-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DfATL4Yz37Fe/WomsNdhiRP7pEMZGhdiEBA+jcxEjyd+gpjslaN8E0gsHEuNRmKv SA9sCASp7CX3XbpR6PHvDQ== 0000038721-04-000015.txt : 20040604 0000038721-04-000015.hdr.sgml : 20040604 20040604151019 ACCESSION NUMBER: 0000038721-04-000015 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040604 EFFECTIVENESS DATE: 20040604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN CUSTODIAN FUNDS INC CENTRAL INDEX KEY: 0000038721 IRS NUMBER: 132573775 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00537 FILM NUMBER: 04849706 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 N-CSRS 1 fcfsemincsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-00537 --------- FRANKLIN CUSTODIAN FUNDS, INC. ------------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (650) 312-2000 -------------- Date of fiscal year end: 9/30 ---- Date of reporting period: 3/31/04 ------- ITEM 1. REPORTS TO STOCKHOLDERS. MARCH 31, 2004 - -------------------------------------------------------------------------------- [PHOTO OMITTED] - -------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER - -------------------------------------------------------------------------------- FRANKLIN CUSTODIAN FUNDS, INC. - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] FRANKLIN[R] TEMPLETON[R] INVESTMENTS FRANKLIN o Templeton o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a leader in tax-free investing and a driving force in fixed income investing around the globe. They also bring expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. TRUE DIVERSIFICATION Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [PHOTO OMITTED] Not part of the semiannual report Contents SHAREHOLDER LETTER ...................... 1 SEMIANNUAL REPORT Franklin DynaTech Fund .................. 3 Franklin Growth Fund .................... 8 Franklin Income Fund .................... 14 Franklin U.S. Government Securities Fund ......................... 23 Franklin Utilities Fund ................. 30 Financial Highlights and Statements of Investments ............... 36 Financial Statements .................... 85 Notes to Financial Statements .................... 94 Proxy Voting Policies and Procedures ..........................110 - -------------------------------------------------------------------------------- Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing most of its assets in companies emphasizing scientific or technological development or that are in fast-growing industries. This semiannual report for Franklin DynaTech Fund covers the period ended March 31, 2004. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +12.79% cumulative total return for the six months ended March 31, 2004. For the period under review, the Fund outperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of 10.33%, and underperformed the broad Standard & Poor's 500 Composite Index (S&P 500), which posted a 14.07% total return.1 You can find the Fund's performance data in the Performance Summary beginning on page 6. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2004, the U.S. economy strengthened. Driven by massive fiscal and economic stimuli injected into the economy last year, the second half of 2003 experienced the fastest advance in output of U.S.-made goods and services in nearly 20 years. Annualized gross domestic product (GDP) growth surged 8.2% in the third quarter of 2003 and rose 4.1% in the fourth quarter. This trend continued in early 2004, and first quarter GDP increased an estimated annualized 4.2%. During the period, the U.S. dollar's value declined against most major currencies, particularly versus the euro, which benefited many U.S. companies and contributed to corporate profit improvements. Business and consumer sentiment rose in early 2004. Consumer spending, however, was constrained by slow wage growth and heavy indebtedness. 1. Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international non-financial 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. 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 39. Semiannual Report | 3 Productivity gains, shifting global manufacturing operations, raw materials shortages, and rising fuel prices, as well as U.S. political uncertainty in an election year, appeared to inhibit U.S. job growth. Unemployment generally decreased during most of the reporting period, and monthly unemployment figures for November 2003 through March 2004 were below 6%. Inflation remained in check during the period, despite higher energy prices stemming from rising global demand, less supply from oil-producing countries and a lower U.S. dollar, which made imported oil more expensive in U.S.-dollar terms. During the period, domestic equity markets continued a rally that began in March 2003. Data showing robust economic growth and improving corporate balance sheets seemed to increase investor confidence in the stock markets. The S&P 500 rose 14.07% for the six months under review, while the technology-heavy NASDAQ Composite Index gained 11.94%.2 As economic data improved, some interest rates increased in fall 2003. However, lack of job creation sparked concerns about the strength of economic recovery, which contributed to an interest rate decline by the end of the period. For example, the 10-year Treasury note yielded 3.96% on September 30, 2003, reached a peak of 4.49% on November 10, 2003, then declined to 3.86% by March 31, 2004. INVESTMENT STRATEGY Normally, we seek to invest in companies and established industry leaders we believe have a competitive advantage due to their state-of-the-art products and technologies. We use a conservative, bottom-up research process to find what we consider undervalued companies. MANAGER'S DISCUSSION During the six-month reporting period, International Game Technology, Genentech and eBay contributed the largest positive performances to the Fund. Shares of International Game Technology, a dominant manufacturer of casino gaming products and systems, rose 60.6% in value during the reporting period. Genentech, a major biotechnology company, also performed well. Share value went up 32.0% during the period. Lastly, leading Internet auction provider eBay appreciated 29.2%. PORTFOLIO BREAKDOWN Franklin DynaTech Fund 3/31/04 - --------------------------------------------------- % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------------------------------------------- Semiconductors 12.4% - --------------------------------------------------- Packaged Software 8.0% - --------------------------------------------------- Biotechnology 8.0% - --------------------------------------------------- Medical Specialties 6.5% - --------------------------------------------------- Electronic Production Equipment 4.9% - --------------------------------------------------- Telecommunications Equipment 4.7% - --------------------------------------------------- Major Pharmaceuticals 4.5% - --------------------------------------------------- Other Consumer Services 4.4% - --------------------------------------------------- Casinos & Gaming 4.2% - --------------------------------------------------- Data Processing Services 4.2% - --------------------------------------------------- Electronic Equipment & Instruments 3.7% - --------------------------------------------------- Managed Health Care 2.9% - --------------------------------------------------- Information Technology Services 2.8% - --------------------------------------------------- Computer Communications 2.4% - --------------------------------------------------- Recreational Products 2.3% - --------------------------------------------------- Computer Processing Hardware 2.0% - --------------------------------------------------- Other 16.8% - --------------------------------------------------- Short-Term Investments & Other Net Assets 5.3% - --------------------------------------------------- 2. Source: Standard & Poor's Micropal. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value-weighted and includes over 3,000 companies. 4 | Semiannual Report On a less positive note, Microsoft, Amgen and Veritas Software detracted the most from Fund performance during the period under review. Microsoft, a large Fund position, declined 9.8% in value during the reporting period. Amgen, the world's largest biotechnology company and another substantial Fund holding, fell 9.9% during the period. Veritas, a data storage software products provider, was down 24.4% for the time we held it. We sold this stock by period-end. Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO] /S/Rupert H. Johnson Rupert H. Johnson, Jr. [PHOTO] /S/Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/04 - ----------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ----------------------------------------------- Intel Corp. 4.2% SEMICONDUCTORS - ----------------------------------------------- Genentech Inc. 4.1% BIOTECHNOLOGY - ----------------------------------------------- eBay Inc. 3.9% OTHER CONSUMER SERVICES - ----------------------------------------------- International Game Technology 3.6% CASINOS & GAMING - ----------------------------------------------- Microsoft Corp. 3.2% PACKAGED SOFTWARE - ----------------------------------------------- UnitedHealth Group Inc. 2.9% MANAGED HEALTH CARE - ----------------------------------------------- International Business Machines Corp. 2.5% INFORMATION TECHNOLOGY SERVICES - ----------------------------------------------- Amgen Inc. 2.3% BIOTECHNOLOGY - ----------------------------------------------- Electronic Arts Inc. 2.3% RECREATIONAL PRODUCTS - ----------------------------------------------- Cisco Systems Inc. 2.3% COMPUTER COMMUNICATIONS - ----------------------------------------------- THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2004, 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 ADVISOR 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 | 5 Performance Summary as of 3/31/04 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - ------------------------------------------------------------------------------- CLASS A CHANGE 3/31/04 9/30/03 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.58 $22.75 $20.17 - ------------------------------------------------------------------------------- CLASS B CHANGE 3/31/04 9/30/03 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.45 $22.24 $19.79 - ------------------------------------------------------------------------------- CLASS C CHANGE 3/31/04 9/30/03 - ------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.42 $22.01 $19.59 - ------------------------------------------------------------------------------- PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.79% +38.30% +9.98% +193.15% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +6.31% +30.37% +0.72% +10.70% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,631 $13,037 $10,366 $27,634 - ----------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION (2/1/00) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.32% +37.28% +9.03% -18.36% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.32% +33.28% +1.97% -5.20% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,832 $13,328 $10,603 $8,005 - ----------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/16/96) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.35% +37.30% +6.01% +83.85% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +11.35% +36.30% +1.17% +8.41% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,135 $13,630 $10,601 $18,385 - -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 6 | Past performance does not guarantee future results. | Semiannual Report Performance Summary (CONTINUED) ENDNOTES INVESTING IN A NON-DIVERSIFIED FUND CONCENTRATING IN THE SCIENTIFIC AND TECHNOLOGY SECTOR INVOLVES SPECIAL RISKS, INCLUDING THOSE RELATED TO FLUCTUATIONS IN THE PRICE OF TECHNOLOGY STOCKS AND INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS AFFECTING THE SECTOR. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. Semiannual Report | Past performance does not guarantee future results. | 7 Franklin Growth Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing mainly in equity securities of companies that are leaders in their industries and that the manager believes are suitable for a buy-and-hold strategy. We are pleased to bring you Franklin Growth Fund's semiannual report covering the period ended March 31, 2004. PERFORMANCE OVERVIEW During the six months under review, Franklin Growth Fund - Class A posted a +12.95% cumulative total return. The Fund underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 14.07% for the same period.1 You can find the Fund's performance data in the Performance Summary beginning on page 11. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2004, the U.S. economy strengthened. Driven by massive fiscal and economic stimuli injected into the economy last year, the second half of 2003 experienced the fastest advance in output of U.S.-made goods and services in nearly 20 years. Annualized gross domestic product (GDP) growth surged 8.2% in the third quarter of 2003 and rose 4.1% in the fourth quarter. This trend continued in early 2004, and first quarter GDP increased an estimated annualized 4.2%. During the period, the U.S. dollar's value declined against most major currencies, particularly versus the euro, which benefited many U.S. companies and contributed to corporate profit improvements. Business and consumer sentiment rose in early 2004. Consumer spending, however, was constrained by slow wage growth and heavy indebtedness. Productivity gains, shifting global manufacturing operations, raw materials shortages, and rising fuel prices, as well as U.S. political uncertainty in an election year, appeared to inhibit U.S. job growth. Unemployment generally decreased during most of the reporting period, and monthly unemployment figures for November 2003 through March 2004 were below 6%. Inflation remained in check during the period, despite higher energy prices stemming from rising global demand, less supply from oil-producing countries and a lower U.S. dollar, which made imported oil more expensive in U.S.-dollar terms. PORTFOLIO BREAKDOWN Franklin Growth Fund 3/31/04 - --------------------------------------------------- % OF TOTAL SECTOR/INDUSTRY NET ASSETS - --------------------------------------------------- Health Technology 21.6% - --------------------------------------------------- Producer Manufacturing 19.6% - --------------------------------------------------- Electronic Technology 18.4% - --------------------------------------------------- Technology Services 10.4% - --------------------------------------------------- Consumer Services 5.1% - --------------------------------------------------- Transportation 5.1% - --------------------------------------------------- Consumer Non-Durables 3.0% - --------------------------------------------------- Commercial Services 2.9% - --------------------------------------------------- Distribution Services 2.7% - --------------------------------------------------- Consumer Durables 2.6% - --------------------------------------------------- Energy Minerals 2.1% - --------------------------------------------------- Industrial Services 1.9% - --------------------------------------------------- Process Industries 1.7% - --------------------------------------------------- Retail Trade 1.2% - --------------------------------------------------- Health Services 0.8% - --------------------------------------------------- Finance 0.3% - --------------------------------------------------- Short-Term Investments & Other Net Assets 0.6% - --------------------------------------------------- 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 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 49. 8 | Semiannual Report During the period, domestic equity markets continued a rally that began in March 2003. Data showing robust economic growth and improving corporate balance sheets seemed to increase investor confidence in the stock markets. The S&P 500 rose 14.07% for the six months under review, while the technology-heavy NASDAQ Composite Index gained 11.94%.2 As economic data improved, some interest rates increased in fall 2003. However, lack of job creation sparked concerns about the strength of economic recovery, which contributed to an interest rate decline by the end of the period. For example, the 10-year Treasury note yielded 3.96% on September 30, 2003, reached a peak of 4.49% on November 10, 2003, then declined to 3.86% by March 31, 2004. INVESTMENT STRATEGY We seek to invest in companies that have strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in mature businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION We remained nearly fully invested in stocks during the entire reporting period. Of the Fund's 111 companies held on March 31, 2004, 53 exceeded the S&P 500's return -- 24 of which more than doubled it -- while 58 did not rise as much as the benchmark index, 17 of which posted negative returns. Holdings that produced the highest returns for the Fund for the period were British Airways (up 80.72%), Zimmer Holdings (+66.19%) and Waters Corp. (+48.89%). The lowest returns came from Delta Airlines (down 40.45%), Continental Airlines (-24.43%) and Southwest Airlines (-19.72%). We held a wide array of airline stocks, consistent with our strategy. We saw an opportunity to diversify the Fund's portfolio into many airline-related companies that we believed offered attractive stock valuations in light of our assessment of their long-term prospects. Despite the Fund's double-digit returns, our health technology holdings -- including Amgen, Wyeth and Merck -- also fared relatively poorly as a group, negatively impacting performance. We believed the Fund's recently depressed pharmaceutical and biotechnology company holdings could improve over the longer term. TOP 10 HOLDINGS Franklin Growth Fund 3/31/04 - -------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------- Pfizer Inc. 3.4% HEALTH TECHNOLOGY - -------------------------------------------------- 3M Co. 3.1% PRODUCER MANUFACTURING - -------------------------------------------------- Amgen Inc. 2.6% HEALTH TECHNOLOGY - -------------------------------------------------- Genentech Inc. 2.5% HEALTH TECHNOLOGY - -------------------------------------------------- International Business Machines Corp. 2.5% TECHNOLOGY SERVICES - -------------------------------------------------- Johnson & Johnson Inc. 2.4% HEALTH TECHNOLOGY - -------------------------------------------------- Northrop Grumman Corp. 2.4% ELECTRONIC TECHNOLOGY - -------------------------------------------------- General Dynamics Corp. 2.1% ELECTRONIC TECHNOLOGY - -------------------------------------------------- Tyco International Ltd. 2.1% PRODUCER MANUFACTURING - -------------------------------------------------- Boeing Co. 2.0% ELECTRONIC TECHNOLOGY - -------------------------------------------------- 2. Source: Standard &Poor's Micropal. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value-weighted and includes over 3,000 companies. Semiannual Report | 9 Overall, the Fund was well diversified on March 31, 2004, with heaviest weightings in health technology, producer manufacturing, electronic technology and technology services sectors. Of the Fund's top 10 holdings, all were from these areas. We welcome your comments and questions and look forward to serving your investment needs in the years to come. [PHOTO] /S/V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2004, 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 ADVISOR 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. 10 | Semiannual Report Performance Summary as of 3/31/04 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------------------------- CLASS A CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +3.45 $30.32 $26.87 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.0289 - -------------------------------------------------------------------------------------------------- CLASS B CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.30 $29.62 $26.32 - -------------------------------------------------------------------------------------------------- CLASS C CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.28 $29.37 $26.09 - -------------------------------------------------------------------------------------------------- CLASS R CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.43 $30.17 $26.74 - -------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.42 $30.33 $26.91 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.0945 - --------------------------------------------------------------------------------------------------
Semiannual Report | Past performance does not guarantee future results. | 11 Performance Summary (CONTINUED) PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.95% +35.67% +1.89% +163.29% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +6.45% +27.90% -0.80% +9.52% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,645 $12,790 $9,604 $24,818 - ----------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.54% +34.64% -1.86% +1.32% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.54% +30.64% -0.75% +0.07% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,854 $13,064 $9,632 $10,038 - ----------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.53% +34.66% -1.83% +99.18% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +11.53% +33.66% -0.37% +8.03% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,153 $13,366 $9,817 $19,918 - ----------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +12.83% +35.35% -4.29% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +11.83% +34.35% -1.94% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,183 $13,435 $9,571 - ----------------------------------------------------------------------------------------------------- ADVISOR CLASS4 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.07% +35.96% +3.15% +170.03% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +13.07% +35.96% +0.62% +10.44% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,307 $13,596 $10,315 $27,003 - -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 12 | Past performance does not guarantee future results. | Semiannual Report Performance Summary (CONTINUED) ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S INVESTMENTS IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +51.89% and +5.94%. Semiannual Report | Past performance does not guarantee future results. | 13 Franklin Income Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. This semiannual report for Franklin Income Fund covers the period ended March 31, 2004. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +11.29% cumulative total return for the six months ended March 31, 2004. The Fund underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 14.07%. However, the Fund outperformed its other benchmark, the Lehman Brothers U.S. Aggregate Index, which returned 2.98%; and the Lipper Income Funds Objective Average, which returned 8.40%.1 You can find the Fund's performance data in the Performance Summary beginning on page 19. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2004, the U.S. economy strengthened. Driven by massive fiscal and economic stimuli injected into the economy last year, the second half of 2003 experienced the fastest advance in output of U.S.-made goods and services in nearly 20 years. Annualized gross domestic product (GDP) growth surged 8.2% in the third quarter of 2003 and rose 4.1% in the fourth quarter. This trend continued in early 2004, and first quarter GDP increased an estimated annualized 4.2%. During the period, the U.S. dollar's value declined against most major currencies, particularly versus the euro, which benefited many U.S. PORTFOLIO BREAKDOWN Franklin Income Fund 3/31/04 - --------------------------------------------------- % OF TOTAL NET ASSETS - --------------------------------------------------- Corporate Straight Bonds 26.0% - --------------------------------------------------- Utilities Stocks 20.1% - --------------------------------------------------- Energy Mineral Stocks 5.9% - --------------------------------------------------- Zero Coupon & Step-Up Bonds 4.3% - --------------------------------------------------- Health Technology Stocks 4.2% - --------------------------------------------------- Corporate Convertible Bonds 3.6% - --------------------------------------------------- U.S. Government & Agency Securities 3.6% - --------------------------------------------------- Finance Stocks 3.0% - --------------------------------------------------- Communication Stocks 2.9% - --------------------------------------------------- Consumer Durables Stocks 2.8% - --------------------------------------------------- Real Estate Stocks 2.2% - --------------------------------------------------- Municipal Securities 1.9% - --------------------------------------------------- Consumer Non-Durables Stocks 1.1% - --------------------------------------------------- Electronic Technology Stocks 1.0% - --------------------------------------------------- Technology Services Stocks 0.9% - --------------------------------------------------- Other Stocks 3.0% - --------------------------------------------------- Short-Term Investment & Other Net Assets 13.5% - --------------------------------------------------- 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 Lehman Brothers 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 non-convertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Income Funds Objective Average is an equally weighted average calculation of performance figures for all funds within the Lipper Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Income Funds are defined as funds that seek a high level of current income through investing in income-producing stocks, bonds, and money market instruments. For the six-month period ended 3/31/04 there were 173 funds in this category. Lipper calculations do not include sales charges. The Fund's performance relative to the average might have differed if such charges had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvested 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 59. 14 | Semiannual Report companies and contributed to corporate profit improvements. Business and consumer sentiment rose in early 2004. Consumer spending, however, was constrained by slow wage growth and heavy indebtedness. Productivity gains, shifting global manufacturing operations, raw materials shortages, and rising fuel prices, as well as U.S. political uncertainty in an election year, appeared to inhibit U.S. job growth. Unemployment generally decreased during most of the reporting period, and monthly unemployment figures for November 2003 through March 2004 were below 6%. Inflation remained in check during the period, despite higher energy prices stemming from rising global demand, less supply from oil-producing countries and a lower U.S. dollar, which made imported oil more expensive in U.S.-dollar terms. During the period, domestic equity markets continued a rally that began in March 2003. Data showing robust economic growth and improving corporate balance sheets seemed to increase investor confidence in the stock markets. The S&P 500 rose 14.07% for the six months under review, while the technology-heavy NASDAQ Composite Index gained 11.94%.2 As economic data improved, some interest rates increased in fall 2003. However, lack of job creation sparked concerns about the strength of economic recovery, which contributed to an interest rate decline by the end of the period. For example, the 10-year Treasury note yielded 3.96% on September 30, 2003, reached a peak of 4.49% on November 10, 2003, then declined to 3.86% by March 31, 2004. 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. TOP 5 BOND HOLDINGS Franklin Income Fund 3/31/04 - -------------------------------------------- % OF TOTAL NET ASSETS - -------------------------------------------- Charter Communications Holdings LLC 3.0% - -------------------------------------------- GNMA 2.0% - -------------------------------------------- Calpine Corp. 2.0% - -------------------------------------------- Dynegy Holdings Inc. 2.0% - -------------------------------------------- Tenet Healthcare Corp. 1.4% - -------------------------------------------- TOP 5 STOCK HOLDINGS Franklin Income Fund 3/31/04 - ------------------------------------------ COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------ Ford Motor Co. Capital Trust II 1.7% CONSUMER DURABLES - ------------------------------------------ Ameren Corp. 1.5% UTILITIES - ------------------------------------------ Dominion Resources Inc. 1.5% UTILITIES - ------------------------------------------ FirstEnergy Corp. 1.4% UTILITIES - ------------------------------------------ Merck & Co. Inc. 1.3% HEALTH TECHNOLOGY - ------------------------------------------ 2. Source: Standard & Poor's Micropal. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value-weighted and includes over 3,000 companies. Semiannual Report | 15 DIVIDEND DISTRIBUTIONS Franklin Income Fund 10/1/03-3/31/04
- ---------------------------------------------------------------------------------------- DIVIDEND PER SHARE ------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1* CLASS C CLASS R ADVISOR CLASS - ---------------------------------------------------------------------------------------- October 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents - ---------------------------------------------------------------------------------------- November 1.30 cents 1.14 cents 1.20 cents 1.20 cents 1.24 cents 1.33 cents - ---------------------------------------------------------------------------------------- December 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents - ---------------------------------------------------------------------------------------- January 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents - ---------------------------------------------------------------------------------------- February 1.30 cents 1.13 cents 1.20 cents 1.21 cents 1.24 cents 1.33 cents - ---------------------------------------------------------------------------------------- March 1.30 cents 1.13 cents 1.19 cents 1.19 cents 1.23 cents 1.33 cents - ---------------------------------------------------------------------------------------- TOTAL 7.80 CENTS 6.80 CENTS 7.19 CENTS 7.22 CENTS 7.43 CENTS 7.98 CENTS - ----------------------------------------------------------------------------------------
*On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. MANAGER'S DISCUSSION During the six months under review, the Fund benefited from the electric utility sector's strong performance. The sector rose 12.9% during the reporting period as measured by the S&P 500 Electric Utilities Index.3 Several trends appeared to favorably impact the sector such as attractive dividend yields and valuation relative to the overall market, more investors attracted to qualified dividend income due to 2003's tax relief act, and greater perceived earnings and cash flow stability as electric utility companies focused on core utility operations instead of failed growth initiatives. Large holdings that contributed to Fund performance during the period include FirstEnergy, DTE Energy and Duke Energy. Major oil and gas companies also benefited the Fund as crude oil and domestic natural gas prices remained relatively high. Higher prices enabled these companies to increase earnings, cash flow and dividends per share. The gradual global economic recovery helped increase demand as the natural decline of existing oil and gas fields and potential actions by the Organization of the Petroleum Exporting Countries (OPEC) influenced global supply. Significant Fund holdings that performed well during the period include BP and ChevronTexaco. 3. Source: Standard & Poor's Micropal. The S&P 500 Electric Utilities Index is a market capitalization-weighted index that includes electric utility stocks in the S&P 500. 16 | Semiannual Report Strong growth domestically and abroad helped drive share prices of cyclical companies, or those that are sensitive to economic changes. Holdings that enhanced Fund performance include commodity chemical producer DOW Chemical, and pulp and paper manufacturer Georgia-Pacific. Increased demand for these companies' products enabled them to deliver higher earnings per share during the period. Within fixed income markets, high yield corporate bonds outperformed 10-year U.S. Treasury securities and investment-grade corporate bonds. Stronger economic conditions along with improving fundamental business conditions enabled the difference, or spread, between Treasury and high yield bond yields to narrow. Already low interest rates and a tighter yield spread contributed to higher corporate bond prices. Some corporate bond holdings that benefited Fund performance include Allegheny Energy Supply, General Motors and Lyondell Chemical. On the other hand, health care investments, particularly stocks of major pharmaceutical companies, underperformed the overall market. Investors focused on several issues clouding the sector's fundamental outlook and were generally more interested in companies they perceived could derive greater benefit from a global economic upturn. Concerns, such as patent expirations, the upcoming presidential election, potential changes to existing legislation and Medicare reimbursement levels, the need to discover new products to drive future revenue and profits, and increased drug importation to offset rising health care costs, weighed on the sector. Holdings that negatively impacted Fund performance include Tenet Healthcare bonds, Goldman Sachs Group into Wyeth convertible preferred stock, and Bristol-Myers Squibb common stock. Semiannual Report | 17 Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO] /S/Charles B. Johnson Charles B. Johnson /S/Edward Perks Edward Perks, CFA Portfolio Management Team Franklin Income Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2004, 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 ADVISOR 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. 18 | Semiannual Report Performance Summary as of 3/31/04 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION - --------------------------------------------------------------------------------------------------- CLASS A CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.41 $2.25 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0780 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0900 - --------------------------------------------------------------------------------------------------- CLASS B CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.40 $2.24 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0680 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0800 - --------------------------------------------------------------------------------------------------- CLASS B 1 CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.41 $2.25 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0719 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0839 - --------------------------------------------------------------------------------------------------- CLASS C CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.42 $2.26 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0722 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0842 - ---------------------------------------------------------------------------------------------------
