Semi
Annual
Report
March 31, 1998
Franklin Custodian Funds, Inc.
Franklin Growth Fund
Franklin Utilities Fund
Franklin Income Fund
Franklin DynaTech Fund
Franklin U.S. Government Securities Fund
Technology Update:
Franklin Templeton Combats
the Year 2000 Problem
By Charles B. Johnson,
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the Millennium
Bug. The problem originated from the software designers' attempt to save memory
by recording years in a two-digit format -- "98" instead of "1998," for example
- -- but didn't take into account that the year 2000 or "00," could also be
interpreted as 1900. Uncorrected, this problem could prevent computers from
accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help ensure that our computer systems, which service the funds and
their shareholders, will be Year-2000 Compliant. As changes reach completion, we
will conduct comprehensive tests to verify their effectiveness. We will also
require all of our major software or data services suppliers to be Year-2000
Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000 Problem,
mutual fund portfolio managers must be aware of the impact it could have on
companies in their portfolios. That's why Franklin Templeton portfolio managers
consistently keep this issue in mind while selecting investments and managing
their portfolios.
GRAPHIC PICTURE OMITTED
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
SHAREHOLDER LETTER
CONTENTS
Shareholder Letter 1
Fund Reports
Franklin Growth Fund 3
Franklin DynaTech Fund 9
Franklin Utilities Fund 14
Franklin Income Fund 23
Franklin U.S. Government
Securities Fund 32
Financial Highlights &
Statement of Investments 38
Financial Statements 64
Notes to
Financial Statements 70
Dear Shareholder:
We are pleased to bring you the Franklin Custodian Funds, Inc. semi-annual
report for the period ended March 31, 1998.
The future foretold?
In our Franklin Custodian Funds, Inc. annual report of September 30, 1997, we
wrote, "It is important to remember E that markets correct -- in our opinion, it
is desirable for them to do so." I assure you that when we wrote these words, we
had no idea the market was about to prove us accurate in quite so dramatic a
fashion. Less than a month later, on October 27, the Dow-Jones(R) Industrial
Average (the Dow) plummeted 7.18% causing the New York Exchange to close early
for the first time.*
Although such a steep descent may alarm some investors, it is important to
remember that periods of volatility offer opportunities to purchase companies'
stocks suddenly selling at more attractive valuations. This viewpoint probably
influenced many bargain-hunting investors following the October 27 fall. On the
very next day, the Dow not only rose 4.71%, but continued to rise to new
heights. By the end of the period under review, it stood at 8799.91, compared
with its September 30 closing of 7945.26.*
The Asian flu: a global epidemic
The Dow's precipitous drop on October 27, in large part, resulted from concern
over growing financial crises in Asia. Following Thailand's currency devaluation
during the summer, many Asian markets plummeted, igniting a worldwide decline in
securities markets. Although estimates for Asian market recovery are still
matter of debate, it is clear that these crises had some positive aspects.
*Source: Standard & Poor's(R) Micropal. The Dow Jones Industrial Average is a
price-weighted average of 30 actively traded blue chip stocks.
"Smart investors view their funds as long-term investments and realize that
market fluctuations and short-term volatility have minimal impact upon their
long-term financial goals."
First, the Asian economies' problems are generally perceived to have had a
dampening effect on the U.S. economy, acting as a "light foot on the brake" that
might otherwise have been applied by the Federal Reserve Board's raising of
interest rates. Second, while the Asian crises may negatively affect profits for
firms that export to the area, the same economic conditions could benefit
businesses that import from the region. Third, the uncertainty in the Asian
equity markets has resulted in a "flight to quality" making financial markets in
the U.S., whose economy has grown moderately without generating inflation, more
attractive to investors worldwide.
A wake-up call
Market volatility such as that experienced during the six months under review is
like the proverbial "wake-up call," rousing investors from dreams of endlessly
rising markets. The fact is that markets always have -- and always will --
fluctuate. Will the market drop again in the near future? Or will it soar to new
heights? We cannot answer those questions, and neither can anyone else.
Smart investors view their funds as long-term investments and realize that
market fluctuations and short-term volatility have minimal impact upon their
long-term financial goals. They understand that patience, discipline and
diversification are keys to successful investing and that mutual funds offer a
level of diversification that is almost impossible for individual investors to
achieve on their own.
Regardless of the market's direction, Franklin Templeton's disciplined
investment strategy remains the same: to provide shareholders with careful
portfolio selection, broad diversification and constant professional
supervision. We encourage you to speak with your investment representative about
your financial goals, diversify your investments, and remember that it is time
- -- not timing -- that makes the difference.
As always, we appreciate your support, welcome your comments, and look forward
to serving your future investment needs.
Sincerely,
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
FRANKLIN GROWTH FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin Growth Fund seeks capital appreciation by
investing primarily in common stocks or convertible securities believed to offer
favorable possibilities for capital appreciation.
- --------------------------------------------------------------------------------
During the six months under review, the U.S. stock market showed strong
performance. Fueled by moderate economic growth, healthy corporate profits,
relatively low interest rates, and virtually non-existent inflation, many
domestic stock indices climbed to record highs. However, it was not all smooth
sailing. Global financial markets experienced severe volatility, and many stock
prices dropped precipitously as shock waves from the Asian currency crises
spread around the world. When it became clear that the international community
was willing to involve itself in solving the Asian crises, the U.S. market not
only steadied, it continued its rise to new heights. By the end of the reporting
period, the Dow Jones Industrial average (the Dow) was 11.70% higher than it had
been on September 30, 1997.* Within this environment, Franklin Growth Fund -
Class I shares posted a +10.34% six-month total return as shown in the
Performance Summary on page 5.
We realize that the fund underperformed the Dow on a short-term basis, but our
aim is to provide solid growth over time, not to achieve wealth overnight.
Knowing that stock prices do not move only in one direction, we were concerned
about the high valuations of many stocks and kept the fund relatively liquid.
With 67% of total net assets invested in common stocks, and 33% in short-term
maturities as of March 31, we believe we can participate in any market advance,
albeit a bit more slowly than other funds that are almost fully invested in
equities. Our sizeable cash position should enable us to make advantageous stock
purchases when bargains present themselves in the future.
During the reporting period, the fund benefited from the performance of most of
its pharmaceutical and health care holdings. Many of these stocks were aided by
highly publicized innovations in the field, and from the fact that investors
generally perceive this sector as relatively immune to cyclical influences. As
you can see in the chart, four of our top 10 holdings were in this sector.
Schering-Plough Corp., our largest holding, is a high-quality company engaging
in the discovery, development, manufacturing and marketing of pharmaceutical and
health care products worldwide. We believe that the company's stability and
geographic diversity make it well positioned to benefit from changes within the
health care industry.
*Source: Standard & Poor's Micropal.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 40 of
this report.
Franklin Growth Fund
Portfolio Breakdown
3/31/98
% of Total
Sector Net Assets
- -----------------------------------------------
Pharmaceuticals 13.45%
Transportation 6.12%
Aerospace & Defense 5.30%
Health Care - Diversified 5.00%
Data Services 4.15%
Environmental Services 3.75%
Business Services 3.63%
Chemicals 3.42%
Energy/Energy Services 3.16%
Computer Hardware 3.01%
Communications &
Entertainment 2.67%
Electronics & Electrical
Equipment 2.51%
Diversified Manufacturers 2.48%
Media & Broadcasting 2.04%
Other Industries 5.95%
Cash & Equivalents 33.36%
Franklin Growth Fund
Top 10 Holdings
3/31/98
Company % of Total
Industry Net Assets
- ----------------------------------------------
Schering-Plough Corp.
PHARMACEUTICALS 3.97%
Pfizer Inc.
PHARMACEUTICALS 3.45%
Computer Sciences Corp.
DATA SERVICES 2.67%
AMR Corp./DE
TRANSPORTATION 2.40%
Minnesota Mining & Mfg Co.
DIVERSIFIED MANUFACTURING 1.83%
Bristol Myers Squibb Co.
PHARMACEUTICALS 1.80%
UAL Corp.
TRANSPORTATION 1.76%
Time Warner Inc.
MEDIA & BROADCASTING 1.75%
Delta Air Lines, Inc.
TRANSPORTATION 1.60%
Johnson & Johnson, Inc.
HEALTH CARE 1.58%
The fund's holdings did not change dramatically over the course of the six
months under review -- a reflection of our "buy and hold" investment strategy.
As you know, we purchase stocks in what we believe to be quality companies at
bargain prices and hold them for the long term. We did, however, increase our
holdings of International Flavors and Fragrances Inc., Ionics, Inc., Cisco
Systems, Inc. and Pall Corp. and initiated a position in Compaq Computer Corp.
These companies were coming out of slow business periods, and in our opinion,
their stocks were available at relatively reasonable prices.
Looking forward, we will maintain our focus on high-quality growth stocks of
well-managed companies that dominate their respective industries, and that we
believe will retain their value regardless of general economic conditions. It is
our job to adjust to all economic environments, and we are confident that given
the recent stock prices and the conservative allocation of our assets, our
value-oriented investment approach should position the fund to perform favorably
over the long term.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Sincerely,
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
PERFORMANCE SUMMARY
Class I
Franklin Growth Fund - Class I produced a +10.34% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 6, the fund's Class I shares delivered a +290.03% cumulative total return
for the 10-year period ended March 31, 1998.
The fund's share price, as measured by net asset value, increased $2.05, from
$27.09 on September 30, 1997, to $29.14 on March 31, 1998. In addition to
distributing 46.60 cents ($0.4660) per share in dividend income, the fund made a
long-term capital gain distribution of 20.23 cents ($0.2023) and a short-term
capital gain distribution of 3.27 cents ($0.0327) during the six-month period.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends.
Franklin Growth Fund - Class I
Periods ended 3/31/98
Since
Inception
1-YEAR 5-YEAR 10-YEAR (3/31/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 27.36% 129.22% 290.03% 21,944.26%
Average Annual Total Return2 21.61% 16.96% 14.05% 11.29%
Value of $10,000 Investment3 $12,161 $21,890 $37,230 $2,106,636
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return4 1.06% 20.43% 33.44% 10.81% 27.36%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.5%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Class II
Franklin Growth Fund - Class II produced a +9.91% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table below,
the fund's Class II shares delivered a +79.50% cumulative total return since the
shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, increased $2.07 cents,
from $26.70 on September 30, 1997, to $28.77 on March 31, 1998. In addition to
distributing 30.31 cents ($0.3031) per share in dividend income, the fund made a
long-term capital gain distribution of 20.23 cents ($0.2023) and a short-term
capital gain distribution of 3.27 cents ($0.0327) during the six-month period.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends.
Franklin Growth Fund - Class II
Periods ended 3/31/98
Since
Inception
1-YEAR (5/1/95)
- ---------------------------------------------------------
Cumulative Total Return1 26.38% 79.50%
Average Annual Total Return2 24.15% 21.80%
Value of $10,000 Investment3 $12,415 $17,771
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Advisor Class
Franklin Growth Fund - Advisor Class produced a +10.48% cumulative total return
for the six-month period ended March 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any.
The fund's share price, as measured by net asset value, increased $2.03, from
$27.13 on September 30, 1997, to $29.16 on March 31, 1998. In addition to
distributing 52.30 cents ($0.5230) in dividend income, the fund made a long-term
capital gain distribution of 20.23 cents ($0.2023) and a short-term capital gain
distribution of 3.27 cents ($0.0327) during the six-month reporting period.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends.
Franklin Growth Fund - Advisor Class
Periods ended 3/31/98
Since
Inception
1-YEAR* 5-YEAR* 10-YEAR* (3/31/48)*
- --------------------------------------------------------------------------------
Cumulative Total Return1 27.60% 129.85% 291.10% 22,004.76%
Average Annual Total Return1 27.60% 18.11% 14.61% 11.40%
Value of $10,000 Investment2 $12,760 $22,985 $39,110 $2,210,476
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return*,3 1.06% 20.43% 33.44% 10.91% 27.60%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) for periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of the Class I expenses, including Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance including the deduction of all fees and expenses applicable
only to that class. Since January 2, 1997 (commencement of sales), the
cumulative total return of Advisor Class shares was 28.98%. This was a period of
generally rising securities prices.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions. You may have a gain or loss when
you sell your shares.
FRANKLIN DYNATECH FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin DynaTech Fund seeks capital appreciation by
investing primarily in companies emphasizing technological development.
- --------------------------------------------------------------------------------
During the six months under review, U.S. unemployment fell, inflation remained
benign, and the domestic economy maintained modest expansion. However, Asian
currency crises created economic havoc in many countries throughout that region,
and global stock markets experienced severe volatility. In the U.S., the Dow
Jones Industrial Average (the Dow) dropped 7.18% on October 27, 1997. The Dow
was 11.70% higher at the close of the reporting period than it had been six
months earlier despite this correction. Technology-related issues, an area where
the fund focuses, underperformed the broader markets, mainly because of this
sector's higher than average sensitivity to Asian market conditions. Within this
environment, the fund's Class I shares provided a +2.37% six-month total return
as shown in the Performance Summary on page 11. The Hambrecht and Quist
Technology Index posted a 2.10% six-month total return.*
The fund's performance during the reporting period benefited from appreciation
in many of its telecommunications investments and from its health care sector
holdings, including pharmaceuticals and health care technology positions.
However, near-term weakness in semiconductors and computer hardware partially
offset those gains.
Although the October correction was disturbing to some, we saw it as an
opportunity to purchase stocks of companies in a variety of industry groups
suddenly selling at more attractive valuations. Seeking to take advantage of
this, we established a new position in Worldcom Inc., one of the U.S.'s fastest
growing telecommunications services providers. In our opinion, Worldcom Inc. is
in an advantageous position to leverage the burgeoning opportunities in data and
Internet traffic when its pending acquisition of MCI Corp. is complete. We also
purchased Tellabs Inc. -- a manufacturer of high-speed voice and data transport
equipment. We believe that the rapidly changing telecommunications industry
offers investors the potential for strong capital appreciation, and as the chart
on the previous page shows, it represented 6.64% of the fund's total net assets
on March 31, 1998.
*Source: Standard & Poor's Micropal. The Hambrecht & Quist Technology Index is
composed of the publicly traded stocks of approximately 275 technology
companies. Total return includes reinvested dividends. One cannot invest
directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 45 of
this report.
Franklin DynaTech Fund
Portfolio Breakdown
3/31/98
% of Total
Sector Net Assets
- -------------------------------------------
Semiconductors 11.19%
Computer Software 9.83%
Telecommunications 6.64%
Computer Hardware 5.55%
Pharmaceuticals 4.91%
Networking 3.71%
Retail 2.41%
Precision Instruments 1.93%
Medical Services 1.79%
Data Services 0.98%
Other 9.16%
Cash Equivalents 41.90%
Franklin DynaTech Fund
Top 10 Holdings
3/31/98
% of Total
Company Net Assets
- ------------------------------------------
Intel Corp. 10.28%
Microsoft Corp. 7.57%
Motorola Inc. 3.99%
Hewlett-Packard Co. 2.98%
Cisco Systems Inc. 2.89%
Warner-Lambert Co. 2.40%
Compaq Computer Corp. 2.19%
Thermo Electron Corp. 1.60%
Schering-Plough Corp. 1.54%
Toys R Us Inc. 1.53%
Looking forward, we believe that uncertainties regarding the impact of the Asian
financial crises are still cause for concern. However, it is also our opinion
that the crises should not derail the underlying strength of the U.S. economy.
Some economists are, in fact, estimating that the impact to U.S. Gross Domestic
Product could be only 0.5%. We are optimistic that the Asian crises' impact on
technology shares will diminish, and that, in the long term, companies driving
technological development and productivity increases should provide superior
returns to investors. Such companies have been one of the leading forces
allowing the U.S. economy to grow at solid rates, and we remain committed to
seeking attractive investment opportunities in them for the fund's shareholders.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Sincerely,
Rupert Johnson
Lisa Costa
Portfolio Management Team
Franklin DynaTech Fund
PERFORMANCE SUMMARY
Class I
Franklin DynaTech Fund - Class I produced a +2.37% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 12, the fund's Class I shares delivered a +332.97% cumulative total return
for the 10-year period ended March 31, 1998.
