-----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, WhcaEiETATGH+KMPMoMdvsJ+bF4jW/hrrJc3n81Oof8MWWU89LnikYoJ7ld8cveR gt5BavhHm8tleEd/jWYqGw== 0000038721-06-000027.txt : 20060531 0000038721-06-000027.hdr.sgml : 20060531 20060531153329 ACCESSION NUMBER: 0000038721-06-000027 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060531 DATE AS OF CHANGE: 20060531 EFFECTIVENESS DATE: 20060531 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: 06876899 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 0000038721 S000006754 FRANKLIN DYNATECH FUND C000018321 CLASS A FKDNX C000018322 CLASS B FDNBX C000018323 CLASS C FDYNX 0000038721 S000006755 FRANKLIN GROWTH FUND C000018324 CLASS A FKGRX C000018325 CLASS B FKGBX C000018326 CLASS C FRGSX C000018327 ADVISOR CLASS FCGAX C000018328 CLASS R FGSRX 0000038721 S000006756 FRANKLIN INCOME FUND C000018329 CLASS A FKINX C000018330 CLASS B1 FICBX C000018331 CLASS B FBICX C000018332 CLASS C FCISX C000018333 ADVISOR CLASS FRIAX C000018334 CLASS R FISRX 0000038721 S000006757 FRANKLIN U.S. GOVERNMENT SECURITIES FUND C000018335 CLASS A FKUSX C000018336 CLASS B FUGBX C000018337 CLASS C FRUGX C000018338 ADVISOR CLASS FUSAX C000018339 CLASS R FUSRX 0000038721 S000006758 FRANKLIN UTILITIES FUND C000018340 CLASS A FKUTX C000018341 CLASS B FRUBX C000018342 CLASS C FRUSX C000018343 ADVISOR CLASS FRUAX C000018344 CLASS R FRURX N-CSRS 1 ncsrs.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) CRAIG S. TYLE, 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: 3/31/06 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- MARCH 31, 2006 - -------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER LETTER - -------------------------------------------------------------------------------- WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? FRANKLIN Eligible shareholders CUSTODIAN FUNDS, INC. can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o Templeton o Mutual Series - -------------------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report CONTENTS SHAREHOLDER LETTER ....................................................... 1 SEMIANNUAL REPORT Franklin DynaTech Fund ................................................... 4 Franklin Growth Fund ..................................................... 12 Franklin Income Fund ..................................................... 21 Franklin U.S. Government Securities Fund ................................. 33 Franklin Utilities Fund .................................................. 43 Financial Highlights and Statements of Investments ....................... 52 Financial Statements ..................................................... 101 Notes to Financial Statements ............................................ 110 Shareholder Information .................................................. 128 - -------------------------------------------------------------------------------- SEMIANNUAL REPORT FRANKLIN DYNATECH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in the equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin DynaTech Fund's semiannual report for the period ended March 31, 2006. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +7.37% cumulative total return for the six months under review. For the same period, the Fund outperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of +6.37%. 1 The Fund also outperformed the broad Standard & Poor's 500 Index (S&P 500), which posted a +6.38% cumulative total return. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2006, the U.S. economy advanced at a modest pace. In fourth quarter 2005, gross domestic product grew 1.7% annualized, the slowest pace in nearly three years. This was due to several factors including declines in vehicle sales and defense spending. Furthermore, slower export growth combined with greater demand for imported goods and materials fueled a widening trade deficit. Residential construction and real estate activity waned as long-term mortgage rates rose, but economic growth 1. Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 55. 4 | Semiannual Report picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed) indicated that the economy was in transition -- away from one led by rapid consumer spending, accommodative monetary policy and other fiscal stimulus toward one led by business investment spending and export trade. The labor market firmed as employment increased in most states and the unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the reporting period. Hiring rebounded in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices remained high, largely due to potential long-term supply disruptions and strong growth in global demand, especially from China and India. Natural gas prices rose during the second half of 2005 mainly because of expected rising demand with the onset of winter; however, they retreated somewhat amid milder-than-expected weather conditions. Although medical and pharmacy costs climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the year under review, which was less than the 2.2% 10-year average. 3 The Fed continued its monetary tightening cycle and raised the federal funds target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested more rate increases may be necessary to balance growth with what it saw as potential inflationary risks of tighter labor and product markets. The effects of the Fed's credit-tightening campaign cooled the previously hot housing and real estate markets as the cost of credit grew less attractive to most consumers who were already dealing with near-record consumer debt burdens and historically high gas prices. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +6.40%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small company stocks outperformed their large-capitalization counterparts by a wide margin, and technology stocks saw their biggest resurgence since 2003. Industrials, materials and telecommunications stocks also performed well. 2. Source: Bureau of Labor Statistics. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Semiconductors 10.1% Packaged Software 9.2% Biotechnology 9.2% Medical Specialties 7.6% Telecommunications Equipment 5.6% Internet Software & Services 5.1% Electronic Equipment & Instruments 4.6% Managed Health Care 4.1% Oilfield Services & Equipment 3.9% Computer Processing Hardware 3.7% Electronic Production Equipment 3.5% Air Freight & Couriers 3.4% Other Pharmaceuticals 2.7% Services to the Health Industry 2.3% Financial Publishing & Services 2.2% Information Technology Services 2.2% Major Pharmaceuticals 2.1% Other 17.8% Short-Term Investments & Other Net Assets 0.7% Semiannual Report | 5 TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Microsoft Corp. 3.4% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Genentech Inc. 3.0% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Intel Corp. 2.9% SEMICONDUCTORS - -------------------------------------------------------------------------------- UnitedHealth Group Inc. 2.7% MANAGED HEALTH CARE - -------------------------------------------------------------------------------- Google Inc., A 2.5% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- Yahoo! Inc. 2.5% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- Amgen Inc. 2.4% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Rockwell Automation Inc. 2.3% ELECTRONIC EQUIPMENT & INSTRUMENTS - -------------------------------------------------------------------------------- Schlumberger Ltd. 2.3% OILFIELD SERVICES & EQUIPMENT - -------------------------------------------------------------------------------- Moody's Corp. 2.2% FINANCIAL PUBLISHING & SERVICES - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. MANAGER'S DISCUSSION During the reporting period, several Fund holdings contributed to Fund performance. Notable performers include Schlumberger (+51%), Rockwell Automation (+37%) and Google (+23%). Increased capital expenditure in the oil industry, primarily due to higher oil prices, positively impacted oil field services company Schlumberger. A strong product cycle, particularly in its Logix business, boosted industrial automation giant Rockwell's returns. Lastly, online search engine Google continued to benefit from the shift of advertising spending to online channels, specifically online search engines. Some stocks, such as Alcon (-18%), Stryker (-10%) and International Rectifier (-8%), negatively impacted the Fund during the period. Eye care products manufacturer Alcon detracted from Fund performance as the company's revenue and earnings growth decelerated significantly from the past two years. We sold some of our Stryker holdings due to concerns about the deteriorating pricing environment for orthopedic medical devices. Semiconductor company International Rectifier missed analysts' expectations for two quarters and we sold the position by period-end. 6 | Semiannual Report Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OMITTED] /s/ Matthew J. Moberg Matthew J. Moberg, CPA [PHOTO OMITTED] /s/ Robert R. Dean Robert R. Dean, CFA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 7 PERFORMANCE SUMMARY AS OF 3/31/06 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION
- ------------------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKDNX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.84 $26.82 $24.98 - ------------------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FDNBX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.67 $25.82 $24.15 - ------------------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FDYNX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.66 $25.56 $23.90 - -------------------------------------------------------------------------------------------------------------
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 +7.37% +18.05% +31.52% +154.82% - ------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.21% +11.24% +4.39% +9.16% - ------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,121 $11,124 $12,398 $24,023 - ------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - ------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.92% +17.15% +26.58% -5.22% - ------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.92% +13.15% +4.49% -0.87% - ------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,292 $11,315 $12,458 $9,478 - ------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (9/16/96) - ------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +6.95% +17.19% +26.67% +113.50% - ------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.95% +16.19% +4.84% +8.28% - ------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,595 $11,619 $12,667 $21,350 - -------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 8 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH INVESTING IN COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE TECHNOLOGY SECTOR HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVE SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICE OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. Semiannual Report | 9 YOUR FUND'S EXPENSES FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 10 | Semiannual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06 - ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,073.70 $5.12 - ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.00 $4.99 - ------------------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,069.20 $8.92 - ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.31 $8.70 - ------------------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,069.50 $8.93 - ------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.31 $8.70 - -------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.99%; B: 1.73%; and C: 1.73%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 11 FRANKLIN GROWTH FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Growth Fund's semiannual report for the period ended March 31, 2006. PERFORMANCE OVERVIEW For the six months under review, Franklin Growth Fund - Class A posted a +10.18% cumulative total return. The Fund outperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.38% for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2006, the U.S. economy advanced at a modest pace. In fourth quarter 2005, gross domestic product grew 1.7% annualized, the slowest pace in nearly three years. This was due to several factors including declines in vehicle sales and defense spending. Furthermore, slower export growth combined with greater demand for imported goods and materials fueled a widening trade deficit. Residential construction and real estate activity waned as long-term mortgage rates rose, but economic growth picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed) indicated that the economy was in transition -- away from one led by rapid consumer spending, accommodative monetary policy and other fiscal stimulus toward one led by business investment spending and export trade. The labor market firmed as employment increased in most states and the unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the reporting period. Hiring rebounded in many industries and personal income grew. 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: Bureau of Labor Statistics. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 65. 12 | Semiannual Report Elevated energy and other commodity prices were a primary economic concern. Oil prices remained high, largely due to potential long-term supply disruptions and strong growth in global demand, especially from China and India. Natural gas prices rose during the second half of 2005 mainly because of expected rising demand with the onset of winter; however, they retreated somewhat amid milder-than-expected weather conditions. Although medical and pharmacy costs climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the year under review, which was less than the 2.2% 10-year average. 3 The Fed continued its monetary tightening cycle and raised the federal funds target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested more rate increases may be necessary to balance growth with what it saw as potential inflationary risks of tighter labor and product markets. The effects of the Fed's credit-tightening campaign cooled the previously hot housing and real estate markets as the cost of credit grew less attractive to most consumers who were already dealing with near-record consumer debt burdens and historically high gas prices. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +6.40%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small company stocks outperformed their large-capitalization counterparts by a wide margin, and technology stocks saw their biggest resurgence since 2003. Industrials, materials and telecommunications stocks also performed well. INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in mature businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 21.4% Health Technology* 20.9% Producer Manufacturing 19.4% Technology Services* 9.3% Transportation 5.6% Consumer Services 4.6% Distribution Services 3.2% Commercial Services 2.9% Energy Minerals 2.6% Consumer Non-Durables 2.3% Process Industries 1.9% Health Services 1.9% Consumer Durables 1.7% Other 0.7% Short-Term Investments & Other Net Assets 1.6% *Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. Semiannual Report | 13 TOP 10 HOLDINGS Franklin Growth Fund 3/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Genentech Inc. 3.5% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- The Boeing Co. 3.2% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Northrop Grumman Corp. 2.8% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Amgen Inc. 2.8% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- General Dynamics Corp. 2.7% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Apple Computer Inc. 2.6% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- 3M Co. 2.5% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Johnson & Johnson 2.4% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Computer Sciences Corp. 2.3% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Yahoo! Inc. 2.1% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- MANAGER'S DISCUSSION The Fund was nearly fully invested with holdings in 99 companies at period-end. We continued to invest in a broad array of companies of all sizes and in varied industries. No particular sector strength or weakness drove Fund performance during the reporting period, but instead results were based on individual company performances. Two of our best performing holdings were Continental Airlines (+178%) and AMR, or American Airlines, (+142%). Other solid contributors included Textron (+31%), Northrop Grumman (+27%), Computer Sciences (+17%), Apple Computer (+17%) and Boeing (+16%). The Fund had some detractors during the period under review. Examples of holdings that did not perform well included Amgen (-9%), Johnson & Johnson (-5%) and Yahoo! (-5%). The poorest performers were Intel (-20%), EnCana (-20%), Gateway (-19%) and Dell (-13%). 14 | Semiannual Report Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 15 PERFORMANCE SUMMARY AS OF 3/31/06 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ---------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKGRX) CHANGE 3/31/06 9/30/05 - ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.48 $38.31 $34.83 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ---------------------------------------------------------------------------------------------------- Dividend Income $0.0644 - ---------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FKGBX) CHANGE 3/31/06 9/30/05 - ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.30 $37.03 $33.73 - ---------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FRGSX) CHANGE 3/31/06 9/30/05 - ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.28 $36.71 $33.43 - ---------------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FGSRX) CHANGE 3/31/06 9/30/05 - ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.48 $38.07 $34.59 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ---------------------------------------------------------------------------------------------------- Dividend Income $0.0013 - ---------------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/06 9/30/05 - ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.45 $38.34 $34.89 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ---------------------------------------------------------------------------------------------------- Dividend Income $0.1518 - ----------------------------------------------------------------------------------------------------
16 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- ----------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +10.18% +15.70% +23.65% +107.86% - ----------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +3.86% +9.06% +3.11% +6.95% - ----------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,386 $10,906 $11,652 $19,587 - ----------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ----------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.78% +14.82% +19.17% +26.67% - ----------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.78% +10.82% +3.22% +3.32% - ----------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,578 $11,082 $11,717 $12,667 - ----------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.78% +14.83% +19.13% +92.77% - ----------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.78% +13.83% +3.56% +6.78% - ----------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,878 $11,383 $11,913 $19,277 - ----------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION(1/1/02) - ----------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +10.06% +15.44% +70.88% +20.83% - ----------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +9.06% +14.44% +19.55% +4.56% - ----------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,906 $11,444 $17,088 $12,083 - ----------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 4 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ----------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +10.34% +15.99% +25.22% +114.29% - ----------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +10.34% +15.99% +4.60% +7.92% - ----------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,034 $11,599 $12,522 $21,429 - -----------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 17 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. THE FUND'S INVESTMENTS IN FOREIGN COMPANIES CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +93.71% and +7.41%. 18 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 19 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06 - ---------------------------------------------------------------------------------------------------------- Actual $1,000 $1,101.80 $4.87 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.29 $4.68 - ---------------------------------------------------------------------------------------------------------- CLASS B - ---------------------------------------------------------------------------------------------------------- Actual $1,000 $1,097.80 $8.73 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.40 - ---------------------------------------------------------------------------------------------------------- CLASS C - ---------------------------------------------------------------------------------------------------------- Actual $1,000 $1,097.80 $8.73 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.60 $8.40 - ---------------------------------------------------------------------------------------------------------- CLASS R - ---------------------------------------------------------------------------------------------------------- Actual $1,000 $1,100.60 $6.18 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.05 $5.94 - ---------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ---------------------------------------------------------------------------------------------------------- Actual $1,000 $1,103.40 $3.57 - ---------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.54 $3.43 - ----------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.93%; B: 1.67%; C: 1.67%; R: 1.18%; and Advisor: 0.68%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 20 | Semiannual Report FRANKLIN INCOME FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin Income Fund covers the period ended March 31, 2006. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +2.46% cumulative total return for the six months under review. The Fund underperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.38%; outperformed its other benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which returned -0.06%; and underperformed its peers as measured by the Lipper Income Funds Classification Average, which returned +3.16%, for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 27. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2006, the U.S. economy advanced at a modest pace. In fourth quarter 2005, gross domestic product grew 1.7% annualized, the slowest pace in nearly three years. This was due to several factors including declines in vehicle sales and defense spending. Furthermore, slower export growth combined with greater demand for imported goods and materials fueled a widening trade deficit. Residential construction and real estate activity waned as long-term mortgage rates rose, but economic growth picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed) indicated that the economy was in transition -- away from one led by 1. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Income Funds are defined as funds that seek a high level of current income through investing in income-producing stocks, bonds and money market instruments. For the six-month period ended 3/31/06, there were 322 funds in this category. Lipper calculations do not include sales charges, but include reinvestment of any income or distributions. The Fund's performance relative to the average may have differed if these and other factors had been considered. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 75. Semiannual Report | 21 rapid consumer spending, accommodative monetary policy and other fiscal stimulus toward one led by business investment spending and export trade. The labor market firmed as employment increased in most states and the unemployment rate dropped from 4.9% to 4.7%. 2 Labor costs increased during the reporting period. Hiring rebounded in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices remained high, largely due to potential long-term supply disruptions and strong growth in global demand, especially from China and India. Natural gas prices rose during the second half of 2005 mainly because of expected rising demand with the onset of winter; however, they retreated somewhat amid milder-than-expected weather conditions. Although medical and pharmacy costs climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the year under review, which was less than the 2.2% 10-year average. 3 The Fed continued its monetary tightening cycle and raised the federal funds target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested more rate increases may be necessary to balance growth with what it saw as potential inflationary risks of tighter labor and product markets. The effects of the Fed's credit-tightening campaign cooled the previously hot housing and real estate markets as the cost of credit grew less attractive to most consumers who were already dealing with near-record consumer debt burdens and historically high gas prices. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +6.40%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 4 Small company stocks outperformed their large-capitalization counterparts by a wide margin, and technology stocks saw their biggest resurgence since 2003. Industrials, materials and telecommunications stocks also performed well. 2. Source: Bureau of Labor Statistics. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. Please see footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 22 | Semiannual Report DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/05-3/31/06
- ---------------------------------------------------------------------------------------------------------------- DIVIDEND PER SHARE ----------------------------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ---------------------------------------------------------------------------------------------------------------- October 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents - ---------------------------------------------------------------------------------------------------------------- November 1.25 cents 1.06 cents 1.14 cents 1.14 cents 1.17 cents 1.28 cents - ---------------------------------------------------------------------------------------------------------------- December 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents - ---------------------------------------------------------------------------------------------------------------- January 1.25 cents 1.08 cents 1.15 cents 1.15 cents 1.19 cents 1.28 cents - ---------------------------------------------------------------------------------------------------------------- February 1.20 cents 1.03 cents 1.10 cents 1.10 cents 1.14 cents 1.23 cents - ---------------------------------------------------------------------------------------------------------------- March 1.20 cents 1.02 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents - ---------------------------------------------------------------------------------------------------------------- TOTAL 7.40 CENTS 6.33 CENTS 6.77 CENTS 6.78 CENTS 6.98 CENTS 7.58 CENTS - ----------------------------------------------------------------------------------------------------------------
*All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. **On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION During the six months under review, the Fund's weak performance compared with strong gains experienced in the overall U.S. equity market can be attributed to several factors. These included the Fund's large weighting in the electric utilities sector as well as weakness during the period in some energy stocks after their share prices had appreciated substantially amid hurricane activities in the summer of 2005. Our emphasis on corporate credit opportunities drove the Fund's favorable performance relative to the overall fixed income market, as measured by the LB U.S. Aggregate Index, and helped offset the substantial rise in long-term interest rates. During the reporting period, the U.S. 10-year Treasury bond yield rose from 4.34% to 4.86%, which negatively impacted bond price performance. Semiannual Report | 23 TOP 5 EQUITY HOLDINGS Franklin Income Fund 3/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Merck & Co. Inc. 3.5% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Bank of America Corp. 2.3% FINANCE - -------------------------------------------------------------------------------- Pfizer Inc. 2.3% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Fannie Mae, 5.375%, cvt. pfd. 1.8% FINANCE - -------------------------------------------------------------------------------- Canadian Oil Sands Trust 1.8% ENERGY MINERALS - -------------------------------------------------------------------------------- TOP 5 BOND HOLDINGS* Franklin Income Fund 3/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- General Motors Acceptance Corp. 4.0% CONSUMER DURABLES ------------------------------------------------------------------------------- Ford Motor Credit Corp. 3.3% CONSUMER DURABLES - -------------------------------------------------------------------------------- Tenet Healthcare Corp. 3.0% HEALTH SERVICES - -------------------------------------------------------------------------------- CCH LLC 2.7% CONSUMER SERVICES - -------------------------------------------------------------------------------- Qwest 2.3% COMMUNICATIONS - -------------------------------------------------------------------------------- *Does not include convertible bonds. At period-end, we had approximately 51% of the Fund's total net assets invested in fixed income securities, 46% in equity securities including common stocks and convertible preferred stocks, and 2.8% in short-term investments and other net assets. We sought to take advantage of broad fixed income market weakness to add to existing holdings and initiate new positions in gaming and lodging companies MGM Mirage and Host Marriott, and defense technology companies L-3 Communications and DRS Technologies. Within the automotive finance sector, we continued to build positions in General Motors Acceptance Corporation (GMAC) and Ford Motor Credit, as we believed strategic initiatives designed to improve liquidity and strengthen core North American operations offset the competitive and structural challenges faced by their parent companies, General Motors and Ford Motor. At the end of the reporting period, the Fund held a significant amount of its total net assets in noninvestment-grade corporate debt due to our assessment of the attractive risk-reward tradeoff in a rising rate environment relative to other fixed income asset classes. During the period, higher coupon payments and tightening credit spreads fueled high yield bonds' relatively strong performance, as represented by the +3.58% total return of the LB High Yield Index relative to the -0.06% total return of the LB U.S. Aggregate Index. 5 The spread, or incremental yield over benchmark U.S. Treasury securities, dropped from 3.66 percentage points to 3.27 percentage points. 5 This decline in average spread, which represents the amount of incremental yield required to compensate investors for credit risk, helped mitigate the effect of rising interest rates on the Fund's investments. The Fund's large weighting in the electric utilities sector hurt Fund performance. Utilities, as measured by the S&P 500 Utilities Index, had a -6.57% total return during the six-month period. 6 Poor sector performance largely resulted from rising long-term interest rates, as dividend yields on utility stocks have historically maintained a high level of correlation to the bond market. Typically, we look for opportunities to invest in utility companies that we believe have the 5. Sources: Lehman Brothers Inc.; Standard & Poor's Micropal. The LB High Yield Index covers the universe of fixed rate, noninvestment-grade debt. The index includes both corporate and non-corporate sectors. Please see footnote 1 for a description of the LB U.S. Aggregate Index. 6. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index that includes electric utility stocks in the S&P 500. 