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
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FRANKLIN CUSTODIAN FUNDS, INC.
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 9/30
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Date of reporting period: 3/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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MARCH 31, 2006
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Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government
Securities Fund
Franklin Utilities Fund
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
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FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[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 ..................................................... 21
Franklin U.S. Government Securities Fund ................................. 33
Franklin Utilities Fund .................................................. 43
Financial Highlights and Statements of Investments ....................... 52
Financial Statements ..................................................... 101
Notes to Financial Statements ............................................ 110
Shareholder Information .................................................. 128
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SEMIANNUAL REPORT
FRANKLIN DYNATECH FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing substantially in the equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
industries.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Franklin DynaTech Fund's semiannual report for the
period ended March 31, 2006.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +7.37% cumulative total return for the
six months under review. For the same period, the Fund outperformed its narrow
benchmark, the NASDAQ 100 Index, which had a price-only return of +6.37%. 1 The
Fund also outperformed the broad Standard & Poor's 500 Index (S&P 500), which
posted a +6.38% 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, 2006, the U.S. economy advanced at a
modest pace. In fourth quarter 2005, gross domestic product grew 1.7%
annualized, the slowest pace in nearly three years. This was due to several
factors including declines in vehicle sales and defense spending. Furthermore,
slower export growth combined with greater demand for imported goods and
materials fueled a widening trade deficit. Residential construction and real
estate activity waned as long-term mortgage rates rose, but economic growth
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 55.
4 | Semiannual Report
picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed)
indicated that the economy was in transition -- away from one led by rapid
consumer spending, accommodative monetary policy and other fiscal stimulus
toward one led by business investment spending and export trade.
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the
reporting period. Hiring rebounded in many industries and personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential long-term supply disruptions and
strong growth in global demand, especially from China and India. Natural gas
prices rose during the second half of 2005 mainly because of expected rising
demand with the onset of winter; however, they retreated somewhat amid
milder-than-expected weather conditions. Although medical and pharmacy costs
climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the
year under review, which was less than the 2.2% 10-year average. 3
The Fed continued its monetary tightening cycle and raised the federal funds
target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested
more rate increases may be necessary to balance growth with what it saw as
potential inflationary risks of tighter labor and product markets. The effects
of the Fed's credit-tightening campaign cooled the previously hot housing and
real estate markets as the cost of credit grew less attractive to most consumers
who were already dealing with near-record consumer debt burdens and historically
high gas prices.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a six-month total return of +6.40%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small
company stocks outperformed their large-capitalization counterparts by a wide
margin, and technology stocks saw their biggest resurgence since 2003.
Industrials, materials and telecommunications stocks also performed well.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
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 NASDAQ domestic and international
based common type stocks listed on The NASDAQ Stock Market. The index is market
value weighted and includes more than 3,000 companies.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Semiconductors 10.1%
Packaged Software 9.2%
Biotechnology 9.2%
Medical Specialties 7.6%
Telecommunications Equipment 5.6%
Internet Software & Services 5.1%
Electronic Equipment & Instruments 4.6%
Managed Health Care 4.1%
Oilfield Services & Equipment 3.9%
Computer Processing Hardware 3.7%
Electronic Production Equipment 3.5%
Air Freight & Couriers 3.4%
Other Pharmaceuticals 2.7%
Services to the Health Industry 2.3%
Financial Publishing & Services 2.2%
Information Technology Services 2.2%
Major Pharmaceuticals 2.1%
Other 17.8%
Short-Term Investments & Other Net Assets 0.7%
Semiannual Report | 5
TOP 10 HOLDINGS
Franklin DynaTech Fund
3/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Microsoft Corp. 3.4%
PACKAGED SOFTWARE
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Genentech Inc. 3.0%
BIOTECHNOLOGY
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Intel Corp. 2.9%
SEMICONDUCTORS
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UnitedHealth Group Inc. 2.7%
MANAGED HEALTH CARE
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Google Inc., A 2.5%
INTERNET SOFTWARE & SERVICES
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Yahoo! Inc. 2.5%
INTERNET SOFTWARE & SERVICES
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Amgen Inc. 2.4%
BIOTECHNOLOGY
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Rockwell Automation Inc. 2.3%
ELECTRONIC EQUIPMENT & INSTRUMENTS
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Schlumberger Ltd. 2.3%
OILFIELD SERVICES & EQUIPMENT
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Moody's Corp. 2.2%
FINANCIAL PUBLISHING & SERVICES
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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.
MANAGER'S DISCUSSION
During the reporting period, several Fund holdings contributed to Fund
performance. Notable performers include Schlumberger (+51%), Rockwell Automation
(+37%) and Google (+23%). Increased capital expenditure in the oil industry,
primarily due to higher oil prices, positively impacted oil field services
company Schlumberger. A strong product cycle, particularly in its Logix
business, boosted industrial automation giant Rockwell's returns. Lastly, online
search engine Google continued to benefit from the shift of advertising spending
to online channels, specifically online search engines.
Some stocks, such as Alcon (-18%), Stryker (-10%) and International Rectifier
(-8%), negatively impacted the Fund during the period. Eye care products
manufacturer Alcon detracted from Fund performance as the company's revenue and
earnings growth decelerated significantly from the past two years. We sold some
of our Stryker holdings due to concerns about the deteriorating pricing
environment for orthopedic medical devices. Semiconductor company International
Rectifier missed analysts' expectations for two quarters and we sold the
position by period-end.
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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 7
PERFORMANCE SUMMARY AS OF 3/31/06
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE INFORMATION
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CLASS A (SYMBOL: FKDNX) CHANGE 3/31/06 9/30/05
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Net Asset Value (NAV) +$1.84 $26.82 $24.98
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CLASS B (SYMBOL: FDNBX) CHANGE 3/31/06 9/30/05
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Net Asset Value (NAV) +$1.67 $25.82 $24.15
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CLASS C (SYMBOL: FDYNX) CHANGE 3/31/06 9/30/05
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Net Asset Value (NAV) +$1.66 $25.56 $23.90
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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
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Cumulative Total Return 1 +7.37% +18.05% +31.52% +154.82%
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Average Annual Total Return 2 +1.21% +11.24% +4.39% +9.16%
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Value of $10,000 Investment 3 $10,121 $11,124 $12,398 $24,023
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
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Cumulative Total Return 1 +6.92% +17.15% +26.58% -5.22%
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Average Annual Total Return 2 +2.92% +13.15% +4.49% -0.87%
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Value of $10,000 Investment 3 $10,292 $11,315 $12,458 $9,478
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CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/16/96)
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Cumulative Total Return 1 +6.95% +17.19% +26.67% +113.50%
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Average Annual Total Return 2 +5.95% +16.19% +4.84% +8.28%
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Value of $10,000 Investment 3 $10,595 $11,619 $12,667 $21,350
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Semiannual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC
OR TECHNOLOGICAL ADVANCEMENT. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S
MOST VOLATILE SECTORS. 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.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
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Actual $1,000 $1,073.70 $5.12
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Hypothetical (5% return before expenses) $1,000 $1,020.00 $4.99
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CLASS B
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Actual $1,000 $1,069.20 $8.92
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Hypothetical (5% return before expenses) $1,000 $1,016.31 $8.70
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CLASS C
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Actual $1,000 $1,069.50 $8.93
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Hypothetical (5% return before expenses) $1,000 $1,016.31 $8.70
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*Expenses are equal to the annualized expense ratio for each class (A: 0.99%; B:
1.73%; and C: 1.73%), 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 substantially in equity securities of companies that
are leaders in their industries.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Franklin Growth Fund's semiannual report for the
period ended March 31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Growth Fund - Class A posted a +10.18%
cumulative total return. The Fund outperformed its benchmark, the Standard &
Poor's 500 Index (S&P 500), which returned +6.38% for the same period. 1 You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 16.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2006, the U.S. economy advanced at a
modest pace. In fourth quarter 2005, gross domestic product grew 1.7%
annualized, the slowest pace in nearly three years. This was due to several
factors including declines in vehicle sales and defense spending. Furthermore,
slower export growth combined with greater demand for imported goods and
materials fueled a widening trade deficit. Residential construction and real
estate activity waned as long-term mortgage rates rose, but economic growth
picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed)
indicated that the economy was in transition -- away from one led by rapid
consumer spending, accommodative monetary policy and other fiscal stimulus
toward one led by business investment spending and export trade.
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the
reporting period. Hiring rebounded in many industries and personal income grew.
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 65.
12 | Semiannual Report
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential long-term supply disruptions and
strong growth in global demand, especially from China and India. Natural gas
prices rose during the second half of 2005 mainly because of expected rising
demand with the onset of winter; however, they retreated somewhat amid
milder-than-expected weather conditions. Although medical and pharmacy costs
climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the
year under review, which was less than the 2.2% 10-year average. 3
The Fed continued its monetary tightening cycle and raised the federal funds
target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested
more rate increases may be necessary to balance growth with what it saw as
potential inflationary risks of tighter labor and product markets. The effects
of the Fed's credit-tightening campaign cooled the previously hot housing and
real estate markets as the cost of credit grew less attractive to most consumers
who were already dealing with near-record consumer debt burdens and historically
high gas prices.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a six-month total return of +6.40%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small
company stocks outperformed their large-capitalization counterparts by a wide
margin, and technology stocks saw their biggest resurgence since 2003.
Industrials, materials and telecommunications stocks also performed well.
INVESTMENT STRATEGY
We seek to invest in companies that have qualities such as 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.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
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 NASDAQ domestic and international
based common type stocks listed on The NASDAQ Stock Market. The index is market
value weighted and includes more than 3,000 companies.
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 21.4%
Health Technology* 20.9%
Producer Manufacturing 19.4%
Technology Services* 9.3%
Transportation 5.6%
Consumer Services 4.6%
Distribution Services 3.2%
Commercial Services 2.9%
Energy Minerals 2.6%
Consumer Non-Durables 2.3%
Process Industries 1.9%
Health Services 1.9%
Consumer Durables 1.7%
Other 0.7%
Short-Term Investments & Other Net Assets 1.6%
*Significant exposure to a single sector may result in greater volatility for
the Fund than a more broadly diversified portfolio. There are specific risks to
investing in technology company stocks, which can be subject to abrupt or
erratic price movements and have been volatile, especially over the short term.
Semiannual Report | 13
TOP 10 HOLDINGS
Franklin Growth Fund
3/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Genentech Inc. 3.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
The Boeing Co. 3.2%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.8%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Amgen Inc. 2.8%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 2.7%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Apple Computer Inc. 2.6%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
3M Co. 2.5%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Johnson & Johnson 2.4%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Computer Sciences Corp. 2.3%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Yahoo! Inc. 2.1%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
The Fund was nearly fully invested with holdings in 99 companies at period-end.
We continued to invest in a broad array of companies of all sizes and in varied
industries.
No particular sector strength or weakness drove Fund performance during the
reporting period, but instead results were based on individual company
performances. Two of our best performing holdings were Continental Airlines
(+178%) and AMR, or American Airlines, (+142%). Other solid contributors
included Textron (+31%), Northrop Grumman (+27%), Computer Sciences (+17%),
Apple Computer (+17%) and Boeing (+16%).
The Fund had some detractors during the period under review. Examples of
holdings that did not perform well included Amgen (-9%), Johnson & Johnson (-5%)
and Yahoo! (-5%). The poorest performers were Intel (-20%), EnCana (-20%),
Gateway (-19%) and Dell (-13%).
14 | Semiannual Report
Thank you for your continued participation in Franklin Growth Fund. We look
forward to serving your future investment needs.
[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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 15
PERFORMANCE SUMMARY AS OF 3/31/06
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKGRX) CHANGE 3/31/06 9/30/05
- ----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.48 $38.31 $34.83
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- ----------------------------------------------------------------------------------------------------
Dividend Income $0.0644
- ----------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/06 9/30/05
- ----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.30 $37.03 $33.73
- ----------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/06 9/30/05
- ----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.28 $36.71 $33.43
- ----------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/06 9/30/05
- ----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.48 $38.07 $34.59
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- ----------------------------------------------------------------------------------------------------
Dividend Income $0.0013
- ----------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/06 9/30/05
- ----------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.45 $38.34 $34.89
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- ----------------------------------------------------------------------------------------------------
Dividend Income $0.1518
- ----------------------------------------------------------------------------------------------------
16 | Semiannual Report
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 +10.18% +15.70% +23.65% +107.86%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.86% +9.06% +3.11% +6.95%
- -----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,386 $10,906 $11,652 $19,587
- -----------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.78% +14.82% +19.17% +26.67%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.78% +10.82% +3.22% +3.32%
- -----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,578 $11,082 $11,717 $12,667
- -----------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.78% +14.83% +19.13% +92.77%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.78% +13.83% +3.56% +6.78%
- -----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,878 $11,383 $11,913 $19,277
- -----------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION(1/1/02)
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.06% +15.44% +70.88% +20.83%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +9.06% +14.44% +19.55% +4.56%
- -----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,906 $11,444 $17,088 $12,083
- -----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 4 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.34% +15.99% +25.22% +114.29%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.34% +15.99% +4.60% +7.92%
- -----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,034 $11,599 $12,522 $21,429
- -----------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 17
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 +93.71% and +7.41%.
18 | Semiannual Report
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.
Semiannual Report | 19
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 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,101.80 $4.87
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.29 $4.68
- ----------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,097.80 $8.73
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.40
- ----------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,097.80 $8.73
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.40
- ----------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,100.60 $6.18
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,103.40 $3.57
- ----------------------------------------------------------------------------------------------------------
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:
1.67%; C: 1.67%; 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.
20 | Semiannual Report
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 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, 2006.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +2.46% cumulative total return for the
six months under review. The Fund underperformed its benchmark, the Standard &
Poor's 500 Index (S&P 500), which returned +6.38%; outperformed its other
benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which returned -0.06%;
and underperformed its peers as measured by the Lipper Income Funds
Classification Average, which returned +3.16%, for the same period. 1 You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 27.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2006, the U.S. economy advanced at a
modest pace. In fourth quarter 2005, gross domestic product grew 1.7%
annualized, the slowest pace in nearly three years. This was due to several
factors including declines in vehicle sales and defense spending. Furthermore,
slower export growth combined with greater demand for imported goods and
materials fueled a widening trade deficit. Residential construction and real
estate activity waned as long-term mortgage rates rose, but economic growth
picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed)
indicated that the economy was in transition -- away from one led by
1. Sources: Standard & Poor's Micropal; 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 represents securities that are SEC-registered, taxable and
dollar denominated. The index covers the U.S. investment grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities and asset-backed securities. All issues included must
have at least one year to final maturity and must be rated investment grade
(Baa3 or better) by Moody's Investors Service. They must also be dollar
denominated and nonconvertible. Total return includes price
appreciation/depreciation and income as a percentage of the original investment.
The index is rebalanced monthly by market capitalization. The Lipper Income
Funds Classification Average is calculated by averaging the total returns of all
funds within the Lipper Income Funds classification in the Lipper Open-End
underlying funds universe. Lipper Income Funds are defined as funds that seek a
high level of current income through investing in income-producing stocks, bonds
and money market instruments. For the six-month period ended 3/31/06, there were
322 funds in this category. Lipper calculations do not include sales charges,
but include reinvestment of any income or distributions. The Fund's performance
relative to the average may have differed if these and other factors had been
considered.
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 75.
Semiannual Report | 21
rapid consumer spending, accommodative monetary policy and other fiscal stimulus
toward one led by business investment spending and export trade.
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the
reporting period. Hiring rebounded in many industries and personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential long-term supply disruptions and
strong growth in global demand, especially from China and India. Natural gas
prices rose during the second half of 2005 mainly because of expected rising
demand with the onset of winter; however, they retreated somewhat amid
milder-than-expected weather conditions. Although medical and pharmacy costs
climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the
year under review, which was less than the 2.2% 10-year average. 3
The Fed continued its monetary tightening cycle and raised the federal funds
target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested
more rate increases may be necessary to balance growth with what it saw as
potential inflationary risks of tighter labor and product markets. The effects
of the Fed's credit-tightening campaign cooled the previously hot housing and
real estate markets as the cost of credit grew less attractive to most consumers
who were already dealing with near-record consumer debt burdens and historically
high gas prices.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a six-month total return of +6.40%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small
company stocks outperformed their large-capitalization counterparts by a wide
margin, and technology stocks saw their biggest resurgence since 2003.
Industrials, materials and telecommunications stocks also performed well.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
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. Please see footnote 1 for a description of
the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and
international based common type stocks listed on The NASDAQ Stock Market. The
index is market value weighted and includes more than 3,000 companies.
22 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/05-3/31/06
- ----------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
October 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents
- ----------------------------------------------------------------------------------------------------------------
November 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents
- ----------------------------------------------------------------------------------------------------------------
December 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents
- ----------------------------------------------------------------------------------------------------------------
January 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents
- ----------------------------------------------------------------------------------------------------------------
February 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.14 cents 1.23 cents
- ----------------------------------------------------------------------------------------------------------------
March 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- ----------------------------------------------------------------------------------------------------------------
TOTAL 7.40 CENTS 6.33 CENTS 6.77 CENTS 6.78 CENTS 6.98 CENTS 7.58 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.
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.
MANAGER'S DISCUSSION
During the six months under review, the Fund's weak performance compared with
strong gains experienced in the overall U.S. equity market can be attributed to
several factors. These included the Fund's large weighting in the electric
utilities sector as well as weakness during the period in some energy stocks
after their share prices had appreciated substantially amid hurricane activities
in the summer of 2005. Our emphasis on corporate credit opportunities drove the
Fund's favorable performance relative to the overall fixed income market, as
measured by the LB U.S. Aggregate Index, and helped offset the substantial rise
in long-term interest rates. During the reporting period, the U.S. 10-year
Treasury bond yield rose from 4.34% to 4.86%, which negatively impacted bond
price performance.
Semiannual Report | 23
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
3/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Merck & Co. Inc. 3.5%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Bank of America Corp. 2.3%
FINANCE
- --------------------------------------------------------------------------------
Pfizer Inc. 2.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Fannie Mae, 5.375%, cvt. pfd. 1.8%
FINANCE
- --------------------------------------------------------------------------------
Canadian Oil Sands Trust 1.8%
ENERGY MINERALS
- --------------------------------------------------------------------------------
TOP 5 BOND HOLDINGS*
Franklin Income Fund
3/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
General Motors Acceptance Corp. 4.0%
CONSUMER DURABLES
-------------------------------------------------------------------------------
Ford Motor Credit Corp. 3.3%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Tenet Healthcare Corp. 3.0%
HEALTH SERVICES
- --------------------------------------------------------------------------------
CCH LLC 2.7%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
Qwest 2.3%
COMMUNICATIONS
- --------------------------------------------------------------------------------
*Does not include convertible bonds.
At period-end, we had approximately 51% of the Fund's total net assets invested
in fixed income securities, 46% in equity securities including common stocks and
convertible preferred stocks, and 2.8% in short-term investments and other net
assets. We sought to take advantage of broad fixed income market weakness to add
to existing holdings and initiate new positions in gaming and lodging companies
MGM Mirage and Host Marriott, and defense technology companies L-3
Communications and DRS Technologies. Within the automotive finance sector, we
continued to build positions in General Motors Acceptance Corporation (GMAC) and
Ford Motor Credit, as we believed strategic initiatives designed to improve
liquidity and strengthen core North American operations offset the competitive
and structural challenges faced by their parent companies, General Motors and
Ford Motor.
At the end of the reporting period, the Fund held a significant amount of its
total net assets in noninvestment-grade corporate debt due to our assessment of
the attractive risk-reward tradeoff in a rising rate environment relative to
other fixed income asset classes. During the period, higher coupon payments and
tightening credit spreads fueled high yield bonds' relatively strong
performance, as represented by the +3.58% total return of the LB High Yield
Index relative to the -0.06% total return of the LB U.S. Aggregate Index. 5 The
spread, or incremental yield over benchmark U.S. Treasury securities, dropped
from 3.66 percentage points to 3.27 percentage points. 5 This decline in average
spread, which represents the amount of incremental yield required to compensate
investors for credit risk, helped mitigate the effect of rising interest rates
on the Fund's investments.
The Fund's large weighting in the electric utilities sector hurt Fund
performance. Utilities, as measured by the S&P 500 Utilities Index, had a -6.57%
total return during the six-month period. 6 Poor sector performance largely
resulted from rising long-term interest rates, as dividend yields on utility
stocks have historically maintained a high level of correlation to the bond
market. Typically, we look for opportunities to invest in utility companies that
we believe have the
5. Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The LB High Yield
Index covers the universe of fixed rate, noninvestment-grade debt. The index
includes both corporate and non-corporate sectors. Please see footnote 1 for a
description of the LB U.S. Aggregate Index.
6. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market
capitalization-weighted index that includes electric utility stocks in the S&P
500.
24 | Semiannual Report
potential to grow their dividends at above-average rates, which can help offset
rising interest rates. Fund holdings PG&E and Alliant Energy, successful
examples of this approach, both materially raised their dividends. In December
2005, PG&E announced a dividend 10% above its prior level, and in January 2006,
Alliant declared a dividend 9.5% above its prior stated level. During the
reporting period, PG&E and Alliant delivered total returns of +0.83% and +10%.
Oil and natural gas commodity prices had a negative impact on utility companies,
especially those involved in oil and gas exploration and production. Since the
beginning of the period, natural gas spot prices fell $7 per million British
thermal units (BTUs), from $14 to nearly $7 per million BTUs. Although the Fund
had limited exposure to these types of utilities, this decline hurt some of our
holdings' expected earnings levels. For example, Dominion Resources is a major
operator of exploration and production properties, and the level of profits
expected from these properties declined as natural gas prices fell. As a result,
Dominion had a -18% return for the period.
Despite significant long-term asset value, independent power producer Calpine
sought bankruptcy court protection on December 21, 2005, as its fundamental
conditions failed to improve quickly enough for the company to address its
highly leveraged balance sheet. The default dampened overall Fund performance.
Calpine's convertible and nonconvertible senior unsecured notes fell, but the
decline was partially offset by strength in our second-priority lien secured
notes.
Our holdings in the telecommunication services sector aided Fund performance,
particularly BellSouth (+35%), which surged following the announced merger with
AT&T (+16%). Optimism surrounding sector consolidation and prospects for
improved financial performance that reflected the benefits of scale and network
synergies contributed to strong relative Fund performance. An initiative to
broaden the product platform to include video services offered the potential to
enhance the company's offerings for consumers and improve the company's
financial performance and the sector's competitive position. Within this sector,
Verizon Communications (+7%) also benefited overall Fund performance.