The fund's share price, as measured by net asset value, decreased 76 cents, from
$18.48 on September 30, 1997, to $17.72 on March 31, 1998. In addition to
distributing 17 cents ($0.170) in dividend income, the fund made a long-term
capital gain distribution of 97 cents ($0.97) during the six-month reporting
period. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not indicative of
future trends.
Franklin DynaTech Fund - Class I
Periods ended 3/31/98
Since
Inception
1-YEAR 5-YEAR 10-YEAR (3/31/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 25.87% 123.25% 332.97% 1,542.88%
Average Annual Total Return2 20.19% 16.35% 15.26% 9.52%
Value of $10,000 Investment3 $12,019 $21,326 $41,379 $156,695
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return4 4.36% 12.18% 20.90% 25.31% 25.87%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.5%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Class II
Franklin DynaTech Fund - Class II produced a +1.80% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table below,
the fund's Class II shares delivered a +40.34% cumulative total return since the
shares became available on September 16, 1996.
The fund's share price, as measured by net asset value, decreased 81 cents, from
$18.30 on September 30, 1997, to $17.49 on March 31, 1998. In addition to
distributing 11.82 cents ($0.1182) in dividend income, the fund made a long-term
capital gain distribution of 97 cents ($0.97) during the six-month reporting
period. Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not indicative of
future trends.
Franklin DynaTech Fund - Class II
Periods ended 3/31/98
Since
Inception
1-YEAR (9/16/96)
- ---------------------------------------------------------
Cumulative Total Return1 24.44% 40.34%
Average Annual Total Return2 22.22% 23.86%
Value of $10,000 Investment3 $12,222 $13,892
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN UTILITIES FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin Utilities Fund seeks both capital appreciation
and current income from a portfolio of public utility industry securities.
- --------------------------------------------------------------------------------
Over the six-month reporting period, Franklin Utilities Fund posted strong
results with Class I shares up 19.35%. Both economic and industry issues drove
this superior performance. In light of the markets' overall volatility, the
Asian currency crises and the recent discussions concerning economic
deflationary pressures, investors once again looked at utility stocks as a
defensive investment.
Investors began to revalue the electric utility industry as they took into
account the industry's improved regulatory clarity and strong financial profile.
We believe that after several years of electric utility restructuring
discussions, investors came to view the new competitive electric utility
generation market as one in which electric companies generally should remain
healthy and, in many cases, thrive.
The balance sheets of many of these companies look stronger now than they have
over the past decade. As a group, the electric utility industry became free
cash-flow positive in the third quarter of 1995. At the end of 1996, the
electric utilities' dividend payout ratio of 71% was at its lowest level in over
10 years.1 This reflects many utilities' ability to maintain high dividends
while increasing cash on hand. Also, constructive legislation in several states
now allows such companies to potentially recover a substantial portion of their
stranded costs. This clarifying legislation which bodes well for the industry
should improve these companies' current and ongoing financial positions.
1. Source: Edison Electric Institute.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 50 of
this report.
What are stranded costs?
Under traditional regulation, utility companies were required to build and
maintain generation plants, transmission and distribution lines and other
equipment. The regulators set rates that companies could charge customers to pay
for these costs, spread over as much as 30 years. When retail competition
begins, customers may choose a different electricity supplier, and will no
longer pay for the facilities that were built to serve them; thus creating
"stranded costs" for their former electricity suppliers.2
In the transition to a competitive environment, many electric utility companies
issued rate refunding bonds and sold or increased depreciation of a substantial
portion of their generation plants. These measures should further enhance the
industry's cash-flow position. What these companies do with the new-found free
cash flow may seriously impact future earnings growth. We believe that,
generally, utilities are likely to use the proceeds to reduce debt, buy back
common shares and pursue additional global diversification efforts in
energy-related industries.
All of the above should enhance the industry's long-term earnings growth rate.
This growth comes from energy outsourcing, asset redeployment and other service
offerings such as telecommunications, home security, heating and air
conditioning. Some of the companies in the fund's portfolio that we believe are
benefiting from these trends include PG&E Corp., Duke Energy Corp., FPL Group,
Inc., New Century Energies, Inc., CINergy Corp. and CMS Energy Trust.
2. Source: Ibid. 3/98.
Franklin Utilities Fund
Top 10 Holdings
3/31/98
% of Total
Company Net Assets
- -------------------------------------------
PG & E Corp. 4.51%
Southern Co. 4.14%
Duke Energy Corp. 4.07%
Florida Progress Corp. 4.06%
New Century Energies, Inc. 4.02%
FPL Group, Inc. 3.90%
Teco Energy, Inc. 3.74%
Dominion Resources, Inc. 3.56%
CINergy Corp. 3.48%
SCANA Corp. 3.38%
On a valuation basis, we believe the electric industry looks like a bargain. As
of March 31, 1998, many electric companies had long-term earnings growth
estimates of 6%-10%, an average price to earnings ratio (P/E) of 14.5 and yield
of 4%. This compared favorably with the S&P 500(R), whose consensus 1998
earnings growth estimates declined to 6.8%, with an average P/E of 22 and a
yield of 1.5%.3
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Sincerely,
Sally Edwards Haff
Portfolio Manager
Franklin Utilities Fund
3. Source: Baseline; Bloomberg, Factset.
PERFORMANCE SUMMARY
Class I
Franklin Utilities Fund - Class I produced a +19.35% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 18, the fund's Class I shares delivered a +213.06% cumulative total return
for the 10-year period ended March 31, 1998.
The fund's share price, as measured by net asset value, increased $1.37, from
$10.04 on September 30, 1997, to $11.41 on March 31, 1998. In addition to
distributing 26.20 cents ($0.2620) in dividend income, the fund made a long-term
capital gain distribution of 26.24 cents ($0.2624) during the six-month
reporting period. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Based on the maximum offering price of $11.92 on March 31, 1998, and an
annualization of the most recent quarterly dividend of 13.10 cents ($0.1310) per
share, the fund's distribution rate was 4.40%.
Franklin Utilities Fund - Class I
Periods ended 3/31/98
Since
Inception
1-YEAR 5-YEAR 10-YEAR (9/30/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 31.55% 57.34% 213.06% 13,955.41%
Average Annual Total Return2 25.90% 8.54% 11.60% 10.41%
Value of $10,000 Investment3 $12,590 $15,062 $29,957 $1,343,348
Distribution Rate4 4.40%
30-Day Standardized Yield5 4.25%
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return6 -7.16% 2.25% 24.02% 1.59% 31.55%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of the most recent 13.10 cent
per share quarterly dividend and the maximum offering price of $11.92 on March
31, 1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
6. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Class II
Franklin Utilities Fund - Class II produced a +19.09% cumulative total return
for the six-month period ended March 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any, and does not include sales charges. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 20, the fund's Class II shares delivered a +60.37% cumulative
total return since the shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, increased $1.38, from
$10.02 on September 30, 1997, to $11.40 on March 31, 1998. In addition to
distributing 22.54 cents ($0.2254) in dividend income, the fund made a long-term
capital gain distribution of 26.24 cents ($0.2624) during the six-month
reporting period. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Based on the maximum offering price of $11.52 on March 31, 1998, and an
annualization of the most recent quarterly dividend of 11.63 cents ($0.1163) per
share, the fund's distribution rate was 4.04%.
Franklin Utilities Fund - Class II
Periods Ended 3/31/98
Since
Inception
1-YEAR (5/1/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 30.93% 60.37%
Average Annual Total Return2 28.69% 17.18%
Value of $10,000 Investment3 $12,869 $15,876
Distribution Rate4 4.04%
30-Day Standardized Yield5 3.88%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of the most recent 11.63 cent
per share quarterly dividend and the maximum offering price of $11.52 on March
31, 1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Advisor Class
Franklin Utilities Fund - Advisor Class produced a +19.43% cumulative total
return for the six-month period ended March 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any.
The fund's share price, as measured by net asset value, increased $1.37, from
$10.04 on September 30, 1997, to $11.41 on March 31, 1998. In addition to
distributing 26.90 cents ($0.2690) in dividend income, the fund made a long-term
capital gain distribution of 26.24 cents ($0.2624) during the six-month
reporting period. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the portfolio, as well
as the level of the fund's operating expenses. Past distributions are not
indicative of future trends.
Based on the fund's net asset value price of $11.41 on March 31, 1998, and an
annualization of the most recent quarterly dividend of 13.47 cents ($0.1347) per
share, the fund's distribution rate was 4.72%.
Franklin Utilities Fund - Advisor Class
Periods ended 3/31/98
Since
Inception
1-YEAR* 5-YEAR* 10-YEAR* (9/30/48)*
- --------------------------------------------------------------------------------
Cumulative Total Return1 31.73% 57.60% 213.58% 13,978.98%
Average Annual Total Return1 31.73% 9.52% 12.11% 10.51%
Value of $10,000 Investment2 $13,173 $15,760 $31,358 $1,407,898
Distribution Rate3 4.72%
30-Day Standardized Yield4 4.55%
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return*,5 -7.16% 2.25% 24.02% 1.62% 31.73%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) for periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of the Class I expenses, including Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance including the deduction of all fees and expenses applicable
only to that class. Since January 2, 1997 (commencement of sales), the
cumulative total return of Advisor Class shares was 30.91%. This was a period of
generally rising securities prices.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. Distribution rate is based on an annualization of the most recent 13.47 cent
per share quarterly dividend and the net asset value price of $11.41 on March
31, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
5. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions. You may have a gain or loss when
you sell your shares.
FRANKLIN INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin Income Fund seeks to maximize income while
maintaining prospects for capital appreciation through a diversified portfolio
of securities.
- --------------------------------------------------------------------------------
The U.S. stock market continued its steady climb upward after experiencing
volatility during the first half of the reporting period. This volatility was
due in part to concerns of slowing economic growth resulting from the potential
influence of Asia's economic turmoil. Conversely, the bond market benefited from
these same concerns, in addition to reports of low inflation and a possible U.S.
government budget surplus. Within this environment, the fund's Class I shares
posted a +8.22% six-month cumulative total return as shown in the Performance
Summary on page 26.
Although presented with several investment opportunities, as well as the ability
to take profits in securities that no longer fit our valuation criteria, we did
not significantly change the portfolio sector weightings during the reporting
period. Compared with our last report on September 30, 1997, the fund's bond
weighting decreased from 53% to 51.5% of total net assets. The fund's stock
weighting increased from 40.2% to 42.2% due in part to appreciation of our
utility stock holdings. The fund's cash position declined from 5.2% to 5.1%.
The fund's bond holdings consisted of corporate, foreign, and U.S. Treasury
bonds. Corporate bonds, representing our largest fixed-income weighting (28.3%
of total net assets), performed positively over the period despite volatility.
We remained selective with respect to our investment in corporate bonds, due to
relatively high valuations in that sector. However, we were able to find
attractive investments, including new positions in Venetian Casino/LV Sands
(Gaming), Denbury Management Inc. (Energy), and Nextel Communications Inc.
(Telecommunications). In addition, companies seeking to retire debt either
called or tendered several of the fund's bonds at premium prices.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 54 of
this report.
What are Brady bonds?
Brady bonds are public issue, U.S. dollar denominated bonds of developing
countries, mainly in Latin America, that were exchanged, in a restructuring, for
commercial bank loans in default. The securities are collateralized by U.S.
Treasury zero-coupon bonds to ensure principal.*
Foreign bond positions turned in a strong performance, rebounding from the
effect of Asia's economic turmoil. Seeking to take advantage of weakness early
in the period, we added to our dollar-denominated Brazilian Brady bonds,
reflecting our belief that Brazil's economic progress would not be adversely
affected by events in the Far East.
We added to the fund's Treasury holdings during the period, as we believed that
Treasury bonds represented an attractive investment, due to the current
environment of subdued inflation and prospects for a balanced budget. As a
result, U.S. Treasury bonds represented 12.9% of total net assets on March 31,
1998, up from 11.4% six months earlier.
The fund's equity sectors delivered mixed performance. Utility stocks performed
well due, in part, to attractive valuations and lower interest rates. We believe
utility stocks continue to offer attractive yields relative to the broader stock
market, as well as improved opportunities for growth from companies that are
successfully adapting to a deregulated environment. The fund's gold and energy
stock sectors experienced declines during the period for varied reasons. Gold
bullion suffered a steep decline in price amid uncertainty related to central
bank reserve selling. We added to several foreign gold stock positions at
attractive prices, including Free State Consolidated Gold Mines Ltd., Anglogold
Ltd., and Western Deep Level Ltd. Weakness in energy stocks, related to
declining oil prices, also offered what we believe are attractive long-term
values. Consequently, we established new positions in Energy Ventures Inc. and
Lomak Financing Trust convertible preferred stocks.
*Source: Dictionary of Finance and Investment Terms. Barron's Educational
Series, Inc., 1995.
Looking at other sectors, we purchased a new real estate convertible position,
Glenborough Realty Trust Inc. (REIT), that offers exposure to a diversified real
estate company with attractive dividend yield. We also initiated a convertible
position in Asian Pulp & Paper Co. Ltd. (Paper), as we believed the company's
position as a global low-cost producer with access to rapidly growing markets
would produce strong total returns. Finally, we sold several stock positions
that no longer fit our valuation criteria.
As we look toward the second half of the fund's fiscal year, we remain selective
with respect to new investments amid historically high valuations for stocks and
corporate bonds. However, we will maintain our search for investment
opportunities across markets. As always, we remain committed to following our
value-oriented approach, searching for income and growth from a diversified mix
of stocks, bonds and cash.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Sincerely,
Charles B. Johnson
Matt Avery
Portfolio Management Team
Franklin Income Fund
Franklin Income Fund
Portfolio Breakdown
3/31/98
% of Total
Sector Net Assets
- ------------------------------------------
Corporate Bonds 26.44%
Utility 23.50%
U.S. Treasury Bonds
& Notes 12.92%
Foreign Bonds 12.12%
Energy/Energy Services 7.17%
Real Estate 2.57%
Metals 2.19%
Telecommunication 1.98%
Consumer Products 1.77%
Cable & Media 0.96%
Other 2.07%
Cash 6.31%
PERFORMANCE SUMMARY
Class I
Franklin Income Fund - Class I produced a +8.22% cumulative total return for the
six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 27, the fund's Class I shares delivered a +219.23% cumulative total return
for the 10-year period ended March 31, 1998.
The fund's share price, as measured by net asset value, increased 8 cents, from
$2.49 on September 30, 1997, to $2.57 on March 31, 1998. In addition to
distributing 9 cents ($0.0900) in dividend income, the fund made a long-term
capital gain distribution of 2.8 cents ($0.0280) during the six-month reporting
period. Distributions will vary based on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not predictive of
future trends.
Based on an annualization of March's monthly per-share dividend of 1.5 cents
($0.015) and the maximum offering price of $2.68 on March 31, 1998, your fund's
distribution rate was 6.72%.
Franklin Income Fund - Class I
Periods ended 3/31/98
Since
Inception
1-YEAR 5-YEAR 10-YEAR (8/31/48)
- --------------------------------------------------------------------------------
Cumulative Total Return1 20.62% 70.57% 219.23% 22,476.33%
Average Annual Total Return2 15.64% 10.34% 11.80% 11.45%
Value of $10,000 Investment3 $11,564 $16,358 $30,510 $2,163,567
Distribution Rate4 6.72%
30-Day Standardized Yield5 6.02%
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return6 6.72% 2.78% 17.23% 9.97% 20.62%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of March's 1.5 cent per share
monthly dividend and the maximum offering price of $2.68 on March 31, 1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
6. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus, actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Class II
Franklin Income Fund - Class II produced a +7.93% cumulative total return for
the six-month period ended March 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, if any, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 29, the fund's Class II shares delivered a +49.08% cumulative total return
since the shares became available on May 1, 1995.
The fund's share price, as measured by net asset value, increased 8 cents, from
$2.49 on September 30, 1997, to $2.57 on March 31, 1998. In addition to
distributing 8.34 cents ($0.0834) in dividend income, the fund made a long-term
capital gain distribution of 2.8 cents ($0.0280) during the six-month reporting
period. Distributions will vary based on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not predictive of
future trends.
Based on an annualization of March's monthly per-share dividend of 1.39 cents
($0.0139) and the maximum offering price of $2.60 on March 31, 1998, your fund's
distribution rate was 6.42%.
