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: 3/31/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC OMITTED)
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MARCH 31, 2007
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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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WANT TO RECEIVE
THIS DOCUMENT
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FRANKLIN
CUSTODIAN FUNDS, INC. Eligible shareholders can
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See inside for details.
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[LOGO] (R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
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
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 BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund(1)
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 Balanced Fund
Franklin Blue Chip Fund(1)
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 Global Real Estate 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
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(4)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund(5)
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(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan(7)
Arizona Minnesota(7)
California(8) Missouri
Colorado New Jersey
Connecticut New York(8)
Florida(8) North Carolina
Georgia Ohio(7)
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts(7) Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the semiannual report
Contents
SHAREHOLDER LETTER ....................................................... 1
SEMIANNUAL REPORT
Franklin DynaTech Fund ................................................... 3
Franklin Growth Fund ..................................................... 11
Franklin Income Fund ..................................................... 19
Franklin U.S. Government Securities Fund ................................. 31
Franklin Utilities Fund .................................................. 41
Financial Highlights and Statements of Investments ....................... 50
Financial Statements ..................................................... 98
Notes to Financial Statements ............................................ 107
Shareholder Information .................................................. 124
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Semiannual Report
Franklin DynaTech Fund
YOUR FUND'S GOALS 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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This semiannual report for Franklin DynaTech Fund covers the period ended March
31, 2007.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A posted a +5.39% cumulative total return for the
six months under review. For the same period, the Fund underperformed its narrow
benchmark, the NASDAQ 100 Index, which had a price-only return of +7.15%, and
the broader Standard & Poor's 500 Index (S&P 500), which posted a +7.38%
cumulative total return. 1 You can find the Fund's long-term performance data in
the Performance Summary beginning on page 7.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2007, the U.S. economy advanced at a
moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the
fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter.
Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase
in exports, the U.S. entered 2007 with a record current account deficit.
Corporate profits and government spending generally remained robust, but
manufacturing activity indicated a downturn. The struggling housing market grew
more fragile with the abrupt unraveling of the subprime mortgage market. This
exacerbated already weak housing prices and an inventory glut in most of the
nation's residential real estate markets.
1. Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of
the largest domestic and international nonfinancial companies listed on
The NASDAQ Stock Market based on market capitalization. The index reflects
companies across major industry groups including computer hardware and
software, telecommunications, retail/wholesale trade and biotechnology. It
does not contain financial companies including investment companies. The
NASDAQ 100 Index is calculated under a modified capitalization-weighted
methodology. Index returns are price-return only and do not include
reinvested dividends. The S&P 500 consists of 500 stocks chosen for market
size, liquidity and industry group representation. Each stock's weight in
the index is proportionate to its market value. The S&P 500 includes
reinvested dividends and is one of the most widely used benchmarks of U.S.
equity performance. The indexes are unmanaged. One cannot invest directly
in an index, nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 53.
Semiannual Report | 3
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 3/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Medical Specialties 10.9%
Packaged Software 8.9%
Biotechnology 8.7%
Semiconductors 8.0%
Internet Software & Services 6.2%
Computer Processing Software 5.8%
Electronic Production Equipment 4.9%
Telecommunications Equipment 4.2%
Information Technology Services 4.1%
Wireless Communications 3.8%
Other Pharmaceuticals 3.1%
Services to the Health Industry 3.0%
Oilfield Services & Equipment 2.9%
Major Pharmaceuticals 2.3%
Recreational Products 2.1%
Computer Communications 2.1%
Medical & Nursing Services 2.0%
Other 16.3%
Short-Term Investments & Other Net Assets 0.7%
Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%,
though overall job growth slowed in the face of rising labor costs. 2 Jobs in
vehicle manufacturing and housing-related industries experienced declines
stemming from reduced consumer demand. Even though tight labor markets and the
associated wage income growth supported consumer spending, consumer confidence
waned in February and March, and large purchases, including those for vehicles
and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as
oil hit a six-month high due to tight supply and high demand, refinery
maintenance issues, and ongoing geopolitical tensions in the Middle East and
Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months
ended March 31, 2007, which was higher than the 2.2% 10-year average. 3
At period-end, the Federal Reserve Board (Fed) was still more concerned with
relatively high inflation than an economic slowdown. Risks to growth have
increased but not enough for the Fed to change its orientation to fighting
inflation. The Fed kept the federal funds target interest rate steady at 5.25%
during the period, while also indicating a change in its long-held tightening
bias, easing the near-term pressure for potential rate hikes.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. Investors reacted swiftly
to market and geopolitical events, especially in regard to China and the Middle
East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while
the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials,
utilities and telecommunications stocks performed particularly well.
INVESTMENT STRATEGY
Based on our independent analysis of individual companies, we search for leading
companies that we believe have a sustainable competitive advantage
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.
4 | Semiannual Report
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 six months under review, several holdings contributed to Fund
performance. In particular, the Fund's position in Apple rose in value due
largely to strong sales of its digital music players and services, PCs and
related computer hardware devices. The iconic iPod surpassed 100 million units
sold, while the iPhone's January 2007 unveiling and the introduction of new
products, including movie downloads from iTunes, helped Apple remain a step
ahead of its competition in the fast-paced consumer electronics industry.
Stryker, which engages in the development, manufacture and marketing of
orthopedic products and medical specialties, was another major contributor to
the Fund's overall results. Stryker's committed management team, dominant
position in a niche market, solid balance sheet and rapidly growing earnings
helped Stryker's share price increase significantly during the six months under
review.
Google, a leader in targeted advertising and Internet search solutions
worldwide, benefited from continued strong demand for search advertisements.
Furthermore, by period-end Google had captured more than two-thirds of the U.S.
search market, a 10% increase since March 2006. Google's share price rose during
the reporting period, which benefited the Fund.
On the other hand, some stocks had negative returns and hindered Fund
performance during the reporting period. Our investment in Motorola, which
provides wireless and broadband communication products worldwide, fell in value.
The primary reasons for Motorola's share price decline included a lack of new
products combined with an increase in competition among its existing product
niches, weak wireless handset sales, and price cuts for its popular but aging
RAZR line of cell phones, all of which impeded the company's earnings and profit
margins.
Biotechnology bellwether Amgen's share price fell this reporting period due in
part to investor concerns over Swiss rival Roche's new anemia drug, CERA. There
was speculation that CERA, which has yet to be released, could pose a threat to
future sales of Amgen's dominant products in the anemia treatment market, namely
Epogen and Aranesp. Furthermore, Amgen received troubling news from clinical
studies on its anemia drugs, prompting the Food and Drug
TOP 10 HOLDINGS
Franklin DynaTech Fund 3/31/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Google Inc., A 3.8%
INTERNET SOFTWARE & SERVICES
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Genentech Inc. 3.8%
BIOTECHNOLOGY
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Microsoft Corp. 3.7%
PACKAGED SOFTWARE
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Intel Corp. 3.7%
SEMICONDUCTORS
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Apple Inc. 3.4%
COMPUTER PROCESSING HARDWARE
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Adobe Systems Inc. 3.0%
PACKAGED SOFTWARE
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Hewlett-Packard Co. 2.3%
COMPUTER PROCESSING HARDWARE
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Stryker Corp. 2.2%
MEDICAL SPECIALTIES
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Alcon Inc. (Switzerland) 2.2%
MEDICAL SPECIALTIES
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Electronic Arts Inc. 2.1%
RECREATIONAL PRODUCTS
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Semiannual Report | 5
Administration (FDA) to immediately place warnings on Epogen, Aranesp and the
company's other anemia remedy, Procrit, which would likely impact the company's
near-term results.
In what was a difficult six months for semiconductor companies in general,
Intel's share price declined and hindered our overall results. The pricing
environment for PC microprocessors was more brutal than expected, especially
between Intel and longtime rival Advanced Micro Devices (AMD). A prolonged price
war, and the resulting weaker prices for computer chips, negatively impacted
Intel's bottom line even as Intel gained some market share over AMD through the
first quarter of 2007.
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
Portfolio Management Team
Franklin DynaTech Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2007, 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.
6 | Semiannual Report
Performance Summary as of 3/31/07
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 3/31/07 9/30/06
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Net Asset Value (NAV) +$1.39 $27.19 $25.80
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CLASS B (SYMBOL: FDNBX) CHANGE 3/31/07 9/30/06
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Net Asset Value (NAV) +$1.24 $25.99 $24.75
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CLASS C (SYMBOL: FDYNX) CHANGE 3/31/07 9/30/06
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Net Asset Value (NAV) +$1.22 $25.72 $24.50
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PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN
SEVEN DAYS OF PURCHASE.
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CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +5.39% +1.38% +36.91% +106.16%
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Average Annual Total Return 2 -0.66% -4.46% +5.23% +6.87%
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Value of $10,000 Investment 3 $ 9,934 $9,554 $12,905 $19,427
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Total Annual Operating Expenses 4 0.97%
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CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
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Cumulative Total Return 1 +5.01% +0.66% +31.80% -4.59%
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Average Annual Total Return 2 +1.01% -3.34% +5.35% -0.65%
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Value of $10,000 Investment 3 $10,101 $9,666 $12,980 $ 9,541
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Total Annual Operating Expenses 4 1.72%
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CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +4.98% +0.63% +31.90% +90.50%
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Average Annual Total Return 2 +3.98% -0.37% +5.69% +6.66%
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Value of $10,000 Investment 3 $10,398 $9,963 $13,190 $19,050
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Total Annual Operating Expenses 4 1.71%
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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.
Semiannual Report | 7
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND
TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE) COULD RESULT
IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID
PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF
COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE FUND MAY ALSO
INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS
RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE
PRICES 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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.
4. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8 | Semiannual Report
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 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 | 9
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 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,053.90 $5.17
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.90 $5.09
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,050.10 $9.00
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.16 $8.85
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,049.80 $8.99
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.16 $8.85
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.01%; B: 1.76%; and C: 1.76%), multiplied by the average account value
over the period, multiplied by 182/365 to reflect the one-half year
period.
10 | Semiannual Report
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Growth Fund's semiannual report for the
period ended March 31, 2007.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A posted a +7.92% cumulative total return for the
six months under review. The Fund outperformed its benchmark, the Standard &
Poor's 500 Index (S&P 500), which returned +7.38% for the same period. 1 You can
find the Fund's long-term performance data in the Performance Summary beginning
on page 14.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2007, the U.S. economy advanced at a
moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the
fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter.
Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase
in exports, the U.S. entered 2007 with a record current account deficit.
Corporate profits and government spending generally remained robust, but
manufacturing activity indicated a downturn. The struggling housing market grew
more fragile with the abrupt unraveling of the subprime mortgage market. This
exacerbated already weak housing prices and an inventory glut in most of the
nation's residential real estate markets.
Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%,
though overall job growth slowed in the face of rising labor costs. 2 Jobs in
vehicle manufacturing and housing-related industries experienced declines
stemming from reduced consumer demand. Even though tight labor markets and the
associated wage income growth supported consumer spending, consumer confidence
waned in February and March, and large purchases, including those for vehicles
and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as
oil hit a six-month high due to tight supply and
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 62.
Semiannual Report | 11
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 3/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Electronic Technology* 23.2%
Health Technology* 19.8%
Producer Manufacturing 18.6%
Technology Services* 9.2%
Transportation 7.0%
Consumer Services 4.7%
Distribution Services 3.2%
Consumer Non-Durables 2.7%
Commercial Services 2.6%
Process Industries 2.1%
Other 5.9%
Short-Term Investments & Other Net Assets 1.0%
* 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.
high demand, refinery maintenance issues, and ongoing geopolitical tensions in
the Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose
2.5% for the 12 months ended March 31, 2007, which was higher than the 2.2%
10-year average. 3
At period-end, the Federal Reserve Board (Fed) was still more concerned with
relatively high inflation than an economic slowdown. Risks to growth have
increased but not enough for the Fed to change its orientation to fighting
inflation. The Fed kept the federal funds target interest rate steady at 5.25%
during the period, while also indicating a change in its long-held tightening
bias, easing the near-term pressure for potential rate hikes.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. Investors reacted swiftly
to market and geopolitical events, especially in regard to China and the Middle
East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while
the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials,
utilities and telecommunication stocks performed particularly 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 businesses selling at depressed prices
but offering favorable recovery possibilities. We analyze securities
individually and buy stocks of large and small companies in our effort to
maintain a solid and diversified portfolio.
MANAGER'S DISCUSSION
Franklin Growth Fund owned holdings in 96 companies at period-end. We continued
to invest in a broad array of companies of all sizes and in varied industries.
During the reporting period, the Fund's top performer was Air France-KLM.
Largely due to recent airline industry reorganizations, we found it difficult to
invest in the industry. Nonetheless, consistent with our strategy, we found
value
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.
12 | Semiannual Report
in some stocks. At period-end, our six airline holdings, Air France-KLM, Alaska
Air Group, AMR, British Airways, Continental Airlines and Southwest Airlines,
together represented 5.8% of the Fund's total net assets. 5 Elsewhere, notable
performers included Johnson Controls, Yahoo!, Apple and International Business
Machines.
The Fund had some detractors from performance in the past six months. Molex, a
leading electronic components supplier that offers worldwide interconnect
solutions, missed its earnings targets during the period and had issues with
option pricings. A large portion of Molex shares is owned by one family who, in
our analysis, sold stock for estate planning and diversification. We continue to
like the company's leadership and think the share price was attractive near
period-end.
Other detractors included Amgen and Quest Diagnostics. Biotechnology bellwether
Amgen's share price fell this reporting period due in part to investor concerns
over Swiss rival Roche's new anemia drug, CERA. There was speculation that CERA,
which has yet to be released, could pose a threat to future sales of Amgen's
dominant products in the anemia treatment market, namely Epogen and Aranesp.
Furthermore, Amgen received troubling news from clinical studies on its anemia
drugs, prompting the Food and Drug Administration (FDA) to immediately place
warnings on Epogen, Aranesp and the company's other anemia remedy, Procrit,
which would likely impact the company's near-term results. Quest's stock fell in
value after the company lost a large contract with United Health Care. Quest is
a leader in health care testing, and although recovery from the contract loss
could be slow, we remained confident in the company's prospects.
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
5. The Fund's airline holdings are in the transportation industry in the SOI.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2007, 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.
TOP 10 HOLDINGS
Franklin Growth Fund
3/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Apple Inc. 3.6%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
The Boeing Co. 3.4%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Genentech Inc. 3.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
General Dynamics Corp. 3.0%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
Northrop Grumman Corp. 2.9%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
3M Co. 2.4%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Johnson & Johnson 2.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
International Business Machines Corp. 2.0%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Computer Sciences Corp. 2.0%
TECHNOLOGY SERVICES
- --------------------------------------------------------------------------------
Amgen Inc. 2.0%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
Semiannual Report | 13
Performance Summary as of 3/31/07
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 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.99 $42.09 $39.10
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1064
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.82 $40.47 $37.65
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.80 $40.12 $37.32
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.00 $41.80 $38.80
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0072
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.95 $42.12 $39.17
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2006
- --------------------------------------------------------------------------------
14 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.92% +10.15% +33.12% +106.62%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.71% +3.81% +4.64% +6.89%
- -------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,171 $10,381 $12,546 $19,475
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 4 0.91%
- -------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.49% +9.29% +28.23% +38.69%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.49% +5.29% +4.77% +4.05%
- -------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,349 $10,529 $12,623 $13,869
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 4 1.67%
- -------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.53% +9.32% +28.25% +91.61%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +6.53% +8.32% +5.10% +6.72%
- -------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,653 $10,832 $12,825 $19,161
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 4 1.66%
- -------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +7.78% +9.84% +31.44% +32.73%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +7.78% +9.84% +5.62% +5.55%
- -------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,778 $10,984 $13,144 $13,273
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 4 1.17%
- -------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.05% +10.39% +34.75% +111.56%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.05% +10.39% +6.15% +7.78%
- -------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,805 $11,039 $13,475 $21,156
- -------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 4 0.67%
- -------------------------------------------------------------------------------------------------
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 | 15
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. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN
STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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.
4. Figures are as stated in the Fund's prospectus current as of the date of
this report.
16 | 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 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 | 17
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 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,079.20 $4.82
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.68
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,074.90 $8.74
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.50 $8.50
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,075.30 $8.74
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.50 $8.50
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,077.80 $6.22
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.04
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,080.50 $3.63
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.44 $3.53
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.93%; B: 1.69%; C: 1.69%; R: 1.20%; and Advisor: 0.70%), multiplied by
the average account value over the period, multiplied by 182/365 to
reflect the one-half year period.
18 | Semiannual Report
Franklin Income Fund
YOUR FUND'S GOALS 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.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Income Fund's semiannual report for the
period ended March 31, 2007.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A posted a +9.95% cumulative total return for the
six months under review. The Fund outperformed the equity benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +7.38%; outperformed the
fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which
returned +2.76%; and outperformed its peers as measured by the Lipper
Mixed-Asset Target Allocation Moderate Funds Classification Average, which
returned +6.45%, for the same period. 1 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 25.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2007, the U.S. economy advanced at a
moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the
fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter.
Although GDP rose 3.3% in 2006 on strong domestic demand and a
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 Mixed-Asset Target Allocation
Moderate Funds Classification Average is calculated by averaging the total
returns of all funds within the Lipper Mixed-Asset Target Allocation
Moderate Funds classification in the Lipper Open-End underlying funds
universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined
as funds that, by portfolio practice, maintain a mix of between 40%-60%
equity securities, with the remainder invested in bonds, cash and cash
equivalents. For the six-month period ended 3/31/07, there were 452 funds
in this category. Lipper calculations do not include sales charges or
expense subsidization by a fund's manager. The Fund's performance relative
to the average may have differed if these and other factors had been
considered. Past performance does not guarantee future results. The
indexes are unmanaged and include reinvestment of any income or
distributions. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 72.
Semiannual Report | 19
healthy increase in exports, the U.S. entered 2007 with a record current account
deficit. Corporate profits and government spending generally remained robust,
but manufacturing activity indicated a downturn. The struggling housing market
grew more fragile with the abrupt unraveling of the subprime mortgage market.
This exacerbated already weak housing prices and an inventory glut in most of
the nation's residential real estate markets.
Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%,
though overall job growth slowed in the face of rising labor costs. 2 Jobs in
vehicle manufacturing and housing-related industries experienced declines
stemming from reduced consumer demand. Even though tight labor markets and the
associated wage income growth supported consumer spending, consumer confidence
waned in February and March, and large purchases, including those for vehicles
and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as
oil hit a six-month high due to tight supply and high demand, refinery
maintenance issues, and ongoing geopolitical tensions in the Middle East and
Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months
ended March 31, 2007, which was higher than the 2.2% 10-year average. 3
At period-end, the Federal Reserve Board (Fed) was still more concerned with
relatively high inflation than an economic slowdown. Risks to growth have
increased but not enough for the Fed to change its orientation to fighting
inflation. The Fed kept the federal funds target interest rate steady at 5.25%
during the period, while also indicating a change in its long-held tightening
bias, easing the near-term pressure for potential rate hikes.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. Investors reacted swiftly
to market and geopolitical events, especially in regard to China and the Middle
East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while
the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials,
utilities and telecommunications stocks performed particularly 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.
20 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/06-3/31/07
- -----------------------------------------------------------------------------------------
DIVIDEND PER SHARE
------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- -----------------------------------------------------------------------------------------
October 1.20 cents 1.03 cents 1.09 cents 1.09 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------
November 1.20 cents 1.03 cents 1.09 cents 1.09 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------
December 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------
January 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------
February 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents
- -----------------------------------------------------------------------------------------
March 1.20 cents 1.01 cents 1.08 cents 1.08 cents 1.13 cents 1.23 cents
- -----------------------------------------------------------------------------------------
TOTAL 7.20 CENTS 6.10 CENTS 6.53 CENTS 6.56 CENTS 6.75 CENTS 7.38 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 results relative to the gains
experienced in the overall U.S. equity market can be attributed to several
factors. In general, the Fund benefited from a relatively balanced mix of equity
(primarily dividend paying common stocks) and debt securities (primarily U.S.
corporate bonds).
The Fund's large weighting in the electric utilities sector was a significant
driver of total return through attractive dividends and stock price
appreciation. Leading contributors to Fund performance included TXU,
FirstEnergy, Dominion Resources, FPL Group and Public Service Enterprise Group.
Improved industry fundamentals, driven in part by increased power demand and an
improved outlook for the industry's supply and demand balance, along
Semiannual Report | 21
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
3/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
AT&T Inc. 2.4%
COMMUNICATIONS
- --------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 2.4%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Pfizer Inc. 2.2%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
TXU Corp. 1.8%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Washington Mutual Inc. 1.8%
FINANCE
- --------------------------------------------------------------------------------
TOP 5 BOND HOLDINGS*
Franklin Income Fund
3/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
GMAC LLC 3.2%
FINANCE
- --------------------------------------------------------------------------------
Ford Motor Credit Co. 3.1%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Tenet Healthcare Corp. 2.3%
HEALTH SERVICES
- --------------------------------------------------------------------------------
Allied Waste North America Inc. 1.9%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
CCH LLC 1.3%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
* Does not include convertible bonds.
with investor optimism regarding prospects for meeting new utility
infrastructure needs, created a positive backdrop for share price performance.
Following its failed merger attempt with Exelon, Public Service Enterprise Group
benefited from improved power market fundamentals in its core New Jersey area
market and efficient management of the company's low-cost generating assets.
According to our analysis, the company's improving balance sheet profile may
enable increased future dividend growth. In regard to TXU, the company's shares
climbed after a takeover bid from a leading group of private equity investors
including KKR (Kohlberg Kravis Roberts & Co.) and TPG (Texas Pacific Group).
