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
------------------------
(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: 3/31/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
[PHOTO] MARCH 31, 2008
Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
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[FRANKLIN TEMPLETON INVESTMENTS LOGO]
Franklin - Templeton - Mutual Series
Semiannual Report
Franklin DynaTech Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital
appreciation by investing substantially in equity securities of companies
emphasizing scientific or technological development or that are in fast-growing
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.
This semiannual report for Franklin DynaTech Fund covers the period ended March
31, 2008.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A had a -12.16% cumulative total return for the
six months under review. For the same period, the Fund performed better than its
narrow benchmark, the NASDAQ 100 Index, which had a price-only return of
- -14.79%; and performed comparably with the broader Standard & Poor's 500 Index
(S&P 500), which posted a -12.46% 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, 2008, the U.S. economy slowed. The housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined. Gross
domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth
quarter largely due to decelerating inventory investment, exports and federal
government spending. For the overall six-month period, however, a weaker U.S.
dollar compared with many foreign currencies contributed to increased exports.
First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due
to the effects of the troubled housing market and subsequent credit market
tightening.
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 51.
Semiannual Report | 3
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 3/31/08
Software 11.7%
Biotechnology 9.6%
Semiconductors & Semiconductor Equipment 9.4%
Computers & Peripherals 7.4%
Health Care Equipment & Supplies 7.1%
Chemicals 6.2%
Communications Equipment 6.1%
Pharmaceuticals 5.5%
Wireless Telecommunication Services 5.3%
Internet Software & Services 5.3%
Energy Equipment & Services 5.3%
IT Services 4.5%
Life Sciences Tools & Services 3.7%
Other 10.3%
Short-Term Investments & Other Net Assets 2.6%
The unemployment rate increased from 4.7% at the beginning of the period to 5.1%
in March 2008.2 Consumer confidence declined during the period, hitting a
five-year low in March, amid rising mortgage and fuel costs, falling home prices
and a weaker job market. Volatile oil prices reached a historical high in March,
topping $110 per barrel, before retreating somewhat to $102 by period-end. For
the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which
excludes food and energy costs, rose 2.4%, which was higher than its 10-year
average rate. (2)
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 200 basis points so far in 2008. Overall, the federal
funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled
riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year
Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on
March 31, 2008.
Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a six-month total return of -10.64%, while the broader
S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index
had a -15.32% return. (3) The consumer staples, materials and energy sectors
performed relatively well. Large-capitalization stocks generally outperformed
small caps, and growth stocks fared better than their value counterparts.
INVESTMENT STRATEGY
Based on our independent analysis of individual companies, we search for leading
companies that we believe have a sustainable competitive advantage due to
state-of-the-art and innovative products, technologies and business models. We
consider such factors as a company's competitive positioning, patents, new
products, market share, industry growth, recent operational execution and
managerial strength. We use a conservative, bottom-up research process to buy
and hold what we consider to be undervalued companies.
2. Source: Bureau of Labor Statistics.
3. 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
MANAGER'S DISCUSSION
One of the most significant contributors to performance during the six months
under review was biopharmaceutical company Gilead Sciences. The company's stock
appreciated amid strong revenues and a promising drug development pipeline.
Other major contributors to performance included global retail electronic
payments network operator Visa, which had an initial public offering in March,
and specialty chemicals company Sigma-Aldrich.
From a sector perspective, the materials sector, particularly the chemicals
industry, contributed notably to performance for the reporting period. (4) In
addition to the aforementioned Sigma-Aldrich, other chemicals companies that
helped performance included Monsanto, Mosaic and Potash.
Fund holdings that declined in value and were among the Fund's major detractors
included Internet search engine Google, computer technology firm NVIDIA and
semiconductor provider Varian Semiconductor Equipment Associates. Google's
shares suffered largely due to decelerating advertising revenue. NVIDIA's and
Varian's share prices declined mainly due to expectations for slowing computer
and semiconductor sales.
By sector, our information technology holdings hurt performance on an absolute
basis during the period, largely due to the aforementioned Google, NVIDIA and
Varian. (5) Other sector holdings that hindered results included Intel and
Apple. The health care sector also weighed on the Fund's performance, in part
due to veterinary services provider VCA Antech and analytical instruments
manufacturer Waters, which reported disappointing earnings during the period.
(6)
4. The materials sector comprises chemicals, and metals and mining in the SOI.
5. The information technology sector comprises communications equipment,
computers and peripherals, electronic equipment and instruments, Internet
software and services, IT services, semiconductors and semiconductor
equipment, and software in the SOI.
6. The health care sector comprises biotechnology, health care equipment and
supplies, health care providers and services, life sciences tools and
services, and pharmaceuticals in the SOI.
TOP 10 HOLDINGS
Franklin DynaTech Fund
3/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------- ----------
Intel Corp. 4.5%
Semiconductors & Semiconductor
Equipment
Apple Inc. 4.4%
Computers & Peripherals
Genentech Inc. 3.8%
Biotechnology
Visa Inc., A 3.6%
IT Services
Google Inc., A 3.3%
Internet Software & Services
Hewlett-Packard Co. 2.9%
Computers & Peripherals
Gilead Sciences Inc. 2.9%
Biotechnology
Sigma-Aldrich Corp. 2.8%
Chemicals
Alcon Inc. (Switzerland) 2.7%
Health Care Equipment & Supplies
Schlumberger Ltd. 2.4%
Energy Equipment & Services
Semiannual Report | 5
Thank you for your continued participation in Franklin DynaTech Fund. We look
forward to serving your future investment needs.
[PHOTO OF RUPERT H. JOHNSON]
- -s- Rupert H. Johnson
Rupert H. Johnson, Jr.
[PHOTO OF MATTHEW J. MOBERG]
- -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, 2008, 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 3/31/08
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 AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKDNX) CHANGE 3/31/08 9/30/07
- -------------------------------- ------- ------- -------
Net Asset Value (NAV) -$ 4.55 $ 27.78 $ 32.33
DISTRIBUTIONS (10/1/07 - 3/31/08)
Long-Term Capital Gain $ 0.7062
CLASS B (SYMBOL: FDNBX) CHANGE 3/31/08 9/30/07
- -------------------------------- ------- ------- -------
Net Asset Value (NAV) -$ 4.46 $ 26.32 $ 30.78
DISTRIBUTIONS (10/1/07 - 3/31/08)
Long-Term Capital Gain $ 0.7062
CLASS C (SYMBOL: FDYNX) CHANGE 3/31/08 9/30/07
- -------------------------------- ------- ------- -------
Net Asset Value (NAV) -$ 4.42 $ 26.04 $ 30.46
DISTRIBUTIONS (10/1/07 - 3/31/08)
Long-Term Capital Gain $ 0.7062
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.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------ ------ -------
Cumulative Total Return (1) -12.16% +4.44% +72.64% +71.07%
Average Annual Total Return (2) -17.21% -1.57% +10.23% +4.89%
Value of $10,000 Investment (3) $ 8,279 $9,843 $16,274 $16,124
Total Annual Operating Expenses (4) 0.99%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00)
- ------------------------------------- ------- ------ ------ ------------------
Cumulative Total Return (1) -12.49% +3.64% +66.28% -1.00%
Average Annual Total Return (2) -15.91% -0.36% +10.44% -0.12%
Value of $10,000 Investment (3) $ 8,409 $9,964 $16,428 $ 9,900
Total Annual Operating Expenses (4) 1.75%
Semiannual Report | 7
Performance Summary (continued)
PERFORMANCE (continued)
Class C 6-Month 1-Year 5-Year 10-Year
- -------------------------------------- ------- ------ ------- -------
Cumulative Total Return (1) -12.49% +3.64% +66.29% +58.66%
Average Annual Total Return (2) -13.34% +2.64% +10.71% +4.72%
Value of $10,000 Investment (3) $ 8,666 $10,264 $16,629 $15,866
Total Annual Operating Expenses (4) 1.74%
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
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 ADVANCEMENTS. 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:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08
----------------- -------------- -------------------------
CLASS A
Actual $ 1,000 $ 878.40 $ 4.56
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.15 $ 4.90
CLASS B
Actual $ 1,000 $ 875.10 $ 8.11
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.35 $ 8.72
CLASS C
Actual $ 1,000 $ 875.10 $ 8.11
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.35 $ 8.72
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.97%; B: 1.73%; and C: 1.73%), multiplied
by the average account value over the period, multiplied by 183/366 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
apprecia-tion 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.
This semiannual report for Franklin Growth Fund covers the period ended March
31, 2008.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A had a -12.61% cumulative total return for the six
months under review. The Fund performed comparably with its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned -12.46% 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, 2008, the U.S. economy slowed. The housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined. Gross
domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth
quarter largely due to decelerating inventory investment, exports and federal
government spending. For the overall six-month period, however, a weaker U.S.
dollar compared with many foreign currencies contributed to increased exports.
First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due
to the effects of the troubled housing market and subsequent credit market
tightening.
The unemployment rate increased from 4.7% at the beginning of the period to 5.1%
in March 2008. (2) Consumer confidence declined during the period, hitting a
five-year low in March, amid rising mortgage and fuel costs, falling home prices
and a weaker job market. Volatile oil prices reached a historical high in March,
topping $110 per barrel, before retreating somewhat to $102 by period-end. For
the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which
excludes food and energy costs, rose 2.4%, which was higher than its 10-year
average rate. (2)
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 reinvestment of any income or distributions. 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 59.
Semiannual Report | 11
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 3/31/08
Industrials* 41.2%
Health Care 21.4%
Information Technology 21.2%
Consumer Discretionary 9.0%
Materials 2.6%
Energy 2.3%
Financials 0.9%
Consumer Staples 0.9%
Utilities 0.3%
Telecommunication Services 0.2%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio.
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 200 basis points so far in 2008. Overall, the federal
funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled
riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year
Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on
March 31, 2008.
Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a six-month total return of -10.64%, while the broader
S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index
had a -15.32% return. (3) The consumer staples, materials and energy sectors
performed relatively well. Large-capitalization stocks generally outperformed
small caps, and growth stocks fared better than their value counterparts.
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 120 companies at period-end. We continue to invest in
a broad array of companies of all sizes and in varied industries.
During the period under review, Fund performance was largely driven by the
positive returns of road and rail holdings within the industrials sector. Among
3. 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
these were trucking company Arkansas Best and Union Pacific, North America's
largest railroad operator. Biotechnology leader Genentech, part of the health
care sector, was another key contributor to performance during the period. The
Fund also benefited from its materials holdings such as chemical producer
Sigma-Aldrich.
The Fund had some detractors from performance during the reporting period.
Within the industrials sector, our position in major aerospace and defense
company Boeing was a major detractor. In the same sector, the airlines industry
struggled and some airline holdings weighed on Fund performance during the
period. Some of the poorest performers were Texas-based AMR, the parent company
of American Airlines, and U.K.-based British Airways.
Thank you for your continued participation in Franklin Growth Fund. We look
forward to serving your future investment needs.
[PHOTO OF V. JERRY PALMIERI]
- -s- V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2008, 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
3/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Apple Inc. 4.4%
Information Technology
General Dynamics Corp. 3.2%
Industrials
Genentech Inc. 3.1%
Health Care
Northrop Grumman Corp. 3.0%
Industrials
The Boeing Co. 3.0%
Industrials
Johnson & Johnson 2.7%
Health Care
3M Co. 2.6%
Industrials
International Business Machines Corp. 2.5%
Information Technology
United Technologies Corp. 2.2%
Industrials
Textron Inc. 2.2%
Industrials
Semiannual Report | 13
Performance Summary as of 3/31/08
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 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.96 $ 40.40 $ 46.36
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $ 0.1302
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.76 $ 38.66 $ 44.42
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.70 $ 38.33 $ 44.03
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$5.88 $ 40.11 $ 45.99
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $ 0.0304
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/08 9/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$6.02 $ 40.43 $ 46.45
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $ 0.2332
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) -12.61% -3.74% +82.51% +56.16%
Average Annual Total Return (2) -17.63% -9.28% +11.46% +3.94%
Value of $10,000 Investment (3) $ 8,237 $ 9,072 $ 17,205 $ 14,717
Total Annual Operating Expenses (4) 0.93%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------- -------- -------- --------- ------------------
Cumulative Total Return (1) -12.97% -4.47% +75.73% +33.50%
Average Annual Total Return (2) -16.45% -8.29% +11.68% +3.17%
Value of $10,000 Investment (3) $ 8,355 $ 9,171 $ 17,373 $ 13,350
Total Annual Operating Expenses (4) 1.69%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- -------- -------- --------- ---------
Cumulative Total Return (1) -12.95% -4.49% +75.74% +44.81%
Average Annual Total Return (2) -13.82% -5.44% +11.94% +3.77%
Value of $10,000 Investment (3) $ 8,618 $ 9,456 $ 17,574 $ 14,481
Total Annual Operating Expenses (4) 1.69%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- -------- -------- --------- ------------------
Cumulative Total Return (1) -12.73% -4.00% +80.19% +27.42%
Average Annual Total Return (2) -12.73% -4.00% +12.50% +3.96%
Value of $10,000 Investment (3) $ 8,727 $ 9,600 $ 18,019 $ 12,742
Total Annual Operating Expenses (4) 1.19%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------- -------- -------- --------- ----------
Cumulative Total Return (1) -12.51% -3.52% +84.68% +59.97%
Average Annual Total Return (2) -12.51% -3.52% +13.05% +4.81%
Value of $10,000 Investment (3) $ 8,749 $ 9,648 $ 18,468 $ 15,997
Total Annual Operating Expenses (4) 0.69%
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 PRICES 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:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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
VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08
----------------- -------------- -------------------------
CLASS A
Actual $ 1,000 $ 873.90 $ 4.26
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.45 $ 4.60
CLASS B
Actual $ 1,000 $ 870.30 $ 7.81
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.65 $ 8.42
CLASS C
Actual $ 1,000 $ 870.50 $ 7.81
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.65 $ 8.42
CLASS R
Actual $ 1,000 $ 872.70 $ 5.48
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.15 $ 5.91
ADVISOR CLASS
Actual $ 1,000 $ 874.90 $ 3.14
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.65 $ 3.39
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.91%; B: 1.67%; C: 1.67%; R: 1.17%; and
Advisor: 0.67%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
18 | Semiannual Report
Franklin Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize
income while maintaining prospects for capital appreciation through a
diversified portfolio of debt and equity securities.
Performance data represent past performance, which does not guarantee future
results. Investment return and principal value will fluctuate, and you may have
a gain or loss when you sell your shares. Current performance may differ from
figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for
most recent month-end performance.
This semiannual report for Franklin Income Fund covers the period ended March
31, 2008.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A had a -7.22% cumulative total return for the six
months under review. The Fund performed better than its equity benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned -12.46%; underperformed
its fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which
returned +5.23%; and underperformed its peers as measured by the Lipper
Mixed-Asset Target Allocation Moderate Funds Classification Average, which
returned -6.29%, for the same period.(1) You can find the Fund's long-term
performance data in the Performance Summary beginning on page 24.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2008, the U.S. economy slowed. The housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined. Gross
domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth
quarter largely due to decelerating inventory investment, exports and federal
government spending. For the overall six-month period, however, 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 3/31/08, there were 503 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 69.
Semiannual Report | 19
weaker U.S. dollar compared with many foreign currencies contributed to
increased exports. First quarter 2008 GDP growth remained at a 0.6% estimated
annualized rate due to the effects of the troubled housing market and subsequent
credit market tightening.
The unemployment rate increased from 4.7% at the beginning of the period to 5.1%
in March 2008.(2) Consumer confidence declined during the period, hitting a
five-year low in March, amid rising mortgage and fuel costs, falling home prices
and a weaker job market. Volatile oil prices reached a historical high in March,
topping $110 per barrel, before retreating somewhat to $102 by period-end. For
the 12 months ended March 31, 2008, the core Consumer Price Index (CPI), which
excludes food and energy costs, rose 2.4%, which was higher than its 10-year
average rate.(2)
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 200 basis points so far in 2008. Overall, the federal
funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled
riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year
Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on
March 31, 2008.
Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a six-month total return of -10.64%, while the broader
S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index
had a -15.32% return.(3) The consumer staples, materials and energy sectors
performed relatively well.
The credit crisis negatively impacted most fixed income markets, especially high
yield corporate bonds. High yield credit spreads over Treasuries widened and
ended the period nearly 800 basis points above Treasuries, the highest level in
five years.(4) Investors' flight to quality, subprime market concerns, lack of
liquidity and pending leverage buyouts (LBOs) contributed to the significantly
wider spreads. General risk aversion led investors to the relative safety of
Treasury securities. Subprime market turmoil and the resulting credit crunch
resulted in recession fears and expectations for increasing default rates in the
near future. In addition, despite a somewhat reduced forward calendar of LBO
transactions, pending supply arranged in a more favorable environment weighed on
the high
2. Source: Bureau of Labor Statistics.
3. 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. Source: Bear Stearns.
20 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/07-3/31/08
DIVIDEND PER SHARE
-------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- ----------- ---------- ---------- ---------- ---------- ---------- -------------
October 1.20 cents 1.01 cents 1.09 cents 1.09 cents 1.12 cents 1.24 cents
November 1.20 cents 1.01 cents 1.09 cents 1.09 cents 1.12 cents 1.24 cents
December*** 1.75 cents 1.55 cents 1.63 cents 1.63 cents 1.67 cents 1.78 cents
January 1.20 cents 1.00 cents 1.08 cents 1.08 cents 1.12 cents 1.23 cents
February 1.25 cents 1.05 cents 1.13 cents 1.13 cents 1.17 cents 1.28 cents
March 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.18 cents 1.28 cents
---------- ---------- ---------- ---------- ---------- -------------
TOTAL 7.85 CENTS 6.70 CENTS 7.17 CENTS 7.17 CENTS 7.38 CENTS 8.05 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.
*** Includes an additional 0.55 cent per share distribution to meet excise tax
requirements.
yield sector. Due to these factors, high yield corporate bonds had a return of
- -4.27% during the period as measured by the LB U.S. Corporate High Yield
Index.(5) In comparison, the LB U.S. Aggregate Index, which has no high yield
exposure and has about 35% in Treasuries and other government bonds, performed
much better with a +5.23% return for the same period.(1) The LB U.S. Aggregate
Index benefited from Treasuries, which returned +8.56% as measured by the LB
U.S. Treasury Index, while investment-grade corporate bonds, as measured by the
LB U.S. Corporate Investment Grade Index, returned +1.80%.(6)
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.
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 3/31/08
Corporate Straight Bonds 40.5%
Utilities Stocks 13.9%
Financials Stocks 8.7%
Energy Stocks 7.2%
Health Care Stocks 6.0%
Mortgage-Backed Securities 4.4%
Senior Floating Rate Interests 3.3%
Telecommunication Services Stocks 3.2%
Information Technology Stocks 2.6%
Industrials Stocks 1.7%
Consumer Discretionary Stocks 1.6%
Materials Stocks 1.3%
Corporate Convertible Bonds 0.7%
Short-Term Investments & Other Net Assets 4.9%
5. Source: Standard & Poor's Micropal. The LB U.S. Corporate High Yield Index is
the corporate component of the LB U.S. High Yield Index, which includes fixed
rate, non-investment grade debt.
6. Source: Standard & Poor's Micropal. The LB U.S. Treasury Index includes
public obligations of the U.S. Treasury with a remaining maturity of one year
or more. All issues must have at least one year to final maturity regardless
of call features, have at least $250 million par amount outstanding and be
rated investment grade (Baa3 or better). They must also be dollar
denominated, nonconvertible and publicly issued. The LB U.S. Corporate
Investment Grade Index is the corporate component of the LB U.S. Credit
Index, which includes publicly issued, SEC-registered bonds that meet
specified maturity, liquidity and quality requirements.
Semiannual Report | 21
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
3/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
AT&T Inc. 2.5%
Telecommunication Services
Pfizer Inc. 2.2%
Health Care
Canadian Oil Sands Trust (Canada) 1.8%
Energy
Bank of America Corp. 1.7%
Financials
Intel Corp. 1.7%
Information Technology
TOP 5 BOND HOLDINGS*
Franklin Income Fund
3/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Ford Motor Credit Co. LLC 3.4%
Consumer Discretionary
GMAC LLC 3.2%
Financials
Tenet Healthcare Corp. 2.3%
Health Care
Dynegy Holdings Inc. 1.5%
Utilities
Dollar General Corp. 1.4%
Consumer Discretionary
* Does not include convertible bonds.
MANAGER'S DISCUSSION
Within equity markets, some of our energy- and commodity-related holdings
performed well due to strong commodity prices driven by the weakening U.S.
dollar and continued solid demand from global economies. Canadian Oil Sands
Trust and Chesapeake Energy (sold by period-end) benefited the Fund as crude oil
and natural gas prices increased, while Newmont Mining (sold by period-end)
contributed to Fund returns as gold and metals prices rose. Some of the Fund's
utility investments also boosted Fund performance. Utility holdings such as
FirstEnergy and FPL Group generated attractive total returns driven by strong
dividend yields and favorable outlooks for future earnings growth and
infrastructure investment opportunities.
Detractors among equity holdings centered on financials negatively impacted by
the credit crisis and deteriorating loan performance. Washington Mutual, Bank of
America, Citigroup and Merrill Lynch were hurt by subprime mortgage or related
structured-securities exposure. These firms were forced to raise capital from
investors to shore up their financial positions. Pharmaceutical companies
Schering-Plough and Merck also declined following a study that challenged the
efficacy of Vytorin, a cholesterol lowering drug, and heightened concerns about
the drug's sales going forward. We sold our Citigroup and Schering-Plough stocks
by period-end.
Within fixed income markets, the Fund's emphasis on high current yield and
investment grade and non-investment grade corporate loans and bonds negatively
impacted results relative to the LB U.S. Aggregate Index. The LB U.S. Aggregate
Index, which does not have any high yield exposure, outperformed the L.B. U.S.
Corporate High Yield Index, which is more representative of the spread and
performance of the Fund's holdings in the current environment.
Nevertheless, several of the Fund's high yield corporate bond holdings,
particularly those with tangible underlying asset value, performed well.
Examples included hospital operator Tenet Healthcare, power generator Dynegy
Holdings and natural gas pipeline operator El Paso. Another strong contributor
was retail chain Dollar General whose recent LBO led to improved company
management and subsequent credit improvement despite a fairly leveraged balance
sheet and a difficult retail environment. Freddie Mac (FHLMC) and Fannie Mae
(FNMA) mortgage-backed securities also boosted Fund returns due to the U.S.
Treasury rally and yield decline.
With widening spreads and fear that access to capital markets may be constrained
for some issuers, many companies with highly leveraged balance sheets or
dependence on ready access to capital suffered. Among the Fund's holdings,
Charter Communications (CCH) declined despite favorable revenue and earnings
performance. Auto finance companies GMAC Financial Services and Ford
22 | Semiannual Report
Motor Credit Company (FMCC) also detracted from Fund returns due to continued
concerns regarding weakening consumer spending and potential credit losses going
forward. R.H. Donnelly (RHD and Dex Media in the SOI; Dex is a wholly owned
subsidiary of RHD) hampered the Fund as the sluggish economy pressured yellow
pages advertising, particularly in markets hit hard by real estate and home
price deterioration.
According to our analysis, some of the Fund's short-maturity high yield bonds
proved defensive and offered attractive profit-taking opportunities. Our
motivation for selling many of these short-maturity bonds near par value was to
reallocate the assets into other opportunities with what we viewed as more
attractive potential total return over the long term. During the period, we sold
at a profit our Nortel Networks senior notes and some of our El Paso, Qwest
Capital Funding and Allied Waste North America senior notes. GMAC and FMCC had
average weighted maturities of less than three years but remained major debt
holdings in the Fund's portfolio.
Thank you for your continued participation in Franklin Income Fund. We look
forward to serving your future investment needs.
