ United States 50,000,000 32,250,000
Nextlink Communications Inc., senior disc. note, zero cpn. to
6/01/04, 12.25% thereafter, 6/01/09 ............................. United States 44,000,000 25,190,000
Sellco Corp., PIK, sub. note, 12.00%, 12/15/04 .................... United States 13,400 2,345
Spectrasite Holdings Inc., senior disc. note, zero cpn. to
4/15/04, 11.25% thereafter, 4/15/09 ............................. United States 20,000,000 11,450,000
Spectrasite Holdings Inc., senior disc. note, zero cpn. to
3/15/05, 12.875% thereafter, 3/15/10 ............................ United States 36,000,000 18,900,000
United Pan-Europe Communications NV, senior disc. note, zero cpn.
to 8/01/04, 12.50% thereafter, 8/01/09 .......................... Netherland 52,000,000 24,960,000
VoiceStream Wireless Corp., senior disc. note, zero cpn.
to 11/15/04, 11.875% thereafter, 11/15/09 ....................... United States 23,000,000 16,790,000
--------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $458,223,294)................ 396,892,175
--------------
TOTAL LONG TERM INVESTMENTS (COST $6,574,077,759).................. 6,765,508,428
--------------
</TABLE>
60
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(d) REPURCHASE AGREEMENT 3.7%
Joint Repurchase Agreement, 6.515%, 10/02/00 (Maturity Value
$265,754,843) (COST $265,610,639) ............................... $265,610,639 $ 265,610,639
Barclays Capital Inc. (Maturity Value $24,766,114)
Bear, Stearns & Co., Inc. (Maturity Value $16,510,742)
Chase Securities Inc. (Maturity Value $24,766,114)
Deutsche Bank Govt. Securities (Maturity Value $24,766,114)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value
$24,766,114)
Dresdner Kleinwort Benson, North America LLC (Maturity Value
$24,766,114)
Goldman, Sachs & Co. (Maturity Value $9,838,333)
Lehman Brothers Inc. (Maturity Value $24,766,114)
Nesbitt Burns Securities Inc. (Maturity Value $24,766,114)
Paribas Corporation (Maturity Value $24,766,114)
Societe Generale (Maturity Value $16,510,742)
UBS Warburg (Maturity Value $24,766,114)
Collateralized by U.S. Treasury Bills and Notes
--------------
TOTAL INVESTMENTS (COST $6,839,688,398) 98.8% ..................... 7,031,119,067
OTHER ASSETS, LESS LIABILITIES 1.2% ............................... 86,608,205
--------------
NET ASSETS 100.0% ................................................. $7,117,727,272
==============
</TABLE>
CURRENCY ABBREVIATION
ZAR - South African Rand
(*) The principal amount is stated in U.S. dollars unless otherwise indicated.
(a) Non-income producing.
(b) See Note 6 regarding defaulted securities.
(d) See Note 1(c) regarding joint repurchase agreement.
(e) See note 7 regarding restricted securities.
(f) The 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. Investment in non-controlled "affiliated
companies" at 9/30/00 was $2,020,198.
See notes to financial statements.
61
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
CLASS A 2000 1999(f) 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 6.62 $ 6.99 $ 6.89 $ 6.72 $ 6.87
------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c)..................... .43 .44 .46 .48 .49
Net realized and unrealized gains (losses) .. .01 (.37) .10 .17 (.15)
------------------------------------------------------------------------------
Total from investment operations ............. .44 .07 .56 .65 .34
------------------------------------------------------------------------------
Less distributions from net investment income (.43) (.44) (.46) (.48) (.49)
------------------------------------------------------------------------------
Net asset value, end of year ................. $ 6.63 $ 6.62 $ 6.99 $ 6.89 $ 6.72
===============================================================================
Total return(a) .............................. 6.90% 1.05% 8.41% 10.08% 5.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $6,852,374 $7,895,906 $9,049,829 $9,350,751 $10,129,483
Ratios to average net assets:
Expenses .................................... .70% .67% .65% .64% .61%
Net investment income ....................... 6.62% 6.43% 6.67% 7.01% 7.18%
Portfolio turnover rate(h) ................... 3.98% 15.04% 25.98% 1.74% 8.01%
<CAPTION>
CLASS B
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 6.62 $ 6.91
--------------------------
Income from investment operations:
Net investment income(c) .................... .39 .30
Net realized and unrealized gains (losses) .. .01 (.28)
--------------------------
Total from investment operations ............. .40 .02
--------------------------
Less distributions from net investment income (.39) (.31)
--------------------------
Net asset value, end of year ................. $ 6.63 $ 6.62
==========================
Total return(a) .............................. 6.35% .25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $ 80,167 $ 51,433
Ratios to average net assets:
Expenses .................................... 1.25% 1.22%(b)
Net investment income ....................... 6.07% 5.93%(b)
Portfolio turnover rate(h) ................... 3.98% 15.04%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(f) For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
(h) 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.
62
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
CLASS C 2000 1999 1998 1997(e) 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year............ $ 6.60 $ 6.97 $ 6.87 $ 6.70 $ 6.85
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c)..................... .39 .40 .42 .44 .45
Net realized and unrealized gains (losses) .. .01 (.37) .10 .17 (.15)
---------------------------------------------------------------------------------
Total from investment operations ............. .40 .03 .52 .61 .30
---------------------------------------------------------------------------------
Less distributions from net investment income (.39) (.40) (.42) (.44) (.45)
---------------------------------------------------------------------------------
Net asset value, end of year ................. $ 6.61 $ 6.60 $ 6.97 $ 6.87 $ 6.70
==================================================================================
Total return(a) .............................. 6.36% .50% 7.85% 9.48% 4.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $ 264,413 $ 308,961 $ 271,665 $ 120,818 $ 57,657
Ratios to average net assets:
Expenses .................................... 1.25% 1.22% 1.21% 1.20% 1.17%
Net investment income ....................... 6.08% 5.89% 6.10% 6.44% 6.80%
Portfolio turnover rate(h) ................... 3.98% 15.04% 25.98% 1.74% 8.01%
<CAPTION>
ADVISOR CLASS
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........... $ 6.63 $ 7.00 $ 6.90 $ 6.76
---------------------------------------------------------------
Income from investment operations:
Net investment income(c) .................... .44 .45 .47 .38
Net realized and unrealized gains (losses) .. -- (.37) .10 .12
---------------------------------------------------------------
Total from investment operations ............. .44 .08 .57 .50
---------------------------------------------------------------
Less distributions from net investment income (.43) (.45) (.47) (.36)
---------------------------------------------------------------
Net asset value, end of year ................. $ 6.64 $ 6.63 $ 7.00 $ 6.90
===============================================================
Total return(a) .............................. 7.02% 1.16% 8.51% 7.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............. $ 46,775 $ 15,544 $ 36,308 $ 14,469
Ratios to average net assets:
Expenses .................................... .60% .57% .56% .56%(b)
Net investment income ....................... 6.73% 6.53% 6.75% 7.01%(b)
Portfolio turnover rate(h) ................... 3.98% 15.04% 25.98% 1.74%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(e) For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
(h) 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.
