UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-00537
---------
FRANKLIN CUSTODIAN FUNDS, INC.
------------------------------
(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-----------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
------------
Date of fiscal year end: 09/30
-----
Date of reporting period: 3/31/05
-------
ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
MARCH 31, 2005
- --------------------------------------------------------------------------------
Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government
Securities Fund
Franklin Utilities Fund
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN Eligible shareholders
CUSTODIAN FUNDS, INC. can sign up for
eDelivery at
franklintempleton.com.
See inside for
details.
- --------------------------------------------------------------------------------
[LOGO]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with research offices in over 25 countries, they
offer investors the broadest global reach in the
industry.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
undervalued stocks, arbitrage situations and
distressed companies.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to distinctly different investment
approaches, Franklin, Templeton and Mutual Series
funds typically have a low overlap of securities.
That's why our funds can be used to build truly
diversified portfolios covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable account services that have helped us
become one of the most trusted names in financial
services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ....................................................... 1
SEMIANNUAL REPORT
Franklin DynaTech Fund ................................................... 4
Franklin Growth Fund ..................................................... 12
Franklin Income Fund ..................................................... 20
Franklin U.S. Government Securities Fund ................................. 31
Franklin Utilities Fund .................................................. 41
Financial Highlights and Statements of Investments ....................... 50
Financial Statements ..................................................... 98
Notes to Financial Statements ............................................ 107
Shareholder Information .................................................. 125
- --------------------------------------------------------------------------------
Shareholder Letter
Dear Shareholder:
During the six-month period ended March 31, 2005, several positive signs
suggested the U.S. economy was on course for sustained economic growth as
business spending increased, the labor market firmed and productivity remained
strong. Although the major stock market indexes edged moderately higher during
the period under review, gains were dampened by inflation fears, mostly due to
volatile oil prices and the U.S. dollar's declining value relative to other
currencies. For example, the Dow Jones Industrial Average gained 5.37%.(1)
Despite the Federal Reserve Board's (Fed's) efforts to manage inflation through
measured rate increases, speculation remained about the size and timing of rate
hikes needed to attain the Fed's desired neutral level -- one that neither spurs
nor inhibits growth. However, given the current historically low interest rate
environment and continued robust productivity growth, our long-term outlook for
the financial markets remains optimistic.
Although future economic and market developments are impossible to predict, as
an investor, you can follow certain basic principles in planning for future
needs.
(1) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders.
- --------------------------------------------------------------------------------
EDELIVERY DETAILS
Log in at franklintempleton.com and click on eDelivery. Shareholders who are
registered at franklintempleton.com can receive these reports via email. Not all
accounts are eligible for eDelivery.
-----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
-----------------------------------------------------
Not part of the semiannual report | 1
First, investing for the long term is important so that you can better weather
short-term market ups and downs. Second, by choosing a mutual fund that
comprises a range of holdings, you can use diversification to help manage
investment risk. Third, it may make sense to follow a regular investment plan,
also called dollar-cost averaging. By investing a certain amount of money
monthly or quarterly, you can take advantage of market dips without worrying
about when they will occur. Your money buys more shares when the price is low
and fewer when the price is high, which can mean a lower average cost per share
over time. Remember, however, to consider your financial ability to continue
purchases through times of low price levels or changing economic conditions
before committing to such a strategy. Dollar-cost averaging does not guarantee a
profit or eliminate risk, and it will not protect you from a loss if you sell
shares at a market low. As always, we encourage you to discuss your goals with
your financial advisor who can address concerns about volatility and
diversification, periodically review your overall portfolio and help you stay
focused on the long term. We firmly believe that most people benefit from
professional advice, and that advice is never more valuable than during a
volatile market.
In the enclosed semiannual report for Franklin Custodian Funds, the portfolio
managers discuss market conditions, investment management decisions and Fund
performance during the period under review. You will also find performance data
and financial information. Please remember that all securities markets
fluctuate, as do mutual fund share prices.
This report contains new information about the Board of Directors' approval of
the Fund's investment advisory contract in the past six months. It is designed
to give you an understanding of several factors considered before the Board
approved its contract with the Investment Manager. The disclosure is in the
"Shareholder Information" section beginning on page 125.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely commentary
from portfolio managers, and find helpful financial planning tools. We hope you
will take advantage of these online services.
2 | Not part of the semiannual report
We thank you for investing with Franklin Templeton, welcome your questions and
comments, and look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
President and Chief Executive Officer - Investment Management
Franklin Custodian Funds, Inc.
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2005. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT HAVE BEEN OBTAINED FROM SOURCES
CONSIDERED RELIABLE.
Not part of the semiannual report | 3
Semiannual Report
Franklin DynaTech Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing mainly in the equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
industries.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin DynaTech Fund covers the period ended March
31, 2005.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +3.23% cumulative total return for the
six months under review. For the same period, the Fund underperformed its narrow
benchmark, the NASDAQ 100 Index, which had a price-only return of 4.94%, and
underperformed the broad Standard & Poor's 500 Composite Index (S&P 500), which
posted a 6.88% cumulative total return.(1) You can find the Fund's long-term
performance data in the Performance Summary beginning on page 8.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2005, domestic economic expansion showed
staying power across most industries, sectors and regions. Gross domestic
product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an
estimated annualized 3.1% in first quarter 2005, benefiting from greater
business investment, sizable inventory buildup and consumer spending. Although
booming demand for imported goods and materials fueled the widening trade gap,
U.S. dollar depreciation supported manufacturing activity and made U.S. exports
more competitive in the global market.
(1) Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of
the largest domestic and international nonfinancial companies listed on The
NASDAQ Stock Market based on market capitalization. The index reflects
companies across major industry groups including computer hardware and
software, telecommunications, retail/wholesale trade and biotechnology. It
does not contain financial companies including investment companies. The
NASDAQ 100 Index is calculated under a modified capitalization-weighted
methodology. Index returns are price-return only and do not include
reinvested dividends. The S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 includes
reinvested dividends and is one of the most widely used benchmarks of U.S.
equity performance. The indexes are unmanaged. One cannot invest directly
in an index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 53.
4 | Semiannual Report
The labor market firmed as employment increased and the unemployment rate
dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in
many industries, bolstered by healthy business spending and solid business
confidence. Soaring energy prices cooled consumer sentiment, but core retail
sales held strong.
The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75%
to 2.75% and said it will respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability. Inflation remained
relatively contained for the 12 months ended March 31, 2005, as measured by the
2.3% rise for the core Consumer Price Index, which excludes volatile food and
energy costs. Pricing pressures were somewhat eased by continued competition,
globalization and offshoring, as companies held back in passing along higher
commodity and energy costs to consumers.
Despite a generally strong economy and improving corporate fundamentals,
investors faced a stock market influenced partly by rising inflation, the
fluctuating dollar and interest rate hikes during the period. Corporate profits
rebounded and dividend payments surged to a record level, with U.S. companies
paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs)
remained strong through much of the reporting period, supporting investor
confidence. The blue chip stocks of the Dow Jones Industrial Average gained
5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the
technology-heavy NASDAQ Composite Index increased 5.74%.(4)
INVESTMENT STRATEGY
Based on our independent analysis of individual companies, we search for leading
companies that we believe have a sustainable competitive advantage due to
state-of-the-art and innovative products, technologies and business models. We
consider such factors as a company's competitive positioning, patents, new
products, market share, industry growth, recent operational execution and
managerial strength. We use a conservative, bottom-up research process to buy
and hold what we consider to be undervalued companies.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets
as of 3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 11.2%
Packaged Software 9.7%
Biotechnology 9.0%
Medical Specialties 9.0%
Internet Software & Services 6.3%
Managed Health Care 5.4%
Electronic Production Equipment 3.7%
Electronic Equipment & Instruments 3.6%
Major Pharmaceuticals 3.3%
Telecommunications Equipment 3.2%
Information Technology Services 3.1%
Computer Processing Hardware 3.0%
Air Freight & Couriers 2.7%
Data Processing Services 2.7%
Other Consumer Services 2.2%
Other 21.5%
Short-Term Investments & Other Net Assets 0.4%
(2) Source: Bureau of Labor Statistics.
(3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P,"
STANDARDANDPOORS.COM, 4/7/05.
(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all
domestic and international common stocks listed on The NASDAQ Stock Market.
The index is market value weighted and includes over 3,000 companies.
Semiannual Report | 5
TOP 10 HOLDINGS
Franklin DynaTech Fund
3/31/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Intel Corp. 3.9%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
UnitedHealth Group Inc. 3.8%
MANAGED HEALTH CARE
- --------------------------------------------------------------------------------
Microsoft Corp. 3.3%
PACKAGED SOFTWARE
- --------------------------------------------------------------------------------
Genentech Inc. 3.1%
BIOTECHNOLOGY
- --------------------------------------------------------------------------------
Yahoo! Inc. 2.9%
INTERNET SOFTWARE & SERVICES
- --------------------------------------------------------------------------------
Adobe Systems Inc. 2.5%
PACKAGED SOFTWARE
- --------------------------------------------------------------------------------
Amgen Inc. 2.5%
BIOTECHNOLOGY
- --------------------------------------------------------------------------------
Rockwell Automation Inc. 2.3%
ELECTRONIC EQUIPMENT & INSTRUMENTS
- --------------------------------------------------------------------------------
Linear Technology Corp. 2.2%
SEMICONDUCTORS
- --------------------------------------------------------------------------------
eBay Inc. 2.2%
OTHER CONSUMER SERVICES
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
Following our strategy during the six months under review, we continued to
emphasize opportunities in established industry leaders we believed had a
sustainable competitive advantage in their respective industries. Packaged
software, semiconductors, biotechnology, medical specialties, and
Internet-related companies represented some of the Fund's largest weightings at
period-end.
We held several positions that performed well this reporting period,
substantially aiding the Fund's overall results. For example, Rockwell
Automation, a provider of industrial control and power system solutions that
helps customers meet and improve their productivity goals, appreciated about
50%. Insurer UnitedHealth Group, an owner and manager of a variety of health
care plans and services, was also one of our largest contributors to Fund
performance in absolute terms as the company's stock appreciated more than 29%
due to strong revenue and earnings-per-share (EPS) growth during the period. Our
shares of Cognizant Technology Solutions, which utilizes an onsite/offshore
business model to provide software development solutions primarily to medium and
large businesses, rose more than 51%.
Despite the Fund's positive absolute return during the reporting period, there
were some detractors from performance. For example, casino game system
manufacturer International Game Technology's stock lost 25% in value during the
period. Similarly, poor results from eBay, the largest online auction site,
detracted from Fund performance as that stock lost 19% of its value. Finally,
investor concerns over pharmaceutical giant Pfizer's products put a damper on
the company's stock results, contributing to its share price depreciation of
13%.
We continued to position the Fund's portfolio with higher quality companies that
we believe should perform well over the next several years. Consistent with our
strategy, we search for companies offering new products and sound business
models, and whose underlying stock prices we believed did not fully reflect
their future growth prospects.
6 | Semiannual Report
Thank you for your continued participation in Franklin DynaTech Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
[PHOTO OMITTED] /s/ Matthew J. Moberg
Matthew J. Moberg, CPA
[PHOTO OMITTED] /s/ Robert R. Dean
Robert R. Dean, CFA
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Semiannual Report | 7
Performance Summary as of 3/31/05
FRANKLIN DYNATECH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes due on
Fund dividends, capital gain distributions, if any, or any realized gains on the
sale of Fund shares. Total return reflects reinvestment of the Fund's dividends
and capital gain distributions, if any, and any unrealized gains or losses.
PRICE INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKDNX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.71 $22.72 $22.01
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FDNBX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.61 $22.04 $21.43
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FDYNX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.60 $21.81 $21.21
- --------------------------------------------------------------------------------
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return(1) +3.23% -0.13% -23.43% +160.99%
- --------------------------------------------------------------------------------
Average Annual Total Return(2) -2.70% -5.88% -6.31% +9.42%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(3) $ 9,730 $9,412 $7,217 $24,599
- --------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
- --------------------------------------------------------------------------------
Cumulative Total Return(1) +2.85% -0.90% -26.27% -19.09%
- --------------------------------------------------------------------------------
Average Annual Total Return(2) -1.15% -4.86% -6.28% -4.20%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(3) $ 9,885 $9,514 $7,230 $8,012
- --------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/16/96)
- --------------------------------------------------------------------------------
Cumulative Total Return(1) +2.83% -0.91% -26.24% +82.18%
- --------------------------------------------------------------------------------
Average Annual Total Return(2) +1.83% -1.90% -5.90% +7.28%
- --------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,183 $9,810 $7,376 $18,218
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND
TECHNOLOGY SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO
FLUCTUATIONS IN THE PRICE OF TECHNOLOGY STOCKS AND INCREASED SUSCEPTIBILITY TO
ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE
TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE. THE FUND MAY ALSO
INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE
PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND
INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge. Six-month return has not been annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.
Semiannual Report | 9
Your Fund's Expenses
FRANKLIN DYNATECH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
10 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.30 $4.91
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.89
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.50 $8.65
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.40 $8.60
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.30 $8.70
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.36 $8.65
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.97%; B: 1.71%; and C: 1.72%), multiplied by the average account value
over the period, multiplied by 182/365 to reflect the one-half year period.
Semiannual Report | 11
Franklin Growth Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital
appreciation by investing mainly in equity securities of companies that are
leaders in their industries.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Growth Fund's semiannual report for the
period ended March 31, 2005.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Growth Fund - Class A posted a +8.73%
cumulative total return. The Fund outperformed its benchmark, the Standard &
Poor's 500 Composite Index (S&P 500), which returned 6.88% for the same
period.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 15.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2005, domestic economic expansion showed
staying power across most industries, sectors and regions. Gross domestic
product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an
estimated annualized 3.1% in first quarter 2005, benefiting from greater
business investment, sizable inventory buildup and consumer spending. Although
booming demand for imported goods and materials fueled the widening trade gap,
U.S. dollar depreciation supported manufacturing activity and made U.S. exports
more competitive in the global market.
The labor market firmed as employment increased and the unemployment rate
dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in
many industries, bolstered by healthy business spending and solid business
confidence. Soaring energy prices cooled consumer sentiment, but core retail
sales held strong.
(1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
(2) Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 62.
12 | Semiannual Report
The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75%
to 2.75% and said it will respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability. Inflation remained
relatively contained for the 12 months ended March 31, 2005, as measured by the
2.3% rise for the core Consumer Price Index, which excludes volatile food and
energy costs. Pricing pressures were somewhat eased by continued competition,
globalization and offshoring, as companies held back in passing along higher
commodity and energy costs to consumers.
Despite a generally strong economy and improving corporate fundamentals,
investors faced a stock market influenced partly by rising inflation, the
fluctuating dollar and interest rate hikes during the period. Corporate profits
rebounded and dividend payments surged to a record level, with U.S. companies
paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs)
remained strong through much of the reporting period, supporting investor
confidence. The blue chip stocks of the Dow Jones Industrial Average gained
5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the
technology-heavy NASDAQ Composite Index increased 5.74%.(4)
INVESTMENT STRATEGY
We seek to invest in companies that have strong management teams, financials and
industry leadership. The Fund looks for opportunities in new and rapidly growing
businesses and in mature businesses selling at depressed prices but offering
favorable recovery possibilities. We analyze securities individually and buy
stocks of large and small companies in our effort to maintain a solid and
diversified portfolio.
MANAGER'S DISCUSSION
The Fund was almost fully invested and broadly diversified, with holdings in 106
companies at period-end. Fund holdings that generated notable returns included
Apple Computer, EnCana, British Airways and Walt Disney during the six months
under review. Apple Computer, riding on a successful gift-buying holiday season
with its popular iPod digital music player, appreciated 115% and
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets
as of 3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Health Technology 20.6%
Producer Manufacturing 20.6%
Electronic Technology 19.2%
Technology Services 11.1%
Consumer Services 5.0%
Transportation 4.4%
Consumer Non-Durables 3.6%
Distribution Services 3.0%
Commercial Services 3.0%
Energy Minerals 2.7%
Process Industries 2.0%
Industrial Services 1.5%
Consumer Durables 1.3%
Other 2.0%
(3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P,"
STANDARDANDPOORS.COM, 4/7/05.
(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all
domestic and international common stocks listed on The NASDAQ Stock Market.
The index is market value weighted and includes over 3,000 companies.
Semiannual Report | 13
TOP 10 HOLDINGS
Franklin Growth Fund
3/31/05
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
3M Co. 3.1%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Johnson & Johnson 3.1%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Boeing Co. 2.7%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Genentech Inc. 2.6%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 2.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Yahoo! Inc. 2.5%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.5%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 2.5%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Pfizer Inc. 2.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Tyco International Ltd. 2.4%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
was one of the biggest contributors to Fund performance. EnCana, a leading North
American independent crude oil and natural gas exploration and production
company, delivered robust sales growth and higher cash flow, which pushed the
stock up 53%. In addition, British Airways rose 33% partly based on reported
growth in the lucrative premium first and business class market. Walt Disney
named a new CEO and the move was favored by analysts as right for the company
and shareholder value. Meanwhile, the stock went up 29% and contributed to
positive Fund performance.
Several stocks had negative returns and held the Fund back during the reporting
period. Waters, an analytical instrument company with exports accounting for
nearly two-thirds of its sales, was the most significant underperformer. Its
stock dropped 19% largely due to weak pharmaceutical capital spending in Europe
and lack of strength in other markets. Pfizer, under pressure of approaching
patent expirations, generic competition and product safety concerns, fell 13%
and detracted from Fund performance during the period. Diversified manufacturer
Illinois Tool Works saw sales and operating revenue increases, but suffered from
a weaker-than-expected profit outlook and declined 3%.
The Fund had little buy and sell activity during the six months under review.
Consistent with our strategy, we purchased shares of Biogen Idec for recovery
possibilities.
We welcome your comments and questions and look forward to serving your
investment needs in the years ahead.
[PHOTO OMITTED] /s/ V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON SUCH FACTORS AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
14 | Semiannual Report
Performance Summary as of 3/31/05
FRANKLIN GROWTH FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes due on
Fund dividends, capital gain distributions, if any, or any realized gains on the
sale of Fund shares. Total return reflects reinvestment of the Fund's dividends
and capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------
CLASS A (SYMBOL: FKGRX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$2.59 $33.17 $30.58
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0787
- ----------------------------------------------------------------------
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$2.48 $32.25 $29.77
- ----------------------------------------------------------------------
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$2.46 $31.97 $29.51
- ----------------------------------------------------------------------
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$2.60 $32.99 $30.39
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0149
- ----------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$2.56 $33.19 $30.63
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.1585
- ----------------------------------------------------------------------
Semiannual Report | 15
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +8.73% +9.66% -2.18% +139.74%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +2.46% +3.35% -1.61% +8.49%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,246 $10,335 $ 9,220 $ 22,597
- -----------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +8.33% +8.88% -5.69% +10.32%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +4.33% +4.88% -1.54% +1.58%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,433 $10,488 $ 9,252 $ 11,032
- -----------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +8.34% +8.85% -5.75% +116.81%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +7.34% +7.85% -1.18% +8.11%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,734 $10,785 $ 9,425 $ 21,681
- -----------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +8.57% +9.36% +3.66% +4.67%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +7.57% +8.36% +1.20% +1.42%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,757 $10,836 $10,366 $ 10,467
- -----------------------------------------------------------------------------------------
ADVISOR CLASS(4) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +8.87% +9.95% -0.95% +146.53%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +8.87% +9.95% -0.19% +9.44%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,887 $10,995 $ 9,905 $ 24,653
- -----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
16 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST
IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL
RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE
SHORT TERM. THE FUND'S INVESTMENTS IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO
CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE
FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE
MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge. Six-month return has not been annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.
(4) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 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, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting 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 +67.00% and +6.42%.
Semiannual Report | 17
Your Fund's Expenses
FRANKLIN GROWTH FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
18 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD 9/30/04-3/31/05
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,087.30 $4.84
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.29 $4.68
- ------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,083.30 $8.73
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.55 $8.45
- ------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,083.40 $8.73
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.55 $8.45
- ------------------------------------------------------------------------------------------------------
CLASS R
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,085.70 $6.14
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------
Actual $1,000 $1,088.70 $3.54
- ------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.54 $3.43
- ------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.93%; B: 1.68%; C: 1.68%; R: 1.18%; and Advisor: 0.68%), multiplied by the
average account value over the period, multiplied by 182/365 to reflect the
one-half year period.
Semiannual Report | 19
Franklin Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize
income while maintaining prospects for capital appreciation through a
diversified portfolio of securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Income Fund covers the period ended March
31, 2005.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +5.00% cumulative total return for the
six months under review. The Fund underperformed its benchmark, the Standard &
Poor's 500 (S&P 500) Composite Index, which returned 6.88%; outperformed the
Lehman Brothers U.S. Aggregate Index, which returned 0.47%; and outperformed its
peers as measured by the Lipper Income Funds Objective Average, which returned
3.91%, for the same period.(1) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 26.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2005, domestic economic expansion showed
staying power across most industries, sectors and regions. Gross domestic
product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an
estimated annualized 3.1% in first quarter 2005, benefiting from greater
business investment, sizable inventory buildup and consumer spending. Although
booming demand for imported goods and materials fueled the widening trade gap,
U.S. dollar depreciation supported manufacturing activity and made U.S. exports
more competitive in the global market.
(1) Sources: Standard & Poor's Micropal; Lehman Brothers Inc.; Lipper Inc. The
S&P 500 consists of 500 stocks chosen for market size, liquidity and
industry group representation. Each stock's weight in the index is
proportionate to its market value. The S&P 500 is one of the most widely
used benchmarks of U.S. equity performance. The LB U.S. Aggregate 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 and $50 million for all others. All returns are market
value weighted inclusive of accrued interest. The index is a composite of
the Government/Credit Index and the Mortgage-Backed Securities Index. Total
return includes price appreciation/depreciation and income as a percentage
of the original investment. The index is rebalanced monthly by market
capitalization. For the six months ended 3/31/05, the Lipper Income Funds
Objective Average consisted of 226 funds. Lipper calculations do not
include sales charges or expense subsidization by a fund's manager. Fund
performance relative to the average may have differed if these or other
factors had been considered. Indexes are unmanaged and include reinvestment
of any income or distributions. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 72.
20 | Semiannual Report
The labor market firmed as employment increased and the unemployment rate
dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in
many industries, bolstered by healthy business spending and solid business
confidence. Soaring energy prices cooled consumer sentiment, but core retail
sales held strong.
The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75%
to 2.75% and said it will respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability. Inflation remained
relatively contained for the 12 months ended March 31, 2005, as measured by the
2.3% rise for the core Consumer Price Index, which excludes volatile food and
energy costs. Pricing pressures were somewhat eased by continued competition,
globalization and offshoring, as companies held back in passing along higher
commodity and energy costs to consumers.
Despite a generally strong economy and improving corporate fundamentals,
investors faced a stock market influenced partly by rising inflation, the
fluctuating dollar and interest rate hikes during the period. Corporate profits
rebounded and dividend payments surged to a record level, with U.S. companies
paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs)
remained strong through much of the reporting period, supporting investor
confidence. The blue chip stocks of the Dow Jones Industrial Average gained
5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the
technology-heavy NASDAQ Composite Index increased 5.74%.(4)
INVESTMENT STRATEGY
Based on our independent analysis of debt, convertible and equity securities, we
search for undervalued or out-of-favor securities we believe offer opportunities
for income today and significant growth tomorrow. We consider such factors as a
company's experience and managerial strength; its responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; a company's changing financial condition and market recognition of
the change; and a security's relative value based on such factors as anticipated
cash flow, interest or dividend coverage, asset coverage and earnings.
(2) Source: Bureau of Labor Statistics.
(3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P,"
STANDARDANDPOORS.COM, 4/7/05.
(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all
domestic and international common stocks listed on The NASDAQ Stock Market.
The index is market value weighted and includes over 3,000 companies.
Semiannual Report | 21
TOP 5 STOCK HOLDINGS
Franklin Income Fund
3/31/05
- -------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------
Merck & Co. Inc. 3.3%
HEALTH TECHNOLOGY
- -------------------------------------------------
Pfizer Inc. 2.4%
HEALTH TECHNOLOGY
- -------------------------------------------------
Ford Motor Co. Capital Trust II 2.1%
CONSUMER DURABLES
- -------------------------------------------------
Fannie Mae 1.7%
FINANCE
- -------------------------------------------------
FirstEnergy Corp. 1.6%
ELECTRIC UTILITIES
- -------------------------------------------------
TOP 5 BOND HOLDINGS
Franklin Income Fund
3/31/05
- ------------------------------------------------
% OF TOTAL
NET ASSETS
- ------------------------------------------------
Calpine Corp. 2.6%
- ------------------------------------------------
Charter Communications Holdings LLC 2.3%
- ------------------------------------------------
General Motors Acceptance Corp. 2.2%
- ------------------------------------------------
Tenet Healthcare Corp. 2.0%
- ------------------------------------------------
Dynegy Holdings Inc. 1.9%
- ------------------------------------------------
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/04-3/31/05
- -----------------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- -----------------------------------------------------------------------------------------
October 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------
November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------
December 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------
January 1.30 cents 1.12 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents
- -----------------------------------------------------------------------------------------
February 1.25 cents 1.07 cents 1.14 cents 1.14 cents 1.18 cents 1.28 cents
- -----------------------------------------------------------------------------------------
March 1.25 cents 1.07 cents 1.15 cents 1.15 cents 1.17 cents 1.28 cents
- -----------------------------------------------------------------------------------------
TOTAL 7.70 CENTS 6.66 CENTS 7.07 CENTS 7.07 CENTS 7.27 CENTS 7.88 CENTS
- -----------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** On November 1, 2001, the Fund closed Class B to new investors and changed
the name to Class B1; a new Class B became available to investors.