[PHOTO OF EDWARD PERKS]
- -s- Edward Perks
Edward Perks, CFA
[PHOTO OF CHARLES B. JOHNSON]
- -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, 2008, 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 | 23
Performance Summary as of 3/31/08
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 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.33 $ 2.41 $ 2.74
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0785
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1394
CLASS B (SYMBOL: FBICX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.33 $ 2.40 $ 2.73
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0670
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1279
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/08 9/30/07
- ------------------------ ------ ------- -------
Net Asset Value (NAV) -$0.33 $ 2.41 $ 2.74
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0717
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1326
CLASS C (SYMBOL: FCISX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.34 $ 2.42 $ 2.76
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0717
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1326
24 | Semiannual Report
Performance Summary (continued)
PRICE AND DISTRIBUTION INFORMATION (continued)
CLASS R (SYMBOL: FISRX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$0.33 $ 2.38 $ 2.71
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0738
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1347
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/08 9/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$0.34 $ 2.39 $ 2.73
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.0805
Short-Term Capital Gain $0.0172
Long-Term Capital Gain $0.0437
TOTAL $0.1414
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) -7.22% -3.69% +74.68% +106.23%
Average Annual Total Return (2) -11.12% -7.78% +10.81% +7.06%
Value of $10,000 Investment (3) $ 8,888 $9,222 $ 16,709 $19,777
Distribution Rate (4) 5.95%
30-Day Standardized Yield (5) 6.97%
Total Annual Operating Expenses (6) 0.63%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01)
- ------------------------------------- ------- ------ -------- ------------------
Cumulative Total Return (1) -7.67% -4.55% +67.81% +70.63%
Average Annual Total Return (2) -11.19% -8.11% +10.64% +8.69%
Value of $10,000 Investment (3) $ 8,881 $9,189 $ 16,581 $17,063
Distribution Rate (4) 5.40%
30-Day Standardized Yield (5) 6.42%
Total Annual Operating Expenses (6) 1.48%
CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------- ------- ------ -------- -------------------
Cumulative Total Return (1) -7.48% -4.19% +70.29% +103.09%
Average Annual Total Return (2) -11.00% -7.75% +10.97% +7.96%
Value of $10,000 Investment (3) $ 8,900 $9,225 $ 16,829 $20,309
Distribution Rate (4) 5.73%
30-Day Standardized Yield (5) 6.77%
Total Annual Operating Expenses (6) 1.13%
Semiannual Report | 25
Performance Summary (continued)
PERFORMANCE (continued)
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- -------- ------- --------- --------
Cumulative Total Return (1) -7.79% -4.55% +69.85% +96.28%
Average Annual Total Return (2) -8.67% -5.44% +11.18% +6.98%
Value of $10,000 Investment (3) $ 9,133 $9,456 $ 16,985 $19,628
Distribution Rate (4) 5.70%
30-Day Standardized Yield (5) 6.82%
Total Annual Operating Expenses (6) 1.13%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- -------- ------- --------- ------------------
Cumulative Total Return (1) -7.49% -4.45% +71.81% +70.18%
Average Annual Total Return (2) -7.49% -4.45% +11.43% +8.89%
Value of $10,000 Investment (3) $ 9,251 $9,555 $ 17,181 $17,018
Distribution Rate (4) 5.95%
30-Day Standardized Yield (5) 6.95%
Total Annual Operating Expenses (6) 0.98%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- -------- ------- --------- --------
Cumulative Total Return (1) -7.57% -3.97% +75.67% +109.00%
Average Annual Total Return (2) -7.57% -3.97% +11.93% +7.65%
Value of $10,000 Investment (3) $ 9,243 $9,603 $ 17,567 $20,900
Distribution Rate (4) 6.43%
30-Day Standardized Yield (5) 7.50%
Total Annual Operating Expenses (6) 0.48%
Performance data represent past performance, which does not guarantee future
results. Investment return and principal value will fluctuate, and you may have
a gain or loss when you sell your shares. Current performance may differ from
figures shown. For most recent month-end performance, see "Funds and
Performance" at FRANKLINTEMPLETON.COM or call 1-800/342-5236.
26 | Semiannual Report
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 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 3/31/08.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/08.
6. Figures are as stated in the Fund's prospectus current as of the date of this
report.
Semiannual Report | 27
Your Fund's Expenses
FRANKLIN INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
28 | Semiannual Report
Your Fund's Expenses(continued)
Please note that expense 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
VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08
----------------- -------------- -------------------------
CLASS A
Actual $ 1,000 $ 927.80 $ 2.99
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.90 $ 3.13
CLASS B
Actual $ 1,000 $ 923.30 $ 7.07
Hypothetical (5% return before expenses) $ 1,000 $ 1,017.65 $ 7.41
CLASS B1
Actual $ 1,000 $ 925.20 $ 5.39
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.40 $ 5.65
CLASS C
Actual $ 1,000 $ 922.10 $ 5.33
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.45 $ 5.60
CLASS R
Actual $ 1,000 $ 925.10 $ 4.67
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.15 $ 4.90
ADVISOR CLASS
Actual $ 1,000 $ 924.30 $ 2.26
Hypothetical (5% return before expenses) $ 1,000 $ 1,022.65 $ 2.38
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.62%; B: 1.47%; B1: 1.12%; C: 1.11%; R:
0.97%; and Advisor: 0.47%), multiplied by the average account value over
the period, multiplied by 183/366 to reflect the one-half year period.
Semiannual Report | 29
Franklin U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund
seeks 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 substantially 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.
PORTFOLIO BREAKDOWN
Franklin U.S. Government Securities Fund
Based on Total Net Assets as of 3/31/08
[PIE CHART]
GNMA 96.5%
Short-Term Investments &
Other Net Assets 3.5%
Performance data represent past performance, which does not guarantee future
results. Investment return and principal value will fluctuate, and you may have
a gain or loss when you sell your shares. Current performance may differ from
figures shown. Please visit FRANKLINTEMPLETON.COM or call 1-800/342-5236 for
most recent month-end performance.
This semiannual report for Franklin U.S. Government Securities Fund covers the
period ended March 31, 2008.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +5.40% cumulative
total return for the six months under review. The Fund performed comparably to
the +5.46% total return of its peers as measured by the Lipper GNMA Funds
Classification Average. (2) In comparison, the Lehman Brothers (LB) U.S.
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: 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 3/31/08, there
were 63 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.
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 84.
30 | Semiannual Report
Government: Intermediate Index returned +7.61% 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
35.
ECONOMIC AND MARKET OVERVIEW
The U.S. economy slowed during the six months ended March 31, 2008, as gross
domestic product growth decelerated sharply and registered an annualized rate of
0.6% in the fourth quarter of 2007 and first quarter of 2008. This was a
significant change from the third quarter's fairly robust 4.9% annualized
growth, which was the highest in more than seven years. A softening labor
market, tighter credit conditions and ongoing housing market weakness rattled
consumer confidence and hurt consumer spending. These factors as well as upward
inflationary pressures from rising food, energy and commodity prices, and a
weaker dollar significantly weighed on the overall economy.
Volatile oil prices reached a historical high in March, topping $110 per barrel
before retreating to $102 by period-end. Core inflation, which excludes food and
energy costs, rose modestly for the period, signaling that inflation risk
remains. For March 2008, core inflation had a 12-month increase of 2.4%. (4) The
Federal Reserve Board's (Fed's) preferred measure of inflation, the core
personal consumption expenditures price index, reported a 12-month increase of
2.1%. (5)
As financial market turmoil and investor uncertainty persisted, the Fed remained
committed to act in an effort to restore confidence and liquidity to U.S.
financial markets. The Fed implemented a number of programs to buffer downside
risk, such as a $200 billion package to increase liquidity to banks, an
extension on direct credit lines to non-banking financial service companies and
the orchestration of Bear Stearns' acquisition by JPMorgan Chase. The Fed cut
interest rates five times over the six-month period, bringing the federal funds
target rate to 2.25%. In addition, regulators eased capital requirements on
government sponsored Fannie Mae and Freddie Mac. Despite the Fed's aggressive
actions,
3. 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.
4. Source: Bureau of Labor Statistics.
5. Source: Bureau of Economic Analysis.
Semiannual Report | 31
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/07 - 3/31/08
DIVIDEND PER SHARE
-----------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- -------- ----------- ----------- ----------- ----------- -------------
October 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents
November 2.69 cents 2.41 cents 2.41 cents 2.49 cents 2.75 cents
December 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
January 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
February 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.75 cents
March 2.69 cents 2.40 cents 2.41 cents 2.49 cents 2.77 cents
----------- ----------- ----------- ----------- -------------
TOTAL 16.14 CENTS 14.42 CENTS 14.46 CENTS 14.94 CENTS 16.52 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
U.S. Treasuries rallied in a flight to quality and equities continued to fall
during the period.
Over the period, as investors sought the relative safety of short-term U.S.
Treasuries, Treasury yields declined and the yield curve steepened. Short-term,
two-and five-year yields declined substantially, with the two-year bill
yielding 1.62% at the end of March, down from 3.97% six months prior. The
10-year U.S. Treasury note ended March yielding 3.45%, compared with 4.59% at
the beginning of the period.
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.
MANAGER'S DISCUSSION
During the six months ended March 31, 2008, the environment for fixed income
investing grew more volatile and uncertain as a series of financial market
disruptions prompted investors to seek the relative safety of U.S. government
and agency securities. In this environment, mortgage-backed securities (MBS)
generally performed well compared with many other credit-related sectors. For
32 | Semiannual Report
example, during the review period, Ginnie Mae (GNMA) MBS performed in line with
their conventional Fannie Mae and Freddie Mac counterparts, however, they lagged
the robust performance of U.S. Treasuries with comparable durations.
What first appeared as an isolated matter in a relatively narrow segment of the
mortgage market quickly unfolded into a much larger affair with wide-ranging
implications for the greater economy, affecting access to credit and financial
market liquidity. It is important to note that GNMAs have a different credit
profile than those mortgage issuers recently in the news and that Franklin U.S.
Government Securities Fund does not invest in subprime MBS. During the reporting
period, we continued to invest only in GNMA MBS, which are guaranteed by the
full faith and credit of the U.S. government. (1) Within the mortgage market,
GNMAs were somewhat buffered from recent market turbulence as GNMA securities
have maintained their premium status due to their explicit government guarantee.
A fundamental part of our strategy is to uncover dislocations across the GNMA
market where prepayment risk may have offered value. The primary risk for GNMA
investors is prepayment risk -- the risk of uncertain cash flows caused by
prepayments in the pools' underlying mortgages. However, rather than avoid
prepayment risk, we actively seek those areas of the GNMA market where we
believe this risk offers value. While housing market volatility does not have an
effect on GNMA credit quality, it can affect prepayment characteristics. With
tightening credit standards and a pullback in housing and refinancing activity,
investors saw a decline in prepayments across all coupons and program types.
Because we believe income will continue to drive performance within the GNMA
markets, we have focused primarily on 30-year collateral bonds rather than their
shorter-term 15-year counterparts. We typically seek to allocate our portfolio
strategically between the two tiers of the GNMA market and incrementally adjust
our weightings based on the findings from our extensive research and analysis.
Over the period, we decreased the Fund's allocation to GNMA II securities
(comprising multiple-issuer pools) as the sector richened and as we believed the
GNMA I sector (comprising single-issuer pools) offered better value. In some
cases, we swapped GNMA IIs into GNMA Is, which benefited the portfolio.
Consistent with our investment strategy, we continually evaluate opportunities
across the entire GNMA sector and coupon spectrum to isolate those securities
that we believe offer the best total return potential.
Semiannual Report | 33
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 OF ROGER A. BAYSTON]
- -s- Roger A. Bayston
Roger A. Bayston, CFA
[PHOTO OF JACK LEMEIN]
- -s- Jack Lemein
Jack Lemein
[PHOTO OF PAUL VARUNOK]
- -s- Paul Varunok
Paul Varunok
Portfolio Management Team
Franklin U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2008, 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.
34 | Semiannual Report
Performance Summary as of 3/31/08
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 3/31/08 9/30/07
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.18 $ 6.57 $ 6.39
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $0.1614
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/08 9/30/07
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.18 $ 6.56 $ 6.38
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $0.1442
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/08 9/30/07
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.18 $ 6.54 $ 6.36
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $0.1446
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/08 9/30/07
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.17 $ 6.56 $ 6.39
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $0.1494
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/08 9/30/07
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) +$0.18 $ 6.59 $ 6.41
DISTRIBUTIONS (10/1/07 - 3/31/08)
Dividend Income $0.1652
Semiannual Report | 35
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) +5.40% +7.46% +21.66% +67.85%
Average Annual Total Return (2) +0.98% +2.82% +3.10% +4.85%
Distribution Rate (3) 4.71%
30-Day Standardized Yield (4) 4.37%
Total Annual Operating Expenses (5) 0.73%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------- ------- ------ ------- ------------------
Cumulative Total Return (1) +5.13% +6.90% +18.55% +53.05%
Average Annual Total Return (2) +1.13% +2.90% +3.13% +4.71%
Distribution Rate (3) 4.39%
30-Day Standardized Yield (4) 4.04%
Total Annual Operating Expenses (5) 1.26%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------ ------- -------
Cumulative Total Return (1) +5.15% +6.93% +18.60% +59.28%
Average Annual Total Return (2) +4.15% +5.93% +3.47% +4.76%
Distribution Rate (3) 4.42%
30-Day Standardized Yield (4) 4.01%
Total Annual Operating Expenses (5) 1.26%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- ------ ------- ------------------
Cumulative Total Return (1) +5.05% +6.90% +19.25% +30.23%
Average Annual Total Return (2) +5.05% +6.90% +3.58% +4.32%
Distribution Rate (3) 4.55%
30-Day Standardized Yield (4) 4.18%
Total Annual Operating Expenses (5) 1.11%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------ ------- -------
Cumulative Total Return (1) +5.45% +7.57% +22.37% +69.95%
Average Annual Total Return (2) +5.45% +7.57% +4.12% +5.45%
Distribution Rate (3) 5.04%
30-Day Standardized Yield (4) 4.70%
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.
36 | Semiannual Report
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 3/31/08.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/08.
5. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 37
Your Fund's Expenses
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
38 | 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
VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07 - 3/31/08
----------------- -------------- -------------------------
CLASS A
Actual $1,000 $1,054.00 $3.70
Hypothetical (5% return before expenses) $1,000 $1,021.40 $3.64
CLASS B
Actual $1,000 $1,051.30 $6.36
Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26
CLASS C
Actual $1,000 $1,051.50 $6.36
Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.26
CLASS R
Actual $1,000 $1,050.50 $5.59
Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.50
ADVISOR CLASS
Actual $1,000 $1,054.50 $3.03
Hypothetical (5% return before expenses) $1,000 $1,022.05 $2.98
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.72%; B: 1.24%; C: 1.24%; R: 1.09%; and
Advisor: 0.59%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
Semiannual Report | 39
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.
This semiannual report for Franklin Utilities Fund covers the period ended March
31, 2008.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Utilities Fund - Class A had a -4.18%
cumulative total return. The Fund performed better than its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned -12.46% for the same
period.(1) The Fund underperformed its narrow benchmark, the S&P 500 Utilities
Index, which returned -3.14%.(2) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 43.
ECONOMIC AND MARKET OVERVIEW
During the six months ended March 31, 2008, the U.S. economy slowed. The housing
downturn negatively affected the overall economy by fourth quarter 2007 as
credit conditions worsened and the pace of consumer spending declined. Gross
domestic product (GDP) growth fell to a 0.6% annualized rate in the fourth
quarter largely due to decelerating inventory investment, exports and federal
government spending. For the overall six-month period, however, a weaker U.S.
dollar compared with many foreign currencies contributed to increased exports.
First quarter 2008 GDP growth remained at a 0.6% estimated annualized rate due
to the effects of the troubled housing market and subsequent credit market
tightening.
The unemployment rate increased from 4.7% at the beginning of the period to 5.1%
in March 2008.(3) Consumer confidence declined during the period, hitting a
five-year low in March, amid rising mortgage and fuel costs, falling
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 all 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.
3. 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 91.
40 | Semiannual Report
home prices and a weaker job market. Volatile oil prices reached a historical
high in March, topping $110 per barrel, before retreating somewhat to $102 by
period-end. For the 12 months ended March 31, 2008, the core Consumer Price
Index (CPI), which excludes food and energy costs, rose 2.4%, which was higher
than its 10-year average rate.(3)
Faced with a deepening housing contraction and stressed financial markets, the
Federal Reserve Board made several cuts to the federal funds target rate during
the period, including 200 basis points so far in 2008. Overall, the federal
funds target rate fell 250 basis points from 4.75% to 2.25%. As investors fled
riskier, poorer-performing assets, U.S. Treasuries rallied and the 10-year
Treasury note yield fell from 4.59% at the beginning of the period to 3.45% on
March 31, 2008.
Stock markets were volatile during the period partly due to investor concerns
about slowing economic growth. Overall, the blue chip stocks of the Dow Jones
Industrial Average had a six-month total return of -10.64%, while the broader
S&P 500 had a -12.46% return, and the technology-heavy NASDAQ Composite Index
had a -15.32% return.(4) The consumer staples, materials and energy sectors
performed relatively well. Large-capitalization stocks generally outperformed
small caps, and growth stocks fared better than their value counterparts.
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
Many utilities companies increased distributions to shareholders, with
significant dividend increases announced during the period by Fund holdings
Exelon, Dominion Resources, FPL Group and Public Service Enterprise Group. In
addition to higher dividends, many utilities may use capital for growth
initiatives. The Edison Electric Institute forecasted higher capital spending by
utilities companies in 2008, which continues a trend that has occurred over the
past few years. An area where utilities increased spending was environmental
emissions
PORTFOLIO BREAKDOWN
Franklin Utilities Fund
Based on Total Net Assets as of 3/31/08
Electric Utilities 50.6%
Multi-Utilities 35.9%
Independent Power Producers & Energy Traders 3.6%
Oil, Gas & Consumable Fuels 3.4%
Gas Utilities 3.1%
Diversified Telecommunication Services 3.0%
Short-Term Investments & Other Net Assets 0.4%
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.
Semiannual Report | 41
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
3/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Entergy Corp. 7.3%
Electric Utilities
Exelon Corp. 6.8%
Electric Utilities
FirstEnergy Corp. 4.4%
Electric Utilities
FPL Group Inc. 4.1%
Electric Utilities
Edison International 3.9%
Electric Utilities
PPL Corp. 3.8%
Electric Utilities
Dominion Resources Inc. 3.6%
Multi-Utilities
The Southern Co. 3.5%
Electric Utilities
Public Service Enterprise Group Inc. 3.4%
Multi-Utilities
PG&E Corp. 3.4%
Multi-Utilities
control, as the industry was preparing for an uncertain future in regard to
regulation and in terms of who will bear the costs of potential CO(2) and
mercury emissions legislation. During the six months under review, Exelon and
First Energy, which appeared well-positioned for future carbon initiatives, were
leading contributors to the Fund's performance. Gaz de France, which operates
Europe's second-largest distribution network and transports natural gas to all
the region's suppliers, also helped the Fund's performance.
Detractors during the period included PG&E, Edison International and National
Grid. We could not identify any single issue related to these companies that
contributed to their shares' weakness over the period. An area of possible
concern related to increased cost inflation, such as for materials and labor,
that the industry was experiencing. PG&E, Edison International and National Grid
each have significant capital deployment programs, and there was some fear from
investors that cost inflation may lead to slower earnings growth over the next
few years as utilities need to file more frequent rate requests to try to
recover such costs.
Overall, we remained focused on a consistent investment strategy, and we look
for opportunities within the utilities sector that we believe are best
positioned to benefit from secular growth trends.
Thank you for your continued participation in Franklin Utilities Fund. We look
forward to serving your future investment needs.
[PHOTO OF JOHN C. KOHLI]
- -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, 2008, 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.
42 | Semiannual Report
Performance Summary as of 3/31/08
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 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.46 $ 13.12 $ 14.58
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.2020
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $0.9371
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.45 $ 13.11 $ 14.56
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.1640
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $0.8991
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.45 $ 13.08 $ 14.53
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.1646
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $0.8997
CLASS R (SYMBOL: FRURX) CHANGE 3/31/08 9/30/07
- ----------------------- ------ ------- -------
Net Asset Value (NAV) -$1.46 $ 13.08 $ 14.54
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.1753
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $0.9104
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/08 9/30/07
- ----------------------------- ------ ------- -------
Net Asset Value (NAV) -$1.46 $ 13.18 $ 14.64
DISTRIBUTIONS (10/1/07-3/31/08)
Dividend Income $0.2126
Short-Term Capital Gain $0.0938
Long-Term Capital Gain $0.6413
TOTAL $0.9477
Semiannual Report | 43
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: 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) -4.18% -3.12% +117.98% +116.11%
Average Annual Total Return (2) -8.27% -7.25% +15.85% +7.54%
Value of $10,000 Investment (3) $ 9,173 $9,275 $ 20,871 $ 20,686
Distribution Rate (4) 2.95%
30-Day Standardized Yield (5) 2.84%
Total Annual Operating Expenses (6) 0.75%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------- -------- ------- --------- ------------------
Cumulative Total Return (1) -4.37% -3.56% +112.59% +100.41%
Average Annual Total Return (2) -7.97% -7.15% +16.06% +7.81%
Value of $10,000 Investment (3) $ 9,203 $9,285 $ 21,059 $ 20,041
Distribution Rate (4) 2.56%
30-Day Standardized Yield (5) 2.46%
Total Annual Operating Expenses (6) 1.26%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- -------- ------- --------- ---------
Cumulative Total Return (1) -4.38% -3.56% +112.53% +105.71%
Average Annual Total Return (2) -5.28% -4.46% +16.27% +7.48%
Value of $10,000 Investment (3) $ 9,472 $9,554 $ 21,253 $ 20,571
Distribution Rate (4) 2.58%
30-Day Standardized Yield (5) 2.46%
Total Annual Operating Expenses (6) 1.26%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- -------- ------- --------- ------------------
Cumulative Total Return (1) -4.37% -3.47% +113.98% +82.87%
Average Annual Total Return (2) -4.37% -3.47% +16.43% +10.15%
Value of $10,000 Investment (3) $ 9,563 $9,653 $ 21,398 $ 18,287
Distribution Rate (4) 2.74%
30-Day Standardized Yield (5) 2.61%
Total Annual Operating Expenses (6) 1.11%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- -------- ------- --------- ---------
Cumulative Total Return (1) -4.09% -2.97% +119.51% +119.79%
Average Annual Total Return (2) -4.09% -2.97% +17.03% +8.19%
Value of $10,000 Investment (3) $ 9,591 $9,703 $ 21,951 $ 21,979
Distribution Rate (4) 3.21%
30-Day Standardized Yield (5) 3.12%
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.
44 | Semiannual Report
Performance Summary (continued)
ENDNOTES
IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY
COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN
INTEREST RATES FALL, UTILITY SECURITIES' PRICES, AND THUS A UTILITIES FUND'S
SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY
FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described
in the prospectus. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated.
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 3/31/08.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 3/31/08.
6. Figures are as stated in the Fund's prospectus current as of the date of this
report.
Semiannual Report | 45
Your Fund's Expenses
FRANKLIN UTILITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
46 | 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
VALUE 10/1/07 VALUE 3/31/08 PERIOD* 10/1/07-3/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 958.20 $3.57
Hypothetical (5% return before expenses) $1,000 $1,021.35 $3.69
CLASS B
Actual $1,000 $ 956.30 $6.02
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21
CLASS C
Actual $1,000 $ 956.20 $6.02
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.21
CLASS R
Actual $1,000 $ 956.30 $5.28
Hypothetical (5% return before expenses) $1,000 $1,019.60 $5.45
ADVISOR CLASS
Actual $1,000 $ 959.10 $2.84
Hypothetical (5% return before expenses) $1,000 $1,022.10 $2.93
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.73%; B: 1.23%; C: 1.23%; R: 1.08%; and
Advisor: 0.58%), multiplied by the average account value over the period,
multiplied by 183/366 to reflect the one-half year period.
