-----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, PIi3/0aF/8ZvKPe9zYoQhjd3zF9WYqBtJAJB9IxkbFNKGcDt4n6DfrRs3nB267n0 +4Fil9uVseNFIjQiBoRkvg== 0000038721-07-000196.txt : 20070531 0000038721-07-000196.hdr.sgml : 20070531 20070531125053 ACCESSION NUMBER: 0000038721-07-000196 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070531 DATE AS OF CHANGE: 20070531 EFFECTIVENESS DATE: 20070531 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: 07890099 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 sform.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: 3/31/07 ------- ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC OMITTED) - -------------------------------------------------------------------------------- MARCH 31, 2007 - -------------------------------------------------------------------------------- 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 CUSTODIAN FUNDS, INC. Eligible shareholders can sign up for eDelivery at franklintempleton.com. See inside for details. - -------------------------------------------------------------------------------- [LOGO] (R) FRANKLIN TEMPLETON INVESTMENTS FRANKLIN o Templeton o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups-- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] Not part of the semiannual report Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund(1) GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II(1) VALUE Franklin Balance Sheet Investment Fund(2) Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(2) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(3) Mutual Shares Fund BLEND Franklin Balanced Fund Franklin Blue Chip Fund(1) Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Global Real Estate Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund RETIREMENT TARGET FUNDS Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(4) Franklin Floating Rate Daily Access Fund Franklin High Income Fund(5) Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund(4) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(4) Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME(6) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(7) LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Michigan(7) Arizona Minnesota(7) California(8) Missouri Colorado New Jersey Connecticut New York(8) Florida(8) North Carolina Georgia Ohio(7) Kentucky Oregon Louisiana Pennsylvania Maryland Tennessee Massachusetts(7) Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(9) 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to Franklin High Income Fund. The fund's investment goal and strategy remained the same. 6. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 7. Portfolio of insured municipal securities. 8. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 9. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 01/07 Not part of the semiannual report Contents SHAREHOLDER LETTER ....................................................... 1 SEMIANNUAL REPORT Franklin DynaTech Fund ................................................... 3 Franklin Growth Fund ..................................................... 11 Franklin Income Fund ..................................................... 19 Franklin U.S. Government Securities Fund ................................. 31 Franklin Utilities Fund .................................................. 41 Financial Highlights and Statements of Investments ....................... 50 Financial Statements ..................................................... 98 Notes to Financial Statements ............................................ 107 Shareholder Information .................................................. 124 - -------------------------------------------------------------------------------- Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in the equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- This semiannual report for Franklin DynaTech Fund covers the period ended March 31, 2007. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A posted a +5.39% cumulative total return for the six months under review. For the same period, the Fund underperformed its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of +7.15%, and the broader Standard & Poor's 500 Index (S&P 500), which posted a +7.38% cumulative total return. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 7. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2007, the U.S. economy advanced at a moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase in exports, the U.S. entered 2007 with a record current account deficit. Corporate profits and government spending generally remained robust, but manufacturing activity indicated a downturn. The struggling housing market grew more fragile with the abrupt unraveling of the subprime mortgage market. This exacerbated already weak housing prices and an inventory glut in most of the nation's residential real estate markets. 1. Source: Standard & Poor's Micropal. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 53. Semiannual Report | 3 PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Medical Specialties 10.9% Packaged Software 8.9% Biotechnology 8.7% Semiconductors 8.0% Internet Software & Services 6.2% Computer Processing Software 5.8% Electronic Production Equipment 4.9% Telecommunications Equipment 4.2% Information Technology Services 4.1% Wireless Communications 3.8% Other Pharmaceuticals 3.1% Services to the Health Industry 3.0% Oilfield Services & Equipment 2.9% Major Pharmaceuticals 2.3% Recreational Products 2.1% Computer Communications 2.1% Medical & Nursing Services 2.0% Other 16.3% Short-Term Investments & Other Net Assets 0.7% Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%, though overall job growth slowed in the face of rising labor costs. 2 Jobs in vehicle manufacturing and housing-related industries experienced declines stemming from reduced consumer demand. Even though tight labor markets and the associated wage income growth supported consumer spending, consumer confidence waned in February and March, and large purchases, including those for vehicles and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to tight supply and high demand, refinery maintenance issues, and ongoing geopolitical tensions in the Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months ended March 31, 2007, which was higher than the 2.2% 10-year average. 3 At period-end, the Federal Reserve Board (Fed) was still more concerned with relatively high inflation than an economic slowdown. Risks to growth have increased but not enough for the Fed to change its orientation to fighting inflation. The Fed kept the federal funds target interest rate steady at 5.25% during the period, while also indicating a change in its long-held tightening bias, easing the near-term pressure for potential rate hikes. U.S. investors entered 2007 cautious after more than four years of bull market gains. The overall domestic equity market rose during the six months under review, but was essentially flat during the first quarter of 2007 after global stock market sell-offs in late February and mid-March. Investors reacted swiftly to market and geopolitical events, especially in regard to China and the Middle East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials, utilities and telecommunications stocks performed particularly well. INVESTMENT STRATEGY Based on our independent analysis of individual companies, we search for leading companies that we believe have a sustainable competitive advantage 2. Source: Bureau of Labor Statistics. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Semiannual Report due to state-of-the-art and innovative products, technologies and business models. We consider such factors as a company's competitive positioning, patents, new products, market share, industry growth, recent operational execution and managerial strength. We use a conservative, bottom-up research process to buy and hold what we consider to be undervalued companies. MANAGER'S DISCUSSION During the six months under review, several holdings contributed to Fund performance. In particular, the Fund's position in Apple rose in value due largely to strong sales of its digital music players and services, PCs and related computer hardware devices. The iconic iPod surpassed 100 million units sold, while the iPhone's January 2007 unveiling and the introduction of new products, including movie downloads from iTunes, helped Apple remain a step ahead of its competition in the fast-paced consumer electronics industry. Stryker, which engages in the development, manufacture and marketing of orthopedic products and medical specialties, was another major contributor to the Fund's overall results. Stryker's committed management team, dominant position in a niche market, solid balance sheet and rapidly growing earnings helped Stryker's share price increase significantly during the six months under review. Google, a leader in targeted advertising and Internet search solutions worldwide, benefited from continued strong demand for search advertisements. Furthermore, by period-end Google had captured more than two-thirds of the U.S. search market, a 10% increase since March 2006. Google's share price rose during the reporting period, which benefited the Fund. On the other hand, some stocks had negative returns and hindered Fund performance during the reporting period. Our investment in Motorola, which provides wireless and broadband communication products worldwide, fell in value. The primary reasons for Motorola's share price decline included a lack of new products combined with an increase in competition among its existing product niches, weak wireless handset sales, and price cuts for its popular but aging RAZR line of cell phones, all of which impeded the company's earnings and profit margins. Biotechnology bellwether Amgen's share price fell this reporting period due in part to investor concerns over Swiss rival Roche's new anemia drug, CERA. There was speculation that CERA, which has yet to be released, could pose a threat to future sales of Amgen's dominant products in the anemia treatment market, namely Epogen and Aranesp. Furthermore, Amgen received troubling news from clinical studies on its anemia drugs, prompting the Food and Drug TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Google Inc., A 3.8% INTERNET SOFTWARE & SERVICES - -------------------------------------------------------------------------------- Genentech Inc. 3.8% BIOTECHNOLOGY - -------------------------------------------------------------------------------- Microsoft Corp. 3.7% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Intel Corp. 3.7% SEMICONDUCTORS - -------------------------------------------------------------------------------- Apple Inc. 3.4% COMPUTER PROCESSING HARDWARE - -------------------------------------------------------------------------------- Adobe Systems Inc. 3.0% PACKAGED SOFTWARE - -------------------------------------------------------------------------------- Hewlett-Packard Co. 2.3% COMPUTER PROCESSING HARDWARE - -------------------------------------------------------------------------------- Stryker Corp. 2.2% MEDICAL SPECIALTIES - -------------------------------------------------------------------------------- Alcon Inc. (Switzerland) 2.2% MEDICAL SPECIALTIES - -------------------------------------------------------------------------------- Electronic Arts Inc. 2.1% RECREATIONAL PRODUCTS - -------------------------------------------------------------------------------- Semiannual Report | 5 Administration (FDA) to immediately place warnings on Epogen, Aranesp and the company's other anemia remedy, Procrit, which would likely impact the company's near-term results. In what was a difficult six months for semiconductor companies in general, Intel's share price declined and hindered our overall results. The pricing environment for PC microprocessors was more brutal than expected, especially between Intel and longtime rival Advanced Micro Devices (AMD). A prolonged price war, and the resulting weaker prices for computer chips, negatively impacted Intel's bottom line even as Intel gained some market share over AMD through the first quarter of 2007. Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. [PHOTO OMITTED] /s/ Matthew J. Moberg Matthew J. Moberg, CPA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Semiannual Report Performance Summary as of 3/31/07 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKDNX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.39 $27.19 $25.80 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FDNBX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.24 $25.99 $24.75 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FDYNX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.22 $25.72 $24.50 - -------------------------------------------------------------------------------- PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +5.39% +1.38% +36.91% +106.16% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -0.66% -4.46% +5.23% +6.87% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $ 9,934 $9,554 $12,905 $19,427 - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 0.97% - --------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +5.01% +0.66% +31.80% -4.59% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.01% -3.34% +5.35% -0.65% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,101 $9,666 $12,980 $ 9,541 - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 1.72% - --------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +4.98% +0.63% +31.90% +90.50% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +3.98% -0.37% +5.69% +6.66% - --------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,398 $9,963 $13,190 $19,050 - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 1.71% - ---------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 7 Performance Summary (CONTINUED) ENDNOTES THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE) COULD RESULT IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENT. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICES OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. 8 | Semiannual Report Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 9 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07 - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,053.90 $5.17 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.90 $5.09 - -------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,050.10 $9.00 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.16 $8.85 - -------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,049.80 $8.99 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.16 $8.85 - --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 1.01%; B: 1.76%; and C: 1.76%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 10 | Semiannual Report Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Growth Fund's semiannual report for the period ended March 31, 2007. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A posted a +7.92% cumulative total return for the six months under review. The Fund outperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +7.38% for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 14. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2007, the U.S. economy advanced at a moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase in exports, the U.S. entered 2007 with a record current account deficit. Corporate profits and government spending generally remained robust, but manufacturing activity indicated a downturn. The struggling housing market grew more fragile with the abrupt unraveling of the subprime mortgage market. This exacerbated already weak housing prices and an inventory glut in most of the nation's residential real estate markets. Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%, though overall job growth slowed in the face of rising labor costs. 2 Jobs in vehicle manufacturing and housing-related industries experienced declines stemming from reduced consumer demand. Even though tight labor markets and the associated wage income growth supported consumer spending, consumer confidence waned in February and March, and large purchases, including those for vehicles and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to tight supply and 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: Bureau of Labor Statistics. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 62. Semiannual Report | 11 PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Electronic Technology* 23.2% Health Technology* 19.8% Producer Manufacturing 18.6% Technology Services* 9.2% Transportation 7.0% Consumer Services 4.7% Distribution Services 3.2% Consumer Non-Durables 2.7% Commercial Services 2.6% Process Industries 2.1% Other 5.9% Short-Term Investments & Other Net Assets 1.0% * Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. There are specific risks to investing in technology company stocks, which can be subject to abrupt or erratic price movements and have been volatile, especially over the short term. high demand, refinery maintenance issues, and ongoing geopolitical tensions in the Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months ended March 31, 2007, which was higher than the 2.2% 10-year average. 3 At period-end, the Federal Reserve Board (Fed) was still more concerned with relatively high inflation than an economic slowdown. Risks to growth have increased but not enough for the Fed to change its orientation to fighting inflation. The Fed kept the federal funds target interest rate steady at 5.25% during the period, while also indicating a change in its long-held tightening bias, easing the near-term pressure for potential rate hikes. U.S. investors entered 2007 cautious after more than four years of bull market gains. The overall domestic equity market rose during the six months under review, but was essentially flat during the first quarter of 2007 after global stock market sell-offs in late February and mid-March. Investors reacted swiftly to market and geopolitical events, especially in regard to China and the Middle East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials, utilities and telecommunication stocks performed particularly well. INVESTMENT STRATEGY We seek to invest in companies that have qualities such as strong management teams, financials and industry leadership. The Fund looks for opportunities in new and rapidly growing businesses and in businesses selling at depressed prices but offering favorable recovery possibilities. We analyze securities individually and buy stocks of large and small companies in our effort to maintain a solid and diversified portfolio. MANAGER'S DISCUSSION Franklin Growth Fund owned holdings in 96 companies at period-end. We continued to invest in a broad array of companies of all sizes and in varied industries. During the reporting period, the Fund's top performer was Air France-KLM. Largely due to recent airline industry reorganizations, we found it difficult to invest in the industry. Nonetheless, consistent with our strategy, we found value 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 12 | Semiannual Report in some stocks. At period-end, our six airline holdings, Air France-KLM, Alaska Air Group, AMR, British Airways, Continental Airlines and Southwest Airlines, together represented 5.8% of the Fund's total net assets. 5 Elsewhere, notable performers included Johnson Controls, Yahoo!, Apple and International Business Machines. The Fund had some detractors from performance in the past six months. Molex, a leading electronic components supplier that offers worldwide interconnect solutions, missed its earnings targets during the period and had issues with option pricings. A large portion of Molex shares is owned by one family who, in our analysis, sold stock for estate planning and diversification. We continue to like the company's leadership and think the share price was attractive near period-end. Other detractors included Amgen and Quest Diagnostics. Biotechnology bellwether Amgen's share price fell this reporting period due in part to investor concerns over Swiss rival Roche's new anemia drug, CERA. There was speculation that CERA, which has yet to be released, could pose a threat to future sales of Amgen's dominant products in the anemia treatment market, namely Epogen and Aranesp. Furthermore, Amgen received troubling news from clinical studies on its anemia drugs, prompting the Food and Drug Administration (FDA) to immediately place warnings on Epogen, Aranesp and the company's other anemia remedy, Procrit, which would likely impact the company's near-term results. Quest's stock fell in value after the company lost a large contract with United Health Care. Quest is a leader in health care testing, and although recovery from the contract loss could be slow, we remained confident in the company's prospects. Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ V. Jerry Palmieri V. Jerry Palmieri Portfolio Manager Franklin Growth Fund 5. The Fund's airline holdings are in the transportation industry in the SOI. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 HOLDINGS Franklin Growth Fund 3/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Apple Inc. 3.6% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- The Boeing Co. 3.4% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Genentech Inc. 3.2% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- General Dynamics Corp. 3.0% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- Northrop Grumman Corp. 2.9% ELECTRONIC TECHNOLOGY - -------------------------------------------------------------------------------- 3M Co. 2.4% PRODUCER MANUFACTURING - -------------------------------------------------------------------------------- Johnson & Johnson 2.3% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- International Business Machines Corp. 2.0% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Computer Sciences Corp. 2.0% TECHNOLOGY SERVICES - -------------------------------------------------------------------------------- Amgen Inc. 2.0% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- Semiannual Report | 13 Performance Summary as of 3/31/07 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKGRX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.99 $42.09 $39.10 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1064 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FKGBX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.82 $40.47 $37.65 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRGSX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.80 $40.12 $37.32 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FGSRX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$3.00 $41.80 $38.80 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.0072 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$2.95 $42.12 $39.17 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.2006 - -------------------------------------------------------------------------------- 14 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +7.92% +10.15% +33.12% +106.62% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.71% +3.81% +4.64% +6.89% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,171 $10,381 $12,546 $19,475 - ------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 0.91% - ------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +7.49% +9.29% +28.23% +38.69% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +3.49% +5.29% +4.77% +4.05% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,349 $10,529 $12,623 $13,869 - ------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 1.67% - ------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +7.53% +9.32% +28.25% +91.61% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +6.53% +8.32% +5.10% +6.72% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,653 $10,832 $12,825 $19,161 - ------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 1.66% - ------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +7.78% +9.84% +31.44% +32.73% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +7.78% +9.84% +5.62% +5.55% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,778 $10,984 $13,144 $13,273 - ------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 1.17% - ------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +8.05% +10.39% +34.75% +111.56% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.05% +10.39% +6.15% +7.78% - ------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,805 $11,039 $13,475 $21,156 - ------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 4 0.67% - -------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 15 Performance Summary (CONTINUED) ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. THE FUND'S PORTFOLIO INCLUDES INVESTMENTS IN TECHNOLOGY, WHICH HAS BEEN AMONG THE MARKET'S MOST VOLATILE SECTORS. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales charge; thus actual total returns may differ. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. 16 | Semiannual Report Your Fund's Expenses FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 17 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07 - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,079.20 $4.82 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.09 $4.68 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,074.90 $8.74 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.50 $8.50 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,075.30 $8.74 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,016.50 $8.50 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,077.80 $6.22 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.04 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $1,000 $1,080.50 $3.63 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.44 $3.53 - -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.93%; B: 1.69%; C: 1.69%; R: 1.20%; and Advisor: 0.70%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 18 | Semiannual Report Franklin Income Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation through a diversified portfolio of securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Income Fund's semiannual report for the period ended March 31, 2007. PERFORMANCE OVERVIEW Franklin Income Fund - Class A posted a +9.95% cumulative total return for the six months under review. The Fund outperformed the equity benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +7.38%; outperformed the fixed income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which returned +2.76%; and outperformed its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which returned +6.45%, for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 25. ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2007, the U.S. economy advanced at a moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand and a 1. Sources: Standard & Poor's Micropal; Lipper Inc. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. The Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the six-month period ended 3/31/07, there were 452 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these and other factors had been considered. Past performance does not guarantee future results. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 72. Semiannual Report | 19 healthy increase in exports, the U.S. entered 2007 with a record current account deficit. Corporate profits and government spending generally remained robust, but manufacturing activity indicated a downturn. The struggling housing market grew more fragile with the abrupt unraveling of the subprime mortgage market. This exacerbated already weak housing prices and an inventory glut in most of the nation's residential real estate markets. Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%, though overall job growth slowed in the face of rising labor costs. 2 Jobs in vehicle manufacturing and housing-related industries experienced declines stemming from reduced consumer demand. Even though tight labor markets and the associated wage income growth supported consumer spending, consumer confidence waned in February and March, and large purchases, including those for vehicles and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to tight supply and high demand, refinery maintenance issues, and ongoing geopolitical tensions in the Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months ended March 31, 2007, which was higher than the 2.2% 10-year average. 3 At period-end, the Federal Reserve Board (Fed) was still more concerned with relatively high inflation than an economic slowdown. Risks to growth have increased but not enough for the Fed to change its orientation to fighting inflation. The Fed kept the federal funds target interest rate steady at 5.25% during the period, while also indicating a change in its long-held tightening bias, easing the near-term pressure for potential rate hikes. U.S. investors entered 2007 cautious after more than four years of bull market gains. The overall domestic equity market rose during the six months under review, but was essentially flat during the first quarter of 2007 after global stock market sell-offs in late February and mid-March. Investors reacted swiftly to market and geopolitical events, especially in regard to China and the Middle East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, while the technology-heavy NASDAQ Composite Index returned +7.65%. 4 Materials, utilities and telecommunications stocks performed particularly well. 2. Source: Bureau of Labor Statistics. 3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 20 | Semiannual Report DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/06-3/31/07