Semiannual Report | Past performance does not guarantee future results. | 19 Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED) - --------------------------------------------------------------------------------------------------- CLASS R CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.39 $2.23 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0743 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0863 - --------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.16 $2.40 $2.24 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.0798 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0120 - --------------------------------------------------------------------------------------------------- TOTAL $0.0918 - ---------------------------------------------------------------------------------------------------
20 | Past performance does not guarantee future results. | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------ CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.29% +31.16% +63.15% +147.49% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +6.56% +25.46% +9.33% +9.02% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,656 $12,546 $15,621 $23,713 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 6.19% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.34% - ------------------------------------------------------------------------------------------------------ CLASS B 6-MONTH 1-YEAR INCEPTION (11/1/01) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +10.86% +30.24% +32.42% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +6.86% +26.24% +11.29% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,686 $12,624 $12,942 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 5.65% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 3.69% - ------------------------------------------------------------------------------------------------------ CLASS B 1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.00% +30.50% +59.15% +54.62% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +7.00% +26.50% +9.46% +8.53% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,700 $12,650 $15,715 $15,362 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 5.93% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.04% - ------------------------------------------------------------------------------------------------------ CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +10.96% +30.34% +58.82% +124.01% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +9.96% +29.34% +9.69% +9.46% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $10,996 $12,934 $15,882 $22,401 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 5.90% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.04% - ------------------------------------------------------------------------------------------------------ CLASS R 6-MONTH 1-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.21% +31.03% +29.78% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +10.21% +30.03% +12.34% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,021 $13,003 $12,978 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 6.18% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.18% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +11.42% +31.51% +63.95% +151.76% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +11.42% +31.51% +10.39% +9.67% - ------------------------------------------------------------------------------------------------------ Value of $10,000 Investment 3 $11,142 $13,151 $16,395 $25,176 - ------------------------------------------------------------------------------------------------------ Distribution Rate 4 6.65% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 5 4.68% - ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | Past performance does not guarantee future results. | 21 Performance Summary (CONTINUED) ENDNOTES THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. INTEREST RATE MOVEMENTS MAY AFFECT THE FUND'S SHARE PRICE AND YIELD. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 7/1/94, these shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 3/31/04. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/04. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +90.36% and +9.29%. 22 | Past performance does not guarantee future results. | Semiannual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income from a portfolio of U.S. government securities. - -------------------------------------------------------------------------------- Since 1983, the Fund has invested primarily in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal.1 Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin U.S. Government Securities Fund's semiannual report covering the period ended March 31, 2004. PERFORMANCE OVERVIEW During the six months under review, Franklin U.S. Government Securities Fund - Class A posted a +2.12% cumulative total return. The Fund outperformed the Lehman Brothers Intermediate U.S. Government Bond Index, which returned 2.00%, and the Lipper GNMA Funds Objective Average, which returned 1.93% for the same FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS Risk vs. Return (4/99-3/04) [CHART OMITTED] plot points: For the 5-year period ended 3/31/04 Risk Return - -------------------------------------------------------------------- Franklin US Govt - Class A 2.81% 6.00% - -------------------------------------------------------------------- PR Tsy 1 year 0.93% 4.14% - -------------------------------------------------------------------- PR Tsy 10 Year 7.82% 7.34% - -------------------------------------------------------------------- PR Tsy 30 Year 11.85% 8.04% - -------------------------------------------------------------------- *Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. The Fund's Class A shares' average annual total return does not include the current, maximum 4.25% initial sales charge. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. 1. U.S. government securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 74. Semiannual Report | 23 period. 2 The Fund's return reflects the effect of management fees and expenses, while indexes do not have such costs. You can find the Fund's performance data in the Performance Summary beginning on page 27. ECONOMIC AND MARKET OVERVIEW For the six months under review, the U.S. economy grew at an estimated 4.1% annualized rate. During the period, a dominant topic was the confusing employment picture. Although the unemployment rate declined over the period to 5.7%, until the March report, job creation was slower than many market participants expected.3 This important factor contributed to the interest rate decline over the period. However, lower interest rates meant reduced mortgage rates, which enabled many homeowners to refinance their mortgages. Refinancing activity helped keep home sales and prices near three-year highs. This, combined with personal income tax reductions, helped improve consumers' net worths and spending ability, thereby supporting the country's economic growth. Increased business spending also helped economic growth. After having been largely absent since the end of 2000, business spending posted strong results for the latter half of 2003. Nonresidential investment spending rose 10.9% annualized in the fourth quarter of 2003.4 Lower interest rates during the reporting period allowed many businesses the opportunity to refinance their old debt at more attractive levels, in turn boosting profits and operating performance. Many corporate fixed income products also benefited from this improvement. Productivity continued to grow, which helped businesses generate more goods and services without substantially raising inflation and labor costs. The core Consumer Price Index, a measure of inflation that excludes food and energy, rose 1.6% for March 2004 compared with the same month a year earlier. Expected inflation is a key determinant of interest rates, and recent, subdued inflation contributed to the historically lower overall interest rate environment during the period. In addition to the positive effect of declining interest rates on the economy, corporate dividend tax reductions supported economic growth during the period. YIELD COMPARISON 3/31/04 [BAR CHART] Franklin U.S. Government Securities Fund - Class A* 3.96% 10-Year Treasury Note* 3.86% Lipper GNMA Funds Average* 3.36% Money Market Funds Average* 0.35% *Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government Securities Fund-Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 3/31/04. The value of Treasuries, if held to maturity, is fixed; principal is guaranteed and interest is fixed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Average is an average of the monthly SEC yields of 66 funds in the Lipper GNMA Funds classification for the 30 days ended 3/31/04. The Lipper Money Market Funds Average is an average of the monthly SEC yields of 351 funds in the Lipper Money Market Funds classification for the 30 days ended 3/31/04. Lipper averages do not include sales charges. 2. Sources: Standard & Poor's Micropal; Lipper Inc. The Lehman Brothers Intermediate U.S. Government Bond Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value-weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The Lipper GNMA Funds Objective Average is an equally weighted average calculation of performance figures for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe. Lipper GNMA Funds are defined as funds that invest primarily in government national mortgage association securities. For the six-month period ended 3/31/04, there were 66 funds in this category. Lipper calculations do not include sales charges. The Fund's performance relative to the average might have differed if such charges had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvested distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 3. Source: Bureau of Labor Statistics. 4. Source: Bureau of Economic Analysis. 24 | Semiannual Report DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/03-3/31/04 - -------------------------------------------------------------------------------- DIVIDEND PER SHARE ---------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------------------------------------------------------------------------------- October 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents - -------------------------------------------------------------------------------- November 2.98 cents 2.70 cents 2.67 cents 2.79 cents 3.05 cents - -------------------------------------------------------------------------------- December** 4.20 cents 3.90 cents 3.91 cents 3.98 cents 4.27 cents - -------------------------------------------------------------------------------- January 2.98 cents 2.68 cents 2.69 cents 2.76 cents 3.06 cents - -------------------------------------------------------------------------------- February 2.98 cents 2.68 cents 2.69 cents 2.76 cents 3.05 cents - -------------------------------------------------------------------------------- March 2.98 cents 2.68 cents 2.67 cents 2.77 cents 3.04 cents - -------------------------------------------------------------------------------- TOTAL 19.10 CENTS 17.34 CENTS 17.30 CENTS 17.85 CENTS 19.52 CENTS - -------------------------------------------------------------------------------- *All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. **Includes an additional 1.22 cent distribution to meet excise tax requirements. INVESTMENT STRATEGY We seek to invest primarily in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash or cash equivalents. MANAGERS' DISCUSSION During the period under review, we continued our investment strategy of investing primarily in GNMAs because our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, Agency debentures, investment grade and high yield corporate bonds, and large capitalization and small capitalization stocks. These time periods include multiple credit, prepayment, economic and interest rate cycles. During the six months under review, we used our research to uncover areas of the markets where we thought mortgage risk may have offered value. In the recent interest rate environment, we looked to add to those positions with valuations that we considered attractive, consistent with our investment strategy. In terms of coupon, we invested across a wide spectrum of securities. With the overall interest rate decline during the reporting period, the Ginnie Mae market generally rose in value; consequently, our holdings provided positive total returns for the Fund. Semiannual Report | 25 Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years to come. [PHOTO] /S/Jack Lemein Jack Lemein [PHOTO] /S/Roger A. Bayston Roger A. Bayston, CFA [PHOTO] /S/T. Anthony Coffey T. Anthony Coffey, CFA Portfolio Management Team Franklin U.S. Government Securities Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2004, 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, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 26 | Semiannual Report Performance Summary as of 3/31/04 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------------------------- CLASS A CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.05 $6.76 $6.81 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1910 - -------------------------------------------------------------------------------------------------- CLASS B CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.05 $6.75 $6.80 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1734 - -------------------------------------------------------------------------------------------------- CLASS C CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.05 $6.73 $6.78 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1730 - -------------------------------------------------------------------------------------------------- CLASS R CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.05 $6.76 $6.81 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1785 - -------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 3/31/04 9/30/03 - -------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.06 $6.77 $6.83 - -------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - -------------------------------------------------------------------------------------------------- Dividend Income $0.1952 - --------------------------------------------------------------------------------------------------
Semiannual Report | Past performance does not guarantee future results. | 27 Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 0% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES.
- ------------------------------------------------------------------------------------------------------ CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.12% +2.56% +33.81% +92.07% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 -2.19% -1.81% +5.09% +6.28% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 5.07% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.96% - ------------------------------------------------------------------------------------------------------ CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +1.85% +2.03% +30.22% +30.89% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 -2.12% -1.85% +5.10% +5.11% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.76% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.61% - ------------------------------------------------------------------------------------------------------ CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +1.85% +2.03% +30.26% +71.22% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +0.86% +1.06% +5.43% +6.21% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.76% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.61% - ------------------------------------------------------------------------------------------------------ CLASS R 6-MONTH 1-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +1.93% +2.19% +11.60% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +0.94% +1.22% +5.02% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 4.92% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 3.75% - ------------------------------------------------------------------------------------------------------ ADVISOR CLASS 5 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------------ Cumulative Total Return 1 +2.03% +2.54% +34.74% +94.36% - ------------------------------------------------------------------------------------------------------ Average Annual Total Return 2 +2.03% +2.54% +6.14% +6.87% - ------------------------------------------------------------------------------------------------------ Distribution Rate 3 5.39% - ------------------------------------------------------------------------------------------------------ 30-Day Standardized Yield 4 4.27% - ------------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 28 | Past performance does not guarantee future results. | Semiannual Report Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD MAY BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. SECURITIES OWNED BY THE FUND, BUT NOT SHARES OF THE FUND, ARE GUARANTEED BY THE U.S. GOVERNMENT AS TO TIMELY PAYMENT OF PRINCIPAL AND INTEREST. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 7/1/94, these shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: 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 a limited class of investors. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/04. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/04. 5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +58.95% and +6.60%. Semiannual Report | Past performance does not guarantee future results. | 29 Franklin Utilities Fund YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income from a portfolio of public utility industry securities. This semiannual report for Franklin Utilities Fund covers the period ended March 31, 2004. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A delivered a +13.66% cumulative total return. The Fund underperformed its benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned 14.07% for the same period.1 Given that the Fund invests in only a few sectors within the S&P 500, the Fund's results are not directly comparable to the index's. You can find the Fund's performance data in the Performance Summary beginning on page 33. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2004, the U.S. economy strengthened. Driven by massive fiscal and economic stimuli injected into the economy last year, the second half of 2003 experienced the fastest advance in output of U.S.-made goods and services in nearly 20 years. Annualized gross domestic product (GDP) growth surged 8.2% in the third quarter of 2003 and rose 4.1% in the fourth quarter. This trend continued in early 2004, and first quarter GDP increased an estimated annualized 4.2%. During the period, the U.S. dollar's value declined against most major currencies, particularly versus the euro, which benefited many U.S. companies and contributed to corporate profit improvements. Business and consumer sentiment rose in early 2004. Consumer spending, however, was constrained by slow wage growth and heavy indebtedness. Productivity gains, shifting global manufacturing operations, raw materials shortages, and rising fuel prices, as well as U.S. political uncertainty in an election year, appeared to inhibit U.S. job growth. Unemployment generally decreased during most of the reporting period, and monthly unemployment figures for November 2003 through March 2004 were below 6%. Inflation remained in check during the period, despite higher energy prices stemming from rising global demand, less supply from oil-producing countries and a lower U.S. dollar, which made imported oil more expensive in U.S.-dollar terms. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/04 [BAR CHART] Utilities 93.1% Communications 2.9% Producer Manufacturing 2.5% Electronic Technology 0.9% Short-Term Investments & Other Net Assets 0.6% 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 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 81. 30 | Semiannual Report During the period, domestic equity markets continued a rally that began in March 2003. Data showing robust economic growth and improving corporate balance sheets seemed to increase investor confidence in the stock markets. The S&P 500 rose 14.07% for the six months under review, while the technology-heavy NASDAQ Composite Index gained 11.94%.2 As economic data improved, some interest rates increased in fall 2003. However, lack of job creation sparked concerns about the strength of economic recovery, which contributed to an interest rate decline by the end of the period. For example, the 10-year Treasury note yielded 3.96% on September 30, 2003, reached a peak of 4.49% on November 10, 2003, then declined to 3.86% by March 31, 2004. 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 Electric utility companies experienced significant changes in recent years related to competition implementation. Several states that were moving toward deregulation in the past considered slowing or reversing that process. Ohio and Virginia are two examples of states that delayed electric utility competition to better understand the transitioning marketplace. California's new governor also gave high priority to analyzing competition and ensuring adequate reliability of electricity. We acquired new positions in two California utilities, PG&E and Edison International, during the reporting period. Both companies generated positive returns by period-end as their outlook has improved since the 2000-2001 California energy crisis. Edison recently reinstated quarterly dividends, and PG&E could exit from Chapter 11 bankruptcy in April. Another western electric utility, Sierra Pacific Resources, was one of the Fund's top performers during the period. Despite Sierra Pacific's strong performance, we continued to hold this stock because the company's share price remained at a significant discount to its December 2003 book value. National Grid Transco and Scottish & Southern Energy also performed well. These holdings, along with our other U.K.-based utility holdings, delivered enhanced returns due to the British pound's appreciation against the U.S. dollar. TOP 10 HOLDINGS Franklin Utilities Fund 3/31/04 - ----------------------------------------------- % OF TOTAL COMPANY NET ASSETS - ----------------------------------------------- FirstEnergy Corp. 5.1% - ----------------------------------------------- Dominion Resources Inc. 4.8% - ----------------------------------------------- Entergy Corp. 4.6% - ----------------------------------------------- FPL Group Inc. 4.3% - ----------------------------------------------- American Electric Power Co. Inc. 4.2% - ----------------------------------------------- Exelon Corp. 4.1% - ----------------------------------------------- Progress Energy Inc. 3.8% - ----------------------------------------------- Southern Co. 3.5% - ----------------------------------------------- TXU Corp. 3.4% - ----------------------------------------------- United Utilities PLC (U.K.) 3.4% - ----------------------------------------------- 2. Source: Standard & Poor's Micropal. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all domestic and international common stocks listed on The NASDAQ Stock Market. The index is market value-weighted and includes over 3,000 companies. Semiannual Report | 31 Given the low interest rate environment during the period under review, all our utilities holdings posted positive performance. However, Puget Energy and Nicor produced lower results. A rate case decision in Washington negatively impacted Puget Energy, and Nicor faced regulatory investigations in Illinois. Based on our long-term investment strategy, we continued to hold these two companies as we believed their long-term prospects were attractive. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO] /S/John C. Kohli, CFA John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2004, 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 ADVISOR 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. 32 | Semiannual Report Performance Summary as of 3/31/04 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION - --------------------------------------------------------------------------------------------------- CLASS A CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $9.79 $8.80 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.2020 - --------------------------------------------------------------------------------------------------- CLASS B CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $9.79 $8.80 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.1796 - --------------------------------------------------------------------------------------------------- CLASS C CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $9.77 $8.78 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.1800 - --------------------------------------------------------------------------------------------------- CLASS R CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $9.78 $8.79 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.1861 - --------------------------------------------------------------------------------------------------- ADVISOR CLASS CHANGE 3/31/04 9/30/03 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.99 $9.83 $8.84 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/03-3/31/04) - --------------------------------------------------------------------------------------------------- Dividend Income $0.2086 - ---------------------------------------------------------------------------------------------------
Semiannual Report | Past performance does not guarantee future results. | 33 Performance Summary (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.66% +29.86% +40.14% +118.19% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.83% +24.34% +6.06% +7.65% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,883 $12,434 $13,418 $20,895 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 3.95% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.80% - ----------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.39% +29.29% +36.80% +21.19% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +9.39% +25.29% +6.15% +3.59% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,939 $12,529 $13,480 $12,031 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 3.67% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.45% - ----------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/95) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.42% +29.19% +36.63% +100.52% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +12.42% +28.19% +6.44% +8.11% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,242 $12,819 $13,663 $20,052 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 3.69% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.45% - ----------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR INCEPTION (1/1/02) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.48% +29.33% +10.53% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +12.48% +28.33% +4.57% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,248 $12,833 $11,053 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 3.80% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.60% - ----------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +13.67% +30.06% +41.13% +122.91% - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +13.67% +30.06% +7.13% +8.35% - ----------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,367 $13,006 $14,113 $22,291 - ----------------------------------------------------------------------------------------------------- Distribution Rate 4 4.25% - ----------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.10% - -----------------------------------------------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 34 | Past performance does not guarantee future results. | Semiannual Report Performance Summary (CONTINUED) ENDNOTES SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO INTEREST RATE MOVEMENTS. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 7/1/94, these shares were offered at a lower initial sales charge; thus actual total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1 plan, which affects subsequent performance. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/04. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/04. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +70.47% and +7.64%. Semiannual Report | Past performance does not guarantee future results. | 35 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $20.17 $15.37 $18.76 $28.60 $23.11 $17.84 ------------------------------------------------------------------------- Income from investment operations: Net investment income (loss)a ................... (.04) (.06) .03 .44 .56 .37 Net realized and unrealized gains (losses) ...... 2.62 4.86 (3.11) (9.70) 5.30 5.14 ------------------------------------------------------------------------- Total from investment operations ................. 2.58 4.80 (3.08) (9.26) 5.86 5.51 ------------------------------------------------------------------------- Less distributions from: Net investment income ........................... -- -- (.29) (.58) (.37) (.24) Tax return of capital ........................... -- -- (.02) -- -- -- ------------------------------------------------------------------------- Total distributions .............................. -- -- (.31) (.58) (.37) (.24) ------------------------------------------------------------------------- Net asset value, end of period ................... $22.75 $20.17 $15.37 $18.76 $28.60 $23.11 ------------------------------------------------------------------------- Total return b ................................... 12.79% 31.23% (16.83)% (32.86)% 25.57% 31.15% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $647,615 $558,687 $413,309 $530,074 $809,140 $499,471 Ratios to average net assets: Expenses ........................................ .97%c 1.04% 1.00% .95% .94% 1.00% Net investment income (loss) .................... (.38)%c (.40)% .13% 1.93% 1.98% 1.70% Portfolio turnover rate .......................... 1.51% 13.68% 8.11% 4.07% 5.45% 6.49% a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
36 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
--------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2003 2002 2001 2000 D --------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $19.79 $15.20 $18.57 $28.45 $28.05 --------------------------------------------------------------- Income from investment operations: Net investment income (loss) a .............................. (.12) (.25) (.12) .25 .28 Net realized and unrealized gains (losses) .................. 2.57 4.84 (3.08) (9.62) .12 --------------------------------------------------------------- Total from investment operations ............................. 2.45 4.59 (3.20) (9.37) .40 --------------------------------------------------------------- Less distributions from: Net investment income ....................................... -- -- (.16) (.51) -- Tax return of capital ....................................... -- -- (.01) -- -- --------------------------------------------------------------- Total distributions .......................................... -- -- (.17) (.51) -- --------------------------------------------------------------- Net asset value, end of period ............................... $22.24 $19.79 $15.20 $18.57 $28.45 --------------------------------------------------------------- Total return b ............................................... 12.32% 30.20% (17.51)% (33.37)% 1.43% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................ $16,471 $10,406 $5,066 $5,473 $4,749 Ratios to average net assets: Expenses .................................................... 1.72%c 1.79% 1.75% 1.70% 1.73%c Net investment income (loss) ................................ (1.13)%c (1.15)% (.62)% 1.13% 1.43%c Portfolio turnover rate ...................................... 1.51% 13.68% 8.11% 4.07% 5.45% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period February 1, 2000 (effective date) to September 30, 2000.