63
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 96.3%
<S> <C> <C>
GNMA I, SF, 5.50%, 5/15/28 - 1/15/29 ....................................... $ 14,160,942 $ 12,895,563
GNMA II, 5.50%, 11/20/28 - 3/20/29 ......................................... 26,024,213 23,582,465
GNMA I, SF, 6.00%, 9/15/23 - 12/15/28 ...................................... 122,233,676 115,394,887
GNMA II, 6.00%, 10/20/23 - 1/20/29 ......................................... 568,399,807 532,502,517
GNMA I, SF, 6.50%, 3/15/03 - 6/15/29 ....................................... 1,886,338,488 1,822,801,195
GNMA II, 6.50%, 6/20/24 - 7/20/28 .......................................... 337,257,622 324,079,808
GNMA I, SF, 6.75%, 3/15/26 - 5/15/26 ....................................... 2,600,164 2,532,842
GNMA PL, 6.75%, 1/15/34 .................................................... 35,440,636 33,889,029
GNMA I, SF, 7.00%, 4/15/16 - 7/15/29 ....................................... 1,513,732,359 1,496,346,763
GNMA PL, 7.00%, 9/15/35 .................................................... 8,823,917 8,562,861
GNMA I, SF, 7.25%, 10/15/25 - 1/15/26 ...................................... 5,218,650 5,191,332
(c)GNMA I, SF, 7.50%, 6/15/05 - 9/15/30 ..................................... 895,626,237 901,703,796
GNMA II, 7.50%, 10/20/22 - 12/20/26 ........................................ 88,436,689 88,481,623
GNMA I, SF, 7.70%, 12/15/20 - 1/15/22 ...................................... 8,349,564 8,425,513
GNMA PL, 7.75%, 10/15/12 ................................................... 4,917,847 4,926,897
GNMA I, SF, 8.00%, 10/15/07 - 7/15/30 ...................................... 697,705,392 713,592,720
GNMA II, 8.00%, 8/20/16 - 6/20/30 .......................................... 58,835,528 59,736,126
GNMA PL, 8.00%, 1/15/32 - 5/15/32 .......................................... 13,930,053 14,139,716
GNMA I, GPM, 8.25%, 3/15/17 - 11/15/17 ..................................... 3,618,262 3,702,032
GNMA PL, 8.25%, 2/15/28 .................................................... 12,642,219 13,016,750
GNMA I, SF, 8.50%, 5/15/16 - 11/15/24 ...................................... 106,672,946 110,530,272
GNMA II, 8.50%, 4/20/16 - 6/20/25 .......................................... 20,892,552 21,516,657
GNMA II, GPM, 8.75%, 3/20/17 - 7/20/17 ..................................... 447,511 458,941
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 ...................................... 129,997,662 136,526,901
GNMA II, 9.00%, 5/20/16 - 11/20/21 ......................................... 6,253,062 6,525,044
GNMA I, GPM, 9.25%, 5/15/16 - 1/15/17 ...................................... 2,119,898 2,194,163
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 ....................................... 71,483,920 75,215,927
GNMA II, 9.50%, 9/20/15 - 4/20/25 .......................................... 4,847,616 5,036,338
GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13 ................................... 2,268,556 2,395,743
GNMA I, SF, 10.00%, 4/15/12 - 4/15/25 ...................................... 82,540,709 87,157,702
GNMA II, 10.00%, 8/20/15 - 3/20/21 ......................................... 8,520,280 8,932,258
GNMA I, GPM, 10.25%, 2/15/16 - 2/15/21 ..................................... 580,009 616,502
GNMA I, SF, 10.50%, 10/15/00 - 10/15/21 .................................... 59,246,564 63,855,011
GNMA II, 10.50%, 9/20/13 - 3/20/21 ......................................... 15,400,858 16,482,804
GNMA I, GPM, 11.00%, 12/15/09 - 3/15/11 .................................... 4,660,742 5,073,834
GNMA I, SF, 11.00%, 11/15/09 - 5/15/21 ..................................... 52,818,288 57,625,689
GNMA II, 11.00%, 8/20/13 - 1/20/21 ......................................... 3,574,563 3,867,985
GNMA I, GPM, 11.25%, 6/15/13 - 1/15/16 ..................................... 2,034,898 2,217,084
GNMA I, GPM, 11.50%, 3/15/10 - 6/15/13 ..................................... 573,199 633,544
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 ..................................... 11,317,528 12,520,215
GNMA II, 11.50%, 8/20/13 - 4/20/18 ......................................... 896,453 985,190
GNMA II, GPM, 11.50%, 7/20/13 - 1/20/14 .................................... 122,957 134,473
GNMA I, GPM, 11.75%, 7/15/13 - 12/15/15 .................................... 316,920 350,441
GNMA I, GPM, 12.00%, 10/15/10 - 1/15/13 .................................... 198,035 221,253
GNMA I, SF, 12.00%, 5/15/11 - 7/15/18 ...................................... 50,891,004 57,089,895
GNMA II, 12.00%, 9/20/13 - 2/20/16 ......................................... 2,263,286 2,521,352
GNMA I, GPM, 12.50%, 4/15/10 - 10/15/11 .................................... 557,599 628,340
GNMA I, SF, 12.50%, 1/15/10 - 8/15/18 ...................................... 48,541,356 54,875,855
GNMA II, 12.50%, 9/20/13 - 11/20/15 ........................................ 2,295,448 2,581,402
GNMA I, GPM, 12.75%, 5/15/14 - 6/15/15 ..................................... 9,112 10,302
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 ...................................... 46,185,289 51,875,710
GNMA II, 13.00%, 10/20/13 - 9/20/15 ........................................ 1,620,773 1,807,984
---------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA)
(COST $7,068,758,371) .................................................... 6,977,969,246
---------------
</TABLE>
64
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS .6%
U.S. Treasury Notes, 4.625%, 11/30/00 (COST $39,906,749) ................... $ 40,000,000 $ 39,887,520
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $7,108,665,120) ........ 7,017,856,766
--------------
REPURCHASE AGREEMENT 3.0%
Barclays Capital Inc., 6.43%, 10/02/00 (Maturity Value $222,598,141)
(COST $220,480,000) Collateralized by U.S. Treasury Notes ................. 220,480,000 220,480,000
--------------
TOTAL INVESTMENTS (COST $7,329,145,120) 99.9% .............................. 7,238,336,766
OTHER ASSETS, LESS LIABILITIES .1% ......................................... 5,391,606
--------------
NET ASSETS 100.0% .......................................................... $7,243,728,372
==============
</TABLE>
(c) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
65
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN UTILITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
CLASS A 2000 1999(f) 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .............. $ 9.58 $ 11.36 $ 10.04 $ 9.73 $ 9.75
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ....................... .43 .48 .52 .53 .54
Net realized and unrealized gains (losses) ..... 1.69 (1.41) 1.58 .73 .03
--------------------------------------------------------------------------------
Total from investment operations ................ 2.12 (.93) 2.10 1.26 .57
--------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (.45) (.52) (.52) (.52) (.52)
Net realized gains ............................. (.36) (.33) (.26) (.43) (.07)
--------------------------------------------------------------------------------
Total distributions ............................. (.81) (.85) (.78) (.95) (.59)
--------------------------------------------------------------------------------
Net asset value, end of year .................... $ 10.89 $ 9.58 $ 11.36 $ 10.04 $ 9.73
=================================================================================
Total return(a) ................................. 24.27% (8.54%) 21.71% 13.72% 5.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 1,574,897 $ 1,594,862 $ 2,054,546 $ 1,953,273 $ 2,400,561
Ratios to average net assets:
Expenses ....................................... .83% .80% .76% .75% .71%
Net investment income .......................... 4.74% 4.60% 4.73% 5.26% 5.24%
Portfolio turnover rate ......................... 19.86% 33.99% 11.77% 7.24% 17.05%
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C>
Net asset value, beginning of year .............. $ 9.59 $ 11.08
-----------------------------
Income from investment operations:
Net investment income(c) ....................... .38 .31
Net realized and unrealized gains (losses) ..... 1.70 (1.44)
-----------------------------
Total from investment operations ................ 2.08 (1.13)
-----------------------------
Less distributions from:
Net investment income .......................... (.41) (.36)
Net realized gains ............................. (.36) --
-----------------------------
Total distributions ............................. (.77) (.36)
-----------------------------
Net asset value, end of year .................... $ 10.90 $ 9.59
=============================
Total return(a) ................................. 23.79% (10.37%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 8,819 $ 3,142
Ratios to average net assets:
Expenses ....................................... 1.34% 1.31%(b)
Net investment income .......................... 4.11% 4.12%(b)
Portfolio turnover rate ......................... 19.86% 33.99%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(f) For the period January 1, 1999 (effective date) to September 30, 1999 for
Class B.