Franklin Income Fund - Class II
Periods ended 3/31/98
Since
Inception
1-YEAR (5/1/95)
- --------------------------------------------------------------
Cumulative Total Return1 19.49% 49.08%
Average Annual Total Return2 17.48% 14.32%
Value of $10,000 Investment3 $11,748 $14,772
Distribution Rate4 6.42%
30-Day Standardized Yield5 5.74%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of March's 1.39 cent per share
monthly dividend and the maximum offering price of $2.60 on March 31, 1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Advisor Class
Franklin Income Fund - Advisor Class produced a +8.33% cumulative total return
for the six-month period ended March 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any, and does not include the sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner.
The fund's share price, as measured by net asset value, increased 8 cents, from
$2.48 on September 30, 1997, to $2.56 on March 31, 1998. In addition to
distributing 9.19 cents ($0.0919) in dividend income, the fund made a long-term
capital gain distribution of 2.8 cents ($0.0280) during the six-month reporting
period. Distributions will vary based on income earned by the fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the fund's operating expenses. Past distributions are not predictive of
future trends.
Based on an annualization of March's monthly per-share dividend of 1.53 cents
($0.0153) and the net asset value of $2.56 on March 31, 1998, your fund's
distribution rate was 7.17%.
Franklin Income Fund - Advisor Class
Periods ended 3/31/98
Since
Inception
1-YEAR* 5-YEAR* 10-YEAR* (8/31/48)*
- --------------------------------------------------------------------------------
Cumulative Total Return1 20.37% 70.27% 218.66% 22,436.30%
Average Annual Total Return1 20.37% 11.23% 12.29% 11.55%
Value of $10,000 Investment2 $12,037 $17,027 $31,866 $2,253,630
Distribution Rate3 7.17%
30-Day Standardized Yield4 6.45%
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98
- --------------------------------------------------------------------------------
One-Year Total Return*,5 6.72% 2.78% 17.23% 10.01% 20.37%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) for periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of the Class I expenses, including Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance including the deduction of all fees and expenses applicable
only to that class. Since January 2, 1997 (commencement of sales), the
cumulative total return of Advisor Class shares was 21.66%. This was a period of
generally rising securities prices.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the indicated periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. Distribution rate is based on an annualization of March's 1.53 cent per share
monthly dividend and the share price of $2.56 on March 31, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
5. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions. You may have a gain or loss when
you sell your shares.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin U.S. Government Securities Fund seeks high
current income from a portfolio of U.S. government securities.
- --------------------------------------------------------------------------------
The U.S. economy maintained its healthy expansion during the six months under
review. Fueled by consumer spending, robust corporate profits and strong housing
markets, U.S. Gross Domestic Product (GDP) grew at an annualized rate of 3.7%
during the fourth quarter of 1997.* Gains in productivity allowed businesses to
absorb rising labor costs without raising prices significantly, despite
tightening labor markets. Lower commodity prices also helped to keep inflation
in check. Consequently, 30-year U.S. Treasury interest rates declined half a
percent, and the yield spread narrowed between the short- and long-term bonds.
The Federal Reserve Board did not change monetary policy or interest rates
during the period.
Although inflation's failure to ignite was a key factor in allowing U.S.
interest rates to move lower, it was not the only factor. Asian currency crises
caused disruptions there, and as the crises spread from country to country, the
U.S. dollar gained strongly versus currencies throughout the Asian region.
Investors opted for a flight to quality, resulting in a higher demand for safe
haven U.S. Treasury securities, which pushed their rates higher, compared with
overall interest rates.
*Source: Standard & Poor's Micropal.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 62 of
this report.
Favorable news surrounding the federal budget deficit contributed to lower
interest rates during the period. The booming U.S. economy produced strong tax
receipts, reducing the need for the government to issue U.S. Treasury bonds.
This resulted in a lower supply of bonds in the marketplace and falling
long-term interest rates.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In response to the declining interest-rate environment during the reporting
period, we added lower coupon Government National Mortgage Association (GNMA)
mortgage pass-through securities to the portfolio. Lower-coupon issues have less
prepayment risk than higher coupon securities, yet still provide income
advantages versus other government issues. Given the uncertainty surrounding
global economies, we expect that U.S. interest rates may remain relatively
stable, and, if so, this should benefit holders of GNMA mortgage passthroughs.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your support, welcome your comments and look forward to serving
you in the future.
Sincerely,
Jack Lemein
Roger A. Bayston
T. Anthony Coffey
Portfolio Management Team
Franklin U.S. Government Securities Fund
PERFORMANCE SUMMARY
Class I
Franklin U.S. Government Securities Fund - Class I share price, as measured by
net asset value, increased 1 cent, from $6.89 on September 30, 1997, to $6.90 on
March 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 23.40 cents ($0.2340) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of March's monthly per-share dividend of 3.9 cents
($0.039) and the maximum offering price of $7.21 on March 31, 1998, your fund's
distribution rate was 6.49%.
Franklin U.S. Government Securities Fund - Class I
Periods ended 3/31/98
Since
Inception
1-Year 5-Year 10-Year (5/31/70)
- --------------------------------------------------------------------------------
Cumulative Total Return1 10.31% 36.94% 123.33% 666.64%
Average Annual Total Return2 5.58% 5.57% 7.89% 7.43%
Distribution Rate3 6.49%
30-Day Standardized Yield4 6.10%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of March's 3.9 cent per share
monthly dividend and the maximum offering price of $7.21 on March 31, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Class II
Franklin U.S. Government Securities Fund - Class II share price, as measured by
net asset value, increased 1 cent, from $6.87 on September 30, 1997, to $6.88 on
March 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 21.48 cents ($0.2148) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of March's monthly per-share dividend of 3.58 cents
($0.0358) and the maximum offering price of $6.95 on March 31, 1998, your fund's
distribution rate was 6.18%.
Franklin U.S. Government Securities Fund - Class II
Periods ended 3/31/98
Since
Inception
1-YEAR (5/1/95)
- --------------------------------------------------------------------------------
Cumulative Total Return1 9.71% 24.94%
Average Annual Total Return2 7.58% 7.55%
Distribution Rate3 6.18%
30-Day Standardized Yield4 5.76%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of March's 3.58 cent per share
monthly dividend and the maximum offering price of $6.95 on March 31, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Advisor Class
Franklin U.S. Government Securities Fund - Advisor Class share price, as
measured by net asset value, increased 1 cent, from $6.90 on September 30, 1997,
to $6.91 on March 31, 1998. During the six-month reporting period, shareholders
received income distributions totaling 23.75 cents per share. Distributions will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Based on an annualization of March's monthly per-share dividend of 3.95 cents
($0.0395) and the net asset value of $6.91 on March 31, 1998, your fund's
distribution rate was 6.86%.
Franklin U.S. Government Securities Fund - Advisor Class
Periods ended 3/31/98
Since
Inception
1-YEAR* 5-YEAR* 10-YEAR* (5/31/70)*
- --------------------------------------------------------------------------------
Cumulative Total Return1 10.56% 37.28% 123.89% 668.56%
Average Annual Total Return1 10.56% 6.54% 8.39% 7.60%
Distribution Rate2 6.86%
30-Day Standardized Yield3 6.47%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) for periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of the Class I expenses, including Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance including the deduction of all fees and expenses applicable
only to that class. Since January 2, 1997 (commencement of sales), the
cumulative total return of Advisor Class shares was 11.61%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. Distribution rate is based on an annualization of March's 3.95 cent per share
monthly dividend and the net asset value price of $6.91 on March 31, 1998.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended March 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions. You may have a gain or loss when
you sell your shares.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin Growth Fund
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
CLASS I (UNAUDITED) 1997 1996 1995**** 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $27.09 $22.82 $19.38 $14.96 $14.25 $13.70
------------------------------------------------------------------
Income from investment operations:
Net investment income .24 .36 .22 .17 .19 .23
Net realized and unrealized gains 2.52 4.34 3.53 4.43 .90 .58
------------------------------------------------------------------
Total from investment operations 2.76 4.70 3.75 4.60 1.09 .81
------------------------------------------------------------------
Less distributions from:
Net investment income (.47) (.23) (.16) (.14) (.30) (.19)
Net realized gains (.24) (.20) (.15) (.04) (.08) (.07)
------------------------------------------------------------------
Total distributions (.71) (.43) (.31) (.18) (.38) (.26)
------------------------------------------------------------------
Net asset value, end of period $29.14 $27.09 $22.82 $19.38 $14.96 $14.25
==================================================================
Total return* 10.34% 20.84% 19.60% 31.11% 7.63% 5.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $1,649,832 $1,435,561 $1,020,486 $712,866 $516,620 $560,824
Ratios to average net assets:
Expenses .87%** .89% .87% .90% .77% .64%
Net investment income 1.79%** 1.60% 1.16% 1.08% 1.23% 1.64%
Portfolio turnover rate .21% 1.77% 2.03% 1.39% 6.52% 1.70%
Average commission rate paid *** $.0544 $.0568 $.0543 -- -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS II
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $26.70 $22.60 $19.33 $16.88
--------------------------------------------
Income from investment operations:
Net investment income .15 .20 .12 .02
Net realized and unrealized gains 2.46 4.25 3.46 2.43
--------------------------------------------
Total from investment operations 2.61 4.45 3.58 2.45
--------------------------------------------
Less distributions from:
Net investment income (.30) (.15) (.16) --
Net realized gains (.24) (.20) (.15) --
--------------------------------------------
Total distributions (.54) (.35) (.31) --
--------------------------------------------
Net asset value, end of period $28.77 $26.70 $22.60 $19.33
============================================
Total return* 9.91% 19.91% 18.73% 14.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $162,267 $117,218 $43,417 $4,161
Ratios to average net assets:
Expenses 1.64%** 1.66% 1.63% 1.79%**
Net investment income 1.03%** .85% .40% .37%**
Portfolio turnover rate .21% 1.77% 2.03% 1.39%
Average commission rate paid *** $.0544 $.0568 $.0543 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period May 1, 1995 (effective date) to September 30, 1995 for Class
II.
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------
ADVISOR CLASS (UNAUDITED) 1997****
- --------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $27.13 $23.24
--------------------------------------------
Income from investment operations:
Net investment income .27 .25
Net realized and unrealized gains 2.52 3.64
--------------------------------------------
Total from investment operations 2.79 3.89
--------------------------------------------
Less distributions from:
Net investment income (.52) --
Net realized gains (.24) --
Total distributions (.76) --
--------------------------------------------
Net asset value, end of period $29.16 $27.13
============================================
Total return* 10.48% 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $39,054 $25,823
Ratios to average net assets:
Expenses .64%** .66%**
Net investment income 2.03%** 1.93%**
Portfolio turnover rate .21% 1.77%
Average commission rate paid *** $.0544 $.0568
</TABLE>
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1998 (unaudited)
SHARES/
GROWTH FUND WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
a,e,gCommon Stocks & Warrants 66.6%
<S> <C> <C>
Aerospace & Defense 5.3%
Boeing Co. 404,200 $ 21,068,925
Lockheed Martin Corp. 162,600 18,292,500
Raytheon Co. 442,000 25,801,750
Rockwell International Corp. 50,000 2,868,750
Thiokol Corp. 240,000 11,595,000
United Technologies Corp. 200,000 18,462,500
--------------
98,089,425
--------------
Auto Parts .3%
Genuine Parts Co. 135,000 5,146,875
Meritor Automotive, Inc. 16,666 442,691
--------------
5,589,566
--------------
Biotechnology 1.5%
aAmgen, Inc. 200,000 12,175,000
aGenentech, Inc. 200,000 14,087,500
aImmunex Corp. 20,000 1,347,500
--------------
27,610,000
--------------
Business Services 3.6%
Avery Dennison Corp. 220,000 11,742,500
aChoicePoint, Inc. 40,000 2,177,500
Cognizant Corp. 244,000 13,999,500
Dun & Bradstreet Corp. 244,000 8,341,750
Equifax, Inc. 400,000 14,600,000
Kelly Services, Inc., Class A 250,000 9,375,000
a,e,gProgramming & Systems, Inc. 345,300 6,906
Wallace Computer Services, Inc. 200,000 6,925,000
--------------
67,168,156
--------------
Chemicals 3.4%
Air Products & Chemicals, Inc. 200,000 16,575,000
Eastman Chemical Co. 25,000 1,685,938
International Flavors and Fragrances, Inc. 400,000 18,850,000
Mallinckrodt Group, Inc. 116,000 4,582,000
NCH Corp. 200,000 14,137,500
Sigma-Aldrich Corp. 200,000 7,450,000
--------------
63,280,438
--------------
Communications & Entertainment 2.7%
aACNielsen Corp. 81,333 2,150,241
American Greetings Corp., Class A 300,000 13,800,000
Disney (Walt) Co. 304,932 32,551,491
aIntervisual Books, Inc. 100,000 287,500
aKing World Productions, Inc. 20,000 585,000
--------------
49,374,232
--------------
Computer Hardware 3.0%
Compaq Computer Corp. 150,000 3,881,250
Hewlett-Packard Co. 360,000 22,815,000
International Business Machines Corp. 280,000 29,085,000
--------------
55,781,250
--------------
Computer Software .2%
aMicrosoft Corp. 40,000 3,580,000
--------------
Data Services 4.1%
Automatic Data Processing, Inc. 400,000 27,225,000
aComputer Sciences Corp. 900,000 49,500,000
--------------
76,725,000
--------------
Diversified Manufacturers 2.5%
Deltic Timber Corp. 11,428 $ 342,126
Minnesota Mining & Manufacturing Co. 372,000 33,921,750
National Service Industries, Inc. 100,000 5,881,250
Teleflex, Inc. 139,200 5,846,400
--------------
45,991,526
--------------
Electronics & Electrical Equipment 2.5%
AMP, Inc. 400,000 17,525,000
Emerson Electric Co. 80,000 5,215,000
aImation Corp. 37,200 688,200
Molex, Inc. 117,187 3,222,643
Molex, Inc., Class A 117,187 3,142,076
Raychem Corp. 400,000 16,625,000
--------------
46,417,919
--------------
Energy/Energy Services 3.2%
Atlantic Richfield Co. 180,000 14,152,500
Coastal Co. 300,000 19,537,500
Murphy Oil Corp. 40,000 2,005,000
Royal Dutch Petroleum Co., New York Shares 280,000 15,907,500
Schlumberger, Ltd. 60,000 4,545,000
Union Pacific Resources Group, Inc. 101,633 2,426,488
--------------
58,573,988
--------------
Environmental Services 3.7%
Betzdearborn, Inc. 200,000 11,287,500
Browning-Ferris Industries, Inc. 165,000 5,383,125
aIonics, Inc. 300,000 12,918,750
Millipore Corp. 400,000 13,900,000
aOsmonics, Inc. 256,500 4,248,281
Pall Corp. 500,000 10,750,000
Waste Management, Inc. 210,000 6,470,625
Wheelabrator Technology, Inc. 270,000 4,455,000
--------------
69,413,281
--------------
Food/Confectionery 1.0%
Hershey Foods Corp. 258,200 18,493,575
--------------
Health Care - Diversified 5.0%
Abbott Laboratories 200,000 15,062,500
Allegiance Corp 50,000 1,978,125
Allergan, Inc. 200,000 7,600,000
aAllergan Specialty Therapeutics, Inc., Class A 10,000 121,250
aAlza Corp., Class A 100,000 4,481,250
aAlza Corp., warrants 8,000 7,750
Baxter International, Inc. 250,000 13,781,250
Johnson & Johnson, Inc. 400,000 29,325,000
aMedPartners, Inc. 75,625 775,156
Nature's Sunshine Products, Inc. 33,000 884,813
aPerrigo Co. 200,000 2,450,000
aRespironics, Inc. 98,000 2,835,875
U.S. Surgical Corp. 400,000 13,200,000
--------------
92,502,969
--------------
Imaging/Photography 1.0%
Eastman Kodak Co. 200,000 12,975,000
Polaroid Corp. 38,000 1,672,000
--------------
14,647,000
--------------
Media & Broadcasting 2.0%
Time Warner, Inc. 450,000 $ 32,400,000
aUSA Networks, Inc. 200,000 5,450,000
--------------
37,850,000
--------------
Networking 1.2%
aCabletron Systems, Inc. 500,000 7,281,250
aCisco Systems, Inc. 225,000 15,384,375
--------------
22,665,625
--------------
Pharmaceuticals 13.4%
American Home Products Corp. 300,000 28,612,500
Bristol-Myers Squibb Co. 320,000 33,380,000
aCrescendo Pharmaceuticals 5,000 63,125
Lilly (Eli) & Co. 400,000 23,850,000
Merck & Co., Inc. 200,000 25,675,000
Pfizer, Inc. 640,000 63,800,000
Schering-Plough Corp. 900,000 73,518,750
--------------
248,899,375
--------------
Real Estate - Diversified
a, cFRM Nexus 115,100 115
--------------
Retail .3 %
Tiffany & Co. 78,900 3,841,443
Weis Markets, Inc. 58,218 2,077,655
--------------
5,919,098
--------------
Toy Manufacturing .6%
Mattel, Inc. 300,000 11,887,500
--------------
Transportation 6.1%
aAMR Corp. 310,000 44,388,125
Delta Air Lines, Inc. 250,000 29,562,500
aUAL Corp. 350,000 32,528,125
Union Pacific Corp. 120,000 6,742,500
--------------
113,221,250
--------------
Total Long Term Investments (Cost $447,819,030) 1,233,681,288
--------------
Joint Repurchase Agreement, 5.819%, 4/01/98 (Maturity Value $617,557,349)
(Cost $617,457,544) $617,457,544 $ 617,457,544
BancAmerica Robertson Stephens (Maturity Value $50,979,359)
Barclays Capital Group, Inc. (Maturity Value $50,979,359)
Bear, Stearns & Co., Inc. (Maturity Value $27,808,608)
BT Alex Brown, Inc. (Maturity Value $9,269,537)
Chase Securities, Inc. (Maturity Value $49,781,298)
CIBC Wood Gundy Securities Corp. (Maturity Value $71,883,675)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $50,979,359)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $50,979,359)
Greenwich Capital Markets, Inc. (Maturity Value $50,979,359)
Morgan Stanley Dean Witter & Co. (Maturity Value $50,979,359)
Paribas Corp. (Maturity Value $50,979,359)
SBC Warburg Dillon Read, Inc. (Maturity Value $50,979,359)
UBS Securities, L.L.C. (Maturity Value $50,979,359)
Collateralized by U.S. Treasury Bills & Notes
--------------
Total Investments (Cost $1,065,276,574) 100.0% 1,851,138,832
Other Assets, less Liabilities 13,484
--------------
Net Assets 100.0% $1,851,152,316
==============
aNon-income producing.