Semiannual Report | 37 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
-------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2003 2002 2001 2000 1999 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $19.59 $15.04 $18.34 $27.95 $22.64 $17.53 -------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a .................. (.12) (.25) (.11) .27 .34 .22 Net realized and unrealized gains (losses) ...... 2.54 4.80 (3.05) (9.50) 5.21 5.05 -------------------------------------------------------------------------- Total from investment operations ................. 2.42 4.55 (3.16) (9.23) 5.55 5.27 -------------------------------------------------------------------------- Less distributions from: Net investment income ........................... -- -- (.13) (.38) (.24) (.16) Tax return of capital ........................... -- -- (.01) -- -- -- -------------------------------------------------------------------------- Total distributions .............................. -- -- (.14) (.38) (.24) (.16) -------------------------------------------------------------------------- Net asset value, end of period ................... $22.01 $19.59 $15.04 $18.34 $27.95 $22.64 -------------------------------------------------------------------------- Total return b ................................... 12.35% 30.25% (17.48)% (33.36)% 24.65% 30.20% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $78,645 $66,952 $51,809 $77,204 $126,313 $73,890 Ratios to average net assets: Expenses ........................................ 1.72%c 1.79% 1.74% 1.70% 1.69% 1.75% Net investment income (loss) .................... (1.13)%c (1.15)% (.61)% 1.19% 1.23% 1.00% Portfolio turnover rate .......................... 1.51% 13.68% 8.11% 4.07% 5.45% 6.49% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
38 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 94.7% AIR FREIGHT/COURIERS 1.9% C.H. Robinson Worldwide Inc. ............................................................ 100,000 $ 4,150,000 United Parcel Service Inc., B ........................................................... 140,000 9,777,600 ------------- 13,927,600 ------------- BIOTECHNOLOGY 8.0% a Amgen Inc. .............................................................................. 300,000 17,451,000 a Chiron Corp. ............................................................................ 150,000 6,601,500 a Genentech Inc. .......................................................................... 290,000 30,687,800 a Gilead Sciences Inc. .................................................................... 80,000 4,461,600 ------------- 59,201,900 ------------- BROADCASTING 1.5% Clear Channel Communications Inc. ....................................................... 200,000 8,470,000 a Entercom Communications Corp. ........................................................... 60,000 2,716,200 ------------- 11,186,200 ------------- CABLE/SATELLITE TELEVISION 1.1% a Comcast Corp., A ........................................................................ 170,000 4,739,600 a Liberty Media Corp., A .................................................................. 300,000 3,285,000 ------------- 8,024,600 ------------- CASINOS/GAMING 4.2% GTECH Holdings Corp. .................................................................... 70,000 4,139,800 International Game Technology ........................................................... 600,000 26,976,000 ------------- 31,115,800 ------------- CHEMICALS: SPECIALTY .9% Sigma-Aldrich Corp. ..................................................................... 125,000 6,917,500 ------------- COMPUTER COMMUNICATIONS 2.4% a Cisco Systems Inc. ...................................................................... 720,000 16,934,400 a F5 Networks Inc. ........................................................................ 30,000 1,015,500 ------------- 17,949,900 ------------- COMPUTER PERIPHERALS .8% a EMC Corp. ............................................................................... 240,000 3,266,400 a Storage Technology Corp. ................................................................ 95,000 2,643,850 ------------- 5,910,250 ------------- COMPUTER PROCESSING HARDWARE 2.0% a Dell Inc. ............................................................................... 145,000 4,874,900 Hewlett-Packard Co. ..................................................................... 450,862 10,297,688 ------------- 15,172,588 -------------
Semiannual Report | 39 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) DATA PROCESSING SERVICES 4.2% a Computer Sciences Corp. ................................................................. 190,000 $ 7,662,700 First Data Corp. ........................................................................ 300,000 12,648,000 Paychex Inc. ............................................................................ 300,000 10,680,000 ------------- 30,990,700 ------------- ELECTRONIC COMPONENTS .2% a Flextronics International Ltd. (Singapore) .............................................. 100,000 1,722,000 ------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 3.7% a Agilent Technologies Inc. ............................................................... 300,000 9,489,000 a JDS Uniphase Corp. ...................................................................... 350,000 1,424,500 Rockwell Automation Inc. ................................................................ 250,000 8,667,500 a Waters Corp. ............................................................................ 200,000 8,168,000 ------------- 27,749,000 ------------- ELECTRONIC PRODUCTION EQUIPMENT 4.9% a Applied Materials Inc. .................................................................. 500,000 10,690,000 a KLA-Tencor Corp. ........................................................................ 200,000 10,070,000 a Lam Research Corp. ...................................................................... 150,000 3,781,500 a Novellus Systems Inc. ................................................................... 100,000 3,179,000 a Teradyne Inc. ........................................................................... 200,000 4,766,000 a Varian Semiconductor Equipment Associates Inc. .......................................... 100,000 4,200,000 ------------- 36,686,500 ------------- ELECTRONICS/APPLIANCE STORES .7% Best Buy Co. Inc. ....................................................................... 100,000 5,172,000 ------------- FINANCIAL CONGLOMERATES 1.3% Citigroup Inc. .......................................................................... 190,000 9,823,000 ------------- HOUSEHOLD/PERSONAL CARE .6% Estee Lauder Cos. Inc., A ............................................................... 100,000 4,434,000 ------------- INDUSTRIAL CONGLOMERATES .4% Tyco International Ltd. ................................................................. 100,000 2,865,000 ------------- INFORMATION TECHNOLOGY SERVICES 2.8% a Cognizant Technology Solutions Corp., A ................................................. 50,000 2,262,500 International Business Machines Corp. ................................................... 200,000 18,368,000 ------------- 20,630,500 ------------- INSURANCE BROKERS/SERVICES .6% a ChoicePoint Inc. ........................................................................ 120,000 4,563,600 -------------
40 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) INTERNET RETAIL .8% a Amazon.com Inc. ......................................................................... 100,000 $ 4,328,000 a Interactive Corp. ....................................................................... 50,000 1,579,500 ------------- 5,907,500 ------------- INTERNET SOFTWARE/SERVICES 1.7% a Check Point Software Technologies Ltd. (Israel) ......................................... 100,000 2,277,000 a Yahoo! Inc. ............................................................................. 210,000 10,203,900 ------------- 12,480,900 ------------- MAJOR PHARMACEUTICALS 4.5% Bristol-Myers Squibb Co. ................................................................ 150,000 3,634,500 Johnson & Johnson Inc. .................................................................. 130,000 6,593,600 Merck & Co. Inc. ........................................................................ 150,000 6,628,500 Pfizer Inc. ............................................................................. 470,000 16,473,500 ------------- 33,330,100 ------------- MANAGED HEALTH CARE 2.9% UnitedHealth Group Inc. ................................................................. 340,000 21,909,600 ------------- MEDIA CONGLOMERATES 1.4% News Corp. Ltd., ADR (Australia) ........................................................ 150,000 5,397,000 a Time Warner Inc. ........................................................................ 280,000 4,720,800 ------------- 10,117,800 ------------- MEDICAL DISTRIBUTORS .7% McKesson Corp. .......................................................................... 175,000 5,265,750 ------------- MEDICAL SPECIALTIES 6.5% Alcon Inc. (Switzerland) ................................................................ 150,000 9,495,000 Medtronic Inc. .......................................................................... 275,000 13,131,250 a Steris Corp. ............................................................................ 75,000 1,935,000 Stryker Corp. ........................................................................... 140,000 12,394,200 a Varian Medical Systems Inc. ............................................................. 10,000 863,100 a Zimmer Holdings Inc. .................................................................... 140,000 10,329,200 ------------- 48,147,750 ------------- OILFIELD SERVICES/EQUIPMENT .9% Schlumberger Ltd. ....................................................................... 100,000 6,385,000 ------------- OTHER CONSUMER SERVICES 4.4% a Apollo Group Inc., A .................................................................... 40,000 3,444,400 a eBay Inc. ............................................................................... 420,000 29,118,600 ------------- 32,563,000 -------------
Semiannual Report | 41 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) OTHER PHARMACEUTICALS 1.3% Teva Pharmaceutical Industries Ltd., ADR (Israel) ....................................... 150,000 $ 9,511,500 ------------- PACKAGED SOFTWARE 8.0% Adobe Systems Inc. ...................................................................... 260,000 10,251,800 a Cognos Inc. (Canada) .................................................................... 75,000 2,329,500 a Intuit Inc. ............................................................................. 230,000 10,322,400 Microsoft Corp. ......................................................................... 950,000 23,721,500 a Oracle Corp. ............................................................................ 220,000 2,642,200 a Symantec Corp. .......................................................................... 220,000 10,186,000 ------------- 59,453,400 ------------- RECREATIONAL PRODUCTS 2.3% a Electronic Arts Inc. .................................................................... 320,000 17,267,200 ------------- SEMICONDUCTORS 12.4% Analog Devices Inc. ..................................................................... 300,000 14,403,000 a Broadcom Corp., A ....................................................................... 125,000 4,896,250 Intel Corp. ............................................................................. 1,150,000 31,280,000 a International Rectifier Corp. ........................................................... 180,000 8,278,200 Intersil Corp. .......................................................................... 100,000 2,229,000 Linear Technology Corp. ................................................................. 400,000 14,808,000 Microchip Technology Inc. ............................................................... 150,000 3,984,000 a Xilinx Inc. ............................................................................. 320,000 12,160,000 ------------- 92,038,450 ------------- TELECOMMUNICATIONS EQUIPMENT 4.7% Motorola Inc. ........................................................................... 680,750 11,981,200 Nokia Corp., ADR (Finland) .............................................................. 330,000 6,692,400 QUALCOMM Inc. ........................................................................... 240,000 15,940,800 ------------- 34,614,400 ------------- TOTAL COMMON STOCKS (COST $504,547,035) ................................................. 703,034,988 ------------- SHORT TERM INVESTMENT (COST $37,155,070) 5.0% b Franklin Institutional Fiduciary Trust Money Market Portfolio ........................... 37,155,070 37,155,070 ------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $541,702,105) ....................... 740,190,058 -------------
42 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (COST $2,351,143) .3% c Joint Repurchase Agreement, 1.010%, 4/01/04 (Maturity Value $2,351,209) ................. $ 2,351,143 $ 2,351,143 ABN AMRO Bank, N.V., New York Branch (Maturity Value $232,934) Banc of America Securities LLC (Maturity Value $109,637) Barclays Capital Inc. (Maturity Value $232,934) Bear, Stearns & Co. Inc. (Maturity Value $109,637) BNP Paribas Securities Corp. (Maturity Value $232,934) Deutsche Bank Securities Inc. (Maturity Value $232,934) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $109,637) Goldman, Sachs & Co. (Maturity Value $232,934) Greenwich Capital Markets Inc. (Maturity Value $158,826) Lehman Brothers Inc. (Maturity Value $232,934) Morgan Stanley & Co. Inc. (Maturity Value $232,934) UBS Securities LLC (Maturity Value $232,934) Collateralized by U.S. Treasury Bills, Notes, and Bonds, and U.S. Government Agency Securities ------------- TOTAL INVESTMENTS (COST $544,053,248) 100.0% ............................................ 742,541,201 OTHER ASSETS, LESS LIABILITIES .......................................................... 189,974 ------------- NET ASSETS 100.0% ....................................................................... $742,731,175 ------------- a Non-income producing. b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. c See Note 1(c) regarding repurchase agreements.
Semiannual Report | See notes to financial statements.| 43 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2003 2002 2001 2000 1999 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $26.87 $22.02 $27.81 $36.91 $33.21 $28.58 ---------------------------------------------------------------------------------- Income from investment operations: Net investment income a ................. .03 .08 .07 .23 .45 .39 Net realized and unrealized gains (losses) ................................ 3.45 4.81 (5.65) (7.26) 3.96 4.89 ---------------------------------------------------------------------------------- Total from investment operations ......... 3.48 4.89 (5.58) (7.03) 4.41 5.28 ---------------------------------------------------------------------------------- Less distributions from: Net investment income ................... (.03) (.04) (.16) (.40) (.45) (.44) Net realized gains ...................... -- -- (.05) (1.67) (.26) (.21) ---------------------------------------------------------------------------------- Total distributions ...................... (.03) (.04) (.21) (2.07) (.71) (.65) ---------------------------------------------------------------------------------- Net asset value, end of period ........... $30.32 $26.87 $22.02 $27.81 $36.91 $33.21 ---------------------------------------------------------------------------------- Total return b ........................... 12.95% 22.27% (20.35)% (20.12)% 13.53% 18.63% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $1,572,475 $1,433,742 $1,249,745 $1,657,387 $2,149,928 $2,119,740 Ratios to average net assets: Expenses ................................ 1.00%c 1.06% .96% .91% .93% .89% Net investment income ................... .17%c .31% .24% .69% 1.27% 1.19% Portfolio turnover rate .................. .85% 5.12% 2.16% .29% 8.12% 3.74% a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
44 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
-------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2003 2002 2001 2000 1999 D -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $26.32 $21.70 $27.46 $36.54 $33.03 $31.45 -------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a .................. (.08) (.11) (.14) (.03) .16 .14 Net realized and unrealized gains (losses) ...... 3.38 4.73 (5.57) (7.18) 3.96 1.44 -------------------------------------------------------------------------- Total from investment operations ................. 3.30 4.62 (5.71) (7.21) 4.12 1.58 -------------------------------------------------------------------------- Less distributions from: Net investment income ........................... -- -- -- (.20) (.35) -- Net realized gains .............................. -- -- (.05) (1.67) (.26) -- -------------------------------------------------------------------------- Total distributions .............................. -- -- (.05) (1.87) (.61) -- -------------------------------------------------------------------------- Net asset value, end of period ................... $29.62 $26.32 $21.70 $27.46 $36.54 $33.03 -------------------------------------------------------------------------- Total return b ................................... 12.54% 21.29% (20.90)% (20.74)% 12.68% 5.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $121,984 $103,499 $75,141 $66,095 $38,353 $17,271 Ratios to average net assets: Expenses ........................................ 1.75%c 1.81% 1.71% 1.66% 1.68% 1.65%c Net investment income (loss) .................... (.58)%c (.44)% (.51)% (.10)% .45% .57%c Portfolio turnover rate .......................... .85% 5.12% 2.16% .29% 8.12% 3.74% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 1999 (effective date) to September 30, 1999.
Semiannual Report | 45 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $26.09 $21.51 $27.24 $36.19 $32.58 $28.11 ------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) a ................... (.08) (.11) (.14) (.02) .18 .14 Net realized and unrealized gains (losses) ....... 3.36 4.69 (5.54) (7.13) 3.91 4.81 ------------------------------------------------------------------------ Total from investment operations .................. 3.28 4.58 (5.68) (7.15) 4.09 4.95 ------------------------------------------------------------------------ Less distributions from: Net investment income ............................ -- -- -- (.13) (.22) (.27) Net realized gains ............................... -- -- (.05) (1.67) (.26) (.21) ------------------------------------------------------------------------ Total distributions ............................... -- -- (.05) (1.80) (.48) (.48) ------------------------------------------------------------------------ Net asset value, end of period .................... $29.37 $26.09 $21.51 $27.24 $36.19 $32.58 ------------------------------------------------------------------------ Total return b .................................... 12.53% 21.29% (20.92)% (20.72)% 12.71% 17.71% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $283,343 $259,169 $232,307 $310,650 $374,483 $362,216 Ratios to average net assets: Expenses ......................................... 1.75%c 1.82% 1.70% 1.66% 1.68% 1.65% Net investment income (loss) ..................... (.58)%c (.45)% (.51)% (.06)% .52% .45% Portfolio turnover rate ........................... .85% 5.12% 2.16% .29% 8.12% 3.74% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
46 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
--------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, CLASS R (UNAUDITED) 2003 2002 D --------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $26.74 $21.98 $31.59 --------------------------------------- Income from investment operations: Net investment income (loss)a .................................. (.01) -- -- Net realized and unrealized gains (losses) ..................... 3.44 4.81 (9.61) --------------------------------------- Total from investment operations ................................ 3.43 4.81 (9.61) --------------------------------------- Less distributions from net investment income ................... -- (.05) -- --------------------------------------- Net asset value, end of period .................................. $30.17 $26.74 $21.98 --------------------------------------- Total return b .................................................. 12.83% 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................... $19,199 $14,755 $2,788 Ratios to average net assets: Expenses ....................................................... 1.25%c 1.31% 1.21%c Net investment income (loss) ................................... (.08)%c .06% .02%c Portfolio turnover rate ......................................... .85% 5.12% 2.16% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | 47 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $26.91 $22.06 $27.86 $36.99 $33.27 $28.63 ------------------------------------------------------------------------ Income from investment operations: Net investment income a ........................... .06 .14 .14 .31 .54 .46 Net realized and unrealized gains (losses) ........ 3.45 4.82 (5.65) (7.28) 3.97 4.90 ------------------------------------------------------------------------ Total from investment operations ................... 3.51 4.96 (5.51) (6.97) 4.51 5.36 ------------------------------------------------------------------------ Less distributions from: Net investment income ............................. (.09) (.11) (.24) (.49) (.53) (.51) Net realized gains ................................ -- -- (.05) (1.67) (.26) (.21) ------------------------------------------------------------------------ Total distributions ................................ (.09) (.11) (.29) (2.16) (.79) (.72) ------------------------------------------------------------------------ Net asset value, end of period ..................... $30.33 $26.91 $22.06 $27.86 $36.99 $33.27 ------------------------------------------------------------------------ Total return b ..................................... 13.07% 22.58% (20.14)% (19.94)% 13.84% 18.89% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $86,791 $41,216 $27,431 $32,498 $39,442 $35,461 Ratios to average net assets: Expenses .......................................... .75%c .81% .71% .66% .68% .65% Net investment income ............................. .42%c .56% .49% .94% 1.51% 1.41% Portfolio turnover rate ............................ .85% 5.12% 2.16% .29% 8.12% 3.74% a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Annualized.
48 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 99.4% COMMERCIAL SERVICES 2.9% a Dun & Bradstreet Corp. ................................................................. 122,000 $ 6,527,000 Equifax Inc. ........................................................................... 400,000 10,328,000 Moody's Corp. .......................................................................... 244,000 17,275,200 a Robert Half International Inc. ......................................................... 300,000 7,086,000 Sabre Holdings Corp., A ................................................................ 800,000 19,848,000 --------------- 61,064,200 --------------- CONSUMER DURABLES 2.6% Eastman Kodak Co. ...................................................................... 500,000 13,085,000 Harley-Davidson Inc. ................................................................... 200,000 10,668,000 Hasbro Inc. ............................................................................ 600,000 13,050,000 Mattel Inc. ............................................................................ 1,000,000 18,440,000 --------------- 55,243,000 --------------- CONSUMER NON-DURABLES 3.0% Hershey Foods Corp. .................................................................... 258,200 21,391,870 International Flavors & Fragrances Inc. ................................................ 500,000 17,750,000 Tootsie Roll Industries Inc. ........................................................... 21,834 798,249 V.F. Corp. ............................................................................. 500,000 23,350,000 --------------- 63,290,119 --------------- CONSUMER SERVICES 5.1% Carnival Corp. ......................................................................... 500,000 22,455,000 Clear Channel Communications Inc. ...................................................... 500,000 21,175,000 Fairmont Hotels & Resorts Inc. (Canada) ................................................ 125,000 3,143,750 a Time Warner Inc. ....................................................................... 1,350,000 22,761,000 Viacom Inc., A ......................................................................... 200,000 7,908,000 Viacom Inc., B ......................................................................... 100,000 3,921,000 The Walt Disney Co. .................................................................... 1,000,000 24,990,000 --------------- 106,353,750 --------------- DISTRIBUTION SERVICES 2.7% Cardinal Health Inc. ................................................................... 236,250 16,277,625 Genuine Parts Co. ...................................................................... 461,700 15,106,824 W.W. Grainger Inc. ..................................................................... 500,000 24,000,000 --------------- 55,384,449 --------------- ELECTRONIC TECHNOLOGY 18.4% a Agilent Technologies Inc. .............................................................. 400,000 12,652,000 a Apple Computer Inc. .................................................................... 500,000 13,525,000 Boeing Co. ............................................................................. 1,000,000 41,070,000 a Cisco Systems Inc. ..................................................................... 1,350,000 31,752,000 a Conexant Systems Inc. .................................................................. 300,000 1,848,000 a Dell Inc. .............................................................................. 500,000 16,810,000 a Dionex Corp. ........................................................................... 250,000 13,200,000 a EMC Corp. .............................................................................. 1,000,000 13,610,000 a Gateway Inc. ........................................................................... 500,000 2,640,000
Semiannual Report | 49 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC TECHNOLOGY (CONT.) General Dynamics Corp. ................................................................. 500,000 $ 44,665,000 Hewlett-Packard Co. .................................................................... 1,116,250 25,495,150 Intel Corp. ............................................................................ 800,000 21,760,000 Lockheed Martin Corp. .................................................................. 500,000 22,820,000 a Micrel Inc. ............................................................................ 25,000 333,750 a Mindspeed Technologies Inc. ............................................................ 100,000 653,000 a Mykrolis Corp. ......................................................................... 270,725 3,860,538 Northrop Grumman Corp. ................................................................. 500,000 49,210,000 Raytheon Co. ........................................................................... 600,000 18,804,000 Rockwell Automation Inc. ............................................................... 100,000 3,467,000 Rockwell Collins Inc. .................................................................. 100,000 3,161,000 a Sun Microsystems Inc. .................................................................. 1,600,000 6,656,000 Texas Instruments Inc. ................................................................. 515,000 15,048,300 a Waters Corp. ........................................................................... 500,000 20,420,000 --------------- 383,460,738 --------------- ENERGY MINERALS 2.1% BP PLC, ADR (United Kingdom) ........................................................... 295,200 15,114,240 Encana Corp. (Canada) .................................................................. 342,000 14,747,040 Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) ..................................... 280,000 13,322,400 --------------- 43,183,680 --------------- FINANCE .3% a ChoicePoint Inc. ....................................................................... 160,000 6,084,797 --------------- HEALTH SERVICES .8% a Caremark RX Inc. ....................................................................... 75,625 2,514,531 IMS Health Inc. ........................................................................ 500,000 11,630,000 a Medco Health Solutions Inc. ............................................................ 48,240 1,640,160 --------------- 15,784,691 --------------- HEALTH TECHNOLOGY 21.6% Abbott Laboratories .................................................................... 400,000 16,440,000 a Advanced Medical Optics Inc. ........................................................... 88,888 2,168,867 Allergan Inc. .......................................................................... 400,000 33,664,000 a Amgen Inc. ............................................................................. 932,000 54,214,440 Baxter International Inc. .............................................................. 500,000 15,445,000 Bristol-Myers Squibb Co. ............................................................... 640,000 15,507,200 a Edwards Lifesciences Corp. ............................................................. 50,000 1,597,500 Eli Lilly & Co. ........................................................................ 400,000 26,760,000 a Genentech Inc. ......................................................................... 500,000 52,910,000 Johnson & Johnson Inc. ................................................................. 996,000 50,517,120 Merck & Co. Inc. ....................................................................... 500,000 22,095,000 a Millipore Corp. ........................................................................ 400,000 20,552,000
50 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) HEALTH TECHNOLOGY (CONT.) Pall Corp. ............................................................................. 500,000 $ 11,345,000 Pfizer Inc. ............................................................................ 2,000,000 70,100,000 Schering-Plough Corp. .................................................................. 1,800,000 29,196,000 Wyeth .................................................................................. 600,000 22,530,000 a Zimmer Holdings Inc. ................................................................... 64,000 4,721,920 --------------- 449,764,047 --------------- INDUSTRIAL SERVICES 1.9% a Ionics Inc. ............................................................................ 400,000 11,360,000 Schlumberger Ltd. ...................................................................... 400,000 25,540,000 a Transocean Inc. ........................................................................ 77,440 2,159,802 --------------- 39,059,802 --------------- PROCESS INDUSTRIES 1.7% Air Products & Chemicals Inc. .......................................................... 500,000 25,060,000 Sigma-Aldrich Corp. .................................................................... 200,000 11,068,000 --------------- 36,128,000 --------------- PRODUCER MANUFACTURING 19.6% 3M Co. ................................................................................. 800,000 65,496,000 American Power Conversion Corp. ........................................................ 500,000 11,505,000 ArvinMeritor Inc. ...................................................................... 12,499 247,855 Avery Dennison Corp. ................................................................... 462,000 28,741,020 a CUNO Inc. .............................................................................. 86,200 3,868,656 Deere & Co. ............................................................................ 300,000 20,793,000 Emerson Electric Co. ................................................................... 500,000 29,960,000 Illinois Tool Works Inc. ............................................................... 500,000 39,615,000 Ingersoll Rand Co., A .................................................................. 501,000 33,892,650 Johnson Controls Inc. .................................................................. 400,000 23,660,000 Molex Inc. ............................................................................. 146,483 4,451,619 Molex Inc., A .......................................................................... 146,483 3,814,417 Teleflex Inc. .......................................................................... 500,000 24,615,000 Textron Inc. ........................................................................... 525,000 27,903,750 Thomas & Betts Corp. ................................................................... 500,000 10,910,000 Tyco International Ltd. ................................................................ 1,550,052 44,408,990 United Technologies Corp. .............................................................. 400,000 34,520,000 --------------- 408,402,957 --------------- RETAIL TRADE 1.2% Family Dollar Stores Inc. .............................................................. 200,000 7,190,000 a Interactive Corp. ...................................................................... 600,200 18,960,318 --------------- 26,150,318 ---------------
Semiannual Report | 51 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) TECHNOLOGY SERVICES 10.4% Automatic Data Processing Inc. ......................................................... 800,000 $ 33,600,000 Certegy Inc. ........................................................................... 200,000 7,004,000 a Computer Sciences Corp. ................................................................ 1,000,000 40,330,000 International Business Machines Corp. .................................................. 560,000 51,430,400 Microsoft Corp. ........................................................................ 1,000,000 24,970,000 a Oracle Corp. ........................................................................... 500,000 6,005,000 a Sungard Data Systems Inc. .............................................................. 500,000 13,700,000 a Yahoo! Inc. ............................................................................ 800,000 38,872,000 --------------- 215,911,400 --------------- TRANSPORTATION 5.1% a Alaska Air Group Inc. .................................................................. 500,000 12,330,000 a AMR Corp. .............................................................................. 1,080,000 13,748,400 a British Airways PLC, ADR (United Kingdom) .............................................. 500,000 25,500,000 Canadian Pacific Railway Ltd. (Canada) ................................................. 250,000 6,045,000 a Continental Airlines Inc., B ........................................................... 500,000 6,265,000 Delta Air Lines Inc. ................................................................... 1,000,000 7,920,000 KLM Royal Dutch Airlines, N.Y. shs. (Netherlands) ...................................... 500,000 10,385,000 a Northwest Airlines Corp. ............................................................... 500,000 5,055,000 Providence & Worchester Railroad Co. ................................................... 23,700 225,150 Southwest Airlines Co. ................................................................. 65,200 926,492 Union Pacific Corp. .................................................................... 300,000 17,946,000 --------------- 106,346,042 --------------- TOTAL COMMON STOCKS (COST $1,021,119,747) .............................................. 2,071,611,990 --------------- SHORT TERM INVESTMENT (COST $19,754,329) 1.0% b Franklin Institutional Fiduciary Trust Money Market Portfolio .......................... 19,754,329 19,754,329 --------------- TOTAL INVESTMENTS (COST $1,040,874,076) 100.4% ......................................... 2,091,366,319 OTHER ASSETS, LESS LIABILITIES (.4)% ................................................... (7,574,485) --------------- NET ASSETS 100.0% ...................................................................... $2,083,791,834 --------------- a Non-income producing. b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio.