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Corporate Straight Bonds 44.0%
Utilities Stocks 16.2%
Health Technology Stocks 8.5%
Finance Stocks 7.6%
Energy Minerals Stocks 4.9%
U.S. Government & Agency Securities 3.7%
Corporate Convertible Bonds 3.6%
Communications Stocks 3.2%
Non-Energy Minerals Stocks 1.4%
Gas Distributors Stocks 1.3%
Other 2.8%
Short-Term Investments & Other Net Assets 2.8%
Semiannual Report | 25
Thank you for your continued participation in Franklin Income Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Edward Perks
Edward Perks, CFA
[PHOTO OMITTED] /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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
26 | Semiannual Report
PERFORMANCE SUMMARY AS OF 3/31/06
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKINX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.47 $2.50
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0740
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0885
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBICX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.46 $2.49
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0633
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0778
- --------------------------------------------------------------------------------
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.47 $2.50
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0677
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0822
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCISX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.48 $2.51
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0678
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0823
- --------------------------------------------------------------------------------
Semiannual Report | 27
PERFORMANCE SUMMARY (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FISRX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.45 $2.48
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0698
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0843
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.03 $2.46 $2.49
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.0758
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0055
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0090
- --------------------------------------------------------------------------------
TOTAL $0.0903
- --------------------------------------------------------------------------------
28 | 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 +2.46% +7.78% +55.32% +141.23%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.85% +3.15% +8.29% +8.74%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,815 $10,315 $14,890 $23,114
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.58%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.17%
- ---------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION (11/1/01)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.02% +6.89% +50.48% +53.00%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.93% +2.89% +13.83% +9.79%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,807 $10,289 $14,748 $15,100
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.98%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.56%
- ---------------------------------------------------------------------------------------------------------------
CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.20% +7.24% +51.50% +79.78%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.75% +3.24% +8.37% +8.43%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,825 $10,324 $14,950 $17,978
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.30%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.90%
- ---------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.19% +7.19% +51.19% +128.70%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.20% +6.19% +8.62% +8.62%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,120 $10,619 $15,119 $22,870
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.32%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.91%
- ---------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.31% +7.47% +53.02% +51.57%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.32% +6.47% +15.24% +10.30%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,132 $10,647 $15,302 $15,157
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.49%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.05%
- ---------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.55% +7.97% +56.78% +146.29%
- ---------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.55% +7.97% +9.41% +9.43%
- ---------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,255 $10,797 $15,678 $24,629
- ---------------------------------------------------------------------------------------------------------------
Distribution Rate 4 6.00%
- ---------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.56%
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 29
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 WILL BE
AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE
PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF 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 3/31/06.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/06.
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 +124.38% and +9.13%.
30 | 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 | 31
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 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.60 $3.23
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.74 $3.23
- --------------------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,020.20 $7.45
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.55 $7.44
- --------------------------------------------------------------------------------------------------------------------
CLASS B1
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.00 $5.75
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.74
- --------------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,021.90 $5.75
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.74
- --------------------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.10 $4.99
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.00 $4.99
- --------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,025.50 $2.47
- --------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.49 $2.47
- --------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio, net of expense waivers, for
each class (A: 0.64%; B: 1.48%; B1: 1.14%; C: 1.14%; R: 0.99%; and Advisor:
0.49%), multiplied by the average account value over the period, multiplied by
182/365 to reflect the one-half year period.
32 | 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 by investing at least 80% of its net assets in U.S.
government securities. The Fund presently invests substantially all of its
assets in Government National Mortgage Association obligations (Ginnie Maes).
- --------------------------------------------------------------------------------
Since 1983, the Fund has invested predominantly in Ginnie Mae securities, which
carry a guarantee backed by the full faith and credit of the U.S. government as
to the timely payment of interest and principal. 1 Issued by the Government
National Mortgage Association (GNMA), Ginnie Maes have been among the highest
yielding U.S. government obligations available.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 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 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ................................................................... 97.3%
Short-Term Investments & Other Net Assets .............................. 2.7%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin U.S. Government Securities Fund's
semiannual report for the period ended March 31, 2006.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +0.71% cumulative
total return for the six months under review. The Fund outperformed the Lehman
Brothers U.S. Government: Intermediate Index, which returned +0.29%. 2 In
comparison, the Lipper GNMA Funds Classification Average returned +0.55%
1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by
the U.S. government, its agencies or instrumentalities as to timely payment of
principal and interest. The Fund's yield and share price are not guaranteed and
will vary with market conditions.
2. Source: Standard & Poor's Micropal. The Lehman Brothers U.S. Government:
Intermediate 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. Past performance does not guarantee future
results. The index is unmanaged and includes 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 90.
Semiannual Report | 33
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (4/01-3/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A PLOTTED CHART IN THE
PRINTED MATERIAL.]
FOR THE 5-YEAR PERIOD ENDED 3/31/06
RISK RETURN
--------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A 2.67% 4.29%
PAYDEN & RYGEL 1-YEAR U.S. TREASURY BILL 0.76% 2.32%
PAYDEN & RYGEL 10-YEAR U.S. TREASURY NOTE 8.27% 4.46%
PAYDEN & RYGEL 30-YEAR U.S. TREASURY BOND 13.20% 6.72%
--------------------------
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.
for the same period. 3 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 38.
3. Source: The Lipper GNMA Funds Classification Average is calculated by
averaging the total return for all funds within the Lipper GNMA Funds
classification in the Lipper Open-End underlying funds universe for the period
indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA
securities. For the six-month period ended 3/31/06, there were 63 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
index is unmanaged and includes reinvestment of any income or distributions. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
34 | Semiannual Report
ECONOMIC AND MARKET OVERVIEW
The U.S. economy continued to grow during the six months under review. After
gross domestic product growth decelerated from an annualized rate of 4.1% in
third quarter 2005 to 1.7% in the fourth quarter, it rebounded to an estimated
4.8% annualized rate in first quarter 2006. Over the reporting period, nonfarm
payroll data, as well as other indexes, showed growing employment. Consumer
spending increased 6.4% (not adjusted for inflation) in March 2006 compared with
the same month a year earlier, which supported the nation's economic
progress. 4
Business spending also rose during the reporting period, contributing to
economic growth. Historically low interest rates allowed many companies easy
access to capital, and ample cash also helped some companies to support their
spending plans. On the other hand, labor costs accelerated and business
productivity fell unexpectedly during fourth quarter 2005, the first decline in
nearly five years.
Oil prices climbed as high as $68 a barrel during the period. Prices were
elevated partially by concerns about potential long-term supply limitations in
the face of expected strong growth in global demand, especially from China and
India, and the potential for supply disruptions stemming from geopolitical
turmoil in several major oil-producing countries. Sustained high commodity
prices contributed to inflationary pressures, and inflation, while still
subdued, rose somewhat. The Personal Consumption Expenditures (PCE) deflator,
the Federal Reserve Board's (Fed's) preferred measure of inflation, reported
inflation of 2.0% for core prices, and 2.9% overall for the 12 months ended
March 31, 2006. 5 A more widely reported inflation index, the core Consumer
Price Index (CPI), rose 2.1% for the same period. 6
During the six-month reporting period, the Fed raised the federal funds target
rate to 4.75% from 3.75%. In March, at the first meeting of the Fed conducted by
newly appointed Fed Chairman Ben Bernanke, the Fed acknowledged the economy's
strength and mentioned it might still raise rates to balance the risks of
sustainable economic growth and price stability. The market reacted to the
statement by increasing yields (and lowering prices) across intermediate- and
longer-term bonds.
4. Source: Bureau of Economic Analysis.
5. Source: Bureau of Economic Analysis. The chain-type price index (or deflator)
measures the inflation rate for individual expenditures on goods and services as
measured by PCE. The PCE is included in the BEA's report on gross domestic
product. The core PCE deflator excludes food and energy costs.
6. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
Semiannual Report | 35
YIELD COMPARISON
3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Franklin U.S Government Securities Fund - Class A* 4.55%
10-Year Treasury Note* 4.86%
Lipper GNMA Funds Average* 4.18%
Lipper Money Market Funds Average* 3.76%
*Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government
Securities Fund - Class A shares' yield, calculated as required by the SEC, is
based on earnings of the Fund's portfolio for the 30 days ended 3/31/06.
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 Classification Average is an average of the monthly SEC
yields of 48 funds in the Lipper GNMA Funds classification for the 30 days ended
3/31/06. The Lipper Money Market Funds Classification Average is an average of
the monthly SEC yields of 291 funds in the Lipper Money Market Funds
classification for the 30 days ended 3/31/06. Lipper averages do not include
sales charges.
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/05-3/31/06
- -------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
-----------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
October 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.66 cents
- -------------------------------------------------------------------------------------------------------------
November 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents
- -------------------------------------------------------------------------------------------------------------
December 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents
- -------------------------------------------------------------------------------------------------------------
January 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents
- -------------------------------------------------------------------------------------------------------------
February 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.66 cents
- -------------------------------------------------------------------------------------------------------------
March 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents
- -------------------------------------------------------------------------------------------------------------
TOTAL 15.60 CENTS 13.90 CENTS 13.87 CENTS 14.34 CENTS 16.00 CENTS
- -------------------------------------------------------------------------------------------------------------
The 10-year Treasury note fluctuated over the past six months, but overall its
yield rose from 4.34% at the beginning of the period to 4.86% on March 31, 2006.
The yield on the 30-year Treasury rose from 4.57% to 4.89% during the same
period. Short-term interest rates rose more than intermediate- and long-term
rates, and the yield curve flattened as the spread between short-term and
long-term rates generally narrowed and even inverted at some points along the
yield curve.
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.
As the mortgage-backed securities (MBS) market has evolved, we believe technical
research tools have increased in importance. In the GNMA sector, we applied our
proprietary research models seeking to uncover areas of the markets where we
believed prepayment risk may have offered value. For example, during the review
period, rising mortgage rates led to a decline in prepayment
36 | Semiannual Report
risk. As we examined the price difference between securities in the GNMA I and
GNMA II programs, we concluded that the stronger prepayment protection generally
associated with GNMA I MBS was overvalued. 7 This resulted in our increased
weighting in GNMA II MBS by period-end.
Thank you for your continued participation in Franklin U.S. Government
Securities Fund. We welcome your comments and questions and look forward to
serving your investment needs in the years ahead.
[PHOTO 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
7. GNMA I MBS are single-issuer pools. GNMA II MBS are multiple-issuer pools and
can include a range of interest rates. GNMA II securities are generally
considered more geographically diverse than single-issuer pools.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 37
PERFORMANCE SUMMARY AS OF 3/31/06
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUSX) CHANGE 3/31/06 9/30/05
- -------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $6.42 $6.53
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- -------------------------------------------------------------------------------------------------------------
Dividend Income $0.1560
- -------------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/06 9/30/05
- -------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $6.41 $6.52
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- -------------------------------------------------------------------------------------------------------------
Dividend Income $0.1390
- -------------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/06 9/30/05
- -------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $6.39 $6.50
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- -------------------------------------------------------------------------------------------------------------
Dividend Income $0.1387
- -------------------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/06 9/30/05
- -------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.11 $6.42 $6.53
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- -------------------------------------------------------------------------------------------------------------
Dividend Income $0.1434
- -------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/06 9/30/05
- -------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.12 $6.43 $6.55
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- -------------------------------------------------------------------------------------------------------------
Dividend Income $0.1600
- -------------------------------------------------------------------------------------------------------------
38 | 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
INCLUDES MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +0.71% +2.37% +23.38% +73.31%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.57% -1.95% +3.40% +5.20%
- ----------------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.66%
- ----------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.55%
- ----------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +0.45% +1.83% +20.04% +35.67%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.49% -2.07% +3.39% +4.30%
- ----------------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.34%
- ----------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.23%
- ----------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +0.44% +1.84% +20.08% +64.31%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.54% +0.86% +3.73% +5.09%
- ----------------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.36%
- ----------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.22%
- ----------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +0.52% +2.14% +6.26% +16.04%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.47% +1.16% +2.04% +3.57%
- ----------------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.47%
- ----------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.38%
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +0.62% +2.49% +24.08% +75.78%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.62% +2.49% +4.41% +5.80%
- ----------------------------------------------------------------------------------------------------------------
Distribution Rate 3 4.98%
- ----------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.89%
- ----------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 39
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND
MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF
INTEREST RATES. THUS, AS THE PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN
INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated 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 3/31/06.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/06.
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 +66.89% and +5.70%.
40 | 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 | 41
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 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.10 $3.65
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.29 $3.68
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,004.50 $6.25
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.29
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,004.40 $6.20
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24
- -----------------------------------------------------------------------------------------------------------
CLASS R
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,005.20 $5.50
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.54
- -----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,006.20 $3.00
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.94 $3.02
- -----------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.73%; B:
1.25%; C: 1.24%; R: 1.10%; and Advisor: 0.60%), multiplied by the average
account value over the period, multiplied by 182/365 to reflect the one-half
year period.
42 | Semiannual Report
FRANKLIN UTILITIES FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both
capital appreciation and current income by investing at least 80% of its net
assets in public utility industry securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Utilities Fund covers the period ended March
31, 2006.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Utilities Fund - Class A posted a
- -3.97% cumulative total return. The Fund underperformed its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +6.38% for the same
period. 1 The Fund outperformed its narrow benchmark, the S&P 500 Utilities
Index, which had a -6.57% return. 2 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 47.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2006, the U.S. economy advanced at a
modest pace. In fourth quarter 2005, gross domestic product grew 1.7%
annualized, the slowest pace in nearly three years. This was due to several
factors including declines in vehicle sales and defense spending. Furthermore,
slower export growth combined with greater demand for imported goods and
materials fueled a widening trade deficit. Residential construction and real
estate activity waned as long-term mortgage rates rose, but economic growth
picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed)
indicated that the economy was in transition -- away from one led by rapid
consumer spending, accommodative monetary policy and other fiscal stimulus
toward one led by business investment spending and export trade.
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: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market
capitalization-weighted index consisting of all utility stocks in the S&P 500
Index.
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 97.
Semiannual Report | 43
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
Electric Utilities 83.9%
Gas Distributors 11.3%
Diversified Telecommunication Services 3.5%
Oil, Gas & Consumable Fuels 1.1%
Short-Term Investments & Other Net Assets 0.2%
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 4.9% to 4.7%. 3 Labor costs increased during the
reporting period. Hiring rebounded in many industries and personal income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential long-term supply disruptions and
strong growth in global demand, especially from China and India. Natural gas
prices rose during the second half of 2005 mainly because of expected rising
demand with the onset of winter; however, they retreated somewhat amid
milder-than-expected weather conditions. Although medical and pharmacy costs
climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the
year under review, which was less than the 2.2% 10-year average. 4
The Fed continued its monetary tightening cycle and raised the federal funds
target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested
more rate increases may be necessary to balance growth with what it saw as
potential inflationary risks of tighter labor and product markets. The effects
of the Fed's credit-tightening campaign cooled the previously hot housing and
real estate markets as the cost of credit grew less attractive to most consumers
who were already dealing with near-record consumer debt burdens and historically
high gas prices.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a six-month total return of +6.40%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 5 Small
company stocks outperformed their large-capitalization counterparts by a wide
margin, and technology stocks saw their biggest resurgence since 2003.
Industrials, materials and telecommunications stocks also performed well.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
5. 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. Please see footnote 1 for a description of
the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and
international based common type stocks listed on The NASDAQ Stock Market. The
index is market value weighted and includes more than 3,000 companies.
44 | Semiannual Report
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
Much of the utilities sector's negative performance relative to the overall
market can be attributed to a rise in long-term interest rates, as dividend
yields on utility stocks have historically maintained a high level of
correlation to the bond market. The 10-year U.S. Treasury bond's yield increased
from 4.34% to 4.86% during the reporting period. One of the major investment
themes we follow is investing in utility companies we believe can grow their
dividends at above-average rates, which can help offset rising interest rates.
Two successful examples of our holdings that demonstrated material dividend
boosts were PG&E and Alliant Energy. In December 2005, PG&E announced a dividend
that was 10% above its prior level. Alliant declared a dividend in January 2006
that was 9.5% above its prior stated level. During the period, these two
companies were among the Fund's best performers. PG&E's total return was +0.83%
while Alliant's was +10%.
Utilities were also negatively impacted by natural gas commodity prices as
companies involved in oil and gas exploration and production (E&P) depend on
these commodities. Since September 30, 2005, natural gas spot prices fell $7 per
million British thermal units (BTUs), from $14 to $7 per million BTUs. Although
the Fund had limited exposure to these types of utilities, the drop affected
some of our holdings' expected earnings levels. An example is Dominion
Resources, a significant operator of E&P properties. Expected profits from
Dominion's properties declined as natural gas spot prices fell. Dominion's total
return during the period was -18%. Questar is another company with similar
exposure to natural gas commodity prices, and its total return was -20%.
The Fund continued to produce solid results out of its international holdings.
National Grid, a U.K.-based utility, and Gaz de France each appreciated 8%
during the period under review. United Utilities also performed well.
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
3/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Entergy Corp. 4.9%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Exelon Corp. 4.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Dominion Resources Inc. 4.5%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
FirstEnergy Corp. 4.4%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 3.9%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Cinergy Corp. 3.9%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
FPL Group Inc. 3.6%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Edison International 3.4%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
The Southern Co. 3.3%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
PG&E Corp. 3.3%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Semiannual Report | 45
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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
46 | Semiannual Report
PERFORMANCE SUMMARY AS OF 3/31/06
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 that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKUTX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.80 $11.79 $12.59
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.2103
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- --------------------------------------------------------------------------------
TOTAL $0.3017
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.79 $11.78 $12.57
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1799
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- --------------------------------------------------------------------------------
TOTAL $0.2713
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.79 $11.76 $12.55
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1807
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- --------------------------------------------------------------------------------
TOTAL $0.2721
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FRURX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.80 $11.77 $12.57
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1924
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- --------------------------------------------------------------------------------
TOTAL $0.2838
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/06 9/30/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.80 $11.84 $12.64
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/05-3/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.2193
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.0914
- --------------------------------------------------------------------------------
TOTAL $0.3107
- --------------------------------------------------------------------------------
Semiannual Report | 47
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 -3.97% +9.67% +40.51% +125.48%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -8.06% +4.99% +6.11% +8.00%
- --------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,194 $10,499 $13,454 $21,591
- --------------------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.28%
- --------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.18%
- --------------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -4.14% +9.08% +37.03% +57.13%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -7.88% +5.08% +6.19% +6.43%
- --------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,212 $10,508 $13,503 $15,713
- --------------------------------------------------------------------------------------------------------------------
Distribution Rate 4 2.91%
- --------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.81%
- --------------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -4.14% +9.11% +37.10% +114.50%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -5.07% +8.11% +6.51% +7.93%
- --------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,493 $10,811 $13,710 $21,450
- --------------------------------------------------------------------------------------------------------------------
Distribution Rate 4 2.91%
- --------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.81%
- --------------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -4.12% +9.29% +68.33% +43.86%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -5.05% +8.29% +18.96% +8.95%
- --------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,495 $10,829 $16,833 $14,386
- --------------------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.12%
- --------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.97%
- --------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 -3.88% +9.87% +41.62% +131.02%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -3.88% +9.87% +7.21% +8.73%
- --------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $9,612 $10,987 $14,162 $23,102
- --------------------------------------------------------------------------------------------------------------------
Distribution Rate 4 3.56%
- --------------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.48%
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
48 | Semiannual Report
PERFORMANCE SUMMARY (CONTINUED)
ENDNOTES
IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY
COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN
INTEREST RATES FALL, UTILITY SECURITIES PRICES AND THUS A UTILITIES FUND'S SHARE
PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated 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 3/31/06.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/06.
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 +124.04% and +9.12%.
Semiannual Report | 49
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.
50 | 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 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 960.30 $3.76
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.09 $3.88
- ---------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 958.60 $6.20
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.39
- ---------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 958.60 $6.15
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34
- ---------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 958.80 $5.47
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.35 $5.64
- ---------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 961.20 $3.03
- ---------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.84 $3.13
- ---------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.77%; B:
1.27%; C: 1.26%; R: 1.12%; and Advisor: 0.62%), multiplied by the average
account value over the period, multiplied by 182/365 to reflect the one-half
year period.
Semiannual Report | 51
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) a ................ (0.03) (0.01) (0.09) (0.06) 0.03 0.44
Net realized and unrealized gains (losses) .... 1.87 2.98 1.93 4.86 (3.11) (9.70)
---------------------------------------------------------------------------------
Total from investment operations ............... 1.84 2.97 1.84 4.80 (3.08) (9.26)
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... -- -- -- -- (0.29) (0.58)
Tax return of capital ......................... -- -- -- -- (0.02) --
---------------------------------------------------------------------------------
Total distributions ............................ -- -- -- -- (0.31) (0.58)
---------------------------------------------------------------------------------
Redemption fees ................................ -- c -- c -- c -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................. $ 26.82 $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76
=================================================================================
Total return b ................................. 7.37% 13.49% 9.12% 31.23% (16.83)% (32.86)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 665,175 $628,732 $40,120 $558,687 $413,309 $530,074
Ratios to average net assets:
Expenses ...................................... 0.99% d,e 1.00% e 0.97% 1.04% 1.00% 0.95%
Net investment income (loss) .................. (0.26)% d (0.02)% (0.41)% (0.40)% 0.13% 1.93%
Portfolio turnover rate ........................ 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
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 Benefit of expense reduction is less than 0.01%.
52 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
---------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) a ............... (0.13) (0.18) (0.25) (0.25) (0.12) 0.25
Net realized and unrealized gains (losses) ... 1.80 2.90 1.89 4.84 (3.08) (9.62)
---------------------------------------------------------------------------------
Total from investment operations .............. 1.67 2.72 1.64 4.59 (3.20) (9.37)
---------------------------------------------------------------------------------
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 -- c -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 25.82 $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57
=================================================================================
Total return b ................................ 6.92% 12.69% 8.29% 30.20% (17.51)% (33.37)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $21,589 $19,497 $18,824 $10,406 $ 5,066 $ 5,473
Ratios to average net assets:
Expenses ..................................... 1.73% d,e 1.74% e 1.72% 1.79% 1.75% 1.70%
Net investment income (loss) ................. (1.00)% d (0.76)% (1.16)% (1.15)% (.62)% 1.13%
Portfolio turnover rate ....................... 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
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 Benefit of expense reduction is less than 0.01%.
Semiannual Report | See notes to financial statements. | 53
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND (CONTINUED)
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) a ............... (0.12) (0.17) (0.25) (0.25) (0.11) 0.27
Net realized and unrealized gains (losses) ... 1.78 2.86 1.87 4.80 (3.05) (9.50)
-----------------------------------------------------------------------------------
Total from investment operations .............. 1.66 2.69 1.62 4.55 (3.16) (9.23)
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- -- -- -- (0.13) (0.38)
Tax return of capital ........................ -- -- -- -- (0.01) --
-----------------------------------------------------------------------------------
Total distributions ........................... -- -- -- -- (0.14) (0.38)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 25.56 $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34
==================================================================================
Total return b ................................ 6.95% 12.68% 8.27% 30.25% (17.48)% (33.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $79,357 $73,587 $75,642 $66,952 $51,809 $77,204
Ratios to average net assets:
Expenses ..................................... 1.73% d,e 1.74% e 1.72% 1.79% 1.74% 1.70%
Net investment income (loss) ................. (1.00)% d (0.76)% (1.16)% (1.15)% (0.61)% 1.19%
Portfolio turnover rate ....................... 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
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 Benefit of expense reduction is less than 0.01%.