- ----------------------------------------------------------------------------------------- DIVIDEND PER SHARE ------------------------------------------------------------------------------ MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----------------------------------------------------------------------------------------- October 1.20 cents 1.03 cents 1.09 cents 1.09 cents 1.13 cents 1.23 cents - ----------------------------------------------------------------------------------------- November 1.20 cents 1.03 cents 1.09 cents 1.09 cents 1.13 cents 1.23 cents - ----------------------------------------------------------------------------------------- December 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents - ----------------------------------------------------------------------------------------- January 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents - ----------------------------------------------------------------------------------------- February 1.20 cents 1.01 cents 1.09 cents 1.10 cents 1.12 cents 1.23 cents - ----------------------------------------------------------------------------------------- March 1.20 cents 1.01 cents 1.08 cents 1.08 cents 1.13 cents 1.23 cents - ----------------------------------------------------------------------------------------- TOTAL 7.20 CENTS 6.10 CENTS 6.53 CENTS 6.56 CENTS 6.75 CENTS 7.38 CENTS - -----------------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. INVESTMENT STRATEGY Based on our independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION During the six months under review, the Fund's results relative to the gains experienced in the overall U.S. equity market can be attributed to several factors. In general, the Fund benefited from a relatively balanced mix of equity (primarily dividend paying common stocks) and debt securities (primarily U.S. corporate bonds). The Fund's large weighting in the electric utilities sector was a significant driver of total return through attractive dividends and stock price appreciation. Leading contributors to Fund performance included TXU, FirstEnergy, Dominion Resources, FPL Group and Public Service Enterprise Group. Improved industry fundamentals, driven in part by increased power demand and an improved outlook for the industry's supply and demand balance, along Semiannual Report | 21 TOP 5 EQUITY HOLDINGS Franklin Income Fund 3/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- AT&T Inc. 2.4% COMMUNICATIONS - -------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 2.4% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Pfizer Inc. 2.2% HEALTH TECHNOLOGY - -------------------------------------------------------------------------------- TXU Corp. 1.8% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Washington Mutual Inc. 1.8% FINANCE - -------------------------------------------------------------------------------- TOP 5 BOND HOLDINGS* Franklin Income Fund 3/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- GMAC LLC 3.2% FINANCE - -------------------------------------------------------------------------------- Ford Motor Credit Co. 3.1% CONSUMER DURABLES - -------------------------------------------------------------------------------- Tenet Healthcare Corp. 2.3% HEALTH SERVICES - -------------------------------------------------------------------------------- Allied Waste North America Inc. 1.9% INDUSTRIAL SERVICES - -------------------------------------------------------------------------------- CCH LLC 1.3% CONSUMER SERVICES - -------------------------------------------------------------------------------- * Does not include convertible bonds. with investor optimism regarding prospects for meeting new utility infrastructure needs, created a positive backdrop for share price performance. Following its failed merger attempt with Exelon, Public Service Enterprise Group benefited from improved power market fundamentals in its core New Jersey area market and efficient management of the company's low-cost generating assets. According to our analysis, the company's improving balance sheet profile may enable increased future dividend growth. In regard to TXU, the company's shares climbed after a takeover bid from a leading group of private equity investors including KKR (Kohlberg Kravis Roberts & Co.) and TPG (Texas Pacific Group). Communications sector investments also benefited Fund performance, including our holdings of major telecommunications service companies AT&T, BellSouth and Verizon Communications. During the period, BellSouth merged with AT&T, sparking opportunities for merger-related synergies and contributing to an improved fundamental profile which was somewhat due to the recent wave of industry consolidation. AT&T, the newly combined company, is benefiting from strong fundamentals in wireless services and an improved outlook for its consumer broadband and enterprise data services. Within the Fund's fixed income sectors, we continued to favor investments in U.S. corporate bonds, driven by our view that corporate fundamentals remained strong during the six-month reporting period. During this time, the average corporate bond yield spread versus U.S. Treasury securities declined from 371 basis points (100 basis points equal one percentage point) to 316 basis points according to the Credit Suisse (CS) High Yield Index. 5 The 10-year U.S. Treasury yield ended the reporting period about where it began, at 4.65%, after trading in a range from 4.43% to 4.90%. 5. Source: Credit Suisse. The CS High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yield debt market. 22 | Semiannual Report Significant contributors included our corporate bond holdings in CCH LLC, a major cable services provider. CCH provides its customers with a wide range of products including telephony, digital cable and high-speed data services. While still dealing with a significant overall debt burden, CCH management's recent efforts have improved the company's earnings results, which we believe could position it favorably for future growth. They also improved the company's balance sheet profile, which we believe has the potential to provide the necessary liquidity for future CCH operations. The Fund held several bond investments in integrated power company Calpine. Although Calpine continued to pursue reorganization following its Chapter 11 bankruptcy filing at the end of 2005, Calpine bonds appreciated significantly during the period. The favorable overall backdrop for electric utilities and power demand benefited Calpine, as did the increased investor interest in and perceived value of the company's generating assets. Despite the Fund's solid performance, some holdings did not perform up to expectations. For example, the Fund's investments in the electronic technology sector negatively impacted performance. In particular, our Intel common stock shares declined amid increased competition and an uncertain 2007 outlook for technology spending and microprocessor demand. Our investment in Canadian Oil Sands Trust also declined in value, negatively impacting Fund performance. According to our analysis, the decline was due in part to investor concerns about future crude oil prices, as well as possible upcoming regulatory changes in Canada's taxation of royalty trusts. Within the financial sector, the Fund's shares of Wachovia rose slightly but underperformed the broader equity market. Investors remained concerned about the compression of net interest margins in a flat to inverted yield curve environment. They also grew concerned about credit quality deterioration during a phase of moderating U.S. economic growth. PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/07 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIALS.] Corporate Straight Bonds 40.3% Utilities Stocks 17.3% Health Technology Stocks 6.0% Energy Minerals Stocks 5.5% Finance Stocks 5.4% Communications Stocks 3.2% Mortgage-Backed Securities 2.9% Electronic Technology Stocks 2.1% Corporate Convertible Bonds 1.8% Non-Energy Minerals Stocks 1.7% Gas Distributors Stocks 1.5% Industrial Services Stocks 1.5% Producer Manufacturing Stocks 1.4% Commercial Banks Stocks 1.1% Other 1.8% Short-Term Investments & Other Net Assets 6.5% Semiannual Report | 23 Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ Edward Perks Edward Perks, CFA [PHOTO OMITTED] /s/ Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 24 | Semiannual Report Performance Summary as of 3/31/07 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------- CLASS A (SYMBOL: FKINX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.71 $ 2.57 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0720 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.1109 - ----------------------------------------------------------------------------------------------- CLASS B (SYMBOL: FBICX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.70 $ 2.56 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0610 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.0999 - ----------------------------------------------------------------------------------------------- CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.71 $ 2.57 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0653 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.1042 - ----------------------------------------------------------------------------------------------- CLASS C (SYMBOL: FCISX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.73 $ 2.59 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0656 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.1045 - -----------------------------------------------------------------------------------------------
Semiannual Report | 25 Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- ----------------------------------------------------------------------------------------------- CLASS R (SYMBOL: FISRX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.69 $ 2.55 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0675 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.1064 - ----------------------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/07 9/30/06 - ----------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.14 $ 2.70 $ 2.56 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - ----------------------------------------------------------------------------------------------- Dividend Income $ 0.0738 - ----------------------------------------------------------------------------------------------- Short-Term Capital Gain $ 0.0192 - ----------------------------------------------------------------------------------------------- Long-Term Capital Gain $ 0.0197 - ----------------------------------------------------------------------------------------------- TOTAL $ 0.1127 - -----------------------------------------------------------------------------------------------
PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.95% +17.75% +74.38% +158.30% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.44% +12.73% +10.79% +9.49% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,544 $11,273 $16,690 $ 24,762 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.09% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.76% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 0.64% - -------------------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01) - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.53% +16.84% +67.52% +78.77% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.53% +12.84% +10.60% +11.22% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,553 $11,284 $16,552 $ 17,777 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 4.49% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.10% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.49% - -------------------------------------------------------------------------------------------------------------- CLASS B1 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.67% +17.15% +70.02% +110.88% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +5.67% +13.15% +10.94% +9.47% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,567 $11,315 $16,802 $ 21,088 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 4.78% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.46% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.14% - --------------------------------------------------------------------------------------------------------------
26 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE (CONTINUED)
- -------------------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.62% +17.53% +70.31% +145.70% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +8.62% +16.53% +11.24% +9.41% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,862 $11,653 $17,031 $ 24,570 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 4.75% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.45% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.14% - -------------------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +9.86% +17.51% +71.41% +78.10% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +9.86% +17.51% +11.38% +11.64% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $10,986 $11,751 $17,141 $ 24,764 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.04% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 4.60% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 0.99% - -------------------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +10.08% +18.01% +76.10% +161.95% - -------------------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +10.08% +18.01% +11.98% +10.11% - -------------------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,008 $11,801 $17,610 $ 26,195 - -------------------------------------------------------------------------------------------------------------- Distribution Rate 4 5.47% - -------------------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 5.13% - -------------------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 0.49% - --------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 27 Performance Summary (CONTINUED) ENDNOTES THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER-YIELDING, LOWER-RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER. THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT GRADE SECURITIES. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES, AND THUS THE FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 3/31/07. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/07. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. 28 | Semiannual Report Your Fund's Expenses FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 29 YOUR FUND'S EXPENSES (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07 - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,099.50 $ 3.35 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,021.74 $ 3.23 - ------------------------------------------------------------------------------------------------------- CLASS B - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,095.30 $ 7.78 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,017.50 $ 7.49 - ------------------------------------------------------------------------------------------------------- CLASS B1 - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,096.70 $ 5.96 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74 - ------------------------------------------------------------------------------------------------------- CLASS C - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,096.20 $ 6.01 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,019.20 $ 5.79 - ------------------------------------------------------------------------------------------------------- CLASS R - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,098.60 $ 5.18 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,020.00 $ 4.99 - ------------------------------------------------------------------------------------------------------- ADVISOR CLASS - ------------------------------------------------------------------------------------------------------- Actual $ 1,000 $ 1,100.80 $ 2.57 - ------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $ 1,000 $ 1,022.49 $ 2.47 - -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.64%; B: 1.49%; B1: 1.14%; C: 1.15%; R: 0.99%; and Advisor: 0.49%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 30 | Semiannual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks high, current income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). - -------------------------------------------------------------------------------- Since 1983, the Fund has invested predominantly in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal. 1 Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/07 [THE FOLLOWING TABLE WAS REPRENSENTED BY A PIE CHART IN THE PRINTED MATERIAL.] GNMA ................................................................... 96.6% Short-Term Investments & Other Net Assets .............................. 3.4% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin U.S. Government Securities Fund's semiannual report for the period ended March 31, 2007. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +2.63% cumulative total return for the six months under review. The Fund outperformed the Lehman Brothers (LB) U.S. Government: Intermediate Index, which returned +2.43%. 2 In comparison, the Lipper GNMA Funds Classification Average 1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. 2. Source: Standard & Poor's Micropal. The LB U.S. Government: Intermediate Index includes fixed-rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in that order. All issues have at least one year to maturity and an outstanding par value of at least $100 million for U.S. government issues. All returns are market value weighted inclusive of accrued interest. The index includes issues of the U.S. government or any agency thereof. It includes only issues with a remaining term to maturity of less than 10 years. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The total return index is rebalanced monthly by market capitalization. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 88. Semiannual Report | 31 FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A VS. COMPARABLE INVESTMENTS* Risk vs. Return (4/02-3/07) [THE FOLLOWING TABLE WAS REPRESENTED BY A CHART IN THE PRINTED MATERIAL.] FOR THE 5-YEAR PERIOD ENDED 3/31/07 RISK RETURN ----- ------ FRANKLIN U.S. GOVERNMENT SECURITIES FUND - CLASS A 2.46% 4.21% PAYDEN & RYGEL 1-YEAR U.S. TREASURY BILL 0.63% 2.47% PAYDEN & RYGEL 10-YEAR U.S. TREASURY NOTE 7.65% 5.58% PAYDEN & RYGEL 30-YEAR U.S. TREASURY BOND 12.39% 8.36% ----- ------ THE CHART DOES NOT INCLUDE THE FUND'S CURRENT, MAXIMUM 4.25% INITIAL SALES CHARGE. IF SALES CHARGES WERE INCLUDED, THE RETURNS WOULD HAVE BEEN LOWER. * Source: Standard & Poor's Micropal (Payden & Rygel). Indexes are unmanaged. Investors cannot invest directly in an index. Average annual total return represents the average annual change in value of an investment over the period indicated. These figures assume reinvestment of distributions and do not include sales charges. Risk is measured by the annualized standard deviation of monthly total returns. In general, the higher the standard deviation, the greater the volatility. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. The Fund's investment return and share price will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. The figures do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Past performance does not guarantee future results. returned +2.57% for the same period. 3 The Fund's return reflects the effect of management fees and expenses, while the LB U.S. Government: Intermediate Index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 36. ECONOMIC AND MARKET OVERVIEW U.S. economic growth slowed somewhat over the six months ended March 31, 2007. Overall, several factors contributed to real growth. An improved labor 3. Source: Lipper Inc. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA securities. For the six-month period ended 3/31/07, there were 61 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. Past performance does not guarantee future results. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 32 | Semiannual Report market and higher personal incomes helped support consumer spending. Although a slowing housing market and moderating profit growth dampened economic expansion, consumer spending for services and durable goods, and state and local government spending, contributed to growth in the first quarter of 2007. Oil prices were volatile and ended the period higher than where they started. Headline, or overall, inflation and core inflation, which excludes food and energy costs, experienced some upward pressure. March's headline Consumer Price Index (CPI) reported a 12-month rise of 2.8%, while core CPI increased 2.5%. 4 In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term rates at 5.25%. However, the Fed changed its stance in its March 21 statement that communicates policy and appeared to drop its long-held tightening bias. The Fed indicated that core inflation was somewhat elevated and remained a key concern. Nevertheless, the markets continued to anticipate the Fed would lower the federal funds target rate, although the exact timing was still uncertain. The 10-year Treasury note yield edged up from 4.64% at the beginning of the period to 4.65% on March 31, 2007. Typically, the intermediate portion of the yield curve generally reflects market expectations of the future direction of inflation. A relatively moderate inflation environment contributed to little overall change for the 10-year Treasury. INVESTMENT STRATEGY We seek to invest predominantly in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments may include short-term government securities and cash or cash equivalents. 4. Source: Bureau of Labor Statistics. YIELD COMPARISON 3/31/07 [THE FOLLOWING TABLE WAS REPRENSENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Franklin U.S Government Securities Fund - Class A* 4.57% 10-Year Treasury Note* 4.65% Lipper GNMA Funds Average* 4.53% Lipper Money Market Funds Average* 4.58% * Sources: Federal Reserve H15 Report; Lipper Inc. Franklin U.S. Government Securities Fund - Class A shares' yield, calculated as required by the SEC, is based on earnings of the Fund's portfolio for the 30 days ended 3/31/07. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; interest payments and principal are guaranteed. Money funds attempt to maintain a stable net asset value of $1.00 per share, while shares of Franklin U.S. Government Securities Fund will fluctuate with market conditions. The Lipper GNMA Funds Classification Average is an average of the monthly SEC yields of 61 funds in the Lipper GNMA Funds classification for the 30 days ended 3/31/07. The Lipper Money Market Funds Classification Average is an average of the monthly SEC yields of 351 funds in the Lipper Money Market Funds classification for the 30 days ended 3/31/07. Lipper averages do not include sales charges or expense subsidization by a fund's manager. Semiannual Report | 33 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/06-3/31/07 - -------------------------------------------------------------------------------- DIVIDEND PER SHARE -------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------------------------------------------------------------------------------- October 2.73 cents 2.47 cents 2.47 cents 2.54 cents 2.81 cents - -------------------------------------------------------------------------------- November 2.73 cents 2.47 cents 2.47 cents 2.54 cents 2.81 cents - -------------------------------------------------------------------------------- December** 3.08 cents 2.81 cents 2.81 cents 2.89 cents 3.14 cents - -------------------------------------------------------------------------------- January 2.73 cents 2.46 cents 2.46 cents 2.54 cents 2.79 cents - -------------------------------------------------------------------------------- February 2.73 cents 2.46 cents 2.46 cents 2.54 cents 2.79 cents - -------------------------------------------------------------------------------- March 2.73 cents 2.43 cents 2.43 cents 2.51 cents 2.77 cents ================================================================================ TOTAL 16.73 CENTS 15.10 CENTS 15.10 CENTS 15.56 CENTS 17.11 CENTS - -------------------------------------------------------------------------------- * All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** Includes an additional 0.35 cent per share distribution to meet excise tax requirements. MANAGER'S DISCUSSION Our research shows that over the past 5-, 10- and 15-year time periods, GNMAs have offered attractive risk-adjusted returns when compared with a variety of asset classes including U.S. Treasuries, agency debentures, investment grade and high yield corporate bonds, and large- and small-capitalization stocks. These time periods include various credit, prepayment, economic and interest rate cycles. Because we believe that income should continue to comprise the greatest portion of total returns in the Ginnie Mae markets, we favored 30-year collateral bonds over their 15-year counterparts during the reporting period. Historically, based on our research process, we have strategically allocated our resources in both GNMA I and GNMA II sectors. During this reporting period, we favored higher coupon securities in the GNMA I sector as yield spreads between GNMA I and GNMA II securities neared historically tight levels. A major focus of the GNMA markets is prepayment risk. Rather than avoid this risk, we followed our strategy and actively analyzed the marketplace seeking to determine where prepayment risk may have offered value. We also applied our research models in an effort to identify attractive opportunities in specified mortgage-backed securities (MBS) pools. 34 | Semiannual Report Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/ Jack Lemein Jack Lemein [PHOTO OMITTED] /s/ Roger A. Bayston Roger A. Bayston, CFA Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 35 Performance Summary as of 3/31/07 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUSX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.00 $6.43 $6.43 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1673 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FUGBX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.00 $6.42 $6.42 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1510 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUGX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.00 $6.40 $6.40 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1510 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FUSRX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.00 $6.43 $6.43 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1556 - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.00 $6.45 $6.45 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1711 - -------------------------------------------------------------------------------- 36 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.63% +5.38% +22.88% +72.30% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.80% +0.97% +3.31% +5.13% - --------------------------------------------------------------------------------------------------- Distribution Rate 3 4.88% - --------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.57% - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 0.74% - --------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.38% +4.85% +19.75% +42.43% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 -1.62% +0.85% +3.34% +4.38% - --------------------------------------------------------------------------------------------------- Distribution Rate 3 4.54% - --------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.26% - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 1.26% - --------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.38% +4.87% +19.81% +63.42% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +1.38% +3.87% +3.68% +5.03% - --------------------------------------------------------------------------------------------------- Distribution Rate 3 4.56% - --------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.24% - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 1.25% - --------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.45% +4.99% +20.64% +21.83% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.45% +4.99% +3.82% +3.84% - --------------------------------------------------------------------------------------------------- Distribution Rate 3 4.68% - --------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.42% - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 1.11% - --------------------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +2.69% +5.66% +23.78% +74.69% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +2.69% +5.66% +4.36% +5.74% - --------------------------------------------------------------------------------------------------- Distribution Rate 3 5.15% - --------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 4 4.94% - --------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 5 0.61% - ---------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. Semiannual Report | 37 Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/07. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/07. 5. Figures are as stated in the Fund's prospectus current as of the date of this report. 38 | Semiannual Report Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 39 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07 - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,026.30 $3.69 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.29 $3.68 - -------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,023.80 $6.36 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34 - -------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,023.80 $6.36 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34 - -------------------------------------------------------------------------------------------------------- CLASS R - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,024.50 $5.60 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.59 - -------------------------------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,026.90 $3.08 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.89 $3.07 - --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.73%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 40 | Semiannual Report Franklin Utilities Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. - -------------------------------------------------------------------------------- PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/07 [THE FOLLOWING TABLE WAS REPRENSENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Electric Utilities 85.4% Gas Distributors 7.8% Diversified Telecommunications Services 3.4% Oil, Gas & Consumable Fuels 1.8% Short-Term Investments & Other Net Assets 1.6% - -------------------------------------------------------------------------------- We are pleased to bring you Franklin Utilities Fund's semiannual report for the period ended March 31, 2007. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A posted a +19.01% cumulative total return. The Fund outperformed its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which returned +7.38% for the same period. 1 The Fund performed comparably with its narrow benchmark, the S&P 500 Utilities Index, which returned +19.29%. 2 You can find the Fund's long-term performance data in the Performance Summary beginning on page 45. 1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks for U.S. equity performance. 2. Source: Standard & Poor's Micropal. The S&P 500 Utilities Index is a market capitalization-weighted index that includes electric utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 95. Semiannual Report | 41 ECONOMIC AND MARKET OVERVIEW During the six months ended March 31, 2007, the U.S. economy advanced at a moderate pace. Gross domestic product (GDP) grew an annualized 2.5% in the fourth quarter of 2006 and an estimated annualized 1.3% in 2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand and a healthy increase in exports, the U.S. entered 2007 with a record current account deficit. Corporate profits and government spending generally remained robust, but manufacturing activity indicated a downturn. The struggling housing market grew more fragile with the abrupt unraveling of the subprime mortgage market. This exacerbated already weak housing prices and an inventory glut in most of the nation's residential real estate markets. Labor markets were upbeat and the unemployment rate decreased from 4.6% to 4.4%, though overall job growth slowed in the face of rising labor costs. 3 Jobs in vehicle manufacturing and housing-related industries experienced declines stemming from reduced consumer demand. Even though tight labor markets and the associated wage income growth supported consumer spending, consumer confidence waned in February and March, and large purchases, including those for vehicles and homes, dropped substantially. Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to tight supply and high demand, refinery maintenance issues, and ongoing geopolitical tensions in the Middle East and Africa. Overall, the core Consumer Price Index (CPI) rose 2.5% for the 12 months ended March 31, 2007, which was higher than the 2.2% 10-year average. 4 At period-end, the Federal Reserve Board (Fed) was still more concerned with relatively high inflation than an economic slowdown. Risks to growth have increased but not enough for the Fed to change its orientation to fighting inflation. The Fed kept the federal funds target interest rate steady at 5.25% during the period, while also indicating a change in its long-held tightening bias, easing the near-term pressure for potential rate hikes. U.S. investors entered 2007 cautious after more than four years of bull market gains. The overall domestic equity market rose during the six months under review, but was essentially flat during the first quarter of 2007 after global stock market sell-offs in late February and mid-March. Investors reacted swiftly to market and geopolitical events, especially in regard to China and the Middle East. Overall, the blue chip stocks of the Dow Jones Industrial Average posted a six-month total return of +7.04%, and the broader S&P 500 returned +7.38%, 3. Source: Bureau of Labor Statistics. 4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs. 42 | Semiannual Report while the technology-heavy NASDAQ Composite Index returned +7.65%. 5 Materials, utilities and telecommunications stocks performed particularly well. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION The utilities sector experienced increased investor interest during the six months under review, due largely to strong energy supply and demand characteristics, as well as many companies' efforts to strengthen their balance sheets and refocus on their core, regulated businesses by exiting non-core businesses. Investments in networks and other infrastructure projects drove operating performance for many utilities companies. For a sector previously viewed as mature, many utilities companies have a backlog of investment opportunities that have the potential to last several years, which we find encouraging. Spending for new power plants, delivery infrastructure development and environmental compliance has increased in recent years. Regarding environmental compliance, potential changes in carbon emissions regulations may further raise utilities' spending needs in the future, in our analysis. Improved utility companies' fundamentals were evident in the industry's dividend trends, as more electric utilities have declared dividend increases over the past three years. Fund holdings Exelon, FPL Group and PG&E reflected the trend by declaring significant dividend increases during the reporting period. These companies' stocks experienced double-digit share price increases during the period. Some utilities companies' proposed mergers fell apart during the second half of 2006 -- namely, Exelon with Public Service Enterprise Group and FPL with Constellation Energy. Nonetheless, their stocks posted some of the strongest returns in the industry. These strong results are not necessarily reflective of failed mergers. To the contrary, they partly reflect why the companies were attractive to others in the industry. Both Constellation and Public Service Enterprise Group benefit by selling electricity from low-cost sources at market-based prices. Other U.S. companies, including Fund holdings Entergy, 5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. See footnote 1 for a description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. Semiannual Report | 43 TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/07 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - -------------------------------------------------------------------------------- Entergy Corp. 6.3% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Exelon Corp. 5.1% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Dominion Resources Inc. 4.8% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- FirstEnergy Corp. 4.3% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- FPL Group Inc. 3.8% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Edison International 3.7% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Public Service Enterprise Group Inc. 3.7% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- PPL Corp. 3.3% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- PG&E Corp. 3.1% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- The Southern Co. 3.1% ELECTRIC UTILITIES - -------------------------------------------------------------------------------- Pepco Holdings and PPL, operate in the same U.S. regions, and have also benefited from tightening supply and demand characteristics. These holdings benefited the Fund's overall returns during the reporting period. Despite the Fund's solid results this reporting period, some of our investments did not perform up to expectations. Against the backdrop of a strong utility equity market, by comparison our fixed-income securities holdings lagged substantially. Our largest bond holding at period-end was in TXU, and unfortunately this was our worst-performing security during the period. In February 2007, TXU announced it had agreed to a transaction that would result in its being taken private by leveraged buyout (LBO) group KKR (Kohlberg Kravis Roberts & Co.). While this announcement resulted in strong appreciation for our TXU equity holding, the bonds declined in value due to expected higher levels of corporate debt under the LBO structure. Despite recent setbacks in the company's bond component, we held TXU bonds at period-end due largely to their solid yields and our view that the company was still capturing strong cash flows and a dominant market share. Among the Fund's equity holdings, electric utility Ameren's share price fell during the six months under review and negatively impacted the Fund's results. Ameren has struggled as Illinois attempts to deregulate its electricity market, and several of the state's politicians have threatened to halt electric rate increases resulting from the transition. We are accustomed to regulatory challenges faced by utilities, and we plan to monitor ongoing developments. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OMITTED] /s/ John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 44 | Semiannual Report Performance Summary as of 3/31/07 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION - -------------------------------------------------------------------------------- CLASS A (SYMBOL: FKUTX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.73 $14.62 $12.89 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.2273 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0657 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.3730 - -------------------------------------------------------------------------------- TOTAL $0.6660 - -------------------------------------------------------------------------------- CLASS B (SYMBOL: FRUBX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.72 $14.60 $12.88 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1930 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0657 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.3730 - -------------------------------------------------------------------------------- TOTAL $0.6317 - -------------------------------------------------------------------------------- CLASS C (SYMBOL: FRUSX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.72 $14.57 $12.85 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.1939 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0657 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.3730 - -------------------------------------------------------------------------------- TOTAL $0.6326 - -------------------------------------------------------------------------------- CLASS R (SYMBOL: FRURX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.72 $14.58 $12.86 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.2064 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0657 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.3730 - -------------------------------------------------------------------------------- TOTAL $0.6451 - -------------------------------------------------------------------------------- Semiannual Report | 45 Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) - -------------------------------------------------------------------------------- ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/07 9/30/06 - -------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.73 $14.68 $12.95 - -------------------------------------------------------------------------------- DISTRIBUTIONS (10/1/06-3/31/07) - -------------------------------------------------------------------------------- Dividend Income $0.2413 - -------------------------------------------------------------------------------- Short-Term Capital Gain $0.0657 - -------------------------------------------------------------------------------- Long-Term Capital Gain $0.3730 - -------------------------------------------------------------------------------- TOTAL $0.6800 - -------------------------------------------------------------------------------- PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------- CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +19.01% +32.22% +86.88% +193.46% - -------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +13.97% +26.63% +12.35% +10.88% - -------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,397 $12,663 $17,901 $ 28,086 - -------------------------------------------------------------------------------------------------- Distribution Rate 4 2.65% - -------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.52% - -------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 0.76% - -------------------------------------------------------------------------------------------------- CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99) - -------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +18.65% +31.51% +82.31% +106.87% - -------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +14.65% +27.51% +12.51% +9.22% - -------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,465 $12,751 $18,031 $ 20,687 - -------------------------------------------------------------------------------------------------- Distribution Rate 4 2.29% - -------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.12% - -------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.26% - -------------------------------------------------------------------------------------------------- CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +18.71% +31.49% +82.23% +179.27% - -------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +17.71% +30.49% +12.75% +10.82% - -------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,771 $13,049 $18,223 $ 27,927 - -------------------------------------------------------------------------------------------------- Distribution Rate 4 2.32% - -------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.12% - -------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.25% - -------------------------------------------------------------------------------------------------- CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - -------------------------------------------------------------------------------------------------- Cumulative Total Return 1 +18.80% +31.68% +83.85% +89.43% - -------------------------------------------------------------------------------------------------- Average Annual Total Return 2 +18.80% +31.68% +12.95% +12.96% - -------------------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,880 $13,168 $18,385 $ 18,943 - -------------------------------------------------------------------------------------------------- Distribution Rate 4 2.46% - -------------------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.26% - -------------------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 1.11% - --------------------------------------------------------------------------------------------------
46 | Semiannual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED) - ------------------------------------------------------------------------------------- ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------- Cumulative Total Return 1 +19.04% +32.36% +88.29% +198.41% - ------------------------------------------------------------------------------------- Average Annual Total Return 2 +19.04% +32.36% +13.49% +11.55% - ------------------------------------------------------------------------------------- Value of $10,000 Investment 3 $11,904 $13,236 $18,829 $29,841 - ------------------------------------------------------------------------------------- Distribution Rate 4 2.88% - ------------------------------------------------------------------------------------- 30-Day Standardized Yield 5 2.77% - ------------------------------------------------------------------------------------- Total Annual Operating Expenses 6 0.61% - -------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236. ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES, AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's most recent quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/07. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/07. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. Semiannual Report | 47 Your Fund's Expenses FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: o Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and o Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 48 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR REDEMPTION FEES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING CLASS A VALUE 10/1/06 VALUE 3/31/07 PERIOD* 10/1/06-3/31/07 - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,190.10 $4.10 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.19 $3.78 - -------------------------------------------------------------------------------------------------------- CLASS B - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,186.50 $6.87 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34 - -------------------------------------------------------------------------------------------------------- CLASS C - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,187.10 $6.87 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.34 - -------------------------------------------------------------------------------------------------------- CLASS R - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,188.00 $6.06 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,019.40 $5.59 - -------------------------------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------------------------------- Actual $1,000 $1,190.40 $3.33 - -------------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.89 $3.07 - --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.75%; B: 1.26%; C: 1.26%; R: 1.11%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 49 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37 $ 18.76 ------------------------------------------------------------------------------------ Income from investment operations a: Net investment income (loss) b ........ (0.05) (0.05) (0.01) (0.09) (0.06) 0.03 Net realized and unrealized gains (losses) ............................ 1.44 0.87 2.98 1.93 4.86 (3.11) ------------------------------------------------------------------------------------ Total from investment operations ......... 1.39 0.82 2.97 1.84 4.80 (3.08) ------------------------------------------------------------------------------------ Less distributions from: Net investment income ................. -- -- -- -- -- (0.29) Tax return of capital ................. -- -- -- -- -- (0.02) ------------------------------------------------------------------------------------ Total distributions ...................... -- -- -- -- -- (0.31) ------------------------------------------------------------------------------------ Redemption fees .......................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------ Net asset value, end of period ........... $ 27.19 $ 25.80 $ 24.98 $ 22.01 $ 20.17 $ 15.37 ==================================================================================== Total return c ........................... 5.39% 3.28% 13.49% 9.12% 31.23% (16.83)% RATIOS TO AVERAGE NET ASSETS Expenses ................................. 1.01% e,f 0.97% f 1.00% f 0.97% f 1.04% 1.00% Net investment income (loss) ............. (0.38)% e (0.20)% (0.02)% (0.41)% (0.40)% 0.13% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $ 516,155 $ 590,633 $ 628,732 $ 640,120 $ 558,687 $ 413,309 Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 50 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20 $ 18.57 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ........ (0.14) (0.23) (0.18) (0.25) (0.25) (0.12) Net realized and unrealized gains (losses) ............................ 1.38 0.83 2.90 1.89 4.84 (3.08) ----------------------------------------------------------------------------------- Total from investment operations ......... 1.24 0.60 2.72 1.64 4.59 (3.20) ----------------------------------------------------------------------------------- Less distributions from: Net investment income ................. -- -- -- -- -- (0.16) Tax return of capital ................. -- -- -- -- -- (0.01) ----------------------------------------------------------------------------------- Total distributions ...................... -- -- -- -- -- (0.17) ----------------------------------------------------------------------------------- Redemption fees .......................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ........... $ 25.99 $ 24.75 $ 24.15 $ 21.43 $ 19.79 $ 15.20 =================================================================================== Total return c ........................... 5.01% 2.48% 12.69% 8.29% 30.20% (17.51)% RATIOS TO AVERAGE NET ASSETS Expenses ................................. 1.76% e,f 1.72% f 1.74% f 1.72% f 1.79% 1.75% Net investment income (loss) ............. (1.13)% e (0.95)% (0.76)% (1.16)% (1.15)% (0.62)% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $ 15,725 $ 18,718 $ 19,497 $ 18,824 $ 10,406 $ 5,066 Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
--------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 --------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..... $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04 $ 18.34 --------------------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ........ (0.14) (0.23) (0.17) (0.25) (0.25) (0.11) Net realized and unrealized gains (losses) ............................ 1.36 0.83 2.86 1.87 4.80 (3.05) --------------------------------------------------------------------------------- Total from investment operations ......... 1.22 0.60 2.69 1.62 4.55 (3.16) --------------------------------------------------------------------------------- Less distributions from: Net investment income ................. -- -- -- -- -- (0.13) Tax return of capital ................. -- -- -- -- -- (0.01) --------------------------------------------------------------------------------- Total distributions ...................... -- -- -- -- -- (0.14) --------------------------------------------------------------------------------- Redemption fees .......................... -- d -- d -- d -- d -- -- --------------------------------------------------------------------------------- Net asset value, end of period ........... $ 25.72 $ 24.50 $ 23.90 $ 21.21 $ 19.59 $ 15.04 ================================================================================= Total return c ........................... 4.98% 2.51% 12.68% 8.27% 30.25% (17.48)% RATIOS TO AVERAGE NET ASSETS Expenses ................................. 1.76% e,f 1.71% f 1.74% f 1.72% f 1.79% 1.74% Net investment income (loss) ............. (1.13)% e (0.94)% (0.76)% (1.16)% (1.15)% (0.61)% SUPPLEMENTAL DATA Net assets, end of period (000's) ........ $ 63,754 $ 69,069 $ 73,587 $ 75,642 $ 66,952 $ 51,809 Portfolio turnover rate .................. 6.19% 18.61% 17.26% 14.93% 13.68% 8.11%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 52 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS 99.3% AIR FREIGHT/COURIERS 1.6% C.H. Robinson Worldwide Inc. ................................................. United States 200,000 $ 9,550,000 -------------- BIOTECHNOLOGY 8.7% a Amgen Inc. ................................................................... United States 175,000 9,779,000 a Celgene Corp. ................................................................ United States 150,000 7,869,000 a Genentech Inc. ............................................................... United States 275,000 22,583,000 a Gilead Sciences Inc. ......................................................... United States 150,000 11,475,000 -------------- 51,706,000 -------------- CABLE/SATELLITE TELEVISION 1.3% a Comcast Corp., A ............................................................. United States 300,000 7,641,000 -------------- CASINOS/GAMING 1.2% International Game Technology ................................................ United States 175,000 7,066,500 -------------- CHEMICALS: SPECIALTY 1.7% Sigma-Aldrich Corp. .......................................................... United States 250,000 10,380,000 -------------- COMPUTER COMMUNICATIONS 2.1% a Cisco Systems Inc. ........................................................... United States 450,000 11,488,500 a Juniper Networks Inc. ........................................................ United States 50,000 984,000 -------------- 12,472,500 -------------- COMPUTER PROCESSING HARDWARE 5.8% a Apple Inc. ................................................................... United States 220,000 20,440,200 a Aruba Networks Inc. .......................................................... United States 42,800 627,876 Hewlett-Packard Co. .......................................................... United States 340,000 13,647,600 -------------- 34,715,676 -------------- DATA PROCESSING SERVICES 1.3% Paychex Inc. ................................................................. United States 200,000 7,574,000 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES 0.7% AT&T Inc. .................................................................... United States 100,000 3,943,000 -------------- ELECTRICAL PRODUCTS 0.6% a SunPower Corp., A ............................................................ United States 80,000 3,640,000 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS 1.6% a Agilent Technologies Inc. .................................................... United States 175,000 5,895,750 a Dolby Laboratories Inc., A ................................................... United States 100,000 3,451,000 -------------- 9,346,750 -------------- ELECTRONIC PRODUCTION EQUIPMENT 4.9% Applied Materials Inc. ....................................................... United States 175,000 3,206,000 KLA-Tencor Corp. ............................................................. United States 200,000 10,664,000 a Lam Research Corp. ........................................................... United States 150,000 7,101,000 a Varian Semiconductor Equipment Associates Inc. ............................... United States 150,000 8,007,000 -------------- 28,978,000 -------------- ELECTRONICS/APPLIANCE STORES 1.1% Best Buy Co. Inc. ............................................................ United States 140,000 6,820,800 --------------
Semiannual Report | 53 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) ELECTRONICS/APPLIANCES 0.6% Sony Corp., ADR .............................................................. Japan 70,000 $ 3,534,300 -------------- FINANCIAL PUBLISHING/SERVICES 1.6% Moody's Corp. ................................................................ United States 150,000 9,309,000 -------------- INFORMATION TECHNOLOGY SERVICES 4.1% a Amdocs Ltd. .................................................................. United States 150,000 5,472,000 a Cognizant Technology Solutions Corp., A ...................................... United States 120,000 10,592,400 Infosys Technologies Ltd., ADR ............................................... India 170,000 8,542,500 -------------- 24,606,900 -------------- INTERNET SOFTWARE/SERVICES 6.2% a Akamai Technologies Inc. ..................................................... United States 100,000 4,992,000 a Google Inc., A ............................................................... United States 50,000 22,908,000 a Internap Network Services Corp. .............................................. United States 20,000 315,000 a Switch and Data Facilities Company Inc. ...................................... United States 36,100 654,132 a Yahoo! Inc. .................................................................. United States 250,000 7,822,500 -------------- 36,691,632 -------------- INVESTMENT BANKS/BROKERS 1.7% The Goldman Sachs Group Inc. ................................................. United States 50,000 10,331,500 -------------- MAJOR PHARMACEUTICALS 2.3% Johnson & Johnson ............................................................ United States 150,000 9,039,000 Pfizer Inc. .................................................................. United States 175,000 4,420,500 -------------- 13,459,500 -------------- MEDICAL SPECIALTIES 10.9% Alcon Inc. ................................................................... Switzerland 100,000 13,182,000 Medtronic Inc. ............................................................... United States 250,000 12,265,000 Stryker Corp. ................................................................ United States 200,000 13,264,000 a Varian Medical Systems Inc. .................................................. United States 125,000 5,961,250 a Waters Corp. ................................................................. United States 200,000 11,600,000 a Zimmer Holdings Inc. ......................................................... United States 100,000 8,541,000 -------------- 64,813,250 -------------- MEDICAL/NURSING SERVICES 2.0% a VCA Antech Inc. .............................................................. United States 325,000 11,800,750 -------------- OILFIELD SERVICES/EQUIPMENT 2.9% a FMC Technologies Inc. ........................................................ United States 90,000 6,278,400 Schlumberger Ltd. ............................................................ United States 160,000 11,056,000 -------------- 17,334,400 -------------- OTHER PHARMACEUTICALS 3.1% Allergan Inc. ................................................................ United States 80,000 8,865,600 Teva Pharmaceutical Industries Ltd., ADR ..................................... Israel 250,000 9,357,500 -------------- 18,223,100 --------------
54 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) PACKAGED SOFTWARE 8.9% Adobe Systems Inc. ........................................................... United States 425,000 $ 17,722,500 Autodesk Inc. ................................................................ United States 200,000 7,520,000 Microsoft Corp. .............................................................. United States 800,000 22,296,000 a Salesforce.com Inc. .......................................................... United States 30,000 1,284,600 SAP AG, ADR .................................................................. Germany 100,000 4,465,000 -------------- 53,288,100 -------------- RECREATIONAL PRODUCTS 2.1% a Electronic Arts Inc. ......................................................... United States 250,000 12,590,000 -------------- SEMICONDUCTORS 8.0% a ANADIGICS Inc. ............................................................... United States 175,000 2,068,500 Analog Devices Inc. .......................................................... United States 75,000 2,586,750 a Hittite Microwave Corp. ...................................................... United States 20,000 803,400 Intel Corp. .................................................................. United States 1,150,000 21,999,500 Linear Technology Corp. ...................................................... United States 125,000 3,948,750 a Marvell Technology Group Ltd. ................................................ Bermuda 175,000 2,941,750 Microchip Technology Inc. .................................................... United States 210,000 7,461,300 a NVIDIA Corp. ................................................................. United States 200,000 5,756,000 -------------- 47,565,950 -------------- SERVICES TO THE HEALTH INDUSTRY 3.0% a Cerner Corp. ................................................................. United States 30,000 1,633,500 Pharmaceutical Product Development Inc. ...................................... United States 350,000 11,791,500 a WebMD Health Corp., A ........................................................ United States 85,000 4,473,550 -------------- 17,898,550 -------------- SPECIALTY TELECOMMUNICATIONS 1.3% a American Tower Corp., A ...................................................... United States 200,000 7,790,000 -------------- TELECOMMUNICATIONS EQUIPMENT 4.2% Garmin Ltd. .................................................................. Cayman Islands 100,000 5,415,000 Motorola Inc. ................................................................ United States 375,000 6,626,250 Nokia Corp., ADR ............................................................. Finland 150,000 3,438,000 a OpNext Inc. .................................................................. United States 80,000 1,183,200 QUALCOMM Inc. ................................................................ United States 200,000 8,532,000 -------------- 25,194,450 -------------- WIRELESS COMMUNICATIONS 3.8% America Movil SAB de CV, L, ADR .............................................. Mexico 200,000 9,558,000 China Mobile (Hong Kong) Ltd., ADR ........................................... China 100,000 4,485,000 a NII Holdings Inc. ............................................................ United States 120,000 8,901,600 -------------- 22,944,600 -------------- TOTAL COMMON STOCKS (COST $305,321,731) ....................................... 591,210,208 --------------
Semiannual Report | 55 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENT (COST $2,054,290) 0.3% MONEY MARKET FUND 0.3% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ......... United States 2,054,290 $ 2,054,290 -------------- TOTAL INVESTMENTS (COST $307,376,021) 99.6% .................................. 593,264,498 OTHER ASSETS, LESS LIABILITIES 0.4% .......................................... 2,370,259 -------------- NET ASSETS 100.0% ............................................................ $ 595,634,757 ==============
See Selected Portfolio Abbreviations on page 97. a Non-income producing for the twelve months ended March 31, 2007. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 56 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
----------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ... $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02 $ 27.81 ----------------------------------------------------------------------------------------- Income from investment operations a: Net investment income b ............. 0.08 0.12 0.13 0.06 0.08 0.07 Net realized and unrealized gains (losses) ......................... 3.02 4.21 4.20 3.68 4.81 (5.65) ----------------------------------------------------------------------------------------- Total from investment operations ....... 3.10 4.33 4.33 3.74 4.89 (5.58) ----------------------------------------------------------------------------------------- Less distributions from: Net investment income ............... (0.11) (0.06) (0.08) (0.03) (0.04) (0.16) Net realized gains .................. -- -- -- -- -- (0.05) ----------------------------------------------------------------------------------------- Total distributions .................... (0.11) (0.06) (0.08) (0.03) (0.04) (0.21) ----------------------------------------------------------------------------------------- Redemption fees ........................ -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------------- Net asset value, end of period ......... $ 42.09 $ 39.10 $ 34.83 $ 30.58 $ 26.87 $ 22.02 ========================================================================================= Total return c ......................... 7.92% 12.46% 14.17% 13.92% 22.27% (20.35)% RATIOS TO AVERAGE NET ASSETS Expenses ............................... 0.93% e,f 0.91% f 0.94% f 0.98% f 1.06% 0.96% Net investment income .................. 0.37% e 0.34% 0.40% 0.20% 0.31% 0.24% SUPPLEMENTAL DATA Net assets, end of period (000's) ...... $1,818,773 $1,695,802 $1,567,675 $1,531,871 $1,433,742 $1,249,745 Portfolio turnover rate ................ 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 57 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...... $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70 $ 27.46 ------------------------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ......... (0.08) (0.15) (0.11) (0.16) (0.11) (0.14) Net realized and unrealized gains (losses) ............................ 2.90 4.07 4.07 3.61 4.73 (5.57) ------------------------------------------------------------------------------------- Total from investment operations .......... 2.82 3.92 3.96 3.45 4.62 (5.71) ------------------------------------------------------------------------------------- Less distributions from net realized gains .................................. -- -- -- -- -- (0.05) ------------------------------------------------------------------------------------- Redemption fees ........................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------- Net asset value, end of period ............ $ 40.47 $ 37.65 $ 33.73 $ 29.77 $ 26.32 $ 21.70 ===================================================================================== Total return c ............................ 7.49% 11.62% 13.30% 13.11% 21.29% (20.90)% RATIOS TO AVERAGE NET ASSETS Expenses .................................. 1.69% e,f 1.67% f 1.69% f 1.73% f 1.81% 1.71% Net investment income (loss) .............. (0.39)% e (0.42)% (0.35)% (0.55)% (0.44)% (0.51)% SUPPLEMENTAL DATA Net assets, end of period (000's) ......... $ 123,415 $ 122,871 $ 123,926 $ 121,986 $ 103,499 $ 75,141 Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 58 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