66
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
CLASS C 2000 1999 1998 1997(e) 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 9.57 $ 11.35 $ 10.02 $ 9.72 $ 9.75
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .38 .43 .46 .45 .46
Net realized and unrealized gains (losses) . 1.69 (1.42) 1.60 .76 .06
-------------------------------------------------------------------------
Total from investment operations ............ 2.07 (.99) 2.06 1.21 .52
-------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.40) (.46) (.47) (.48) (.48)
Net realized gains ......................... (.36) (.33) (.26) (.43) (.07)
-------------------------------------------------------------------------
Total distributions ......................... (.76) (.79) (.73) (.91) (.55)
-------------------------------------------------------------------------
Net asset value, end of year ................ $ 10.88 $ 9.57 $ 11.35 $ 10.02 $ 9.72
=========================================================================
Total return(a) ............................. 23.65% (9.06%) 21.24% 13.06% 5.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 37,837 $ 34,697 $ 40,628 $ 21,906 $ 19,655
Ratios to average net assets:
Expenses ................................... 1.34% 1.31% 1.28% 1.27% 1.23%
Net investment income ...................... 4.22% 4.08% 4.19% 4.78% 4.86%
Portfolio turnover rate ..................... 19.86% 33.99% 11.77% 7.24% 17.05%
<CAPTION>
ADVISOR CLASS
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 9.61 $ 11.39 $ 10.04 $ 9.55
-------------------------------------------------------
Income from investment operations:
Net investment income(c) ................... .44 .51 .58 .36
Net realized and unrealized gains (losses) . 1.69 (1.42) 1.57 .53
-------------------------------------------------------
Total from investment operations ............ 2.13 (.91) 2.15 .89
-------------------------------------------------------
Less distributions from:
Net investment income ...................... (.46) (.54) (.54) (.40)
Net realized gains ......................... (.36) (.33) (.26) --
-------------------------------------------------------
Total distributions ......................... (.82) (.87) (.80) (.40)
-------------------------------------------------------
Net asset value, end of year ................ $ 10.92 $ 9.61 $ 11.39 $ 10.04
=======================================================
Total return(a) ............................. 24.50% (8.48%) 22.20% 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 9,234 $ 8,058 $ 13,651 $ 8,719
Ratios to average net assets:
Expenses ................................... .69% .66% .63% .62%(b)
Net investment income ...................... 4.87% 4.82% 4.93% 5.33%(b)
Portfolio turnover rate ..................... 19.86% 33.99% 11.77% 7.24%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized.
(c) Based on average shares outstanding effective year ended September 30,
1999.
(e) For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
See notes to financial statements.
67
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
UTILITIES FUND SHARES VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 82.7%
Allegheny Energy Inc. ................................................................... 760,000 $ 29,022,500
American Electric Power Co. Inc. ........................................................ 944,100 36,937,913
AT&T Corp ............................................................................... 282,000 8,283,750
Avista Corp. ............................................................................ 350,000 7,875,000
CH Energy Group Inc. .................................................................... 355,000 14,155,625
Cinergy Corp. ........................................................................... 1,000,000 33,062,500
CMS Energy Corp. ........................................................................ 551,900 14,866,806
Constellation Energy Group Inc. ......................................................... 882,900 43,924,275
Dominion Resources Inc. ................................................................. 1,200,000 69,675,000
DQE Inc. ................................................................................ 500,000 20,062,500
DTE Energy Co. .......................................................................... 852,200 32,596,650
Duke Energy Corp. ....................................................................... 1,425,000 122,193,750
Edison International .................................................................... 1,000,000 19,312,500
Entergy Corp. ........................................................................... 1,750,000 65,187,500
Florida Progress Corp. .................................................................. 296,900 15,717,144
FPL Group Inc. .......................................................................... 1,515,000 99,611,250
GPU Inc. ................................................................................ 567,000 18,392,063
Hawaiian Electric Industries Inc. ....................................................... 400,000 13,950,000
Kansas City Power & Light Co. ........................................................... 526,400 14,048,300
MCN Energy Group Inc. ................................................................... 90,500 2,319,063
Montana Power Co. ....................................................................... 400,000 13,350,000
NiSource Inc. ........................................................................... 1,200,000 29,250,000
Northeast Utilities ..................................................................... 500,000 10,843,750
Northwestern Corp. ...................................................................... 554,000 10,803,000
NSTAR ................................................................................... 234,700 9,446,675
PECO Energy Co. ......................................................................... 1,291,700 78,228,581
Peoples Energy Corp. .................................................................... 500,000 16,687,500
PG&E Corp. .............................................................................. 1,514,900 36,641,644
Pinnacle West Capital Corp. ............................................................. 400,000 20,350,000
Puget Sound Energy Inc. ................................................................. 750,000 19,031,250
Reliant Energy Inc. ..................................................................... 1,000,000 46,500,000
SBC Communications Inc. ................................................................. 514,200 25,710,000
SCANA Corp. ............................................................................. 200,000 6,175,000
Sempra Energy ........................................................................... 359,006 7,471,812
Sierra Pacific Resources ................................................................ 1,504,000 27,072,000
Southern Co. ............................................................................ 2,829,300 91,775,419
TECO Energy Inc. ........................................................................ 1,300,000 37,375,000
Texas Utilities Co. ..................................................................... 762,750 30,223,969
Unicom Corp. ............................................................................ 1,175,000 66,020,313
Vectren Corp. ........................................................................... 600,000 12,187,500
Verizon Communications .................................................................. 766,000 37,103,125
Xcel Energy Inc. ........................................................................ 1,258,824 34,617,658
-------------
TOTAL COMMON STOCKS (Cost $975,397,735) ................................................. 1,348,058,285
-------------
CONVERTIBLE PREFERRED STOCKS 8.0%
AES Trust VII, 6.00%, cvt. pfd., 144A ................................................... 228,000 18,525,000
CMS Energy Trust I, 7.75%, cvt. pfd. .................................................... 705,000 27,979,688
Kinder Morgan Inc., 8.25%, cvt. pfd. .................................................... 250,000 13,812,500
NiSource Inc., 7.75%, cvt. pfd. ......................................................... 200,000 9,600,000
Texas Utilities Co., 9.25%, cvt pfd. .................................................... 647,600 30,234,825
Utilicorp United Inc., 9.75%, cvt. pfd. ................................................. 1,100,000 30,937,500
-------------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $129,500,328) .................................. 131,089,513
-------------
</TABLE>
68
<PAGE>
Franklin Custodian Funds, Inc.