Semiannual Report | 47
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
----------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period .... $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37
-------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (loss) (b) ...... (0.04) (0.08) (0.05) (0.01) (0.09) (0.06)
Net realized and unrealized
gains (losses) ...................... (3.80) 6.61 0.87 2.98 1.93 4.86
-------- -------- -------- -------- -------- --------
Total from investment operations ........ (3.84) 6.53 0.82 2.97 1.84 4.80
-------- -------- -------- -------- -------- --------
Less distributions from net
realized gains ........................ (0.71) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period .......... 27.78 $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17
======== ======== ======== ======== ======== ========
Total return (c)......................... (12.16)% 25.31% 3.28% 13.49% 9.12% 31.23%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ................................ 0.97% (f) 0.99% (f) 0.97% (f) 1.00% (f) 0.97% (f) 1.04%
Net investment income (loss) ............ (0.27)% (0.30)% (0.20)% (0.02)% (0.41)% (0.40)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $458,190 $553,347 $590,633 $628,732 $640,120 $558,687
Portfolio turnover rate ................. 22.10% 18.03% 18.61% 17.26% 14.93% 13.68%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ---------------------------------------------------------------------
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period..... $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20
-------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (loss) (b)...... (0.15) (0.28) (0.23) (0.18) (0.25) (0.25)
Net realized and unrealized gains
(losses)............................. (3.60) 6.31 0.83 2.90 1.89 4.84
-------- -------- -------- -------- -------- --------
Total from investment operations......... (3.75) 6.03 0.60 2.72 1.64 4.59
-------- -------- -------- -------- -------- --------
Less distributions from net realized
gains.................................. (0.71) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Redemption fees.......... ............... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period........... $ 26.32 $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79
======== ======== ======== ======== ======== ========
Total return (c)......................... (12.49)% 24.36% 2.48% 12.69% 8.29% 30.20%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses................................. 1.73% (f) 1.75% (f) 1.72% (f) 1.74% (f) 1.72% (f) 1.79%
Net investment income (loss)............. (1.03)% (1.06)% (0.95)% (0.76)% (1.16)% (1.15)%
SUPPLEMENTAL DATA
Net assets, end of period (000's)........ $ 13,743 $ 16,625 $ 18,718 $ 19,497 $ 18,824% $ 10,406
Portfolio turnover rate.................. 22.10% 18.03% 18.61% 17.26% 14.93% 13.68%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 49
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period...... $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04
-------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (loss) (b)........ (0.15) (0.28) (0.23) (0.17) (0.25) (0.25)
Net realized and unrealized gains
(losses)............................. (3.56) 6.24 0.83 2.86 1.87 4.80
-------- -------- -------- -------- -------- --------
Total from investment operations.......... (3.71) 5.96 0.60 2.69 1.62 4.55
-------- -------- -------- -------- -------- --------
Less distributions from net realized
gains................................... (0.71) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Redemption fees........................... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period............ $ 26.04 $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59
======== ======== ======== ======== ======== ========
Total return (c).......................... (12.49)% 24.33% 2.51% 12.68% 8.27% 30.25%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses.................................. 1.73% (f) 1.74% (f) 1.71% (f) 1.74% (f) 1.72% (f) 1.79%
Net investment income (loss).............. (1.03)% (1.05)% (0.94)% (0.76)% (1.16)% (1.15)%
SUPPLEMENTAL DATA
Net assets, end of period (000's)......... $ 61,431 $ 70,413 $ 69,069 $ 73,587 $ 75,642 $ 66,952
Portfolio turnover rate................... 22.10% 18.03% 18.61% 17.26% 14.93% 13.68%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------- -------------- --------- --------------
COMMON STOCKS 97.4%
AIR FREIGHT & LOGISTICS 1.5%
C.H. Robinson Worldwide Inc...................... United States 150,000 $ 8,160,000
-------------
BIOTECHNOLOGY 9.6%
(a) Celgene Corp..................................... United States 200,000 12,258,000
(a) Genentech Inc.................................... United States 250,000 20,295,000
(a) Gilead Sciences Inc.............................. United States 300,000 15,459,000
(a) Millennium Pharmaceuticals Inc................... United States 200,000 3,092,000
-------------
51,104,000
-------------
CAPITAL MARKETS 0.8%
The Goldman Sachs Group Inc...................... United States 25,000 4,134,750
-------------
CHEMICALS 6.2%
Monsanto Co...................................... United States 100,000 11,150,000
(a) The Mosaic Co.................................... United States 40,000 4,104,000
Potash Corp. of Saskatchewan Inc................. Canada 20,000 3,104,200
Sigma-Aldrich Corp............................... United States 250,000 14,912,500
-------------
33,270,700
-------------
COMMERCIAL SERVICES & SUPPLIES 0.8%
(a) Stericycle Inc................................... United States 85,000 4,377,500
-------------
COMMUNICATIONS EQUIPMENT 6.1%
(a) Cisco Systems Inc................................ United States 450,000 10,840,500
Nokia Corp., ADR................................. Finland 220,000 7,002,600
QUALCOMM Inc..................................... United States 200,000 8,200,000
(a) Research In Motion Ltd........................... Canada 60,000 6,733,800
-------------
32,776,900
-------------
COMPUTERS & PERIPHERALS 7.4%
(a) Apple Inc........................................ United States 165,000 23,677,500
Hewlett-Packard Co............................... United States 340,000 15,524,400
-------------
39,201,900
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 1.1%
AT&T Inc. ....................................... United States 150,000 5,745,000
-------------
ELECTRICAL EQUIPMENT 1.0%
ABB Ltd., ADR.................................... Switzerland 200,000 5,384,000
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.8%
(a) Dolby Laboratories Inc., A ...................... United States 100,000 3,626,000
(a) FLIR Systems Inc. ............................... United States 20,000 601,800
-------------
4,227,800
-------------
ENERGY EQUIPMENT & SERVICES 5.3%
(a) FMC Technologies Inc............................. United States 200,000 11,378,000
Schlumberger Ltd................................. United States 150,000 13,050,000
-------------
(a) Weatherford International Ltd.................... United States 50,000 3,623,500
-------------
Semiannual Report | 51
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------- -------------- --------- --------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES 7.1%
Alcon Inc. ...................................... Switzerland 100,000 $ 14,225,000
(a) Intuitive Surgical Inc. ......................... United States 10,000 3,243,500
Medtronic Inc. .................................. United States 150,000 7,255,500
Stryker Corp. ................................... United States 200,000 13,010,000
-------------
37,734,000
-------------
HEALTH CARE PROVIDERS & SERVICES 1.3%
(a) Express Scripts Inc. ............................ United States 40,000 2,572,800
(a) VCA Antech Inc. ................................. United States 150,000 4,102,500
-------------
6,675,300
-------------
HOTELS, RESTAURANTS & LEISURE 1.1%
International Game Technology ................... United States 150,000 6,031,500
-------------
INTERNET & CATALOG RETAIL 1.5%
(a) Amazon.com Inc. ................................. United States 60,000 4,278,000
(a) Priceline.com Inc. .............................. United States 30,000 3,625,800
-------------
7,903,800
-------------
INTERNET SOFTWARE & SERVICES 5.3%
(a) Baidu.com Inc., ADR ............................. China 10,000 2,396,300
(a) Google Inc., A .................................. United States 40,000 17,618,800
(a) Mercadolibre Inc. ............................... Argentina 50,000 1,988,000
(a) Omniture Inc. ................................... United States 150,000 3,481,500
(a) Sohu.com Inc. ................................... China 60,000 2,707,800
-------------
28,192,400
-------------
IT SERVICES 4.5%
MasterCard Inc., A .............................. United States 20,000 4,459,800
(a) Visa Inc., A .................................... United States 309,600 19,306,656
-------------
23,766,456
-------------
LIFE SCIENCES TOOLS & SERVICES 3.7%
(a) Covance Inc. .................................... United States 45,000 3,733,650
Pharmaceutical Product Development Inc. ......... United States 120,000 5,028,000
(a) Waters Corp. .................................... United States 200,000 11,140,000
-------------
19,901,650
-------------
METALS & MINING 0.4%
Nucor Corp. ..................................... United States 30,000 2,032,200
-------------
PHARMACEUTICALS 5.5%
Allergan Inc. ................................... United States 80,000 4,511,200
Johnson & Johnson ............................... United States 100,000 6,487,000
Novo-Nordisk AS, ADR ............................ Denmark 100,000 6,924,000
Teva Pharmaceutical Industries Ltd., ADR......... Israel 250,000 11,547,500
-------------
29,469,700
-------------
52 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------- ------------- ---------- -------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 9.4%
(a) Hittite Microwave Corp. ....................................................... United States 60,000 $ 2,245,200
Intel Corp. ................................................................... United States 1,125,000 23,827,500
KLA-Tencor Corp. .............................................................. United States 100,000 3,710,000
(a) Lam Research Corp. ............................................................ United States 125,000 4,777,500
(a) MEMC Electronic Materials Inc. ................................................ United States 60,000 4,254,000
(a) NVIDIA Corp. .................................................................. United States 300,000 5,937,000
(a) Varian Semiconductor Equipment Associates Inc. ................................ United States 200,000 5,630,000
-------------
50,381,200
-------------
SOFTWARE 11.7%
(a) Activision Inc. ............................................................... United States 50,000 1,365,500
(a) Adobe Systems Inc. ............................................................ United States 350,000 12,456,500
(a) Autodesk Inc. ................................................................. United States 100,000 3,148,000
(a) Concur Technologies Inc. ...................................................... United States 135,000 4,191,750
(a) Electronic Arts Inc. .......................................................... United States 140,000 6,988,800
Microsoft Corp. ............................................................... United States 425,000 12,061,500
Nintendo Co. Ltd., ADR ........................................................ Japan 150,000 9,723,000
(a) Salesforce.com Inc. ........................................................... United States 100,000 5,787,000
(a) UbiSoft Entertainment SA ...................................................... France 75,000 6,459,587
-------------
62,181,637
-------------
WIRELESS TELECOMMUNICATION SERVICES 5.3%
America Movil SAB de CV, L, ADR ............................................... Mexico 140,000 8,916,600
(a) American Tower Corp., A ....................................................... United States 185,000 7,253,850
China Mobile (Hong Kong) Ltd., ADR ............................................ China 85,000 6,375,850
Mobile TeleSystems, ADR ....................................................... Russia 30,000 2,275,500
Vimpel-Communications, ADR .................................................... Russia 120,000 3,586,800
-------------
28,408,600
-------------
TOTAL COMMON STOCKS (COST $284,157,558) ....................................... 519,112,493
-------------
SHORT TERM INVESTMENT (COST $15,195,393) 2.8%
MONEY MARKET FUND 2.8%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .......... United States 15,195,393 15,195,393
-------------
TOTAL INVESTMENTS (COST $299,352,951) 100.2% .................................. 534,307,886
OTHER ASSETS, LESS LIABILITIES (0.2)% ......................................... (942,769)
-------------
NET ASSETS 100.0% ............................................................. $ 533,365,117
=============
See Selected Portfolio Abbreviations on page 94.
(a) Non-income producing for the twelve months ended March 31, 2008.
(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. | 53
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ------------------------------------------------------------------------------
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
---------------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period .................... $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02
----------- ---------- ---------- ---------- ---------- ----------
Income from investment
operations (a):
Net investment income (b)...... 0.10 0.16 0.12 0.13 0.06 0.08
Net realized and unrealized
gains (losses) .............. (5.93) 7.21 4.21 4.20 3.68 4.81
----------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations. ................... (5.83) 7.37 4.33 4.33 3.74 4.89
----------- ---------- ---------- ---------- ---------- ----------
Less distributions from net
investment income ............. (0.13) (0.11) (0.06) (0.08) (0.03) (0.04)
----------- ---------- ---------- ---------- ---------- ----------
Redemption fees ................. -- (e ) -- (e) -- (e) -- (e) -- (e) --
----------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period ........................ $ 40.40 $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87
=========== ========== ========== ========== ========== ==========
Total return (c) ................ (12.61)% 18.87% 12.46% 14.17% 13.92% 22.27%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ........................ 0.91% (f) 0.93% (f) 0.91% (f) 0.94% (f) 0.98% (f) 1.06%
Net investment income ........... 0.46% 0.37% 0.34% 0.40% 0.20% 0.31%
SUPPLEMENTAL DATA
Net assets, end of
period (000's). ............... $ 1,883,485 $2,123,419 $1,695,802 $1,567,675 $1,531,871 $1,433,742
Portfolio turnover rate ......... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
54 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
---------------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ..... $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70
-------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (loss) (b)........ (0.06) (0.16) (0.15) (0.11) (0.16) (0.11)
Net realized and unrealized
gains (losses) ....................... (5.70) 6.93 4.07 4.07 3.61 4.73
-------- -------- -------- -------- -------- --------
Total from investment operations ......... (5.76) 6.77 3.92 3.96 3.45 4.62
-------- -------- -------- -------- -------- --------
Redemption fees .......................... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ........... $ 38.66 $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32
======== ======== ======== ======== ======== ========
Total return (c) ......................... (12.97)% 17.98% 11.62% 13.30% 13.11% 21.29%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ................................. 1.67% (f) 1.69% (f) 1.67% (f) 1.69% (f) 1.73% (f) 1.81%
Net investment income (loss) ............. (0.30)% (0.39)% (0.42)% (0.35)% (0.55)% (0.44)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ........ $109,614 $138,640 $122,871 $123,926 $121,986 $103,499
Portfolio turnover rate .................. 4.14% 0.37% 2.21% 1.16% 1.56% 5.12%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 55
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period..... $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51
--------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (loss) (b)....... (0.06) (0.16) (0.15) (0.11) (0.16) (0.11)
Net realized and unrealized
gains (losses). ..................... (5.64) 6.87 4.04 4.03 3.58 4.69
--------- -------- -------- -------- -------- --------
Total from investment operations......... (5.70) 6.71 3.89 3.92 3.42 4.58
--------- -------- -------- -------- -------- --------
Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- -------- -------- -------- -------- --------
Net asset value, end of period........... $ 38.33 $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09
========= ======== ======== ======== ======== ========
Total return (c)......................... (12.95)% 17.98% 11.60% 13.32% 13.11% 21.29%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses................................. 1.67% (f) 1.69% (f) 1.66% (f) 1.69% (f) 1.73% (f) 1.82%
Net investment income (loss)............. (0.30)% (0.39)% (0.41)% (0.35)% (0.55)% (0.45)%
SUPPLEMENTAL DATA
Net assets, end of period (000's)........ $ 290,535 $340,671 $273,512 $270,538 $270,131 $259,169
Portfolio turnover rate ................. 4.14% 0.37% 2.21% 1.16% 1.56% 5.12%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
56 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ...................... $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98
---------------- -------- -------- -------- -------- --------
Income from investment
operations (a):
Net investment income
(loss) (b) ................ 0.05 0.04 0.02 0.05 (0.02) -- (e)
Net realized and unrealized
gains (losses). ........... (5.90) 7.16 4.19 4.16 3.67 4.81
---------------- -------- -------- -------- -------- --------
Total from investment
operations .................. (5.85) 7.20 4.21 4.21 3.65 4.81
---------------- -------- -------- -------- -------- --------
Less distributions from
net investment income ....... (0.03) (0.01) -- (e) (0.01) -- (0.05)
---------------- -------- -------- -------- -------- --------
Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) --
---------------- -------- -------- -------- -------- --------
Net asset value, end of
period ........................ $ 40.11 $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74
================ ======== ======== ======== ======== ========
Total return (c)............... (12.73)% 18.55% 12.18% 13.87% 13.65% 21.92%
RATIOS TO AVERAGE NET
ASSETS (d)
Expenses ...................... 1.17% (f) 1.19% (f) 1.17% (f) 1.19% (f) 1.23% (f) 1.31%
Net investment income (loss) .. 0.20% 0.11% 0.08% 0.15% (0.05)% 0.06%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ..................... $ 53,200 $ 53,134 $ 37,804 $ 27,818 $ 20,060 $ 14,755
Portfolio turnover rate ....... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2008 YEAR ENDED SEPTEMBER 30,
---------------- --------------------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
---------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ...................... $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06
---------------- -------- -------- -------- -------- --------
Income from investment
operations (a):
Net investment income (b).... 0.15 0.27 0.22 0.21 0.14 0.14
Net realized and unrealized
gains (losses). ........... (5.94) 7.21 4.21 4.21 3.67 4.82
---------------- -------- -------- -------- -------- --------
Total from investment
operations .................. (5.79) 7.48 4.43 4.42 3.81 4.96
---------------- -------- -------- -------- -------- --------
Less distributions from net
investment income ........... (0.23) (0.20) (0.15) (0.16) (0.09) (0.11)
---------------- -------- -------- -------- -------- --------
Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) --
---------------- -------- -------- -------- -------- --------
Net asset value, end of
period ...................... $ 40.43 $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91
================ ======== ======== ======== ======== ========
Total return (c)............... (12.51)% 19.16% 12.73% 14.45% 14.19% 22.58%
RATIOS TO AVERAGE NET
ASSETS (d)
Expenses ...................... 0.67% (f) 0.69% (f) 0.67% (f) 0.69% (f) 0.73% (f) 0.81%
Net investment income ......... 0.70% 0.61% 0.58% 0.65% 0.45% 0.56%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) .............. $ 295,749 $363,221 $274,603 $221,752 $133,332 $ 41,216
Portfolio turnover rate ....... 4.14% 0.37% 2.21% 1.16% 1.56% 5.12%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
FRANKLIN GROWTH FUND SHARES VALUE
- --------------------------------------------- ----------- ------------
COMMON STOCKS 100.0%
CONSUMER DISCRETIONARY 9.0%
Carnival Corp. .......................... 565,000 $ 22,871,200
Clear Channel Communications Inc. ....... 500,000 14,610,000
(a) Expedia Inc. ............................ 300,100 6,569,189
(a) Ford Motor Co. .......................... 1,100,000 6,292,000
General Motors Corp. .................... 400,000 7,620,000
Genuine Parts Co. ....................... 375,400 15,098,588
Harley-Davidson Inc. .................... 500,000 18,750,000
(a) IAC/InterActiveCorp. ................ ... 300,100 6,230,076
Johnson Controls Inc. ................... 1,200,000 40,560,000
Time Warner Inc. ........................ 1,350,000 18,927,000
VF Corp. ................................ 500,000 38,755,000
(a) Viacom Inc., A .......................... 100,000 3,963,000
(a) Viacom Inc., B .......................... 50,000 1,981,000
The Walt Disney Co. ..................... 1,130,000 35,459,400
------------
237,686,453
------------
CONSUMER STAPLES 0.9%
CVS Caremark Corp. ...................... 126,293 5,116,129
The Hershey Co. ......................... 400,000 15,068,000
The Procter & Gamble Co. ................ 35,000 2,452,450
------------
22,636,579
------------
ENERGY 2.3%
BP PLC, ADR ............................. 350,200 21,239,630
ConocoPhillips .......................... 35,000 2,667,350
Devon Energy Corp. ...................... 50,000 5,216,500
Exxon Mobil Corp. ....................... 70,000 5,920,600
Royal Dutch Shell PLC, A, ADR ........... 280,000 19,314,400
Schlumberger Ltd. ....................... 40,000 3,480,000
(a) Transocean Inc. ......................... 15,222 2,058,014
------------
59,896,494
------------
FINANCIALS 0.9%
AFLAC Inc. .............................. 85,000 5,520,750
Moody's Corp. ........................... 538,000 18,738,540
------------
24,259,290
------------
HEALTH CARE 21.4%
Abbott Laboratories ..................... 400,000 22,060,000
(a) Advanced Medical Optics Inc. ............ 88,888 1,804,427
Allergan Inc. ........................... 800,000 45,112,000
(a) Amgen Inc. .............................. 932,000 38,938,960
Baxter International Inc. ............... 400,000 23,128,000
(a) Biogen Idec Inc. ........................ 400,000 24,676,000
Cardinal Health Inc. .................... 300,000 15,753,000
(a) Celgene Corp. ........................... 25,000 1,532,250
(a) Dionex Corp. ............................ 250,000 19,247,500
(a) Edwards Lifesciences Corp. .............. 50,000 2,227,500
Semiannual Report | 59
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN GROWTH FUND SHARES VALUE
- --------------------------------------------- ----------- ------------
COMMON STOCKS (CONTINUED)
HEALTH CARE (CONTINUED)
Eli Lilly and Co. ....................... 400,000 $ 20,636,000
(a) Genentech Inc. .......................... 1,000,000 81,180,000
(a) Hospira Inc. ........................... 40,000 1,710,800
IMS Health Inc. ......................... 500,000 10,505,000
(a) Intuitive Surgical Inc. ................. 1,000 324,350
Johnson & Johnson ....................... 1,081,000 70,124,470
(a) Medco Health Solutions Inc. ............. 96,480 4,224,859
Medtronic Inc. .......................... 60,000 2,902,200
Merck & Co. Inc. ........................ 500,000 18,975,000
(a) Millipore Corp. ......................... 400,000 26,964,000
Pfizer Inc. ............................. 2,170,000 45,418,100
Quest Diagnostics Inc. .................. 500,000 22,635,000
Roche Holding AG, ADR ................... 40,000 3,779,000
Schering-Plough Corp. ................... 120,000 1,729,200
(a) Waters Corp. ............................ 500,000 27,850,000
Wyeth ................................... 600,000 25,056,000
(a) Zimmer Holdings Inc. .................... 64,000 4,983,040
------------
563,476,656
------------
INDUSTRIALS 41.2%
3M Co. .................................. 855,000 67,673,250
Air France-KLM, ADR . ................. 550,000 15,482,500
(a) Alaska Air Group Inc. ................... 500,000 9,810,000
(a) AMR Corp. ............................... 2,000,000 18,040,000
Arkansas Best Corp. ..................... 500,000 15,930,000
Avery Dennison Corp. .................... 462,000 22,753,500
The Boeing Co. .......................... 1,045,000 77,716,650
(a) British Airways PLC, ADR ............... 500,000 23,175,000
Canadian National Railway Co. ........... 500,000 24,160,000
Canadian Pacific Railway Ltd. ........... 500,000 32,145,000
(a) Continental Airlines Inc., B ............ 1,000,000 19,230,000
Dun & Bradstreet Corp. .................. 122,000 9,928,360
Emerson Electric Co. .................... 1,000,000 51,460,000
Equifax Inc. ............................ 400,000 13,792,000
Expeditors International of
Washington Inc. ....................... 80,000 3,614,400
FedEx Corp. ............................. 40,000 3,706,800
Forward Air Corp. ....................... 500,000 17,720,000
General Dynamics Corp. .................. 1,000,000 83,370,000
General Electric Co. .................... 70,000 2,590,700
Heartland Express Inc. . ................ 500,000 7,130,000
Illinois Tool Works Inc. ................ 1,000,000 48,230,000
Ingersoll-Rand Co. Ltd., A .............. 1,002,000 44,669,160
Lockheed Martin Corp. ................... 500,000 49,650,000
Northrop Grumman Corp. .................. 1,000,000 77,810,000
Pall Corp. .............................. 500,000 17,535,000
Raytheon Co. ............................ 600,000 38,766,000
Robert Half International Inc. .......... 300,000 7,722,000
Rockwell Collins Inc. ................... 100,000 5,715,000
60 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN GROWTH FUND SHARES VALUE
- --------------------------------------------- ----------- --------------
COMMON STOCKS (CONTINUED)
INDUSTRIALS (CONTINUED)
Southwest Airlines Co. .................. 65,200 $ 808,480
(a) SunPower Corp., A ....................... 2,000 149,020
Teleflex Inc. ........................... 500,000 23,855,000
Textron Inc. ............................ 1,050,000 58,191,000
(a) Thomas & Betts Corp. .................... 500,000 18,185,000
Tyco International Ltd. ................. 387,513 17,069,948
Union Pacific Corp. ..................... 300,000 37,614,000
United Technologies Corp. ............... 850,000 58,497,000
W.W. Grainger Inc. ...................... 550,000 42,014,500
Werner Enterprises Inc. ................. 500,000 9,280,000
(a) YRC Worldwide Inc. ...................... 700,000 9,184,000
--------------
1,084,373,268
--------------
INFORMATION TECHNOLOGY 21.2%
(a) Agilent Technologies Inc. ............... 400,000 11,932,000
(a) Apple Inc. .............................. 800,000 114,800,000
Automatic Data Processing Inc. .......... 700,000 29,673,000
(a) Cisco Systems Inc. ...................... 1,545,000 37,219,050
(a) Computer Sciences Corp. ................. 1,000,000 40,790,000
(a) Dell Inc. ............................... 500,000 9,960,000
(a) EMC Corp. ............................... 1,000,000 14,340,000
(a) Google Inc., A .......................... 27,000 11,892,690
Hewlett-Packard Co. ..................... 1,156,250 52,794,375
Intel Corp. ............................. 970,000 20,544,600
International Business Machines Corp..... 580,000 66,781,200
KLA-Tencor Corp. ........................ 35,000 1,298,500
(a) Logitech International SA ............. 150,000 3,816,000
(a) Mettler-Toledo International Inc. ....... 50,000 4,856,000
Microsoft Corp. ......................... 1,175,000 33,346,500
Molex Inc. .............................. 146,483 3,392,546
Molex Inc., A ........................... 146,483 3,202,119
(a) Oracle Corp. ............................ 500,000 9,780,000
Paychex Inc. ............................ 50,000 1,713,000
QUALCOMM Inc. ........................... 110,000 4,510,000
(a) Sun Microsystems Inc. ................... 400,000 6,212,000
Texas Instruments Inc. .................. 515,000 14,559,050
Tyco Electronics Ltd..................... 387,513 13,299,446
(a) Verigy Ltd............................... 48,974 922,670
(a) Yahoo! Inc. ............................. 1,600,000 46,288,000
--------------
557,922,746
--------------
MATERIALS 2.6%
Air Products and Chemicals Inc. ......... 500,000 46,000,000
Sigma-Aldrich Corp. ..................... 400,000 23,860,000
--------------
69,860,000
--------------
TELECOMMUNICATION SERVICES 0.2%
(a) American Tower Corp., A ................. 115,000 4,509,150
--------------
Semiannual Report | 61
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN GROWTH FUND SHARES VALUE
- ----------------------------------------------------------------------------- ---------- --------------
COMMON STOCKS (CONTINUED)
UTILITIES 0.3%
Exelon Corp. ............................................................ 50,000 $ 4,063,500
Public Service Enterprise Group Inc...................................... 100,000 4,019,000
--------------
8,082,500
--------------
TOTAL COMMON STOCKS (COST $1,125,153,369) ............................... 2,632,703,136
--------------
SHORT TERM INVESTMENT (COST $2,357,461) 0.1%
MONEY MARKET FUND 0.1%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .... 2,357,461 2,357,461
--------------
TOTAL INVESTMENTS (COST $1,127,510,830) 100.1% .......................... 2,635,060,597
OTHER ASSETS, LESS LIABILITIES (0.1)% ................................... (2,477,648)
--------------
NET ASSETS 100.0% ....................................................... $2,632,582,949
==============
See Selected Portfolio abbreviations list on page 94.