24 | Semiannual Report potential to grow their dividends at above-average rates, which can help offset rising interest rates. Fund holdings PG&E and Alliant Energy, successful examples of this approach, both materially raised their dividends. In December 2005, PG&E announced a dividend 10% above its prior level, and in January 2006, Alliant declared a dividend 9.5% above its prior stated level. During the reporting period, PG&E and Alliant delivered total returns of +0.83% and +10%. Oil and natural gas commodity prices had a negative impact on utility companies, especially those involved in oil and gas exploration and production. Since the beginning of the period, natural gas spot prices fell $7 per million British thermal units (BTUs), from $14 to nearly $7 per million BTUs. Although the Fund had limited exposure to these types of utilities, this decline hurt some of our holdings' expected earnings levels. For example, Dominion Resources is a major operator of exploration and production properties, and the level of profits expected from these properties declined as natural gas prices fell. As a result, Dominion had a -18% return for the period. Despite significant long-term asset value, independent power producer Calpine sought bankruptcy court protection on December 21, 2005, as its fundamental conditions failed to improve quickly enough for the company to address its highly leveraged balance sheet. The default dampened overall Fund performance. Calpine's convertible and nonconvertible senior unsecured notes fell, but the decline was partially offset by strength in our second-priority lien secured notes. Our holdings in the telecommunication services sector aided Fund performance, particularly BellSouth (+35%), which surged following the announced merger with AT&T (+16%). Optimism surrounding sector consolidation and prospects for improved financial performance that reflected the benefits of scale and network synergies contributed to strong relative Fund performance. An initiative to broaden the product platform to include video services offered the potential to enhance the company's offerings for consumers and improve the company's financial performance and the sector's competitive position. Within this sector, Verizon Communications (+7%) also benefited overall Fund performance. PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Corporate Straight Bonds 44.0% Utilities Stocks 16.2% Health Technology Stocks 8.5% Finance Stocks 7.6% Energy Minerals Stocks 4.9% U.S. Government & Agency Securities 3.7% Corporate Convertible Bonds 3.6% Communications Stocks 3.2% Non-Energy Minerals Stocks 1.4% Gas Distributors Stocks 1.3% Other 2.8% Short-Term Investments & Other Net Assets 2.8% Semiannual Report | 25 Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Edward Perks Edward Perks, CFA [PHOTO OMITTED] /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 26 | Semiannual Report PERFORMANCE SUMMARY AS OF 3/31/06 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKINX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.47 $2.50 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0740 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0885 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FBICX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.46 $2.49 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0633 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0778 - -------------------------------------------------------------------------------- CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.47 $2.50 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0677 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0822 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FCISX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.48 $2.51 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0678 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0823 - -------------------------------------------------------------------------------- Semiannual Report | 27 PERFORMANCE SUMMARY (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FISRX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.45 $2.48 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0698 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0843 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.03 $2.46 $2.49 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.0758 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0055 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0090 - -------------------------------------------------------------------------------- TOTAL $0.0903 - -------------------------------------------------------------------------------- 28 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS B1: CDSC DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- --------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.46% +7.78% +55.32% +141.23% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.85% +3.15% +8.29% +8.74% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,815 $10,315 $14,890 $23,114 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.58% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.17% - --------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 3-YEAR INCEPTION (11/1/01) - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.02% +6.89% +50.48% +53.00% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.93% +2.89% +13.83% +9.79% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,807 $10,289 $14,748 $15,100 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 4.98% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.56% - --------------------------------------------------------------------------------------------------------------- CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.20% +7.24% +51.50% +79.78% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.75% +3.24% +8.37% +8.43% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,825 $10,324 $14,950 $17,978 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.30% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.90% - --------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.19% +7.19% +51.19% +128.70% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.20% +6.19% +8.62% +8.62% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,120 $10,619 $15,119 $22,870 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.32% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.91% - --------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.31% +7.47% +53.02% +51.57% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.32% +6.47% +15.24% +10.30% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,132 $10,647 $15,302 $15,157 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.49% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.05% - --------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.55% +7.97% +56.78% +146.29% - --------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.55% +7.97% +9.41% +9.43% - --------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,255 $10,797 $15,678 $24,629 - --------------------------------------------------------------------------------------------------------------- Distribution Rate 4 6.00% - --------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.56% - ---------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 29 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE RISKS ASSOCIATED WITH HIGHER YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER RISK OF DEFAULT AND LOSS OF PRINCIPAL. THE FUND MAY ALSO INVEST IN FOREIGN COMPANIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 3/31/06. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/06. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +124.38% and +9.13%. 30 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 31 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06 - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.60 $3.23 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.74 $3.23 - -------------------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,020.20 $7.45 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.55 $7.44 - -------------------------------------------------------------------------------------------------------------------- CLASS B1 - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,022.00 $5.75 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.74 - -------------------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,021.90 $5.75 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.74 - -------------------------------------------------------------------------------------------------------------------- CLASS R - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,023.10 $4.99 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.00 $4.99 - -------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------------------------------------------- Actual $1,000 $1,025.50 $2.47 - -------------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.49 $2.47 - --------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio, net of expense waivers, for each class (A: 0.64%; B: 1.48%; B1: 1.14%; C: 1.14%; R: 0.99%; and Advisor: 0.49%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 32 | Semiannual Report FRANKLIN U.S. GOVERNMENT SECURITIES FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). - -------------------------------------------------------------------------------- Since 1983, the Fund has invested predominantly in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal. 1 Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.] GNMA ................................................................... 97.3% Short-Term Investments & Other Net Assets .............................. 2.7% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin U.S. Government Securities Fund's semiannual report for the period ended March 31, 2006. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +0.71% cumulative total return for the six months under review. The Fund outperformed the Lehman Brothers U.S. Government: Intermediate Index, which returned +0.29%. 2 In comparison, the Lipper GNMA Funds Classification Average returned +0.55% 1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. 2. Source: Standard & Poor's Micropal. The Lehman Brothers U.S. Government: Intermediate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. Past performance does not guarantee future results. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 90. Semiannual Report | 33 FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (4/01-3/06) [THE FOLLOWING TABLE WAS REPRESENTED AS A PLOTTED CHART IN THE PRINTED MATERIAL.] FOR THE 5-YEAR PERIOD ENDED 3/31/06 RISK RETURN -------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A 2.67% 4.29% PAYDEN & RYGEL 1-YEAR U.S. TREASURY BILL 0.76% 2.32% PAYDEN & RYGEL 10-YEAR U.S. TREASURY NOTE 8.27% 4.46% PAYDEN & RYGEL 30-YEAR U.S. TREASURY BOND 13.20% 6.72% -------------------------- THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER. *Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. for the same period. 3 The Fund's return reflects the effect of management fees and expenses, while the index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 38. 3. Source: The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA securities. For the six-month period ended 3/31/06, there were 63 funds in this category. Lipper calculations do not include sales charges. The Fund's performance relative to the average may have differed if these or other factors had been considered. Past performance does not guarantee future results. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 34 | Semiannual Report ECONOMIC AND MARKET OVERVIEW The U.S. economy continued to grow during the six months under review. After gross domestic product growth decelerated from an annualized rate of 4.1% in third quarter 2005 to 1.7% in the fourth quarter, it rebounded to an estimated 4.8% annualized rate in first quarter 2006. Over the reporting period, nonfarm payroll data, as well as other indexes, showed growing employment. Consumer spending increased 6.4% (not adjusted for inflation) in March 2006 compared with the same month a year earlier, which supported the nation's economic progress. 4 Business spending also rose during the reporting period, contributing to economic growth. Historically low interest rates allowed many companies easy access to capital, and ample cash also helped some companies to support their spending plans. On the other hand, labor costs accelerated and business productivity fell unexpectedly during fourth quarter 2005, the first decline in nearly five years. Oil prices climbed as high as $68 a barrel during the period. Prices were elevated partially by concerns about potential long-term supply limitations in the face of expected strong growth in global demand, especially from China and India, and the potential for supply disruptions stemming from geopolitical turmoil in several major oil-producing countries. Sustained high commodity prices contributed to inflationary pressures, and inflation, while still subdued, rose somewhat. The Personal Consumption Expenditures (PCE) deflator, the Federal Reserve Board's (Fed's) preferred measure of inflation, reported inflation of 2.0% for core prices, and 2.9% overall for the 12 months ended March 31, 2006. 5 A more widely reported inflation index, the core Consumer Price Index (CPI), rose 2.1% for the same period. 6 During the six-month reporting period, the Fed raised the federal funds target rate to 4.75% from 3.75%. In March, at the first meeting of the Fed conducted by newly appointed Fed Chairman Ben Bernanke, the Fed acknowledged the economy's strength and mentioned it might still raise rates to balance the risks of sustainable economic growth and price stability. The market reacted to the statement by increasing yields (and lowering prices) across intermediate- and longer-term bonds. 4. Source: Bureau of Economic Analysis. 5. Source: Bureau of Economic Analysis. The chain-type price index (or deflator) measures the inflation rate for individual expenditures on goods and services as measured by PCE. The PCE is included in the BEA's report on gross domestic product. The core PCE deflator excludes food and energy costs. 6. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. Semiannual Report | 35 YIELD COMPARISON 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Franklin U.S Government Securities Fund - Class A* 4.55% 10-Year Treasury Note* 4.86% Lipper GNMA Funds Average* 4.18% Lipper Money Market Funds Average* 3.76% *Sources: Standard & Poor's Micropal; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 3/31/06. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Classification Average is an average of the monthly SEC yields of 48 funds in the Lipper GNMA Funds classification for the 30 days ended 3/31/06. The Lipper Money Market Funds Classification Average is an average of the monthly SEC yields of 291 funds in the Lipper Money Market Funds classification for the 30 days ended 3/31/06. Lipper averages do not include sales charges. DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/05-3/31/06
- ------------------------------------------------------------------------------------------------------------- DIVIDEND PER SHARE ----------------------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - ------------------------------------------------------------------------------------------------------------- October 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.66 cents - ------------------------------------------------------------------------------------------------------------- November 2.60 cents 2.31 cents 2.31 cents 2.39 cents 2.67 cents - ------------------------------------------------------------------------------------------------------------- December 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents - ------------------------------------------------------------------------------------------------------------- January 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.67 cents - ------------------------------------------------------------------------------------------------------------- February 2.60 cents 2.32 cents 2.31 cents 2.39 cents 2.66 cents - ------------------------------------------------------------------------------------------------------------- March 2.60 cents 2.32 cents 2.32 cents 2.39 cents 2.67 cents - ------------------------------------------------------------------------------------------------------------- TOTAL 15.60 CENTS 13.90 CENTS 13.87 CENTS 14.34 CENTS 16.00 CENTS - -------------------------------------------------------------------------------------------------------------
The 10-year Treasury note fluctuated over the past six months, but overall its yield rose from 4.34% at the beginning of the period to 4.86% on March 31, 2006. The yield on the 30-year Treasury rose from 4.57% to 4.89% during the same period. Short-term interest rates rose more than intermediate- and long-term rates, and the yield curve flattened as the spread between short-term and long-term rates generally narrowed and even inverted at some points along the yield curve. INVESTMENT STRATEGY We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments include short-term government securities and cash or cash equivalents. MANAGER'S DISCUSSION Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, agency debentures, investment grade and high yield corporate bonds, and large- and small-capitalization stocks. These time periods include various credit, prepayment, economic and interest rate cycles. As the mortgage-backed securities (MBS) market has evolved, we believe technical research tools have increased in importance. In the GNMA sector, we applied our proprietary research models seeking to uncover areas of the markets where we believed prepayment risk may have offered value. For example, during the review period, rising mortgage rates led to a decline in prepayment 36 | Semiannual Report risk. As we examined the price difference between securities in the GNMA I and GNMA II programs, we concluded that the stronger prepayment protection generally associated with GNMA I MBS was overvalued. 7 This resulted in our increased weighting in GNMA II MBS by period-end. Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ Jack Lemein Jack Lemein [PHOTO OMITTED] /s/ Roger A. Bayston Roger A. Bayston, CFA Portfolio Management Team Franklin U.S. Government Securities Fund 7. GNMA I MBS are single-issuer pools. GNMA II MBS are multiple-issuer pools and can include a range of interest rates. GNMA II securities are generally considered more geographically diverse than single-issuer pools. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 37 PERFORMANCE SUMMARY AS OF 3/31/06 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUSX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.11 $6.42 $6.53 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ------------------------------------------------------------------------------------------------------------- Dividend Income $0.1560 - ------------------------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FUGBX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.11 $6.41 $6.52 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ------------------------------------------------------------------------------------------------------------- Dividend Income $0.1390 - ------------------------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUGX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.11 $6.39 $6.50 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ------------------------------------------------------------------------------------------------------------- Dividend Income $0.1387 - ------------------------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FUSRX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.11 $6.42 $6.53 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ------------------------------------------------------------------------------------------------------------- Dividend Income $0.1434 - ------------------------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/06 9/30/05 - ------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.12 $6.43 $6.55 - ------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - ------------------------------------------------------------------------------------------------------------- Dividend Income $0.1600 - -------------------------------------------------------------------------------------------------------------
38 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +0.71% +2.37% +23.38% +73.31% - ---------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -3.57% -1.95% +3.40% +5.20% - ---------------------------------------------------------------------------------------------------------------- Distribution Rate 3 4.66% - ---------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.55% - ---------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ---------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +0.45% +1.83% +20.04% +35.67% - ---------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -3.49% -2.07% +3.39% +4.30% - ---------------------------------------------------------------------------------------------------------------- Distribution Rate 3 4.34% - ---------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.23% - ---------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +0.44% +1.84% +20.08% +64.31% - ---------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -0.54% +0.86% +3.73% +5.09% - ---------------------------------------------------------------------------------------------------------------- Distribution Rate 3 4.36% - ---------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.22% - ---------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - ---------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +0.52% +2.14% +6.26% +16.04% - ---------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -0.47% +1.16% +2.04% +3.57% - ---------------------------------------------------------------------------------------------------------------- Distribution Rate 3 4.47% - ---------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.38% - ---------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 5 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ---------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +0.62% +2.49% +24.08% +75.78% - ---------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +0.62% +2.49% +4.41% +5.80% - ---------------------------------------------------------------------------------------------------------------- Distribution Rate 3 4.98% - ---------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.89% - ----------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 39 PERFORMANCE SUMMARY (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS THE PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/06. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/06. 5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +66.89% and +5.70%. 40 | Semiannual Report YOUR FUND'S EXPENSES FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 41 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06 - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,007.10 $3.65 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.29 $3.68 - ----------------------------------------------------------------------------------------------------------- CLASS B - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,004.50 $6.25 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.29 - ----------------------------------------------------------------------------------------------------------- CLASS C - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,004.40 $6.20 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.75 $6.24 - ----------------------------------------------------------------------------------------------------------- CLASS R - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,005.20 $5.50 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.45 $5.54 - ----------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ----------------------------------------------------------------------------------------------------------- Actual $1,000 $1,006.20 $3.00 - ----------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.94 $3.02 - -----------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.73%; B: 1.25%; C: 1.24%; R: 1.10%; and Advisor: 0.60%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 42 | Semiannual Report FRANKLIN UTILITIES FUND YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility industry securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin Utilities Fund covers the period ended March 31, 2006. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A posted a - -3.97% cumulative total return. The Fund underperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +6.38% for the same period. 1 The Fund outperformed its narrow benchmark, the S&P 500 Utilities Index, which had a -6.57% return. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 47. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2006, the U.S. economy advanced at a modest pace. In fourth quarter 2005, gross domestic product grew 1.7% annualized, the slowest pace in nearly three years. This was due to several factors including declines in vehicle sales and defense spending. Furthermore, slower export growth combined with greater demand for imported goods and materials fueled a widening trade deficit. Residential construction and real estate activity waned as long-term mortgage rates rose, but economic growth picked up again in first quarter 2006. In March, the Federal Reserve Board (Fed) indicated that the economy was in transition -- away from one led by rapid consumer spending, accommodative monetary policy and other fiscal stimulus toward one led by business investment spending and export trade. 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500 Index. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 97. Semiannual Report | 43 PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/06 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] Electric Utilities 83.9% Gas Distributors 11.3% Diversified Telecommunication Services 3.5% Oil, Gas & Consumable Fuels 1.1% Short-Term Investments & Other Net Assets 0.2% The labor market firmed as employment increased in most states and the unemployment rate dropped from 4.9% to 4.7%. 3 Labor costs increased during the reporting period. Hiring rebounded in many industries and personal income grew. Elevated energy and other commodity prices were a primary economic concern. Oil prices remained high, largely due to potential long-term supply disruptions and strong growth in global demand, especially from China and India. Natural gas prices rose during the second half of 2005 mainly because of expected rising demand with the onset of winter; however, they retreated somewhat amid milder-than-expected weather conditions. Although medical and pharmacy costs climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the year under review, which was less than the 2.2% 10-year average. 4 The Fed continued its monetary tightening cycle and raised the federal funds target rate from 3.75% to 4.75% in four quarter-point steps. The Fed suggested more rate increases may be necessary to balance growth with what it saw as potential inflationary risks of tighter labor and product markets. The effects of the Fed's credit-tightening campaign cooled the previously hot housing and real estate markets as the cost of credit grew less attractive to most consumers who were already dealing with near-record consumer debt burdens and historically high gas prices. In this environment, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +6.40%, while the broader S&P 500 and the technology-heavy NASDAQ Composite Index returned +6.38% and +9.28%. 5 Small company stocks outperformed their large-capitalization counterparts by a wide margin, and technology stocks saw their biggest resurgence since 2003. Industrials, materials and telecommunications stocks also performed well. 3. Source: Bureau of Labor Statistics. 4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. Please see footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 44 | Semiannual Report INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION Much of the utilities sector's negative performance relative to the overall market can be attributed to a rise in long-term interest rates, as dividend yields on utility stocks have historically maintained a high level of correlation to the bond market. The 10-year U.S. Treasury bond's yield increased from 4.34% to 4.86% during the reporting period. One of the major investment themes we follow is investing in utility companies we believe can grow their dividends at above-average rates, which can help offset rising interest rates. Two successful examples of our holdings that demonstrated material dividend boosts were PG&E and Alliant Energy. In December 2005, PG&E announced a dividend that was 10% above its prior level. Alliant declared a dividend in January 2006 that was 9.5% above its prior stated level. During the period, these two companies were among the Fund's best performers. PG&E's total return was +0.83% while Alliant's was +10%. Utilities were also negatively impacted by natural gas commodity prices as companies involved in oil and gas exploration and production (E&P) depend on these commodities. Since September 30, 2005, natural gas spot prices fell $7 per million British thermal units (BTUs), from $14 to $7 per million BTUs. Although the Fund had limited exposure to these types of utilities, the drop affected some of our holdings' expected earnings levels. An example is Dominion Resources, a significant operator of E&P properties. Expected profits from Dominion's properties declined as natural gas spot prices fell. Dominion's total return during the period was -18%. Questar is another company with similar exposure to natural gas commodity prices, and its total return was -20%. The Fund continued to produce solid results out of its international holdings. National Grid, a U.K.-based utility, and Gaz de France each appreciated 8% during the period under review. United Utilities also performed well. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/06 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Entergy Corp. 4.9% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Exelon Corp. 4.7% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Dominion Resources Inc. 4.5% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- FirstEnergy Corp. 4.4% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 3.9% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Cinergy Corp. 3.9% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- FPL Group Inc. 3.6% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Edison International 3.4% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- The Southern Co. 3.3% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- PG&E Corp. 3.3% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Semiannual Report | 45 Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 46 | Semiannual Report PERFORMANCE SUMMARY AS OF 3/31/06 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUTX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.80 $11.79 $12.59 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.2103 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 - -------------------------------------------------------------------------------- TOTAL $0.3017 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FRUBX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.79 $11.78 $12.57 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.1799 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 - -------------------------------------------------------------------------------- TOTAL $0.2713 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUSX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.79 $11.76 $12.55 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.1807 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 - -------------------------------------------------------------------------------- TOTAL $0.2721 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FRURX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.80 $11.77 $12.57 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.1924 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 - -------------------------------------------------------------------------------- TOTAL $0.2838 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/06 9/30/05 - -------------------------------------------------------------------------------- Net Asset Value (NAV) -$0.80 $11.84 $12.64 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/05-3/31/06) - -------------------------------------------------------------------------------- Dividend Income $0.2193 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.0914 - -------------------------------------------------------------------------------- TOTAL $0.3107 - -------------------------------------------------------------------------------- Semiannual Report | 47 PERFORMANCE SUMMARY (CONTINUED) PERFORMANCE CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R: 1% CDSC FOR FIRST 18 MONTHS ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES.