cSee Note 7 regarding restricted securities.
eThe Investment Company Act of 1940 defines affiliated companies as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in affiliated companies at March 31, 1998 were
$6,906.
gTrading suspended
hSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin DynaTech Fund
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------------------------------
CLASS I (UNAUDITED) 1997 1996**** 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $18.48 $14.03 $12.78 $9.85 $10.29 $9.21
---------------------------------------------------------------
Income from investment operations:
Net investment income .13 .10 .06 .12 .07 .10
Net realized and unrealized gains .25 4.81 1.54 2.99 .21 1.21
---------------------------------------------------------------
Total from investment operations .38 4.91 1.60 3.11 .28 1.31
---------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.06) (.12) (.05) (.12) (.12)
Net realized gains (.97) (.40) (.23) (.13) (.60) (.11)
---------------------------------------------------------------
Total distributions (1.14) (.46) (.35) (.18) (.72) (.23)
---------------------------------------------------------------
Net asset value, end of period $17.72 $18.48 $14.03 $12.78 $9.85 $10.29
===============================================================
Total return* 2.37% 35.63% 12.84% 32.10% 2.89% 14.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $205,036 $188,102 $104,508 $92,987 $67,413 $71,469
Ratios to average net assets:
Expenses 1.01%** 1.04% 1.05% 1.01% 1.00% .81%
Net investment income 1.55%** .75% .43% 1.11% .69% 1.03%
Portfolio turnover rate 5.64% 5.59% 11.94% 9.83% 9.73% 26.56%
Average commission rate paid *** $.0590 $.0536 $.0551 -- -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS II
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Net asset value, beginning of period $18.30 $14.03 $13.57
--------------------------------------
Income from investment operations:
Net investment income .09 .07 --
Net realized and unrealized gains .19 4.66 .46
--------------------------------------
Total from investment operations .28 4.73 .46
--------------------------------------
Less distributions from:
Net investment income (.12) (.06) --
Net realized gains (.97) (.40) --
--------------------------------------
Total distributions (1.09) (.46) --
--------------------------------------
Net asset value, end of period $17.49 $18.30 $14.03
======================================
Total return* 1.80% 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $7,649 $3,386 $--
Ratios to average net assets:
Expenses 1.80%** 1.82% 1.85%**
Net investment income .79%** .25% (.14%)**
Portfolio turnover rate 5.64% 5.59% 11.94%
Average commission rate paid *** $.0590 $.0536 $.0551
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period September 16, 1996 (effective date) to September 30, 1996 for
Class II.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1998 (unaudited)
DYNATECH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
aCommon Stocks 58.2%
Biotechnology .3%
<S> <C> <C>
aAmgen, Inc. 10,000 $ 608,750
--------------
Business Services 1.4%
aChoicePoint, Inc. 2,000 108,875
Cognizant Corp. 10,000 573,750
Equifax, Inc. 20,000 730,000
First Data Corp. 50,000 1,625,000
--------------
3,037,625
--------------
Chemicals .9%
Sigma-Aldrich Corp. 50,000 1,862,500
--------------
Computer Hardware 5.6%
aCompaq Computer Corp. 180,000 4,657,500
Hewlett-Packard Co. 100,000 6,337,500
aKomag, Inc. 55,000 797,500
--------------
11,792,500
--------------
Computer Software 9.8%
Adobe Systems, Inc. 20,000 903,750
aElectronic Arts, Inc. 10,000 469,375
aFundtech, Ltd. 27,600 496,800
aI2 Technologies, Inc. 10,000 656,250
aIntuit, Inc. 25,000 1,209,375
aMicrosoft Corp. 180,000 16,110,000
aParametric Technology Co. 30,000 999,375
aRealNetworks, Inc. 1,800 52,200
--------------
20,897,125
--------------
Consumer Services .2%
aCendant Corp. 10,000 396,250
--------------
Data Services 1.0%
aComputer Sciences Corp. 20,000 1,100,000
Symbol Technologies, Inc. 20,000 983,750
--------------
2,083,750
--------------
Electronic Technology .4%
aUniphase Corp. 20,000 841,250
--------------
Energy/Energy Services 1.6%
aAES Corp. 20,000 1,048,750
Schlumberger, Ltd. 30,000 2,272,500
--------------
3,321,250
--------------
Environmental Services .6%
Browning-Ferris Industries, Inc. 20,000 652,500
aUS Filter Corp. 20,000 702,500
--------------
1,355,000
--------------
Financial Services .3%
Associates First Capital Corp. 3,600 284,400
aE*Trade Group, Inc. 10,000 249,375
--------------
533,775
--------------
Health Technology 1.7%
aBoston Scientific Corp. 10,000 675,000
HBO & Co. 30,000 1,811,250
Medtronic, Inc. 20,000 1,037,500
Mentor Corp. 5,000 138,125
--------------
3,661,875
--------------
Lodging .1%
aHost Marriott Corp. 10,000 189,375
--------------
Media & Broadcasting 1.5%
aLiberty Media Group, Class A 55,968 $ 1,923,900
News Corp., Ltd., Sponsored ADR (Australia) 20,000 538,750
Time Warner, Inc. 10,000 720,000
--------------
3,182,650
--------------
Medical Services 1.8%
Columbia/HCA Healthcare Corp. 22,500 725,625
aPacifiCare Health Systems, Inc., Class B 15,000 1,128,750
United Healthcare Corp. 30,000 1,942,500
--------------
3,796,875
--------------
Networking 3.7%
a3Com Corp. 20,000 718,750
aCisco Systems, Inc. 90,000 6,153,750
aInternational Network Services 35,000 1,023,750
--------------
7,896,250
--------------
Pharmaceuticals 4.9%
Merck & Co., Inc. 15,000 1,925,625
aNoven Pharmaceuticals, Inc. 20,400 133,875
Schering-Plough Corp. 40,000 3,267,500
Warner-Lambert Co. 30,000 5,109,375
--------------
10,436,375
--------------
Precision Instruments/Test Equipment 1.9%
aThermo Electron Corp. 84,375 3,406,641
aWaters Corp. 13,800 689,138
--------------
4,095,779
--------------
Retail 2.4%
Estee Lauder Cos., Class A 20,000 1,357,500
aFederated Department Stores, Inc. 10,000 518,125
aToys R Us, Inc. 108,000 3,246,750
--------------
5,122,375
--------------
Semiconductor/Manufacturer 11.2%
aApplied Materials, Inc. 20,000 706,250
aGenesis Microchip, Inc. 12,500 175,781
Intel Corp. 280,000 21,857,500
Linear Technology Corp. 10,000 690,000
aXilinx, Inc. 10,000 374,375
--------------
23,803,906
--------------
Telecommunications 6.6%
aAirTouch Communications, Inc. 20,000 978,750
aAndrew Corp. 10,000 198,125
AT&T Corp. 15,000 984,375
Lucent Technologies, Inc. 8,102 1,036,043
Motorola, Inc. 140,000 8,487,500
aReltec Corp. 1,100 38,980
aTellabs, Inc. 10,000 671,250
aWorldCom, Inc. 40,000 1,722,500
--------------
14,117,523
--------------
Transportation .3%
Air Express International Corp. 15,000 398,438
C.H. Robinson Worldwide, Inc. 10,000 260,000
--------------
658,438
--------------
Total Long Term Investments (Cost $36,147,841) 123,691,196
--------------
Joint Repurchase Agreement, 5.819%, 4/01/98 (Maturity Value $89,129,434)
(Cost $89,115,030) $89,115,030 $ 89,115,030
BancAmerica Robertson Stephens (Maturity Value $7,357,635)
Barclays Capital Group, Inc. (Maturity Value $7,357,635)
Bear, Stearns & Co., Inc. (Maturity Value $4,013,497)
BT Alex Brown, Inc. (Maturity Value $1,337,832)
Chase Securities, Inc. (Maturity Value $7,184,724)
CIBC Wood Gundy Securities Corp. (Maturity Value $10,374,666)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $7,357,635)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $7,357,635)
Greenwich Capital Markets, Inc. (Maturity Value $7,357,635)
Morgan Stanley Dean Witter & Co. (Maturity Value $7,357,635)
Paribas Corp. (Maturity Value $7,357,635)
SBC Warburg Dillon Read, Inc. (Maturity Value $7,357,635)
UBS Securities, L.L.C. (Maturity Value $7,357,635)
Collateralized by U.S. Treasury Bills & Notes
--------------
Total Investments (Cost $125,262,871) 100.1% 212,806,226
Other Assets, less Liabilities (.1)% (121,449)
--------------
Net Assets 100.0% $212,684,777
==============
aNon-income producing.
hSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin Utilities Fund
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------------------------------
CLASS I (UNAUDITED) 1997 1996 1995**** 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.04 $9.73 $9.75 $8.33 $10.78 $9.63
---------------------------------------------------------------
Income from investment operations:
Net investment income .26 .53 .54 .53 .55 .53
Net realized and unrealized gains (losses) 1.63 .73 .03 1.42 (2.44) 1.17
---------------------------------------------------------------
Total from investment operations 1.89 1.26 .57 1.95 (1.89) 1.70
---------------------------------------------------------------
Less distributions from:
Net investment income (.26) (.52) (.52) (.52) (.52) (.55)
Net realized gains (.26) (.43) (.07) (.01) (.04) --
---------------------------------------------------------------
Total distributions (.52) (.95) (.59) (.53) (.56) (.55)
---------------------------------------------------------------
Net asset value, end of period $11.41 $10.04 $9.73 $9.75 $8.33 $10.78
===============================================================
Total return* 19.35% 13.72% 5.94% 24.19% (17.94%) 17.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $2,145,928 $1,953,273 $2,400,561 $2,765,976 $2,572,508 $3,626,774
Ratios to average net assets:
Expenses .77%** .75% .71% .73% .64% .55%
Net investment income 4.78%** 5.26% 5.24% 5.88% 5.76% 5.30%
Portfolio turnover rate 2.12% 7.24% 17.05% 5.55% 6.34% 7.81%
Average commission rate paid *** $.0502 $.0505 $.0486 -- -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS II
- -----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.02 $9.72 $9.75 $8.89
----------------------------------------------
Income from investment operations:
Net investment income .23 .45 .46 .23
Net realized and unrealized gains 1.64 .76 .06 .88
----------------------------------------------
Total from investment operations 1.87 1.21 .52 1.11
----------------------------------------------
Less distributions from:
Net investment income (.23) (.48) (.48) (.25)
Net realized gains (.26) (.43) (.07) --
----------------------------------------------
Total distributions (.49) (.91) (.55) (.25)
----------------------------------------------
Net asset value, end of period $11.40 $10.02 $9.72 $9.75
==============================================
Total return* 19.09% 13.06% 5.39% 13.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $32,532 $21,906 $19,655 $8,369
Ratios to average net assets:
Expenses 1.29%** 1.27% 1.23% 1.21%**
Net investment income 4.24%** 4.78% 4.86% 5.15%**
Portfolio turnover rate 2.12% 7.24% 17.05% 5.55%
Average commission rate paid *** $.0502 $.0505 $.0486 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period May 1, 1995 (effective date) to September 30, 1995 for Class
II.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------
ADVISOR CLASS (UNAUDITED) 1997****
- ---------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $10.04 $9.55
-----------------------------
Income from investment operations:
Net investment income .29 .36
Net realized and unrealized gains 1.61 .53
-----------------------------
Total from investment operations 1.90 .89
-----------------------------
Less distributions from:
Net investment income (.27) (.40)
Net realized gains (.26) --
-----------------------------
Total distributions (.53) (.40)
-----------------------------
Net asset value, end of period $11.41 $10.04
=============================
Total return* 19.43% 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $14,578 $8,719
Ratios to average net assets:
Expenses .64%** .62%**
Net investment income 4.98%** 5.33%**
Portfolio turnover rate 2.12% 7.24%
Average commission rate paid *** $.0502 $.0505
</TABLE>
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1998 (unaudited)
UTILITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
bCommon Stocks 80.3%
<S> <C> <C>
AGL Resources, Inc. 350,000 $ 7,525,000
aAirTouch Communications, Inc. 203,200 9,944,100
Allegheny Energy, Inc. 1,800,000 60,412,500
American Electric Power Co., Inc. 1,000,000 50,250,000
Central & South West Corp. 1,429,100 38,228,425
CINergy Corp. 2,059,800 76,212,600
Conectiv, Inc. 2,359,800 51,768,112
Dominion Resources, Inc. 1,858,950 78,075,900
Duke Energy Corp. 1,500,000 89,343,750
Edison International 1,120,800 32,923,500
Enova Corp. 2,505,600 70,000,200
Entergy Corp. 1,875,400 55,793,150
Florida Progress Corp. 2,135,175 89,010,108
FPL Group, Inc. 1,330,000 85,452,500
GPU, Inc. 937,000 41,462,250
Hawaiian Electric Industries, Inc. 988,480 41,021,920
MidAmerican Energy Co. 2,059,800 46,731,713
Montana Power Co. 28,000 1,009,750
Nevada Power Co. 661,700 17,700,475
New Century Energies, Inc. 1,748,445 88,077,917
New Jersey Resources Corp. 245,500 9,620,531
NIPSCO Industries, Inc. 2,020,600 56,576,800
Northern States Power Co. 397,200 23,434,800
OGE Energy Corp. 444,300 25,713,863
Pacific Enterprises 1,160,800 47,375,150
PacifiCorp 1,695,900 41,761,538
PG&E Corp. 3,000,000 99,000,000
Pinnacle West Capital Corp. 518,485 23,040,177
Puget Sound Power & Light Co. 900,000 25,368,750
SBC Communications 264,200 11,525,725
SCANA Corp. 2,398,500 74,203,594
Sierra Pacific Resources 350,000 13,146,875
SIGCORP, Inc. 787,665 25,156,051
Southern Co. 3,276,800 90,726,400
TECO Energy, Inc. 2,900,400 81,936,300
Texas Utilities Co. 1,162,750 45,710,609
Western Resources, Inc. 827,800 35,388,450
--------------
Total Common Stocks (Cost $1,298,654,048) 1,760,629,483
--------------
Preferred Stocks 5.6%
AES Trust I, Series A, 5.375%, 3/31/27 cvt. pfd. 400,000 31,950,000
cCMS Energy Trust I, 7.75%, cvt. pfd. 705,000 44,547,188
MCN Financing III, 8.00%, 5/16/00, cvt. pfd. 108,400 6,233,000
Nortel Inversora, SA, 10.00%, cvt. pfd., MEDS (Argentina) 650,000 41,275,000
--------------
Total Preferred Stocks (Cost $87,231,042) 124,005,188
--------------
PRINCIPAL
AMOUNT
---------
Corporate Bonds 12.4%
Alabama Power Co., 8.75%, 12/01/21 $ 8,204,000 8,688,660
Alabama Power Co., 8.50%, 5/01/22 4,950,000 5,257,479
Arizona Public Service Co., 10.25%, 5/15/20 10,500,000 11,687,897
Arizona Public Service Co., 9.00%, 12/15/21 14,500,000 16,084,386
Commonwealth Edison Co., 8.875%, 10/01/21 2,000,000 2,114,454
Commonwealth Edison Co., 8.50%, 7/15/22 5,000,000 5,399,355
Commonwealth Edison Co., 8.375%, 9/15/22 10,000,000 10,627,980
Consolidated Edison Inc., 7.10%, 2/01/28 15,000,000 15,059,850
Duquesne Light Co., 8.375%, 5/15/24 5,000,000 5,276,075
Enron Corp., 7.00%, 8/15/23 19,000,000 18,736,736
Gulf States Utilities Co., 9.72%, 7/01/98 1,185,000 1,192,455
Illinois Power Co., 8.00%, 2/15/23 $10,000,000 $ 10,391,730
Itron, Inc., cvt., 144A, 6.75%, 3/31/04 10,000,000 10,600,000
Long Island Lighting Co., 9.75%, 5/01/21 10,000,000 10,271,130
Louisiana Power & Light Co., 8.50%, 7/01/22 10,000,000 10,395,700
Midland CoGeneration Venture, 10.33%, 7/23/02 10,726,782 11,600,790
Niagara Mohawk Power Corp., 9.50%, 3/01/21 7,500,000 7,973,557
Niagara Mohawk Power Corp., 8.75%, 4/01/22 5,000,000 5,349,264
Northwest Pipeline Corp., 7.125%, 12/01/25 3,000,000 3,063,723
Ohio Edison Co., 8.75%, 6/15/22 8,000,000 8,508,424
Pacific Bell, 7.75%, 9/15/32 10,000,000 10,483,450
Pacific Bell, 7.50%, 2/01/33 10,000,000 10,309,260
Panhandle Eastern Co., 7.20%, 8/15/24 20,000,000 19,855,640
Philadelphia Electric Co., 8.75%, 4/01/22 15,000,000 15,879,210
Texas Utilities Co., 8.75%, 11/01/23 10,000,000 10,945,220
Texas Utilities Co., 8.50%, 8/01/24 10,000,000 10,637,480
US West Communications Group, 6.875%, 9/15/33 16,000,000 15,470,720
--------------
Total Corporate Bonds (Cost $258,103,156) 271,860,625
--------------
Total Long Term Investments (Cost $1,643,988,246) 2,156,495,296
--------------
hRepurchase Agreement 1.3%
Joint Repurchase Agreement, 5.819%, 4/01/98 (Maturity Value $27,591,637)
(Cost $27,587,178) 27,587,178 27,587,178
BancAmerica Robertson Stephens (Maturity Value $2,277,690)
Barclays Capital Group, Inc. (Maturity Value $2,277,690)
Bear, Stearns & Co., Inc. (Maturity Value $1,242,450)
BT Alex Brown, Inc. (Maturity Value $414,150)
Chase Securities, Inc. (Maturity Value $2,224,161)
CIBC Wood Gundy Securities Corp. (Maturity Value $3,211,666)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,277,690)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $2,277,690)
Greenwich Capital Markets, Inc. (Maturity Value $2,277,690)
Morgan Stanley Dean Witter & Co. (Maturity Value $2,277,690)
Paribas Corp. (Maturity Value $2,277,690)
SBC Warburg Dillon Read, Inc. (Maturity Value $2,277,690)
UBS Securities, L.L.C. (Maturity Value $2,277,690)
Collateralized by U.S. Treasury Bills & Notes
--------------
Total Investments (Cost $1,671,575,424) 99.6% 2,184,082,474
Other Assets, less Liabilities .4% 8,954,769
--------------
Net Assets 100.0% $2,193,037,243
==============
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
aNon-income producing
cSee Note 7 regarding restricted securities.
hSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin Income Fund
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
CLASS I (UNAUDITED) 1997 1996 1995**** 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $2.49 $2.30 $2.30 $2.22 $2.46 $2.25
------------------------------------------------------------------
Income from investment operations:
Net investment income .09 .18 .19 .18 .17 .18
Net realized and unrealized gains (losses) .11 .20 .02 .11 (.20) .23
------------------------------------------------------------------
Total from investment operations .20 .38 .21 .29 (.03) .41
------------------------------------------------------------------
Less distributions from:
Net investment income (.09) (.18) (.18) (.18) (.18) (.19)
Net realized gains (.03) (.01) (.03) (.03) (.03) (.01)
------------------------------------------------------------------
Total distributions (.12) (.19) (.21) (.21) (.21) (.20)
------------------------------------------------------------------
Net asset value, end of period $2.57 $2.49 $2.30 $2.30 $2.22 $2.46
==================================================================
Total return* 8.22% 17.31% 9.43% 14.00% (1.52%) 18.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $8,316,907 $7,738,746 $6,780,153 $5,885,788 $4,891,505 $3,935,444
Ratios to average net assets:
Expenses .71%** .72% .70% .71% .64% .54%
Net investment income 6.83%** 7.45% 8.27% 8.26% 7.37% 7.84%
Portfolio turnover rate 7.49% 16.15% 25.29% 58.64% 23.37% 25.41%
Average commission rate paid *** $.0516 $.0498 $.0518 -- -- --
</TABLE>
<TABLE>
<CAPTION>
CLASS II
- -----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $2.49 $2.30 $2.30 $2.18
------------------------------------------------
Income from investment operations:
Net investment income .08 .16 .17 .08
Net realized and unrealized gains .11 .21 .03 .11
------------------------------------------------
Total from investment operations .19 .37 .20 .19
------------------------------------------------
Less distributions from:
Net investment income (.08) (.17) (.17) (.07)
Net realized gains (.03) (.01) (.03) --
------------------------------------------------
Total distributions (.11) (.18) (.20) (.07)
------------------------------------------------
Net asset value, end of period $2.57 $2.49 $2.30 $2.30
================================================
Total return* 7.93% 16.72% 8.86% 8.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $949,100 $695,355 $343,314 $65,822
Ratios to average net assets:
Expenses 1.22%** 1.22% 1.21% 1.23%**
Net investment income 6.36%** 6.96% 7.84% 7.89%**
Portfolio turnover rate 7.49% 16.15% 25.29% 58.64%
Average commission rate paid *** $.0516 $.0498 $.0518 --
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
***Relates to purchases and sales of equity securities. Prior to September 30,
1996 disclosure of average commission rate was not required.
****For the period May 1, 1995 (effective date) to September 30, 1995 for Class
II.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------
ADVISOR CLASS (UNAUDITED) 1997****
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $2.48 $2.34
-----------------------------------------
Income from investment operations:
Net investment income .09 .14
Net realized and unrealized gains .11 .14
-----------------------------------------
Total from investment operations .20 .28
-----------------------------------------
Less distributions from:
Net investment income (.09) (.14)
Net realized gains (.03) --
Total distributions (.12) (.14)
-----------------------------------------
Net asset value, end of period $2.56 $2.48
=========================================
Total return* 8.33% 12.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $15,452 $13,318
Ratios to average net assets:
Expenses .56%** .57%**
Net investment income 7.04%** 7.58%**
Portfolio turnover rate 7.49% 16.15%
Average commission rate paid *** $.0516 $.0498
*Total return is not annualized.
**Annualized
***Relates to purchases and sales of equity securities.
****For the period January 2, 1997 (effective date) to September 30, 1997.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1998 (unaudited)
SHARES/
INCOME FUND WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
a,c,eCommon Stocks 30.9%
<S> <C> <C>
Apparel/Textiles .2%
a,c,eBibb Co. 2,097,122 $ 20,184,799
--------------
Automotive .3%
General Motors Corp. 450,000 30,346,875
--------------
Computer/Technology .2%
a,eAnacomp, Inc. 949,600 14,481,400
--------------
Consumer Products 1.7%
Philip Morris Cos., Inc. 3,300,000 137,568,750
RJR Nabisco Holdings Corp. 600,000 18,787,500
--------------
156,356,250
--------------
Energy/Energy Services 2.7%
Athabasca Oil Sands Trust (Canada) 2,700,000 37,970,678
Atlantic Richfield Co. 450,000 35,381,250
Canadian Oil Sands Trust Units (Canada) 2,400,000 37,801,920
Energy Group, Plc., Sponsored ADR (United Kingdom) 237,500 13,374,219
Occidental Petroleum Corp. 1,076,449 31,553,411
Pioneer Natural Resources Co. 1,200,015 29,850,373
aSanta Fe Energy Resources, Inc. 1,122,805 12,350,855
Snyder Oil Corp. 109,287 2,226,723
Texaco, Inc. 500,000 30,125,000
Ultramar Diamond Shamrock Corp. 625,000 22,031,250
--------------
252,665,679
--------------
Metals/Mining 1.0%
Anglo American Platinum Corp., Ltd., ADR (South Africa) 943,691 14,513,968
Anglogold, Ltd., ADR (South Africa) 3,000,000 12,750,000
DeBeers Consolidated Mines, Ltd., ADR (South Africa) 100,000 2,193,750
Driefontein Consolidated, Ltd., Sponsored ADR (South Africa) 700,000 4,462,500
Free State Consolidated Gold Mines, Ltd., ADR (South Africa) 3,525,000 16,303,125
Freeport-McMoRan Copper & Gold, Inc., Class A 705,000 13,174,687
Impala Platinum Holdings, Ltd., ADR (South Africa) 1,184,200 13,160,370
Samancor, Ltd., ADR (South Africa) 300,000 1,443,750
St. Helena Gold Mines, Ltd., ADR (South Africa) 187,500 445,313
Western Deep Levels, Ltd., ADR (South Africa) 700,000 14,962,500
--------------
93,409,963
--------------
Real Estate Investment Trusts .3%
Meditrust Corp. 720,960 22,259,640
--------------
Telecommunications 1.0%
US West Communications Group 1,700,000 93,075,000
--------------
Utilities 23.5%
American Electric Power Co., Inc. 2,200,000 110,550,000
Central & South West Corp. 3,800,000 101,650,000
CINergy Corp. 2,400,000 88,800,000
Conectiv, Inc. 2,800,000 61,425,000
Dominion Resources, Inc. 2,500,000 105,000,000
Edison International 3,100,000 91,062,500
Enova Corp. 3,000,000 83,812,500
Entergy Corp. 3,700,000 110,075,000
FirstEnergy Corp. 2,100,000 64,706,250
Florida Progress Corp. 2,722,800 113,506,725
FPL Group, Inc. 1,400,000 89,950,000
GPU, Inc. 1,700,000 75,225,000
Hawaiian Electric Industries, Inc. 610,000 25,315,000
Houston Industries, Inc. 1,900,000 54,625,000
Long Island Lighting Co. 1,800,000 56,700,000
MidAmerican Energy Holdings Co. 1,776,600 40,306,613
Nevada Power Co. 825,000 22,068,750
Utilities (cont.)