52 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2003 2002 2001 2000 1999 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $2.25 $1.90 $2.16 $2.35 $2.23 $2.34 ---------------------------------------------------------------------------------- Income from investment operations: Net investment income a ................. .06 .14 .14 .17 .18 .17 Net realized and unrealized gains (losses) ................................ .19 .38 (.21) (.15) .13 (.09) ---------------------------------------------------------------------------------- Total from investment operations ......... .25 .52 (.07) .02 .31 .08 ---------------------------------------------------------------------------------- Less distributions from: Net investment income ................... (.08) (.16) (.17) (.18) (.18) (.18) Net realized gains ...................... (.01) (.01) (.02) (.03) (.01) (.01) ---------------------------------------------------------------------------------- Total distributions ...................... (.09) (.17) (.19) (.21) (.19) (.19) ---------------------------------------------------------------------------------- Net asset value, end of period ........... $2.41 $2.25 $1.90 $2.16 $2.35 $2.23 ---------------------------------------------------------------------------------- Total return b ........................... 11.29% 28.12% (4.18)% .58% 14.68% 4.02% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $12,610,530 $9,640,156 $6,001,117 $5,960,990 $6,083,135 $6,776,804 Ratios to average net assets: Expenses ................................ .69%c .73% .72% .73% .76% .73% Net investment income ................... 5.04%c 6.63% 6.67% 7.54% 8.01% 7.46% Portfolio turnover rate .................. 20.48% 48.36% 51.16% 28.13% 24.41% 17.35% a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
Semiannual Report | 53 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, CLASS B (UNAUDITED) 2003 2002 D ---------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $2.24 $1.90 $2.15 ---------------------------------------- Income from investment operations: Net investment income a ........................................ .05 .12 .11 Net realized and unrealized gains (losses) ..................... .19 .37 (.21) ---------------------------------------- Total from investment operations ................................ .24 .49 (.10) ---------------------------------------- Less distributions from: Net investment income .......................................... (.07) (.14) (.13) Net realized gains ............................................. (.01) (.01) (.02) ---------------------------------------- Total distributions ............................................. (.08) (.15) (.15) ---------------------------------------- Net asset value, end of period .................................. $2.40 $2.24 $1.90 ---------------------------------------- Total return b .................................................. 10.86% 26.58% (5.63)% ---------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................... $2,965,795 $2,083,783 $558,580 Ratios to average net assets: Expenses ....................................................... 1.54%c 1.58% 1.57%c Net investment income .......................................... 4.19%c 5.78% 6.01%c Portfolio turnover rate ......................................... 20.48% 48.36% 51.16% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period November 1, 2001 (effective date) to September 30, 2002.
54 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS B1 (UNAUDITED) 2003 2002 2001 2000 1999 D ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $2.25 $1.90 $2.17 $2.35 $2.24 $2.36 ------------------------------------------------------------------------ Income from investment operations: Net investment income a ........................... .05 .13 .13 .16 .17 .12 Net realized and unrealized gains (losses) ........ .19 .38 (.22) (.14) .12 (.11) ------------------------------------------------------------------------ Total from investment operations ................... .24 .51 (.09) .02 .29 .01 ------------------------------------------------------------------------ Less distributions from: Net investment income ............................. (.07) (.15) (.16) (.17) (.17) (.13) Net realized gains ................................ (.01) (.01) (.02) (.03) (.01) -- ------------------------------------------------------------------------ Total distributions ................................ (.08) (.16) (.18) (.20) (.18) (.13) ------------------------------------------------------------------------ Net asset value, end of period ..................... $2.41 $2.25 $1.90 $2.17 $2.35 $2.24 ------------------------------------------------------------------------ Total return b ..................................... 11.00% 27.51% (4.66)% .10% 14.09% .34% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $524,313 $495,004 $430,226 $446,245 $140,711 $83,031 Ratios to average net assets: Expenses .......................................... 1.19%c 1.23% 1.22% 1.23% 1.26% 1.23%c Net investment income ............................. 4.54%c 6.13% 6.15% 7.02% 7.49% 7.22%c Portfolio turnover rate ............................ 20.48% 48.36% 51.16% 28.13% 24.41% 17.35% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 1999 (effective date) to September 30, 1999.
Semiannual Report | 55 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....... $2.26 $1.91 $2.17 $2.36 $2.24 $2.34 -------------------------------------------------------------------------------- Income from investment operations: Net investment income a ................... .05 .13 .13 .16 .17 .16 Net realized and unrealized gains (losses) .................................. .19 .38 (.21) (.15) .13 (.08) -------------------------------------------------------------------------------- Total from investment operations ........... .24 .51 (.08) .01 .30 .08 -------------------------------------------------------------------------------- Less distributions from: Net investment income ..................... (.07) (.15) (.16) (.17) (.17) (.17) Net realized gains ........................ (.01) (.01) (.02) (.03) (.01) (.01) -------------------------------------------------------------------------------- Total distributions ........................ (.08) (.16) (.18) (.20) (.18) (.18) -------------------------------------------------------------------------------- Net asset value, end of period ............. $2.42 $2.26 $1.91 $2.17 $2.36 $2.24 -------------------------------------------------------------------------------- Total return b ............................. 10.96% 27.37% (4.64)% .09% 14.54% 3.46% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .......... $5,531,928 $3,764,372 $1,545,377 $1,080,315 $872,662 $997,438 Ratios to average net assets: Expenses .................................. 1.19%c 1.24% 1.21% 1.23% 1.26% 1.23% Net investment income ..................... 4.54%c 6.12% 6.21% 7.04% 7.51% 6.97% Portfolio turnover rate .................... 20.48% 48.36% 51.16% 28.13% 24.41% 17.35% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
56 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
-------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, CLASS R (UNAUDITED) 2003 2002 D -------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $2.23 $1.89 $2.18 Income from investment operations: Net investment income a ................................... .06 .13 .10 Net realized and unrealized gains (losses) ................ .18 .37 (.27) -------------------------------------- Total from investment operations ........................... .24 .50 (.17) -------------------------------------- Less distributions from: Net investment income ..................................... (.07) (.15) (.12) Net realized gains ........................................ (.01) (.01) -- -------------------------------------- Total distributions ........................................ (.08) (.16) (.12) -------------------------------------- Net asset value, end of period ............................. $2.39 $2.23 $1.89 -------------------------------------- Total return b ............................................. 11.21% 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .......................... $60,160 $36,417 $6,350 Ratios to average net assets: Expenses .................................................. 1.04%c 1.08% 1.07%c Net investment income ..................................... 4.69%c 6.28% 6.77%c Portfolio turnover rate .................................... 20.48% 48.36% 51.16% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | 57 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $2.24 $1.89 $2.16 $2.34 $2.23 $2.34 ------------------------------------------------------------------------ Income from investment operations: Net investment income a ........................... .06 .14 .14 .18 .18 .17 Net realized and unrealized gains (losses) ........ .19 .38 (.22) (.15) .12 (.09) ------------------------------------------------------------------------ Total from investment operations ................... .25 .52 (.08) .03 .30 .08 ------------------------------------------------------------------------ Less distributions from: Net investment income ............................. (.08) (.16) (.17) (.18) (.18) (.18) Net realized gains ................................ (.01) (.01) (.02) (.03) (.01) (.01) ------------------------------------------------------------------------ Total distributions ................................ (.09) (.17) (.19) (.21) (.19) (.19) ------------------------------------------------------------------------ Net asset value, end of period ..................... $2.40 $2.24 $1.89 $2.16 $2.34 $2.23 ------------------------------------------------------------------------ Total return b ..................................... 11.42% 28.47% (4.50)% 1.21% 14.90% 3.71% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $458,544 $95,009 $30,737 $22,737 $21,220 $23,891 Ratios to average net assets: Expenses .......................................... .54%c .58% .57% .58% .61% .58% Net investment income ............................. 5.19%c 6.78% 6.85% 7.69% 8.16% 7.60% Portfolio turnover rate ............................ 20.48% 48.36% 51.16% 28.13% 24.41% 17.35% a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Annualized.
58 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 37.5% COMMUNICATIONS 2.2% AT&T Corp. ...................................................... United States 5,000,000 $ 97,850,000 BellSouth Corp. ................................................. United States 1,000,000 27,690,000 a NII Holdings Inc., B ............................................ United States 320,232 11,217,727 a NTL Inc. ........................................................ United States 379,020 22,532,739 SBC Communications Inc. ......................................... United States 5,333,000 130,871,820 a Telecom Argentina Stet - France Telecom SA, B, ADR .............. Argentina 1,700,000 18,105,000 Verizon Communications Inc. ..................................... United States 4,583,200 167,470,128 a XO Communications Inc. .......................................... United States 83,772 417,185 a XO Communications Inc., wts., A, 1/16/10 ........................ United States 167,543 351,840 a XO Communications Inc., wts., B, 1/16/10 ........................ United States 125,656 207,333 a XO Communications Inc., wts., C, 1/16/10 ........................ United States 125,656 144,504 ---------------- 476,858,276 ---------------- CONSUMER DURABLES .5% General Motors Corp. ............................................ United States 2,500,000 117,750,000 ---------------- CONSUMER NON-DURABLES 1.1% Altria Group Inc. ............................................... United States 3,250,000 176,962,500 Loews Corp. - Carolina Group .................................... United States 2,717,500 74,323,625 ---------------- 251,286,125 ---------------- ELECTRONIC TECHNOLOGY .4% Lockheed Martin Corp. ........................................... United States 1,925,600 87,884,384 ---------------- ENERGY MINERALS 5.3% BP PLC, ADR ..................................................... United Kingdom 3,500,000 179,200,000 a,b Callon Petroleum Company, wts., 12/08/10 ...................... United States 1,537,500 5,677,987 Canadian Oil Sands Trust ........................................ Canada 6,000,000 203,157,695 ChevronTexaco Corp. ............................................. United States 2,500,000 219,450,000 Marathon Oil Corp. .............................................. United States 4,812,500 162,036,875 a,c Mission Resources Corp. ....................................... United States 3,330,000 10,822,500 Petroleo Brasileiro SA, ADR ..................................... Brazil 1,600,000 53,600,000 Royal Dutch Petroleum Co., N.Y. shs. ............................ Netherlands 5,000,000 237,900,000 Yukos Corp., ADR ................................................ Russia 1,958,000 112,271,720 ---------------- 1,184,116,777 ---------------- FINANCE 2.6% Bank of America Corp. ........................................... United States 2,443,320 197,860,054 Comerica Inc. ................................................... United States 3,500,000 190,120,000 Fifth Third Bancorp ............................................. United States 1,000,000 55,370,000 JP Morgan Chase & Co. ........................................... United States 3,250,000 136,337,500 ---------------- 579,687,554 ----------------
Semiannual Report | 59 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) HEALTH TECHNOLOGY 3.7% Bristol-Myers Squibb Co. ........................................ United States 10,000,000 $ 242,300,000 Johnson & Johnson Inc. .......................................... United States 3,250,000 164,840,000 Merck & Co. Inc. ................................................ United States 6,700,000 296,073,000 Pfizer Inc. ..................................................... United States 3,000,000 105,150,000 ---------------- 808,363,000 ---------------- NON-ENERGY MINERALS .8% AngloGold Ltd., ADR ............................................. South Africa 2,250,000 95,107,500 Barrick Gold Corp. .............................................. Canada 3,000,000 71,340,000 ---------------- 166,447,500 ---------------- PROCESS INDUSTRIES .6% Dow Chemical Co. ................................................ United States 1,250,000 50,350,000 Georgia-Pacific Corp. ........................................... United States 2,500,000 84,225,000 ---------------- 134,575,000 ---------------- PRODUCER MANUFACTURING .5% General Electric Co. ............................................ United States 3,400,000 103,768,000 ---------------- REAL ESTATE INVESTMENT TRUSTS .7% Archstone-Smith Trust ........................................... United States 1,346,900 39,747,019 iStar Financial Inc. ............................................ United States 2,586,900 109,425,870 ---------------- 149,172,889 ---------------- TECHNOLOGY SERVICES a Anacomp Inc., A ................................................. United States 76,900 1,526,465 ---------------- UTILITIES 19.1% Alliant Energy Corp. ............................................ United States 5,000,000 130,300,000 Ameren Corp. .................................................... United States 7,000,000 322,630,000 American Electric Power Co. Inc. ................................ United States 5,500,000 181,060,000 CenterPoint Energy Inc. ......................................... United States 3,000,000 34,290,000 Cinergy Corp. ................................................... United States 5,500,000 224,895,000 a CMS Energy Corp. ................................................ United States 3,650,000 32,667,500 Dominion Resources Inc. ......................................... United States 5,000,000 321,500,000 DTE Energy Co. .................................................. United States 5,250,000 216,037,500 Duke Energy Corp. ............................................... United States 6,500,000 146,900,000 Edison International ............................................ United States 1,590,300 38,628,387 Energy East Corp. ............................................... United States 4,500,000 114,120,000 Exelon Corp. .................................................... United States 3,500,000 241,045,000 FirstEnergy Corp. ............................................... United States 8,000,000 312,640,000 FPL Group Inc. .................................................. United States 2,161,500 144,496,275 Hawaiian Electric Industries Inc. ............................... United States 860,000 44,582,400 KeySpan Corp. ................................................... United States 3,769,600 144,074,112 NiSource Inc. ................................................... United States 3,760,700 79,914,875 ONEOK Inc. ...................................................... United States 3,196,900 72,090,095
60 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) UTILITIES (CONT.) Pepco Holdings Inc. ............................................. United States 5,500,000 $ 112,420,000 Pinnacle West Capital Corp. ..................................... United States 3,250,000 127,887,500 PPL Corp. ....................................................... United States 2,500,000 114,000,000 Progress Energy Inc. ............................................ United States 3,924,000 184,741,920 Public Service Enterprise Group Inc. ............................ United States 3,000,000 140,940,000 Puget Energy Inc. ............................................... United States 4,000,000 89,480,000 Sempra Energy ................................................... United States 4,200,000 133,560,000 Southern Co. .................................................... United States 6,639,100 202,492,550 TECO Energy Inc. ................................................ United States 9,000,000 131,670,000 TXU Corp. ....................................................... United States 4,200,000 120,372,000 Xcel Energy Inc. ................................................ United States 4,332,500 77,161,825 ---------------- 4,236,596,939 ---------------- TOTAL COMMON STOCKS AND WARRANTS (COST $7,162,604,049) .......... 8,298,032,909 ---------------- PREFERRED STOCK COMMUNICATIONS a Nortel Inversora SA, B, ADR, pfd. ............................... Argentina 524,000 2,656,680 ---------------- PROCESS INDUSTRIES a,d Asia Pulp & Paper Co. Ltd., 12.00%, pfd. ...................... Indonesia 75,000,000 1,500,000 ---------------- TOTAL PREFERRED STOCK (COST $65,541,450) ........................ 4,156,680 ---------------- CONVERTIBLE PREFERRED STOCKS 9.6% COMMUNICATIONS .7% ALLTEL Corp., 7.75%, cvt. pfd. .................................. United States 2,900,000 147,088,000 a McLeodUSA Inc., 2.50%, cvt. pfd. ................................ United States 177,366 1,298,319 ---------------- 148,386,319 ---------------- CONSUMER DURABLES 2.3% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ............... United States 7,000,000 371,350,000 General Motors Corp., 6.25%, cvt. pfd. .......................... United States 4,500,000 137,745,000 ---------------- 509,095,000 ---------------- CONSUMER SERVICES .3% Goldman Sachs Group Inc. into Time Warner, 6.50%, cvt. pfd. ..... United States 4,500,000 70,843,500 ---------------- ELECTRONIC TECHNOLOGY .6% Lehman Brothers Holdings Inc. into Solectron Corp., 7.00%, cvt. pfd. United States 3,000,000 67,515,000 Motorola Inc., 7.00%, cvt. pfd. ................................. United States 1,250,000 60,700,000 ---------------- 128,215,000 ---------------- ENERGY MINERALS .6% Range Resources Corp., 5.90%, cvt. pfd. ......................... United States 900,000 67,950,000 Unocal Corp., 6.25%, cvt. pfd. .................................. United States 1,250,000 65,468,750 ---------------- 133,418,750 ----------------
Semiannual Report | 61 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (CONT.) FINANCE .4% Nuevo Financing I, 5.75%, cvt. pfd., A .......................... United States 1,583,100 $ 72,031,050 Travelers Property Casualty Corp., 4.50%, cvt. pfd. ............. United States 700,000 17,115,000 ---------------- 89,146,050 ---------------- HEALTH TECHNOLOGY .5% Goldman Sachs Group Inc. into Wyeth, 7.00%, cvt. pfd. ........... United States 1,400,000 55,455,400 Morgan Stanley into Pfizer Inc., 5.00%, cvt. pfd. ............... United States 1,780,000 62,413,475 ---------------- 117,868,875 ---------------- INDUSTRIAL SERVICES .8% Lehman Brothers Holdings Inc. into Rowan Companies, 6.00%, cvt. pfd. ..................................................... United States 4,000,000 87,400,000 Lehman Brothers Holdings Inc. into Weatherford International, 6.00%, cvt. pfd. ..................................................... United States 2,250,000 93,791,250 ---------------- 181,191,250 ---------------- PROCESS INDUSTRIES El Paso Energy Capital Trust I, 4.75%, cvt. pfd. ................ United States 199,200 6,374,400 ---------------- REAL ESTATE INVESTMENT TRUSTS 1.5% Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .................. United States 2,100,000 50,295,000 Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A .............. United States 3,550,000 89,779,500 Host Marriott Corp., 6.75%, cvt. pfd. ........................... United States 2,500,000 128,247,500 Reckson Associates Realty Corp., 7.625%, cvt. pfd., A ........... United States 1,900,000 50,587,500 ---------------- 318,909,500 ---------------- TECHNOLOGY SERVICES .9% Electronic Data Systems Corp., 7.625%, cvt. pfd. ................ United States 2,000,000 37,940,000 Morgan Stanley into Accenture Inc., 6.00%, cvt. pfd. ............ United States 6,750,000 157,443,750 ---------------- 195,383,750 ---------------- UTILITIES 1.0% American Electric Power Co. Inc., 9.25%, cvt. pfd. .............. United States 848,400 40,002,060 CMS Energy Trust I, 7.75%, cvt. pfd. ............................ United States 1,150,000 49,709,900 ONEOK Inc., 8.50%, cvt. pfd. .................................... United States 700,000 21,938,000 Sempra Energy, 8.50%, cvt. pfd. ................................. United States 2,000,000 57,740,000 TXU Corp., 8.75%, cvt. pfd. ..................................... United States 1,300,000 47,606,000 ---------------- 216,995,960 ---------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,052,168,216) ........ 2,115,828,354 ---------------- ----------------- PRINCIPAL AMOUNT ----------------- BONDS 26.0% COMMUNICATIONS 2.8% Qwest Capital Funding, 7.00%, 8/03/09 ........................... United States $ 165,000,000 145,612,500 Qwest Capital Funding, 7.25%, 2/15/11 ........................... United States 145,000,000 125,425,000 Qwest Communications Inc., senior notes, 144A, 7.50%, 2/15/14 ... United States 90,000,000 85,275,000
62 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) COMMUNICATIONS (CONT.) Qwest Corp., 7.20%, 11/10/26 .................................... United States $ 38,000,000 $ 35,150,000 Qwest Corp., 6.875%, 9/15/33 .................................... United States 70,000,000 62,300,000 Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 ......... United States 47,400,000 43,963,500 Time Warner Telecom Inc., senior note, 144A, 9.25%, 2/15/14 ..... United States 52,500,000 53,287,500 d WorldCom Inc., 8.00%, 5/15/06 ................................... United States 150,000,000 51,000,000 d WorldCom Inc., 7.50%, 5/15/11 ................................... United States 73,000,000 24,820,000 ---------------- 626,833,500 ---------------- CONSUMER DURABLES .6% General Motors, 8.375%, 7/15/33 ................................. United States 125,000,000 142,214,375 ---------------- CONSUMER NON-DURABLES d Compania Alimentos Fargo SA, 13.25%, 8/01/08 .................... Argentina 27,000,000 4,860,000 ---------------- CONSUMER SERVICES 5.1% d Adelphia Communications Corp., senior note, 7.875%, 5/01/09 ..... United States 53,600,000 49,848,000 d Adelphia Communications Corp., senior note, 10.875%, 10/01/10 ... United States 55,000,000 53,625,000 e Cablevision Systems Corp., senior note, 144A, 8.00%, 4/15/12 .... United States 192,000,000 192,480,000 Charter Communications Holdings LLC, senior note, 8.25%, 4/01/07 ....................................................... United States 214,800,000 205,671,000 Charter Communications Holdings LLC, senior note, 8.625%, 4/01/09 ....................................................... United States 155,000,000 128,650,000 Charter Communications Holdings LLC, senior note, 10.75%, 10/01/09 ...................................................... United States 70,000,000 61,600,000 CKE Restaurants Inc., senior sub. note, 9.125%, 5/01/09 ......... United States 12,900,000 13,448,250 Coast Hotel & Casino Inc., senior sub. note, 9.50%, 4/01/09 ..... United States 38,900,000 41,039,500 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .............. United States 118,000,000 125,080,000 CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ............ United States 40,000,000 41,900,000 EchoStar DBS Corp., senior note, 10.375%, 10/01/07 .............. United States 49,000,000 53,532,500 El Dorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ........ United States 7,052,000 7,122,520 Host Marriott LP, senior note, 7.125%, 11/01/13 ................. United States 60,000,000 62,550,000 Six Flags Inc., senior note, 9.50%, 2/01/09 ..................... United States 45,000,000 47,700,000 Universal City Development, senior note, 11.75%, 4/01/10 ........ United States 8,000,000 9,350,000 Young Broadcasting Inc., senior sub. note, 10.00%, 3/01/11 ...... United States 23,768,000 25,550,600 ---------------- 1,119,147,370 ---------------- ELECTRONIC TECHNOLOGY .9% Invensys PLC, 144A, 9.875%, 3/15/11 ............................. United Kingdom 51,100,000 52,633,000 Lucent Technologies, 6.45%, 3/15/29 ............................. United States 180,000,000 153,000,000 Solectron Corp., senior note, 9.625%, 2/15/09 ................... United States 3,400,000 3,774,000 ---------------- 209,407,000 ---------------- ENERGY MINERALS .6% Callon Petroleum Co., 144A, 9.75%, 12/08/10 ..................... United States 117,500,000 112,226,394 c Mission Resources Corp., senior sub. note, C, 10.875%, 4/01/07 .. United States 24,600,000 24,723,000 ---------------- 136,949,394 ----------------