Statement of Investments, September 30, 2000 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
UTILITIES FUND AMOUNT VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 7.5%
Arizona Public Service Co., 9.00%, 12/15/21 ......................................... $ 14,500,000 $ 14,645,882
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 ..................................... 25,000,000 25,667,523
Commonwealth Edison Co., 8.50%, 7/15/22 ............................................. 5,000,000 5,087,455
Commonwealth Edison Co., 8.375%, 9/15/22 ............................................ 10,000,000 10,044,172
Duquesne Light Co., 8.375%, 5/15/24 ................................................. 5,000,000 5,044,215
Liberty Media Corp., cvt., 4.00%, 11/15/29 .......................................... 10,000,000 9,443,800
Midland Funding Corp. I, C-94, 10.33%, 7/23/02 ...................................... 5,928,837 6,048,600
Niagara Mohawk Power Corp., 8.75%, 4/01/22 .......................................... 5,000,000 5,097,490
Niagara Mohawk Power Corp., senior disc. note, H, zero cpn. to 7/01/03,
8.50% thereafter, 7/01/10 .......................................................... 6,000,000 4,845,744
Niagara Mohawk Power Corp., senior note, D, 7.25%, 10/01/02 ......................... 3,024,391 3,030,608
Niagara Mohawk Power Corp., senior note, G, 7.75%, 10/01/08 ......................... 4,600,000 4,632,158
Ohio Edison Co., 8.75%, 6/15/22 ..................................................... 8,000,000 8,107,952
Texas Utilities Co., 8.75%, 11/01/23 ................................................ 10,000,000 10,175,767
Texas Utilities Co., 8.50%, 8/01/24 ................................................. 10,000,000 10,158,909
----------------
TOTAL BONDS (COST $120,454,512) ..................................................... 122,030,275
----------------
TOTAL LONG TERM INVESTMENTS (COST $1,225,352,575) ................................... 1,601,178,073
----------------
(d) REPURCHASE AGREEMENT 1.7%
Joint Repurchase Agreement, 6.515%, 10/02/00 (Maturity Value $27,546,799)
(COST $27,531,851) ................................................................ 27,531,851 27,531,851
Barclays Capital Inc. (Maturity Value $2,567,130)
Bear, Stearns Securities Corp. (Maturity Value $1,711,419)
Chase Securities Inc. (Maturity Value $2,567,130)
Deutsche Bank Govt. Securities (Maturity Value $2,567,130)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,567,130)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $2,567,130)
Goldman, Sachs & Co. (Maturity Value $1,019,791)
Lehman Brothers Inc. (Maturity Value $2,567,130)
Nesbitt Burns Securities Inc. (Maturity Value $2,567,130)
Paribas Capital Markets (Maturity Value $2,567,130)
Societe Generale (Maturity Value $1,711,419)
UBS Warburg (Maturity Value $2,567,130)
Collateralized by U.S. Treasury Bills and Notes ----------------
TOTAL INVESTMENTS (COST $1,252,884,426) 99.9% ....................................... 1,628,709,924
OTHER ASSETS, LESS LIABILITIES .1% .................................................. 2,077,887
----------------
NET ASSETS 100.0% ................................................................... $1,630,787,811
================
</TABLE>
(d) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
69
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ...................................... $ 185,207,637 $1,006,194,094 $6,574,077,759 $ 7,108,665,120 $1,225,352,575
====================================================================================
Value ..................................... 489,467,312 2,216,002,322 6,765,508,428 7,017,856,766 1,601,178,073
Repurchase agreements, at value and cost . 467,220,220 390,233,694 265,610,639 220,480,000 27,531,851
Cash ..................................... -- -- -- 3,496 --
Receivables:
Investment securities sold ................ -- 4,375 24,825,542 -- --
Capital shares sold ....................... 1,496,409 3,117,910 5,328,757 7,204,168 3,145,674
Dividends and interest .................... 76,758 1,433,726 103,807,767 43,158,966 4,653,705
------------------------------------------------------------------------------------
Total assets .............................. 958,260,699 2,610,792,027 7,165,081,133 7,288,703,396 1,636,509,303
------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........... 14,851,075 -- 21,709,192 20,116,667 --
Capital shares redeemed ................... 1,744,682 3,951,503 12,640,654 10,528,840 2,415,568
Affiliates ................................ 1,170,407 3,304,637 6,483,149 5,728,853 1,385,879
Shareholders .............................. 253,818 1,258,430 6,254,695 8,371,766 1,864,780
Other liabilities ........................ 38,619 71,749 266,171 228,898 55,265
------------------------------------------------------------------------------------
Total liabilities ......................... 18,058,601 8,586,319 47,353,861 44,975,024 5,721,492
------------------------------------------------------------------------------------
Net assets, at value ..................... $ 940,202,098 $2,602,205,708 $7,117,727,272 $ 7,243,728,372 $1,630,787,811
====================================================================================
Net assets consist of:
Undistributed net investment income ...... $ 12,826,374 $ 19,324,466 $ 24,318,283 $ 9,445,010 $ 4,522
Net unrealized appreciation (depreciation) 304,259,675 1,209,808,228 191,383,960 (90,808,354) 375,825,498
Accumulated net realized gain (loss) ..... (1,728,083) 117,366,217 68,418,000 (336,595,304) 505,116
Capital shares ........................... 624,844,132 1,255,706,797 6,833,607,029 7,661,687,020 1,254,452,675
------------------------------------------------------------------------------------
Net assets, at value ...................... $ 940,202,098 $2,602,205,708 $7,117,727,272 $ 7,243,728,372 $1,630,787,811
====================================================================================
</TABLE>
See notes to financial statements.