54 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 99.3%
AIR FREIGHT/COURIERS 3.4%
C.H. Robinson Worldwide Inc. .......................................... United States 300,000 $ 14,727,000
United Parcel Service Inc., B ......................................... United States 140,000 11,113,200
-------------
25,840,200
-------------
BIOTECHNOLOGY 9.2%
a Amgen Inc. ............................................................ United States 250,000 18,187,500
a Biogen Idec Inc. ...................................................... United States 100,000 4,710,000
a,b Celgene Corp. ......................................................... United States 80,000 3,537,600
a Charles River Laboratories International Inc. ......................... United States 55,000 2,696,100
a Genentech Inc. ........................................................ United States 275,000 23,240,250
a Gilead Sciences Inc. .................................................. United States 150,000 9,333,000
a Invitrogen Corp. ...................................................... United States 125,000 8,766,250
-------------
70,470,700
-------------
CABLE/SATELLITE TELEVISION 0.3%
a Comcast Corp., A ...................................................... United States 85,000 2,220,200
-------------
CASINOS/GAMING 0.9%
International Game Technology ......................................... United States 200,000 7,044,000
-------------
CHEMICALS: SPECIALTY 1.1%
Sigma-Aldrich Corp. ................................................... United States 125,000 8,223,750
-------------
COMPUTER COMMUNICATIONS 1.4%
a Cisco Systems Inc. .................................................... United States 500,000 10,835,000
-------------
COMPUTER PROCESSING HARDWARE 3.7%
a,b Apple Computer Inc. ................................................... United States 210,000 13,171,200
a Dell Inc. ............................................................. United States 100,000 2,976,000
Hewlett-Packard Co. ................................................... United States 380,000 12,502,000
-------------
28,649,200
-------------
DATA PROCESSING SERVICES 1.6%
Paychex Inc. .......................................................... United States 300,000 12,498,000
-------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 4.6%
a Agilent Technologies Inc. ............................................. United States 300,000 11,265,000
a Dolby Laboratories Inc., A ............................................ United States 100,000 2,090,000
Rockwell Automation Inc. .............................................. United States 250,000 17,977,500
a,c SunPower Corp., A ..................................................... United States 100,000 3,816,000
-------------
35,148,500
-------------
ELECTRONIC PRODUCTION EQUIPMENT 3.5%
Applied Materials Inc. ................................................ United States 350,000 6,128,500
KLA-Tencor Corp. ...................................................... United States 200,000 9,672,000
a Lam Research Corp. .................................................... United States 150,000 6,450,000
a Varian Semiconductor Equipment Associates Inc. ........................ United States 150,000 4,212,000
-------------
26,462,500
-------------
ELECTRONICS/APPLIANCE STORES 1.4%
Best Buy Co. Inc. ..................................................... United States 187,500 10,486,875
-------------
Semiannual Report | 55
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
ELECTRONICS/APPLIANCES 0.3%
Sony Corp., ADR ....................................................... Japan 50,000 $ 2,303,500
-------------
FINANCIAL PUBLISHING/SERVICES 2.2%
Moody's Corp. ......................................................... United States 240,000 17,150,400
-------------
FOOD RETAIL 0.4%
Whole Foods Market Inc. ............................................... United States 40,000 2,657,600
-------------
HOSPITAL/NURSING MANAGEMENT 0.9%
a United Surgical Partners International Inc. ........................... United States 200,000 7,082,000
-------------
INFORMATION TECHNOLOGY SERVICES 2.2%
a,b Amdocs Ltd. ........................................................... United States 20,000 721,200
a Cognizant Technology Solutions Corp., A ............................... United States 150,000 8,923,500
Infosys Technologies Ltd., ADR ........................................ India 90,000 7,007,400
-------------
16,652,100
-------------
INSURANCE BROKERS/SERVICES 0.5%
a ChoicePoint Inc. ...................................................... United States 80,000 3,580,000
-------------
INTERNET SOFTWARE/SERVICES 5.1%
a Google Inc., A ........................................................ United States 50,000 19,500,000
a Yahoo! Inc. ........................................................... United States 600,000 19,356,000
-------------
38,856,000
-------------
INVESTMENT BANKS/BROKERS 1.4%
a Nasdaq Stock Market Inc. .............................................. United States 60,000 2,402,400
a,c NYSE Group Inc. ....................................................... United States 100,000 7,925,000
-------------
10,327,400
-------------
MAJOR PHARMACEUTICALS 2.1%
Johnson & Johnson ..................................................... United States 150,000 8,883,000
Pfizer Inc. ........................................................... United States 300,000 7,476,000
-------------
16,359,000
-------------
MANAGED HEALTH CARE 4.1%
a Caremark Rx Inc. ...................................................... United States 225,000 11,065,500
UnitedHealth Group Inc. ............................................... United States 370,000 20,668,200
-------------
31,733,700
-------------
MEDIA CONGLOMERATES 0.1%
News Corp., B ......................................................... United States 40,000 702,400
-------------
MEDICAL SPECIALTIES 7.6%
Alcon Inc. ............................................................ Switzerland 100,000 10,426,000
a China Medical Technologies Inc., ADR .................................. Cayman Islands 10,000 302,100
Medtronic Inc. ........................................................ United States 275,000 13,956,250
Stryker Corp. ......................................................... United States 200,000 8,868,000
a Varian Medical Systems Inc. ........................................... United States 165,000 9,266,400
a Waters Corp. .......................................................... United States 200,000 8,630,000
a Zimmer Holdings Inc. .................................................. United States 100,000 6,760,000
-------------
58,208,750
-------------
56 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MEDICAL/NURSING SERVICES 1.2%
a VCA Antech Inc. ....................................................... United States 325,000 $ 9,256,000
-------------
MISCELLANEOUS COMMERCIAL SERVICES 1.1%
Corporate Executive Board Co. ......................................... United States 85,000 8,576,500
-------------
MOVIES/ENTERTAINMENT 0.8%
a Pixar ................................................................. United States 100,000 6,414,000
-------------
OILFIELD SERVICES/EQUIPMENT 3.9%
a FMC Technologies Inc. ................................................. United States 100,000 5,122,000
b Halliburton Co. ....................................................... United States 30,000 2,190,600
a National-Oilwell Varco Inc. ........................................... United States 75,000 4,809,000
Schlumberger Ltd. ..................................................... United States 140,000 17,719,800
-------------
29,841,400
-------------
OTHER CONSUMER SERVICES 1.0%
a eBay Inc. ............................................................. United States 200,000 7,812,000
-------------
OTHER PHARMACEUTICALS 2.7%
Allergan Inc. ......................................................... United States 80,000 8,680,000
Teva Pharmaceutical Industries Ltd., ADR .............................. Israel 300,000 12,354,000
-------------
21,034,000
-------------
PACKAGED SOFTWARE 9.2%
Adobe Systems Inc. .................................................... United States 475,000 16,587,000
Autodesk Inc. ......................................................... United States 200,000 7,704,000
Microsoft Corp. ....................................................... United States 950,000 25,849,500
a NAVTEQ ................................................................ United States 200,000 10,130,000
a Salesforce.com Inc. ................................................... United States 50,000 1,816,500
SAP AG, ADR ........................................................... Germany 160,000 8,691,200
-------------
70,778,200
-------------
RECREATIONAL PRODUCTS 1.8%
a Electronic Arts Inc. .................................................. United States 250,000 13,680,000
-------------
SAVINGS BANKS 0.4%
Golden West Financial Corp. ........................................... United States 50,000 3,395,000
-------------
SEMICONDUCTORS 10.1%
Analog Devices Inc. ................................................... United States 310,000 11,869,900
a,b Broadcom Corp., A ..................................................... United States 100,000 4,316,000
Intel Corp. ........................................................... United States 1,150,000 22,252,500
Linear Technology Corp. ............................................... United States 400,000 14,032,000
a Marvell Technology Group Ltd. ......................................... Bermuda 200,000 10,820,000
Microchip Technology Inc. ............................................. United States 210,000 7,623,000
a,b NVIDIA Corp. .......................................................... United States 40,000 2,290,400
Xilinx Inc. ........................................................... United States 155,000 3,946,300
-------------
77,150,100
-------------
SERVICES TO THE HEALTH INDUSTRY 2.3%
a Cerner Corp. .......................................................... United States 40,000 1,898,000
Pharmaceutical Product Development Inc. ............................... United States 350,000 12,113,500
a WebMD Health Corp., A ................................................. United States 85,000 3,539,400
-------------
17,550,900
-------------
Semiannual Report | 57
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
SPECIALTY TELECOMMUNICATIONS 0.1%
a American Tower Corp., A ................................................. United States 20,000 $ 606,400
-------------
TELECOMMUNICATIONS EQUIPMENT 5.6%
a Corning Inc. ............................................................ United States 275,000 7,400,250
Garmin Ltd. ............................................................. Cayman Islands 20,000 1,588,600
Motorola Inc. ........................................................... United States 680,750 15,595,982
Nokia Corp., ADR ........................................................ Finland 315,000 6,526,800
QUALCOMM Inc. ........................................................... United States 225,000 11,387,250
a,b SiRF Technology Holdings Inc. ........................................... United States 20,000 708,200
-------------
43,207,082
-------------
WIRELESS COMMUNICATIONS 1.1%
America Movil SA de CV, L, ADR .......................................... Mexico 210,000 7,194,600
a,b NII Holdings Inc. ....................................................... United States 20,000 1,179,400
-------------
8,374,000
-------------
TOTAL COMMON STOCKS (COST $451,227,095) ................................. 761,167,357
-------------
SHORT TERM INVESTMENTS 1.7%
MONEY MARKET FUND 0.2%
d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% .... United States 1,654,549 1,654,549
-------------
----------------
PRINCIPAL AMOUNT
----------------
e,f INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 1.5%
REPURCHASE AGREEMENTS 1.5%
Banc of America Securities LLC, 4.85%, 4/03/06
(Maturity Value $2,001,077)
Collateralized by U.S. Government Agency Securities, 5.00 - 5.50%,
2/01/34 - 3/01/36 ................................................... United States $2,000,269 2,000,269
Citigroup Global Markets Inc., 4.82%, 4/03/06 (Maturity Value $2,001,071)
Collateralized by gU.S. Government Agency Discount Notes,
7/24/06 - 3/23/28; U.S. Government Agency Securities, 2.00 - 6.25%,
9/14/06 - 4/15/32 ..................................................... United States 2,000,268 2,000,268
Deutsche Bank Securities Inc., 4.87%, 4/03/06 (Maturity Value $2,001,083)
Collateralized by g U.S. Government Agency Discount Notes, 4/06/06;
Collateralized by U.S. Agency Securities, 2.25 - 10.00%,
4/30/06 - 5/15/47 ..................................................... United States 2,000,271 2,000,271
Goldman, Sachs & Co., 4.84%, 4/03/06 (Maturity Value $1,490,801)
Collateralized by U.S. Government Agency Securities, 2.83 - 8.00%,
6/01/09 - 10/01/40 .................................................... United States 1,490,200 1,490,200
JP Morgan Securities, 4.85%, 4/03/06 (Maturity Value $541,292)
Collateralized by U.S. Government Agency Securities, 5.50 - 6.00%,
11/01/34 - 4/01/36 .................................................... United States 541,073 541,073
Merrill Lynch Government Securities Inc., 4.85%, 4/03/06
(Maturity Value $2,001,077)
Collateralized by g U.S. Government Agency Discount Notes,
4/11/06 - 9/08/28; U.S. Government Agency Securities, 1.88 - 7.53%,
4/13/06 - 8/06/38 .................................................... United States 2,000,269 2,000,269
58 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
e,f INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(CONTINUED)
REPURCHASE AGREEMENTS (CONTINUED)
Morgan Stanley & Co. Inc., 4.85%, 4/03/06 (Maturity Value $1,300,700)
Collateralized by g U.S. Government Agency Discount Notes,
1/15/07 - 4/15/30; U.S. Government Agency Securities, 1.75 - 13.00%,
4/11/06 - 11/01/42 .................................................. United States $1,300,175 $ 1,300,175
-------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES .. 11,332,525
-------------
TOTAL SHORT TERM INVESTMENTS (COST $12,987,074) ........................ 12,987,074
-------------
TOTAL INVESTMENTS (COST $464,214,169) 101.0% ........................... 774,154,431
OTHER ASSETS, LESS LIABILITIES (1.0)% .................................. (8,034,041)
-------------
NET ASSETS 100.0% ...................................................... $ 766,120,390
=============
See Selected Portfolio Abbreviations on page 100.
a Non-income producing.
b See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
c A portion or all of the security is on loan as of March 31, 2006. See Note
1(f).
d See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
e See Note 1(f) regarding securities on loan.
f At March 31, 2006, all repurchase agreements had been entered into on that
date.
g A portion or all of the security is traded on a discount basis with no stated
coupon rate.
Semiannual Report | See notes to financial statements. | 59
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income a .............. 0.05 0.13 0.06 0.08 0.07 0.23
Net realized and unrealized gains
(losses) ............................ 3.49 4.20 3.68 4.81 (5.65) (7.26)
-----------------------------------------------------------------------------------------
Total from investment operations ...... 3.54 4.33 3.74 4.89 (5.58) (7.03)
-----------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.06) (0.08) (0.03) (0.04) (0.16) (0.40)
Net realized gains ................... -- -- -- -- (0.05) (1.67)
-----------------------------------------------------------------------------------------
Total distributions ................... (0.06) (0.08) (0.03) (0.04) (0.21) (2.07)
-----------------------------------------------------------------------------------------
Redemption fees ....................... -- c -- c -- c -- -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 38.31 $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81
=========================================================================================
Total return b ........................ 10.18% 14.17% 13.92% 22.27% (20.35)% (20.12)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $1,700,902 $1,567,675 $1,531,871 $1,433,742 $1,249,745 $1,657,387
Ratios to average net assets:
Expenses ............................. 0.93% d,e 0.94% e 0.98% 1.06% 0.96% 0.91%
Net investment income ................ 0.25% d 0.40% 0.20% 0.31% 0.24% 0.69%
Portfolio turnover rate ............... 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
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 Benefit of expense reduction is less than 0.01%.
60 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 2001
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54
------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) a ................ (0.09) (0.11) (0.16) (0.11) (0.14) (0.03)
Net realized and unrealized gains (losses) .... 3.39 4.07 3.61 4.73 (5.57) (7.18)
------------------------------------------------------------------------------
Total from investment operations ............... 3.30 3.96 3.45 4.62 (5.71) (7.21)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... -- -- -- -- -- (0.20)
Net realized gains ............................ -- -- -- -- (0.05) (1.67)
------------------------------------------------------------------------------
Total distributions ............................ -- -- -- -- (0.05) (1.87)
------------------------------------------------------------------------------
Redemption fees ................................ -- c -- c -- c -- -- --
------------------------------------------------------------------------------
Net asset value, end of period ................. $ 37.03 $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46
==============================================================================
Total return b ................................. 9.78% 13.30% 13.11% 21.29% (20.90)% (20.74)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $129,217 $123,926 $121,986 $103,499 $75,141 $66,095
Ratios to average net assets:
Expenses ...................................... 1.67% d,e 1.69% e 1.73% 1.81% 1.71% 1.66%
Net investment income (loss) .................. (0.49)% d (0.35)% (0.55)% (0.44)% (0.51)% (0.10)%
Portfolio turnover rate ........................ 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
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 Benefit of expense reduction is less than 0.01%.
Semiannual Report | See notes to financial statements. | 61
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
---------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) a ............... (0.09) (0.11) (0.16) (0.11) (0.14) (0.02)
Net realized and unrealized gains (losses) ... 3.37 4.03 3.58 4.69 (5.54) (7.13)
---------------------------------------------------------------------------------
Total from investment operations .............. 3.28 3.92 3.42 4.58 (5.68) (7.15)
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ -- -- -- -- -- (0.13)
Net realized gains ........................... -- -- -- -- (0.05) (1.67)
---------------------------------------------------------------------------------
Total distributions ........................... -- -- -- -- (0.05) (1.80)
---------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 36.71 $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24
==================================================================================
Total return b ................................ 9.78% 13.32% 13.11% 21.29% (20.92)% (20.72)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $283,884 $270,538 $270,131 $259,169 $232,307 $310,650
Ratios to average net assets:
Expenses ..................................... 1.67% d,e 1.69%e 1.73% 1.82% 1.70% 1.66%
Net investment income (loss) ................. (0.49)% d (0.35)% (0.55)% (0.45)% (0.51)% (0.06)%
Portfolio turnover rate ....................... 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
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 Benefit of expense reduction is less than 0.01%.
62 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
----------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2005 2004 2003 2002 h
----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 34.59 $ 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) .... 3.48 4.16 3.67 4.81 (9.61)
-------------------------------------------------------------------------------
Total from investment operations ............... 3.48 4.21 3.65 4.81 (9.61)
-------------------------------------------------------------------------------
Less distributions from net investment income .. -- c (0.01) -- (0.05) --
-------------------------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................. $ 38.07 $ 34.59 $ 30.39 $ 26.74 $ 21.98
===============================================================================
Total return b ................................. 10.06% 13.87% 13.65% 21.92% (30.42)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $39,587 $27,818 $20,060 $14,755 $ 2,788
Ratios to average net assets:
Expenses ...................................... 1.18% e,f 1.19% f 1.23% 1.31% 1.21% e
Net investment income (loss) .................. --% e,g 0.15% (0.05)% 0.06% 0.02% e
Portfolio turnover rate ........................ 1.73% 1.16% 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 Includes distribution from net investment income of $0.001.
d Amount is less than $0.01 per share.
e Annualized.
f Benefit of expense reduction is less than 0.01%.
g Rounds to less than 0.01%.
h For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | See notes to financial statements. | 63
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99
------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ....................... 0.09 0.21 0.14 0.14 0.14 0.31
Net realized and unrealized gains (losses) .... 3.51 4.21 3.67 4.82 (5.65) (7.28)
------------------------------------------------------------------------------
Total from investment operations ............... 3.60 4.42 3.81 4.96 (5.51) (6.97)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.15) (0.16) (0.09) (0.11) (0.24) (0.49)
Net realized gains ............................ -- -- -- -- (0.05) (1.67)
------------------------------------------------------------------------------
Total distributions ............................ (0.15) (0.16) (0.09) (0.11) (0.29) (2.16)
------------------------------------------------------------------------------
Redemption fees ................................ -- c -- c -- c -- -- --
------------------------------------------------------------------------------
Net asset value, end of period ................. $ 38.34 $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86
===============================================================================
Total returnb .................................. 10.34% 14.45% 14.19% 22.58% (20.14)% (19.94)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $257,703 $221,752 $133,332 $41,216 $27,431 $32,498
Ratios to average net assets:
Expenses ...................................... 0.68% d,e 0.69% e 0.73% 0.81% 0.71% 0.66%
Net investment income ......................... 0.50% d 0.65% 0.45% 0.56% 0.49% 0.94%
Portfolio turnover rate ........................ 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
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 Benefit of expense reduction is less than 0.01%.