Communications sector investments also benefited Fund performance, including our
holdings of major telecommunications service companies AT&T, BellSouth and
Verizon Communications. During the period, BellSouth merged with AT&T, sparking
opportunities for merger-related synergies and contributing to an improved
fundamental profile which was somewhat due to the recent wave of industry
consolidation. AT&T, the newly combined company, is benefiting from strong
fundamentals in wireless services and an improved outlook for its consumer
broadband and enterprise data services.
Within the Fund's fixed income sectors, we continued to favor investments in
U.S. corporate bonds, driven by our view that corporate fundamentals remained
strong during the six-month reporting period. During this time, the average
corporate bond yield spread versus U.S. Treasury securities declined from 371
basis points (100 basis points equal one percentage point) to 316 basis points
according to the Credit Suisse (CS) High Yield Index. 5 The 10-year U.S.
Treasury yield ended the reporting period about where it began, at 4.65%, after
trading in a range from 4.43% to 4.90%.
5. Source: Credit Suisse. The CS High Yield Index is designed to mirror the
investable universe of the U.S. dollar-denominated high yield debt market.
22 | Semiannual Report
Significant contributors included our corporate bond holdings in CCH LLC, a
major cable services provider. CCH provides its customers with a wide range of
products including telephony, digital cable and high-speed data services. While
still dealing with a significant overall debt burden, CCH management's recent
efforts have improved the company's earnings results, which we believe could
position it favorably for future growth. They also improved the company's
balance sheet profile, which we believe has the potential to provide the
necessary liquidity for future CCH operations.
The Fund held several bond investments in integrated power company Calpine.
Although Calpine continued to pursue reorganization following its Chapter 11
bankruptcy filing at the end of 2005, Calpine bonds appreciated significantly
during the period. The favorable overall backdrop for electric utilities and
power demand benefited Calpine, as did the increased investor interest in and
perceived value of the company's generating assets.
Despite the Fund's solid performance, some holdings did not perform up to
expectations. For example, the Fund's investments in the electronic technology
sector negatively impacted performance. In particular, our Intel common stock
shares declined amid increased competition and an uncertain 2007 outlook for
technology spending and microprocessor demand.
Our investment in Canadian Oil Sands Trust also declined in value, negatively
impacting Fund performance. According to our analysis, the decline was due in
part to investor concerns about future crude oil prices, as well as possible
upcoming regulatory changes in Canada's taxation of royalty trusts.
Within the financial sector, the Fund's shares of Wachovia rose slightly but
underperformed the broader equity market. Investors remained concerned about
the compression of net interest margins in a flat to inverted yield curve
environment. They also grew concerned about credit quality deterioration during
a phase of moderating U.S. economic growth.
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 3/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIALS.]
Corporate Straight Bonds 40.3%
Utilities Stocks 17.3%
Health Technology Stocks 6.0%
Energy Minerals Stocks 5.5%
Finance Stocks 5.4%
Communications Stocks 3.2%
Mortgage-Backed Securities 2.9%
Electronic Technology Stocks 2.1%
Corporate Convertible Bonds 1.8%
Non-Energy Minerals Stocks 1.7%
Gas Distributors Stocks 1.5%
Industrial Services Stocks 1.5%
Producer Manufacturing Stocks 1.4%
Commercial Banks Stocks 1.1%
Other 1.8%
Short-Term Investments & Other Net Assets 6.5%
Semiannual Report | 23
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, 2007, 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.
24 | Semiannual Report
Performance Summary as of 3/31/07
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 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.71 $ 2.57
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0720
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.1109
- -----------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FBICX) CHANGE 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.70 $ 2.56
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0610
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.0999
- -----------------------------------------------------------------------------------------------
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.71 $ 2.57
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0653
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.1042
- -----------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FCISX) CHANGE 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.73 $ 2.59
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0656
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.1045
- -----------------------------------------------------------------------------------------------
Semiannual Report | 25
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- -----------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FISRX) CHANGE 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.69 $ 2.55
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0675
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.1064
- -----------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/07 9/30/06
- -----------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.14 $ 2.70 $ 2.56
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- -----------------------------------------------------------------------------------------------
Dividend Income $ 0.0738
- -----------------------------------------------------------------------------------------------
Short-Term Capital Gain $ 0.0192
- -----------------------------------------------------------------------------------------------
Long-Term Capital Gain $ 0.0197
- -----------------------------------------------------------------------------------------------
TOTAL $ 0.1127
- -----------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25%
MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND
MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.95% +17.75% +74.38% +158.30%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.44% +12.73% +10.79% +9.49%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,544 $11,273 $16,690 $ 24,762
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.09%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.76%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.64%
- --------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.53% +16.84% +67.52% +78.77%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.53% +12.84% +10.60% +11.22%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,553 $11,284 $16,552 $ 17,777
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.49%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.10%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.49%
- --------------------------------------------------------------------------------------------------------------
CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.67% +17.15% +70.02% +110.88%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +5.67% +13.15% +10.94% +9.47%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,567 $11,315 $16,802 $ 21,088
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.78%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.46%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.14%
- --------------------------------------------------------------------------------------------------------------
26 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.62% +17.53% +70.31% +145.70%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.62% +16.53% +11.24% +9.41%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,862 $11,653 $17,031 $ 24,570
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.75%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.45%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.14%
- --------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +9.86% +17.51% +71.41% +78.10%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +9.86% +17.51% +11.38% +11.64%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,986 $11,751 $17,141 $ 24,764
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.04%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.60%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.99%
- --------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +10.08% +18.01% +76.10% +161.95%
- --------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.08% +18.01% +11.98% +10.11%
- --------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,008 $11,801 $17,610 $ 26,195
- --------------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.47%
- --------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.13%
- --------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.49%
- --------------------------------------------------------------------------------------------------------------
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 | 27
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING,
LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER.
THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT
GRADE SECURITIES. 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. THUS, AS 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 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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.
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 3/31/07.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/07.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
28 | Semiannual Report
Your Fund's Expenses
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 29
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,099.50 $ 3.35
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.74 $ 3.23
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,095.30 $ 7.78
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,017.50 $ 7.49
- -------------------------------------------------------------------------------------------------------
CLASS B1
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,096.70 $ 5.96
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,096.20 $ 6.01
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.20 $ 5.79
- -------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,098.60 $ 5.18
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.00 $ 4.99
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 1,100.80 $ 2.57
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,022.49 $ 2.47
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.64%; B: 1.49%; B1: 1.14%; C: 1.15%; 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.
30 | Semiannual Report
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund
seeks high, current income 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 3/31/07
[THE FOLLOWING TABLE WAS REPRENSENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
GNMA ................................................................... 96.6%
Short-Term Investments & Other Net Assets .............................. 3.4%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin U.S. Government Securities Fund's
semiannual report for the period ended March 31, 2007.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +2.63% cumulative
total return for the six months under review. The Fund outperformed the Lehman
Brothers (LB) U.S. Government: Intermediate Index, which returned +2.43%. 2 In
comparison, the Lipper GNMA Funds Classification Average
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 LB 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. 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 88.
Semiannual Report | 31
FRANKLIN U.S. GOVERNMENT SECURITIES FUND -
CLASS A VS. COMPARABLE INVESTMENTS*
Risk vs. Return (4/02-3/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A CHART IN THE PRINTED MATERIAL.]
FOR THE 5-YEAR PERIOD ENDED 3/31/07
RISK RETURN
----- ------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A 2.46% 4.21%
PAYDEN & RYGEL 1-YEAR U.S. TREASURY BILL 0.63% 2.47%
PAYDEN & RYGEL 10-YEAR U.S. TREASURY NOTE 7.65% 5.58%
PAYDEN & RYGEL 30-YEAR U.S. TREASURY BOND 12.39% 8.36%
----- ------
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.
returned +2.57% for the same period. 3 The Fund's return reflects the effect of
management fees and expenses, while the LB U.S. Government: Intermediate Index
does not have such costs. You can find the Fund's long-term performance data in
the Performance Summary beginning on page 36.
ECONOMIC AND MARKET OVERVIEW
U.S. economic growth slowed somewhat over the six months ended March 31, 2007.
Overall, several factors contributed to real growth. An improved labor
3. Source: Lipper Inc. 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
3/31/07, there were 61 funds in this category. Lipper calculations do not
include sales charges or expense subsidization by a fund's manager. 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.
32 | Semiannual Report
market and higher personal incomes helped support consumer spending. Although a
slowing housing market and moderating profit growth dampened economic expansion,
consumer spending for services and durable goods, and state and local government
spending, contributed to growth in the first quarter of 2007.
Oil prices were volatile and ended the period higher than where they started.
Headline, or overall, inflation and core inflation, which excludes food and
energy costs, experienced some upward pressure. March's headline Consumer Price
Index (CPI) reported a 12-month rise of 2.8%, while core CPI increased 2.5%. 4
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate, although the exact timing was still uncertain.
The 10-year Treasury note yield edged up from 4.64% at the beginning of the
period to 4.65% on March 31, 2007. Typically, the intermediate portion of the
yield curve generally reflects market expectations of the future direction of
inflation. A relatively moderate inflation environment contributed to little
overall change for the 10-year Treasury.
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 may include short-term
government securities and cash or cash equivalents.
4. Source: Bureau of Labor Statistics.
YIELD COMPARISON
3/31/07
[THE FOLLOWING TABLE WAS REPRENSENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Franklin U.S Government Securities Fund - Class A* 4.57%
10-Year Treasury Note* 4.65%
Lipper GNMA Funds Average* 4.53%
Lipper Money Market Funds Average* 4.58%
* Sources: Federal Reserve H15 Report; 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
3/31/07. 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 61 funds in the Lipper
GNMA Funds classification for the 30 days ended 3/31/07. The Lipper Money
Market Funds Classification Average is an average of the monthly SEC
yields of 351 funds in the Lipper Money Market Funds classification for
the 30 days ended 3/31/07. Lipper averages do not include sales charges or
expense subsidization by a fund's manager.
Semiannual Report | 33
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/06-3/31/07
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- --------------------------------------------------------------------------------
October 2.73 cents 2.47 cents 2.47 cents 2.54 cents 2.81 cents
- --------------------------------------------------------------------------------
November 2.73 cents 2.47 cents 2.47 cents 2.54 cents 2.81 cents
- --------------------------------------------------------------------------------
December** 3.08 cents 2.81 cents 2.81 cents 2.89 cents 3.14 cents
- --------------------------------------------------------------------------------
January 2.73 cents 2.46 cents 2.46 cents 2.54 cents 2.79 cents
- --------------------------------------------------------------------------------
February 2.73 cents 2.46 cents 2.46 cents 2.54 cents 2.79 cents
- --------------------------------------------------------------------------------
March 2.73 cents 2.43 cents 2.43 cents 2.51 cents 2.77 cents
================================================================================
TOTAL 16.73 CENTS 15.10 CENTS 15.10 CENTS 15.56 CENTS 17.11 CENTS
- --------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 0.35 cent per share distribution to meet excise tax
requirements.
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.
Because we believe that income should continue to comprise the greatest portion
of total returns in the Ginnie Mae markets, we favored 30-year collateral bonds
over their 15-year counterparts during the reporting period. Historically, based
on our research process, we have strategically allocated our resources in both
GNMA I and GNMA II sectors. During this reporting period, we favored higher
coupon securities in the GNMA I sector as yield spreads between GNMA I and GNMA
II securities neared historically tight levels.
A major focus of the GNMA markets is prepayment risk. Rather than avoid this
risk, we followed our strategy and actively analyzed the marketplace seeking to
determine where prepayment risk may have offered value. We also applied our
research models in an effort to identify attractive opportunities in specified
mortgage-backed securities (MBS) pools.
34 | Semiannual Report
Thank you for your continued participation in Franklin U.S. Government
Securities Fund. We welcome your comments and questions and look forward to
serving your investment needs in the years 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
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2007, 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 | 35
Performance Summary as of 3/31/07
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 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $6.43 $6.43
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1673
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $6.42 $6.42
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1510
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $6.40 $6.40
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1510
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $6.43 $6.43
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1556
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.00 $6.45 $6.45
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1711
- --------------------------------------------------------------------------------
36 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN
INCLUDES MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.63% +5.38% +22.88% +72.30%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.80% +0.97% +3.31% +5.13%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 3 4.88%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.57%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.74%
- ---------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.38% +4.85% +19.75% +42.43%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -1.62% +0.85% +3.34% +4.38%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 3 4.54%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.26%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.26%
- ---------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.38% +4.87% +19.81% +63.42%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.38% +3.87% +3.68% +5.03%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 3 4.56%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.24%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.25%
- ---------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.45% +4.99% +20.64% +21.83%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.45% +4.99% +3.82% +3.84%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 3 4.68%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.42%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.11%
- ---------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.69% +5.66% +23.78% +74.69%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.69% +5.66% +4.36% +5.74%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 3 5.15%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 4 4.94%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.61%
- ---------------------------------------------------------------------------------------------------
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 | 37
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 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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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 3/31/07.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/07.
5. Figures are as stated in the Fund's prospectus current as of the date of
this report.
38 | Semiannual Report
Your Fund's Expenses
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 39
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.30 $3.69
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.29 $3.68
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.80 $6.36
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.80 $6.36
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.50 $5.60
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.59
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.90 $3.08
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.89 $3.07
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.73%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by
the average account value over the period, multiplied by 182/365 to
reflect the one-half year period.
40 | Semiannual Report
Franklin Utilities Fund
YOUR FUND'S GOALS 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 company 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 3/31/07
[THE FOLLOWING TABLE WAS REPRENSENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Electric Utilities 85.4%
Gas Distributors 7.8%
Diversified Telecommunications Services 3.4%
Oil, Gas & Consumable Fuels 1.8%
Short-Term Investments & Other Net Assets 1.6%
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Utilities Fund's semiannual report for the
period ended March 31, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Utilities Fund - Class A posted a
+19.01% cumulative total return. The Fund outperformed its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +7.38% for the same
period. 1 The Fund performed comparably with its narrow benchmark, the S&P 500
Utilities Index, which returned +19.29%. 2 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 45.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks for U.S. equity performance.
2. 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.
The indexes are unmanaged and include reinvested dividends. 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 95.
Semiannual Report | 41
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2007, the U.S. economy advanced at a
moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the
fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter.
Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase
in exports, the U.S. entered 2007 with a record current account deficit.
Corporate profits and government spending generally remained robust, but
manufacturing activity indicated a downturn. The struggling housing market grew
more fragile with the abrupt unraveling of the subprime mortgage market. This
exacerbated already weak housing prices and an inventory glut in most of the
nation's residential real estate markets.
Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%,
though overall job growth slowed in the face of rising labor costs. 3 Jobs in
vehicle manufacturing and housing-related industries experienced declines
stemming from reduced consumer demand. Even though tight labor markets and the
associated wage income growth supported consumer spending, consumer confidence
waned in February and March, and large purchases, including those for vehicles
and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as
oil hit a six-month high due to tight supply and high demand, refinery
maintenance issues, and ongoing geopolitical tensions in the Middle East and
Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months
ended March 31, 2007, which was higher than the 2.2% 10-year average. 4
At period-end, the Federal Reserve Board (Fed) was still more concerned with
relatively high inflation than an economic slowdown. Risks to growth have
increased but not enough for the Fed to change its orientation to fighting
inflation. The Fed kept the federal funds target interest rate steady at 5.25%
during the period, while also indicating a change in its long-held tightening
bias, easing the near-term pressure for potential rate hikes.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. Investors reacted swiftly
to market and geopolitical events, especially in regard to China and the Middle
East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +7.04%, and the broader S&P 500 returned +7.38%,
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
42 | Semiannual Report
while the technology-heavy NASDAQ Composite Index returned +7.65%. 5 Materials,
utilities and telecommunications stocks performed particularly well.
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
The utilities sector experienced increased investor interest during the six
months under review, due largely to strong energy supply and demand
characteristics, as well as many companies' efforts to strengthen their balance
sheets and refocus on their core, regulated businesses by exiting non-core
businesses. Investments in networks and other infrastructure projects drove
operating performance for many utilities companies. For a sector previously
viewed as mature, many utilities companies have a backlog of investment
opportunities that have the potential to last several years, which we find
encouraging. Spending for new power plants, delivery infrastructure development
and environmental compliance has increased in recent years. Regarding
environmental compliance, potential changes in carbon emissions regulations may
further raise utilities' spending needs in the future, in our analysis.
Improved utility companies' fundamentals were evident in the industry's dividend
trends, as more electric utilities have declared dividend increases over the
past three years. Fund holdings Exelon, FPL Group and PG&E reflected the trend
by declaring significant dividend increases during the reporting period. These
companies' stocks experienced double-digit share price increases during the
period. Some utilities companies' proposed mergers fell apart during the second
half of 2006 -- namely, Exelon with Public Service Enterprise Group and FPL with
Constellation Energy. Nonetheless, their stocks posted some of the strongest
returns in the industry. These strong results are not necessarily reflective of
failed mergers. To the contrary, they partly reflect why the companies were
attractive to others in the industry. Both Constellation and Public Service
Enterprise Group benefit by selling electricity from low-cost sources at
market-based prices. Other U.S. companies, including Fund holdings Entergy,
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. 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.
Semiannual Report | 43
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
3/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Entergy Corp. 6.3%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Exelon Corp. 5.1%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Dominion Resources Inc. 4.8%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
FirstEnergy Corp. 4.3%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
FPL Group Inc. 3.8%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Edison International 3.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Public Service Enterprise Group Inc. 3.7%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
PPL Corp. 3.3%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
PG&E Corp. 3.1%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
The Southern Co. 3.1%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Pepco Holdings and PPL, operate in the same U.S. regions, and have also
benefited from tightening supply and demand characteristics. These holdings
benefited the Fund's overall returns during the reporting period.
Despite the Fund's solid results this reporting period, some of our investments
did not perform up to expectations. Against the backdrop of a strong utility
equity market, by comparison our fixed-income securities holdings lagged
substantially. Our largest bond holding at period-end was in TXU, and
unfortunately this was our worst-performing security during the period. In
February 2007, TXU announced it had agreed to a transaction that would result in
its being taken private by leveraged buyout (LBO) group KKR (Kohlberg Kravis
Roberts & Co.). While this announcement resulted in strong appreciation for our
TXU equity holding, the bonds declined in value due to expected higher levels of
corporate debt under the LBO structure. Despite recent setbacks in the company's
bond component, we held TXU bonds at period-end due largely to their solid
yields and our view that the company was still capturing strong cash flows and a
dominant market share.
Among the Fund's equity holdings, electric utility Ameren's share price fell
during the six months under review and negatively impacted the Fund's results.
Ameren has struggled as Illinois attempts to deregulate its electricity market,
and several of the state's politicians have threatened to halt electric rate
increases resulting from the transition. We are accustomed to regulatory
challenges faced by utilities, and we plan to monitor ongoing developments.
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, 2007, 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.
44 | Semiannual Report
Performance Summary as of 3/31/07
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 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.73 $14.62 $12.89
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2273
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0657
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.3730
- --------------------------------------------------------------------------------
TOTAL $0.6660
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.72 $14.60 $12.88
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1930
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0657
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.3730
- --------------------------------------------------------------------------------
TOTAL $0.6317
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.72 $14.57 $12.85
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1939
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0657
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.3730
- --------------------------------------------------------------------------------
TOTAL $0.6326
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FRURX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.72 $14.58 $12.86
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2064
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0657
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.3730
- --------------------------------------------------------------------------------
TOTAL $0.6451
- --------------------------------------------------------------------------------
Semiannual Report | 45
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/07 9/30/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.73 $14.68 $12.95
- --------------------------------------------------------------------------------
DISTRIBUTIONS (10/1/06-3/31/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2413
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0657
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.3730
- --------------------------------------------------------------------------------
TOTAL $0.6800
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +19.01% +32.22% +86.88% +193.46%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +13.97% +26.63% +12.35% +10.88%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,397 $12,663 $17,901 $ 28,086
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 2.65%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.52%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.76%
- --------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +18.65% +31.51% +82.31% +106.87%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +14.65% +27.51% +12.51% +9.22%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,465 $12,751 $18,031 $ 20,687
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 2.29%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.12%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.26%
- --------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +18.71% +31.49% +82.23% +179.27%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +17.71% +30.49% +12.75% +10.82%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,771 $13,049 $18,223 $ 27,927
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 2.32%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.12%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.25%
- --------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +18.80% +31.68% +83.85% +89.43%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +18.80% +31.68% +12.95% +12.96%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,880 $13,168 $18,385 $ 18,943
- --------------------------------------------------------------------------------------------------
Distribution Rate 4 2.46%
- --------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.26%
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.11%
- --------------------------------------------------------------------------------------------------
46 | Semiannual Report
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------
Cumulative Total Return 1 +19.04% +32.36% +88.29% +198.41%
- -------------------------------------------------------------------------------------
Average Annual Total Return 2 +19.04% +32.36% +13.49% +11.55%
- -------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,904 $13,236 $18,829 $29,841
- -------------------------------------------------------------------------------------
Distribution Rate 4 2.88%
- -------------------------------------------------------------------------------------
30-Day Standardized Yield 5 2.77%
- -------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.61%
- -------------------------------------------------------------------------------------
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.
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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. 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.
4. Distribution rate is based on an annualization of the respective class's
most recent quarterly dividend and the maximum offering price (NAV for
Classes B, C, R and Advisor) per share on 3/31/07.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/07.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 47
Your Fund's Expenses
FRANKLIN UTILITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
48 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,190.10 $4.10
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.19 $3.78
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,186.50 $6.87
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,187.10 $6.87
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,188.00 $6.06
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.59
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,190.40 $3.33
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.89 $3.07
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.75%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by
the average account value over the period, multiplied by 182/365 to
reflect the one-half year period.