-------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...... $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51 $ 27.24 -------------------------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ......... (0.08) (0.15) (0.11) (0.16) (0.11) (0.14) Net realized and unrealized gains (losses) ............................ 2.88 4.04 4.03 3.58 4.69 (5.54) -------------------------------------------------------------------------------------- Total from investment operations .......... 2.80 3.89 3.92 3.42 4.58 (5.68) -------------------------------------------------------------------------------------- Less distributions from net realized gains .................................. -- -- -- -- -- (0.05) -------------------------------------------------------------------------------------- Redemption fees ........................... -- d -- d -- d -- d -- -- -------------------------------------------------------------------------------------- Net asset value, end of period ............ $ 40.12 $ 37.32 $ 33.43 $ 29.51 $ 26.09 $ 21.51 ====================================================================================== Total return c ............................ 7.53% 11.60% 13.32% 13.11% 21.29% (20.92)% RATIOS TO AVERAGE NET ASSETS Expenses .................................. 1.69% e,f 1.66% f 1.69% f 1.73% f 1.82% 1.70% Net investment income (loss) .............. (0.39)% e (0.41)% (0.35)% (0.55)% (0.45)% (0.51)% SUPPLEMENTAL DATA Net assets, end of period (000's) ......... $ 288,494 $ 273,512 $ 270,538 $ 270,131 $ 259,169 $ 232,307 Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 59 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g ------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98 $ 31.59 ------------------------------------------------------------------------------- Income from investment operations a: Net investment income (loss) b ............... 0.02 0.02 0.05 (0.02) -- -- Net realized and unrealized gains (losses) ... 2.99 4.19 4.16 3.67 4.81 (9.61) ------------------------------------------------------------------------------- Total from investment operations ................ 3.01 4.21 4.21 3.65 4.81 (9.61) ------------------------------------------------------------------------------- Less distributions from net investment income ... (0.01) -- d (0.01) -- (0.05) -- ------------------------------------------------------------------------------- Redemption fees ................................. -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------- Net asset value, end of period .................. $ 41.80 $ 38.80 $ 34.59 $ 30.39 $ 26.74 $ 21.98 =============================================================================== Total return c .................................. 7.78% 12.18% 13.87% 13.65% 21.92% (30.42)% RATIOS TO AVERAGE NET ASSETS Expenses ........................................ 1.20% e,f 1.17% f 1.19% f 1.23% f 1.31% 1.21% e Net investment income (loss) .................... 0.10% e 0.08% 0.15% (0.05)% 0.06% 0.02% e SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 43,258 $ 37,804 $ 27,818 $ 20,060 $ 14,755 $ 2,788 Portfolio turnover rate ......................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market of the investment of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. g For the period January 1, 2002 (effective date) to September 30, 2002. 60 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ...... $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06 $ 27.86 ------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ................ 0.13 0.22 0.21 0.14 0.14 0.14 Net realized and unrealized gains (losses) ............................ 3.02 4.21 4.21 3.67 4.82 (5.65) ------------------------------------------------------------------------------------ Total from investment operations .......... 3.15 4.43 4.42 3.81 4.96 (5.51) ------------------------------------------------------------------------------------ Less distributions from: Net investment income .................. (0.20) (0.15) (0.16) (0.09) (0.11) (0.24) Net realized gains ..................... -- -- -- -- -- (0.05) ------------------------------------------------------------------------------------ Total distributions ....................... (0.20) (0.15) (0.16) (0.09) (0.11) (0.29) ------------------------------------------------------------------------------------ Redemption fees ........................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------ Net asset value, end of period ............ $ 42.12 $ 39.17 $ 34.89 $ 30.63 $ 26.91 $ 22.06 ==================================================================================== Total return c ............................ 8.05% 12.73% 14.45% 14.19% 22.58% (20.14)% RATIOS TO AVERAGE NET ASSETS Expenses .................................. 0.70% e,f 0.67% f 0.69% f 0.73% f 0.81% 0.71% Net investment income ..................... 0.60% e 0.58% 0.65% 0.45% 0.56% 0.49% SUPPLEMENTAL DATA Net assets, end of period (000's) ......... $ 315,581 $ 274,603 $ 221,752 $ 133,332 $ 41,216 $ 27,431 Portfolio turnover rate ................... 0.28% 2.21% 1.16% 1.56% 5.12% 2.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market of the investment of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 61 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS 99.0% COMMERCIAL SERVICES 2.6% Dun & Bradstreet Corp. ................................................... United States 122,000 $ 11,126,400 Equifax Inc. ............................................................. United States 400,000 14,580,000 Moody's Corp. ............................................................ United States 488,000 30,285,280 Robert Half International Inc. ........................................... United States 300,000 11,103,000 --------------- 67,094,680 --------------- CONSUMER DURABLES 1.9% Ford Motor Co. ........................................................... United States 1,100,000 8,679,000 General Motors Corp. ..................................................... United States 400,000 12,256,000 Harley-Davidson Inc. ..................................................... United States 500,000 29,375,000 --------------- 50,310,000 --------------- CONSUMER NON-DURABLES 2.7% The Hershey Co. .......................................................... United States 516,400 28,226,424 Tootsie Roll Industries Inc. ............................................. United States 23,856 714,959 VF Corp. ................................................................. United States 500,000 41,310,000 --------------- 70,251,383 --------------- CONSUMER SERVICES 4.7% Carnival Corp. ........................................................... United States 500,000 23,430,000 CBS Corp., A ............................................................. United States 100,000 3,061,000 CBS Corp., B ............................................................. United States 50,000 1,529,500 Clear Channel Communications Inc. ........................................ United States 500,000 17,520,000 a Expedia Inc. ............................................................. United States 300,100 6,956,318 a Live Nation Inc. ......................................................... United States 62,500 1,378,750 Time Warner Inc. ......................................................... United States 1,350,000 26,622,000 a Viacom Inc., A ........................................................... United States 100,000 4,106,000 a Viacom Inc., B ........................................................... United States 50,000 2,055,500 The Walt Disney Co. ...................................................... United States 1,000,000 34,430,000 --------------- 121,089,068 --------------- DISTRIBUTION SERVICES 3.2% Cardinal Health Inc. ..................................................... United States 300,000 21,885,000 Genuine Parts Co. ........................................................ United States 375,400 18,394,600 W.W. Grainger Inc. ....................................................... United States 550,000 42,482,000 --------------- 82,761,600 --------------- ELECTRONIC TECHNOLOGY 23.2% a Agilent Technologies Inc. ................................................ United States 400,000 13,476,000 a Apple Inc. ............................................................... United States 1,000,000 92,910,000 The Boeing Co. ........................................................... United States 1,000,000 88,910,000 a Cisco Systems Inc. ....................................................... United States 1,350,000 34,465,500 a Dell Inc. ................................................................ United States 500,000 11,605,000 a Dionex Corp. ............................................................. United States 250,000 17,027,500 a EMC Corp. ................................................................ United States 1,000,000 13,850,000 a Entegris Inc. ............................................................ United States 376,307 4,026,485 a Gateway Inc. ............................................................. United States 300,000 657,000 General Dynamics Corp. ................................................... United States 1,000,000 76,400,000
62 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS (CONTINUED) ELECTRONIC TECHNOLOGY (CONTINUED) Hewlett-Packard Co. ...................................................... United States 1,116,250 $ 44,806,275 Intel Corp. .............................................................. United States 800,000 15,304,000 Lockheed Martin Corp. .................................................... United States 500,000 48,510,000 a Micrel Inc. .............................................................. United States 25,000 275,500 a Mindspeed Technologies Inc. .............................................. United States 100,000 217,000 Northrop Grumman Corp. ................................................... United States 1,000,000 74,220,000 Raytheon Co. ............................................................. United States 600,000 31,476,000 Rockwell Collins Inc. .................................................... United States 100,000 6,693,000 a Sun Microsystems Inc. .................................................... United States 1,600,000 9,616,000 Texas Instruments Inc. ................................................... United States 515,000 15,501,500 a Verigy Ltd. .............................................................. Singapore 48,974 1,149,420 --------------- 601,096,180 --------------- ENERGY MINERALS 1.5% BP PLC, ADR .............................................................. United Kingdom 295,200 19,114,200 Royal Dutch Shell PLC, A, ADR ............................................ United Kingdom 280,000 18,564,000 --------------- 37,678,200 --------------- FINANCE 0.2% a ChoicePoint Inc. ......................................................... United States 160,000 5,988,800 --------------- HEALTH SERVICES 1.7% IMS Health Inc. .......................................................... United States 500,000 14,830,000 a Medco Health Solutions Inc. .............................................. United States 48,240 3,498,847 Quest Diagnostics Inc. ................................................... United States 500,000 24,935,000 --------------- 43,263,847 --------------- HEALTH TECHNOLOGY 19.8% Abbott Laboratories ...................................................... United States 400,000 22,320,000 a Advanced Medical Optics Inc. ............................................. United States 88,888 3,306,633 Allergan Inc. ............................................................ United States 400,000 44,328,000 a Amgen Inc. ............................................................... United States 932,000 52,080,160 Baxter International Inc. ................................................ United States 400,000 21,068,000 a Biogen Idec Inc. ......................................................... United States 400,000 17,752,000 a Edwards Lifesciences Corp. ............................................... United States 50,000 2,535,000 Eli Lilly and Co. ........................................................ United States 400,000 21,484,000 a Genentech Inc. ........................................................... United States 1,000,000 82,120,000 a Hospira Inc. ............................................................. United States 40,000 1,636,000 Johnson & Johnson ........................................................ United States 996,000 60,018,960 Merck & Co. Inc. ......................................................... United States 500,000 22,085,000 a Millipore Corp. .......................................................... United States 400,000 28,988,000 Pall Corp. ............................................................... United States 500,000 19,000,000 Pfizer Inc. .............................................................. United States 2,000,000 50,520,000 a Waters Corp. ............................................................. United States 500,000 29,000,000 Wyeth .................................................................... United States 600,000 30,018,000 a Zimmer Holdings Inc. ..................................................... United States 64,000 5,466,240 --------------- 513,725,993 ---------------
Semiannual Report | 63 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS AND WARRANTS (CONTINUED) PROCESS INDUSTRIES 2.1% Air Products and Chemicals Inc. .......................................... United States 500,000 $ 36,980,000 Sigma-Aldrich Corp. ...................................................... United States 400,000 16,608,000 --------------- 53,588,000 --------------- PRODUCER MANUFACTURING 18.6% 3M Co. ................................................................... United States 800,000 61,144,000 Avery Dennison Corp. ..................................................... United States 462,000 29,688,120 Emerson Electric Co. ..................................................... United States 1,000,000 43,090,000 Illinois Tool Works Inc. ................................................. United States 1,000,000 51,600,000 Ingersoll-Rand Co. Ltd., A ............................................... United States 1,002,000 43,456,740 Johnson Controls Inc. .................................................... United States 400,000 37,848,000 Molex Inc. ............................................................... United States 146,483 4,130,821 Molex Inc., A ............................................................ United States 146,483 3,645,962 Teleflex Inc. ............................................................ United States 500,000 34,035,000 Textron Inc. ............................................................. United States 525,000 47,145,000 a Thomas & Betts Corp. ..................................................... United States 500,000 24,410,000 Tyco International Ltd. .................................................. United States 1,550,052 48,904,140 United Technologies Corp. ................................................ United States 800,000 52,000,000 --------------- 481,097,783 --------------- RETAIL TRADE 0.6% CVS/Caremark Corp. ....................................................... United States 126,294 4,311,669 a InterActiveCorp .......................................................... United States 300,100 11,316,771 --------------- 15,628,440 --------------- TECHNOLOGY SERVICES 9.2% Automatic Data Processing Inc. ........................................... United States 800,000 38,720,000 a Computer Sciences Corp. .................................................. United States 1,000,000 52,130,000 a Google Inc., A ........................................................... United States 15,000 6,872,400 International Business Machines Corp. .................................... United States 560,000 52,785,600 Microsoft Corp. .......................................................... United States 1,000,000 27,870,000 a Oracle Corp. ............................................................. United States 500,000 9,065,000 a Yahoo! Inc. .............................................................. United States 1,600,000 50,064,000 --------------- 237,507,000 --------------- TRANSPORTATION 7.0% Air France-KLM, ADR ...................................................... France 550,000 25,085,500 a Air France-KLM, ADR, wts., 11/05/07 ...................................... France 500,000 6,675,000 a Alaska Air Group Inc. .................................................... United States 500,000 19,050,000 a AMR Corp. ................................................................ United States 1,080,000 32,886,000 a British Airways PLC, ADR ................................................. United Kingdom 500,000 48,260,000 a Continental Airlines Inc., B ............................................. United States 500,000 18,195,000 Southwest Airlines Co. ................................................... United States 65,200 958,440 Union Pacific Corp. ...................................................... United States 300,000 30,465,000 --------------- 181,574,940 --------------- TOTAL COMMON STOCKS AND WARRANTS (COST $900,890,205) 2,562,655,914 ---------------
64 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN GROWTH FUND COUNTRY SHARES/WARRANTS VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENT (COST $31,920,013) 1.2% MONEY MARKET FUND 1.2% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ..... United States 31,920,013 $ 31,920,013 --------------- TOTAL INVESTMENTS (COST $932,810,218) 100.2% ............................. 2,594,575,927 OTHER ASSETS, LESS LIABILITIES (0.2)% .................................... (5,054,191) --------------- NET ASSETS 100.0% ........................................................ $ 2,589,521,736 ===============
See Selected Portfolio Abbreviations on page 97. a Non-income producing for the twelve months ended March 31, 2007. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 65 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
-------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................. $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.16 -------------------------------------------------------------------------------------------- Income from investment operations a: Net investment income b ........... 0.07 0.14 0.14 0.12 0.14 0.14 Net realized and unrealized gains (losses) ........................ 0.18 0.09 0.10 0.22 0.38 (0.21) -------------------------------------------------------------------------------------------- Total from investment operations ..... 0.25 0.23 0.24 0.34 0.52 (0.07) -------------------------------------------------------------------------------------------- Less distributions from: Net investment income ............. (0.07) (0.15) (0.15) (0.16) (0.16) (0.17) Net realized gains ................ (0.04) (0.01) (0.01) (0.01) (0.01) (0.02) -------------------------------------------------------------------------------------------- Total distributions .................. (0.11) (0.16) (0.16) (0.17) (0.17) (0.19) -------------------------------------------------------------------------------------------- Redemption fees ...................... -- d -- d -- d -- d -- -- -------------------------------------------------------------------------------------------- Net asset value, end of period ....... $ 2.71 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 ============================================================================================ Total return c ....................... 9.95% 9.73% 10.45% 15.50% 28.12% (4.18)% RATIOS TO AVERAGE NET ASSETS Expenses ............................. 0.64% e,f 0.64% g 0.65% g 0.68% e 0.73% 0.72% Net investment income ................ 5.26% f 5.61% 5.54% 5.11% 6.63% 6.67% SUPPLEMENTAL DATA Net assets, end of period (000's) .... $ 32,234,821 $26,641,398 $21,934,575 $14,743,190 $9,640,156 $6,001,117 Portfolio turnover rate .............. 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 66 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
--------------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 h --------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90 $ 2.15 --------------------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .......... 0.06 0.12 0.11 0.10 0.12 0.11 Net realized and unrealized gains (losses) ....................... 0.18 0.08 0.11 0.22 0.37 (0.21) --------------------------------------------------------------------------------------------- Total from investment operations .... 0.24 0.20 0.22 0.32 0.49 (0.10) --------------------------------------------------------------------------------------------- Less distributions from: Net investment income ............ (0.06) (0.12) (0.13) (0.14) (0.14) (0.13) Net realized gains ............... (0.04) (0.01) (0.01) (0.01) (0.01) (0.02) --------------------------------------------------------------------------------------------- Total distributions ................. (0.10) (0.13) (0.14) (0.15) (0.15) (0.15) --------------------------------------------------------------------------------------------- Redemption fees ..................... -- d -- d -- d -- d -- -- --------------------------------------------------------------------------------------------- Net asset value, end of period ...... $ 2.70 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.90 ============================================================================================= Total return c ...................... 9.53% 8.83% 9.57% 14.59% 26.58% (5.63)% RATIOS TO AVERAGE NET ASSETS Expenses ............................ 1.49% e,f 1.49% g 1.50% g 1.53% e 1.58% 1.57% f Net investment income ............... 4.41% f 4.76% 4.69% 4.26% 5.78% 6.01% f SUPPLEMENTAL DATA Net assets, end of period (000's) ... $ 3,866,737 $ 3,743,374 $ 3,922,396 $ 3,486,880 $2,083,783 $ 558,580 Portfolio turnover rate ............. 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. h For the period November 1, 2001 (effective date) to September 30, 2002. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 67 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B1 (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 $ 2.17 ------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ......... 0.06 0.13 0.12 0.11 0.13 0.13 Net realized and unrealized gains (losses) ...................... 0.19 0.08 0.11 0.21 0.38 (0.22) ------------------------------------------------------------------------------ Total from investment operations ... 0.25 0.21 0.23 0.32 0.51 (0.09) ------------------------------------------------------------------------------ Less distributions from: Net investment income ........... (0.07) (0.13) (0.14) (0.14) (0.15) (0.16) Net realized gains .............. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02) ------------------------------------------------------------------------------ Total distributions ................ (0.11) (0.14) (0.15) (0.15) (0.16) (0.18) ------------------------------------------------------------------------------ Redemption fees .................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------ Net asset value, end of period ..... $ 2.71 $ 2.57 $ 2.50 $ 2.42 $ 2.25 $ 1.90 ============================================================================== Total return c ..................... 9.67% 9.17% 9.90% 14.90% 27.51% (4.66)% RATIOS TO AVERAGE NET ASSETS Expenses ........................... 1.14% e,f 1.14% g 1.15% g 1.18% e 1.23% 1.22% Net investment income .............. 4.76% f 5.11% 5.04% 4.61% 6.13% 6.15% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) .. $453,876 $459,302 $493,063 $511,471 $495,004 $430,226 Portfolio turnover rate ............ 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 68 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............................. $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91 $ 2.17 ------------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............ 0.06 0.13 0.13 0.11 0.13 0.13 Net realized and unrealized gains (losses) ......................... 0.19 0.09 0.10 0.21 0.38 (0.21) ------------------------------------------------------------------------------------------ Total from investment operations ...... 0.25 0.22 0.23 0.32 0.51 (0.08) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income .............. (0.07) (0.13) (0.14) (0.14) (0.15) (0.16) Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02) ------------------------------------------------------------------------------------------ Total distributions ................... (0.11) (0.14) (0.15) (0.15) (0.16) (0.18) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 2.73 $ 2.59 $ 2.51 $ 2.43 $ 2.26 $ 1.91 ========================================================================================== Total return c ........................ 9.62% 9.56% 9.84% 14.85% 27.37% (4.64)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 1.15% e,f 1.14% g 1.15% g 1.18% e 1.24% 1.21% Net investment income ................. 4.75% f 5.11% 5.04% 4.61% 6.12% 6.21% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $14,759,879 $12,138,969 $10,113,365 $6,616,891 $3,764,372 $1,545,377 Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 69 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
----------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 h ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89 $ 2.18 ----------------------------------------------------------------------------- Income from investment operations a: Net investment income b ............ 0.06 0.13 0.13 0.11 0.13 0.10 Net realized and unrealized gains (losses) ......................... 0.19 0.09 0.10 0.22 0.37 (0.27) ----------------------------------------------------------------------------- Total from investment operations ...... 0.25 0.22 0.23 0.33 0.50 (0.17) ----------------------------------------------------------------------------- Less distributions from: Net investment income .............. (0.07) (0.14) (0.14) (0.15) (0.15) (0.12) Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) -- ----------------------------------------------------------------------------- Total distributions ................... (0.11) (0.15) (0.15) (0.16) (0.16) (0.12) ----------------------------------------------------------------------------- Redemption fees ....................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------- Net asset value, end of period ........ $ 2.69 $ 2.55 $ 2.48 $ 2.40 $ 2.23 $ 1.89 ============================================================================= Total return c ........................ 9.86% 9.43% 10.15% 15.25% 27.31% (8.34)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 0.99% e,f 0.99% g 1.00% g 1.03% e 1.08% 1.07% f Net investment income ................. 4.91% f 5.26% 5.19% 4.76% 6.28% 6.77% f SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $237,734 $183,609 $122,222 $73,165 $36,417 $ 6,350 Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. h For the period January 1, 2002 (effective date) to September 30, 2002. 70 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
---------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002 ---------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89 $ 2.16 ---------------------------------------------------------------------------------- Income from investment operations a: Net investment income b ............ 0.07 0.14 0.14 0.12 0.14 0.14 Net realized and unrealized gains (losses) ......................... 0.18 0.09 0.11 0.22 0.38 (0.22) ---------------------------------------------------------------------------------- Total from investment operations ...... 0.25 0.23 0.25 0.34 0.52 (0.08) ---------------------------------------------------------------------------------- Less distributions from: Net investment income .............. (0.07) (0.15) (0.16) (0.16) (0.16) (0.17) Net realized gains ................. (0.04) (0.01) (0.01) (0.01) (0.01) (0.02) ---------------------------------------------------------------------------------- Total distributions ................... (0.11) (0.16) (0.17) (0.17) (0.17) (0.19) ---------------------------------------------------------------------------------- Redemption fees ....................... -- d -- d -- d -- d -- -- ---------------------------------------------------------------------------------- Net asset value, end of period ........ $ 2.70 $ 2.56 $ 2.49 $ 2.41 $ 2.24 $ 1.89 ================================================================================== Total return c ........................ 10.08% 9.94% 10.65% 15.74% 28.47% (4.50)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 0.49% e,f 0.49% g 0.50% g 0.53% e 0.58% 0.57% Net investment income ................. 5.41% f 5.76% 5.69% 5.26% 6.78% 6.85% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $5,206,344 $3,786,643 $2,280,318 $901,149 $95,009 $30,737 Portfolio turnover rate ............... 13.59% 28.35% 28.51% 31.90% 48.36% 51.16%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Benefit of expense reduction rounds to less than 0.01%. f Annualized. g Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 71 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 93.5% COMMON STOCKS 41.1% COMMERCIAL BANKS 1.1% HSBC Holdings PLC .................................................. United Kingdom 35,000,000 $ 612,547,499 ---------------- COMMUNICATIONS 3.2% AT&T Inc. .......................................................... United States 35,250,000 1,389,907,500 Verizon Communications Inc. ........................................ United States 11,000,000 417,120,000 ---------------- 1,807,027,500 ---------------- ELECTRIC UTILITIES 17.2% Alliant Energy Corp. ............................................... United States 2,750,000 123,255,000 a Ameren Corp. ....................................................... United States 12,261,900 616,773,570 American Electric Power Co. Inc. ................................... United States 8,633,800 420,897,750 CenterPoint Energy Inc. ............................................ United States 6,000,000 107,640,000 Consolidated Edison Inc. ........................................... United States 4,632,100 236,515,026 Constellation Energy Group ......................................... United States 3,000,000 260,850,000 Dominion Resources Inc. ............................................ United States 10,000,000 887,700,000 DTE Energy Co. ..................................................... United States 5,270,400 252,452,160 Duke Energy Corp. .................................................. United States 20,884,000 423,736,360 Edison International ............................................... United States 3,073,500 151,001,055 Energy East Corp. .................................................. United States 4,530,000 110,350,800 FirstEnergy Corp. .................................................. United States 13,000,000 861,120,000 FPL Group Inc. ..................................................... United States 7,000,000 428,190,000 Hawaiian Electric Industries Inc. .................................. United States 1,720,000 44,702,800 PG&E Corp. ......................................................... United States 12,208,900 589,323,603 a Pinnacle West Capital Corp. ........................................ United States 5,500,000 265,375,000 PPL Corp. .......................................................... United States 2,000,000 81,800,000 Progress Energy Inc. ............................................... United States 9,000,000 453,960,000 a Public Service Enterprise Group Inc. ............................... United States 16,500,000 1,370,160,000 a Puget Energy Inc. .................................................. United States 7,500,000 192,600,000 The Southern Co. ................................................... United States 19,125,000 700,931,250 TECO Energy Inc. ................................................... United States 9,500,000 163,495,000 TXU Corp. .......................................................... United States 16,000,000 1,025,600,000 ---------------- 9,768,429,374 ---------------- ELECTRONIC TECHNOLOGY 0.7% Intel Corp. ........................................................ United States 20,000,000 382,600,000 ---------------- ENERGY MINERALS 4.4% BP PLC, ADR ........................................................ United Kingdom 6,000,000 388,500,000 a Canadian Oil Sands Trust ........................................... Canada 25,770,600 630,816,073 Chevron Corp. ...................................................... United States 7,500,000 554,700,000 ConocoPhillips ..................................................... United States 9,547,700 652,585,295 Royal Dutch Shell PLC, A, ADR ...................................... United Kingdom 4,000,000 265,200,000 ---------------- 2,491,801,368 ---------------- FINANCE 5.0% Bank of America Corp. .............................................. United States 15,000,000 765,300,000 Citigroup Inc. ..................................................... United States 3,000,000 154,020,000 Fifth Third Bancorp ................................................ United States 7,750,000 299,847,500
72 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) FINANCE (CONTINUED) JPMorgan Chase & Co. ............................................... United States 8,000,000 $ 387,040,000 Wachovia Corp. ..................................................... United States 3,750,000 206,437,500 Washington Mutual Inc. ............................................. United States 25,000,000 1,009,500,000 ---------------- 2,822,145,000 ---------------- GAS DISTRIBUTORS 1.5% AGL Resources Inc. ................................................. United States 500,000 21,360,000 Atmos Energy Corp. ................................................. United States 4,000,000 125,120,000 NiSource Inc. ...................................................... United States 4,500,000 109,980,000 Sempra Energy ...................................................... United States 4,878,300 297,625,083 Spectra Energy Corp. ............................................... United States 12,000,000 315,240,000 ---------------- 869,325,083 ---------------- HEALTH TECHNOLOGY 5.1% Bristol-Myers Squibb Co. ........................................... United States 14,000,000 388,640,000 Johnson & Johnson .................................................. United States 6,000,000 361,560,000 Merck & Co. Inc. ................................................... United States 20,000,000 883,400,000 Pfizer Inc. ........................................................ United States 50,000,000 1,263,000,000 ---------------- 2,896,600,000 ---------------- INDUSTRIAL SERVICES 0.3% Halliburton Co. .................................................... United States 5,000,000 158,700,000 ---------------- NON-ENERGY MINERALS 0.3% AngloGold Ashanti Ltd., ADR ........................................ South Africa 2,250,000 100,327,500 Barrick Gold Corp. ................................................. Canada 3,000,000 85,650,000 ---------------- 185,977,500 ---------------- PROCESS INDUSTRIES 0.9% The Dow Chemical Co. ............................................... United States 7,122,400 326,633,264 Lyondell Chemical Co. .............................................. United States 6,000,000 179,820,000 ---------------- 506,453,264 ---------------- PRODUCER MANUFACTURING 1.4% 3M Co. ............................................................. United States 7,000,000 535,010,000 General Electric Co. ............................................... United States 8,002,400 282,964,864 ---------------- 817,974,864 ---------------- TOTAL COMMON STOCKS (COST $18,100,591,553) ......................... 23,319,581,452 ---------------- CONVERTIBLE PREFERRED STOCKS 7.4% CONSUMER DURABLES 0.5% b Citigroup Funding into D.R. Horton Inc., 9.63%, cvt. pfd. .......... United States 5,000,000 114,192,000 b,c Lehman Brothers Holdings Inc. into KB Home, 12.00%, cvt. pfd. ...... United States 2,320,000 99,249,600 b,d Merrill Lynch & Co. Inc. into KB Home, 9.00%, cvt. pfd., 144A ...... United States 1,800,000 79,488,000 ---------------- 292,929,600 ---------------- ELECTRIC UTILITIES 0.1% CMS Energy Trust I, 7.75%, cvt. pfd. ............................... United States 1,508,000 75,233,668 ----------------