64 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 98.4%
COMMERCIAL SERVICES 2.9%
a Dun & Bradstreet Corp. ............................................ United States 122,000 $ 9,354,960
Equifax Inc. ...................................................... United States 400,000 14,896,000
Moody's Corp. ..................................................... United States 488,000 34,872,480
Robert Half International Inc. .................................... United States 300,000 11,583,000
-------------
70,706,440
-------------
CONSUMER DURABLES 1.7%
Eastman Kodak Co. ................................................. United States 200,000 5,688,000
Ford Motor Co. .................................................... United States 800,000 6,368,000
General Motors Corp. .............................................. United States 350,000 7,444,500
Harley-Davidson Inc. .............................................. United States 400,000 20,752,000
-------------
40,252,500
-------------
CONSUMER NON-DURABLES 2.3%
The Hershey Co. ................................................... United States 516,400 26,971,572
Tootsie Roll Industries Inc. ...................................... United States 23,162 677,940
VF Corp. .......................................................... United States 500,000 28,450,000
-------------
56,099,512
-------------
CONSUMER SERVICES 4.6%
Carnival Corp. .................................................... United States 500,000 23,685,000
CBS Corp., A ...................................................... United States 100,000 2,410,000
CBS Corp., B ...................................................... United States 50,000 1,199,000
Clear Channel Communications Inc. ................................. United States 500,000 14,505,000
a Expedia Inc. ...................................................... United States 300,100 6,083,027
Fairmont Hotels & Resorts Inc. .................................... Canada 125,000 5,587,500
a Live Nation Inc. .................................................. United States 62,500 1,240,000
Time Warner Inc. .................................................. United States 1,350,000 22,666,500
a Viacom Inc., A .................................................... United States 100,000 3,876,000
a Viacom Inc., B .................................................... United States 50,000 1,940,000
The Walt Disney Co. ............................................... United States 1,000,000 27,890,000
-------------
111,082,027
-------------
DISTRIBUTION SERVICES 3.2%
Cardinal Health Inc. .............................................. United States 300,000 22,356,000
Genuine Parts Co. ................................................. United States 375,400 16,453,782
W.W. Grainger Inc. ................................................ United States 500,000 37,675,000
-------------
76,484,782
-------------
ELECTRONIC TECHNOLOGY 21.4%
a Agilent Technologies Inc. ......................................... United States 400,000 15,020,000
a Apple Computer Inc. ............................................... United States 1,000,000 62,720,000
The Boeing Co. .................................................... United States 1,000,000 77,930,000
a Cisco Systems Inc. ................................................ United States 1,350,000 29,254,500
a Conexant Systems Inc. ............................................. United States 300,000 1,035,000
a Dell Inc. ......................................................... United States 500,000 14,880,000
a Dionex Corp. ...................................................... United States 250,000 15,370,000
a EMC Corp. ......................................................... United States 1,000,000 13,630,000
a Entegris Inc. ..................................................... United States 376,307 4,003,907
a Gateway Inc. ...................................................... United States 300,000 657,000
Semiannual Report | 65
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
General Dynamics Corp. ............................................ United States 1,000,000 $ 63,980,000
Hewlett-Packard Co. ............................................... United States 1,116,250 36,724,625
Intel Corp. ....................................................... United States 800,000 15,480,000
Lockheed Martin Corp. ............................................. United States 500,000 37,565,000
a Micrel Inc. ....................................................... United States 25,000 370,500
a Mindspeed Technologies Inc. ....................................... United States 100,000 398,000
Northrop Grumman Corp. ............................................ United States 1,000,000 68,290,000
Raytheon Co. ...................................................... United States 600,000 27,504,000
Rockwell Collins Inc. ............................................. United States 100,000 5,635,000
a Sun Microsystems Inc. ............................................. United States 1,600,000 8,208,000
Texas Instruments Inc. ............................................ United States 515,000 16,722,050
-------------
515,377,582
-------------
ENERGY MINERALS 2.6%
BP PLC, ADR ....................................................... United Kingdom 295,200 20,351,088
EnCana Corp. ...................................................... Canada 559,000 26,122,070
Royal Dutch Shell PLC, A, ADR ..................................... United Kingdom 280,000 17,432,800
-------------
63,905,958
-------------
FINANCE 0.3%
a ChoicePoint Inc. .................................................. United States 160,000 7,160,000
-------------
HEALTH SERVICES 1.9%
a Caremark Rx Inc. .................................................. United States 75,625 3,719,237
IMS Health Inc. ................................................... United States 500,000 12,885,000
a Medco Health Solutions Inc. ....................................... United States 48,240 2,760,293
Quest Diagnostics Inc. ............................................ United States 500,000 25,650,000
-------------
45,014,530
-------------
HEALTH TECHNOLOGY 20.9%
Abbott Laboratories ............................................... United States 400,000 16,988,000
a Advanced Medical Optics Inc. ...................................... United States 88,888 4,145,736
Allergan Inc. ..................................................... United States 400,000 43,400,000
a Amgen Inc. ........................................................ United States 932,000 67,803,000
Baxter International Inc. ......................................... United States 400,000 15,524,000
a Biogen Idec Inc. .................................................. United States 400,000 18,840,000
a Edwards Lifesciences Corp. ........................................ United States 50,000 2,175,000
Eli Lilly and Co. ................................................. United States 400,000 22,120,000
a Genentech Inc. .................................................... United States 1,000,000 84,510,000
a Hospira Inc. ...................................................... United States 40,000 1,578,400
Johnson & Johnson ................................................. United States 996,000 58,983,120
Merck & Co. Inc. .................................................. United States 500,000 17,615,000
a Millipore Corp. ................................................... United States 400,000 29,224,000
Pall Corp. ........................................................ United States 500,000 15,595,000
Pfizer Inc. ....................................................... United States 2,000,000 49,840,000
a Waters Corp. ...................................................... United States 500,000 21,575,000
Wyeth ............................................................. United States 600,000 29,112,000
a Zimmer Holdings Inc. .............................................. United States 64,000 4,326,400
-------------
503,354,656
-------------
66 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
PROCESS INDUSTRIES 1.9%
Air Products and Chemicals Inc. ................................... United States 500,000 $ 33,595,000
Sigma-Aldrich Corp. ............................................... United States 200,000 13,158,000
-------------
46,753,000
-------------
PRODUCER MANUFACTURING 19.4%
3M Co. ............................................................ United States 800,000 60,552,000
American Power Conversion Corp. ................................... United States 500,000 11,555,000
Avery Dennison Corp. .............................................. United States 462,000 27,017,760
Emerson Electric Co. .............................................. United States 500,000 41,815,000
Illinois Tool Works Inc. .......................................... United States 500,000 48,155,000
Ingersoll-Rand Co. Ltd., A ........................................ United States 1,002,000 41,873,580
Johnson Controls Inc. ............................................. United States 400,000 30,372,000
Molex Inc. ........................................................ United States 146,483 4,863,235
Molex Inc., A ..................................................... United States 146,483 4,353,475
Teleflex Inc. ..................................................... United States 500,000 35,815,000
Textron Inc. ...................................................... United States 525,000 49,029,750
a Thomas & Betts Corp. .............................................. United States 500,000 25,690,000
Tyco International Ltd. ........................................... United States 1,550,052 41,665,398
United Technologies Corp. ......................................... United States 800,000 46,376,000
-------------
469,133,198
-------------
RETAIL TRADE 0.4%
a IAC/InterActiveCorp ............................................... United States 300,100 8,843,947
-------------
TECHNOLOGY SERVICES 9.3%
Automatic Data Processing Inc. .................................... United States 800,000 36,544,000
a Computer Sciences Corp. ........................................... United States 1,000,000 55,550,000
International Business Machines Corp. ............................. United States 560,000 46,183,200
Microsoft Corp. ................................................... United States 1,000,000 27,210,000
a Oracle Corp. ...................................................... United States 500,000 6,845,000
a Yahoo! Inc. ....................................................... United States 1,600,000 51,616,000
-------------
223,948,200
-------------
TRANSPORTATION 5.6%
Air France-KLM, ADR ............................................... France 550,000 13,013,000
a Air France-KLM, ADR, wts., 11/05/07 ............................... France 500,000 1,070,000
a Alaska Air Group Inc. ............................................. United States 500,000 17,725,000
a AMR Corp. ......................................................... United States 1,080,000 29,214,000
a British Airways PLC, ADR .......................................... United Kingdom 500,000 30,685,000
a Continental Airlines Inc., B ...................................... United States 500,000 13,450,000
Southwest Airlines Co. ............................................ United States 65,200 1,172,948
Union Pacific Corp. ............................................... United States 300,000 28,005,000
-------------
134,334,948
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $905,146,785) .............. 2,372,451,280
-------------
Semiannual Report | 67
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $42,504,493) 1.8%
MONEY MARKET FUND 1.8%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ... United States 42,504,493 $ 42,504,493
--------------
TOTAL INVESTMENTS (COST $947,651,278) 100.2% ........................... 2,414,955,773
OTHER ASSETS, LESS LIABILITIES (0.2)% .................................. (3,662,423)
--------------
NET ASSETS 100.0% ...................................................... $2,411,293,350
==============
See Selected Portfolio Abbreviations on page 100.
a Non-income producing.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
68 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
-------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning
of period ........................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35
-------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ............. 0.07 0.14 0.12 0.14 0.14 0.17
Net realized and unrealized gains
(losses) ........................... (0.02) 0.10 0.22 0.38 (0.21) (0.15)
-------------------------------------------------------------------------------------------
Total from investment operations ..... 0.05 0.24 0.34 0.52 (0.07) 0.02
-------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.07) (0.15) (0.16) (0.16) (0.17) (0.18)
Net realized gains .................. (0.01) (0.01) (0.01) (0.01) (0.02) (0.03)
-------------------------------------------------------------------------------------------
Total distributions .................. (0.08) (0.16) (0.17) (0.17) (0.19) (0.21)
-------------------------------------------------------------------------------------------
Redemption fees ...................... -- c -- c -- c -- -- --
-------------------------------------------------------------------------------------------
Net asset value, end of period ....... $ 2.47 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16
===========================================================================================
Total return b ....................... 2.46% 10.45% 15.50% 28.12% (4.18)% 0.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $23,576,919 $21,934,575 $14,743,190 $9,640,156 $6,001,117 $5,960,990
Ratios to average net assets:
Expenses ............................ 0.64% d,e 0.65% e 0.68% 0.73% 0.72% 0.73%
Net investment income ............... 5.51% d 5.54% 5.11% 6.63% 6.67% 7.54%
Portfolio turnover rate .............. 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
Semiannual Report | See notes to financial statements. | 69
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 f
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ........................ 0.06 0.11 0.10 0.12 0.11
Net realized and unrealized gains (losses) ..... (0.02) 0.11 0.22 0.37 (0.21)
--------------------------------------------------------------------------------
Total from investment operations ................ 0.04 0.22 0.32 0.49 (0.10)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.06) (0.13) (0.14) (0.14) (0.13)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.01) (0.02)
--------------------------------------------------------------------------------
Total distributions ............................. (0.07) (0.14) (0.15) (0.15) (0.15)
--------------------------------------------------------------------------------
Redemption fees ................................. -- c -- c -- c -- --
--------------------------------------------------------------------------------
Net asset value, end of period .................. $ 2.46 $ 2.49 $ 2.41 $ 2.24 $ 1.90
================================================================================
Total return b .................................. 2.02% 9.57% 14.59% 26.58% (5.63)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $3,718,146 $3,922,396 $3,486,880 $2,083,783 $558,580
Ratios to average net assets:
Expenses ....................................... 1.48% d,e 1.50% e 1.53% 1.58% 1.57% d
Net investment income .......................... 4.67%d 4.69% 4.26% 5.78% 6.01% d
Portfolio turnover rate ......................... 17.89% 28.51% 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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
f For the period November 1, 2001 (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, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B1 (UNAUDITED) 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ........................ 0.06 0.12 0.11 0.13 0.13 0.16
Net realized and unrealized gains (losses) ..... (0.01) 0.11 0.21 0.38 (0.22) (0.14)
---------------------------------------------------------------------------------
Total from investment operations ................ 0.05 0.23 0.32 0.51 (0.09) 0.02
---------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.07) (0.14) (0.14) (0.15) (0.16) (0.17)
Net realized gains ............................. (0.01) (0.01) (0.01) (0.01) (0.02) (0.03)
---------------------------------------------------------------------------------
Total distributions ............................. (0.08) (0.15) (0.15) (0.16) (0.18) (0.20)
---------------------------------------------------------------------------------
Redemption fees ................................. -- c -- c -- c -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period .................. $ 2.47 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17
=================================================================================
Total return b .................................. 2.20% 9.90% 14.90% 27.51% (4.66)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 462,529 $493,063 $511,471 $495,004 $430,226 $446,245
Ratios to average net assets:
Expenses ....................................... 1.14% d,e 1.15% e 1.18% 1.23% 1.22% 1.23%
Net investment income .......................... 5.01% d 5.04% 4.61% 6.13% 6.15% 7.02%
Portfolio turnover rate ......................... 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
Semiannual Report | See notes to financial statements. | 71
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning
of period ............................ $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income a .............. 0.06 0.13 0.11 0.13 0.13 0.16
Net realized and unrealized gains
(losses) ............................ (0.01) 0.10 0.21 0.38 (0.21) (0.15)
------------------------------------------------------------------------------------------
Total from investment operations ...... 0.05 0.23 0.32 0.51 (0.08) 0.01
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.07) (0.14) (0.14) (0.15) (0.16) (0.17)
Net realized gains ................... (0.01) (0.01) (0.01) (0.01) (0.02) (0.03)
------------------------------------------------------------------------------------------
Total distributions ................... (0.08) (0.15) (0.15) (0.16) (0.18) (0.20)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- c -- c -- c -- -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 2.48 $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17
==========================================================================================
Total return b ........................ 2.19% 9.84% 14.85% 27.37% (4.64)% 0.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $10,695,121 $10,113,365 $6,616,891 $3,764,372 $1,545,377 $1,080,315
Ratios to average net assets:
Expenses ............................. 1.14% d,e 1.15% e 1.18% 1.24% 1.21% 1.23%
Net investment income ................ 5.01% d 5.04% 4.61% 6.12% 6.21% 7.04%
Portfolio turnover rate ............... 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
72 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2005 2004 2003 2002 f
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18
---------------------------------------------------------------------------
Income from investment operations:
Net investment income a ...................... 0.06 0.13 0.11 0.13 0.10
Net realized and unrealized gains (losses) ... (0.01) 0.10 0.22 0.37 (0.27)
---------------------------------------------------------------------------
Total from investment operations .............. 0.05 0.23 0.33 0.50 (0.17)
---------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.07) (0.14) (0.15) (0.15) (0.12)
Net realized gains ........................... (0.01) (0.01) (0.01) (0.01) --
---------------------------------------------------------------------------
Total distributions ........................... (0.08) (0.15) (0.16) (0.16) (0.12)
---------------------------------------------------------------------------
Redemption fees ............................... -- c -- c --c -- --
---------------------------------------------------------------------------
Net asset value, end of period ................ $ 2.45 $ 2.48 $ 2.40 $ 2.23 $ 1.89
===========================================================================
Total return b ................................ 2.31% 10.15% 15.25% 27.31% (8.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 149,450 $122,222 $73,165 $36,417 $6,350
Ratios to average net assets:
Expenses ..................................... 0.99% d,e 1.00% e 1.03% 1.08% 1.07% d
Net investment income ........................ 5.16% d 5.19% 4.76% 6.28% 6.77% d
Portfolio turnover rate ....................... 17.89% 28.51% 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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | See notes to financial statements. | 73
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ....................... 0.07 0.14 0.12 0.14 0.14 0.18
Net realized and unrealized gains (losses) .... (0.01) 0.11 0.22 0.38 (0.22) (0.15)
--------------------------------------------------------------------------------
Total from investment operations ............... 0.06 0.25 0.34 0.52 (0.08) 0.03
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.08) (0.16) (0.16) (0.16) (0.17) (0.18)
Net realized gains ............................ (0.01) (0.01) (0.01) (0.01) (0.02) (0.03)
--------------------------------------------------------------------------------
Total distributions ............................ (0.09) (0.17) (0.17) (0.17) (0.19) (0.21)
--------------------------------------------------------------------------------
Redemption fees ................................ -- c -- c -- c -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................. $ 2.46 $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16
================================================================================
Total return b ................................. 2.55% 10.65% 15.74% 28.47% (4.50)% 1.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $2,954,826 $2,280,318 $901,149 $95,009 $30,737 $22,737
Ratios to average net assets:
Expenses ...................................... 0.49% d,e 0.50% e 0.53% 0.58% 0.57% 0.58%
Net investment income ......................... 5.66% d 5.69% 5.26% 6.78% 6.85% 7.69%
Portfolio turnover rate ........................ 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
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 Benefit of waiver and payment by affiliate and expense reduction is less than
0.01%.
74 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.2%
COMMON STOCKS AND WARRANTS 37.7%
COMMUNICATIONS 3.2%
AT&T Inc. .......................................................... United States 20,000,000 $ 540,800,000
BellSouth Corp. .................................................... United States 12,000,000 415,800,000
Verizon Communications Inc. ........................................ United States 11,000,000 374,660,000
a XO Holdings Inc., wts., A, 1/16/10 ................................. United States 53,846 24,231
a XO Holdings Inc., wts., B, 1/16/10 ................................. United States 40,386 16,154
a XO Holdings Inc., wts., C, 1/16/10 ................................. United States 40,386 10,097
--------------
1,331,310,482
--------------
ELECTRIC UTILITIES 16.0%
Alliant Energy Corp. ............................................... United States 4,527,770 142,488,922
Ameren Corp. ....................................................... United States 9,500,000 473,290,000
American Electric Power Co. Inc. ................................... United States 8,633,800 293,721,876
CenterPoint Energy Inc. ............................................ United States 6,000,000 71,580,000
Cinergy Corp. ...................................................... United States 8,900,000 404,149,000
Consolidated Edison Inc. ........................................... United States 3,500,000 152,250,000
Dominion Resources Inc. ............................................ United States 8,500,000 586,755,000
DTE Energy Co. ..................................................... United States 5,270,000 211,274,300
Duke Energy Corp. .................................................. United States 7,000,000 204,050,000
Energy East Corp. .................................................. United States 4,530,000 110,079,000
Entergy Corp. ...................................................... United States 4,500,000 310,230,000
Exelon Corp. ....................................................... United States 300,000 15,870,000
FirstEnergy Corp. .................................................. United States 14,000,000 684,600,000
FPL Group Inc. ..................................................... United States 7,500,000 301,050,000
Hawaiian Electric Industries Inc. .................................. United States 1,720,000 46,663,600
NSTAR .............................................................. United States 31,000 886,910
Pepco Holdings Inc. ................................................ United States 4,900,000 111,671,000
PG&E Corp. ......................................................... United States 12,250,000 476,525,000
Pinnacle West Capital Corp. ........................................ United States 5,000,000 195,500,000
PPL Corp. .......................................................... United States 4,300,400 126,431,760
Progress Energy Inc. ............................................... United States 8,600,000 378,228,000
Public Service Enterprise Group Inc. ............................... United States 6,023,560 385,748,782
b Puget Energy Inc. .................................................. United States 7,500,000 158,850,000
The Southern Co. ................................................... United States 17,000,000 557,090,000
TECO Energy Inc. ................................................... United States 9,000,000 145,080,000
TXU Corp. .......................................................... United States 40,800 1,826,208
Xcel Energy Inc. ................................................... United States 4,500,000 81,675,000
--------------
6,627,564,358
--------------
ENERGY MINERALS 4.1%
BP PLC, ADR ........................................................ United Kingdom 3,500,000 241,290,000
Callon Petroleum Co. ............................................... United States 777,114 16,334,936
b Canadian Oil Sands Trust ........................................... Canada 5,300,000 760,676,515
Chevron Corp. ...................................................... United States 7,500,000 434,775,000
Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 4,000,000 249,040,000
--------------
1,702,116,451
--------------
Semiannual Report | 75
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND WARRANTS (CONTINUED)
FINANCE 4.9%
Bank of America Corp. ................................................. United States 21,000,000 $ 956,340,000
Fifth Third Bancorp ................................................... United States 6,750,000 265,680,000
Freddie Mac ........................................................... United States 5,000,000 305,000,000
JPMorgan Chase & Co. .................................................. United States 12,000,000 499,680,000
Montpelier Re Holdings Ltd. ........................................... Bermuda 1,800,000 29,340,000
---------------
2,056,040,000
---------------
GAS DISTRIBUTORS 1.3%
Atmos Energy Corp. .................................................... United States 2,235,000 58,847,550
NiSource Inc. ......................................................... United States 5,000,000 101,100,000
ONEOK Inc. ............................................................ United States 3,996,700 128,893,575
Sempra Energy ......................................................... United States 5,164,000 239,919,440
---------------
528,760,565
---------------
HEALTH TECHNOLOGY 7.2%
Bristol-Myers Squibb Co. .............................................. United States 17,000,000 418,370,000
Eli Lilly and Co. ..................................................... United States 3,336,100 184,486,330
Merck & Co. Inc. ...................................................... United States 41,500,000 1,462,045,000
Pfizer Inc. ........................................................... United States 38,000,000 946,960,000
---------------
3,011,861,330
---------------
NON-ENERGY MINERALS 0.9%
AngloGold Ashanti Ltd., ADR ........................................... South Africa 2,250,000 121,770,000
Barrick Gold Corp. .................................................... Canada 4,000,000 108,960,000
Southern Copper Corp. ................................................. United States 1,650,600 139,442,688
---------------
370,172,688
---------------
PROCESS INDUSTRIES 0.1%
Lyondell Chemical Co. ................................................. United States 3,000,000 59,700,000
---------------
TOTAL COMMON STOCKS AND WARRANTS (COST $13,180,325,417) ............... 15,687,525,874
---------------
PREFERRED STOCK (COST $57,833,250) 0.0% c
PROCESS INDUSTRIES 0.0% c
d,e,f Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ................... Indonesia 75,000,000 817,500
---------------
CONVERTIBLE PREFERRED STOCKS 8.2%
CONSUMER DURABLES 0.1%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ..................... United States 1,500,000 45,075,000
---------------
CONSUMER NON-DURABLES 0.2%
Lehman Brothers Holdings Inc. into General Mills, 6.25%,
cvt. pfd. ........................................................... United States 3,750,000 100,312,500
---------------
ELECTRIC UTILITIES 0.2%
CMS Energy Trust I, 7.75%, cvt. pfd. .................................. United States 1,508,000 73,892,000
---------------
ELECTRONIC TECHNOLOGY 0.9%
Citigroup Funding Inc. into Altera Corp., 7.00%, cvt. pfd.............. United States 5,000,000 99,918,000
Goldman Sachs Group into Applied Materials Inc., 7.35%,
cvt. pfd. ............................................................ United States 5,500,000 97,064,000
76 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
g Morgan Stanley into Intel Corp., 7.40%, cvt. pfd., 144A ................. United States 6,500,000 $ 130,292,500
Morgan Stanley into Network Appliance Inc., 7.25%, cvt. pfd. ............ United States 2,000,000 54,530,000
--------------
381,804,500
--------------
ENERGY MINERALS 0.8%
g Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ......................... United States 900,000 95,400,000
g Deutsche Bank AG into ConocoPhillips, 8.50%, cvt. pfd., 144A ............ United States 2,500,000 159,105,750
g Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A .......... United States 900,000 54,202,500
--------------
308,708,250
--------------
FINANCE 2.7%
E*TRADE Financial Corp., 6.125%, cvt. pfd. .............................. United States 2,500,000 86,625,000
Fannie Mae, 5.375%, cvt. pfd. ........................................... United States 8,000 768,542,000
MetLife Inc., 6.375%, cvt. pfd. ......................................... United States 6,400,000 173,600,000
Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. ....................... United States 1,510,000 96,405,950
--------------
1,125,172,950
--------------
HEALTH TECHNOLOGY 1.3%
Goldman Sachs Group Inc. into Wyeth, 6.25%, cvt. pfd. ................... United States 2,210,000 105,920,880
Morgan Stanley into Forest Laboratories Inc., 6.25%, cvt. pfd. .......... United States 1,360,000 60,635,600
Schering-Plough Corp., 6.00%, cvt. pfd. ................................. United States 7,401,000 375,822,780
--------------
542,379,260
--------------