Semiannual Report | 63 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) FINANCE .7% Ford Motor Credit Co., 7.00%, 10/01/13 .......................... United States $ 150,000,000 $ 158,564,700 ---------------- HEALTH SERVICES 1.7% HealthSouth Corp., senior note, 7.625%, 6/01/12 ................. United States 75,000,000 74,062,500 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ........... United States 200,000,000 174,000,000 Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ............ United States 145,000,000 131,587,500 ---------------- 379,650,000 ---------------- INDUSTRIAL SERVICES 1.3% El Paso Corp., senior note, 6.75%, 5/15/09 ...................... United States 157,500,000 139,781,250 El Paso Corp., senior note, 7.75%, 1/15/32 ...................... United States 100,000,000 80,750,000 El Paso Production Holdings, 7.75%, 6/01/13 ..................... United States 24,000,000 22,380,000 Hanover Equipment Trust 01, senior secured note, B, 8.75%, 9/01/11 ....................................................... United States 16,200,000 17,658,000 Williams Co. Inc., 7.125%, 9/01/11 .............................. United States 30,000,000 31,650,000 ---------------- 292,219,250 ---------------- PROCESS INDUSTRIES 1.8% Consoltex Group Inc., PIK, 11.00%, 1/31/09 ...................... United States 58,995,205 5,899 Equistar Chemicals LP, senior note, 10.125%, 9/01/08 ............ United States 49,800,000 53,784,000 Four M Corp., senior note, B, 12.00%, 6/01/06 ................... United States 30,000,000 29,850,000 Graphic Packaging International Corp., 9.50%, 8/15/13 ........... United States 50,000,000 56,750,000 Huntsman LLC, 11.625%, 10/15/10 ................................. United States 52,600,000 55,493,000 Lyondell Chemical Co., 9.625%, 5/01/07 .......................... United States 82,000,000 85,280,000 Lyondell Chemical Co., senior secured note, 10.50%, 6/01/13 ..... United States 71,500,000 75,790,000 Nalco Co., senior sub. note, 144A, 8.875%, 11/15/13 ............. United States 2,800,000 2,933,000 d Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ..... Indonesia 87,000,000 31,755,000 ---------------- 391,640,899 ---------------- PRODUCER MANUFACTURING .9% Case New Holland Inc., senior note, 144A, 9.25%, 8/01/11 ........ United States 78,000,000 88,530,000 Dana Corp., 7.00%, 3/01/29 ...................................... United States 41,000,000 41,102,500 H&E Equipment/Finance, 11.125%, 6/15/12 ......................... United States 26,000,000 27,170,000 Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 Canada 30,000,000 31,050,000 ---------------- 187,852,500 ---------------- REAL ESTATE INVESTMENT TRUSTS 1.1% Felcor Lodging LP, 9/15/08 ...................................... United States 74,000,000 79,180,000 HMH Properties Inc., B, 7.875%, 8/01/08 ......................... United States 75,000,000 78,187,500 Meristar Hospitality Corp., 9.125%, 1/15/11 ..................... United States 72,500,000 76,668,750 ---------------- 234,036,250 ---------------- UTILITIES 8.5% Allegheny Energy Supply Co. LLC, 7.80%, 3/15/11 ................. United States 90,000,000 88,200,000 Allegheny Energy Supply Co. LLC, 144A, 8.75%, 4/15/12 ........... United States 140,000,000 140,000,000 Aquila Inc., 14.875%, 7/01/12 ................................... United States 97,500,000 131,625,000 Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 ...... Canada 158,000,000 117,710,000 Calpine Corp., senior note, 8.50%, 2/15/11 ...................... United States 292,500,000 216,450,000
64 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) UTILITIES (CONT.) Calpine Corp., senior secured note, 144A, 8.75%, 7/15/13 ........ United States $ 45,000,000 $ 41,400,000 Calpine Corp., senior note, 8.625%, 8/15/10 ..................... United States 128,000,000 94,720,000 Calpine Corp., senior note, 7.875%, 4/01/08 ..................... United States 125,000,000 91,718,750 Calpine Generating Co., 144A, 10.25%, 4/01/11 ................... United States 50,000,000 47,625,000 CMS Energy Corp., senior note, 144A, 7.75%, 8/01/10 ............. United States 40,000,000 41,700,000 Dynegy Holdings Inc., secured note, 144A, 9.875%, 7/15/10 ....... United States 100,000,000 109,250,000 Dynegy Holdings Inc., secured note, 144A, 10.125%, 7/15/13 ...... United States 97,000,000 106,942,500 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 .............. United States 147,500,000 129,062,500 Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ............... United States 100,000,000 95,000,000 FirstEnergy Corp., 6.45%, 11/15/11 .............................. United States 60,000,000 65,809,440 Pacific Gas & Electric Co., 6.05%, 3/01/34 ...................... United States 240,000,000 243,757,680 Sierra Pacific Resources, 8.75%, 5/15/05 ........................ United States 114,900,000 123,517,500 ---------------- 1,884,488,370 ---------------- TOTAL BONDS (COST $5,578,830,313) ............................... 5,767,863,608 ---------------- CONVERTIBLE BONDS 3.6% COMMUNICATIONS .3% Nextel Communications Inc., cvt., 5.25%, 1/15/10 ................ United States 60,000,000 60,600,000 ---------------- CONSUMER SERVICES .3% d Adelphia Communications Corp., junior sub. note, cvt., 6.00%, 2/15/06 ....................................................... United States 85,000,000 35,700,000 Charter Communications Inc., cvt., 5.75%, 10/15/05 .............. United States 22,000,000 21,450,000 Charter Communications Inc., cvt., 4.75%, 6/01/06 ............... United States 4,400,000 4,180,000 ---------------- 61,330,000 ---------------- ELECTRONIC TECHNOLOGY 1.5% Liberty Media Corp. into Motorola, senior deb., cvt., 3.50%, 1/15/31 ....................................................... United States 5,000,000 4,593,750 Nortel Networks Corp., senior note, cvt., 4.25%, 9/01/08 ........ Canada 230,000,000 234,887,500 SCI Systems Inc., sub. note, cvt., 3.00%, 3/15/07 ............... United States 100,000,000 96,250,000 ---------------- 335,731,250 ---------------- HEALTH TECHNOLOGY .1% Enzon Pharmaceuticals Inc., cvt., 4.50%, 7/01/08 ................ United States 13,500,000 13,061,250 ---------------- INDUSTRIAL SERVICES .2% Hanover Compressor Co., cvt., 4.75%, 3/15/08 .................... United States 55,000,000 52,250,000 ---------------- NON-ENERGY MINERALS Trizec Hahn Corp. into Barrick Gold, cvt., senior deb., 3.00%, 1/29/21 ....................................................... Canada 9,900,000 8,068,500 ---------------- REAL ESTATE INVESTMENT TRUSTS 1.2% Host Marriott LP, 144A, cvt., 3.25%, 3/15/24 .................... United States 140,000,000 141,965,600 Meristar Hospitality Corp., cvt., 9.50%, 4/01/10 ................ United States 95,000,000 122,550,000 ---------------- 264,515,600 ---------------- TOTAL CONVERTIBLE BONDS (COST $700,149,655) ..................... 795,556,600 ----------------
Semiannual Report | 65 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- ZERO COUPON/STEP-UP BONDS 4.3% COMMERCIAL SERVICES .3% Johnsondiversey Inc., zero cpn. to 5/15/07, 10.67% thereafter, 5/15/13 ....................................................... United States $ 100,000,000 $ 76,000,000 ---------------- CONSUMER SERVICES 2.0% Charter Communications Holdings LLC, senior disc. note, zero cpn. to 4/01/04, 9.92% thereafter, 4/01/11 ............... United States 160,000,000 133,200,000 Charter Communications Holdings LLC, senior disc. note, zero cpn. to 1/15/06, 13.50% thereafter, 1/15/11 .............. United States 150,000,000 108,000,000 Dex Media Inc., zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 United States 200,000,000 129,000,000 Quebecor Media Inc., senior disc. note, zero cpn. to 7/15/06, 13.75% thereafter, 7/15/11 .................................... Canada 55,200,000 50,508,000 Yell Finance BV, senior disc. note, zero cpn. to 8/01/06, 13.50% thereafter, 8/01/11 .................................... United Kingdom 26,865,000 25,387,425 ---------------- 446,095,425 ---------------- INDUSTRIAL SERVICES .1% Hanover Compressor Co., sub. note, zero cpn., 3/31/07 ........... United States 35,000,000 27,125,000 ---------------- PROCESS INDUSTRIES 1.9% HMP Equity Holdings Corp., 144A, zero cpn., 5/15/08 ............. United States 21,500,000 14,405,000 Huntsman ICI Holdings LLC, senior disc. note, zero cpn., 12/31/09 United States 180,000,000 83,700,000 Nalco Finance Holdings, senior note, 144A, zero cpn. to 8/1/09, 9.00% thereafter, 2/01/14 ..................................... United States 515,000,000 309,000,000 ---------------- 407,105,000 ---------------- TOTAL ZERO COUPON/STEP-UP BONDS (COST $976,639,275) ............. 956,325,425 ---------------- AGENCY BONDS 3.6% FHLMC, 5.00%, 5/01/33 ........................................... United States 1,986,447 1,998,465 FHLMC, 5.00%, 6/01/33 ........................................... United States 3,962,173 3,986,145 FHLMC, 5.00%, 7/01/33 ........................................... United States 3,982,285 4,006,378 FHLMC, 5.00%, 8/01/33 ........................................... United States 7,875,803 7,923,451 FHLMC, 5.00%, 9/01/33 ........................................... United States 22,850,585 22,988,832 FHLMC, 5.00%, 10/01/33 .......................................... United States 59,396,834 59,756,188 FHLMC, 5.00%, 11/01/33 .......................................... United States 29,649,104 29,828,482 FHLMC, 5.00%, 12/01/33 .......................................... United States 57,622,949 57,971,571 FHLMC, 5.00%, 1/01/34 ........................................... United States 64,679,411 65,070,966 FHLMC, 5.00%, 2/01/34 ........................................... United States 13,973,807 14,058,467 FHLMC, 5.00%, 8/01/33 ........................................... United States 8,907,174 8,961,062 FHLMC, 5.00%, 2/01/34 ........................................... United States 72,821,769 73,262,343 GNMA, 5.00%, 4/15/33 ............................................ United States 3,999,600 4,034,287 GNMA, 5.00%, 7/15/33 ............................................ United States 1,000,099 1,008,773 GNMA, 5.00%, 8/15/33 ............................................ United States 38,997,707 39,335,924 GNMA, 5.00%, 9/15/33 ............................................ United States 84,993,545 85,730,665 GNMA, 5.00%, 10/15/33 ........................................... United States 33,997,023 34,291,867 GNMA, 5.00%, 11/15/33 ........................................... United States 8,999,105 9,077,151 GNMA, 5.00%, 1/15/34 ............................................ United States 2,000,198 2,017,325
66 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- AGENCY BONDS (CONT.) GNMA, 5.00%, 3/15/34 ............................................ United States $ 26,000,200 $ 26,222,827 GNMA, 5.00%, 4/01/34 ............................................ United States 250,000,000 251,797,000 ---------------- TOTAL AGENCY BONDS (COST $792,699,051) .......................... 803,328,169 ---------------- MUNICIPAL BONDS 1.9% California State GO, 5.00%, 2/01/26 ............................. United States 10,450,000 10,464,734 California State GO, 5.25%, 11/01/26 ............................ United States 25,000,000 25,603,750 California State GO, 5.25%, 11/01/27 ............................ United States 20,400,000 20,876,952 California State GO, 5.25%, 2/01/28 ............................. United States 24,600,000 25,143,906 California State GO, 5.00%, 2/01/32 ............................. United States 65,250,000 64,953,765 California State GO, 5.00%, 2/01/33 ............................. United States 126,650,000 125,802,400 California State GO, Refunding, 5.25%, 2/01/33 .................. United States 28,500,000 29,021,550 California State Various Purpose GO, 5.25%, 11/01/28 ............ United States 25,000,000 25,565,250 California State Various Purpose GO, 5.25%, 11/01/29 ............ United States 22,500,000 22,991,625 California State Various Purpose GO, 5.50%, 11/01/33 ............ United States 55,300,000 57,834,952 ---------------- TOTAL MUNICIPAL BONDS (COST $391,387,870) ....................... 408,258,884 ---------------- TOTAL LONG TERM INVESTMENTS (COST $17,720,019,879) .............. 19,149,350,629 ---------------- ------------ SHARES ------------ SHORT TERM INVESTMENT (COST $158,578,689) .7% f Franklin Institutional Fiduciary Trust Money Market Portfolio ... United States 158,578,689 158,578,689 ---------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $17,878,598,568) ........................................ 19,307,929,318 ---------------- ------------------ PRINCIPAL AMOUNT ------------------ REPURCHASE AGREEMENTS 14.3% g Joint Repurchase Agreement, 1.010%, 4/01/04 (Maturity Value $3,100,021,247) ............................... United States $ 3,099,934,277 3,099,934,277 ABN AMRO Bank, N.V., New York Branch (Maturity Value $307,119,105) Banc of America Securities LLC (Maturity Value $144,553,991) Barclays Capital Inc. (Maturity Value $307,119,105) Bear, Stearns & Co. Inc. (Maturity Value $144,553,991) BNP Paribas Securities Corp. (Maturity Value $307,119,105) Deutsche Bank Securities Inc. (Maturity Value $307,119,105) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $144,553,991) Goldman, Sachs & Co. (Maturity Value $307,119,105) Greenwich Capital Markets Inc. (Maturity Value $307,119,105) Lehman Brothers Inc. (Maturity Value $209,406,434) Morgan Stanley & Co. Inc. (Maturity Value $307,119,105) UBS Securities LLC (Maturity Value $307,119,105) Collateralized by U.S. Treasury Bills, Notes, and Bonds, and U.S. Government Agency Securities
Semiannual Report | 67 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (CONT.) h Barclays Capital Inc., 1.07%, 4/01/04 (Maturity Value $1,562,079) ................................... United States $ 1,562,033 $ 1,562,033 Collateralized by U.S. Government Agency Securities h Bear, Stearns & Co. Inc., 1.08%, 4/01/04 (Maturity Value $15,000,773) .................................. United States 15,000,323 15,000,323 Collateralized by U.S. Government Agency Securities h Deutsche Bank Securities Inc., 1.10%, 4/01/04 (Maturity Value $15,000,789) .................................. United States 15,000,331 15,000,331 Collateralized by U.S. Government Agency Securities h Morgan Stanley & Co. Inc., 1.10%, 4/01/04 (Maturity Value $15,000,789) .................................. United States 15,000,331 15,000,331 Collateralized by U.S. Government Agency Securities h Goldman, Sachs & Co., 1.10%, 4/01/04 (Maturity Value $15,000,789) .................................. United States 15,000,331 15,000,331 Collateralized by U.S. Government Agency Securities h JP Morgan Securities Inc., 1.10%, 4/01/04 (Maturity Value $15,000,789) .................................. United States 15,000,331 15,000,331 Collateralized by U.S. Government Agency Securities ---------------- TOTAL REPURCHASE AGREEMENTS (COST $3,176,497,957) ............... 3,176,497,957 ---------------- TOTAL INVESTMENTS (COST $21,055,096,525) 101.5% ................. 22,484,427,275 OTHER ASSETS, LESS LIABILITIES (1.5)% ........................... (333,157,117) ---------------- NET ASSETS 100.0% ............................................... $22,151,270,158 ---------------- See glossary of terms on page 84. a Non-income producing. b See Note 8 regarding restricted securities. c See Note 9 regarding holdings of 5% voting securities. d The fund discontinues accruing income on defaulted securities. See Note 7. e See Note 1(d) regarding securities purchased on a when-issued, delayed delivery or TBA basis. f See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. g See Note 1(c) regarding repurchase agreements. h Collateral for loaned securities. See Note 1(f).
68 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2003 2002 2001 2000 1999 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...... $6.81 $6.99 $6.93 $6.63 $6.62 $6.99 ---------------------------------------------------------------------------------- Income from investment operations: Net investment income a .................. .13 .28 .38 .41d .43 .44 Net realized and unrealized gains (losses) ................................. .01 (.10) .09 .33d .01 (.37) ---------------------------------------------------------------------------------- Total from investment operations .......... .14 .18 .47 .74 .44 .07 ---------------------------------------------------------------------------------- Less distributions from net investment income ................................... (.19) (.36) (.41) (.44) (.43) (.44) ---------------------------------------------------------------------------------- Net asset value, end of period ............ $6.76 $6.81 $6.99 $6.93 $6.63 $6.62 ---------------------------------------------------------------------------------- Total return b ............................ 2.12% 2.66% 7.06% 11.52% 6.90% 1.05% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ......... $6,910,272 $7,286,317 $7,726,914 $7,197,334 $6,852,374 $7,895,906 Ratios to average net assets: Expenses ................................. .71%c .70% .69% .68% .70% .67% Net investment income .................... 4.03%c 4.11% 5.48% 6.12%d 6.62% 6.43% Portfolio turnover rate ................... 17.39% 66.96% 44.62% 19.18% 3.98% 15.04% a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ........................... $(.008) Net realized and unrealized gains (losses) per share ...... .008 Ratio of net investment income to average net assets ...... (.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy.
Semiannual Report | 69 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2003 2002 2001 2000 1999 E ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $6.80 $6.98 $6.93 $6.63 $6.62 $6.91 ------------------------------------------------------------------------ Income from investment operations: Net investment income a ........................... .12 .25 .34 .37d .39 .30 Net realized and unrealized gains (losses) ........ -- (.10) .09 .33d .01 (.28) ------------------------------------------------------------------------ Total from investment operations ................... .12 .15 .43 .70 .40 .02 ------------------------------------------------------------------------ Less distributions from net investment income ...... (.17) (.33) (.38) (.40) (.39) (.31) ------------------------------------------------------------------------ Net asset value, end of period ..................... $6.75 $6.80 $6.98 $6.93 $6.63 $6.62 ------------------------------------------------------------------------ Total return b ..................................... 1.85% 2.13% 6.37% 10.94% 6.35% .25% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $630,526 $678,814 $559,966 $225,517 $80,167 $51,433 Ratios to average net assets: Expenses .......................................... 1.24%c 1.23% 1.22% 1.22% 1.25% 1.22%c Net investment income ............................. 3.50%c 3.58% 4.95% 5.51%d 6.07% 5.93%c Portfolio turnover rate ............................ 17.39% 66.96% 44.62% 19.18% 3.98% 15.04% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ......................... $(.008) Net realized and unrealized gains (losses) per share .... .008 Ratio of net investment income to average net assets .... (.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. e For the period January 1, 1999 (effective date) to September 30, 1999.
70 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............... $6.78 $6.97 $6.91 $6.61 $6.60 $6.97 ------------------------------------------------------------------------ Income from investment operations: Net investment income a ........................... .12 .25 .34 .37d .39 .40 Net realized and unrealized gains (losses) ........ -- (.11) .10 .33d .01 (.37) ------------------------------------------------------------------------ Total from investment operations ................... .12 .14 .44 .70 .40 .03 ------------------------------------------------------------------------ Less distributions from net investment income ...... (.17) (.33) (.38) (.40) (.39) (.40) ------------------------------------------------------------------------ Net asset value, end of period ..................... $6.73 $6.78 $6.97 $6.91 $6.61 $6.60 ------------------------------------------------------------------------ Total return b ..................................... 1.85% 2.00% 6.53% 10.96% 6.36% .50% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .................. $706,219 $814,635 $803,049 $422,114 $264,413 $308,961 Ratios to average net assets: Expenses .......................................... 1.24%c 1.23% 1.21% 1.22% 1.25% 1.22% Net investment income ............................. 3.50%c 3.58% 4.96% 5.55%d 6.08% 5.89% Portfolio turnover rate ............................ 17.39% 66.96% 44.62% 19.18% 3.98% 15.04% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share .......................... $(.008) Net realized and unrealized gains (losses) per share ..... .008 Ratio of net investment income to average net assets ..... (.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy.
Semiannual Report | 71 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
--------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, CLASS R (UNAUDITED) 2003 2002 D --------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $6.81 $6.99 $6.81 ---------------------------------------- Income from investment operations: Net investment income a ........................................ .12 .25 .25 Net realized and unrealized gains (losses) ..................... .01 (.09) .22 ---------------------------------------- Total from investment operations ................................ .13 .16 .47 ---------------------------------------- Less distributions from net investment income ................... (.18) (.34) (.29) ---------------------------------------- Net asset value, end of period .................................. $6.76 $6.81 $6.99 ---------------------------------------- Total return b .................................................. 1.93% 2.29% 7.03% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............................... $56,264 $54,042 $14,042 Ratios to average net assets: Expenses ....................................................... 1.09%c 1.08% 1.07%c Net investment income .......................................... 3.65%c 3.73% 5.10%c Portfolio turnover rate ......................................... 17.39% 66.96% 44.62% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 2002 (effective date) to September 30, 2002.
72 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
----------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2003 2002 2001 2000 1999 ----------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $6.83 $7.01 $6.94 $6.64 $6.63 $7.00 ----------------------------------------------------------------------- Income from investment operations: Net investment income a ............................ .14 .29 .38 .43d .44 .45 Net realized and unrealized gains (losses) ......... -- (.10) .11 .32d -- (.37) ----------------------------------------------------------------------- Total from investment operations .................... .14 .19 .49 .75 .44 .08 ----------------------------------------------------------------------- Less distributions from net investment income ....... (.20) (.37) (.42) (.45) (.43) (.45) ----------------------------------------------------------------------- Net asset value, end of period ...................... $6.77 $6.83 $7.01 $6.94 $6.64 $6.63 ----------------------------------------------------------------------- Total return b ...................................... 2.03% 2.79% 7.33% 11.63% 7.02% 1.16% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $328,402 $308,411 $198,437 $19,960 $46,775 $15,544 Ratios to average net assets: Expenses ........................................... .59%c .58% .57% .57% .60% .57% Net investment income .............................. 4.15%c 4.23% 5.60% 6.30%d 6.73% 6.53% Portfolio turnover rate ............................. 17.39% 66.96% 44.62% 19.18% 3.98% 15.04% a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Annualized. d Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ......................... $(.008) Net realized and unrealized gains (losses) per share .... .008 Ratio of net investment income to average net assets .... (.11)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy.