MANAGER'S DISCUSSION
During the past six months, the Fund continued to benefit from the utility
sector's strong performance, which rose 18.27% as measured by the S&P 500
Utilities Index.(5) Nevertheless, in recent months utility companies felt the
pressure of rising interest rates. Additionally, U.S. Treasury yields rose
significantly over the reporting period, hurting typically higher-yielding
utility stocks. However, high oil and natural gas prices created some favorable
investment opportunities in those utilities involved in oil and gas exploration
and production, and those with large coal and nuclear power generation assets.
We sought to take advantage of relatively higher natural gas prices and general
market conditions which enabled us to capture strong returns from portfolio
holdings such as Dominion Resources and TXU, just two examples that benefited
from the recent utilities commodity cycle. In addition, we continued to realize
value from the nation's leading nuclear generation companies, Southern Company
and Exelon, who were well positioned given market conditions and fuel prices
during the six months under review.
(5) Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market
capitalization-weighted index that includes utility stocks in the S&P 500.
22 | Semiannual Report
At period-end, we continued to find value in Dominion Resources, which
represented one of the Fund's larger investments in the utility sector and whose
share price increased more than 16% in the six months ended March 31, 2005. With
its strong ties to the commodity cycle, Dominion benefited the Fund with a
strong dividend yield and solid growth potential. At the other end of the
country, an improved regulatory situation and market stabilization following the
California energy crisis of 2000-2001 unlocked value in three of our California
utilities positions: PG&E, Edison International (sold by period-end) and Sempra
Energy. PG&E recently reinstated its regular dividend, and its underlying stock
price rose 13% this reporting period. Our investment in Edison International and
Sempra Energy generated impressive returns of 21% and 11%, and Sempra recently
raised its dividend by 16%.
Our position in Exelon reflected our belief that nuclear power generators could
continue to outperform their peers in an era characterized by high-priced fossil
fuels and environmental legislation. In December 2004, the Fund also benefited
from Exelon's bid to acquire Public Service Enterprise Group, greatly enhancing
the combined entities' market position while achieving business synergies across
their portfolio of valuable assets.
Our major oil and gas company holdings within the energy minerals sector also
enhanced the Fund's performance, as crude oil and domestic natural gas prices
remained relatively high throughout the reporting period. The recent commodity
pricing environment was attributable to robust demand fueled by global economic
growth as well as renewed concerns regarding the potential for supply to meet
that demand over the long term. Higher oil and gas prices over the period
allowed related companies to increase earnings, cash flows and dividends per
share. Significant Fund holdings that benefited from this environment included
BP (+10% for the six months under review), Royal Dutch Petroleum (+19%) and
ChevronTexaco (+10%). In addition, the Fund realized strong returns from one of
the sector's investment trusts, Canadian Oil Sands Trust.
Among our fixed income investments, we decreased the Fund's overall bond
position from 39.4% of total net assets on September 30, 2004, to 37.7% at
period-end. Concerns over the impact of rising overall interest rates as well as
our view of fairly valued corporate credit markets led us to be more focused
when selecting bond investments. Our objective has been to focus on investment
opportunities we believe provide attractive current income and good long-term
appreciation potential. To that end, our in-house research analysts seek to
uncover investment opportunities in companies offering the potential to
experience improving credit fundamentals, including improving liquidity and
ultimately the potential to reduce debt going forward. Additionally, within our
higher yielding, non-investment grade corporate bond investments we paid
particular attention to the ultimate value of a company's given assets and the
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets
as of 3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Corporate Bonds 26.9%
Utilities Stocks 18.8%
Health Technology Stocks 9.2%
Finance Stocks 8.1%
Energy Minerals Stocks 3.9%
Communications Stocks 3.8%
U.S. Government & Agency Securities 3.4%
Corporate Convertible Bonds 3.3%
Zero Coupon & Step-Up Bonds 2.8%
Consumer Durables Stocks 2.5%
Consumer Non-Durables Stocks 2.0%
Real Estate Investment Trust Stocks 1.8%
Electronic Technology Stocks 1.4%
Municipal Bonds 1.3%
Other Stocks 3.1%
Short-Term Investments & Other Net Assets 7.7%
Semiannual Report | 23
level of our claim relative to that asset value. Although the Fund's overall
bond stake declined, we actually increased our holdings in several companies
including Calpine, Charter Communications, Tenet HealthCare and Allied Waste
Industries, and initiated a new position in General Motors Acceptance
Corporation.
The Fund had some detractors to performance among its health technology sector
investments, which struggled to keep pace with the overall market and over the
short term failed to meet our expectations for attractive current income and
capital appreciation. Two pharmaceutical companies in particular, Pfizer and
Merck & Co., vastly underperformed the overall stock market due to widely
reported health complications related to their prescription drug products. These
companies faced near-term fundamental challenges including lower profit growth,
generic competition, drug pricing pressures and rising biotechnology
competition. However, following our strategy, we believe a compelling longer
term case can be made given their attractive dividend yields, strong corporate
balance sheets, and ongoing long-range focus on new product development.
In addition, securities of General Motors (GM) and Ford struggled due to
historically high oil prices and disappointing company earnings. Increased
global competition and the rising cost of legacy benefits for former employees,
along with the need to continually refresh product offerings, hurt financial
performance for companies like GM and Ford. Longer term, we believe actions
taken to improve product quality and competitiveness, along with continued focus
on cost reduction, should benefit these companies and could lead to improved
valuations for their underlying securities.
24 | Semiannual Report
Thank you for your continued participation in Franklin Income Fund. We look
forward to serving your future investment needs.
[PHOTO OMMITTED] /s/ Edward Perks,
Edward Perks, CFA
[PHOTO OMMITTED] /s/ Charles B. Johnson
Charles B. Johnson
Portfolio Management Team
Franklin Income Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Semiannual Report | 25
Performance Summary as of 3/31/05
FRANKLIN INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes due on
Fund dividends, capital gain distributions, if any, or any realized gains on the
sale of Fund shares. Total return reflects reinvestment of the Fund's dividends
and capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------
CLASS A (SYMBOL: FKINX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.45 $2.42
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0770
- ----------------------------------------------------------------------
CLASS B (SYMBOL: FBICX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.44 $2.41
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0666
- ----------------------------------------------------------------------
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.45 $2.42
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0707
- ----------------------------------------------------------------------
CLASS C (SYMBOL: FCISX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.46 $2.43
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0707
- ----------------------------------------------------------------------
CLASS R (SYMBOL: FISRX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.43 $2.40
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0727
- ----------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/05 9/30/04
- ----------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $2.44 $2.41
- ----------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- ----------------------------------------------------------------------
Dividend Income $0.0788
- ----------------------------------------------------------------------
26 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED
THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18
MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL
TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- -----------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.00% +8.97% +72.90% +162.39%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.44% +4.21% +10.65% +9.67%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,044 $10,421 $16,586 $25,180
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 5.86%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.78%
- -----------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION(11/1/01)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.58% +8.09% +34.13% +43.14%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.58% +4.09% +9.45% +10.40%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,058 $10,409 $13,113 $14,014
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 5.26%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.14%
- -----------------------------------------------------------------------------------------
CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.73% +8.42% +68.64% +67.63%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +0.73% +4.42% +10.75% +8.62%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,073 $10,442 $16,664 $16,763
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 5.63%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.49%
- -----------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.71% +8.38% +68.26% +142.77%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +3.71% +7.38% +10.97% +9.35%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,371 $10,738 $16,826 $24,277
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 5.61%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.50%
- -----------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION(1/1/02)
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.86% +8.66% +35.73% +41.03%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +3.86% +7.66% +10.72% +11.19%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,386 $10,766 $13,573 $14,103
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 5.78%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 4.65%
- -----------------------------------------------------------------------------------------
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.10% +9.17% +73.79% +167.41%
- -----------------------------------------------------------------------------------------
Average Annual Total Return(2) +5.10% +9.17% +11.69% +10.34%
- -----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,510 $10,917 $17,379 $26,741
- -----------------------------------------------------------------------------------------
Distribution Rate(4) 6.30%
- -----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 5.16%
- -----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 27
Performance Summary (CONTINUED)
ENDNOTES
THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER
RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN
COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL,
ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S SHARE PRICE AND YIELD MAY BE
AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE
PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM INTEREST RATES. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than
Class A shares.
CLASS B1
(formerly Class B): These shares have higher annual fees and expenses than
Class A shares. Effective 11/1/01, closed to new
investors.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have
differed. These shares have higher annual fees and
expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher
annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge. Six-month return has not been annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.
(4) Distribution rate is based on an annualization of the respective class's
March dividend and the maximum offering price (NAV for Classes B, B1, C, R
and Advisor) per share on 3/31/05.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/05.
(6) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 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, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting 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 +107.82% and +9.28%.
28 | Semiannual Report
Your Fund's Expenses
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 29
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,050.00 $3.32
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.69 $3.28
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,045.80 $7.65
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.45 $7.54
- -------------------------------------------------------------------------------------------------------
CLASS B1
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,047.30 $5.87
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.79
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,047.10 $5.87
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.20 $5.79
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,048.60 $5.11
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.95 $5.04
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,051.00 $2.56
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.44 $2.52
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense for each class (A: 0.65%; B:
1.50%; B1: 1.15%; C: 1.15%; R: 1.00%; and Advisor: 0.50%), multiplied by
the average account value over the period, multiplied by 182/365 to reflect
the one-half year period.
30 | Semiannual Report
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund
seeks high, current income from a portfolio of U.S. government securities.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin U.S. Government Securities Fund Based on Total Net
Assets as of 3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ...................... 97.7%
Short-Term Investments &
Other Net Assets .......... 2.3%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin U.S. Government Securities Fund's
semiannual report for the period ended March 31, 2005.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +1.01% cumulative
total return for the six months under review. The Fund outperformed the Lehman
Brothers Intermediate U.S. Government Bond Index, which returned
(1) U.S. government securities owned by the Fund, but not shares of the Fund,
are guaranteed by the U.S. government, its agency or instrumentalities, as
to timely payment of principal and interest. The Fund's yield and share
price are not guaranteed and will vary with market conditions.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 87.
Semiannual Report | 31
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (4/00-3/05)
[THE FOLLOWING TABLE WAS REPRESENTED BY A PLOT CHART IN THE PRINTED MATERIAL.]
Risk Return
-------------------------
Franklin US Government Securities Fund - Class A 2.73% 6.06%
Payden & Rygel 1-Year Treasury Bill 1.03% 3.36%
Payden & Rygel 10-Year Treasury Note 8.14% 7.11%
Payden & Rygel 30-Year Treasury Bond 12.45% 8.70%
THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES
CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER.
* 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. Treasuries, if held to maturity,
offer a fixed rate of return and fixed principal value; interest payments
and principal are guaranteed. 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. The figures do not reflect the deduction of taxes
that a shareholder would pay on Fund distributions or the sale of Fund
shares. Past performance does not guarantee future results.
- -0.46%.(2) In comparison, the Lipper GNMA Funds Objective Average returned 0.70%
for the same period.(2) The Fund's return reflects the effect of management fees
and expenses, while the index does not have such costs. You can find the Fund's
long-term performance data in the Performance Summary beginning on page 36.
(2) Sources: Lehman Brothers Inc.; Lipper Inc. 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 10 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. The Lipper GNMA Funds Objective Average is calculated by
averaging the total return for all funds within the Lipper GNMA Funds
classification in the Lipper Open-End underlying funds universe for the
period indicated. Lipper GNMA Funds are defined as funds that invest
primarily in Government National Mortgage Association securities. For the
6-month period ended 3/31/05, there were 64 funds in this category. Lipper
calculations do not include sales charges. The Fund's performance relative
to the average may have differed if these or other factors had been
considered. Past performance does not guarantee future results. The indexes
are unmanaged and include reinvestment of any income or distributions. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
32 | Semiannual Report
ECONOMIC AND MARKET OVERVIEW
Overall domestic economic growth remained healthy during the reporting period.
Approximately two-thirds of U.S. gross domestic product (GDP) is generated by
consumer spending, and almost one-fifth by business spending. Since consumer
spending relies on consumers' ability to remain gainfully employed, many
analysts study the employment picture for indications of consumer spending. Over
the past six months, nonfarm payroll data, as well as other indexes, showed
growing employment. This along with other factors helped consumer spending
increase 6.1% (not adjusted for inflation) in March 2005 compared with the same
month a year earlier, which supported U.S. economic growth.(3)
Business spending also rose during the reporting period, contributing to
economic growth. For example, nonresidential investment spending increased 14.5%
in the fourth quarter of 2004, although it slowed to 4.7% in the first quarter
of 2005.(4) Historically low interest rates continued to allow many companies
easy access to capital, and ample cash helped some companies to boost their
balance sheets. Many corporate debt investments also benefited from this
improvement early in the period. Productivity continued to grow, which helped
businesses generate more goods and services without substantially raising
inflation.
Energy prices rose significantly, as oil prices neared $57 a barrel.(5) The
Federal Reserve Board (Fed) raised the federal funds target rate to 2.75% from
1.75% during the reporting period. Inflation remained relatively contained, as
measured by the 2.3% rise for the core Consumer Price Index (CPI), which
excludes food and energy costs, for the 12 months ended March 31, 2005. Although
higher than in the past two calendar years, this matched the core CPI's 10-year
average of 2.3%.(3) The Fed funds futures contracts priced in the potential for
further rate increases. During the period, the yield curve flattened somewhat,
as the 10-year U.S. Treasury yield also increased, but not as much as the
shorter end of the curve. At period-end, the 10-year Treasury yielded 4.50%.
(3) Source: Bureau of Labor Statistics.
(4) Source: Bureau of Economic Analysis.
(5) Source: Bloomberg Energy/Commodity Service.
Semiannual Report | 33
YIELD COMPARISON
3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY BAR CHART IN THE PRINTED MATERIAL.]
Franklin U.S. Government Securities Fund - Class A* 4.25%
10-Year Treasury Note* 4.50%
Lipper GNMA Funds Average* 3.32%
Money Market Funds Average* 1.87%
* Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government
Securities Fund - Class A shares' yield, calculated as required by SEC, is
based on earnings of the Fund's portfolio for the 30 days ended 3/31/05.
Treasuries, if held to maturity, offer a fixed rate of return and fixed
principal value; interest payments and principal are guaranteed. 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. The Lipper GNMA Funds Average is an average of the
monthly SEC yields of 64 funds in the Lipper GNMA Funds classification for
the 30 days ended 3/31/05. The Lipper Money Market Funds Average is an
average of the monthly SEC yields of 391 funds in the Lipper Money Market
Funds classification for the 30 days ended 3/31/05. Lipper averages do not
include sales charges.
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/04-3/31/05
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- --------------------------------------------------------------------------------
October 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents
- --------------------------------------------------------------------------------
November 2.78 cents 2.50 cents 2.49 cents 2.58 cents 2.85 cents
- --------------------------------------------------------------------------------
December 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- --------------------------------------------------------------------------------
January 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- --------------------------------------------------------------------------------
February 2.78 cents 2.48 cents 2.48 cents 2.56 cents 2.85 cents
- --------------------------------------------------------------------------------
March 2.78 cents 2.49 cents 2.49 cents 2.58 cents 2.84 cents
- --------------------------------------------------------------------------------
TOTAL 16.68 CENTS 14.93 CENTS 14.91 CENTS 15.42 CENTS 17.09 CENTS
- --------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
INVESTMENT STRATEGY
We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze
securities using proprietary models to help us identify attractive investment
opportunities. The Fund's short-term investments include short-term government
securities and cash or cash equivalents.
MANAGER'S DISCUSSION
Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs
have offered attractive risk-adjusted returns when compared with a variety of
asset classes including U.S. Treasuries, Agency debentures, investment grade and
high yield corporate bonds, and large- and small-capitalization stocks. These
time periods include various credit, prepayment, economic and interest rate
cycles.
In the GNMA sector, we continued to uncover areas of the market where our
research found relative value opportunities across the coupon spectrum. Despite
the increase in intermediate-term interest rates during the reporting period,
our holdings provided positive total returns for the Fund. When constructing our
portfolios, we managed our allocations relative to our benchmark. As the yield
curve flattened, we preferred 30-year GNMAs over 15-year GNMAs. Within the
30-year sector we invested in lower-coupon securities instead of higher-coupon
securities. We also invested in more securities associated with the GNMA II
program than the GNMA I program, and tended to focus more on specified pool
purchasing rather than the To Be Announced (TBA) marketplace.(6)
(6) A TBA security consists of generic mortgage pools to be determined at the
settlement date.
34 | Semiannual Report
Thank you for your continued participation in Franklin U.S. Government
Securities Fund. We welcome your comments and questions and look forward to
serving your investment needs in the years to come.
[PHOTO OMITTED] /s/ Jack Lemein
Jack Lemein
[PHOTO OMITTED] /s/ Roger A. Bayston
Roger A. Bayston, CFA
Portfolio Management Team
Franklin U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Semiannual Report | 35
Performance Summary as of 3/31/05
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes due on
Fund dividends, capital gain distributions, if any, or any realized gains on the
sale of Fund shares. Total return reflects reinvestment of the Fund's dividends
and capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUSX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.58 $6.68
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1668
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.57 $6.67
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1493
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.55 $6.65
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1491
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $6.57 $6.68
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1542
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.10 $6.59 $6.69
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.1709
- --------------------------------------------------------------------------------
36 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return(1) +1.01% +2.33% +34.22% +86.84%
- ---------------------------------------------------------------------------------------
Average Annual Total Return(2) -3.34% -2.02% +5.15% +5.99%
- ---------------------------------------------------------------------------------------
Distribution Rate(3) 4.86%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.25%
- ---------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------
Cumulative Total Return(1) +0.74% +1.79% +30.80% +33.23%
- ---------------------------------------------------------------------------------------
Average Annual Total Return(2) -3.20% -2.10% +5.19% +4.70%
- ---------------------------------------------------------------------------------------
Distribution Rate(3) 4.55%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.92%
- ---------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ---------------------------------------------------------------------------------------
Cumulative Total Return(1) +0.74% +1.79% +30.65% +74.28%
- ---------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.24% +0.81% +5.49% +5.76%
- ---------------------------------------------------------------------------------------
Distribution Rate(3) 4.56%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 3.92%
- ---------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------
Cumulative Total Return(1) +0.66% +1.80% +12.50% +13.61%
- ---------------------------------------------------------------------------------------
Average Annual Total Return(2) -0.32% +0.83% +4.01% +4.02%
- ---------------------------------------------------------------------------------------
Distribution Rate(3) 4.71%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.09%
- ---------------------------------------------------------------------------------------
ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return(1) +1.07% +2.45% +35.15% +89.28%
- ---------------------------------------------------------------------------------------
Average Annual Total Return(2) +1.07% +2.45% +6.21% +6.59%
- ---------------------------------------------------------------------------------------
Distribution Rate(3) 5.17%
- ---------------------------------------------------------------------------------------
30-Day Standardized Yield(4) 4.57%
- ---------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 37
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION FROM
INTEREST RATES. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND, ARE
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES, AS TO
TIMELY PAYMENT OF PRINCIPAL AND INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge. Six-month return has not been annualized.
(3) Distribution rate is based on an annualization of the respective class's
March dividend and the maximum offering price (NAV for Classes B, C, R and
Advisor) per share on 3/31/05.
(4) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/05.
(5) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 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, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting 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 +62.83% and +6.09%.
38 | Semiannual Report
Your Fund's Expenses
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 39
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.10 $3.61
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.34 $3.63
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.40 $6.21
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.40 $6.21
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,006.60 $5.45
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.50 $5.49
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.70 $2.96
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.99 $2.97
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.72%; B: 1.24%; C: 1.24%; R: 1.09%; and Advisor: 0.59%), multiplied by the
average account value over the period, multiplied by 182/365 to reflect the
one-half year period.
40 | Semiannual Report
Franklin Utilities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income from a portfolio of public utility
industry securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Utilities Fund's semiannual report for the
period ended March 31, 2005.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Utilities Fund - Class A posted a
+12.79% cumulative total return. The Fund outperformed its benchmark, the
Standard & Poor's 500 Composite Index (S&P 500), which returned 6.88% for the
same period.(1) Given that the Fund invests in only a few sectors within the S&P
500, the Fund's results are not directly comparable to the index's. You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 45.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2005, domestic economic expansion showed
staying power across most industries, sectors and regions. Gross domestic
product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an
estimated annualized 3.1% in first quarter 2005, benefiting from greater
business investment, sizable inventory buildup and consumer spending. Although
booming demand for imported goods and materials fueled the widening trade gap,
U.S. dollar depreciation supported manufacturing activity and made U.S. exports
more competitive in the global market.
The labor market firmed as employment increased and the unemployment rate
dropped from 5.5% to 5.2% during the reporting period.(2) Hiring rebounded in
many industries, bolstered by healthy business spending and solid business
confidence. Soaring energy prices cooled consumer sentiment, but core retail
sales held strong.
(1) Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks for U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's
portfolio.
(2) Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 94.
Semiannual Report | 41
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 3/31/05
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electric Utilities .................................. 73.0%
Multi-Utilities & Unregulated Power ................. 11.7%
Gas Utilities ....................................... 11.2%
Integrated Telecommunication Services ............... 2.6%
Oil & Gas Refining Marketing & Transportation ....... 1.0%
Short-Term Investments & Other Net Assets ........... 0.5%
- --------------------------------------------------------------------------------
The Federal Reserve Board (Fed) raised the federal funds target rate from 1.75%
to 2.75% and said it will respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability. Inflation remained
relatively contained for the 12 months ended March 31, 2005, as measured by the
2.3% rise for the core Consumer Price Index, which excludes volatile food and
energy costs. Pricing pressures were somewhat eased by continued competition,
globalization and offshoring, as companies held back in passing along higher
commodity and energy costs to consumers.
Despite a generally strong economy and improving corporate fundamentals,
investors faced a stock market influenced partly by rising inflation, the
fluctuating dollar and interest rate hikes during the period. Corporate profits
rebounded and dividend payments surged to a record level, with U.S. companies
paying out $181 billion in 2004.(3) The pace of initial public offerings (IPOs)
remained strong through much of the reporting period, supporting investor
confidence. The blue chip stocks of the Dow Jones Industrial Average gained
5.37% for the period under review, while the broader S&P 500 rose 6.88%, and the
technology-heavy NASDAQ Composite Index increased 5.74%.(4)
INVESTMENT STRATEGY
We search for the best return opportunities available in the global utilities
arena with a specific focus on the U.S. electricity sector. Generally, we look
for companies producing a high percentage of earnings from regulated utility
franchise operations.
MANAGER'S DISCUSSION
During the past six months, the Fund outperformed the general market, as
measured by the S&P 500. Positive industry fundamentals including strong balance
sheets and continued cash flow generation contributed to the outperformance.
Rising oil and natural gas prices created some favorable investment
opportunities in those utilities involved in oil and gas exploration and
production,
(3) Source: Standard & Poor's, "2004 Buybacks Soar to Record Levels, Says S&P,"
STANDARDANDPOORS.COM, 4/7/05.
(4) Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all
domestic and international common stocks listed on The NASDAQ Stock Market.
The index is market value weighted and includes over 3,000 companies.
42 | Semiannual Report
and those with large coal and nuclear power generation assets. Some Fund
investments realized higher returns in their energy supply businesses due to
high natural gas prices. TXU, for example, captured higher operating margins
from the peaking natural gas commodity cycle during the reporting period. In
addition, we continued to realize value from the nation's leading nuclear
generation companies, Entergy, Southern Company and Exelon, which were
relatively well-positioned given recent market conditions and fuel prices.
We continued to see value in Dominion Resources, the Fund's largest holding at
period-end. As an integrated utility with a direct exposure to the commodity
cycle, Dominion contributed to Fund performance with a strong dividend yield and
solid growth potential. At the other end of the country, an improved regulatory
situation and market stabilization following the California energy crisis of
2000-2001 unlocked value in three of our California utility holdings: PG&E,
Edison International and Sempra Energy. PG&E recently reinstated its regular
dividend and performed well in the past six months. Edison International and
Sempra Energy generated impressive returns of 20% and 11%, and both companies
recently raised their dividends by 25% and 16% respectively. Our large holdings
in Exelon and Entergy reflected our belief that nuclear power generators will
continue to outperform their peers in an era characterized by high-priced fossil
fuels and environmental legislation. In December 2004, the Fund also benefited
from Exelon's bid to acquire Public Service Enterprise Group, greatly enhancing
the combined entities' market position while achieving business synergies across
their portfolio of valuable assets.
Furthermore, the Fund continued to realize sound returns from our international
holdings. United Utilities and Scottish & Southern Energy delivered strong price
appreciation and solid dividend yields. These holdings, along with our other
U.K.-based investments, benefited from currency exchange rates between the
British pound and the U.S. dollar.