INDUSTRIAL SERVICES 0.8%
El Paso Corp., 4.99%, cvt. pfd. ......................................... United States 130,000 142,575,810
g Morgan Stanley into Williams Cos. Inc., 8.50%, cvt. pfd., 144A........... United States 4,000,000 86,420,000
g,h Wachovia Bank into El Paso, 9.05%, cvt. pfd., 144A....................... United States 8,200,000 99,302,000
--------------
328,297,810
--------------
NON-ENERGY MINERALS 0.5%
Freeport-McMoRan Copper & Gold Inc., 5.50%, cvt. pfd. ................... United States 43,300 55,624,263
Lehman Brothers Holdings Inc. into Alcoa Inc., 6.50%, cvt. pfd. ........ United States 4,600,000 139,955,000
--------------
195,579,263
--------------
PROCESS INDUSTRIES 0.1%
Lehman Brothers Holdings Inc. into Lyondell Chemical, 8.00%,
cvt. pfd. .............................................................. United States 3,000,000 59,700,000
--------------
PRODUCER MANUFACTURING 0.2%
Goldman Sachs Group into Tyco International Ltd., 7.00%,
cvt. pfd. .............................................................. United States 3,000,000 82,377,000
--------------
REAL ESTATE INVESTMENT TRUSTS 0.4%
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .......................... United States 3,000,000 75,000,000
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ...................... United States 1,333,590 33,286,506
Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .................. United States 1,200,000 55,428,000
--------------
163,714,506
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,336,083,374) ................ 3,407,013,039
--------------
Semiannual Report | 77
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS 44.0%
ALTERNATIVE POWER GENERATION 2.2%
d,e Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 ............... Canada $ 436,000,000 $ 261,600,000
d,e Calpine Corp.,
senior note, 7.875%, 4/01/08 .......................................... United States 101,818,000 62,108,980
senior note, 8.625%, 8/15/10 .......................................... United States 221,000,000 89,505,000
senior note, 8.50%, 2/15/11 ........................................... United States 90,000,000 36,900,000
g senior secured note, 144A, 8.50%, 7/15/10 ............................. United States 325,000,000 299,812,500
g senior secured note, 144A, 9.875%, 12/01/11 ........................... United States 30,000,000 27,525,000
g senior secured note, 144A, 8.75%, 7/15/13 ............................. United States 140,000,000 129,150,000
--------------
906,601,480
--------------
COMMERCIAL SERVICES 1.5%
Dex Media Inc.,
senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter,
11/15/13 ............................................................ United States 60,000,000 51,000,000
zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ..................... United States 210,000,000 178,500,000
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07,
10.67% thereafter, 5/15/13 .............................................. United States 156,000,000 135,720,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ............... United States 84,000,000 86,625,000
g R.H. Donnelley Corp.,
senior disc. note, 144A, 6.875%, 1/15/13 .............................. United States 110,700,000 104,058,000
senior note, 144A, 8.875%, 1/15/16 .................................... United States 47,600,000 49,742,000
--------------
605,645,000
--------------
COMMUNICATIONS 2.6%
Qwest Capital Funding Inc.,
7.00%, 8/03/09 ........................................................ United States 300,000,000 306,000,000
7.25%, 2/15/11 ........................................................ United States 365,000,000 371,843,750
Qwest Communications International Inc., senior note, 7.50%,
2/15/14 ................................................................. United States 250,000,000 258,750,000
Qwest Corp., 6.875%, 9/15/33 ............................................. United States 30,000,000 28,950,000
Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 ........... United States 50,600,000 54,521,500
Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 .................. United States 43,000,000 45,418,750
--------------
1,065,484,000
--------------
CONSUMER DURABLES 9.9%
Ford Motor Co., 7.45%, 7/16/31 ........................................... United States 660,000,000 493,350,000
Ford Motor Credit Co.,
7.375%, 10/28/09 ...................................................... United States 450,000,000 423,382,050
7.875%, 6/15/10 ....................................................... United States 355,000,000 333,089,400
7.375%, 2/01/11 ....................................................... United States 450,000,000 414,390,600
7.00%, 10/01/13 ....................................................... United States 120,000,000 107,479,080
senior note, 7.25%, 10/25/11 .......................................... United States 120,000,000 109,468,560
General Motors Acceptance Corp.,
5.625%, 5/15/09 ....................................................... United States 125,000,000 116,407,375
7.75%, 1/19/10 ........................................................ United States 420,000,000 409,833,900
6.875%, 9/15/11 ....................................................... United States 800,000,000 746,485,600
6.875%, 8/28/12 ....................................................... United States 300,400,000 277,470,168
6.75%, 12/01/14 ....................................................... United States 125,000,000 112,703,250
General Motors Corp., senior deb., 8.375%, 7/15/33 ....................... United States 485,000,000 357,687,500
78 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
Hovnanian K Enterprises Inc., senior note, 7.50%, 5/15/16 ............... United States $ 45,000,000 $ 44,588,925
KB Home,
6.375%, 8/15/11 ..................................................... United States 15,000,000 14,793,585
senior note, 5.75%, 2/01/14 ......................................... United States 35,000,000 32,171,720
h senior note, 7.25%, 6/15/18 ......................................... United States 70,500,000 69,713,361
g Visant Holding Corp., senior note, 144A, 8.75%, 12/01/13 ................ United States 50,000,000 48,002,500
--------------
4,111,017,574
--------------
CONSUMER SERVICES 6.6%
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............... United States 440,000,000 431,200,000
CCH I Holdings LLC, senior note,
13.50%, 1/15/14 ..................................................... United States 329,000,000 203,980,000
9.92%, 4/01/14 ...................................................... United States 117,380,000 59,863,800
zero cpn. to 5/15/06, 11.75% thereafter, 5/15/14 .................... United States 195,000,000 102,375,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 ........................ United States 850,000,000 710,812,500
CCH II LLC, senior note, 10.25%, 9/15/10 ................................ United States 50,600,000 49,967,500
Clear Channel Communications Inc.,
5.50%, 9/15/14 ...................................................... United States 125,000,000 115,690,000
senior note, 5.75%, 1/15/13 ......................................... United States 10,000,000 9,531,410
CSC Holdings Inc.,
senior deb., 7.625%, 7/15/18 ........................................ United States 27,000,000 26,831,250
senior note, B, 7.625%, 4/01/11 ...................................... United States 200,000,000 202,000,000
DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ...................... United States 25,300,000 25,110,250
g EchoStar DBS Corp., senior note, 144A, 7.125%, 2/01/16 .................. United States 360,000,000 355,950,000
g Hertz Corp.,
senior note, 144A, 8.875%, 1/01/14 .................................. United States 67,950,000 70,837,875
senior sub. note, 144A, 10.50%, 1/01/16 ............................. United States 25,000,000 27,250,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 ........................ United States 148,000,000 138,366,680
MGM MIRAGE Inc., senior note,
6.625%, 7/15/15 ..................................................... United States 100,000,000 98,875,000
g,h 144A, 6.75%, 4/01/13 ................................................ United States 60,000,000 60,000,000
g Quebecor Media Inc., senior note, 144A, 7.75%, 3/15/16 .................. Canada 19,675,000 20,314,437
Six Flags Inc., senior note, 9.625%, 6/01/14 ............................ United States 35,000,000 35,437,500
--------------
2,744,393,202
--------------
ELECTRIC UTILITIES 2.8%
Aquila Inc., senior note, 14.875%, 7/01/12 .............................. United States 95,400,000 129,505,500
CMS Energy Corp., senior note, 7.75%, 8/01/10 ........................... United States 30,000,000 31,575,000
NRG Energy Inc., senior note,
7.25%, 2/01/14 ...................................................... United States 49,500,000 50,428,125
7.375%, 2/01/16 ..................................................... United States 93,775,000 96,002,156
Reliant Resources Inc., senior note, 9.25%, 7/15/10 ..................... United States 65,000,000 65,406,250
TXU Corp., senior note,
5.55%, 11/15/14 ..................................................... United States 350,000,000 329,138,600
6.55%, 11/15/34 ..................................................... United States 200,000,000 181,489,200
Q, 6.50%, 11/15/24 .................................................. United States 310,000,000 284,089,890
--------------
1,167,634,721
--------------
Semiannual Report | 79
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
ELECTRONIC TECHNOLOGY 1.5%
DRS Technologies Inc., senior note, 6.625%, 2/01/16 ................... United States $ 50,000,000 $ 50,000,000
Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ..... Singapore 105,000,000 103,425,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ................................................... United States 23,500,000 22,501,250
6.375%, 10/15/15 .................................................. United States 60,000,000 59,400,000
Lucent Technologies Inc., 6.45%, 3/15/29 .............................. United States 180,000,000 163,350,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 .................................................... United States 134,000,000 128,305,000
8.125%, 3/01/16 ................................................... United States 85,000,000 86,275,000
------------
613,256,250
------------
ENERGY MINERALS 1.4%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 .................... United States 113,800,000 120,059,000
Chesapeake Energy Corp., senior note,
6.25%, 1/15/18 .................................................... United States 150,000,000 147,375,000
g 144A, 6.50%, 8/15/17 .............................................. United States 77,500,000 76,918,750
g 144A, 6.875%, 11/15/20 ............................................ United States 100,000,000 101,250,000
g Massey Energy Co., senior note, 144A, 6.875%, 12/15/13 ................ United States 59,650,000 58,755,250
Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ........... United States 90,900,000 91,240,875
------------
595,598,875
------------
FINANCE 1.3%
E*TRADE Financial Corp., senior note,
7.375%, 9/15/13 ................................................... United States 230,000,000 235,750,000
7.875%, 12/01/15 .................................................. United States 25,000,000 26,500,000
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09,
9.00% thereafter, 2/01/14 ............................................ United States 380,000,000 288,800,000
------------
551,050,000
------------
GAS DISTRIBUTORS 2.1%
Dynegy Holdings Inc.,
g secured note, 144A, 9.875%, 7/15/10 ............................... United States 100,000,000 110,108,000
senior note, 6.875%, 4/01/11 ...................................... United States 310,000,000 300,700,000
senior note, 8.75%, 2/15/12 ....................................... United States 225,500,000 236,775,000
g,h senior note, 144A, 8.375%, 5/01/16 ................................ United States 100,000,000 100,000,000
g senior secured note, 144A, 10.125%, 7/15/13 ....................... United States 95,000,000 108,960,250
------------
856,543,250
------------
HEALTH SERVICES 4.1%
DaVita Inc.,
senior note, 6.625%, 3/15/13 ...................................... United States 23,600,000 23,659,000
senior sub. note, 7.25%, 3/15/15 .................................. United States 49,400,000 49,894,000
HCA Inc.,
6.375%, 1/15/15 ................................................... United States 160,000,000 156,524,000
6.50%, 2/15/16 .................................................... United States 223,525,000 218,888,421
80 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
HEALTH SERVICES (CONTINUED)
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 .............................................. United States $ 515,000,000 $ 467,362,500
6.50%, 6/01/12 ................................................ United States 240,000,000 217,200,000
7.375%, 2/01/13 ............................................... United States 350,000,000 321,125,000
g 144A, 9.50%, 2/01/15 .......................................... United States 231,000,000 232,155,000
--------------
1,686,807,921
--------------
INDUSTRIAL SERVICES 3.5%
Allied Waste North America Inc.,
senior note, 7.25%, 3/15/15 ................................... United States 150,000,000 153,750,000
senior note, B, 7.375%, 4/15/14 ............................... United States 190,000,000 189,050,000
senior secured note, 6.50%, 11/15/10 .......................... United States 120,000,000 119,100,000
senior secured note, 6.375%, 4/15/11 .......................... United States 35,000,000 34,431,250
senior secured note, 6.125%, 2/15/14 .......................... United States 207,000,000 197,685,000
Browning-Ferris Industries Inc., 7.40%, 9/15/35 ................... United States 45,000,000 42,075,000
El Paso Corp., senior note,
6.75%, 5/15/09 ................................................ United States 245,000,000 245,612,500
j FRN, 6.14%, 8/16/07 ........................................... United States 70,000,000 71,575,000
MTN, 7.75%, 1/15/32 ........................................... United States 270,000,000 273,375,000
El Paso Production Holding Co., 7.75%, 6/01/13 .................... United States 87,500,000 91,109,375
Sonat Inc., senior note, 7.625%, 7/15/11 .......................... United States 35,000,000 36,225,000
--------------
1,453,988,125
--------------
NON-ENERGY MINERALS 0.3%
g Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ................... Canada 125,000,000 120,625,000
--------------
PROCESS INDUSTRIES 1.7%
Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 .. Canada 100,600,000 98,588,000
Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 ............. United States 195,000,000 192,318,750
Nalco Co., senior sub. note, 8.875%, 11/15/13 ..................... United States 10,000,000 10,450,000
NewPage Corp., senior secured note, 10.00%, 5/01/12 ............... United States 110,000,000 116,050,000
Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 . United States 50,000,000 49,125,000
e,f,g Pindo Deli Finance Mauritius Ltd., 144A,
j FRN, 5.664%, 4/29/15 .......................................... Indonesia 113,073 25,509
j FRN, 5.664%, 4/29/18 .......................................... Indonesia 294,012 66,329
zero cpn., 4/29/25 ............................................ Indonesia 607,466 137,045
Rhodia SA, senior note, 10.25%, 6/01/10 ........................... France 110,859,000 124,854,949
Stone Container Corp., senior note, 9.75%, 2/01/11 ................ United States 80,000,000 82,600,000
e,f,g Tjiwi Kimia Finance Mauritius, secured note, 144A,
j FRN, 5.664%, 4/29/15 .......................................... Indonesia 12,883,549 3,812,242
j FRN, 5.664%, 4/29/18 .......................................... Indonesia 33,160,560 9,812,210
zero cpn., 4/29/25 ............................................ Indonesia 42,601,657 12,605,830
--------------
700,445,864
--------------
PRODUCER MANUFACTURING 1.0%
Case New Holland Inc., senior note,
6.00%, 6/01/09 ................................................ United States 225,000,000 220,500,000
g 144A, 7.125%, 3/01/14 ......................................... United States 69,900,000 69,375,750
Semiannual Report | 81
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
g Invensys PLC, senior note, 144A, 9.875%, 3/15/11 .................... United Kingdom $ 60,000,000 $ 64,050,000
Polymer Holdings LLC, senior disc. note, zero cpn. to 1/15/09,
12.00% thereafter, 7/15/14 ........................................ United States 100,000,000 80,250,000
---------------
434,175,750
---------------
REAL ESTATE DEVELOPMENT 0.0%c
D.R. Horton Inc., 5.625%, 1/15/16 ................................... United States 20,000,000 18,706,320
---------------
REAL ESTATE INVESTMENT TRUSTS 1.1%
Host Marriott LP,
g,h 144A, 6.75%, 6/01/16 ............................................ United States 138,200,000 138,718,250
senior note, K, 7.125%, 11/01/13 ................................ United States 50,000,000 51,125,000
senior note, O, 6.375%, 3/15/15 ................................. United States 210,000,000 207,637,500
MeriStar Hospitality Corp., 9.125%, 1/15/11 ......................... United States 64,500,000 74,981,250
---------------
472,462,000
---------------
TECHNOLOGY SERVICES 0.4%
g SunGard Data Systems Inc.,
senior note, 144A, 9.125%, 8/15/13 .............................. United States 59,300,000 63,006,250
senior sub. note, 144A, 10.25%, 8/15/15 ......................... United States 93,000,000 98,347,500
---------------
161,353,750
---------------
TOTAL BONDS (COST $18,344,187,418) .................................. 18,265,789,082
---------------
CONVERTIBLE BONDS 3.6%
ALTERNATIVE POWER GENERATION 0.5%
d,e Calpine Corp., cvt.,
senior note, 6.00% to 9/30/06, zero cpn. to 9/30/09,
6.00% thereafter, 9/30/14 ....................................... United States 137,000,000 43,840,000
senior note, 4.75%, 11/15/23 .................................... United States 88,000,000 36,960,000
sub. note, 7.75%, 6/01/15 ....................................... United States 450,000,000 128,250,000
---------------
209,050,000
---------------
CONSUMER SERVICES 0.1%
d Adelphia Communications Corp., cvt., junior sub. note, 6.00%,
2/15/06 ........................................................... United States 75,000,000 1,781,250
EchoStar Communications Corp., cvt., sub. note, 5.75%, 5/15/08 ...... United States 25,500,000 25,308,750
---------------
27,090,000
---------------
82 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
ELECTRONIC TECHNOLOGY 2.3%
Bank of America into Analog Devices Inc., cvt., senior note, 7.25%,
9/27/06 ............................................................. United States $ 152,520,000 $ 152,844,867
Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 United States . 280,000,000 274,750,000
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 .............. Canada 500,000,000 476,250,000
SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ..................... United States 66,000,000 64,185,000
---------------
968,029,867
---------------
HEALTH TECHNOLOGY 0.3%
Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%, 7/01/08 ........... United States 112,000,000 104,860,000
---------------
INDUSTRIAL SERVICES 0.2%
Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ............. United States 103,000,000 99,523,750
---------------
REAL ESTATE INVESTMENT TRUSTS 0.2%
MeriStar Hospitality Corp., cvt., sub. note, 9.50%, 4/01/10 ........... United States 95,000,000 101,056,250
---------------
TOTAL CONVERTIBLE BONDS (COST $1,904,037,771) ......................... 1,509,609,867
---------------
MORTGAGE-BACKED SECURITIES 3.7%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 2.0%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 .......................... United States 503,343,620 480,141,720
FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 ......................... United States 345,290,833 337,341,373
---------------
817,483,093
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.7%
FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 ................................ United States 298,184,169 291,240,870
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.0%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ........................... United States 423,983,263 411,327,036
---------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $1,546,457,462) ................ 1,520,050,999
---------------
TOTAL LONG TERM INVESTMENTS (COST $38,368,924,692) .................... 40,390,806,361
---------------
-----------
SHARES
-----------
SHORT TERM INVESTMENTS 2.9%
MONEY MARKET FUND (COST $180,645,389) 0.4%
k Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% .. United States 180,645,389 180,645,389
---------------
Semiannual Report | 83
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENT (COST $ 1,017,405,043) 2.5%
l Joint Repurchase Agreement, 4.683%, 4/03/06
(Maturity Value $1,017,802,085) ...................................... United States $1,017,405,043 $ 1,017,405,043
ABN AMRO Bank, N.V., New York Branch
(Maturity Value $84,772,735)
Banc of America Securities LLC (Maturity Value $84,772,735)
Barclays Capital Inc. (Maturity Value $84,772,735)
Bear, Stearns & Co. Inc. (Maturity Value $84,772,735)
BNP Paribas Securities Corp. (Maturity Value $97,810,780)
Deutsche Bank Securities Inc. (Maturity Value $21,740,259)
Dresdner Kleinwort Wasserstein Securities LLC
(Maturity Value $63,032,483)
Goldman, Sachs & Co. (Maturity Value $84,772,735)
Greenwich Capital Markets Inc. (Maturity Value $84,772,735)
Lehman Brothers Inc. (Maturity Value $59,225,903)
Merrill Lynch Government Securities Inc. (Maturity Value $84,772,735)
Morgan Stanley & Co. Inc. (Maturity Value $97,810,780)
UBS Securities LLC (Maturity Value $84,772,735)
Collateralized by U.S. Government Agency Securities,
1.75 - 7.125%, 5/02/06 - 2/01/11; m U.S. Government Agency
Discount Notes, 4/7/06 - 5/02/06; and m U.S. Treasury Bills,
6/22/06; and U.S. Treasury Notes, 2.50 - 6.125%,
10/31/06 - 8/15/09
---------------
TOTAL INVESTMENTS (COST $39,566,975,124) 100.1% ........................ 41,588,856,793
OTHER ASSETS, LESS LIABILITIES (0.1)% .................................. (31,865,016)
---------------
NET ASSETS 100.0% ...................................................... $41,556,991,777
===============
See Selected Portfolio Abbreviations on page 100.
a Non-income producing.
b See Note 10 regarding holdings of 5% voting securities.
c Rounds to less than 0.1% of net assets.
d See Note 8 regarding defaulted securities.
e See Note 11 regarding other considerations.
f See Note 9 regarding restricted securities.
g Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Directors. At March 31, 2006, the value of these securities
was $3,186,094,227, representing 7.67% of net assets.
h Security purchased on a when-issued or delayed delivery basis.
i The principal amount is stated in U.S. dollars unless otherwise indicated.
j The coupon rate shown represents the rate at period end.
k See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
l See Note 1(c) regarding joint repurchase agreement.
m A portion or all of the security is traded on a discount basis with no stated
coupon rate.
84 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ............... 0.15 0.28 0.27 0.28 0.38 0.41 f
Net realized and unrealized gains
(losses) ............................. (0.10) (0.11) (0.04) (0.10) 0.09 0.33 f
-----------------------------------------------------------------------------------------
Total from investment operations ........ 0.05 0.17 0.23 0.18 0.47 0.74
-----------------------------------------------------------------------------------------
Less distributions from net investment
income ................................ (0.16) (0.32) (0.36) (0.36) (0.41) (0.44)
-----------------------------------------------------------------------------------------
Redemption fees ......................... -- c -- c -- c -- -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period .......... $ 6.42 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93
=========================================================================================
Total return b .......................... 0.71% 2.67% 3.46% 2.66% 7.06% 11.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $5,522,532 $5,901,449 $6,420,381 $7,286,317 $7,726,914 $7,197,334
Ratios to average net assets:
Expenses .............................. 0.73% d,e 0.72% e 0.70% 0.70% 0.69% 0.68%
Net investment income ................. 4.53% d 4.29% 4.09% 4.11% 5.48% 6.12% f
Portfolio turnover rate ................. 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
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 Benefit of expense reduction is less than 0.01%.
f 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)%
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, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63
Income from investment operations:
Net investment income a ....................... 0.13 0.25 0.24 0.25 0.34 0.37 f
Net realized and unrealized gains (losses) .... (0.10) (0.11) (0.05) (0.10) 0.09 0.33 f
--------------------------------------------------------------------------------
Total from investment operations ................ 0.03 0.14 0.19 0.15 0.43 0.70
--------------------------------------------------------------------------------
Less distributions from net investment income ... (0.14) (0.29) (0.32) (0.33) (0.38) (0.40)
--------------------------------------------------------------------------------
Redemption fees ................................. -- c -- c -- c -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period .................. $ 6.41 $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93
================================================================================
Total return b .................................. 0.45% 2.13% 2.92% 2.13% 6.37% 10.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 428,370 $478,788 $568,276 $678,814 $559,966 $225,517
Ratios to average net assets:
Expenses ...................................... 1.25% d,e 1.25% e 1.23% 1.23% 1.22% 1.22%
Net investment income ......................... 4.01% d 3.76% 3.56% 3.58% 4.95% 5.51% f
Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
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 Benefit of expense reduction is less than 0.01%.
f 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)%
86 | 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, 2006 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ....................... 0.13 0.25 0.24 0.25 0.34 0.37 f
Net realized and unrealized gains (losses) .... (0.10) (0.11) (0.05) (0.11) 0.10 0.33 f
--------------------------------------------------------------------------------
Total from investment operations ................ 0.03 0.14 0.19 0.14 0.44 0.70
--------------------------------------------------------------------------------
Less distributions from net investment income ... (0.14) (0.29) (0.32) (0.33) (0.38) (0.40)
--------------------------------------------------------------------------------
Redemption fees ................................. -- c -- c -- c -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period .................. $ 6.39 $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91
================================================================================
Total return b .................................. 0.44% 2.14% 2.91% 2.00% 6.53% 10.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $454,818 $508,539 $597,451 $814,635 $803,049 $422,114
Ratios to average net assets:
Expenses ...................................... 1.24% d,e 1.25% e 1.23% 1.23% 1.21% 1.22%
Net investment income ......................... 4.02% d 3.76% 3.56% 3.58% 4.96% 5.55% f
Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
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 Benefit of expense reduction is less than 0.01%.
f 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)%
Semiannual Report | See notes to financial statements. | 87
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2005 2004 2003 2002 f
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................. $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81
----------------------------------------------------------------------
Income from investment operations:
Net investment income a ............................. 0.13 0.26 0.25 0.25 0.25
Net realized and unrealized gains (losses) .......... (0.10) (0.11) (0.05) (0.09) 0.22
----------------------------------------------------------------------
Total from investment operations ...................... 0.03 0.15 0.20 0.16 0.47
----------------------------------------------------------------------
Less distributions from net investment income ......... (0.14) (0.30) (0.33) (0.34) (0.29)
----------------------------------------------------------------------
Redemption fees ....................................... -- c -- c -- c -- --
----------------------------------------------------------------------
Net asset value, end of period ........................ $ 6.42 $ 6.53 $ 6.68 $ 6.81 $ 6.99
======================================================================
Total return b ........................................ 0.52% 2.29% 3.08% 2.29% 7.03%
Ratios/supplemental data
Net assets, end of period (000's) ..................... $64,896 $65,790 $59,431 $54,042 $14,042
Ratios to average net assets:
Expenses ............................................ 1.10% d,e 1.10% e 1.08% 1.08% 1.07% d
Net investment income ............................... 4.16% d 3.91% 3.71% 3.73% 5.10% d
Portfolio turnover rate ............................... 11.31% 29.14% 41.45% 66.96% 44.62%
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred s ales charge, and is
not annualized for periods less than one year.
c Amount is less than $0.01 per share.
d Annualized.
e Benefit of expense reduction is less than 0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
88 | 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, 2006 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64
------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ....................... 0.15 0.29 0.28 0.29 0.38 0.43 f
Net realized and unrealized gains (losses) .... (0.11) (0.10) (0.06) (0.10) 0.11 0.32 f
------------------------------------------------------------------------------
Total from investment operations ................ 0.04 0.19 0.22 0.19 0.49 0.75
------------------------------------------------------------------------------
Less distributions from net investment income ... (0.16) (0.33) (0.36) (0.37) (0.42) (0.45)
------------------------------------------------------------------------------
Redemption fees ................................. -- c -- c -- c -- -- --
------------------------------------------------------------------------------
Net asset value, end of period .................. $ 6.43 $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94
===============================================================================
Total return b .................................. 0.62% 2.95% 3.42% 2.79% 7.33% 11.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $366,476 $334,681 $340,279 $308,411 $198,437 $19,960
Ratios to average net assets:
Expenses ...................................... 0.60% d,e 0.60% e 0.58% 0.58% 0.57% 0.57%
Net investment income ......................... 4.66% d 4.41% 4.21% 4.23% 5.60% 6.30% f
Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
a Based on average daily shares outstanding.