Semiannual Report | See notes to financial statements. | 73 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 96.1% a GNMA I, SF, 5.00%, 2/15/33 - 4/01/34 ................................................. $ 589,310,841 $ 594,372,915 GNMA II, 5.00%, 7/20/33 - 12/20/33 ................................................... 808,557,577 814,515,564 a GNMA I, SF, 5.50%, 4/15/03 - 2/15/34 ................................................. 1,947,442,637 2,005,539,140 GNMA II, 5.50%, 7/20/33 - 3/15/34 .................................................... 151,874,996 156,214,641 GNMA I, SF, 6.00%, 9/15/23 - 8/15/33 ................................................. 1,371,361,977 1,434,102,552 GNMA II, 6.00%, 10/20/23 - 2/20/31 ................................................... 29,021,114 30,382,554 GNMA I, SF, 6.50%, 5/15/23 - 3/15/33 ................................................. 1,086,847,574 1,149,614,718 GNMA II, 6.50%, 6/20/24 - 3/20/33 .................................................... 234,174,854 246,813,229 GNMA I, SF, 6.75%, 3/15/26 - 4/15/26 ................................................. 305,423 325,388 GNMA PL, 6.75%, 1/15/34 .............................................................. 34,379,584 36,513,191 GNMA I, SF, 7.00%, 4/15/16 - 9/15/32 ................................................. 802,474,497 857,566,675 GNMA II, 7.00%, 2/20/28 - 7/20/33 .................................................... 286,112,060 304,100,791 GNMA PL, 7.00%, 9/15/35 .............................................................. 8,604,030 9,103,731 GNMA I, SF, 7.25%, 11/15/25 - 1/15/26 ................................................ 1,882,475 2,023,872 GNMA I, SF, 7.50%, 6/15/05 - 8/15/32 ................................................. 188,556,643 203,832,754 GNMA II, 7.50%, 10/20/22 - 1/20/32 ................................................... 31,286,524 33,621,838 GNMA I, SF, 7.70%, 12/15/20 - 1/15/22 ................................................ 1,632,151 1,794,100 GNMA I, SF, 8.00%, 10/15/07 - 9/15/30 ................................................ 134,723,217 148,415,241 GNMA II, 8.00%, 8/20/16 - 6/20/30 .................................................... 12,296,138 13,402,770 GNMA I, GP, 8.25%, 3/15/17 - 11/15/17 ................................................ 665,029 734,802 GNMA I, SF, 8.25%, 3/15/27 - 11/15/27 ................................................ 418,310 458,117 GNMA I, SF, 8.50%, 12/15/09 - 6/15/25 ................................................ 26,324,524 29,257,191 GNMA II, 8.50%, 4/20/16 - 6/20/25 .................................................... 5,057,387 5,585,103 GNMA II, 8.75%, 3/20/17 - 7/20/17 .................................................... 122,791 136,700 GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 ................................................ 34,016,733 38,162,998 GNMA II, 9.00%, 5/20/16 - 11/20/21 ................................................... 1,606,788 1,794,439 GNMA I, GP, 9.25%, 5/15/16 - 12/15/16 ................................................ 796,189 887,272 GNMA I, SF, 9.50%, 5/15/09 - 1/15/23 ................................................. 20,015,567 22,407,096 GNMA II, 9.50%, 8/20/17 - 4/20/25 .................................................... 1,212,607 1,354,922 GNMA I, GP, 10.00%, 11/15/09 - 8/15/13 ............................................... 817,258 905,632 GNMA I, SF, 10.00%, 4/15/12 - 3/15/25 ................................................ 24,141,536 27,385,129 GNMA II, 10.00%, 8/20/15 - 3/20/21 ................................................... 2,049,043 2,314,425 GNMA I, GP, 10.25%, 6/15/18 - 8/15/20 ................................................ 61,559 69,734 GNMA I, SF, 10.50%, 12/15/09 - 10/15/21 .............................................. 18,479,321 21,083,985 GNMA II, 10.50%, 9/20/13 - 3/20/21 ................................................... 4,884,251 5,545,709 GNMA I, GP, 11.00%, 12/15/09 - 1/15/11 ............................................... 1,575,167 1,768,657 GNMA I, SF, 11.00%, 11/15/09 - 5/15/21 ............................................... 17,915,895 20,416,050 GNMA II, 11.00%, 8/20/13 - 1/20/21 ................................................... 1,016,608 1,160,819 GNMA I, GP, 11.25%, 6/15/13 - 1/15/16 ................................................ 497,930 569,244 GNMA I, GP, 11.50%, 1/15/13 - 6/15/13 ................................................ 144,071 165,165 GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 ............................................... 4,108,189 4,739,159 GNMA II, 11.50%, 8/20/13 - 2/20/18 ................................................... 430,720 494,991 GNMA I, GP, 11.75%, 7/15/13 - 12/15/15 ............................................... 96,861 111,234 GNMA I, GP, 12.00%, 3/15/11 - 1/15/13 ................................................ 51,840 59,409 GNMA I, SF, 12.00%, 5/15/11 - 7/15/18 ................................................ 19,285,626 22,373,186 GNMA II, 12.00%, 9/20/13 - 2/20/16 ................................................... 746,698 863,041 GNMA I, GP, 12.50%, 4/15/10 - 7/15/10 ................................................ 152,913 175,026 GNMA I, SF, 12.50%, 4/15/10 - 8/15/18 ................................................ 17,928,410 20,800,544
74 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (CONT.) GNMA II, 12.50%, 10/20/13 - 11/20/15 ................................................. $ 783,505 $ 910,555 GNMA I, GP, 12.75%, 5/15/14 .......................................................... 6,916 8,058 GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 ................................................ 19,750,717 23,117,959 GNMA II, 13.00%, 10/20/13 - 9/20/15 .................................................. 608,135 712,438 --------------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ....................................... 8,298,784,453 b ALLOWANCE FOR PAYDOWNS ............................................................... (7,255,135) --------------- TOTAL LONG TERM INVESTMENTS (COST $8,072,277,035) .................................... 8,291,529,318 --------------- ---------------- SHARES ---------------- SHORT TERM INVESTMENT (COST $158,578,689) 1.8% c Franklin Institutional Fiduciary Trust Money Market Portfolio ........................ 158,578,689 158,578,689 --------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $8,230,855,724) .................. 8,450,108,007 --------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENT (COST $214,885,000) 2.5% d Barclays Capital Inc., 1.00%, 4/01/04 (Maturity Value $214,890,969) .................. $ 214,885,000 214,885,000 --------------- TOTAL INVESTMENTS (COST $8,445,740,724) 100.4% ....................................... 8,664,993,007 OTHER ASSETS, LESS LIABILITIES (.4)% ................................................. (33,311,141) --------------- NET ASSETS 100.0% .................................................................... $8,631,681,866 --------------- See glossary of terms on page 84. a See Note 1(d) regarding securities purchased on a when-issued, delayed delivery or TBA basis. b See Note 1(e) regarding allowance for paydowns. c See Note 6 regarding investments in the Franklin Institutional Fiduciary Trus Money Market Portfolio. d See Note 1(c) regarding repurchase agreements.
Semiannual Report | See notes to financial statements. | 75 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $8.80 $7.96 $10.02 $10.89 $ 9.58 $11.36 ----------------------------------------------------------------------------------- Income from investment operations: Net investment income a ................. .21 .42 .46 .46 .43 .48 Net realized and unrealized gains (losses) ................................ .98 .85 (1.60) (.86) 1.69 (1.41) ----------------------------------------------------------------------------------- Total from investment operations ......... 1.19 1.27 (1.14) (.40) 2.12 (.93) Less distributions from: Net investment income ................... (.20) (.43) (.45) (.45) (.45) (.52) Net realized gains ...................... -- -- (.47) (.02) (.36) (.33) ----------------------------------------------------------------------------------- Total distributions ...................... (.20) (.43) (.92) (.47) (.81) (.85) ----------------------------------------------------------------------------------- Net asset value, end of period ........... $9.79 $8.80 $ 7.96 $10.02 $10.89 $ 9.58 ----------------------------------------------------------------------------------- Total return b ........................... 13.66% 16.38% (12.49)% (4.03)% 24.27% (8.54)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $1,398,513 $1,259,886 $1,090,216 $1,349,027 $1,574,897 $1,594,862 Ratios to average net assets: Expenses ................................ .81%c .83% .80% .79% .83% .80% Net investment income ................... 4.58%c 5.00% 4.87% 4.26% 4.74% 4.60% Portfolio turnover rate .................. 10.12% 25.81% 30.60% 34.03% 19.86% 33.99% a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
76 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2003 2002 2001 2000 1999 D --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $8.80 $7.97 $10.02 $10.90 $ 9.59 $11.08 --------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment incomea .......................... .19 .37 .41 .41 .38 .31 Net realized and unrealized gains (losses) ...... .98 .85 (1.58) (.87) 1.70 (1.44) --------------------------------------------------------------------------- Total from investment operations ................. 1.17 1.22 (1.17) (.46) 2.08 (1.13) --------------------------------------------------------------------------- Less distributions from: Net investment income ........................... (.18) (.39) (.41) (.40) (.41) (.36) Net realized gains .............................. -- -- (.47) (.02) (.36) -- --------------------------------------------------------------------------- Total distributions .............................. (.18) (.39) (.88) (.42) (.77) (.36) --------------------------------------------------------------------------- Net asset value, end of period ................... $9.79 $8.80 $ 7.97 $10.02 $10.90 $ 9.59 --------------------------------------------------------------------------- Total return b ................................... 13.39% 15.88% (12.88)% (4.58)% 23.79% (10.37)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $117,469 $95,321 $32,802 $15,212 $8,819 $3,142 Ratios to average net assets: Expenses ........................................ 1.32%c 1.34% 1.31% 1.30% 1.34% 1.31%c Net investment income ........................... 4.07%c 4.49% 4.44% 3.74% 4.11% 4.12%c Portfolio turnover rate .......................... 10.12% 25.81% 30.60% 34.03% 19.86% 33.99% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 1999 (effective date) to September 30, 1999.
Semiannual Report | 77 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2003 2002 2001 2000 1999 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $8.78 $7.95 $10.01 $10.88 $ 9.57 $11.35 --------------------------------------------------------------------------- Income from investment operations: Net investment incomea .......................... .19 .36 .41 .41 .38 .43 Net realized and unrealized gains (losses) ...... .98 .86 (1.59) (.87) 1.69 (1.42) --------------------------------------------------------------------------- Total from investment operations ................. 1.17 1.22 (1.18) (.46) 2.07 (.99) --------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income ........................... (.18) (.39) (.41) (.39) (.40) (.46) Net realized gains .............................. -- -- (.47) (.02) (.36) (.33) --------------------------------------------------------------------------- Total distributions .............................. (.18) (.39) (.88) (.41) (.76) (.79) --------------------------------------------------------------------------- Net asset value, end of period ................... $9.77 $8.78 $ 7.95 $10.01 $10.88 $ 9.57 --------------------------------------------------------------------------- Total return b ................................... 13.42% 15.77% (12.90)% (4.50)% 23.65% (9.06)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $276,294 $222,030 $67,428 $44,985 $37,837 $34,697 Ratios to average net assets: Expenses ........................................ 1.32%c 1.34% 1.29% 1.30% 1.34% 1.31% Net investment income ........................... 4.07%c 4.49% 4.43% 3.76% 4.22% 4.08% Portfolio turnover rate .......................... 10.12% 25.81% 30.60% 34.03% 19.86% 33.99% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized.
78 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, CLASS R (UNAUDITED) 2003 2002 D ------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $8.79 $7.96 $9.81 ------------------------------------- Income from investment operations: Net investment incomea ................................. .20 .37 .32 Net realized and unrealized gains (losses) ............. .98 .86 (1.85) ------------------------------------- Total from investment operations ........................ 1.18 1.23 (1.53) ------------------------------------- Less distributions from net investment income ........... (.19) (.40) (.32) ------------------------------------- Net Asset Value, End of Period .......................... $9.78 $8.79 $7.96 ------------------------------------- Total return b .......................................... 13.48% 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....................... $1,246 $1,142 $142 Ratios to average net assets: Expenses ............................................... 1.17%c 1.19% 1.16%c Net investment income .................................. 4.22%c 4.64% 4.82%c Portfolio turnover rate ................................. 10.12% 25.81% 30.60% a Based on average daily shares outstanding. b Total return does not reflect contingent deferred sales charge, and is not annualized for periods less than one year. c Annualized. d For the period January 1, 2002 (effective date) to September 30, 2002.
Semiannual Report | 79 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2004 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................ $8.84 $7.99 $10.05 $10.92 $ 9.61 $11.39 ------------------------------------------------------------------------ Income from investment operations: Net investment incomea ............................. .22 .42 .47 .48 .44 .51 Net realized and unrealized gains (losses) ......... .98 .87 (1.60) (.87) 1.69 (1.42) ------------------------------------------------------------------------ Total from investment operations .................... 1.20 1.29 (1.13) (.39) 2.13 (.91) ------------------------------------------------------------------------ Less distributions from: Net investment income .............................. (.21) (.44) (.46) (.46) (.46) (.54) Net realized gains ................................. -- -- (.47) (.02) (.36) (.33) ------------------------------------------------------------------------ Total distributions ................................. (.21) (.44) (.93) (.48) (.82) (.87) ------------------------------------------------------------------------ Net asset value, end of period ...................... $9.83 $8.84 $ 7.99 $10.05 $10.92 $ 9.61 ------------------------------------------------------------------------ Total return b ...................................... 13.67% 16.61% (12.32)% (3.89)% 24.50% (8.48)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $62,015 $47,167 $15,664 $8,829 $9,234 $8,058 Ratios to average net assets: Expenses ........................................... .67%c .69% .66% .65% .69% .66% Net investment income .............................. 4.72%c 5.14% 5.07% 4.39% 4.87% 4.82% Portfolio turnover rate ............................. 10.12% 25.81% 30.60% 34.03% 19.86% 33.99% a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Annualized.
80 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 83.3% AGL Resources Inc. ................................................................. 500,000 $ 14,510,000 Allete Inc. ........................................................................ 1,300,000 45,617,000 Alliant Energy Corp. ............................................................... 800,000 20,848,000 Ameren Corp. ....................................................................... 850,000 39,176,500 American Electric Power Co. Inc. ................................................... 1,750,000 57,610,000 Atmos Energy Corp. ................................................................. 700,000 17,899,000 Central Vermont Public Service Corp. ............................................... 182,800 4,113,000 Cinergy Corp. ...................................................................... 1,500,000 61,335,000 Dominion Resources Inc. ............................................................ 850,000 54,655,000 DTE Energy Co. ..................................................................... 400,000 16,460,000 Edison International ............................................................... 1,400,000 34,006,000 Energy East Corp. .................................................................. 1,100,000 27,896,000 Entergy Corp. ...................................................................... 1,445,000 85,977,500 Equitable Resources Inc. ........................................................... 500,000 22,210,000 Exelon Corp. ....................................................................... 1,100,000 75,757,000 FirstEnergy Corp. .................................................................. 1,700,000 66,436,000 FPL Group Inc. ..................................................................... 1,200,000 80,220,000 Hawaiian Electric Industries Inc. .................................................. 200,000 10,368,000 KeySpan Corp. ...................................................................... 1,100,000 42,042,000 Kinder Morgan Inc. ................................................................. 300,000 18,906,000 National Grid Transco PLC (United Kingdom) ......................................... 5,000,000 39,651,909 Nicor Inc. ......................................................................... 550,000 19,376,500 NiSource Inc. ...................................................................... 2,600,000 55,250,000 ONEOK Inc. ......................................................................... 1,250,000 28,187,500 Pepco Holdings Inc. ................................................................ 1,900,000 38,836,000 a PG&E Corp. ......................................................................... 500,000 14,485,000 Pinnacle West Capital Corp. ........................................................ 725,000 28,528,750 PPL Corp. .......................................................................... 600,000 27,360,000 Progress Energy Inc. ............................................................... 1,500,000 70,620,000 Puget Energy Inc. .................................................................. 1,725,000 38,588,250 SBC Communications Inc. ............................................................ 1,300,000 31,902,000 Scottish & Southern Energy PLC (United Kingdom) .................................... 2,335,000 29,503,455 Scottish Power PLC (United Kingdom) ................................................ 6,000,000 41,985,995 Sempra Energy ...................................................................... 900,000 28,620,000 a Sierra Pacific Resources Co. ....................................................... 1,730,109 12,802,807 Southern Co. ....................................................................... 2,100,000 64,050,000 TECO Energy Inc. ................................................................... 200,000 2,926,000 TXU Corp. .......................................................................... 1,700,000 48,722,000 United Utilities PLC (United Kingdom) .............................................. 5,000,000 47,692,562 United Utilities PLC, A (United Kingdom) ........................................... 2,500,000 14,771,829 Vectren Corp. ...................................................................... 900,000 22,203,000 Verizon Communications Inc. ........................................................ 600,000 21,924,000 Xcel Energy Inc. ................................................................... 1,200,000 21,372,000 --------------- TOTAL COMMON STOCKS (COST $1,209,952,077) .......................................... 1,545,401,557 ---------------
Semiannual Report | 81 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS 9.1% Ameren Corp., 9.75%, cvt. pfd. ..................................................... 800,600 $ 22,516,875 American Electric Power Co. Inc., 9.25%, cvt. pfd. ................................. 450,000 21,217,500 CMS Energy Trust I, 7.75%, cvt. pfd. ............................................... 260,000 11,238,760 Dominion Resources Inc., 9.50%, cvt. pfd. .......................................... 627,000 35,212,320 Duke Energy Corp., 8.00%, cvt. pfd. ................................................ 1,500,000 22,725,000 PPL Capital Fund Trust I, 7.75%, cvt. pfd., E 1,661,000 36,840,980 Sierra Pacific Resources Co., 9.00%, cvt. pfd., PIES ............................... 148,000 5,498,200 TXU Corp., 8.75%, cvt. pfd. ........................................................ 400,000 14,648,000 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $176,123,386) ............................. 169,897,635 --------------- ---------------- PRINCIPAL AMOUNT ---------------- BONDS 6.1% CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .................................... $ 25,000,000 32,480,225 CMS Energy Corp., 9.875%, 10/15/07 ................................................. 8,500,000 9,413,750 Firstenergy Corp., senior note, 7.375%, 11/15/31 ................................... 25,000,000 27,971,950 Northeast Generation Co., senior note, 8.812%, 10/15/26 ............................ 7,500,000 8,493,038 Pacific Gas & Electric Co., 6.05%, 3/01/34 ......................................... 5,000,000 5,078,285 PPL Capital Funding, 8.375%, 6/15/07 ............................................... 15,000,000 17,305,560 Utilicorp United Inc., 9.95%, senior note, 2/01/11 ................................. 6,000,000 6,300,000 Utilicorp United Inc., senior note, 8.27%, 11/15/21 ................................ 6,100,000 5,596,750 --------------- TOTAL BONDS (COST $97,022,916) ..................................................... 112,639,558 --------------- CONVERTIBLE BOND (COST $9,000,000) .9% Sierra Pacific Resources Co., cvt., 144A, 7.25%, 2/14/10 ........................... 9,000,000 17,133,750 --------------- TOTAL LONG TERM INVESTMENTS (COST $1,492,098,379) .................................. 1,845,072,500 --------------- --------------- SHARES --------------- SHORT TERM INVESTMENT (COST $6,601,453) .4% b Franklin Institutional Fiduciary Trust Money Market Portfolio ...................... 6,601,453 6,601,453 --------------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $1,498,699,832) ............... 1,851,673,953 ---------------
82 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND PRINCIPAL AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS 1.1% c Barclays Capital Inc., 1.07%, 4/01/04 (Maturity Value $3,846,228) .................. $ 3,846,114 $ 3,846,114 Collateralized by U.S. Government Agency Securities c Deutsche Bank Securities Inc., 1.10%, 4/01/04 (Maturity Value $3,870,236) .......... 3,870,118 3,870,118 Collateralized by U.S. Government Agency Securities c Morgan Stanley & Co. Inc., 1.10%, 4/01/04 (Maturity Value $3,000,183) .............. 3,000,092 3,000,092 Collateralized by U.S. Government Agency Securities c Goldman, Sachs & Co., 1.10%, 4/01/04 (Maturity Value $3,900,238) ................... 3,900,119 3,900,119 Collateralized by U.S. Government Agency Securities c Bear, Stearns & Co. Inc., 1.08%, 4/01/04 (Maturity Value $1,364,082) ............... 1,364,041 1,364,041 Collateralized by U.S. Government Agency Securities c JP Morgan Securities, 1.10%, 4/01/04 (Maturity Value $3,900,238) ................... 3,900,119 3,900,119 Collateralized by U.S. Government Agency Securities --------------- TOTAL REPURCHASE AGREEMENTS (COST $19,880,603) ..................................... 19,880,603 --------------- TOTAL INVESTMENTS (COST $1,518,580,435) 100.9% ..................................... 1,871,554,556 OTHER ASSETS, LESS LIABILITIES (.9)% ............................................... (16,108,300) --------------- NET ASSETS 100.0% .................................................................. $1,855,536,256 ---------------
See glossary of terms on page 84. a Non-income producing. b See Note 6 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. c Collateral for loaned securities. See Note 1(f). Semiannual Report | See notes to financial statements. | 83 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2004 (UNAUDITED) (CONTINUED) GLOSSARY OF TERMS FRN - Floating Rate Notes GO - General Obligation GP - Graduated Payment PIES - Premium Income Equity Securities PIK - Payment In Kind PL - Project Loan SF - Single Family 84 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2004 (unaudited)
------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ Assets: Investments in securities: Cost - Unaffiliated issuers ...................................... $541,702,105 $1,040,874,076 $17,850,635,401 Cost - Non-controlled affiliated issuers ......................... -- -- 27,963,167 ------------------------------------------------ Value - Unaffiliated issuers a ................................... 740,190,058 2,091,366,319 19,272,383,818 Value - Non-controlled affiliated issuers ........................ -- -- 35,545,500 Repurchase agreements, at value and cost .......................... 2,351,143 -- 3,176,497,957 Cash -- 29,070 -- Receivables: Investment securities sold ....................................... -- -- 18,723,953 Capital shares sold .............................................. 1,633,148 2,503,595 131,083,629 Dividends and interest ........................................... 375,108 1,552,258 166,423,286 ------------------------------------------------ Total assets ................................................. 744,549,457 2,095,451,242 22,800,658,143 ------------------------------------------------ Liabilities: Payables: Investment securities purchased .................................. -- 4,444,000 518,302,918 Capital shares redeemed .......................................... 687,258 2,978,574 27,997,592 Affiliates ....................................................... 796,648 2,334,606 20,741,436 Shareholders ..................................................... 198,564 879,614 4,162,248 Unaffiliated transfer agent fees ................................. 112,339 704,366 1,037,562 Payable upon return of securities loaned [Note 1(f)] .............. -- -- 76,563,680 Other liabilities ................................................. 23,473 318,248 582,549 ------------------------------------------------ Total liabilities ............................................ 1,818,282 11,659,408 649,387,985 ------------------------------------------------ Net assets, at value ........................................ $742,731,175 $2,083,791,834 $22,151,270,158 ------------------------------------------------ Net assets consist of: Undistributed net investment income (loss) (distributions in excess of net investment income) ............................................ $ (1,695,818) $ (136,414) $ (113,286,391) Net unrealized appreciation (depreciation) ........................ 198,487,953 1,050,492,243 1,429,330,750 Accumulated net realized gain (loss) .............................. (88,743,281) (243,481,000) 360,603,833 Capital shares .................................................... 634,682,321 1,276,917,005 20,474,621,966 ------------------------------------------------ Net assets, at value ........................................ $742,731,175 $2,083,791,834 $22,151,270,158 ------------------------------------------------ a The Franklin Income Fund includes $74,730,322 of securities loaned. See Note 1(f).