70
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A:
Net assets, at value ..................... $809,140,289 $2,149,927,926 $6,083,134,502 $6,852,373,831 $1,574,897,277
================================================================================
Shares outstanding ....................... 28,289,791 58,244,701 2,592,010,425 1,033,192,345 144,674,047
================================================================================
Net asset value per share* ............... $ 28.60 $ 36.91 $ 2.35 $ 6.63 $ 10.89
================================================================================
Maximum offering price per share
(net asset value per share/94.25%, 94.25%,
95.75%, 95.75%, and 95.75%, respectively) $ 30.34 $ 39.16 $ 2.45 $ 6.92 $ 11.37
================================================================================
CLASS B:
Net assets, at value ..................... $ 4,748,697 $ 38,352,829 $ 140,710,566 $ 80,166,611 $ 8,819,269
================================================================================
Shares outstanding ....................... 166,894 1,049,644 59,941,444 12,100,064 809,441
================================================================================
Net asset value and maximum offering price
per share* .............................. $ 28.45 $ 36.54 $ 2.35 $ 6.63 $ 10.90
================================================================================
CLASS C:
Net assets, at value ..................... $126,313,112 $ 374,482,616 $ 872,662,188 $ 264,413,186 $ 37,836,829
================================================================================
Shares outstanding ....................... 4,519,147 10,348,213 370,400,133 40,007,585 3,478,621
================================================================================
Net asset value per share* ............... $ 27.95 $ 36.19 $ 2.36 $ 6.61 $ 10.88
================================================================================
Maximum offering price per share
(net asset value per share/99.00%) ...... $ 28.23 $ 36.56 $ 2.38 $ 6.68 $ 10.99
================================================================================
ADVISOR CLASS:
Net assets, at value ..................... -- $ 39,442,337 $ 21,220,016 $ 46,774,744 $ 9,234,436
================================================================================
Shares outstanding ....................... -- 1,066,332 9,066,517 7,045,496 846,005
================================================================================
Net asset value and maximum offering price
per share ............................... -- $ 36.99 $ 2.34 $ 6.64 $ 10.92
================================================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
71
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:(+)
Dividends .............................. $ 1,012,002 $ 23,146,276 $ 202,802,719 $ -- $ 66,024,107
Interest ............................... 23,822,844 34,132,908 419,795,280 555,514,497 15,421,419
-------------------------------------------------------------------------------
Total investment income ................. 24,834,846 57,279,184 622,597,999 555,514,497 81,445,526
-------------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ............... 4,130,733 11,971,966 32,030,795 34,246,735 6,810,095
Distribution fees (Note 3)
Class A ................................. 1,841,670 5,426,311 9,156,775 7,765,414 1,948,126
Class B ................................. 15,290 281,732 688,782 427,811 31,279
Class C ................................. 1,127,603 3,716,201 5,689,459 1,804,582 199,092
Transfer agent fees (Note 3) ........... 1,406,209 4,985,843 9,473,991 9,156,174 2,880,901
Custodian fees ......................... 6,814 17,026 380,516 49,952 5,297
Reports to shareholders ................ 170,984 558,283 1,021,273 1,135,962 252,428
Registration and filing fees ........... 81,980 89,146 111,320 122,618 51,459
Professional fees (Note 3) ............. 42,066 80,032 200,878 198,453 55,732
Directors' fees and expenses ........... 6,091 21,299 52,267 57,368 10,504
Other .................................. 22,043 79,649 256,662 334,164 52,864
-------------------------------------------------------------------------------
Total expenses .......................... 8,851,483 27,227,488 59,062,718 55,299,233 12,297,777
-------------------------------------------------------------------------------
Net investment income .................. 15,983,363 30,051,696 563,535,281 500,215,264 69,147,749
-------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................. (733,762) 119,903,279 94,858,904 (46,648,877) 523,921
Foreign currency transactions ........... -- -- (402,022) -- --
-------------------------------------------------------------------------------
Net realized gain (loss) ................ (733,762) 119,903,279 94,456,882 (46,648,877) 523,921
Net unrealized appreciation
(depreciation) on:
Investments ........................... 133,523,955 172,291,947 276,867,456 33,038,640 244,066,549
Translation of assets and liabilities
denominated in foreign currencies ...... -- -- (81,158) -- --
-------------------------------------------------------------------------------
Net unrealized appreciation ............. 133,523,955 172,291,947 276,786,298 33,038,640 244,066,549
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) . 132,790,193 292,195,226 371,243,180 (13,610,237) 244,590,470
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations ............................ $ 148,773,556 $322,246,922 $ 934,778,461 $ 486,605,027 $313,738,219
==============================================================================
</TABLE>
(+) Net of foreign taxes and fees of $9,796, $167,019 and $445,215 for the
DynaTech Fund, Growth Fund and Income Fund, respectively.
See notes to financial statements.
72
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
DYNATECH FUND GROWTH FUND
--------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .............................. $ 15,983,363 $ 6,865,590 $ 30,051,696 $ 26,305,706
Net realized gain (loss) from investments .......... (733,762) (338,333) 119,903,279 29,214,381
Net unrealized appreciation on investments ......... 133,523,955 83,837,801 172,291,947 306,579,274
--------------------------------------------------------------------
Net increase in net assets resulting from
operations .................................... 148,773,556 90,365,058 322,246,922 362,099,361
Distributions to shareholders from:
Net investment income:
Class A .......................................... (8,349,156) (3,136,187) (28,512,907) (25,640,633)
Class B .......................................... -- -- (210,834) --
Class C .......................................... (830,976) (124,996) (2,415,955) (2,012,593)
Advisor Class .................................... -- -- (604,017) (1,007,143)
Net realized gains:
Class A .......................................... -- -- (16,550,559) (12,164,613)
Class B .......................................... -- -- (157,901) --
Class C .......................................... -- -- (2,910,619) (1,558,802)
Advisor Class .................................... -- -- (298,276) (412,806)
--------------------------------------------------------------------
Total distributions to shareholders ............... (9,180,132) (3,261,183) (51,661,068) (42,796,590)
Capital share transactions: (Note 2)
Class A .......................................... 187,792,579 204,020,827 (195,753,441) 208,528,068
Class B .......................................... 4,944,371 -- 18,668,292 17,377,780
Class C .......................................... 34,511,263 54,012,938 (25,938,267) 136,924,339
Advisor Class .................................... -- -- (44,553) (14,668,648)
--------------------------------------------------------------------
Total capital share transactions ................... 227,248,213 258,033,765 (203,067,969) 348,161,539
Net increase in net assets ...................... 366,841,637 345,137,640 67,517,885 667,464,310
Net assets:
Beginning of year ................................. 573,360,461 228,222,821 2,534,687,823 1,867,223,513
--------------------------------------------------------------------
End of year ....................................... $ 940,202,098 $ 573,360,461 $ 2,602,205,708 $ 2,534,687,823
====================================================================
Undistributed net investment income included in
net assets:
End of year ....................................... $ 12,826,374 $ 6,023,143 $ 19,324,466 $ 21,016,483
====================================================================
</TABLE>
See notes to financial statements.