Semiannual Report | 49
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ..... $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76
------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........ (0.05) (0.05) (0.01) (0.09) (0.06) 0.03
Net realized and unrealized gains
(losses) ............................ 1.44 0.87 2.98 1.93 4.86 (3.11)
------------------------------------------------------------------------------------
Total from investment operations ......... 1.39 0.82 2.97 1.84 4.80 (3.08)
------------------------------------------------------------------------------------
Less distributions from:
Net investment income ................. -- -- -- -- -- (0.29)
Tax return of capital ................. -- -- -- -- -- (0.02)
------------------------------------------------------------------------------------
Total distributions ...................... -- -- -- -- -- (0.31)
------------------------------------------------------------------------------------
Redemption fees .......................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------
Net asset value, end of period ........... $ 27.19 $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37
====================================================================================
Total return c ........................... 5.39% 3.28% 13.49% 9.12% 31.23% (16.83)%
RATIOS TO AVERAGE NET ASSETS
Expenses ................................. 1.01% e,f 0.97% f 1.00% f 0.97% f 1.04% 1.00%
Net investment income (loss) ............. (0.38)% e (0.20)% (0.02)% (0.41)% (0.40)% 0.13%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ........ $ 516,155 $ 590,633 $ 628,732 $ 640,120 $ 558,687 $ 413,309
Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
50 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ..... $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........ (0.14) (0.23) (0.18) (0.25) (0.25) (0.12)
Net realized and unrealized gains
(losses) ............................ 1.38 0.83 2.90 1.89 4.84 (3.08)
-----------------------------------------------------------------------------------
Total from investment operations ......... 1.24 0.60 2.72 1.64 4.59 (3.20)
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income ................. -- -- -- -- -- (0.16)
Tax return of capital ................. -- -- -- -- -- (0.01)
-----------------------------------------------------------------------------------
Total distributions ...................... -- -- -- -- -- (0.17)
-----------------------------------------------------------------------------------
Redemption fees .......................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ........... $ 25.99 $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20
===================================================================================
Total return c ........................... 5.01% 2.48% 12.69% 8.29% 30.20% (17.51)%
RATIOS TO AVERAGE NET ASSETS
Expenses ................................. 1.76% e,f 1.72% f 1.74% f 1.72% f 1.79% 1.75%
Net investment income (loss) ............. (1.13)% e (0.95)% (0.76)% (1.16)% (1.15)% (0.62)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ........ $ 15,725 $ 18,718 $ 19,497 $ 18,824 $ 10,406 $ 5,066
Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
---------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ..... $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........ (0.14) (0.23) (0.17) (0.25) (0.25) (0.11)
Net realized and unrealized gains
(losses) ............................ 1.36 0.83 2.86 1.87 4.80 (3.05)
---------------------------------------------------------------------------------
Total from investment operations ......... 1.22 0.60 2.69 1.62 4.55 (3.16)
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ................. -- -- -- -- -- (0.13)
Tax return of capital ................. -- -- -- -- -- (0.01)
---------------------------------------------------------------------------------
Total distributions ...................... -- -- -- -- -- (0.14)
---------------------------------------------------------------------------------
Redemption fees .......................... -- d -- d -- d -- d -- --
---------------------------------------------------------------------------------
Net asset value, end of period ........... $ 25.72 $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04
=================================================================================
Total return c ........................... 4.98% 2.51% 12.68% 8.27% 30.25% (17.48)%
RATIOS TO AVERAGE NET ASSETS
Expenses ................................. 1.76% e,f 1.71% f 1.74% f 1.72% f 1.79% 1.74%
Net investment income (loss) ............. (1.13)% e (0.94)% (0.76)% (1.16)% (1.15)% (0.61)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ........ $ 63,754 $ 69,069 $ 73,587 $ 75,642 $ 66,952 $ 51,809
Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
52 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 99.3%
AIR FREIGHT/COURIERS 1.6%
C.H. Robinson Worldwide Inc. ................................................. United States 200,000 $ 9,550,000
--------------
BIOTECHNOLOGY 8.7%
a Amgen Inc. ................................................................... United States 175,000 9,779,000
a Celgene Corp. ................................................................ United States 150,000 7,869,000
a Genentech Inc. ............................................................... United States 275,000 22,583,000
a Gilead Sciences Inc. ......................................................... United States 150,000 11,475,000
--------------
51,706,000
--------------
CABLE/SATELLITE TELEVISION 1.3%
a Comcast Corp., A ............................................................. United States 300,000 7,641,000
--------------
CASINOS/GAMING 1.2%
International Game Technology ................................................ United States 175,000 7,066,500
--------------
CHEMICALS: SPECIALTY 1.7%
Sigma-Aldrich Corp. .......................................................... United States 250,000 10,380,000
--------------
COMPUTER COMMUNICATIONS 2.1%
a Cisco Systems Inc. ........................................................... United States 450,000 11,488,500
a Juniper Networks Inc. ........................................................ United States 50,000 984,000
--------------
12,472,500
--------------
COMPUTER PROCESSING HARDWARE 5.8%
a Apple Inc. ................................................................... United States 220,000 20,440,200
a Aruba Networks Inc. .......................................................... United States 42,800 627,876
Hewlett-Packard Co. .......................................................... United States 340,000 13,647,600
--------------
34,715,676
--------------
DATA PROCESSING SERVICES 1.3%
Paychex Inc. ................................................................. United States 200,000 7,574,000
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.7%
AT&T Inc. .................................................................... United States 100,000 3,943,000
--------------
ELECTRICAL PRODUCTS 0.6%
a SunPower Corp., A ............................................................ United States 80,000 3,640,000
--------------
ELECTRONIC EQUIPMENT/INSTRUMENTS 1.6%
a Agilent Technologies Inc. .................................................... United States 175,000 5,895,750
a Dolby Laboratories Inc., A ................................................... United States 100,000 3,451,000
--------------
9,346,750
--------------
ELECTRONIC PRODUCTION EQUIPMENT 4.9%
Applied Materials Inc. ....................................................... United States 175,000 3,206,000
KLA-Tencor Corp. ............................................................. United States 200,000 10,664,000
a Lam Research Corp. ........................................................... United States 150,000 7,101,000
a Varian Semiconductor Equipment Associates Inc. ............................... United States 150,000 8,007,000
--------------
28,978,000
--------------
ELECTRONICS/APPLIANCE STORES 1.1%
Best Buy Co. Inc. ............................................................ United States 140,000 6,820,800
--------------
Semiannual Report | 53
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
ELECTRONICS/APPLIANCES 0.6%
Sony Corp., ADR .............................................................. Japan 70,000 $ 3,534,300
--------------
FINANCIAL PUBLISHING/SERVICES 1.6%
Moody's Corp. ................................................................ United States 150,000 9,309,000
--------------
INFORMATION TECHNOLOGY SERVICES 4.1%
a Amdocs Ltd. .................................................................. United States 150,000 5,472,000
a Cognizant Technology Solutions Corp., A ...................................... United States 120,000 10,592,400
Infosys Technologies Ltd., ADR ............................................... India 170,000 8,542,500
--------------
24,606,900
--------------
INTERNET SOFTWARE/SERVICES 6.2%
a Akamai Technologies Inc. ..................................................... United States 100,000 4,992,000
a Google Inc., A ............................................................... United States 50,000 22,908,000
a Internap Network Services Corp. .............................................. United States 20,000 315,000
a Switch and Data Facilities Company Inc. ...................................... United States 36,100 654,132
a Yahoo! Inc. .................................................................. United States 250,000 7,822,500
--------------
36,691,632
--------------
INVESTMENT BANKS/BROKERS 1.7%
The Goldman Sachs Group Inc. ................................................. United States 50,000 10,331,500
--------------
MAJOR PHARMACEUTICALS 2.3%
Johnson & Johnson ............................................................ United States 150,000 9,039,000
Pfizer Inc. .................................................................. United States 175,000 4,420,500
--------------
13,459,500
--------------
MEDICAL SPECIALTIES 10.9%
Alcon Inc. ................................................................... Switzerland 100,000 13,182,000
Medtronic Inc. ............................................................... United States 250,000 12,265,000
Stryker Corp. ................................................................ United States 200,000 13,264,000
a Varian Medical Systems Inc. .................................................. United States 125,000 5,961,250
a Waters Corp. ................................................................. United States 200,000 11,600,000
a Zimmer Holdings Inc. ......................................................... United States 100,000 8,541,000
--------------
64,813,250
--------------
MEDICAL/NURSING SERVICES 2.0%
a VCA Antech Inc. .............................................................. United States 325,000 11,800,750
--------------
OILFIELD SERVICES/EQUIPMENT 2.9%
a FMC Technologies Inc. ........................................................ United States 90,000 6,278,400
Schlumberger Ltd. ............................................................ United States 160,000 11,056,000
--------------
17,334,400
--------------
OTHER PHARMACEUTICALS 3.1%
Allergan Inc. ................................................................ United States 80,000 8,865,600
Teva Pharmaceutical Industries Ltd., ADR ..................................... Israel 250,000 9,357,500
--------------
18,223,100
--------------
54 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
PACKAGED SOFTWARE 8.9%
Adobe Systems Inc. ........................................................... United States 425,000 $ 17,722,500
Autodesk Inc. ................................................................ United States 200,000 7,520,000
Microsoft Corp. .............................................................. United States 800,000 22,296,000
a Salesforce.com Inc. .......................................................... United States 30,000 1,284,600
SAP AG, ADR .................................................................. Germany 100,000 4,465,000
--------------
53,288,100
--------------
RECREATIONAL PRODUCTS 2.1%
a Electronic Arts Inc. ......................................................... United States 250,000 12,590,000
--------------
SEMICONDUCTORS 8.0%
a ANADIGICS Inc. ............................................................... United States 175,000 2,068,500
Analog Devices Inc. .......................................................... United States 75,000 2,586,750
a Hittite Microwave Corp. ...................................................... United States 20,000 803,400
Intel Corp. .................................................................. United States 1,150,000 21,999,500
Linear Technology Corp. ...................................................... United States 125,000 3,948,750
a Marvell Technology Group Ltd. ................................................ Bermuda 175,000 2,941,750
Microchip Technology Inc. .................................................... United States 210,000 7,461,300
a NVIDIA Corp. ................................................................. United States 200,000 5,756,000
--------------
47,565,950
--------------
SERVICES TO THE HEALTH INDUSTRY 3.0%
a Cerner Corp. ................................................................. United States 30,000 1,633,500
Pharmaceutical Product Development Inc. ...................................... United States 350,000 11,791,500
a WebMD Health Corp., A ........................................................ United States 85,000 4,473,550
--------------
17,898,550
--------------
SPECIALTY TELECOMMUNICATIONS 1.3%
a American Tower Corp., A ...................................................... United States 200,000 7,790,000
--------------
TELECOMMUNICATIONS EQUIPMENT 4.2%
Garmin Ltd. .................................................................. Cayman Islands 100,000 5,415,000
Motorola Inc. ................................................................ United States 375,000 6,626,250
Nokia Corp., ADR ............................................................. Finland 150,000 3,438,000
a OpNext Inc. .................................................................. United States 80,000 1,183,200
QUALCOMM Inc. ................................................................ United States 200,000 8,532,000
--------------
25,194,450
--------------
WIRELESS COMMUNICATIONS 3.8%
America Movil SAB de CV, L, ADR .............................................. Mexico 200,000 9,558,000
China Mobile (Hong Kong) Ltd., ADR ........................................... China 100,000 4,485,000
a NII Holdings Inc. ............................................................ United States 120,000 8,901,600
--------------
22,944,600
--------------
TOTAL COMMON STOCKS (COST $305,321,731) ....................................... 591,210,208
--------------
Semiannual Report | 55
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $2,054,290) 0.3%
MONEY MARKET FUND 0.3%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ......... United States 2,054,290 $ 2,054,290
--------------
TOTAL INVESTMENTS (COST $307,376,021) 99.6% .................................. 593,264,498
OTHER ASSETS, LESS LIABILITIES 0.4% .......................................... 2,370,259
--------------
NET ASSETS 100.0% ............................................................ $ 595,634,757
==============
See Selected Portfolio Abbreviations on page 97.
a Non-income producing for the twelve months ended March 31, 2007.
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.
56 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81
-----------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............. 0.08 0.12 0.13 0.06 0.08 0.07
Net realized and unrealized gains
(losses) ......................... 3.02 4.21 4.20 3.68 4.81 (5.65)
-----------------------------------------------------------------------------------------
Total from investment operations ....... 3.10 4.33 4.33 3.74 4.89 (5.58)
-----------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.11) (0.06) (0.08) (0.03) (0.04) (0.16)
Net realized gains .................. -- -- -- -- -- (0.05)
-----------------------------------------------------------------------------------------
Total distributions .................... (0.11) (0.06) (0.08) (0.03) (0.04) (0.21)
-----------------------------------------------------------------------------------------
Redemption fees ........................ -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 42.09 $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02
=========================================================================================
Total return c ......................... 7.92% 12.46% 14.17% 13.92% 22.27% (20.35)%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................... 0.93% e,f 0.91% f 0.94% f 0.98% f 1.06% 0.96%
Net investment income .................. 0.37% e 0.34% 0.40% 0.20% 0.31% 0.24%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $1,818,773 $1,695,802 $1,567,675 $1,531,871 $1,433,742 $1,249,745
Portfolio turnover rate ................ 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
-------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ...... $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46
-------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ......... (0.08) (0.15) (0.11) (0.16) (0.11) (0.14)
Net realized and unrealized gains
(losses) ............................ 2.90 4.07 4.07 3.61 4.73 (5.57)
-------------------------------------------------------------------------------------
Total from investment operations .......... 2.82 3.92 3.96 3.45 4.62 (5.71)
-------------------------------------------------------------------------------------
Less distributions from net realized
gains .................................. -- -- -- -- -- (0.05)
-------------------------------------------------------------------------------------
Redemption fees ........................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------------
Net asset value, end of period ............ $ 40.47 $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70
=====================================================================================
Total return c ............................ 7.49% 11.62% 13.30% 13.11% 21.29% (20.90)%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................. 1.69% e,f 1.67% f 1.69% f 1.73% f 1.81% 1.71%
Net investment income (loss) .............. (0.39)% e (0.42)% (0.35)% (0.55)% (0.44)% (0.51)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 123,415 $ 122,871 $ 123,926 $ 121,986 $ 103,499 $ 75,141
Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ...... $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24
--------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ......... (0.08) (0.15) (0.11) (0.16) (0.11) (0.14)
Net realized and unrealized gains
(losses) ............................ 2.88 4.04 4.03 3.58 4.69 (5.54)
--------------------------------------------------------------------------------------
Total from investment operations .......... 2.80 3.89 3.92 3.42 4.58 (5.68)
--------------------------------------------------------------------------------------
Less distributions from net realized
gains .................................. -- -- -- -- -- (0.05)
--------------------------------------------------------------------------------------
Redemption fees ........................... -- d -- d -- d -- d -- --
--------------------------------------------------------------------------------------
Net asset value, end of period ............ $ 40.12 $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51
======================================================================================
Total return c ............................ 7.53% 11.60% 13.32% 13.11% 21.29% (20.92)%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................. 1.69% e,f 1.66% f 1.69% f 1.73% f 1.82% 1.70%
Net investment income (loss) .............. (0.39)% e (0.41)% (0.35)% (0.55)% (0.45)% (0.51)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 288,494 $ 273,512 $ 270,538 $ 270,131 $ 259,169 $ 232,307
Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
-------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98 $ 31.59
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............... 0.02 0.02 0.05 (0.02) -- --
Net realized and unrealized gains (losses) ... 2.99 4.19 4.16 3.67 4.81 (9.61)
-------------------------------------------------------------------------------
Total from investment operations ................ 3.01 4.21 4.21 3.65 4.81 (9.61)
-------------------------------------------------------------------------------
Less distributions from net investment income ... (0.01) -- d (0.01) -- (0.05) --
-------------------------------------------------------------------------------
Redemption fees ................................. -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period .................. $ 41.80 $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98
===============================================================================
Total return c .................................. 7.78% 12.18% 13.87% 13.65% 21.92% (30.42)%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.20% e,f 1.17% f 1.19% f 1.23% f 1.31% 1.21% e
Net investment income (loss) .................... 0.10% e 0.08% 0.15% (0.05)% 0.06% 0.02% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 43,258 $ 37,804 $ 27,818 $ 20,060 $ 14,755 $ 2,788
Portfolio turnover rate ......................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to September 30, 2002.
60 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ...... $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86
------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................ 0.13 0.22 0.21 0.14 0.14 0.14
Net realized and unrealized gains
(losses) ............................ 3.02 4.21 4.21 3.67 4.82 (5.65)
------------------------------------------------------------------------------------
Total from investment operations .......... 3.15 4.43 4.42 3.81 4.96 (5.51)
------------------------------------------------------------------------------------
Less distributions from:
Net investment income .................. (0.20) (0.15) (0.16) (0.09) (0.11) (0.24)
Net realized gains ..................... -- -- -- -- -- (0.05)
------------------------------------------------------------------------------------
Total distributions ....................... (0.20) (0.15) (0.16) (0.09) (0.11) (0.29)
------------------------------------------------------------------------------------
Redemption fees ........................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------
Net asset value, end of period ............ $ 42.12 $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06
====================================================================================
Total return c ............................ 8.05% 12.73% 14.45% 14.19% 22.58% (20.14)%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................. 0.70% e,f 0.67% f 0.69% f 0.73% f 0.81% 0.71%
Net investment income ..................... 0.60% e 0.58% 0.65% 0.45% 0.56% 0.49%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 315,581 $ 274,603 $ 221,752 $ 133,332 $ 41,216 $ 27,431
Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market of the investment of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 61
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS 99.0%
COMMERCIAL SERVICES 2.6%
Dun & Bradstreet Corp. ................................................... United States 122,000 $ 11,126,400
Equifax Inc. ............................................................. United States 400,000 14,580,000
Moody's Corp. ............................................................ United States 488,000 30,285,280
Robert Half International Inc. ........................................... United States 300,000 11,103,000
---------------
67,094,680
---------------
CONSUMER DURABLES 1.9%
Ford Motor Co. ........................................................... United States 1,100,000 8,679,000
General Motors Corp. ..................................................... United States 400,000 12,256,000
Harley-Davidson Inc. ..................................................... United States 500,000 29,375,000
---------------
50,310,000
---------------
CONSUMER NON-DURABLES 2.7%
The Hershey Co. .......................................................... United States 516,400 28,226,424
Tootsie Roll Industries Inc. ............................................. United States 23,856 714,959
VF Corp. ................................................................. United States 500,000 41,310,000
---------------
70,251,383
---------------
CONSUMER SERVICES 4.7%
Carnival Corp. ........................................................... United States 500,000 23,430,000
CBS Corp., A ............................................................. United States 100,000 3,061,000
CBS Corp., B ............................................................. United States 50,000 1,529,500
Clear Channel Communications Inc. ........................................ United States 500,000 17,520,000
a Expedia Inc. ............................................................. United States 300,100 6,956,318
a Live Nation Inc. ......................................................... United States 62,500 1,378,750
Time Warner Inc. ......................................................... United States 1,350,000 26,622,000
a Viacom Inc., A ........................................................... United States 100,000 4,106,000
a Viacom Inc., B ........................................................... United States 50,000 2,055,500
The Walt Disney Co. ...................................................... United States 1,000,000 34,430,000
---------------
121,089,068
---------------
DISTRIBUTION SERVICES 3.2%
Cardinal Health Inc. ..................................................... United States 300,000 21,885,000
Genuine Parts Co. ........................................................ United States 375,400 18,394,600
W.W. Grainger Inc. ....................................................... United States 550,000 42,482,000
---------------
82,761,600
---------------
ELECTRONIC TECHNOLOGY 23.2%
a Agilent Technologies Inc. ................................................ United States 400,000 13,476,000
a Apple Inc. ............................................................... United States 1,000,000 92,910,000
The Boeing Co. ........................................................... United States 1,000,000 88,910,000
a Cisco Systems Inc. ....................................................... United States 1,350,000 34,465,500
a Dell Inc. ................................................................ United States 500,000 11,605,000
a Dionex Corp. ............................................................. United States 250,000 17,027,500
a EMC Corp. ................................................................ United States 1,000,000 13,850,000
a Entegris Inc. ............................................................ United States 376,307 4,026,485
a Gateway Inc. ............................................................. United States 300,000 657,000
General Dynamics Corp. ................................................... United States 1,000,000 76,400,000
62 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
ELECTRONIC TECHNOLOGY (CONTINUED)
Hewlett-Packard Co. ...................................................... United States 1,116,250 $ 44,806,275
Intel Corp. .............................................................. United States 800,000 15,304,000
Lockheed Martin Corp. .................................................... United States 500,000 48,510,000
a Micrel Inc. .............................................................. United States 25,000 275,500
a Mindspeed Technologies Inc. .............................................. United States 100,000 217,000
Northrop Grumman Corp. ................................................... United States 1,000,000 74,220,000
Raytheon Co. ............................................................. United States 600,000 31,476,000
Rockwell Collins Inc. .................................................... United States 100,000 6,693,000
a Sun Microsystems Inc. .................................................... United States 1,600,000 9,616,000
Texas Instruments Inc. ................................................... United States 515,000 15,501,500
a Verigy Ltd. .............................................................. Singapore 48,974 1,149,420
---------------
601,096,180
---------------
ENERGY MINERALS 1.5%
BP PLC, ADR .............................................................. United Kingdom 295,200 19,114,200
Royal Dutch Shell PLC, A, ADR ............................................ United Kingdom 280,000 18,564,000
---------------
37,678,200
---------------
FINANCE 0.2%
a ChoicePoint Inc. ......................................................... United States 160,000 5,988,800
---------------
HEALTH SERVICES 1.7%
IMS Health Inc. .......................................................... United States 500,000 14,830,000
a Medco Health Solutions Inc. .............................................. United States 48,240 3,498,847
Quest Diagnostics Inc. ................................................... United States 500,000 24,935,000
---------------
43,263,847
---------------
HEALTH TECHNOLOGY 19.8%
Abbott Laboratories ...................................................... United States 400,000 22,320,000
a Advanced Medical Optics Inc. ............................................. United States 88,888 3,306,633
Allergan Inc. ............................................................ United States 400,000 44,328,000
a Amgen Inc. ............................................................... United States 932,000 52,080,160
Baxter International Inc. ................................................ United States 400,000 21,068,000
a Biogen Idec Inc. ......................................................... United States 400,000 17,752,000
a Edwards Lifesciences Corp. ............................................... United States 50,000 2,535,000
Eli Lilly and Co. ........................................................ United States 400,000 21,484,000
a Genentech Inc. ........................................................... United States 1,000,000 82,120,000
a Hospira Inc. ............................................................. United States 40,000 1,636,000
Johnson & Johnson ........................................................ United States 996,000 60,018,960
Merck & Co. Inc. ......................................................... United States 500,000 22,085,000
a Millipore Corp. .......................................................... United States 400,000 28,988,000
Pall Corp. ............................................................... United States 500,000 19,000,000
Pfizer Inc. .............................................................. United States 2,000,000 50,520,000
a Waters Corp. ............................................................. United States 500,000 29,000,000
Wyeth .................................................................... United States 600,000 30,018,000
a Zimmer Holdings Inc. ..................................................... United States 64,000 5,466,240
---------------
513,725,993
---------------
Semiannual Report | 63
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
PROCESS INDUSTRIES 2.1%
Air Products and Chemicals Inc. .......................................... United States 500,000 $ 36,980,000
Sigma-Aldrich Corp. ...................................................... United States 400,000 16,608,000
---------------
53,588,000
---------------
PRODUCER MANUFACTURING 18.6%
3M Co. ................................................................... United States 800,000 61,144,000
Avery Dennison Corp. ..................................................... United States 462,000 29,688,120
Emerson Electric Co. ..................................................... United States 1,000,000 43,090,000
Illinois Tool Works Inc. ................................................. United States 1,000,000 51,600,000
Ingersoll-Rand Co. Ltd., A ............................................... United States 1,002,000 43,456,740
Johnson Controls Inc. .................................................... United States 400,000 37,848,000
Molex Inc. ............................................................... United States 146,483 4,130,821
Molex Inc., A ............................................................ United States 146,483 3,645,962
Teleflex Inc. ............................................................ United States 500,000 34,035,000
Textron Inc. ............................................................. United States 525,000 47,145,000
a Thomas & Betts Corp. ..................................................... United States 500,000 24,410,000
Tyco International Ltd. .................................................. United States 1,550,052 48,904,140
United Technologies Corp. ................................................ United States 800,000 52,000,000
---------------
481,097,783
---------------
RETAIL TRADE 0.6%
CVS/Caremark Corp. ....................................................... United States 126,294 4,311,669
a InterActiveCorp .......................................................... United States 300,100 11,316,771
---------------
15,628,440
---------------
TECHNOLOGY SERVICES 9.2%
Automatic Data Processing Inc. ........................................... United States 800,000 38,720,000
a Computer Sciences Corp. .................................................. United States 1,000,000 52,130,000
a Google Inc., A ........................................................... United States 15,000 6,872,400
International Business Machines Corp. .................................... United States 560,000 52,785,600
Microsoft Corp. .......................................................... United States 1,000,000 27,870,000
a Oracle Corp. ............................................................. United States 500,000 9,065,000
a Yahoo! Inc. .............................................................. United States 1,600,000 50,064,000
---------------
237,507,000
---------------
TRANSPORTATION 7.0%
Air France-KLM, ADR ...................................................... France 550,000 25,085,500
a Air France-KLM, ADR, wts., 11/05/07 ...................................... France 500,000 6,675,000
a Alaska Air Group Inc. .................................................... United States 500,000 19,050,000
a AMR Corp. ................................................................ United States 1,080,000 32,886,000
a British Airways PLC, ADR ................................................. United Kingdom 500,000 48,260,000
a Continental Airlines Inc., B ............................................. United States 500,000 18,195,000
Southwest Airlines Co. ................................................... United States 65,200 958,440
Union Pacific Corp. ...................................................... United States 300,000 30,465,000
---------------
181,574,940
---------------
TOTAL COMMON STOCKS AND WARRANTS (COST $900,890,205) 2,562,655,914
---------------
64 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $31,920,013) 1.2%
MONEY MARKET FUND 1.2%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ..... United States 31,920,013 $ 31,920,013
---------------
TOTAL INVESTMENTS (COST $932,810,218) 100.2% ............................. 2,594,575,927
OTHER ASSETS, LESS LIABILITIES (0.2)% .................................... (5,054,191)
---------------
NET ASSETS 100.0% ........................................................ $ 2,589,521,736
===============
See Selected Portfolio Abbreviations on page 97.