Semiannual Report | 73 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE PREFERRED STOCKS (CONTINUED) ELECTRONIC TECHNOLOGY 1.4% Citigroup Funding into Texas Instrument Inc., 7.50%, cvt. pfd. ..... United States 5,000,000 $ 150,195,000 Deutsche Bank AG into Apple Computer Inc., 9.50%, cvt. pfd. ........ United States 750,000 56,647,500 Goldman Sachs Group Inc. into KLAC-Tencor Corp., 8.00%, cvt. pfd. .. United States 2,100,000 111,329,400 Lehman Brothers Holdings Inc. into Cisco Systems Inc., 8.50%, cvt. pfd. ...................................................... United States 10,000,000 200,500,000 d Morgan Stanley into Applied Materials Inc., 7.75%, cvt. pfd., 144A ........................................................... United States 5,650,000 102,745,250 b,d Morgan Stanley into Intel Corp., 7.30%, cvt. pfd., 144A ............ United States 10,250,000 202,181,250 ---------------- 823,598,400 ---------------- ENERGY MINERALS 1.1% Chesapeake Energy Corp., 6.25%, cvt. pfd. .......................... United States 700,000 185,248,700 d Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A .................... United States 900,000 98,075,700 d Goldman Sachs Group Inc. into Peabody Energy Corp., 10.00%, cvt. pfd., 144A ................................................ United States 5,000,000 200,745,001 b,d Morgan Stanley into Devon Energy Corp., 8.00%, cvt. pfd., 144A ..... United States 1,700,000 116,016,500 ---------------- 600,085,901 ---------------- FINANCE 0.4% E*TRADE Financial Corp., 6.125%, cvt. pfd. ......................... United States 2,500,000 69,775,000 MetLife Inc., 6.375%, cvt. pfd. .................................... United States 1,750,000 56,437,500 Morgan Stanley into Freddie Mac, 8.20%, cvt. pfd. .................. United States 1,510,000 90,758,549 ---------------- 216,971,049 ---------------- HEALTH TECHNOLOGY 0.9% Lehman Brothers Holdings Inc. into Boston Scientific, 7.50%, cvt. pfd. ...................................................... United States 4,000,000 59,760,000 Schering-Plough Corp., 6.00%, cvt. pfd. ............................ United States 7,450,000 438,432,500 ---------------- 498,192,500 ---------------- INDUSTRIAL SERVICES 1.2% El Paso Corp., 4.99%, cvt. pfd. .................................... United States 130,000 166,732,109 b Lehman Brothers Holdings Inc. into Baker Hughes Inc., 8.00%, cvt. pfd. ...................................................... United States 2,290,000 151,987,300 d Morgan Stanley into GlobalSantaFe Corp., 9.00%, cvt. pfd., 144A .... United States 3,700,000 223,017,500 Wachovia Bank into El Paso Corp., 9.05%, cvt. pfd. ................. United States 8,200,000 114,308,000 ---------------- 656,044,909 ---------------- NON-ENERGY MINERALS 1.4% d Deutsche Bank AG into Barrick Gold Corp., 8.50%, cvt. pfd., 144A ... United States 2,550,000 74,819,805 b,c,d Deutsche Bank AG into Freeport-McMoRan Copper & Gold Inc., 10.00%, cvt. pfd., 144A ................................................ United Kingdom 3,600,000 237,079,440 b Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. .............. United States 1,313,100 140,383,521 Lehman Brothers Holdings Inc. into Alcoa Inc., 7.00%, cvt. pfd. .... United States 4,200,000 142,254,000 d Morgan Stanley into Newmont Mining Corp., 8.50%, cvt. pfd., 144A ... United States 4,800,000 203,736,000 ---------------- 798,272,766 ----------------
74 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CONVERTIBLE PREFERRED STOCKS (CONTINUED) REAL ESTATE INVESTMENT TRUSTS 0.2% Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A ..................... United States 3,000,000 $ 77,370,000 Lexington Realty Trust, 6.50%, cvt. pfd. ........................... United States 1,200,000 55,980,000 ---------------- 133,350,000 ---------------- RETAIL TRADE 0.2% d Wachovia Bank into The Home Depot Inc., 7.25%, cvt. pfd., 144A ..... United States 3,800,000 136,572,000 ---------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,003,360,958) ........... 4,231,250,793 ---------------- ------------------ PRINCIPAL AMOUNT e ------------------ CORPORATE BONDS 40.3% ALTERNATIVE POWER GENERATION 1.8% f,g Calpine Corp., senior note, 8.625%, 8/15/10 ................................... United States $ 65,000,000 71,012,500 d senior secured note, 144A, 8.50%, 7/15/10 ...................... United States 125,000,000 133,125,000 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ................................................ United States 310,000,000 312,325,000 8.75%, 2/15/12 ................................................. United States 265,000,000 282,887,500 8.375%, 5/01/16 ................................................ United States 225,000,000 235,125,000 ---------------- 1,034,475,000 ---------------- COMMERCIAL SERVICES 1.3% Dex Media Inc., senior disc. note, zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 ..................................................... United States 60,000,000 56,175,000 zero cpn. to 11/15/08, 9.00% thereafter, 11/15/13 .............. United States 210,000,000 196,612,500 JohnsonDiversey Holdings Inc., senior disc. note, zero cpn. to 5/17/07, 10.67% thereafter, 5/15/13 ............................ United States 158,000,000 163,925,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ......... United States 125,000,000 131,250,000 R.H. Donnelley Corp., 6.875%, 1/15/13 ................................................ United States 26,300,000 25,708,250 senior discount note, 6.875%, 1/15/13 .......................... United States 94,400,000 92,276,000 senior note, 8.875%, 1/15/16 ................................... United States 55,000,000 58,712,500 ---------------- 724,659,250 ---------------- COMMUNICATIONS 2.0% d Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ............. Jamaica 140,000,000 136,150,000 d MetroPCS Wireless Inc., senior note, 144A, 9.25%, 11/01/14 ......... United States 105,000,000 111,562,500 Qwest Capital Funding Inc., 7.00%, 8/03/09 ................................................. United States 300,000,000 305,250,000 7.25%, 2/15/11 ................................................. United States 365,000,000 375,493,750 Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ................................................. United States 40,000,000 41,400,000 B, 7.50%, 2/15/14 .............................................. United States 140,000,000 144,900,000 ---------------- 1,114,756,250 ----------------
Semiannual Report | 75 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER DURABLES 5.7% Beazer Homes USA Inc., senior note, 6.875%, 7/15/15 ................................................ United States $ 59,000,000 $ 52,952,500 h 8.125%, 6/15/16 ................................................ United States 91,000,000 85,995,000 D.R. Horton Inc., 5.625%, 1/15/16 ................................................ United States 35,000,000 32,430,160 6.50%, 4/15/16 ................................................. United States 35,000,000 34,287,435 Ford Motor Co., 7.45%, 7/16/31 ..................................... United States 600,000,000 467,250,000 Ford Motor Credit Co., 7.375%, 10/28/09 ............................................... United States 550,000,000 549,304,800 7.875%, 6/15/10 ................................................ United States 355,000,000 356,568,390 7.375%, 2/01/11 ................................................ United States 450,000,000 442,952,100 7.00%, 10/01/13 ................................................ United States 100,000,000 93,076,500 d 144A, 9.75%, 9/15/10 ........................................... United States 105,000,000 110,681,340 senior note, 9.875%, 8/10/11 ................................... United States 75,000,000 79,495,275 senior note, 7.25%, 10/25/11 ................................... United States 120,000,000 116,739,240 General Motors Corp., senior deb., 8.375%, 7/15/33 ................. United States 510,000,000 460,275,000 K Hovnanian Enterprises Inc., 6.25%, 1/15/16 ................................................. United States 10,000,000 8,625,000 senior note, 7.50%, 5/15/16 .................................... United States 60,000,000 56,250,000 KB Home, 6.375%, 8/15/11 ................................................ United States 40,000,000 38,979,760 senior note, 5.75%, 2/01/14 .................................... United States 50,000,000 44,946,650 senior note, 6.25%, 6/15/15 .................................... United States 100,000,000 90,125,000 senior note, 7.25%, 6/15/18 .................................... United States 70,500,000 65,461,012 Visant Holding Corp., senior note, 8.75%, 12/01/13 ................. United States 50,000,000 52,375,000 ---------------- 3,238,770,162 ---------------- CONSUMER FINANCE 0.2% Residential Capital LLC, senior note, 6.375%, 6/30/10 .............. United States 100,000,000 100,045,300 ---------------- CONSUMER NON-DURABLES 0.2% Reynolds American Inc., senior secured note, 7.25%, 6/01/13 ........ United States 90,000,000 94,761,900 ---------------- CONSUMER SERVICES 7.0% Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 .......... United States 450,000,000 459,000,000 CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ................................................ United States 335,000,000 340,025,000 9.92%, 4/01/14 ................................................. United States 117,380,000 105,055,100 11.75%, 5/15/14 ................................................ United States 260,000,000 250,250,000 CCH I LLC, senior secured note, 11.00%, 10/01/15 ................... United States 725,000,000 755,812,500 CCH II LLC, senior note, 10.25%, 9/15/10 ........................... United States 80,000,000 84,800,000 Clear Channel Communications Inc., 5.50%, 9/15/14 ................................................. United States 100,000,000 88,661,300 senior note, 5.75%, 1/15/13 .................................... United States 75,000,000 70,409,775 CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 ................. United States 200,000,000 206,000,000 DIRECTV Holdings LLC, senior note, 6.375%, 6/15/15 ................. United States 25,300,000 24,161,500 EchoStar DBS Corp., senior note, 7.125%, 2/01/16 ................... United States 360,000,000 373,500,000 Hertz Corp., senior note, 8.875%, 1/01/14 ................................... United States 102,950,000 111,443,375 senior sub. note, 10.50%, 1/01/16 .............................. United States 6,500,000 7,442,500
76| Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) CONSUMER SERVICES (CONTINUED) Liberty Media Corp., senior note, 5.70%, 5/15/13 .................... United States $ 148,000,000 $ 142,638,108 MGM MIRAGE Inc., senior note, 6.75%, 4/01/13 .................................................. United States 70,000,000 69,825,000 6.625%, 7/15/15 ................................................. United States 110,000,000 106,150,000 7.625%, 1/15/17 ................................................. United States 250,000,000 254,375,000 d Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ......................................................... United States 300,000,000 300,375,000 Viacom Inc., senior note, 6.25%, 4/30/16 ............................ United States 100,000,000 101,549,200 XM Satellite Radio Inc., senior note, 9.75%, 5/01/14 ................ United States 127,000,000 128,746,250 ---------------- 3,980,219,608 ---------------- ELECTRIC UTILITIES 1.8% Aquila Inc., senior note, 14.875%, 7/01/12 .......................... United States 95,400,000 124,735,500 NRG Energy Inc., senior note, 7.25%, 2/01/14 .................................................. United States 60,000,000 61,650,000 7.375%, 2/01/16 ................................................. United States 80,000,000 82,400,000 Reliant Resources Inc., senior note, 9.25%, 7/15/10 ................. United States 65,000,000 68,818,750 TXU Corp., senior note, P, 5.55%, 11/15/14 .............................................. United States 350,000,000 311,737,300 Q, 6.50%, 11/15/24 .............................................. United States 310,000,000 262,825,130 R, 6.55%, 11/15/34 .............................................. United States 150,000,000 126,359,700 ---------------- 1,038,526,380 ---------------- ELECTRONIC TECHNOLOGY 1.9% DRS Technologies Inc., senior note, 6.625%, 2/01/16 ................. United States 55,000,000 55,825,000 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ... Singapore 110,000,000 106,975,000 d Freescale Semiconductor Inc., senior note, 144A, 8.875%, 12/15/14 ............................. United States 200,000,000 201,250,000 senior sub. note, 144A, 10.125%, 12/15/16 ....................... United States 80,000,000 80,600,000 L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 ................................................. United States 41,000,000 40,026,250 6.375%, 10/15/15 ................................................ United States 85,000,000 84,681,250 Lucent Technologies Inc., 6.45%, 3/15/29 ............................ United States 180,000,000 163,350,000 d NXP BV/NXP Funding LLC, 144A, 9.50%, 10/15/15 ....................... Netherlands 50,000,000 51,875,000 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .................................................. United States 150,000,000 137,250,000 8.125%, 3/01/16 ................................................. United States 90,000,000 85,050,000 Seagate Technology HDD Holdings, senior note, 6.375%, 10/01/11 ................................................ United States 25,000,000 25,125,000 6.80%, 10/01/16 ................................................. United States 40,000,000 40,400,000 ---------------- 1,072,407,500 ---------------- ENERGY MINERALS 1.9% Callon Petroleum Co., senior note, 9.75%, 12/08/10 .................. United States 105,000,000 105,525,000 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ................................................. United States 75,000,000 80,062,500 6.50%, 8/15/17 .................................................. United States 115,000,000 114,137,500 6.25%, 1/15/18 .................................................. United States 150,000,000 148,875,000 6.875%, 11/15/20 ................................................ United States 145,000,000 145,000,000
Semiannual Report | 77 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) ENERGY MINERALS (CONTINUED) Mariner Energy Inc., senior note, 7.50%, 4/15/13 .................... United States $ 42,600,000 $ 42,067,500 Massey Energy Co., senior note, 6.875%, 12/15/13 .................... United States 59,650,000 56,891,188 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ......... United States 110,000,000 110,550,000 Peabody Energy Corp., senior note, 7.375%, 11/01/16 ................. United States 57,225,000 60,515,438 Pioneer Natural Resources Co., 6.65%, 3/15/17 .................................................. United States 38,000,000 37,780,778 6.875%, 5/01/18 ................................................. United States 107,000,000 105,701,769 Pogo Producing Co., senior sub. note, 7.875%, 5/01/13 ............... United States 78,175,000 79,152,187 ---------------- 1,086,258,860 ---------------- FINANCE 3.8% E*TRADE Financial Corp., senior note, 7.375%, 9/15/13 ................................................. United States 230,000,000 241,500,000 7.875%, 12/01/15 ................................................ United States 25,000,000 27,093,750 GMAC LLC, 5.625%, 5/15/09 ................................................. United States 135,000,000 132,615,495 7.75%, 1/19/10 .................................................. United States 420,000,000 431,365,200 6.875%, 9/15/11 ................................................. United States 800,000,000 801,532,000 6.875%, 8/28/12 ................................................. United States 300,400,000 299,522,231 6.75%, 12/01/14 ................................................. United States 125,000,000 123,067,375 United Rentals Inc., senior note, 6.50%, 2/15/12 .................... United States 35,000,000 35,087,500 United Rentals North America Inc., senior sub. note, 7.75%, 11/15/13 ................................................. United States 40,000,000 41,300,000 7.00%, 2/15/14 .................................................. United States 45,000,000 45,112,500 ---------------- 2,178,196,051 ---------------- HEALTH SERVICES 3.7% DaVita Inc., senior note, 6.625%, 3/15/13 .................................... United States 30,000,000 30,150,000 d senior note, 144A, 6.625%, 3/15/13 .............................. United States 175,000,000 175,875,000 senior sub. note, 7.25%, 3/15/15 ................................ United States 85,000,000 86,381,250 HCA Inc., 6.375%, 1/15/15 ................................................. United States 125,000,000 107,031,250 senior note, 6.95%, 5/01/12 ..................................... United States 50,000,000 48,375,000 senior note, 6.50%, 2/15/16 ..................................... United States 150,000,000 128,437,500 d senior secured note, 144A, 9.25%, 11/15/16 ...................... United States 107,000,000 115,693,750 Tenet Healthcare Corp., senior note, 6.375%, 12/01/11 ................................................ United States 520,000,000 488,800,000 6.50%, 6/01/12 .................................................. United States 260,000,000 241,150,000 7.375%, 2/01/13 ................................................. United States 360,000,000 336,150,000 i FRN, 9.25%, 2/01/15 ............................................. United States 250,000,000 248,750,000 d,i U.S. Oncology Holdings Inc., senior note, 144A, FRN, 9.797%, 3/15/12 ........................................................... United States 66,800,000 67,802,000 Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to 10/01/09, 11.25% thereafter, 10/01/15 ............................. United States 20,000,000 16,350,000 ---------------- 2,090,945,750 ----------------
78 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) INDUSTRIAL SERVICES 4.3% Allied Waste North America Inc., senior note, 7.25%, 3/15/15 ..................................... United States $ 130,000,000 $ 133,250,000 h senior note, B, 7.375%, 4/15/14 ................................ United States 190,000,000 193,800,000 senior note, B, 7.125%, 5/15/16 ................................. United States 170,000,000 173,825,000 senior secured note, 6.50%, 11/15/10 ............................ United States 120,000,000 120,900,000 senior secured note, 6.375%, 4/15/11 ............................ United States 44,000,000 44,110,000 senior secured note, 6.125%, 2/15/14 ............................ United States 207,000,000 202,342,500 senior secured note, 6.875%, 6/01/17 ............................ United States 190,000,000 191,425,000 Browning-Ferris Industries Inc., 7.40%, 9/15/35 ..................... United States 70,000,000 67,550,000 El Paso Corp., senior note, 6.75%, 5/15/09 .................................................. United States 245,000,000 252,043,750 MTN, 7.75%, 1/15/32 ............................................. United States 280,000,000 310,800,000 El Paso Production Holding Co., 7.75%, 6/01/13 ...................... United States 100,000,000 105,000,000 d Sabine Pass LNG LP, senior note, 144A, 7.25%, 11/30/13 ................................................. United States 92,000,000 92,920,000 7.50%, 11/30/16 ................................................. United States 390,000,000 393,900,000 Sesi LLC, senior note, 6.875%, 6/01/14 .............................. United States 110,000,000 109,725,000 Sonat Inc., senior note, 7.625%, 7/15/11 ............................ United States 35,000,000 37,756,250 ---------------- 2,429,347,500 ---------------- NON-ENERGY MINERALS 0.9% Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 .................................................. United States 86,600,000 93,419,750 8.375%, 4/01/17 ................................................. United States 214,275,000 232,220,531 Novelis Inc., senior note, 7.25%, 2/15/15 ........................... Canada 190,000,000 201,875,000 ---------------- 527,515,281 ---------------- PROCESS INDUSTRIES 1.6% Abitibi-Consolidated Co. of Canada, senior note, 8.375%, 4/01/15 .... Canada 100,600,000 95,067,000 Chemtura Corp., senior note, 6.875%, 6/01/16 ........................ United States 24,000,000 23,340,000 Jefferson Smurfit Corp., senior note, 8.25%, 10/01/12 ............... United States 200,000,000 201,000,000 Lyondell Chemical Co., senior note, 8.00%, 9/15/14 .................................................. United States 70,000,000 73,675,000 8.25%, 9/15/16 .................................................. United States 33,100,000 35,582,500 Nalco Co., senior sub. note, 8.875%, 11/15/13 ....................... United States 20,000,000 21,350,000 Nalco Finance Holdings, senior note, zero cpn. to 8/01/09, 9.00% thereafter, 2/01/14 ......................................... United States 380,000,000 336,300,000 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 .......................................................... United States 50,000,000 49,750,000 d Stone Container Corp., senior note, 144A, 8.00%, 3/15/17 ............ United States 68,000,000 66,810,000 ---------------- 902,874,500 ---------------- PRODUCER MANUFACTURING 1.0% Case New Holland Inc., senior note, 6.00%, 6/01/09 .................................................. United States 225,000,000 226,125,000 7.125%, 3/01/14 ................................................. United States 81,900,000 85,585,500 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ..................................... United States 40,000,000 41,800,000 senior sub. note, 11.75%, 8/01/16 ............................... United States 63,000,000 67,961,250
Semiannual Report | 79 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) CORPORATE BONDS (CONTINUED) PRODUCER MANUFACTURING (CONTINUED) Rexnord Holdings Inc., senior note, Toggle Term Loan, PIK, 11.35%, 2/20/13 ........................................................... United States $ 75,000,000 $ 73,920,750 d TRW Automotive Inc., senior note, 144A, 7.00%, 3/15/14 .................................................. United States 22,700,000 22,359,500 7.25%, 3/15/17 .................................................. United States 48,200,000 47,477,000 ---------------- 565,229,000 ---------------- REAL ESTATE INVESTMENT TRUSTS 0.9% Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 ............. United States 87,600,000 89,352,000 Host Marriott LP, senior note, K, 7.125%, 11/01/13 ............................................. United States 50,000,000 51,375,000 O, 6.375%, 3/15/15 .............................................. United States 215,000,000 214,462,500 Q, 6.75%, 6/01/16 ............................................... United States 145,000,000 146,812,500 ---------------- 502,002,000 ---------------- TECHNOLOGY SERVICES 0.3% SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 .................................... United States 59,300,000 63,895,750 senior sub. note, 10.25%, 8/15/15 ............................... United States 100,000,000 109,625,000 ---------------- 173,520,750 ---------------- TOTAL CORPORATE BONDS (COST $21,929,227,328) ........................ 22,854,511,042 ---------------- CONVERTIBLE BONDS 1.8% ALTERNATIVE POWER GENERATION 0.7% f,g Calpine Corp., cvt., senior note, zero cpn. to 6/30/09, 6.00% thereafter, 9/30/14 .... United States 48,400,000 45,919,500 sub. note, 7.75%, 6/01/15 ....................................... United States 320,000,000 340,000,000 ---------------- 385,919,500 ---------------- ELECTRONIC TECHNOLOGY 0.9% Nortel Networks Corp., cvt., senior note, 4.25%, 9/01/08 ............ Canada 512,500,000 507,924,913 ---------------- HEALTH TECHNOLOGY 0.0% j d Enzon Pharmaceuticals Inc., cvt., 144A, 4.00% 6/01/13 ............... United States 23,300,000 25,088,974 ---------------- INDUSTRIAL SERVICES 0.2% Hanover Compressor Co., cvt., senior note, 4.75%, 3/15/08 ........... United States 103,000,000 100,425,000 ---------------- TOTAL CONVERTIBLE BONDS (COST $948,095,257) ......................... 1,019,358,387 ---------------- MORTGAGE-BACKED SECURITIES 2.9% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.8% FHLMC Gold 30 Year, 5.00%, 5/01/33 - 8/01/34 ........................ United States 450,730,578 436,580,418 FHLMC Gold 30 Year, 5.50%, 8/01/35 - 11/01/35 ....................... United States 311,331,851 308,383,698 FHLMC Gold 30 Year, 6.00%, 8/01/35 - 6/01/36 ........................ United States 278,597,744 280,850,327 ---------------- 1,025,814,443 ---------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.5% FNMA 30 Year, 5.50%, 2/01/35 - 1/01/36 .............................. United States 267,826,315 265,298,380 ----------------
80 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.6% GNMA I SF 30 Year, 5.00%, 4/15/33 - 6/15/34 ......................... United States $ 357,933,139 $ 348,733,862 ---------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $1,643,938,134) .............. 1,639,846,685 ---------------- TOTAL LONG TERM INVESTMENTS (COST $46,625,213,230) .................. 53,064,548,359 ---------------- ------------------ SHARES ------------------ SHORT TERM INVESTMENTS 6.3% MONEY MARKET FUND (COST $179,241,151) 0.3% k Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ............................................................ United States 179,241,151 179,241,151 ---------------- ------------------ PRINCIPAL AMOUNT e ------------------ REPURCHASE AGREEMENTS 5.9% l Joint Repurchase Agreement, 5.257%, 4/02/07 (Maturity Value $3,366,967,769) ................................... United States $ 3,365,493,295 3,365,493,295 ABN AMRO Bank, NV, New York Branch (Maturity Value $317,235,704) Banc of America Securities LLC (Maturity Value $303,229,117) Barclays Capital Inc. (Maturity Value $303,229,117) Bear, Stearns & Co. Inc. (Maturity Value $278,885,941) BNP Paribas Securities Corp. (Maturity Value $303,229,117) Credit Suisse Securities (USA) LLC (Maturity Value $41,784,071) Deutsche Bank Securities Inc. (Maturity Value $303,229,117) Goldman, Sachs & Co. (Maturity Value $303,229,117) Greenwich Capital Markets Inc. (Maturity Value $303,229,117) Merrill Lynch Government Securities Inc. (Maturity Value $303,229,117) Morgan Stanley & Co. Inc. (Maturity Value $303,229,117) UBS Securities LLC (Maturity Value $303,229,117) Collateralized by U.S. Government Agency Securities, 0.00% m - 7.125%, 4/16/07 - 2/17/12; n U.S. Government Agency Discount Notes, 7/06/07 - 4/20/09; and U.S. Treasury Notes, 2.75% - 6.50%, 5/15/07 - 1/31/12 ---------------- o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1% p REPURCHASE AGREEMENTS 0.1% Banc of America Securities LLC, 5.40%, 4/02/07 (Maturity Value $3,382,521) Collateralized by U.S. Government Agency Securities, 5.00%, 5/01/35 - 7/01/35 ............................................. United States 3,381,000 3,381,000 Barclays Capital Inc., 5.40%, 4/02/07 (Maturity Value $1,176,529) Collateralized by U.S. Government Agency Securities, 3.50% - 9.50%, 4/01/07 - 3/01/47 ............................................. United States 1,176,000 1,176,000 Deutsche Bank Securities Inc., 5.41%, 4/02/07 (Maturity Value $4,734,133) Collateralized by U.S. Government Agency Securities, 4.00% - 7.00%, 5/01/18 - 4/01/37 .............................. United States 4,732,000 4,732,000
Semiannual Report | 81 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT e VALUE - ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS (CONTINUED) o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES (CONTINUED) p REPURCHASE AGREEMENTS (CONTINUED) Goldman, Sachs & Co., 5.35%, 4/02/07 (Maturity Value $3,825,705) Collateralized by U.S. Government Agency Securities, 4.875% - 6.75%, 8/27/07 - 9/15/29 ............................. United States $ 3,824,000 $ 3,824,000 Merrill Lynch Government Securities Inc., 5.35%, 4/02/07 (Maturity Value $4,673,082) Collateralized by U.S. Government Agency Securities, 2.35% - 7.375%, 4/05/07 - 9/26/36; n U.S. Government Agency Discount Notes, 4/08/07 - 11/15/30 .......................... United States 4,671,000 4,671,000 Morgan Stanley & Co. Inc., 5.40%, 4/02/07 (Maturity Value $4,497,023) Collateralized by U.S. Government Agency Securities, 2.35% - 7.125%, 4/05/07 - 7/15/36 ............................. United States 4,495,000 4,495,000 ---------------- TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES (COST $22,279,000) ..................................... 22,279,000 ---------------- TOTAL REPURCHASE AGREEMENTS (COST $3,387,772,295) ................... 3,387,772,295 ---------------- TOTAL INVESTMENTS (COST $50,192,226,676) 99.8% ...................... 56,631,561,805 OTHER ASSETS, LESS LIABILITIES 0.2% ................................. 127,829,566 ---------------- NET ASSETS 100.0% ................................................... $ 56,759,391,371 ================