b Amount is less than $0.01 per share.
c Total return is not annualized for periods less than one year.
d Annualized.
e Benefit of expense reduction is less than 0.01%.
f 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)%
Semiannual Report | See notes to financial statements. | 89
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 97.3%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 97.3%
GNMA I GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ................................. $ 264,170 $ 281,276
GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ................................. 431,234 467,278
GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ................................ 392,078 414,116
GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ................................. 12,965 14,266
GNMA I GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ............................... 777,968 833,602
GNMA I GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ................................. 365,184 402,338
GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ................................. 62,987 69,248
GNMA I GP 30 Year, 11.75%, 7/15/13 - 9/15/15 ................................. 59,025 65,368
GNMA I GP 30 Year, 12.00%, 3/15/11 - 12/15/12 ................................ 23,969 26,370
GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ................................. 72,349 79,050
GNMA I GP 30 Year, 12.75%, 5/15/14 ........................................... 6,175 6,817
GNMA I SF 15 Year, 6.50%, 5/15/18 ............................................ 3,810,363 3,910,976
a GNMA I SF 30 Year, 5.00%, 2/15/33 - 4/15/36 .................................. 806,205,928 782,074,022
GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 .................................. 1,409,059,227 1,396,634,407
GNMA I SF 30 Year, 6.00%, 10/15/23 - 11/15/35 ................................ 691,083,204 699,980,239
GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 .................................. 437,032,705 453,232,613
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................................. 99,537 103,119
GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ................................. 299,406,408 312,136,758
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................................. 784,552 819,937
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................................. 82,201,321 86,388,256
GNMA I SF 30 Year, 7.70%, 12/15/20 -1/15/22 .................................. 810,063 857,989
GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ................................. 62,880,480 67,058,433
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................................. 149,674 160,224
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................................. 13,513,715 14,592,943
GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ................................. 17,498,064 18,866,824
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................................. 10,929,085 11,942,813
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................................. 13,300,666 14,691,094
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ............................... 9,942,254 11,027,142
GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ................................ 9,699,237 10,629,865
GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 ................................ 2,252,016 2,496,187
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................................. 11,052,764 12,375,818
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................................. 10,101,549 11,170,352
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................................. 11,098,353 12,359,522
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................................. 72,546 77,226
GNMA II GP 30 Year, 11.50%, 8/20/13 .......................................... 17,716 19,409
GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 ................................ 49,657,359 46,309,376
GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................................. 322,642,613 311,681,962
GNMA II SF 30 Year, 5.00%, 9/20/33 ........................................... 350,564,139 338,887,994
GNMA II SF 30 Year, 5.00%, 10/20/33 .......................................... 73,668,106 71,209,927
GNMA II SF 30 Year, 5.50%, 6/20/34 ........................................... 94,079,654 92,957,168
GNMA II SF 30 Year, 5.50%, 7/20/34 - 2/20/36 ................................. 326,025,551 322,061,964
GNMA II SF 30 Year, 5.50%, 12/20/34 .......................................... 285,554,369 282,147,354
GNMA II SF 30 Year, 5.50%, 1/20/35 ........................................... 114,650,429 113,250,202
GNMA II SF 30 Year, 5.50%, 2/20/35 ........................................... 143,317,787 141,567,445
GNMA II SF 30 Year, 5.50%, 6/20/35 ........................................... 80,884,541 79,896,698
GNMA II SF 30 Year, 6.00%, 10/20/23 - 3/20/36 ................................ 388,511,217 391,947,710
GNMA II SF 30 Year, 6.00%, 6/20/34 ........................................... 71,426,416 72,075,298
90 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED)
GNMA II SF 30 Year, 6.00%, 9/20/34 ........................................... $ 94,162,981 $ 95,016,749
GNMA II SF 30 Year, 6.00%, 11/20/35 .......................................... 80,463,264 81,187,159
GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 ................................. 160,452,824 164,805,236
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................................. 85,912,505 88,934,171
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ................................ 11,096,880 11,575,607
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................................. 5,382,093 5,727,116
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................................. 2,578,696 2,772,521
GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ................................ 830,383 893,180
GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 ................................. 496,936 545,505
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ................................ 1,057,941 1,164,972
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ................................ 2,913,586 3,217,704
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ................................ 441,741 487,630
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ................................ 221,719 246,669
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ................................ 513,167 571,623
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 .............................. 347,925 385,046
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ............................... 322,373 358,800
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,733,675,478) ....................... 6,648,148,683
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENTS 2.7%
MONEY MARKET FUND (COST $176,842,441) 2.6%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ......... 176,842,441 176,842,441
--------------
----------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENT (COST $10,000,000) 0.1%
c Barclays Capital Inc., 4.400%, 4/03/06 (Maturity Value $10,003,667)
Collateralized by dU.S. Treasury Bill, 6/01/06 ............................... 10,000,000 10,000,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $186,842,441) ............................. 186,842,441
--------------
TOTAL INVESTMENTS (COST $6,920,517,919) 100.0% ............................... 6,834,991,124
OTHER ASSETS, LESS LIABILITIES 0.0% e ........................................ 2,101,368
--------------
NET ASSETS 100.0% ............................................................ $6,837,092,492
==============
See Selected Portfolio Abbreviations on page 100
a See Note 1(d) regarding securities purchased on a to-be-announced basis.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
c See Note 1(c) regarding repurchase agreement.
d The security is traded on a discount basis with no stated coupon rate.
e Rounds to less than 0.1% of net assets.
Semiannual Report | See notes to financial statements. | 91
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89
---------------------------------------------------------------------------------------
ncome from investment operations:
Net investment income a ............. 0.19 0.45 0.43 0.42 0.46 0.46
Net realized and unrealized gains
(losses) ........................... (0.69) 2.42 1.33 0.85 (1.60) (0.86)
---------------------------------------------------------------------------------------
Total from investment operations ...... (0.50) 2.87 1.76 1.27 (1.14) (0.40)
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................. (0.21) (0.44) (0.40) (0.43) (0.45) (0.45)
Net realized gains .................... (0.09) -- -- -- (0.47) (0.02)
---------------------------------------------------------------------------------------
Total distributions ................... (0.30) (0.44) (0.40) (0.43) (0.92) (0.47)
---------------------------------------------------------------------------------------
Redemption fees ....................... -- c -- c -- c -- -- --
---------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 11.79 $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02
=======================================================================================
Total return b ........................ (3.97)% 28.81% 20.40% 16.38% (12.49)% (4.03)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $1,838,570 $1,986,034 $1,450,832 $1,259,886 $1,090,216 $1,349,027
Ratios to average net assets:
Expenses ............................ 0.77% d,e 0.78% e 0.80% 0.83% 0.80% 0.79%
Net investment income ............... 3.24% d 3.92% 4.49% 5.00% 4.87% 4.26%
Portfolio turnover rate ............... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
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. dAnnualized.
e Benefit of expense reduction is less than 0.01%.
92 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2005 2004 2003 2002 2001
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income a .......................... 0.16 0.39 0.38 0.37 0.41 0.41
Net realized and unrealized gains (losses) ....... (0.68) 2.42 1.33 0.85 (1.58) (0.87)
--------------------------------------------------------------------------------
Total from investment operations ................. (0.52) 2.81 1.71 1.22 (1.17) (0.46)
--------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... (0.18) (0.39) (0.36) (0.39) (0.41) (0.40)
Net realized gains ............................. (0.09) -- -- -- (0.47) (0.02)
--------------------------------------------------------------------------------
Total distributions .............................. (0.27) (0.39) (0.36) (0.39) (0.88) (0.42)
--------------------------------------------------------------------------------
Redemption fees .................................. -- c -- c -- c -- -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................... $ 11.78 $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02
================================================================================
Total return b ................................... (4.14)% 28.11% 19.71% 15.88% (12.88)% (4.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $135,016 $154,277 $127,105 $95,321 $32,802 $15,212
Ratios to average net assets:
Expenses ....................................... 1.27% d,e 1.28% e 1.30% 1.34% 1.31% 1.30%
Net investment income .......................... 2.74% d 3.42% 3.99% 4.49% 4.44% 3.74%
Portfolio turnover rate .......................... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
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 Benefit of expense reduction is less than 0.01%.
Semiannual Report | See notes to financial statements. | 93
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ........................ 0.16 0.39 0.38 0.36 0.41 0.41
Net realized and unrealized gains (losses) ..... (0.68) 2.42 1.33 0.86 (1.59) (0.87)
----------------------------------------------------------------------------------
Total from investment operations ............... (0.52) 2.81 1.71 1.22 (1.18) (0.46)
----------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.18) (0.39) (0.36) (0.39) (0.41) (0.39)
Net realized gains ........................... (0.09) -- -- -- (0.47) (0.02)
----------------------------------------------------------------------------------
Total distributions ............................ (0.27) (0.39) (0.36) (0.39) (0.88) (0.41)
----------------------------------------------------------------------------------
Redemption fees ................................ -- c -- c -- c -- -- --
----------------------------------------------------------------------------------
Net asset value, end of period ................. $ 11.76 $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01
==================================================================================
Total return b ................................. (4.14)% 28.16% 19.76% 15.77% (12.90)% (4.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $379,011 $435,714 $283,747 $222,030 $67,428 $44,985
Ratios to average net assets:
Expenses ..................................... 1.26% d,e 1.28% e 1.30% 1.34% 1.29% 1.30%
Net investment income ........................ 2.75% d 3.42% 3.99% 4.49% 4.43% 3.76%
Portfolio turnover rate ........................ 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
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 Benefit of expense reduction is less than 0.01%.
94 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2005 2004 2003 2002 f
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81
------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ......................... 0.17 0.43 0.39 0.37 0.32
Net realized and unrealized gains (losses) ...... (0.69) 2.40 1.34 0.86 (1.85)
------------------------------------------------------------------------------
Total from investment operations .................. (0.52) 2.83 1.73 1.23 (1.53)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.19) (0.41) (0.37) (0.40) (0.32)
Net realized gains ................................ (0.09) -- -- -- --
------------------------------------------------------------------------------
Total distributions ............................... (0.28) (0.41) (0.37) (0.40) (0.32)
------------------------------------------------------------------------------
Redemption fees ................................... -- c -- c -- c -- --
------------------------------------------------------------------------------
Net asset value, end of period .................... $ 11.77 $ 12.57 $10.15 $ 8.79 $ 7.96
==============================================================================
Total return b .................................... (4.12)% 28.35% 20.02% 15.96% (16.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $17,200 $14,649 $1,590 $1,142 $ 142
Ratios to average net assets:
Expenses ........................................ 1.12% d,e 1.13% e 1.15% 1.19% 1.16% d
Net investment income ........................... 2.89% d 3.57% 4.14% 4.64% 4.82% d
Portfolio turnover rate ........................... 3.76% 13.53% 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 Benefit of expense reduction is less than 0.01%.
f For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | See notes to financial statements. | 95
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND (CONTINUED)
---------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05 $10.92
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income a ......................... 0.20 0.48 0.44 0.42 0.47 0.48
Net realized and unrealized gains (losses) ...... (0.69) 2.42 1.34 0.87 (1.60) (0.87)
---------------------------------------------------------------------------------
Total from investment operations .................. (0.49) 2.90 1.78 1.29 (1.13) (0.39)
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.22) (0.46) (0.42) (0.44) (0.46) (0.46)
Net realized gains ................................ (0.09) -- -- -- (0.47) (0.02)
---------------------------------------------------------------------------------
Total distributions ............................... (0.31) (0.46) (0.42) (0.44) (0.93) (0.48)
---------------------------------------------------------------------------------
Redemption fees ................................... -- c -- c -- c -- -- --
---------------------------------------------------------------------------------
Net asset value, end of period .................... $ 11.84 $ 12.64 $ 10.20 $ 8.84 $ 7.99 $10.05
---------------------------------------------------------------------------------
Total return b .................................... (3.88)% 29.00% 20.48% 16.61% (12.32)% (3.89)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $83,053 $110,249 $51,586 $47,167 $ 15,664 $8,829
Ratios to average net assets:
Expenses ........................................ 0.62% d,e 0.63% e 0.65% 0.69% 0.66% 0.65%
Net investment income ........................... 3.39% d 4.07% 4.64% 5.14% 5.07% 4.39%
Portfolio turnover rate ........................... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
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 Benefit of expense reduction is less than 0.01%.
96 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.8%
COMMON STOCKS 94.0%
DIVERSIFIED TELECOMMUNICATION SERVICES 3.5%
AT&T Inc. ........................................................... United States 1,500,000 $ 40,560,000
Verizon Communications Inc. ......................................... United States 1,300,000 44,278,000
--------------
84,838,000
--------------
ELECTRIC UTILITIES 78.1%
Alliant Energy Corp. ................................................ United States 1,712,000 53,876,640
Ameren Corp. ........................................................ United States 1,229,441 61,250,751
American Electric Power Co. Inc. .................................... United States 1,800,000 61,236,000
CenterPoint Energy Inc. ............................................. United States 1,262,800 15,065,204
Central Vermont Public Service Corp. ................................ United States 168,400 3,571,764
Cinergy Corp. ....................................................... United States 2,100,000 95,361,000
Consolidated Edison Inc. ............................................ United States 700,000 30,450,000
Constellation Energy Group .......................................... United States 200,000 10,942,000
Dominion Resources Inc. ............................................. United States 1,600,000 110,448,000
DTE Energy Co. ...................................................... United States 400,000 16,036,000
Duke Energy Corp. ................................................... United States 1,215,400 35,428,910
Edison International ................................................ United States 2,000,000 82,360,000
Energy East Corp. ................................................... United States 800,000 19,440,000
Entergy Corp. ....................................................... United States 1,750,000 120,645,000
Exelon Corp. ........................................................ United States 2,200,000 116,380,000
FirstEnergy Corp. ................................................... United States 2,200,000 107,580,000
FPL Group Inc. ...................................................... United States 2,200,000 88,308,000
Hawaiian Electric Industries Inc. ................................... United States 500,000 13,565,000
ITC Holdings Corp. .................................................. United States 581,000 15,251,250
National Grid PLC ................................................... United Kingdom 4,987,755 49,624,594
Northeast Utilities ................................................. United States 1,971,500 38,503,395
Pepco Holdings Inc. ................................................. United States 1,600,000 36,464,000
PG&E Corp. .......................................................... United States 2,100,000 81,690,000
Pinnacle West Capital Corp. ......................................... United States 800,000 31,280,000
PPL Corp. ........................................................... United States 2,400,000 70,560,000
Progress Energy Inc. ................................................ United States 1,600,000 70,368,000
Public Service Enterprise Group Inc. ................................ United States 1,500,000 96,060,000
Puget Energy Inc. ................................................... United States 1,725,000 36,535,500
Scottish Power PLC .................................................. United Kingdom 3,000,000 30,316,669
a Sierra Pacific Resources ............................................ United States 3,472,473 47,954,852
The Southern Co. .................................................... United States 2,500,000 81,925,000
TXU Corp. ........................................................... United States 700,000 31,332,000
United Utilities PLC ................................................ United Kingdom 5,000,000 59,860,661
Westar Energy Inc. .................................................. United States 900,000 18,729,000
Wisconsin Energy Corp. .............................................. United States 1,000,000 39,990,000
Xcel Energy Inc. .................................................... United States 2,082,200 37,791,930
--------------
1,916,181,120
--------------
Semiannual Report | 97
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
GAS DISTRIBUTORS 11.3%
AGL Resources Inc. ................................................. United States 1,200,000 $ 43,260,000
Atmos Energy Corp. ................................................. United States 1,000,000 26,330,000
a Gaz de France ...................................................... France 544,033 19,669,047
KeySpan Corp. ...................................................... United States 626,600 25,609,142
NiSource Inc. ...................................................... United States 2,800,000 56,616,000
ONEOK Inc. ......................................................... United States 500,000 16,125,000
Questar Corp. ...................................................... United States 303,600 21,267,180
Sempra Energy ...................................................... United States 1,000,000 46,460,000
Vectren Corp. ...................................................... United States 800,000 21,104,000
--------------
276,440,369
--------------
OIL & GAS PIPELINES 1.1%
Kinder Morgan Inc. ................................................. United States 300,000 27,597,000
--------------
TOTAL COMMON STOCKS (COST $1,698,327,997) .......................... 2,305,056,489
--------------
CONVERTIBLE PREFERRED STOCKS 1.3%
ELECTRIC UTILITIES 1.3%
CMS Energy Trust I, 7.75%, cvt. pfd ................................ United States 260,000 12,740,000
PNM Resources Inc., 6.75%, cvt. pfd ................................ United States 400,000 19,550,000
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,519) .............. 32,290,000
--------------
----------------
PRINCIPAL AMOUNT
----------------
BONDS 4.5%
ELECTRIC UTILITIES 4.5%
Aquila Inc., senior note,
9.95%, 2/01/11 .................................................. United States $ 6,000,000 6,675,000
8.27%, 11/15/21 ................................................. United States 6,100,000 6,191,500
CMS Energy Corp., senior note, 9.875%, 10/15/07 .................... United States 8,500,000 9,084,375
MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ....... United States 25,000,000 30,984,225
Northeast Generation Co., senior note, 8.812%, 10/15/26 ............ United States 7,500,000 7,431,045
PP&L Capital Funding, 8.375%, 6/15/07 .............................. United States 15,000,000 15,429,720
TXU Corp., senior note, 6.55%, 11/15/34 ............................ United States 40,000,000 36,297,840
--------------
TOTAL BONDS (COST $108,005,488) .................................... 112,093,705
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,839,774,004) .................. 2,449,440,194
--------------
98 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $3,856,827) 0.2%
MONEY MARKET FUND 0.2%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ..... United States 3,856,827 $ 3,856,827
--------------
TOTAL INVESTMENTS (COST $1,843,630,831) 100.0% ........................... 2,453,297,021
OTHER ASSETS, LESS LIABILITIES 0.0% c .................................... (447,300)
--------------
NET ASSETS 100.0% ........................................................ $2,452,849,721
==============
a Non-income producing.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
c Rounds to less than 0.1% of net assets.
Semiannual Report | See notes to financial statements. | 99
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
GP - Graduated Payment
MTN - Medium Term Notes
SF - Single Family
100 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2006 (unaudited)
------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................ $451,227,095 $ 905,146,785 $38,165,566,427
Cost - Non-controlled affiliated issuers (Note 10) ................. -- -- 203,358,265
Cost - Sweep Money Fund (Note 7) ................................... 1,654,549 42,504,493 180,645,389
Cost - Repurchase agreements ....................................... 11,332,525 -- 1,017,405,043
-----------------------------------------------------
Total cost of investments .......................................... $464,214,169 $ 947,651,278 $39,566,975,124
=====================================================
Value - Unaffiliated issuers ....................................... $761,167,356 $2,372,451,280 $39,471,279,846
Value - Non-controlled affiliated issuers (Note 10) ................ -- -- 919,526,515
Value - Sweep Money Fund (Note 7) .................................. 1,654,549 42,504,493 180,645,389
Value - Repurchase agreements ...................................... 11,332,525 -- 1,017,405,043
-----------------------------------------------------
Total value of investments a ....................................... 774,154,430 2,414,955,773 41,588,856,793
Cash ................................................................. -- 35,636 --
Receivables:
Investment securities sold ......................................... 11,702,481 -- 253,182,628
Capital shares sold ................................................ 1,020,099 2,701,417 124,386,515
Dividends .......................................................... 300,597 1,487,839 387,780,822
-----------------------------------------------------
Total assets .................................................... 787,177,607 2,419,180,665 42,354,206,758
-----------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................................... 6,871,689 -- 660,639,041
Capital shares redeemed ............................................ 1,730,416 4,646,686 75,280,182
Affiliates ......................................................... 813,720 2,467,134 36,171,668
Payable upon return of securities loaned ............................. 11,332,525 -- --
Deferred sales proceeds (Note 11) .................................... -- -- 18,979,779
Accrued expenses and other liabilities ............................... 308,867 773,495 6,144,311
-----------------------------------------------------
Total liabilities ............................................... 21,057,217 7,887,315 797,214,981
-----------------------------------------------------
Net assets, at value ........................................... $766,120,390 $2,411,293,350 $41,556,991,777
=====================================================
Net assets consist of:
Paid-in capital ...................................................... $535,112,859 $1,089,809,149 $39,113,741,429
Undistributed net investment income (loss) ........................... (1,344,461) 87,471 --
Distributions in excess of net investment income ..................... -- -- (51,880,740)
Net unrealized appreciation (depreciation) ........................... 309,940,261 1,467,304,495 2,021,881,669
Accumulated net realized gain (loss) ................................. (77,588,269) (145,907,765) 473,249,419
-----------------------------------------------------
Net assets, at value ........................................... $766,120,390 $2,411,293,350 $41,556,991,777
=====================================================
a Including securities loaned ........................................... $ 11,741,000 -- --
Semiannual Report | See notes to financial statements. | 101
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2006 (unaudited)
----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
----------------------------------------------------
CLASS A:
Net assets, at value ................................................ $665,175,041 $1,700,902,239 $23,576,919,301
===================================================
Shares outstanding .................................................. 24,804,316 44,393,894 9,557,270,358
===================================================
Net asset value per share a ......................................... $ 26.82 $ 38.31 $ 2.47
===================================================
Maximum offering price per share (net asset value per share / 94.25%,
94.25% and 95.75%, respectively) ................................... $ 28.46 $ 40.65 $ 2.58
===================================================
CLASS B:
Net assets, at value ................................................ $ 21,588,525 $ 129,216,924 $ 3,718,146,471
===================================================
Shares outstanding .................................................. 836,038 3,489,544 1,512,438,689
===================================================
Net asset value and maximum offering price per share a .............. $ 25.82 $ 37.03 $ 2.46
===================================================
CLASS B1:
Net assets, at value ................................................ -- -- $ 462,528,809
===================================================
Shares outstanding .................................................. -- -- 187,440,742
===================================================
Net asset value and maximum offering price per share a .............. -- -- $ 2.47
===================================================
CLASS C:
Net assets, at value ................................................ $ 79,356,824 $ 283,884,067 $10,695,121,166
===================================================
Shares outstanding .................................................. 3,105,096 7,733,325 4,310,507,519
===================================================
Net asset value and maximum offering price per share a .............. $ 25.56 $ 36.71 $ 2.48
===================================================
CLASS R:
Net assets, at value ................................................ -- $ 39,587,103 $ 149,450,365
===================================================
Shares outstanding .................................................. -- 1,039,911 61,121,412
===================================================
Net asset value and maximum offering price per share a .............. -- $ 38.07 $ 2.45
===================================================
ADVISOR CLASS:
Net assets, at value ................................................ -- $ 257,703,017 $ 2,954,825,665
===================================================
Shares outstanding .................................................. -- 6,722,059 1,203,059,532
===================================================
Net asset value and maximum offering price per share a .............. -- $ 38.34 $ 2.46
===================================================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Funds.