a Non-income producing for the twelve months ended March 31, 2007.
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.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
--------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ............................. $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16
--------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........... 0.07 0.14 0.14 0.12 0.14 0.14
Net realized and unrealized gains
(losses) ........................ 0.18 0.09 0.10 0.22 0.38 (0.21)
--------------------------------------------------------------------------------------------
Total from investment operations ..... 0.25 0.23 0.24 0.34 0.52 (0.07)
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............. (0.07) (0.15) (0.15) (0.16) (0.16) (0.17)
Net realized gains ................ (0.04) (0.01) (0.01) (0.01) (0.01) (0.02)
--------------------------------------------------------------------------------------------
Total distributions .................. (0.11) (0.16) (0.16) (0.17) (0.17) (0.19)
--------------------------------------------------------------------------------------------
Redemption fees ...................... -- d -- d -- d -- d -- --
--------------------------------------------------------------------------------------------
Net asset value, end of period ....... $ 2.71 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
============================================================================================
Total return c ....................... 9.95% 9.73% 10.45% 15.50% 28.12% (4.18)%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................. 0.64% e,f 0.64% g 0.65% g 0.68% e 0.73% 0.72%
Net investment income ................ 5.26% f 5.61% 5.54% 5.11% 6.63% 6.67%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 32,234,821 $26,641,398 $21,934,575 $14,743,190 $9,640,156 $6,001,117
Portfolio turnover rate .............. 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 h
---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ............................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15
---------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .......... 0.06 0.12 0.11 0.10 0.12 0.11
Net realized and unrealized gains
(losses) ....................... 0.18 0.08 0.11 0.22 0.37 (0.21)
---------------------------------------------------------------------------------------------
Total from investment operations .... 0.24 0.20 0.22 0.32 0.49 (0.10)
---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............ (0.06) (0.12) (0.13) (0.14) (0.14) (0.13)
Net realized gains ............... (0.04) (0.01) (0.01) (0.01) (0.01) (0.02)
---------------------------------------------------------------------------------------------
Total distributions ................. (0.10) (0.13) (0.14) (0.15) (0.15) (0.15)
---------------------------------------------------------------------------------------------
Redemption fees ..................... -- d -- d -- d -- d -- --
---------------------------------------------------------------------------------------------
Net asset value, end of period ...... $ 2.70 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90
=============================================================================================
Total return c ...................... 9.53% 8.83% 9.57% 14.59% 26.58% (5.63)%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................ 1.49% e,f 1.49% g 1.50% g 1.53% e 1.58% 1.57% f
Net investment income ............... 4.41% f 4.76% 4.69% 4.26% 5.78% 6.01% f
SUPPLEMENTAL DATA
Net assets, end of period (000's) ... $ 3,866,737 $ 3,743,374 $ 3,922,396 $ 3,486,880 $2,083,783 $ 558,580
Portfolio turnover rate ............. 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
h For the period November 1, 2001 (effective date) to September 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B1 (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ........................... $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......... 0.06 0.13 0.12 0.11 0.13 0.13
Net realized and unrealized gains
(losses) ...................... 0.19 0.08 0.11 0.21 0.38 (0.22)
------------------------------------------------------------------------------
Total from investment operations ... 0.25 0.21 0.23 0.32 0.51 (0.09)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........... (0.07) (0.13) (0.14) (0.14) (0.15) (0.16)
Net realized gains .............. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02)
------------------------------------------------------------------------------
Total distributions ................ (0.11) (0.14) (0.15) (0.15) (0.16) (0.18)
------------------------------------------------------------------------------
Redemption fees .................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of period ..... $ 2.71 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
==============================================================================
Total return c ..................... 9.67% 9.17% 9.90% 14.90% 27.51% (4.66)%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................... 1.14% e,f 1.14% g 1.15% g 1.18% e 1.23% 1.22%
Net investment income .............. 4.76% f 5.11% 5.04% 4.61% 6.13% 6.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $453,876 $459,302 $493,063 $511,471 $495,004 $430,226
Portfolio turnover rate ............ 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .............................. $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.06 0.13 0.13 0.11 0.13 0.13
Net realized and unrealized gains
(losses) ......................... 0.19 0.09 0.10 0.21 0.38 (0.21)
------------------------------------------------------------------------------------------
Total from investment operations ...... 0.25 0.22 0.23 0.32 0.51 (0.08)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.07) (0.13) (0.14) (0.14) (0.15) (0.16)
Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02)
------------------------------------------------------------------------------------------
Total distributions ................... (0.11) (0.14) (0.15) (0.15) (0.16) (0.18)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 2.73 $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91
==========================================================================================
Total return c ........................ 9.62% 9.56% 9.84% 14.85% 27.37% (4.64)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 1.15% e,f 1.14% g 1.15% g 1.18% e 1.24% 1.21%
Net investment income ................. 4.75% f 5.11% 5.04% 4.61% 6.12% 6.21%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $14,759,879 $12,138,969 $10,113,365 $6,616,891 $3,764,372 $1,545,377
Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 69
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 h
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18
-----------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.06 0.13 0.13 0.11 0.13 0.10
Net realized and unrealized gains
(losses) ......................... 0.19 0.09 0.10 0.22 0.37 (0.27)
-----------------------------------------------------------------------------
Total from investment operations ...... 0.25 0.22 0.23 0.33 0.50 (0.17)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.07) (0.14) (0.14) (0.15) (0.15) (0.12)
Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) --
-----------------------------------------------------------------------------
Total distributions ................... (0.11) (0.15) (0.15) (0.16) (0.16) (0.12)
-----------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------
Net asset value, end of period ........ $ 2.69 $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89
=============================================================================
Total return c ........................ 9.86% 9.43% 10.15% 15.25% 27.31% (8.34)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 0.99% e,f 0.99% g 1.00% g 1.03% e 1.08% 1.07% f
Net investment income ................. 4.91% f 5.26% 5.19% 4.76% 6.28% 6.77% f
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $237,734 $183,609 $122,222 $73,165 $36,417 $ 6,350
Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
h For the period January 1, 2002 (effective date) to September 30, 2002.
70 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16
----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.07 0.14 0.14 0.12 0.14 0.14
Net realized and unrealized gains
(losses) ......................... 0.18 0.09 0.11 0.22 0.38 (0.22)
----------------------------------------------------------------------------------
Total from investment operations ...... 0.25 0.23 0.25 0.34 0.52 (0.08)
----------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.07) (0.15) (0.16) (0.16) (0.16) (0.17)
Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02)
----------------------------------------------------------------------------------
Total distributions ................... (0.11) (0.16) (0.17) (0.17) (0.17) (0.19)
----------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
----------------------------------------------------------------------------------
Net asset value, end of period ........ $ 2.70 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89
==================================================================================
Total return c ........................ 10.08% 9.94% 10.65% 15.74% 28.47% (4.50)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 0.49% e,f 0.49% g 0.50% g 0.53% e 0.58% 0.57%
Net investment income ................. 5.41% f 5.76% 5.69% 5.26% 6.78% 6.85%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $5,206,344 $3,786,643 $2,280,318 $901,149 $95,009 $30,737
Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Annualized.
g Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.5%
COMMON STOCKS 41.1%
COMMERCIAL BANKS 1.1%
HSBC Holdings PLC .................................................. United Kingdom 35,000,000 $ 612,547,499
----------------
COMMUNICATIONS 3.2%
AT&T Inc. .......................................................... United States 35,250,000 1,389,907,500
Verizon Communications Inc. ........................................ United States 11,000,000 417,120,000
----------------
1,807,027,500
----------------
ELECTRIC UTILITIES 17.2%
Alliant Energy Corp. ............................................... United States 2,750,000 123,255,000
a Ameren Corp. ....................................................... United States 12,261,900 616,773,570
American Electric Power Co. Inc. ................................... United States 8,633,800 420,897,750
CenterPoint Energy Inc. ............................................ United States 6,000,000 107,640,000
Consolidated Edison Inc. ........................................... United States 4,632,100 236,515,026
Constellation Energy Group ......................................... United States 3,000,000 260,850,000
Dominion Resources Inc. ............................................ United States 10,000,000 887,700,000
DTE Energy Co. ..................................................... United States 5,270,400 252,452,160
Duke Energy Corp. .................................................. United States 20,884,000 423,736,360
Edison International ............................................... United States 3,073,500 151,001,055
Energy East Corp. .................................................. United States 4,530,000 110,350,800
FirstEnergy Corp. .................................................. United States 13,000,000 861,120,000
FPL Group Inc. ..................................................... United States 7,000,000 428,190,000
Hawaiian Electric Industries Inc. .................................. United States 1,720,000 44,702,800
PG&E Corp. ......................................................... United States 12,208,900 589,323,603
a Pinnacle West Capital Corp. ........................................ United States 5,500,000 265,375,000
PPL Corp. .......................................................... United States 2,000,000 81,800,000
Progress Energy Inc. ............................................... United States 9,000,000 453,960,000
a Public Service Enterprise Group Inc. ............................... United States 16,500,000 1,370,160,000
a Puget Energy Inc. .................................................. United States 7,500,000 192,600,000
The Southern Co. ................................................... United States 19,125,000 700,931,250
TECO Energy Inc. ................................................... United States 9,500,000 163,495,000
TXU Corp. .......................................................... United States 16,000,000 1,025,600,000
----------------
9,768,429,374
----------------
ELECTRONIC TECHNOLOGY 0.7%
Intel Corp. ........................................................ United States 20,000,000 382,600,000
----------------
ENERGY MINERALS 4.4%
BP PLC, ADR ........................................................ United Kingdom 6,000,000 388,500,000
a Canadian Oil Sands Trust ........................................... Canada 25,770,600 630,816,073
Chevron Corp. ...................................................... United States 7,500,000 554,700,000
ConocoPhillips ..................................................... United States 9,547,700 652,585,295
Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 4,000,000 265,200,000
----------------
2,491,801,368
----------------
FINANCE 5.0%
Bank of America Corp. .............................................. United States 15,000,000 765,300,000
Citigroup Inc. ..................................................... United States 3,000,000 154,020,000
Fifth Third Bancorp ................................................ United States 7,750,000 299,847,500
72 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
FINANCE (CONTINUED)
JPMorgan Chase & Co. ............................................... United States 8,000,000 $ 387,040,000
Wachovia Corp. ..................................................... United States 3,750,000 206,437,500
Washington Mutual Inc. ............................................. United States 25,000,000 1,009,500,000
----------------
2,822,145,000
----------------
GAS DISTRIBUTORS 1.5%
AGL Resources Inc. ................................................. United States 500,000 21,360,000
Atmos Energy Corp. ................................................. United States 4,000,000 125,120,000
NiSource Inc. ...................................................... United States 4,500,000 109,980,000
Sempra Energy ...................................................... United States 4,878,300 297,625,083
Spectra Energy Corp. ............................................... United States 12,000,000 315,240,000
----------------
869,325,083
----------------
HEALTH TECHNOLOGY 5.1%
Bristol-Myers Squibb Co. ........................................... United States 14,000,000 388,640,000
Johnson & Johnson .................................................. United States 6,000,000 361,560,000
Merck & Co. Inc. ................................................... United States 20,000,000 883,400,000
Pfizer Inc. ........................................................ United States 50,000,000 1,263,000,000
----------------
2,896,600,000
----------------
INDUSTRIAL SERVICES 0.3%
Halliburton Co. .................................................... United States 5,000,000 158,700,000
----------------
NON-ENERGY MINERALS 0.3%
AngloGold Ashanti Ltd., ADR ........................................ South Africa 2,250,000 100,327,500
Barrick Gold Corp. ................................................. Canada 3,000,000 85,650,000
----------------
185,977,500
----------------
PROCESS INDUSTRIES 0.9%
The Dow Chemical Co. ............................................... United States 7,122,400 326,633,264
Lyondell Chemical Co. .............................................. United States 6,000,000 179,820,000
----------------
506,453,264
----------------
PRODUCER MANUFACTURING 1.4%
3M Co. ............................................................. United States 7,000,000 535,010,000
General Electric Co. ............................................... United States 8,002,400 282,964,864
----------------
817,974,864
----------------
TOTAL COMMON STOCKS (COST $18,100,591,553) ......................... 23,319,581,452
----------------
CONVERTIBLE PREFERRED STOCKS 7.4%
CONSUMER DURABLES 0.5%
b Citigroup Funding into D.R. Horton Inc., 9.63%, cvt. pfd. .......... United States 5,000,000 114,192,000
b,c Lehman Brothers Holdings Inc. into KB Home, 12.00%, cvt. pfd. ...... United States 2,320,000 99,249,600
b,d Merrill Lynch & Co. Inc. into KB Home, 9.00%, cvt. pfd., 144A ...... United States 1,800,000 79,488,000
----------------
292,929,600
----------------
ELECTRIC UTILITIES 0.1%
CMS Energy Trust I, 7.75%, cvt. pfd. ............................... United States 1,508,000 75,233,668
----------------
Semiannual Report | 73
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
ELECTRONIC TECHNOLOGY 1.4%
Citigroup Funding into Texas Instrument Inc., 7.50%, cvt. pfd. ..... United States 5,000,000 $ 150,195,000
Deutsche Bank AG into Apple Computer Inc., 9.50%, cvt. pfd. ........ United States 750,000 56,647,500
Goldman Sachs Group Inc. into KLAC-Tencor Corp., 8.00%, cvt. pfd. .. United States 2,100,000 111,329,400
Lehman Brothers Holdings Inc. into Cisco Systems Inc., 8.50%,
cvt. pfd. ...................................................... United States 10,000,000 200,500,000
d Morgan Stanley into Applied Materials Inc., 7.75%, cvt. pfd.,
144A ........................................................... United States 5,650,000 102,745,250
b,d Morgan Stanley into Intel Corp., 7.30%, cvt. pfd., 144A ............ United States 10,250,000 202,181,250
----------------
823,598,400
----------------
ENERGY MINERALS 1.1%
Chesapeake Energy Corp., 6.25%, cvt. pfd. .......................... United States 700,000 185,248,700
d Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A .................... United States 900,000 98,075,700
d Goldman Sachs Group Inc. into Peabody Energy Corp., 10.00%,
cvt. pfd., 144A ................................................ United States 5,000,000 200,745,001
b,d Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A ..... United States 1,700,000 116,016,500
----------------
600,085,901
----------------
FINANCE 0.4%
E*TRADE Financial Corp., 6.125%, cvt. pfd. ......................... United States 2,500,000 69,775,000
MetLife Inc., 6.375%, cvt. pfd. .................................... United States 1,750,000 56,437,500
Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. .................. United States 1,510,000 90,758,549
----------------
216,971,049
----------------
HEALTH TECHNOLOGY 0.9%
Lehman Brothers Holdings Inc. into Boston Scientific, 7.50%,
cvt. pfd. ...................................................... United States 4,000,000 59,760,000
Schering-Plough Corp., 6.00%, cvt. pfd. ............................ United States 7,450,000 438,432,500
----------------
498,192,500
----------------
INDUSTRIAL SERVICES 1.2%
El Paso Corp., 4.99%, cvt. pfd. .................................... United States 130,000 166,732,109
b Lehman Brothers Holdings Inc. into Baker Hughes Inc., 8.00%,
cvt. pfd. ...................................................... United States 2,290,000 151,987,300
d Morgan Stanley into GlobalSantaFe Corp., 9.00%, cvt. pfd., 144A .... United States 3,700,000 223,017,500
Wachovia Bank into El Paso Corp., 9.05%, cvt. pfd. ................. United States 8,200,000 114,308,000
----------------
656,044,909
----------------
NON-ENERGY MINERALS 1.4%
d Deutsche Bank AG into Barrick Gold Corp., 8.50%, cvt. pfd., 144A ... United States 2,550,000 74,819,805
b,c,d Deutsche Bank AG into Freeport-McMoRan Copper & Gold Inc., 10.00%,
cvt. pfd., 144A ................................................ United Kingdom 3,600,000 237,079,440
b Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. .............. United States 1,313,100 140,383,521
Lehman Brothers Holdings Inc. into Alcoa Inc., 7.00%, cvt. pfd. .... United States 4,200,000 142,254,000
d Morgan Stanley into Newmont Mining Corp., 8.50%, cvt. pfd., 144A ... United States 4,800,000 203,736,000
----------------
798,272,766
----------------
74 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS 0.2%
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ..................... United States 3,000,000 $ 77,370,000
Lexington Realty Trust, 6.50%, cvt. pfd. ........................... United States 1,200,000 55,980,000
----------------
133,350,000
----------------
RETAIL TRADE 0.2%
d Wachovia Bank into The Home Depot Inc., 7.25%, cvt. pfd., 144A ..... United States 3,800,000 136,572,000
----------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,003,360,958) ........... 4,231,250,793
----------------
------------------
PRINCIPAL AMOUNT e
------------------
CORPORATE BONDS 40.3%
ALTERNATIVE POWER GENERATION 1.8%
f,g Calpine Corp.,
senior note, 8.625%, 8/15/10 ................................... United States $ 65,000,000 71,012,500
d senior secured note, 144A, 8.50%, 7/15/10 ...................... United States 125,000,000 133,125,000
Dynegy Holdings Inc., senior note,
6.875%, 4/01/11 ................................................ United States 310,000,000 312,325,000
8.75%, 2/15/12 ................................................. United States 265,000,000 282,887,500
8.375%, 5/01/16 ................................................ United States 225,000,000 235,125,000
----------------
1,034,475,000
----------------
COMMERCIAL SERVICES 1.3%
Dex Media Inc.,
senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter,
11/15/13 ..................................................... United States 60,000,000 56,175,000
zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 .............. United States 210,000,000 196,612,500
JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to
5/17/07, 10.67% thereafter, 5/15/13 ............................ United States 158,000,000 163,925,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ......... United States 125,000,000 131,250,000
R.H. Donnelley Corp.,
6.875%, 1/15/13 ................................................ United States 26,300,000 25,708,250
senior discount note, 6.875%, 1/15/13 .......................... United States 94,400,000 92,276,000
senior note, 8.875%, 1/15/16 ................................... United States 55,000,000 58,712,500
----------------
724,659,250
----------------
COMMUNICATIONS 2.0%
d Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ............. Jamaica 140,000,000 136,150,000
d MetroPCS Wireless Inc., senior note, 144A, 9.25%, 11/01/14 ......... United States 105,000,000 111,562,500
Qwest Capital Funding Inc.,
7.00%, 8/03/09 ................................................. United States 300,000,000 305,250,000
7.25%, 2/15/11 ................................................. United States 365,000,000 375,493,750
Qwest Communications International Inc., senior note,
7.50%, 2/15/14 ................................................. United States 40,000,000 41,400,000
B, 7.50%, 2/15/14 .............................................. United States 140,000,000 144,900,000