See Selected Portfolio Abbreviations on page 97. a See Note 9 regarding holdings of 5% voting securities. b Non-income producing for the twelve months ended March 31, 2007. c See Note 1(d) regarding securities purchased on a when-issued or delayed delivery basis. d Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Fund's Board of Directors. At March 31, 2007, the aggregate value of these securities was $3,808,021,510, representing 6.71% of net assets. e The principal amount is stated in U.S. dollars unless otherwise indicated. f See Note 8 regarding defaulted securities. g See Note 10 regarding other considerations - credit committee participation. h A portion or all of the security is on loan as of March 31, 2007. See Note 1(f). i The coupon rate shown represents the rate at period end. j Rounds to less than 0.1% of net assets. k See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. l See Note 1(c) regarding joint repurchase agreement. m Rounds to less than 0.01%. n The security is traded on a discount basis with no stated coupon rate. o Collateral for loaned securities. See Note 1(c). p See Note 1(c) regarding repurchase agreement. 82 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.93 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.15 0.32 0.28 0.27 0.28 0.38 Net realized and unrealized gains (losses) ................................. 0.02 (0.11) (0.11) (0.04) (0.10) 0.09 ----------------------------------------------------------------------------------- Total from investment operations .............. 0.17 0.21 0.17 0.23 0.18 0.47 ----------------------------------------------------------------------------------- Less distributions from net investment income ...................................... (0.17) (0.31) (0.32) (0.36) (0.36) (0.41) ----------------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 6.43 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 =================================================================================== Total return c ................................ 2.63% 3.40% 2.67% 3.46% 2.66% 7.06% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 0.73% e,f 0.72% f 0.72% f 0.70% f 0.70% 0.69% Net investment income ......................... 4.74% e 4.64% 4.29% 4.09% 4.11% 5.48% SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $5,136,922 $5,291,117 $5,901,449 $6,420,381 $7,286,317 $7,726,914 Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 83 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98 $ 6.93 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.13 0.29 0.25 0.24 0.25 0.34 Net realized and unrealized gains (losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.10) 0.09 ----------------------------------------------------------------------------------- Total from investment operations .............. 0.15 0.18 0.14 0.19 0.15 0.43 ----------------------------------------------------------------------------------- Less distributions from net investment income ...................................... (0.15) (0.28) (0.29) (0.32) (0.33) (0.38) ----------------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 6.42 $ 6.42 $ 6.52 $ 6.67 $ 6.80 $ 6.98 =================================================================================== Total return c ................................ 2.38% 2.87% 2.13% 2.92% 2.13% 6.37% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 1.26% e,f 1.24% f 1.25% f 1.23% f 1.23% 1.22% Net investment income ......................... 4.21% e 4.12% 3.76% 3.56% 3.58% 4.95% SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $349,899 $388,807 $478,788 $568,276 $678,814 $559,966 Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 84 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97 $ 6.91 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.13 0.29 0.25 0.24 0.25 0.34 Net realized and unrealized gains (losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.11) 0.10 ----------------------------------------------------------------------------------- Total from investment operations .............. 0.15 0.18 0.14 0.19 0.14 0.44 ----------------------------------------------------------------------------------- Less distributions from net investment income ...................................... (0.15) (0.28) (0.29) (0.32) (0.33) (0.38) ----------------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 6.40 $ 6.40 $ 6.50 $ 6.65 $ 6.78 $ 6.97 =================================================================================== Total return c ................................ 2.38% 2.88% 2.14% 2.91% 2.00% 6.53% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 1.26% e,f 1.23% f 1.25% f 1.23% f 1.23% 1.21% Net investment income ......................... 4.21% e 4.13% 3.76% 3.56% 3.58% 4.96% SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $411,107 $424,462 $508,539 $597,451 $814,635 $803,049 Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 85 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 $ 6.81 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.14 0.30 0.26 0.25 0.25 0.25 Net realized and unrealized gains (losses) ................................. 0.02 (0.11) (0.11) (0.05) (0.09) 0.22 ----------------------------------------------------------------------------------- Total from investment operations .............. 0.16 0.19 0.15 0.20 0.16 0.47 ----------------------------------------------------------------------------------- Less distributions from net investment income ...................................... (0.16) (0.29) (0.30) (0.33) (0.34) (0.29) ----------------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 6.43 $ 6.43 $ 6.53 $ 6.68 $ 6.81 $ 6.99 =================================================================================== Total return c ................................ 2.45% 3.01% 2.29% 3.08% 2.29% 7.03% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 1.11% e,f 1.09% f 1.10% f 1.08% f 1.08% 1.07% e Net investment income ......................... 4.36% e 4.27% 3.91% 3.71% 3.73% 5.10% e SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $74,661 $71,104 $65,790 $59,431 $54,042 $14,042 Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. g For the period January 1, 2002 (effective date) to September 30, 2002. 86 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01 $ 6.94 ----------------------------------------------------------------------------------- Income from investment operations a: Net investment income b .................... 0.16 0.34 0.29 0.28 0.29 0.38 Net realized and unrealized gains (losses) ................................. 0.01 (0.12) (0.10) (0.06) (0.10) 0.11 ----------------------------------------------------------------------------------- Total from investment operations .............. 0.17 0.22 0.19 0.22 0.19 0.49 ----------------------------------------------------------------------------------- Less distributions from net investment income ...................................... (0.17) (0.32) (0.33) (0.36) (0.37) (0.42) ----------------------------------------------------------------------------------- Redemption fees ............................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------- Net asset value, end of period ................ $ 6.45 $ 6.45 $ 6.55 $ 6.69 $ 6.83 $ 7.01 =================================================================================== Total return c ................................ 2.69% 3.53% 2.95% 3.42% 2.79% 7.33% RATIOS TO AVERAGE NET ASSETS Expenses ...................................... 0.61% e,f 0.59% f 0.60% f 0.58% f 0.58% 0.57% Net investment income ......................... 4.86% e 4.77% 4.41% 4.21% 4.23% 5.60% SUPPLEMENTAL DATA Net assets, end of period (000's) ............. $423,217 $387,239 $334,681 $340,279 $308,411 $198,437 Portfolio turnover rate ....................... 3.77% 20.54% 29.14% 41.45% 66.96% 44.62%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 87 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES 96.6% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.6% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 .............................................. $ 119,374 $ 126,598 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 .............................................. 361,953 389,322 GNMA GP 30 Year, 10.00%, 11/15/09 - 4/15/10 ............................................. 253,738 267,117 GNMA GP 30 Year, 10.25%, 5/15/20 ........................................................ 10,834 12,059 GNMA GP 30 Year, 11.00%, 12/15/09 - 12/15/10 ............................................ 500,296 536,273 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 .............................................. 281,956 312,386 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 .............................................. 41,802 46,168 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 .............................................. 39,000 43,551 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 ............................................. 19,743 21,784 GNMA GP 30 Year, 12.50%, 5/15/10 - 7/15/10 .............................................. 41,103 44,933 GNMA GP 30 Year, 12.75%, 5/15/14 ........................................................ 5,725 6,371 GNMA I SF 15 Year, 6.50%, 5/15/18 ....................................................... 2,573,306 2,637,969 GNMA I SF 30 Year, 5.00%, 2/15/33 - 11/15/36 ............................................ 696,894,250 678,987,103 a GNMA I SF 30 Year, 5.50%, 5/15/28 - 11/15/36 ............................................ 1,269,540,820 1,264,033,299 a GNMA I SF 30 Year, 6.00%, 10/15/23 - 1/15/37 ............................................ 832,168,513 844,436,721 GNMA I SF 30 Year, 6.50%, 5/15/23 - 9/15/36 ............................................. 393,282,615 404,440,788 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 ............................................. 72,219 75,057 GNMA I SF 30 Year, 7.00%, 10/15/09 - 9/15/32 ............................................ 234,730,840 245,365,174 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ............................................ 722,469 750,141 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/32 ............................................. 63,987,313 66,710,032 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 ............................................. 559,304 589,086 GNMA I SF 30 Year, 8.00%, 10/15/07 - 9/15/30 ............................................ 49,819,530 52,776,517 GNMA I SF 30 Year, 8.25%, 3/15/27 - 11/15/27 ............................................ 145,620 155,528 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ............................................ 10,981,415 11,805,630 GNMA I SF 30 Year, 9.00%, 11/15/08 - 7/15/23 ............................................ 13,831,953 14,869,175 GNMA I SF 30 Year, 9.50%, 5/15/09 - 1/15/23 ............................................. 8,597,070 9,345,075 GNMA I SF 30 Year, 10.00%, 4/15/12 - 3/15/25 ............................................ 10,706,780 11,898,411 GNMA I SF 30 Year, 10.50%, 12/15/09 - 10/15/21 .......................................... 8,086,250 9,013,901 GNMA I SF 30 Year, 11.00%, 11/15/09 - 5/15/21 ........................................... 7,318,447 8,042,016 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ............................................ 1,825,360 2,026,672 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ............................................ 8,703,625 9,779,452 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ............................................ 7,705,779 8,540,760 GNMA I SF 30 Year, 13.00%, 7/15/10 - 1/15/16 ............................................ 8,320,764 9,294,217 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ............................................ 68,043 72,283 GNMA II GP 30 Year, 11.50%, 8/20/13 ..................................................... 16,072 17,689 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 ........................................... 44,738,214 42,196,535 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ............................................ 346,095,905 335,836,061 GNMA II SF 30 Year, 5.00%, 9/20/33 ...................................................... 299,145,594 290,451,855 GNMA II SF 30 Year, 5.50%, 6/20/34 ...................................................... 79,079,560 78,604,135 GNMA II SF 30 Year, 5.50%, 7/20/34 - 6/20/36 ............................................ 391,546,026 389,024,657 GNMA II SF 30 Year, 5.50%, 12/20/34 ..................................................... 241,273,085 239,822,556 GNMA II SF 30 Year, 5.50%, 1/20/35 ...................................................... 97,345,156 96,717,816 GNMA II SF 30 Year, 5.50%, 2/20/35 ...................................................... 121,276,821 120,495,254 GNMA II SF 30 Year, 5.50%, 6/20/35 ...................................................... 71,450,935 70,990,471 GNMA II SF 30 Year, 5.50%, 4/20/36 ...................................................... 68,022,458 67,550,741 GNMA II SF 30 Year, 6.00%, 10/20/23 - 7/20/36 ........................................... 461,853,147 467,520,182 GNMA II SF 30 Year, 6.00%, 9/20/34 ...................................................... 77,478,137 78,493,721
88 | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.6% (CONTINUED) GNMA II SF 30 Year, 6.00%, 11/20/35 ..................................................... $ 70,960,943 $ 71,821,707 GNMA II SF 30 Year, 6.50%, 6/20/24 - 7/20/35 ............................................ 93,913,178 96,455,569 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ............................................ 47,784,110 49,810,515 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 ........................................... 8,472,376 8,811,647 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ............................................ 4,285,111 4,524,491 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ............................................ 2,203,070 2,358,189 GNMA II SF 30 Year, 9.00%, 7/20/16 - 11/20/21 ........................................... 601,154 644,737 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ............................................ 353,220 385,619 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ........................................... 792,312 877,520 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ........................................... 2,348,881 2,606,745 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ........................................... 350,181 388,782 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ........................................... 194,893 217,293 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ........................................... 390,760 436,980 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ......................................... 278,628 309,661 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 .......................................... 273,224 305,405 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $6,226,281,913) .................................. 6,175,128,102 -------------- ---------------- SHARES ---------------- SHORT TERM INVESTMENTS 4.2% MONEY MARKET FUND (COST $179,207,272) 2.8% b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% .................... 179,207,272 179,207,272 -------------- ---------------- PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENT (COST $91,980,000) 1.4% c Barclays De Zoete Wedd Securities Inc., 5.08%, 4/02/07 (Maturity Value $92,018,938) d Collateralized by U.S. Treasury Bill, 5/31/07 ....................................... $ 91,980,000 91,980,000 -------------- TOTAL SHORT TERM INVESTMENTS (COST $271,187,272) ........................................ 271,187,272 -------------- TOTAL INVESTMENTS (COST $6,497,469,185) 100.8% .......................................... 6,446,315,374 OTHER ASSETS, LESS LIABILITIES (0.8)% ................................................... (50,508,258) -------------- NET ASSETS 100.0% ....................................................................... $6,395,807,116 ==============
See Selected Portfolio Abbreviations on page 97. a See Note 1(d) regarding securities purchased on a to-be-announced basis. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. c See Note 1(c) regarding repurchase agreement. d The security is traded on a discount basis with no stated coupon rate. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 89 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS A (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96 $ 10.02 ------------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............ 0.19 0.43 0.45 0.43 0.42 0.46 Net realized and unrealized gains (losses) ........................ 2.21 0.37 2.42 1.33 0.85 (1.60) ------------------------------------------------------------------------------------------ Total from investment operations ...... 2.40 0.80 2.87 1.76 1.27 (1.14) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income .............. (0.23) (0.41) (0.44) (0.40) (0.43) (0.45) Net realized gains ................. (0.44) (0.09) -- -- -- (0.47) ------------------------------------------------------------------------------------------ Total distributions ................... (0.67) (0.50) (0.44) (0.40) (0.43) (0.92) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 14.62 $ 12.89 $ 12.59 $ 10.16 $ 8.80 $ 7.96 ========================================================================================== Total return c ........................ 19.01% 6.69% 28.81% 20.40% 16.38% (12.49)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 0.75% e,f 0.76% f 0.78% f 0.80% 0.83% 0.80% Net investment income ................. 2.78% e 3.54% 3.92% 4.49% 5.00% 4.87% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $2,206,389 $1,926,732 $1,986,034 $1,450,832 $1,259,886 $1,090,216 Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 90 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97 $ 10.02 ------------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............ 0.16 0.37 0.39 0.38 0.37 0.41 Net realized and unrealized gains (losses) .......................... 2.19 0.38 2.42 1.33 0.85 (1.58) ------------------------------------------------------------------------------------------ Total from investment operations ...... 2.35 0.75 2.81 1.71 1.22 (1.17) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income .............. (0.19) (0.35) (0.39) (0.36) (0.39) (0.41) Net realized gains ................. (0.44) (0.09) -- -- -- (0.47) ------------------------------------------------------------------------------------------ Total distributions ................... (0.63) (0.44) (0.39) (0.36) (0.39) (0.88) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 14.60 $ 12.88 $ 12.57 $ 10.15 $ 8.80 $ 7.97 ========================================================================================== Total return c ........................ 18.65% 6.25% 28.11% 19.71% 15.88% (12.88)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 1.26% e,f 1.26% f 1.28% f 1.30% 1.34% 1.31% Net investment income ................. 2.27% e 3.04% 3.42% 3.99% 4.49% 4.44% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 143,466 $ 133,824 $ 154,277 $ 127,105 $ 95,321 $ 32,802 Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 91 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95 $ 10.01 ------------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............ 0.16 0.37 0.39 0.38 0.36 0.41 Net realized and unrealized gains (losses) ......................... 2.19 0.37 2.42 1.33 0.86 (1.59) ------------------------------------------------------------------------------------------ Total from investment operations ...... 2.35 0.74 2.81 1.71 1.22 (1.18) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income .............. (0.19) (0.35) (0.39) (0.36) (0.39) (0.41) Net realized gains ................. (0.44) (0.09) -- -- -- (0.47) ------------------------------------------------------------------------------------------ Total distributions ................... (0.63) (0.44) (0.39) (0.36) (0.39) (0.88) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 14.57 $ 12.85 $ 12.55 $ 10.13 $ 8.78 $ 7.95 ========================================================================================== Total return c ........................ 18.71% 6.19% 28.16% 19.76% 15.77% (12.90)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 1.26% e,f 1.25% f 1.28% f 1.30% 1.34% 1.29% Net investment income ................. 2.27% e 3.05% 3.42% 3.99% 4.49% 4.43% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 448,772 $ 391,509 $ 435,714 $ 283,747 $ 222,030 $ 67,428 Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 92 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
------------------------------------------------------------------------------------------ SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96 $ 9.81 ------------------------------------------------------------------------------------------ Income from investment operations a: Net investment income b ............ 0.17 0.39 0.43 0.39 0.37 0.32 Net realized and unrealized gains (losses) ......................... 2.20 0.36 2.40 1.34 0.86 (1.85) ------------------------------------------------------------------------------------------ Total from investment operations ...... 2.37 0.75 2.83 1.73 1.23 (1.53) ------------------------------------------------------------------------------------------ Less distributions from: Net investment income .............. (0.21) (0.37) (0.41) (0.37) (0.40) (0.32) Net realized gains ................. (0.44) (0.09) -- -- -- -- ------------------------------------------------------------------------------------------ Total distributions ................... (0.65) (0.46) (0.41) (0.37) (0.40) (0.32) ------------------------------------------------------------------------------------------ Redemption fees ....................... -- d -- d -- d -- d -- -- ------------------------------------------------------------------------------------------ Net asset value, end of period ........ $ 14.58 $ 12.86 $ 12.57 $ 10.15 $ 8.79 $ 7.96 ========================================================================================== Total return c ........................ 18.80% 6.29% 28.35% 20.02% 15.96% (16.01)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 1.11% e,f 1.11% e,f 1.13% f 1.15% 1.19% 1.16% e Net investment income ................. 2.42% e 3.19% 3.57% 4.14% 4.64% 4.82% e SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 40,073 $ 27,736 $ 14,649 $ 1,590 $ 1,142 $ 142 Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. g For the period January 1, 2002 (effective date) to September 30, 2002. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 93 Franklin Custodian Funds, Inc. FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
----------------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED SEPTEMBER 30, ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002 ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .. $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99 $ 10.05 ----------------------------------------------------------------------------------------- Income from investment operations a: Net investment income b ............ 0.20 0.45 0.48 0.44 0.42 0.47 Net realized and unrealized gains (losses) ......................... 2.21 0.38 2.42 1.34 0.87 (1.60) ----------------------------------------------------------------------------------------- Total from investment operations ...... 2.41 0.83 2.90 1.78 1.29 (1.13) ----------------------------------------------------------------------------------------- Less distributions from: Net investment income .............. (0.24) (0.43) (0.46) (0.42) (0.44) (0.46) Net realized gains ................. (0.44) (0.09) -- -- -- (0.47) ----------------------------------------------------------------------------------------- Total distributions ................... (0.68) (0.52) (0.46) (0.42) (0.44) (0.93) ----------------------------------------------------------------------------------------- Redemption fees ....................... -- d -- d -- d -- d -- -- ----------------------------------------------------------------------------------------- Net asset value, end of period ........ $ 14.68 $ 12.95 $ 12.64 $ 10.20 $ 8.84 $ 7.99 ========================================================================================= Total return c ........................ 19.04% 6.88% 29.00% 20.48% 16.61% (12.32)% RATIOS TO AVERAGE NET ASSETS Expenses .............................. 0.61% e,f 0.61% f 0.63% f 0.65% 0.69% 0.66% Net investment income ................. 2.92% e 3.69% 4.07% 4.64% 5.14% 5.07% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 97,052 $ 103,041 $ 110,249 $ 51,586 $ 47,167 $ 15,664 Portfolio turnover rate ............... 4.97% 7.97% 13.53% 16.13% 25.81% 30.60%
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. b Based on average daily shares outstanding. c Total return is not annualized for periods less than one year. d Amount rounds to less than $0.01 per share. e Annualized. f Benefit of expense reduction rounds to less than 0.01%. 94 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS 98.4% COMMON STOCKS 93.5% DIVERSIFIED TELECOMMUNICATION SERVICES 3.4% AT&T Inc. ............................................................... United States 1,400,000 $ 55,202,000 Verizon Communications Inc. ............................................. United States 1,200,000 45,504,000 --------------- 100,706,000 --------------- ELECTRIC UTILITIES 80.5% Alliant Energy Corp. .................................................... United States 1,300,000 58,266,000 Ameren Corp. ............................................................ United States 1,429,441 71,900,882 American Electric Power Co. Inc. ........................................ United States 1,200,000 58,500,000 California Water Service Group .......................................... United States 400,000 15,328,000 CenterPoint Energy Inc. ................................................. United States 1,500,000 26,910,000 Cleco Corp. ............................................................. United States 1,000,000 25,830,000 Consolidated Edison Inc. ................................................ United States 700,000 35,742,000 Constellation Energy Group .............................................. United States 600,000 52,170,000 Dominion Resources Inc. ................................................. United States 1,600,000 142,032,000 DTE Energy Co. .......................................................... United States 600,000 28,740,000 Duke Energy Corp. ....................................................... United States 4,391,400 89,101,506 Edison International .................................................... United States 2,200,000 108,086,000 Energy East Corp. ....................................................... United States 600,000 14,616,000 Entergy Corp. ........................................................... United States 1,750,000 183,610,000 Exelon Corp. ............................................................ United States 2,200,000 151,162,000 FirstEnergy Corp. ....................................................... United States 1,900,000 125,856,000 FPL Group Inc. .......................................................... United States 1,800,000 110,106,000 Hawaiian Electric Industries Inc. ....................................... United States 500,000 12,995,000 National Grid PLC ....................................................... United Kingdom 4,987,755 78,312,985 Northeast Utilities ..................................................... United States 1,600,000 52,432,000 Pepco Holdings Inc. ..................................................... United States 1,400,000 40,628,000 PG&E Corp. .............................................................. United States 1,900,000 91,713,000 Pinnacle West Capital Corp. ............................................. United States 800,000 38,600,000 PPL Corp. ............................................................... United States 2,400,000 98,160,000 Progress Energy Inc. .................................................... United States 1,500,000 75,660,000 Public Service Enterprise Group Inc. .................................... United States 1,300,000 107,952,000 Puget Energy Inc. ....................................................... United States 1,725,000 44,298,000 SCANA Corp. ............................................................. United States 1,000,000 43,170,000 a Sierra Pacific Resources ................................................ United States 3,200,000 55,616,000 The Southern Co. ........................................................ United States 2,500,000 91,625,000 TXU Corp. ............................................................... United States 1,100,000 70,510,000 United Utilities PLC .................................................... United Kingdom 3,000,000 44,594,521 Westar Energy Inc. ...................................................... United States 800,000 22,016,000 Wisconsin Energy Corp. .................................................. United States 1,000,000 48,520,000 Xcel Energy Inc. ........................................................ United States 2,000,000 49,380,000 --------------- 2,364,138,894 --------------- GAS DISTRIBUTORS 7.8% AGL Resources Inc. ...................................................... United States 1,000,000 42,720,000 Atmos Energy Corp. ...................................................... United States 600,000 18,768,000 Gaz de France ........................................................... France 544,033 25,239,611
Semiannual Report | 95 Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ LONG TERM INVESTMENTS (CONTINUED) COMMON STOCKS (CONTINUED) GAS DISTRIBUTORS (CONTINUED) Sempra Energy ........................................................... United States 1,000,000 $ 61,010,000 Spectra Energy Corp. .................................................... United States 2,195,700 57,681,039 Vectren Corp. ........................................................... United States 800,000 22,880,000 --------------- 228,298,650 --------------- OIL & GAS PIPELINES 1.8% Kinder Morgan Inc. ...................................................... United States 200,000 21,290,000 The Williams Cos. Inc. .................................................. United States 1,100,000 31,306,000 --------------- 52,596,000 --------------- TOTAL COMMON STOCKS (COST $1,599,916,935) ............................... 2,745,739,544 --------------- CONVERTIBLE PREFERRED STOCKS 1.2% ELECTRIC UTILITIES 1.2% CMS Energy Trust I, 7.75%, cvt. pfd. .................................... United States 260,000 12,971,322 PNM Resources Inc., 6.75%, cvt. pfd. .................................... United States 400,000 21,750,000 --------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,440,520) ................... 34,721,322 --------------- ------------------ PRINCIPAL AMOUNT b ------------------ CORPORATE BONDS 3.7% ELECTRIC UTILITIES 3.7% Aquila Inc., senior note, 9.95%, 2/01/11 ...................................................... United States $ 6,000,000 6,600,000 8.27%, 11/15/21 ..................................................... United States 6,100,000 7,289,500 CMS Energy Corp., senior note, 9.875%, 10/15/07 ......................... United States 8,500,000 8,723,125 MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ............ United States 25,000,000 31,549,400 Northeast Generation Co., senior note, 8.812%, 10/15/26 ................. United States 7,500,000 7,717,125 PP&L Capital Funding, 8.375%, 6/15/07 ................................... United States 15,000,000 15,081,855 TXU Corp., senior note, R, 6.55%, 11/15/34 .............................. United States 40,000,000 33,695,920 --------------- TOTAL CORPORATE BONDS (COST $107,935,453) ............................... 110,656,925 --------------- TOTAL LONG TERM INVESTMENTS (COST $1,741,292,908) ....................... 2,891,117,791 --------------- ------------------ SHARES ------------------ SHORT TERM INVESTMENT (COST $39,855,609) 1.4% MONEY MARKET FUND 1.4% c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% .... United States 39,855,609 39,855,609 --------------- TOTAL INVESTMENTS (COST $1,781,148,517) 99.8% ........................... 2,930,973,400 OTHER ASSETS, LESS LIABILITIES 0.2% ..................................... 4,779,637 --------------- NET ASSETS 100.0% ....................................................... $ 2,935,753,037 ===============
See Selected Portfolio Abbreviations on page 97. a Non-income producing for the twelve months ended March 31, 2007. b The principal amount is stated in U.S. dollars unless otherwise indicated. c See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 96 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. STATEMENT OF INVESTMENTS, MARCH 31, 2007 (UNAUDITED) SELECTED PORTFOLIO ABBREVIATIONS ADR - American Depository Receipt FHLMC - Federal Home Loan Mortgage Corp. FNMA - Federal National Mortgage Association FRN - Floating Rate Note GNMA - Government National Mortgage Association GP - Graduated Payment MTN - Medium Term Note PIK - Payment-In-Kind SF - Single Family Semiannual Report | The accompanying notes are an integral part of these financial statements. | 97 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2007 (unaudited)
----------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ----------------------------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ............................ $ 305,321,731 $ 900,890,205 $ 44,763,440,122 Cost - Non-controlled affiliated issuers (Note 9) ...... -- -- 1,861,773,108 Cost - Sweep Money Fund (Note 7) ....................... 2,054,290 31,920,013 179,241,151 Cost - Repurchase agreements ........................... -- -- 3,387,772,295 ----------------------------------------------------- Total cost of investments .............................. $ 307,376,021 $ 932,810,218 $ 50,192,226,676 ===================================================== Value - Unaffiliated issuers ........................... $ 591,210,208 $ 2,562,655,914 $ 49,988,823,716 Value - Non-controlled affiliated issuers (Note 9) ..... -- -- 3,075,724,643 Value - Sweep Money Fund (Note 7) ...................... 2,054,290 31,920,013 179,241,151 Value - Repurchase agreements .......................... -- -- 3,387,772,295 ----------------------------------------------------- Total value of investments a ........................... 593,264,498 2,594,575,927 56,631,561,805 Receivables: Investment securities sold ............................. 4,821,491 -- 109,623,610 Capital shares sold .................................... 457,601 2,814,272 204,335,387 Dividends and interest ................................. 156,848 1,859,487 506,973,033 ----------------------------------------------------- Total assets ........................................ 598,700,438 2,599,249,686 57,452,493,835 ----------------------------------------------------- Liabilities: Payables: Investment securities purchased ........................ -- 2,299,018 534,154,347 Capital shares redeemed ................................ 1,978,670 3,316,892 78,781,685 Affiliates ............................................. 636,198 2,546,442 46,960,327 Payable upon return of securities loaned .................. -- -- 22,279,000 Accrued expenses and other liabilities .................... 450,813 1,565,598 10,927,105 ----------------------------------------------------- Total liabilities ................................... 3,065,681 9,727,950 693,102,464 ----------------------------------------------------- Net assets, at value ............................. $ 595,634,757 $ 2,589,521,736 $ 56,759,391,371 ===================================================== Net assets consist of: Paid-in capital ........................................... $ 357,213,007 $ 1,039,720,835 $ 49,749,987,182 Undistributed net investment income (loss) ................ (1,542,809) 1,155,278 -- Distributions in excess of net investment income .......... -- -- (79,959,726) Net unrealized appreciation (depreciation) ................ 285,888,477 1,661,765,709 6,439,373,957 Accumulated net realized gain (loss) ...................... (45,923,918) (113,120,086) 649,989,958 ----------------------------------------------------- Net assets, at value ............................. $ 595,634,757 $ 2,589,521,736 $ 56,759,391,371 ===================================================== a Including securities loaned ................................ -- -- $ 21,895,851
98 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2007 (unaudited)