- -------------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 -3.97% +9.67% +40.51% +125.48% - -------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -8.06% +4.99% +6.11% +8.00% - -------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,194 $10,499 $13,454 $21,591 - -------------------------------------------------------------------------------------------------------------------- Distribution Rate 4 3.28% - -------------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.18% - -------------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 -4.14% +9.08% +37.03% +57.13% - -------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -7.88% +5.08% +6.19% +6.43% - -------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,212 $10,508 $13,503 $15,713 - -------------------------------------------------------------------------------------------------------------------- Distribution Rate 4 2.91% - -------------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.81% - -------------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 -4.14% +9.11% +37.10% +114.50% - -------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -5.07% +8.11% +6.51% +7.93% - -------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,493 $10,811 $13,710 $21,450 - -------------------------------------------------------------------------------------------------------------------- Distribution Rate 4 2.91% - -------------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.81% - -------------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (1/1/02) - -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 -4.12% +9.29% +68.33% +43.86% - -------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -5.05% +8.29% +18.96% +8.95% - -------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,495 $10,829 $16,833 $14,386 - -------------------------------------------------------------------------------------------------------------------- Distribution Rate 4 3.12% - -------------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.97% - -------------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 -3.88% +9.87% +41.62% +131.02% - -------------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -3.88% +9.87% +7.21% +8.73% - -------------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $9,612 $10,987 $14,162 $23,102 - -------------------------------------------------------------------------------------------------------------------- Distribution Rate 4 3.56% - -------------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 3.48% - --------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. 48 | Semiannual Report PERFORMANCE SUMMARY (CONTINUED) ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated and does not include a sales charge. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated and includes any current, applicable, maximum sales charge. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated and include any current, applicable, maximum sales charge. 4. Distribution rate is based on an annualization of the respective class's current quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/06. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/06. 6. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 1/2/97, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 1/2/97 (commencement of sales), the cumulative and average annual total returns of Advisor Class shares were +124.04% and +9.12%. Semiannual Report | 49 YOUR FUND'S EXPENSES FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 50 | Semiannual Report YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06 - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 960.30 $3.76 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.09 $3.88 - --------------------------------------------------------------------------------------------------------------- CLASS B - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.60 $6.20 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.39 - --------------------------------------------------------------------------------------------------------------- CLASS C - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.60 $6.15 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34 - --------------------------------------------------------------------------------------------------------------- CLASS R - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 958.80 $5.47 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.35 $5.64 - --------------------------------------------------------------------------------------------------------------- ADVISOR CLASS - --------------------------------------------------------------------------------------------------------------- Actual $1,000 $ 961.20 $3.03 - --------------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.84 $3.13 - ---------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.77%; B: 1.27%; C: 1.26%; R: 1.12%; and Advisor: 0.62%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 51 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 $ 28.60 --------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ................ (0.03) (0.01) (0.09) (0.06) 0.03 0.44 Net realized and unrealized gains (losses) .... 1.87 2.98 1.93 4.86 (3.11) (9.70) --------------------------------------------------------------------------------- Total from investment operations ............... 1.84 2.97 1.84 4.80 (3.08) (9.26) --------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... -- -- -- -- (0.29) (0.58) Tax return of capital ......................... -- -- -- -- (0.02) -- --------------------------------------------------------------------------------- Total distributions ............................ -- -- -- -- (0.31) (0.58) --------------------------------------------------------------------------------- Redemption fees ................................ -- c -- c -- c -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ................. $ 26.82 $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 ================================================================================= Total return b ................................. 7.37% 13.49% 9.12% 31.23% (16.83)% (32.86)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $ 665,175 $628,732 $40,120 $558,687 $413,309 $530,074 Ratios to average net assets: Expenses ...................................... 0.99% d,e 1.00% e 0.97% 1.04% 1.00% 0.95% Net investment income (loss) .................. (0.26)% d (0.02)% (0.41)% (0.40)% 0.13% 1.93% Portfolio turnover rate ........................ 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 52 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 $ 28.45 --------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ............... (0.13) (0.18) (0.25) (0.25) (0.12) 0.25 Net realized and unrealized gains (losses) ... 1.80 2.90 1.89 4.84 (3.08) (9.62) --------------------------------------------------------------------------------- Total from investment operations .............. 1.67 2.72 1.64 4.59 (3.20) (9.37) --------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- -- -- (0.16) (0.51) Tax return of capital ........................ -- -- -- -- (0.01) -- --------------------------------------------------------------------------------- Total distributions ........................... -- -- -- -- (0.17) (0.51) --------------------------------------------------------------------------------- Redemption fees ............................... -- c -- c -- c -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ................ $ 25.82 $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 ================================================================================= Total return b ................................ 6.92% 12.69% 8.29% 30.20% (17.51)% (33.37)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $21,589 $19,497 $18,824 $10,406 $ 5,066 $ 5,473 Ratios to average net assets: Expenses ..................................... 1.73% d,e 1.74% e 1.72% 1.79% 1.75% 1.70% Net investment income (loss) ................. (1.00)% d (0.76)% (1.16)% (1.15)% (.62)% 1.13% Portfolio turnover rate ....................... 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. Semiannual Report | See notes to financial statements. | 53 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND (CONTINUED)
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 $ 27.95 ----------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ............... (0.12) (0.17) (0.25) (0.25) (0.11) 0.27 Net realized and unrealized gains (losses) ... 1.78 2.86 1.87 4.80 (3.05) (9.50) ----------------------------------------------------------------------------------- Total from investment operations .............. 1.66 2.69 1.62 4.55 (3.16) (9.23) ----------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- -- -- (0.13) (0.38) Tax return of capital ........................ -- -- -- -- (0.01) -- ----------------------------------------------------------------------------------- Total distributions ........................... -- -- -- -- (0.14) (0.38) ----------------------------------------------------------------------------------- Redemption fees ............................... -- c -- c -- c -- -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 25.56 $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 ================================================================================== Total return b ................................ 6.95% 12.68% 8.27% 30.25% (17.48)% (33.36)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $79,357 $73,587 $75,642 $66,952 $51,809 $77,204 Ratios to average net assets: Expenses ..................................... 1.73% d,e 1.74% e 1.72% 1.79% 1.74% 1.70% Net investment income (loss) ................. (1.00)% d (0.76)% (1.16)% (1.15)% (0.61)% 1.19% Portfolio turnover rate ....................... 11.83% 17.26% 14.93% 13.68% 8.11% 4.07%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 54 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 99.3% AIR FREIGHT/COURIERS 3.4% C.H. Robinson Worldwide Inc. .......................................... United States 300,000 $ 14,727,000 United Parcel Service Inc., B ......................................... United States 140,000 11,113,200 ------------- 25,840,200 ------------- BIOTECHNOLOGY 9.2% a Amgen Inc. ............................................................ United States 250,000 18,187,500 a Biogen Idec Inc. ...................................................... United States 100,000 4,710,000 a,b Celgene Corp. ......................................................... United States 80,000 3,537,600 a Charles River Laboratories International Inc. ......................... United States 55,000 2,696,100 a Genentech Inc. ........................................................ United States 275,000 23,240,250 a Gilead Sciences Inc. .................................................. United States 150,000 9,333,000 a Invitrogen Corp. ...................................................... United States 125,000 8,766,250 ------------- 70,470,700 ------------- CABLE/SATELLITE TELEVISION 0.3% a Comcast Corp., A ...................................................... United States 85,000 2,220,200 ------------- CASINOS/GAMING 0.9% International Game Technology ......................................... United States 200,000 7,044,000 ------------- CHEMICALS: SPECIALTY 1.1% Sigma-Aldrich Corp. ................................................... United States 125,000 8,223,750 ------------- COMPUTER COMMUNICATIONS 1.4% a Cisco Systems Inc. .................................................... United States 500,000 10,835,000 ------------- COMPUTER PROCESSING HARDWARE 3.7% a,b Apple Computer Inc. ................................................... United States 210,000 13,171,200 a Dell Inc. ............................................................. United States 100,000 2,976,000 Hewlett-Packard Co. ................................................... United States 380,000 12,502,000 ------------- 28,649,200 ------------- DATA PROCESSING SERVICES 1.6% Paychex Inc. .......................................................... United States 300,000 12,498,000 ------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 4.6% a Agilent Technologies Inc. ............................................. United States 300,000 11,265,000 a Dolby Laboratories Inc., A ............................................ United States 100,000 2,090,000 Rockwell Automation Inc. .............................................. United States 250,000 17,977,500 a,c SunPower Corp., A ..................................................... United States 100,000 3,816,000 ------------- 35,148,500 ------------- ELECTRONIC PRODUCTION EQUIPMENT 3.5% Applied Materials Inc. ................................................ United States 350,000 6,128,500 KLA-Tencor Corp. ...................................................... United States 200,000 9,672,000 a Lam Research Corp. .................................................... United States 150,000 6,450,000 a Varian Semiconductor Equipment Associates Inc. ........................ United States 150,000 4,212,000 ------------- 26,462,500 ------------- ELECTRONICS/APPLIANCE STORES 1.4% Best Buy Co. Inc. ..................................................... United States 187,500 10,486,875 -------------
Semiannual Report | 55 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) ELECTRONICS/APPLIANCES 0.3% Sony Corp., ADR ....................................................... Japan 50,000 $ 2,303,500 ------------- FINANCIAL PUBLISHING/SERVICES 2.2% Moody's Corp. ......................................................... United States 240,000 17,150,400 ------------- FOOD RETAIL 0.4% Whole Foods Market Inc. ............................................... United States 40,000 2,657,600 ------------- HOSPITAL/NURSING MANAGEMENT 0.9% a United Surgical Partners International Inc. ........................... United States 200,000 7,082,000 ------------- INFORMATION TECHNOLOGY SERVICES 2.2% a,b Amdocs Ltd. ........................................................... United States 20,000 721,200 a Cognizant Technology Solutions Corp., A ............................... United States 150,000 8,923,500 Infosys Technologies Ltd., ADR ........................................ India 90,000 7,007,400 ------------- 16,652,100 ------------- INSURANCE BROKERS/SERVICES 0.5% a ChoicePoint Inc. ...................................................... United States 80,000 3,580,000 ------------- INTERNET SOFTWARE/SERVICES 5.1% a Google Inc., A ........................................................ United States 50,000 19,500,000 a Yahoo! Inc. ........................................................... United States 600,000 19,356,000 ------------- 38,856,000 ------------- INVESTMENT BANKS/BROKERS 1.4% a Nasdaq Stock Market Inc. .............................................. United States 60,000 2,402,400 a,c NYSE Group Inc. ....................................................... United States 100,000 7,925,000 ------------- 10,327,400 ------------- MAJOR PHARMACEUTICALS 2.1% Johnson & Johnson ..................................................... United States 150,000 8,883,000 Pfizer Inc. ........................................................... United States 300,000 7,476,000 ------------- 16,359,000 ------------- MANAGED HEALTH CARE 4.1% a Caremark Rx Inc. ...................................................... United States 225,000 11,065,500 UnitedHealth Group Inc. ............................................... United States 370,000 20,668,200 ------------- 31,733,700 ------------- MEDIA CONGLOMERATES 0.1% News Corp., B ......................................................... United States 40,000 702,400 ------------- MEDICAL SPECIALTIES 7.6% Alcon Inc. ............................................................ Switzerland 100,000 10,426,000 a China Medical Technologies Inc., ADR .................................. Cayman Islands 10,000 302,100 Medtronic Inc. ........................................................ United States 275,000 13,956,250 Stryker Corp. ......................................................... United States 200,000 8,868,000 a Varian Medical Systems Inc. ........................................... United States 165,000 9,266,400 a Waters Corp. .......................................................... United States 200,000 8,630,000 a Zimmer Holdings Inc. .................................................. United States 100,000 6,760,000 ------------- 58,208,750 -------------
56 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) MEDICAL/NURSING SERVICES 1.2% a VCA Antech Inc. ....................................................... United States 325,000 $ 9,256,000 ------------- MISCELLANEOUS COMMERCIAL SERVICES 1.1% Corporate Executive Board Co. ......................................... United States 85,000 8,576,500 ------------- MOVIES/ENTERTAINMENT 0.8% a Pixar ................................................................. United States 100,000 6,414,000 ------------- OILFIELD SERVICES/EQUIPMENT 3.9% a FMC Technologies Inc. ................................................. United States 100,000 5,122,000 b Halliburton Co. ....................................................... United States 30,000 2,190,600 a National-Oilwell Varco Inc. ........................................... United States 75,000 4,809,000 Schlumberger Ltd. ..................................................... United States 140,000 17,719,800 ------------- 29,841,400 ------------- OTHER CONSUMER SERVICES 1.0% a eBay Inc. ............................................................. United States 200,000 7,812,000 ------------- OTHER PHARMACEUTICALS 2.7% Allergan Inc. ......................................................... United States 80,000 8,680,000 Teva Pharmaceutical Industries Ltd., ADR .............................. Israel 300,000 12,354,000 ------------- 21,034,000 ------------- PACKAGED SOFTWARE 9.2% Adobe Systems Inc. .................................................... United States 475,000 16,587,000 Autodesk Inc. ......................................................... United States 200,000 7,704,000 Microsoft Corp. ....................................................... United States 950,000 25,849,500 a NAVTEQ ................................................................ United States 200,000 10,130,000 a Salesforce.com Inc. ................................................... United States 50,000 1,816,500 SAP AG, ADR ........................................................... Germany 160,000 8,691,200 ------------- 70,778,200 ------------- RECREATIONAL PRODUCTS 1.8% a Electronic Arts Inc. .................................................. United States 250,000 13,680,000 ------------- SAVINGS BANKS 0.4% Golden West Financial Corp. ........................................... United States 50,000 3,395,000 ------------- SEMICONDUCTORS 10.1% Analog Devices Inc. ................................................... United States 310,000 11,869,900 a,b Broadcom Corp., A ..................................................... United States 100,000 4,316,000 Intel Corp. ........................................................... United States 1,150,000 22,252,500 Linear Technology Corp. ............................................... United States 400,000 14,032,000 a Marvell Technology Group Ltd. ......................................... Bermuda 200,000 10,820,000 Microchip Technology Inc. ............................................. United States 210,000 7,623,000 a,b NVIDIA Corp. .......................................................... United States 40,000 2,290,400 Xilinx Inc. ........................................................... United States 155,000 3,946,300 ------------- 77,150,100 ------------- SERVICES TO THE HEALTH INDUSTRY 2.3% a Cerner Corp. .......................................................... United States 40,000 1,898,000 Pharmaceutical Product Development Inc. ............................... United States 350,000 12,113,500 a WebMD Health Corp., A ................................................. United States 85,000 3,539,400 ------------- 17,550,900 -------------
Semiannual Report | 57 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) SPECIALTY TELECOMMUNICATIONS 0.1% a American Tower Corp., A ................................................. United States 20,000 $ 606,400 ------------- TELECOMMUNICATIONS EQUIPMENT 5.6% a Corning Inc. ............................................................ United States 275,000 7,400,250 Garmin Ltd. ............................................................. Cayman Islands 20,000 1,588,600 Motorola Inc. ........................................................... United States 680,750 15,595,982 Nokia Corp., ADR ........................................................ Finland 315,000 6,526,800 QUALCOMM Inc. ........................................................... United States 225,000 11,387,250 a,b SiRF Technology Holdings Inc. ........................................... United States 20,000 708,200 ------------- 43,207,082 ------------- WIRELESS COMMUNICATIONS 1.1% America Movil SA de CV, L, ADR .......................................... Mexico 210,000 7,194,600 a,b NII Holdings Inc. ....................................................... United States 20,000 1,179,400 ------------- 8,374,000 ------------- TOTAL COMMON STOCKS (COST $451,227,095) ................................. 761,167,357 ------------- SHORT TERM INVESTMENTS 1.7% MONEY MARKET FUND 0.2% d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% .... United States 1,654,549 1,654,549 ------------- ---------------- PRINCIPAL AMOUNT ---------------- e,f INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 1.5% REPURCHASE AGREEMENTS 1.5% Banc of America Securities LLC, 4.85%, 4/03/06 (Maturity Value $2,001,077) Collateralized by U.S. Government Agency Securities, 5.00 - 5.50%, 2/01/34 - 3/01/36 ................................................... United States $2,000,269 2,000,269 Citigroup Global Markets Inc., 4.82%, 4/03/06 (Maturity Value $2,001,071) Collateralized by gU.S. Government Agency Discount Notes, 7/24/06 - 3/23/28; U.S. Government Agency Securities, 2.00 - 6.25%, 9/14/06 - 4/15/32 ..................................................... United States 2,000,268 2,000,268 Deutsche Bank Securities Inc., 4.87%, 4/03/06 (Maturity Value $2,001,083) Collateralized by g U.S. Government Agency Discount Notes, 4/06/06; Collateralized by U.S. Agency Securities, 2.25 - 10.00%, 4/30/06 - 5/15/47 ..................................................... United States 2,000,271 2,000,271 Goldman, Sachs & Co., 4.84%, 4/03/06 (Maturity Value $1,490,801) Collateralized by U.S. Government Agency Securities, 2.83 - 8.00%, 6/01/09 - 10/01/40 .................................................... United States 1,490,200 1,490,200 JP Morgan Securities, 4.85%, 4/03/06 (Maturity Value $541,292) Collateralized by U.S. Government Agency Securities, 5.50 - 6.00%, 11/01/34 - 4/01/36 .................................................... United States 541,073 541,073 Merrill Lynch Government Securities Inc., 4.85%, 4/03/06 (Maturity Value $2,001,077) Collateralized by g U.S. Government Agency Discount Notes, 4/11/06 - 9/08/28; U.S. Government Agency Securities, 1.88 - 7.53%, 4/13/06 - 8/06/38 .................................................... United States 2,000,269 2,000,269
58 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS (CONTINUED) e,f INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES (CONTINUED) REPURCHASE AGREEMENTS (CONTINUED) Morgan Stanley & Co. Inc., 4.85%, 4/03/06 (Maturity Value $1,300,700) Collateralized by g U.S. Government Agency Discount Notes, 1/15/07 - 4/15/30; U.S. Government Agency Securities, 1.75 - 13.00%, 4/11/06 - 11/01/42 .................................................. United States $1,300,175 $ 1,300,175 ------------- TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES .. 11,332,525 ------------- TOTAL SHORT TERM INVESTMENTS (COST $12,987,074) ........................ 12,987,074 ------------- TOTAL INVESTMENTS (COST $464,214,169) 101.0% ........................... 774,154,431 OTHER ASSETS, LESS LIABILITIES (1.0)% .................................. (8,034,041) ------------- NET ASSETS 100.0% ...................................................... $ 766,120,390 =============
See Selected Portfolio Abbreviations on page 100. a Non-income producing. b See Note 1(d) regarding securities purchased on a when-issued or delayed delivery basis. c A portion or all of the security is on loan as of March 31, 2006. See Note 1(f). d See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. e See Note 1(f) regarding securities on loan. f At March 31, 2006, all repurchase agreements had been entered into on that date. g A portion or all of the security is traded on a discount basis with no stated coupon rate. Semiannual Report | See notes to financial statements. | 59 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
----------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 $ 36.91 ----------------------------------------------------------------------------------------- Income from investment operations: Net investment income a .............. 0.05 0.13 0.06 0.08 0.07 0.23 Net realized and unrealized gains (losses) ............................ 3.49 4.20 3.68 4.81 (5.65) (7.26) ----------------------------------------------------------------------------------------- Total from investment operations ...... 3.54 4.33 3.74 4.89 (5.58) (7.03) ----------------------------------------------------------------------------------------- Less distributions from: Net investment income ................ (0.06) (0.08) (0.03) (0.04) (0.16) (0.40) Net realized gains ................... -- -- -- -- (0.05) (1.67) ----------------------------------------------------------------------------------------- Total distributions ................... (0.06) (0.08) (0.03) (0.04) (0.21) (2.07) ----------------------------------------------------------------------------------------- Redemption fees ....................... -- c -- c -- c -- -- -- ----------------------------------------------------------------------------------------- Net asset value, end of period ........ $ 38.31 $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 ========================================================================================= Total return b ........................ 10.18% 14.17% 13.92% 22.27% (20.35)% (20.12)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $1,700,902 $1,567,675 $1,531,871 $1,433,742 $1,249,745 $1,657,387 Ratios to average net assets: Expenses ............................. 0.93% d,e 0.94% e 0.98% 1.06% 0.96% 0.91% Net investment income ................ 0.25% d 0.40% 0.20% 0.31% 0.24% 0.69% Portfolio turnover rate ............... 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 60 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 $ 36.54 ------------------------------------------------------------------------------ Income from investment operations: Net investment income (loss) a ................ (0.09) (0.11) (0.16) (0.11) (0.14) (0.03) Net realized and unrealized gains (losses) .... 3.39 4.07 3.61 4.73 (5.57) (7.18) ------------------------------------------------------------------------------ Total from investment operations ............... 3.30 3.96 3.45 4.62 (5.71) (7.21) ------------------------------------------------------------------------------ Less distributions from: Net investment income ......................... -- -- -- -- -- (0.20) Net realized gains ............................ -- -- -- -- (0.05) (1.67) ------------------------------------------------------------------------------ Total distributions ............................ -- -- -- -- (0.05) (1.87) ------------------------------------------------------------------------------ Redemption fees ................................ -- c -- c -- c -- -- -- ------------------------------------------------------------------------------ Net asset value, end of period ................. $ 37.03 $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 ============================================================================== Total return b ................................. 9.78% 13.30% 13.11% 21.29% (20.90)% (20.74)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $129,217 $123,926 $121,986 $103,499 $75,141 $66,095 Ratios to average net assets: Expenses ...................................... 1.67% d,e 1.69% e 1.73% 1.81% 1.71% 1.66% Net investment income (loss) .................. (0.49)% d (0.35)% (0.55)% (0.44)% (0.51)% (0.10)% Portfolio turnover rate ........................ 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. Semiannual Report | See notes to financial statements. | 61 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 $ 36.19 --------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ............... (0.09) (0.11) (0.16) (0.11) (0.14) (0.02) Net realized and unrealized gains (losses) ... 3.37 4.03 3.58 4.69 (5.54) (7.13) --------------------------------------------------------------------------------- Total from investment operations .............. 3.28 3.92 3.42 4.58 (5.68) (7.15) --------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ -- -- -- -- -- (0.13) Net realized gains ........................... -- -- -- -- (0.05) (1.67) --------------------------------------------------------------------------------- Total distributions ........................... -- -- -- -- (0.05) (1.80) --------------------------------------------------------------------------------- Redemption fees ............................... -- c -- c -- c -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period ................ $ 36.71 $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 ================================================================================== Total return b ................................ 9.78% 13.32% 13.11% 21.29% (20.92)% (20.72)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $283,884 $270,538 $270,131 $259,169 $232,307 $310,650 Ratios to average net assets: Expenses ..................................... 1.67% d,e 1.69%e 1.73% 1.82% 1.70% 1.66% Net investment income (loss) ................. (0.49)% d (0.35)% (0.55)% (0.45)% (0.51)% (0.06)% Portfolio turnover rate ....................... 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 62 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
---------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2005 2004 2003 2002 h ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 34.59 $ 30.39 $ 26.74 $ 21.98 $ 31.59 ------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) a ................ -- 0.05 (0.02) -- -- Net realized and unrealized gains (losses) .... 3.48 4.16 3.67 4.81 (9.61) ------------------------------------------------------------------------------- Total from investment operations ............... 3.48 4.21 3.65 4.81 (9.61) ------------------------------------------------------------------------------- Less distributions from net investment income .. -- c (0.01) -- (0.05) -- ------------------------------------------------------------------------------- Redemption fees ................................ -- d -- d -- d -- -- ------------------------------------------------------------------------------- Net asset value, end of period ................. $ 38.07 $ 34.59 $ 30.39 $ 26.74 $ 21.98 =============================================================================== Total return b ................................. 10.06% 13.87% 13.65% 21.92% (30.42)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $39,587 $27,818 $20,060 $14,755 $ 2,788 Ratios to average net assets: Expenses ...................................... 1.18% e,f 1.19% f 1.23% 1.31% 1.21% e Net investment income (loss) .................. --% e,g 0.15% (0.05)% 0.06% 0.02% e Portfolio turnover rate ........................ 1.73% 1.16% 1.56% 5.12% 2.16%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Includes distribution from net investment income of $0.001. d Amount is less than $0.01 per share. e Annualized. f Benefit of expense reduction is less than 0.01%. g Rounds to less than 0.01%. h For the period January 1, 2002 (effective date) to September 30, 2002. Semiannual Report | See notes to financial statements. | 63 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND (CONTINUED)
------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 $ 36.99 ------------------------------------------------------------------------------ Income from investment operations: Net investment income a ....................... 0.09 0.21 0.14 0.14 0.14 0.31 Net realized and unrealized gains (losses) .... 3.51 4.21 3.67 4.82 (5.65) (7.28) ------------------------------------------------------------------------------ Total from investment operations ............... 3.60 4.42 3.81 4.96 (5.51) (6.97) ------------------------------------------------------------------------------ Less distributions from: Net investment income ......................... (0.15) (0.16) (0.09) (0.11) (0.24) (0.49) Net realized gains ............................ -- -- -- -- (0.05) (1.67) ------------------------------------------------------------------------------ Total distributions ............................ (0.15) (0.16) (0.09) (0.11) (0.29) (2.16) ------------------------------------------------------------------------------ Redemption fees ................................ -- c -- c -- c -- -- -- ------------------------------------------------------------------------------ Net asset value, end of period ................. $ 38.34 $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 =============================================================================== Total returnb .................................. 10.34% 14.45% 14.19% 22.58% (20.14)% (19.94)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $257,703 $221,752 $133,332 $41,216 $27,431 $32,498 Ratios to average net assets: Expenses ...................................... 0.68% d,e 0.69% e 0.73% 0.81% 0.71% 0.66% Net investment income ......................... 0.50% d 0.65% 0.45% 0.56% 0.49% 0.94% Portfolio turnover rate ........................ 1.73% 1.16% 1.56% 5.12% 2.16% 0.29%