----------------
1,114,756,250
----------------
Semiannual Report | 75
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES 5.7%
Beazer Homes USA Inc., senior note,
6.875%, 7/15/15 ................................................ United States $ 59,000,000 $ 52,952,500
h 8.125%, 6/15/16 ................................................ United States 91,000,000 85,995,000
D.R. Horton Inc.,
5.625%, 1/15/16 ................................................ United States 35,000,000 32,430,160
6.50%, 4/15/16 ................................................. United States 35,000,000 34,287,435
Ford Motor Co., 7.45%, 7/16/31 ..................................... United States 600,000,000 467,250,000
Ford Motor Credit Co.,
7.375%, 10/28/09 ............................................... United States 550,000,000 549,304,800
7.875%, 6/15/10 ................................................ United States 355,000,000 356,568,390
7.375%, 2/01/11 ................................................ United States 450,000,000 442,952,100
7.00%, 10/01/13 ................................................ United States 100,000,000 93,076,500
d 144A, 9.75%, 9/15/10 ........................................... United States 105,000,000 110,681,340
senior note, 9.875%, 8/10/11 ................................... United States 75,000,000 79,495,275
senior note, 7.25%, 10/25/11 ................................... United States 120,000,000 116,739,240
General Motors Corp., senior deb., 8.375%, 7/15/33 ................. United States 510,000,000 460,275,000
K Hovnanian Enterprises Inc.,
6.25%, 1/15/16 ................................................. United States 10,000,000 8,625,000
senior note, 7.50%, 5/15/16 .................................... United States 60,000,000 56,250,000
KB Home,
6.375%, 8/15/11 ................................................ United States 40,000,000 38,979,760
senior note, 5.75%, 2/01/14 .................................... United States 50,000,000 44,946,650
senior note, 6.25%, 6/15/15 .................................... United States 100,000,000 90,125,000
senior note, 7.25%, 6/15/18 .................................... United States 70,500,000 65,461,012
Visant Holding Corp., senior note, 8.75%, 12/01/13 ................. United States 50,000,000 52,375,000
----------------
3,238,770,162
----------------
CONSUMER FINANCE 0.2%
Residential Capital LLC, senior note, 6.375%, 6/30/10 .............. United States 100,000,000 100,045,300
----------------
CONSUMER NON-DURABLES 0.2%
Reynolds American Inc., senior secured note, 7.25%, 6/01/13 ........ United States 90,000,000 94,761,900
----------------
CONSUMER SERVICES 7.0%
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 .......... United States 450,000,000 459,000,000
CCH I Holdings LLC, senior note,
13.50%, 1/15/14 ................................................ United States 335,000,000 340,025,000
9.92%, 4/01/14 ................................................. United States 117,380,000 105,055,100
11.75%, 5/15/14 ................................................ United States 260,000,000 250,250,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 ................... United States 725,000,000 755,812,500
CCH II LLC, senior note, 10.25%, 9/15/10 ........................... United States 80,000,000 84,800,000
Clear Channel Communications Inc.,
5.50%, 9/15/14 ................................................. United States 100,000,000 88,661,300
senior note, 5.75%, 1/15/13 .................................... United States 75,000,000 70,409,775
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 ................. United States 200,000,000 206,000,000
DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ................. United States 25,300,000 24,161,500
EchoStar DBS Corp., senior note, 7.125%, 2/01/16 ................... United States 360,000,000 373,500,000
Hertz Corp.,
senior note, 8.875%, 1/01/14 ................................... United States 102,950,000 111,443,375
senior sub. note, 10.50%, 1/01/16 .............................. United States 6,500,000 7,442,500
76| Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER SERVICES (CONTINUED)
Liberty Media Corp., senior note, 5.70%, 5/15/13 .................... United States $ 148,000,000 $ 142,638,108
MGM MIRAGE Inc., senior note,
6.75%, 4/01/13 .................................................. United States 70,000,000 69,825,000
6.625%, 7/15/15 ................................................. United States 110,000,000 106,150,000
7.625%, 1/15/17 ................................................. United States 250,000,000 254,375,000
d Univision Communications Inc., senior note, 144A, PIK, 9.75%,
3/15/15 ......................................................... United States 300,000,000 300,375,000
Viacom Inc., senior note, 6.25%, 4/30/16 ............................ United States 100,000,000 101,549,200
XM Satellite Radio Inc., senior note, 9.75%, 5/01/14 ................ United States 127,000,000 128,746,250
----------------
3,980,219,608
----------------
ELECTRIC UTILITIES 1.8%
Aquila Inc., senior note, 14.875%, 7/01/12 .......................... United States 95,400,000 124,735,500
NRG Energy Inc., senior note,
7.25%, 2/01/14 .................................................. United States 60,000,000 61,650,000
7.375%, 2/01/16 ................................................. United States 80,000,000 82,400,000
Reliant Resources Inc., senior note, 9.25%, 7/15/10 ................. United States 65,000,000 68,818,750
TXU Corp., senior note,
P, 5.55%, 11/15/14 .............................................. United States 350,000,000 311,737,300
Q, 6.50%, 11/15/24 .............................................. United States 310,000,000 262,825,130
R, 6.55%, 11/15/34 .............................................. United States 150,000,000 126,359,700
----------------
1,038,526,380
----------------
ELECTRONIC TECHNOLOGY 1.9%
DRS Technologies Inc., senior note, 6.625%, 2/01/16 ................. United States 55,000,000 55,825,000
Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ... Singapore 110,000,000 106,975,000
d Freescale Semiconductor Inc.,
senior note, 144A, 8.875%, 12/15/14 ............................. United States 200,000,000 201,250,000
senior sub. note, 144A, 10.125%, 12/15/16 ....................... United States 80,000,000 80,600,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 ................................................. United States 41,000,000 40,026,250
6.375%, 10/15/15 ................................................ United States 85,000,000 84,681,250
Lucent Technologies Inc., 6.45%, 3/15/29 ............................ United States 180,000,000 163,350,000
d NXP BV/NXP Funding LLC, 144A, 9.50%, 10/15/15 ....................... Netherlands 50,000,000 51,875,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 .................................................. United States 150,000,000 137,250,000
8.125%, 3/01/16 ................................................. United States 90,000,000 85,050,000
Seagate Technology HDD Holdings, senior note,
6.375%, 10/01/11 ................................................ United States 25,000,000 25,125,000
6.80%, 10/01/16 ................................................. United States 40,000,000 40,400,000
----------------
1,072,407,500
----------------
ENERGY MINERALS 1.9%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 .................. United States 105,000,000 105,525,000
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ................................................. United States 75,000,000 80,062,500
6.50%, 8/15/17 .................................................. United States 115,000,000 114,137,500
6.25%, 1/15/18 .................................................. United States 150,000,000 148,875,000
6.875%, 11/15/20 ................................................ United States 145,000,000 145,000,000
Semiannual Report | 77
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY MINERALS (CONTINUED)
Mariner Energy Inc., senior note, 7.50%, 4/15/13 .................... United States $ 42,600,000 $ 42,067,500
Massey Energy Co., senior note, 6.875%, 12/15/13 .................... United States 59,650,000 56,891,188
Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ......... United States 110,000,000 110,550,000
Peabody Energy Corp., senior note, 7.375%, 11/01/16 ................. United States 57,225,000 60,515,438
Pioneer Natural Resources Co.,
6.65%, 3/15/17 .................................................. United States 38,000,000 37,780,778
6.875%, 5/01/18 ................................................. United States 107,000,000 105,701,769
Pogo Producing Co., senior sub. note, 7.875%, 5/01/13 ............... United States 78,175,000 79,152,187
----------------
1,086,258,860
----------------
FINANCE 3.8%
E*TRADE Financial Corp., senior note,
7.375%, 9/15/13 ................................................. United States 230,000,000 241,500,000
7.875%, 12/01/15 ................................................ United States 25,000,000 27,093,750
GMAC LLC,
5.625%, 5/15/09 ................................................. United States 135,000,000 132,615,495
7.75%, 1/19/10 .................................................. United States 420,000,000 431,365,200
6.875%, 9/15/11 ................................................. United States 800,000,000 801,532,000
6.875%, 8/28/12 ................................................. United States 300,400,000 299,522,231
6.75%, 12/01/14 ................................................. United States 125,000,000 123,067,375
United Rentals Inc., senior note, 6.50%, 2/15/12 .................... United States 35,000,000 35,087,500
United Rentals North America Inc., senior sub. note,
7.75%, 11/15/13 ................................................. United States 40,000,000 41,300,000
7.00%, 2/15/14 .................................................. United States 45,000,000 45,112,500
----------------
2,178,196,051
----------------
HEALTH SERVICES 3.7%
DaVita Inc.,
senior note, 6.625%, 3/15/13 .................................... United States 30,000,000 30,150,000
d senior note, 144A, 6.625%, 3/15/13 .............................. United States 175,000,000 175,875,000
senior sub. note, 7.25%, 3/15/15 ................................ United States 85,000,000 86,381,250
HCA Inc.,
6.375%, 1/15/15 ................................................. United States 125,000,000 107,031,250
senior note, 6.95%, 5/01/12 ..................................... United States 50,000,000 48,375,000
senior note, 6.50%, 2/15/16 ..................................... United States 150,000,000 128,437,500
d senior secured note, 144A, 9.25%, 11/15/16 ...................... United States 107,000,000 115,693,750
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 ................................................ United States 520,000,000 488,800,000
6.50%, 6/01/12 .................................................. United States 260,000,000 241,150,000
7.375%, 2/01/13 ................................................. United States 360,000,000 336,150,000
i FRN, 9.25%, 2/01/15 ............................................. United States 250,000,000 248,750,000
d,i U.S. Oncology Holdings Inc., senior note, 144A, FRN, 9.797%,
3/15/12 ........................................................... United States 66,800,000 67,802,000
Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to
10/01/09, 11.25% thereafter, 10/01/15 ............................. United States 20,000,000 16,350,000
----------------
2,090,945,750
----------------
78 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
INDUSTRIAL SERVICES 4.3%
Allied Waste North America Inc.,
senior note, 7.25%, 3/15/15 ..................................... United States $ 130,000,000 $ 133,250,000
h senior note, B, 7.375%, 4/15/14 ................................ United States 190,000,000 193,800,000
senior note, B, 7.125%, 5/15/16 ................................. United States 170,000,000 173,825,000
senior secured note, 6.50%, 11/15/10 ............................ United States 120,000,000 120,900,000
senior secured note, 6.375%, 4/15/11 ............................ United States 44,000,000 44,110,000
senior secured note, 6.125%, 2/15/14 ............................ United States 207,000,000 202,342,500
senior secured note, 6.875%, 6/01/17 ............................ United States 190,000,000 191,425,000
Browning-Ferris Industries Inc., 7.40%, 9/15/35 ..................... United States 70,000,000 67,550,000
El Paso Corp., senior note,
6.75%, 5/15/09 .................................................. United States 245,000,000 252,043,750
MTN, 7.75%, 1/15/32 ............................................. United States 280,000,000 310,800,000
El Paso Production Holding Co., 7.75%, 6/01/13 ...................... United States 100,000,000 105,000,000
d Sabine Pass LNG LP, senior note, 144A,
7.25%, 11/30/13 ................................................. United States 92,000,000 92,920,000
7.50%, 11/30/16 ................................................. United States 390,000,000 393,900,000
Sesi LLC, senior note, 6.875%, 6/01/14 .............................. United States 110,000,000 109,725,000
Sonat Inc., senior note, 7.625%, 7/15/11 ............................ United States 35,000,000 37,756,250
----------------
2,429,347,500
----------------
NON-ENERGY MINERALS 0.9%
Freeport-McMoRan Copper & Gold Inc., senior note,
8.25%, 4/01/15 .................................................. United States 86,600,000 93,419,750
8.375%, 4/01/17 ................................................. United States 214,275,000 232,220,531
Novelis Inc., senior note, 7.25%, 2/15/15 ........................... Canada 190,000,000 201,875,000
----------------
527,515,281
----------------
PROCESS INDUSTRIES 1.6%
Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 .... Canada 100,600,000 95,067,000
Chemtura Corp., senior note, 6.875%, 6/01/16 ........................ United States 24,000,000 23,340,000
Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 ............... United States 200,000,000 201,000,000
Lyondell Chemical Co., senior note,
8.00%, 9/15/14 .................................................. United States 70,000,000 73,675,000
8.25%, 9/15/16 .................................................. United States 33,100,000 35,582,500
Nalco Co., senior sub. note, 8.875%, 11/15/13 ....................... United States 20,000,000 21,350,000
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09,
9.00% thereafter, 2/01/14 ......................................... United States 380,000,000 336,300,000
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 .......................................................... United States 50,000,000 49,750,000
d Stone Container Corp., senior note, 144A, 8.00%, 3/15/17 ............ United States 68,000,000 66,810,000
----------------
902,874,500
----------------
PRODUCER MANUFACTURING 1.0%
Case New Holland Inc., senior note,
6.00%, 6/01/09 .................................................. United States 225,000,000 226,125,000
7.125%, 3/01/14 ................................................. United States 81,900,000 85,585,500
RBS Global & Rexnord Corp.,
senior note, 9.50%, 8/01/14 ..................................... United States 40,000,000 41,800,000
senior sub. note, 11.75%, 8/01/16 ............................... United States 63,000,000 67,961,250
Semiannual Report | 79
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Rexnord Holdings Inc., senior note, Toggle Term Loan, PIK, 11.35%,
2/20/13 ........................................................... United States $ 75,000,000 $ 73,920,750
d TRW Automotive Inc., senior note, 144A,
7.00%, 3/15/14 .................................................. United States 22,700,000 22,359,500
7.25%, 3/15/17 .................................................. United States 48,200,000 47,477,000
----------------
565,229,000
----------------
REAL ESTATE INVESTMENT TRUSTS 0.9%
Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ............. United States 87,600,000 89,352,000
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 ............................................. United States 50,000,000 51,375,000
O, 6.375%, 3/15/15 .............................................. United States 215,000,000 214,462,500
Q, 6.75%, 6/01/16 ............................................... United States 145,000,000 146,812,500
----------------
502,002,000
----------------
TECHNOLOGY SERVICES 0.3%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 .................................... United States 59,300,000 63,895,750
senior sub. note, 10.25%, 8/15/15 ............................... United States 100,000,000 109,625,000
----------------
173,520,750
----------------
TOTAL CORPORATE BONDS (COST $21,929,227,328) ........................ 22,854,511,042
----------------
CONVERTIBLE BONDS 1.8%
ALTERNATIVE POWER GENERATION 0.7%
f,g Calpine Corp., cvt.,
senior note, zero cpn. to 6/30/09, 6.00% thereafter, 9/30/14 .... United States 48,400,000 45,919,500
sub. note, 7.75%, 6/01/15 ....................................... United States 320,000,000 340,000,000
----------------
385,919,500
----------------
ELECTRONIC TECHNOLOGY 0.9%
Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ............ Canada 512,500,000 507,924,913
----------------
HEALTH TECHNOLOGY 0.0% j
d Enzon Pharmaceuticals Inc., cvt., 144A, 4.00% 6/01/13 ............... United States 23,300,000 25,088,974
----------------
INDUSTRIAL SERVICES 0.2%
Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ........... United States 103,000,000 100,425,000
----------------
TOTAL CONVERTIBLE BONDS (COST $948,095,257) ......................... 1,019,358,387
----------------
MORTGAGE-BACKED SECURITIES 2.9%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.8%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ........................ United States 450,730,578 436,580,418
FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 ....................... United States 311,331,851 308,383,698
FHLMC Gold 30 Year, 6.00%, 8/01/35 - 6/01/36 ........................ United States 278,597,744 280,850,327
----------------
1,025,814,443
----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.5%
FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 .............................. United States 267,826,315 265,298,380
----------------
80 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.6%
GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ......................... United States $ 357,933,139 $ 348,733,862
----------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $1,643,938,134) .............. 1,639,846,685
----------------
TOTAL LONG TERM INVESTMENTS (COST $46,625,213,230) .................. 53,064,548,359
----------------
------------------
SHARES
------------------
SHORT TERM INVESTMENTS 6.3%
MONEY MARKET FUND (COST $179,241,151) 0.3%
k Franklin Institutional Fiduciary Trust Money Market Portfolio,
4.99% ............................................................ United States 179,241,151 179,241,151
----------------
------------------
PRINCIPAL AMOUNT e
------------------
REPURCHASE AGREEMENTS 5.9%
l Joint Repurchase Agreement, 5.257%, 4/02/07
(Maturity Value $3,366,967,769) ................................... United States $ 3,365,493,295 3,365,493,295
ABN AMRO Bank, NV, New York Branch
(Maturity Value $317,235,704)
Banc of America Securities LLC (Maturity Value $303,229,117)
Barclays Capital Inc. (Maturity Value $303,229,117)
Bear, Stearns & Co. Inc. (Maturity Value $278,885,941)
BNP Paribas Securities Corp. (Maturity Value $303,229,117)
Credit Suisse Securities (USA) LLC (Maturity Value $41,784,071)
Deutsche Bank Securities Inc. (Maturity Value $303,229,117)
Goldman, Sachs & Co. (Maturity Value $303,229,117)
Greenwich Capital Markets Inc. (Maturity Value $303,229,117)
Merrill Lynch Government Securities Inc.
(Maturity Value $303,229,117)
Morgan Stanley & Co. Inc. (Maturity Value $303,229,117)
UBS Securities LLC (Maturity Value $303,229,117)
Collateralized by U.S. Government Agency Securities,
0.00% m - 7.125%, 4/16/07 - 2/17/12; n U.S. Government Agency
Discount Notes, 7/06/07 - 4/20/09; and U.S. Treasury Notes,
2.75% - 6.50%, 5/15/07 - 1/31/12
----------------
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
p REPURCHASE AGREEMENTS 0.1%
Banc of America Securities LLC, 5.40%, 4/02/07
(Maturity Value $3,382,521)
Collateralized by U.S. Government Agency Securities, 5.00%,
5/01/35 - 7/01/35 ............................................. United States 3,381,000 3,381,000
Barclays Capital Inc., 5.40%, 4/02/07 (Maturity Value $1,176,529)
Collateralized by U.S. Government Agency Securities, 3.50% - 9.50%,
4/01/07 - 3/01/47 ............................................. United States 1,176,000 1,176,000
Deutsche Bank Securities Inc., 5.41%, 4/02/07
(Maturity Value $4,734,133)
Collateralized by U.S. Government Agency Securities,
4.00% - 7.00%, 5/01/18 - 4/01/37 .............................. United States 4,732,000 4,732,000
Semiannual Report | 81
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES (CONTINUED)
p REPURCHASE AGREEMENTS (CONTINUED)
Goldman, Sachs & Co., 5.35%, 4/02/07 (Maturity Value $3,825,705)
Collateralized by U.S. Government Agency Securities,
4.875% - 6.75%, 8/27/07 - 9/15/29 ............................. United States $ 3,824,000 $ 3,824,000
Merrill Lynch Government Securities Inc., 5.35%, 4/02/07
(Maturity Value $4,673,082)
Collateralized by U.S. Government Agency Securities,
2.35% - 7.375%, 4/05/07 - 9/26/36; n U.S. Government Agency
Discount Notes, 4/08/07 - 11/15/30 .......................... United States 4,671,000 4,671,000
Morgan Stanley & Co. Inc., 5.40%, 4/02/07
(Maturity Value $4,497,023)
Collateralized by U.S. Government Agency Securities,
2.35% - 7.125%, 4/05/07 - 7/15/36 ............................. United States 4,495,000 4,495,000
----------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES (COST $22,279,000) ..................................... 22,279,000
----------------
TOTAL REPURCHASE AGREEMENTS (COST $3,387,772,295) ................... 3,387,772,295
----------------
TOTAL INVESTMENTS (COST $50,192,226,676) 99.8% ...................... 56,631,561,805
OTHER ASSETS, LESS LIABILITIES 0.2% ................................. 127,829,566
----------------
NET ASSETS 100.0% ................................................... $ 56,759,391,371
================
See Selected Portfolio Abbreviations on page 97.
a See Note 9 regarding holdings of 5% voting securities.
b Non-income producing for the twelve months ended March 31, 2007.
c See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
d 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, 2007,
the aggregate value of these securities was $3,808,021,510, representing
6.71% of net assets.
e The principal amount is stated in U.S. dollars unless otherwise indicated.
f See Note 8 regarding defaulted securities.
g See Note 10 regarding other considerations - credit committee
participation.
h A portion or all of the security is on loan as of March 31, 2007. See Note
1(f).
i The coupon rate shown represents the rate at period end.
j Rounds to less than 0.1% of net assets.