73
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 563,535,281 $ 626,733,329 $ 500,215,264 $ 567,920,398
Net realized gain (loss) from investments and
foreign currency transactions ....................... 94,456,882 51,617,531 (46,648,877) (20,761,165)
Net unrealized appreciation (depreciation) on
investments and translation of assets and liabilities
denominated in foreign currencies ................... 276,786,298 (348,262,211) 33,038,640 (456,909,537)
-----------------------------------------------------------------------
Net increase in net assets resulting from
operations .......................................... 934,778,461 330,088,649 486,605,027 90,249,696
Distributions to shareholders from:
Net investment income:
Class A ............................................... (503,166,522) (577,135,832) (472,305,401) (553,411,179)
Class B ............................................... (7,977,573) (2,209,823) (3,891,343) (1,105,149)
Class C ............................................... (67,802,844) (75,801,312) (16,763,516) (17,924,290)
Advisor Class ......................................... (1,709,361) (1,498,463) (1,920,966) (1,446,021)
Net realized gains:
Class A ............................................... (41,553,598) (39,569,871) -- --
Class B ............................................... (596,476) -- -- --
Class C ............................................... (6,094,361) (5,375,553) -- --
Advisor Class ......................................... (120,550) (111,728) -- --
-----------------------------------------------------------------------
Total distributions to shareholders .................... (629,021,285) (701,702,582) (494,881,226) (573,886,639)
Capital share transactions: (Note 2)
Class A ............................................... (955,278,353) (606,190,104) (1,034,726,750) (688,853,199)
Class B ............................................... 50,336,038 85,436,281 28,245,837 52,403,589
Class C ............................................... (160,667,883) 29,256,414 (44,019,848) 53,652,278
Advisor Class ......................................... (3,584,074) 2,808,064 30,660,897 (19,523,483)
-----------------------------------------------------------------------
Total capital share transactions ........................ (1,069,194,272) (488,689,345) (1,019,839,864) (602,320,815)
Net decrease in net assets ............................. (763,437,096) (860,303,278) (1,028,116,063) (1,085,957,758)
Net assets:
Beginning of year ...................................... 7,881,164,368 8,741,467,646 8,271,844,435 9,357,802,193
-----------------------------------------------------------------------
End of year ............................................ $ 7,117,727,272 $ 7,881,164,368 $ 7,243,728,372 $ 8,271,844,435
=======================================================================
Undistributed net investment income included in
net assets:
End of year ............................................ $ 24,318,283 $ 43,630,103 $ 9,445,010 $ 4,078,828
=======================================================================
</TABLE>
See notes to financial statements.
74
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
UTILITIES FUND
----------------------------------
2000 1999
----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 69,147,749 $ 89,780,235
Net realized gain from investments ......................... 523,921 60,357,191
Net unrealized appreciation (depreciation) on investments .. 244,066,549 (326,085,108)
----------------------------------
Net increase (decrease) in net assets resulting from
operations 313,738,219 (175,947,682)
Distributions to shareholders from:
Net investment income:
Class A ..................................................... (68,401,514) (93,740,439)
Class B ..................................................... (216,223) (70,888)
Class C ..................................................... (1,336,111) (1,856,680)
Advisor Class ............................................... (389,847) (573,225)
Net realized gains:
Class A ..................................................... (58,704,235) (61,726,172)
Class B ..................................................... (135,732) --
Class C ..................................................... (1,227,161) (1,415,836)
Advisor Class ............................................... (304,748) (394,011)
----------------------------------
Total distributions to shareholders ........................... (130,715,571) (159,777,251)
Capital share transactions: (Note 2)
Class A ..................................................... (196,391,383) (133,473,544)
Class B ..................................................... 4,524,298 3,363,935
Class C ..................................................... (1,190,622) 1,499,912
Advisor Class ............................................... 63,656 (3,731,163)
----------------------------------
Total capital share transactions ............................. (192,994,051) (132,340,860)
Net decrease in net assets ................................... (9,971,403) (468,065,793)
Net assets:
Beginning of year ............................................ 1,640,759,214 2,108,825,007
----------------------------------
End of year .................................................. $ 1,630,787,811 $ 1,640,759,214
==================================
Undistributed net investment income included in net assets:
End of year .................................................. $ 4,522 $ 1,200,468
==================================
</TABLE>
See notes to financial statements.
75
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
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 a diversified, open-end investment company, consisting of
five series (the Funds). The Funds and their investment objectives are:
<TABLE>
<CAPTION>
CAPITAL GROWTH GROWTH AND INCOME CURRENT INCOME
--------------------------------------------------------------------------------------
<S> <C> <C>
DynaTech Fund Income Fund U.S. Government Securities Fund
Growth Fund Utilities Fund
</TABLE>
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. 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 gain or loss 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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. COMBINED JOINT & REGULAR REPURCHASE AGREEMENT
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balances are deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Funds based on their pro-rata
interest. Certain Funds may enter into repurchase agreements which are accounted
for as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At September 30, 2000,
all repurchase agreements had been entered into on September 29, 2000.
d. 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 to
distribute substantially all of its taxable income.
76
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. 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.
f. 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.
2. CAPITAL STOCK
The classes of shares offered within each of the Funds are indicated below.