In general, the Fund's holdings recorded positive performance during the period
under review. However, Nicor and Puget Energy posted lackluster returns in
recent months. Nicor, an Illinois-based gas distributor, faced a regulatory
investigation regarding allegations of revenue-sharing fraud, as well as
turnover at the senior management level. Shares of Puget Energy, a
Washington-based utility, struggled due to regulatory uncertainty and lower than
expected earnings forecasts. Based upon our long-term investment strategy, we
continued to hold positions in these companies, as we believe that their future
prospects remained positive.
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
3/31/05
- --------------------------------------------------------------------------------
% OF TOTAL
COMPANY NET ASSETS
- --------------------------------------------------------------------------------
Dominion Resources Inc. 4.8%
- --------------------------------------------------------------------------------
Entergy Corp. 4.7%
- --------------------------------------------------------------------------------
Exelon Corp. 4.7%
- --------------------------------------------------------------------------------
FPL Group Inc. 4.0%
- --------------------------------------------------------------------------------
FirstEnergy Corp. 3.4%
- --------------------------------------------------------------------------------
PPL Corp. 3.3%
- --------------------------------------------------------------------------------
Southern Co. 3.3%
- --------------------------------------------------------------------------------
United Utilities PLC, ord. & A (U.K.) 3.1%
- --------------------------------------------------------------------------------
Cinergy Corp. 3.1%
- --------------------------------------------------------------------------------
American Electric Power Co. Inc., ord. & 9.25% cvt. pfd. 3.0%
- --------------------------------------------------------------------------------
Semiannual Report | 43
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ John C. Kohli
John C. Kohli, CFA
Portfolio Manager
Franklin Utilities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON SUCH FACTORS AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
44 | Semiannual Report
Performance Summary as of 3/31/05
FRANKLIN UTILITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes due on
Fund dividends, capital gain distributions, if any, or any realized gains on the
sale of Fund shares. Total return reflects reinvestment of the Fund's dividends
and capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUTX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.05 $11.21 $10.16
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2422
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.06 $11.21 $10.15
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2109
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.06 $11.19 $10.13
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2106
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FRURX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.05 $11.20 $10.15
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2231
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/05 9/30/04
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.05 $11.25 $10.20
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/04-3/31/05)
- --------------------------------------------------------------------------------
Dividend Income $0.2538
- --------------------------------------------------------------------------------
Semiannual Report | 45
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY.
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.79% +19.49% +72.46% +154.97%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +8.01% +14.46% +10.55% +9.33%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,801 $11,446 $16,515 $24,404
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.45%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.30%
- ----------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.58% +18.86% +68.06% +44.05%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +8.58% +14.86% +10.68% +6.02%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $10,858 $11,486 $16,606 $14,405
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.41%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 2.94%
- ----------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.60% +18.89% +68.18% +138.41%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +11.60% +17.89% +10.96% +9.15%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,160 $11,789 $16,818 $23,841
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.41%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 2.94%
- ----------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.61% +19.10% +27.76% +31.63%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +11.61% +18.10% +8.51% +8.85%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,161 $11,810 $12,776 $13,163
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.47%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.09%
- ----------------------------------------------------------------------------------------
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.86% +19.62% +73.59% +160.78%
- ----------------------------------------------------------------------------------------
Average Annual Total Return(2) +12.86% +19.62% +11.66% +10.06%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment(3) $11,286 $11,962 $17,359 $26,078
- ----------------------------------------------------------------------------------------
Distribution Rate(4) 3.73%
- ----------------------------------------------------------------------------------------
30-Day Standardized Yield(5) 3.59%
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
46 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
IN ADDITION TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES ARE
PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS. WHEN INTEREST RATES FALL,
UTILITY SECURITIES PRICES TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES
GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
(2) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge. Six-month return has not been
annualized.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.
(4) Distribution rate is based on an annualization of the respective class's
current quarterly dividend and the maximum offering price (NAV for
Classes B, C, R and Advisor) per share on 3/31/05.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/05.
(6) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 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, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting 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 +103.92% and +9.02%.
Semiannual Report | 47
Your Fund's Expenses
FRANKLIN UTILITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
48 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 9/30/04 VALUE 3/31/05 PERIOD* 9/30/04-3/31/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,127.90 $4.14
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,125.80 $6.78
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.44
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,126.00 $6.78
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.44
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,126.10 $5.99
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.30 $5.69
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,128.60 $3.34
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.79 $3.18
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.78%; B: 1.28%; C: 1.28%; R: 1.13%; and Advisor: 0.63%), multiplied by the
average account value over the period, multiplied by 182/365 to reflect the
one-half year period.
Semiannual Report | 49
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
---------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2004 2003 2002 2001 2000
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60 $ 23.11
---------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ............. 0.04 (0.09) (0.06) 0.03 0.44 0.56
Net realized and unrealized gains (losses) .. 0.67 1.93 4.86 (3.11) (9.70) 5.30
---------------------------------------------------------------------------
Total from investment operations ............... 0.71 1.84 4.80 (3.08) (9.26) 5.86
---------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... -- -- -- (0.29) (0.58) (0.37)
Tax return of capital ....................... -- -- -- (0.02) -- --
---------------------------------------------------------------------------
Total distributions ............................ -- -- -- (0.31) (0.58) (0.37)
---------------------------------------------------------------------------
Redemption fees ................................ --(c) --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................. $ 22.72 $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60
===========================================================================
Total return(b) ................................ 3.23% 9.12% 31.23% (16.83)% (32.86)% 25.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $600,802 $640,120 $558,687 $413,309 $530,074 $809,140
Ratios to average net assets:
Expenses .................................... 0.97%(d) 0.97% 1.04% 1.00% 0.95% 0.94%
Net investment income (loss) ................ 0.33%(d) (0.41)% (0.40)% 0.13% 1.93% 1.98%
Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
50 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
--------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2004 2003 2002 2001 2000(e)
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45 $28.05
--------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ............. (0.05) (0.25) (0.25) (0.12) 0.25 0.28
Net realized and unrealized gains (losses) .. 0.66 1.89 4.84 (3.08) (9.62) 0.12
--------------------------------------------------------------------------
Total from investment operations ............... 0.61 1.64 4.59 (3.20) (9.37) 0.40
--------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... -- -- -- (0.16) (0.51) --
Tax return of capital ....................... -- -- -- (0.01) -- --
--------------------------------------------------------------------------
Total distributions ............................ -- -- -- (0.17) (0.51) --
--------------------------------------------------------------------------
Redemption fees ................................ --(c) --(c) -- -- -- --
--------------------------------------------------------------------------
Net asset value, end of period ................. $ 22.04 $ 21.43 $ 19.79 $ 15.20 $ 18.57 $28.45
==========================================================================
Total return(b) ................................ 2.85% 8.29% 30.20% (17.51)% (33.37)% 1.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $18,822 $18,824 $10,406 $ 5,066 $ 5,473 $4,749
Ratios to average net assets:
Expenses .................................... 1.71%(d) 1.72% 1.79% 1.75% 1.70% 1.73%(d)
Net investment income (loss) ................ (0.41)%(d) (1.16)% (1.15)% (.62)% 1.13% 1.43%(d)
Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period February 1, 2000 (effective date) to September 30, 2000.
Semiannual Report | See notes to financial statements. | 51
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2004 2003 2002 2001 2000
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95 $ 22.64
------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) ............. (0.05) (0.25) (0.25) (0.11) 0.27 0.34
Net realized and unrealized gains (losses) .. 0.65 1.87 4.80 (3.05) (9.50) 5.21
------------------------------------------------------------------------
Total from investment operations ............... 0.60 1.62 4.55 (3.16) (9.23) 5.55
------------------------------------------------------------------------
Less distributions from:
Net investment income ....................... -- -- -- (0.13) (0.38) (0.24)
Tax return of capital ....................... -- -- -- (0.01) -- --
------------------------------------------------------------------------
Total distributions ............................ -- -- -- (0.14) (0.38) (0.24)
------------------------------------------------------------------------
Redemption fees ................................ --(c) --(c) -- -- -- --
------------------------------------------------------------------------
Net asset value, end of period ................. $ 21.81 $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95
========================================================================
Total return(b) ................................ 2.83% 8.27% 30.25% (17.48)% (33.36)% 24.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $72,352 $75,642 $66,952 $51,809 $77,204 $126,313
Ratios to average net assets:
Expenses .................................... 1.72%(d) 1.72% 1.79% 1.74% 1.70% 1.69%
Net investment income (loss) ................... (0.42)%(d) (1.16)% (1.15)% (0.61)% 1.19% 1.23%
Portfolio turnover rate ........................ 11.40% 14.93% 13.68% 8.11% 4.07% 5.45%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
52 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------
COMMON STOCKS 99.6%
AEROSPACE & DEFENSE 0.5%
Rockwell Collins Inc. ........................... United States 75,000 $ 3,569,250
-----------
AIR FREIGHT/COURIERS 2.7%
C.H. Robinson Worldwide Inc. .................... United States 150,000 7,729,500
Expeditors International of Washington Inc. ..... United States 20,000 1,071,000
United Parcel Service Inc., B ................... United States 140,000 10,183,600
-----------
18,984,100
-----------
BIOTECHNOLOGY 9.0%
(a) Amgen Inc. ...................................... United States 300,000 17,463,000
(a) Biogen Idec Inc. ................................ United States 100,000 3,451,000
(a) Charles River Laboratories International Inc. ... United States 100,000 4,704,000
(a) Genentech Inc. .................................. United States 375,000 21,228,750
(a) Gilead Sciences Inc. ............................ United States 150,000 5,370,000
(a) Invitrogen Corp. ................................ United States 150,000 10,380,000
-----------
62,596,750
-----------
CABLE/SATELLITE TELEVISION 1.4%
(a) Comcast Corp., A ................................ United States 175,000 5,845,000
(a) Liberty Media Corp., A .......................... United States 300,000 3,111,000
(a) Liberty Media International Inc., A ............. United States 15,000 656,100
-----------
9,612,100
-----------
CASINOS/GAMING 0.8%
International Game Technology ................... United States 200,000 5,332,000
-----------
CHEMICALS: SPECIALTY 1.1%
Sigma-Aldrich Corp. ............................. United States 125,000 7,656,250
-----------
COMPUTER COMMUNICATIONS 1.6%
(a) Cisco Systems Inc. .............................. United States 600,000 10,734,000
-----------
COMPUTER PERIPHERALS 0.4%
(a) Storage Technology Corp. ........................ United States 95,000 2,926,000
-----------
COMPUTER PROCESSING HARDWARE 3.0%
(a) Apple Computer Inc. ............................. United States 50,000 2,083,500
(a) Dell Inc. ....................................... United States 250,000 9,605,000
Hewlett-Packard Co. ............................. United States 400,000 8,776,000
-----------
20,464,500
-----------
DATA PROCESSING SERVICES 2.7%
First Data Corp. ................................ United States 225,000 8,844,750
Paychex Inc. .................................... United States 300,000 9,846,000
-----------
18,690,750
-----------
Semiannual Report | 53
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC EQUIPMENT/INSTRUMENTS 3.6%
(a) Agilent Technologies Inc. ....................... United States 300,000 $ 6,660,000
(a) Dolby Laboratories Inc., A ...................... United States 100,000 2,350,000
Rockwell Automation Inc. ........................ United States 277,500 15,717,600
-----------
24,727,600
-----------
ELECTRONIC PRODUCTION EQUIPMENT 3.7%
(a) Applied Materials Inc. .......................... United States 500,000 8,125,000
(a) KLA-Tencor Corp. ................................ United States 200,000 9,202,000
(a) Lam Research Corp. .............................. United States 150,000 4,329,000
(a) Varian Semiconductor Equipment Associates Inc. .. United States 100,000 3,801,000
-----------
25,457,000
-----------
ELECTRONICS/APPLIANCE STORES 1.0%
Best Buy Co. Inc. ............................... United States 125,000 6,751,250
-----------
ELECTRONICS/APPLIANCES 0.1%
Eastman Kodak Co. ............................... United States 30,000 976,500
-----------
FINANCIAL CONGLOMERATES 0.6%
Citigroup Inc. .................................. United States 100,000 4,494,000
-----------
FINANCIAL PUBLISHING/SERVICES 1.4%
Moody's Corp. ................................... United States 120,000 9,703,200
-----------
HOSPITAL/NURSING MANAGEMENT 0.2%
(a) United Surgical Partners International Inc. ..... United States 30,000 1,373,100
-----------
HOUSEHOLD/PERSONAL CARE 0.6%
Estee Lauder Cos. Inc., A ....................... United States 100,000 4,498,000
-----------
INDUSTRIAL CONGLOMERATES 1.0%
Tyco International Ltd. ......................... United States 200,000 6,760,000
-----------
INFORMATION TECHNOLOGY SERVICES 3.1%
(a) Cognizant Technology Solutions Corp., A ......... United States 220,000 10,164,000
International Business Machines Corp. ........... United States 120,000 10,965,600
-----------
21,129,600
-----------
INSURANCE BROKERS/SERVICES 0.7%
(a) ChoicePoint Inc. ................................ United States 120,000 4,813,200
-----------
INTERNET SOFTWARE/SERVICES 6.3%
(a) Google Inc., A .................................. United States 75,000 13,538,250
(a) InfoSpace Inc. .................................. United States 120,000 4,899,600
(a) Marchex Inc., B ................................. United States 122,300 2,279,672
(a) VeriSign Inc. ................................... United States 100,000 2,870,000
(a) Yahoo! Inc. ..................................... United States 600,000 20,340,000
-----------
43,927,522
-----------
54 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
MAJOR PHARMACEUTICALS 3.3%
Bristol-Myers Squibb Co. .................. United States 100,000 $ 2,546,000
Johnson & Johnson ......................... United States 150,000 10,074,000
Pfizer Inc. ............................... United States 400,000 10,508,000
-----------
23,128,000
-----------
MANAGED HEALTH CARE 5.4%
(a) Caremark Rx Inc. .......................... United States 200,000 7,956,000
(a) Centene Corp. ............................. United States 100,000 2,999,000
UnitedHealth Group Inc. ................... United States 275,000 26,229,500
-----------
37,184,500
-----------
MEDIA CONGLOMERATES 1.3%
News Corp. Ltd., B ........................ United States 300,000 5,283,000
(a) Time Warner Inc. .......................... United States 200,000 3,510,000
-----------
8,793,000
-----------
MEDICAL SPECIALTIES 9.0%
Alcon Inc. ................................ Switzerland 150,000 13,393,500
Medtronic Inc. ............................ United States 275,000 14,011,250
Stryker Corp. ............................. United States 280,000 12,490,800
(a) Varian Medical Systems Inc. ............... United States 125,000 4,285,000
(a) Waters Corp. .............................. United States 200,000 7,158,000
(a) Zimmer Holdings Inc. ...................... United States 140,000 10,893,400
-----------
62,231,950
-----------
MEDICAL/NURSING SERVICES 0.9%
(a) VCA Antech Inc. ........................... United States 300,000 6,069,000
-----------
MOVIES/ENTERTAINMENT 1.4%
(a) Pixar ..................................... United States 100,000 9,755,000
-----------
OILFIELD SERVICES/EQUIPMENT 1.5%
Schlumberger Ltd. ......................... United States 150,000 10,572,000
-----------
OTHER CONSUMER SERVICES 2.2%
(a) eBay Inc. ................................. United States 400,000 14,904,000
-----------
OTHER PHARMACEUTICALS 1.3%
Teva Pharmaceutical Industries Ltd., ADR .. Israel 300,000 9,300,000
-----------
PACKAGED SOFTWARE 9.7%
Adobe Systems Inc. ........................ United States 260,000 17,464,200
Autodesk Inc. ............................. United States 300,000 8,928,000
(a) Cognos Inc. ............................... Canada 150,000 6,291,000
Microsoft Corp. ........................... United States 950,000 22,961,500
(a) NAVTEQ Corp. .............................. United States 160,000 6,936,000
(a) Symantec Corp. ............................ United States 200,000 4,266,000
-----------
66,846,700
-----------
Semiannual Report | 55
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
RECREATIONAL PRODUCTS 1.9%
(a) Electronic Arts Inc. ........................... United States 250,000 $ 12,945,000
------------
SAVINGSBANKS 0.9%
Golden West Financial Corp. .................... United States 100,000 6,050,000
------------
SEMICONDUCTORS 11.2%
Analog Devices Inc. ............................ United States 310,000 11,203,400
Intel Corp. .................................... United States 1,150,000 26,714,500
(a) International Rectifier Corp. .................. United States 180,000 8,190,000
Linear Technology Corp. ........................ United States 400,000 15,324,000
(a) Marvell Technology Group Ltd. .................. Bermuda 75,000 2,875,500
Microchip Technology Inc. ...................... United States 150,000 3,901,500
Xilinx Inc. .................................... United States 320,000 9,353,600
------------
77,562,500
------------
SERVICES TO THE HEALTH INDUSTRY 0.9%
(a) Pharmaceutical Product Development Inc. ........ United States 125,000 6,056,250
------------
TELECOMMUNICATIONS EQUIPMENT 3.2%
Motorola Inc. .................................. United States 680,750 10,190,827
(a) Nokia Corp., ADR ............................... Finland 315,000 4,860,450
QUALCOMM Inc. .................................. United States 200,000 7,330,000
------------
22,381,277
------------
TOTAL COMMON STOCKS (COST $479,823,807) ........ 688,955,849
------------
SHORT TERM INVESTMENT (COST $4,093,487) 0.6%
MONEY FUND 0.6%
(b) Franklin Institutional Fiduciary Trust
Money Market Portfolio ......................... United States 4,093,487 4,093,487
------------
TOTAL INVESTMENTS (COST $483,917,294) 100.2% ... 693,049,336
OTHER ASSETS, LESS LIABILITIES (0.2)% .......... (1,074,687)
------------
NET ASSETS 100.0% .............................. $691,974,649
============
See Selected Portfolio Abbreviations on page 97.
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
56 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91 $ 33.21
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............ 0.09 0.06 0.08 0.07 0.23 0.45
Net realized and unrealized gains
(losses) ......................... 2.58 3.68 4.81 (5.65) (7.26) 3.96
----------------------------------------------------------------------------------
Total from investment operations ....... 2.67 3.74 4.89 (5.58) (7.03) 4.41
----------------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.08) (0.03) (0.04) (0.16) (0.40) (0.45)
Net realized gains .................. -- -- -- (0.05) (1.67) (0.26)
----------------------------------------------------------------------------------
Total distributions .................... (0.08) (0.03) (0.04) (0.21) (2.07) (0.71)
----------------------------------------------------------------------------------
Redemption fees ........................ --(c) --(c) -- -- -- --
----------------------------------------------------------------------------------
Net asset value, end of period ......... $ 33.17 $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91
==================================================================================
Total return(b) ........................ 8.73% 13.92% 22.27% (20.35)% (20.12)% 13.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $1,563,357 $1,531,871 $1,433,742 $1,249,745 $1,657,387 $2,149,928
Ratios to average net assets:
Expenses ............................ 0.93%(d) 0.98% 1.06% 0.96% 0.91% 0.93%
Net investment income ............... 0.58%(d) 0.20% 0.31% 0.24% 0.69% 1.27%
Portfolio turnover rate ................ 0.58% 1.56% 5.12% 2.16% 0.29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 57
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2004 2003 2002 2001 2000
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54 $ 33.03
-------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a) .............. (0.03) (0.16) (0.11) (0.14) (0.03) 0.16
Net realized and unrealized gains (losses) ... 2.51 3.61 4.73 (5.57) (7.18) 3.96
-------------------------------------------------------------------------
Total from investment operations ................ 2.48 3.45 4.62 (5.71) (7.21) 4.12
-------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- -- -- -- (0.20) (0.35)
Net realized gains ........................... -- -- -- (0.05) (1.67) (0.26)
-------------------------------------------------------------------------
Total distributions ............................. -- -- -- (0.05) (1.87) (0.61)
-------------------------------------------------------------------------
Redemption fees ................................. --(c) --(c) -- -- -- --
-------------------------------------------------------------------------
Net asset value, end of period .................. $ 32.25 $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54
=========================================================================
Total return(b) ................................. 8.33% 13.11% 21.29% (20.90)% (20.74)% 12.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $126,078 $121,986 $103,499 $75,141 $66,095 $38,353
Ratios to average net assets:
Expenses ..................................... 1.68%(d) 1.73% 1.81% 1.71% 1.66% 1.68%
Net investment income (loss) ................. (0.17)%(d) (0.55)% (0.44)% (0.51)% (0.10)% 0.45%
Portfolio turnover rate ......................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
58 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2004 2003 2002 2001 2000
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period............. $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19 $ 32.58
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(a)............... (0.03) (0.16) (0.11) (0.14) (0.02) 0.18
Net realized and unrealized gains (losses).... 2.49 3.58 4.69 (5.54) (7.13) 3.91
-------------------------------------------------------------------------------
Total from investment operations................. 2.46 3.42 4.58 (5.68) (7.15) 4.09
-------------------------------------------------------------------------------
Less distributions from:
Net investment income......................... -- -- -- -- (0.13) (0.22)
Net realized gains............................ -- -- -- (0.05) (1.67) (0.26)
-------------------------------------------------------------------------------
Total distributions.............................. -- -- -- (0.05) (1.80) (0.48)
-------------------------------------------------------------------------------
Redemption fees.................................. --(c) --(c) -- -- -- --
-------------------------------------------------------------------------------
Net asset value, end of period................... $ 31.97 $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19
===============================================================================
Total return(b).................................. 8.34% 13.11% 21.29% (20.92)% (20.72)% 12.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)................ $272,895 $270,131 $259,169 $232,307 $310,650 $374,483
Ratios to average net assets:
Expenses...................................... 1.68%(d) 1.73% 1.82% 1.70% 1.66% 1.68%
Net investment income (loss).................. (0.17)%(d) (0.55)% (0.45) (0.51)% (0.06)% 0.52%
Portfolio turnover rate.......................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 59
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
----------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2004 2003 2002(e)
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period.............. $ 30.39 $ 26.74 $ 21.98 $ 31.59
----------------------------------------------------
Income from investment operations:
Net investment income (loss)(a)................ 0.05 (0.02) -- --
Net realized and unrealized gains (losses)..... 2.56 3.67 4.81 (9.61)
----------------------------------------------------
Total from investment operations.................. 2.61 3.65 4.81 (9.61)
----------------------------------------------------
Less distributions from net investment income..... (0.01) -- (0.05) --
----------------------------------------------------
Redemption fees................................... --(c) --(c) -- --
----------------------------------------------------
Net asset value, end of period.................... $ 32.99 $ 30.39 $ 26.74 $ 21.98
====================================================
Total return(b)................................... 8.57% 13.65% 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)................. $23,080 $20,060 $14,755 $ 2,788
Ratios to average net assets:
Expenses 1.18%(d) 1.23% 1.31% 1.21%(d)
Net investment income (loss) 0.33%(d) (0.05)% 0.06% 0.02%(d)
Portfolio turnover rate........................... 0.58% 1.56% 5.12% 2.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period January 1, 2002 (effective date) to September 30, 2002.