Semiannual Report | 85 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2004 (unaudited)
----------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ----------------------------------------------- CLASS A: Net assets, at value .............................................. $647,615,274 $1,572,474,756 $12,610,530,347 ----------------------------------------------- Shares outstanding ................................................ 28,465,190 51,861,372 5,237,510,993 ----------------------------------------------- Net asset value per share a ....................................... $22.75 $30.32 $2.41 ----------------------------------------------- Maximum offering price per share (net asset value per share / 94.25%, 94.25%, and 95.75%, respectively) ................................. $24.14 $32.17 $2.52 ----------------------------------------------- CLASS B: Net assets, at value .............................................. $ 16,470,937 $ 121,983,682 $ 2,965,795,182 ----------------------------------------------- Shares outstanding ................................................ 740,598 4,117,980 1,235,474,231 ----------------------------------------------- Net asset value and maximum offering price per share a ............ $22.24 $29.62 $2.40 ----------------------------------------------- CLASS B1: Net assets, at value .............................................. -- -- $ 524,312,684 ----------------------------------------------- Shares outstanding ................................................ -- -- 217,720,118 ----------------------------------------------- Net asset value and maximum offering price per share a ............ -- -- $2.41 ----------------------------------------------- CLASS C: Net assets, at value .............................................. $ 78,644,964 $ 283,343,223 $ 5,531,927,503 ----------------------------------------------- Shares outstanding ................................................ 3,573,559 9,648,246 2,286,176,052 ----------------------------------------------- Net asset value and maximum offering price per share a ............ $22.01 $29.37 $2.42 ----------------------------------------------- CLASS R: Net assets, at value .............................................. -- $ 19,199,287 $ 60,159,943 ----------------------------------------------- Shares outstanding ................................................ -- 636,441 25,183,934 ----------------------------------------------- Net asset value and maximum offering price per share a ............ -- $30.17 $2.39 ----------------------------------------------- ADVISOR CLASS: Net assets, at value .............................................. -- $ 86,790,886 $ 458,544,499 ----------------------------------------------- Shares outstanding ................................................ -- 2,861,352 191,199,733 ----------------------------------------------- Net asset value and maximum offering price per share .............. -- $30.33 $2.40 ----------------------------------------------- a Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
86 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2004 (unaudited)
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Assets: Investments in securities: Cost ............................................................................... $8,230,855,724 $1,498,699,832 --------------------------------- Value a ............................................................................ 8,450,108,007 1,851,673,953 Repurchase agreements, at value and cost ............................................ 214,885,000 19,880,603 Cash ................................................................................ 1,999 -- Receivables: Investment securities sold ......................................................... 264,104 1,113,240 Capital shares sold ................................................................ 11,390,708 3,905,404 Dividends and interest ............................................................. 38,973,073 4,181,470 --------------------------------- Total assets ................................................................... 8,715,622,891 1,880,754,670 --------------------------------- Liabilities: Payables: Investment securities purchased .................................................... 50,800,000 -- Capital shares redeemed ............................................................ 19,334,740 2,393,042 Affiliates ......................................................................... 6,431,866 1,477,504 Shareholders ....................................................................... 5,804,527 927,245 Unaffiliated transfer agent fees ................................................... 1,085,038 362,395 Payable upon return of securities loaned [Note 1(f)] ................................ -- 19,880,603 Other liabilities ................................................................... 484,854 177,625 --------------------------------- Total liabilities .............................................................. 83,941,025 25,218,414 --------------------------------- Net assets, at value .......................................................... $8,631,681,866 $1,855,536,256 --------------------------------- Net assets consist of: Undistributed net investment income (distributions in excess of net investment income) $ (48,609,094) $ 2,980,733 Net unrealized appreciation (depreciation) .......................................... 219,252,283 352,974,121 Accumulated net realized gain (loss) ................................................ (381,907,137) (97,266,085) Capital shares ...................................................................... 8,842,945,814 1,596,847,487 --------------------------------- Net assets, at value .......................................................... $8,631,681,866 $1,855,536,256 --------------------------------- a The Franklin Utilities Fund includes $19,508,346 of securities loaned. See Note 1(f).
Semiannual Report | 87 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2004 (unaudited)
---------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ---------------------------------- CLASS A: Net assets, at value .............................................................. $6,910,271,710 $1,398,513,005 ---------------------------------- Shares outstanding ................................................................ 1,022,124,151 142,797,335 ---------------------------------- Net asset value per share a ....................................................... $6.76 $9.79 ---------------------------------- Maximum offering price per share (net asset value per share / 95.75%) ............. $7.06 $10.22 ---------------------------------- CLASS B: Net assets, at value .............................................................. $ 630,526,060 $ 117,468,795 ---------------------------------- Shares outstanding ................................................................ 93,389,691 12,002,943 ---------------------------------- Net asset value and maximum offering price per share a ............................ $6.75 $9.79 ---------------------------------- CLASS C: Net assets, at value .............................................................. $ 706,218,989 $ 276,293,635 ---------------------------------- Shares outstanding ................................................................ 104,902,446 28,282,506 ---------------------------------- Net asset value and maximum offering price per share a ............................ $6.73 $9.77 ---------------------------------- CLASS R: Net assets, at value .............................................................. $ 56,263,568 $ 1,246,008 ---------------------------------- Shares outstanding ................................................................ 8,326,575 127,376 ---------------------------------- Net asset value and maximum offering price per share a ............................ $6.76 $9.78 ---------------------------------- ADVISOR CLASS: Net assets, at value .............................................................. $ 328,401,539 $ 62,014,813 ---------------------------------- Shares outstanding ................................................................ 48,480,904 6,308,502 ---------------------------------- Net asset value and maximum offering price per share .............................. $6.77 $9.83 ---------------------------------- a Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
88 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended March 31, 2004 (unaudited)
--------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND --------------------------------------------- Investment income: Dividends: Unaffiliated issuers ................................................. $ 2,082,055 $ 12,098,733 $ 218,525,345 Non-controlled affiliated issuers (Note 9) ........................... -- -- 4,647,578 Interest .............................................................. 19,818 -- 335,044,068 --------------------------------------------- Total investment income .......................................... 2,101,873 12,098,733 558,216,991 --------------------------------------------- Expenses: Management fees (Note 3) .............................................. 1,698,702 4,707,871 42,771,563 Distribution fees (Note 3) Class A .............................................................. 780,469 1,970,007 8,487,588 Class B .............................................................. 67,672 589,198 12,951,594 Class B1 ............................................................. -- -- 1,687,334 Class C .............................................................. 376,088 1,426,718 15,512,360 Class R .............................................................. -- 44,778 120,139 Transfer agent fees (Note 3) .......................................... 789,914 2,614,199 7,587,145 Custodian fees ........................................................ 2,472 8,704 156,520 Reports to shareholders ............................................... 35,924 288,590 354,599 Registration and filing fees .......................................... 18,259 49,851 1,042,705 Professional fees ..................................................... 17,511 28,068 87,031 Directors' fees and expenses .......................................... 2,786 5,516 54,857 Other ................................................................. 7,894 44,772 313,766 --------------------------------------------- Total expenses ................................................... 3,797,691 11,778,272 91,127,201 --------------------------------------------- Net investment income (loss) .................................... (1,695,818) 320,461 467,089,790 --------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ................................................ (10,314,522) 8,526,968 408,445,567 Non-controlled affiliated issuers (Note 9) .......................... -- -- 3,170,018 Foreign currency transactions ........................................ (13) 1,376 (20,704) --------------------------------------------- Net realized gain (loss) ........................................ (10,314,535) 8,528,344 411,594,881 Net unrealized appreciation (depreciation) on: Investments .......................................................... 93,017,836 229,409,470 1,035,483,096 Translation of assets and liabilities denominated in foreign currencies -- -- (60,701) --------------------------------------------- Net unrealized appreciation (depreciation) ...................... 93,017,836 229,409,470 1,035,422,395 --------------------------------------------- Net realized and unrealized gain (loss) ................................ 82,703,301 237,937,814 1,447,017,276 --------------------------------------------- Net increase (decrease) in net assets resulting from operations ........ $ 81,007,483 $238,258,275 $1,914,107,066 ---------------------------------------------
Semiannual Report | 89 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended March 31, 2004 (unaudited)
-------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------- Investment income: Dividends ............................................................... $ 566,189 $ 41,954,836 Interest ................................................................ 208,797,050 5,079,014 -------------------------------- Total investment income ............................................ 209,363,239 47,033,850 -------------------------------- Expenses: Management fees (Note 3) ................................................ 19,636,091 4,073,103 Distribution fees (Note 3) Class A ................................................................ 4,404,417 959,983 Class B ................................................................ 2,113,712 348,728 Class C ................................................................ 2,450,487 818,515 Class R ................................................................ 138,745 2,992 Transfer agent fees (Note 3) ............................................ 5,543,729 1,490,103 Custodian fees .......................................................... 47,770 37,580 Reports to shareholders ................................................. 303,252 78,619 Registration and filing fees ............................................ 210,778 98,770 Professional fees ....................................................... 81,687 32,585 Directors' fees and expenses ............................................ 19,699 4,883 Other ................................................................... 196,112 45,263 -------------------------------- Total expenses ..................................................... 35,146,479 7,991,124 -------------------------------- Net investment income ............................................. 174,216,760 39,042,726 -------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ............................................................ 5,799,251 190,563 Foreign currency transactions .......................................... -- 132,010 -------------------------------- Net realized gain (loss) .......................................... 5,799,251 322,573 Net unrealized appreciation (depreciation) on investments ............... (3,111,343) 182,031,921 -------------------------------- Net realized and unrealized gain (loss) .................................. 2,687,908 182,354,494 -------------------------------- Net increase (decrease) in net assets resulting from operations .......... $176,904,668 $221,397,220 --------------------------------
90 | See notes to financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the six months ended March 31, 2004 (unaudited) and the year ended September 30, 2003
--------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND --------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, 2003 MARCH 31, 2004 SEPTEMBER 30, 2003 --------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ......... $ (1,695,818) $ (2,654,387) $ 320,461 $ 2,903,913 Net realized gain (loss) from investments and foreign currency transactions ........................ (10,314,535) (16,748,652) 8,528,344 (76,197,267) Net unrealized appreciation (depreciation) on investments ....... 93,017,836 163,452,859 229,409,470 408,465,676 --------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ..................... 81,007,483 144,049,820 238,258,275 335,172,322 Distributions to shareholders from: Net investment income: Class A ............................. -- -- (1,531,991) (2,180,220) Class R ............................. -- -- -- (9,229) Advisor Class ....................... -- -- (173,053) (137,491) --------------------------------------------------------------------------------- Total distributions to shareholders ... -- -- (1,705,044) (2,326,940) Capital share transactions: (Note 2) Class A ............................. 17,534,018 18,073,256 (44,660,205) (78,190,367) Class B ............................. 4,717,587 3,561,921 5,342,713 11,719,589 Class C ............................. 3,427,080 176,270 (8,262,063) (19,434,571) Class R ............................. -- -- 2,488,155 10,272,806 Advisor Class ....................... -- -- 39,949,214 7,755,631 --------------------------------------------------------------------------------- Total capital share transactions ...... 25,678,685 21,811,447 (5,142,186) (67,876,912) Net increase (decrease) in net assets ......................... 106,686,168 165,861,267 231,411,045 264,968,470 Net assets: Beginning of period ................... 636,045,007 470,183,740 1,852,380,789 1,587,412,319 --------------------------------------------------------------------------------- End of period ......................... $742,731,175 $636,045,007 $2,083,791,834 $1,852,380,789 --------------------------------------------------------------------------------- Undistributed net investment income (loss) (distributions in excess of net investment income) included in net assets: End of period ........................ $ (1,695,818) $ -- $ (136,414) $ 1,248,169 ---------------------------------------------------------------------------------
Semiannual Report | 91 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the six months ended March 31, 2004 (unaudited) and the year ended September 30, 2003
-------------------------------------------------------------------------------- FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND -------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, 2003 MARCH 31, 2004 SEPTEMBER 30, 2003 -------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ................ $ 467,089,790 $ 735,666,186 $ 174,216,760 $ 385,176,849 Net realized gain (loss) from investments and foreign currency transactions ... 411,594,881 202,185,840 5,799,251 6,367,829 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ... 1,035,422,395 1,869,977,309 (3,111,343) (153,242,028) -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ...................... 1,914,107,066 2,807,829,335 176,904,668 238,302,650 Distributions to shareholders from: Net investment income: Class A ............................. (365,292,191) (550,726,670) (200,224,072) (401,413,321) Class B ............................. (72,633,905) (73,650,217) (16,800,977) (31,260,885) Class B1 ............................ (15,782,415) (32,370,788) -- -- Class C ............................. (140,361,614) (160,832,793) (19,562,191) (41,821,072) Class R ............................. (1,452,577) (1,320,431) (1,451,450) (1,798,291) Advisor Class ....................... (7,670,676) (3,320,435) (8,888,933) (16,202,012) Net realized gains: Class A ............................. (55,089,253) (16,155,200) -- -- Class B ............................. (12,566,787) (1,716,893) -- -- Class B1 ............................ (2,636,951) (1,110,777) -- -- Class C ............................. (22,718,362) (4,321,592) -- -- Class R ............................. (216,296) (24,873) -- -- Advisor Class ....................... (943,558) (84,254) -- -- -------------------------------------------------------------------------------- Total distributions to shareholders ... (697,364,585) (845,634,923) (246,927,623) (492,495,581) Capital share transactions: (Note 2) Class A ............................. 2,257,045,721 2,373,919,438 (320,264,051) (238,733,117) Class B ............................. 721,152,432 1,325,085,686 (43,086,546) 137,202,182 Class B1 ............................ (5,273,197) (12,337,854) -- -- Class C ............................. 1,473,704,567 1,810,160,408 (102,059,979) 36,448,805 Class R ............................. 20,990,288 26,634,343 2,632,689 41,088,097 Advisor Class ....................... 352,166,448 56,697,121 22,263,766 117,998,378 -------------------------------------------------------------------------------- Total capital share transactions ...... 4,819,786,259 5,580,159,142 (440,514,121) 94,004,345 Net increase (decrease) in net assets .......................... 6,036,528,740 7,542,353,554 (510,537,076) (160,188,586) Net assets: Beginning of period ................... 16,114,741,418 8,572,387,864 9,142,218,942 9,302,407,528 -------------------------------------------------------------------------------- End of period ......................... $22,151,270,158 $16,114,741,418 $8,631,681,866 $9,142,218,942 -------------------------------------------------------------------------------- Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ........................ $ (113,286,391) $ 22,817,197 $ (48,609,094) $ 24,101,769 --------------------------------------------------------------------------------
92 | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) for the six months ended March 31, 2004 (unaudited) and the year ended September 30, 2003
------------------------------------- FRANKLIN UTILITIES FUND ------------------------------------- SIX MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, 2003 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................... $ 39,042,726 $ 68,169,572 Net realized gain (loss) from investments and foreign currency transactions 322,573 (62,932,757) Net unrealized appreciation (depreciation) on investments ................ 182,031,921 202,226,165 ------------------------------------- Net increase (decrease) in net assets resulting from operations ...... 221,397,220 207,462,980 Distributions to shareholders from: Net investment income: Class A ................................................................. (28,639,778) (59,182,929) Class B ................................................................. (2,079,532) (3,015,514) Class C ................................................................. (4,878,804) (6,581,692) Class R ................................................................. (23,993) (38,182) Advisor Class ........................................................... (1,214,127) (1,485,977) ------------------------------------- Total distributions to shareholders ....................................... (36,836,234) (70,304,294) Capital share transactions: (Note 2) Class A ................................................................. (2,267,664) 55,030,287 Class B ................................................................. 10,773,283 56,154,888 Class C ................................................................. 27,698,446 141,064,759 Class R ................................................................. (19,919) 924,022 Advisor Class ........................................................... 9,244,302 28,963,358 ------------------------------------- Total capital share transactions .......................................... 45,428,448 282,137,314 Net increase (decrease) in net assets ................................ 229,989,434 419,296,000 Net assets: Beginning of period ....................................................... 1,625,546,822 1,206,250,822 ------------------------------------- End of period ............................................................. $1,855,536,256 $1,625,546,822 ------------------------------------- Undistributed net investment income included in net assets: End of period ............................................................. $ 2,980,733 $ 774,241 -------------------------------------
Semiannual Report | See notes to financial statements. | 93 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Company) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company, consisting of five series (the Funds). The Funds and their investment objectives are:
- --------------------------------------------------------------------------------------------------------- CAPITAL GROWTH GROWTH AND INCOME CURRENT INCOME - --------------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Growth Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange are valued at the last reported sales price. Securities listed or traded on NASDAQ are valued at their official closing price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Debt securities are valued by independent pricing services or market makers under procedures approved by the Board of Directors. Foreign securities are valued at the close of trading of the foreign exchange or the NYSE, whichever is earlier. If events occur that materially affect the values of securities after the prices or foreign exchange rates are determined but prior to 4:00 PM ET or the close of trading on the NYSE, whichever is earlier, or if market quotations are deemed not readily available or reliable, the securities (including restricted securities) will be valued at fair value as determined following procedures approved by the Board of Directors. Investments in open-end mutual funds are valued at the closing net asset value. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. 94 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS The Funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account to be used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the Funds based on their pro-rata interest. The Funds may enter into repurchase agreements which are accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the Funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. At March 31, 2004, all repurchase agreements held by the Funds had been entered into on that date. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. ALLOWANCE FOR PAYDOWNS The Franklin U.S. Government Securities Fund provides estimates, based on historical experience, for anticipated paydowns. The allowance is recorded as a reduction or increase to net assets as noted on the Statement of Investments and is included in the unrealized appreciation/depreciation shown on the accompanying financial statements. F. SECURITIES LENDING The Franklin Income Fund and the Franklin Utilities Fund loan securities to certain brokers for which they received cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short-term instruments as noted in the Statement of Investments. These funds received interest income of $252,287 and $734,896, respectively, from the investment of cash collateral, adjusted by lender fees and broker rebates. The funds bear the risk of loss with respect to the investment of the collateral. The securities lending agent has agreed to indemnify the funds in the case of default of any securities borrower. G. INCOME TAXES No provision has been made for income taxes because each fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its taxable income. Semiannual Report | 95 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Discounts and premiums on securities purchased are amortized over the lives of the respective securities. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Common expenses incurred by the Company are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets. Other expenses are charged to each fund on a specific identification basis. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. J. GUARANTEES AND INDEMNIFICATIONS Under the Company's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Company. Additionally, in the normal course of business, the Company enters into contracts with service providers that contain general indemnification clauses. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote. 2. CAPITAL STOCK 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
96 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED) At March 31, 2004, there were 32 billion shares authorized ($.01 par value), allocated to the Funds as follows (in millions):
---------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ---------------------------------------------------------- Class A ................................... 250 250 7,600 2,500 400 Class B ................................... 500 750 2,000 1,000 750 Class B1 .................................. -- -- 1,000 -- -- Class C ................................... 250 250 3,600 2,500 400 Class R ................................... -- 1,000 1,000 1,000 1,000 Advisor Class ............................. -- 1,000 1,000 1,000 1,000
Transactions in the Funds' shares were as follows:
-------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- CLASS A SHARES: Six months ended March 31, 2004 Shares sold ....................... 4,508,756 $100,829,106 3,521,261 $ 105,135,097 Shares issued in reinvestment of distributions .................... -- -- 47,974 1,399,409 Shares redeemed ................... (3,737,821) (83,295,088) (5,074,112) (151,194,711) -------------------------------------------------------------- Net increase (decrease) ........... 770,935 $ 17,534,018 (1,504,877) $ (44,660,205) -------------------------------------------------------------- Year ended September 30, 2003 Shares sold ....................... 5,979,321 $110,050,574 7,379,824 $ 183,219,424 Shares issued in reinvestment of distributions .................... -- -- 79,146 1,984,183 Shares redeemed ................... (5,174,158) (91,977,318) (10,859,570) (263,393,974) -------------------------------------------------------------- Net increase (decrease) ........... 805,163 $ 18,073,256 (3,400,600) $ (78,190,367) -------------------------------------------------------------- CLASS B SHARES: Six months ended March 31, 2004 Shares sold ....................... 260,757 $ 5,726,720 464,717 $ 13,496,731 Shares redeemed ................... (45,879) (1,009,133) (279,076) (8,154,018) -------------------------------------------------------------- Net increase (decrease) ........... 214,878 $ 4,717,587 185,641 $ 5,342,713 -------------------------------------------------------------- Year ended September 30, 2003 Shares sold ....................... 299,381 $ 5,444,460 1,190,166 $ 28,759,271 Shares redeemed ................... (107,026) (1,882,539) (721,310) (17,039,682) -------------------------------------------------------------- Net increase (decrease) ........... 192,355 $ 3,561,921 468,856 $ 11,719,589 --------------------------------------------------------------
Semiannual Report | 97 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS C SHARES: Six months ended March 31, 2004 Shares sold ........................ 527,851 $ 11,457,588 779,893 $ 22,479,414 Shares redeemed .................... (372,297) (8,030,508) (1,063,791) (30,741,477) ------------------------------------------------------------- Net increase (decrease) ............ 155,554 $ 3,427,080 (283,898) $ (8,262,063) ------------------------------------------------------------- Year ended September 30, 2003 Shares sold ........................ 775,065 $ 13,737,768 1,813,481 $ 43,685,324 Shares redeemed .................... (802,705) (13,561,498) (2,679,771) (63,119,895) ------------------------------------------------------------- Net increase (decrease) ............ (27,640) $ 176,270 (866,290) $(19,434,571) ------------------------------------------------------------- CLASS R SHARES: Six months ended March 31, 2004 Shares sold ........................ 153,912 $ 4,542,257 Shares redeemed .................... (69,335) (2,054,102) ------------------------- Net increase (decrease) ............ 84,577 $ 2,488,155 ------------------------- Year ended September 30, 2003 Shares sold ........................ 502,954 $ 12,216,083 Shares issued in reinvestment of distributions ..................... 365 9,135 Shares redeemed .................... (78,318) (1,952,412) ------------------------- Net increase (decrease) ............ 425,001 $ 10,272,806 ------------------------- ADVISOR CLASS SHARES: Six months ended March 31, 2004 Shares sold ........................ 1,383,132 $ 41,544,956 Shares issued in reinvestment of distributions ..................... 5,745 167,517 Shares redeemed .................... (59,372) (1,763,259) ------------------------- Net increase (decrease) ............ 1,329,505 $ 39,949,214 ------------------------- Year ended September 30, 2003 Shares sold ........................ 580,561 $ 14,712,785 Shares issued in reinvestment of distributions ..................... 5,208 130,503 Shares redeemed .................... (297,671) (7,087,657) ------------------------- Net increase (decrease) ............ 288,098 $ 7,755,631 -------------------------