Effective February 1, 2000, the DynaTech Fund began offering a new class of
shares, Class B. Each class of shares differs by its initial sales load,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
<TABLE>
<CAPTION>
CLASS A, CLASS B CLASS A, CLASS B,
& CLASS C CLASS C & ADVISOR CLASS
---------------- -----------------------------
<S> <C>
DynaTech Fund Growth Fund
Income Fund
U.S. Government Securities Fund
Utilities Fund
</TABLE>
At September 30, 2000, there were 23 billion shares authorized ($0.01 par
value), allocated to the Funds as follows (in millions):
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A ..... 250 250 4,600 2,500 400
Class B ..... 500 750 1,000 1,000 750
Class C ..... 250 250 3,600 2,500 400
Advisor Class -- 1,000 1,000 1,000 1,000
</TABLE>
77
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
DYNATECH FUND GROWTH FUND
------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
2000
Shares sold .................................. 16,328,800 $ 466,816,087 16,680,057 $ 598,656,309
Shares issued in reinvestment of distributions 268,770 6,756,864 1,230,966 41,077,067
Shares redeemed .............................. (9,917,479) (285,780,372) (23,497,248) (835,486,817)
-----------------------------------------------------------------------
Net increase (decrease) ...................... 6,680,091 $ 187,792,579 (5,586,225) $(195,753,441)
=======================================================================
1999
Shares sold .................................. 17,286,196 $ 370,259,728 24,514,491 $ 788,134,524
Shares issued in reinvestment of distributions 127,556 2,501,368 1,118,691 34,679,441
Shares redeemed .............................. (7,906,769) (168,740,269) (19,040,973) (614,285,897)
------------------------------------------------------------------------
Net increase ................................. 9,506,983 $ 204,020,827 6,592,209 $ 208,528,068
=======================================================================
CLASS B SHARES:
2000(a)
Shares sold .................................. 171,803 $ 5,087,263 655,046 $ 23,196,555
Shares issued in reinvestment of distributions -- -- 10,297 342,163
Shares redeemed .............................. (4,909) (142,892) (138,646) (4,870,426)
------------------------------------------------------------------------
Net increase ................................. 166,894 $ 4,944,371 526,697 $ 18,668,292
=======================================================================
1999(b)
Shares sold .................................. 543,882 $ 18,086,933
Shares redeemed .............................. (20,935) (709,153)
-------------------------------
Net increase ................................. 522,947 $ 17,377,780
===============================
CLASS C SHARES:
2000
Shares sold .................................. 2,071,333 $ 57,180,184 2,803,395 $ 97,487,263
Shares issued in reinvestment of distributions 30,582 755,982 149,266 4,913,835
Shares redeemed .............................. (846,374) (23,424,903) (3,721,739) (128,339,365)
========================================================================
Net increase (decrease) ...................... 1,255,541 $ 34,511,263 (769,078) $ (25,938,267)
========================================================================
1999
Shares sold .................................. 3,291,292 $ 69,762,043 6,792,630 $ 214,759,039
Shares issued in reinvestment of distributions 6,129 118,473 108,414 3,318,582
Shares redeemed .............................. (738,937) (15,867,578) (2,527,969) (81,153,282)
========================================================================
Net increase ................................. 2,558,484 $ 54,012,938 4,373,075 $ 136,924,339
========================================================================
ADVISOR CLASS SHARES:
2000
Shares sold .................................. 232,850 $ 8,178,631
Shares issued in reinvestment of distributions 26,712 891,373
Shares redeemed .............................. (259,069) (9,114,557)
-------------------------------
Net increase (decrease) ...................... 493 $ (44,553)
===============================
1999
Shares sold .................................. 981,629 $ 31,090,587
Shares issued in reinvestment of distributions 45,473 1,409,662
Shares redeemed .............................. (1,423,873) (47,168,897)
-------------------------------
Net decrease ................................. (396,771) $ (14,668,648)
===============================
</TABLE>
78
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
2000
Shares sold ............................................. 284,298,630 $ 621,458,969 139,242,027 $ 908,315,568
Shares issued in reinvestment of distributions .......... 144,362,346 313,113,142 37,929,073 246,981,215
Shares redeemed ......................................... (869,037,429) (1,889,850,464) (336,014,986) (2,190,023,533)
---------------------------------------------------------------------
Net decrease ............................................ (440,376,453) $ (955,278,353) (158,843,886) $(1,034,726,750)
=====================================================================
1999
Shares sold ............................................. 338,537,606 $ 782,395,737 285,103,662 $ 1,934,434,693
Shares issued in reinvestment of distributions .......... 157,627,005 363,473,509 41,934,467 283,874,052
Shares redeemed ......................................... (760,496,959) (1,752,059,350) (429,458,313) (2,907,161,944)
---------------------------------------------------------------------
Net decrease ............................................ (264,332,348) $ (606,190,104) (102,420,184) $ (688,853,199)
=====================================================================
CLASS B SHARES:
2000
Shares sold ............................................. 29,020,696 $ 63,893,779 6,320,412 $ 41,220,582
Shares issued in reinvestment of distributions .......... 2,023,987 4,400,365 393,898 2,562,247
Shares redeemed ......................................... (8,250,500) (17,958,106) (2,385,215) (15,536,992)
---------------------------------------------------------------------
Net increase ............................................ 22,794,183 $ 50,336,038 4,329,095 $ 28,245,837
=====================================================================
1999(b)
Shares sold ............................................. 37,825,077 $ 86,986,436 8,225,072 $ 55,415,226
Shares issued in reinvestment of distributions .......... 505,585 1,157,703 109,018 723,581
Shares redeemed ......................................... (1,183,401) (2,707,858) (563,121) (3,735,218)
---------------------------------------------------------------------
Net increase ............................................ 37,147,261 $ 85,436,281 7,770,969 $ 52,403,589
=====================================================================
CLASS C SHARES:
2000
Shares sold ............................................. 63,630,861 $ 140,107,315 14,031,977 $ 91,216,855
Shares issued in reinvestment of distributions .......... 20,633,423 44,946,169 1,710,397 11,104,406
Shares redeemed ......................................... (158,669,112) (345,721,367) (22,528,303) (146,341,109)
---------------------------------------------------------------------
Net decrease ............................................ (74,404,828) $ (160,667,883) (6,785,929) $ (44,019,848)
=====================================================================
1999
Shares sold ............................................. 109,923,377 $ 255,290,823 25,192,988 $ 171,121,432
Shares issued in reinvestment of distributions .......... 22,213,949 51,426,235 1,822,494 12,288,387
Shares redeemed ......................................... (120,130,411) (277,460,644) (19,198,838) (129,757,541)
---------------------------------------------------------------------
Net increase ............................................ 12,006,915 $ 29,256,414 7,816,644 $ 53,652,278
=====================================================================
ADVISOR CLASS SHARES:
2000
Shares sold ............................................. 6,700,901 $ 14,620,742 5,443,412 $ 35,502,355
Shares issued in reinvestment of distributions .......... 677,240 1,469,077 250,207 1,630,500
Shares redeemed ......................................... (9,022,657) (19,673,893) (993,644) (6,471,958)
---------------------------------------------------------------------
Net increase (decrease) ................................. (1,644,516) $ (3,584,074) 4,699,975 $ 30,660,897
=====================================================================
1999
Shares sold ............................................. 4,378,496 $ 9,880,188 2,098,984 $ 14,369,642
Shares issued in reinvestment of distributions .......... 633,401 1,460,321 171,896 1,170,966
Shares redeemed ......................................... (3,655,393) (8,532,445) (5,113,145) (35,064,091)
---------------------------------------------------------------------
Net increase (decrease) ................................. 1,356,504 $ 2,808,064 (2,842,265) $ (19,523,483)
=====================================================================
</TABLE>
79
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
UTILITIES FUND
------------------------------------
SHARES AMOUNT
------------------------------------
<S> <C> <C>
CLASS A SHARES:
2000
Shares sold ........................................................... 16,722,387 $ 155,617,263
Shares issued in reinvestment of distributions ........................ 11,207,288 98,870,199
Shares redeemed ....................................................... (49,678,573) (450,878,845)
------------------------------------
Net decrease .......................................................... (21,748,898) $(196,391,383)
====================================
1999
Shares sold ........................................................... 27,242,414 $ 297,519,311
Shares issued in reinvestment of distributions ........................ 11,041,416 116,411,589
Shares redeemed ....................................................... (52,663,254) (547,404,444)
------------------------------------
Net decrease .......................................................... (14,379,424) $(133,473,544)
====================================
CLASS B SHARES:
2000
Shares sold ........................................................... 581,073 $ 5,442,177
Shares issued in reinvestment of distributions ........................ 30,206 269,720
Shares redeemed ....................................................... (129,287) (1,187,599)
------------------------------------
Net increase .......................................................... 481,992 $ 4,524,298
====================================
1999(b)
Shares sold ........................................................... 334,316 $ 3,432,812
Shares issued in reinvestment of distributions ........................ 5,132 52,100
Shares redeemed ....................................................... (11,999) (120,977)
------------------------------------
Net increase .......................................................... 327,449 $ 3,363,935
====================================
CLASS C SHARES:
2000
Shares sold ........................................................... 1,450,140 $ 13,414,286
Shares issued in reinvestment of distributions ........................ 224,597 1,980,804
Shares redeemed ....................................................... (1,820,334) (16,585,712)
------------------------------------
Net decrease .......................................................... (145,597) $ (1,190,622)
====================================
1999
Shares sold ........................................................... 2,112,393 $ 22,884,423
Shares issued in reinvestment of distributions ........................ 242,398 2,560,093
Shares redeemed ....................................................... (2,311,438) (23,944,604)
------------------------------------
Net increase .......................................................... 43,353 $ 1,499,912
====================================
ADVISOR CLASS SHARES:
2000
Shares sold ........................................................... 41,840 $ 387,858
Shares issued in reinvestment of distributions ........................ 65,508 581,268
Shares redeemed ....................................................... (100,063) (905,470)
------------------------------------
Net increase .......................................................... 7,285 $ 63,656
====================================
1999
Shares sold ........................................................... 635,157 $ 6,855,548
Shares issued in reinvestment of distributions ........................ 78,903 832,220
Shares redeemed ....................................................... (1,073,756) (11,418,931)
------------------------------------
Net decrease .......................................................... (359,696) $ (3,731,163)
====================================
</TABLE>
(a) For the period February 1, 2000 (effective date) to September 30, 2000 for
the DynaTech Fund.