60 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period.............. $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99 $ 33.27
------------------------------------------------------------------------
Income from investment operations:
Net investment income(a)....................... 0.13 0.14 0.14 0.14 0.31 0.54
Net realized and unrealized gains (losses)..... 2.59 3.67 4.82 (5.65) (7.28) 3.97
------------------------------------------------------------------------
Total from investment operations.................. 2.72 3.81 4.96 (5.51) (6.97) 4.51
------------------------------------------------------------------------
Less distributions from:
Net investment income.......................... (0.16) (0.09) (0.11) (0.24) (0.49) (0.53)
Net realized gains............................. -- -- -- (0.05) (1.67) (0.26)
------------------------------------------------------------------------
Total distributions............................... -- (0.09) (0.11) (0.29) (2.16) (0.79)
------------------------------------------------------------------------
Redemption fees................................... --(c) --(c) -- -- -- --
------------------------------------------------------------------------
Net asset value, end of period.................... $ 33.19 $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99
========================================================================
Total return(b)................................... 8.87% 14.19% 22.58% (20.14)% (19.94)% 13.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)................. $196,029 $133,332 $41,216 $27,431 $32,498 $39,442
Ratios to average net assets:
Expenses....................................... 0.68%(d) 0.73% 0.81% 0.71% 0.66% 0.68%
Net investment income.......................... 0.83%(d) 0.45% 0.56% 0.49% 0.94% 1.51%
Portfolio turnover rate........................... 0.58% 1.56% 5.12% 2.16% 0.29% 8.12%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 61
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 99.7%
COMMERCIAL SERVICES 3.0%
(a) Dun & Bradstreet Corp. ....................... United States 122,000 $ 7,496,900
Equifax Inc. ................................. United States 400,000 12,276,000
Moody's Corp. ................................ United States 244,000 19,729,840
Robert Half International Inc. ............... United States 300,000 8,088,000
Sabre Holdings Corp., A ...................... United States 800,000 17,504,000
------------
65,094,740
------------
CONSUMER DURABLES 1.3%
Eastman Kodak Co. ............................ United States 500,000 16,275,000
Harley-Davidson Inc. ......................... United States 200,000 11,552,000
------------
27,827,000
------------
CONSUMER NON-DURABLES 3.6%
Hershey Foods Corp. .......................... United States 516,400 31,221,544
International Flavors & Fragrances Inc. ...... United States 409,300 16,167,350
Tootsie Roll Industries Inc. ................. United States 22,488 674,640
V.F. Corp. ................................... United States 500,000 29,570,000
------------
77,633,534
------------
CONSUMER SERVICES 5.0%
Carnival Corp. ............................... United States 500,000 25,905,000
Clear Channel Communications Inc. ............ United States 500,000 17,235,000
Fairmont Hotels & Resorts Inc. ............... Canada 125,000 4,142,500
(a) Time Warner Inc. ............................. United States 1,350,000 23,692,500
Viacom Inc., A ............................... United States 200,000 7,008,000
Viacom Inc., B ............................... United States 100,000 3,483,000
The Walt Disney Co. .......................... United States 1,000,000 28,730,000
------------
110,196,000
------------
DISTRIBUTION SERVICES 3.0%
Cardinal Health Inc. ......................... United States 300,000 16,740,000
Genuine Parts Co. ............................ United States 400,000 17,396,000
W.W. Grainger Inc. ........................... United States 500,000 31,135,000
------------
65,271,000
------------
ELECTRONIC TECHNOLOGY 19.2%
(a) Agilent Technologies Inc. .................... United States 400,000 8,880,000
(a) Apple Computer Inc. .......................... United States 1,000,000 41,670,000
Boeing Co. ................................... United States 1,000,000 58,460,000
(a) Cisco Systems Inc. ........................... United States 1,350,000 24,151,500
(a) Conexant Systems Inc. ........................ United States 300,000 450,000
(a) Dell Inc. .................................... United States 500,000 19,210,000
(a) Dionex Corp. ................................. United States 250,000 13,625,000
(a) EMC Corp. .................................... United States 1,000,000 12,320,000
(a) Gateway Inc. ................................. United States 500,000 2,015,000
General Dynamics Corp. ....................... United States 500,000 53,525,000
Hewlett-Packard Co. .......................... United States 1,116,250 24,490,525
62 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
Intel Corp. .................................. United States 800,000 $ 18,584,000
Lockheed Martin Corp. ........................ United States 500,000 30,530,000
(a) Micrel Inc. .................................. United States 25,000 230,500
(a) Mindspeed Technologies Inc. .................. United States 100,000 223,000
(a) Mykrolis Corp. ............................... United States 270,725 3,871,368
Northrop Grumman Corp. ....................... United States 1,000,000 53,980,000
Raytheon Co. ................................. United States 600,000 23,220,000
Rockwell Automation Inc. ..................... United States 100,000 5,664,000
Rockwell Collins Inc. ........................ United States 100,000 4,759,000
(a) Sun Microsystems Inc. ........................ United States 1,600,000 6,464,000
Texas Instruments Inc. ....................... United States 515,000 13,127,350
------------
419,450,243
------------
ENERGY MINERALS 2.7%
BP PLC, ADR .................................. United Kingdom 295,200 18,420,480
EnCana Corp. ................................. Canada 342,000 24,083,640
Royal Dutch Petroleum Co., N.Y. shs. ......... Netherlands 280,000 16,811,200
------------
59,315,320
------------
FINANCE 0.3%
(a) ChoicePoint Inc. ............................. United States 160,000 6,417,597
------------
HEALTH SERVICES 0.8%
(a) Caremark Rx Inc. ............................. United States 75,625 3,008,362
IMS Health Inc. .............................. United States 500,000 12,195,000
(a) Medco Health Solutions Inc. .................. United States 48,240 2,391,257
------------
17,594,619
------------
HEALTH TECHNOLOGY 20.6%
Abbott Laboratories .......................... United States 400,000 18,648,000
(a) Advanced Medical Optics Inc. ................. United States 88,888 3,218,634
Allergan Inc. ................................ United States 400,000 27,788,000
(a) Amgen Inc. ................................... United States 932,000 54,251,720
Baxter International Inc. .................... United States 400,000 13,592,000
(a) Biogen Idec Inc. ............................. United States 325,000 11,215,750
Bristol-Myers Squibb Co. ..................... United States 640,000 16,294,400
(a) Edwards Lifesciences Corp. ................... United States 50,000 2,161,000
Eli Lilly & Co. .............................. United States 400,000 20,840,000
(a) Genentech Inc. ............................... United States 1,000,000 56,610,000
(a) Hospira Inc. ................................. United States 40,000 1,290,800
Johnson & Johnson ............................ United States 996,000 66,891,360
Merck & Co. Inc. ............................. United States 500,000 16,185,000
(a) Millipore Corp. .............................. United States 400,000 17,360,000
Pall Corp. ................................... United States 500,000 13,560,000
Pfizer Inc. .................................. United States 2,000,000 52,540,000
Schering-Plough Corp. ........................ United States 500,000 9,075,000
(a) Waters Corp. ................................. United States 500,000 17,895,000
Semiannual Report | 63
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
HEALTH TECHNOLOGY (CONT.)
Wyeth ........................................................... United States 600,000 $ 25,308,000
(a) Zimmer Holdings Inc. ............................................ United States 64,000 4,979,840
------------
449,704,504
------------
INDUSTRIAL SERVICES 1.5%
Schlumberger Ltd. ............................................... United States 400,000 28,192,000
(a) Transocean Inc. ................................................. United States 77,440 3,985,062
------------
32,177,062
------------
PROCESS INDUSTRIES 2.0%
Air Products & Chemicals Inc. ................................... United States 500,000 31,645,000
Sigma-Aldrich Corp. ............................................. United States 200,000 12,250,000
------------
43,895,000
------------
PRODUCER MANUFACTURING 20.6%
3M Co. .......................................................... United States 800,000 68,552,000
American Power Conversion Corp. ................................. United States 500,000 13,055,000
Avery Dennison Corp. ............................................ United States 462,000 28,611,660
(a) CUNO Inc. ....................................................... United States 86,200 4,429,818
Deere & Co. ..................................................... United States 200,000 13,426,000
Emerson Electric Co. ............................................ United States 500,000 32,465,000
Illinois Tool Works Inc. ........................................ United States 500,000 44,765,000
Ingersoll Rand Co., A ........................................... United States 501,000 39,904,650
Johnson Controls Inc. ........................................... United States 400,000 22,304,000
Molex Inc. ...................................................... United States 146,483 3,861,292
Molex Inc., A ................................................... United States 146,483 3,456,999
Teleflex Inc. ................................................... United States 500,000 25,590,000
Textron Inc. .................................................... United States 525,000 39,175,500
(a) Thomas & Betts Corp. ............................................ United States 500,000 16,150,000
Tyco International Ltd. ......................................... United States 1,550,053 52,391,757
United Technologies Corp. ....................................... United States 400,000 40,664,000
------------
448,802,676
------------
RETAIL TRADE 0.6%
(a) IAC/InterActiveCorp ............................................. United States 600,200 13,366,454
------------
TECHNOLOGY SERVICES 11.1%
Automatic Data Processing Inc. .................................. United States 800,000 35,960,000
Certegy Inc. .................................................... United States 200,000 6,924,000
(a) Computer Sciences Corp. ......................................... United States 1,000,000 45,850,000
International Business Machines Corp. .. ... . ... .. ..... ..... United States 560,000 51,172,800
Microsoft Corp. ................................................. United States 1,000,000 24,170,000
(a) Oracle Corp. .................................................... United States 500,000 6,240,000
(a) Sungard Data Systems Inc. ....................................... United States 500,000 17,250,000
(a) Yahoo! Inc. ..................................................... United States 1,600,000 54,240,000
------------
241,806,800
------------
64 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
TRANSPORTATION 4.4%
Air France-KLM, ADR ............................................. France 550,000 $ 9,889,000
(a) Air France-KLM, ADR, wts., 5/05/05 .............................. France 500,000 440,000
(a) Alaska Air Group Inc. ........................................... United States 500,000 14,720,000
(a) AMR Corp. ....................................................... United States 1,080,000 11,556,000
(a) British Airways PLC, ADR ........................................ United Kingdom 500,000 25,115,000
(a) Continental Airlines Inc., B .................................... United States 500,000 6,020,000
(a) Delta Air Lines Inc. ............................................ United States 1,000,000 4,050,000
(a) Northwest Airlines Corp. ........................................ United States 500,000 3,345,000
Southwest Airlines Co. .......................................... United States 65,200 928,448
Union Pacific Corp. ............................................. United States 300,000 20,910,001
--------------
96,973,449
--------------
TOTAL COMMON STOCKS AND WARRANTS (COST $970,831,491) ............ 2,175,525,998
--------------
SHORT TERM INVESTMENT (COST $4,408,451) 0.2%
MONEY FUND 0.2%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio ... United States 4,408,451 4,408,451
--------------
TOTAL INVESTMENTS (COST $975,239,942) 99.9% ..................... 2,179,934,449
OTHER ASSETS, LESS LIABILITIES 0.1% ............................. 1,503,509
--------------
NET ASSETS 100.0% ............................................... $2,181,437,958
==============
See Selected Portfolio Abbreviations on page 97.
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
Semiannual Report | See notes to financial statements. | 65
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2004 2003 2002 2001 2000
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35 $ 2.23
--------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.06 0.12 0.14 0.14 0.17 0.18
Net realized and unrealized gains
(losses) .......................... 0.06 0.22 0.38 (0.21) (0.15) 0.13
--------------------------------------------------------------------------------------
Total from investment operations ........ 0.12 0.34 0.52 (0.07) 0.02 0.31
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.08) (0.16) (0.16) (0.17) (0.18) (0.18)
Net realized gains ................... (0.01) (0.01) (0.01) (0.02) (0.03) (0.01)
--------------------------------------------------------------------------------------
Total distributions ..................... (0.09) (0.17) (0.17) (0.19) (0.21) (0.19)
--------------------------------------------------------------------------------------
Redemption fees ......................... --(c) --(c) -- -- -- --
--------------------------------------------------------------------------------------
Net asset value, end of period .......... $ 2.45 $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35
======================================================================================
Total return(b) ......................... 5.00% 15.50% 28.12% (4.18)% 0.58% 14.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $18,107,259 $14,743,190 $9,640,156 $6,001,117 $5,960,990 $6,083,135
Ratios to average net assets:
Expenses ................................ 0.65%(d) 0.68% 0.73% 0.72% 0.73% 0.76%
Net investment income ................... 5.25%(d) 5.11% 6.63% 6.67% 7.54% 8.01%
Portfolio turnover rate ................. 15.60% 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
66 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
-----------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2004 2003 2002(e)
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 2.41 $ 2.24 $ 1.90 $ 2.15
-----------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... 0.05 0.10 0.12 0.11
Net realized and unrealized gains (losses) .... 0.06 0.22 0.37 (0.21)
-----------------------------------------------------------
Total from investment operations ................. 0.11 0.32 0.49 (0.10)
-----------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.07) (0.14) (0.14) (0.13)
Net realized gains ............................ (0.01) (0.01) (0.01) (0.02)
-----------------------------------------------------------
Total distributions .............................. (0.08) (0.15) (0.15) (0.15)
-----------------------------------------------------------
Redemption fees .................................. --(c) --(c) -- --
-----------------------------------------------------------
Net asset value, end of period ................... $ 2.44 $ 2.41 $ 2.24 $ 1.90
===========================================================
Total return(b) .................................. 4.58% 14.59% 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $3,935,777 $3,486,880 $2,083,783 $558,580
Ratios to average net assets:
Expenses ...................................... 1.50%(d) 1.53% 1.58% 1.57%(d)
Net investment income ......................... 4.40%(d) 4.26% 5.78% 6.01%(d)
Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period November 1, 2001 (effective date) to September 30, 2002.
Semiannual Report |See notes to financial statements. | 67
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS B1 (UNAUDITED) 2004 2003 2002 2001 2000
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35 $ 2.24
---------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... 0.06 0.11 0.13 0.13 0.16 0.17
Net realized and unrealized gains (losses) .... 0.05 0.21 0.38 (0.22) (0.14) 0.12
---------------------------------------------------------------------------
Total from investment operations ................. 0.11 0.32 0.51 (0.09) 0.02 0.29
---------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.07) (0.14) (0.15) (0.16) (0.17) (0.17)
Net realized gains ............................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01)
---------------------------------------------------------------------------
Total distributions .............................. (0.08) (0.15) (0.16) (0.18) (0.20) (0.18)
---------------------------------------------------------------------------
Redemption fees .................................. --(c) --(c) -- -- -- --
---------------------------------------------------------------------------
Net asset value, end of period ................... $ 2.45 $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35
===========================================================================
Total return(b) .................................. 4.73% 14.90% 27.51% (4.66)% 0.10% 14.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $504,139 $511,471 $495,004 $430,226 $446,245 $140,711
Ratios to average net assets:
Expenses ...................................... 1.15%(d) 1.18% 1.23% 1.22% 1.23% 1.26%
Net investment income ......................... 4.75%(d) 4.61% 6.13% 6.15% 7.02% 7.49%
Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
68 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36 $ 2.24
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) .................. 0.06 0.11 0.13 0.13 0.16 0.17
Net realized and unrealized gains
(losses) ............................... 0.05 0.21 0.38 (0.21) (0.15) 0.13
-----------------------------------------------------------------------------------
Total from investment operations ............. 0.11 0.32 0.51 (0.08) 0.01 0.30
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income ..................... (0.07) (0.14) (0.15) (0.16) (0.17) (0.17)
Net realized gains ........................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01)
-----------------------------------------------------------------------------------
Total distributions .......................... (0.08) (0.15) (0.16) (0.18) (0.20) (0.18)
-----------------------------------------------------------------------------------
Redemption fees .............................. --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ............... $ 2.46 $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36
===================================================================================
Total return(b) .............................. 4.71% 14.85% 27.37% (4.64)% 0.09% 14.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............ $8,299,236 $6,616,891 $3,764,372 $1,545,377 $1,080,315 $872,662
Ratios to average net assets:
Expenses .................................. 1.15%(d) 1.18% 1.24% 1.21% 1.23% 1.26%
Net investment income ..................... 4.75%(d) 4.61% 6.12% 6.21% 7.04% 7.51%
Portfolio turnover rate ...................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 69
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2004 2003 2002(e)
---------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 2.40 $ 2.23 $ 1.89 $ 2.18
---------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... 0.06 0.11 0.13 0.10
Net realized and unrealized gains (losses) .... 0.05 0.22 0.37 (0.27)
---------------------------------------------------
Total from investment operations ................. 0.11 0.33 0.50 (0.17)
---------------------------------------------------
Less distributions from:
Net investment income ......................... (0.07) (0.15) (0.15) (0.12)
Net realized gains ............................ (0.01) (0.01) (0.01) --
---------------------------------------------------
Total distributions .............................. (0.08) (0.16) (0.16) (0.12)
---------------------------------------------------
Redemption fees .................................. --(c) --(c) -- --
---------------------------------------------------
Net asset value, end of period ................... $2.43 $2.40 $ 2.23 $ 1.89
===================================================
Total return(b) .................................. 4.86% 15.25% 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $98,998 $73,165 $36,417 $6,350
Ratios to average net assets:
Expenses ...................................... 1.00%(d) 1.03% 1.08% 1.07%(d)
Net investment income ......................... 4.90%(d) 4.76% 6.28% 6.77%(d)
Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period January 1, 2002 (effective date) to September 30, 2002.
70 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
----------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34 $ 2.23
-----------------------------------------------------------------------
Income from investment operations:
Net investment income(a)....................... 0.07 0.12 0.14 0.14 0.18 0.18
Net realized and unrealized gains (losses) .... 0.05 0.22 0.38 (0.22) (0.15) 0.12
-----------------------------------------------------------------------
Total from investment operations ................. 0.12 0.34 0.52 (0.08) 0.03 0.30
-----------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.08) (0.16) (0.16) (0.17) (0.18) (0.18)
Net realized gains ............................ (0.01) (0.01) (0.01) (0.02) (0.03) (0.01)
-----------------------------------------------------------------------
Total distributions .............................. (0.09) (0.17) (0.17) (0.19) (0.21) (0.19)
-----------------------------------------------------------------------
Redemption fees .................................. --(c) --(c) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of period ................... $ 2.44 $ 2.41 $ 2.24 $ 1.89 $2.16 $2.34
=======================================================================
Total return(b) .................................. 5.10% 15.74% 28.47% (4.50)% 1.21% 14.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $1,553,512 $901,149 $95,009 $30,737 $22,737 $21,220
Ratios to average net assets:
Expenses ...................................... 0.50%(d) 0.53% 0.58% 0.57% 0.58% 0.61%
Net investment income ......................... 5.40%(d) 5.26% 6.78% 6.85% 7.69% 8.16%
Portfolio turnover rate .......................... 15.60% 31.90% 48.36% 51.16% 28.13% 24.41%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 71
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 44.9%
COMMERCIAL SERVICES 0.4%
Dex Media Inc. ......................................... United States 5,400,000 $ 111,510,000
--------------
COMMUNICATIONS 3.4%
AT&T Corp. ............................................. United States 5,000,000 93,750,000
BellSouth Corp. ........................................ United States 17,309,600 455,069,384
MCI Inc. ............................................... United States 1,716,723 42,780,737
(a) NII Holdings Inc., B ................................... United States 320,232 18,413,340
(a) NTL Inc. ............................................... United Kingdom 379,020 24,132,204
SBC Communications Inc. ................................ United States 9,000,000 213,210,000
(a) Telecom Argentina SA, B, ADR ........................... Argentina 1,700,000 20,842,000
Telus Corp. ............................................ Canada 1,377,600 42,444,062
Verizon Communications Inc. ............................ United States 5,500,000 195,250,000
--------------
1,105,891,727
--------------
CONSUMER DURABLES 0.4%
General Motors Corp. ................................... United States 4,500,000 132,255,000
--------------
CONSUMER NON-DURABLES 1.6%
Altria Group Inc. ...................................... United States 2,750,000 179,822,500
General Mills Inc. ..................................... United States 5,000,000 245,750,000
Loews Corp. - Carolina Group ........................... United States 2,717,500 89,949,250
--------------
515,521,750
--------------
ELECTRIC UTILITIES 16.1%
Alliant Energy Corp. ................................... United States 5,000,000 133,900,000
Ameren Corp. ........................................... United States 8,750,000 428,837,500
American Electric Power Co. Inc. ....................... United States 8,000,000 272,480,000
CenterPoint Energy Inc. ................................ United States 3,500,000 42,105,000
Cinergy Corp. .......................................... United States 8,000,000 324,160,000
Consolidated Edison Inc. ............................... United States 3,500,000 147,630,000
Dominion Resources Inc. ................................ United States 6,000,000 446,580,000
DPL Inc. ............................................... United States 2,100,000 52,500,000
DTE Energy Co. ......................................... United States 5,250,000 238,770,000
Duke Energy Corp. ...................................... United States 5,000,000 140,050,000
Energy East Corp. ...................................... United States 4,500,000 117,990,000
Exelon Corp. ........................................... United States 4,500,000 206,505,000
FirstEnergy Corp. ...................................... United States 12,500,000 524,375,000
FPL Group Inc. ......................................... United States 4,000,000 160,600,000
Hawaiian Electric Industries Inc. ...................... United States 1,720,000 43,894,400
Pepco Holdings Inc. .................................... United States 5,500,000 115,445,000
PG&E Corp. ............................................. United States 8,500,000 289,850,000
Pinnacle West Capital Corp. ............................ United States 3,880,000 164,938,800
PPL Corp. .............................................. United States 2,138,500 115,457,615
Progress Energy Inc. ................................... United States 5,000,000 209,750,000
Public Service Enterprise Group Inc. ................... United States 6,000,000 326,340,000
Puget Energy Inc. ...................................... United States 4,100,000 90,364,000
Southern Co. ........................................... United States 11,810,500 375,928,215
TECO Energy Inc. ....................................... United States 9,000,000 141,120,000
72 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRIC UTILITIES (CONT.)
TXU Corp. .............................................. United States 633,000 $ 50,405,790
Xcel Energy Inc. ....................................... United States 4,332,500 74,432,350
--------------
5,234,408,670
--------------
ENERGY MINERALS 3.9%
BP PLC, ADR ............................................ United Kingdom 3,500,000 218,400,000
(a) Callon Petroleum Co., wts., 12/08/10 ................... United States 1,537,500 8,931,338
Canadian Oil Sands Trust ............................... Canada 5,600,000 380,834,263
ChevronTexaco Corp. .................................... United States 5,000,000 291,550,000
Royal Dutch Petroleum Co., N.Y. shs. ................... Netherlands 6,000,000 360,240,000
(a) Yukos Corp., ADR ....................................... Russia 2,158,000 4,769,180
--------------
1,264,724,781
--------------
FINANCE 6.6%
Bank of America Corp. .................................. United States 4,886,640 215,500,824
Comerica Inc. .......................................... United States 4,000,000 220,320,000
Fannie Mae ............................................. United States 2,500,000 136,125,000
Fifth Third Bancorp .................................... United States 9,500,000 408,310,000
Freddie Mac ............................................ United States 5,500,000 347,600,000
JPMorgan Chase & Co. ................................... United States 11,500,000 397,900,000
Marsh & McLennan Cos. Inc. ............................. United States 3,000,000 91,260,000
MBNA Corp. ............................................. United States 13,000,000 319,150,000
--------------
2,136,165,824
--------------
GAS UTILITIES 2.1%
Atmos Energy Corp. ..................................... United States 2,200,000 59,400,000
KeySpan Corp. .......................................... United States 5,000,000 194,850,000
NiSource Inc. .......................................... United States 5,000,000 113,950,000
ONEOK Inc. ............................................. United States 3,956,500 121,939,330
Sempra Energy .......................................... United States 5,138,000 204,697,920
--------------
694,837,250
--------------
HEALTH TECHNOLOGY 8.6%
Bristol-Myers Squibb Co. ............................... United States 17,000,000 432,820,000
Johnson & Johnson ...................................... United States 2,600,000 174,616,000
Merck & Co. Inc. ....................................... United States 33,500,000 1,084,395,000
Pfizer Inc. ............................................ United States 30,000,000 788,100,000
Wyeth .................................................. United States 7,180,000 302,852,400
--------------
2,782,783,400
--------------
NON-ENERGY MINERALS 0.5%
AngloGold Ashanti Ltd., ADR ............................ South Africa 2,250,000 77,512,500
Barrick Gold Corp. ..................................... Canada 4,000,000 95,840,000
--------------
173,352,500
--------------
PROCESS INDUSTRIES 0.4%
Dow Chemical Co. ....................................... United States 2,505,000 124,874,250
--------------
Semiannual Report | 73
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONT.)
PRODUCER MANUFACTURING 0.1%
General Electric Co. ...................................... United States 1,088,600 $ 39,254,916
---------------
REAL ESTATE INVESTMENT TRUSTS 0.7%
Developers Diversified Realty Corp. ....................... United States 3,750,000 149,062,500
Glenborough Realty Trust Inc. ............................. United States 1,250,000 23,900,000
iStar Financial Inc. ...................................... United States 1,500,000 61,770,000
---------------
234,732,500
---------------
TECHNOLOGY SERVICES 0.1%
Electronic Data Systems Corp. ............................. United States 1,686,000 34,849,620
---------------
TOTAL COMMON STOCKS AND WARRANTS (COST $12,934,960,355) ... 14,585,162,188
---------------
PREFERRED STOCKS 0.2%
FINANCE 0.2%
Fannie Mae, 7.00%, pfd. ................................... United States 1,200,000 66,660,000
---------------
PROCESS INDUSTRIES 0.0%(b)
(c), (d), (e) Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ....... Indonesia 75,000,000 841,500
---------------
TOTAL PREFERRED STOCKS (COST $117,833,250) ................ 67,501,500
---------------
CONVERTIBLE PREFERRED STOCKS 9.5%
BIOTECHNOLOGY 0.2%
(f) Morgan Stanley into Biogen Idec Inc., 8.50%, cvt. pfd. .... United States 1,600,000 55,720,480
---------------
COMMUNICATIONS 0.4%
ALLTEL Corp., 7.75%, cvt. pfd. ............................ United States 2,400,000 121,176,000
(a) McLeodUSA Inc., 2.50%, cvt. pfd. .......................... United States 177,366 177,366
---------------
121,353,366
---------------
CONSUMER DURABLES 2.1%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ......... United States 15,240,000 690,981,600
---------------
CONSUMER NON-DURABLES 0.4%
Lehman Brothers Holdings Inc. into General Mills,
6.25%, cvt. pfd. ....................................... United States 4,750,000 126,468,750
---------------
ELECTRIC UTILITIES 0.6%
Aquila Inc., 6.75%, cvt. pfd. ............................. United States 3,807,500 132,272,550
CMS Energy Trust I, 7.75%, cvt. pfd. ...................... United States 1,150,000 58,650,000
---------------
190,922,550
---------------
ELECTRONIC TECHNOLOGY 1.4%
Citigroup Global Markets Holdings into Altera, 9.00%,
cvt. pfd. .............................................. United States 4,000,000 78,520,000
Citigroup Global Markets into Motorola Inc., 7.60%,
cvt. pfd. .............................................. United States 4,300,000 67,725,000
Goldman Sachs Group into Applied Materials Inc., 7.35%,
cvt. pfd. .............................................. United States 5,500,000 92,774,000
Goldman Sachs into Linear Technology Corp., 7.00%,
cvt. pfd. .............................................. United States 1,400,000 54,171,600
Lehman Brothers Holdings Inc. into Solectron Corp.,
7.00%, cvt. pfd. ....................................... United States 3,000,000 42,630,000
Morgan Stanley into Intel Corp., 6.50%, cvt. pfd. ......... United States 5,000,000 110,575,000
---------------
446,395,600
---------------
74 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (CONT.)