102 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2006 (unaudited)
-----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
-----------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................................. $ 6,733,675,478 $1,839,774,004
Cost - Sweep Money Fund (Note 7) ......................................................... 176,842,441 3,856,827
Cost - Repurchase agreements ............................................................. 10,000,000 --
-----------------------------------
Total cost of investments ................................................................ $ 6,920,517,919 $1,843,630,831
===================================
Value - Unaffiliated issuers ............................................................. $ 6,648,148,683 $2,449,440,194
Value - Sweep Money Fund (Note 7) ........................................................ 176,842,441 3,856,827
Value - Repurchase agreements ............................................................ 10,000,000 --
-----------------------------------
Total value of investments ............................................................... 6,834,991,124 2,453,297,021
Receivables:
Investment securities sold ............................................................... 21,515,313 1,301,204
Capital shares sold ...................................................................... 3,875,757 2,012,883
Interest ................................................................................. 31,072,512 6,370,552
-----------------------------------
Total assets ....................................................................... 6,891,454,706 2,462,981,660
-----------------------------------
Liabilities:
Payables:
Investment securities purchased .......................................................... 22,129,071 --
Capital shares redeemed .................................................................. 25,089,569 7,424,873
Affiliates ............................................................................... 4,939,613 1,986,587
Accrued expenses and other liabilities ................................................... 2,203,961 720,479
-----------------------------------
Total liabilities .................................................................. 54,362,214 10,131,939
-----------------------------------
Net assets, at value ............................................................. $ 6,837,092,492 $2,452,849,721
===================================
Net assets consist of:
Paid-in capital ........................................................................... $ 7,340,588,385 $1,813,593,363
Undistributed net investment income (distributions in excess of net investment income) .... (9,737,120) 3,466,491
Net realized appreciation (depreciation) .................................................. (85,526,795) 609,666,143
Accumulated net realized gain (loss) ...................................................... (408,231,978) 26,123,724
-----------------------------------
Net assets, at value ............................................................. $ 6,837,092,492 $2,452,849,721
===================================
Semiannual Report | See notes to financial statements. | 103
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2006 (unaudited)
---------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------------
CLASS A:
Net assets, at value .............................................................. $5,522,532,454 $1,838,569,600
======================================
Shares outstanding ................................................................ 860,189,482 155,916,531
======================================
Net asset value per share a ....................................................... $ 6.42 $ 11.79
======================================
Maximum offering price per share (net asset value per share / 95.75%) ............. $ 6.70 $ 12.31
======================================
CLASS B:
Net assets, at value .............................................................. $ 428,370,175 $ 135,016,016
======================================
Shares outstanding ................................................................ 66,813,242 11,459,500
======================================
Net asset value and maximum offering price per share a ............................ $ 6.41 $ 11.78
======================================
CLASS C:
Net assets, at value .............................................................. $ 454,817,995 $ 379,010,757
======================================
Shares outstanding ................................................................ 71,157,725 32,232,702
======================================
Net asset value and maximum offering price per share a ............................ $ 6.39 $ 11.76
======================================
CLASS R:
Net assets, at value .............................................................. $ 64,896,190 $ 17,200,150
======================================
Shares outstanding ................................................................ 10,115,032 1,461,623
======================================
Net asset value and maximum offering price per share a ............................ $ 6.42 $ 11.77
======================================
ADVISOR CLASS:
Net assets, at value .............................................................. $ 366,475,678 $ 83,053,198
======================================
Shares outstanding ................................................................ 56,958,681 7,014,829
======================================
Net asset value and maximum offering price per share a ............................ $ 6.43 $ 11.84
======================================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Funds.
104 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended ended March 31, 2006 (unaudited)
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers .................................................... $ 2,415,592 $ 13,095,082 $ 423,349,307
Non-controlled affiliated issuers (Note 10) ............................. -- -- 14,803,162
Sweep Money Fund (Note 7) ............................................... 120,782 433,495 3,303,778
Interest:
Unaffiliated issuers .................................................... -- -- 766,507,805
Non-controlled affiliated issuers (Note 10) ............................. -- -- 7,095,375
Income from securities loaned - net ...................................... 229,121 -- --
------------------------------------------------
Total investment income ............................................. 2,765,495 13,528,577 1,215,059,427
------------------------------------------------
Expenses:
Management fees (Note 3a) ................................................ 1,826,765 5,302,318 78,570,563
Distribution fees: (Note 3c)
Class A ................................................................. 826,136 2,020,190 17,000,091
Class B ................................................................. 102,827 627,572 18,595,404
Class B1 ................................................................ -- -- 1,512,354
Class C ................................................................. 383,496 1,370,927 33,267,080
Class R ................................................................. -- 85,032 336,725
Transfer agent fees (Note 3e) ............................................ 788,908 2,162,435 14,331,834
Custodian fees (Note 4) .................................................. 14,954 32,991 418,064
Reports to shareholders .................................................. 117,135 186,578 1,487,685
Registration and filing fees ............................................. 26,256 60,498 926,601
Professional fees ........................................................ 13,733 24,664 163,499
Directors' fees and expenses ............................................. 1,641 6,169 87,898
Other .................................................................... 8,117 24,936 457,426
------------------------------------------------
Total expenses ...................................................... 4,109,968 11,904,310 167,155,224
Expense reductions (Note 4) ......................................... (12) (4) (3,772)
Expenses waived/paid by affiliates (Note 3f) ........................ -- -- (123,828)
------------------------------------------------
Net expenses ....................................................... 4,109,956 11,904,306 167,027,624
------------------------------------------------
Net investment income (loss) ...................................... (1,344,461) 1,624,271 1,048,031,803
------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated Issuers ................................................... 15,774,379 66,104,641 500,520,738
Non-controlled affiliated issuers (Note 10) ............................ -- -- 45,577,782
Foreign currency transactions ........................................... 1,178 -- (158,748)
------------------------------------------------
Net realized gain (loss) .......................................... 15,775,557 66,104,641 545,939,772
------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 37,482,336 154,807,804 (611,525,708)
------------------------------------------------
Net realized and unrealized gain (loss) ................................... 53,257,893 220,912,445 (65,585,936)
------------------------------------------------
Net increase (decrease) in net assets resulting from operations ........... $51,913,432 $222,536,716 $ 982,445,867
================================================
Semiannual Report | See notes to financial statements. | 105
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended ended March 31, 2006 (unaudited)
--------------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................................ $ -- $ 44,858,505
Sweep Money Fund (Note 7) ....................................................... 3,307,756 1,292,444
Interest ......................................................................... 182,346,494 4,316,447
Income from securities loaned - net .............................................. -- 8,430
------------------------------------
Total investment income ................................................... 185,654,250 50,475,826
------------------------------------
Expenses:
Management fees (Note 3a) ........................................................ 15,690,641 5,784,420
Distribution fees: (Note 3c)
Class A ......................................................................... 3,574,363 1,406,863
Class B ......................................................................... 1,469,535 458,394
Class C ......................................................................... 1,544,427 1,269,761
Class R ......................................................................... 162,901 39,463
Transfer agent fees (Note 3e) .................................................... 4,567,046 1,555,581
Custodian fees (Note 4) .......................................................... 70,723 44,946
Reports to shareholders .......................................................... 397,249 229,950
Registration and filing fees ..................................................... 76,646 83,130
Professional fees ................................................................ 51,556 24,637
Directors' fees and expenses ..................................................... 18,592 10,760
Other ............................................................................ 239,638 33,417
------------------------------------
Total expenses ............................................................ 27,863,317 10,941,322
Expense reductions (Note 4) ............................................... (10,178) (3,350)
------------------------------------
Net expenses ............................................................ 27,853,139 10,937,972
------------------------------------
Net investment income .................................................. 157,801,111 39,537,854
------------------------------------
Realized and unrealized losses:
Net realized gain (loss) from:
Investments ..................................................................... (718,752) 39,294,121
Foreign currency transactions ................................................... -- 61,898
------------------------------------
Net realized gain (loss) ............................................... (718,752) 39,356,019
------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................................... (110,183,768) (186,185,372)
Translation of assets and liabilities denominated in foreign currencies ......... -- (47)
------------------------------------
Net change in unrealized appreciation (depreciation) ................... (110,183,768) (186,185,419)
------------------------------------
Net realized and unrealized gain (loss) ........................................... (110,902,520) (146,829,400)
------------------------------------
Net increase (decrease) in net assets resulting from operations ................... $ 46,898,591 $(107,291,546)
====================================
106 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED MARCH 31, 2006 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2005 (UNAUDITED) SEPTEMBER 30, 2005
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ................. $ (1,344,461) $ (860,145) $ 1,624,271 $ 6,147,997
Net realized gain (loss) from
investments and foreign currency
transactions ................................ 15,775,557 (905,096) 66,104,641 33,738,259
Net change in unrealized appreciation
(depreciation) on investments ............... 37,482,336 93,542,036 154,807,804 244,117,335
---------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations ........................ 51,913,432 91,776,795 222,536,716 284,003,591
---------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ..................................... -- -- (2,878,763) (3,882,872)
Class R ..................................... -- -- (1,109) (10,415)
Advisor Class ............................... -- -- (964,032) (732,270)
---------------------------------------------------------------------------
Total distributions to shareholders ........... -- -- (3,843,904) (4,625,557)
---------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ..................................... (9,124,228) (91,991,179) (22,417,623) (168,604,093)
Class B ..................................... 744,557 (1,613,902) (6,511,641) (13,722,938)
Class C ..................................... 768,980 (10,942,390) (12,482,101) (33,781,675)
Class R ..................................... -- -- 8,813,889 4,768,742
Advisor Class ............................... -- -- 13,483,465 66,279,985
---------------------------------------------------------------------------
Total capital share transactions .............. (7,610,691) (104,547,471) (19,114,011) (145,059,979)
---------------------------------------------------------------------------
Redemption fees ............................... 1,682 1,039 5,470 11,358
---------------------------------------------------------------------------
Net increase (decrease) in
net assets ............................. 44,304,423 (12,769,637) 199,584,271 134,329,413
Net assets:
Beginning of period ........................... 721,815,967 734,585,604 2,211,709,079 2,077,379,666
---------------------------------------------------------------------------
End of period ................................. $ 766,120,390 $ 721,815,967 $ 2,411,293,350 $ 2,211,709,079
===========================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ................................ $ (1,344,461) $ -- $ 87,471 $ 2,307,104
===========================================================================
Semiannual Report | See notes to financial statements. | 107
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
---------------------------------------------------------------------------------
FRANKLIN
FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED MARCH 31, 2006 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2005 (UNAUDITED) SEPTEMBER 30, 2005
---------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 1,048,031,803 $ 1,736,884,708 $ 157,801,111 $ 320,563,601
Net realized gain (loss) from investments
and foreign currency transactions ......... 545,939,772 408,724,204 (718,752) 3,270,275
Net change in unrealized appreciation
(depreciation) on investments ............. (611,525,708) 893,534,036 (110,183,768) (126,557,362)
--------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations ....................... 982,445,867 3,039,142,948 46,898,591 197,276,514
--------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................... (679,215,107) (1,104,437,012) (138,217,903) (302,745,166)
Class B ................................... (98,356,309) (206,484,397) (9,852,806) (23,185,787)
Class B1 .................................. (13,116,646) (28,826,258) -- --
Class C ................................... (283,118,452) (461,493,148) (10,399,819) (24,272,966)
Class R ................................... (3,826,836) (5,706,119) (1,439,889) (2,810,550)
Advisor Class ............................. (78,991,442) (95,145,372) (8,577,547) (15,327,999)
Net realized gains:
Class A ................................... (132,930,599) (84,143,096) -- --
Class B ................................... (22,601,208) (19,751,225) -- --
Class B1 .................................. (2,827,473) (2,705,174) -- --
Class C ................................... (60,547,408) (37,975,944) -- --
Class R ................................... (778,984) (432,526) -- --
Advisor Class ............................. (14,814,566) (5,808,100) -- --
--------------------------------------------------------------------------------
Total distributions to shareholders ......... (1,391,125,030) (2,052,908,371) (168,487,964) (368,342,468)
--------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ................................... 1,871,831,945 6,640,381,449 (280,581,068) (380,358,442)
Class B ................................... (154,830,584) 317,307,812 (42,602,206) (77,684,862)
Class B1 .................................. (24,247,455) (34,777,479) -- --
Class C ................................... 688,507,353 3,242,801,825 (45,416,708) (76,479,175)
Class R ................................... 28,281,896 46,237,588 218,349 7,779,886
Advisor Class ............................. 690,008,918 1,334,835,525 37,795,485 1,208,804
--------------------------------------------------------------------------------
Total capital share transactions ............ 3,099,552,073 11,546,786,720 (330,586,148) (525,533,789)
--------------------------------------------------------------------------------
Redemption fees ............................. 178,758 173,429 19,548 31,088
--------------------------------------------------------------------------------
Net increase (decrease) in
net assets ............................ 2,691,051,668 12,533,194,726 (452,155,973) (696,568,655)
Net assets:
Beginning of period ......................... 38,865,940,109 26,332,745,383 7,289,248,465 7,985,817,120
--------------------------------------------------------------------------------
End of period ............................... $ 41,556,991,777 $ 38,865,940,109 $ 6,837,092,492 $ 7,289,248,465
================================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period .............................. $ (51,880,740) $ 145,660,727 $ (9,737,120) $ 949,733
================================================================================
108 | See notes to financial statements. | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------
FRANKLIN UTILITIES FUND
-------------------------------------
SIX MONTHS ENDED
MARCH 31, 2006 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2005
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 39,537,854 $ 87,329,712
Net realized gain (loss) from investments and foreign currency transactions ............ 39,356,019 86,597,164
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ............................. (186,185,419) 395,798,703
------------------------------------
Net increase (decrease) in net assets resulting from operations .................. (107,291,546) 569,725,579
------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .............................................................................. (32,965,331) (65,898,832)
Class B .............................................................................. (2,125,318) (4,861,315)
Class C .............................................................................. (5,980,202) (12,160,417)
Class R .............................................................................. (258,606) (210,458)
Advisor Class ........................................................................ (1,613,835) (3,309,596)
Net realized gains:
Class A .............................................................................. (14,345,312) --
Class B .............................................................................. (1,090,928) --
Class C .............................................................................. (3,070,998) --
Class R .............................................................................. (117,357) --
Advisor Class ........................................................................ (696,993) --
------------------------------------
Total distributions to shareholders ..................................................... (62,264,880) (86,440,618)
------------------------------------
Capital share transactions: (Note 2)
Class A .............................................................................. (22,464,435) 175,567,341
Class B .............................................................................. (9,626,301) (3,086,774)
Class C .............................................................................. (29,529,771) 76,710,176
Class R .............................................................................. 3,517,000 11,865,292
Advisor Class ........................................................................ (20,417,585) 41,716,286
------------------------------------
Total capital share transactions ........................................................ (78,521,092) 302,772,321
------------------------------------
Redemption fees ......................................................................... 5,002 4,687
------------------------------------
Net increase (decrease) in net assets .......................................... (248,072,516) 786,061,969
Net assets:
Beginning of period ..................................................................... 2,700,922,237 1,914,860,268
------------------------------------
End of period ........................................................................... $ 2,452,849,721 $ 2,700,922,237
====================================
Undistributed net investment income included in net assets:
End of period ........................................................................... $ 3,466,491 $ 6,871,929
====================================
Semiannual Report | See notes to financial statements. | 109
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 classes of shares offered within each
of the Funds are indicated below. Effective March 1, 2005, Class B/B1 shares are
only offered to existing Class B shareholders in the form of reinvested
distributions and certain exchanges from other Franklin Templeton Class B
shares. 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
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, 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 Fund 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.
110 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Custodian Funds have procedures to determine the fair value of individual
securities and other assets for which market prices are not readily available or
which may not be reliably priced. Methods for valuing these securities may
include: fundamental analysis, 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
Custodian Funds' Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, 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 Custodian Funds' 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
Statements of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements. Repurchase agreements are
accounted for as a loan by the fund to the seller, collateralized by securities
which are delivered to the fund's custodian. The market value, including accrued
interest, of the initial collateralization is required
Semiannual Report | 111
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REPURCHASE AGREEMENTS (CONTINUED)
to be at least 102% of the dollar amount invested by the funds, with the value
of the underlying securities marked to market daily to maintain coverage of at
least 100%. The Funds may also enter into joint repurchase agreements whereby
their uninvested cash balance is deposited into a joint cash account with other
funds managed by the investment manager or an affiliate of the investment
manager and is used to invest in one or more repurchase agreements. The value
and face amount of the joint repurchase agreement are allocated to the funds
based on their pro-rata interest. Repurchase agreements are valued at cost. At
March 31, 2006, all repurchase agreements held by the funds had been entered
into on that date.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
Certain Funds may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the funds will generally purchase these securities with
the intention of holding the securities, they may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
E. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they 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 Statements 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, which may be in
excess of the amount reflected in the Statements of Assets and Liabilities.
F. SECURITIES LENDING
Certain funds may 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 as noted in the
Statement of Investments. The fund receives interest income from the investment
of cash collateral, adjusted by lender fees and broker rebates. The fund bears
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 fund
in the case of default of any securities borrower.
112 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. INCOME TAXES
No provision has been made for U.S. income taxes because each Fund's policy is
to continue to qualify as a regulated investment company under the Internal
Revenue Code and to distribute to shareholders substantially all of its taxable
income and net realized gains.
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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recognized as soon as the Funds are
notified of the ex-dividend date. Distributions to shareholders are recorded on
the ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. These differences may be permanent or temporary. Permanent
differences are reclassified among capital accounts to reflect their tax
character. These reclassifications have no impact on net assets or the results
of operations. Temporary differences are not reclassified, as they may reverse
in subsequent periods.