(a) Non-income producing for the twelve months ended March 31, 2008.
(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.
62 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ------------------------------------------------------------------------------------
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
---------------- ------------ ------------ ------------ ------------ -----------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period ... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
------------ ------------ ------------ ------------ ------------ -----------
Income from investment
operations (a):
Net investment
income (b)........... 0.08 0.14 0.14 0.14 0.12 0.14
Net realized and
unrealized
gains (losses) ..... (0.27) 0.21 0.09 0.10 0.22 0.38
------------ ------------ ------------ ------------ ------------ -----------
Total from investment
operations ........... (0.19) 0.35 0.23 0.24 0.34 0.52
------------ ------------ ------------ ------------ ------------ -----------
Less distributions from:
Net investment
income .............. (0.08) (0.14) (0.15) (0.15) (0.16) (0.16)
Net realized gains .... (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ -----------
Total distributions ..... (0.14) (0.18) (0.16) (0.16) (0.17) (0.17)
------------ ------------ ------------ ------------ ------------ -----------
Redemption fees ........ -- (e) -- (e) -- (e) -- (e) -- (e) --
------------ ------------ ------------ ------------ ------------ -----------
Net asset value,
end of period ......... $ 2.41 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25
============ ============ ============ ============ ============ ===========
Total return (c) (7.22)% 14.14% 9.73% 10.45% 15.50% 28.12%
RATIOS TO AVERAGE
NET ASSETS (d)
Expenses ............... 0.62% (f) 0.63% (f) 0.64% (g) 0.65% (g) 0.68% (f) 0.73%
Net investment income ... 6.25% 5.31% 5.61% 5.54% 5.11% 6.63%
SUPPLEMENTAL DATA
Net assets, end
of period (000's) ..... $ 32,595,956 $ 35,476,603 $ 26,641,398 $ 21,934,575 $ 14,743,190 $ 9,640,156
Portfolio turnover
rate .................. 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(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. | 63
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------------------
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
---------------- ----------- ----------- ---------- ---------- ----------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ................ $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90
------------ ----------- ----------- ---------- ---------- ----------
Income from investment
operations (a):
Net investment income (b)... 0.07 0.12 0.12 0.11 0.10 0.12
Net realized and
unrealized gains
(losses) ............... (0.27) 0.21 0.08 0.11 0.22 0.37
------------ ----------- ----------- ---------- ---------- ----------
Total from investment
operations ................ (0.20) 0.33 0.20 0.22 0.32 0.49
------------ ----------- ----------- ---------- ---------- ----------
Less distributions from:
Net investment income ..... (0.07) (0.12) (0.12) (0.13) (0.14) (0.14)
Net realized gains ........ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
------------ ----------- ----------- ---------- ---------- ----------
Total distributions ......... (0.13) (0.16) (0.13) (0.14) (0.15) (0.15)
------------ ----------- ----------- ---------- ---------- ----------
Redemption fees ............. -- (e) -- (e) -- (e) -- (e) -- (e) --
------------ ----------- ----------- ---------- ---------- ----------
Net asset value, end
of period ................. $ 2.40 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24
============ =========== =========== ========== ========== ==========
Total return (c).............. (7.67)% 13.23% 8.83% 9.57% 14.59% 26.58%
RATIOS TO AVERAGE NET
ASSETS (d)
Expenses .................... 1.47% (f) 1.48% (f) 1.49% (g) 1.50% (g) 1.53% (f) 1.58%
Net investment income ....... 5.40% 4.46% 4.76% 4.69% 4.26% 5.78%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ................... $ 3,179,241 $ 3,745,636 $ 3,743,374 $3,922,396 $3,486,880 $2,083,783
Portfolio turnover rate ..... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of waiver and payment by affiliate and expense reduction rounds to
less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -----------------------------------------------------------------------
CLASS B1 (UNAUDITED) 2007 2006 2005 2004 2003
---------------- --------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period .......................... $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90
--------- --------- --------- --------- --------- ---------
Income from investment operations (a):
Net investment income (b)........... 0.07 0.13 0.13 0.12 0.11 0.13
Net realized and unrealized
gains (losses) ................... (0.27) 0.21 0.08 0.11 0.21 0.38
--------- --------- --------- --------- --------- ---------
Total from investment operations ..... (0.20) 0.34 0.21 0.23 0.32 0.51
--------- --------- --------- --------- --------- ---------
Less distributions from:
Net investment income ............. (0.07) (0.13) (0.13) (0.14) (0.14) (0.15)
Net realized gains ................ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
--------- --------- --------- --------- --------- ---------
Total distributions .................. (0.13) (0.17) (0.14) (0.15) (0.15) (0.16)
--------- --------- --------- --------- --------- ---------
Redemption fees ...................... -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- --------- --------- --------- --------- ---------
Net asset value, end of period ....... $ 2.41 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25
========= ========= ========= ========= ========= =========
Total return (c)...................... (7.48)% 13.57% 9.17% 9.90% 14.90% 27.51%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ............................. 1.12% (f) 1.13% (f) 1.14% (g) 1.15% (g) 1.18% (f) 1.23%
Net investment income ................ 5.75% 4.81% 5.11% 5.04% 4.61% 6.13%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 312,529 $ 397,224 $ 459,302 $ 493,063 $ 511,471 $ 495,004
Portfolio turnover rate .............. 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(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. | 65
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ------------------------------------------------------------------------------------
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
------------ ------------ ------------ ------------ ---------- -----------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period .... $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91
------------ ------------ ------------ ------------ ---------- -----------
Income from investment
operations (a):
Net investment income (b) 0.07 0.13 0.13 0.13 0.11 0.13
Net realized and
unrealized gains
(losses) ............ (0.28) 0.21 0.09 0.10 0.21 0.38
------------ ------------ ------------ ------------ ---------- -----------
Total from investment
operations ............ (0.21) 0.34 0.22 0.23 0.32 0.51
------------ ------------ ------------ ------------ ---------- -----------
Less distributions from:
Net investment income . (0.07) (0.13) (0.13) (0.14) (0.14) (0.15)
Net realized gains .... (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------ ---------- -----------
Total distributions ...... (0.13) (0.17) (0.14) (0.15) (0.15) (0.16)
------------ ------------ ------------ ------------ ---------- -----------
Redemption fees .......... -- (e) -- (e) -- (e) -- (e) -- (e) --
------------ ------------ ------------ ------------ ---------- -----------
Net asset value,
end of period .......... $ 2.42 $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26
============ ============ ============ ============ ========== ===========
Total return (c) ......... (7.79)% 13.47% 9.56% 9.84% 14.85% 27.37%
RATIOS TO AVERAGE
NET ASSETS (d)
Expenses ................. 1.11% (f) 1.13% (f) 1.14% (g) 1.15% (g) 1.18% (f) 1.24%
Net investment income .... 5.76% 4.81% 5.11% 5.04% 4.61% 6.12%
SUPPLEMENTAL DATA
Net assets, end
of period (000's) ...... $ 14,892,036 $ 16,203,796 $ 12,138,969 $ 10,113,365 $6,616,891 $ 3,764,372
Portfolio turnover
rate ................... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(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
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------------------
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
---------------- --------- --------- --------- --------- ---------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ...................... $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89
--------- --------- --------- ---------- --------- ---------
Income from investment
operations (a):
Net investment income (b)....... 0.07 0.13 0.13 0.13 0.11 0.13
Net realized and
unrealized
gains (losses) .............. (0.27) 0.20 0.09 0.10 0.22 0.37
--------- --------- --------- ---------- --------- ---------
Total from investment
operations ..................... (0.20) 0.33 0.22 0.23 0.33 0.50
--------- --------- --------- ---------- --------- ---------
Less distributions from:
Net investment income ......... (0.07) (0.13) (0.14) (0.14) (0.15) (0.15)
Net realized gains ............ (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
--------- --------- --------- ---------- --------- ---------
Total distributions .............. (0.13) (0.17) (0.15) (0.15) (0.16) (0.16)
--------- --------- --------- ---------- --------- ---------
Redemption fees .................. -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- --------- --------- ---------- --------- ---------
Net asset value, end
of period ...................... $ 2.38 $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23
========= ========= ========= ========== ========= =========
Total return (c) ................. (7.49)% 13.47% 9.43% 10.15% 15.25% 27.31%
RATIOS TO AVERAGE
NET ASSETS (d)
Expenses ......................... 0.97% (f) 0.98% (f) 0.99% (g) 1.00% (g) 1.03% (f) 1.08%
Net investment income ............ 5.90% 4.96% 5.26% 5.19% 4.76% 6.28%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ........................ $ 290,023 $ 286,670 $ 183,609 $ 122,222 $ 73,165 $ 36,417
Portfolio turnover rate .......... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(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. | 67
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
---------------- ---------- ---------- ---------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ........................ $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89
----------- ---------- ---------- ---------- --------- --------
Income from investment
operations (a):
Net investment income (b)....... 0.08 0.15 0.14 0.14 0.12 0.14
Net realized and unrealized
gains (losses) ................ (0.28) 0.21 0.09 0.11 0.22 0.38
----------- ---------- ---------- ---------- --------- --------
Total from investment
operations ...................... (0.20) 0.36 0.23 0.25 0.34 0.52
----------- ---------- ---------- ---------- --------- --------
Less distributions from:
Net investment income .......... (0.08) (0.15) (0.15) (0.16) (0.16) (0.16)
Net realized gains ............. (0.06) (0.04) (0.01) (0.01) (0.01) (0.01)
----------- ---------- ---------- ---------- --------- --------
Total distributions ............... (0.14) (0.19) (0.16) (0.17) (0.17) (0.17)
----------- ---------- ---------- ---------- --------- --------
Redemption fees ................... -- (e) -- (e) -- (e) -- (e) -- (e) --
----------- ---------- ---------- ---------- --------- --------
Net asset value, end of period .... $ 2.39 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24
=========== ========== ========== ========== ========= ========
Total return (c)................... (7.57)% 14.36% 9.94% 10.65% 15.74% 28.47%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses .......................... 0.47% (f) 0.48% (f) 0.49% (g) 0.50% (g) 0.53% (f) 0.58%
Net investment income ............. 6.40% 5.46% 5.76% 5.69% 5.26% 6.78%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ......................... $ 5,430,862 $6,195,966 $3,786,643 $2,280,318 $ 901,149 $95,009
Portfolio turnover rate ........... 22.44% 25.45% 28.35% 28.51% 31.90% 48.36%
(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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
(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
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------- ----------------- ---------------- ---------------
LONG TERM INVESTMENTS 95.1%
COMMON STOCKS 36.2%
ENERGY 5.1%
BP PLC, ADR................................... United Kingdom 6,500,000 $ 394,225,000
(a) Canadian Oil Sands Trust ..................... Canada 25,000,000 1,010,814,496
Chevron Corp. ................................ United States 4,500,000 384,120,000
ConocoPhillips ............................... United States 5,750,000 438,207,500
Royal Dutch Shell PLC, A, ADR ................ Netherlands 4,000,000 275,920,000
Spectra Energy Corp. ......................... United States 17,100,000 389,025,000
---------------
2,892,311,996
---------------
FINANCIALS 5.1%
Bank of America Corp.......................... United States 26,000,000 985,660,000
Duke Realty Corp.............................. United States 1,150,000 26,231,500
HSBC Holdings PLC ............................ United Kingdom 35,000,000 576,497,212
iStar Financial Inc. ......................... United States 5,213,500 73,145,405
JPMorgan Chase & Co. ......................... United States 8,000,000 343,600,000
Merrill Lynch & Co. Inc. ..................... United States 4,500,000 183,330,000
Wachovia Corp. ............................... United States 3,750,000 101,250,000
Washington Mutual Inc. ....................... United States 20,000,000 206,000,000
Wells Fargo & Co. ............................ United States 13,900,000 404,490,000
---------------
2,900,204,117
---------------
HEALTH CARE 5.5%
(b) Amgen Inc. ................................... United States 3,521,000 147,107,380
Bristol-Myers Squibb Co....................... United States 14,000,000 298,200,000
Johnson & Johnson............................. United States 12,000,000 778,440,000
Merck & Co. Inc. ............................. United States 13,000,000 493,350,000
Pfizer Inc. .................................. United States 60,867,506 1,273,956,900
Wyeth......................................... United States 4,000,000 167,040,000
---------------
3,158,094,280
---------------
INDUSTRIALS 1.0%
3M Co. ....................................... Uited States 7,000,000 554,050,000
---------------
Information Technology 2.0%
Intel Corp. .................................. Uited States 45,000,000 953,100,000
Microchip Technology Inc...................... United States 5,000,000 163,650,000
---------------
1,116,750,000
---------------
MATERIALS 0.6%
AngloGold Ashanti Ltd., ADR................... South Africa 2,250,000 76,410,000
The Dow Chemical Co........................... United States 7,181,222 264,628,031
---------------
341,038,031
---------------
TELECOMMUNICATION SERVICES 3.2%
AT&T Inc. .................................... United States 36,900,000 1,413,270,000
Verizon Communications Inc ................... United States 11,000,000 399,084,664
---------------
1,812,354,664
---------------
UTILITIES 13.7%
AGL Resources Inc. ........................... United States 1,500,000 51,480,000
(a) Ameren Cor ................................... United States 12,500,000 550,500,000
American Electric Power Co. Inc. ............. United States 8,633,800 359,425,094
Semiannual Report | 69
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------- ----------------- -------------- ---------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
UTILITIES (CONTINUED)
Atmos Energy Corp. .......................... United States 4,000,000 $ 102,000,000
CenterPoint Energy Inc. ..................... United States 6,000,000 85,620,000
Consolidated Edison Inc. .................... United States 12,000,000 476,400,000
Dominion Resources Inc. ..................... United States 20,000,000 816,800,000
DTE Energy Co. .............................. United States 5,270,400 204,965,856
Duke Energy Corp. ........................... United States 32,500,000 580,125,000
FirstEnergy Corp. ........................... United States 10,000,000 686,200,000
FPL Group Inc. .............................. United States 5,500,000 345,070,000
Hawaiian Electric IndustriesInc. ............ United States 1,720,000 41,056,400
NiSource Inc. ............................... United States 4,500,000 77,580,000
(a) PG&E Corp. .................................. United States 19,000,000 699,580,000
(a) Pinnacle West Capital Corp................... United States 5,500,000 192,940,000
Portland General Electric Co. ............... United States 3,100,000 69,905,000
Progress Energy Inc. ........................ United States 9,000,000 375,300,000
Public Service Enterprise Group Inc. ........ United States 20,000,000 803,800,000
(a) Puget Energy Inc. ........................... United States 7,500,000 194,025,000
The Southern Co. ............................ United States 25,000,000 890,250,000
TECO Energy Inc. ............................ United States 9,500,000 151,525,000
---------------
7,754,547,350
---------------
TOTAL COMMON STOCKS (COST $ 18,221,113,916) . 20,529,350,438
---------------
CONVERTIBLE PREFERRED STOCKS 8.6%
CONSUMER DISCRETIONARY 1.6%
Citigroup into Comcast Corp.,
8.50%, cvt. pfd. ............................ United States 15,000,000 295,147,500
General Motors Corp., 6.25%, cvt. pfd. ...... United States 10,000,000 165,000,000
(c) The Goldman Sachs Group Inc. into
Comcast Corp., 5.00%, cvt. pfd., 144A........ United States 2,800,000 53,306,400
(c) Lehman Brothers into Target Corp.,
7.50%, cvt. pfd., 144A ..................... United States 4,800,000 246,528,000
(c) Merrill Lynch & Co. Inc. into Home
Depot Inc., 9.00%, cvt. pfd., 144A ......... United States 6,000,000 172,410,000
---------------
932,391,900
---------------
ENERGY 2.1%
(c) Deutsche Bank AG into Chevron Corp.,
8.00%, cvt. pfd., 144A ..................... United States 5,000,000 425,450,000
(c) Morgan Stanley into ConocoPhillips,
7.00%, cvt. pfd., 144A ..................... United States 6,000,000 454,650,000
(c) Morgan Stanley into Halliburton Co.,
8.00%, cvt. pfd., 144A ...................... United States 9,000,000 324,585,000
---------------
1,204,685,000
---------------
FINANCIALS 2.2%
Bank of America Corp.,
7.25%, cvt. pfd., L ........................ United States 399,000 412,167,000
Citigroup Inc., 6.50%, cvt.pfd. ............. United States 3,800,000 180,766,000
E*TRADE Financial Corp.,
6.125%, cvt. pfd. ......................... United States 2,302,200 13,122,540
Fannie Mae, 5.375%, cvt. pfd. .............. United States 4,700 336,469,945
Felcor Lodging Trust Inc.,
7.80%, cvt. pfd., A ........................ United States 3,000,000 59,220,000
Washington Mutual Inc.,
7.75%, cvt. pfd., R ......................... United States 363,500 258,085,000
---------------
1,259,830,485
---------------
70| Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE
- ------------------------------------------------- ----------------- -------------- ---------------
Long Term Investments (continued)
Convertible Preferred Stocks (continued)
Health Care 0.5%
(c) Lehman Brothers Holdings into Schering-Plough Corp.,
8.00%, cvt. pfd., 144A........................................... United States 12,327,000 $ 192,547,740
Schering-Plough Corp., 6.00%, cvt. pfd............................. United States 500,000 76,596,352
---------------
269,144,092
---------------
INDUSTRIALS 0.7%
Lehman Brothers Holdings into General Electric Co.,
7.50%, cvt. pfd ................................................. United States 11,500,000 417,450,000
---------------
INFORMATION TECHNOLOGY 0.6%
(c) Morgan Stanley into Texas Instruments Inc.,
7.50%, cvt. pfd., 144A .......................................... United States 11,250,000 332,156,250
---------------
Materials 0.7%
(c) The Goldman Sachs Group Inc. into Barrick Gold Corp.,
10.00%, cvt. pfd., 144A.......................................... United States 8,600,000 391,532,200
---------------
UTILITIES 0.2
CMS Energy Trust I, 7.75%, cvt. pfd................................ United States 1,711,000 84,514,845
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,407,520,325)........... 4,891,704,772
---------------
PREFERRED STOCKS 1.4%
FINANCIALS 1.4%
FHLMC, 8.375%, pfd................................................. United States 16,108,000 393,035,200
FNMA, 6.75%, pfd................................................... United States 3,000,000 67,770,000
FNMA, 7.625%, pfd., R.............................................. United States 2,399,400 56,865,780
FNMA, 8.25%, pfd................................................... United States 11,284,000 271,380,200
---------------
TOTAL PREFERRED STOCKS (COST $819,785,000) 789,051,180
---------------
PRINCIPAL AMOUNT (f)
-------------------
(D,E) SENIOR FLOATING RATE INTERESTS 3.3%
CONSUMER DISCRETIONARY 0.4%
Allison Transmission, Term Loan B, 5.74% - 5.75%, 8/07/14........ United States 164,687,500 145,160,338
Jarden Corp., Term Loan B-3, 7.698%, 1/24/12..................... United States 124,375,000 118,531,863
---------------
263,692,201
---------------
HEALTH CARE 0.1%
Bausch and Lomb Inc.,
(g) Delayed Draw Term Loan, 5.946%, 4/28/15................... United States 4,390,000 4,272,765
Parent Term Loan B, 5.946%, 4/28/15....................... United States 35,032,200 34,096,665
---------------
38,369,430
---------------
INDUSTRIALS 0.5%
Ceva Group PLC,
Dollar Pre-Refunded L/C Commitment, 5.696%, 8/01/12......... United States 13,684,211 12,362,042
EGL Term Loans, 5.818%, 8/01/12. ........................... United States 115,443,421 104,822,626
(h) Rexnord Holdings Inc., PIK Interest Facility, 10.058%, 2/20/13... 84,930,127 59,451,089
U.S. Investigations Services Inc., Term Loan B, 5.599%, 4/01/15.. United States 109,448,622 93,781,051
---------------
270,416,808
---------------
Semiannual Report | 71
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE
- -------------------------------------------------------------------------- -------------- ------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
(d,e) SENIOR FLOATING RATE INTERESTS (CONTINUED)
INFORMATION TECHNOLOGY 0.9%
First Data Corp.,
(i) Term Loan B-2, 5.349% - 5.446%, 9/24/14 United States 248,775,000 $ 224,462,966
Term Loan B-3, 5.349% - 5.446%, 9/24/14 United States 333,474,624 300,223,869
---------------
524,686,835
---------------
MATERIALS 0.2%
(h) Berry Plastics Holding Corp., Senior Unsecured Term Loan, PIK,
11.646%, 6/15/14 United States 140,792,671 99,258,833
---------------
TELECOMMUNICATION SERVICES 0.1%
(i) Intelsat Subsidiary Holding Co. Ltd., Bridge Term Loan,
5.25%, 1/15/15 Bermuda 85,000,000 74,834,000
---------------
UTILITIES 1.1%
Texas Competitive Electric Holdings Co. LLC,
Term Loan B-1, 5.25%, 10/10/14 United States 150,000,000 136,562,550
Term Loan B-2, 6.478% - 6.596%, 10/10/14 United States 249,375,000 227,696,333
Term Loan B-3, 6.478% - 6.596%, 10/10/14 United States 274,312,500 249,761,531
---------------
614,020,414
---------------
TOTAL SENIOR FLOATING RATE INTERESTS (COST $ 2,053,307,802) 1,885,278,521
---------------
CORPORATE BONDS 40.5%
CONSUMER DISCRETIONARY 13.6%
Beazer Homes USA Inc., senior note,
6.875%, 7/15/15 United States 59,000,000 42,480,000
8.125%, 6/15/16 United States 32,100,000 23,834,250
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 United States 490,000,000 478,975,000
CCH I Holdings LLC, senior note,
13.50%, 1/15/14 United States 375,000,000 238,125,000
9.92%, 4/01/14 . United States 117,380,000 56,342,400
11.75%, 5/15/14 United States 342,000,000 174,420,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 United States 755,000,000 528,500,000
CCH II LLC, senior note, 10.25%, 9/15/10 United States 180,000,000 164,700,000
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 United States 152,900,000 151,944,375
D.R. Horton Inc.,
5.625%, 1/15/16 United States 35,000,000 29,400,000
senior note, 6.50%, 4/15/16 United States 50,000,000 44,750,000
Dex Media Inc.,
B, 8.00%, 11/15/13 United States 20,000,000 14,700,000
senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter,
11/15/13 United States 60,000,000 43,500,000
zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 United States 220,000,000 159,500,000
Dish Network Corp., senior note, 7.125%, 2/01/16 United States 250,000,000 234,375,000
Dollar General Corp.,
(j) senior note, 10.625%, 7/15/15 United States 625,000,000 606,250,000
(h) senior sub. note, PIK, 11.875%, 7/15/17 United States 220,000,000 193,600,000
Ford Motor Co., 7.45%, 7/16/31 United States 600,000,000 399,000,000
72 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE
- -------------------------------------------------------------------------- -------------- ------------------- ---------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER DISCRETIONARY (CONTINUED)
Ford Motor Credit Co. LLC,
7.375%, 10/28/09 United States 760,000,000 $ 693,149,640
7.875%, 6/15/10 United States 550,000,000 480,016,350
7.375%, 2/01/11 United States 450,000,000 375,795,450
7.00%, 10/01/13 United States 100,000,000 78,101,400
senior note, 9.75%, 9/15/10 United States 145,000,000 129,306,795
senior note, 9.875%, 8/10/11 United States 75,000,000 66,986,700
senior note, 7.25%, 10/25/11 United States 155,000,000 127,517,725
General Motors Corp., senior deb., 8.375%, 7/15/33 United States 510,000,000 362,100,000
Hertz Corp., senior note, 8.875%, 1/01/14 United States 210,000,000 200,025,000
K. Hovnanian Enterprises Inc., senior note, 7.50%, 5/15/16 United States 45,600,000 31,920,000
KB Home, senior note,
6.375%, 8/15/11 United States 40,000,000 37,800,000
5.75%, 2/01/14 United States 75,000,000 64,875,000
(j) 6.25%, 6/15/15 United States 90,000,000 80,212,500
7.25%, 6/15/18 United States 70,500,000 63,450,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 United States 130,400,000 114,871,837
MGM MIRAGE, senior note,
6.75%, 4/01/13 United States 70,000,000 64,750,000
6.625%, 7/15/15 United States 120,000,000 105,000,000
7.625%, 1/15/17 United States 250,000,000 228,750,000
R.H. Donnelley Corp.,
6.875%, 1/15/13 United States 36,300,000 22,324,500
senior discount note, 6.875%, 1/15/13 United States 134,400,000 82,656,000
senior note, 6.875%, 1/15/13 United States 20,000,000 12,300,000
senior note, 8.875%, 1/15/16 United States 82,000,000 52,275,000
(c) senior note, 144A, 8.875%, 10/15/17 United States 360,000,000 226,800,000
Seagate Technology HDD Holdings, senior note, 6.80%, 10/01/16 United States 40,000,000 38,300,000
(c) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 United States 28,000,000 25,620,000
(c,h) Univision Communications Inc., senior note, 144A, PIK, 9.75%,
3/15/15 United States 357,000,000 217,770,000
Visant Holding Corp., senior note, 8.75%, 12/01/13 United States 50,000,000 47,000,000
XM Satellite Radio Inc., senior note, 9.75%, 5/01/14 United States 127,000,000 123,190,000
---------------
7,737,259,922
---------------
ENERGY 4.2%
Callon Petroleum Co., senior note, 9.75%, 12/08/10 United States 110,000,000 105,050,000
Chesapeake Energy Corp., senior note,
6.50%, 8/15/17 United States 138,000,000 133,860,000
6.25%, 1/15/18 United States 150,000,000 144,000,000
6.875%, 11/15/20 . United States 135,000,000 131,625,000