a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 64 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS 98.4% COMMERCIAL SERVICES 2.9% a Dun & Bradstreet Corp. ............................................ United States 122,000 $ 9,354,960 Equifax Inc. ...................................................... United States 400,000 14,896,000 Moody's Corp. ..................................................... United States 488,000 34,872,480 Robert Half International Inc. .................................... United States 300,000 11,583,000 ------------- 70,706,440 ------------- CONSUMER DURABLES 1.7% Eastman Kodak Co. ................................................. United States 200,000 5,688,000 Ford Motor Co. .................................................... United States 800,000 6,368,000 General Motors Corp. .............................................. United States 350,000 7,444,500 Harley-Davidson Inc. .............................................. United States 400,000 20,752,000 ------------- 40,252,500 ------------- CONSUMER NON-DURABLES 2.3% The Hershey Co. ................................................... United States 516,400 26,971,572 Tootsie Roll Industries Inc. ...................................... United States 23,162 677,940 VF Corp. .......................................................... United States 500,000 28,450,000 ------------- 56,099,512 ------------- CONSUMER SERVICES 4.6% Carnival Corp. .................................................... United States 500,000 23,685,000 CBS Corp., A ...................................................... United States 100,000 2,410,000 CBS Corp., B ...................................................... United States 50,000 1,199,000 Clear Channel Communications Inc. ................................. United States 500,000 14,505,000 a Expedia Inc. ...................................................... United States 300,100 6,083,027 Fairmont Hotels & Resorts Inc. .................................... Canada 125,000 5,587,500 a Live Nation Inc. .................................................. United States 62,500 1,240,000 Time Warner Inc. .................................................. United States 1,350,000 22,666,500 a Viacom Inc., A .................................................... United States 100,000 3,876,000 a Viacom Inc., B .................................................... United States 50,000 1,940,000 The Walt Disney Co. ............................................... United States 1,000,000 27,890,000 ------------- 111,082,027 ------------- DISTRIBUTION SERVICES 3.2% Cardinal Health Inc. .............................................. United States 300,000 22,356,000 Genuine Parts Co. ................................................. United States 375,400 16,453,782 W.W. Grainger Inc. ................................................ United States 500,000 37,675,000 ------------- 76,484,782 ------------- ELECTRONIC TECHNOLOGY 21.4% a Agilent Technologies Inc. ......................................... United States 400,000 15,020,000 a Apple Computer Inc. ............................................... United States 1,000,000 62,720,000 The Boeing Co. .................................................... United States 1,000,000 77,930,000 a Cisco Systems Inc. ................................................ United States 1,350,000 29,254,500 a Conexant Systems Inc. ............................................. United States 300,000 1,035,000 a Dell Inc. ......................................................... United States 500,000 14,880,000 a Dionex Corp. ...................................................... United States 250,000 15,370,000 a EMC Corp. ......................................................... United States 1,000,000 13,630,000 a Entegris Inc. ..................................................... United States 376,307 4,003,907 a Gateway Inc. ...................................................... United States 300,000 657,000
Semiannual Report | 65 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS (CONTINUED) ELECTRONIC TECHNOLOGY (CONTINUED) General Dynamics Corp. ............................................ United States 1,000,000 $ 63,980,000 Hewlett-Packard Co. ............................................... United States 1,116,250 36,724,625 Intel Corp. ....................................................... United States 800,000 15,480,000 Lockheed Martin Corp. ............................................. United States 500,000 37,565,000 a Micrel Inc. ....................................................... United States 25,000 370,500 a Mindspeed Technologies Inc. ....................................... United States 100,000 398,000 Northrop Grumman Corp. ............................................ United States 1,000,000 68,290,000 Raytheon Co. ...................................................... United States 600,000 27,504,000 Rockwell Collins Inc. ............................................. United States 100,000 5,635,000 a Sun Microsystems Inc. ............................................. United States 1,600,000 8,208,000 Texas Instruments Inc. ............................................ United States 515,000 16,722,050 ------------- 515,377,582 ------------- ENERGY MINERALS 2.6% BP PLC, ADR ....................................................... United Kingdom 295,200 20,351,088 EnCana Corp. ...................................................... Canada 559,000 26,122,070 Royal Dutch Shell PLC, A, ADR ..................................... United Kingdom 280,000 17,432,800 ------------- 63,905,958 ------------- FINANCE 0.3% a ChoicePoint Inc. .................................................. United States 160,000 7,160,000 ------------- HEALTH SERVICES 1.9% a Caremark Rx Inc. .................................................. United States 75,625 3,719,237 IMS Health Inc. ................................................... United States 500,000 12,885,000 a Medco Health Solutions Inc. ....................................... United States 48,240 2,760,293 Quest Diagnostics Inc. ............................................ United States 500,000 25,650,000 ------------- 45,014,530 ------------- HEALTH TECHNOLOGY 20.9% Abbott Laboratories ............................................... United States 400,000 16,988,000 a Advanced Medical Optics Inc. ...................................... United States 88,888 4,145,736 Allergan Inc. ..................................................... United States 400,000 43,400,000 a Amgen Inc. ........................................................ United States 932,000 67,803,000 Baxter International Inc. ......................................... United States 400,000 15,524,000 a Biogen Idec Inc. .................................................. United States 400,000 18,840,000 a Edwards Lifesciences Corp. ........................................ United States 50,000 2,175,000 Eli Lilly and Co. ................................................. United States 400,000 22,120,000 a Genentech Inc. .................................................... United States 1,000,000 84,510,000 a Hospira Inc. ...................................................... United States 40,000 1,578,400 Johnson & Johnson ................................................. United States 996,000 58,983,120 Merck & Co. Inc. .................................................. United States 500,000 17,615,000 a Millipore Corp. ................................................... United States 400,000 29,224,000 Pall Corp. ........................................................ United States 500,000 15,595,000 Pfizer Inc. ....................................................... United States 2,000,000 49,840,000 a Waters Corp. ...................................................... United States 500,000 21,575,000 Wyeth ............................................................. United States 600,000 29,112,000 a Zimmer Holdings Inc. .............................................. United States 64,000 4,326,400 ------------- 503,354,656 -------------
66 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS (CONTINUED) PROCESS INDUSTRIES 1.9% Air Products and Chemicals Inc. ................................... United States 500,000 $ 33,595,000 Sigma-Aldrich Corp. ............................................... United States 200,000 13,158,000 ------------- 46,753,000 ------------- PRODUCER MANUFACTURING 19.4% 3M Co. ............................................................ United States 800,000 60,552,000 American Power Conversion Corp. ................................... United States 500,000 11,555,000 Avery Dennison Corp. .............................................. United States 462,000 27,017,760 Emerson Electric Co. .............................................. United States 500,000 41,815,000 Illinois Tool Works Inc. .......................................... United States 500,000 48,155,000 Ingersoll-Rand Co. Ltd., A ........................................ United States 1,002,000 41,873,580 Johnson Controls Inc. ............................................. United States 400,000 30,372,000 Molex Inc. ........................................................ United States 146,483 4,863,235 Molex Inc., A ..................................................... United States 146,483 4,353,475 Teleflex Inc. ..................................................... United States 500,000 35,815,000 Textron Inc. ...................................................... United States 525,000 49,029,750 a Thomas & Betts Corp. .............................................. United States 500,000 25,690,000 Tyco International Ltd. ........................................... United States 1,550,052 41,665,398 United Technologies Corp. ......................................... United States 800,000 46,376,000 ------------- 469,133,198 ------------- RETAIL TRADE 0.4% a IAC/InterActiveCorp ............................................... United States 300,100 8,843,947 ------------- TECHNOLOGY SERVICES 9.3% Automatic Data Processing Inc. .................................... United States 800,000 36,544,000 a Computer Sciences Corp. ........................................... United States 1,000,000 55,550,000 International Business Machines Corp. ............................. United States 560,000 46,183,200 Microsoft Corp. ................................................... United States 1,000,000 27,210,000 a Oracle Corp. ...................................................... United States 500,000 6,845,000 a Yahoo! Inc. ....................................................... United States 1,600,000 51,616,000 ------------- 223,948,200 ------------- TRANSPORTATION 5.6% Air France-KLM, ADR ............................................... France 550,000 13,013,000 a Air France-KLM, ADR, wts., 11/05/07 ............................... France 500,000 1,070,000 a Alaska Air Group Inc. ............................................. United States 500,000 17,725,000 a AMR Corp. ......................................................... United States 1,080,000 29,214,000 a British Airways PLC, ADR .......................................... United Kingdom 500,000 30,685,000 a Continental Airlines Inc., B ...................................... United States 500,000 13,450,000 Southwest Airlines Co. ............................................ United States 65,200 1,172,948 Union Pacific Corp. ............................................... United States 300,000 28,005,000 ------------- 134,334,948 ------------- TOTAL COMMON STOCKS AND WARRANTS (COST $905,146,785) .............. 2,372,451,280 -------------
Semiannual Report | 67 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------- FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENT (COST $42,504,493) 1.8% MONEY MARKET FUND 1.8% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ... United States 42,504,493 $ 42,504,493 -------------- TOTAL INVESTMENTS (COST $947,651,278) 100.2% ........................... 2,414,955,773 OTHER ASSETS, LESS LIABILITIES (0.2)% .................................. (3,662,423) -------------- NET ASSETS 100.0% ...................................................... $2,411,293,350 ==============
See Selected Portfolio Abbreviations on page 100. a Non-income producing. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 68 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 $ 2.35 ------------------------------------------------------------------------------------------- Income from investment operations: Net investment income a ............. 0.07 0.14 0.12 0.14 0.14 0.17 Net realized and unrealized gains (losses) ........................... (0.02) 0.10 0.22 0.38 (0.21) (0.15) ------------------------------------------------------------------------------------------- Total from investment operations ..... 0.05 0.24 0.34 0.52 (0.07) 0.02 ------------------------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.07) (0.15) (0.16) (0.16) (0.17) (0.18) Net realized gains .................. (0.01) (0.01) (0.01) (0.01) (0.02) (0.03) ------------------------------------------------------------------------------------------- Total distributions .................. (0.08) (0.16) (0.17) (0.17) (0.19) (0.21) ------------------------------------------------------------------------------------------- Redemption fees ...................... -- c -- c -- c -- -- -- ------------------------------------------------------------------------------------------- Net asset value, end of period ....... $ 2.47 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 =========================================================================================== Total return b ....................... 2.46% 10.45% 15.50% 28.12% (4.18)% 0.58% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .... $23,576,919 $21,934,575 $14,743,190 $9,640,156 $6,001,117 $5,960,990 Ratios to average net assets: Expenses ............................ 0.64% d,e 0.65% e 0.68% 0.73% 0.72% 0.73% Net investment income ............... 5.51% d 5.54% 5.11% 6.63% 6.67% 7.54% Portfolio turnover rate .............. 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. Semiannual Report | See notes to financial statements. | 69 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 f -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15 -------------------------------------------------------------------------------- Income from investment operations: Net investment income a ........................ 0.06 0.11 0.10 0.12 0.11 Net realized and unrealized gains (losses) ..... (0.02) 0.11 0.22 0.37 (0.21) -------------------------------------------------------------------------------- Total from investment operations ................ 0.04 0.22 0.32 0.49 (0.10) -------------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.06) (0.13) (0.14) (0.14) (0.13) Net realized gains ............................. (0.01) (0.01) (0.01) (0.01) (0.02) -------------------------------------------------------------------------------- Total distributions ............................. (0.07) (0.14) (0.15) (0.15) (0.15) -------------------------------------------------------------------------------- Redemption fees ................................. -- c -- c -- c -- -- -------------------------------------------------------------------------------- Net asset value, end of period .................. $ 2.46 $ 2.49 $ 2.41 $ 2.24 $ 1.90 ================================================================================ Total return b .................................. 2.02% 9.57% 14.59% 26.58% (5.63)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $3,718,146 $3,922,396 $3,486,880 $2,083,783 $558,580 Ratios to average net assets: Expenses ....................................... 1.48% d,e 1.50% e 1.53% 1.58% 1.57% d Net investment income .......................... 4.67%d 4.69% 4.26% 5.78% 6.01% d Portfolio turnover rate ......................... 17.89% 28.51% 31.90% 48.36% 51.16%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. f For the period November 1, 2001 (effective date) to September 30, 2002. 70 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B1 (UNAUDITED) 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 $ 2.35 --------------------------------------------------------------------------------- Income from investment operations: Net investment income a ........................ 0.06 0.12 0.11 0.13 0.13 0.16 Net realized and unrealized gains (losses) ..... (0.01) 0.11 0.21 0.38 (0.22) (0.14) --------------------------------------------------------------------------------- Total from investment operations ................ 0.05 0.23 0.32 0.51 (0.09) 0.02 --------------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.07) (0.14) (0.14) (0.15) (0.16) (0.17) Net realized gains ............................. (0.01) (0.01) (0.01) (0.01) (0.02) (0.03) --------------------------------------------------------------------------------- Total distributions ............................. (0.08) (0.15) (0.15) (0.16) (0.18) (0.20) --------------------------------------------------------------------------------- Redemption fees ................................. -- c -- c -- c -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period .................. $ 2.47 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 ================================================================================= Total return b .................................. 2.20% 9.90% 14.90% 27.51% (4.66)% 0.10% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 462,529 $493,063 $511,471 $495,004 $430,226 $446,245 Ratios to average net assets: Expenses ....................................... 1.14% d,e 1.15% e 1.18% 1.23% 1.22% 1.23% Net investment income .......................... 5.01% d 5.04% 4.61% 6.13% 6.15% 7.02% Portfolio turnover rate ......................... 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. Semiannual Report | See notes to financial statements. | 71 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 $ 2.36 ------------------------------------------------------------------------------------------ Income from investment operations: Net investment income a .............. 0.06 0.13 0.11 0.13 0.13 0.16 Net realized and unrealized gains (losses) ............................ (0.01) 0.10 0.21 0.38 (0.21) (0.15) ------------------------------------------------------------------------------------------ Total from investment operations ...... 0.05 0.23 0.32 0.51 (0.08) 0.01 ------------------------------------------------------------------------------------------ Less distributions from: Net investment income ................ (0.07) (0.14) (0.14) (0.15) (0.16) (0.17) Net realized gains ................... (0.01) (0.01) (0.01) (0.01) (0.02) (0.03) ------------------------------------------------------------------------------------------ Total distributions ................... (0.08) (0.15) (0.15) (0.16) (0.18) (0.20) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- c -- c -- c -- -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 2.48 $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 ========================================================================================== Total return b ........................ 2.19% 9.84% 14.85% 27.37% (4.64)% 0.09% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $10,695,121 $10,113,365 $6,616,891 $3,764,372 $1,545,377 $1,080,315 Ratios to average net assets: Expenses ............................. 1.14% d,e 1.15% e 1.18% 1.24% 1.21% 1.23% Net investment income ................ 5.01% d 5.04% 4.61% 6.12% 6.21% 7.04% Portfolio turnover rate ............... 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. 72 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
--------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2005 2004 2003 2002 f --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18 --------------------------------------------------------------------------- Income from investment operations: Net investment income a ...................... 0.06 0.13 0.11 0.13 0.10 Net realized and unrealized gains (losses) ... (0.01) 0.10 0.22 0.37 (0.27) --------------------------------------------------------------------------- Total from investment operations .............. 0.05 0.23 0.33 0.50 (0.17) --------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.07) (0.14) (0.15) (0.15) (0.12) Net realized gains ........................... (0.01) (0.01) (0.01) (0.01) -- --------------------------------------------------------------------------- Total distributions ........................... (0.08) (0.15) (0.16) (0.16) (0.12) --------------------------------------------------------------------------- Redemption fees ............................... -- c -- c --c -- -- --------------------------------------------------------------------------- Net asset value, end of period ................ $ 2.45 $ 2.48 $ 2.40 $ 2.23 $ 1.89 =========================================================================== Total return b ................................ 2.31% 10.15% 15.25% 27.31% (8.34)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $ 149,450 $122,222 $73,165 $36,417 $6,350 Ratios to average net assets: Expenses ..................................... 0.99% d,e 1.00% e 1.03% 1.08% 1.07% d Net investment income ........................ 5.16% d 5.19% 4.76% 6.28% 6.77% d Portfolio turnover rate ....................... 17.89% 28.51% 31.90% 48.36% 51.16%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. Semiannual Report | See notes to financial statements. | 73 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 $ 2.34 -------------------------------------------------------------------------------- Income from investment operations: Net investment income a ....................... 0.07 0.14 0.12 0.14 0.14 0.18 Net realized and unrealized gains (losses) .... (0.01) 0.11 0.22 0.38 (0.22) (0.15) -------------------------------------------------------------------------------- Total from investment operations ............... 0.06 0.25 0.34 0.52 (0.08) 0.03 -------------------------------------------------------------------------------- Less distributions from: Net investment income ......................... (0.08) (0.16) (0.16) (0.16) (0.17) (0.18) Net realized gains ............................ (0.01) (0.01) (0.01) (0.01) (0.02) (0.03) -------------------------------------------------------------------------------- Total distributions ............................ (0.09) (0.17) (0.17) (0.17) (0.19) (0.21) -------------------------------------------------------------------------------- Redemption fees ................................ -- c -- c -- c -- -- -- -------------------------------------------------------------------------------- Net asset value, end of period ................. $ 2.46 $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 ================================================================================ Total return b ................................. 2.55% 10.65% 15.74% 28.47% (4.50)% 1.21% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $2,954,826 $2,280,318 $901,149 $95,009 $30,737 $22,737 Ratios to average net assets: Expenses ...................................... 0.49% d,e 0.50% e 0.53% 0.58% 0.57% 0.58% Net investment income ......................... 5.66% d 5.69% 5.26% 6.78% 6.85% 7.69% Portfolio turnover rate ........................ 17.89% 28.51% 31.90% 48.36% 51.16% 28.13%
a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of waiver and payment by affiliate and expense reduction is less than 0.01%. 74 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 97.2% COMMON STOCKS AND WARRANTS 37.7% COMMUNICATIONS 3.2% AT&T Inc. .......................................................... United States 20,000,000 $ 540,800,000 BellSouth Corp. .................................................... United States 12,000,000 415,800,000 Verizon Communications Inc. ........................................ United States 11,000,000 374,660,000 a XO Holdings Inc., wts., A, 1/16/10 ................................. United States 53,846 24,231 a XO Holdings Inc., wts., B, 1/16/10 ................................. United States 40,386 16,154 a XO Holdings Inc., wts., C, 1/16/10 ................................. United States 40,386 10,097 -------------- 1,331,310,482 -------------- ELECTRIC UTILITIES 16.0% Alliant Energy Corp. ............................................... United States 4,527,770 142,488,922 Ameren Corp. ....................................................... United States 9,500,000 473,290,000 American Electric Power Co. Inc. ................................... United States 8,633,800 293,721,876 CenterPoint Energy Inc. ............................................ United States 6,000,000 71,580,000 Cinergy Corp. ...................................................... United States 8,900,000 404,149,000 Consolidated Edison Inc. ........................................... United States 3,500,000 152,250,000 Dominion Resources Inc. ............................................ United States 8,500,000 586,755,000 DTE Energy Co. ..................................................... United States 5,270,000 211,274,300 Duke Energy Corp. .................................................. United States 7,000,000 204,050,000 Energy East Corp. .................................................. United States 4,530,000 110,079,000 Entergy Corp. ...................................................... United States 4,500,000 310,230,000 Exelon Corp. ....................................................... United States 300,000 15,870,000 FirstEnergy Corp. .................................................. United States 14,000,000 684,600,000 FPL Group Inc. ..................................................... United States 7,500,000 301,050,000 Hawaiian Electric Industries Inc. .................................. United States 1,720,000 46,663,600 NSTAR .............................................................. United States 31,000 886,910 Pepco Holdings Inc. ................................................ United States 4,900,000 111,671,000 PG&E Corp. ......................................................... United States 12,250,000 476,525,000 Pinnacle West Capital Corp. ........................................ United States 5,000,000 195,500,000 PPL Corp. .......................................................... United States 4,300,400 126,431,760 Progress Energy Inc. ............................................... United States 8,600,000 378,228,000 Public Service Enterprise Group Inc. ............................... United States 6,023,560 385,748,782 b Puget Energy Inc. .................................................. United States 7,500,000 158,850,000 The Southern Co. ................................................... United States 17,000,000 557,090,000 TECO Energy Inc. ................................................... United States 9,000,000 145,080,000 TXU Corp. .......................................................... United States 40,800 1,826,208 Xcel Energy Inc. ................................................... United States 4,500,000 81,675,000 -------------- 6,627,564,358 -------------- ENERGY MINERALS 4.1% BP PLC, ADR ........................................................ United Kingdom 3,500,000 241,290,000 Callon Petroleum Co. ............................................... United States 777,114 16,334,936 b Canadian Oil Sands Trust ........................................... Canada 5,300,000 760,676,515 Chevron Corp. ...................................................... United States 7,500,000 434,775,000 Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 4,000,000 249,040,000 -------------- 1,702,116,451 --------------
Semiannual Report | 75 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS AND WARRANTS (CONTINUED) FINANCE 4.9% Bank of America Corp. ................................................. United States 21,000,000 $ 956,340,000 Fifth Third Bancorp ................................................... United States 6,750,000 265,680,000 Freddie Mac ........................................................... United States 5,000,000 305,000,000 JPMorgan Chase & Co. .................................................. United States 12,000,000 499,680,000 Montpelier Re Holdings Ltd. ........................................... Bermuda 1,800,000 29,340,000 --------------- 2,056,040,000 --------------- GAS DISTRIBUTORS 1.3% Atmos Energy Corp. .................................................... United States 2,235,000 58,847,550 NiSource Inc. ......................................................... United States 5,000,000 101,100,000 ONEOK Inc. ............................................................ United States 3,996,700 128,893,575 Sempra Energy ......................................................... United States 5,164,000 239,919,440 --------------- 528,760,565 --------------- HEALTH TECHNOLOGY 7.2% Bristol-Myers Squibb Co. .............................................. United States 17,000,000 418,370,000 Eli Lilly and Co. ..................................................... United States 3,336,100 184,486,330 Merck & Co. Inc. ...................................................... United States 41,500,000 1,462,045,000 Pfizer Inc. ........................................................... United States 38,000,000 946,960,000 --------------- 3,011,861,330 --------------- NON-ENERGY MINERALS 0.9% AngloGold Ashanti Ltd., ADR ........................................... South Africa 2,250,000 121,770,000 Barrick Gold Corp. .................................................... Canada 4,000,000 108,960,000 Southern Copper Corp. ................................................. United States 1,650,600 139,442,688 --------------- 370,172,688 --------------- PROCESS INDUSTRIES 0.1% Lyondell Chemical Co. ................................................. United States 3,000,000 59,700,000 --------------- TOTAL COMMON STOCKS AND WARRANTS (COST $13,180,325,417) ............... 15,687,525,874 --------------- PREFERRED STOCK (COST $57,833,250) 0.0% c PROCESS INDUSTRIES 0.0% c d,e,f Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ................... Indonesia 75,000,000 817,500 --------------- CONVERTIBLE PREFERRED STOCKS 8.2% CONSUMER DURABLES 0.1% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ..................... United States 1,500,000 45,075,000 --------------- CONSUMER NON-DURABLES 0.2% Lehman Brothers Holdings Inc. into General Mills, 6.25%, cvt. pfd. ........................................................... United States 3,750,000 100,312,500 --------------- ELECTRIC UTILITIES 0.2% CMS Energy Trust I, 7.75%, cvt. pfd. .................................. United States 1,508,000 73,892,000 --------------- ELECTRONIC TECHNOLOGY 0.9% Citigroup Funding Inc. into Altera Corp., 7.00%, cvt. pfd.............. United States 5,000,000 99,918,000 Goldman Sachs Group into Applied Materials Inc., 7.35%, cvt. pfd. ............................................................ United States 5,500,000 97,064,000
76 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE PREFERRED STOCKS (CONTINUED) ELECTRONIC TECHNOLOGY (CONTINUED) g Morgan Stanley into Intel Corp., 7.40%, cvt. pfd., 144A ................. United States 6,500,000 $ 130,292,500 Morgan Stanley into Network Appliance Inc., 7.25%, cvt. pfd. ............ United States 2,000,000 54,530,000 -------------- 381,804,500 -------------- ENERGY MINERALS 0.8% g Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ......................... United States 900,000 95,400,000 g Deutsche Bank AG into ConocoPhillips, 8.50%, cvt. pfd., 144A ............ United States 2,500,000 159,105,750 g Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A .......... United States 900,000 54,202,500 -------------- 308,708,250 -------------- FINANCE 2.7% E*TRADE Financial Corp., 6.125%, cvt. pfd. .............................. United States 2,500,000 86,625,000 Fannie Mae, 5.375%, cvt. pfd. ........................................... United States 8,000 768,542,000 MetLife Inc., 6.375%, cvt. pfd. ......................................... United States 6,400,000 173,600,000 Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. ....................... United States 1,510,000 96,405,950 -------------- 1,125,172,950 -------------- HEALTH TECHNOLOGY 1.3% Goldman Sachs Group Inc. into Wyeth, 6.25%, cvt. pfd. ................... United States 2,210,000 105,920,880 Morgan Stanley into Forest Laboratories Inc., 6.25%, cvt. pfd. .......... United States 1,360,000 60,635,600 Schering-Plough Corp., 6.00%, cvt. pfd. ................................. United States 7,401,000 375,822,780 -------------- 542,379,260 -------------- INDUSTRIAL SERVICES 0.8% El Paso Corp., 4.99%, cvt. pfd. ......................................... United States 130,000 142,575,810 g Morgan Stanley into Williams Cos. Inc., 8.50%, cvt. pfd., 144A........... United States 4,000,000 86,420,000 g,h Wachovia Bank into El Paso, 9.05%, cvt. pfd., 144A....................... United States 8,200,000 99,302,000 -------------- 328,297,810 -------------- NON-ENERGY MINERALS 0.5% Freeport-McMoRan Copper & Gold Inc., 5.50%, cvt. pfd. ................... United States 43,300 55,624,263 Lehman Brothers Holdings Inc. into Alcoa Inc., 6.50%, cvt. pfd. ........ United States 4,600,000 139,955,000 -------------- 195,579,263 -------------- PROCESS INDUSTRIES 0.1% Lehman Brothers Holdings Inc. into Lyondell Chemical, 8.00%, cvt. pfd. .............................................................. United States 3,000,000 59,700,000 -------------- PRODUCER MANUFACTURING 0.2% Goldman Sachs Group into Tyco International Ltd., 7.00%, cvt. pfd. .............................................................. United States 3,000,000 82,377,000 -------------- REAL ESTATE INVESTMENT TRUSTS 0.4% Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .......................... United States 3,000,000 75,000,000 Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ...................... United States 1,333,590 33,286,506 Lexington Corporate Properties Trust, 6.50%, cvt. pfd. .................. United States 1,200,000 55,428,000 -------------- 163,714,506 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,336,083,374) ................ 3,407,013,039 --------------