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 Rounds to less than 0.01%.
n The security is traded on a discount basis with no stated coupon rate.
o Collateral for loaned securities. See Note 1(c).
p See Note 1(c) regarding repurchase agreement.
82 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.15 0.32 0.28 0.27 0.28 0.38
Net realized and unrealized gains
(losses) ................................. 0.02 (0.11) (0.11) (0.04) (0.10) 0.09
-----------------------------------------------------------------------------------
Total from investment operations .............. 0.17 0.21 0.17 0.23 0.18 0.47
-----------------------------------------------------------------------------------
Less distributions from net investment
income ...................................... (0.17) (0.31) (0.32) (0.36) (0.36) (0.41)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.43 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
===================================================================================
Total return c ................................ 2.63% 3.40% 2.67% 3.46% 2.66% 7.06%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.73% e,f 0.72% f 0.72% f 0.70% f 0.70% 0.69%
Net investment income ......................... 4.74% e 4.64% 4.29% 4.09% 4.11% 5.48%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $5,136,922 $5,291,117 $5,901,449 $6,420,381 $7,286,317 $7,726,914
Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 83
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.13 0.29 0.25 0.24 0.25 0.34
Net realized and unrealized gains
(losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.10) 0.09
-----------------------------------------------------------------------------------
Total from investment operations .............. 0.15 0.18 0.14 0.19 0.15 0.43
-----------------------------------------------------------------------------------
Less distributions from net investment
income ...................................... (0.15) (0.28) (0.29) (0.32) (0.33) (0.38)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.42 $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98
===================================================================================
Total return c ................................ 2.38% 2.87% 2.13% 2.92% 2.13% 6.37%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.26% e,f 1.24% f 1.25% f 1.23% f 1.23% 1.22%
Net investment income ......................... 4.21% e 4.12% 3.76% 3.56% 3.58% 4.95%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $349,899 $388,807 $478,788 $568,276 $678,814 $559,966
Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
84 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.13 0.29 0.25 0.24 0.25 0.34
Net realized and unrealized gains
(losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.11) 0.10
-----------------------------------------------------------------------------------
Total from investment operations .............. 0.15 0.18 0.14 0.19 0.14 0.44
-----------------------------------------------------------------------------------
Less distributions from net investment
income ...................................... (0.15) (0.28) (0.29) (0.32) (0.33) (0.38)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.40 $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97
===================================================================================
Total return c ................................ 2.38% 2.88% 2.14% 2.91% 2.00% 6.53%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.26% e,f 1.23% f 1.25% f 1.23% f 1.23% 1.21%
Net investment income ......................... 4.21% e 4.13% 3.76% 3.56% 3.58% 4.96%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $411,107 $424,462 $508,539 $597,451 $814,635 $803,049
Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 85
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.14 0.30 0.26 0.25 0.25 0.25
Net realized and unrealized gains
(losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.09) 0.22
-----------------------------------------------------------------------------------
Total from investment operations .............. 0.16 0.19 0.15 0.20 0.16 0.47
-----------------------------------------------------------------------------------
Less distributions from net investment
income ...................................... (0.16) (0.29) (0.30) (0.33) (0.34) (0.29)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.43 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
===================================================================================
Total return c ................................ 2.45% 3.01% 2.29% 3.08% 2.29% 7.03%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.11% e,f 1.09% f 1.10% f 1.08% f 1.08% 1.07% e
Net investment income ......................... 4.36% e 4.27% 3.91% 3.71% 3.73% 5.10% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $74,661 $71,104 $65,790 $59,431 $54,042 $14,042
Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to September 30, 2002.
86 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94
-----------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.16 0.34 0.29 0.28 0.29 0.38
Net realized and unrealized gains
(losses) ................................. 0.01 (0.12) (0.10) (0.06) (0.10) 0.11
-----------------------------------------------------------------------------------
Total from investment operations .............. 0.17 0.22 0.19 0.22 0.19 0.49
-----------------------------------------------------------------------------------
Less distributions from net investment
income ...................................... (0.17) (0.32) (0.33) (0.36) (0.37) (0.42)
-----------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.45 $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01
===================================================================================
Total return c ................................ 2.69% 3.53% 2.95% 3.42% 2.79% 7.33%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.61% e,f 0.59% f 0.60% f 0.58% f 0.58% 0.57%
Net investment income ......................... 4.86% e 4.77% 4.41% 4.21% 4.23% 5.60%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $423,217 $387,239 $334,681 $340,279 $308,411 $198,437
Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 87
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 96.6%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.6%
GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 .............................................. $ 119,374 $ 126,598
GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 .............................................. 361,953 389,322
GNMA GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ............................................. 253,738 267,117
GNMA GP 30 Year, 10.25%, 5/15/20 ........................................................ 10,834 12,059
GNMA GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ............................................ 500,296 536,273
GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 .............................................. 281,956 312,386
GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 .............................................. 41,802 46,168
GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 .............................................. 39,000 43,551
GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 ............................................. 19,743 21,784
GNMA GP 30 Year, 12.50%, 5/15/10 - 7/15/10 .............................................. 41,103 44,933
GNMA GP 30 Year, 12.75%, 5/15/14 ........................................................ 5,725 6,371
GNMA I SF 15 Year, 6.50%, 5/15/18 ....................................................... 2,573,306 2,637,969
GNMA I SF 30 Year, 5.00%, 2/15/33 - 11/15/36 ............................................ 696,894,250 678,987,103
a GNMA I SF 30 Year, 5.50%, 5/15/28 - 11/15/36 ............................................ 1,269,540,820 1,264,033,299
a GNMA I SF 30 Year, 6.00%, 10/15/23 - 1/15/37 ............................................ 832,168,513 844,436,721
GNMA I SF 30 Year, 6.50%, 5/15/23 - 9/15/36 ............................................. 393,282,615 404,440,788
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ............................................. 72,219 75,057
GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ............................................ 234,730,840 245,365,174
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ............................................ 722,469 750,141
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 ............................................. 63,987,313 66,710,032
GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 ............................................. 559,304 589,086
GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ............................................ 49,819,530 52,776,517
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ............................................ 145,620 155,528
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ............................................ 10,981,415 11,805,630
GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ............................................ 13,831,953 14,869,175
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ............................................. 8,597,070 9,345,075
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ............................................ 10,706,780 11,898,411
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 .......................................... 8,086,250 9,013,901
GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ........................................... 7,318,447 8,042,016
GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ............................................ 1,825,360 2,026,672
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ............................................ 8,703,625 9,779,452
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ............................................ 7,705,779 8,540,760
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ............................................ 8,320,764 9,294,217
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ............................................ 68,043 72,283
GNMA II GP 30 Year, 11.50%, 8/20/13 ..................................................... 16,072 17,689
GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 ........................................... 44,738,214 42,196,535
GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ............................................ 346,095,905 335,836,061
GNMA II SF 30 Year, 5.00%, 9/20/33 ...................................................... 299,145,594 290,451,855
GNMA II SF 30 Year, 5.50%, 6/20/34 ...................................................... 79,079,560 78,604,135
GNMA II SF 30 Year, 5.50%, 7/20/34 - 6/20/36 ............................................ 391,546,026 389,024,657
GNMA II SF 30 Year, 5.50%, 12/20/34 ..................................................... 241,273,085 239,822,556
GNMA II SF 30 Year, 5.50%, 1/20/35 ...................................................... 97,345,156 96,717,816
GNMA II SF 30 Year, 5.50%, 2/20/35 ...................................................... 121,276,821 120,495,254
GNMA II SF 30 Year, 5.50%, 6/20/35 ...................................................... 71,450,935 70,990,471
GNMA II SF 30 Year, 5.50%, 4/20/36 ...................................................... 68,022,458 67,550,741
GNMA II SF 30 Year, 6.00%, 10/20/23 - 7/20/36 ........................................... 461,853,147 467,520,182
GNMA II SF 30 Year, 6.00%, 9/20/34 ...................................................... 77,478,137 78,493,721
88 | Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.6% (CONTINUED)
GNMA II SF 30 Year, 6.00%, 11/20/35 ..................................................... $ 70,960,943 $ 71,821,707
GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 ............................................ 93,913,178 96,455,569
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ............................................ 47,784,110 49,810,515
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ........................................... 8,472,376 8,811,647
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ............................................ 4,285,111 4,524,491
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ............................................ 2,203,070 2,358,189
GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ........................................... 601,154 644,737
GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ............................................ 353,220 385,619
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................................... 792,312 877,520
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ........................................... 2,348,881 2,606,745
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................................... 350,181 388,782
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ........................................... 194,893 217,293
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................................... 390,760 436,980
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ......................................... 278,628 309,661
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 .......................................... 273,224 305,405
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,226,281,913) .................................. 6,175,128,102
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENTS 4.2%
MONEY MARKET FUND (COST $179,207,272) 2.8%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% .................... 179,207,272 179,207,272
--------------
----------------
PRINCIPAL AMOUNT
----------------
REPURCHASE AGREEMENT (COST $91,980,000) 1.4%
c Barclays De Zoete Wedd Securities Inc., 5.08%, 4/02/07 (Maturity Value $92,018,938)
d Collateralized by U.S. Treasury Bill, 5/31/07 ....................................... $ 91,980,000 91,980,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $271,187,272) ........................................ 271,187,272
--------------
TOTAL INVESTMENTS (COST $6,497,469,185) 100.8% .......................................... 6,446,315,374
OTHER ASSETS, LESS LIABILITIES (0.8)% ................................................... (50,508,258)
--------------
NET ASSETS 100.0% ....................................................................... $6,395,807,116
==============
See Selected Portfolio Abbreviations on page 97.
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.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 89
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.19 0.43 0.45 0.43 0.42 0.46
Net realized and unrealized gains
(losses) ........................ 2.21 0.37 2.42 1.33 0.85 (1.60)
------------------------------------------------------------------------------------------
Total from investment operations ...... 2.40 0.80 2.87 1.76 1.27 (1.14)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.23) (0.41) (0.44) (0.40) (0.43) (0.45)
Net realized gains ................. (0.44) (0.09) -- -- -- (0.47)
------------------------------------------------------------------------------------------
Total distributions ................... (0.67) (0.50) (0.44) (0.40) (0.43) (0.92)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 14.62 $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96
==========================================================================================
Total return c ........................ 19.01% 6.69% 28.81% 20.40% 16.38% (12.49)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 0.75% e,f 0.76% f 0.78% f 0.80% 0.83% 0.80%
Net investment income ................. 2.78% e 3.54% 3.92% 4.49% 5.00% 4.87%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $2,206,389 $1,926,732 $1,986,034 $1,450,832 $1,259,886 $1,090,216
Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
90 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.16 0.37 0.39 0.38 0.37 0.41
Net realized and unrealized gains
(losses) .......................... 2.19 0.38 2.42 1.33 0.85 (1.58)
------------------------------------------------------------------------------------------
Total from investment operations ...... 2.35 0.75 2.81 1.71 1.22 (1.17)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.19) (0.35) (0.39) (0.36) (0.39) (0.41)
Net realized gains ................. (0.44) (0.09) -- -- -- (0.47)
------------------------------------------------------------------------------------------
Total distributions ................... (0.63) (0.44) (0.39) (0.36) (0.39) (0.88)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 14.60 $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97
==========================================================================================
Total return c ........................ 18.65% 6.25% 28.11% 19.71% 15.88% (12.88)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 1.26% e,f 1.26% f 1.28% f 1.30% 1.34% 1.31%
Net investment income ................. 2.27% e 3.04% 3.42% 3.99% 4.49% 4.44%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 143,466 $ 133,824 $ 154,277 $ 127,105 $ 95,321 $ 32,802
Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 91
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.16 0.37 0.39 0.38 0.36 0.41
Net realized and unrealized gains
(losses) ......................... 2.19 0.37 2.42 1.33 0.86 (1.59)
------------------------------------------------------------------------------------------
Total from investment operations ...... 2.35 0.74 2.81 1.71 1.22 (1.18)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.19) (0.35) (0.39) (0.36) (0.39) (0.41)
Net realized gains ................. (0.44) (0.09) -- -- -- (0.47)
------------------------------------------------------------------------------------------
Total distributions ................... (0.63) (0.44) (0.39) (0.36) (0.39) (0.88)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 14.57 $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95
==========================================================================================
Total return c ........................ 18.71% 6.19% 28.16% 19.76% 15.77% (12.90)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 1.26% e,f 1.25% f 1.28% f 1.30% 1.34% 1.29%
Net investment income ................. 2.27% e 3.05% 3.42% 3.99% 4.49% 4.43%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 448,772 $ 391,509 $ 435,714 $ 283,747 $ 222,030 $ 67,428
Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
92 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81
------------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.17 0.39 0.43 0.39 0.37 0.32
Net realized and unrealized gains
(losses) ......................... 2.20 0.36 2.40 1.34 0.86 (1.85)
------------------------------------------------------------------------------------------
Total from investment operations ...... 2.37 0.75 2.83 1.73 1.23 (1.53)
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.21) (0.37) (0.41) (0.37) (0.40) (0.32)
Net realized gains ................. (0.44) (0.09) -- -- -- --
------------------------------------------------------------------------------------------
Total distributions ................... (0.65) (0.46) (0.41) (0.37) (0.40) (0.32)
------------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 14.58 $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96
==========================================================================================
Total return c ........................ 18.80% 6.29% 28.35% 20.02% 15.96% (16.01)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 1.11% e,f 1.11% e,f 1.13% f 1.15% 1.19% 1.16% e
Net investment income ................. 2.42% e 3.19% 3.57% 4.14% 4.64% 4.82% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 40,073 $ 27,736 $ 14,649 $ 1,590 $ 1,142 $ 142
Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 93
Franklin Custodian Funds, Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED SEPTEMBER 30,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .. $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05
-----------------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............ 0.20 0.45 0.48 0.44 0.42 0.47
Net realized and unrealized gains
(losses) ......................... 2.21 0.38 2.42 1.34 0.87 (1.60)
-----------------------------------------------------------------------------------------
Total from investment operations ...... 2.41 0.83 2.90 1.78 1.29 (1.13)
-----------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (0.24) (0.43) (0.46) (0.42) (0.44) (0.46)
Net realized gains ................. (0.44) (0.09) -- -- -- (0.47)
-----------------------------------------------------------------------------------------
Total distributions ................... (0.68) (0.52) (0.46) (0.42) (0.44) (0.93)
-----------------------------------------------------------------------------------------
Redemption fees ....................... -- d -- d -- d -- d -- --
-----------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 14.68 $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99
=========================================================================================
Total return c ........................ 19.04% 6.88% 29.00% 20.48% 16.61% (12.32)%
RATIOS TO AVERAGE NET ASSETS
Expenses .............................. 0.61% e,f 0.61% f 0.63% f 0.65% 0.69% 0.66%
Net investment income ................. 2.92% e 3.69% 4.07% 4.64% 5.14% 5.07%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 97,052 $ 103,041 $ 110,249 $ 51,586 $ 47,167 $ 15,664
Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
94 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 98.4%
COMMON STOCKS 93.5%
DIVERSIFIED TELECOMMUNICATION SERVICES 3.4%
AT&T Inc. ............................................................... United States 1,400,000 $ 55,202,000
Verizon Communications Inc. ............................................. United States 1,200,000 45,504,000
---------------
100,706,000
---------------
ELECTRIC UTILITIES 80.5%
Alliant Energy Corp. .................................................... United States 1,300,000 58,266,000
Ameren Corp. ............................................................ United States 1,429,441 71,900,882
American Electric Power Co. Inc. ........................................ United States 1,200,000 58,500,000
California Water Service Group .......................................... United States 400,000 15,328,000
CenterPoint Energy Inc. ................................................. United States 1,500,000 26,910,000
Cleco Corp. ............................................................. United States 1,000,000 25,830,000
Consolidated Edison Inc. ................................................ United States 700,000 35,742,000
Constellation Energy Group .............................................. United States 600,000 52,170,000
Dominion Resources Inc. ................................................. United States 1,600,000 142,032,000
DTE Energy Co. .......................................................... United States 600,000 28,740,000
Duke Energy Corp. ....................................................... United States 4,391,400 89,101,506
Edison International .................................................... United States 2,200,000 108,086,000
Energy East Corp. ....................................................... United States 600,000 14,616,000
Entergy Corp. ........................................................... United States 1,750,000 183,610,000
Exelon Corp. ............................................................ United States 2,200,000 151,162,000
FirstEnergy Corp. ....................................................... United States 1,900,000 125,856,000
FPL Group Inc. .......................................................... United States 1,800,000 110,106,000
Hawaiian Electric Industries Inc. ....................................... United States 500,000 12,995,000
National Grid PLC ....................................................... United Kingdom 4,987,755 78,312,985
Northeast Utilities ..................................................... United States 1,600,000 52,432,000
Pepco Holdings Inc. ..................................................... United States 1,400,000 40,628,000
PG&E Corp. .............................................................. United States 1,900,000 91,713,000
Pinnacle West Capital Corp. ............................................. United States 800,000 38,600,000
PPL Corp. ............................................................... United States 2,400,000 98,160,000
Progress Energy Inc. .................................................... United States 1,500,000 75,660,000
Public Service Enterprise Group Inc. .................................... United States 1,300,000 107,952,000
Puget Energy Inc. ....................................................... United States 1,725,000 44,298,000
SCANA Corp. ............................................................. United States 1,000,000 43,170,000
a Sierra Pacific Resources ................................................ United States 3,200,000 55,616,000
The Southern Co. ........................................................ United States 2,500,000 91,625,000
TXU Corp. ............................................................... United States 1,100,000 70,510,000
United Utilities PLC .................................................... United Kingdom 3,000,000 44,594,521
Westar Energy Inc. ...................................................... United States 800,000 22,016,000
Wisconsin Energy Corp. .................................................. United States 1,000,000 48,520,000
Xcel Energy Inc. ........................................................ United States 2,000,000 49,380,000
---------------
2,364,138,894
---------------
GAS DISTRIBUTORS 7.8%
AGL Resources Inc. ...................................................... United States 1,000,000 42,720,000
Atmos Energy Corp. ...................................................... United States 600,000 18,768,000
Gaz de France ........................................................... France 544,033 25,239,611
Semiannual Report | 95
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
GAS DISTRIBUTORS (CONTINUED)
Sempra Energy ........................................................... United States 1,000,000 $ 61,010,000
Spectra Energy Corp. .................................................... United States 2,195,700 57,681,039
Vectren Corp. ........................................................... United States 800,000 22,880,000
---------------
228,298,650
---------------
OIL & GAS PIPELINES 1.8%
Kinder Morgan Inc. ...................................................... United States 200,000 21,290,000
The Williams Cos. Inc. .................................................. United States 1,100,000 31,306,000
---------------
52,596,000
---------------
TOTAL COMMON STOCKS (COST $1,599,916,935) ............................... 2,745,739,544
---------------
CONVERTIBLE PREFERRED STOCKS 1.2%
ELECTRIC UTILITIES 1.2%
CMS Energy Trust I, 7.75%, cvt. pfd. .................................... United States 260,000 12,971,322
PNM Resources Inc., 6.75%, cvt. pfd. .................................... United States 400,000 21,750,000
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,520) ................... 34,721,322
---------------
------------------
PRINCIPAL AMOUNT b
------------------
CORPORATE BONDS 3.7%
ELECTRIC UTILITIES 3.7%
Aquila Inc., senior note,
9.95%, 2/01/11 ...................................................... United States $ 6,000,000 6,600,000
8.27%, 11/15/21 ..................................................... United States 6,100,000 7,289,500
CMS Energy Corp., senior note, 9.875%, 10/15/07 ......................... United States 8,500,000 8,723,125
MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ............ United States 25,000,000 31,549,400
Northeast Generation Co., senior note, 8.812%, 10/15/26 ................. United States 7,500,000 7,717,125
PP&L Capital Funding, 8.375%, 6/15/07 ................................... United States 15,000,000 15,081,855
TXU Corp., senior note, R, 6.55%, 11/15/34 .............................. United States 40,000,000 33,695,920
---------------
TOTAL CORPORATE BONDS (COST $107,935,453) ............................... 110,656,925
---------------
TOTAL LONG TERM INVESTMENTS (COST $1,741,292,908) ....................... 2,891,117,791
---------------
------------------
SHARES
------------------
SHORT TERM INVESTMENT (COST $39,855,609) 1.4%
MONEY MARKET FUND 1.4%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% .... United States 39,855,609 39,855,609
---------------
TOTAL INVESTMENTS (COST $1,781,148,517) 99.8% ........................... 2,930,973,400
OTHER ASSETS, LESS LIABILITIES 0.2% ..................................... 4,779,637
---------------
NET ASSETS 100.0% ....................................................... $ 2,935,753,037
===============
See Selected Portfolio Abbreviations on page 97.
a Non-income producing for the twelve months ended March 31, 2007.
b The principal amount is stated in U.S. dollars unless otherwise indicated.
c 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.