-------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND -------------------------------------------------- CLASS A: Net assets, at value ................................................... $ 516,155,098 $ 1,818,773,221 $ 32,234,821,434 ================================================== Shares outstanding ..................................................... 18,983,166 43,213,914 11,888,074,958 ================================================== Net asset value per share b ............................................ $ 27.19 $ 42.09 $ 2.71 ================================================== Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ..................................... $ 28.85 $ 44.66 $ 2.83 ================================================== CLASS B: Net assets, at value ................................................... $ 15,725,209 $ 123,415,080 $ 3,866,737,248 ================================================== Shares outstanding ..................................................... 605,123 3,049,277 1,431,538,604 ================================================== Net asset value and maximum offering price per share b ................. $ 25.99 $ 40.47 $ 2.70 ================================================== CLASS B1: Net assets, at value ................................................... -- -- $ 453,875,607 ================================================== Shares outstanding ..................................................... -- -- 167,322,653 ================================================== Net asset value and maximum offering price per share b ................. -- -- $ 2.71 ================================================== CLASS C: Net assets, at value ................................................... $ 63,754,450 $ 288,494,424 $ 14,759,878,842 ================================================== Shares outstanding ..................................................... 2,478,918 7,190,006 5,410,984,971 ================================================== Net asset value and maximum offering price per share b ................. $ 25.72 $ 40.12 $ 2.73 ================================================== CLASS R: Net assets, at value ................................................... -- $ 43,258,111 $ 237,734,245 ================================================== Shares outstanding ..................................................... -- 1,034,763 88,523,629 ================================================== Net asset value and maximum offering price per share b ................. -- $ 41.80 $ 2.69 ================================================== ADVISOR CLASS: Net assets, at value ................................................... -- $ 315,580,900 $ 5,206,343,995 ================================================== Shares outstanding ..................................................... -- 7,492,652 1,929,131,768 ================================================== Net asset value and maximum offering price per share b ................. -- $ 42.12 $ 2.70 ==================================================
b Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 99 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2007 (unaudited)
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................ $ 6,226,281,913 $ 1,741,292,908 Cost - Sweep Money Fund (Note 7) ................... 179,207,272 39,855,609 Cost - Repurchase agreements ....................... 91,980,000 -- --------------------------------- Total cost of investments .......................... $ 6,497,469,185 $ 1,781,148,517 ================================= Value - Unaffiliated issuers ....................... $ 6,175,128,102 $ 2,891,117,791 Value - Sweep Money Fund (Note 7) .................. 179,207,272 39,855,609 Value - Repurchase agreements ...................... 91,980,000 -- --------------------------------- Total value of investments ......................... 6,446,315,374 2,930,973,400 Cash .................................................. 2,539 -- Receivables: Capital shares sold ................................ 5,674,758 5,390,064 Dividends and interest ............................. 28,294,497 7,183,509 --------------------------------- Total assets .................................... 6,480,287,168 2,943,546,973 --------------------------------- Liabilities: Payables: Investment securities purchased .................... 65,541,016 -- Capital shares redeemed ............................ 11,851,842 4,652,832 Affiliates ......................................... 4,518,813 3,052,791 Accrued expenses and other liabilities ................ 2,568,381 88,313 --------------------------------- Total liabilities ............................... 84,480,052 7,793,936 --------------------------------- Net assets, at value ......................... $ 6,395,807,116 $ 2,935,753,037 ================================= Net assets consist of: Paid-in capital ....................................... $ 6,860,584,149 $ 1,730,690,159 Undistributed net investment income (distributions in excess of net investment income) .. (4,219,282) 3,432,465 Net unrealized appreciation (depreciation) ............ (51,153,811) 1,149,824,883 Accumulated net realized gain (loss) .................. (409,403,940) 51,805,530 --------------------------------- Net assets, at value ......................... $ 6,395,807,116 $ 2,935,753,037 =================================
100 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2007 (unaudited)
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- CLASS A: Net assets, at value ................................................... $ 5,136,922,317 $ 2,206,389,427 ================================= Shares outstanding ..................................................... 798,472,250 150,927,947 ================================= Net asset value per share a ............................................ $ 6.43 $ 14.62 ================================= Maximum offering price per share (net asset value per share / 95.75%) .. $ 6.72 $ 15.27 ================================= CLASS B: Net assets, at value ................................................... $ 349,899,363 $ 143,465,641 ================================= Shares outstanding ..................................................... 54,469,477 9,823,876 ================================= Net asset value and maximum offering price per share a ................. $ 6.42 $ 14.60 ================================= CLASS C: Net assets, at value ................................................... $ 411,107,479 $ 448,772,320 ================================= Shares outstanding ..................................................... 64,207,426 30,796,533 ================================= Net asset value and maximum offering price per share a ................. $ 6.40 $ 14.57 ================================= CLASS R: Net assets, at value ................................................... $ 74,660,804 $ 40,073,179 ================================= Shares outstanding ..................................................... 11,613,425 2,748,187 ================================= Net asset value and maximum offering price per share a ................. $ 6.43 $ 14.58 ================================= ADVISOR CLASS: Net assets, at value ................................................... $ 423,217,153 $ 97,052,470 ================================= Shares outstanding ..................................................... 65,634,622 6,611,751 ================================= Net asset value and maximum offering price per share a ................. $ 6.45 $ 14.68 =================================
a Redemption price is equal to net asset value less contingent deferred sales charges, if applicable, and redemption fees retained by the Fund. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 101 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended March 31, 2007 (unaudited)
------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------- Investment income: Dividends: Unaffiliated issuers ..................................................... $ 2,081,602 $ 16,723,015 $ 456,320,011 Non-controlled affiliated issuers (Note 9) ............................... -- -- 56,401,935 Sweep Money Fund (Note 7) ................................................ 74,996 498,477 4,550,988 Interest .................................................................... -- -- 1,015,141,331 Income from securities loaned - net ......................................... -- -- 508,071 ------------------------------------------------- Total investment income ............................................... 2,156,598 17,221,492 1,532,922,336 ------------------------------------------------- Expenses: Management fees (Note 3a) ................................................... 1,562,730 5,886,981 101,621,166 Distribution fees: (Note 3c) Class A .................................................................. 681,444 2,086,680 22,082,737 Class B .................................................................. 86,553 632,348 19,038,631 Class B1 ................................................................. -- -- 1,493,552 Class C .................................................................. 335,257 1,432,455 44,239,008 Class R .................................................................. -- 104,017 523,544 Transfer agent fees (Note 3e) ............................................... 898,042 3,220,793 23,156,239 Custodian fees (Note 4) ..................................................... 14,642 23,862 436,350 Reports to shareholders ..................................................... 57,643 216,865 2,065,032 Registration and filing fees ................................................ 34,904 75,922 1,179,717 Professional fees (Note 3f) ................................................. 16,351 33,610 268,332 Directors' fees and expenses ................................................ 1,999 7,119 109,603 Other ....................................................................... 9,846 16,351 301,651 ------------------------------------------------- Total expenses ........................................................ 3,699,411 13,737,003 216,515,562 Expense reductions (Note 4) ........................................... (4) (101) (24,692) ------------------------------------------------- Net expenses ....................................................... 3,699,407 13,736,902 216,490,870 ------------------------------------------------- Net investment income (loss) ..................................... (1,542,809) 3,484,590 1,316,431,466 ------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments Unaffiliated Issuers ................................................... 10,203,403 4,715,357 757,318,226 Non-controlled affiliated issuers (Note 9) ............................. -- -- 8,538,302 Foreign currency transactions ............................................ (1,422) (25) (716,003) ------------------------------------------------- Net realized gain (loss) ......................................... 10,201,981 4,715,332 765,140,525 ------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments .............................................................. 26,541,771 179,948,743 2,740,985,458 Translation of assets and liabilities denominated in foreign currencies .. -- -- 38,828 ------------------------------------------------- Net change in unrealized appreciation (depreciation) ............. 26,541,771 179,948,743 2,741,024,286 ------------------------------------------------- Net realized and unrealized gain (loss) ........................................ 36,743,752 184,664,075 3,506,164,811 ------------------------------------------------- Net increase (decrease) in net assets resulting from operations ................ $ 35,200,943 $ 188,148,665 $ 4,822,596,277 =================================================
102 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended March 31, 2007 (unaudited)
--------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Investment income: Dividends: Unaffiliated issuers .................................................. $ -- $ 44,204,580 Sweep Money Fund (Note 7) ............................................. 3,961,906 269,705 Interest ................................................................. 173,141,460 4,263,810 --------------------------------- Total investment income ............................................ 177,103,366 48,738,095 --------------------------------- Expenses: Management fees (Note 3a) ................................................ 14,388,693 6,364,267 Distribution fees: (Note 3c) Class A ............................................................... 3,184,763 1,421,244 Class B ............................................................... 1,193,074 451,228 Class C ............................................................... 1,344,696 1,357,680 Class R ............................................................... 181,500 82,115 Transfer agent fees (Note 3e) ............................................ 5,090,255 2,003,791 Custodian fees (Note 4) .................................................. 63,919 37,950 Reports to shareholders .................................................. 437,716 103,601 Registration and filing fees ............................................. 123,859 69,831 Professional fees (Note 3f) .............................................. 43,232 31,813 Directors' fees and expenses ............................................. 22,834 13,930 Other .................................................................... 74,934 34,791 --------------------------------- Total expenses ..................................................... 26,149,475 11,972,241 Expense reductions (Note 4) ........................................ (129) (277) --------------------------------- Net expenses ...................................................... 26,149,346 11,971,964 --------------------------------- Net investment income (loss) .................................... 150,954,020 36,766,131 --------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................... (289,893) 71,240,753 Foreign currency transactions ......................................... -- (29,099) --------------------------------- Net realized gain (loss) ........................................ (289,893) 71,211,654 --------------------------------- Net change in unrealized appreciation (depreciation) on investments ...... 18,176,757 368,267,669 --------------------------------- Net realized and unrealized gain (loss) ..................................... 17,886,864 439,479,323 --------------------------------- Net increase (decrease) in net assets resulting from operations ............. $ 168,840,884 $ 476,245,454 =================================
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 103 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ---------------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED MARCH 31, 2007 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2006 (UNAUDITED) SEPTEMBER 30, 2006 ---------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ............. $ (1,542,809) $ (2,150,136) $ 3,484,590 $ 5,235,063 Net realized gain (loss) from investments and foreign currency transactions ...... 10,201,981 37,234,123 4,715,332 94,169,928 Net change in unrealized appreciation (depreciation) on investments .......... 26,541,771 (13,111,219) 179,948,743 169,320,275 ---------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations .............. 35,200,943 21,972,768 188,148,665 268,725,266 ---------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ............................... -- -- (4,596,418) (2,878,816) Class R ............................... -- -- (7,075) (1,109) Advisor Class ......................... -- -- (1,417,769) (964,032) ---------------------------------------------------------------------------------- Total distributions to shareholders ......... -- -- (6,021,262) (3,843,957) ---------------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ............................... (105,379,624) (58,206,956) (5,993,269) (61,066,872) Class B ............................... (3,895,344) (1,156,433) (8,660,512) (14,734,540) Class C ............................... (8,711,372) (6,007,946) (5,474,185) (27,044,966) Class R ............................... -- -- 2,667,513 6,380,501 Advisor Class ......................... -- -- 20,258,920 24,459,918 ---------------------------------------------------------------------------------- Total capital share transactions ............ (117,986,340) (65,371,335) 2,798,467 (72,005,959) ---------------------------------------------------------------------------------- Redemption fees ............................. 717 2,037 3,208 8,229 ---------------------------------------------------------------------------------- Net increase (decrease) in net assets ....................... (82,784,680) (43,396,530) 184,929,078 192,883,579 Net assets: Beginning of period ......................... 678,419,437 721,815,967 2,404,592,658 2,211,709,079 ---------------------------------------------------------------------------------- End of period ............................... $ 595,634,757 $ 678,419,437 $ 2,589,521,736 $ 2,404,592,658 ================================================================================== Undistributed net investment income (loss) included in net assets: End of period ............................... $ (1,542,809) $ -- $ 1,155,278 $ 3,691,950 ==================================================================================
104 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
---------------------------------------------------------------------------------- FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ---------------------------------------------------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED MARCH 31, 2007 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2006 (UNAUDITED) SEPTEMBER 30, 2006 ---------------------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .................... $ 1,316,431,466 $ 2,251,128,737 $ 150,954,020 $ 313,718,824 Net realized gain (loss) from investments and foreign currency transactions ...... 765,140,525 708,504,197 (289,893) (1,705,377) Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ...... 2,741,024,286 1,064,942,294 18,176,757 (93,987,541) ---------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations .............. 4,822,596,277 4,024,575,228 168,840,884 218,025,906 ---------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ............................... (791,655,423) (1,378,791,711) (135,676,969) (270,849,710) Class B ............................... (88,485,762) (189,035,634) (8,765,500) (18,899,716) Class B1 .............................. (11,460,201) (25,054,794) -- -- Class C ............................... (327,661,331) (571,320,771) (9,845,840) (20,148,370) Class R ............................... (5,285,009) (8,167,468) (1,752,714) (2,989,468) Advisor Class ......................... (123,368,164) (175,243,446) (10,613,188) (18,476,100) Net realized gains: Class A ............................... (420,454,280) (140,038,105) -- -- Class B ............................... (56,272,957) (23,629,261) -- -- Class B1 .............................. (6,844,643) (2,953,524) -- -- Class C ............................... (190,856,659) (63,765,145) -- -- Class R ............................... (2,957,517) (827,485) -- -- Advisor Class ......................... (62,928,530) (15,806,072) -- -- ---------------------------------------------------------------------------------- Total distributions to shareholders ......... (2,088,230,476) (2,594,633,416) (166,654,211) (331,363,364) ---------------------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ............................... 4,041,723,563 3,892,312,218 (156,025,521) (518,339,020) Class B ............................... (79,596,213) (281,240,958) (38,981,257) (82,378,909) Class B1 .............................. (30,233,773) (46,251,019) -- -- Class C ............................... 1,910,214,390 1,657,633,123 (13,401,776) (76,075,166) Class R ............................... 43,243,668 55,454,673 3,530,544 6,209,239 Advisor Class ......................... 1,186,272,471 1,379,240,071 35,753,602 57,275,425 ---------------------------------------------------------------------------------- Total capital share transactions ............ 7,071,624,106 6,657,148,108 (169,124,408) (613,308,431) ---------------------------------------------------------------------------------- Redemption fees ............................. 105,900 265,535 16,520 125,755 ---------------------------------------------------------------------------------- Net increase (decrease) in net assets ........................... 9,806,095,807 8,087,355,455 (166,921,215) (726,520,134) Net assets: Beginning of period ......................... 46,953,295,564 38,865,940,109 6,562,728,331 7,289,248,465 ---------------------------------------------------------------------------------- End of period ............................... $ 56,759,391,371 $ 46,953,295,564 $ 6,395,807,116 $ 6,562,728,331 ================================================================================== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period ............................... $ (79,959,726) $ (48,475,302) $ (4,219,282) $ 11,480,909 ==================================================================================
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 105 Franklin Custodian Funds, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------- FRANKLIN UTILITIES FUND -------------------------------------- SIX MONTHS ENDED MARCH 31, 2007 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2006 -------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .......................................................... $ 36,766,131 $ 86,200,184 Net realized gain (loss) from investments and foreign currency transactions .... 71,211,654 79,469,077 Net change in unrealized appreciation (depreciation) on investments ............ 368,267,669 (14,294,348) -------------------------------------- Net increase (decrease) in net assets resulting from operations .......... 476,245,454 151,374,913 -------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................................................... (33,835,827) (63,192,877) Class B ..................................................................... (1,943,586) (3,961,723) Class C ..................................................................... (5,905,947) (11,209,132) Class R ..................................................................... (488,603) (562,410) Advisor Class ............................................................... (1,527,737) (3,148,388) Net realized gains: Class A ..................................................................... (64,820,958) (14,345,312) Class B ..................................................................... (4,455,820) (1,090,928) Class C ..................................................................... (13,297,323) (3,070,998) Class R ..................................................................... (997,296) (117,357) Advisor Class ............................................................... (2,701,856) (696,993) -------------------------------------- Total distributions to shareholders ............................................... (129,974,953) (101,396,118) -------------------------------------- Capital share transactions: (Note 2) Class A ..................................................................... 19,810,583 (98,910,206) Class B ..................................................................... (7,877,799) (22,687,061) Class C ..................................................................... 4,506,751 (50,418,336) Class R ..................................................................... 8,216,786 12,337,719 Advisor Class ............................................................... (18,022,466) (8,392,780) -------------------------------------- Total capital share transactions .................................................. 6,633,855 (168,070,664) -------------------------------------- Redemption fees ................................................................... 7,419 10,894 -------------------------------------- Net increase (decrease) in net assets .................................... 352,911,775 (118,080,975) Net assets: Beginning of period ............................................................... 2,582,841,262 2,700,922,237 -------------------------------------- End of period ..................................................................... $ 2,935,753,037 $ 2,582,841,262 ====================================== Undistributed net investment income included in net assets: End of period ..................................................................... $ 3,432,465 $ 10,368,034 ======================================
106 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds, Inc. (the Custodian Funds) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act) as a diversified, open-end investment company, consisting of five funds (the Funds). The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
- ---------------------------------------------------------------------------------------------------- CLASS A, CLASS B CLASS A, CLASS B, CLASS C, CLASS A, CLASS B, CLASS B1, & CLASS C CLASS R & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ---------------------------------------------------------------------------------------------------- Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The funds may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The funds' pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. Semiannual Report | 107 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) The Funds have procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Custodian Funds' Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Custodian Funds' Board of Directors. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statements of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. 108 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The Funds may also enter into joint repurchase agreements whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. All repurchase agreements held by the funds at period end had been entered into on March 30, 2007. Repurchase agreements are valued at cost. D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS Certain funds may purchase securities on a when-issued, delayed delivery, or to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statements of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statements of Assets and Liabilities. F. SECURITIES LENDING Certain funds may loan securities to certain brokers through a securities lending agent for which they receive initial cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at Semiannual Report | 109 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. SECURITIES LENDING (CONTINUED) the close of fund business each day; any additional collateral required due to changes in security values is delivered to the funds on the next business day. The collateral is invested in short-term instruments as noted in the Statement of Investments. The funds receive interest income from the investment of cash collateral, adjusted by lender fees and broker rebates. The funds bear the risk of loss with respect to the investment of the collateral and the securities loaned. The securities lending agent has agreed to indemnify the fund in the case of default of any securities borrower. G. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Custodian Funds are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Custodian Funds. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, other than class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. I. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. 110 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. REDEMPTION FEES A short term trading redemption fee will be imposed, with some exceptions, on any fund shares that are redeemed or exchanged within seven calendar days following their purchase date. The redemption fee is 2% of the amount redeemed. Such fees are retained by the funds and accounted for as an addition to paid-in capital. K. GUARANTEES AND INDEMNIFICATIONS Under the Custodian Funds' organizational documents, their officers and directors are indemnified by the Custodian Funds against certain liabilities arising out of the performance of their duties to the Custodian Funds. Additionally, in the normal course of business, the Custodian Funds enter into contracts with service providers that contain general indemnification clauses. The Custodian Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Custodian Funds that have not yet occurred. Currently, the Custodian Funds expect the risk of loss to be remote. 2. CAPITAL STOCK At March 31, 2007, there were 46.2 billion shares of the Custodian Funds authorized ($0.01 par value) and allocated to the Funds as follows (in millions): ---------------------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND ---------------------------------------------------------------------------- 1,000 3,250 30,400 8,000 3,550 Transactions in the Funds' shares were as follows:
--------------------------------------------------------- FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND --------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT --------------------------------------------------------- CLASS A SHARES: Six months ended March 31, 2007 Shares sold ...................................... 1,108,993 $ 29,904,399 3,668,879 $ 153,846,782 Shares issued in reinvestment of distributions ... -- -- 101,411 4,209,597 Shares redeemed .................................. (5,014,686) (135,284,023) (3,926,538) (164,049,648) --------------------------------------------------------- Net increase (decrease) .......................... (3,905,693) $ (105,379,624) (156,248) $ (5,993,269) ========================================================= Year ended September 30, 2006 Shares sold ...................................... 7,549,106 $ 196,574,987 5,839,020 $ 216,936,848 Shares issued in reinvestment of distributions ... -- -- 72,200 2,651,898 Shares redeemed .................................. (9,824,846) (254,781,943) (7,553,843) (280,655,618) --------------------------------------------------------- Net increase (decrease) .......................... (2,275,740) $ (58,206,956) (1,642,623) $ (61,066,872) =========================================================
Semiannual Report | 111 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------ FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------ CLASS B SHARES: Six months ended March 31, 2007 Shares sold ...................................... 14,510 $ 375,049 70,891 $ 2,874,779 Shares redeemed .................................. (165,522) (4,270,393) (285,402) (11,535,291) ------------------------------------------------------ Net increase (decrease) .......................... (151,012) $ (3,895,344) (214,511) $ (8,660,512) ====================================================== Year ended September 30, 2006 Shares sold ...................................... 130,112 $ 3,277,620 131,693 $ 4,727,781 Shares redeemed .................................. (181,335) (4,434,053) (542,288) (19,462,321) ------------------------------------------------------ Net increase (decrease) .......................... (51,223) $ (1,156,433) (410,595) $ (14,734,540) ====================================================== CLASS C SHARES: Six months ended March 31, 2007 Shares sold ...................................... 155,479 $ 3,975,858 441,749 $ 17,671,940 Shares redeemed .................................. (495,770) (12,687,230) (580,341) (23,146,125) ------------------------------------------------------ Net increase (decrease) .......................... (340,291) $ (8,711,372) (138,592) $ (5,474,185) ====================================================== Year ended September 30, 2006 Shares sold ...................................... 544,669 $ 13,596,186 805,722 $ 28,644,387 Shares redeemed .................................. (804,572) (19,604,132) (1,568,706) (55,689,353) ------------------------------------------------------ Net increase (decrease) .......................... (259,903) $ (6,007,946) (762,984) $ (27,044,966) ====================================================== CLASS R SHARES: Six months ended March 31, 2007 Shares sold ...................................... 249,370 $ 10,471,738 Shares issued in reinvestment of distributions ... 170 7,025 Shares redeemed .................................. (189,117) (7,811,250) --------------------------- Net increase (decrease) .......................... 60,423 $ 2,667,513 =========================== Year ended September 30, 2006 Shares sold ...................................... 761,379 $ 28,236,014 Shares issued in reinvestment of distributions ... 30 1,108 Shares redeemed .................................. (591,370) (21,856,621) --------------------------- Net increase (decrease) .......................... 170,039 $ 6,380,501 =========================== ADVISOR CLASS SHARES: Six months ended March 31, 2007 Shares sold ...................................... 711,013 $ 29,898,180 Shares issued in reinvestment of distributions ... 30,694 1,273,761 Shares redeemed .................................. (259,327) (10,913,021) --------------------------- Net increase (decrease) .......................... 482,380 $ 20,258,920 =========================== Year ended September 30, 2006 Shares sold ...................................... 1,865,004 $ 68,842,317 Shares issued in reinvestment of distributions ... 23,979 880,512 Shares redeemed .................................. (1,234,780) (45,262,911) --------------------------- Net increase (decrease) .......................... 654,203 $ 24,459,918 ===========================