FINANCE 1.3%
Fannie Mae, 5.375%, cvt. pfd. ............................. United States 3,750 $ 349,642,500
Genworth Financial Inc., 6.00%, cvt. pfd., A .............. United States 1,000,000 32,100,000
Travelers Property Casualty Corp., junior sub. note,
4.50%, cvt. pfd. ....................................... United States 1,834,500 40,579,140
--------------
422,321,640
--------------
HEALTH TECHNOLOGY 0.6%
Citigroup Global Markets into Wye Elks, 6.00%,
cvt. pfd. .............................................. United States 1,000,000 41,250,000
Morgan Stanley into Forest Laboratories Inc., 6.25%,
cvt. pfd. .............................................. United States 1,360,000 51,360,400
Schering-Plough Corp., 6.00%, cvt. pfd. ................... United States 2,100,000 105,630,000
--------------
198,240,400
--------------
INDUSTRIAL SERVICES 0.3%
Allied Waste Industries Inc., 6.25%, cvt. pfd. ............ United States 2,450,000 105,987,000
--------------
METALS & MINING 0.5%
Freeport Mcmoran Copper & Gold Inc., 5.50%, cvt. pfd. ..... United States 30,000 29,737,500
Lehman Brothers Holdings Inc. into Alcoa, 6.50%,
cvt. pfd. .............................................. United States 4,600,000 139,518,000
--------------
169,255,500
--------------
PROCESS INDUSTRIES 0.2%
Lehman Brothers Holdings Inc. into Lyondell Chemical,
8.00%, cvt. pfd. ....................................... United States 3,000,000 85,365,000
--------------
REAL ESTATE INVESTMENT TRUSTS 1.1%
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ............ United States 3,000,000 74,220,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ........ United States 1,333,594 33,873,288
Host Marriott Corp., 6.75%, cvt. pfd. ..................... United States 2,400,000 133,200,000
Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .... United States 1,200,000 60,300,000
Simon Property Group Inc., 6.00%, cvt. pfd. ............... United States 799,980 44,342,891
--------------
345,936,179
--------------
TECHNOLOGY SERVICES 0.4%
Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. ...... United States 5,750,000 138,891,250
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,136,578,066)... 3,097,839,315
--------------
-------------------
PRINCIPAL AMOUNT(g)
-------------------
BONDS 26.9%
ALTERNATIVE POWER GENERATION 5.6%
Calpine Canada Energy Finance, senior note, 8.50%,
5/01/08 .............................................. Canada $466,000,000 333,190,000
Calpine Corp., senior note, 7.875%, 4/01/08 ............. United States 151,000,000 110,230,000
Calpine Corp., senior note, 8.625%, 8/15/10 ............. United States 210,000,000 147,525,000
Calpine Corp., senior note, 8.50%, 2/15/11 .............. United States 405,000,000 287,550,000
Calpine Corp., senior secured note, 144A, 8.50%,
7/15/10 .............................................. United States 275,000,000 217,250,000
Calpine Corp., senior secured note, 144A, 8.75%,
7/15/13 .............................................. United States 119,000,000 90,440,000
Dynegy Holdings Inc., secured note, 144A, 9.875%,
7/15/10 United States 100,000,000 107,625,000
Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ...... United States 286,000,000 255,255,000
Semiannual Report | 75
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE
- ----------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
ALTERNATIVE POWER GENERATION (CONT.)
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ............... United States $171,000,000 $ 164,587,500
Dynegy Holdings Inc., senior secured note, 144A, 10.125%,
7/15/13 ...................................................... United States 97,000,000 106,215,000
--------------
1,819,867,500
--------------
COMMUNICATIONS 2.4%
Qwest Capital Funding, 7.00%, 8/03/09 ........................... United States 275,000,000 259,187,500
Qwest Capital Funding, 7.25%, 2/15/11 ........................... United States 268,000,000 251,250,000
Qwest Communications International Inc., senior note,
144A, 7.50%, 2/15/14 ......................................... United States 108,000,000 106,110,000
Qwest Corp., 6.875%, 9/15/33 .................................... United States 75,000,000 65,062,500
Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 .. United States 50,000,000 48,250,000
Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ......... United States 45,000,000 43,650,000
--------------
773,510,000
--------------
CONSUMER DURABLES 1.1%
Ford Motor Co., 7.45%, 7/16/31 .................................. United States 200,000,000 181,406,000
General Motors Corp., senior deb., 8.375%, 7/15/33 .............. United States 200,000,000 171,560,400
--------------
352,966,400
--------------
CONSUMER SERVICES 3.0%
(c) Adelphia Communications Corp., 7.875%, 5/01/09 .................. United States 23,600,000 19,588,000
(c) Adelphia Communications Corp., senior note, 10.875%, 10/01/10 ... United States 35,000,000 31,150,000
Cablevision Systems Corp., senior note, 144A, 8.00%, 4/15/12 .... United States 175,000,000 180,687,500
Charter Communications Holdings LLC, senior disc. note,
11.75%, 1/15/10 .............................................. United States 55,000,000 47,437,500
Charter Communications Holdings LLC, senior disc. note,
9.92%, 4/01/11 ............................................... United States 173,000,000 133,642,500
Charter Communications Holdings LLC, senior note, 8.625%,
4/01/09 ...................................................... United States 180,000,000 139,950,000
Charter Communications Holdings LLC, senior note, 10.75%,
10/01/09 ..................................................... United States 180,000,000 148,500,000
Charter Communications Operating LLC, senior note, 144A, 8.375%,
4/30/14 ...................................................... United States 117,500,000 118,675,000
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .............. United States 100,000,000 104,500,000
Six Flags Inc., senior note, 9.625%, 6/01/14 .................... United States 44,200,000 40,995,500
--------------
965,126,000
--------------
ELECTRIC UTILITIES 2.3%
Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ................. United States 90,000,000 93,825,000
Allegheny Energy Supply Co. LLC, 144A, 8.25%, 4/15/12 ........... United States 135,000,000 143,775,000
Aquila Inc., senior note, 14.875%, 7/01/12 ...................... United States 97,500,000 134,062,500
CMS Energy Corp., senior note, 7.75%, 8/01/10 ................... United States 30,000,000 31,425,000
FirstEnergy Corp., 6.45%, 11/15/11 .............................. United States 50,000,000 52,823,200
Sierra Pacific Resources Co., 8.75%, 5/15/05 .................... United States 114,900,000 115,515,634
TXU Corp., 144A, 5.55%, 11/15/14 ................................ United States 85,000,000 80,795,985
TXU Corp., 144A, 6.55%, 11/15/34 ................................ United States 100,000,000 95,104,100
--------------
747,326,419
--------------
76 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
ELECTRONIC TECHNOLOGY 0.7%
Lucent Technologies, 6.45%, 3/15/29 ............................. United States $180,000,000 $156,150,000
Xerox Corp., senior note, 6.875%, 8/15/11 ....................... United States 74,400,000 76,167,000
------------
232,317,000
------------
ENERGY MINERALS 0.7%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 .............. United States 117,500,000 124,550,000
Chesapeake Energy Corp., senior note, 144A, 6.375%, 6/15/15 ..... United States 34,300,000 34,042,750
Mission Resources Corp., senior note, 9.875%, 4/01/11 ........... United States 40,000,000 42,800,000
Sonat Inc., senior note, 7.625%, 7/15/11 ........................ United States 35,000,000 34,737,500
------------
236,130,250
------------
FINANCE 2.6%
Ford Motor Credit Co., 7.00%, 10/01/13 .......................... United States 150,000,000 145,535,250
General Motors Acceptance Corp., 6.875%, 9/15/11 ................ United States 600,000,000 543,586,800
General Motors Acceptance Corp., 6.75%, 12/01/14 ................ United States 200,000,000 173,052,200
------------
862,174,250
------------
HEALTH SERVICES 2.6%
Davita Inc., senior note, 144A, 6.625%, 3/15/13 ................. United States 23,600,000 23,482,000
Davita Inc., senior sub. note, 144A, 7.25%, 3/15/15 ............. United States 36,800,000 36,248,000
HCA Inc., 6.375%, 1/15/15 ....................................... United States 70,000,000 69,834,940
HealthSouth Corp., senior note, 7.625%, 6/01/12 ................. United States 75,000,000 72,375,000
Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ........... United States 372,000,000 345,030,000
Tenet Healthcare Corp., senior note, 6.50%, 6/01/12 ............. United States 81,000,000 74,925,000
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ............ United States 250,000,000 236,875,000
------------
858,769,940
------------
INDUSTRIAL SERVICES 3.0%
Allied Waste Industries Inc., 7.40%, 9/15/35 .................... United States 40,000,000 33,000,000
Allied Waste North America Inc., senior note, 144A, 7.25%,
3/15/15 ...................................................... United States 100,000,000 95,500,000
Allied Waste North America Inc., senior note, B, 7.375%,
4/15/14 ...................................................... United States 150,000,000 136,500,000
Allied Waste North America Inc., senior secured note, 6.50%,
11/15/10 ..................................................... United States 85,000,000 82,875,000
Allied Waste North America Inc., senior secured note, 6.125%,
2/15/14 ...................................................... United States 110,000,000 98,725,000
El Paso Corp., senior note, 7.75%, 1/15/32 ...................... United States 250,000,000 236,875,000
(h) El Paso Energy, senior note, 6.75%, 5/15/09 ..................... United States 205,000,000 200,900,000
El Paso Production Holdings, 7.75%, 6/01/13 ..................... United States 87,500,000 89,031,250
------------
973,406,250
------------
NON-ENERGY MINERALS 0.2%
Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ................. Canada 56,900,000 56,046,500
------------
PROCESS INDUSTRIES 0.9%
Lyondell Chemical Co., 9.625%, 5/01/07 .......................... United States 82,000,000 88,355,000
Rhodia SA, senior note, 10.25%, 6/01/10 ......................... France 170,000,000 186,150,000
(c), (d), (e) Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ..... Indonesia 87,000,000 26,995,230
------------
301,500,230
------------
Semiannual Report | 77
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE
- -----------------------------------------------------------------------------------------------------------------------------
BONDS (CONT.)
PRODUCER MANUFACTURING 0.9%
Case New Holland Inc., senior note, 144A, 6.00%, 6/01/09 ........ United States $200,000,000 $ 191,000,000
Dana Corp., 7.00%, 3/01/29 ...................................... United States 41,000,000 36,210,380
Invensys PLC, senior note, 144A, 9.875%, 3/15/11 ................ United Kingdom 51,100,000 52,249,750
--------------
279,460,130
--------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
HMH Properties Inc., senior secured note, 7.875%, 8/01/08 ....... United States 18,887,000 19,359,175
Host Marriott LP, senior note, 7.125%, 11/01/13 ................. United States 60,000,000 59,850,000
Meristar Hospitality Corp., 9.125%, 1/15/11 ..................... United States 67,500,000 70,875,000
--------------
150,084,175
--------------
TECHNOLOGY SERVICES 0.4%
Electronic Data Systems Corp., B, 6.50%, 8/01/13 ................ United States 125,000,000 128,039,625
--------------
TOTAL BONDS (COST $8,609,028,831) ............................... 8,736,724,669
--------------
CONVERTIBLE BONDS 3.3%
COMMUNICATIONS 0.1%
Nextel Communications Inc., cvt., senior note, 5.25%, 1/15/10 ... United States 50,000,000 51,500,000
--------------
CONSUMER SERVICES 0.3%
(c) Adelphia Communications Corp., cvt., junior sub. note,
6.00%, 2/15/06 ............................................... United States 75,000,000 5,250,000
Six Flags Inc., cvt., 4.50%, 5/15/15 ............................ United States 100,000,000 93,080,000
--------------
98,330,000
--------------
ELECTRIC UTILITIES 0.4%
CMS Energy Corp., cvt., senior note, 2.875%, 12/01/24 ........... United States 109,000,000 120,350,170
--------------
ELECTRONIC TECHNOLOGY 1.4%
Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 .......... United States 220,000,000 194,425,000
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ........ Canada 200,000,000 186,000,000
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ............... United States 66,000,000 63,937,500
--------------
444,362,500
--------------
HEALTH TECHNOLOGY 0.1%
Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%, 7/01/08 ..... United States 30,000,000 27,112,500
--------------
INDUSTRIAL SERVICES 0.2%
Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ....... United States 85,000,000 82,556,250
--------------
REAL ESTATE INVESTMENT TRUSTS 0.8%
Host Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 ....... United States 140,000,000 153,300,000
Meristar Hospitality Corp., cvt., sub. note, 9.50%, 4/01/10 ..... United States 95,000,000 117,239,500
--------------
270,539,500
--------------
TOTAL CONVERTIBLE BONDS (COST $1,062,813,603) ................... 1,094,750,920
--------------
78 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON/STEP-UP BONDS 2.8%
COMMERCIAL SERVICES 0.8%
Dex Media Inc., zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ...... United States $200,000,000 $ 153,000,000
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07,
10.67% thereafter, 5/15/13 .......................................... United States 110,000,000 95,150,000
---------------
248,150,000
---------------
CONSUMER SERVICES 0.9%
Charter Communications Holdings LLC, senior disc. note, zero cpn. to
5/15/06, 11.75% thereafter, 5/15/11 ................................. United States 30,000,000 20,850,000
Charter Communications Holdings LLC, senior disc. note, zero cpn. to
1/15/06, 13.50% thereafter, 1/15/11 ................................. United States 325,000,000 261,625,000
---------------
282,475,000
---------------
FINANCE 0.8%
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00%
thereafter, 2/01/14 ................................................. United States 369,016,000 280,452,160
---------------
INDUSTRIAL SERVICES 0.1%
Hanover Compressor Co., sub. note, zero cpn., 3/31/07 .................. United States 36,000,000 31,860,000
---------------
PRODUCER MANUFACTURING 0.2%
Polymer Holdings LLC, senior disc. note, 144A, zero cpn. to 7/15/09,
12.00% thereafter, 7/15/14 .......................................... United States 100,000,000 62,500,000
---------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $891,498,860) 905,437,160
---------------
AGENCY SECURITIES 3.4%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.8%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ........................... United States 589,417,762 577,851,880
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.6%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ............................ United States 525,857,875 519,621,595
---------------
TOTAL AGENCY SECURITIES (COST $1,098,879,818) .......................... 1,097,473,475
---------------
MUNICIPAL BOND SECURITIES 1.3%
California State GO, 5.00%, 2/01/26 .................................... United States 10,450,000 10,677,601
California State GO, 5.25%, 11/01/26 ................................... United States 25,000,000 26,266,000
California State GO, 5.25%, 11/01/27 ................................... United States 20,400,000 21,403,476
California State GO, 5.25%, 2/01/28 .................................... United States 24,600,000 25,728,156
California State GO, 5.00%, 2/01/32 .................................... United States 65,250,000 66,311,617
California State GO, 5.00%, 2/01/33 .................................... United States 103,400,000 105,089,556
California State GO, 5.00%, 2/01/33 .................................... United States 23,250,000 23,612,235
California State GO, Refunding, 5.25%, 2/01/33 ......................... United States 28,500,000 29,608,650
California State GO, Various Purpose, 5.25%, 11/01/28 .................. United States 25,000,000 26,175,750
California State GO, Various Purpose, 5.25%, 11/01/29 .................. United States 22,500,000 23,525,550
California State GO, Various Purpose, 5.50%, 11/01/33 .................. United States 55,300,000 59,195,333
---------------
TOTAL MUNICIPAL BOND SECURITIES (COST $391,562,055) .................... 417,593,924
---------------
TOTAL LONG TERM INVESTMENTS (COST $28,243,154,838) ..................... 30,002,483,151
---------------
Semiannual Report | 79
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 6.9%
MONEY FUND (COST $176,023,849) 0.5%
(i) Franklin Institutional Fiduciary Trust Money Market Portfolio......... United States 176,023,849 $ 176,023,849
--------------
-------------------
PRINCIPAL AMOUNT(g)
-------------------
REPURCHASE AGREEMENTS 6.4%
(j) Joint Repurchase Agreement, 2.721%, 4/01/05
(Maturity Value $2,042,624,939).................................. United States $2,042,470,562 2,042,470,562
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $192,353,991)
Banc of America Securities LLC (Maturity Value $192,353,991)
Barclays Capital Inc. (Maturity Value $192,353,991)
Bear, Stearns & Co. Inc. (Maturity Value $118,349,688)
BNP Paribas Securities Corp. (Maturity Value $192,353,991)
Deutsche Bank Securities Inc. (Maturity Value $118,349,688)
Goldman, Sachs & Co. (Maturity Value $88,752,053)
Greenwich Capital Markets Inc. (Maturity Value $192,353,991)
Lehman Brothers Inc. (Maturity Value $178,341,582)
Merrill Lynch Government Securities Inc.
(Maturity Value $192,353,991)
Morgan Stanley & Co. Inc. (Maturity Value $192,353,991)
UBS Securities LLC (Maturity Value $192,353,991)
Collateralized by U.S. Government Agency Securities, 0.00 -
7.00%, 4/05/05 - 3/15/10; and (k)U.S. Treasury Bills,
6/30/05 - 9/22/05
(j), (l) Barclays Capital Inc., 2.84%, 4/01/2005
(Maturity Value $6,000,946)
Collateralized by U.S. Government Agency Securities,
0.00% - 6.375%,4/15/05 - 7/09/21........................... United States 6,000,473 6,000,473
(j), (l) Bear Sterns & Co. Inc., 2.85%, 4/01/2005
(Maturity Value $4,903,776)
Collateralized by U.S. Government Agency Securities,
0.00% - 7.25%, 4/05/05 - 3/15/31........................... United States 4,903,388 4,903,388
(j), (l) Goldman Sachs & Co., 2.90%, 4/01/2005
(Maturity Value $6,000,966)
Collateralized by U.S. Government Agency Securities,
4.00% - 9.50%, 11/01/07 - 3/01/35......................... United States 6,000,483 6,000,483
(j), (l) JP Morgan Securities, 2.89%, 4/01/2005 (Maturity Value $4,000,642)
Collateralized by U.S. Government Agency Securities,
3.143% - 5.648%, 7/01/20 - 1/01/35............................ United States 4,000,321 4,000,321
(j), (l) Morgan Stanley & Co. Inc., 2.90%, 4/01/2005
(Maturity Value $3,973,640)
Collateralized by U.S. Government Agency Securities,
5.50% - 6.053%, 4/01/12 - 2/01/35.......................... United States 3,973,320 3,973,320
-------------
TOTAL REPURCHASE AGREEMENTS (COST $2,067,348,547)................... 2,067,348,547
=============
80 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN INCOME FUND VALUE
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $30,486,527,234) 99.2%................ $32,245,855,547
OTHER ASSETS, LESS LIABILITIES 0.8%........................... 253,066,705
---------------
NET ASSETS 100.0%............................................. $32,498,922,252
===============
See Selected Portfolio Abbreviations on page 97.
(a) Non-income producing.
(b) Rounds to less than 0.05% of net assets.
(c) Defaulted securities. See Note 8.
(d) See Note 11 regarding other considerations.
(e) See Note 9 regarding restricted securities.
(f) Security purchased on a when issued or delayed delivery basis.
(g) The principal amount is stated in U.S. dollars unless otherwise indicated.
(h) A portion or all of the security is on loan as of March 31, 2005. See Note
1(f).
(i) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
(j) See Note 1(c) regarding repurchase agreement(s).
(k) A portion or all of the security is traded on a discount basis with no
stated coupon rate.
(l) Investments from cash collateral received for loaned securities. See Note
1(f).
Semiannual Report | See notes to financial statements. | 81
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------------------------
Six Months Ended
March 31, 2005 Year Ended September 30,
CLASS A (unaudited) 2004 2003 2002 2001 2000
---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63 $ 6.62
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.14 0.27 0.28 0.38 0.41(e) 0.43
Net realized and unrealized gains
(losses) .......................... (0.07) (0.04) (0.10) 0.09 0.33(e) 0.01
---------------------------------------------------------------------------------------
Total from investment operations ........ 0.07 0.23 0.18 0.47 0.74 0.44
Less distributions from net investment
income ............................... (0.17) (0.36) (0.36) (0.41) (0.44) (0.43)
Redemption fees ......................... --(c) --(c) -- -- -- --
---------------------------------------------------------------------------------------
Net asset value, end of period .......... $ 6.58 $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63
=======================================================================================
Total return(b) ......................... 1.01% 3.46% 2.66% 7.06% 11.52% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $6,097,159 $6,420,381 $7,286,317 $7,726,914 $7,197,334 $6,852,374
Ratios to average net assets:
Expenses ............................. 0.72%(d) 0.70% 0.70% 0.69% 0.68% 0.70%
Net investment income ................ 4.31%(d) 4.09% 4.11% 5.48% 6.12%(e) 6.62%
Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began recording all
paydown gains and losses as part of investment income, as required. The
effect of this change was as follows:
Net investment income per share ........................ $(0.008)
Net realized and unrealized gains (losses) per share ... 0.008
Ratio of net investment income to average net assets ... (0.11)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
82 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------------------------------
Six Months Ended
March 31, 2005 Year Ended September 30,
CLASS B (unaudited) 2004 2003 2002 2001 2000
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .... $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63 $ 6.62
----------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.13 0.24 0.25 0.34 0.37(e) 0.39
Net realized and unrealized gains
(losses) .......................... (0.08) (0.05) (0.10) 0.09 0.33(e) 0.01
----------------------------------------------------------------------------
Total from investment operations ........ 0.05 0.19 0.15 0.43 0.70 0.40
Less distributions from net investment
income (0.15) (0.32) (0.33) (0.38) (0.40) (0.39)
Redemption fees ......................... --(c) --(c) -- -- -- --
----------------------------------------------------------------------------
Net asset value, end of period .......... $ 6.57 $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63
============================================================================
Total return(b) ......................... 0.74% 2.92% 2.13% 6.37% 10.94% 6.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $521,131 $568,276 $678,814 $559,966 $225,517 $80,167
Ratios to average net assets:
Expenses ............................. 1.24%(d) 1.23% 1.23% 1.22% 1.22% 1.25%
Net investment income ................ 3.79%(d) 3.56% 3.58% 4.95% 5.51%(e) 6.07%
Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began recording all
paydown gains and losses as part of investment income, as required. The
effect of this change was as follows:
Net investment income per share ........................ $(0.008)
Net realized and unrealized gains (losses) per share ... 0.008
Ratio of net investment income to average net assets ... (0.11)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
Semiannual Report | See notes to financial statements. | 83
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-----------------------------------------------------------------------------
Six Months Ended
March 31, 2005 Year Ended September 30,
CLASS C (unaudited) 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .... $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61 $ 6.60
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.13 0.24 0.25 0.34 0.37(e) 0.39
Net realized and unrealized gains
(losses) .......................... (0.08) (0.05) (0.11) 0.10 0.33(e) 0.01
-----------------------------------------------------------------------------
Total from investment operations ........ 0.05 0.19 0.14 0.44 0.70 0.40
Less distributions from net investment
income (0.15) (0.32) (0.33) (0.38) (0.40) (0.39)
Redemption fees ......................... --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------
Net asset value, end of period .......... $ 6.55 $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61
=============================================================================
Total return(b) ......................... 0.74% 2.91% 2.00% 6.53% 10.96% 6.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $539,510 $597,451 $814,635 $803,049 $422,114 $264,413
Ratios to average net assets:
Expenses ............................. 1.24%(d) 1.23% 1.23% 1.21% 1.22% 1.25%
Net investment income ................ 3.79%(d) 3.56% 3.58% 4.96% 5.55%(e) 6.08%
Portfolio turnover rate ................. 16.87% 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began recording all
paydown gains and losses as part of investment income, as required. The
effect of this change was as follows:
Net investment income per share ........................ $(0.008)
Net realized and unrealized gains (losses) per share ... 0.008
Ratio of net investment income to average net assets ... (0.11)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
84 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2004 2003 2002(e)
-------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 6.68 $ 6.81 $ 6.99 $ 6.81
-------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... 0.13 0.25 0.25 0.25
Net realized and unrealized gains (losses) ... (0.09) (0.05) (0.09) 0.22
-------------------------------------------------
Total from investment operations ................ 0.04 0.20 0.16 0.47
Less distributions from net investment income ... (0.15) (0.33) (0.34) (0.29)
Redemption fees ................................. --(c) --(c) -- --
-------------------------------------------------
Net asset value, end of period .................. $ 6.57 $ 6.68 $ 6.81 $ 6.99
=================================================
Total return(b) ................................. 0.66% 3.08% 2.29% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $62,551 $59,431 $54,042 $14,042
Ratios to average net assets:
Expenses ..................................... 1.09%(d) 1.08% 1.08% 1.07%(d)
Net investment income ........................ 3.94%(d) 3.71% 3.73% 5.10%(d)
Portfolio turnover rate ......................... 16.87% 41.45% 66.96% 44.62%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | See notes to financial statements. | 85
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
--------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64 $ 6.63
--------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ....................... 0.15 0.28 0.29 0.38 0.43(e) 0.44
Net realized and unrealized gains (losses) ..... (0.08) (0.06) (0.10) 0.11 0.32(e) --
--------------------------------------------------------------------------
Total from investment operations .................. 0.07 0.22 0.19 0.49 0.75 0.44
Less distributions from net investment income ..... (0.17) (0.36) (0.37) (0.42) (0.45) (0.43)
Redemption fees ................................... --(c) --(c) -- -- -- --
--------------------------------------------------------------------------
Net asset value, end of period .................... $ 6.59 $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64
==========================================================================
Total return(b) ................................... 1.07% 3.42% 2.79% 7.33% 11.63% 7.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $302,202 $340,279 $308,411 $198,437 $19,960 $46,775
Ratios to average net assets:
Expenses ....................................... 0.59%(d) 0.58% 0.58% 0.57% 0.57% 0.60%
Net investment income .......................... 4.44%(d) 4.21% 4.23% 5.60% 6.30%(e) 6.73%
Portfolio turnover rate ........................... 16.87% 41.45% 66.96% 44.62% 19.18% 3.98%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) Effective October 1, 2000, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began recording all
paydown gains and losses as part of investment income, as required. The
effect of this change was as follows:
Net investment income per share ............................... $(0.008)
Net realized and unrealized gains (losses) per share .......... 0.008
Ratio of net investment income to average net assets .......... (0.11)%
Per share data and ratios for prior periods have not been restated to
reflect this change in accounting policy.