Semiannual Report | 77 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) BONDS 44.0% ALTERNATIVE POWER GENERATION 2.2% d,e Calpine Canada Energy Finance, senior note, 8.50%, 5/01/08 ............... Canada $ 436,000,000 $ 261,600,000 d,e Calpine Corp., senior note, 7.875%, 4/01/08 .......................................... United States 101,818,000 62,108,980 senior note, 8.625%, 8/15/10 .......................................... United States 221,000,000 89,505,000 senior note, 8.50%, 2/15/11 ........................................... United States 90,000,000 36,900,000 g senior secured note, 144A, 8.50%, 7/15/10 ............................. United States 325,000,000 299,812,500 g senior secured note, 144A, 9.875%, 12/01/11 ........................... United States 30,000,000 27,525,000 g senior secured note, 144A, 8.75%, 7/15/13 ............................. United States 140,000,000 129,150,000 -------------- 906,601,480 -------------- COMMERCIAL SERVICES 1.5% Dex Media Inc., senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ............................................................ United States 60,000,000 51,000,000 zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ..................... United States 210,000,000 178,500,000 JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 .............................................. United States 156,000,000 135,720,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ............... United States 84,000,000 86,625,000 g R.H. Donnelley Corp., senior disc. note, 144A, 6.875%, 1/15/13 .............................. United States 110,700,000 104,058,000 senior note, 144A, 8.875%, 1/15/16 .................................... United States 47,600,000 49,742,000 -------------- 605,645,000 -------------- COMMUNICATIONS 2.6% Qwest Capital Funding Inc., 7.00%, 8/03/09 ........................................................ United States 300,000,000 306,000,000 7.25%, 2/15/11 ........................................................ United States 365,000,000 371,843,750 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ................................................................. United States 250,000,000 258,750,000 Qwest Corp., 6.875%, 9/15/33 ............................................. United States 30,000,000 28,950,000 Time Warner Telecom Holdings Inc., senior note, 9.25%, 2/15/14 ........... United States 50,600,000 54,521,500 Time Warner Telecom Inc., senior note, 10.125%, 2/01/11 .................. United States 43,000,000 45,418,750 -------------- 1,065,484,000 -------------- CONSUMER DURABLES 9.9% Ford Motor Co., 7.45%, 7/16/31 ........................................... United States 660,000,000 493,350,000 Ford Motor Credit Co., 7.375%, 10/28/09 ...................................................... United States 450,000,000 423,382,050 7.875%, 6/15/10 ....................................................... United States 355,000,000 333,089,400 7.375%, 2/01/11 ....................................................... United States 450,000,000 414,390,600 7.00%, 10/01/13 ....................................................... United States 120,000,000 107,479,080 senior note, 7.25%, 10/25/11 .......................................... United States 120,000,000 109,468,560 General Motors Acceptance Corp., 5.625%, 5/15/09 ....................................................... United States 125,000,000 116,407,375 7.75%, 1/19/10 ........................................................ United States 420,000,000 409,833,900 6.875%, 9/15/11 ....................................................... United States 800,000,000 746,485,600 6.875%, 8/28/12 ....................................................... United States 300,400,000 277,470,168 6.75%, 12/01/14 ....................................................... United States 125,000,000 112,703,250 General Motors Corp., senior deb., 8.375%, 7/15/33 ....................... United States 485,000,000 357,687,500
78 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) BONDS (CONTINUED) CONSUMER DURABLES (CONTINUED) Hovnanian K Enterprises Inc., senior note, 7.50%, 5/15/16 ............... United States $ 45,000,000 $ 44,588,925 KB Home, 6.375%, 8/15/11 ..................................................... United States 15,000,000 14,793,585 senior note, 5.75%, 2/01/14 ......................................... United States 35,000,000 32,171,720 h senior note, 7.25%, 6/15/18 ......................................... United States 70,500,000 69,713,361 g Visant Holding Corp., senior note, 144A, 8.75%, 12/01/13 ................ United States 50,000,000 48,002,500 -------------- 4,111,017,574 -------------- CONSUMER SERVICES 6.6% Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............... United States 440,000,000 431,200,000 CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ..................................................... United States 329,000,000 203,980,000 9.92%, 4/01/14 ...................................................... United States 117,380,000 59,863,800 zero cpn. to 5/15/06, 11.75% thereafter, 5/15/14 .................... United States 195,000,000 102,375,000 CCH I LLC, senior secured note, 11.00%, 10/01/15 ........................ United States 850,000,000 710,812,500 CCH II LLC, senior note, 10.25%, 9/15/10 ................................ United States 50,600,000 49,967,500 Clear Channel Communications Inc., 5.50%, 9/15/14 ...................................................... United States 125,000,000 115,690,000 senior note, 5.75%, 1/15/13 ......................................... United States 10,000,000 9,531,410 CSC Holdings Inc., senior deb., 7.625%, 7/15/18 ........................................ United States 27,000,000 26,831,250 senior note, B, 7.625%, 4/01/11 ...................................... United States 200,000,000 202,000,000 DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ...................... United States 25,300,000 25,110,250 g EchoStar DBS Corp., senior note, 144A, 7.125%, 2/01/16 .................. United States 360,000,000 355,950,000 g Hertz Corp., senior note, 144A, 8.875%, 1/01/14 .................................. United States 67,950,000 70,837,875 senior sub. note, 144A, 10.50%, 1/01/16 ............................. United States 25,000,000 27,250,000 Liberty Media Corp., senior note, 5.70%, 5/15/13 ........................ United States 148,000,000 138,366,680 MGM MIRAGE Inc., senior note, 6.625%, 7/15/15 ..................................................... United States 100,000,000 98,875,000 g,h 144A, 6.75%, 4/01/13 ................................................ United States 60,000,000 60,000,000 g Quebecor Media Inc., senior note, 144A, 7.75%, 3/15/16 .................. Canada 19,675,000 20,314,437 Six Flags Inc., senior note, 9.625%, 6/01/14 ............................ United States 35,000,000 35,437,500 -------------- 2,744,393,202 -------------- ELECTRIC UTILITIES 2.8% Aquila Inc., senior note, 14.875%, 7/01/12 .............................. United States 95,400,000 129,505,500 CMS Energy Corp., senior note, 7.75%, 8/01/10 ........................... United States 30,000,000 31,575,000 NRG Energy Inc., senior note, 7.25%, 2/01/14 ...................................................... United States 49,500,000 50,428,125 7.375%, 2/01/16 ..................................................... United States 93,775,000 96,002,156 Reliant Resources Inc., senior note, 9.25%, 7/15/10 ..................... United States 65,000,000 65,406,250 TXU Corp., senior note, 5.55%, 11/15/14 ..................................................... United States 350,000,000 329,138,600 6.55%, 11/15/34 ..................................................... United States 200,000,000 181,489,200 Q, 6.50%, 11/15/24 .................................................. United States 310,000,000 284,089,890 -------------- 1,167,634,721 --------------
Semiannual Report | 79 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) BONDS (CONTINUED) ELECTRONIC TECHNOLOGY 1.5% DRS Technologies Inc., senior note, 6.625%, 2/01/16 ................... United States $ 50,000,000 $ 50,000,000 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ..... Singapore 105,000,000 103,425,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ................................................... United States 23,500,000 22,501,250 6.375%, 10/15/15 .................................................. United States 60,000,000 59,400,000 Lucent Technologies Inc., 6.45%, 3/15/29 .............................. United States 180,000,000 163,350,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .................................................... United States 134,000,000 128,305,000 8.125%, 3/01/16 ................................................... United States 85,000,000 86,275,000 ------------ 613,256,250 ------------ ENERGY MINERALS 1.4% Callon Petroleum Co., senior note, 9.75%, 12/08/10 .................... United States 113,800,000 120,059,000 Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 .................................................... United States 150,000,000 147,375,000 g 144A, 6.50%, 8/15/17 .............................................. United States 77,500,000 76,918,750 g 144A, 6.875%, 11/15/20 ............................................ United States 100,000,000 101,250,000 g Massey Energy Co., senior note, 144A, 6.875%, 12/15/13 ................ United States 59,650,000 58,755,250 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ........... United States 90,900,000 91,240,875 ------------ 595,598,875 ------------ FINANCE 1.3% E*TRADE Financial Corp., senior note, 7.375%, 9/15/13 ................................................... United States 230,000,000 235,750,000 7.875%, 12/01/15 .................................................. United States 25,000,000 26,500,000 Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 ............................................ United States 380,000,000 288,800,000 ------------ 551,050,000 ------------ GAS DISTRIBUTORS 2.1% Dynegy Holdings Inc., g secured note, 144A, 9.875%, 7/15/10 ............................... United States 100,000,000 110,108,000 senior note, 6.875%, 4/01/11 ...................................... United States 310,000,000 300,700,000 senior note, 8.75%, 2/15/12 ....................................... United States 225,500,000 236,775,000 g,h senior note, 144A, 8.375%, 5/01/16 ................................ United States 100,000,000 100,000,000 g senior secured note, 144A, 10.125%, 7/15/13 ....................... United States 95,000,000 108,960,250 ------------ 856,543,250 ------------ HEALTH SERVICES 4.1% DaVita Inc., senior note, 6.625%, 3/15/13 ...................................... United States 23,600,000 23,659,000 senior sub. note, 7.25%, 3/15/15 .................................. United States 49,400,000 49,894,000 HCA Inc., 6.375%, 1/15/15 ................................................... United States 160,000,000 156,524,000 6.50%, 2/15/16 .................................................... United States 223,525,000 218,888,421
80 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) BONDS (CONTINUED) HEALTH SERVICES (CONTINUED) Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 .............................................. United States $ 515,000,000 $ 467,362,500 6.50%, 6/01/12 ................................................ United States 240,000,000 217,200,000 7.375%, 2/01/13 ............................................... United States 350,000,000 321,125,000 g 144A, 9.50%, 2/01/15 .......................................... United States 231,000,000 232,155,000 -------------- 1,686,807,921 -------------- INDUSTRIAL SERVICES 3.5% Allied Waste North America Inc., senior note, 7.25%, 3/15/15 ................................... United States 150,000,000 153,750,000 senior note, B, 7.375%, 4/15/14 ............................... United States 190,000,000 189,050,000 senior secured note, 6.50%, 11/15/10 .......................... United States 120,000,000 119,100,000 senior secured note, 6.375%, 4/15/11 .......................... United States 35,000,000 34,431,250 senior secured note, 6.125%, 2/15/14 .......................... United States 207,000,000 197,685,000 Browning-Ferris Industries Inc., 7.40%, 9/15/35 ................... United States 45,000,000 42,075,000 El Paso Corp., senior note, 6.75%, 5/15/09 ................................................ United States 245,000,000 245,612,500 j FRN, 6.14%, 8/16/07 ........................................... United States 70,000,000 71,575,000 MTN, 7.75%, 1/15/32 ........................................... United States 270,000,000 273,375,000 El Paso Production Holding Co., 7.75%, 6/01/13 .................... United States 87,500,000 91,109,375 Sonat Inc., senior note, 7.625%, 7/15/11 .......................... United States 35,000,000 36,225,000 -------------- 1,453,988,125 -------------- NON-ENERGY MINERALS 0.3% g Novelis Inc., senior note, 144A, 7.25%, 2/15/15 ................... Canada 125,000,000 120,625,000 -------------- PROCESS INDUSTRIES 1.7% Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 .. Canada 100,600,000 98,588,000 Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 ............. United States 195,000,000 192,318,750 Nalco Co., senior sub. note, 8.875%, 11/15/13 ..................... United States 10,000,000 10,450,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ............... United States 110,000,000 116,050,000 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 . United States 50,000,000 49,125,000 e,f,g Pindo Deli Finance Mauritius Ltd., 144A, j FRN, 5.664%, 4/29/15 .......................................... Indonesia 113,073 25,509 j FRN, 5.664%, 4/29/18 .......................................... Indonesia 294,012 66,329 zero cpn., 4/29/25 ............................................ Indonesia 607,466 137,045 Rhodia SA, senior note, 10.25%, 6/01/10 ........................... France 110,859,000 124,854,949 Stone Container Corp., senior note, 9.75%, 2/01/11 ................ United States 80,000,000 82,600,000 e,f,g Tjiwi Kimia Finance Mauritius, secured note, 144A, j FRN, 5.664%, 4/29/15 .......................................... Indonesia 12,883,549 3,812,242 j FRN, 5.664%, 4/29/18 .......................................... Indonesia 33,160,560 9,812,210 zero cpn., 4/29/25 ............................................ Indonesia 42,601,657 12,605,830 -------------- 700,445,864 -------------- PRODUCER MANUFACTURING 1.0% Case New Holland Inc., senior note, 6.00%, 6/01/09 ................................................ United States 225,000,000 220,500,000 g 144A, 7.125%, 3/01/14 ......................................... United States 69,900,000 69,375,750
Semiannual Report | 81 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) BONDS (CONTINUED) PRODUCER MANUFACTURING (CONTINUED) g Invensys PLC, senior note, 144A, 9.875%, 3/15/11 .................... United Kingdom $ 60,000,000 $ 64,050,000 Polymer Holdings LLC, senior disc. note, zero cpn. to 1/15/09, 12.00% thereafter, 7/15/14 ........................................ United States 100,000,000 80,250,000 --------------- 434,175,750 --------------- REAL ESTATE DEVELOPMENT 0.0%c D.R. Horton Inc., 5.625%, 1/15/16 ................................... United States 20,000,000 18,706,320 --------------- REAL ESTATE INVESTMENT TRUSTS 1.1% Host Marriott LP, g,h 144A, 6.75%, 6/01/16 ............................................ United States 138,200,000 138,718,250 senior note, K, 7.125%, 11/01/13 ................................ United States 50,000,000 51,125,000 senior note, O, 6.375%, 3/15/15 ................................. United States 210,000,000 207,637,500 MeriStar Hospitality Corp., 9.125%, 1/15/11 ......................... United States 64,500,000 74,981,250 --------------- 472,462,000 --------------- TECHNOLOGY SERVICES 0.4% g SunGard Data Systems Inc., senior note, 144A, 9.125%, 8/15/13 .............................. United States 59,300,000 63,006,250 senior sub. note, 144A, 10.25%, 8/15/15 ......................... United States 93,000,000 98,347,500 --------------- 161,353,750 --------------- TOTAL BONDS (COST $18,344,187,418) .................................. 18,265,789,082 --------------- CONVERTIBLE BONDS 3.6% ALTERNATIVE POWER GENERATION 0.5% d,e Calpine Corp., cvt., senior note, 6.00% to 9/30/06, zero cpn. to 9/30/09, 6.00% thereafter, 9/30/14 ....................................... United States 137,000,000 43,840,000 senior note, 4.75%, 11/15/23 .................................... United States 88,000,000 36,960,000 sub. note, 7.75%, 6/01/15 ....................................... United States 450,000,000 128,250,000 --------------- 209,050,000 --------------- CONSUMER SERVICES 0.1% d Adelphia Communications Corp., cvt., junior sub. note, 6.00%, 2/15/06 ........................................................... United States 75,000,000 1,781,250 EchoStar Communications Corp., cvt., sub. note, 5.75%, 5/15/08 ...... United States 25,500,000 25,308,750 --------------- 27,090,000 ---------------
82 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE BONDS (CONTINUED) ELECTRONIC TECHNOLOGY 2.3% Bank of America into Analog Devices Inc., cvt., senior note, 7.25%, 9/27/06 ............................................................. United States $ 152,520,000 $ 152,844,867 Conexant Systems Inc., cvt., sub. note, 4.00%, 2/01/07 United States . 280,000,000 274,750,000 Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 .............. Canada 500,000,000 476,250,000 SCI Systems Inc., cvt., sub. note, 3.00%, 3/15/07 ..................... United States 66,000,000 64,185,000 --------------- 968,029,867 --------------- HEALTH TECHNOLOGY 0.3% Enzon Pharmaceuticals Inc., cvt., sub. note, 4.50%, 7/01/08 ........... United States 112,000,000 104,860,000 --------------- INDUSTRIAL SERVICES 0.2% Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ............. United States 103,000,000 99,523,750 --------------- REAL ESTATE INVESTMENT TRUSTS 0.2% MeriStar Hospitality Corp., cvt., sub. note, 9.50%, 4/01/10 ........... United States 95,000,000 101,056,250 --------------- TOTAL CONVERTIBLE BONDS (COST $1,904,037,771) ......................... 1,509,609,867 --------------- MORTGAGE-BACKED SECURITIES 3.7% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 2.0% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 .......................... United States 503,343,620 480,141,720 FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 ......................... United States 345,290,833 337,341,373 --------------- 817,483,093 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.7% FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 ................................ United States 298,184,169 291,240,870 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.0% GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ........................... United States 423,983,263 411,327,036 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $1,546,457,462) ................ 1,520,050,999 --------------- TOTAL LONG TERM INVESTMENTS (COST $38,368,924,692) .................... 40,390,806,361 --------------- ----------- SHARES ----------- SHORT TERM INVESTMENTS 2.9% MONEY MARKET FUND (COST $180,645,389) 0.4% k Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% .. United States 180,645,389 180,645,389 ---------------
Semiannual Report | 83 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT i VALUE - ----------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS (CONTINUED) REPURCHASE AGREEMENT (COST $ 1,017,405,043) 2.5% l Joint Repurchase Agreement, 4.683%, 4/03/06 (Maturity Value $1,017,802,085) ...................................... United States $1,017,405,043 $ 1,017,405,043 ABN AMRO Bank, N.V., New York Branch (Maturity Value $84,772,735) Banc of America Securities LLC (Maturity Value $84,772,735) Barclays Capital Inc. (Maturity Value $84,772,735) Bear, Stearns & Co. Inc. (Maturity Value $84,772,735) BNP Paribas Securities Corp. (Maturity Value $97,810,780) Deutsche Bank Securities Inc. (Maturity Value $21,740,259) Dresdner Kleinwort Wasserstein Securities LLC (Maturity Value $63,032,483) Goldman, Sachs & Co. (Maturity Value $84,772,735) Greenwich Capital Markets Inc. (Maturity Value $84,772,735) Lehman Brothers Inc. (Maturity Value $59,225,903) Merrill Lynch Government Securities Inc. (Maturity Value $84,772,735) Morgan Stanley & Co. Inc. (Maturity Value $97,810,780) UBS Securities LLC (Maturity Value $84,772,735) Collateralized by U.S. Government Agency Securities, 1.75 - 7.125%, 5/02/06 - 2/01/11; m U.S. Government Agency Discount Notes, 4/7/06 - 5/02/06; and m U.S. Treasury Bills, 6/22/06; and U.S. Treasury Notes, 2.50 - 6.125%, 10/31/06 - 8/15/09 --------------- TOTAL INVESTMENTS (COST $39,566,975,124) 100.1% ........................ 41,588,856,793 OTHER ASSETS, LESS LIABILITIES (0.1)% .................................. (31,865,016) --------------- NET ASSETS 100.0% ...................................................... $41,556,991,777 ===============
See Selected Portfolio Abbreviations on page 100. a Non-income producing. b See Note 10 regarding holdings of 5% voting securities. c Rounds to less than 0.1% of net assets. d See Note 8 regarding defaulted securities. e See Note 11 regarding other considerations. f See Note 9 regarding restricted securities. g Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At March 31, 2006, the value of these securities was $3,186,094,227, representing 7.67% of net assets. h Security purchased on a when-issued or delayed delivery basis. i The principal amount is stated in U.S. dollars unless otherwise indicated. j The coupon rate shown represents the rate at period end. k See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. l See Note 1(c) regarding joint repurchase agreement. m A portion or all of the security is traded on a discount basis with no stated coupon rate. 84 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .... $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 $ 6.63 ----------------------------------------------------------------------------------------- Income from investment operations: Net investment income a ............... 0.15 0.28 0.27 0.28 0.38 0.41 f Net realized and unrealized gains (losses) ............................. (0.10) (0.11) (0.04) (0.10) 0.09 0.33 f ----------------------------------------------------------------------------------------- Total from investment operations ........ 0.05 0.17 0.23 0.18 0.47 0.74 ----------------------------------------------------------------------------------------- Less distributions from net investment income ................................ (0.16) (0.32) (0.36) (0.36) (0.41) (0.44) ----------------------------------------------------------------------------------------- Redemption fees ......................... -- c -- c -- c -- -- -- ----------------------------------------------------------------------------------------- Net asset value, end of period .......... $ 6.42 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 ========================================================================================= Total return b .......................... 0.71% 2.67% 3.46% 2.66% 7.06% 11.52% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ....... $5,522,532 $5,901,449 $6,420,381 $7,286,317 $7,726,914 $7,197,334 Ratios to average net assets: Expenses .............................. 0.73% d,e 0.72% e 0.70% 0.70% 0.69% 0.68% Net investment income ................. 4.53% d 4.29% 4.09% 4.11% 5.48% 6.12% f Portfolio turnover rate ................. 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ..................................... $(0.008) Net realized and unrealized gains (losses) per share ................ 0.008 Ratio of net investment income to average net assets ................ (0.11)% Semiannual Report | See notes to financial statements. | 85 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 $ 6.63 Income from investment operations: Net investment income a ....................... 0.13 0.25 0.24 0.25 0.34 0.37 f Net realized and unrealized gains (losses) .... (0.10) (0.11) (0.05) (0.10) 0.09 0.33 f -------------------------------------------------------------------------------- Total from investment operations ................ 0.03 0.14 0.19 0.15 0.43 0.70 -------------------------------------------------------------------------------- Less distributions from net investment income ... (0.14) (0.29) (0.32) (0.33) (0.38) (0.40) -------------------------------------------------------------------------------- Redemption fees ................................. -- c -- c -- c -- -- -- -------------------------------------------------------------------------------- Net asset value, end of period .................. $ 6.41 $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 ================================================================================ Total return b .................................. 0.45% 2.13% 2.92% 2.13% 6.37% 10.94% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 428,370 $478,788 $568,276 $678,814 $559,966 $225,517 Ratios to average net assets: Expenses ...................................... 1.25% d,e 1.25% e 1.23% 1.23% 1.22% 1.22% Net investment income ......................... 4.01% d 3.76% 3.56% 3.58% 4.95% 5.51% f Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ...................................... $(0.008) Net realized and unrealized gains (losses) per share ................. 0.008 Ratio of net investment income to average net assets ................. (0.11)% 86 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 $ 6.61 -------------------------------------------------------------------------------- Income from investment operations: Net investment income a ....................... 0.13 0.25 0.24 0.25 0.34 0.37 f Net realized and unrealized gains (losses) .... (0.10) (0.11) (0.05) (0.11) 0.10 0.33 f -------------------------------------------------------------------------------- Total from investment operations ................ 0.03 0.14 0.19 0.14 0.44 0.70 -------------------------------------------------------------------------------- Less distributions from net investment income ... (0.14) (0.29) (0.32) (0.33) (0.38) (0.40) -------------------------------------------------------------------------------- Redemption fees ................................. -- c -- c -- c -- -- -- -------------------------------------------------------------------------------- Net asset value, end of period .................. $ 6.39 $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 ================================================================================ Total return b .................................. 0.44% 2.14% 2.91% 2.00% 6.53% 10.96% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $454,818 $508,539 $597,451 $814,635 $803,049 $422,114 Ratios to average net assets: Expenses ...................................... 1.24% d,e 1.25% e 1.23% 1.23% 1.21% 1.22% Net investment income ......................... 4.02% d 3.76% 3.56% 3.58% 4.96% 5.55% f Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ..................................... $(0.008) Net realized and unrealized gains (losses) per share ................ 0.008 Ratio of net investment income to average net assets ................ (0.11)% Semiannual Report | See notes to financial statements. | 87 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
---------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2005 2004 2003 2002 f ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81 ---------------------------------------------------------------------- Income from investment operations: Net investment income a ............................. 0.13 0.26 0.25 0.25 0.25 Net realized and unrealized gains (losses) .......... (0.10) (0.11) (0.05) (0.09) 0.22 ---------------------------------------------------------------------- Total from investment operations ...................... 0.03 0.15 0.20 0.16 0.47 ---------------------------------------------------------------------- Less distributions from net investment income ......... (0.14) (0.30) (0.33) (0.34) (0.29) ---------------------------------------------------------------------- Redemption fees ....................................... -- c -- c -- c -- -- ---------------------------------------------------------------------- Net asset value, end of period ........................ $ 6.42 $ 6.53 $ 6.68 $ 6.81 $ 6.99 ====================================================================== Total return b ........................................ 0.52% 2.29% 3.08% 2.29% 7.03% Ratios/supplemental data Net assets, end of period (000's) ..................... $64,896 $65,790 $59,431 $54,042 $14,042 Ratios to average net assets: Expenses ............................................ 1.10% d,e 1.10% e 1.08% 1.08% 1.07% d Net investment income ............................... 4.16% d 3.91% 3.71% 3.73% 5.10% d Portfolio turnover rate ............................... 11.31% 29.14% 41.45% 66.96% 44.62%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred s ales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. 88 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONTINUED)
------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 $ 6.64 ------------------------------------------------------------------------------ Income from investment operations: Net investment income a ....................... 0.15 0.29 0.28 0.29 0.38 0.43 f Net realized and unrealized gains (losses) .... (0.11) (0.10) (0.06) (0.10) 0.11 0.32 f ------------------------------------------------------------------------------ Total from investment operations ................ 0.04 0.19 0.22 0.19 0.49 0.75 ------------------------------------------------------------------------------ Less distributions from net investment income ... (0.16) (0.33) (0.36) (0.37) (0.42) (0.45) ------------------------------------------------------------------------------ Redemption fees ................................. -- c -- c -- c -- -- -- ------------------------------------------------------------------------------ Net asset value, end of period .................. $ 6.43 $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 =============================================================================== Total return b .................................. 0.62% 2.95% 3.42% 2.79% 7.33% 11.63% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $366,476 $334,681 $340,279 $308,411 $198,437 $19,960 Ratios to average net assets: Expenses ...................................... 0.60% d,e 0.60% e 0.58% 0.58% 0.57% 0.57% Net investment income ......................... 4.66% d 4.41% 4.21% 4.23% 5.60% 6.30% f Portfolio turnover rate ......................... 11.31% 29.14% 41.45% 66.96% 44.62% 19.18%
a Based on average daily shares outstanding. b Amount is less than $0.01 per share. c Total return is not annualized for periods less than one year. d Annualized. e Benefit of expense reduction is less than 0.01%. f Effective October 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began recording all paydown gains and losses as part of investment income, as required. The effect of this change was as follows: Net investment income per share ..................................... $(0.008) Net realized and unrealized gains (losses) per share ................ 0.008 Ratio of net investment income to average net assets ................ (0.11)% Semiannual Report | See notes to financial statements. | 89 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 97.3% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 97.3% GNMA I GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ................................. $ 264,170 $ 281,276 GNMA I GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ................................. 431,234 467,278 GNMA I GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ................................ 392,078 414,116 GNMA I GP 30 Year, 10.25%, 6/15/18 - 5/15/20 ................................. 12,965 14,266 GNMA I GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ............................... 777,968 833,602 GNMA I GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ................................. 365,184 402,338 GNMA I GP 30 Year, 11.50%, 2/15/13 - 6/15/13 ................................. 62,987 69,248 GNMA I GP 30 Year, 11.75%, 7/15/13 - 9/15/15 ................................. 59,025 65,368 GNMA I GP 30 Year, 12.00%, 3/15/11 - 12/15/12 ................................ 23,969 26,370 GNMA I GP 30 Year, 12.50%, 4/15/10 - 7/15/10 ................................. 72,349 79,050 GNMA I GP 30 Year, 12.75%, 5/15/14 ........................................... 6,175 6,817 GNMA I SF 15 Year, 6.50%, 5/15/18 ............................................ 3,810,363 3,910,976 a GNMA I SF 30 Year, 5.00%, 2/15/33 - 4/15/36 .................................. 806,205,928 782,074,022 GNMA I SF 30 Year, 5.50%, 5/15/28 - 9/15/35 .................................. 1,409,059,227 1,396,634,407 GNMA I SF 30 Year, 6.00%, 10/15/23 - 11/15/35 ................................ 691,083,204 699,980,239 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/34 .................................. 437,032,705 453,232,613 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................................. 99,537 103,119 GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ................................. 299,406,408 312,136,758 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................................. 784,552 819,937 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 .................................. 82,201,321 86,388,256 GNMA I SF 30 Year, 7.70%, 12/15/20 -1/15/22 .................................. 810,063 857,989 GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ................................. 62,880,480 67,058,433 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ................................. 149,674 160,224 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................................. 13,513,715 14,592,943 GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ................................. 17,498,064 18,866,824 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 .................................. 10,929,085 11,942,813 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ................................. 13,300,666 14,691,094 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 ............................... 9,942,254 11,027,142 GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ................................ 9,699,237 10,629,865 GNMA I SF 30 Year, 11.50%, 3/15/13 - 12/15/17 ................................ 2,252,016 2,496,187 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................................. 11,052,764 12,375,818 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................................. 10,101,549 11,170,352 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ................................. 11,098,353 12,359,522 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................................. 72,546 77,226 GNMA II GP 30 Year, 11.50%, 8/20/13 .......................................... 17,716 19,409 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 ................................ 49,657,359 46,309,376 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................................. 322,642,613 311,681,962 GNMA II SF 30 Year, 5.00%, 9/20/33 ........................................... 350,564,139 338,887,994 GNMA II SF 30 Year, 5.00%, 10/20/33 .......................................... 73,668,106 71,209,927 GNMA II SF 30 Year, 5.50%, 6/20/34 ........................................... 94,079,654 92,957,168 GNMA II SF 30 Year, 5.50%, 7/20/34 - 2/20/36 ................................. 326,025,551 322,061,964 GNMA II SF 30 Year, 5.50%, 12/20/34 .......................................... 285,554,369 282,147,354 GNMA II SF 30 Year, 5.50%, 1/20/35 ........................................... 114,650,429 113,250,202 GNMA II SF 30 Year, 5.50%, 2/20/35 ........................................... 143,317,787 141,567,445 GNMA II SF 30 Year, 5.50%, 6/20/35 ........................................... 80,884,541 79,896,698 GNMA II SF 30 Year, 6.00%, 10/20/23 - 3/20/36 ................................ 388,511,217 391,947,710 GNMA II SF 30 Year, 6.00%, 6/20/34 ........................................... 71,426,416 72,075,298