New Century Energies, Inc. 1,805,000 $ 90,926,875
New England Electric System 1,900,000 86,806,250
New York State Electric & Gas Corp. 1,000,000 39,875,000
Northern States Power Co. 1,010,000 59,590,000
PacifiCorp 525,000 12,928,125
PECO Energy Co. 3,000,000 66,375,000
PG&E Corp. 3,200,000 105,600,000
Potomac Electric Power Co. 2,100,000 52,631,250
Public Service Enterprise Group, Inc. 2,350,000 89,006,250
SCANA Corp. 800,000 24,750,000
Southern Co. 2,700,000 74,756,250
Texas Utilities Co. 2,400,000 94,350,000
Western Resources, Inc. 2,075,000 88,706,250
--------------
2,181,079,588
--------------
Total Common Stocks (Cost $2,151,471,431) 2,863,859,194
--------------
Preferred Stocks 11.2%
Cable Systems .5%
CSC Holdings, Inc., 8.50% cvt. pfd., Series I 950,000 48,806,250
--------------
Consumer Products .1%
Pantry Pride, Inc., $14.875 pfd., Series B 75,000 7,528,125
--------------
Energy/Energy Services 4.4%
Devon Financing Trust, $3.25 cvt. pfd., 144A 570,000 39,864,375
Enron Corp., 6.25% cvt. pfd. 2,150,000 47,568,750
EVI Inc., 5.00% cvt. pfd., 144A 1,200,000 54,000,000
Lomak Financing Trust, 5.75% cvt. pfd., 144A 750,000 35,437,500
McDermott International, Inc., $2.875 cvt. pfd., Series C, 144A 1,100,000 65,518,750
Nuevo Energy Co., 5.75% cvt. pfd., Series A 1,315,000 64,599,375
Patina Oil & Gas Corp., 7.125% cvt. pfd. 158,100 4,535,494
--------------
311,524,244
--------------
Lodging .7%
Host Marriott Corp., 6.75% cvt. pfd., 144A 1,100,000 62,975,000
--------------
Media & Broadcasting .4%
Time Warner, Inc., 10.25% pfd., Series M 35,691 39,929,077
--------------
Metals/Mining 1.2%
Amax Gold, Inc., $3.75 cvt. pfd., Series B 650,000 30,062,500
Armco, Inc., $3.625 cum. cvt. pfd., Series A 300,000 15,225,000
Armco, Inc., $4.50 cvt. pfd., Class B 114,200 5,852,750
Battle Mountain Gold Co., $3.25 cvt. pfd. 295,000 13,975,625
Coeur D'Alene Mines Corp., 7.00% cvt. pfd. 600,000 9,150,000
Cyprus Minerals, $4.00 cvt. pfd., Series A 200,000 9,700,000
Freeport-McMoRan, Inc., 8.75% cvt. pfd., Series B 400,000 9,475,000
Hecla Mining Co., $3.50 cvt. pfd., Series B 375,000 16,875,000
--------------
110,315,875
--------------
Paper & Forest Products .6%
Asia Pulp & Paper Co. Ltd., 12.00% pfd. (Indonesia) 60,000,000 50,550,000
--------------
Real Estate Investment Trusts 2.3%
FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A 1,800,000 52,200,000
Glenborough Realty Trust, 7.75%, cvt. pfd., Series A 2,350,000 61,393,750
Security Capital Industrial Trust, 7.00% cvt. pfd. 800,000 26,000,000
Security Capital Pacific Trust, $1.75 cvt. pfd., Series A 1,040,000 33,670,000
Vornado Realty Trust, 6.50% cvt. pfd. Series A 700,000 43,487,500
--------------
216,751,250
--------------
Telecommunications 1.0%
Nortel Inversora, SA, 10.00% cvt. pfd. MEDS (Argentina) 1,200,000 $ 76,200,000
Nortel Inversora, SA, ADR, variable cvt. pfd., Series B (Argentina) 504,000 14,553,000
--------------
90,753,000
--------------
Utilities 1.0%
cCMS Energy Trust I, 7.75% cvt. pfd. 1,600,000 101,100,000
--------------
Total Preferred Stocks (Cost $914,113,699) 1,040,232,821
--------------
Partnership Units .1%
BP Prudhoe Bay Royalty Trust (Cost $13,670,957) 500,000 7,343,750
--------------
Warrants
a,cBoardwalk Casino, Inc. 1,281,869 1,620,282
aSecurity Capital Group 121,485 402,419
--------------
Total Warrants (Cost $2,643,855) 2,022,701
--------------
Miscellaneous
Miscellaneous (Cost $6,362,906) 355,508 4,004,517
--------------
Total Common Stocks, Preferred Stocks, Partnership Units, Warrants and Miscellaneous
(Cost $3,088,262,848) 3,917,462,983
--------------
PRINCIPAL
AMOUNT*
---------
Corporate Bonds 25.3%
Apparel/Textiles 1.4%
Consoltex Group, Inc., senior sub. notes, Series B, 11.00%, 10/01/03 $ 50,000,000 53,000,000
Hartmarx Corp., senior sub. notes, 10.875%, 1/15/02 35,000,000 36,225,000
Polysindo International Finance Co., secured notes, 11.375%, 6/15/06 (Indonesia) 13,000,000 8,352,500
The William Carter Co., senior sub. notes, Series A, 10.375%, 12/01/06 6,000,000 6,450,000
Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 25,000,000 26,562,500
--------------
130,590,000
--------------
Automotive .8%
Collins & Aikman Corp., senior sub. notes., 11.50%, 4/15/06 35,000,000 39,550,000
Exide Corp., cvt. sub. notes, 144A, 2.90%, 12/15/05 30,000,000 18,450,000
bHarvard Industries, Inc., senior notes, 11.125%, 8/01/05 50,000,000 18,750,000
--------------
76,750,000
--------------
Biotechnology .2%
Centocor, Inc., Eurobonds, cvt. sub. deb., 6.75%, 10/16/01 16,500,000 16,500,000
--------------
Building Products .4%
American Standard, Inc., S.F., senior sub. deb., 9.25%, 12/01/16 4,272,000 4,442,880
Inter-City Products Corp., senior notes, 9.75%, 3/01/00 30,000,000 30,600,000
--------------
35,042,880
--------------
Cable Systems 1.3%
Continental Cablevision, Inc., senior sub. deb., 9.50%, 8/01/13 30,000,000 35,983,200
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 40,000,000 44,500,000
Helicon Group, senior notes, Series B, 11.00%, 11/01/03 35,000,000 37,887,500
--------------
118,370,700
--------------
Chemicals .7%
Applied Extrusion Technology, senior notes, Series B, 11.50%, 4/01/02 29,000,000 30,885,000
Uniroyal Chemical Co., senior notes, 10.50%, 5/01/02 8,900,000 9,745,500
Uniroyal Chemical Co., senior sub. notes, 11.00%, 5/01/03 20,000,000 21,200,000
--------------
61,830,500
--------------
Computer/Technology 1.1%
Acclaim Entertainment, Inc., cvt. sub. notes, 10.00%, 3/01/02 $ 25,000,000 $ 33,125,000
Anacomp, Inc., senior sub. notes, Series B, 10.875%, 4/01/04 60,000,000 63,600,000
Maxtor Corp., cvt. sub. deb., 5.75%, 3/01/12 8,000,000 5,640,000
--------------
102,365,000
--------------
Consumer Products 1.4%
E&S Holdings Corp., senior sub. notes, Series B, 10.375%, 10/01/06 32,000,000 26,760,000
Outsourcing Services Group, senior sub. notes, 144A, 10.875%, 3/01/06 22,000,000 22,550,000
Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 38,500,000 39,847,500
RJR Nabisco, Inc., notes, 9.25%, 8/15/13 35,000,000 39,000,080
--------------
128,157,580
--------------
Containers & Packaging 1.0%
Calmar Inc., senior sub. notes, Series B, 11.50%, 8/15/05 30,000,000 31,950,000
Packaging Resources, Inc., senior notes, 11.625%, 5/01/03 38,000,000 37,430,000
Printpack, Inc., senior sub. notes, Series B, 10.625%, 8/15/06 15,000,000 16,387,500
U.S. Can Corp., unsecured senior sub. notes, Series B, 10.125%, 10/15/06 6,000,000 6,450,000
--------------
92,217,500
--------------
Electrical Equipment .2%
Trans-Lux Corp., cvt. sub. notes, 7.50%, 12/01/06 8,000,000 9,160,000
Trench Electric & Trench, Inc., senior sub. deb., 144A, 10.25%, 12/15/07 (Canada) 10,000,000 10,187,500
--------------
19,347,500
--------------
Energy/Energy Services 2.4%
Bellwether Exploration Co., senior sub. notes, 10.875%, 4/01/07 12,000,000 12,750,000
Denbury Management, Inc., unsecured senior sub. notes, 9.00%, 3/01/08 41,000,000 40,948,750
Falcon Drilling, senior sub. notes, Series B, 12.50%, 3/15/05 15,000,000 17,175,000
Gerrity Oil & Gas Corp., senior sub. notes, 11.75%, 7/15/04 40,000,000 43,800,000
Mesa Operating Co., unsecured senior sub. notes, 10.625%, 7/01/06 5,000,000 5,875,000
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 45,000,000 45,112,500
Plains Resources, Inc., senior sub. notes, 10.25%, 3/15/06 8,000,000 8,640,000
Swift Energy Co., cvt. sub. notes, 6.25%,11/15/06 50,000,000 49,000,000
--------------
223,301,250
--------------
Entertainment .2%
AMF Bowling Worldwide, Inc., Series B, 10.875%, 3/15/06 12,000,000 13,275,000
--------------
Financial Services 1.1%
First Nationwide Holdings, Inc., senior sub. notes, 10.625%, 10/01/03 10,000,000 11,300,000
Fuji JGB Investment, L.L.C., 144A, 9.87% to 6/30/08, variable rate thereafter,
12/31/49 36,000,000 35,775,000
IBJ Preferred Capital Co., L.L.C., 144A, 8.79% to 6/30/08, variable rate
thereafter, 12/29/49 30,000,000 28,950,000
Tokai Preferred Capital Co., L.L.C., 144A, 9.98% to 6/30/08, variable rate
thereafter, 12/29/49 27,000,000 27,388,125
--------------
103,413,125
--------------
Food & Beverages 2.2%
Chock Full O'Nuts Corp., S.F., cvt. sub. deb., 8.00%, 9/15/06 3,446,000 3,635,530
Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 2/01/05 45,000,000 49,725,000
Del Monte Corp., senior sub. notes, Series B, 12.25%, 4/15/07 46,000,000 52,325,000
Doane Products Co., senior notes, 10.625%, 3/01/06 21,000,000 22,837,500
International Home Foods, senior sub. notes, 10.375%, 11/01/06 30,000,000 33,525,000
Specialty Foods Corp., senior sub. notes, Series B, 11.25%, 8/15/03 25,000,000 23,250,000
Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 8/15/01 20,000,000 19,900,000
--------------
205,198,030
--------------
Food Chains .1%
bBruno's, Inc., senior sub. notes, 10.50%, 8/01/05 60,000,000 11,100,000
--------------
Gaming & Leisure 1.9%
Aztar Corp., senior sub. notes, 11.00%, 10/01/02 60,000,000 62,250,000
Eldorado Resorts, L.L.C., senior sub. notes, 10.50%, 8/15/06 8,000,000 8,900,000
Hard Rock Hotel, Inc., senior sub. notes, 144A, 9.25%, 4/01/05 4,500,000 4,581,563
Gaming & Leisure (cont.)
Harveys Casino Resorts, senior sub. notes, 10.625%, 6/01/06 $ 11,000,000 $ 12,320,000
Rio Hotel & Casino, Inc., senior sub. notes, 10.625%, 7/15/05 35,000,000 38,150,000
Venetian Casino/LV Sands, mortgage notes, 144A, 12.25%, 11/15/04 47,000,000 48,762,500
--------------
174,964,063
--------------
Health Care .5%
Continucare Corp., cvt. sub. notes, 144A, 8.00%,10/31/02 9,500,000 9,262,500
Dade International, Inc., senior sub. notes, 11.125%, 5/01/06 22,000,000 24,530,000
Medical Care International, Inc., cvt. sub. deb., 144A, 6.75%, 10/01/06 15,000,000 13,650,000
--------------
47,442,500
--------------
Industrial Products 1.0%
Nortek, Inc., senior sub. notes, 9.875%, 3/01/04 18,500,000 19,263,125
RBX Corp., senior sub. notes, Series B, 11.25%, 10/15/05 60,000,000 53,700,000
Thermadyne Industries, Inc., senior sub. notes, 10.25%, 5/01/02 7,393,000 7,725,685
Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 14,500,000 15,623,750
--------------
96,312,560
--------------
Media & Broadcasting .1%
Benedek Broadcasting, senior notes, 11.875%, 3/01/05 12,250,000 13,873,125
--------------
Metals 1.9%
Armco Steel, Inc., senior notes, 9.375%, 11/01/00 5,000,000 5,200,000
Ashanti Capital, Ltd., cvt. notes, 5.50%, 3/15/03 (Ghana) 50,000,000 38,000,000
Coeur D' Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 900,000 738,000
Coeur D' Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 20,000,000 17,900,000
FMC Corp., Eurobonds, cvt. senior sub. deb., 6.75%, 1/16/05 13,020,000 12,434,100
Jorgensen, Earle M. Co., senior notes, 10.75%, 3/01/00 50,000,000 51,687,500
Republic Engineered Steel Co., first mortgage, 9.875%, 12/15/01 50,000,000 50,812,500
--------------
176,772,100
--------------
Paper & Forest Products 1.5%
Four M Corp., senior notes, Series B, 12.00%, 6/01/06 30,000,000 31,800,000
Riverwood International, senior sub. notes, 10.875%, 4/01/08 60,000,000 60,600,000
Tjiwa Kimia Finance Mauritius, senior unsecured notes, 10.00%, 8/01/04 (Indonesia) 60,000,000 49,350,000
--------------
141,750,000
--------------
Pharmaceuticals .4%
ICN Pharmaceuticals, Inc., senior notes, Series B, 9.25%, 8/15/05 37,000,000 39,960,000
--------------
Pollution Control .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 21,000,000 17,456,250
--------------
Real Estate Development .1%
Rouse Co., cvt. sub. deb., 5.75%, 7/23/02 9,000,000 10,023,750
--------------
Real Estate Investment Trusts .6%
Macerich Co., cvt. sub. notes, 144A, 7.25%, 12/15/02 55,000,000 56,375,000
--------------
Retail .1%
Drug Emporium, Inc., cvt. sub. deb., 7.75%, 10/01/14 9,000,000 7,852,500
--------------
Shipping Services .1%
First Wave Marine, Inc., senior notes, 11.00%, 02/01/08 8,000,000 8,360,000
--------------
Telecommunications .3%
Paging Network, senior sub. notes, 10.125%, 8/01/07 25,000,000 26,375,000
--------------
Utilities 2.1%
ESCOM, E168, utility deb., 11.00%, 6/01/08 (South Africa) 975,837,500 ZAR 169,353,025
Midland CoGeneration Venture, deb., Series C-91, 10.33%, 7/23/02 5,692,503 6,156,322
Midland Funding Corp I, deb., Series C-94, 10.33%, 7/23/02 11,033,262 11,932,241
Texas-New Mexico Power Co., secured deb., 10.75%, 9/15/03 6,000,000 6,531,828
--------------
193,973,416
--------------
Total Corporate Bonds (Cost $2,363,549,642) 2,348,949,329
--------------
U.S. Government Securities 12.9%
U.S. Treasury Bonds, 6.00% - 7.125%, 2/15/23 - 2/15/26 $1,031,000,000 $1,086,208,156
U.S. Treasury Notes, 6.375%, 8/15/02 110,000,000 112,956,360
--------------
Total U.S. Government Securities (Cost $1,107,377,580) 1,199,164,516
--------------
Foreign Government Securities 10.3%
Republic of Argentina PAR, step coupon, 5.50%, 3/31/23 520,000,000 398,125,000
Republic of Brazil - EI, floating rate deb., 6.875%, 4/15/06 230,300,000 207,701,813
Republic of Brazil - IDU, variable rate deb., Series A, 6.875%, 1/01/01 42,175,000 41,199,703
Republic of Brazil PAR Z-L, variable rate collateralized deb., 5.25%, 4/15/24 280,000,000 211,050,000
Republic of South Africa, 12.00%, 2/28/05 515,000,000 ZAR 97,767,216
--------------
Total Foreign Government Securities (Cost $808,689,332) 955,843,732
--------------
Zero Coupon/Step-up Bonds 3.0%
AMF Bowling Worldwide, Inc., senior disc. notes, Series B, zero coupon to 3/15/01,
12.25% thereafter, 3/15/06 23,294,000 18,984,610
APP Finance VI Mauritius, cvt. bond, 11/18/12 (Indonesia) 150,000,000 39,187,500
Marcus Cable Co., senior disc. notes, zero coupon to 6/15/00, 14.25%
thereafter, 12/15/05 75,000,000 68,343,750
Mesa Operating Co., unsecured senior sub. notes, zero coupon to 7/01/01, 11.625%
thereafter, 7/01/06 15,000,000 12,525,000
Nextel Communications Inc., senior disc. notes, 144A, zero coupon to 2/15/03,
9.95% thereafter, 2/15/08 86,500,000 55,143,750
Nextel Communications Inc., senior disc. notes, 144A, zero coupon to 4/15/03,
12.125 % thereafter, 4/15/08 50,000,000 30,125,000
Revlon Worldwide Corp., senior disc. notes, Series B, 3/15/01 50,000,000 38,312,500
Uniroyal Chemical Co. Investors, disc. notes, zero coupon to 5/1/98, 12.00%
thereafter, 5/01/05 12,000,000 11,970,000
--------------
Total Zero Coupon/Step-up Bonds (Cost $250,044,494) 274,592,110
--------------
Total Long Term Investment (Cost $7,617,923,896) 8,696,012,670
--------------
hRepurchase Agreements 5.1%
Joint Repurchase Agreement, 5.819%, 4/01/98, (Maturity Value $476,480,395)
(Cost $476,403,390) 476,403,390 476,403,390
BancAmerica Robertson Stephens (Maturity Value $39,333,457)
Barclays Capital Group, Inc. (Maturity Value $39,333,457)
Bear, Stearns & Co., Inc. (Maturity Value $21,455,911)
BT Alex Brown, Inc. (Maturity Value $7,151,970)
Chase Securities, Inc. (Maturity Value $38,409,084)
CIBC Wood Gundy Securities Corp. (Maturity Value $55,462,317)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $39,333,457)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $39,333,457)
Greenwich Capital Markets, Inc. (Maturity Value $39,333,457)
Morgan Stanley Dean Witter & Co. (Maturity Value $39,333,457)
Paribas Corp. (Maturity Value $39,333,457)
SBC Warburg Dillon Read, Inc. (Maturity Value $39,333,457)
UBS Securities, L.L.C. (Maturity Value $39,333,457)
Collateralized by U.S. Treasury Bills & Notes
--------------
Total Investments (Cost $8,094,327,286) 98.8% 9,172,416,060
Other Assets, less Liabilities 1.2% 109,043,070
--------------
Net Assets 100.0% $9,281,459,130
==============
CURRENCY ABBREVIATIONS:
ZAR - South African Rand
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 6 regarding defaulted securities.
cSee Note 7 regarding restricted securities.
eThe Investment Company Act of 1940 defines affiliated companies as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in affiliated companies at March, 31 1998 were
$34,666,199.
hSee Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
Franklin U.S. Government Securities Fund
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
CLASS I (UNAUDITED) 1997 1996 1995**** 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.89 $6.72 $6.87 $6.51 $7.20 $7.26
--------------------------------------------------------------
Income from investment operations:
Net investment income .23 .48 .49 .50 .50 .56
Net realized and unrealized gains (losses) .01 .17 (.15) .35 (.68) (.06)
--------------------------------------------------------------
Total from investment operations .24 .65 .34 .85 (.18) .50
--------------------------------------------------------------
Less distributions from net investment income (.23) (.48) (.49) (.49) (.51) (.56)
--------------------------------------------------------------
Net asset value, end of period $6.90 $6.89 $6.72 $6.87 $6.51 $7.20
==============================================================
Total return* 3.60% 10.08% 5.15% 13.56% (2.75%) 6.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $9,126,465 $9,350,751 $10,129,483 $11,101,605 $11,668,747 $14,268,516
Ratios to average net assets:
Expenses .66%** .64% .61% .61% .55% .52%
Net investment income 6.74%** 7.01% 7.18% 7.50% 7.37% 7.71%
Portfolio turnover rate+ 9.33% 1.74% 8.01% 5.48% 18.28% 43.10%
</TABLE>
<TABLE>
<CAPTION>
CLASS II
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $6.87 $6.70 $6.85 $6.67
------------------------------------------------
Income from investment operations:
Net investment income .21 .44 .45 .21
Net realized and unrealized gains (losses) .01 .17 (.15) .16
------------------------------------------------
Total from investment operations .22 .61 .30 .37
------------------------------------------------
Less distributions from net investment income (.21) (.44) (.45) (.19)
------------------------------------------------
Net asset value, end of period $6.88 $6.87 $6.70 $6.85
================================================
Total return* 3.32% 9.48% 4.55% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $171,504 $120,818 $57,657 $11,695
Ratios to average net assets:
Expenses 1.20%** 1.20% 1.17% 1.18%**
Net investment income 6.20%** 6.44% 6.80% 6.48%**
Portfolio turnover rate+ 9.33% 1.74% 8.01% 5.48%
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
****For the period May 1, 1995 (effective date) to September 30, 1995 for Class
II.