96 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
GP - Graduated Payment
MTN - Medium Term Note
PIK - Payment-In-Kind
SF - Single Family
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2007 (unaudited)
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-----------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................ $ 305,321,731 $ 900,890,205 $ 44,763,440,122
Cost - Non-controlled affiliated issuers (Note 9) ...... -- -- 1,861,773,108
Cost - Sweep Money Fund (Note 7) ....................... 2,054,290 31,920,013 179,241,151
Cost - Repurchase agreements ........................... -- -- 3,387,772,295
-----------------------------------------------------
Total cost of investments .............................. $ 307,376,021 $ 932,810,218 $ 50,192,226,676
=====================================================
Value - Unaffiliated issuers ........................... $ 591,210,208 $ 2,562,655,914 $ 49,988,823,716
Value - Non-controlled affiliated issuers (Note 9) ..... -- -- 3,075,724,643
Value - Sweep Money Fund (Note 7) ...................... 2,054,290 31,920,013 179,241,151
Value - Repurchase agreements .......................... -- -- 3,387,772,295
-----------------------------------------------------
Total value of investments a ........................... 593,264,498 2,594,575,927 56,631,561,805
Receivables:
Investment securities sold ............................. 4,821,491 -- 109,623,610
Capital shares sold .................................... 457,601 2,814,272 204,335,387
Dividends and interest ................................. 156,848 1,859,487 506,973,033
-----------------------------------------------------
Total assets ........................................ 598,700,438 2,599,249,686 57,452,493,835
-----------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........................ -- 2,299,018 534,154,347
Capital shares redeemed ................................ 1,978,670 3,316,892 78,781,685
Affiliates ............................................. 636,198 2,546,442 46,960,327
Payable upon return of securities loaned .................. -- -- 22,279,000
Accrued expenses and other liabilities .................... 450,813 1,565,598 10,927,105
-----------------------------------------------------
Total liabilities ................................... 3,065,681 9,727,950 693,102,464
-----------------------------------------------------
Net assets, at value ............................. $ 595,634,757 $ 2,589,521,736 $ 56,759,391,371
=====================================================
Net assets consist of:
Paid-in capital ........................................... $ 357,213,007 $ 1,039,720,835 $ 49,749,987,182
Undistributed net investment income (loss) ................ (1,542,809) 1,155,278 --
Distributions in excess of net investment income .......... -- -- (79,959,726)
Net unrealized appreciation (depreciation) ................ 285,888,477 1,661,765,709 6,439,373,957
Accumulated net realized gain (loss) ...................... (45,923,918) (113,120,086) 649,989,958
-----------------------------------------------------
Net assets, at value ............................. $ 595,634,757 $ 2,589,521,736 $ 56,759,391,371
=====================================================
a Including securities loaned ................................ -- -- $ 21,895,851
98 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2007 (unaudited)
--------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
--------------------------------------------------
CLASS A:
Net assets, at value ................................................... $ 516,155,098 $ 1,818,773,221 $ 32,234,821,434
==================================================
Shares outstanding ..................................................... 18,983,166 43,213,914 11,888,074,958
==================================================
Net asset value per share b ............................................ $ 27.19 $ 42.09 $ 2.71
==================================================
Maximum offering price per share (net asset value per share / 94.25%,
94.25% and 95.75%, respectively) ..................................... $ 28.85 $ 44.66 $ 2.83
==================================================
CLASS B:
Net assets, at value ................................................... $ 15,725,209 $ 123,415,080 $ 3,866,737,248
==================================================
Shares outstanding ..................................................... 605,123 3,049,277 1,431,538,604
==================================================
Net asset value and maximum offering price per share b ................. $ 25.99 $ 40.47 $ 2.70
==================================================
CLASS B1:
Net assets, at value ................................................... -- -- $ 453,875,607
==================================================
Shares outstanding ..................................................... -- -- 167,322,653
==================================================
Net asset value and maximum offering price per share b ................. -- -- $ 2.71
==================================================
CLASS C:
Net assets, at value ................................................... $ 63,754,450 $ 288,494,424 $ 14,759,878,842
==================================================
Shares outstanding ..................................................... 2,478,918 7,190,006 5,410,984,971
==================================================
Net asset value and maximum offering price per share b ................. $ 25.72 $ 40.12 $ 2.73
==================================================
CLASS R:
Net assets, at value ................................................... -- $ 43,258,111 $ 237,734,245
==================================================
Shares outstanding ..................................................... -- 1,034,763 88,523,629
==================================================
Net asset value and maximum offering price per share b ................. -- $ 41.80 $ 2.69
==================================================
ADVISOR CLASS:
Net assets, at value ................................................... -- $ 315,580,900 $ 5,206,343,995
==================================================
Shares outstanding ..................................................... -- 7,492,652 1,929,131,768
==================================================
Net asset value and maximum offering price per share b ................. -- $ 42.12 $ 2.70
==================================================
b Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2007 (unaudited)
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................ $ 6,226,281,913 $ 1,741,292,908
Cost - Sweep Money Fund (Note 7) ................... 179,207,272 39,855,609
Cost - Repurchase agreements ....................... 91,980,000 --
---------------------------------
Total cost of investments .......................... $ 6,497,469,185 $ 1,781,148,517
=================================
Value - Unaffiliated issuers ....................... $ 6,175,128,102 $ 2,891,117,791
Value - Sweep Money Fund (Note 7) .................. 179,207,272 39,855,609
Value - Repurchase agreements ...................... 91,980,000 --
---------------------------------
Total value of investments ......................... 6,446,315,374 2,930,973,400
Cash .................................................. 2,539 --
Receivables:
Capital shares sold ................................ 5,674,758 5,390,064
Dividends and interest ............................. 28,294,497 7,183,509
---------------------------------
Total assets .................................... 6,480,287,168 2,943,546,973
---------------------------------
Liabilities:
Payables:
Investment securities purchased .................... 65,541,016 --
Capital shares redeemed ............................ 11,851,842 4,652,832
Affiliates ......................................... 4,518,813 3,052,791
Accrued expenses and other liabilities ................ 2,568,381 88,313
---------------------------------
Total liabilities ............................... 84,480,052 7,793,936
---------------------------------
Net assets, at value ......................... $ 6,395,807,116 $ 2,935,753,037
=================================
Net assets consist of:
Paid-in capital ....................................... $ 6,860,584,149 $ 1,730,690,159
Undistributed net investment income
(distributions in excess of net investment income) .. (4,219,282) 3,432,465
Net unrealized appreciation (depreciation) ............ (51,153,811) 1,149,824,883
Accumulated net realized gain (loss) .................. (409,403,940) 51,805,530
---------------------------------
Net assets, at value ......................... $ 6,395,807,116 $ 2,935,753,037
=================================
100 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2007 (unaudited)
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
CLASS A:
Net assets, at value ................................................... $ 5,136,922,317 $ 2,206,389,427
=================================
Shares outstanding ..................................................... 798,472,250 150,927,947
=================================
Net asset value per share a ............................................ $ 6.43 $ 14.62
=================================
Maximum offering price per share (net asset value per share / 95.75%) .. $ 6.72 $ 15.27
=================================
CLASS B:
Net assets, at value ................................................... $ 349,899,363 $ 143,465,641
=================================
Shares outstanding ..................................................... 54,469,477 9,823,876
=================================
Net asset value and maximum offering price per share a ................. $ 6.42 $ 14.60
=================================
CLASS C:
Net assets, at value ................................................... $ 411,107,479 $ 448,772,320
=================================
Shares outstanding ..................................................... 64,207,426 30,796,533
=================================
Net asset value and maximum offering price per share a ................. $ 6.40 $ 14.57
=================================
CLASS R:
Net assets, at value ................................................... $ 74,660,804 $ 40,073,179
=================================
Shares outstanding ..................................................... 11,613,425 2,748,187
=================================
Net asset value and maximum offering price per share a ................. $ 6.43 $ 14.58
=================================
ADVISOR CLASS:
Net assets, at value ................................................... $ 423,217,153 $ 97,052,470
=================================
Shares outstanding ..................................................... 65,634,622 6,611,751
=================================
Net asset value and maximum offering price per share a ................. $ 6.45 $ 14.68
=================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 101
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended March 31, 2007 (unaudited)
-------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ..................................................... $ 2,081,602 $ 16,723,015 $ 456,320,011
Non-controlled affiliated issuers (Note 9) ............................... -- -- 56,401,935
Sweep Money Fund (Note 7) ................................................ 74,996 498,477 4,550,988
Interest .................................................................... -- -- 1,015,141,331
Income from securities loaned - net ......................................... -- -- 508,071
-------------------------------------------------
Total investment income ............................................... 2,156,598 17,221,492 1,532,922,336
-------------------------------------------------
Expenses:
Management fees (Note 3a) ................................................... 1,562,730 5,886,981 101,621,166
Distribution fees: (Note 3c)
Class A .................................................................. 681,444 2,086,680 22,082,737
Class B .................................................................. 86,553 632,348 19,038,631
Class B1 ................................................................. -- -- 1,493,552
Class C .................................................................. 335,257 1,432,455 44,239,008
Class R .................................................................. -- 104,017 523,544
Transfer agent fees (Note 3e) ............................................... 898,042 3,220,793 23,156,239
Custodian fees (Note 4) ..................................................... 14,642 23,862 436,350
Reports to shareholders ..................................................... 57,643 216,865 2,065,032
Registration and filing fees ................................................ 34,904 75,922 1,179,717
Professional fees (Note 3f) ................................................. 16,351 33,610 268,332
Directors' fees and expenses ................................................ 1,999 7,119 109,603
Other ....................................................................... 9,846 16,351 301,651
-------------------------------------------------
Total expenses ........................................................ 3,699,411 13,737,003 216,515,562
Expense reductions (Note 4) ........................................... (4) (101) (24,692)
-------------------------------------------------
Net expenses ....................................................... 3,699,407 13,736,902 216,490,870
-------------------------------------------------
Net investment income (loss) ..................................... (1,542,809) 3,484,590 1,316,431,466
-------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated Issuers ................................................... 10,203,403 4,715,357 757,318,226
Non-controlled affiliated issuers (Note 9) ............................. -- -- 8,538,302
Foreign currency transactions ............................................ (1,422) (25) (716,003)
-------------------------------------------------
Net realized gain (loss) ......................................... 10,201,981 4,715,332 765,140,525
-------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................. 26,541,771 179,948,743 2,740,985,458
Translation of assets and liabilities denominated in foreign currencies .. -- -- 38,828
-------------------------------------------------
Net change in unrealized appreciation (depreciation) ............. 26,541,771 179,948,743 2,741,024,286
-------------------------------------------------
Net realized and unrealized gain (loss) ........................................ 36,743,752 184,664,075 3,506,164,811
-------------------------------------------------
Net increase (decrease) in net assets resulting from operations ................ $ 35,200,943 $ 188,148,665 $ 4,822,596,277
=================================================
102 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended March 31, 2007 (unaudited)
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
Investment income:
Dividends:
Unaffiliated issuers .................................................. $ -- $ 44,204,580
Sweep Money Fund (Note 7) ............................................. 3,961,906 269,705
Interest ................................................................. 173,141,460 4,263,810
---------------------------------
Total investment income ............................................ 177,103,366 48,738,095
---------------------------------
Expenses:
Management fees (Note 3a) ................................................ 14,388,693 6,364,267
Distribution fees: (Note 3c)
Class A ............................................................... 3,184,763 1,421,244
Class B ............................................................... 1,193,074 451,228
Class C ............................................................... 1,344,696 1,357,680
Class R ............................................................... 181,500 82,115
Transfer agent fees (Note 3e) ............................................ 5,090,255 2,003,791
Custodian fees (Note 4) .................................................. 63,919 37,950
Reports to shareholders .................................................. 437,716 103,601
Registration and filing fees ............................................. 123,859 69,831
Professional fees (Note 3f) .............................................. 43,232 31,813
Directors' fees and expenses ............................................. 22,834 13,930
Other .................................................................... 74,934 34,791
---------------------------------
Total expenses ..................................................... 26,149,475 11,972,241
Expense reductions (Note 4) ........................................ (129) (277)
---------------------------------
Net expenses ...................................................... 26,149,346 11,971,964
---------------------------------
Net investment income (loss) .................................... 150,954,020 36,766,131
---------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... (289,893) 71,240,753
Foreign currency transactions ......................................... -- (29,099)
---------------------------------
Net realized gain (loss) ........................................ (289,893) 71,211,654
---------------------------------
Net change in unrealized appreciation (depreciation) on investments ...... 18,176,757 368,267,669
---------------------------------
Net realized and unrealized gain (loss) ..................................... 17,886,864 439,479,323
---------------------------------
Net increase (decrease) in net assets resulting from operations ............. $ 168,840,884 $ 476,245,454
=================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 103
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, 2007 YEAR ENDED MARCH 31, 2007 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2006 (UNAUDITED) SEPTEMBER 30, 2006
----------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ............. $ (1,542,809) $ (2,150,136) $ 3,484,590 $ 5,235,063
Net realized gain (loss) from investments
and foreign currency transactions ...... 10,201,981 37,234,123 4,715,332 94,169,928
Net change in unrealized appreciation
(depreciation) on investments .......... 26,541,771 (13,111,219) 179,948,743 169,320,275
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .............. 35,200,943 21,972,768 188,148,665 268,725,266
----------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... -- -- (4,596,418) (2,878,816)
Class R ............................... -- -- (7,075) (1,109)
Advisor Class ......................... -- -- (1,417,769) (964,032)
----------------------------------------------------------------------------------
Total distributions to shareholders ......... -- -- (6,021,262) (3,843,957)
----------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... (105,379,624) (58,206,956) (5,993,269) (61,066,872)
Class B ............................... (3,895,344) (1,156,433) (8,660,512) (14,734,540)
Class C ............................... (8,711,372) (6,007,946) (5,474,185) (27,044,966)
Class R ............................... -- -- 2,667,513 6,380,501
Advisor Class ......................... -- -- 20,258,920 24,459,918
----------------------------------------------------------------------------------
Total capital share transactions ............ (117,986,340) (65,371,335) 2,798,467 (72,005,959)
----------------------------------------------------------------------------------
Redemption fees ............................. 717 2,037 3,208 8,229
----------------------------------------------------------------------------------
Net increase (decrease) in
net assets ....................... (82,784,680) (43,396,530) 184,929,078 192,883,579
Net assets:
Beginning of period ......................... 678,419,437 721,815,967 2,404,592,658 2,211,709,079
----------------------------------------------------------------------------------
End of period ............................... $ 595,634,757 $ 678,419,437 $ 2,589,521,736 $ 2,404,592,658
==================================================================================
Undistributed net investment income (loss)
included in net assets:
End of period ............................... $ (1,542,809) $ -- $ 1,155,278 $ 3,691,950
==================================================================================
104 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
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, 2007 YEAR ENDED MARCH 31, 2007 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2006 (UNAUDITED) SEPTEMBER 30, 2006
----------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 1,316,431,466 $ 2,251,128,737 $ 150,954,020 $ 313,718,824
Net realized gain (loss) from investments
and foreign currency transactions ...... 765,140,525 708,504,197 (289,893) (1,705,377)
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ...... 2,741,024,286 1,064,942,294 18,176,757 (93,987,541)
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .............. 4,822,596,277 4,024,575,228 168,840,884 218,025,906
----------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (791,655,423) (1,378,791,711) (135,676,969) (270,849,710)
Class B ............................... (88,485,762) (189,035,634) (8,765,500) (18,899,716)
Class B1 .............................. (11,460,201) (25,054,794) -- --
Class C ............................... (327,661,331) (571,320,771) (9,845,840) (20,148,370)
Class R ............................... (5,285,009) (8,167,468) (1,752,714) (2,989,468)
Advisor Class ......................... (123,368,164) (175,243,446) (10,613,188) (18,476,100)
Net realized gains:
Class A ............................... (420,454,280) (140,038,105) -- --
Class B ............................... (56,272,957) (23,629,261) -- --
Class B1 .............................. (6,844,643) (2,953,524) -- --
Class C ............................... (190,856,659) (63,765,145) -- --
Class R ............................... (2,957,517) (827,485) -- --
Advisor Class ......................... (62,928,530) (15,806,072) -- --
----------------------------------------------------------------------------------
Total distributions to shareholders ......... (2,088,230,476) (2,594,633,416) (166,654,211) (331,363,364)
----------------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... 4,041,723,563 3,892,312,218 (156,025,521) (518,339,020)
Class B ............................... (79,596,213) (281,240,958) (38,981,257) (82,378,909)
Class B1 .............................. (30,233,773) (46,251,019) -- --
Class C ............................... 1,910,214,390 1,657,633,123 (13,401,776) (76,075,166)
Class R ............................... 43,243,668 55,454,673 3,530,544 6,209,239
Advisor Class ......................... 1,186,272,471 1,379,240,071 35,753,602 57,275,425
----------------------------------------------------------------------------------
Total capital share transactions ............ 7,071,624,106 6,657,148,108 (169,124,408) (613,308,431)
----------------------------------------------------------------------------------
Redemption fees ............................. 105,900 265,535 16,520 125,755
----------------------------------------------------------------------------------
Net increase (decrease) in net
assets ........................... 9,806,095,807 8,087,355,455 (166,921,215) (726,520,134)
Net assets:
Beginning of period ......................... 46,953,295,564 38,865,940,109 6,562,728,331 7,289,248,465
----------------------------------------------------------------------------------
End of period ............................... $ 56,759,391,371 $ 46,953,295,564 $ 6,395,807,116 $ 6,562,728,331
==================================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period ............................... $ (79,959,726) $ (48,475,302) $ (4,219,282) $ 11,480,909
==================================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 105
Franklin Custodian Funds, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------
FRANKLIN UTILITIES FUND
--------------------------------------
SIX MONTHS ENDED
MARCH 31, 2007 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2006
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................................................... $ 36,766,131 $ 86,200,184
Net realized gain (loss) from investments and foreign currency transactions .... 71,211,654 79,469,077
Net change in unrealized appreciation (depreciation) on investments ............ 368,267,669 (14,294,348)
--------------------------------------
Net increase (decrease) in net assets resulting from operations .......... 476,245,454 151,374,913
--------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ..................................................................... (33,835,827) (63,192,877)
Class B ..................................................................... (1,943,586) (3,961,723)
Class C ..................................................................... (5,905,947) (11,209,132)
Class R ..................................................................... (488,603) (562,410)
Advisor Class ............................................................... (1,527,737) (3,148,388)
Net realized gains:
Class A ..................................................................... (64,820,958) (14,345,312)
Class B ..................................................................... (4,455,820) (1,090,928)
Class C ..................................................................... (13,297,323) (3,070,998)
Class R ..................................................................... (997,296) (117,357)
Advisor Class ............................................................... (2,701,856) (696,993)
--------------------------------------
Total distributions to shareholders ............................................... (129,974,953) (101,396,118)
--------------------------------------
Capital share transactions: (Note 2)
Class A ..................................................................... 19,810,583 (98,910,206)
Class B ..................................................................... (7,877,799) (22,687,061)
Class C ..................................................................... 4,506,751 (50,418,336)
Class R ..................................................................... 8,216,786 12,337,719
Advisor Class ............................................................... (18,022,466) (8,392,780)
--------------------------------------
Total capital share transactions .................................................. 6,633,855 (168,070,664)
--------------------------------------
Redemption fees ................................................................... 7,419 10,894
--------------------------------------
Net increase (decrease) in net assets .................................... 352,911,775 (118,080,975)
Net assets:
Beginning of period ............................................................... 2,582,841,262 2,700,922,237
--------------------------------------
End of period ..................................................................... $ 2,935,753,037 $ 2,582,841,262
======================================
Undistributed net investment income included in net assets:
End of period ..................................................................... $ 3,432,465 $ 10,368,034
======================================
106 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the
Investment Company Act of 1940, as amended, (the 1940 Act) as a diversified,
open-end investment company, consisting of five funds (the Funds). The classes
of shares offered within each of the Funds are indicated below. 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 funds may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The funds' 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.
Semiannual Report | 107
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Funds have procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. 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. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. 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.
108 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. All repurchase agreements held by the funds at period end had been
entered into on March 30, 2007. Repurchase agreements are valued at cost.
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 initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at
Semiannual Report | 109
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. SECURITIES LENDING (CONTINUED)
the close of fund business each day; any additional collateral required due to
changes in security values is delivered to the funds on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The funds receive interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The funds bear the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower.
G. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy 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. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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.
110 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. Currently, the Custodian Funds expect the risk of
loss to be remote.