90 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 6.00%, 9/20/34 ........................................... $ 94,162,981 $ 95,016,749 GNMA II SF 30 Year, 6.00%, 11/20/35 .......................................... 80,463,264 81,187,159 GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 ................................. 160,452,824 164,805,236 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................................. 85,912,505 88,934,171 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ................................ 11,096,880 11,575,607 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................................. 5,382,093 5,727,116 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................................. 2,578,696 2,772,521 GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ................................ 830,383 893,180 GNMA II SF 30 Year, 9.50%, 8/20/17 - 4/20/25 ................................. 496,936 545,505 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ................................ 1,057,941 1,164,972 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ................................ 2,913,586 3,217,704 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ................................ 441,741 487,630 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ................................ 221,719 246,669 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ................................ 513,167 571,623 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 .............................. 347,925 385,046 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ............................... 322,373 358,800 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,733,675,478) ....................... 6,648,148,683 -------------- ---------------- SHARES ---------------- SHORT TERM INVESTMENTS 2.7% MONEY MARKET FUND (COST $176,842,441) 2.6% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ......... 176,842,441 176,842,441 -------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENT (COST $10,000,000) 0.1% c Barclays Capital Inc., 4.400%, 4/03/06 (Maturity Value $10,003,667) Collateralized by dU.S. Treasury Bill, 6/01/06 ............................... 10,000,000 10,000,000 -------------- TOTAL SHORT TERM INVESTMENTS (COST $186,842,441) ............................. 186,842,441 -------------- TOTAL INVESTMENTS (COST $6,920,517,919) 100.0% ............................... 6,834,991,124 OTHER ASSETS, LESS LIABILITIES 0.0% e ........................................ 2,101,368 -------------- NET ASSETS 100.0% ............................................................ $6,837,092,492 ==============
See Selected Portfolio Abbreviations on page 100 a See Note 1(d) regarding securities purchased on a to-be-announced basis. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. c See Note 1(c) regarding repurchase agreement. d The security is traded on a discount basis with no stated coupon rate. e Rounds to less than 0.1% of net assets. Semiannual Report | See notes to financial statements. | 91 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2005 2004 2003 2002 2001 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 $ 10.89 --------------------------------------------------------------------------------------- ncome from investment operations: Net investment income a ............. 0.19 0.45 0.43 0.42 0.46 0.46 Net realized and unrealized gains (losses) ........................... (0.69) 2.42 1.33 0.85 (1.60) (0.86) --------------------------------------------------------------------------------------- Total from investment operations ...... (0.50) 2.87 1.76 1.27 (1.14) (0.40) --------------------------------------------------------------------------------------- Less distributions from: Net investment income ................. (0.21) (0.44) (0.40) (0.43) (0.45) (0.45) Net realized gains .................... (0.09) -- -- -- (0.47) (0.02) --------------------------------------------------------------------------------------- Total distributions ................... (0.30) (0.44) (0.40) (0.43) (0.92) (0.47) --------------------------------------------------------------------------------------- Redemption fees ....................... -- c -- c -- c -- -- -- --------------------------------------------------------------------------------------- Net asset value, end of period ........ $ 11.79 $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 ======================================================================================= Total return b ........................ (3.97)% 28.81% 20.40% 16.38% (12.49)% (4.03)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $1,838,570 $1,986,034 $1,450,832 $1,259,886 $1,090,216 $1,349,027 Ratios to average net assets: Expenses ............................ 0.77% d,e 0.78% e 0.80% 0.83% 0.80% 0.79% Net investment income ............... 3.24% d 3.92% 4.49% 5.00% 4.87% 4.26% Portfolio turnover rate ............... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
a Based on average daily shares outstanding. b Total return does not reflect sales commissions or the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. dAnnualized. e Benefit of expense reduction is less than 0.01%. 92 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
-------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 $ 10.90 -------------------------------------------------------------------------------- Income from investment operations: Net investment income a .......................... 0.16 0.39 0.38 0.37 0.41 0.41 Net realized and unrealized gains (losses) ....... (0.68) 2.42 1.33 0.85 (1.58) (0.87) -------------------------------------------------------------------------------- Total from investment operations ................. (0.52) 2.81 1.71 1.22 (1.17) (0.46) -------------------------------------------------------------------------------- Less distributions from: Net investment income .......................... (0.18) (0.39) (0.36) (0.39) (0.41) (0.40) Net realized gains ............................. (0.09) -- -- -- (0.47) (0.02) -------------------------------------------------------------------------------- Total distributions .............................. (0.27) (0.39) (0.36) (0.39) (0.88) (0.42) -------------------------------------------------------------------------------- Redemption fees .................................. -- c -- c -- c -- -- -- -------------------------------------------------------------------------------- Net asset value, end of period ................... $ 11.78 $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 ================================================================================ Total return b ................................... (4.14)% 28.11% 19.71% 15.88% (12.88)% (4.58)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $135,016 $154,277 $127,105 $95,321 $32,802 $15,212 Ratios to average net assets: Expenses ....................................... 1.27% d,e 1.28% e 1.30% 1.34% 1.31% 1.30% Net investment income .......................... 2.74% d 3.42% 3.99% 4.49% 4.44% 3.74% Portfolio turnover rate .......................... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. Semiannual Report | See notes to financial statements. | 93 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........... $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 $ 10.88 ---------------------------------------------------------------------------------- Income from investment operations: Net investment income a ........................ 0.16 0.39 0.38 0.36 0.41 0.41 Net realized and unrealized gains (losses) ..... (0.68) 2.42 1.33 0.86 (1.59) (0.87) ---------------------------------------------------------------------------------- Total from investment operations ............... (0.52) 2.81 1.71 1.22 (1.18) (0.46) ---------------------------------------------------------------------------------- Less distributions from: Net investment income ........................ (0.18) (0.39) (0.36) (0.39) (0.41) (0.39) Net realized gains ........................... (0.09) -- -- -- (0.47) (0.02) ---------------------------------------------------------------------------------- Total distributions ............................ (0.27) (0.39) (0.36) (0.39) (0.88) (0.41) ---------------------------------------------------------------------------------- Redemption fees ................................ -- c -- c -- c -- -- -- ---------------------------------------------------------------------------------- Net asset value, end of period ................. $ 11.76 $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 ================================================================================== Total return b ................................. (4.14)% 28.16% 19.76% 15.77% (12.90)% (4.50)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .............. $379,011 $435,714 $283,747 $222,030 $67,428 $44,985 Ratios to average net assets: Expenses ..................................... 1.26% d,e 1.28% e 1.30% 1.34% 1.29% 1.30% Net investment income ........................ 2.75% d 3.42% 3.99% 4.49% 4.43% 3.76% Portfolio turnover rate ........................ 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 94 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2005 2004 2003 2002 f ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81 ------------------------------------------------------------------------------ Income from investment operations: Net investment income a ......................... 0.17 0.43 0.39 0.37 0.32 Net realized and unrealized gains (losses) ...... (0.69) 2.40 1.34 0.86 (1.85) ------------------------------------------------------------------------------ Total from investment operations .................. (0.52) 2.83 1.73 1.23 (1.53) ------------------------------------------------------------------------------ Less distributions from: Net investment income ............................. (0.19) (0.41) (0.37) (0.40) (0.32) Net realized gains ................................ (0.09) -- -- -- -- ------------------------------------------------------------------------------ Total distributions ............................... (0.28) (0.41) (0.37) (0.40) (0.32) ------------------------------------------------------------------------------ Redemption fees ................................... -- c -- c -- c -- -- ------------------------------------------------------------------------------ Net asset value, end of period .................... $ 11.77 $ 12.57 $10.15 $ 8.79 $ 7.96 ============================================================================== Total return b .................................... (4.12)% 28.35% 20.02% 15.96% (16.01)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $17,200 $14,649 $1,590 $1,142 $ 142 Ratios to average net assets: Expenses ........................................ 1.12% d,e 1.13% e 1.15% 1.19% 1.16% d Net investment income ........................... 2.89% d 3.57% 4.14% 4.64% 4.82% d Portfolio turnover rate ........................... 3.76% 13.53% 16.13% 25.81% 30.60%
a Based on average daily shares outstanding. b Total return does not reflect the contingent deferred sales charge, and is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. f For the period January 1, 2002 (effective date) to September 30, 2002. Semiannual Report | See notes to financial statements. | 95 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND (CONTINUED)
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............. $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05 $10.92 --------------------------------------------------------------------------------- Income from investment operations: Net investment income a ......................... 0.20 0.48 0.44 0.42 0.47 0.48 Net realized and unrealized gains (losses) ...... (0.69) 2.42 1.34 0.87 (1.60) (0.87) --------------------------------------------------------------------------------- Total from investment operations .................. (0.49) 2.90 1.78 1.29 (1.13) (0.39) --------------------------------------------------------------------------------- Less distributions from: Net investment income ............................. (0.22) (0.46) (0.42) (0.44) (0.46) (0.46) Net realized gains ................................ (0.09) -- -- -- (0.47) (0.02) --------------------------------------------------------------------------------- Total distributions ............................... (0.31) (0.46) (0.42) (0.44) (0.93) (0.48) --------------------------------------------------------------------------------- Redemption fees ................................... -- c -- c -- c -- -- -- --------------------------------------------------------------------------------- Net asset value, end of period .................... $ 11.84 $ 12.64 $ 10.20 $ 8.84 $ 7.99 $10.05 --------------------------------------------------------------------------------- Total return b .................................... (3.88)% 29.00% 20.48% 16.61% (12.32)% (3.89)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $83,053 $110,249 $51,586 $47,167 $ 15,664 $8,829 Ratios to average net assets: Expenses ........................................ 0.62% d,e 0.63% e 0.65% 0.69% 0.66% 0.65% Net investment income ........................... 3.39% d 4.07% 4.64% 5.14% 5.07% 4.39% Portfolio turnover rate ........................... 3.76% 13.53% 16.13% 25.81% 30.60% 34.03%
a Based on average daily shares outstanding. b Total return is not annualized for periods less than one year. c Amount is less than $0.01 per share. d Annualized. e Benefit of expense reduction is less than 0.01%. 96 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 99.8% COMMON STOCKS 94.0% DIVERSIFIED TELECOMMUNICATION SERVICES 3.5% AT&T Inc. ........................................................... United States 1,500,000 $ 40,560,000 Verizon Communications Inc. ......................................... United States 1,300,000 44,278,000 -------------- 84,838,000 -------------- ELECTRIC UTILITIES 78.1% Alliant Energy Corp. ................................................ United States 1,712,000 53,876,640 Ameren Corp. ........................................................ United States 1,229,441 61,250,751 American Electric Power Co. Inc. .................................... United States 1,800,000 61,236,000 CenterPoint Energy Inc. ............................................. United States 1,262,800 15,065,204 Central Vermont Public Service Corp. ................................ United States 168,400 3,571,764 Cinergy Corp. ....................................................... United States 2,100,000 95,361,000 Consolidated Edison Inc. ............................................ United States 700,000 30,450,000 Constellation Energy Group .......................................... United States 200,000 10,942,000 Dominion Resources Inc. ............................................. United States 1,600,000 110,448,000 DTE Energy Co. ...................................................... United States 400,000 16,036,000 Duke Energy Corp. ................................................... United States 1,215,400 35,428,910 Edison International ................................................ United States 2,000,000 82,360,000 Energy East Corp. ................................................... United States 800,000 19,440,000 Entergy Corp. ....................................................... United States 1,750,000 120,645,000 Exelon Corp. ........................................................ United States 2,200,000 116,380,000 FirstEnergy Corp. ................................................... United States 2,200,000 107,580,000 FPL Group Inc. ...................................................... United States 2,200,000 88,308,000 Hawaiian Electric Industries Inc. ................................... United States 500,000 13,565,000 ITC Holdings Corp. .................................................. United States 581,000 15,251,250 National Grid PLC ................................................... United Kingdom 4,987,755 49,624,594 Northeast Utilities ................................................. United States 1,971,500 38,503,395 Pepco Holdings Inc. ................................................. United States 1,600,000 36,464,000 PG&E Corp. .......................................................... United States 2,100,000 81,690,000 Pinnacle West Capital Corp. ......................................... United States 800,000 31,280,000 PPL Corp. ........................................................... United States 2,400,000 70,560,000 Progress Energy Inc. ................................................ United States 1,600,000 70,368,000 Public Service Enterprise Group Inc. ................................ United States 1,500,000 96,060,000 Puget Energy Inc. ................................................... United States 1,725,000 36,535,500 Scottish Power PLC .................................................. United Kingdom 3,000,000 30,316,669 a Sierra Pacific Resources ............................................ United States 3,472,473 47,954,852 The Southern Co. .................................................... United States 2,500,000 81,925,000 TXU Corp. ........................................................... United States 700,000 31,332,000 United Utilities PLC ................................................ United Kingdom 5,000,000 59,860,661 Westar Energy Inc. .................................................. United States 900,000 18,729,000 Wisconsin Energy Corp. .............................................. United States 1,000,000 39,990,000 Xcel Energy Inc. .................................................... United States 2,082,200 37,791,930 -------------- 1,916,181,120 --------------
Semiannual Report | 97 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) GAS DISTRIBUTORS 11.3% AGL Resources Inc. ................................................. United States 1,200,000 $ 43,260,000 Atmos Energy Corp. ................................................. United States 1,000,000 26,330,000 a Gaz de France ...................................................... France 544,033 19,669,047 KeySpan Corp. ...................................................... United States 626,600 25,609,142 NiSource Inc. ...................................................... United States 2,800,000 56,616,000 ONEOK Inc. ......................................................... United States 500,000 16,125,000 Questar Corp. ...................................................... United States 303,600 21,267,180 Sempra Energy ...................................................... United States 1,000,000 46,460,000 Vectren Corp. ...................................................... United States 800,000 21,104,000 -------------- 276,440,369 -------------- OIL & GAS PIPELINES 1.1% Kinder Morgan Inc. ................................................. United States 300,000 27,597,000 -------------- TOTAL COMMON STOCKS (COST $1,698,327,997) .......................... 2,305,056,489 -------------- CONVERTIBLE PREFERRED STOCKS 1.3% ELECTRIC UTILITIES 1.3% CMS Energy Trust I, 7.75%, cvt. pfd ................................ United States 260,000 12,740,000 PNM Resources Inc., 6.75%, cvt. pfd ................................ United States 400,000 19,550,000 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,519) .............. 32,290,000 -------------- ---------------- PRINCIPAL AMOUNT ---------------- BONDS 4.5% ELECTRIC UTILITIES 4.5% Aquila Inc., senior note, 9.95%, 2/01/11 .................................................. United States $ 6,000,000 6,675,000 8.27%, 11/15/21 ................................................. United States 6,100,000 6,191,500 CMS Energy Corp., senior note, 9.875%, 10/15/07 .................... United States 8,500,000 9,084,375 MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ....... United States 25,000,000 30,984,225 Northeast Generation Co., senior note, 8.812%, 10/15/26 ............ United States 7,500,000 7,431,045 PP&L Capital Funding, 8.375%, 6/15/07 .............................. United States 15,000,000 15,429,720 TXU Corp., senior note, 6.55%, 11/15/34 ............................ United States 40,000,000 36,297,840 -------------- TOTAL BONDS (COST $108,005,488) .................................... 112,093,705 -------------- TOTAL LONG TERM INVESTMENTS (COST $1,839,774,004) .................. 2,449,440,194 --------------
98 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENT (COST $3,856,827) 0.2% MONEY MARKET FUND 0.2% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.36% ..... United States 3,856,827 $ 3,856,827 -------------- TOTAL INVESTMENTS (COST $1,843,630,831) 100.0% ........................... 2,453,297,021 OTHER ASSETS, LESS LIABILITIES 0.0% c .................................... (447,300) -------------- NET ASSETS 100.0% ........................................................ $2,452,849,721 ==============
a Non-income producing. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. c Rounds to less than 0.1% of net assets. Semiannual Report | See notes to financial statements. | 99 FRANKLIN CUSTODIAN FUNDS, INC. STATEMENT OF INVESTMENTS, MARCH 31, 2006 (UNAUDITED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corporation FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GP - Graduated Payment MTN - Medium Term Notes SF - Single Family 100 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2006 (unaudited)
------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------------ Assets: Investments in securities: Cost - Unaffiliated issuers ........................................ $451,227,095 $ 905,146,785 $38,165,566,427 Cost - Non-controlled affiliated issuers (Note 10) ................. -- -- 203,358,265 Cost - Sweep Money Fund (Note 7) ................................... 1,654,549 42,504,493 180,645,389 Cost - Repurchase agreements ....................................... 11,332,525 -- 1,017,405,043 ----------------------------------------------------- Total cost of investments .......................................... $464,214,169 $ 947,651,278 $39,566,975,124 ===================================================== Value - Unaffiliated issuers ....................................... $761,167,356 $2,372,451,280 $39,471,279,846 Value - Non-controlled affiliated issuers (Note 10) ................ -- -- 919,526,515 Value - Sweep Money Fund (Note 7) .................................. 1,654,549 42,504,493 180,645,389 Value - Repurchase agreements ...................................... 11,332,525 -- 1,017,405,043 ----------------------------------------------------- Total value of investments a ....................................... 774,154,430 2,414,955,773 41,588,856,793 Cash ................................................................. -- 35,636 -- Receivables: Investment securities sold ......................................... 11,702,481 -- 253,182,628 Capital shares sold ................................................ 1,020,099 2,701,417 124,386,515 Dividends .......................................................... 300,597 1,487,839 387,780,822 ----------------------------------------------------- Total assets .................................................... 787,177,607 2,419,180,665 42,354,206,758 ----------------------------------------------------- Liabilities: Payables: Investment securities purchased .................................... 6,871,689 -- 660,639,041 Capital shares redeemed ............................................ 1,730,416 4,646,686 75,280,182 Affiliates ......................................................... 813,720 2,467,134 36,171,668 Payable upon return of securities loaned ............................. 11,332,525 -- -- Deferred sales proceeds (Note 11) .................................... -- -- 18,979,779 Accrued expenses and other liabilities ............................... 308,867 773,495 6,144,311 ----------------------------------------------------- Total liabilities ............................................... 21,057,217 7,887,315 797,214,981 ----------------------------------------------------- Net assets, at value ........................................... $766,120,390 $2,411,293,350 $41,556,991,777 ===================================================== Net assets consist of: Paid-in capital ...................................................... $535,112,859 $1,089,809,149 $39,113,741,429 Undistributed net investment income (loss) ........................... (1,344,461) 87,471 -- Distributions in excess of net investment income ..................... -- -- (51,880,740) Net unrealized appreciation (depreciation) ........................... 309,940,261 1,467,304,495 2,021,881,669 Accumulated net realized gain (loss) ................................. (77,588,269) (145,907,765) 473,249,419 ----------------------------------------------------- Net assets, at value ........................................... $766,120,390 $2,411,293,350 $41,556,991,777 ===================================================== a Including securities loaned ........................................... $ 11,741,000 -- --
Semiannual Report | See notes to financial statements. | 101 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2006 (unaudited)
---------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ---------------------------------------------------- CLASS A: Net assets, at value ................................................ $665,175,041 $1,700,902,239 $23,576,919,301 =================================================== Shares outstanding .................................................. 24,804,316 44,393,894 9,557,270,358 =================================================== Net asset value per share a ......................................... $ 26.82 $ 38.31 $ 2.47 =================================================== Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ................................... $ 28.46 $ 40.65 $ 2.58 =================================================== CLASS B: Net assets, at value ................................................ $ 21,588,525 $ 129,216,924 $ 3,718,146,471 =================================================== Shares outstanding .................................................. 836,038 3,489,544 1,512,438,689 =================================================== Net asset value and maximum offering price per share a .............. $ 25.82 $ 37.03 $ 2.46 =================================================== CLASS B1: Net assets, at value ................................................ -- -- $ 462,528,809 =================================================== Shares outstanding .................................................. -- -- 187,440,742 =================================================== Net asset value and maximum offering price per share a .............. -- -- $ 2.47 =================================================== CLASS C: Net assets, at value ................................................ $ 79,356,824 $ 283,884,067 $10,695,121,166 =================================================== Shares outstanding .................................................. 3,105,096 7,733,325 4,310,507,519 =================================================== Net asset value and maximum offering price per share a .............. $ 25.56 $ 36.71 $ 2.48 =================================================== CLASS R: Net assets, at value ................................................ -- $ 39,587,103 $ 149,450,365 =================================================== Shares outstanding .................................................. -- 1,039,911 61,121,412 =================================================== Net asset value and maximum offering price per share a .............. -- $ 38.07 $ 2.45 =================================================== ADVISOR CLASS: Net assets, at value ................................................ -- $ 257,703,017 $ 2,954,825,665 =================================================== Shares outstanding .................................................. -- 6,722,059 1,203,059,532 =================================================== Net asset value and maximum offering price per share a .............. -- $ 38.34 $ 2.46 ===================================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Funds. 102 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2006 (unaudited)
----------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND ----------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................................................. $ 6,733,675,478 $1,839,774,004 Cost - Sweep Money Fund (Note 7) ......................................................... 176,842,441 3,856,827 Cost - Repurchase agreements ............................................................. 10,000,000 -- ----------------------------------- Total cost of investments ................................................................ $ 6,920,517,919 $1,843,630,831 =================================== Value - Unaffiliated issuers ............................................................. $ 6,648,148,683 $2,449,440,194 Value - Sweep Money Fund (Note 7) ........................................................ 176,842,441 3,856,827 Value - Repurchase agreements ............................................................ 10,000,000 -- ----------------------------------- Total value of investments ............................................................... 6,834,991,124 2,453,297,021 Receivables: Investment securities sold ............................................................... 21,515,313 1,301,204 Capital shares sold ...................................................................... 3,875,757 2,012,883 Interest ................................................................................. 31,072,512 6,370,552 ----------------------------------- Total assets ....................................................................... 6,891,454,706 2,462,981,660 ----------------------------------- Liabilities: Payables: Investment securities purchased .......................................................... 22,129,071 -- Capital shares redeemed .................................................................. 25,089,569 7,424,873 Affiliates ............................................................................... 4,939,613 1,986,587 Accrued expenses and other liabilities ................................................... 2,203,961 720,479 ----------------------------------- Total liabilities .................................................................. 54,362,214 10,131,939 ----------------------------------- Net assets, at value ............................................................. $ 6,837,092,492 $2,452,849,721 =================================== Net assets consist of: Paid-in capital ........................................................................... $ 7,340,588,385 $1,813,593,363 Undistributed net investment income (distributions in excess of net investment income) .... (9,737,120) 3,466,491 Net realized appreciation (depreciation) .................................................. (85,526,795) 609,666,143 Accumulated net realized gain (loss) ...................................................... (408,231,978) 26,123,724 ----------------------------------- Net assets, at value ............................................................. $ 6,837,092,492 $2,452,849,721 ===================================
Semiannual Report | See notes to financial statements. | 103 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2006 (unaudited)