112 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
-------------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND -------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT -------------------------------------------------------------------- CLASS A SHARES: Six months ended March 31, 2007 Shares sold ...................................... 1,871,213,475 $ 4,965,935,996 37,863,358 $ 243,407,351 Shares issued in reinvestment of distributions ... 337,594,388 890,509,065 13,765,508 88,405,102 Shares redeemed .................................. (683,925,918) (1,814,721,498) (75,916,707) (487,837,974) -------------------------------------------------------------------- Net increase (decrease) .......................... 1,524,881,945 $ 4,041,723,563 (24,287,841) $ (156,025,521) ==================================================================== Year ended September 30, 2006 Shares sold ...................................... 2,696,366,641 $ 6,638,171,639 74,108,689 $ 475,165,349 Shares issued in reinvestment of distributions ... 419,071,279 1,027,948,938 27,302,160 174,712,964 Shares redeemed .................................. (1,536,463,921) (3,773,808,359) (182,139,799) (1,168,217,333) -------------------------------------------------------------------- Net increase (decrease) .......................... 1,578,973,999 $ 3,892,312,218 (80,728,950) $ (518,339,020) ==================================================================== CLASS B SHARES: Six months ended March 31, 2007 Shares sold ...................................... 14,428,129 $ 37,989,074 660,506 $ 4,241,151 Shares issued in reinvestment of distributions ... 37,607,376 98,817,391 963,646 6,182,523 Shares redeemed .................................. (81,923,925) (216,402,678) (7,697,917) (49,404,931) -------------------------------------------------------------------- Net increase (decrease) .......................... (29,888,420) $ (79,596,213) (6,073,765) $ (38,981,257) ==================================================================== Year ended September 30, 2006 Shares sold ...................................... 26,637,625 $ 65,369,671 1,981,038 $ 12,637,018 Shares issued in reinvestment of distributions ... 55,871,397 136,411,780 2,075,139 13,272,404 Shares redeemed .................................. (197,429,792) (483,022,409) (16,913,499) (108,288,331) -------------------------------------------------------------------- Net increase (decrease) .......................... (114,920,770) $ (281,240,958) (12,857,322) $ (82,378,909) ==================================================================== CLASS B1 SHARES: Six months ended March 31, 2007 Shares sold ...................................... 482,661 $ 1,278,416 Shares issued in reinvestment of distributions ... 4,358,111 11,495,038 Shares redeemed .................................. (16,125,563) (43,007,227) ---------------------------------- Net increase (decrease) .......................... (11,284,791) $ (30,233,773) ================================== Year ended September 30, 2006 Shares sold ...................................... 1,061,971 $ 2,609,506 Shares issued in reinvestment of distributions ... 6,529,196 15,992,703 Shares redeemed .................................. (26,407,031) (64,853,228) ---------------------------------- Net increase (decrease) .......................... (18,815,864) $ (46,251,019) ================================== CLASS C SHARES: Six months ended March 31, 2007 Shares sold ...................................... 883,192,872 $ 2,356,432,866 5,885,877 $ 37,662,441 Shares issued in reinvestment of distributions ... 134,675,339 357,133,405 1,052,911 6,734,112 Shares redeemed .................................. (301,050,423) (803,351,881) (9,038,225) (57,798,329) -------------------------------------------------------------------- Net increase (decrease) .......................... 716,817,788 $ 1,910,214,390 (2,099,437) $ (13,401,776) ====================================================================
Semiannual Report | 113 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND ---------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- CLASS C SHARES: (CONTINUED) Year ended September 30, 2006 Shares sold ...................................... 1,197,637,346 $ 2,970,142,401 9,638,095 $ 61,502,139 Shares issued in reinvestment of distributions ... 166,806,121 411,488,472 2,119,611 13,512,599 Shares redeemed .................................. (698,120,168) (1,723,997,750) (23,652,039) (151,089,904) ---------------------------------------------------------------- Net increase (decrease) .......................... 666,323,299 $ 1,657,633,123 (11,894,333) $ (76,075,166) ================================================================ CLASS R SHARES: Six months ended March 31, 2007 Shares sold ...................................... 25,328,102 $ 66,671,495 2,161,954 $ 13,884,880 Shares issued in reinvestment of distributions ... 2,935,621 7,664,845 269,524 1,730,954 Shares redeemed .................................. (11,822,773) (31,092,672) (1,881,906) (12,085,290) ---------------------------------------------------------------- Net increase (decrease) .......................... 16,440,950 $ 43,243,668 549,572 $ 3,530,544 ================================================================ Year ended September 30, 2006 Shares sold ...................................... 35,951,956 $ 87,751,074 4,180,818 $ 27,602,806 Shares issued in reinvestment of distributions ... 3,434,439 8,359,852 421,527 2,782,416 Shares redeemed .................................. (16,667,648) (40,656,253) (3,423,452) (22,605,336) ---------------------------------------------------------------- Net increase (decrease) .......................... 22,718,747 $ 55,454,673 1,178,893 $ 7,779,886 ================================================================ ADVISOR CLASS SHARES: Six months ended March 31, 2007 Shares sold ...................................... 398,786,739 $ 1,053,820,154 4,852,177 $ 31,255,077 Shares issued in reinvestment of distributions ... 69,086,446 181,194,151 1,548,916 9,967,882 Shares redeemed .................................. (18,451,807) (48,741,834) (849,396) (5,469,357) ---------------------------------------------------------------- Net increase (decrease) .......................... 449,421,378 $ 1,186,272,471 5,551,697 $ 35,753,602 ================================================================ Year ended September 30, 2006 Shares sold ...................................... 536,707,405 $ 1,314,899,137 20,893,833 $ 134,424,816 Shares issued in reinvestment of distributions ... 75,142,358 183,808,062 2,672,825 17,119,867 Shares redeemed .................................. (49,253,364) (119,467,128) (14,613,605) (94,269,258) ---------------------------------------------------------------- Net increase (decrease) .......................... 562,596,399 $ 1,379,240,071 8,953,053 $ 57,275,425 ================================================================
----------------------------- FRANKLIN UTILITIES FUND ----------------------------- SHARES AMOUNT ----------------------------- CLASS A SHARES: Six months ended March 31, 2007 Shares sold ......................................................................... 7,980,157 $ 109,958,841 Shares issued in reinvestment of distributions ...................................... 5,810,953 79,034,028 Shares redeemed ..................................................................... (12,340,805) (169,182,286) ----------------------------- Net increase (decrease) ............................................................. 1,450,305 $ 19,810,583 ============================= Year ended September 30, 2006 Shares sold ......................................................................... 21,710,054 $ 263,631,372 Shares issued in reinvestment of distributions ...................................... 4,863,147 59,003,083 Shares redeemed ..................................................................... (34,893,525) (421,544,661) ----------------------------- Net increase (decrease) ............................................................. (8,320,324) $ (98,910,206) =============================
114 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. CAPITAL STOCK (CONTINUED)
---------------------------- FRANKLIN UTILITIES FUND ---------------------------- SHARES AMOUNT ---------------------------- CLASS B SHARES: Six months ended March 31, 2007 Shares sold ...................................... 207,730 $ 2,843,931 Shares issued in reinvestment of distributions ... 277,131 3,762,925 Shares redeemed .................................. (1,052,501) (14,484,655) ---------------------------- Net increase (decrease) .......................... (567,640) $ (7,877,799) ============================ Year ended September 30, 2006 Shares sold ...................................... 520,507 $ 6,326,393 Shares issued in reinvestment of distributions ... 231,269 2,799,228 Shares redeemed .................................. (2,628,864) (31,812,682) ---------------------------- Net increase (decrease) .......................... (1,877,088) $ (22,687,061) ============================ CLASS C SHARES: Six months ended March 31, 2007 Shares sold ...................................... 2,189,138 $ 30,019,916 Shares issued in reinvestment of distributions ... 763,916 10,349,981 Shares redeemed .................................. (2,617,937) (35,863,146) ---------------------------- Net increase (decrease) .......................... 335,117 $ 4,506,751 ============================ Year ended September 30, 2006 Shares sold ...................................... 4,480,664 $ 54,267,851 Shares issued in reinvestment of distributions ... 576,307 6,963,061 Shares redeemed .................................. (9,312,099) (111,649,248) ---------------------------- Net increase (decrease) .......................... (4,255,128) $ (50,418,336) ============================ CLASS R SHARES: Six months ended March 31, 2007 Shares sold ...................................... 879,533 $ 12,173,833 Shares issued in reinvestment of distributions ... 107,993 1,465,766 Shares redeemed .................................. (395,703) (5,422,813) ---------------------------- Net increase (decrease) .......................... 591,823 $ 8,216,786 ============================ Year ended September 30, 2006 Shares sold ...................................... 1,759,282 $ 21,583,826 Shares issued in reinvestment of distributions ... 54,640 665,605 Shares redeemed .................................. (823,343) (9,911,712) ---------------------------- Net increase (decrease) .......................... 990,579 $ 12,337,719 ============================ ADVISOR CLASS SHARES: Six months ended March 31, 2007 Shares sold ...................................... 1,699,043 $ 23,756,950 Shares issued in reinvestment of distributions ... 260,430 3,557,523 Shares redeemed .................................. (3,307,065) (45,336,939) ---------------------------- Net increase (decrease) .......................... (1,347,592) $ (18,022,466) ============================ Year ended September 30, 2006 Shares sold ...................................... 2,685,330 $ 33,289,067 Shares issued in reinvestment of distributions ... 269,026 3,282,823 Shares redeemed .................................. (3,720,560) (44,964,670) ---------------------------- Net increase (decrease) .......................... (766,204) $ (8,392,780) ============================
Semiannual Report | 115 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Custodian Funds are also officers and/or directors of the following subsidiaries:
- ----------------------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - ----------------------------------------------------------------------------------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES The Funds, except Franklin Growth Fund, pay an investment management fee to Advisers, whereas the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the funds as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $10 billion 0.440% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion B. ADMINISTRATIVE FEES Under agreements with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. C. DISTRIBUTION FEES The Custodian Funds Board of Directors has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. 116 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES (CONTINUED) The maximum annual plan rates, based on the average daily net assets, for each class, are as follows: --------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND --------------------------------------------------------- Reimbursement Plans: Class A ......... 0.25% 0.25% 0.15% 0.15% 0.15% Compensation Plans: Class B ......... 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 ........ -- -- 0.65% -- -- Class C ......... 1.00% 1.00% 0.65% 0.65% 0.65% Class R ......... -- 0.50% 0.50% 0.50% 0.50% D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period: ------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------ Sales charges retained net of commissions paid to unaffiliated broker/dealers ........................ $ 41,673 $ 376,398 $ 16,290,866 Contingent deferred sales charges retained ................ $ 25,235 $ 68,242 $ 3,069,199 ---------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ---------------------------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ... $ 324,861 $ 195,076 Contingent deferred sales charges retained .............................. $ 364,912 $ 69,005 E. TRANSFER AGENT FEES For the period ended March 31, 2007, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services: ------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ------------------------------------- Transfer agent fees .................... $ 497,538 $ 1,597,743 $ 9,787,153 Semiannual Report | 117 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES (CONTINUED) ----------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ----------------------------- Transfer agent fees ............................ $ 2,870,420 $ 970,634 F. OTHER AFFILIATED TRANSACTIONS Included in professional fees are legal fees of $92,388 that were paid to a law firm in which a partner is an officer of the Funds. 4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended March 31, 2007, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES At September 30, 2006, the Franklin Income Fund had tax basis capital losses of $2,516,775 from the merged Franklin Multi-Income Trust which may be carried over to offset future capital gains, subject to certain limitations For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2006, the capital loss carryforwards were as follows:
-------------------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT DYNATECH GROWTH INCOME SECURITIES FUND FUND FUND FUND -------------------------------------------------------------- Capital loss carryforwards expiring in: 2007 .................................. $ -- $ -- $ -- $ 18,954,412 2008 .................................. -- -- -- 21,105,846 2009 .................................. -- -- -- 46,256,951 2010 .................................. -- -- -- 11,768,551 2011 .................................. 19,032,674 78,768,578 2,020,605 33,556,845 2012 .................................. 21,838,085 39,052,129 496,170 129,102,166 2013 .................................. 14,781,620 -- -- 74,283,298 2014 .................................. -- -- -- 47,763,112 -------------------------------------------------------------- $ 55,652,379 $ 117,820,707 $ 2,516,775 $ 382,791,181 ==============================================================
118 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) For tax purposes, realized capital losses and realized currency losses, occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2006, the Franklin U.S. Government Securities Fund had deferred realized capital losses of $26,322,866. At September 30, 2006, the Franklin Dynatech Fund, Franklin Growth Fund and Franklin Income Fund had deferred realized currency losses of $142, $14,711 and $79,262, respectively. At March 31, 2007, the cost of investments and net unrealized appreciation (depreciation), for income tax purposes were as follows:
----------------------------------------------------- FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND ----------------------------------------------------- Cost of investments ........................... $ 307,376,021 $ 932,810,218 $ 50,208,357,326 ===================================================== Unrealized appreciation ....................... $ 287,781,624 $ 1,664,649,590 $ 6,956,547,562 Unrealized depreciation ....................... (1,893,147) (2,883,881) (533,343,083) ----------------------------------------------------- Net unrealized appreciation (depreciation) .... $ 285,888,477 $ 1,661,765,709 $ 6,423,204,479 =====================================================
---------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ---------------------------------- Cost of investments ........................... $ 6,497,469,185 $ 1,784,266,214 ================================== Unrealized appreciation ....................... $ 34,312,300 $ 1,153,031,888 Unrealized depreciation ....................... (85,466,111) (6,324,702) ---------------------------------- Net unrealized appreciation (depreciation) .... $ (51,153,811) $ 1,146,707,186 ==================================
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses and bond discounts and premiums. Semiannual Report | 119 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales (excluding short term securities) for the period ended March 31, 2007, were as follows: ------------------------------------------------ FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------------------------------------------ Purchases ................... $ 39,851,258 $ 7,075,703 $ 10,259,815,602 Sales ....................... $ 161,321,183 $ 15,590,053 $ 6,661,242,975 --------------------------------- FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------------------------- Purchases ................... $ 238,126,449 $ 135,682,724 Sales ....................... $ 546,880,800 $ 255,991,231 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 39.70% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At March 31, 2007, the aggregate value of these securities was $590,057,000, representing 1.04% of the fund's net assets. The fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 120 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund for the period ended March 31, 2007 were as shown below.
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF SHARES SHARES REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- NON-CONTROLLED AFFILIATES Ameren Corp. ................... 11,274,400 987,500 -- 12,261,900 $ 616,773,570 $ 15,045,309 $ -- Canadian Oil Sands Trust ....... 25,770,600 -- -- 25,770,600 630,816,073 11,411,688 -- Pinnacle West Capital Corp. .... 5,500,000 -- -- 5,500,000 265,375,000 5,775,000 -- Public Service Enterprise Group Inc. .................. 16,500,000 1,179,600 1,179,600 16,500,000 1,370,160,000 20,419,938 8,538,302 Puget Energy Inc. .............. 7,500,000 -- -- 7,500,000 192,600,000 3,750,000 -- --------------------------------------------- TOTAL AFFILIATED SECURITIES (5.42% of Net Assets) .......... $ 3,075,724,643 $ 56,401,935 $ 8,538,302 =============================================
10. OTHER CONSIDERATIONS Officers, directors or employees of Advisers, as the Franklin Income Fund's Investment Manager, serve as members of various bondholders' steering committees, official creditors' committees, or representatives of the fund in corporate restructuring negotiations. The securities of such companies have been identified on the accompanying Statement of Investments. As a result of this involvement, such individuals may be in possession of certain material, non-public information. If the fund's Investment Manager, while in possession of such information, seeks to buy or sell any of the securities of such companies, it will comply with all applicable federal securities laws. 11. UPCOMING ACQUISITIONS/MERGERS On December 4, 2006, the Board of Trustees for the Franklin Strategic Series approved a proposal to merge Franklin Blue Chip Fund into the Franklin Growth Fund, subject to approval by the shareholders of Franklin Blue Chip Fund. 12. REORGANIZATION TO A DELAWARE STATUTORY TRUST On October 17, 2006, the Board of Directors approved an Agreement and Plan of Reorganization (the Agreement) whereby the Franklin Custodian Funds would be reorganized and their domicile changed from a Maryland corporation to a Delaware statutory trust subject to approval by the shareholders. Semiannual Report | 121 Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 13. REGULATORY AND LITIGATION MATTERS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares ("marketing support"), Franklin Resources, Inc. and certain of its subsidiaries (collectively, the "Company"), entered into settlements with certain of those regulators and governmental entities. Specifically, the Company entered into settlements with the SEC, among others, concerning market timing and marketing support. On June 23, 2006, the SEC approved the proposed plan of distribution for the marketing support settlement, and disbursement of the settlement monies to the designated funds, in accordance with the terms and conditions of that settlement and plan, was completed in September 2006 and was recorded as other income. The plan of distribution for the market timing settlement is currently under review by the SEC staff. After publication of notice of the plan and a 30-day comment period, the proposed plan of distribution will be submitted to the SEC for approval. Following the SEC's approval of the plan of distribution, with modifications as appropriate, distribution of the settlement monies will begin in accordance with the terms and conditions of the settlement and plan. In addition, the Company, as well as most of the mutual funds within Franklin Templeton Investments and certain current or former officers, Company directors, fund directors, and employees, have been named in private lawsuits (styled as shareholder class actions, or as derivative actions on behalf of either the named funds or Franklin Resources, Inc.). The lawsuits relate to the industry practices referenced above, as well as to allegedly excessive commissions and advisory and distribution fees. The Company and fund management believe that the claims made in each of the private lawsuits referenced above are without merit and intend to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Custodian Funds, it is committed to making the Custodian Funds or their shareholders whole, as appropriate. 122 | Semiannual Report Franklin Custodian Funds, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 14. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. On December 22, 2006, the Securities and Exchange Commission extended the implementation date to no later than the last net asset value calculation in the first semi annual reporting period in 2007. The Funds are currently evaluating the impact, if any, of applying the various provisions of FIN 48. In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Custodian Funds believes the adoption of SFAS 157 will have no material impact on its financial statements. Semiannual Report | 123 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 27, 2007, the Board of Directors ("Board), including a majority of non-interested or independent Directors, approved renewal of the investment management agreement for each of the five separate funds comprising Franklin Custodian Funds ("Fund(s)"). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager ("Manager") and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. In considering such material, the independent Directors received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Directors, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net 124 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a pre-designated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, the high industry ranking given the Franklin Templeton website, and the firsthand experience of the individual Board members who deal with the shareholder services department in their capacities as shareholders in one or more of the various Franklin Templeton funds. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper report furnished for the agreement renewals. The Lipper report prepared for each individual Fund showed the investment performance of its Class A shares during 2006 and the previous 10 years ended December 31, 2006, in comparison with a performance universe selected by Lipper. Investment performance was shown on a total return basis for all Funds with income return being shown as well for those Funds having income as an investment objective element. The following summarizes the performance results for each Fund. FRANKLIN DYNATECH FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of the Fund and all retail and institutional science and technology funds as classified by Lipper. The Fund's Lipper report showed its total return during 2006 to be in the second-lowest quintile of such performance universe, but such return on an annualized basis was in the upper half of such universe and in the highest and second-highest quintiles of such universe for the previous three-, five- and ten-year periods, respectively. The Board expressed satisfaction with such performance. Semiannual Report | 125 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) FRANKLIN GROWTH FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional multi-cap core funds as classified by Lipper. The Fund's Lipper report showed its total return during 2006 ranked it in the upper half of its performance universe. Its total return on an annualized basis ranked it in the second-highest quintile of the performance universe during the previous three-year period and the second-lowest quintile during each of the previous five- and ten-year periods. The Board found such performance acceptable. FRANKLIN INCOME FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional mixed-asset target allocation moderate funds as classified by Lipper. The Fund's Lipper report showed its income return during 2006 and for each of the previous ten years was in the highest quintile of this performance universe. The Fund's total return as shown in such report during 2006 and on an annualized basis during each of the previous three-, five- and ten-year periods was also in the highest quintile of its performance universe. The Board expressed satisfaction with such performance. FRANKLIN U.S. GOVERNMENT SECURITIES FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional Ginnie Mae funds as classified by Lipper. The Fund's Lipper report showed its income return during 2006 was in the second-highest quintile of such universe, and during each of the previous three-, five- and ten-year periods on an annualized basis was in the highest quintile of such performance universe. The Fund's total return, as shown in such report, was in the middle quintile of its performance universe during 2006, and on an annualized basis was in the second-highest quintile of such universe for each of the previous three-, five- and ten-year periods. The Board expressed satisfaction with such performance. FRANKLIN UTILITIES FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional utility funds as classified by Lipper. The Fund's Lipper report showed its income return during 2006, as well as during each of the previous three-, five- and ten-year periods on an annualized basis, was in the highest quintile of such performance universe. The Fund's total return during 2006 placed it in the second-lowest quintile of its performance universe, and on an annualized basis placed it in the second-lowest quintile of its performance universe during the previous three-year period as well, but placed it in the second-highest quintile during each of the previous five- and ten-year periods. The Board expressed satisfaction with such performance, noting that the Fund had a total return of 23.88% in 2006 as shown in such Lipper report. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as constituting its appropriate Lipper expense group. Prior to making such comparison, the Board relied upon a survey showing that the scope of services covered under each Fund's investment management agreement was similar to those provided by fund managers to other mutual fund groups. In reviewing comparative costs, emphasis was given to each Fund's contractual 126 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis considers administrative charges as being part of management fees and total expenses for comparative consistency are shown by Lipper for fund Class A shares. The results of such expense comparisons showed that the contractual investment management fee rate for each of Franklin DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund was in the least expensive quintile of its respective Lipper expense group, for Franklin Income Fund was in the second-least expensive quintile of its Lipper expense group, and for Franklin U.S. Government Fund, was less than one basis point above the median of its Lipper expense group. The actual total expenses for all the Funds were in the least expensive quintile of their respective Lipper expense groups. Based upon the above, the Board was satisfied with the management fees and total expenses of each Fund in comparison to its respective Lipper expense group. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds. Specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the cost allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid to brokers/dealers Semiannual Report | 127 Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) who sold fund Class B shares prior to February 25, 2005, when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such fund. The Board also noted that economies of scale are shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. Prior to 2006, the fee structure under the investment management agreement with each Fund provided an initial fee of 0.625% on the first $100 million of assets; 0.50% on the next $150 million of assets; 0.45% on the next $9.75 billion of assets; 0.44% on the next $2.5 billion of assets; and thereafter declined by 0.02% for each subsequent $2.5 billion until reaching a final breakpoint of 0.36% for assets in excess of $20 billion. The only Fund whose assets exceed $20 billion is Franklin Income Fund and the investment management agreement was amended at the February 28, 2006, Board meeting to further reduce fees charged the Funds to 0.355% on net assets in excess of $35 billion up to $50 billion, and to 0.35% on assets in excess of $50 billion. Such reductions formalized fee waivers previously agreed to by the Manager at a Board meeting held April 19, 2005. In discussing such overall fee structure, management stated its view that it reaches a relatively low rate quickly reflecting anticipated economies of scale as a Fund's assets increase and pointed out the favorable effective management fee and total expense comparisons for each Fund within its Lipper expense group, as previously discussed under "Comparative Expenses." The Board believed that to the extent economies of scale may be realized by the Manager and its affiliates, the schedule of fees under the investment management agreement for each Fund provides a sharing of benefits with the Fund and its shareholders. PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. 128 | Semiannual Report Franklin Custodian Funds, Inc. SHAREHOLDER INFORMATION (CONTINUED) QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. Semiannual Report | 129 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. [LOGO] (R) One Franklin Parkway FRANKLIN TEMPLETON San Mateo, CA 94403-1906 INVESTMENTS - - 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 S2007 05/07 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Edith E. Holiday and Harris J. Ashton and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS, INC. By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 24, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/JIMMY D. GAMBILL ------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date May 24, 2007 By /S/GALEN G. VETTER ------------------ Galen G. Vetter Chief Financial Officer Date May 24, 2007 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 24, 2007 /S/JIMMY D. GAMBILL 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 24, 2007 /S/GALEN G. VETTER 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 03/31/07 (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 24, 2007 /S/JIMMY D. GAMBILL 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 03/31/07 (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 24, 2007 /S/GALEN G. VETTER Galen G. Vetter Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----