(b) For the period January 1, 1999 (effective date) to September 30, 1999.
80
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers or directors of
the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Advisers Inc. (Advisers) Investment manager (all Funds except the Growth Fund)
Franklin Investment Advisory Services, Inc. (Investment Advisory) Investment manager (the Growth Fund)
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Services, Inc. (FT Services) Administrative manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer agent
</TABLE>
The Funds, except the Growth Fund, pay an investment management fee to Advisers,
and the Growth Fund pays an investment management fee to Investment Advisory,
based on the net assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE MONTH-END NET ASSETS
---------------------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
Under an agreement with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
The Funds reimburse Distributors up to the stated percentages per year of their
average daily net assets for costs incurred in marketing the Funds' shares as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A ......... .25% .25% .15% .15% .15%
Class B ......... 1.00% 1.00% .65% .65% .65%
Class C ......... 1.00% 1.00% .65% .65% .65%
</TABLE>
Distributors 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
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions paid $257,130 $1,115,231 $2,678,836 $2,353,528 $199,787
Contingent deferred sales charges $ 59,273 $ 218,867 $ 712,716 $ 441,832 $ 38,722
</TABLE>
The Funds paid transfer agent fees of $27,903,118, of which $20,683,626 were
paid to Investor Services.
Included in professional fees are legal fees of $198,757 that were paid to two
law firms in which a partner in each law firm is an officer of the Funds.
81
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
4. INCOME TAXES
At September 30, 2000, the DynaTech Fund and the U.S. Government Securities Fund
had tax basis capital losses of $1,072,520 and $290,997,019, respectively, which
may be carried over to offset future capital gains. Such losses expire as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND SECURITIES FUND
------------- ---------------
<S> <C> <C>
Capital loss carryovers expiring in: 2002 $ -- $111,364,839
2003 -- 3,698,366
2004 -- 57,539,178
2005 -- 50,054,906
2006 -- 28,279,472
2007 677,592 18,954,412
2008 394,928 21,105,846
---------- ------------
$1,072,520 $290,997,019
========== ============
</TABLE>
At September 30, 2000, the DynaTech Fund and the U.S. Government Securities Fund
have deferred capital losses occurring subsequent to October 31, 1999 of
$655,563 and $45,598,285, respectively. For tax purposes, such losses will be
reflected in the year ending September 30, 2001.
At September 30, 2000, the Income Fund has deferred currency losses subsequent
to October 31, 1999 of $14,051,779. For tax purposes, such losses will be
reflected in the year ending September 30, 2001.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
At September 30, 2000, the net unrealized appreciation (depreciation) based on
the cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ........................ $ 652,427,857 $ 1,396,427,788 $ 6,839,688,398 $ 7,329,145,120 $ 1,252,886,826
=====================================================================================
Unrealized appreciation .................... 319,028,832 1,311,017,515 1,003,552,620 57,521,114 411,888,263
Unrealized depreciation .................... (14,769,157) (101,209,287) (812,121,951) (148,329,468) (36,065,165)
-------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) . $ 304,259,675 $ 1,209,808,228 $ 191,430,669 $ (90,808,354) $ 375,823,098
=====================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended September 30, 2000 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .................. $105,094,614 $344,861,818 $1,677,659,730 $ 292,517,348 $285,462,853
Sales ...................... $ 24,313,794 $163,865,551 $3,048,021,290 $1,306,842,219 $488,786,992
</TABLE>
82
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (continued)
6. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 38.0% 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, 2000, the
Income Fund held defaulted securities with a value aggregating $52,635,000,
representing 0.74% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
7. RESTRICTED SECURITIES
The Income Fund may purchase securities through a private offering that
generally cannot be resold to the public without prior registration under the
Securities Act of 1933. The costs of registering such securities are paid by the
issuer. At September 30, 2000, the Fund held one restricted security as follows:
<TABLE>
<CAPTION>
SHARES ISSUER ACQUISITION DATE COST VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME FUND 3,591,463 Continucare Corp. ............ 6/16/00 $2,469,131 $2,020,198
</TABLE>
83
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Independent Auditors' Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
FRANKLIN CUSTODIAN FUNDS:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds included in this
report constituting the Franklin Custodian Funds (hereafter referred to as the
"Funds") at September 30, 2000, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 2000 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
November 2, 2000
84
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Funds hereby
designate the following amounts as capital gain dividends for the fiscal year
ended September 30, 2000:
<TABLE>
<CAPTION>
GROWTH FUND INCOME FUND UTILITIES FUND
------------------------------------------------------
<S> <C> <C>
$114,079,350 $84,318,649 $523,921
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the following percentage amounts of the ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
September 30, 2000:
<TABLE>
<CAPTION>
DYNATECH FUND GROWTH FUND INCOME FUND UTILITIES FUND
------------------------------------------------------------
<S> <C> <C> <C>
7.98% 61.54% 27.23% 92.81%
</TABLE>
85
<PAGE>
This page intentionally left blank.
<PAGE>
This page intentionally left blank.
<PAGE>
This page intentionally left blank.