El Paso Corp., senior note, MTN, 7.75%, 1/15/32 United States 250,000,000 258,065,000
Mariner Energy Inc., senior note,
7.50%, 4/15/13 United States 45,000,000 43,425,000
8.00%, 5/15/17 . United States 25,000,000 24,000,000
Nalco Finance Holdings, senior note, zero cpn. to 8/01/09,
9.00% thereafter, 2/01/14 United States 380,000,000 343,900,000
Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 United States 110,000,000 108,350,000
Semiannual Report | 73
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE
- -------------------------------------------------------------------------- -------------- ------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
OPTI Canada Inc., senior note, 7.875%, 12/15/14 Canada 220,000,000 $ 216,150,000
Pioneer Natural Resources Co., senior bond, 6.875%, 5/01/18 United States 110,000,000 104,810,750
Plains Exploration & Production Co., senior note, 7.75%, 6/15/15 United States 75,000,000 75,187,500
Sabine Pass LNG LP, senior secured note,
7.25%, 11/30/13 United States 92,000,000 89,240,000
7.50%, 11/30/16 United States 390,000,000 378,300,000
Sesi LLC, senior note, 6.875%, 6/01/14 United States 110,000,000 105,600,000
(c) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 United States 100,000,000 93,250,000
--------------
2,354,813,250
--------------
FINANCIALS 5.4%
American Express Co., senior note, 7.00%, 3/19/18 United States 120,300,000 126,611,179
E*TRADE Financial Corp., senior note, 7.375%, 9/15/13 United States 220,000,000 157,300,000
GMAC LLC,
5.625%, 5/15/09 United States 225,000,000 205,121,700
7.75%, 1/19/10 United States 600,000,000 519,443,400
7.25%, 3/02/11 United States 175,000,000 138,002,200
6.875%, 9/15/11 United States 800,000,000 613,266,400
6.875%, 8/28/12 United States 300,400,000 228,564,747
6.75%, 12/01/14 United States 125,000,000 88,599,500
Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 United States 87,600,000 83,877,000
Host Marriott LP, senior note,
K, 7.125%, 11/01/13 United States 50,000,000 49,250,000
O, 6.375%, 3/15/15 United States 215,000,000 201,025,000
Q, 6.75%, 6/01/16 United States 160,000,000 150,400,000
iStar Financial Inc., senior note, 5.95%, 10/15/13 United States 13,800,000 10,085,012
Lehman Brothers Holdings Inc., senior note,
6.20%, 9/26/14 United States 326,000,000 322,047,250
7.00%, 9/27/27 United States 100,000,000 92,668,600
Residential Capital LLC, senior note, 6.50%, 6/01/12 United States 125,000,000 61,875,000
--------------
3,048,136,988
--------------
HEALTH CARE 4.2%
Community Health Systems Inc., senior sub. note, 8.875%,
7/15/15 United States 350,000,000 353,062,500
DaVita Inc.,
senior note, 6.625%, 3/15/13 United States 228,100,000 222,397,500
senior sub. note, 7.25%, 3/15/15 United States 80,000,000 78,400,000
HCA Inc.,
6.375%, 1/15/15 United States 125,000,000 106,406,250
senior note, 6.95%, 5/01/12 United States 10,988,000 10,383,660
senior note, 6.50%, 2/15/16 United States 150,000,000 127,125,000
senior secured note, 9.25%, 11/15/16 United States 107,000,000 111,280,000
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 United States 540,000,000 490,050,000
6.50%, 6/01/12 United States 265,000,000 235,187,500
7.375%, 2/01/13 United States 360,000,000 323,100,000
(d) FRN, 9.25%, 2/01/15 United States 250,000,000 235,000,000
74 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE
- --------------------------------------------------------------------------- -------------- ------------------- --------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
HEALTH CARE (CONTINUED)
(d,h) U.S. Oncology Holdings Inc., senior note, FRN, PIK, 10.759%,
3/15/12 United States 73,755,000 $ 57,160,125
Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn.
to 10/01/09, 11.25% thereafter, 10/01/15 United States 23,900,000 18,403,000
--------------
2,367,955,535
--------------
INDUSTRIALS 3.0%
Allied Waste North America Inc.,
senior note, 7.25%, 3/15/15 United States 75,000,000 75,281,250
senior note, B, 7.375%, 4/15/14 United States 200,000,000 197,750,000
senior note, B, 7.125%, 5/15/16 United States 150,000,000 150,375,000
senior secured note, 6.125%, 2/15/14 United States 207,000,000 200,790,000
senior secured note, 6.875%, 6/01/17 United States 170,000,000 167,450,000
Browning-Ferris Industries Inc., 7.40%, 9/15/35 United States 72,500,000 66,337,500
(c) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 United Kingdom 100,000,000 97,250,000
DRS Technologies Inc., senior note, 6.625%, 2/01/16 United States 34,600,000 33,994,500
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 United States 158,000,000 152,470,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 United States 125,000,000 123,750,000
L-3 Communications Corp., senior sub. note,
5.875%, 1/15/15 United States 38,000,000 36,575,000
6.375%, 10/15/15 United States 38,900,000 38,219,250
RBS Global & Rexnord Corp.,
senior note, 9.50%, 8/01/14 United States 80,000,000 75,200,000
senior sub. note, 11.75%, 8/01/16 United States 65,000,000 56,550,000
Terex Corp., senior sub. note, 8.00%, 11/15/17 United States 180,000,000 180,000,000
(c) U.S. Investigations Services Inc., senior note, 144A, 10.50%,
11/01/15 United States 50,000,000 41,000,000
--------------
1,692,992,500
--------------
INFORMATION TECHNOLOGY 3.8%
(c) Ceridian Corp., senior note, 144A, 11.25%, 11/15/15 United States 80,000,000 68,600,000
(c) First Data Corp., senior note, 144A, 9.875%, 9/24/15 United States 275,000,000 226,531,250
Fiserv Inc., senior note,
6.125%, 11/20/12 United States 100,000,000 103,196,000
6.80%, 11/20/17 United States 80,000,000 82,876,560
Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 Singapore 110,000,000 101,750,000
Freescale Semiconductor Inc., senior note,
8.875%, 12/15/14 United States 435,000,000 342,562,500
(j) 10.125%, 12/15/16 United States 630,000,000 428,400,000
Lucent Technologies Inc., 6.45%, 3/15/29 United States 180,000,000 129,600,000
NXP BV/NXP Funding LLC, senior note, 9.50%, 10/15/15 Netherlands 50,000,000 41,250,000
Qwest Capital Funding Inc., 7.25%, 2/15/11 United States 269,500,000 257,372,500
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 United States 150,000,000 130,875,000
8.125%, 3/01/16 United States 100,000,000 89,000,000
Semiannual Report | 75
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(F) VALUE
- ----------------------------------------------------------------------- -------------- ------------------- ---------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 United States 59,300,000 $ 60,189,500
senior sub. note, 10.25%, 8/15/15 United States 100,000,000 101,000,000
--------------
2,163,203,310
--------------
MATERIALS 1.1%
Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%,
4/01/15 United States 34,600,000 36,589,500
(c) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%,
2/15/16 United Kingdom 150,000,000 EUR 172,823,852
Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 United States 200,000,000 181,250,000
Novelis Inc., senior note, 7.25%, 2/15/15 Canada 190,000,000 169,100,000
Stone Container Corp., senior note, 8.00%, 3/15/17 United States 68,000,000 57,460,000
--------------
617,223,352
--------------
TELECOMMUNICATION SERVICES 0.2%
(c) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 Jamaica 140,000,000 117,250,000
--------------
UTILITIES 5.0%
Aquila Inc., senior note, 14.875%, 7/01/12 United States 72,650,000 89,904,375
Dynegy Holdings Inc., senior note,
6.875%, 4/01/11 United States 310,000,000 306,125,000
8.75%, 2/15/12 United States 260,000,000 268,450,000
8.375%, 5/01/16 United States 210,000,000 208,950,000
7.75%, 6/01/19 United States 90,000,000 84,600,000
Energy Future Holdings Corp., senior note,
(c) 144A, 10.875%, 11/01/17 United States 187,500,000 190,312,500
(c,h) 144A, PIK, 11.25%, 11/01/17 United States 243,700,000 242,481,500
P, 5.55%, 11/15/14 United States 346,300,000 272,207,384
(c) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 Netherlands 140,000,000 147,000,000
Reliant Energy Inc., senior note,
7.625%, 6/15/14 United States 175,000,000 174,562,500
7.875%, 6/15/17 United States 153,100,000 153,100,000
(c) Texas Competitive Electric Holdings Co. LLC, senior note,
144A, 10.25%, 11/01/15 United States 353,025,000 353,466,281
(h) 144A, PIK, 10.50%, 11/01/16 United States 150,000,000 147,750,000
B, 144A, 10.25%, 11/01/15 United States 186,900,000 187,133,625
--------------
2,826,043,165
--------------
TOTAL CORPORATE BONDS (COST $ 25,078,821,458) 22,924,878,022
--------------
CONVERTIBLE BONDS 0.7%
FINANCIALS 0.3%
(d) iStar Financial Inc., cvt., senior note,
FRN, 5.229%, 10/01/12 United States 250,000,000 177,125,000
--------------
INFORMATION TECHNOLOGY 0.4%
(c) Advanced Micro Devices Inc., cvt., senior note,
144A, 5.75%, 8/15/12 United States 325,000,000 230,750,000
--------------
TOTAL CONVERTIBLE BONDS (COST $558,661,166) 407,875,000
--------------
76 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT (f) VALUE
- ---------------------------------------------------------------- ------------- ------------------- ---------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES 4.4%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.7%
FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 United States 409,621,460 $ 406,695,089
FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 United States 282,739,248 286,090,865
FHLMC Gold 30 Year, 6.00%, 8/01/35 - 6/01/36 United States 241,845,098 248,342,113
---------------
941,128,067
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 2.3%
FNMA 30 Year, 5.50%, 2/01/35 - 3/01/38 United States 710,282,084 718,047,433
FNMA 30 Year, 6.00%, 5/01/37 - 8/01/37 United States 584,208,250 599,085,973
---------------
1,317,133,406
---------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.4%
GNMA I SF 30 YEAR, 5.00%, 4/14/33 - 5/15/34 United States 208,888,552 209,285,428
---------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $ 2,393,001,682) 2,467,546,901
---------------
TOTAL LONG TERM INVESTMENTS (COST $ 54,532,211,349) 53,895,684,834
---------------
SHARES
---------------
SHORT TERM INVESTMENTS 4.1%
MONEY MARKET FUND (COST $210,085,740) 0.4%
(k) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 2.50% United States 210,085,740 210,085,740
INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUND (COST $95,063,000) 0.1%
(l) Bank of New York Institutional Cash Reserve Fund, 2.92% United States 95,063,000 95,063,000
PRINCIPAL AMOUNT (f)
REPURCHASE AGREEMENT (COST $2,038,394,816) 3.6%
(m) Joint Repurchase Agreement, 2.022%, 4/01/08
(Maturity Value $2,038,509,322) 2,038,394,816 2,038,394,816
ABN AMRO BankNV, New York Branch
(Maturity Value $221,606,348)
Banc of America Securities LLC (Maturity Value $ 221,606,348)
Barclays Capital Inc. (Maturity Value $ 288,714,078)
BNP Paribas Securities Corp. (Maturity Value $ 221,606,348)
Deutsche Bank Securities Inc. (Maturity Value $ 221,606,348)
Goldman, Sachs & Co. (Maturity Value $ 221,606,348)
Lehman Brothers Inc. (Maturity Value $ 114,604,994)
Merrill Lynch Government Securities Inc.
(Maturity Value $ 221,606,348)
Morgan Stanley & Co. Incorporated (Maturity Value $ 83,945,814)
UBS Securities LLC (Maturity Value $ 221,606,348)
Collateralized by U.S. Government Agency Securities,
2.21% - 6.25%, 4/11/08 - 10/03/12; nU.S. Government Agency
(n) Discount Notes, 5/14/08 - 8/01/12; U.S. Treasury Bill, 7/24/08; and U.S.
Treasury Notes, 3.375% - 4.875%, 8/31/08 - 9/15/09
----------------
TOTAL INVESTMENTS (COST $56,875,754,905) 99.2% 56,239,228,390
OTHER ASSETS, LESS LIABILITIES 0.8% 461,417,822
----------------
NET ASSETS 100.0% $ 56,700,646,212
================
Semiannual Report | 77
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN INCOME FUND
See Currency and Selected Portfolio Abbreviations on page 94.
(a) See Note 10 regarding holdings of 5% voting securities.
(b) Non-income producing for the twelve months ended March 31, 2008.
(c) 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 Trustees. At March 31, 2008,
the aggregate value of these securities were $5,378,954,598, representing
9.49% of net assets.
(d) The coupon rate shown represents the rate at period end.
(e) See Note 1(g) regarding senior floating rate interests.
(f) The principal amount is stated in U.S. dollars unless otherwise indicated.
(g) See Note 9 regarding unfunded loan commitments.
(h) Income may be received in additional securities and/or cash.
(i) A portion or all of the security purchased on a when-issued or delayed
delivery basis. See Note 1(d).
(j) A portion or all of the security is on loan as of March 31, 2008. See Note
1(f).
(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) The rate shown is the annualized seven-day yield at period end.
(m) See Note 1(c) regarding joint repurchase agreement.
(n) The security is traded on a discount basis with no stated coupon rate.
78 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -----------------------------------------------------------------------------------
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
- ---------------------------- ---------------- ----------- ----------- ----------- ----------- -----------
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ................ $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
----------- ----------- ----------- ----------- ----------- -----------
Income from investment
operations (a):
Net investment
income (b) ............. 0.15 0.31 0.30 0.28 0.27 0.28
Net realized and
unrealized gains
(losses) .............. 0.19 (0.02) (0.09) (0.11) (0.04) (0.10)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations ............... 0.34 0.29 0.21 0.17 0.23 0.18
----------- ----------- ----------- ----------- ----------- -----------
Less distributions from
net investment income .... (0.16) (0.33) (0.31) (0.32) (0.36) (0.36)
----------- ----------- ----------- ----------- ----------- -----------
Redemption fees ............ -- (e) -- (e) -- (e) -- (e) -- (e)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of
period ................... $ 6.57 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81
=========== =========== =========== =========== =========== ===========
Total return (c) ........... 5.40% 4.63% 3.40% 2.67% 3.46% 2.66%
RATIOS TO AVERAGE NET
ASSETS (d)
Expenses ................... 0.72% (f) 0.72% (f) 0.72% (f) 0.72% (f) 0.70% (f) 0.70%
Net investment income ...... 4.66% 4.78% 4.64% 4.29% 4.09% 4.11%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ........... $ 5,350,470 $ 5,073,449 $ 5,291,117 $ 5,901,449 $ 6,420,381 $ 7,286,317
Portfolio turnover rate .... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------------
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------------ ---------------- --------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ........................ $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98
--------- --------- --------- --------- --------- ---------
Income from investment
operations (a):
Net investment income (b) ....... 0.13 0.27 0.26 0.25 0.24 0.25
Net realized and unrealized
gains (losses) ................ 0.19 (0.01) (0.08) (0.11) (0.05) (0.10)
--------- --------- --------- --------- --------- ---------
Total from investment operations ... 0.32 0.26 0.18 0.14 0.19 0.15
--------- --------- --------- --------- --------- ---------
Less distributions from net
investment income ................ (0.14) (0.30) (0.28) (0.29) (0.32) (0.33)
--------- --------- --------- --------- --------- ---------
Redemption fees .................... -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- --------- --------- --------- --------- ---------
Net asset value, end of period ..... $ 6.56 $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80
========= ========= ========= ========= ========= =========
Total return (c) ................... 5.13% 4.10% 2.87% 2.13% 2.92% 2.13%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ........................... 1.24% (f) 1.25% (f) 1.24% (f) 1.25% (f) 1.23% (f) 1.23%
Net investment income .............. 4.14% 4.25% 4.12% 3.76% 3.56% 3.58%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .. $ 305,606 $ 316,720 $ 388,807 $ 478,788 $ 568,276 $ 678,814
Portfolio turnover rate ............ 8.27% 12.34% 20.54% 29.14% 41.45% 66.96%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
80| The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------------------
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------- --------------- --------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ...................... $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97
--------- --------- --------- --------- --------- ---------
Income from investment
operations (a):
Net investment income (b) ... 0.13 0.27 0.26 0.25 0.24 0.25
Net realized and
unrealized gains (losses) ... 0.19 (0.01) (0.08) (0.11) (0.05) (0.11)
--------- --------- --------- --------- --------- ---------
Total from investment
operations ..................... 0.32 0.26 0.18 0.14 0.19 0.14
--------- --------- --------- --------- --------- ---------
Less distributions from net
investment income .............. (0.14) (0.30) (0.28) (0.29) (0.32) (0.33)
--------- --------- --------- --------- --------- ---------
Redemption fees ................ -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- --------- --------- --------- --------- ---------
Net asset value, end
of period ...................... $ 6.54 $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78
========= ========= ========= ========= ========= =========
Total return (c) ............... 5.15% 4.12% 2.88% 2.14% 2.91 2.00%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ....................... 1.24% (f) 1.25% (f) 1.23% (f) 1.25% (f) 1.23% (f) 1.23% (f)
Net investment income .......... 4.14% 4.25% 4.13% 3.76% 3.56 3.58%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ................. $ 524,267 $ 418,951 $ 424,462 $ 508,539 $ 597,451 $ 814,635
Portfolio turnover rate ........ 8.27% 12.34% 20.54% 29.14% 41.45 66.96%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 --------------------------------------------------------------------
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------- --------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ..................... $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99
-------- -------- -------- -------- -------- --------
Income from investment
operations (a):
Net investment income (b) .. 0.14 0.28 0.27 0.26 0.25 0.25
Net realized and
unrealized gains (losses) .. 0.18 (0.01) (0.08) (0.11) (0.05) (0.09)
-------- -------- -------- -------- -------- --------
Total from investment
operations .................... 0.32 0.27 0.19 0.15 0.20 0.16
-------- -------- -------- -------- -------- --------
Less distributions from net
investment income ............. (0.15) (0.31) (0.29) (0.30) (0.33) (0.34)
-------- -------- -------- -------- -------- --------
Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value,
end of period ................. $ 6.56 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81
======== ======== ======== ======== ======== ========
Total return (c)............... 5.05% 4.25% 3.01% 2.29% 3.08% 2.29%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ...................... 1.09% (f) 1.10% (f) 1.09% (f) 1.10% (f) 1.08% (f) 1.08%
Net investment income ......... 4.29% 4.40% 4.27% 3.91% 3.71% 3.73%
SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 84,631 $ 74,537 $ 71,104 $ 65,790 $ 59,431 $ 54,042
Portfolio turnover rate ....... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
82 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------- ---------------- --------- -------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ..................... $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01
--------- --------- -------- --------- --------- ---------
Income from investment
operations (a):
Net investment income (b) .. 0.16 0.31 0.31 0.29 0.28 0.29
Net realized and
unrealized gains (losses) .. 0.19 (0.01) (0.09) (0.10) (0.06) (0.10)
--------- --------- -------- --------- --------- ---------
Total from investment
operations .................... 0.35 0.30 0.22 0.19 0.22 0.19
--------- --------- -------- --------- --------- ---------
Less distributions from net
investment income ............. (0.17) (0.34) (0.32) (0.33) (0.36) (0.37)
--------- --------- -------- --------- --------- ---------
Redemption fees ............... -- (e) -- (e) -- (e) -- (e) -- (e) --
--------- --------- -------- --------- --------- ---------
Net asset value,
end of period ................. $ 6.59 $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83
========= ========= ======== ========= ========= =========
Total return (c) .............. 5.45% 4.75% 3.53% 2.95% 3.42% 2.79%
RATIOS TO AVERAGE
NET ASSETS (d)
Expenses ...................... 0.59% (f) 0.60% (f) 0.59% (f) 0.60% (f) 0.58% (f) 0.58%
Net investment income ......... 4.79% 4.90% 4.77% 4.41% 4.21% 4.23%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) .............. $ 552,705 $ 470,751 $387,239 $ 334,681 $ 340,279 $ 308,411
Portfolio turnover rate ....... 8.27% 12.34% 20.54% 29.14% 41.45% 66.96%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------- ---------------- ---------------
MORTGAGE-BACKED SECURITIES 96.5%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.5%
GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 110,652 $ 120,619
GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 277,486 305,076
GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 .................... 115,325 122,739
GNMA GP 30 Year, 10.25%, 5/15/20 ............................... 10,430 12,567
GNMA GP 30 Year, 11.00%, 1/15/10 - 12/15/10 .................... 291,898 318,664
GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 228,354 270,313
GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ..................... 35,523 41,705
GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 34,494 40,690
GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 13,048 14,882
GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 ..................... 23,502 26,023
GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 5,146 6,122
GNMA I SF 15 Year, 6.50%, 5/15/18 .............................. 1,653,199 1,726,292
GNMA I SF 15 Year, 7.00%, 10/15/09 ............................. 215,549 216,256
GNMA I SF 30 Year, 5.00%, 2/15/33 - 9/15/36 .................... 618,624,283 619,787,552
GNMA I SF 30 Year, 5.50%, 5/15/28 - 2/15/38 .................... 1,085,394,331 1,109,526,291
GNMA I SF 30 Year, 6.00%, 10/15/23 - 2/15/38 ................... 1,437,859,841 1,487,784,367
GNMA I SF 30 Year, 6.00%, 1/15/36 .............................. 69,075,696 71,430,777
GNMA I SF 30 Year, 6.00%, 3/15/38 .............................. 74,323,650 76,826,284
GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 .................... 431,926,568 450,846,641
GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 70,186 74,704
GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 .................... 193,296,282 206,840,267
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 596,045 639,472
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................... 52,116,673 56,153,234
GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 476,363 517,384
GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................... 40,505,442 44,266,747
GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................... 142,907 156,659
GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 8,864,833 9,774,836
GNMA I SF 30 Year, 9.00%, 12/15/08 - 7/15/23 ................... 11,032,570 12,101,548
GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................... 6,879,931 7,656,338
GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................... 8,746,228 10,495,767
GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ................. 6,565,465 7,898,396
GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 .................. 5,432,086 6,351,707
GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................... 1,416,286 1,680,781
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 6,747,909 8,103,263
GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 5,573,748 6,519,521
GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................... 6,105,492 7,216,411
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 63,102 68,542
GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 14,220 16,641
GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 39,611,572 38,300,737
GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................... 304,614,305 303,877,288
GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 261,881,405 261,398,443
GNMA II SF 30 Year, 5.50%, 6/20/34 ............................. 67,978,629 69,336,063
GNMA II SF 30 Year, 5.50%, 7/20/34 - 8/20/37 ................... 518,847,914 529,092,189
GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 205,866,146 209,976,994
GNMA II SF 30 Year, 5.50%, 1/20/35 ............................. 83,732,608 85,399,500
84 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------- ---------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED)
GNMA II SF 30 Year, 5.50%, 2/20/35 ................................... $ 103,361,646 $ 105,419,299
GNMA II SF 30 Year, 6.00%, 10/20/23 - 10/20/37 ....................... 535,282,495 553,134,217
GNMA II SF 30 Year, 6.00%, 1/20/38 ................................... 79,295,608 81,878,911
GNMA II SF 30 Year, 6.50%, 6/20/24 - 3/20/34 ......................... 72,266,817 75,593,858
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ......................... 38,504,241 41,101,123
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ........................ 6,953,136 7,469,922
GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ......................... 3,372,805 3,680,080
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ......................... 1,742,025 1,912,869
GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 ........................ 524,037 573,327
GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ......................... 315,472 352,102
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................ 664,433 796,469
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ........................ 1,947,932 2,330,292
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................ 306,337 367,508
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ........................ 146,907 175,344
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................ 322,481 386,322
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ...................... 225,866 269,169
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ....................... 230,644 276,529
---------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $6,471,919,097) ............... 6,579,054,633
---------------
SHARES
-----------
SHORT TERM INVESTMENT 3.1%
MONEY MARKET FUND (COST $210,084,798) 3.1%
(a) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.50% .......... 210,084,798 210,084,798
---------------
TOTAL INVESTMENTS (COST $6,682,003,895) 99.6% ................................. 6,789,139,431
OTHER ASSETS, LESS LIABILITIES 0.4% ........................................... 28,540,481
---------------
NET ASSETS 100.0% ............................................................. $ 6,817,679,912
===============
See Selected Portfolio Abbreviations on page 94.