86 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 97.7%
GNMA I GP 30 Year, 8.25%, 3/15/17 - 11/15/17 ........ $ 383,464 $ 415,345
GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ........ 600,123 657,627
GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ....... 553,902 596,481
GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ........ 13,373 15,081
GNMA I GP 30 Year, 11.00%, 12/15/09 - 1/15/11 ....... 1,168,178 1,276,110
GNMA I GP 30 Year, 11.25%, 6/15/13 - 1/15/16 ........ 446,932 495,325
GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ........ 97,478 108,471
GNMA I GP 30 Year, 11.75%, 7/15/13 - 12/15/15 ....... 91,754 101,987
GNMA I GP 30 Year, 12.00%, 3/15/11 - 1/15/13 ........ 44,997 49,989
GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ........ 102,605 114,114
GNMA I GP 30 Year, 12.75%, 5/15/14 .................. 6,570 7,391
GNMA I SF 15 Year, 7.00%, 10/15/09 .................. 3,847,953 3,981,198
GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/35 ......... 661,904,526 654,178,141
GNMA I SF 30 Year, 5.50%, 5/15/28 - 12/15/34 ........ 1,743,539,551 1,761,979,616
GNMA I SF 30 Year, 6.00%, 10/15/23 - 9/15/34 ........ 894,905,145 921,597,665
GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 ......... 638,633,256 668,932,723
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ......... 190,825 201,308
GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 ......... 437,259,502 463,581,571
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ........ 1,054,999 1,129,326
GNMA I SF 30 Year, 7.50%, 12/15/05 - 8/15/32 ........ 115,850,598 124,852,319
GNMA I SF 30 Year, 7.70%, 12/15/20 - 1/15/22 ........ 886,201 950,857
GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ........ 88,100,030 95,168,056
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ........ 203,379 220,564
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ........ 17,841,057 19,577,994
GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ........ 23,172,763 25,399,229
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ......... 14,722,698 16,268,425
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ........ 17,238,320 19,449,244
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ...... 13,421,871 15,228,685
GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ....... 13,211,591 14,629,789
GNMA I SF 30 Year, 11.50%, 2/15/13 - 12/15/17 ....... 3,082,110 3,449,896
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ........ 14,523,206 16,327,897
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ........ 13,355,685 15,035,998
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ........ 14,908,392 16,889,356
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ........ 92,915 100,700
GNMA II GP 30 Year, 11.50%, 8/20/13 ................. 19,175 21,265
GNMA II SF 30 Year, 5.00%, 7/20/33 - 2/15/35 ........ 107,266,047 105,826,455
GNMA II SF 30 Year, 5.00%, 9/15/33 .................. 426,785,611 421,177,246
GNMA II SF 30 Year, 5.00%, 10/20/33 ................. 90,071,739 88,869,787
GNMA II SF 30 Year, 5.00%, 11/20/33 ................. 85,114,914 83,979,108
GNMA II SF 30 Year, 5.50%, 1/20/34 - 3/20/35 ........ 168,842,603 170,372,661
GNMA II SF 30 Year, 5.50%, 6/20/34 .................. 116,148,778 117,200,830
GNMA II SF 30 Year, 5.50%, 12/20/34 ................. 256,540,850 258,864,546
GNMA II SF 30 Year, 5.50%, 1/15/35 .................. 79,449,475 80,172,911
GNMA II SF 30 Year, 5.50%, 2/15/35 .................. 166,150,689 167,663,592
GNMA II SF 30 Year, 6.00%, 10/20/23 - 2/20/35 ....... 332,464,334 341,604,912
GNMA II SF 30 Year, 6.00%, 6/20/34 .................. 100,548,692 103,249,987
GNMA II SF 30 Year, 6.00%, 9/20/34 .................. 124,129,880 127,459,631
GNMA II SF 30 Year, 6.50%, 6/20/24 - 9/15/34 ........ 225,016,202 234,693,898
Semiannual Report | 87
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.)
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ........................... $139,082,298 $ 146,588,816
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .......................... 16,835,423 18,046,231
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ........................... 7,388,846 7,942,150
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ........................... 3,477,308 3,799,999
GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 .......................... 1,133,950 1,238,965
GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 ........................... 731,468 811,187
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 .......................... 1,408,707 1,583,945
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 .......................... 3,725,146 4,208,181
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 .......................... 647,419 718,589
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 .......................... 308,220 344,473
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 .......................... 639,561 717,297
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ........................ 533,576 601,646
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ......................... 480,473 544,750
--------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $7,297,812,377) ... 7,351,271,536
--------------
--------------
SHARES
--------------
SHORT TERM INVESTMENT (COST $157,147,840) 2.1%
MONEY FUND 2.1%
(a) Franklin Institutional Fiduciary Trust Money Market Portfolio .......... 157,147,840 157,147,840
--------------
TOTAL INVESTMENTS (COST $7,454,960,217 ) 99.8% ......................... 7,508,419,376
OTHER ASSETS, LESS LIABILITIES 0.2% .................................... 14,132,799
--------------
NET ASSETS 100.0% ...................................................... $7,522,552,175
==============
See Selected Portfolio Abbreviations on page 97.
(a) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
88 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
-------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89 $ 9.58
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.20 0.43 0.42 0.46 0.46 0.43
Net realized and unrealized gains
(losses) .......................... 1.09 1.33 0.85 (1.60) (0.86) 1.69
-------------------------------------------------------------------------------------
Total from investment operations ........ 1.29 1.76 1.27 (1.14) (0.40) 2.12
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.24) (0.40) (0.43) (0.45) (0.45) (0.45)
Net realized gains ................... -- -- -- (0.47) (0.02) (0.36)
-------------------------------------------------------------------------------------
Total distributions ..................... (0.24) (0.40) (0.43) (0.92) (0.47) (0.81)
-------------------------------------------------------------------------------------
Redemption fees ......................... --(c) --(c) -- -- -- --
-------------------------------------------------------------------------------------
Net asset value, end of period .......... $ 11.21 $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89
=====================================================================================
Total return(b) ......................... 12.79% 20.40% 16.38% (12.49)% (4.03)% 24.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $1,654,518 $1,450,832 $1,259,886 $1,090,216 $1,349,027 $1,574,897
Ratios to average net assets:
Expenses ............................. 0.78%(d) 0.80% 0.83% 0.80% 0.79% 0.83%
Net investment income ................ 3.66%(d) 4.49% 5.00% 4.87% 4.26% 4.74%
Portfolio turnover rate ................. 9.31% 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 89
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90 $ 9.59
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ............. 0.17 0.38 0.37 0.41 0.41 0.38
Net realized and unrealized gains
(losses) .......................... 1.10 1.33 0.85 (1.58) (0.87) 1.70
-----------------------------------------------------------------------------------
Total from investment operations ........ 1.27 1.71 1.22 (1.17) (0.46) 2.08
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.21) (0.36) (0.39) (0.41) (0.40) (0.41)
Net realized gains ................... -- -- -- (0.47) (0.02) (0.36)
-----------------------------------------------------------------------------------
Total distributions ..................... (0.21) (0.36) (0.39) (0.88) (0.42) (0.77)
-----------------------------------------------------------------------------------
Redemption fees ......................... --(c) --(c) -- -- -- --
-----------------------------------------------------------------------------------
Net asset value, end of period .......... $ 11.21 $ 10.15 $ 8.80 $ 7.97 $ 10.02 $10.90
===================================================================================
Total return(b) ......................... 12.58% 19.71% 15.88% (12.88)% (4.58)% 23.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $140,938 $127,105 $95,321 $32,802 $15,212 $8,819
Ratios to average net assets:
Expenses ............................. 1.28%(d) 1.30% 1.34% 1.31% 1.30% 1.34%
Net investment income ................ 3.16%(d) 3.99% 4.49% 4.44% 3.74% 4.11%
Portfolio turnover rate ................. 9.31% 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
90 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
-------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2004 2003 2002 2001 2000
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88 $ 9.57
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ...................... 0.17 0.38 0.36 0.41 0.41 0.38
Net realized and unrealized gains (losses) .... 1.10 1.33 0.86 (1.59) (0.87) 1.69
-------------------------------------------------------------------------
Total from investment operations ................. 1.27 1.71 1.22 (1.18) (0.46) 2.07
-------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.21) (0.36) (0.39) (0.41) (0.39) (0.40)
Net realized gains ............................ -- -- -- (0.47) (0.02) (0.36)
-------------------------------------------------------------------------
Total distributions .............................. (0.21) (0.36) (0.39) (0.88) (0.41) (0.76)
-------------------------------------------------------------------------
Redemption fees .................................. --(c) --(c) -- -- -- --
-------------------------------------------------------------------------
Net asset value, end of period ................... $ 11.19 $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88
=========================================================================
Total return(b) .................................. 12.60% 19.76% 15.77% (12.90)% (4.50)% 23.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $349,263 $283,747 $222,030 $67,428 $44,985 $37,837
Ratios to average net assets:
Expenses ...................................... 1.28%(d) 1.30% 1.34% 1.29% 1.30% 1.34%
Net investment income ......................... 3.16%(d) 3.99% 4.49% 4.43% 3.76% 4.22%
Portfolio turnover rate .......................... 9.31% 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 91
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2004 2003 2002(e)
--------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $10.15 $ 8.79 $ 7.96 $ 9.81
--------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... 0.18 0.39 0.37 0.32
Net realized and unrealized gains (losses) ... 1.09 1.34 0.86 (1.85)
--------------------------------------------------
Total from investment operations ................ 1.27 1.73 1.23 (1.53)
--------------------------------------------------
Less distributions from net investment income ... (0.22) (0.37) (0.40) (0.32)
--------------------------------------------------
Redemption fees ................................. --(c) --(c) -- --
--------------------------------------------------
Net asset value, end of period .................. $11.20 $10.15 $ 8.79 $ 7.96
==================================================
Total return(b) ................................. 12.61% 20.02% 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $4,502 $1,590 $1,142 $ 142
Ratios to average net assets:
Expenses ..................................... 1.13%(d) 1.15% 1.19% 1.16%(d)
Net investment income ........................ 3.31%(d) 4.14% 4.64% 4.82%(d)
Portfolio turnover rate ......................... 9.31% 16.13% 25.81% 30.60%
(a) Based on average daily shares outstanding.
(b) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
(e) For the period January 1, 2002 (effective date) to September 30, 2002.
92 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
---------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2005 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2004 2003 2002 2001 2000
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 10.20 $ 8.84 $ 7.99 $ 10.05 $10.92 $ 9.61
---------------------------------------------------------------------
Income from investment operations:
Net investment income(a) ..................... 0.21 0.44 0.42 0.47 0.48 0.44
Net realized and unrealized gains (losses) ... 1.09 1.34 0.87 (1.60) (0.87) 1.69
---------------------------------------------------------------------
Total from investment operations ................ 1.30 1.78 1.29 (1.13) (0.39) 2.13
---------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.25) (0.42) (0.44) (0.46) (0.46) (0.46)
Net realized gains ........................... -- -- -- (0.47) (0.02) (0.36)
---------------------------------------------------------------------
Total distributions ............................. (0.25) (0.42) (0.44) (0.93) (0.48) (0.82)
---------------------------------------------------------------------
Redemption fees ................................. --(c) --(c) -- -- -- --
---------------------------------------------------------------------
Net asset value, end of period .................. $ 11.25 $ 10.20 $ 8.84 $ 7.99 $10.05 $10.92
=====================================================================
Total return(b) ................................. 12.86% 20.48% 16.61% (12.32)% (3.89)% 24.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $82,557 $51,586 $47,167 $15,664 $8,829 $9,234
Ratios to average net assets:
Expenses ..................................... 0.63%(d) 0.65% 0.69% 0.66% 0.65% 0.69%
Net investment income ........................ 3.81%(d) 4.64% 5.14% 5.07% 4.39% 4.87%
Portfolio turnover rate ......................... 9.31% 16.13% 25.81% 30.60% 34.03% 19.86%
(a) Based on average daily shares outstanding.
(b) Total return is not annualized for periods less than one year.
(c) Amount is less than $0.01 per share.
(d) Annualized.
Semiannual Report | See notes to financial statements. | 93
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED)
- ------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCKS 89.3%
ELECTRIC UTILITIES 63.8%
Alliant Energy Corp. ................... United States 900,000 $ 24,102,000
Ameren Corp. ........................... United States 700,000 34,307,000
American Electric Power Co. Inc. ....... United States 1,500,000 51,090,000
CenterPoint Energy Inc. ................ United States 1,262,800 15,191,484
Central Vermont Public Service Corp. ... United States 169,200 3,803,616
Cinergy Corp. .......................... United States 1,700,000 68,884,000
Consolidated Edison Inc. ............... United States 750,000 31,635,000
DTE Energy Co. ......................... United States 400,000 18,192,000
Duke Energy Corp. ...................... United States 1,000,000 28,010,000
Edison International ................... United States 1,600,000 55,552,000
Energy East Corp. ...................... United States 1,100,000 28,842,000
Entergy Corp. .......................... United States 1,500,000 105,990,000
Exelon Corp. ........................... United States 2,300,000 105,547,000
FirstEnergy Corp. ...................... United States 1,800,000 75,510,000
FPL Group Inc. ......................... United States 2,200,000 88,330,000
Hawaiian Electric Industries Inc. ...... United States 400,000 10,208,000
Northeast Utilities .................... United States 1,400,000 26,978,000
Pepco Holdings Inc. .................... United States 1,788,700 37,544,813
PG&E Corp. ............................. United States 1,500,000 51,150,000
Pinnacle West Capital Corp. ............ United States 1,200,000 51,012,000
PPL Corp. .............................. United States 1,361,000 73,480,390
Progress Energy Inc. ................... United States 1,500,000 62,925,000
Public Service Enterprise Group Inc. ... United States 900,000 48,951,000
Puget Energy Inc. ...................... United States 1,725,000 38,019,000
Scottish & Southern Energy PLC ......... United Kingdom 1,500,000 25,017,482
Scottish Power PLC ..................... United Kingdom 6,000,000 46,378,017
(a) Sierra Pacific Resources Co. ........... United States 1,500,000 16,125,000
Southern Co. ........................... United States 2,300,000 73,209,000
TECO Energy Inc. ....................... United States 200,000 3,136,000
TXU Corp. .............................. United States 579,600 46,153,548
Westar Energy Inc. ..................... United States 900,000 19,476,000
Wisconsin Energy Corp. ................. United States 1,100,000 39,050,000
Xcel Energy Inc. ....................... United States 1,200,000 20,616,000
--------------
1,424,415,350
--------------
GAS UTILITIES 11.2%
AGL Resources Inc. ..................... United States 1,000,000 34,930,000
Atmos Energy Corp. ..................... United States 1,000,000 27,000,000
KeySpan Corp. .......................... United States 1,000,000 38,970,000
Nicor Inc. ............................. United States 550,000 20,399,500
NiSource Inc. .......................... United States 2,800,000 63,812,000
Sempra Energy .......................... United States 1,000,000 39,840,000
Vectren Corp. .......................... United States 900,000 23,976,000
--------------
248,927,500
--------------
94 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
INTEGRATED TELECOMMUNICATION SERVICES 2.6%
SBC Communications Inc. ................................. United States 1,400,000 $ 33,166,000
Verizon Communications Inc. ............................. United States 700,000 24,850,000
--------------
58,016,000
--------------
MULTI-UTILITIES & UNREGULATED POWER 10.7%
Dominion Resources Inc. ................................. United States 1,450,000 107,923,500
National Grid Transco PLC ............................... United Kingdom 5,000,000 46,349,668
ONEOK Inc. .............................................. United States 500,000 15,410,000
United Utilities PLC .................................... United Kingdom 4,000,000 47,700,943
United Utilities PLC, A ................................. United Kingdom 2,500,000 21,320,375
--------------
238,704,486
--------------
OIL & GAS REFINING,MARKETING & TRANSPORTATION 1.0%
Kinder Morgan Inc. ...................................... United States 300,000 22,710,000
--------------
TOTAL COMMON STOCKS (COST $1,480,737,267) ............... 1,992,773,336
--------------
CONVERTIBLE PREFERRED STOCKS 3.5%
ELECTRIC UTILITIES 3.5%
Ameren Corp., 9.75%, cvt. pfd. .......................... United States 800,600 21,716,275
American Electric Power Co. Inc., 9.25%, cvt. pfd. ...... United States 354,700 15,110,220
Aquila Inc., 6.75%, cvt. pfd. ........................... United States 500,000 17,370,000
CMS Energy Trust I, 7.75%, cvt. pfd. .................... United States 260,000 13,260,000
(a) PNM Resources Inc., 6.75%, cvt. pfd. .................... United States 205,000 10,209,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $73,134,200) ... 77,665,495
--------------
----------------
PRINCIPAL AMOUNT
----------------
BONDS 5.7%
ELECTRIC UTILITIES 5.7%
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .......... United States $25,000,000 32,782,125
CMS Energy Corp., senior note, 9.875%, 10/15/07 .......... United States 8,500,000 9,265,000
FirstEnergy Corp., senior note, 7.375%, 11/15/31 ......... United States 25,000,000 28,405,725
Northeast Generation Co., senior note, 8.812%, 10/15/26 .. United States 7,500,000 8,307,983
PPL Capital Funding, 8.375%, 6/15/07 ..................... United States 15,000,000 16,193,415
TXU Corp., 144A, 6.55%, 11/15/34 ......................... United States 20,000,000 19,020,820
Utilicorp United Inc., senior note, 9.95%, 2/01/11 ....... United States 6,000,000 6,750,000
Utilicorp United Inc., senior note, 8.27%, 11/15/21 ...... United States 6,100,000 6,237,250
-------------
TOTAL BONDS (COST $111,897,294) .......................... 126,962,318
-------------
CONVERTIBLE BOND (COST $9,000,000) 1.0%
MULTI-UTILITIES & UNREGULATED POWER 1.0%
Sierra Pacific Resources Co., cvt., senior note,
144A, 7.25%, 2/14/10 .................................. 9,000,000 22,792,500
-------------
TOTAL LONG TERM INVESTMENTS (COST $1,674,768,761) ........ 2,220,193,649
-------------
Semiannual Report | 95
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $7,311,412) 0.3%
MONEY FUND 0.3%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio .... 7,311,412 $ 7,311,412
--------------
TOTAL INVESTMENTS (COST $1,682,080,173) 99.8% .................... 2,227,505,061
OTHER ASSETS, LESS LIABILITIES 0.2% .............................. 4,272,915
--------------
NET ASSETS 100.0% ................................................ $2,231,777,976
==============
(a) Non-income producing.
(b) See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
96 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2005 (UNAUDITED) (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLMC - Federal Home Loan Mortgage Corporation
GNMA - Government National Mortgage Association
GO - General Obligation
GP - Graduated Payment
PLC - Public Limited Co.