98 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------ CLASS A SHARES: Six months ended March 31, 2004 Shares sold .................... 1,125,321,173 $2,663,121,994 50,408,078 $ 340,330,089 Shares issued in reinvestment of distributions ................. 113,546,357 266,308,250 18,442,816 124,012,850 Shares redeemed ................ (283,513,601) (672,384,523) (116,250,826) (784,606,990) ------------------------------------------------------------------ Net increase (decrease) ........ 955,353,929 $2,257,045,721 (47,399,932) $ (320,264,051) ------------------------------------------------------------------ Year ended September 30, 2003 Shares sold .................... 1,420,460,711 $2,978,192,401 178,073,164 $ 1,232,868,939 Shares issued in reinvestment of distributions ................. 166,636,905 340,980,517 35,293,588 243,128,476 Shares redeemed ................ (462,636,792) (945,253,480) (248,820,975) (1,714,730,532) ------------------------------------------------------------------ Net increase (decrease) ........ 1,124,460,824 $2,373,919,438 (35,454,223) $ (238,733,117) ------------------------------------------------------------------ CLASS B SHARES: Six months ended March 31, 2004 Shares sold .................... 327,665,941 $ 770,426,203 5,580,528 $ 37,626,509 Shares issued in reinvestment of distributions ................. 22,956,901 53,756,840 1,741,841 11,700,227 Shares redeemed ................ (43,514,212) (103,030,611) (13,706,705) (92,413,282) ------------------------------------------------------------------ Net increase (decrease) ........ 307,108,630 $ 721,152,432 (6,384,336) $ (43,086,546) ------------------------------------------------------------------ Year ended September 30, 2003 Shares sold .................... 663,029,400 $1,384,557,403 41,548,785 $ 287,642,126 Shares issued in reinvestment of distributions ................. 21,203,582 43,812,599 3,141,416 21,609,158 Shares redeemed ................ (50,454,482) (103,284,316) (25,090,330) (172,049,102) ------------------------------------------------------------------ Net increase (decrease) ........ 633,778,500 $1,325,085,686 19,599,871 $ 137,202,182 ------------------------------------------------------------------ CLASS B1 SHARES: Six months ended March 31, 2004 Shares sold .................... 3,832,870 $ 9,033,038 Shares issued in reinvestment of distributions ................. 4,504,733 10,557,695 Shares redeemed ................ (10,482,464) (24,863,930) ------------------------------ Net increase (decrease) ........ (2,144,861) $ (5,273,197) ------------------------------ Year ended September 30, 2003 Shares sold .................... 12,538,502 $ 25,859,856 Shares issued in reinvestment of distributions ................. 8,955,929 18,230,536 Shares redeemed ................ (27,953,932) (56,428,246) ------------------------------ Net increase (decrease) ........ (6,459,501) $ (12,337,854) ------------------------------
Semiannual Report | 99 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ----------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ----------------------------------------------------------------- CLASS C SHARES: Six months ended March 31, 2004 Shares sold ..................... 695,434,825 $1,650,253,726 9,470,918 $ 63,675,463 Shares issued in reinvestment of distributions .................. 45,392,478 107,159,750 1,900,165 12,725,989 Shares redeemed ................. (118,756,184) (283,708,909) (26,550,858) (178,461,431) ----------------------------------------------------------------- Net increase (decrease) ......... 622,071,119 $1,473,704,567 (15,179,775) $(102,059,979) ----------------------------------------------------------------- Year ended September 30, 2003 Shares sold ..................... 951,930,027 $2,009,359,415 57,357,026 $ 396,061,501 Shares issued in reinvestment of distributions .................. 50,130,794 103,732,412 4,055,220 27,836,743 Shares redeemed ................. (147,253,703) (302,931,419) (56,619,048) (387,449,439) ----------------------------------------------------------------- Net increase (decrease) ......... 854,807,118 $1,810,160,408 4,793,198 $ 36,448,805 ----------------------------------------------------------------- CLASS R SHARES: Six months ended March 31, 2004 Shares sold ..................... 10,776,335 $ 25,411,518 2,241,880 $ 15,128,009 Shares issued in reinvestment of distributions .................. 687,670 1,604,290 215,019 1,445,454 Shares redeemed ................. (2,586,290) (6,025,520) (2,066,591) (13,940,774) ----------------------------------------------------------------- Net increase (decrease) ......... 8,877,715 $ 20,990,288 390,308 $ 2,632,689 ----------------------------------------------------------------- Year ended September 30, 2003 Shares sold ..................... 14,633,211 $ 30,251,574 8,174,860 $ 56,511,590 Shares issued in reinvestment of distributions .................. 632,563 1,303,713 261,116 1,791,684 Shares redeemed ................. (2,327,993) (4,920,944) (2,508,245) (17,215,177) ----------------------------------------------------------------- Net increase (decrease) ......... 12,937,781 $ 26,634,343 5,927,731 $ 41,088,097 ----------------------------------------------------------------- ADVISOR CLASS SHARES: Six months ended March 31, 2004 Shares sold ..................... 149,593,846 $ 353,985,022 4,591,861 $ 31,087,087 Shares issued in reinvestment of distributions .................. 3,095,478 7,311,419 1,083,525 7,298,373 Shares redeemed ................. (3,856,861) (9,129,993) (2,380,231) (16,121,694) ----------------------------------------------------------------- Net increase (decrease) ......... 148,832,463 $ 352,166,448 3,295,155 $ 22,263,766 ----------------------------------------------------------------- Year ended September 30, 2003 Shares sold ..................... 29,225,067 $ 63,085,044 21,146,530 $ 147,068,753 Shares issued in reinvestment of distributions .................. 1,253,004 2,564,820 1,903,612 13,126,237 Shares redeemed ................. (4,343,162) (8,952,743) (6,189,973) (42,196,612) ----------------------------------------------------------------- Net increase (decrease) ......... 26,134,909 $ 56,697,121 16,860,169 $ 117,998,378 -----------------------------------------------------------------
100 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------- FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ---------------------------- CLASS A SHARES: Six months ended March 31, 2004 Shares sold ........................................................ 9,065,317 $ 84,912,335 Shares issued in reinvestment of distributions ..................... 2,286,271 21,464,865 Shares redeemed .................................................... (11,661,694) (108,644,864) ---------------------------- Net increase (decrease) ............................................ (310,106) $ (2,267,664) ---------------------------- Year ended September 30, 2003 Shares sold ........................................................ 25,175,427 $ 211,667,227 Shares issued in reinvestment of distributions ..................... 5,384,148 44,381,490 Shares redeemed .................................................... (24,337,215) (201,018,430) ---------------------------- Net increase (decrease) ............................................ 6,222,360 $ 55,030,287 ---------------------------- CLASS B SHARES: Six months ended March 31, 2004 Shares sold ........................................................ 1,778,518 $ 16,484,771 Shares issued in reinvestment of distributions ..................... 114,559 1,075,959 Shares redeemed .................................................... (723,457) (6,787,447) ---------------------------- Net increase (decrease) ............................................ 1,169,620 $ 10,773,283 ---------------------------- Year ended September 30, 2003 Shares sold ........................................................ 7,731,921 $ 64,628,039 Shares issued in reinvestment of distributions ..................... 177,803 1,479,606 Shares redeemed .................................................... (1,194,549) (9,952,757) ---------------------------- Net increase (decrease) ............................................ 6,715,175 $ 56,154,888 ---------------------------- CLASS C SHARES: Six months ended March 31, 2004 Shares sold ........................................................ 5,335,491 $ 49,496,396 Shares issued in reinvestment of distributions ..................... 265,670 2,490,769 Shares redeemed .................................................... (2,596,034) (24,288,719) ---------------------------- Net increase (decrease) ............................................ 3,005,127 $ 27,698,446 ---------------------------- Year ended September 30, 2003 Shares sold ........................................................ 19,436,624 $ 163,113,516 Shares issued in reinvestment of distributions ..................... 415,191 3,452,384 Shares redeemed .................................................... (3,052,249) (25,501,141) ---------------------------- Net increase (decrease) ............................................ 16,799,566 $ 141,064,759 ---------------------------- CLASS R SHARES: Six months ended March 31, 2004 Shares sold ........................................................ 50,613 $ 477,890 Shares issued in reinvestment of distributions ..................... 2,506 23,519 Shares redeemed .................................................... (55,617) (521,328) ---------------------------- Net increase (decrease) ............................................ (2,498) $ (19,919) ---------------------------- Year ended September 30, 2003 Shares sold ........................................................ 125,002 $ 1,034,190 Shares issued in reinvestment of distributions ..................... 4,296 35,809 Shares redeemed .................................................... (17,198) (145,977) ---------------------------- Net increase (decrease) ............................................ 112,100 $ 924,022 ----------------------------
Semiannual Report | 101 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------- FRANKLIN UTILITIES FUND -------------------------- SHARES AMOUNT -------------------------- ADVISOR CLASS SHARES: Six months ended March 31, 2004 Shares sold .......................................................... 2,126,696 $ 20,104,118 Shares issued in reinvestment of distributions ....................... 77,743 733,113 Shares redeemed ...................................................... (1,234,238) (11,592,929) -------------------------- Net increase (decrease) .............................................. 970,201 $ 9,244,302 -------------------------- Year ended September 30, 2003 Shares sold .......................................................... 3,596,924 $ 30,787,970 Shares issued in reinvestment of distributions ....................... 162,041 1,358,329 Shares redeemed ...................................................... (380,448) (3,182,941) -------------------------- Net increase (decrease) .............................................. 3,378,517 $ 28,963,358 --------------------------
3. TRANSACTIONS WITH AFFILIATES Certain officers and directors of the Funds are also officers or directors of the following entities: - -------------------------------------------------------------------------------- ENTITY AFFILIATION - -------------------------------------------------------------------------------- Franklin Advisers Inc. (Advisers) Investment manager Franklin Investment Advisory Services Inc. Investment manager (Investment Advisory) Franklin Templeton Services LLC (FT Services) Administrative manager Franklin/Templeton Distributors Inc. (Distributors) Principal underwriter Franklin/Templeton Investor Services LLC (Investor Services) Transfer agent The Funds, except the Franklin Growth Fund, pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of the Funds as follows: - ---------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ---------------------------------------------------------------------------- .625% First $100 million .500% Over $100 million, up to and including $250 million .450% Over $250 million, up to and including $10 billion .440% Over $10 billion, up to and including $12.5 billion .420% Over $12.5 billion, up to and including $15 billion .400% Over $15 billion, up to and including $17.5 billion .380% Over $17.5 billion, up to and including $20 billion .360% In excess of $20 billion Under an agreement with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. 102 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) The Funds reimburse Distributors for costs incurred in marketing the Funds' shares under a Rule 12b-1 plan up to a certain percentage per year of their average daily net assets of each class as follows: -------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------------------------------------------------------- Class A .............. .25% .25% .15% .15% .15% Class B .............. 1.00% 1.00% 1.00% .65% .65% Class B1 ............. -- -- .65% -- -- Class C .............. 1.00% 1.00% .65% .65% .65% Class R .............. -- .50% .50% .50% .50% Distributors has advised the Funds it paid net commissions on sales of the Funds' shares, and received contingent deferred sales charges for the period as follows: ------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------ Net commissions paid ..................... $167,302 $454,020 $39,019,724 Contingent deferred sales charges ........ $ 18,514 $124,555 $ 2,507,678 ------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Net commissions paid ........................... $1,418,142 $756,849 Contingent deferred sales charges .............. $1,070,583 $134,231 The Funds paid transfer agent fees as noted in the Statement of Operations of which the following amounts were paid to Investor Services: ---------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------------- Transfer agent fees .................. $626,219 $1,935,896 $5,057,149 ------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Transfer agent fees .................. $3,800,955 $928,270 Included in professional fees are legal fees of $43,850 that were paid to a law firm in which a partner is an officer of the Funds. Semiannual Report | 103 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. INCOME TAXES At September 30, 2003, the following funds had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: ----------------------------- FRANKLIN FRANKLIN DYNATECH GROWTH FUND FUND ----------------------------- Capital loss carryovers expiring in: 2007 ......................................... $ 677,592 $ -- 2008 ......................................... 394,928 -- 2009 ......................................... 1,170,048 -- 2010 ......................................... 6,843,771 -- 2011 ......................................... 47,180,600 206,696,356 ----------------------------- $ 56,266,939 $ 206,696,356 ----------------------------- ----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Capital loss carryovers expiring in: 2004 ......................................... $ 57,539,178 $ -- 2005 ......................................... 50,054,906 -- 2006 ......................................... 28,279,472 -- 2007 ......................................... 18,954,412 -- 2008 ......................................... 21,105,846 -- 2009 ......................................... 46,256,951 -- 2010 ......................................... 11,768,551 -- 2011 ......................................... 33,556,845 54,600,730 ----------------------------- $ 267,516,161 $ 54,600,730 ----------------------------- On September 30, 2003, the Franklin U.S. Government Securities Fund had expired capital loss carryovers of $3,698,366, which were reclassified to paid-in capital. At September 30, 2003, the following funds had deferred capital losses occurring subsequent to October 31, 2002. For tax purposes, such losses will be reflected in the year ending September 30, 2004. ------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH U.S. GOVERNMENT UTILITIES FUND FUND SECURITIES FUND FUND ------------------------------------------------------------- $16,459,129 $45,312,989 $120,190,227 $21,478,885 At September 30, 2003, the Franklin Income Fund had deferred currency losses occurring subsequent to October 31, 2002 of $5,927,510. For tax purposes, such losses will be reflected in the year ending September 30, 2004. 104 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. INCOME TAXES (CONTINUED) Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, paydown losses, foreign currency transactions, and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, paydown losses, foreign currency transactions, and bond discounts and premiums. At March 31, 2004, the net unrealized appreciation (depreciation) based on the cost of investments for income tax purposes was as follows: ---------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------------------- Cost of investments ........... $549,755,926 $1,040,874,076 $21,093,734,304 ---------------------------------------------- Unrealized appreciation ....... $235,754,287 $1,076,766,146 $ 2,185,914,525 Unrealized depreciation ....... (42,969,012) (26,273,903) (795,221,554) ---------------------------------------------- Net unrealized appreciation (depreciation) ................ $192,785,275 $1,050,492,243 $ 1,390,692,971 ---------------------------------------------- ------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------- Cost of investments ......................... $8,445,740,724 $1,539,488,769 ------------------------------- Unrealized appreciation ..................... $ 234,017,527 $ 374,360,164 Unrealized depreciation ..................... (14,765,244) (42,294,377) ------------------------------- Net unrealized appreciation (depreciation) .. $ 219,252,283 $ 332,065,787 ------------------------------- 5. INVESTMENT TRANSACTIONS Purchases and sales of investments and securities sold short (excluding short-term securities) for the period ended March 31, 2004 were as follows: -------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------------------------------------------- Purchases ...................... $ 51,275,188 $ 18,584,490 $7,431,452,573 Sales .......................... $ 10,185,412 $ 17,114,270 $3,388,374,278 ------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------ Purchases ................................... $ 1,511,667,375 $ 241,633,258 Sales ....................................... $ 2,159,114,161 $ 174,543,438 Semiannual Report | 105 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENTS IN THE FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. The Funds earned dividend income from investment in the Sweep Money Fund for the period ended March 31, 2004, as follows: --------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND --------------------------------- Dividend income ............................ $113,119 $118,047 $582,110 -------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND -------------------------- Dividend income ................................... $566,189 $39,724 7. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 31.2% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The fund held defaulted and/or other securities for which the income has been deemed uncollectible. The fund discontinues accruing income on these securities and provides an estimate for losses on interest receivable. At March 31, 2004, the value of these securities was $253,108,000, representing 1.14% of the fund's net assets. For information as to specific securities, see the accompanying Statement of Investments. 106 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 8. RESTRICTED SECURITIES At March 31, 2004, investments in securities included issues that are restricted or illiquid. Restricted securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933, may have contractual restrictions on resale, and are valued under methods approved by the Board of Directors as reflecting fair value. A security may also be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At March 31, 2004, the Franklin Income Fund held an investment in a restricted and illiquid security that was valued under approved methods by the Directors, as follows:
- ------------------------------------------------------------------------------------------------------ SHARES/ ACQUISITION WARRANTS ISSUER DATE COST VALUE - ------------------------------------------------------------------------------------------------------ 1,537,500 Callon Petroleum Company, wts., 12/08/10 (.03% of net assets) ........ 12/08/03 $5,734,875 $5,677,987
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund at March 31, 2004 were as shown below.
- ---------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF SHARES HELD SHARES HELD VALUE REALIZED AT BEGINNING GROSS GROSS AT END AT END DIVIDEND GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ---------------------------------------------------------------------------------------------------------------- Mission Resources Corp. . -- 3,330,000 -- 3,330,000 $10,822,500 $ -- $ -- Mission Resources Corp., 144A, 9.75%, 12/08/10 ........ 47,000,000 -- 22,400,000 24,600,000 24,723,000 -- (323,035) TECO Energy Inc. ........ 11,879,500 -- 2,879,500 9,000,000 a 3,990,000 9,354,264 TECO Energy Inc., ACES, 9.50%, cvt. pfd. ....... 831,000 -- 831,000 -- -- 657,578 (5,861,211) ----------------------------------- TOTAL NON-CONTROLLED AFFILIATED ISSUERS ..................................................... $35,545,500 $4,647,578 $3,170,018 ----------------------------------- a As of 3/31/04, no longer an affiliate
10. REGULATORY MATTERS MASSACHUSETTS ADMINISTRATIVE PROCEEDING On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the "Company") claiming violations of the Massachusetts Uniform Securities Act ("Massachusetts Act") with respect to an alleged arrangement to permit market timing (the "Mass. Proceeding"). On February 14, 2004, the Company filed an answer denying all violations of the Massachusetts Act. Semiannual Report | 107 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. REGULATORY MATTERS (CONTINUED) GOVERNMENTAL INVESTIGATIONS As part of ongoing investigations by the U.S. Securities and Exchange Commission (SEC), the U.S. Attorney for the Northern District of California, the New York Attorney General, the California Attorney General, the U.S. Attorney for the District of Massachusetts, the Florida Department of Financial Services and the Commissioner of Securities, the West Virginia Attorney General and the Vermont Department of Banking, Insurance, Securities, and Health Care Administration, relating to certain practices in the mutual fund industry, including late trading, market timing and payments to securities dealers who sell Fund shares, the Company, as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and its current employees are providing documents and information in response to these requests and subpoenas. In addition, the Company has responded to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. The staff of the SEC has informed the Company that it intends to recommend that the SEC authorize a civil injunctive action against Franklin Advisers, Inc. The SEC's investigation is focused on the activities that are the subject of the Mass. Proceeding described above and other instances of alleged market timing by a limited number of third parties that ended in 2000. The Company currently believes that the charges the SEC staff is contemplating are unwarranted. There are discussions underway with the SEC staff in an effort to resolve the issues raised in their investigation. In response to requests for information and subpoenas from the SEC and the California Attorney General, the Company has provided documents and testimony has been taken relating to payments to security dealers who sell Fund shares. Effective November 28, 2003, the Company determined not to direct any further brokerage commissions where the allocation is based, not only on best execution, but also on the sale of Fund shares. OTHER LEGAL PROCEEDINGS The Funds, in addition to other entities within Franklin Templeton Investments, including the Company and certain of its subsidiaries, other funds, and current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York, New Jersey, and Florida, alleging violations of various federal securities laws and seeking, among other things, monetary damages and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain funds managed by Company subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the Mass. Proceeding detailed above. The lawsuits are styled as class actions or derivative actions. 108 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) In addition, the Company and its subsidiaries, as well as certain current and former officers, employees, and directors have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and payment of allegedly excessive commissions and advisory fees. These lawsuits are styled as class actions and derivative actions. Management strongly believes that the claims made in each of these lawsuits are without merit and intends to vigorously defend against them. The Company cannot predict with certainty the eventual outcome of the foregoing Mass. Proceeding, other governmental investigations or class actions or other lawsuits. The impact, if any, of these matters on the Funds is uncertain at this time. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Funds, it is committed to making the Funds or their shareholders whole, as appropriate. Semiannual Report | 109 PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Semiannual Report | 110 This page intentionally left blank. This page intentionally left blank. Literature Request For a brochure and prospectus, which contains more complete information, including charges, expenses and risks, call Franklin Templeton Investments at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund 4 SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Franklin Technology Fund Mutual Financial Services Fund Asset Allocation Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 5 Franklin's AGE High Income Fund Franklin Federal Money Fund 5, 6 Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust 3 Franklin Income Fund Franklin Money Fund 5, 6 Franklin Short-Intermediate U.S. Government Securities Fund 5 Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 5 Templeton Global Bond Fund TAX-FREE INCOME 7 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 8 Tax-Exempt Money Fund 5, 6 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC 7 Alabama Arizona California 9 Colorado Connecticut Florida 9 Georgia Kentucky Louisiana Maryland Massachusetts 8 Michigan 8 Minnesota 8 Missouri New Jersey New York 9 North Carolina Ohio 8 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 10 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders as well as select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. Upon reaching approximately $350 million in assets, the fund intends to close to all investors. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. No assurance exists that the fund's $1.00 per share price will be maintained. It is possible to lose money by investing in the fund. 7. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 8. Portfolio of insured municipal securities. 9. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 10. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 02/04 Not part of the semiannual report [LOGO] FRANKLIN[R] TEMPLETON[R] One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS, INC. INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF S2004 05/04 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(A), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Edith E. Holiday and Harris J. Ashton, and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 10. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 11. EXHIBITS. (A) Code of Ethics for Principal Executive and Senior Financial Officers. (B)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Diomedes Tam-Loo, Chief Financial Officer (B)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Diomedes Tam-Loo, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 11, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 11, 2004 By /s/Diomedes Tam-Loo Chief Financial Officer Date May 11, 2004 EX-99.CODE ETH 2 codeofethics.txt EXHIBIT (A) FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS AND PURPOSE OF THE CODE This code of ethics (the "Code")1 is for the investment companies within the complex registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") applies to each FT Fund's Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers" each of whom are set forth in Exhibit A) for the purpose of promoting: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/2 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors; o any direct or indirect business relationship with any independent public accounting firm; and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). There are some conflict of interest situations that should always be approved in writing by FT's General Counsel or Deputy General Counsel, if material. Examples of these include/3: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100; o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. FT's General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the FT Funds, the adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o Upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify FT's General Counsel or Deputy General Counsel promptly if he knows of any violation of this Code. Failure to do so is itself is a violation of this Code. FT's General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation.4 However, the Independent Directors of the respective fund will consider any approvals or waivers5 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o FT's General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, FT's General Counsel or Deputy General Counsel believes that no violation has occurred, FT's General Counsel is not required to take any further action; o Any matter that FT's General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies there under. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-l under the Investment Company Act and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy, President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Diomedes Loo-Tam Treasurer & Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Diomedes Loo-Tam Treasurer & Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Diomedes Loo-Tam Treasurer & Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: FT GENERAL COUNSEL, LEGAL DEPARTMENT I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment -------------------- --------------------- Signature Date signed 1 Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. 2 Reporting of these affiliations or other relationships may be made separately by completing the Directors and Officers Questionnaire and returning to FT's General Counsel or Deputy General Counsel. 3 Any activity or relationship that would present a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 4 FT's General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 5 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. EX-99.CERT 3 fcfjimg302.txt EXHIBIT (B)(1) CERTIFICATIONS I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of the Franklin Custodian Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 11, 2004 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration I, Diomedes Loo-Tam, certify that: 1. I have reviewed this report on Form N-CSR of the Franklin Custodian Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 11, 2004 /s/DIOMEDES LOO-TAM Treasurer and Chief Financial Officer EX-99.906 4 fcfjimg906.txt EXHIBIT (B)(2) CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the Franklin Custodian Funds, Inc. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 03/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: May 11, 2004 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Diomedes Loo-Tam, Chief Financial Officer of the Franklin Custodian Funds, Inc. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 03/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: May 11, 2004 /S/DIOMEDES LOO-TAM Treasurer and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----