(a) 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. | 85
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ----------------------------------------------------------------------------
CLASS A (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------- ---------------- --------------- ------------- -------------- -------------- -----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period .......... $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96
---------- ---------- --------- ---------- ---------- ----------
Income from
investment operations (a):
Net investment income (b) ..... 0.19 0.40 0.43 0.45 0.43 0.42
Net realized and
unrealized
gains (losses) ........... (0.71) 2.16 0.37 2.42 1.33 0.85
---------- ---------- --------- ---------- ---------- ----------
Total from
investment operations ......... (0.52) 2.56 0.80 2.87 1.76 1.27
---------- ---------- --------- ---------- ---------- ----------
Less distributions from:
Net investment
income .................... (0.20) (0.40) (0.41) (0.44) (0.40) (0.43)
Net
realized gains ............ (0.74) (0.47) (0.09) -- -- --
---------- ---------- --------- ---------- ---------- ----------
Total distributions ........... (0.94) (0.87) (0.50) (0.44) (0.40) (0.43)
---------- ---------- --------- ---------- ---------- ----------
Redemption fees -- (e) -- (e) -- (e) -- (e) -- (e) --
---------- ---------- --------- ---------- ---------- ----------
Net asset
value, end of period ......... $ 13.12 $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80
========== ========== ========== ========== ========== ==========
Total return (c) ............... (4.18)% 20.32% 6.69% 28.81% 20.40% 16.38%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ...................... 0.73% (f) 0.75% (f) 0.76% (f) 0.78% (f) 0.80% 0.83%
Net investment income ......... 2.61% 2.83% 3.54% 3.92% 4.49% 5.00%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ............... $2,003,088 $2,157,614 $1,926,732 $1,986,034 $1,450,832 $1,259,886
Portfolio
turnover rate ................ 5.76% 10.84% 7.97% 13.53% 16.13% 25.81%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
86 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------------
CLASS B (UNAUDITED) 2007 2006 2005 2004 2003
- ------------------------------------ ---------------- ------------- ------------- ------------- ------------ --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period ............... $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97
-------- -------- -------- -------- -------- -------
Income from
investment operations (a):
Net investment income (b) ........ 0.15 0.33 0.37 0.39 0.38 0.37
Net realized
and unrealized gains (losses) .. (0.70) 2.15 0.38 2.42 1.33 0.85
-------- -------- -------- -------- -------- -------
Total from investment
operations ........................ (0.55) 2.48 0.75 2.81 1.71 1.22
-------- -------- -------- -------- -------- -------
Less distributions from:
Net investment income ........... (0.16) (0.33) (0.35) (0.39) (0.36) (0.39)
Net realized gains .............. (0.74) (0.47) (0.09) -- -- --
-------- -------- -------- -------- -------- -------
Total distributions . .............. (0.90) (0.80) (0.44) (0.39) (0.36) (0.39)
-------- -------- -------- -------- -------- -------
Redemption fees .................... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- -------
Net asset value, end of period ..... $ 13.11 $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80
======== ======== ======== ======== ======== =======
Total return (c) .................... (4.37)% 19.66% 6.25% 28.11% 19.71% 15.88%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ........................... 1.23% (f) 1.26% (f) 1.26% (f) 1.28% (f) 1.30% 1.34%
Net investment income . ............ 2.11% 2.32% 3.04% 3.42% 3.99% 4.49%
SUPPLEMENTAL DATA
Net assets, end
of period (000's) ................. $112,595 $127,587 $133,824 $154,277 $127,105 $95,321
Portfolio turnover
rate .............................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------------
CLASS C (UNAUDITED) 2007 2006 2005 2004 2003
- ----------------------------------------- ---------------- ------------- ------------- ------------- ----------- ---------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period .................... $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95
-------- -------- -------- -------- -------- --------
Income from investment operations (a):
Net investment income (b) ............. 0.15 0.33 0.37 0.39 0.38 0.36
Net realized and
unrealized gains (losses) ........... (0.70) 2.15 0.37 2.42 1.33 0.86
-------- -------- -------- -------- -------- --------
Total from investment operations ........ (0.55) 2.48 0.74 2.81 1.71 1.22
-------- -------- -------- -------- -------- --------
Less distributions from:
Net investment income ................ (0.16) (0.33) (0.35) (0.39) (0.36) (0.39)
Net realized gains ................... (0.74) (0.47) (0.09) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions . ................... (0.90) (0.80) (0.44) (0.39) (0.36) (0.39)
-------- -------- -------- -------- -------- --------
Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) --
-------- -------- -------- -------- -------- --------
Net asset value, end of period .......... $ 13.08 $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78
======== ======== ======== ======== ======== ========
Total return (c)......................... (4.38)% 19.72% 6.19% 28.16% 19.76% 15.77%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ................................ 1.23% (f) 1.26% (f) 1.25% (f) 1.28% (f) 1.30% 1.34%
Net investment income . ................. 2.11% 2.32% 3.05% 3.42% 3.99% 4.49%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $391,180 $424,977 $391,509 $435,714 $283,747 $222,030
Portfolio turnover rate ................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
88 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 -------------------------------------------------------------
CLASS R (UNAUDITED) 2007 2006 2005 2004 2003
- ----------------------------------------- ---------------- ------------ ------------ ------------ ---------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period . .................. $ 14.54 $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96
------- ------- ------- ------- ------ ------
Income from investment operations (a):
Net investment income (b) ............. 0.16 0.35 0.39 0.43 0.39 0.37
Net realized and unrealized
gains (losses) ...................... (0.70) 2.16 0.36 2.40 1.34 0.86
------- ------- ------- ------- ------ ------
Total from investment operations ........ (0.54) 2.51 0.75 2.83 1.73 1.23
------- ------- ------- ------- ------ ------
Less distributions from:
Net investment income ................ (0.18) (0.36) (0.37) (0.41) (0.37) (0.40)
Net realized gains ................... (0.74) (0.47) (0.09) -- -- --
------- ------- ------- ------- ------ ------
Total distributions . ................... (0.92) (0.83) (0.46) (0.41) (0.37) (0.40)
------- ------- ------- ------- ------ ------
Redemption fees ......................... -- (e) -- (e) -- (e) -- (e) -- (e) --
------- ------- ------- ------- ------ ------
Net asset value, end of period .......... $ 13.08 $ 14.54 $ 12.86 $ 12.57 $10.15 $ 8.79
======= ======= ======= ======= ====== ======
Total return (c) ........................ (4.37)% 19.92% 6.29% 28.35% 20.02% 15.96%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses ................................ 1.08% (f) 1.11% (f) 1.11% (f) 1.13% (f) 1.15% 1.19%
Net investment income . ................. 2.26% 2.47% 3.19% 3.57% 4.14% 4.64%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....... $40,899 $41,845 $27,736 $14,649 $1,590 $1,142
Portfolio turnover rate ................. 5.76% 10.84% 7.97% 13.53% 16.13% 25.81%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(f) Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 89
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (continued)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 2008 ------------------------------------------------------------------
ADVISOR CLASS (UNAUDITED) 2007 2006 2005 2004 2003
- --------------------------------------- ---------------- ------------ ------------- ------------- ----------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period . ................ $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99
------- ------- -------- -------- ------- -------
Income from investment
operations (a):
Net investment income (b) ........... 0.20 0.42 0.45 0.48 0.44 0.42
Net realized and unrealized
gains (losses) .................... (0.71) 2.17 0.38 2.42 1.34 0.87
------- ------- -------- -------- ------- -------
Total from investment
operations ........................... (0.51) 2.59 0.83 2.90 1.78 1.29
------- ------- -------- -------- ------- -------
Less distributions from:
Net investment income .............. (0.21) (0.43) (0.43) (0.46) (0.42) (0.44)
Net realized gains ................. (0.74) (0.47) (0.09) -- -- --
------- ------- -------- -------- ------- -------
Total distributions . ................. (0.95) (0.90) (0.52) (0.46) (0.42) (0.44)
------- ------- -------- -------- ------- -------
Redemption fees ....................... -- (e) -- (e) -- (e) -- (e) -- (e) --
------- ------- -------- -------- ------- -------
Net asset value, end of period ........ $ 13.18 $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84
======= ======= ======== ======== ======= =======
Total return (c) ....................... (4.09)% 20.43% 6.88% 29.00% 20.48% 16.61%
RATIOS TO AVERAGE NET ASSETS (d)
Expenses .............................. 0.58% (f) 0.61% (f) 0.61% (f) 0.63% (f) 0.65% 0.69%
Net investment income . ............... 2.76% 2.97% 3.69% 4.07% 4.64% 5.14%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $78,120 $86,823 $103,041 $110,249 $51,586 $47,167
Portfolio turnover rate ............... 5.76% 10.84% 7.97% 13.53% 16.13% 25.81%
(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 repurchases 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) Ratios are annualized for periods less than one year.
(e) Amount rounds to less than $0.01 per share.
(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
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
------------------------ ------------- ----------- ---------------
LONG TERM INVESTMENTS 99.6%
COMMON STOCKS 95.7%
DIVERSIFIED TELECOMMUNICATION SERVICES 3.0%
AT&T Inc. ....................................... United States 1,200,000 $ 45,960,000
Verizon Communications Inc. ..................... United States 900,000 32,805,000
---------------
78,765,000
---------------
ELECTRIC UTILITIES 48.7%
American Electric Power Co. Inc. ................ United States 1,300,000 54,119,000
Cleco Corp. ..................................... United States 1,000,000 22,180,000
Duke Energy Corp. ............................... United States 3,800,000 67,830,000
Edison International ............................ United States 2,100,000 102,942,000
Entergy Corp. ................................... United States 1,750,000 190,890,000
Exelon Corp. .................................... United States 2,200,000 178,794,000
FirstEnergy Corp. ............................... United States 1,700,000 116,654,000
FPL Group Inc. .................................. United States 1,700,000 106,658,000
Hawaiian Electric Industries Inc. ............... United States 500,000 11,935,000
Northeast Utilities ............................. United States 1,000,000 24,540,000
Pepco Holdings Inc. ............................. United States 1,300,000 32,136,000
Pinnacle West Capital Corp. .................... United States 800,000 28,064,000
Portland General Electric Co. ................... United States 1,200,000 27,060,000
PPL Corp. ....................................... United States 2,200,000 101,024,000
Progress Energy Inc. ............................ United States 1,400,000 58,380,000
Sierra Pacific Resources ........................ United States 3,000,000 37,890,000
The Southern Co. ................................ United States 2,600,000 92,586,000
UIL Holdings Corp. .............................. United States 230,400 6,941,952
Westar Energy Inc. .............................. United States 807,900 18,395,883
---------------
1,279,019,835
---------------
GAS UTILITIES 3.1%
AGL Resources Inc. .............................. United States 800,000 27,456,000
Gaz de France. .................................. France 700,000 42,247,935
Southwest Gas Corp. ............................. United States 400,000 11,184,000
---------------
80,887,935
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.5%
Constellation Energy Group ...................... United States 600,000 52,962,000
(a,b) Iberdrola Renovables, 144A ...................... Spain 1,979,200 13,775,832
---------------
66,737,832
---------------
MULTI-UTILITIES 35.0%
Alliant Energy Corp. ............................ United States 1,400,000 49,014,000
Ameren Corp. .................................... United States 1,300,000 57,252,000
CenterPoint Energy Inc. ......................... United States 1,700,000 24,259,000
Consolidated Edison Inc. ........................ United States 800,000 31,760,000
Dominion Resources Inc. ......................... United States 2,300,000 93,932,000
DTE Energy Co. .................................. United States 600,000 23,334,000
Integrys Energy Group Inc. ...................... United States 800,000 37,312,000
National Grid PLC ............................... United Kingdom 4,987,755 68,495,538
PG&E Corp. ...................................... United States 2,400,000 88,368,000
Public Service Enterprise Group Inc. ............ United States 2,200,000 88,418,000
Semiannual Report | 91
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ----------------------- -------------- ------------ --------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
MULTI-UTILITIES (CONTINUED)
Puget Energy Inc. ..................................... United States 1,725,000 $ 44,625,750
RWE AG ................................................ Germany 300,000 37,045,858
SCANA Corp. ........................................... United States 1,200,000 43,896,000
Sempra Energy ......................................... United States 1,500,000 79,920,000
TECO Energy Inc. ...................................... United States 269,800 4,303,310
United Utilities PLC .................................. United Kingdom 2,777,892 38,065,375
Vectren Corp. ......................................... United States 600,000 16,098,000
Wisconsin Energy Corp. ................................ United States 1,000,000 43,990,000
Xcel Energy Inc. ...................................... United States 2,400,000 47,880,000
--------------
917,968,831
--------------
OIL, GAS & CONSUMABLE FUELS 3.4%
Spectra Energy Corp. .................................. United States 2,195,700 49,952,175
TransCanada Corp. ..................................... Canada 350,000 13,486,457
The Williams Cos. Inc. ................................ United States 800,000 26,384,000
--------------
89,822,632
--------------
TOTAL COMMON STOCKS (COST $ 1,624,825,890) ............ 2,513,202,065
--------------
CONVERTIBLE PREFERRED STOCKS 0.9%
ELECTRIC UTILITIES 0.5%
CMS Energy Trust I, 7.75%, cvt. pfd. .................. United States 270,050 13,339,120
--------------
MULTI-UTILITIES 0.4%
PNM Resources Inc., 6.75%, cvt. pfd. .................. United States 450,000 10,603,125
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $36,440,245) .................................... 23,942,245
--------------
PRINCIPAL AMOUNT (c)
CORPORATE BONDS 3.0%
ELECTRIC UTILITIES 1.4%
MidAmerican Energy Holdings Co., senior note, 8.48%,
9/15/28 ............................................... United States $ 25,000,000 30,053,700
Northeast Generation Co., senior secured note, B-1,
8.812%, 10/15/26 ...................................... United States 7,417,969 8,252,490
--------------
38,306,190
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.1%
Energy Future Holdings Corp., senior note,
P, 5.55%, 11/15/14 ................................. United States 32,300,000 25,389,253
R, 6.55%, 11/15/34 ................................. United States 5,700,000 4,053,390
--------------
29,442,643
--------------
MULTI-UTILITIES 0.5%
Aquila Inc., senior note,
9.95%, 2/01/11 ..................................... United States 6,000,000 6,349,260
8.27%, 11/15/21 .................................... United States 6,100,000 6,470,008
--------------
12,819,268
--------------
TOTAL CORPORATE BONDS (COST $ 76,687,361) ............. 80,568,101
--------------
TOTAL LONG TERM INVESTMENTS (COST $ 1,737,953,496) .... 2,617,712,411
--------------
92 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED) (continued)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- --------------------------- ------------- ------------ ---------------
SHORT TERM INVESTMENT (COST $6,731,962) 0.3%
MONEY MARKET FUND 0.3%
(d) Franklin Institutional Fiduciary Trust Money
Market Portfolio, 2.50% ........................... United States 6,731,962 $ 6,731,962
---------------
TOTAL INVESTMENTS (COST $1,744,685,458) 99.9% ..... 2,624,444,373
OTHER ASSETS, LESS LIABILITIES 0.1% ............... 1,437,600
---------------
NET ASSETS 100.0% ................................. $ 2,625,881,973
===============
(a) Non-income producing for the twelve months ended March 31, 2008.
(b) 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 Trustees. At March 31, 2008,
the value of this security was $13,775,832, representing 0.52% of net
assets.
(c) The principal amount is stated in U.S. dollars unless otherwise indicated.
(d) See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 93
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2008 (UNAUDITED)
CURRENCY ABBREVIATIONS SELECTED PORTFOLIO ABBREVIATIONS
EUR - Euro 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
94 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------- ---------------- ----------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................ $ 284,157,558 $ 1,125,153,369 $ 52,935,435,532
Cost - Non-controlled affiliated issuers (Note 10) ......... -- -- 1,691,838,817
Cost - Sweep Money Fund (Note 7) ........................... 15,195,393 2,357,461 210,085,740
Cost - Repurchase agreements ............................... -- -- 2,038,394,816
------------- --------------- ----------------
Total cost of investments .................................. $ 299,352,951 $ 1,127,510,830 $ 56,875,754,905
============= =============== ================
Value - Unaffiliated issuers ............................... $ 519,112,493 $ 2,632,703,136 $ 51,342,888,338
Value - Non-controlled affiliated issuers (Note 10) ........ -- -- 2,647,859,496
Value - Sweep Money Fund (Note 7) .......................... 15,195,393 2,357,461 210,085,740
Value - Repurchase agreements .............................. -- -- 2,038,394,816
------------- --------------- ----------------
Total value of investments (a) .............................. 534,307,886 2,635,060,597 56,239,228,390
Cash -- 94,986 11,048,590
Receivables:
Investment securities sold ................................. 5,050,354 -- 54,711,495
Capital shares sold ........................................ 397,538 3,032,762 106,304,081
Dividends and interest ..................................... 130,405 2,268,007 648,496,700
------------- --------------- ----------------
Total assets ............................................ 539,886,183 2,640,456,352 57,059,789,256
------------- --------------- ----------------
Liabilities:
Payables:
Investment securities purchased ............................ 4,953,090 -- 101,162,416
Capital shares redeemed .................................... 813,228 3,831,461 106,323,321
Affiliates ................................................. 571,433 2,659,501 47,505,331
Unaffiliated transfer agent fees ........................... 105,015 983,271 5,396,262
Payable upon return of securities loaned ..................... -- -- 95,063,000
Unrealized loss on unfunded loan commitments (Note 9) ........ -- -- 106,623
Accrued expenses and other liabilities ....................... 78,300 399,170 3,586,091
------------- --------------- ----------------
Total liabilities ....................................... 6,521,066 7,873,403 359,143,044
------------- --------------- ----------------
Net assets, at value .................................. $ 533,365,117 $ 2,632,582,949 $ 56,700,646,212
============= =============== ================
Net assets consist of:
Paid-in capital .............................................. $ 277,282,269 $ 1,166,416,110 $ 56,952,047,718
Undistributed net investment income (loss) ................... (1,104,421) 2,376,137 45,418,996
Net unrealized appreciation (depreciation) ................... 234,954,935 1,507,549,767 (636,697,655)
Accumulated net realized gain (loss) ......................... 22,232,334 (43,759,065) 339,877,153
------------- --------------- ----------------
Net assets, at value .................................. $ 533,365,117 $ 2,632,582,949 $ 56,700,646,212
============= =============== ================
(a) The Franklin Income Fund includes $91,068,414 of securities loaned.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 95
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF ASSETS AND LIABILITIES (continued)
March 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------- --------------- ----------------
CLASS A:
Net assets, at value ......................................... $ 458,190,481 $ 1,883,484,984 $ 32,595,956,279
------------- --------------- ----------------
Shares outstanding ........................................... 16,491,655 46,625,948 13,551,697,882
------------- --------------- ----------------
Net asset value per share(a) ................................. $ 27.78 $ 40.40 $ 2.41
------------- --------------- ----------------
Maximum offering price per share (net asset value per
share / 94.25%, 94.25% and 95.75%, respectively) ........... $ 29.47 $ 42.86 $ 2.52
------------- --------------- ----------------
CLASS B:
Net assets, at value ......................................... $ 13,743,446 $ 109,614,344 $ 3,179,240,958
------------- --------------- ----------------
Shares outstanding ........................................... 522,156 2,835,069 1,326,788,428
------------- --------------- ----------------
Net asset value and maximum offering price per share(a) ...... $ 26.32 $ 38.66 $ 2.40
------------- --------------- ----------------
CLASS B1:
Net assets, at value ......................................... -- -- $ 312,528,879
------------- --------------- ----------------
Shares outstanding ........................................... -- -- 129,835,401
------------- --------------- ----------------
Net asset value and maximum offering price per share(a) ...... -- -- $ 2.41
------------- --------------- ----------------
CLASS C:
Net assets, at value ......................................... $ 61,431,190 $ 290,534,717 $ 14,892,035,582
------------- --------------- ----------------
Shares outstanding ........................................... 2,358,990 7,579,372 6,149,796,630
------------- --------------- ----------------
Net asset value and maximum offering price per share(a) ...... $ 26.04 $ 38.33 $ 2.42
------------- --------------- ----------------
CLASS R:
Net assets, at value ......................................... -- $ 53,200,071 $ 290,022,515
------------- --------------- ----------------
Shares outstanding ........................................... -- 1,326,322 121,829,203
------------- --------------- ----------------
Net asset value and maximum offering price per share(a) ...... -- $ 40.11 $ 2.38
------------- --------------- ----------------
ADVISOR CLASS:
Net assets, at value ......................................... -- $ 295,748,833 $ 5,430,861,999
------------- --------------- ----------------
Shares outstanding ........................................... -- 7,314,366 2,268,983,566
------------- --------------- ----------------
Net asset value and maximum offering price per share(a) ...... -- $ 40.43 $ 2.39
------------- --------------- ----------------
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
96 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF ASSETS AND LIABILITIES (continued)
March 31, 2008 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- ---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................... $ 6,471,919,097 $ 1,737,953,496
Cost - Sweep Money Fund (Note 7) ..................... 210,084,798 6,731,962
--------------- ---------------
Total cost of investments ............................ $ 6,682,003,895 $ 1,744,685,458
=============== ===============
Value - Unaffiliated issuers ......................... $ 6,579,054,633 $ 2,617,712,411
Value - Sweep Money Fund (Note 7) .................... 210,084,798 6,731,962
--------------- ---------------
Total value of investments ........................... 6,789,139,431 2,624,444,373
Cash ................................................... 1,517,169 --
Receivables: ...........................................