2. CAPITAL STOCK
At March 31, 2007, there were 46.2 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 30,400 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, 2007
Shares sold ...................................... 1,108,993 $ 29,904,399 3,668,879 $ 153,846,782
Shares issued in reinvestment of distributions ... -- -- 101,411 4,209,597
Shares redeemed .................................. (5,014,686) (135,284,023) (3,926,538) (164,049,648)
---------------------------------------------------------
Net increase (decrease) .......................... (3,905,693) $ (105,379,624) (156,248) $ (5,993,269)
=========================================================
Year ended September 30, 2006
Shares sold ...................................... 7,549,106 $ 196,574,987 5,839,020 $ 216,936,848
Shares issued in reinvestment of distributions ... -- -- 72,200 2,651,898
Shares redeemed .................................. (9,824,846) (254,781,943) (7,553,843) (280,655,618)
---------------------------------------------------------
Net increase (decrease) .......................... (2,275,740) $ (58,206,956) (1,642,623) $ (61,066,872)
=========================================================
Semiannual Report | 111
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
CLASS B SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 14,510 $ 375,049 70,891 $ 2,874,779
Shares redeemed .................................. (165,522) (4,270,393) (285,402) (11,535,291)
------------------------------------------------------
Net increase (decrease) .......................... (151,012) $ (3,895,344) (214,511) $ (8,660,512)
======================================================
Year ended September 30, 2006
Shares sold ...................................... 130,112 $ 3,277,620 131,693 $ 4,727,781
Shares redeemed .................................. (181,335) (4,434,053) (542,288) (19,462,321)
------------------------------------------------------
Net increase (decrease) .......................... (51,223) $ (1,156,433) (410,595) $ (14,734,540)
======================================================
CLASS C SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 155,479 $ 3,975,858 441,749 $ 17,671,940
Shares redeemed .................................. (495,770) (12,687,230) (580,341) (23,146,125)
------------------------------------------------------
Net increase (decrease) .......................... (340,291) $ (8,711,372) (138,592) $ (5,474,185)
======================================================
Year ended September 30, 2006
Shares sold ...................................... 544,669 $ 13,596,186 805,722 $ 28,644,387
Shares redeemed .................................. (804,572) (19,604,132) (1,568,706) (55,689,353)
------------------------------------------------------
Net increase (decrease) .......................... (259,903) $ (6,007,946) (762,984) $ (27,044,966)
======================================================
CLASS R SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 249,370 $ 10,471,738
Shares issued in reinvestment of distributions ... 170 7,025
Shares redeemed .................................. (189,117) (7,811,250)
---------------------------
Net increase (decrease) .......................... 60,423 $ 2,667,513
===========================
Year ended September 30, 2006
Shares sold ...................................... 761,379 $ 28,236,014
Shares issued in reinvestment of distributions ... 30 1,108
Shares redeemed .................................. (591,370) (21,856,621)
---------------------------
Net increase (decrease) .......................... 170,039 $ 6,380,501
===========================
ADVISOR CLASS SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 711,013 $ 29,898,180
Shares issued in reinvestment of distributions ... 30,694 1,273,761
Shares redeemed .................................. (259,327) (10,913,021)
---------------------------
Net increase (decrease) .......................... 482,380 $ 20,258,920
===========================
Year ended September 30, 2006
Shares sold ...................................... 1,865,004 $ 68,842,317
Shares issued in reinvestment of distributions ... 23,979 880,512
Shares redeemed .................................. (1,234,780) (45,262,911)
---------------------------
Net increase (decrease) .......................... 654,203 $ 24,459,918
===========================
112 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
--------------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
CLASS A SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 1,871,213,475 $ 4,965,935,996 37,863,358 $ 243,407,351
Shares issued in reinvestment of distributions ... 337,594,388 890,509,065 13,765,508 88,405,102
Shares redeemed .................................. (683,925,918) (1,814,721,498) (75,916,707) (487,837,974)
--------------------------------------------------------------------
Net increase (decrease) .......................... 1,524,881,945 $ 4,041,723,563 (24,287,841) $ (156,025,521)
====================================================================
Year ended September 30, 2006
Shares sold ...................................... 2,696,366,641 $ 6,638,171,639 74,108,689 $ 475,165,349
Shares issued in reinvestment of distributions ... 419,071,279 1,027,948,938 27,302,160 174,712,964
Shares redeemed .................................. (1,536,463,921) (3,773,808,359) (182,139,799) (1,168,217,333)
--------------------------------------------------------------------
Net increase (decrease) .......................... 1,578,973,999 $ 3,892,312,218 (80,728,950) $ (518,339,020)
====================================================================
CLASS B SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 14,428,129 $ 37,989,074 660,506 $ 4,241,151
Shares issued in reinvestment of distributions ... 37,607,376 98,817,391 963,646 6,182,523
Shares redeemed .................................. (81,923,925) (216,402,678) (7,697,917) (49,404,931)
--------------------------------------------------------------------
Net increase (decrease) .......................... (29,888,420) $ (79,596,213) (6,073,765) $ (38,981,257)
====================================================================
Year ended September 30, 2006
Shares sold ...................................... 26,637,625 $ 65,369,671 1,981,038 $ 12,637,018
Shares issued in reinvestment of distributions ... 55,871,397 136,411,780 2,075,139 13,272,404
Shares redeemed .................................. (197,429,792) (483,022,409) (16,913,499) (108,288,331)
--------------------------------------------------------------------
Net increase (decrease) .......................... (114,920,770) $ (281,240,958) (12,857,322) $ (82,378,909)
====================================================================
CLASS B1 SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 482,661 $ 1,278,416
Shares issued in reinvestment of distributions ... 4,358,111 11,495,038
Shares redeemed .................................. (16,125,563) (43,007,227)
----------------------------------
Net increase (decrease) .......................... (11,284,791) $ (30,233,773)
==================================
Year ended September 30, 2006
Shares sold ...................................... 1,061,971 $ 2,609,506
Shares issued in reinvestment of distributions ... 6,529,196 15,992,703
Shares redeemed .................................. (26,407,031) (64,853,228)
----------------------------------
Net increase (decrease) .......................... (18,815,864) $ (46,251,019)
==================================
CLASS C SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 883,192,872 $ 2,356,432,866 5,885,877 $ 37,662,441
Shares issued in reinvestment of distributions ... 134,675,339 357,133,405 1,052,911 6,734,112
Shares redeemed .................................. (301,050,423) (803,351,881) (9,038,225) (57,798,329)
--------------------------------------------------------------------
Net increase (decrease) .......................... 716,817,788 $ 1,910,214,390 (2,099,437) $ (13,401,776)
====================================================================
Semiannual Report | 113
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS C SHARES: (CONTINUED)
Year ended September 30, 2006
Shares sold ...................................... 1,197,637,346 $ 2,970,142,401 9,638,095 $ 61,502,139
Shares issued in reinvestment of distributions ... 166,806,121 411,488,472 2,119,611 13,512,599
Shares redeemed .................................. (698,120,168) (1,723,997,750) (23,652,039) (151,089,904)
----------------------------------------------------------------
Net increase (decrease) .......................... 666,323,299 $ 1,657,633,123 (11,894,333) $ (76,075,166)
================================================================
CLASS R SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 25,328,102 $ 66,671,495 2,161,954 $ 13,884,880
Shares issued in reinvestment of distributions ... 2,935,621 7,664,845 269,524 1,730,954
Shares redeemed .................................. (11,822,773) (31,092,672) (1,881,906) (12,085,290)
----------------------------------------------------------------
Net increase (decrease) .......................... 16,440,950 $ 43,243,668 549,572 $ 3,530,544
================================================================
Year ended September 30, 2006
Shares sold ...................................... 35,951,956 $ 87,751,074 4,180,818 $ 27,602,806
Shares issued in reinvestment of distributions ... 3,434,439 8,359,852 421,527 2,782,416
Shares redeemed .................................. (16,667,648) (40,656,253) (3,423,452) (22,605,336)
----------------------------------------------------------------
Net increase (decrease) .......................... 22,718,747 $ 55,454,673 1,178,893 $ 7,779,886
================================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 398,786,739 $ 1,053,820,154 4,852,177 $ 31,255,077
Shares issued in reinvestment of distributions ... 69,086,446 181,194,151 1,548,916 9,967,882
Shares redeemed .................................. (18,451,807) (48,741,834) (849,396) (5,469,357)
----------------------------------------------------------------
Net increase (decrease) .......................... 449,421,378 $ 1,186,272,471 5,551,697 $ 35,753,602
================================================================
Year ended September 30, 2006
Shares sold ...................................... 536,707,405 $ 1,314,899,137 20,893,833 $ 134,424,816
Shares issued in reinvestment of distributions ... 75,142,358 183,808,062 2,672,825 17,119,867
Shares redeemed .................................. (49,253,364) (119,467,128) (14,613,605) (94,269,258)
----------------------------------------------------------------
Net increase (decrease) .......................... 562,596,399 $ 1,379,240,071 8,953,053 $ 57,275,425
================================================================
-----------------------------
FRANKLIN UTILITIES FUND
-----------------------------
SHARES AMOUNT
-----------------------------
CLASS A SHARES:
Six months ended March 31, 2007
Shares sold ......................................................................... 7,980,157 $ 109,958,841
Shares issued in reinvestment of distributions ...................................... 5,810,953 79,034,028
Shares redeemed ..................................................................... (12,340,805) (169,182,286)
-----------------------------
Net increase (decrease) ............................................................. 1,450,305 $ 19,810,583
=============================
Year ended September 30, 2006
Shares sold ......................................................................... 21,710,054 $ 263,631,372
Shares issued in reinvestment of distributions ...................................... 4,863,147 59,003,083
Shares redeemed ..................................................................... (34,893,525) (421,544,661)
-----------------------------
Net increase (decrease) ............................................................. (8,320,324) $ (98,910,206)
=============================
114 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
CLASS B SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 207,730 $ 2,843,931
Shares issued in reinvestment of distributions ... 277,131 3,762,925
Shares redeemed .................................. (1,052,501) (14,484,655)
----------------------------
Net increase (decrease) .......................... (567,640) $ (7,877,799)
============================
Year ended September 30, 2006
Shares sold ...................................... 520,507 $ 6,326,393
Shares issued in reinvestment of distributions ... 231,269 2,799,228
Shares redeemed .................................. (2,628,864) (31,812,682)
----------------------------
Net increase (decrease) .......................... (1,877,088) $ (22,687,061)
============================
CLASS C SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 2,189,138 $ 30,019,916
Shares issued in reinvestment of distributions ... 763,916 10,349,981
Shares redeemed .................................. (2,617,937) (35,863,146)
----------------------------
Net increase (decrease) .......................... 335,117 $ 4,506,751
============================
Year ended September 30, 2006
Shares sold ...................................... 4,480,664 $ 54,267,851
Shares issued in reinvestment of distributions ... 576,307 6,963,061
Shares redeemed .................................. (9,312,099) (111,649,248)
----------------------------
Net increase (decrease) .......................... (4,255,128) $ (50,418,336)
============================
CLASS R SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 879,533 $ 12,173,833
Shares issued in reinvestment of distributions ... 107,993 1,465,766
Shares redeemed .................................. (395,703) (5,422,813)
----------------------------
Net increase (decrease) .......................... 591,823 $ 8,216,786
============================
Year ended September 30, 2006
Shares sold ...................................... 1,759,282 $ 21,583,826
Shares issued in reinvestment of distributions ... 54,640 665,605
Shares redeemed .................................. (823,343) (9,911,712)
----------------------------
Net increase (decrease) .......................... 990,579 $ 12,337,719
============================
ADVISOR CLASS SHARES:
Six months ended March 31, 2007
Shares sold ...................................... 1,699,043 $ 23,756,950
Shares issued in reinvestment of distributions ... 260,430 3,557,523
Shares redeemed .................................. (3,307,065) (45,336,939)
----------------------------
Net increase (decrease) .......................... (1,347,592) $ (18,022,466)
============================
Year ended September 30, 2006
Shares sold ...................................... 2,685,330 $ 33,289,067
Shares issued in reinvestment of distributions ... 269,026 3,282,823
Shares redeemed .................................. (3,720,560) (44,964,670)
----------------------------
Net increase (decrease) .......................... (766,204) $ (8,392,780)
============================
Semiannual Report | 115
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 Franklin Growth Fund, pay an investment management fee to
Advisers, whereas 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 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
B. ADMINISTRATIVE FEES
Under agreements with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
C. DISTRIBUTION FEES
The 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
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate. Under the Class A reimbursement distribution plans, costs exceeding
the maximum for the current plan year cannot be reimbursed in subsequent
periods.
In addition, under the Funds' compensation distribution plans, the Funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
116 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
---------------------------------------------------------
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
---------------------------------------------------------
Reimbursement Plans:
Class A ......... 0.25% 0.25% 0.15% 0.15% 0.15%
Compensation Plans:
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
------------------------------------
Sales charges retained net of
commissions paid to unaffiliated
broker/dealers ........................ $ 41,673 $ 376,398 $ 16,290,866
Contingent deferred
sales charges retained ................ $ 25,235 $ 68,242 $ 3,069,199
----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
----------------------------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ... $ 324,861 $ 195,076
Contingent deferred sales charges
retained .............................. $ 364,912 $ 69,005
E. TRANSFER AGENT FEES
For the period ended March 31, 2007, 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 .................... $ 497,538 $ 1,597,743 $ 9,787,153
Semiannual Report | 117
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES (CONTINUED)
-----------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
-----------------------------
Transfer agent fees ............................ $ 2,870,420 $ 970,634
F. OTHER AFFILIATED TRANSACTIONS
Included in professional fees are legal fees of $92,388 that were paid to a law
firm in which a partner is an officer of the Funds.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with 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, 2007, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
At September 30, 2006, the Franklin Income Fund had tax basis capital losses of
$2,516,775 from the merged Franklin Multi-Income Trust which may be carried over
to offset future capital gains, subject to certain limitations
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At September 30, 2006, 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:
2007 .................................. $ -- $ -- $ -- $ 18,954,412
2008 .................................. -- -- -- 21,105,846
2009 .................................. -- -- -- 46,256,951
2010 .................................. -- -- -- 11,768,551
2011 .................................. 19,032,674 78,768,578 2,020,605 33,556,845
2012 .................................. 21,838,085 39,052,129 496,170 129,102,166
2013 .................................. 14,781,620 -- -- 74,283,298
2014 .................................. -- -- -- 47,763,112
--------------------------------------------------------------
$ 55,652,379 $ 117,820,707 $ 2,516,775 $ 382,791,181
==============================================================
118 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses and realized currency 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, 2006, the Franklin
U.S. Government Securities Fund had deferred realized capital losses of
$26,322,866. At September 30, 2006, the Franklin Dynatech Fund, Franklin Growth
Fund and Franklin Income Fund had deferred realized currency losses of $142,
$14,711 and $79,262, respectively.
At March 31, 2007, 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 ........................... $ 307,376,021 $ 932,810,218 $ 50,208,357,326
=====================================================
Unrealized appreciation ....................... $ 287,781,624 $ 1,664,649,590 $ 6,956,547,562
Unrealized depreciation ....................... (1,893,147) (2,883,881) (533,343,083)
-----------------------------------------------------
Net unrealized appreciation (depreciation) .... $ 285,888,477 $ 1,661,765,709 $ 6,423,204,479
=====================================================
----------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
----------------------------------
Cost of investments ........................... $ 6,497,469,185 $ 1,784,266,214
==================================
Unrealized appreciation ....................... $ 34,312,300 $ 1,153,031,888
Unrealized depreciation ....................... (85,466,111) (6,324,702)
----------------------------------
Net unrealized appreciation (depreciation) .... $ (51,153,811) $ 1,146,707,186
==================================
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 | 119
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short term securities) for the period ended March
31, 2007, were as follows:
------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
Purchases ................... $ 39,851,258 $ 7,075,703 $ 10,259,815,602
Sales ....................... $ 161,321,183 $ 15,590,053 $ 6,661,242,975
---------------------------------
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
Purchases ................... $ 238,126,449 $ 135,682,724
Sales ....................... $ 546,880,800 $ 255,991,231
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 39.70% 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, 2007, the aggregate
value of these securities was $590,057,000, representing 1.04% of the fund's net
assets. The fund discontinues accruing income on securities for which income has
been deemed uncollectible and provides an estimate for losses on interest
receivable. The securities have been identified on the accompanying Statement of
Investments.
120 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act 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 for the
period ended March 31, 2007 were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES SHARES 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
Ameren Corp. ................... 11,274,400 987,500 -- 12,261,900 $ 616,773,570 $ 15,045,309 $ --
Canadian Oil Sands Trust ....... 25,770,600 -- -- 25,770,600 630,816,073 11,411,688 --
Pinnacle West Capital Corp. .... 5,500,000 -- -- 5,500,000 265,375,000 5,775,000 --
Public Service Enterprise
Group Inc. .................. 16,500,000 1,179,600 1,179,600 16,500,000 1,370,160,000 20,419,938 8,538,302
Puget Energy Inc. .............. 7,500,000 -- -- 7,500,000 192,600,000 3,750,000 --
---------------------------------------------
TOTAL AFFILIATED SECURITIES
(5.42% of Net Assets) .......... $ 3,075,724,643 $ 56,401,935 $ 8,538,302
=============================================
10. OTHER CONSIDERATIONS
Officers, directors or employees of Advisers, as the Franklin Income Fund's
Investment Manager, serve as members of various bondholders' steering
committees, official creditors' committees, or representatives of the fund in
corporate restructuring negotiations. The securities of such companies have been
identified on the accompanying Statement of Investments. As a result of this
involvement, such individuals may be in possession of certain material,
non-public information. If the fund's Investment Manager, while in possession of
such information, seeks to buy or sell any of the securities of such companies,
it will comply with all applicable federal securities laws.
11. UPCOMING ACQUISITIONS/MERGERS
On December 4, 2006, the Board of Trustees for the Franklin Strategic Series
approved a proposal to merge Franklin Blue Chip Fund into the Franklin Growth
Fund, subject to approval by the shareholders of Franklin Blue Chip Fund.
12. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On October 17, 2006, the Board of Directors approved an Agreement and Plan of
Reorganization (the Agreement) whereby the Franklin Custodian Funds would be
reorganized and their domicile changed from a Maryland corporation to a Delaware
statutory trust subject to approval by the shareholders.
Semiannual Report | 121
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), 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 ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and was recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and 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.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management 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 Custodian Funds, it
is committed to making the Custodian Funds or their shareholders whole, as
appropriate.
122 | Semiannual Report
Franklin Custodian Funds, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi annual reporting period in 2007. The Funds
are currently evaluating the impact, if any, of applying the various provisions
of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Custodian Funds believes the adoption of
SFAS 157 will have no material impact on its financial statements.
Semiannual Report | 123
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, 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 reports compared each Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. 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 material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such material, 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 complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net
124 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
asset value calculations. The Board also noted the extent of benefits provided
Fund shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's continuous 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 Florida hurricanes and
blackouts experienced in recent years. 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 and that a
portion of such bonus was required to be invested in a pre-designated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
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, the high industry ranking given the
Franklin Templeton website, and the firsthand experience of the individual Board
members 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 2006 and the previous 10 years ended
December 31, 2006, in comparison with a performance universe selected by Lipper.
Investment performance was shown on a total return basis for all Funds with
income return being shown as well for those Funds having income as an investment
objective element. The following summarizes the performance results for each
Fund.
FRANKLIN DYNATECH FUND - This Fund's investment 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 2006 to be in the second-lowest
quintile of such performance universe, but such return on an annualized basis
was in the upper half of such universe and in the highest and second-highest
quintiles of such universe for the previous three-, five- and ten-year periods,
respectively. The Board expressed satisfaction with such performance.
Semiannual Report | 125
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
FRANKLIN GROWTH FUND - This Fund's investment 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 2006 ranked it in the upper half of its performance
universe. Its total return on an annualized basis ranked it in the
second-highest quintile of the performance universe during the previous
three-year period and the second-lowest quintile during each of the previous
five- and ten-year periods. The Board found such performance acceptable.
FRANKLIN INCOME FUND - This Fund's investment performance was shown in
comparison to a performance universe consisting of all retail and institutional
mixed-asset target allocation moderate funds as classified by Lipper. The Fund's
Lipper report showed its income return during 2006 and for each of the previous
ten years was in the highest quintile of this performance universe. The Fund's
total return as shown in such report during 2006 and on an annualized basis
during each of the previous three-, five- and ten-year periods was also in the
highest quintile of its performance universe. The Board expressed satisfaction
with such performance.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - This Fund's 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 2006 was in the second-highest quintile of such
universe, and during each of the previous three-, five- and ten-year periods on
an annualized basis was in the highest quintile of such performance universe.
The Fund's total return, as shown in such report, was in the middle quintile of
its performance universe during 2006, and on an annualized basis was in the
second-highest quintile of such universe for each of the previous three-, five-
and ten-year periods. The Board expressed satisfaction with such performance.
FRANKLIN UTILITIES FUND - This Fund's 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 2006, as well as during each of the previous three-, five-
and ten-year periods on an annualized basis, was in the highest quintile of such
performance universe. The Fund's total return during 2006 placed it in the
second-lowest quintile of its performance universe, and on an annualized basis
placed it in the second-lowest quintile of its performance universe during the
previous three-year period as well, but placed it in the second-highest quintile
during each of the previous five- and ten-year periods. The Board expressed
satisfaction with such performance, noting that the Fund had a total return of
23.88% in 2006 as shown in such Lipper report.
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. In reviewing comparative costs, emphasis was given to each
Fund's contractual
126 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
investment management fee in comparison with the contractual investment
management fee that would have been charged by other funds within its Lipper
expense group assuming they were similar in size to the Fund, as well as the
actual total expenses of the Fund in comparison with those of its Lipper expense
group. The Lipper contractual investment 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 contractual investment management
fee rate for each of Franklin DynaTech Fund, Franklin Growth Fund and Franklin
Utilities Fund was in the least expensive quintile of its respective Lipper
expense group, for Franklin Income Fund was in the second-least expensive
quintile of its Lipper expense group, and for Franklin U.S. Government Fund, was
less than one basis point above the median of its Lipper expense group. The
actual total expenses for all the Funds were in the least expensive 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.
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. 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, while being continuously refined and reflecting changes in the
Manager's own cost accounting, 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. In reviewing
and discussing such analysis, management discussed with the Board its belief
that costs incurred in establishing the infrastructure necessary for 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. 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
Semiannual Report | 127
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
who sold fund Class B shares prior to February 25, 2005, when the offering of
such shares was discontinued, as well as potential benefits resulting from
allocation of fund brokerage and the use of "soft" commission dollars to pay for
research. 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 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. Prior to 2006, 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 0.02% 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 fees charged the Funds 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
provides a sharing of benefits with the Fund and its shareholders.
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 1-954/527-7678 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.
128 | Semiannual Report
Franklin Custodian Funds, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
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 | 129
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[LOGO] (R) One Franklin Parkway
FRANKLIN TEMPLETON San Mateo, CA 94403-1906
INVESTMENTS
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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 S2007 05/07
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 24, 2007
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 24, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date May 24, 2007