SF - Single Family
Semiannual Report | See notes to financial statements. | 97
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2005 (unaudited)
------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............... $479,823,807 $ 970,831,491 $28,243,154,838
Cost - Sweep Money Fund (Note 7) .......... 4,093,487 4,408,451 176,023,849
Cost - Repurchase agreements .............. -- -- 2,067,348,547
------------------------------------------------
Total cost of investments ................. $483,917,294 $ 975,239,942 $30,486,527,234
================================================
Value - Unaffiliated issuers .............. $688,955,849 $2,175,525,998 $30,002,483,151
Value - Sweep Money Fund (Note 7) ......... 4,093,487 4,408,451 176,023,849
Value - Repurchase agreements ............. -- -- 2,067,348,547
------------------------------------------------
Total value of investments ................ 693,049,336 2,179,934,449 32,245,855,547
Cash ......................................... -- -- 4,848,453
Receivables:
Investment securities sold ................ -- 4,783,338 162,862,164
Capital shares sold ....................... 921,949 1,847,295 168,311,808
Dividends and interest .................... 219,761 1,916,483 280,370,451
------------------------------------------------
Total assets ........................... 694,191,046 2,188,481,565 32,862,248,423
------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........... -- -- 243,545,592
Capital shares redeemed ................... 1,361,101 4,051,665 54,360,203
Affiliates ................................ 764,713 2,375,182 29,488,396
Unaffiliated transfer agent fees .......... 66,790 557,905 1,644,407
Payable upon return of securities loaned ..... -- -- 24,877,985
Deferred sale proceeds (Note 11) ............. -- -- 9,239,222
Other liabilities ............................ 23,793 58,855 170,366
------------------------------------------------
Total liabilities ...................... 2,216,397 7,043,607 363,326,171
------------------------------------------------
Net assets, at value ................ $691,974,649 $2,181,437,958 $32,498,922,252
================================================
Net assets consist of:
Undistributed net investment income (loss) ... $ 864,123 $ 1,147,875 $ (84,475,582)
Net unrealized appreciation (depreciation) ... 209,132,042 1,204,694,507 1,759,328,106
Accumulated net realized gain (loss) ......... (98,719,778) (208,840,766) 457,273,001
Paid-in capital .............................. 580,698,262 1,184,436,342 30,366,796,727
------------------------------------------------
Net assets, at value ................ $691,974,649 $2,181,437,958 $32,498,922,252
================================================
98 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2005 (unaudited)
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------
CLASS A:
Net assets, at value ................................................. $ 600,801,530 $1,563,357,461 $18,107,258,979
-------------------------------------------------
Shares outstanding ................................................... 26,449,280 47,128,475 7,398,956,161
-------------------------------------------------
Net asset value per share(a) ......................................... $ 22.72 $ 33.17 $ 2.45
-------------------------------------------------
Maximum offering price per share (net asset value per share / 94.25%,
94.25% and 95.75%, respectively) .................................. $ 24.11 $ 35.19 $ 2.56
-------------------------------------------------
CLASS B:
Net assets, at value ................................................. $ 18,821,558 $ 126,077,529 $ 3,935,777,224
-------------------------------------------------
Shares outstanding ................................................... 854,045 3,909,941 1,613,495,167
-------------------------------------------------
Net asset value and maximum offering price per share(a) .............. $ 22.04 $ 32.25 $ 2.44
-------------------------------------------------
CLASS B1:
Net assets, at value ................................................. -- -- $ 504,139,381
-------------------------------------------------
Shares outstanding ................................................... -- -- 205,935,560
-------------------------------------------------
Net asset value and maximum offering price per share(a) .............. -- -- $ 2.45
-------------------------------------------------
CLASS C:
Net assets, at value ................................................. $ 72,351,561 $ 272,894,770 $ 8,299,236,291
-------------------------------------------------
Shares outstanding ................................................... 3,317,747 8,537,137 3,372,966,168
-------------------------------------------------
Net asset value and maximum offering price per share(a) .............. $ 21.81 $ 31.97 $ 2.46
-------------------------------------------------
CLASS R:
Net assets, at value ................................................. -- $ 23,079,602 $ 98,997,973
-------------------------------------------------
Shares outstanding ................................................... -- 699,692 40,792,728
-------------------------------------------------
Net asset value and maximum offering price per share(a) .............. -- $ 32.99 $ 2.43
-------------------------------------------------
ADVISOR CLASS:
Net assets, at value ................................................. -- $ 196,028,596 $ 1,553,512,404
-------------------------------------------------
Shares outstanding ................................................... -- 5,906,420 637,435,494
-------------------------------------------------
Net asset value and maximum offering price per share(a) .............. -- $ 33.19 $ 2.44
-------------------------------------------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report | See notes to financial statements. | 99
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2005 (unaudited)
--------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............... $7,297,812,377 $1,674,768,761
Cost - Sweep Money Fund (Note 7) .......... 157,147,840 7,311,412
--------------------------------
Total cost of investments ................. $7,454,960,217 $1,682,080,173
================================
Value - Unaffiliated issuers .............. $7,351,271,536 $2,220,193,649
Value - Sweep Money Fund (Note 7) ......... 157,147,840 7,311,412
--------------------------------
Total value of investments ................ 7,508,419,376 2,227,505,061
Cash ......................................... -- 552,420
Receivables:
Capital shares sold ....................... 4,926,819 4,296,962
Dividends and interest .................... 34,350,826 5,974,622
--------------------------------
Total assets ........................... 7,547,697,021 2,238,329,065
--------------------------------
Liabilities:
Payables:
Investment securities purchased ........... -- 250,750
Capital shares redeemed ................... 18,616,695 4,058,707
Affiliates ................................ 5,516,658 1,833,400
Unaffiliated transfer agent fees .......... 720,379 319,901
Other liabilities ............................ 291,114 88,331
--------------------------------
Total liabilities ...................... 25,144,846 6,551,089
--------------------------------
Net assets, at value ................ $7,522,552,175 $2,231,777,976
================================
Net assets consist of:
Undistributed net investment income (loss) ... $ (28,015,643) $ (2,983,881)
Net unrealized appreciation (depreciation) ... 53,459,159 545,424,888
Accumulated net realized gain (loss) ......... (409,198,516) (16,261,212)
Paid-in capital .............................. 7,906,307,175 1,705,598,181
--------------------------------
Net assets, at value ................ $7,522,552,175 $2,231,777,976
================================
100 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2005 (unaudited)
--------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------------------------
CLASS A:
Net assets, at value ................................................... $6,097,159,226 $1,654,517,869
--------------------------------
Shares outstanding ..................................................... 927,317,300 147,556,401
--------------------------------
Net asset value per share(a) ........................................... $ 6.58 $ 11.21
--------------------------------
Maximum offering price per share (net asset value per share / 95.75%) .. $ 6.87 $ 11.71
--------------------------------
CLASS B:
Net assets, at value ................................................... $ 521,130,549 $ 140,937,977
--------------------------------
Shares outstanding ..................................................... 79,364,931 12,574,289
--------------------------------
Net asset value and maximum offering price per share(a) ................ $ 6.57 $ 11.21
--------------------------------
CLASS C:
Net assets, at value ................................................... $ 539,509,941 $ 349,262,904
--------------------------------
Shares outstanding ..................................................... 82,407,884 31,219,921
--------------------------------
Net asset value and maximum offering price per share(a) ................ $ 6.55 $ 11.19
--------------------------------
CLASS R:
Net assets, at value ................................................... $ 62,550,882 $ 4,501,804
--------------------------------
Shares outstanding ..................................................... 9,519,200 401,917
--------------------------------
Net asset value and maximum offering price per share(a) ................ $ 6.57 $ 11.20
--------------------------------
ADVISOR CLASS:
Net assets, at value ................................................... $ 302,201,577 $ 82,557,422
--------------------------------
Shares outstanding ..................................................... 45,864,644 7,336,058
--------------------------------
Net asset value and maximum offering price per share(a) ................ $ 6.59 $ 11.25
--------------------------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report | See notes to financial statements. | 101
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended March 31, 2005 (unaudited)
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
----------------------------------------------
Investment income:
Dividends
Unaffiliated issuers ................................ $ 4,700,697 $ 16,335,340 $ 331,392,647
Sweep Money Fund (Note 7) ........................... 69,844 38,370 1,655,984
Interest
Unaffiliated issuers ................................ -- -- 539,593,403
Non-controlled affiliated issuers (Note 10) ......... -- -- 1,964,028
Income from securities loaned - net ................. 8,310 -- 105,847
Other Income (Note 12) ................................. 27,651 104,408 679,464
----------------------------------------------
Total investment income .......................... 4,806,502 16,478,118 875,391,373
----------------------------------------------
Expenses:
Management fees (Note 3) ............................... 1,764,776 5,036,250 61,568,717
Distribution fees: (Note 3)
Class A ............................................. 799,928 1,992,465 12,428,716
Class B ............................................. 98,555 631,509 19,056,788
Class B1 ............................................ -- -- 1,665,640
Class C ............................................. 384,658 1,380,194 24,504,334
Class R ............................................. -- 56,599 217,995
Transfer agent fees (Note 3) ........................... 776,256 2,139,671 10,770,059
Custodian fees (Note 4) ................................ 9,735 21,817 257,414
Reports to shareholders ................................ 49,375 105,021 448,127
Registration and filing fees ........................... 31,005 41,340 974,089
Professional fees ...................................... 13,550 27,804 173,311
Directors' fees and expenses ........................... 1,923 3,869 56,205
Other .................................................. 12,623 50,899 570,243
----------------------------------------------
Total expenses ................................... 3,942,384 11,487,438 132,691,639
Expense reductions (Note 4) ...................... (5) (287) (23,232)
----------------------------------------------
Net expenses .................................. 3,942,379 11,487,151 132,668,407
----------------------------------------------
Net investment income ...................... 864,123 4,990,967 742,722,966
----------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ............................. (6,261,559) 36,912,599 520,854,214
Non-controlled affiliated issuers (Note 10) ...... -- -- 12,827,824
Foreign currency transactions .................... 511 (4,880) 479,468
----------------------------------------------
Net realized gain (loss) ...................... (6,261,048) 36,907,719 534,161,506
Net change in unrealized appreciation (depreciation) on:
Investments ......................................... 30,216,153 136,315,151 32,976,099
Translation of assets and liabilities denominated in
foreign currencies ............................... -- -- (207)
----------------------------------------------
Net change in unrealized appreciation
(depreciation) ............................. 30,216,153 136,315,151 32,975,892
----------------------------------------------
Net realized and unrealized gain (loss) ................... 23,955,105 173,222,870 567,137,398
----------------------------------------------
Net increase (decrease) in net assets resulting from
operations ............................................. $24,819,228 $178,213,837 $1,309,860,364
==============================================
102 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended March 31, 2005 (unaudited)
--------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------------------------
Investment income:
Dividends
Unaffiliated issuers ............................................. $ -- $ 42,030,450
Sweep Money Fund (Note 7) ........................................ 1,591,809 92,222
Interest ............................................................ 193,270,970 4,698,871
Other income (Note 12) .............................................. -- 52,932
-------------------------------
Total investment income ....................................... 194,862,779 46,874,475
-------------------------------
Expenses:
Management fees (Note 3) ............................................ 17,220,677 4,932,777
Distribution fees: (Note 3)
Class A .......................................................... 3,944,553 1,164,744
Class B .......................................................... 1,766,691 444,770
Class C .......................................................... 1,847,658 1,042,927
Class R .......................................................... 153,800 6,928
Transfer agent fees (Note 3) ........................................ 4,793,834 1,404,752
Custodian fees (Note 4) ............................................. 79,136 37,056
Reports to shareholders ............................................. 397,905 168,825
Registration and filing fees ........................................ 79,985 80,205
Professional fees ................................................... 83,266 25,735
Directors' fees and expenses ........................................ 16,466 4,471
Other ............................................................... 248,314 27,593
-------------------------------
Total expenses ................................................ 30,632,285 9,340,783
Expense reductions (Note 4) ................................... (15,689) (1,514)
-------------------------------
Net expenses ............................................... 30,616,596 9,339,269
-------------------------------
Net investment income ................................... 164,246,183 37,535,206
-------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................... 3,025,142 63,525,922
Foreign currency transactions .................................... -- (87,854)
-------------------------------
Net realized gain (loss) ................................... 3,025,142 63,438,068
Net change in unrealized appreciation (depreciation) on investments.. (97,755,176) 145,372,029
-------------------------------
Net realized and unrealized gain (loss) ................................ (94,730,034) 208,810,097
-------------------------------
Net increase (decrease) in net assets resulting from operations ........ $ 69,516,149 $246,345,303
==============================
Semiannual Report | See notes to financial statements. | 103
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the six months ended March 31, 2005 (unaudited)
and the year ended September 30, 2004
-----------------------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2005 SEPTEMBER 30, 2004 MARCH 31, 2005 SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............... $ 864,123 $ (3,634,884) $ 4,990,967 $ 1,223,391
Net realized gain (loss) from investments
and foreign currency transactions ....... (6,261,048) (14,029,079) 36,907,719 6,262,419
Net change in unrealized appreciation
(depreciation) on investments ........... 30,216,153 73,445,772 136,315,151 247,296,583
----------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations ........................ 24,819,228 55,781,809 178,213,837 254,782,393
----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................. -- -- (3,882,891) (1,532,029)
Class R ................................. -- -- (10,415) --
Advisor Class ........................... -- -- (732,270) (173,053)
----------------------------------------------------------------------------
Total distributions to shareholders ........... -- -- (4,625,576) (1,705,082)
----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ................................. (61,361,579) 31,657,014 (96,800,537) (98,948,884)
Class B ................................. (539,652) 7,768,447 (5,968,709) 4,780,418
Class C ................................. (5,529,547) 3,332,636 (19,240,647) (22,857,255)
Class R ................................. -- -- 1,224,359 3,224,209
Advisor Class ........................... -- -- 51,249,706 85,716,783
----------------------------------------------------------------------------
Total capital share transactions .............. (67,430,778) 42,758,097 (69,535,828) (28,084,729)
----------------------------------------------------------------------------
Redemption fees ............................... 595 691 5,859 6,295
----------------------------------------------------------------------------
Net increase (decrease) in
net assets ........................ (42,610,955) 98,540,597 104,058,292 224,998,877
Net assets:
Beginning of period ........................... 734,585,604 636,045,007 2,077,379,666 1,852,380,789
----------------------------------------------------------------------------
End of period ................................. $691,974,649 $734,585,604 $2,181,437,958 $2,077,379,666
============================================================================
Undistributed net investment income
included in net assets:
End of period .............................. $ 864,123 $ -- $ 1,147,875 $ 782,484
============================================================================
104 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the six months ended March 31, 2005 (unaudited)
and the year ended September 30, 2004
-----------------------------------------------------------------------------
FRANKLIN
FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2005 SEPTEMBER 30, 2004 MARCH 31, 2005 SEPTEMBER 30, 2004
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 742,722,966 $ 1,044,441,688 $ 164,246,183 $ 339,860,811
Net realized gain (loss) from investments
and foreign currency transactions ....... 534,161,506 451,159,295 3,025,142 2,260,202
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ....... 32,975,892 1,332,443,859 (97,755,176) (71,149,291)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......... 1,309,860,364 2,828,044,842 69,516,149 270,971,722
-----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (510,625,522) (798,349,922) (158,059,697) (364,404,705)
Class B .................................... (102,672,661) (162,621,962) (12,391,779) (29,981,316)
Class B1 ................................... (14,816,396) (31,263,684) -- --
Class C .................................... (211,649,915) (316,248,066) (12,942,725) (33,894,559)
Class R .................................... (2,542,555) (3,457,009) (1,423,126) (2,762,490)
Advisor Class .............................. (37,548,722) (28,902,829) (7,558,350) (17,122,309)
Net realized gains:
Class A .................................... (84,143,096) (55,088,598) -- --
Class B .................................... (19,751,225) (12,569,134) -- --
Class B1 ................................... (2,705,174) (2,636,974) -- --
Class C .................................... (37,975,944) (22,715,500) -- --
Class R .................................... (432,526) (216,288) -- --
Advisor Class .............................. (5,808,100) (943,590) -- --
-----------------------------------------------------------------------------
Total distributions to shareholders .............. (1,030,671,836) (1,435,013,556) (192,375,677) (448,165,379)
-----------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................... 3,208,027,945 4,294,278,432 (223,547,145) (724,886,754)
Class B .................................... 408,567,134 1,219,777,152 (38,513,442) (97,262,940)
Class B1 ................................... (13,751,525) (19,911,534) -- --
Class C .................................... 1,611,729,043 2,514,302,239 (48,943,036) (201,426,271)
Class R .................................... 25,205,958 33,450,501 4,108,338 6,444,739
Advisor Class .............................. 647,138,975 783,062,664 (33,523,493) 37,919,958
-----------------------------------------------------------------------------
Total capital share transactions ................. 5,886,917,530 8,824,959,454 (340,418,778) (979,211,268)
-----------------------------------------------------------------------------
Redemption fees .................................. 70,811 13,225 13,361 3,103
-----------------------------------------------------------------------------
Net increase (decrease) in net
assets ............................... 6,166,176,869 10,218,003,965 (463,264,945) (1,156,401,822)
Net assets:
Beginning of period ........................... 26,332,745,383 16,114,741,418 7,985,817,120 9,142,218,942
-----------------------------------------------------------------------------
End of period ................................. $32,498,922,252 $26,332,745,383 $7,522,552,175 $ 7,985,817,120
=============================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period .............................. $ (84,475,582) $ 52,657,223 $ (28,015,643) $ 113,851
=============================================================================
Semiannual Report | See notes to financial statements. | 105
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
for the six months ended March 31, 2005 (unaudited)
and the year ended September 30, 2004
-------------------------------------
FRANKLIN UTILITIES FUND
-------------------------------------
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2005 SEPTEMBER 30, 2004
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................ $ 37,535,206 $ 77,992,985
Net realized gain (loss) from investments and foreign currency transactions .. 63,438,068 17,758,493
Net change in unrealized appreciation (depreciation) on investments .......... 145,372,029 229,110,659
-------------------------------------
Net increase (decrease) in net assets resulting from operations ........... 246,345,303 324,862,137
-------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ...................................................................... (35,118,393) (57,157,619)
Class B ...................................................................... (2,665,812) (4,239,501)
Class C ...................................................................... (6,256,741) (9,771,431)
Class R ...................................................................... (61,882) (51,170)
Advisor Class ................................................................ (1,590,503) (2,242,376)
-------------------------------------
Total distributions to shareholders ................................................ (45,693,331) (73,462,097)
-------------------------------------
Capital share transactions: (Note 2)
Class A ...................................................................... 52,409,567 (1,380,506)
Class B ...................................................................... 590,058 15,905,081
Class C ...................................................................... 35,303,329 25,559,310
Class R ...................................................................... 2,707,553 262,939
Advisor Class ................................................................ 25,253,791 (2,434,692)
-------------------------------------
Total capital share transactions ................................................... 116,264,298 37,912,132
-------------------------------------
Redemption fees .................................................................... 1,438 1,274
-------------------------------------
Net increase (decrease) in net assets ..................................... 316,917,708 289,313,446
Net assets:
Beginning of period ............................................................. 1,914,860,268 1,625,546,822
-------------------------------------
End of period ................................................................... $2,231,777,976 $1,914,860,268
=====================================
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of period ................................................................ $ (2,983,881) $ 5,174,244
=====================================
106 | See notes to financial statements. | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company,
consisting of five series (the Funds).
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, U.S. Government securities, Mortgage pass-through
securities, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The Funds may utilize independent
pricing services, quotations from bond dealers and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Fund's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Funds have procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Fund's Board of
Directors.
Semiannual Report | 107
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollars
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account with other funds managed by
the investment manager or an affiliate of the investment manager used to invest
in one or more repurchase agreements. The value and face amount of the joint
repurchase agreement are allocated to the Funds based on their pro-rata
interest. A repurchase agreement is accounted for as a loan by the Funds to the
seller, collateralized by securities which are delivered to the Funds'
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%. Repurchase agreements are valued at cost.
At March 31, 2005, all repurchase agreements held by the Funds had been entered
into on that date.
D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
108 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
F. SECURITIES LENDING
The Franklin DynaTech Fund and the Franklin Income Fund loan securities to
certain brokers through a securities lending agent for which they receive cash
collateral against the loaned securities in an amount equal to at least 102% of
the market value of the loaned securities. The collateral is invested in
short-term instruments. The funds receive interest income from the investment of
cash collateral, adjusted by lender fees and broker rebates. The funds bear the
risk of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the funds in the
case of default of any securities borrower. At March 31, 2005, the Franklin
DynaTech Fund had no securities on loan.
G. INCOME TAXES
No provision has been made for U.S. income taxes because each Fund's policy is
to qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
H. 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. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
Common expenses incurred by the Custodian Funds 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.
Semiannual Report | 109
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
J. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of the Funds' shares held five
trading days or less may be subject to the Funds' redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Funds and accounted for as
additional paid-in capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Custodian Fund's organizational documents, its officers and trustees
are indemnified by the Custodian Funds against certain liabilities arising out
of the performance of their duties to the Custodian Funds. Additionally, in the
normal course of business, the Custodian Funds enter into contracts with service
providers that contain general indemnification clauses. The Custodian Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Custodian Funds that have not yet
occurred. However, based on experience, the Custodian Funds expect the risk of
loss to be remote.
2. CAPITAL STOCK
The classes of shares offered within each of the Funds are indicated below.
Effective March 1, 2005, Class B shares will no longer be offered except to
existing Class B shareholders through reinvested distributions or exchanges into
other Franklin Templeton funds' Class B shares, as permitted by the applicable
fund prospectus. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
- ----------------------------------------------------------------------------------------------------
CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1,
& CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------
Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
110 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
At March 31, 2005, there were 32 billion shares authorized ($0.01 par value),
allocated to the Funds as follows (in millions):
------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
------------------------------------------------------------
Class A............................ 250 250 7,600 2,500 400
Class B............................ 500 750 2,000 1,000 750
Class B1........................... -- -- 1,000 -- --
Class C............................ 250 250 3,600 2,500 400
Class R............................ -- 1,000 1,000 1,000 1,000
Advisor Class...................... -- 1,000 1,000 1,000 1,000
Transactions in the Funds' shares were as follows:
--------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
CLASS A SHARES:
Six months ended March 31, 2005
Shares sold .............................. 2,870,480 $ 66,608,471 2,397,485 $ 78,084,505
Shares issued in reinvestment
of distributions ...................... -- -- 106,686 3,548,365
Shares redeemed .......................... (5,503,558) (127,970,050) (5,462,956) (178,433,407)
--------------------------------------------------------
Net increase (decrease) .................. (2,633,078) $ (61,361,579) (2,958,785) $ (96,800,537)
========================================================
Year ended September 30, 2004
Shares sold .............................. 9,014,383 $ 201,786,839 6,395,481 $ 193,229,695
Shares issued in reinvestment
of distributions ...................... -- -- 47,975 1,399,446
Shares redeemed .......................... (7,626,280) (170,129,825) (9,722,445) (293,578,025)
--------------------------------------------------------
Net increase (decrease) .................. 1,388,103 $ 31,657,014 (3,278,989) $ (98,948,884)
========================================================
CLASS B SHARES:
Six months ended March 31, 2005
Shares sold .............................. 101,591 $ 2,289,686 176,692 $ 5,568,777
Shares redeemed .......................... (125,745) (2,829,338) (364,477) (11,537,486)
--------------------------------------------------------
Net increase (decrease) .................. (24,154) $ (539,652) (187,785) $ (5,968,709)
========================================================
Year ended September 30, 2004
Shares sold .............................. 463,560 $ 10,173,910 731,263 $ 21,476,065
Shares redeemed .......................... (111,081) (2,405,463) (565,876) (16,695,647)
--------------------------------------------------------
Net increase (decrease) .................. 352,479 $ 7,768,447 165,387 $ 4,780,418
========================================================
Semiannual Report | 111
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
---------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------
CLASS C SHARES:
Six months ended March 31, 2005
Shares sold ..................................... 263,603 $ 5,878,836 412,494 $ 13,011,391
Shares redeemed ................................. (512,171) (11,408,383) (1,028,731) (32,252,038)
---------------------------------------------------
Net increase (decrease) ......................... (248,568) $ (5,529,547) (616,237) $(19,240,647)
===================================================
Year ended September 30, 2004
Shares sold ..................................... 917,943 $ 19,881,973 1,305,882 $ 38,083,688
Shares redeemed ................................. (769,633) (16,549,337) (2,084,652) (60,940,943)
---------------------------------------------------
Net increase (decrease) ......................... 148,310 $ 3,332,636 (778,770) $(22,857,255)
===================================================
CLASS R SHARES:
Six months ended March 31, 2005
Shares sold ............................................................... 128,391 $ 4,107,622
Shares issued in reinvestment of distributions ............................ 314 10,387
Shares redeemed ........................................................... (89,048) (2,893,650)
-------------------------
Net increase (decrease) ................................................... 39,657 $ 1,224,359
=========================
Year ended September 30, 2004
Shares sold ............................................................... 254,043 $ 7,608,802
Shares redeemed ........................................................... (145,872) (4,384,593)
-------------------------
Net increase (decrease) ................................................... 108,171 $ 3,224,209
=========================
ADVISOR CLASS SHARES:
Six months ended March 31, 2005
Shares sold ............................................................... 1,632,942 $ 53,825,617
Shares issued in reinvestment of distributions ............................ 21,696 721,407
Shares redeemed ........................................................... (100,648) (3,297,318)
-------------------------
Net increase (decrease) ................................................... 1,553,990 $ 51,249,706
=========================
Year ended September 30, 2004
Shares sold ............................................................... 2,942,725 $ 89,412,412
Shares issued in reinvestment of distributions ............................ 5,745 167,517
Shares redeemed ........................................................... (127,887) (3,863,146)
-------------------------
Net increase (decrease) ................................................... 2,820,583 $ 85,716,783
=========================
112 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Six months ended March 31, 2005
Shares sold ................. 1,533,144,461 $ 3,781,386,048 37,513,794 $ 249,334,651
Shares issued in reinvestment
of distributions ......... 157,246,401 386,511,582 15,022,255 99,648,374
Shares redeemed ............. (388,964,944) (959,869,685) (86,171,572) (572,530,170)
----------------------------------------------------------------
Net increase (decrease) ..... 1,301,425,918 $ 3,208,027,945 (33,635,523) $ (223,547,145)
================================================================
Year ended September 30, 2004
Shares sold ................. 2,247,241,860 $ 5,316,264,931 86,401,010 $ 578,723,039
Shares issued in reinvestment
of distributions ......... 226,682,607 533,294,345 33,946,772 226,702,288
Shares redeemed ............. (658,551,288) (1,555,280,844) (228,919,042) (1,530,312,081)
----------------------------------------------------------------
Net increase (decrease) ..... 1,815,373,179 $ 4,294,278,432 (108,571,260) $ (724,886,754)
================================================================
CLASS B SHARES:
Six months ended March 31, 2005
Shares sold ................. 200,447,516 $ 491,581,008 2,037,216 $ 13,543,504
Shares issued in reinvestment
of distributions ......... 32,241,978 78,954,949 1,302,958 8,634,644
Shares redeemed ............. (65,848,114) (161,968,823) (9,145,954) (60,691,590)
----------------------------------------------------------------
Net increase (decrease) ..... 166,841,380 $ 408,567,134 (5,805,780) $ (38,513,442)
================================================================
Year ended September 30, 2004
Shares sold ................. 580,969,805 $ 1,367,704,171 8,827,015 $ 59,118,085
Shares issued in reinvestment
of distributions ......... 43,346,237 108,838,135 3,121,214 20,832,270
Shares redeemed ............. (109,027,856) (256,765,154) (26,551,545) (177,213,295)
----------------------------------------------------------------
Net increase (decrease) ..... 515,288,186 $ 1,219,777,152 (14,603,316) $ (97,262,940)
================================================================
CLASS B1 SHARES:
Six months ended March 31, 2005
Shares sold ................. 1,778,254 $ 4,371,261
Shares issued in reinvestment
of distributions ......... 4,101,663 10,081,382
Shares redeemed ............. (11,430,435) (28,204,168)
--------------------------------
Net increase (decrease) ..... (5,550,518) $ (13,751,525)
================================
Year ended September 30, 2004
Shares sold ................. 6,809,085 $ 16,060,956
Shares issued in reinvestment
of distributions ......... 8,043,400 18,919,939
Shares redeemed ............. (23,231,386) (54,892,429)
--------------------------------
Net increase (decrease) ..... (8,378,901) $ (19,911,534)
================================
Semiannual Report | 113
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS C SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 774,592,847 $1,920,430,236 5,211,408 $ 34,478,795
Shares issued in reinvestment of distributions ... 65,542,920 162,036,806 1,279,392 8,453,007
Shares redeemed .................................. (189,742,931) (470,737,999) (13,887,012) (91,874,838)
-------------------------------------------------------------
Net increase (decrease) .......................... 650,392,836 $1,611,729,043 (7,396,212) $ (48,943,036)
=============================================================
Year ended September 30, 2004
Shares sold ...................................... 1,255,981,744 $2,984,372,367 14,861,247 $ 99,281,128
Shares issued in reinvestment of distributions ... 91,955,343 217,651,704 3,312,543 22,050,949
Shares redeemed .................................. (289,468,688) (687,721,832) (48,451,915) (322,758,348)
-------------------------------------------------------------
Net increase (decrease) .......................... 1,058,468,399 $2,514,302,239 (30,278,125) $(201,426,271)
=============================================================
CLASS R SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 13,166,315 $ 32,276,197 1,987,710 $ 13,200,410
Shares issued in reinvestment of distributions ... 1,160,592 2,830,328 212,971 1,411,914
Shares redeemed .................................. (4,038,935) (9,900,567) (1,582,393) (10,503,986)
-------------------------------------------------------------
Net increase (decrease) .......................... 10,287,972 $ 25,205,958 618,288 $ 4,108,338
=============================================================
Year ended September 30, 2004
Shares sold ...................................... 19,381,084 $ 45,663,790 3,748,305 $ 25,113,231
Shares issued in reinvestment of distributions ... 1,500,196 3,505,433 411,848 2,748,659
Shares redeemed .................................. (6,682,743) (15,718,722) (3,195,508) (21,417,151)
-------------------------------------------------------------
Net increase (decrease) .......................... 14,198,537 $ 33,450,501 964,645 $ 6,444,739
=============================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 257,106,861 $ 632,287,257 6,614,193 $ 44,052,858
Shares issued in reinvestment of distributions ... 16,577,880 40,620,008 983,597 6,537,260
Shares redeemed .................................. (10,489,996) (25,768,290) (12,561,687) (84,113,611)
-------------------------------------------------------------
Net increase (decrease) .......................... 263,194,745 $ 647,138,975 (4,963,897) $ (33,523,493)
=============================================================
Year ended September 30, 2004
Shares sold ...................................... 335,191,629 $ 790,679,833 10,246,929 $ 68,640,458
Shares issued in reinvestment of distributions ... 11,426,569 26,885,121 2,127,795 14,230,250
Shares redeemed .................................. (14,744,719) (34,502,290) (6,731,932) (44,950,750)
-------------------------------------------------------------
Net increase (decrease) .......................... 331,873,479 $ 783,062,664 5,642,792 $ 37,919,958
=============================================================
114 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
CLASS A SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 13,674,704 $ 149,777,298
Shares issued in reinvestment of distributions ... 2,402,770 26,253,074
Shares redeemed .................................. (11,295,762) (123,620,805)
----------------------------
Net increase (decrease) .......................... 4,781,712 $ 52,409,567
============================
Year ended September 30, 2004
Shares sold ...................................... 18,406,095 $ 176,356,055
Shares issued in reinvestment of distributions ... 4,465,126 42,773,250
Shares redeemed .................................. (23,203,973) (220,509,811)
----------------------------
Net increase (decrease) .......................... (332,752) $ (1,380,506)
============================
CLASS B SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 1,197,130 $ 13,033,582
Shares issued in reinvestment of distributions ... 127,984 1,401,282
Shares redeemed .................................. (1,268,928) (13,844,806)
----------------------------
Net increase (decrease) .......................... 56,186 $ 590,058
============================
Year ended September 30, 2004
Shares sold ...................................... 3,179,780 $ 30,167,433
Shares issued in reinvestment of distributions ... 230,148 2,206,595
Shares redeemed .................................. (1,725,148) (16,468,947)
----------------------------
Net increase (decrease) .......................... 1,684,780 $ 15,905,081
============================
CLASS C SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 5,822,427 $ 63,615,271
Shares issued in reinvestment of distributions ... 268,427 2,933,432
Shares redeemed .................................. (2,868,288) (31,245,374)
----------------------------
Net increase (decrease) .......................... 3,222,566 $ 35,303,329
============================
Year ended September 30, 2004
Shares sold ...................................... 9,181,623 $ 87,063,153
Shares issued in reinvestment of distributions ... 515,325 4,924,301
Shares redeemed .................................. (6,976,972) (66,428,144)
----------------------------
Net increase (decrease) .......................... 2,719,976 $ 25,559,310
============================
CLASS R SHARES:
Six months ended March 31, 2005
Shares sold ...................................... 285,541 $ 3,150,160
Shares issued in reinvestment of distributions ... 5,490 60,348
Shares redeemed .................................. (45,719) (502,955)
----------------------------
Net increase (decrease) .......................... 245,312 $ 2,707,553
============================
Year ended September 30, 2004
Shares sold ...................................... 91,198 $ 872,504
Shares issued in reinvestment of distributions ... 5,281 50,695
Shares redeemed .................................. (69,748) (660,260)
----------------------------
Net increase (decrease) .......................... 26,731 $ 262,939
============================
Semiannual Report | 115
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-------------------------
FRANKLIN UTILITIES FUND
-------------------------
SHARES AMOUNT
-------------------------
ADVISOR CLASS SHARES:
Six months ended March 31, 2005
Shares sold ..................................... 3,356,699 $ 37,110,564
Shares issued in reinvestment of distributions .. 121,661 1,339,026
Shares redeemed ................................. (1,199,635) (13,195,799)
-------------------------
Net increase (decrease) ......................... 2,278,725 $ 25,253,791
=========================
Year ended September 30, 2004
Shares sold ..................................... 3,628,361 $ 34,881,431
Shares issued in reinvestment of distributions .. 159,863 1,540,703
Shares redeemed ................................. (4,069,192) (38,856,826)
-------------------------
Net increase (decrease) ......................... (280,968) $ (2,434,692)
=========================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Funds are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Investment Advisory Services Inc. Investment manager
(Investment Advisory)
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor
Services) Transfer agent
A. MANAGEMENT FEES
The Funds, except the Franklin Growth Fund, pay an investment management fee to
Advisers, and the Franklin Growth Fund pays an investment management fee to
Investment Advisory, based on the month-end net assets of the Funds as follows:
- --------------------------------------------------------------------------------
Annualized Fee Rate Net Assets
- --------------------------------------------------------------------------------
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20.0 billion
0.360% In excess of $20 billion
116 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
Under an agreement with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
C. DISTRIBUTION FEES
The Funds reimburse Distributors for costs incurred in marketing the Funds'
shares under a Rule 12b-1 plan up to a certain percentage per year of their
average daily net assets of each class as follows:
------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
------------------------------------------------------------
Class A ......... 0.25% 0.25% 0.15% 0.15% 0.15%
Class B ......... 1.00% 1.00% 1.00% 0.65% 0.65%
Class B1 ........ -- -- 0.65% -- --
Class C ......... 1.00% 1.00% 0.65% 0.65% 0.65%
Class R ......... -- 0.50% 0.50% 0.50% 0.50%
Under the Class A distribution plan, costs exceeding the maximum for the current
plan year cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the period:
-------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------------------------------
Net sales charges received .................... $60,890 $186,764 $11,629,840
Contingent deferred sales charges retained .... $57,931 $148,859 $ 3,502,114
---------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------
Net sales charges received ....................... $353,458 $199,490
Contingent deferred sales charges retained ....... $619,784 $121,699
Semiannual Report | 117
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statement of Operations of
which the following amounts were retained by Investor Services:
----------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
----------------------------------
Transfer agent fees ....................... $609,339 $1,836,858 $6,836,736
---------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------
Transfer agent fees .............................. $3,461,629 $932,036
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Effective May 1, 2005, the Franklin Income Fund agreed in advance to voluntarily
waive a portion of management fees in the form of additional breakpoints based
on month-end net assets of the fund as follows:
- -----------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -----------------------------------------------------------------------
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
G. OTHER AFFILIATED TRANSACTIONS
Included in professional fees are legal fees of $36,305 that were paid to a law
firm in which a partner is an officer of the Funds.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended March 31, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
118 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES
At September 30, 2004, the following Funds had tax basis capital losses which
may be carried over to offset future capital gains. Such losses expire as
follows:
--------------------------
FRANKLIN FRANKLIN
DYNATECH GROWTH
FUND FUND
--------------------------
Capital loss carryovers expiring in:
2007 ........................................... $ 677,592 $ --
2008 ........................................... 394,928 --
2009 ........................................... 1,170,048 --
2010 ........................................... 6,843,771 --
2011 ........................................... 47,180,600 206,696,356
2012 ........................................... 21,838,085 39,052,129
--------------------------
$78,105,024 $245,748,485
==========================
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Capital loss carryovers expiring in:
2005 ........................................... $ 50,054,906 $ --
2006 ........................................... 28,279,472 --
2007 ........................................... 18,954,412 --
2008 ........................................... 21,105,846 --
2009 ........................................... 46,256,951 --
2010 ........................................... 11,768,551 --
2011 ........................................... 33,556,845 54,600,730
2012 ........................................... 129,102,166 8,123,186
-----------------------------
$339,079,149 $62,723,916
=============================
At September 30, 2004, the Franklin DynaTech Fund and the Franklin U.S.