+Maturity of U.S. government issues and the reinvestment of the proceeds thereof
are considered as purchases and sales of securities in computing the portfolio
turnover rate.
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1998 YEAR ENDED SEPTEMBER 30,
------------------------
ADVISOR CLASS (UNAUDITED) 1997****
- ------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
<S> <C> <C>
Net asset value, beginning of period $6.90 $6.76
------------------------------------------
Income from investment operations:
Net investment income .24 .38
Net realized and unrealized gains .01 .12
------------------------------------------
Total from investment operations .25 .50
------------------------------------------
Less distributions from net investment income (.24) (.36)
------------------------------------------
Net asset value, end of period $6.91 $6.90
==========================================
Total return* 3.65% 7.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $21,041 $14,469
Ratios to average net assets:
Expenses .56%** .56%**
Net investment income 6.84%** 7.01%**
Portfolio turnover rate+ 9.33% 1.74%
*Total return is not annualized.
**Annualized
****For the period January 2, 1997 (effective date) to September 30, 1997.
+Maturity of U.S. government issues and the reinvestment of the proceeds thereof
are considered as purchases and sales of securities in computing the portfolio
turnover rate.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1998 (unaudited)
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
aGovernment National Mortgage Association (GNMA) 98.4%
<S> <C> <C>
fGNMA I, SF, 6.00%, 9/15/23 - 4/01/28 $ 78,772,577 $ 76,546,867
fGNMA I, SF, 6.50%, 3/15/03 - 4/01/28 1,429,580,344 1,420,582,530
GNMA II, 6.50%, 6/20/24 - 2/20/28 388,519,201 383,902,346
GNMA I, SF, 6.75%, 3/15/26 - 5/15/26 3,529,785 3,525,479
GNMA PL, 6.75%, 1/15/34 36,054,600 36,080,561
GNMA I, SF, 7.00%, 4/15/16 - 12/15/26 1,837,124,493 1,862,691,999
GNMA II, 7.00%, 3/20/24 - 10/20/27 403,744,706 407,606,847
GNMA PL, 7.00%, 9/15/35 8,950,197 9,073,084
GNMA I, SF, 7.25%, 10/15/25 - 1/15/26 8,323,990 8,444,132
GNMA PL, 7.375%, 4/15/29 35,061,471 35,611,235
GNMA PL, 7.425%, 7/15/29 20,982,143 21,021,003
GNMA I, SF, 7.50%, 6/15/05 - 9/15/27 1,384,640,266 1,426,269,361
GNMA II, 7.50%, 10/20/22 - 12/20/26 276,734,382 283,749,793
GNMA PL, 7.75%, 10/15/12 5,466,226 5,671,046
GNMA I, SF, 8.00%, 10/15/07 - 5/15/26 1,094,935,555 1,143,239,013
GNMA II, 8.00%, 8/20/16 - 10/20/26 79,988,983 82,622,263
GNMA PL, 8.00%, 7/15/23 - 5/15/32 38,055,320 39,717,077
GNMA I, GPM, 8.25%, 3/15/17 - 11/15/17 6,692,621 7,037,559
GNMA PL, 8.25%, 2/15/28 12,904,508 13,749,755
GNMA I, SF, 8.50%, 5/15/16 - 11/15/24 252,756,542 267,994,186
GNMA II, 8.50%, 4/20/16 - 6/20/25 47,943,755 50,355,774
GNMA II, GPM, 8.75%, 3/20/17 - 7/20/17 1,133,076 1,215,588
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 304,388,972 330,001,141
GNMA II, 9.00%, 5/20/16 - 11/20/21 16,159,426 17,326,678
GNMA I, GPM, 9.25%, 5/15/16 - 1/15/17 4,632,258 5,044,003
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 166,165,884 181,829,729
GNMA II, 9.50%, 9/20/15 - 4/20/25 15,154,720 16,392,329
GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13 5,478,924 6,010,944
GNMA I, SF, 10.00%, 4/15/12 - 4/15/25 197,164,920 217,678,839
GNMA II, 10.00%, 8/20/13 - 3/20/21 23,085,993 25,195,888
GNMA I, GPM, 10.25%, 2/15/16 - 2/15/21 2,368,340 2,609,864
GNMA I, SF, 10.50%, 4/15/98 - 10/15/21 141,646,357 157,701,561
GNMA II, 10.50%, 9/20/13 - 3/20/21 38,428,434 41,939,079
GNMA I, GPM, 11.00%, 12/15/09 - 3/15/11 9,423,489 10,479,998
GNMA I, SF, 11.00%, 1/15/01 - 5/15/21 118,553,671 133,177,176
GNMA II, 11.00%, 7/20/13 - 1/20/21 10,232,252 11,298,040
GNMA I, GPM, 11.25%, 6/15/13 - 1/15/16 4,591,585 5,186,577
GNMA I, GPM, 11.50%, 3/15/10 - 6/15/13 1,742,154 1,979,775
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 25,226,962 28,903,379
GNMA II, GPM, 11.50%, 7/20/13 - 1/20/14 134,015 151,808
GNMA II, 11.50%, 8/20/13 - 4/20/18 1,825,459 2,052,405
GNMA I, GPM, 11.75%, 7/15/13 - 12/15/15 936,367 1,068,666
GNMA I, GPM, 12.00%, 10/15/10 - 3/15/13 463,912 529,112
GNMA I, SF, 12.00%, 5/15/11 - 8/15/19 116,101,060 133,715,719
GNMA II, 12.00%, 9/20/13 - 2/20/16 5,334,289 6,026,147
GNMA I, GPM, 12.50%, 4/15/10 - 10/15/12 914,533 1,047,143
GNMA I, SF, 12.50%, 1/15/10 - 8/15/18 103,610,115 120,002,368
GNMA II, 12.50%, 9/20/13 - 11/20/15 4,646,786 5,296,501
GNMA I, GPM, 12.75%, 11/15/13 - 6/15/15 58,207 67,536
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 97,057,255 113,704,659
GNMA II, 13.00%, 10/20/13 - 9/20/15 3,029,391 3,497,340
--------------
Total Government National Mortgage Association (GNMA) (Cost $8,960,201,133) 9,166,621,902
--------------
U.S. Government Securities 1.1%
U.S. Treasury Bonds, 6.00%, 2/15/26 (Cost $96,343,750) 100,000,000 99,843,800
--------------
Total Long Term Investments (Cost $9,056,544,883) 9,266,465,702
--------------
dU.S. Treasury Bills, 4.985% - 5.39%, 4/02/98 - 5/14/98 $ 91,532,443
U.S. Treasury Notes, 5.875%, 4/30/98 30,018,780
--------------
Total Short Term Investments (Cost $121,572,077) 121,551,223
--------------
Total Investments (Cost $9,178,116,960) 100.8% 9,388,016,925
Other Assets, less Liabilities (.8)% (69,006,478)
--------------
Net Assets 100.0% $9,319,010,447
==============
dSecurities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
fSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements
Statements of Assets and Liabilities
March 31, 1998 (unaudited)
U.S. GOVERNMENT
GROWTH FUND DYNATECH FUND UTILITIES FUND INCOME FUND SECURITIES FUND
------------------------------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C> <C> <C>
Cost $ 447,819,030 $ 36,147,841 $1,643,988,246 $7,617,923,896 $9,178,116,960
==============================================================================
Value 1,233,681,288 123,691,196 2,156,495,296 8,696,012,670 9,388,016,925
Repurchase agreements, at value and cost 617,457,544 89,115,030 27,587,178 476,403,390 --
Cash 601,436 -- -- 915,125 22,730
Receivables:
Investment securities sold -- 154,682 4,089,888 -- --
Capital shares sold 2,348,227 614,696 960,180 20,756,999 8,874,851
Dividends and interest 912,514 60,539 10,338,883 121,594,902 58,421,100
------------------------------------------------------------------------------
Total assets 1,855,001,009 213,636,143 2,199,471,425 9,315,683,086 9,455,335,606
------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased -- -- -- -- 107,404,299
Capital shares redeemed 802,923 407,562 2,597,446 17,588,111 11,150,146
Affiliates 1,675,151 206,612 1,594,259 6,882,532 6,035,757
Shareholders 1,370,619 218,809 2,157,898 6,496,954 11,377,984
Payable upon return of securities loaned (Note 8) -- -- -- 2,982,400 --
Other liabilities -- 118,383 84,579 273,959 356,973
------------------------------------------------------------------------------
Total liabilities 3,848,693 951,366 6,434,182 34,223,956 136,325,159
------------------------------------------------------------------------------
Net assets, at value $1,851,152,316 $212,684,777 $2,193,037,243 $9,281,459,130 $9,319,010,447
==============================================================================
Net assets consist of:
Undistributed net investment income $ 7,370,875 $ 733,301 $ 8,473,162 $ 58,776,130 $ 4,986,327
Net unrealized appreciation 785,862,258 87,543,355 512,507,050 1,077,910,823 209,899,965
Accumulated net realized gain (loss) 1,533,601 (564,612) 19,433,435 38,169,671 (401,708,838)
Capital shares 1,056,385,582 124,972,733 1,652,623,596 8,106,602,506 9,505,832,993
------------------------------------------------------------------------------
Net assets, at value $1,851,152,316 $212,684,777 $2,193,037,243 $9,281,459,130 $9,319,010,447
==============================================================================
U.S. GOVERNMENT
GROWTH FUND DYNATECH FUND UTILITIES FUND INCOME FUND SECURITIES FUND
------------------------------------------------------------------------------
Class I:
<S> <C> <C> <C> <C> <C>
Net assets, at value $1,649,831,671 $205,035,502 $2,145,927,816 $8,316,906,604 $9,126,464,843
==============================================================================
Shares outstanding 56,618,524 11,573,511 188,116,146 3,242,113,375 1,322,087,035
==============================================================================
Net asset value per share* $29.14 $17.72 $11.41 $2.57 $6.90
==============================================================================
Maximum offering price per share (net asset value
per share / 95.50%, 95.50%, 95.75%, 95.75%,
and 95.75%, respectively) $30.51 $18.55 $11.92 $2.68 $7.21
==============================================================================
Class II:
Net assets, at value $ 162,266,737 $ 7,649,275 $ 32,531,675 $ 949,100,291 $ 171,504,463
==============================================================================
Shares outstanding 5,639,817 437,401 2,854,010 369,682,707 24,918,794
==============================================================================
Net asset value per share* $28.77 $17.49 $11.40 $2.57 $6.88
==============================================================================
Maximum offering price per share (net asset value
per share / 99.00%) $29.06 $17.67 $11.52 $2.60 $6.95
==============================================================================
Advisor Class:
Net assets, at value $ 39,053,908 -- $ 14,577,752 $ 15,452,235 $ 21,041,141
==============================================================================
Shares outstanding 1,339,488 -- 1,278,003 6,041,255 3,045,278
==============================================================================
Net asset value and maximum offering
price per share $29.16 -- $11.41 $2.56 $6.91
==============================================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Statements (continued)
Statements of Operations
for the six months ended March 31, 1998 (unaudited)
U.S. GOVERNMENT
GROWTH FUND DYNATECH FUND UTILITIES FUND INCOME FUND SECURITIES FUND
------------------------------------------------------------------------------
Investment income:
<S> <C> <C> <C> <C> <C>
Dividends $ 6,750,250 $ 205,017 $ 45,630,847 $ 96,089,000 $--
Interest 15,748,434 2,281,679 12,424,920 233,454,480 348,485,528
-----------------------------------------------------------------------------
Total investment income 22,498,684 2,486,696 58,055,767 329,543,480 348,485,528
-----------------------------------------------------------------------------
Expenses:
Management fees (Note 3) 3,970,053 553,381 4,891,986 19,965,641 21,328,002
Distribution fees: (Note 3)
Class I 1,745,810 204,274 1,320,983 5,807,859 4,249,383
Class II 680,162 27,183 83,607 2,625,538 464,887
Transfer agent fees (Note 3) 1,129,271 150,554 1,343,725 3,121,661 3,583,976
Custodian fees 8,842 864 10,177 289,258 48,623
Reports to shareholders 215,062 45,889 381,659 825,939 1,111,905
Registration and filing fees 70,194 14,890 51,923 168,982 59,057
Professional fees (Note 3) 14,451 2,315 20,185 94,437 79,557
Directors' fees and expenses 4,364 556 5,651 20,858 25,226
Other 16,342 1,397 32,774 84,303 109,090
-----------------------------------------------------------------------------
Total expenses 7,854,551 1,001,303 8,142,670 33,004,476 31,059,706
-----------------------------------------------------------------------------
Net investment income 14,644,133 1,485,393 49,913,097 296,539,004 317,425,822
-----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 1,568,878 2,742,888 20,347,170 46,985,540 (10,013,189)
Foreign currency transactions -- -- -- (619,876) --
-----------------------------------------------------------------------------
Net realized gain (loss) 1,568,878 2,742,888 20,347,170 46,365,664 (10,013,189)
Net unrealized appreciation (depreciation) on:
Investments 153,621,745 700,740 298,382,478 334,698,779 29,964,515
Translation of assets and liabilities denominated
in foreign currencies -- -- -- (87,611) --
-----------------------------------------------------------------------------
Net unrealized appreciation 153,621,745 700,740 298,382,478 334,611,168 29,964,515
-----------------------------------------------------------------------------
Net realized and unrealized gains 155,190,623 3,443,628 318,729,648 380,976,832 19,951,326
-----------------------------------------------------------------------------
Net increase in net assets resulting
from operations $169,834,756 $4,929,021 $368,642,745 $677,515,836 $337,377,148
=============================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
for the six months ended March 31, 1998 (unaudited)
and the year ended September 30, 1997
GROWTH FUND DYNATECH FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997 MARCH 31, 1998 SEPTEMBER 30, 1997
--------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income $ 14,644,133 $ 20,531,240 $ 1,485,393 $ 1,043,236
Net realized gain from investments 1,568,878 14,065,272 2,742,888 6,949,626
Net unrealized appreciation on investments 153,621,745 215,960,743 700,740 33,474,575
--------------------------------------------------------------------------
Net increase in net assets resulting from operations 169,834,756 250,557,255 4,929,021 41,467,437
Distributions to shareholders from:
Net investment income:
Class I (25,163,817) (10,432,896) (1,752,802) (415,339)
Class II (1,439,959) (420,404) (30,932) (177)
Advisor Class (559,926) -- -- --
Net realized gains:
Class I (12,689,832) (9,283,568) (10,001,069) (3,013,708)
Class II (1,116,454) (554,318) (253,840) (1,254)
Advisor Class (251,592) -- -- --
--------------------------------------------------------------------------
Total distributions to shareholders (41,221,580) (20,691,186) (12,038,643) (3,430,478)
Capital share transactions: (Note 2)
Class I 99,268,956 202,804,236 24,043,658 45,863,685
Class II 34,006,868 58,785,996 4,263,396 3,078,539
Advisor Class 10,661,804 23,241,991 -- --
--------------------------------------------------------------------------
Total capital share transactions 143,937,628 284,832,223 28,307,054 48,942,224
Net increase in net assets 272,550,804 514,698,292 21,197,432 86,979,183
Net assets:
Beginning of period 1,578,601,512 1,063,903,220 191,487,345 104,508,162
--------------------------------------------------------------------------
End of period $1,851,152,316 $1,578,601,512 $212,684,777 $191,487,345
==========================================================================
Undistributed net investment income included in net assets
End of period $ 7,370,875 $ 19,890,444 $ 733,301 $ 1,031,642
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
UTILITIES FUND INCOME FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997 MARCH 31, 1998 SEPTEMBER 30, 1997
--------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income $ 49,913,097 $ 114,866,322 $ 296,539,004 $ 574,909,657
Net realized gain from investments and
foreign currency transactions 20,347,170 49,829,022 46,365,664 133,917,032
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies 298,382,478 112,850,805 334,611,168 524,014,976
--------------------------------------------------------------------------
Net increase in net assets resulting from operations 368,642,745 277,546,149 677,515,836 1,232,841,665
Distributions to shareholders from:
Net investment income:
Class I (49,593,123) (113,914,994) (284,364,358) (545,342,618)
Class II (557,666) (1,067,340) (26,130,962) (35,350,218)
Advisor Class (280,339) (277,630) (508,305) (498,714)
Net realized gains:
Class I (49,823,439) (100,515,956) (87,788,867) (29,741,890)
Class II (579,398) (903,261) (8,459,447) (1,712,633)
Advisor Class (244,503) -- (152,641) --
--------------------------------------------------------------------------
Total distributions to shareholders (101,078,468) (216,679,181) (407,404,580) (612,646,073)
Capital share transactions: (Note 2)
Class I (70,045,064) (507,188,024) 336,052,509 382,416,473
Class II 7,237,358 1,602,454 226,184,879 308,632,125
Advisor Class 4,382,011 8,401,319 1,691,249 12,707,793
--------------------------------------------------------------------------
Total capital share transactions (58,425,695) (497,184,251) 563,928,637 703,756,391
--------------------------------------------------------------------------
Net increase (decrease) in net assets 209,138,582 (436,317,283) 834,039,893 1,323,951,983
Net assets:
Beginning of period 1,983,898,661 2,420,215,944 8,447,419,237 7,123,467,254
--------------------------------------------------------------------------
End of period $2,193,037,243 $1,983,898,661 $9,281,459,130 $8,447,419,237
==========================================================================
Undistributed net investment income included in net assets
End of period $ 8,473,162 $ 8,991,193 $ 58,776,130 $ 69,436,365
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets (cont.)