Common expenses incurred by the Custodian Funds are allocated among the Funds
based on the ratio of net assets of each fund to the combined net assets of the
Custodian Funds. Fund specific expenses are charged directly to the fund that
incurred the expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by 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
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
Semiannual Report | 113
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. GUARANTEES AND INDEMNIFICATIONS
Under the Custodian Funds' organizational documents, their officers and
directors 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 Funds' 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
At March 31, 2006, there were 44.2 billion shares of the Custodian Funds
authorized ($0.01 par value) and allocated to the Funds as follows (in
millions):
------------------------------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
------------------------------------------------------------------------------------
1,000 3,250 28,400 8,000 3,550
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, 2006
Shares sold ................................ 5,290,346 $ 139,431,940 3,145,492 $ 115,257,634
Shares issued in reinvestment
of distributions ......................... -- -- 72,199 2,651,844
Shares redeemed ............................ (5,650,629) (148,556,168) (3,836,582) (140,327,101)
----------------------------------------------------------------
Net increase (decrease) .................... (360,283) $ (9,124,228) (618,891) $ (22,417,623)
================================================================
Year ended September 30, 2005
Shares sold ................................ 5,939,499 $ 140,943,371 4,972,706 $ 165,487,177
Shares issued in reinvestment
of distributions ......................... -- -- 106,686 3,548,371
Shares redeemed ............................ (9,857,258) (232,934,550) (10,153,867) (337,639,641)
----------------------------------------------------------------
Net increase (decrease) .................... (3,917,759) $ (91,991,179) (5,074,475) $(168,604,093)
================================================================
CLASS B SHARES:
Six months ended March 31, 2006
Shares sold ................................ 87,569 $ 2,234,170 82,337 $ 2,932,915
Shares redeemed ............................ (58,889) (1,489,613) (267,176) (9,444,556)
----------------------------------------------------------------
Net increase (decrease) .................... 28,680 $ 744,557 (184,839) $ (6,511,641)
================================================================
114 | Semiannual Report
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 B SHARES: (CONTINUED)
Year ended September 30, 2005
Shares sold ............................... 133,963 $ 3,049,030 242,741 $ 7,743,683
Shares redeemed ........................... (204,804) (4,662,932) (666,084) (21,466,621)
--------------------------------------------------------------
Net increase (decrease) ................... (70,841) $ (1,613,902) (423,343) $(13,722,938)
==============================================================
CLASS C SHARES:
Six months ended March 31, 2006
Shares sold ............................... 373,452 $ 9,450,291 464,044 $ 16,283,486
Shares redeemed ........................... (347,468) (8,681,311) (822,301) (28,765,587)
--------------------------------------------------------------
Net increase (decrease) ................... 25,984 $ 768,980 (358,257) $(12,482,101)
==============================================================
Year ended September 30, 2005
Shares sold ............................... 482,114 $ 10,909,830 886,979 $ 28,487,942
Shares redeemed ........................... (969,317) (21,852,220) (1,948,771) (62,269,617)
--------------------------------------------------------------
Net increase (decrease) ................... (487,203) $(10,942,390) (1,061,792) $(33,781,675)
==============================================================
CLASS R SHARES:
Six months ended March 31, 2006
Shares sold ............................... 548,170 $ 20,195,703
Shares issued in reinvestment
of distributions ......................... 30 1,108
Shares redeemed ........................... (312,590) (11,382,922)
-----------------------------
Net increase (decrease) ................... 235,610 $ 8,813,889
=============================
Year ended September 30, 2005
Shares sold ............................... 301,713 $ 9,964,493
Shares issued in reinvestment
of distributions ......................... 313 10,387
Shares redeemed ........................... (157,760) (5,206,138)
-----------------------------
Net increase (decrease) ................... 144,266 $ 4,768,742
=============================
ADVISOR CLASS SHARES:
Six months ended March 31, 2006
Shares sold ............................... 1,350,476 $ 49,316,752
Shares issued in reinvestment
of distributions ......................... 23,979 880,512
Shares redeemed ........................... (1,008,465) (36,713,799)
-----------------------------
Net increase (decrease) ................... 365,990 $ 13,483,465
=============================
Year ended September 30, 2005
Shares sold ............................... 2,738,052 $ 91,354,618
Shares issued in reinvestment
of distributions ......................... 21,696 721,407
Shares redeemed ........................... (756,109) (25,796,040)
-----------------------------
Net increase (decrease) ................... 2,003,639 $ 66,279,985
=============================
Semiannual Report | 115
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, 2006
Shares sold ........................... 1,357,142,604 $ 3,289,830,395 37,823,540 $ 244,979,029
Shares issued in reinvestment
of distributions ..................... 229,051,296 554,430,197 13,728,740 88,754,506
Shares redeemed ....................... (813,142,556) (1,972,428,647) (94,851,839) (614,314,603)
------------------------------------------------------------------------------
Net increase (decrease) ............... 773,051,344 $ 1,871,831,945 (43,299,559) $ (280,581,068)
==============================================================================
Year ended September 30, 2005
Shares sold ........................... 3,233,548,786 $ 7,991,126,134 80,655,804 $ 532,927,988
Shares issued on merger
(Note 12) ............................ 22,580,678 57,129,115 -- --
Shares issued in reinvestment
of distributions ..................... 310,204,492 763,747,314 29,003,758 191,550,552
Shares redeemed ....................... (879,645,185) (2,171,621,114) (167,123,344) (1,104,836,982)
------------------------------------------------------------------------------
Net increase (decrease) ............... 2,686,688,771 $ 6,640,381,449 (57,463,782) $ (380,358,442)
==============================================================================
CLASS B SHARES:
Six months ended March 31, 2006
Shares sold ........................... 12,430,066 $ 30,015,075 815,328 $ 5,275,399
Shares issued in reinvestment
of distributions ..................... 32,807,752 79,076,887 1,068,261 6,902,585
Shares redeemed ....................... (109,146,923) (263,922,546) (8,470,911) (54,780,190)
------------------------------------------------------------------------------
Net increase (decrease) ............... (63,909,105) $ (154,830,584) (6,587,322) $ (42,602,206)
==============================================================================
Year ended September 30, 2005
Shares sold ........................... 216,067,791 $ 530,027,930 2,734,327 $ 18,126,694
Shares issued in reinvestment
of distributions ..................... 58,417,660 143,410,552 2,446,399 16,142,982
Shares redeemed ....................... (144,791,444) (356,130,670) (16,950,873) (111,954,538)
------------------------------------------------------------------------------
Net increase (decrease) ............... 129,694,007 $ 317,307,812 (11,770,147) $ (77,684,862)
==============================================================================
CLASS B1 SHARES:
Six months ended March 31, 2006
Shares sold ........................... 582,483 $ 1,417,988
Shares issued in reinvestment
of distributions ..................... 3,861,773 9,340,391
Shares redeemed ....................... (14,426,822) (35,005,834)
------------------------------------
Net increase (decrease) ............... (9,982,566) $ (24,247,455)
====================================
Year ended September 30, 2005
Shares sold ........................... 2,378,752 $ 5,860,213
Shares issued in reinvestment
of distributions ..................... 7,165,232 17,644,463
Shares redeemed ....................... (23,606,754) (58,282,155)
------------------------------------
Net increase (decrease) ............... (14,062,770) $ (34,777,479)
====================================
116 | 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 C SHARES:
Six months ended March 31, 2006
Shares sold ........................... 566,391,740 $ 1,381,213,208 4,524,599 $ 29,185,538
Shares issued in reinvestment
of distributions ..................... 92,791,777 225,951,361 1,078,042 6,944,258
Shares redeemed ....................... (376,519,882) (918,657,216) (12,646,112) (81,546,504)
----------------------------------------------------------------------------------
Net increase (decrease) ............... 282,663,635 $ 688,507,353 (7,043,471) $ (45,416,708)
==================================================================================
Year ended September 30, 2005
Shares sold ........................... 1,587,994,257 $ 3,945,015,780 11,343,153 $ 74,643,597
Shares issued in reinvestment
of distributions ..................... 128,622,410 318,755,436 2,413,285 15,876,049
Shares redeemed ....................... (411,346,115) (1,020,969,391) (25,359,338) (166,998,821)
==================================================================================
Net increase (decrease) ............... 1,305,270,552 $ 3,242,801,825 (11,602,900) $ (76,479,175)
==================================================================================
CLASS R SHARES:
Six months ended March 31, 2006
Shares sold ........................... 18,590,186 $ 44,779,754 1,575,419 $ 10,203,858
Shares issued in reinvestment
of distributions ..................... 1,787,791 4,293,949 218,505 1,412,300
Shares redeemed ....................... (8,620,497) (20,791,807) (1,758,697) (11,397,809)
==================================================================================
Net increase (decrease) ............... 11,757,480 $ 28,281,896 35,227 $ 218,349
==================================================================================
Year ended September 30, 2005
Shares sold ........................... 26,352,002 $ 64,518,265 4,180,818 $ 27,602,806
Shares issued in reinvestment
of distributions ..................... 2,379,605 5,812,421 421,527 2,782,416
Shares redeemed ....................... (9,872,431) (24,093,098) (3,423,452) (22,605,336)
==================================================================================
Net increase (decrease) ............... 18,859,176 $ 46,237,588 1,178,893 $ 7,779,886
==================================================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 2006
Shares sold ........................... 281,309,560 $ 678,383,877 11,145,619 $ 72,315,626
Shares issued in reinvestment
of distributions ..................... 37,324,983 90,047,993 1,182,917 7,666,655
Shares redeemed ....................... (32,689,002) (78,422,952) (6,499,727) (42,186,796)
==================================================================================
Net increase (decrease) ............... 285,945,541 $ 690,008,918 5,828,809 $ 37,795,485
==================================================================================
Year ended September 30, 2005
Shares sold ........................... 525,718,339 $ 1,292,792,031 13,517,268 $ 89,567,508
Shares issued in reinvestment
of distributions ..................... 38,816,130 95,287,128 1,992,298 13,178,931
Shares redeemed ....................... (21,661,227) (53,243,634) (15,208,235) (101,537,635)
==================================================================================
Net increase (decrease) ............... 542,873,242 $ 1,334,835,525 301,331 $ 1,208,804
==================================================================================
Semiannual Report | 117
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, 2006
Shares sold .............................................. 12,587,757 $ 150,420,375
Shares issued in reinvestment of distributions ........... 3,053,268 36,337,531
Shares redeemed .......................................... (17,522,460) (209,222,341)
---------------------------------
Net increase (decrease) .................................. (1,881,435) $ (22,464,435)
=================================
Year ended September 30, 2005
Shares sold .............................................. 34,569,804 $ 400,170,506
Shares issued in reinvestment of distributions ........... 4,305,025 49,165,990
Shares redeemed .......................................... (23,851,552) (273,769,155)
---------------------------------
Net increase (decrease) .................................. 15,023,277 $ 175,567,341
=================================
CLASS B SHARES:
Six months ended March 31, 2006
Shares sold .............................................. 281,085 $ 3,365,922
Shares issued in reinvestment of distributions ........... 151,043 1,795,116
Shares redeemed .......................................... (1,241,232) (14,787,339)
---------------------------------
Net increase (decrease) .................................. (809,104) $ (9,626,301)
=================================
Year ended September 30, 2005
Shares sold .............................................. 1,759,896 $ 19,743,236
Shares issued in reinvestment of distributions ........... 224,565 2,562,564
Shares redeemed .......................................... (2,233,960) (25,392,574)
---------------------------------
Net increase (decrease) .................................. (249,499) $ (3,086,774)
=================================
CLASS C SHARES:
Six months ended March 31, 2006
Shares sold .............................................. 2,540,294 $ 30,235,072
Shares issued in reinvestment of distributions ........... 375,638 4,455,243
Shares redeemed .......................................... (5,399,774) (64,220,086)
---------------------------------
Net increase (decrease) .................................. (2,483,842) $ (29,529,771)
=================================
Year ended September 30, 2005
Shares sold .............................................. 12,226,563 $ 139,657,945
Shares issued in reinvestment of distributions ........... 495,205 5,658,566
Shares redeemed .......................................... (6,002,579) (68,606,335)
---------------------------------
Net increase (decrease) .................................. 6,719,189 $ 76,710,176
=================================
CLASS R SHARES:
Six months ended March 31, 2006
Shares sold .............................................. 670,279 $ 7,994,509
Shares issued in reinvestment of distributions ........... 30,852 366,802
Shares redeemed .......................................... (405,293) (4,844,311)
---------------------------------
Net increase (decrease) .................................. 295,838 $ 3,517,000
=================================
Year ended September 30, 2005
Shares sold .............................................. 1,167,612 $ 13,713,510
Shares issued in reinvestment of distributions ........... 17,357 204,087
Shares redeemed .......................................... (175,789) (2,052,305)
---------------------------------
Net increase (decrease) .................................. 1,009,180 $ 11,865,292
=================================
118 | Semiannual Report
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, 2006
Shares sold ........................................... 760,806 $ 9,177,936
Shares issued in reinvestment of distributions ........ 164,902 1,969,134
Shares redeemed ....................................... (2,636,426) (31,564,655)
-------------------------------
Net increase (decrease) ............................... (1,710,718) $(20,417,585)
===============================
Year ended September 30, 2005
Shares sold ........................................... 5,741,424 $ 65,649,487
Shares issued in reinvestment of distributions ........ 243,650 2,814,290
Shares redeemed ....................................... (2,316,860) (26,747,491)
-------------------------------
Net increase (decrease) ............................... 3,668,214 $ 41,716,286
===============================
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 Custodian Funds are also officers and/or directors of the
following subsidiaries:
- --------------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Funds, except the Franklin Income Fund and 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 each of the funds as follows:
- ----------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ----------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $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
Semiannual Report | 119
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
Effective March 15, 2006, the Franklin Income Fund pays an investment management
fee to Advisers based on the month-end net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $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 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
Prior to March 15, 2006, an annualized fee rate of 0.36% was applicable to net
assets in excess of $20 billion.
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
C. DISTRIBUTION FEES
The Custodian Funds' Board of Directors has adopted distribution plans for each
share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1
under the 1940 Act. Under the Funds' Class A reimbursement distribution plans,
the Funds reimburse Distributors for costs incurred in connection with the sale
and distribution of each Fund's shares up to a certain percentage per year of
their average daily net assets 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%
Under the Class A reimbursement distribution plans, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
120 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Funds' compensation distribution plans, the Funds pay Distributors for
costs incurred in connection with the sale and distribution of each Fund's
shares 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 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%
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 a ..................... $79,505 335,967 $11,536,333
Contingent deferred sales charges retained ....... $21,647 108,657 $ 5,020,179
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Net sales charges received a ...................... $325,902 $197,797
Contingent deferred sales charges retained ........ $607,465 $152,818
a Net of commissions paid to unaffiliated broker/dealers.
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
----------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
----------------------------------------
Transfer agent fees ............................... $556,760 $1,685,264 $8,690,537
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
---------------------------------
Transfer agent fees ............................... $3,058,475 $983,216
Semiannual Report | 121
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
Prior to March 15, 2006, Advisers had agreed in advance to voluntarily waive a
portion of management fees for the Franklin Income Fund, as noted in the
Statement of Operations, 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
Effective March 15, 2006, the waiver was discontinued.
G. OTHER AFFILIATED TRANSACTIONS
Included in professional fees are legal fees of $55,100 that were paid to a law
firm in which a partner is an officer of the Custodian Funds.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended March 31, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
At September 30, 2005, the funds had tax basis capital losses which may be
carried over to offset future capital gains, if any.
At September 30, 2005, the capital loss carryforwards were as follows:
------------------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT
DYNATECH GROWTH INCOME SECURITIES
FUND FUND FUND FUND
------------------------------------------------------------------
Capital loss carryforwards expiring in:
2006 ..................................... $ -- $ -- $ -- $ 28,279,472
2007 ..................................... 677,592 -- -- 18,954,412
2008 ..................................... 394,928 -- -- 21,105,846
2009 ..................................... 1,170,048 -- -- 46,256,951
2010 ..................................... 6,843,771 -- 4,507,154 11,768,551
2011 ..................................... 47,180,600 172,953,217 4,348,077 33,556,845
2012 ..................................... 21,838,085 39,052,129 496,170 129,102,166
2013 ..................................... 14,781,620 -- -- 74,283,298
----------------------------------------------------------------
$92,886,644 $212,005,346 $9,351,401 $363,307,541
================================================================
122 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses, realized currency losses, and
ordinary income losses, occurring subsequent to October 31, may be deferred and
treated as occurring on the first day of the following fiscal year. At September
30, 2005, the Franklin U.S. Government Securities Fund deferred realized capital
losses of $44,205,685. At September 30, 2005, the Franklin DynaTech Fund, the
Franklin Growth Fund and the Franklin Utilities Fund deferred realized currency
losses of $3,804, $7,060 and $369,187, respectively. At September 30, 2005, the
Franklin Income Fund and the Franklin Utilities Fund deferred ordinary income
losses of $11,931,281 and $4,624,565, respectively.
At March 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
---------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
---------------------------------------------------
Cost of investments .................................. $464,687,547 $ 947,651,278 $39,581,362,236
===================================================
Unrealized appreciation $317,131,155 $1,473,544,596 $ 3,593,370,226
Unrealized depreciation .............................. (7,664,272) (6,240,101) (1,585,875,669)
---------------------------------------------------
Net unrealized appreciation (depreciation) ........... $309,466,883 $1,467,304,495 $ 2,007,494,557
===================================================
-------------------------------
FRANKLIN
U.S.
GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------
Cost of investments .................................. $6,920,517,919 $1,846,133,305
===============================
Unrealized appreciation .............................. $ 39,910,846 $ 632,176,347
Unrealized depreciation .............................. (125,437,641) (25,012,631)
-------------------------------
Net unrealized appreciation (depreciation) ........... $ (85,526,795) $ 607,163,716
===============================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, paydown losses and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, paydown losses and bond discounts and premiums.
Semiannual Report | 123
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended March 31, 2006, were as follows:
-------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------------------------------------------------------
Purchases ............................. $88,790,410 $ 39,519,811 $10,361,518,523
Sales ................................. $99,927,812 $106,872,130 $ 6,870,076,991
-------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-------------------------------
Purchases ............................. $771,040,598 $ 95,014,999
Sales ................................. $977,939,021 $183,463,554
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 and
administrative fees paid by the Sweep Money Fund.
8. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Income Fund has 37.06% 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 Franklin Income Fund held defaulted securities and/or other securities for
which the income has been deemed uncollectible. At March 31, 2006, the aggregate
value of these securities was $1,118,250,230 representing 2.69% of fund's net
assets. The fund discontinues accruing income on securities for which income has
been deemed uncollectible and provides an estimate for losses on interest
receivable. The securities have been identified on the accompanying Statement of
Investments.
124 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. RESTRICTED SECURITIES
At March 31, 2006, investments in securities included issues that are restricted
under the Securities Act of 1933 (the 1933 Act). Restricted securities are often
purchased in private placement transactions, and cannot be sold without prior
registration, unless the sale is pursuant to an exemption under the 1933 Act.
At March 31, 2006, the Franklin Income Fund held investments in restricted
securities, valued in accordance with procedures approved by the fund's Board of
Directors as reflecting fair value, as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/ ACQUISITION
SHARES ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ......... 2/14/97 - 7/18/00 $57,833,250 $ 817,500
$ 113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 5.664%,
4/29/15 ................................................... 4/30/05 26,274 25,509
$ 294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 5.664%,
4/29/18 ................................................... 4/30/05 68,317 66,329
$ 607,466 Pindo Deli Finance Mauritius Ltd., 144A, zero cpn.,
4/29/25 ................................................... 4/30/05 141,151 137,045
$12,883,549 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN,
5.664%, 4/29/15 ........................................... 4/30/05 3,926,906 3,812,242
$33,160,560 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN,
5.664%, 4/29/18 ........................................... 4/30/05 10,107,339 9,812,210
$42,601,657 Tjiwi Kimia Finance Mauritius, secured note, 144A, zero cpn.,
4/29/25 ................................................... 4/30/05 12,984,985 12,605,830
-----------
TOTAL RESTRICTED SECURITIES (0.07% OF NET ASSETS) ........... $27,276,665
===========
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, 2006 were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/ SHARES/
PRINCIPAL PRINCIPAL REALIZED
HELD AT HELD AT VALUE CAPITAL
BEGINNING GROSS GROSS END AT END INVESTMENT GAIN
NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Aquila Inc. ...................... 25,000,000 -- 25,000,000 -- -- -- 12,617,854
Aquila Inc., senior note,
14.875%, 7/01/12 ............... 95,400,000 -- -- 95,400,000 a 7,095,375 --
Canadian Oil Sands Trust ......... 5,600,000 -- 300,000 5,300,000 760,676,515 11,893,912 32,959,928
Puget Energy Inc. ................ 4,137,000 3,363,000 -- 7,500,000 158,850,000 2,909,250 --
----------------------------------------
TOTAL AFFILIATED SECURITIES
(2.21% of Net Assets) $919,526,515 $21,898,537 $45,577,782
========================================
a As of March 31, 2006, no longer an affiliate.
Semiannual Report | 125
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. OTHER CONSIDERATIONS
Directors or employees Franklin Advisers, Inc., as the Franklin Income Fund's
Investment Manager, may serve as members of various bondholders' steering
committees, on credit committees, or may represent the Fund in certain corporate
negotiations. At March 31, 2006, such individuals serve in one or more of these
capacities for Calpine Corp. and Calpine Canada Energy Finance. As a result of
this involvement, such individuals may be in possession of certain material
non-public information. If the Franklin Income Fund's Investment Manager, while
in possession of such information, seeks to buy or sell any of these securities,
it will comply with all applicable federal securities laws.
Subject to certain terms and conditions, the Franklin Income Fund has agreed to
sell its holdings in Asia Pulp & Paper Co. Ltd., Pindo Deli Finance Mauritius
Ltd. and Tjiwi Kimia Finance Mauritius in November 2006. Until the completion of
sale, the transaction is being 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. MERGER
On August 4, 2005, the Franklin Income Fund acquired the net assets of the
Franklin Multi-Income Trust pursuant to a plan of reorganization approved by the
Franklin Multi-Income Trust's shareholders. The merger was accomplished by a
tax-free exchange of 22,580,678 Class A shares of the Fund (valued at $2.53) for
the net assets of the Franklin Multi-Income Trust which aggregated $57,129,115,
including $13,521,127 of unrealized appreciation (depreciation). The merger was
accounted for as a pooling-of-interests without restatement for financial
reporting purposes. The combined net assets of the Fund immediately after the
merger were $37,481,139,819.
13. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
126 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. REGULATORY MATTERS (CONTINUED)
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds in March, 2005. The
SEC has not yet approved the distribution plan pertaining to the December 13,
2004 SEC Order. When approved, disbursements of settlement monies will be made
promptly to the relevant funds, in accordance with the terms and conditions of
that order. The IDC has also prepared and submitted to the SEC for its approval
a plan of distribution under the August 2, 2004 SEC Order that resolved the
SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend 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. 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.
Semiannual Report | 127
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 28, 2006, the Board of Directors ("Board"), including
a majority of non-interested or independent Directors, approved renewal of the
investment management agreement for each of the five separate funds comprising
Franklin Custodian Funds ("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, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report 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. 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 and its affiliates 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 was 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
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement 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 management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
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
128 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
complex, the adherence to fair value pricing procedures established by the
Board, and the accuracy of net 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 functioned smoothly
during the hurricanes and blackout experienced last year in Florida. Among other
factors taken into account by the Board were the Manager's best-execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. 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 interests 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 firsthand
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 report furnished for the agreement renewals.
The Lipper report prepared for each individual Fund showed the investment
performance of its Class A shares during 2005 and the previous ten years ended
December 31, 2005, in comparison with a performance universe selected by Lipper.
The following summarizes the performance results for each Fund.
FRANKLIN DYNATECH 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 Lipper report showed its total return
during 2005 placed it in the second-highest quintile of such performance
universe. Its total return on an annualized basis placed it in the fourth or
second-lowest quintile for the previous three-year period but in the first or
highest quintile for the previous five- and ten-year periods. The Board
expressed satisfaction with such performance.
Semiannual Report | 129
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (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 Lipper report showed its total return during 2005 ranked it in the top
half of its performance universe. Its total return on an annualized basis ranked
it in the middle quintile of the performance universe during each of the
previous three- and five-year periods, and the fourth or second-lowest quintile
during the previous ten-year period. The Board found such performance
acceptable, noting that the Fund's annualized total return for the previous
ten-year period exceeded 7.5% 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 income funds as classified by
Lipper. The Fund's Lipper report showed its income return during 2005 and for
each of the previous ten years was in the first or highest quintile of this
performance universe. The Fund's total return as shown in such report during
2005 was in the lowest quintile of its performance universe, but on an
annualized basis was in the highest quintile of its performance universe during
each of the previous three-, five- and ten-year periods. 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 Lipper report showed its income return
during 2005 and during each of the previous three-, five- and ten-year periods
on an annualized basis was in the first or highest quintile of such performance
universe. The Fund's total return during 2005, as shown in such report, was in
the first or highest quintile of its performance universe during 2005, and on an
annualized basis was in the first- or second-highest quintiles of such universe
for each of the previous three-, 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 Lipper report showed its
income return during 2005, as well as during each of the previous three-,
five-and ten-year periods on an annualized basis was in the first or highest
quintile of such performance universe. The Fund's total return during 2005
placed it in the fourth or next-to-lowest quintile of its performance universe,
and on an annualized basis placed it in the fourth quintile of its performance
universe during the previous three-year period, the highest quintile during the
previous five-year period, and in the middle quintile for the previous ten-year
period. The Board expressed satisfaction with such performance, noting that the
Fund had a total return of 10.74% in 2005 as shown in such Lipper report.
130 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (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 services covered under each Fund's investment
management agreement was similar to those provided by fund managers to other
mutual fund groups that would be used as a basis of comparison in the Lipper
report. 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 Lipper expense group. The Lipper effective
management fee analysis considers administrative charges as being part of
management fees and total expenses for comparative consistency are shown by
Lipper for Fund Class A shares. The results of such expense comparisons showed
that the effective management fee rate for each of Franklin DynaTech Fund,
Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund was in
the lowest quintile of their respective Lipper expense groups, and for Franklin
U.S. Government Securities Fund was at the median of its Lipper expense group.
The actual total expenses for all the Funds were in the lowest quintile of their
respective Lipper expense groups. Based upon the above, the Board was satisfied
with the management fees and total expenses of each Fund in comparison to its
respective Lipper expense group as shown in the Lipper report.
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 that financed up-front
commissions paid to brokers/dealers who sold fund Class B 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 Funds made in
prior years and that the Funds' independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Funds' Board solely for
their purposes and use in reference to the profitability analysis. Included in
the analysis were the revenue and related costs involved in providing services
to the Fund, as well as each Fund's relative contribution to the profitability
of the Manager's parent. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in
Semiannual Report | 131
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
establishing the infrastructure necessary to the type of mutual fund operations
conducted by the Manager and its 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 its consideration of all these
factors, the Board determined that the level of profits realized by the Manager
and its affiliates from providing services to 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 management
agreement with each Fund provided an initial fee of 0.625% on the first $100
million of assets; 0.50% on the next $150 million of assets; 0.45% on the next
$9.75 billion of assets; 0.44% on the next $2.5 billion of assets; and
thereafter declined by 2 basis points for each subsequent $2.5 billion until
reaching a final breakpoint of 0.36% for assets in excess of $20 billion. The
only Fund whose assets exceed $20 billion is Franklin Income Fund and the
investment management agreement was amended at the February 28, 2006, Board
meeting to further reduce the fees to 0.355% on net assets in excess of $35
billion up to $50 billion, and to 0.35% on assets in excess of $50 billion. Such
reductions formalized fee waivers previously agreed to by the Manager at a Board
meeting held April 19, 2005. In discussing such overall fee structure,
management stated its view that it reaches a relatively low rate quickly,
reflecting anticipated economies of scale as a Fund's assets increase and
pointed out the favorable effective management fee and total expense comparisons
for each Fund within its Lipper expense group, as previously discussed under
"Comparative Expenses." 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 management agreement for each Fund provided a sharing of benefits
with the Fund and its shareholders.
132 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS, INC.
SHAREHOLDER INFORMATION (CONTINUED)
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.
Semiannual Report | 133
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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 MidCap Value Fund
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
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
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
'
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 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
1. The fund is closed to new investors. Existing shareholders 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. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
6. Portfolio of insured municipal securities.
7. 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).
8.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05 Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
|_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
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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 S2006 05/06
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial 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. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Directors that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) Changes in Internal Controls. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a) Code of Ethics
(a)(2) 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) 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
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date May 22, 2006
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
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date May 22, 2006
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date May 22, 2006