Government Securities Fund had deferred capital losses occurring subsequent to
October 31, 2003 of $13,880,328 and $73,144,508, respectively. For tax purposes,
such losses will be reflected in the year ending September 30, 2005.
At September 30, 2004, the Franklin Income Fund had deferred currency losses
occurring subsequent to October 31, 2003 of $16,670,944. For tax purposes, such
losses will be reflected in the year ending September 30, 2005.
On September 30, 2004, the Franklin U.S. Government Securities Fund had expired
capital loss carryovers of $57,539,178, which were reclassified to paid-in
capital.
Semiannual Report | 119
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
At March 31, 2005, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes were as follows:
------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
------------------------------------------------
Cost of investments ................................ $484,390,672 $ 975,239,942 $30,490,099,855
================================================
Unrealized appreciation ............................ $228,717,648 $1,238,768,867 $ 2,910,447,191
Unrealized depreciation ............................ (20,058,984) (34,074,360) (1,154,691,499)
------------------------------------------------
Net unrealized appreciation (depreciation) ......... $208,658,664 $1,204,694,507 $ 1,755,755,692
================================================
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------------
Cost of investments ................................ $7,454,960,217 $1,685,747,452
=================================
Unrealized appreciation ............................ $ 96,467,290 $ 574,400,727
Unrealized depreciation ............................ (43,008,131) (32,643,118)
---------------------------------
Net unrealized appreciation (depreciation) ......... $ 53,459,159 $ 541,757,609
=================================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, paydown losses, bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, paydown losses, and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
period ended March 31, 2005, were as follows:
--------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------------------------------------------
Purchases .......................................... $ 82,779,709 $12,544,360 $10,930,095,161
Sales .............................................. $119,807,196 $86,357,708 $ 4,159,743,993
120 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS (CONTINUED)
------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------------------------
Purchases .......................................... $1,272,829,353 $313,300,984
Sales .............................................. $1,599,170,228 $195,061,564
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management fees paid by the
Sweep Money Fund.
8. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 25.47% of its portfolio invested in below
investment grade 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.
The fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At March 31, 2005, the value of these securities
was $83,824,730, representing 0.26% of the fund's net assets. The fund
discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. For
information as to specific securities, see the accompanying Statement of
Investments.
9. RESTRICTED SECURITIES
At March 31, 2005, investments in securities included issues that are restricted
and illiquid. Restricted securities are often purchased in private placement
transactions, are not registered under the Securities Act of 1933, may have
contractual restrictions on resale, and are valued under methods approved by the
Board of Directors as reflecting fair value. A security may also be considered
illiquid if it lacks a readily available market or if its valuation has not
changed for a certain period of time. At March 31, 2005, the Franklin Income
Fund held investments in restricted and illiquid securities, as follows:
Semiannual Report | 121
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/ ACQUISITION
SHARES ISSUER DATE COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ........... 2/14/97 $57,833,250 $ 841,500
$87,000,000 Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ... 7/29/97 78,711,240 26,995,230
-----------
TOTAL RESTRICTED SECURITIES (0.09% of Net Assets) ............. $27,836,730
===========
10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Franklin Income Fund at March 31, 2005, were as shown below.
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD VALUE REALIZED
AT BEGINNING GROSS GROSS AT END AT END INVESTMENT GAIN
NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
Mission Resources Corp .............. 3,330,000 -- 3,330,000 -- -- $ -- $12,827,824
Mission Resources Corp., senior
note, 9.875%, 4/01/11 ............ 40,000,000 -- -- 40,000,000 (a) 1,964,028 --
-----------------------------------
TOTAL AFFILIATED SECURITIES
(0.00% of Net Assets) ...... $ -- $1,964,028 $12,827,824
===================================
(a) As of March 31, 2005, no longer an affiliate.
11. OTHER CONSIDERATIONS
Subject to certain terms and conditions, the Franklin Income Fund has agreed to
sell its holdings in Asia Pulp and Paper and related subsidiaries in November
2006. Until the completion of the sale, the transaction will be accounted for as
a secured borrowing with a pledge of collateral and any preliminary sales
proceeds received are deferred until the completion of the transaction.
12. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, provided documents and information in response to
subpoenas and/or requests for documents, information
122 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. REGULATORY MATTERS (CONTINUED)
INVESTIGATIONS AND SETTLEMENTS (CONTINUED)
and/or testimony. Beginning in August 2004, the Company entered into settlements
with certain of the regulators and a governmental entity investigating the
mutual fund industry practices noted above. The Company believes that settlement
of each of the matters is in the best interest of the Company and shareholders
of the Franklin, Templeton, and Mutual Series mutual funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds and are recorded as other income in the current period. The SEC has not
yet approved the distribution plan pertaining to the SEC settlement. When
approved, disbursements of settlement monies under the SEC's settlement will be
made promptly in accordance with the terms and conditions of that order.
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other
parties alleging violations of the West Virginia Consumer Credit and Protection
Act and seeking, among other things, civil penalties and attorneys' fees and
costs. To the extent applicable to the Company, the complaint arises from
activity that occurred in 2001 and duplicates, in whole or in part, the
allegations asserted in the February 4, 2004 Massachusetts Administrative
Complaint concerning one instance of market timing (the "Administrative
Complaint") and the SEC's findings regarding market timing in its August 2, 2004
Order (the "SEC Order"), both of which matters were previously reported.
The Funds, in addition to the Company and other funds, and certain current and
former officers, employees, and directors have been named in multiple lawsuits
in different courts alleging violations of various federal securities laws and
seeking, among other relief, monetary damages, restitution, removal of fund
trustees, directors, advisers, administrators, and distributors, rescission of
management contracts and 12b-1 plans, and/or attorneys' fees and costs.
Specifically, the lawsuits claim breach of duty with respect to alleged
arrangements to permit market timing and/or late trading activity, or breach of
duty with respect to the valuation of the portfolio securities of certain
Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in
alleged market timing activity. The majority of these lawsuits duplicate, in
whole or in part, the allegations asserted in the Administrative Complaint and
the SEC's findings regarding market timing in the SEC Order. The lawsuits are
styled as class actions, or derivative actions on behalf of either the named
funds or Franklin Resources, Inc.
Semiannual Report | 123
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of marketing support payments and/or payment of allegedly
excessive commissions and/or advisory or distribution fees, and seeking, among
other relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of the Funds and other funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits described above are without merit and intends to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. Public trust and confidence are critical to the Company's business and
any material loss of investor and/or client confidence could result in a
significant decline in assets under management by the Company, which would have
an adverse effect on future financial results. If it is determined that the
Company bears responsibility for any unlawful or inappropriate conduct that
caused losses to the Funds, it is committed to making the Funds or their
shareholders whole, as appropriate. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.
124 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held February 28, 2005, the Board of Directors (the "Board"),
including a majority of non-interested or independent Directors, approved
renewal of the investment advisory contract for each of the five separate funds
comprising the Franklin Custodian Funds (the "Fund(s)"). In reaching this
decision, the Board took into account information furnished throughout the year
at regular Board meetings, as well as information prepared specifically in
connection with the annual renewal review process. Information furnished and
discussed throughout the year included investment performance reports and
related financial information for each Fund, as well as periodic reports on
shareholder services, legal compliance, pricing, brokerage commissions and
execution and other services provided by the Investment Manager ("Manager") and
its affiliates. Information furnished specifically in connection with the
renewal process included a report for each Fund prepared by Lipper Financial
Services ("Lipper"), an independent organization, as well as a Fund
Profitability Analysis Report prepared by management. The Lipper Reports
compared each Fund's investment performance and expenses with those of other
mutual funds deemed comparable to the Fund as selected by Lipper. The Fund
Profitability Analysis Report discussed the profitability to Franklin Templeton
Investments from its overall U.S. fund operations, as well as on an individual
fund-by-fund basis utilizing expense allocation methodologies deemed reasonable
by the Fund's independent accountants. Included with such Profitability Analysis
Report was information on a fund-by-fund basis listing portfolio managers and
other accounts they manage, as well as information on management fees charged by
the Manager including management's explanation of differences where relevant,
and a three year expense analysis with an explanation for any increase in
expense ratios. Additional information accompanying such Report were a
memorandum prepared by management describing enhancements to the services
provided to the funds by the Franklin Templeton Investments organization, as
well as a memorandum relating to economies of scale.
In considering such materials, the independent Directors received assistance and
advice from and met separately with independent counsel. While the investment
advisory contracts for all Funds were approved at the same Board meeting, the
Board dealt with each Fund separately. In approving continuance of the
investment advisory contract for each Fund, the Board, including a majority of
independent Directors, determined that the existing management fee structure was
fair and reasonable and that continuance of the investment advisory contract was
in the best interests of each Fund and its shareholders. While attention was
given to all information furnished, the following discusses the primary factors
relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the Code of Ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net
Semiannual Report | 125
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
asset value calculations. The Board also noted the extent of benefits provided
Fund shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted by the Board that such
systems and procedures had been favorably reported on in discussions with the
Fund's outside accountants and had functioned smoothly during the hurricanes and
blackout experienced last year in Florida. Other factors taken into account by
the Board were the Manager's best execution trading policies, including a
favorable third party report on portfolio execution, as well as the compliance
procedures and qualifications of the Chief Compliance Officer established in
accordance with recently adopted SEC requirements. Consideration was also given
to the experience of each Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of a portfolio
manager's bonus compensation was the relative investment performance of the
funds he or she managed so as to be aligned with the interest of Fund
shareholders. The Board also took into account the transfer agent and
shareholder services provided Fund shareholders by an affiliate of the Manager,
noting continuing expenditures by management to increase and improve the scope
of such services, periodic favorable reports on such service conducted by third
parties such as Dalbar, and the first hand experience of the individual
Directors who deal with the shareholder services department in their capacities
as shareholders in one or more of the various Franklin Templeton Funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper Reports furnished for the contract renewals.
The Lipper Reports prepared for each individual Fund showed the investment
performance of its Class A shares during 2004 and the previous ten years in
comparison with a performance universe selected by Lipper. The following
summarizes the performance results for each Fund.
FRANKLIN DYNA TECH FUND - This Fund's investment objective is capital
appreciation and performance was shown in comparison to a performance universe
consisting of the Fund and all retail and institutional science and technology
funds as classified by Lipper. The Fund's total return during 2004 placed it in
the second highest quintile of such performance universe. Its total return on an
annualized basis placed it in the top quintile for the previous three and five
year periods and the second highest quintile for the previous ten year period.
The Board expressed satisfaction with such performance.
126 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
FRANKLIN GROWTH FUND - The Fund's investment objective is capital
appreciation, and performance was shown in comparison to a performance universe
consisting of all retail and institutional multi-cap core funds as classified by
Lipper. The Fund's total return during 2004 ranked it in the top half of its
performance universe. Its total return on an annualized basis ranked it in the
fourth lowest quintile during the previous three year period, the upper half
during the previous five year period and the fourth quintile during the previous
ten year period. The Board found such performance acceptable, noting that the
Fund's 2004 total return exceeded 11% and that its total annualized return for
the previous ten year period exceeded 10% as shown in such Lipper Report.
FRANKLIN INCOME FUND - While maintaining prospects for capital
appreciation, this Fund's investment objective is to maximize income, and its
investment performance was shown in comparison to a performance universe
consisting of the Fund and all other retail and institutional funds as
classified by Lipper. The Fund's income return, as shown in such Report during
2004 and for each of the previous ten years, placed it in the first or highest
quintile of this performance universe. The Fund's total return on an annualized
basis also placed it in the first quintile of its performance universe during
each of the previous three and five year periods and in the second highest
quintile during the ten year period. The Board expressed satisfaction with such
performance.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - The investment objective of this
Fund is realizing income, and its investment performance was shown in comparison
to a performance universe consisting of all retail and institutional Ginnie Mae
funds as classified by Lipper. The Fund's income return during 2004 and during
each of the previous three, five and ten year periods on an annualized basis,
placed it in the first or highest quintile of such performance universe. The
Fund's total return during 2004, as shown in such Report, also placed it in the
first quintile of its performance universe and on an annualized basis was in the
top half for the previous three years and in the second highest quintile for the
previous five and ten year periods. The Board expressed satisfaction with such
performance.
FRANKLIN UTILITIES FUND - The investment objectives of this Fund are
current income and capital appreciation, and its investment performance was
shown in comparison to a performance universe consisting of all retail and
institutional utility funds as classified by Lipper. The Fund's income return,
as shown in such Report, during 2004 placed it in the first or highest quintile
of this performance group and its income return on an annualized basis also
placed it in the first quintile for each of the three, five and ten year
periods. The Fund's total return during 2004 also placed it in the top half of
its performance universe and on an annualized basis placed it in the first
quintile of its performance universe during the previous three and five year
periods, and in the second highest quintile for the ten year period. The Board
expressed satisfaction with such performance.
Semiannual Report | 127
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as constituting its appropriate Lipper
Expense Group. Prior to making such comparison, the Board relied upon a survey
showing that the scope of management advisory services covered under each Fund's
investment advisory contract was similar to those provided by fund managers to
other mutual fund groups which would be used as a basis of comparison in the
Lipper Reports. In reviewing comparative costs, emphasis was given to each
Fund's management fee in comparison with the effective management fee that would
have been charged by other funds within its Lipper Expense Group assuming they
were the same size as the Fund, as well as the actual total expenses of the Fund
in comparison with those of its peer group which for comparative consistency was
shown by Lipper for Fund Class A shares. The results of such expense comparisons
showed that the effective management fee rate for each of the Franklin DynaTech
Fund, Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund was
in the lowest or least expensive quintile of their respective Lipper Expense
Group and for the Franklin U.S. Government Securities Fund, was in the lower
half of its Lipper Expense Group. The actual total expenses for all the Funds
were in the lowest or least expensive quintile of their respective Lipper
expense groups, and this was true whether such expenses were computed for such
Groups on a basis that included or excluded 12b-1 fees. While realizing that
other factors such as the Manager's profitability and economies of scale bear on
the reasonableness of fees, the Board was satisfied with the management fees and
total expenses of each Fund in comparison to its expense peer group as shown in
the Lipper Reports.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund Profitability Analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity which finances up-front
commissions paid to brokers/dealers who sold fund Class B and Class B1 shares,
as well as potential benefits resulting from allocation of fund brokerage and
the use of "soft" commission dollars to pay for research. Specific attention was
given to the methodology followed in allocating costs to each Fund, it being
recognized that allocation methodologies are inherently subjective and various
allocation methodologies may each be reasonable while producing different
results. In this respect, the Board noted that the cost allocation methodology
was consistent with that followed in profitability report presentations for the
Fund made in prior years and that such methodology was subject to review and
testing by the Fund's outside accountants every other year. It was also noted
that legal costs and payments incurred by Franklin Templeton in resolving
various legal proceedings arising from its U.S. fund operations had not been
allocated to the Funds for purposes of determining profitability. Included in
the analysis for each Fund were the revenue and related costs broken down
separately from the management, underwriting, and shareholder services functions
provided by the Manager and its affiliates to each Fund, as well as the relative
contribution of each Fund to the
128 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
profitability of the Manager's parent. In reviewing and discussing such
analysis, management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary to the type of mutual fund operations
conducted by the Manager and its corporate affiliates may not be fully reflected
in the expenses allocated to each Fund in determining its profitability, as well
as the fact that the level of profits, to a certain extent, reflected
operational cost savings and efficiencies initiated by management. The Board
also took into account management's expenditures in improving shareholder
services provided the Funds, as well as the need to meet additional regulatory
and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC
requirements. In addition, the Board considered a third party study comparing
the profitability of the Manager's parent on an overall basis as compared to
other publicly held managers broken down to show profitability from management
operations exclusive of distribution expenses, as well as profitability
including distribution expenses. Based upon their consideration of all these
factors, the Board determined that the level of profits realized by the Manager
under its investment advisory contract with each Fund was not excessive in view
of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund Profitability Analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure under the investment advisory
contract with each Fund provides an initial annual fee of .625% on the first
$100 million of assets; .50% on the next $150 million of assets; .45% on the
next $9.75 billion of assets; .44% on the next $2.5 billion of assets; and
thereafter declines by .02% for each subsequent $2.5 billion until it reaches a
final breakpoint of .36% for assets in excess of $20 billion. As a result of
substantial net sales during the previous year, the assets of the Franklin
Income Fund, however, had grown to exceed the $20 billion last breakpoint level
and were approximately $33 billion at the time of the February 28, 2005 Board
meeting. In view of such fact, the independent Directors requested that
management consider adding further fee breakpoints for such Fund. Management's
position in response to such request was that the Franklin Income Fund is a
great value to shareholders in providing outstanding performance at very low
cost and that no further breakpoints were warranted. Management also expressed
its view that the existing fee schedule reflected anticipated economies of scale
and pointed out the favorable effective management fee and total expense
comparisons of the Franklin Income Fund as well as each of the other Funds
within their respective Lipper Expense Groups. Management also observed, and the
Board acknowledged the fact that the Franklin Income Fund had assets beyond the
last breakpoint level did not mean that it no longer benefited from economies of
scale since the amount of assets being charged at the lowest .36% fee level
resulted in a lower overall management fee rate. While intending to continue
discussions on this topic with
Semiannual Report | 129
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
management, the Board believed that to the extent economies of scale may be
realized by the Manager and its affiliates, the schedule of fees under the
investment advisory contract for each Fund provides a sharing of benefits with
the Fund and its shareholders. At a Board meeting held April 19, 2005,
management agreed to fee waivers reducing the annual management fee to .355% on
Franklin Income Fund net assets in excess of $35 billion up to $50 billion, and
to .35% thereafter.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
130 | Semiannual Report
This page intentionally left blank.
This page intentionally left blank.
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet
Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(2)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(3)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund(4)
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund(4),(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(4)
Templeton Global Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida(8)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust(9)
(1) The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
(2) The fund is only open to existing shareholders and select retirement plans.
(3) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25% of
the outstanding number of shares. Investors may tender all or a portion of
their shares during the tender period.
(4) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(5) Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
(6) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7) Portfolio of insured municipal securities.
(8) These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
(9) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05 Not part of the semiannual report
[LOGO] (R) One Franklin Parkway
FRANKLIN(R) TEMPLETON(R) San Mateo, CA 94403-1906
INVESTMENTS
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN CUSTODIAN FUNDS, INC.
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FCF S2005 05/05
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 11(A), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are Edith E. Holiday and Harris J.
Ashton and they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 10. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 11. EXHIBITS.
(A) Code of Ethics
(B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN CUSTODIAN FUNDS, INC.
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date May 20, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date May 20, 2005
By /s/Galen G. Vetter
Chief Financial Officer
Date May 20, 2005