--------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------------- CLASS A: Net assets, at value .............................................................. $5,522,532,454 $1,838,569,600 ====================================== Shares outstanding ................................................................ 860,189,482 155,916,531 ====================================== Net asset value per share a ....................................................... $ 6.42 $ 11.79 ====================================== Maximum offering price per share (net asset value per share / 95.75%) ............. $ 6.70 $ 12.31 ====================================== CLASS B: Net assets, at value .............................................................. $ 428,370,175 $ 135,016,016 ====================================== Shares outstanding ................................................................ 66,813,242 11,459,500 ====================================== Net asset value and maximum offering price per share a ............................ $ 6.41 $ 11.78 ====================================== CLASS C: Net assets, at value .............................................................. $ 454,817,995 $ 379,010,757 ====================================== Shares outstanding ................................................................ 71,157,725 32,232,702 ====================================== Net asset value and maximum offering price per share a ............................ $ 6.39 $ 11.76 ====================================== CLASS R: Net assets, at value .............................................................. $ 64,896,190 $ 17,200,150 ====================================== Shares outstanding ................................................................ 10,115,032 1,461,623 ====================================== Net asset value and maximum offering price per share a ............................ $ 6.42 $ 11.77 ====================================== ADVISOR CLASS: Net assets, at value .............................................................. $ 366,475,678 $ 83,053,198 ====================================== Shares outstanding ................................................................ 56,958,681 7,014,829 ====================================== Net asset value and maximum offering price per share a ............................ $ 6.43 $ 11.84 ======================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Funds. 104 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended ended March 31, 2006 (unaudited)
------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------- Investment income: Dividends: Unaffiliated issuers .................................................... $ 2,415,592 $ 13,095,082 $ 423,349,307 Non-controlled affiliated issuers (Note 10) ............................. -- -- 14,803,162 Sweep Money Fund (Note 7) ............................................... 120,782 433,495 3,303,778 Interest: Unaffiliated issuers .................................................... -- -- 766,507,805 Non-controlled affiliated issuers (Note 10) ............................. -- -- 7,095,375 Income from securities loaned - net ...................................... 229,121 -- -- ------------------------------------------------ Total investment income ............................................. 2,765,495 13,528,577 1,215,059,427 ------------------------------------------------ Expenses: Management fees (Note 3a) ................................................ 1,826,765 5,302,318 78,570,563 Distribution fees: (Note 3c) Class A ................................................................. 826,136 2,020,190 17,000,091 Class B ................................................................. 102,827 627,572 18,595,404 Class B1 ................................................................ -- -- 1,512,354 Class C ................................................................. 383,496 1,370,927 33,267,080 Class R ................................................................. -- 85,032 336,725 Transfer agent fees (Note 3e) ............................................ 788,908 2,162,435 14,331,834 Custodian fees (Note 4) .................................................. 14,954 32,991 418,064 Reports to shareholders .................................................. 117,135 186,578 1,487,685 Registration and filing fees ............................................. 26,256 60,498 926,601 Professional fees ........................................................ 13,733 24,664 163,499 Directors' fees and expenses ............................................. 1,641 6,169 87,898 Other .................................................................... 8,117 24,936 457,426 ------------------------------------------------ Total expenses ...................................................... 4,109,968 11,904,310 167,155,224 Expense reductions (Note 4) ......................................... (12) (4) (3,772) Expenses waived/paid by affiliates (Note 3f) ........................ -- -- (123,828) ------------------------------------------------ Net expenses ....................................................... 4,109,956 11,904,306 167,027,624 ------------------------------------------------ Net investment income (loss) ...................................... (1,344,461) 1,624,271 1,048,031,803 ------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments Unaffiliated Issuers ................................................... 15,774,379 66,104,641 500,520,738 Non-controlled affiliated issuers (Note 10) ............................ -- -- 45,577,782 Foreign currency transactions ........................................... 1,178 -- (158,748) ------------------------------------------------ Net realized gain (loss) .......................................... 15,775,557 66,104,641 545,939,772 ------------------------------------------------ Net change in unrealized appreciation (depreciation) on investments 37,482,336 154,807,804 (611,525,708) ------------------------------------------------ Net realized and unrealized gain (loss) ................................... 53,257,893 220,912,445 (65,585,936) ------------------------------------------------ Net increase (decrease) in net assets resulting from operations ........... $51,913,432 $222,536,716 $ 982,445,867 ================================================
Semiannual Report | See notes to financial statements. | 105 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended ended March 31, 2006 (unaudited)
-------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND -------------------------------------- Investment income: Dividends: Unaffiliated issuers ............................................................ $ -- $ 44,858,505 Sweep Money Fund (Note 7) ....................................................... 3,307,756 1,292,444 Interest ......................................................................... 182,346,494 4,316,447 Income from securities loaned - net .............................................. -- 8,430 ------------------------------------ Total investment income ................................................... 185,654,250 50,475,826 ------------------------------------ Expenses: Management fees (Note 3a) ........................................................ 15,690,641 5,784,420 Distribution fees: (Note 3c) Class A ......................................................................... 3,574,363 1,406,863 Class B ......................................................................... 1,469,535 458,394 Class C ......................................................................... 1,544,427 1,269,761 Class R ......................................................................... 162,901 39,463 Transfer agent fees (Note 3e) .................................................... 4,567,046 1,555,581 Custodian fees (Note 4) .......................................................... 70,723 44,946 Reports to shareholders .......................................................... 397,249 229,950 Registration and filing fees ..................................................... 76,646 83,130 Professional fees ................................................................ 51,556 24,637 Directors' fees and expenses ..................................................... 18,592 10,760 Other ............................................................................ 239,638 33,417 ------------------------------------ Total expenses ............................................................ 27,863,317 10,941,322 Expense reductions (Note 4) ............................................... (10,178) (3,350) ------------------------------------ Net expenses ............................................................ 27,853,139 10,937,972 ------------------------------------ Net investment income .................................................. 157,801,111 39,537,854 ------------------------------------ Realized and unrealized losses: Net realized gain (loss) from: Investments ..................................................................... (718,752) 39,294,121 Foreign currency transactions ................................................... -- 61,898 ------------------------------------ Net realized gain (loss) ............................................... (718,752) 39,356,019 ------------------------------------ Net change in unrealized appreciation (depreciation) on: Investments ..................................................................... (110,183,768) (186,185,372) Translation of assets and liabilities denominated in foreign currencies ......... -- (47) ------------------------------------ Net change in unrealized appreciation (depreciation) ................... (110,183,768) (186,185,419) ------------------------------------ Net realized and unrealized gain (loss) ........................................... (110,902,520) (146,829,400) ------------------------------------ Net increase (decrease) in net assets resulting from operations ................... $ 46,898,591 $(107,291,546) ====================================
106 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ----------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED MARCH 31, 2006 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2005 (UNAUDITED) SEPTEMBER 30, 2005 ----------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................. $ (1,344,461) $ (860,145) $ 1,624,271 $ 6,147,997 Net realized gain (loss) from investments and foreign currency transactions ................................ 15,775,557 (905,096) 66,104,641 33,738,259 Net change in unrealized appreciation (depreciation) on investments ............... 37,482,336 93,542,036 154,807,804 244,117,335 --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ........................ 51,913,432 91,776,795 222,536,716 284,003,591 --------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................... -- -- (2,878,763) (3,882,872) Class R ..................................... -- -- (1,109) (10,415) Advisor Class ............................... -- -- (964,032) (732,270) --------------------------------------------------------------------------- Total distributions to shareholders ........... -- -- (3,843,904) (4,625,557) --------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ..................................... (9,124,228) (91,991,179) (22,417,623) (168,604,093) Class B ..................................... 744,557 (1,613,902) (6,511,641) (13,722,938) Class C ..................................... 768,980 (10,942,390) (12,482,101) (33,781,675) Class R ..................................... -- -- 8,813,889 4,768,742 Advisor Class ............................... -- -- 13,483,465 66,279,985 --------------------------------------------------------------------------- Total capital share transactions .............. (7,610,691) (104,547,471) (19,114,011) (145,059,979) --------------------------------------------------------------------------- Redemption fees ............................... 1,682 1,039 5,470 11,358 --------------------------------------------------------------------------- Net increase (decrease) in net assets ............................. 44,304,423 (12,769,637) 199,584,271 134,329,413 Net assets: Beginning of period ........................... 721,815,967 734,585,604 2,211,709,079 2,077,379,666 --------------------------------------------------------------------------- End of period ................................. $ 766,120,390 $ 721,815,967 $ 2,411,293,350 $ 2,211,709,079 =========================================================================== Undistributed net investment income (loss) included in net assets: End of period ................................ $ (1,344,461) $ -- $ 87,471 $ 2,307,104 ===========================================================================
Semiannual Report | See notes to financial statements. | 107 FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------------------------------------------------- FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND --------------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED MARCH 31, 2006 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2005 (UNAUDITED) SEPTEMBER 30, 2005 --------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................... $ 1,048,031,803 $ 1,736,884,708 $ 157,801,111 $ 320,563,601 Net realized gain (loss) from investments and foreign currency transactions ......... 545,939,772 408,724,204 (718,752) 3,270,275 Net change in unrealized appreciation (depreciation) on investments ............. (611,525,708) 893,534,036 (110,183,768) (126,557,362) -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ....................... 982,445,867 3,039,142,948 46,898,591 197,276,514 -------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ................................... (679,215,107) (1,104,437,012) (138,217,903) (302,745,166) Class B ................................... (98,356,309) (206,484,397) (9,852,806) (23,185,787) Class B1 .................................. (13,116,646) (28,826,258) -- -- Class C ................................... (283,118,452) (461,493,148) (10,399,819) (24,272,966) Class R ................................... (3,826,836) (5,706,119) (1,439,889) (2,810,550) Advisor Class ............................. (78,991,442) (95,145,372) (8,577,547) (15,327,999) Net realized gains: Class A ................................... (132,930,599) (84,143,096) -- -- Class B ................................... (22,601,208) (19,751,225) -- -- Class B1 .................................. (2,827,473) (2,705,174) -- -- Class C ................................... (60,547,408) (37,975,944) -- -- Class R ................................... (778,984) (432,526) -- -- Advisor Class ............................. (14,814,566) (5,808,100) -- -- -------------------------------------------------------------------------------- Total distributions to shareholders ......... (1,391,125,030) (2,052,908,371) (168,487,964) (368,342,468) -------------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ................................... 1,871,831,945 6,640,381,449 (280,581,068) (380,358,442) Class B ................................... (154,830,584) 317,307,812 (42,602,206) (77,684,862) Class B1 .................................. (24,247,455) (34,777,479) -- -- Class C ................................... 688,507,353 3,242,801,825 (45,416,708) (76,479,175) Class R ................................... 28,281,896 46,237,588 218,349 7,779,886 Advisor Class ............................. 690,008,918 1,334,835,525 37,795,485 1,208,804 -------------------------------------------------------------------------------- Total capital share transactions ............ 3,099,552,073 11,546,786,720 (330,586,148) (525,533,789) -------------------------------------------------------------------------------- Redemption fees ............................. 178,758 173,429 19,548 31,088 -------------------------------------------------------------------------------- Net increase (decrease) in net assets ............................ 2,691,051,668 12,533,194,726 (452,155,973) (696,568,655) Net assets: Beginning of period ......................... 38,865,940,109 26,332,745,383 7,289,248,465 7,985,817,120 -------------------------------------------------------------------------------- End of period ............................... $ 41,556,991,777 $ 38,865,940,109 $ 6,837,092,492 $ 7,289,248,465 ================================================================================ Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .............................. $ (51,880,740) $ 145,660,727 $ (9,737,120) $ 949,733 ================================================================================
108 | See notes to financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
------------------------------------- FRANKLIN UTILITIES FUND ------------------------------------- SIX MONTHS ENDED MARCH 31, 2006 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2005 ------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................. $ 39,537,854 $ 87,329,712 Net realized gain (loss) from investments and foreign currency transactions ............ 39,356,019 86,597,164 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............................. (186,185,419) 395,798,703 ------------------------------------ Net increase (decrease) in net assets resulting from operations .................. (107,291,546) 569,725,579 ------------------------------------ Distributions to shareholders from: Net investment income: Class A .............................................................................. (32,965,331) (65,898,832) Class B .............................................................................. (2,125,318) (4,861,315) Class C .............................................................................. (5,980,202) (12,160,417) Class R .............................................................................. (258,606) (210,458) Advisor Class ........................................................................ (1,613,835) (3,309,596) Net realized gains: Class A .............................................................................. (14,345,312) -- Class B .............................................................................. (1,090,928) -- Class C .............................................................................. (3,070,998) -- Class R .............................................................................. (117,357) -- Advisor Class ........................................................................ (696,993) -- ------------------------------------ Total distributions to shareholders ..................................................... (62,264,880) (86,440,618) ------------------------------------ Capital share transactions: (Note 2) Class A .............................................................................. (22,464,435) 175,567,341 Class B .............................................................................. (9,626,301) (3,086,774) Class C .............................................................................. (29,529,771) 76,710,176 Class R .............................................................................. 3,517,000 11,865,292 Advisor Class ........................................................................ (20,417,585) 41,716,286 ------------------------------------ Total capital share transactions ........................................................ (78,521,092) 302,772,321 ------------------------------------ Redemption fees ......................................................................... 5,002 4,687 ------------------------------------ Net increase (decrease) in net assets .......................................... (248,072,516) 786,061,969 Net assets: Beginning of period ..................................................................... 2,700,922,237 1,914,860,268 ------------------------------------ End of period ........................................................................... $ 2,452,849,721 $ 2,700,922,237 ==================================== Undistributed net investment income included in net assets: End of period ........................................................................... $ 3,466,491 $ 6,871,929 ====================================
Semiannual Report | See notes to financial statements. | 109 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company, consisting of five series (the Funds). The classes of shares offered within each of the Funds are indicated below. Effective March 1, 2005, Class B/B1 shares are only offered to existing Class B shareholders in the form of reinvested distributions and certain exchanges from other Franklin Templeton Class B shares. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
- ------------------------------------------------------------------------------------------------------------- CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ------------------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. 110 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) The Custodian Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Custodian Funds' Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Custodian Funds' Board of Directors. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statements of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required Semiannual Report | 111 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS (CONTINUED) to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The Funds may also enter into joint repurchase agreements whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. Repurchase agreements are valued at cost. At March 31, 2006, all repurchase agreements held by the funds had been entered into on that date. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS Certain Funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statements of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statements of Assets and Liabilities. F. SECURITIES LENDING Certain funds may loan securities to certain brokers through a securities lending agent for which they receive cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. The collateral is invested in short term instruments as noted in the Statement of Investments. The fund receives interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The fund bears the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. 112 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. INCOME TAXES No provision has been made for U.S. income taxes because each Fund's policy is to continue to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Funds are notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Custodian Funds are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Custodian Funds. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in class-level expenses may result in payment of different per share distributions by class. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. J. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the funds and accounted for as an addition to paid-in capital. Semiannual Report | 113 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) K. GUARANTEES AND INDEMNIFICATIONS Under the Custodian Funds' organizational documents, their officers and directors are indemnified by the Custodian Funds against certain liabilities arising out of the performance of their duties to the Custodian Funds. Additionally, in the normal course of business, the Custodian Funds enter into contracts with service providers that contain general indemnification clauses. The Custodian Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Custodian Funds that have not yet occurred. However, based on experience, the Custodian Funds expect the risk of loss to be remote. 2. CAPITAL STOCK At March 31, 2006, there were 44.2 billion shares of the Custodian Funds authorized ($0.01 par value) and allocated to the Funds as follows (in millions):
------------------------------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND ------------------------------------------------------------------------------------ 1,000 3,250 28,400 8,000 3,550
Transactions in the Funds' shares were as follows:
---------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ---------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- CLASS A SHARES: Six months ended March 31, 2006 Shares sold ................................ 5,290,346 $ 139,431,940 3,145,492 $ 115,257,634 Shares issued in reinvestment of distributions ......................... -- -- 72,199 2,651,844 Shares redeemed ............................ (5,650,629) (148,556,168) (3,836,582) (140,327,101) ---------------------------------------------------------------- Net increase (decrease) .................... (360,283) $ (9,124,228) (618,891) $ (22,417,623) ================================================================ Year ended September 30, 2005 Shares sold ................................ 5,939,499 $ 140,943,371 4,972,706 $ 165,487,177 Shares issued in reinvestment of distributions ......................... -- -- 106,686 3,548,371 Shares redeemed ............................ (9,857,258) (232,934,550) (10,153,867) (337,639,641) ---------------------------------------------------------------- Net increase (decrease) .................... (3,917,759) $ (91,991,179) (5,074,475) $(168,604,093) ================================================================ CLASS B SHARES: Six months ended March 31, 2006 Shares sold ................................ 87,569 $ 2,234,170 82,337 $ 2,932,915 Shares redeemed ............................ (58,889) (1,489,613) (267,176) (9,444,556) ---------------------------------------------------------------- Net increase (decrease) .................... 28,680 $ 744,557 (184,839) $ (6,511,641) ================================================================
114 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND -------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------- CLASS B SHARES: (CONTINUED) Year ended September 30, 2005 Shares sold ............................... 133,963 $ 3,049,030 242,741 $ 7,743,683 Shares redeemed ........................... (204,804) (4,662,932) (666,084) (21,466,621) -------------------------------------------------------------- Net increase (decrease) ................... (70,841) $ (1,613,902) (423,343) $(13,722,938) ============================================================== CLASS C SHARES: Six months ended March 31, 2006 Shares sold ............................... 373,452 $ 9,450,291 464,044 $ 16,283,486 Shares redeemed ........................... (347,468) (8,681,311) (822,301) (28,765,587) -------------------------------------------------------------- Net increase (decrease) ................... 25,984 $ 768,980 (358,257) $(12,482,101) ============================================================== Year ended September 30, 2005 Shares sold ............................... 482,114 $ 10,909,830 886,979 $ 28,487,942 Shares redeemed ........................... (969,317) (21,852,220) (1,948,771) (62,269,617) -------------------------------------------------------------- Net increase (decrease) ................... (487,203) $(10,942,390) (1,061,792) $(33,781,675) ============================================================== CLASS R SHARES: Six months ended March 31, 2006 Shares sold ............................... 548,170 $ 20,195,703 Shares issued in reinvestment of distributions ......................... 30 1,108 Shares redeemed ........................... (312,590) (11,382,922) ----------------------------- Net increase (decrease) ................... 235,610 $ 8,813,889 ============================= Year ended September 30, 2005 Shares sold ............................... 301,713 $ 9,964,493 Shares issued in reinvestment of distributions ......................... 313 10,387 Shares redeemed ........................... (157,760) (5,206,138) ----------------------------- Net increase (decrease) ................... 144,266 $ 4,768,742 ============================= ADVISOR CLASS SHARES: Six months ended March 31, 2006 Shares sold ............................... 1,350,476 $ 49,316,752 Shares issued in reinvestment of distributions ......................... 23,979 880,512 Shares redeemed ........................... (1,008,465) (36,713,799) ----------------------------- Net increase (decrease) ................... 365,990 $ 13,483,465 ============================= Year ended September 30, 2005 Shares sold ............................... 2,738,052 $ 91,354,618 Shares issued in reinvestment of distributions ......................... 21,696 721,407 Shares redeemed ........................... (756,109) (25,796,040) ----------------------------- Net increase (decrease) ................... 2,003,639 $ 66,279,985 =============================
Semiannual Report | 115 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------------------ CLASS A SHARES: Six months ended March 31, 2006 Shares sold ........................... 1,357,142,604 $ 3,289,830,395 37,823,540 $ 244,979,029 Shares issued in reinvestment of distributions ..................... 229,051,296 554,430,197 13,728,740 88,754,506 Shares redeemed ....................... (813,142,556) (1,972,428,647) (94,851,839) (614,314,603) ------------------------------------------------------------------------------ Net increase (decrease) ............... 773,051,344 $ 1,871,831,945 (43,299,559) $ (280,581,068) ============================================================================== Year ended September 30, 2005 Shares sold ........................... 3,233,548,786 $ 7,991,126,134 80,655,804 $ 532,927,988 Shares issued on merger (Note 12) ............................ 22,580,678 57,129,115 -- -- Shares issued in reinvestment of distributions ..................... 310,204,492 763,747,314 29,003,758 191,550,552 Shares redeemed ....................... (879,645,185) (2,171,621,114) (167,123,344) (1,104,836,982) ------------------------------------------------------------------------------ Net increase (decrease) ............... 2,686,688,771 $ 6,640,381,449 (57,463,782) $ (380,358,442) ============================================================================== CLASS B SHARES: Six months ended March 31, 2006 Shares sold ........................... 12,430,066 $ 30,015,075 815,328 $ 5,275,399 Shares issued in reinvestment of distributions ..................... 32,807,752 79,076,887 1,068,261 6,902,585 Shares redeemed ....................... (109,146,923) (263,922,546) (8,470,911) (54,780,190) ------------------------------------------------------------------------------ Net increase (decrease) ............... (63,909,105) $ (154,830,584) (6,587,322) $ (42,602,206) ============================================================================== Year ended September 30, 2005 Shares sold ........................... 216,067,791 $ 530,027,930 2,734,327 $ 18,126,694 Shares issued in reinvestment of distributions ..................... 58,417,660 143,410,552 2,446,399 16,142,982 Shares redeemed ....................... (144,791,444) (356,130,670) (16,950,873) (111,954,538) ------------------------------------------------------------------------------ Net increase (decrease) ............... 129,694,007 $ 317,307,812 (11,770,147) $ (77,684,862) ============================================================================== CLASS B1 SHARES: Six months ended March 31, 2006 Shares sold ........................... 582,483 $ 1,417,988 Shares issued in reinvestment of distributions ..................... 3,861,773 9,340,391 Shares redeemed ....................... (14,426,822) (35,005,834) ------------------------------------ Net increase (decrease) ............... (9,982,566) $ (24,247,455) ==================================== Year ended September 30, 2005 Shares sold ........................... 2,378,752 $ 5,860,213 Shares issued in reinvestment of distributions ..................... 7,165,232 17,644,463 Shares redeemed ....................... (23,606,754) (58,282,155) ------------------------------------ Net increase (decrease) ............... (14,062,770) $ (34,777,479) ====================================
116 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ---------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------------------------- CLASS C SHARES: Six months ended March 31, 2006 Shares sold ........................... 566,391,740 $ 1,381,213,208 4,524,599 $ 29,185,538 Shares issued in reinvestment of distributions ..................... 92,791,777 225,951,361 1,078,042 6,944,258 Shares redeemed ....................... (376,519,882) (918,657,216) (12,646,112) (81,546,504) ---------------------------------------------------------------------------------- Net increase (decrease) ............... 282,663,635 $ 688,507,353 (7,043,471) $ (45,416,708) ================================================================================== Year ended September 30, 2005 Shares sold ........................... 1,587,994,257 $ 3,945,015,780 11,343,153 $ 74,643,597 Shares issued in reinvestment of distributions ..................... 128,622,410 318,755,436 2,413,285 15,876,049 Shares redeemed ....................... (411,346,115) (1,020,969,391) (25,359,338) (166,998,821) ================================================================================== Net increase (decrease) ............... 1,305,270,552 $ 3,242,801,825 (11,602,900) $ (76,479,175) ================================================================================== CLASS R SHARES: Six months ended March 31, 2006 Shares sold ........................... 18,590,186 $ 44,779,754 1,575,419 $ 10,203,858 Shares issued in reinvestment of distributions ..................... 1,787,791 4,293,949 218,505 1,412,300 Shares redeemed ....................... (8,620,497) (20,791,807) (1,758,697) (11,397,809) ================================================================================== Net increase (decrease) ............... 11,757,480 $ 28,281,896 35,227 $ 218,349 ================================================================================== Year ended September 30, 2005 Shares sold ........................... 26,352,002 $ 64,518,265 4,180,818 $ 27,602,806 Shares issued in reinvestment of distributions ..................... 2,379,605 5,812,421 421,527 2,782,416 Shares redeemed ....................... (9,872,431) (24,093,098) (3,423,452) (22,605,336) ================================================================================== Net increase (decrease) ............... 18,859,176 $ 46,237,588 1,178,893 $ 7,779,886 ================================================================================== ADVISOR CLASS SHARES: Six months ended March 31, 2006 Shares sold ........................... 281,309,560 $ 678,383,877 11,145,619 $ 72,315,626 Shares issued in reinvestment of distributions ..................... 37,324,983 90,047,993 1,182,917 7,666,655 Shares redeemed ....................... (32,689,002) (78,422,952) (6,499,727) (42,186,796) ================================================================================== Net increase (decrease) ............... 285,945,541 $ 690,008,918 5,828,809 $ 37,795,485 ================================================================================== Year ended September 30, 2005 Shares sold ........................... 525,718,339 $ 1,292,792,031 13,517,268 $ 89,567,508 Shares issued in reinvestment of distributions ..................... 38,816,130 95,287,128 1,992,298 13,178,931 Shares redeemed ....................... (21,661,227) (53,243,634) (15,208,235) (101,537,635) ================================================================================== Net increase (decrease) ............... 542,873,242 $ 1,334,835,525 301,331 $ 1,208,804 ==================================================================================