Investment securities sold ........................... 22,119 --
Capital shares sold .................................. 14,579,133 1,905,608
Dividends and interest ............................... 29,912,704 7,004,481
--------------- ---------------
Total assets ...................................... 6,835,170,556 2,633,354,462
--------------- ---------------
Liabilities:
Payables:
Capital shares redeemed .............................. 11,467,844 4,789,344
Affiliates 4,822,002 2,172,031
Accrued expenses and other liabilities ................. 1,200,798 511,114
--------------- ---------------
Total liabilities ................................. 17,490,644 7,472,489
--------------- ---------------
Net assets, at value ............................ $ 6,817,679,912 $ 2,625,881,973
=============== ===============
Net assets consist of:
Paid-in capital ........................................ $ 7,126,263,050 $ 1,732,233,433
Undistributed net investment income (distributions in
excess of net investment income) ...................... (4,781,871) 2,681,117
Net unrealized appreciation (depreciation) ............. 107,135,536 879,758,232
Accumulated net realized gain (loss) ................... (410,936,803) 11,209,191
--------------- ---------------
Net assets, at value ............................ $ 6,817,679,912 $ 2,625,881,973
=============== ===============
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF ASSETS AND LIABILITIES (continued)
March 31, 2008 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- ---------------
CLASS A:
Net assets, at value ................................... $ 5,350,470,104 $ 2,003,087,511
=============== ===============
Shares outstanding ..................................... 814,367,650 152,675,109
=============== ===============
Net asset value per share (a) .......................... $ 6.57 $ 13.12
=============== ===============
Maximum offering price per share (net asset value per
share / 95.75%) ....................................... $ 6.86 $ 13.70
=============== ===============
CLASS B:
Net assets, at value ................................... $ 305,606,347 $ 112,595,364
=============== ===============
Shares outstanding ..................................... 46,588,652 8,589,546
=============== ===============
Net asset value and maximum offering price per share (a) $ 6.56 $ 13.11
=============== ===============
CLASS C:
Net assets, at value ................................... $ 524,267,144 $ 391,180,083
=============== ===============
Shares outstanding ..................................... 80,201,538 29,916,091
=============== ===============
Net asset value and maximum offering price per share (a) $ 6.54 $ 13.08
=============== ===============
CLASS R:
Net assets, at value ................................... $ 84,631,294 $ 40,898,921
=============== ===============
Shares outstanding ..................................... 12,892,253 3,126,031
=============== ===============
Net asset value and maximum offering price per share (a) $ 6.56 $ 13.08
=============== ===============
ADVISOR CLASS:
Net assets, at value ................................... $ 552,705,023 $ 78,120,094
=============== ===============
Shares outstanding ..................................... 83,923,158 5,926,304
=============== ===============
Net asset value and maximum offering price per share (a) $ 6.59 $ 13.18
=============== ===============
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
98 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF OPERATIONS
for the six months ended March 31, 2008 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
-------------- -------------- ----------------
Investment income:
Dividends:
Unaffiliated issuers ............................................... $ 1,802,456 $ 18,975,530 $ 548,831,595
Non-controlled affiliated issuers (Note 10) ........................ -- -- 78,163,216
Sweep Money Fund (Note 7) .......................................... 228,981 703,360 4,054,735
Interest ............................................................. 546 -- 1,427,162,820
Income from securities loaned ........................................ 42,842 -- 2,352,229
-------------- -------------- ----------------
Total investment income ....................................... 2,074,825 19,678,890 2,060,564,595
-------------- -------------- ----------------
Expenses:
Management fees (Note 3a) ............................................ 1,429,570 6,505,066 113,764,108
Distribution fees: (Note 3c)
Class A ............................................................ 605,633 2,476,073 25,760,405
Class B ............................................................ 78,162 627,643 17,359,693
Class B1 ........................................................... -- -- 1,146,362
Class C ............................................................ 333,827 1,600,757 50,463,713
Class R ............................................................ -- 137,348 732,580
Transfer agent fees (Note 3e) ........................................ 599,759 2,656,579 20,699,754
Custodian fees (Note 4) .............................................. 4,917 27,532 561,320
Reports to shareholders .............................................. 70,432 271,058 2,693,312
Registration and filing fees ......................................... 26,926 69,532 1,159,665
Professional fees..................................................... 17,608 44,161 351,737
Trustees' fees and expenses .......................................... 1,210 8,414 112,830
Other ................................................................ 11,206 34,194 632,091
-------------- -------------- ----------------
Total expenses ................................................ 3,179,250 14,458,357 235,437,570
Expense reductions (Note 4) ................................... (4) (72) (315,744)
-------------- -------------- ----------------
Net expenses ............................................... 3,179,246 14,458,285 235,121,826
-------------- -------------- ----------------
Net investment income (loss) ............................. (1,104,421) 5,220,605 1,825,442,769
-------------- -------------- ----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated Issuers ............................................ 37,814,600 66,034,334 279,792,053
Non-controlled affiliated issuers (Note 10) ..................... -- -- 130,903,235
Foreign currency transactions ...................................... (21,026) -- (305,316)
-------------- -------------- ----------------
Net realized gain (loss) ................................. 37,793,574 66,034,334 410,389,972
-------------- -------------- ----------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................ (112,695,471) (460,354,148) (6,852,784,940)
Translation of assets and liabilities denominated in foreign
currencies......................................................... -- -- (249,736)
-------------- -------------- ----------------
Net change in unrealized appreciation (depreciation)...... (112,695,471) (460,354,148) (6,853,034,676)
-------------- -------------- ----------------
Net realized and unrealized gain (loss).................................. (74,901,897) (394,319,814) (6,442,644,704)
-------------- -------------- ----------------
Net increase (decrease) in net assets resulting from operations ......... $ (76,006,318) $ (389,099,209) $ (4,617,201,935)
============== ============== ================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF OPERATIONS (continued)
for the six months ended March 31, 2008 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- --------------
Investment income:
Dividends:
Unaffiliated issuers ...................................................... $ -- $ 43,587,905
Sweep Money Fund (Note 7) ................................................. 4,053,494 690,844
Interest .................................................................... 172,700,100 3,420,851
------------- --------------
Total investment income ................................................ 176,753,594 47,699,600
------------- --------------
Expenses:
Management fees (Note 3a) ................................................... 14,669,547 6,456,575
Distribution fees: (Note 3c)
Class A ................................................................... 3,317,316 1,585,326
Class B ................................................................... 1,006,587 405,833
Class C ................................................................... 1,483,538 1,380,433
Class R ................................................................... 198,159 109,284
Transfer agent fees (Note 3e) ............................................... 4,173,925 1,534,943
Custodian fees (Note 4) ..................................................... 58,599 40,172
Reports to shareholders ..................................................... 292,893 178,739
Registration and filing fees ................................................ 77,470 55,355
Professional fees ........................................................... 43,585 39,977
Trustees' fees and expenses ................................................. 16,147 5,637
Other ....................................................................... 89,741 18,124
------------- --------------
Total expenses ......................................................... 25,427,507 11,810,398
Expense reductions (Note 4) ............................................ (32) (11,807)
------------- --------------
Net expenses ......................................................... 25,427,475 11,798,591
------------- --------------
Net investment income ............................................. 151,326,119 35,901,009
------------- --------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................................... (1,239,380) 50,711,004
Foreign currency transactions ............................................. -- 353,522
------------- --------------
Net realized gain (loss) .......................................... (1,239,380) 51,064,526
------------- --------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................... 186,828,421 (206,259,160)
Translation of assets and liabilities denominated in foreign currencies ... -- (1,385)
------------- --------------
Net change in unrealized appreciation (depreciation) .............. 186,828,421 (206,260,545)
------------- --------------
Net realized and unrealized gain (loss) ........................................ 185,589,041 (155,196,019)
------------- --------------
Net increase (decrease) in net assets resulting from operations ................ $ 336,915,160 $ (119,295,010)
============= ==============
100 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
------------------------------------- -------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2008 YEAR ENDED MARCH 31, 2008 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2007 (UNAUDITED) SEPTEMBER 30, 2007
---------------- ------------------ ---------------- ------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ........... $ (1,104,421) $ (2,484,227) $ 5,220,605 $ 7,383,921
Net realized gain (loss) from
investments and foreign currency
transactions ........................ 37,793,574 54,267,988 66,034,334 8,027,309
Net change in unrealized appreciation
(depreciation) on investments ....... (112,695,471) 88,303,700 (460,354,148) 436,966,418
-------------- -------------- --------------- ---------------
Net increase (decrease) in net assets
resulting from operations ........... (76,006,318) 140,087,461 (389,099,209) 452,377,648
-------------- -------------- --------------- ---------------
Distributions to shareholders from:
Net investment income:
Class A ............................. -- -- (6,070,929) (4,596,420)
Class R ............................. -- -- (37,603) (7,075)
Advisor Class ....................... -- -- (1,821,203) (1,417,769)
Net realized gains:
Class A ............................. (11,692,400) -- -- --
Class B ............................. (381,099) -- -- --
Class C ............................. (1,631,083) -- -- --
-------------- -------------- --------------- ---------------
Total distributions to shareholders ...... (13,704,582) -- (7,929,735) (6,021,264)
-------------- -------------- --------------- ---------------
Capital share transactions: (Note 2)
Class A ............................. (18,564,975) (159,197,616) 40,573,296 111,946,191
Class B ............................. (400,680) (5,690,695) (11,720,639) (5,331,820)
Class C ............................. 1,654,294 (13,236,699) (5,888,967) 18,194,989
Class R ............................. -- -- 7,948,327 8,345,533
Advisor Class ....................... -- -- (20,390,727) 34,972,750
-------------- -------------- --------------- ---------------
Total capital share transactions ......... (17,311,361) (178,125,010) 10,521,290 168,127,643
-------------- -------------- --------------- ---------------
Redemption fees .......................... 1,597 3,893 5,567 8,351
-------------- -------------- --------------- ---------------
Net increase (decrease) in
net assets ..................... (107,020,664) (38,033,656) (386,502,087) 614,492,378
Net assets:
Beginning of period ...................... 640,385,781 678,419,437 3,019,085,036 2,404,592,658
-------------- -------------- --------------- ---------------
End of period ............................ $ 533,365,117 $ 640,385,781 $ 2,632,582,949 $ 3,019,085,036
============== ============== =============== ===============
Undistributed net investment income (loss)
included in net assets:
End of period .......................... $ (1,104,421) $ -- $ 2,376,137 $ 5,085,267
============== ============== =============== ===============
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 101
Franklin Custodian Funds
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, 2008 YEAR ENDED MARCH 31, 2008 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2007 (UNAUDITED) SEPTEMBER 30, 2007
---------------- ------------------ ---------------- ------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 1,825,442,769 $ 2,885,381,172 $ 151,326,119 $ 301,720,105
Net realized gain (loss) from
investments and foreign currency
transactions .......................... 410,389,972 1,473,778,958 (1,239,380) (2,097,105)
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ..... (6,853,034,676) 2,517,987,350 186,828,421 (10,362,317)
---------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
resulting from operations ............. (4,617,201,935) 6,877,147,480 336,915,160 289,260,683
---------------- ---------------- --------------- ---------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (1,041,525,880) (1,687,207,815) (129,036,486) (264,748,989)
Class B ............................... (91,145,298) (173,469,301) (6,905,714) (16,375,700)
Class B1 .............................. (9,928,483) (21,754,097) -- --
Class C ............................... (431,708,619) (694,869,015) (10,040,978) (19,237,012)
Class R ............................... (8,368,676) (11,742,767) (1,804,703) (3,515,272)
Advisor Class ......................... (187,447,999) (280,791,335) (12,982,588) (22,110,321)
Net realized gains:
Class A ............................... (800,136,963) (420,454,280) -- --
Class B ............................... (82,518,087) (56,272,957) -- --
Class B1 .............................. (8,423,685) (6,844,643) -- --
Class C ............................... (363,091,783) (190,856,659) -- --
Class R ............................... (6,753,237) (2,957,517) -- --
Advisor Class ......................... (142,671,038) (62,928,530) -- --
---------------- ---------------- --------------- ---------------
Total distributions to shareholders ........ (3,173,719,748) (3,610,148,916) (160,770,469) (325,987,294)
---------------- ---------------- --------------- ---------------
Capital share transactions: (Note 2)
Class A ............................... 1,566,751,573 6,982,490,371 137,272,309 (188,222,491)
Class B ............................... (114,864,068) (237,976,392) (19,487,189) (69,804,640)
Class B1 .............................. (38,778,836) (91,477,067) -- --
Class C ............................... 712,367,957 3,211,521,930 93,428,987 (3,037,771)
Class R 41,477,703 89,672,613 7,951,143 3,854,638
Advisor Class ......................... 18,598,793 2,131,138,371 67,903,965 85,580,325
---------------- ---------------- --------------- ---------------
Total capital share transactions ........... 2,185,553,122 12,085,369,826 287,069,215 (171,629,939)
---------------- ---------------- --------------- ---------------
Redemption fees ............................ 119,652 231,167 58,438 35,787
---------------- ---------------- --------------- ---------------
Net increase (decrease) in
net assets ....................... (5,605,248,909) 15,352,599,557 463,272,344 (208,320,763)
Net assets:
Beginning of period ........................ 62,305,895,121 46,953,295,564 6,354,407,568 6,562,728,331
---------------- ---------------- --------------- ---------------
End of period .............................. $ 56,700,646,212 $ 62,305,895,121 $ 6,817,679,912 $ 6,354,407,568
================ ================ =============== ===============
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period ............................ $ 45,418,996 $ (9,898,818) $ (4,781,871) $ 4,662,479
================ ================ =============== ===============
102 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS (continued)
FRANKLIN UTILITIES FUND
-------------------------------------
SIX MONTHS ENDED
MARCH 31, 2008 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2007
---------------- ------------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................................... $ 35,901,009 $ 77,162,851
Net realized gain (loss) from investments and foreign currency transactions ... 51,064,526 122,861,109
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies .... (206,260,545) 304,461,563
--------------- ---------------
Net increase (decrease) in net assets resulting from operations .......... (119,295,010) 504,485,523
--------------- ---------------
Distributions to shareholders from:
Net investment income:
Class A .................................................................... (30,266,972) (60,045,625)
Class B .................................................................... (1,408,762) (3,213,589)
Class C .................................................................... (4,859,621) (10,097,373)
Class R .................................................................... (530,797) (958,675)
Advisor Class .............................................................. (1,417,207) (2,754,192)
Net realized gains:
Class A .................................................................... (107,496,310) (68,750,277)
Class B .................................................................... (6,261,449) (4,691,564)
Class C .................................................................... (21,133,601) (14,079,324)
Class R .................................................................... (2,175,474) (1,073,396)
Advisor Class .............................................................. (4,410,835) (2,861,866)
--------------- ---------------
Total distributions to shareholders ............................................. (179,961,028) (168,525,881)
--------------- ---------------
Capital share transactions: (Note 2)
Class A .................................................................... 71,176,151 (21,840,975)
Class B .................................................................... (2,249,310) (23,358,533)
Class C .................................................................... 10,561,626 (17,678,674)
Class R .................................................................... 3,585,368 10,467,103
Advisor Class .............................................................. 3,215,675 (27,554,529)
--------------- ---------------
Total capital share transactions ................................................ 86,289,510 (79,965,608)
--------------- ---------------
Redemption fees ................................................................. 3,040 10,165
--------------- ---------------
Net increase (decrease) in net assets .................................... (212,963,488) 256,004,199
Net assets:
Beginning of period ............................................................. 2,838,845,461 2,582,841,262
--------------- ---------------
End of period ................................................................... $ 2,625,881,973 $ 2,838,845,461
=============== ===============
Undistributed net investment income included in net assets:
End of period ................................................................... $ 2,681,117 $ 5,263,467
=============== ===============
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 103
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds (Trust) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as a diversified, open-end investment company,
consisting of five funds (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 Trust 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 Trusts' pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has 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
104 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. SECURITY VALUATION (continued)
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 Trust's Board of Trustees.
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 Trust's Board of Trustees.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. JOINT REPURCHASE AGREEMENT
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account with other funds managed by
the investment manager or an affiliate of the investment manager 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. A repurchase agreement is accounted for as a loan by the fund to the
Semiannual Report | 105
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. JOINT REPURCHASE AGREEMENT (continued)
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 joint repurchase agreement held by
the Funds at period end had been entered into on March 31, 2008. The joint
repurchase agreement is valued at cost.
d. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
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 at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement 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 the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower.
106 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
g. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
h. 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.
i. 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. Facility fees are recognized as income over the expected term of the
loan. 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 of America. 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 Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. 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.
Semiannual Report | 107
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
j. 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.
k. 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.
l. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Funds, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At March 31, 2008, there were an unlimited number of shares authorized (without
par value). 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, 2008
Shares sold ......................... 1,460,277 $ 45,012,936 4,939,148 $ 217,784,595
Shares issued in reinvestment
of distributions .................... 327,827 10,398,722 122,947 5,584,242
Shares redeemed ..................... (2,413,271) (73,976,633) (4,236,581) (182,795,541)
------------ ------------- ---------- -------------
Net increase (decrease) ............. (625,167) $ (18,564,975) 825,514 $ 40,573,296
============ ============= ========== =============
Year ended September 30, 2007
Shares sold ......................... 2,290,315 $ 65,251,876 7,116,058 $ 308,077,143
Shares issued on merger (Note 11) ... -- -- 3,043,797 137,823,135
Shares issued in reinvestment
of distributions .................. -- -- 101,412 4,209,599
Shares redeemed ..................... (8,062,352) (224,449,492) (7,830,995) (338,163,686)
------------ ------------- ---------- -------------
Net increase (decrease) ............. (5,772,037) $(159,197,616) 2,430,272 $ 111,946,191
============ ============= ========== =============
108 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. SHARES OF BENEFICIAL INTEREST (continued)
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------------ ---------- ------------
CLASS B SHARES:
Six Months ended March 31, 2008
Shares sold ........................ 33,917 $ 1,024,650 73,164 $ 3,066,992
Shares issued in reinvestment
of distributions ................. 11,458 345,223 -- --
Shares redeemed .................... (63,369) (1,770,553) (359,502) (14,787,631)
-------- ------------ ---------- ------------
Net increase (decrease) ............ (17,994) $ (400,680) (286,338) $(11,720,639)
======== ============ ========== ============
Year ended September 30, 2007
Shares sold ........................ 35,535 $ 983,338 126,580 $ 5,254,130
Shares issued on merger (Note 11)... -- -- 417,038 18,128,654
Shares redeemed .................... (251,520) (6,674,033) (685,999) (28,714,604)
-------- ------------ ---------- ------------
Net increase (decrease) ............ (215,985) $ (5,690,695) (142,381) $ (5,331,820)
======== ============ ========== ============
CLASS C SHARES:
Six Months ended March 31, 2008
Shares sold ........................ 244,033 $ 7,062,208 593,969 $ 24,857,211
Shares issued in reinvestment
of distributions ................. 49,809 1,484,796 -- --
Shares redeemed .................... (246,492) (6,892,710) (751,286) (30,746,178)
-------- ------------ ---------- ------------
Net increase (decrease) ............ 47,350 $ 1,654,294 (157,317) $ (5,888,967)
======== ============ ========== ============
Year ended September 30, 2007
Shares sold ........................ 309,370 $ 8,310,379 908,813 $ 37,554,639
Shares issued on merger (Note 11)... -- -- 716,864 30,896,850
Shares redeemed .................... (816,939) (21,547,078) (1,217,586) (50,256,500)
-------- ------------ ---------- ------------
Net increase (decrease) ............ (507,569) $(13,236,699) 408,091 $ 18,194,989
======== ============ ========== ============
CLASS R SHARES:
Six Months ended March 31, 2008
Shares sold ........................ 643,608 $ 28,782,159
Shares issued in reinvestment
of distributions ................. 831 37,532
Shares redeemed .................... (473,386) (20,871,364)
---------- ------------
Net increase (decrease) ............ 171,053 $ 7,948,327
========== ============
Year ended September 30, 2007
Shares sold ........................ 673,616 $ 29,574,369
Shares issued on merger (Note 11)... 111,203 4,998,560
Shares issued in reinvestment
of distributions ................. 170 7,025
Shares redeemed ................... (604,060) (26,234,421)
---------- ------------
Net increase (decrease) ............ 180,929 $ 8,345,533
========== ============
Semiannual Report | 109
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. SHARES OF BENEFICIAL INTEREST (continued)
FRANKLIN GROWTH FUND
-------------------------
SHARES AMOUNT
--------- ------------
ADVISOR CLASS SHARES:
Six Months ended March 31, 2008
Shares sold ........................................ 248,880 $ 10,985,188
Shares issued in reinvestment of distributions ..... 35,629 1,618,617
Shares redeemed .................................... (789,205) (32,994,532)
--------- ------------
Net increase (decrease) ............................ (504,696) $(20,390,727)
========= ============
Year ended September 30, 2007
Shares sold .................... 1,295,736 $ 56,171,819
Shares issued in reinvestment of distributions ..... 30,693 1,273,761
Shares redeemed .................................... (517,639) (22,472,830)
--------- ------------
Net increase (decrease) ............................ 808,790 $ 34,972,750
========= ============
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
--------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- ------------ ---------------
CLASS A SHARES:
Six Months ended March 31, 2008
Shares sold ................. 1,307,405,021 $ 3,356,355,172 76,371,257 $ 497,093,915
Shares issued in reinvestment
of distributions .......... 549,467,229 1,421,869,331 13,335,041 86,501,262
Shares redeemed ............. (1,261,406,414) (3,211,472,930) (68,770,392) (446,322,868)
-------------- --------------- ------------ ---------------
Net increase (decrease) ..... 595,465,836 $ 1,566,751,573 20,935,906 $ 137,272,309
============== =============== ============ ===============
Year ended September 30, 2007
Shares sold ................. 3,628,482,534 $ 9,782,378,082 89,570,006 $ 572,054,399
Shares issued in reinvestment
of distributions .......... 571,568,447 1,528,060,841 27,176,503 173,586,391
Shares redeemed ............. (1,607,011,948) (4,327,948,552) (146,074,856) (933,863,281)
-------------- --------------- ------------ ---------------
Net increase (decrease) ..... 2,593,039,033 $ 6,982,490,371 (29,328,347) $ (188,222,491)
============== =============== ============ ===============
CLASS B SHARES:
Six Months ended March 31, 2008
Shares sold ................. 16,983,803 $ 43,238,360 2,350,680 $ 15,315,884
Shares issued in reinvestment
of distributions .......... 47,166,569 121,967,553 751,851 4,869,357
Shares redeemed ............. (110,604,417) (280,069,981) (6,123,294) (39,672,430)
-------------- --------------- ------------ ---------------
Net increase (decrease) ..... (46,454,045) $ (114,864,068) (3,020,763) $ (19,487,189)
============== =============== ============ ===============
Year ended September 30, 2007
Shares sold ................. 26,283,586 $ 70,278,655 3,616,339 $ 23,020,104
Shares issued in reinvestment
of distributions .......... 57,504,745 152,858,061 1,811,967 11,565,622
Shares redeemed ............. (171,972,882) (461,113,108) (16,362,133) (104,390,366)
-------------- --------------- ------------ ---------------
Net increase (decrease) ..... (88,184,551) $ (237,976,392) (10,933,827) $ (69,804,640)
============== =============== ============ ===============
110 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. SHARES OF BENEFICIAL INTEREST (continued)
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
-------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- --------------- ----------- --------------
CLASS B1 SHARES:
Six Months ended March 31, 2008
Shares sold .................... 540,917 $ 1,372,916
Shares issued in reinvestment
of distributions ............. 4,624,249 12,012,780
Shares redeemed ................ (20,327,641) (52,164,532)
------------- ---------------
Net increase (decrease) ........ (15,162,475) $ (38,778,836)
============= ===============
Year ended September 30, 2007
Shares sold .................... 899,431 $ 2,413,953
Shares issued in reinvestment
of distributions ............. 6,473,282 17,262,644
Shares redeemed ................ (40,982,281) (111,153,664)
------------- ---------------
Net increase (decrease) ........ (33,609,568) $ (91,477,067)
============= ===============
CLASS C SHARES:
Six Months ended March 31, 2008
Shares sold .................... 608,430,975 $ 1,572,451,061 21,576,634 $ 140,092,145
Shares issued in reinvestment
of distributions ............. 215,565,586 562,151,212 1,112,246 7,184,513
Shares redeemed ................ (555,200,461) (1,422,234,316) (8,330,694) (53,847,671)
------------- --------------- ----------- --------------
Net increase (decrease) ........ 268,796,100 $ 712,367,957 14,358,186 $ 93,428,987
============= =============== =========== ==============
Year ended September 30, 2007
Shares sold .................... 1,644,870,588 $ 4,457,040,035 15,412,013 $ 97,975,806
Shares issued in reinvestment
of distributions ............. 222,758,383 598,767,427 2,096,225 13,330,712
Shares redeemed ................ (680,795,624) (1,844,285,532) (17,971,749) (114,344,289)
------------- --------------- ----------- --------------
Net increase (decrease) ........ 1,186,833,347 $ 3,211,521,930 (463,511) $ (3,037,771)
============= =============== =========== ==============
CLASS R SHARES:
Six Months ended March 31, 2008
Shares sold .................... 29,234,086 $ 74,590,735 3,941,843 $ 25,610,444
Shares issued in reinvestment
of distributions ............. 5,459,532 13,996,516 270,191 1,750,951
Shares redeemed ................ (18,603,678) (47,109,548) (2,985,416) (19,410,252)
------------- --------------- ----------- --------------
Net increase (decrease) ........ 16,089,940 $ 41,477,703 1,226,618 $ 7,951,143
============= =============== =========== ==============
Year ended September 30, 2007
Shares sold .................... 53,585,214 $ 142,909,679 4,541,307 $ 28,992,426
Shares issued in reinvestment
of distributions ............. 5,151,276 13,638,691 540,550 3,451,439
Shares redeemed ................ (25,079,906) (66,875,757) (4,480,075) (28,589,227)
------------- --------------- ----------- --------------
Net increase (decrease) ........ 33,656,584 $ 89,672,613 601,782 $ 3,854,638
============= =============== =========== ==============
Semiannual Report | 111
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. SHARES OF BENEFICIAL INTEREST (continued)
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
------------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ---------- -------------
ADVISOR CLASS SHARES:
Six Months ended March 31, 2008
Shares sold ................. 100,009,835 $ 263,950,995 10,240,394 $ 66,415,404
Shares issued in reinvestment
of distributions .......... 125,308,119 323,028,064 1,894,915 12,320,169
Shares redeemed ............. (229,823,600) (568,380,266) (1,663,520) (10,831,608)
------------ --------------- ---------- -------------
Net increase (decrease) ..... (4,505,646) $ 18,598,793 10,471,789 $ 67,903,965
============ =============== ========== =============
Year ended September 30, 2007
Shares sold ................. 769,652,986 $ 2,071,994,710 12,993,585 $ 83,208,714
Shares issued in reinvestment
of distributions .......... 125,446,877 334,084,120 3,251,900 20,807,294
Shares redeemed ............. (101,321,041) (274,940,459) (2,877,041) (18,435,683)
------------ --------------- ---------- -------------
Net increase (decrease) ..... 793,778,822 $ 2,131,138,371 13,368,444 $ 85,580,325
============ =============== ========== =============
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------- -------------
CLASS A SHARES:
Six Months ended March 31, 2008
Shares sold ................................................... 10,226,291 $ 147,385,057
Shares issued in reinvestment of distributions ................ 7,788,221 113,367,285
Shares redeemed ............................................... (13,336,049) (189,576,191)
----------- -------------
Net increase (decrease) ....................................... 4,678,463 $ 71,176,151
=========== =============
Year ended September 30, 2007
Shares sold ................................................... 16,452,979 $ 234,790,574
Shares issued in reinvestment of distributions ................ 7,413,021 102,543,663
Shares redeemed ............................................... (25,346,996) (359,175,212)
----------- -------------
Net increase (decrease) ....................................... (1,480,996) $ (21,840,975)
=========== =============
CLASS B SHARES:
Six Months ended March 31, 2008
Shares sold ................................................... 347,688 $ 5,023,143
Shares issued in reinvestment of distributions ................ 326,338 4,757,365
Shares redeemed ............................................... (844,659) (12,029,818)
----------- -------------
Net increase (decrease) ....................................... (170,633) $ (2,249,310)
=========== =============
Year ended September 30, 2007
Shares sold ................................................... 350,265 $ 4,952,986
Shares issued in reinvestment of distributions ................ 336,830 4,638,541
Shares redeemed ............................................... (2,318,432) (32,950,060)
----------- -------------
Net increase (decrease) ....................................... (1,631,337) $ (23,358,533)
=========== =============
CLASS C SHARES:
Six Months ended March 31, 2008
Shares sold .................... 2,841,918 $ 40,725,798
Shares issued in reinvestment of distributions ................ 1,053,316 15,319,573
Shares redeemed ............................................... (3,225,118) (45,483,745)
----------- -------------
Net increase (decrease) ....................................... 670,116 $ 10,561,626
=========== =============
112 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. SHARES OF BENEFICIAL INTEREST (continued)
<Table>
<Caption>
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------- --------------
CLASS C SHARES: (continued)
Year ended September 30, 2007
Shares sold ............................................. 4,165,031 $ 59,095,738
Shares issued in reinvestment of distributions .......... 944,817 12,995,547
Shares redeemed ......................................... (6,325,289) (89,769,959)
----------- --------------
Net increase (decrease).................................. (1,215,441) $ (17,678,674)
=========== ==============
CLASS R SHARES:
Six Months ended March 31, 2008
Shares sold ............................................. 918,548 $ 13,173,516
Shares issued in reinvestment of distributions........... 183,342 2,663,151
Shares redeemed ......................................... (854,028) (12,251,299)
----------- --------------
Net increase (decrease) ................................. 247,862 $ 3,585,368
=========== ==============
Year ended September 30, 2007
Shares sold ............................................. 1,804,789 $ 25,896,475
Shares issued in reinvestment of distributions .......... 144,680 2,003,404
Shares redeemed ......................................... (1,227,664) (17,432,776)
----------- --------------
Net increase (decrease) ................................. 721,805 $ 10,467,103
=========== ==============
ADVISOR CLASS SHARES:
Six Months ended March 31, 2008
Shares sold ............................................. 2,381,829 $ 35,219,994
Shares issued in reinvestment of distributions........... 327,428 4,784,952
Shares redeemed ......................................... (2,713,278) (36,789,271)
----------- --------------
Net increase (decrease) ................................. (4,021) $ 3,215,675
=========== ==============
Year ended September 30, 2007
Shares sold ............................................. 2,917,605 $ 42,109,228
Shares issued in reinvestment of distributions........... 339,912 4,731,472
Shares redeemed ......................................... (5,286,535) (74,395,229)
----------- --------------
Net increase (decrease) ................................. (2,029,018) $ (27,554,529)
=========== ==============
</Table>
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
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
<Table>
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
</Table>
Semiannual Report | 113
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. TRANSACTIONS WITH AFFILIATES (continued)
a. MANAGEMENT FEES
Effective January 1, 2008, the Franklin Income Fund and the Franklin Utilities
Fund pay an investment management fee to Advisers 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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% Over $50 billion, up to and including $65 billion
0.345% Over $65 billion, up to and including $80 billion
0.340% In excess of $80 billion
Effective January 1, 2008, the Franklin DynaTech Fund and the Franklin U.S.
Government Securities Fund pay an investment management fee to Advisers, and the
Franklin Growth Fund pays an investment management fee to Investment Advisory,
based on the month-end net assets of each of the funds as follows:
<Table>
<Caption>
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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
</Table>
114 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. TRANSACTIONS WITH AFFILIATES (continued)
a. MANAGEMENT FEES (continued)
Prior to January 1, 2008, the Funds, except Franklin Growth Fund, paid fees to
Advisers, and the Franklin Growth Fund paid fees 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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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 an agreement with Advisers and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
c. DISTRIBUTION FEES
The Trust's Board of Trustees 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.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
<Table>
<Caption>
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%
</Table>
Semiannual Report | 115
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. TRANSACTIONS WITH AFFILIATES (continued)
c. DISTRIBUTION FEES (continued)
<Table>
<Caption>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
DYNATECH GROWTH INCOME SECURITIES UTILITIES
FUND FUND FUND FUND FUND
-------- -------- -------- --------------- ---------
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%
</Table>
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:
<Table>
<Caption>
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
-------- --------- -----------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers....... $ 40,655 $ 495,154 $ 8,464,347
Contingent deferred sales charges retained.... $ 9,267 $ 54,621 $ 3,541,545
</Table>
<Table>
<Caption>
FRANKLIN U.S.
GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------- ---------
Sales charges retained net of commissions
paid to unaffiliated broker/dealers....... $ 490,655 $ 222,623
Contingent deferred sales charges retained.... $ 180,511 $ 54,008
</Table>
e. TRANSFER AGENT FEES
For the period ended March 31, 2008, the Funds paid transfer agent fees as noted
in the Statements of Operations of which the following amounts were retained by
Investor Services:
<Table>
<Caption>
FRANKLIN FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME
FUND FUND FUND
--------- ----------- -------------
Transfer agent fees....... $ 420,535 $ 1,693,220 $ 11,300,322
</Table>
<Table>
<Caption>
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------- ---------
Transfer agent fees....... $ 2,704,352 $ 971,478
</Table>
116 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
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, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At September 30, 2007, the capital loss carryforwards were as
follows:
<Table>
<Caption>
FRANKLIN
FRANKLIN U.S. GOVERNMENT
DYNATECH FRANKLIN SECURITIES
FUND GROWTH FUND FUND
----------- --------------- ---------------
Capital loss carryforwards expiring in:
2008................................ $ -- $ -- $ 21,105,846
2009................................ -- -- 46,256,951
2010................................ -- -- 11,768,551
2011................................ -- 70,730,110 33,556,845
2012................................ -- 39,052,129 129,102,166
2013................................ 1,854,237 -- 74,283,298
2014................................ -- -- 47,763,112
2015................................ -- -- 28,034,940
----------- ------------- -------------
$ 1,854,237 $ 109,782,239 $ 391,871,709
=========== ============= =============
</Table>
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, 2007, the Franklin U.S.
Government Securities Fund deferred realized capital losses of $17,825,714. At
September 30, 2007, the Franklin DynaTech Fund, Franklin Growth Fund and
Franklin Income Fund deferred realized currency losses of $2,421, $11,158, and
$73,767, respectively.
At March 31, 2008, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
<Table>
<Caption>
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------- --------------- -----------------
Cost of investments............................ $ 299,352,951 $ 1,130,127,816 $ 56,878,754,746
------------- --------------- -----------------
Unrealized appreciation........................ $ 241,245,345 $ 1,552,289,402 $ 4,237,575,363
Unrealized depreciation........................ (6,290,410) (47,356,621) (4,877,101,719)
------------- --------------- -----------------
Net unrealized appreciation (depreciation)..... $ 234,954,935 $ 1,504,932,781 $ (639,526,356)
============= =============== =================
</Table>
Semiannual Report | 117
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. INCOME TAXES (continued)
<Table>
<Caption>
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
--------------- ----------------
Cost of investments............................ $ 6,682,003,895 $ 1,741,182,648
--------------- ---------------
Unrealized appreciation........................ $ 113,647,631 $ 922,574,735
Unrealized depreciation........................ (6,512,095) (39,313,010)
--------------- ---------------
Net unrealized appreciation (depreciation)..... $ 107,135,536 $ 883,261,725
=============== ===============
</Table>
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, paydown
losses, payments-in-kind 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.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended March 31, 2008, were as follows:
<Table>
<Caption>
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------- ------------- ----------------
Purchases............. $ 129,005,183 $ 149,410,771 $ 14,770,611,578
Sales................. $ 176,448,117 $ 118,196,320 $ 12,798,447,901
</Table>
<Table>
<Caption>
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------- --------------
Purchases............. $ 820,055,484 $ 161,932,870
Sales................. $ 516,876,658 $ 194,319,180
</Table>
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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.
118 | Semiannual Report
FRANKLIN CUSTODIAN FUNDS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
8. CREDIT RISK
The Franklin Income Fund has 43.5% 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.
9. UNFUNDED LOAN COMMITMENTS
The Franklin Income Fund may enter into certain credit agreements, all or a
portion of which may be unfunded. The fund is obligated to fund these loan
commitments at the borrowers' discretion. Funded portions of credit agreements
are presented on the Statement of Investments.
At March 31, 2008, unfunded commitments were as follows:
<Table>
<Caption>
UNFUNDED
COMMITMENT
-----------
BORROWER
Bausch and Lomb Inc., ....... $ 4,390,000
</Table>
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
10. 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, 2008, were as shown below.
<Table>
<Caption>
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)
- ---------------------------- ----------- --------- ---------- ----------- ----------------- ------------ ------------
FRANKLIN INCOME FUND
NON-CONTROLLED AFFILIATES
Ameren Corp. ............... 12,500,000 -- -- 12,500,000 $ 550,500,000 $ 15,875,000 $ --
Canadian Oil Sands Trust ... 25,770,600 -- 770,600 25,000,000 1,010,814,496 28,733,216 29,211,741
PG&E Corp. ................. 12,000,000 7,000,000 -- 19,000,000 699,580,000 11,730,000 --
Pinnacle West Capital
Corp. .................. 5,500,000 -- -- 5,500,000 192,940,000 5,775,000 --
Public Service Enterprise
Group Inc. ............. 13,500,000 -- 3,500,000 20,000,000 (a) -- (b) 12,300,000 101,691,494
Puget Energy Inc. .......... 7,500,000 -- -- 7,500,000 194,025,000 3,750,000 --
--------------- ------------ ------------
TOTAL AFFILIATED SECURITIES (4.67%of Net Assets) ....................... $ 2,647,859,496 $ 78,163,216 $130,903,235
=============== ============ ============
</Table>
(a) Reflects a 2:1 stock split during the period.
(b) As of March 31, 2008, no longer an affiliate.
Semiannual Report | 119
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
11. MERGER
On June 15, 2007, the Franklin Growth Fund acquired the net assets of the
Franklin Blue Chip Fund pursuant to a plan of reorganization approved by the
Franklin Blue Chip Fund's shareholders. The merger was accomplished by a
tax-free exchange of 3,043,797 shares of Class A, 417,038 shares of Class B,
716,864 shares of Class C and 111,203 shares of Class R of the Franklin Growth
Fund (valued at $45.28, $43.47, $43.10 and $44.95, respectively) for the net
assets of the Franklin Blue Chip Fund which aggregated $191,847,199, and
includes $49,120,531 of unrealized appreciation (depreciation). The combined net
assets of the Franklin Growth Fund immediately after the merger were
$2,955,373,004.
12. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On October 17, 2006, the Board of Directors approved an Agreement and Plan of
Reorganization (Agreement) whereby the Franklin Custodian Funds, Inc. would be
reorganized and its domicile changed from a Maryland corporation to a Delaware
statutory trust. In connection with these changes, the Trust's name was also
changed to Franklin Custodian Funds, formerly known as the Franklin Custodian
Funds, Inc. On April 11, 2007, shareholders of the Franklin Custodian Funds
approved the agreement. The reorganization became effective on February 1, 2008.
13. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the U.S. 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 May 9, 2008, the SEC approved a final plan of distribution for the Company's
market timing settlement. Disbursements of settlement monies will be made
promptly to individuals who were shareholders of the designated funds during the
relevant period, 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.
120 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
13. REGULATORY AND LITIGATION MATTERS (continued)
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 Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
14. NEW ACCOUNTING PRONOUNCEMENTS
The Funds adopted 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), on March 31, 2008. FIN 48
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. The Funds have reviewed the
tax positions for each of the three open tax years as of September 30, 2007 and
have determined that the implementation of FIN 48 did not have a material impact
on the Funds' financial statements.
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 Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Funds are currently
evaluating the impact, if any, of applying the various provisions of SFAS 161.
Semiannual Report | 121
Franklin Custodian Funds
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 25, 2008, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, 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 materials, the independent Trustees 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 Trustees, 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
122 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (continued)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued)
Templeton fund complex, the adherence to fair value pricing procedures
established by the Board, and the accuracy of net asset value calculations. The
Board also noted the extent of benefits provided Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of funds without a sales charge, the ability
to reinvest Fund dividends into other funds and the right to combine holdings in
other funds to obtain a reduced sales charge. Favorable consideration was given
to management's 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 predesignated 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 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 reports furnished for the agreement
renewals. The Lipper reports prepared for each Fund showed the investment
performance of its Class A shares during 2007 and the previous 10-year period
ended December 31, 2007, 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 2007 to be in the highest quintile
of such performance universe, and on an annualized basis to be in the
second-highest quintile of such universe for the previous three- and 10-year
periods, and the second-lowest quintile for the previous five-year period. The
Board expressed satisfaction with such performance.
Semiannual Report | 123
Franklin Custodian Funds
SHAREHOLDER INFORMATION (continued)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued)
FRANKLIN GROWTH FUND - The 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 2007 ranked it in the upper half of its performance universe and
its total return on an annualized basis ranked it in the second-highest quintile
of such universe during each of the previous three- and five-year periods and
the middle quintile of such universe for the previous 10-year period. The Board
found such performance acceptable.
FRANKLIN INCOME FUND - This Fund's investment performance was shown in
comparison to a performance universe consisting of the Fund and all other retail
and institutional mixed-asset target allocation moderate funds as classified by
Lipper. The Fund's Lipper report showed its income return during 2007 and for
each of the previous 10 years was in the highest quintile of this performance
universe. The Fund's total return as shown in such report during 2007 was in the
middle quintile of it performance universe, while being in the highest quintile
of such universe on an annualized basis during each of the previous three-,
five- and 10-year periods. 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 2007 was in the second-highest quintile of such
universe and during each of the previous three-, five- and 10-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 second-highest quintile
of its performance universe during 2007, and on an annualized basis was in the
middle quintile of such universe for the previous three- and five-year periods,
and the second-highest quintile of such universe for the previous 10-year
period. 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 2007, as well as during each of the previous three-, five-
and 10-year periods on an annualized basis was in the highest quintile of such
performance universe. The Fund's total return during 2007 placed it in the
lowest quintile of its performance universe, and on an annualized basis placed
it in the lowest, second-lowest and middle quintile of its performance universe
during the previous three-, five- and 10-year periods, respectively. The Board
found such performance to be consistent with the Fund's investment emphasis on
regulated electric utilities and noted that its 2007 total return exceeded 16%
as shown in such Lipper report.
124 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (continued)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued)
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as constituting its appropriate Lipper
expense group. Prior to making such comparison, the Board relied upon a survey
showing that the scope of services covered under each Fund's investment
management agreement was similar to those provided by fund managers to other
mutual fund groups. In reviewing comparative costs, emphasis was given to each
Fund's contractual 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 Securities Fund, was less than five basis points above the median of
its Lipper expense group. The actual total expenses for all the Funds were in
the least expensive quintiles 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 Fund. 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,
Semiannual Report | 125
Franklin Custodian Funds
SHAREHOLDER INFORMATION (continued)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (continued)
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory
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 who sold fund Class B shares prior
to February 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 a fund. The Board also noted that
economies of scale are shared with each Fund and its shareholders through
management fee breakpoints so that as a fund grows in size, its effective
management fee rate declines. The fee structure under the investment management
agreement with each Fund provides 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
$7.25 billion of assets; and declining thereafter for each subsequent $2.5
billion of assets until reaching a breakpoint of 0.35% for assets in excess of
$50 billion, with such breakpoints continuing in the case of Franklin Income
Fund and Franklin Utilities Fund to 0.345% on assets in excess of $65 billion
and 0.34% on assets in excess of $80 billion. It was noted that new or reduced
breakpoints in the fee structure for all Funds at the $7.5 billion and $10
billion asset levels and in the fee structure for Franklin Income and Franklin
Utilities Funds at the $65 billion and $80 billion levels had been authorized by
the Trustees at a Board meeting held December 3, 2007, and had become effective
January 1, 2008. In discussing such overall fee structure, management noted that
the asset sizes of all Funds were beneath their last breakpoint levels and
stated its view that such fee structures reach 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.
126 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (continued)
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures (Policies) that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 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.
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 | 127
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN CUSTODIAN FUNDS
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.
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 John B. Wilson and he is
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 Trustees 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)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
F. Fergerson, Chief Financial Officer and Chief Accounting 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
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date May 27, 2008
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/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Executive Officer - Finance and Administration
Date May 27, 2008
By /S/LAURA F. FERGERSON
---------------------
Laura F. Fergerson
Chief Financial Officer and Chief Accounting Officer
Date May 27, 2008