Semiannual Report | 117 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
--------------------------------- FRANKLIN UTILITIES FUND --------------------------------- SHARES AMOUNT --------------------------------- CLASS A SHARES: Six months ended March 31, 2006 Shares sold .............................................. 12,587,757 $ 150,420,375 Shares issued in reinvestment of distributions ........... 3,053,268 36,337,531 Shares redeemed .......................................... (17,522,460) (209,222,341) --------------------------------- Net increase (decrease) .................................. (1,881,435) $ (22,464,435) ================================= Year ended September 30, 2005 Shares sold .............................................. 34,569,804 $ 400,170,506 Shares issued in reinvestment of distributions ........... 4,305,025 49,165,990 Shares redeemed .......................................... (23,851,552) (273,769,155) --------------------------------- Net increase (decrease) .................................. 15,023,277 $ 175,567,341 ================================= CLASS B SHARES: Six months ended March 31, 2006 Shares sold .............................................. 281,085 $ 3,365,922 Shares issued in reinvestment of distributions ........... 151,043 1,795,116 Shares redeemed .......................................... (1,241,232) (14,787,339) --------------------------------- Net increase (decrease) .................................. (809,104) $ (9,626,301) ================================= Year ended September 30, 2005 Shares sold .............................................. 1,759,896 $ 19,743,236 Shares issued in reinvestment of distributions ........... 224,565 2,562,564 Shares redeemed .......................................... (2,233,960) (25,392,574) --------------------------------- Net increase (decrease) .................................. (249,499) $ (3,086,774) ================================= CLASS C SHARES: Six months ended March 31, 2006 Shares sold .............................................. 2,540,294 $ 30,235,072 Shares issued in reinvestment of distributions ........... 375,638 4,455,243 Shares redeemed .......................................... (5,399,774) (64,220,086) --------------------------------- Net increase (decrease) .................................. (2,483,842) $ (29,529,771) ================================= Year ended September 30, 2005 Shares sold .............................................. 12,226,563 $ 139,657,945 Shares issued in reinvestment of distributions ........... 495,205 5,658,566 Shares redeemed .......................................... (6,002,579) (68,606,335) --------------------------------- Net increase (decrease) .................................. 6,719,189 $ 76,710,176 ================================= CLASS R SHARES: Six months ended March 31, 2006 Shares sold .............................................. 670,279 $ 7,994,509 Shares issued in reinvestment of distributions ........... 30,852 366,802 Shares redeemed .......................................... (405,293) (4,844,311) --------------------------------- Net increase (decrease) .................................. 295,838 $ 3,517,000 ================================= Year ended September 30, 2005 Shares sold .............................................. 1,167,612 $ 13,713,510 Shares issued in reinvestment of distributions ........... 17,357 204,087 Shares redeemed .......................................... (175,789) (2,052,305) --------------------------------- Net increase (decrease) .................................. 1,009,180 $ 11,865,292 =================================
118 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------- FRANKLIN UTILITIES FUND ------------------------------- SHARES AMOUNT ------------------------------- ADVISOR CLASS SHARES: Six months ended March 31, 2006 Shares sold ........................................... 760,806 $ 9,177,936 Shares issued in reinvestment of distributions ........ 164,902 1,969,134 Shares redeemed ....................................... (2,636,426) (31,564,655) ------------------------------- Net increase (decrease) ............................... (1,710,718) $(20,417,585) =============================== Year ended September 30, 2005 Shares sold ........................................... 5,741,424 $ 65,649,487 Shares issued in reinvestment of distributions ........ 243,650 2,814,290 Shares redeemed ....................................... (2,316,860) (26,747,491) ------------------------------- Net increase (decrease) ............................... 3,668,214 $ 41,716,286 ===============================
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Custodian Funds are also officers and/or directors of the following subsidiaries:
- -------------------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Funds, except the Franklin Income Fund and Franklin Growth Fund, pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the funds as follows:
- ---------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - ---------------------------------------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20.0 billion 0.360% In excess of $20 billion
Semiannual Report | 119 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) Effective March 15, 2006, the Franklin Income Fund pays an investment management fee to Advisers based on the month-end net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $ 12.5 billion 0.420% Over $ 12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $ 17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion Prior to March 15, 2006, an annualized fee rate of 0.36% was applicable to net assets in excess of $20 billion. B. ADMINISTRATIVE FEES Under an agreement with Advisers, FT Services provides administrative services to the Funds. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Custodian Funds' Board of Directors has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the sale and distribution of each Fund's shares up to a certain percentage per year of their average daily net assets as follows:
---------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ---------------------------------------------------------------- Class A ............... 0.25% 0.25% 0.15% 0.15% 0.15%
Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. 120 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) Under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the sale and distribution of each Fund's shares up to a certain percentage per year of their average daily net assets of each class as follows:
----------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND ----------------------------------------------------------------- Class B ........................... 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 .......................... -- -- 0.65% -- -- Class C ........................... 1.00% 1.00% 0.65% 0.65% 0.65% Class R ........................... -- 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------ Net sales charges received a ..................... $79,505 335,967 $11,536,333 Contingent deferred sales charges retained ....... $21,647 108,657 $ 5,020,179
----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Net sales charges received a ...................... $325,902 $197,797 Contingent deferred sales charges retained ........ $607,465 $152,818
a Net of commissions paid to unaffiliated broker/dealers. E. TRANSFER AGENT FEES The Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
---------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ---------------------------------------- Transfer agent fees ............................... $556,760 $1,685,264 $8,690,537
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------------------------- Transfer agent fees ............................... $3,058,475 $983,216
Semiannual Report | 121 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS Prior to March 15, 2006, Advisers had agreed in advance to voluntarily waive a portion of management fees for the Franklin Income Fund, as noted in the Statement of Operations, in the form of additional breakpoints based on month-end net assets of the fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion Effective March 15, 2006, the waiver was discontinued. G. OTHER AFFILIATED TRANSACTIONS Included in professional fees are legal fees of $55,100 that were paid to a law firm in which a partner is an officer of the Custodian Funds. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended March 31, 2006, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES At September 30, 2005, the funds had tax basis capital losses which may be carried over to offset future capital gains, if any. At September 30, 2005, the capital loss carryforwards were as follows:
------------------------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT DYNATECH GROWTH INCOME SECURITIES FUND FUND FUND FUND ------------------------------------------------------------------ Capital loss carryforwards expiring in: 2006 ..................................... $ -- $ -- $ -- $ 28,279,472 2007 ..................................... 677,592 -- -- 18,954,412 2008 ..................................... 394,928 -- -- 21,105,846 2009 ..................................... 1,170,048 -- -- 46,256,951 2010 ..................................... 6,843,771 -- 4,507,154 11,768,551 2011 ..................................... 47,180,600 172,953,217 4,348,077 33,556,845 2012 ..................................... 21,838,085 39,052,129 496,170 129,102,166 2013 ..................................... 14,781,620 -- -- 74,283,298 ---------------------------------------------------------------- $92,886,644 $212,005,346 $9,351,401 $363,307,541 ================================================================
122 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) For tax purposes, realized capital losses, realized currency losses, and ordinary income losses, occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2005, the Franklin U.S. Government Securities Fund deferred realized capital losses of $44,205,685. At September 30, 2005, the Franklin DynaTech Fund, the Franklin Growth Fund and the Franklin Utilities Fund deferred realized currency losses of $3,804, $7,060 and $369,187, respectively. At September 30, 2005, the Franklin Income Fund and the Franklin Utilities Fund deferred ordinary income losses of $11,931,281 and $4,624,565, respectively. At March 31, 2006, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
--------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND --------------------------------------------------- Cost of investments .................................. $464,687,547 $ 947,651,278 $39,581,362,236 =================================================== Unrealized appreciation $317,131,155 $1,473,544,596 $ 3,593,370,226 Unrealized depreciation .............................. (7,664,272) (6,240,101) (1,585,875,669) --------------------------------------------------- Net unrealized appreciation (depreciation) ........... $309,466,883 $1,467,304,495 $ 2,007,494,557 ===================================================
------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------- Cost of investments .................................. $6,920,517,919 $1,846,133,305 =============================== Unrealized appreciation .............................. $ 39,910,846 $ 632,176,347 Unrealized depreciation .............................. (125,437,641) (25,012,631) ------------------------------- Net unrealized appreciation (depreciation) ........... $ (85,526,795) $ 607,163,716 ===============================
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. Semiannual Report | 123 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended March 31, 2006, were as follows:
------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------------------------- Purchases ............................. $88,790,410 $ 39,519,811 $10,361,518,523 Sales ................................. $99,927,812 $106,872,130 $ 6,870,076,991
------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------------------------- Purchases ............................. $771,040,598 $ 95,014,999 Sales ................................. $977,939,021 $183,463,554
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 37.06% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At March 31, 2006, the aggregate value of these securities was $1,118,250,230 representing 2.69% of fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 124 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. RESTRICTED SECURITIES At March 31, 2006, investments in securities included issues that are restricted under the Securities Act of 1933 (the 1933 Act). Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration, unless the sale is pursuant to an exemption under the 1933 Act. At March 31, 2006, the Franklin Income Fund held investments in restricted securities, valued in accordance with procedures approved by the fund's Board of Directors as reflecting fair value, as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL AMOUNT/ ACQUISITION SHARES ISSUER DATE COST VALUE - ------------------------------------------------------------------------------------------------------------------------------------ 75,000,000 Asia Pulp & Paper Co. Ltd., 12.00%, pfd., Perpetual ......... 2/14/97 - 7/18/00 $57,833,250 $ 817,500 $ 113,073 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 5.664%, 4/29/15 ................................................... 4/30/05 26,274 25,509 $ 294,012 Pindo Deli Finance Mauritius Ltd., 144A, FRN, 5.664%, 4/29/18 ................................................... 4/30/05 68,317 66,329 $ 607,466 Pindo Deli Finance Mauritius Ltd., 144A, zero cpn., 4/29/25 ................................................... 4/30/05 141,151 137,045 $12,883,549 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 5.664%, 4/29/15 ........................................... 4/30/05 3,926,906 3,812,242 $33,160,560 Tjiwi Kimia Finance Mauritius, secured note, 144A, FRN, 5.664%, 4/29/18 ........................................... 4/30/05 10,107,339 9,812,210 $42,601,657 Tjiwi Kimia Finance Mauritius, secured note, 144A, zero cpn., 4/29/25 ................................................... 4/30/05 12,984,985 12,605,830 ----------- TOTAL RESTRICTED SECURITIES (0.07% OF NET ASSETS) ........... $27,276,665 ===========
10. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund at March 31, 2006 were as shown below.
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF SHARES/ SHARES/ PRINCIPAL PRINCIPAL REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- NON-CONTROLLED AFFILIATES Aquila Inc. ...................... 25,000,000 -- 25,000,000 -- -- -- 12,617,854 Aquila Inc., senior note, 14.875%, 7/01/12 ............... 95,400,000 -- -- 95,400,000 a 7,095,375 -- Canadian Oil Sands Trust ......... 5,600,000 -- 300,000 5,300,000 760,676,515 11,893,912 32,959,928 Puget Energy Inc. ................ 4,137,000 3,363,000 -- 7,500,000 158,850,000 2,909,250 -- ---------------------------------------- TOTAL AFFILIATED SECURITIES (2.21% of Net Assets) $919,526,515 $21,898,537 $45,577,782 ========================================
a As of March 31, 2006, no longer an affiliate. Semiannual Report | 125 FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. OTHER CONSIDERATIONS Directors or employees Franklin Advisers, Inc., as the Franklin Income Fund's Investment Manager, may serve as members of various bondholders' steering committees, on credit committees, or may represent the Fund in certain corporate negotiations. At March 31, 2006, such individuals serve in one or more of these capacities for Calpine Corp. and Calpine Canada Energy Finance. As a result of this involvement, such individuals may be in possession of certain material non-public information. If the Franklin Income Fund's Investment Manager, while in possession of such information, seeks to buy or sell any of these securities, it will comply with all applicable federal securities laws. Subject to certain terms and conditions, the Franklin Income Fund has agreed to sell its holdings in Asia Pulp & Paper Co. Ltd., Pindo Deli Finance Mauritius Ltd. and Tjiwi Kimia Finance Mauritius in November 2006. Until the completion of sale, the transaction is being accounted for as a secured borrowing with a pledge of collateral and any preliminary sales proceeds received are deferred until the completion of the transaction. 12. MERGER On August 4, 2005, the Franklin Income Fund acquired the net assets of the Franklin Multi-Income Trust pursuant to a plan of reorganization approved by the Franklin Multi-Income Trust's shareholders. The merger was accomplished by a tax-free exchange of 22,580,678 Class A shares of the Fund (valued at $2.53) for the net assets of the Franklin Multi-Income Trust which aggregated $57,129,115, including $13,521,127 of unrealized appreciation (depreciation). The merger was accounted for as a pooling-of-interests without restatement for financial reporting purposes. The combined net assets of the Fund immediately after the merger were $37,481,139,819. 13. REGULATORY MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators. 126 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 13. REGULATORY MATTERS (CONTINUED) Specifically, the Company entered into settlements with the Securities and Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC Order") and marketing support payments to securities dealers who sell fund shares (the "December 13, 2004 SEC Order") and with the California Attorney General's Office ("CAGO") concerning marketing support payments to securities dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the settlements with the SEC and the CAGO, the Company retained an Independent Distribution Consultant ("IDC") to develop a plan for distribution of the respective settlement monies. The CAGO approved the distribution plan under the CAGO Settlement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the relevant funds in March, 2005. The SEC has not yet approved the distribution plan pertaining to the December 13, 2004 SEC Order. When approved, disbursements of settlement monies will be made promptly to the relevant funds, in accordance with the terms and conditions of that order. The IDC has also prepared and submitted to the SEC for its approval a plan of distribution under the August 2, 2004 SEC Order that resolved the SEC's market timing investigation. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, directors, and/or employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.) relating to the industry practices referenced above, as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees. The lawsuits were filed in different courts throughout the country. Many of those suits are now pending in a multi-district litigation in the United States District Court for the District of Maryland. The Company and fund management strongly believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Funds, it is committed to making the Funds or their shareholders whole, as appropriate. Semiannual Report | 127 FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 28, 2006, the Board of Directors ("Board"), including a majority of non-interested or independent Directors, approved renewal of the investment management agreement for each of the five separate funds comprising Franklin Custodian Funds ("Fund(s)"). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager ("Manager") and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper report compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional information accompanying such report was a memorandum prepared by management describing enhancements to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale. In considering such materials, the independent Directors received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Directors, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund 128 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had functioned smoothly during the hurricanes and blackout experienced last year in Florida. Among other factors taken into account by the Board were the Manager's best-execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed so as to be aligned with the interests of Fund shareholders. The Board also took into account the transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties such as Dalbar, and the firsthand experience of the individual Directors who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper report furnished for the agreement renewals. The Lipper report prepared for each individual Fund showed the investment performance of its Class A shares during 2005 and the previous ten years ended December 31, 2005, in comparison with a performance universe selected by Lipper. The following summarizes the performance results for each Fund. FRANKLIN DYNATECH FUND - This Fund's investment objective is capital appreciation, and performance was shown in comparison to a performance universe consisting of the Fund and all retail and institutional science and technology funds as classified by Lipper. The Fund's Lipper report showed its total return during 2005 placed it in the second-highest quintile of such performance universe. Its total return on an annualized basis placed it in the fourth or second-lowest quintile for the previous three-year period but in the first or highest quintile for the previous five- and ten-year periods. The Board expressed satisfaction with such performance. Semiannual Report | 129 FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) FRANKLIN GROWTH FUND - The Fund's investment objective is capital appreciation, and performance was shown in comparison to a performance universe consisting of all retail and institutional multi-cap core funds as classified by Lipper. The Fund's Lipper report showed its total return during 2005 ranked it in the top half of its performance universe. Its total return on an annualized basis ranked it in the middle quintile of the performance universe during each of the previous three- and five-year periods, and the fourth or second-lowest quintile during the previous ten-year period. The Board found such performance acceptable, noting that the Fund's annualized total return for the previous ten-year period exceeded 7.5% as shown in such Lipper report. FRANKLIN INCOME FUND - While maintaining prospects for capital appreciation, this Fund's investment objective is to maximize income, and its investment performance was shown in comparison to a performance universe consisting of the Fund and all other retail and institutional income funds as classified by Lipper. The Fund's Lipper report showed its income return during 2005 and for each of the previous ten years was in the first or highest quintile of this performance universe. The Fund's total return as shown in such report during 2005 was in the lowest quintile of its performance universe, but on an annualized basis was in the highest quintile of its performance universe during each of the previous three-, five- and ten-year periods. The Board expressed satisfaction with such performance. FRANKLIN U.S. GOVERNMENT SECURITIES FUND - The investment objective of this Fund is realizing income, and its investment performance was shown in comparison to a performance universe consisting of all retail and institutional Ginnie Mae funds as classified by Lipper. The Fund's Lipper report showed its income return during 2005 and during each of the previous three-, five- and ten-year periods on an annualized basis was in the first or highest quintile of such performance universe. The Fund's total return during 2005, as shown in such report, was in the first or highest quintile of its performance universe during 2005, and on an annualized basis was in the first- or second-highest quintiles of such universe for each of the previous three-, five- and ten-year periods. The Board expressed satisfaction with such performance. FRANKLIN UTILITIES FUND - The investment objectives of this Fund are current income and capital appreciation, and its investment performance was shown in comparison to a performance universe consisting of all retail and institutional utility funds as classified by Lipper. The Fund's Lipper report showed its income return during 2005, as well as during each of the previous three-, five-and ten-year periods on an annualized basis was in the first or highest quintile of such performance universe. The Fund's total return during 2005 placed it in the fourth or next-to-lowest quintile of its performance universe, and on an annualized basis placed it in the fourth quintile of its performance universe during the previous three-year period, the highest quintile during the previous five-year period, and in the middle quintile for the previous ten-year period. The Board expressed satisfaction with such performance, noting that the Fund had a total return of 10.74% in 2005 as shown in such Lipper report. 130 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as constituting its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of services covered under each Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups that would be used as a basis of comparison in the Lipper report. In reviewing comparative costs, emphasis was given to each Fund's management fee in comparison with the effective management fee that would have been charged by other funds within its Lipper expense group assuming they were the same size as the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper effective management fee analysis considers administrative charges as being part of management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The results of such expense comparisons showed that the effective management fee rate for each of Franklin DynaTech Fund, Franklin Growth Fund, Franklin Income Fund and Franklin Utilities Fund was in the lowest quintile of their respective Lipper expense groups, and for Franklin U.S. Government Securities Fund was at the median of its Lipper expense group. The actual total expenses for all the Funds were in the lowest quintile of their respective Lipper expense groups. Based upon the above, the Board was satisfied with the management fees and total expenses of each Fund in comparison to its respective Lipper expense group as shown in the Lipper report. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers who sold fund Class B shares, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the cost allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. Included in the analysis were the revenue and related costs involved in providing services to the Fund, as well as each Fund's relative contribution to the profitability of the Manager's parent. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in Semiannual Report | 131 FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) establishing the infrastructure necessary to the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreement with each Fund provided an initial fee of 0.625% on the first $100 million of assets; 0.50% on the next $150 million of assets; 0.45% on the next $9.75 billion of assets; 0.44% on the next $2.5 billion of assets; and thereafter declined by 2 basis points for each subsequent $2.5 billion until reaching a final breakpoint of 0.36% for assets in excess of $20 billion. The only Fund whose assets exceed $20 billion is Franklin Income Fund and the investment management agreement was amended at the February 28, 2006, Board meeting to further reduce the fees to 0.355% on net assets in excess of $35 billion up to $50 billion, and to 0.35% on assets in excess of $50 billion. Such reductions formalized fee waivers previously agreed to by the Manager at a Board meeting held April 19, 2005. In discussing such overall fee structure, management stated its view that it reaches a relatively low rate quickly, reflecting anticipated economies of scale as a Fund's assets increase and pointed out the favorable effective management fee and total expense comparisons for each Fund within its Lipper expense group, as previously discussed under "Comparative Expenses." The Board believed that to the extent economies of scale may be realized by the Manager and its affiliates, the schedule of fees under the investment management agreement for each Fund provided a sharing of benefits with the Fund and its shareholders. 132 | Semiannual Report FRANKLIN CUSTODIAN FUNDS, INC. SHAREHOLDER INFORMATION (CONTINUED) PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 133 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. LITERATURE REQUEST LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 5 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 6 ' LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California 7 Colorado Connecticut Florida 7 Georgia Kentucky Louisiana Maryland Massachusetts 6 Michigan 6 Minnesota 6 Missouri New Jersey New York 7 North Carolina Ohio 7 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 8 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 6. Portfolio of insured municipal securities. 7. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 8.The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/05 Not part of the semiannual report [LOGO](R) FRANKLIN TEMPLETON One Franklin Parkway INVESTMENTS San Mateo, CA 94403-1906 |_| WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL? 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 S2006 05/06 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Edith E. Holiday and Harris J. Ashton and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) Changes in Internal Controls. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 22, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 22, 2006 By /s/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date May 22, 2006 EX-99.CODE ETH 2 ncsr-code1205.txt Exhibit (a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 2005 - ------------------------------------------------------------------------------- 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") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution 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 will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, 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 superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. 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 or her 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 apposition 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 or her personal influence or personal relationships improperly to influence investment decisions orfinancial 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 FT 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:/ 1 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 of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); 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). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association 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 from the Franklin Resources General Counsel 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. Franklin Resources 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. IV. 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 or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's 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. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she 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 Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' 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./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the 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 FT Fund or 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./5 VI. 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 thereunder. 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-1 under the Investment Company Act, the Code of Ethics and Business Conduct 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. VII. 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. VIII. 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. IX. 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. X. Disclosure on Form N-CSR 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. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2005 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. 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 Galen G. Vetter Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett 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 Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER 2005 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 c/o Maria Abbott within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Maria Abbott, Manager, Code of Ethics, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Abbott, Maria (internal address); mabbott@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: Franklin Resources 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 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may 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. 3 Franklin Resources 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. 4 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. See Part X. 5 See Part X. EX-99.CERT 3 cert302.txt Exhibit (a)(2) CERTIFICATIONS I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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 22, 2006 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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 22, 2006 /S/GALEN G. VETTER Chief Financial Officer EX-99.906CERT 4 cert906.txt Exhibit (b) CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT 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 03/31/06 (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 22, 2006 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, 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 03/31/06 (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 22, 2006 /S/GALEN G. VETTER Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----