for the six months ended March 31, 1998 (unaudited)
and the year ended September 30, 1997
U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1998 SEPTEMBER 30, 1997
---------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 317,425,822 $ 689,860,208
Net realized loss from investments (10,013,189) (29,505,613)
Net unrealized appreciation on investment 29,964,515 285,289,807
----------------------------------------------------
Net increase in net assets resulting from operations 337,377,148 945,644,402
Distributions to shareholders from:
Net investment income:
Class I (314,527,975) (694,284,790)
Class II (4,355,006) (5,467,178)
Advisor Class (592,555) (363,656)
----------------------------------------------------
Total distributions to shareholders (319,475,536) (700,115,624)
Capital share transactions: (Note 2)
Class I (241,938,049) (1,021,750,769)
Class II 50,474,886 60,845,500
Advisor Class 6,533,443 14,274,791
----------------------------------------------------
Total capital share transactions (184,929,720) (946,630,478)
Net decrease in net assets (167,028,108) (701,101,700)
Net assets:
Beginning of period 9,486,038,555 10,187,140,255
----------------------------------------------------
End of period $9,319,010,447 $ 9,486,038,555
====================================================
Undistributed net investment income included in net assets
End of period $ 4,986,327 $ 7,036,041
====================================================
See notes to financial statements.
</TABLE>
FRANKLIN CUSTODIAN FUNDS, INC.
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Custodian Funds, Inc. (the Company) is registered under the Investment
Company Act of 1940 as an open-end, diversified investment company, consisting
of five series (the Funds). The Funds and their investment policies are:
Capital Growth Growth and Incom Current Income
Growth Fund Utilities Fund U.S. Government Securities Fund
DynaTech Fund Income Fund
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the 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 and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gains or losses from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. Repurchase Agreement:
The Funds, except the U.S. Government Securities Fund, may enter into a joint
repurchase agreement whereby their uninvested cash balance is deposited into a
joint cash account to be used to invest in one or more repurchase agreements.
The value and face amount of the joint repurchase agreements are allocated to
the Funds based on their pro-rata interest. A repurchase agreement is accounted
for as a loan by the Funds to the seller, collateralized by securities which are
delivered to the Funds' custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At March 31, 1998, all
outstanding repurchase agreements had been entered into on that date.
d. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
e. 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. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Security Transactions, Investment Income, Expenses and Distributions: (cont.)
Common expenses incurred by the Company are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. Other expenses
are charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
f. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles 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 expense during the reporting
period. Actual results could differ from those estimates.
<TABLE>
<CAPTION>
2. CAPITAL STOCK
Effective January 2, 1997, the Funds, except the DynaTech Fund, offered Advisor
Class shares to qualified investors. The shares have the same rights except for
their initial sales load, distribution fees, voting rights on matters affecting
a single class and the exchange privilege of each class.
At March 31, 1998, there were 19 billion shares authorized ($0.01 par value),
allocated to the Funds as follows:
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class I 250,000,000 250,000,000 400,000,000 4,600,000,000 2,500,000,000
Class II 250,000,000 250,000,000 400,000,000 3,600,000,000 2,500,000,000
Advisor Class 1,000,000,000 -- 1,000,000,000 1,000,000,000 1,000,000,000
</TABLE>
<TABLE>
<CAPTION>
Transactions in the Funds' shares were as follows:
Growth Fund DynaTech Fund Utilities Fund
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
Class I Shares:
Six months ended March 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold 8,102,520 $223,139,445 3,672,987 $ 63,277,973 11,347,188 $119,482,940
Shares issued in reinvestment
of distributions 1,274,133 34,618,158 600,720 10,128,126 7,338,506 77,311,364
Shares redeemed (5,754,222) (158,488,647) (2,877,690) (49,362,441) (25,104,536) (266,839,368)
----------------------------------------------------------------------------------------
Net increase (decrease) 3,622,431 $ 99,268,956 1,396,017 $ 24,043,658 (6,418,842) $ (70,045,064)
========================================================================================
Year ended September 30, 1997
Shares sold 19,647,652 $486,355,148 7,207,685 $118,420,191 12,100,694 $117,393,777
Shares issued in reinvestment
of distributions 742,458 17,759,635 199,095 3,046,165 17,222,762 165,255,047
Shares redeemed (12,109,484) (301,310,547) (4,675,913) (75,602,671) (81,440,706) (789,836,848)
----------------------------------------------------------------------------------------
Net increase (decrease) 8,280,626 $202,804,236 2,730,867 $45,863,685 (52,117,250) $(507,188,024)
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
2. CAPITAL STOCK (cont.)
Growth Fund DynaTech Fund Utilities Fund
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
Class II Shares:
Six months ended March 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,658,466 $ 45,140,370 329,735 $ 5,591,779 847,136 $ 9,127,661
Shares issued in reinvestment
of distributions 88,125 2,369,698 16,419 274,790 86,255 908,564
Shares redeemed (497,783) (13,503,200) (93,731) (1,603,173) (264,935) (2,798,867)
----------------------------------------------------------------------------------------
Net increase 1,248,808 $ 34,006,868 252,423 $ 4,263,396 668,456 $ 7,237,358
========================================================================================
Year ended September 30, 1997
Shares sold 3,570,458 $ 86,687,120 275,202 $ 4,648,946 853,797 $ 8,267,730
Shares issued in reinvestment
of distributions 38,528 914,269 94 1,430 164,131 1,574,635
Shares redeemed (1,139,059) (28,815,393) (90,332) (1,571,837) (854,260) (8,239,911)
----------------------------------------------------------------------------------------
Net increase 2,469,927 $ 58,785,996 184,964 $ 3,078,539 163,668 $ 1,602,454
========================================================================================
Advisor Class Shares:
Six months ended March 31, 1998
Shares sold 408,869 $ 11,270,200 -- -- 884,002 $ 9,546,104
Shares issued in reinvestment
of distributions 29,525 801,892 -- -- 39,117 412,704
Shares redeemed (50,837) (1,410,288) -- -- (513,883) (5,576,797)
----------------------------------------------------------------------------------------
Net increase 387,557 $ 10,661,804 -- -- 409,236 $ 4,382,011
========================================================================================
Year ended September 30, 1997
Shares sold 1,309,960 $ 32,540,802 -- -- 1,303,704 $ 12,598,164
Shares issued in reinvestment
of distributions -- -- -- -- 23,787 228,226
Shares redeemed (358,029) (9,298,811) -- -- (458,724) (4,425,071)
----------------------------------------------------------------------------------------
Net increase 951,931 $ 23,241,991 -- -- 868,767 $ 8,401,319
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income Fund U.S. Government Securities Fund
-------------------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------------
Class I Shares:
Six months ended March 31, 1998
<S> <C> <C> <C> <C>
Shares sold 321,213,252 $ 800,227,333 61,254,213 $ 423,689,255
Shares issued in reinvestment
of distributions 94,392,281 233,927,570 21,949,448 151,048,539
Shares redeemed (280,112,946) (698,102,394) (118,398,603) (816,675,843)
-------------------------------------------------------------------
Net increase (decrease) 135,492,587 $ 336,052,509 (35,194,942) $ (241,938,049)
===================================================================
Year ended September 30, 1997
Shares sold 538,060,045 1,275,083,285 78,194,660 $530,758,896
Shares issued in reinvestment
of distributions . 145,251,547 342,526,929 47,930,052 324,058,840
Shares redeemed (520,661,763) (1,235,193,741) (276,583,345) (1,876,568,505)
-------------------------------------------------------------------
Net increase (decrease) 162,649,829 $ 382,416,473 (150,458,633) $(1,021,750,769)
===================================================================
</TABLE>
<TABLE>
<CAPTION>
2. CAPITAL STOCK (cont.)
Income Fund U.S. Government Securities Fund
---------------------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------------------
CLASS II SHARES:
Six months ended March 31, 1998
<S> <C> <C> <C> <C>
Shares sold 101,897,906 $254,234,749 10,324,260 $71,077,498
Shares issued in reinvestment
of distributions 9,369,126 23,244,077 426,427 2,928,451
Shares redeemed (20,535,735) (51,293,947) (3,418,759) (23,531,063)
---------------------------------------------------------------
Net increase 90,731,297 $226,184,879 7,331,928 $50,474,886
===============================================================
Year ended September 30, 1997
Shares sold 151,188,247 $359,348,533 11,765,224 $79,728,970
Shares issued in reinvestment
of distributions 9,605,212 22,720,777 527,102 3,558,535
Shares redeemed (30,837,863) (73,437,185) (3,311,245) (22,442,005)
---------------------------------------------------------------
Net increase 129,955,596 $308,632,125 8,981,081 $60,845,500
===============================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 1998
Shares sold 865,105 $ 2,167,110 1,852,448 $12,800,541
Shares issued in reinvestment
of distributions 245,458 606,590 67,313 463,665
Shares redeemed (435,518) (1,082,451) (972,473) (6,730,763)
---------------------------------------------------------------
Net increase 675,045 $ 1,691,249 947,288 $ 6,533,443
===============================================================
Year ended September 30, 1997
Shares sold 5,630,896 $ 13,341,229 2,433,391 $16,553,387
Shares issued in reinvestment
of distributions . 198,471 470,649 40,139 272,353
Shares redeemed (463,157) (1,104,085) (375,540) (2,550,949)
---------------------------------------------------------------
Net increase 5,366,210 $ 12,707,793 2,097,990 $14,274,791
===============================================================
+For the period January 2, 1997 (effective date) to September 30, 1997 for the
Advisor Class of shares.
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Funds'
investment manager, principal underwriter, administrative manager and transfer
agent, respectively.
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
Annualized Fee Rate Month End Net Assets
---------------------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
.440% Over $10 billion, up to and including $12.5 billion
Fees are further reduced on net assets over $12.5 billion.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
The Income, Utilities and U.S. Government Securities Funds reimburse
Distributors up to .15% and .65% per year of their average daily net assets of
Class I and Class II, respectively, and the Growth and DynaTech Funds reimburse
Distributors up to .25% and 1.00% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares.
<TABLE>
<CAPTION>
3. TRANSACTIONS WITH AFFILIATES (cont.)
Distributors paid net commissions on sales of the Funds shares, and received
contingent deferred sales charges for the period as follows:
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions paid $(445,798) $(8,948) $(169,005) $(1,443,000) $(836,586)
Contingent deferred sales charges $ 13,565 $ 134 $ 1,220 $ 45,991 $ 21,414
</TABLE>
During the period ended March 31, 1998, legal fees of $46,212 were paid to a law
firm in which a director of the Funds is a partner.
4. INCOME TAXES
At September 30, 1997, the U.S. Government Securities Fund had tax basis capital
losses of $364,759,311 which may be carried over to offset future capital gains.
Such losses expire as follows:
U.S. Government
Securities Fund
---------------
Capital loss carryovers expiring in: 1998 $ 74,910,973
1999 67,082,683
2002 111,364,839
2003 3,698,366
2004 57,539,178
2005 50,163,272
---------------
$364,759,311
===============
At September 30, 1997, the U.S. Government Securities Fund had deferred capital
losses occurring subsequent to October 31, 1996 of $26,936,338. For tax
purposes, such losses will be reflected in the year ending September 30, 1998.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
At March 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost $1,065,276,574 $125,262,871 $1,671,577,824 $8,094,327,286 $9,178,116,960
======================================================================================
Unrealized appreciation 788,924,957 88,366,942 522,795,435 1,340,296,904 230,518,185
Unrealized depreciation (3,062,699) (823,587) (10,290,785) (262,208,130) (20,618,220)
--------------------------------------------------------------------------------------
Net unrealized appreciation $ 785,862,258 $ 87,543,355 $ 512,504,650 $1,078,088,774 $ 209,899,965
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended March 31, 1998 were as follows:
U.S. Government
Growth Fund DynaTech Fund Utilities Fund Income Fund Securities Fund
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $15,148,668 $7,836,650 $ 43,237,823 $1,040,812,825 $980,334,201
Sales $ 2,375,054 $6,397,489 $138,677,860 $ 622,338,982 $859,328,482
</TABLE>
6. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 33.6% of its portfolio invested in lower rated 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. At March 31, 1998, the
Income Fund held defaulted securities with a value aggregating $29,850,000,
representing .3% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide estimates for losses on interest receivable.
The Utilities Fund has investments in excess of 10% of its total net assets in
the Utilities industry. The Income Fund has investments in excess of 10% of its
total net assets in various foreign government agencies. Such concentration may
subject the Funds more significantly to economic changes occurring within that
industry/sector.
<TABLE>
<CAPTION>
7. RESTRICTED SECURITIES
The Funds, except for the U.S. Government Securities Fund, may purchase
securities through a private offering that generally cannot be resold to the
public without prior registration under the Securities Act of 1933. The costs of
registering such securities are paid by the issuer. Restricted securities held
at March 31, 1998 are as follows:
Shares/
Warrants Issuer Acquisition Date Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
Income Fund
<S> <C> <C> <C> <C>
2,097,122 Bibb Co 9/27/96 $29,681,742 $ 20,184,799
1,281,869 Boardwalk Casino, Inc., warrants 4/12/95 2,643,855 1,620,282
1,600,000 CMS Energy Trust I, 7.75% cvt. pfd. 6/18/97 80,000,000 101,100,000
-----------
Total Restricted Securities Held in the Income Fund (1.32% of Net Assets) $122,905,081
===========
Growth Fund
115,100 FRM Nexus (0.00% of Net Assets) 8/01/89 421,013 $ 115
===========
Utilities Fund
705,000 CMS Energy Trust I, 7.75%, cvt. pfd. (2.03% of Net Assets) 6/18/97 35,250,000 $ 44,547,188
===========
</TABLE>
8. LENDING OF PORTFOLIO SECURITIES
The Income Fund loans securities to certain brokers for which it receives cash
collateral against the loaned securities in an amount equal to at least 102% of
the market value of the loaned securities. Net interest income from the
investment of the cash collateral received was $155,263 for the period ended
March 31, 1998. The value of the loaned securities was $2,842,600 at March 31,
1998.
9. OTHER CONSIDERATIONS
Advisers, as the Funds' manager, may serve as a member of various credit
committees, representing credit interests in certain corporate restructuring
negotiations. Currently, the manager serves on the credit committee for Harvard
Industries. As a result of this involvement, Advisers may be in possession of
certain material non-public information. The Funds' manager has not nor does it
intend to sell any of its holdings in this security while in possession of this
information.
Franklin Custodian Funds, Inc.
Semi-annual Report
March 31, 1998.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the portfolio breakdown of the Franklin Utilities
Fund based on total long-term investments as of 3/31/98.
Utilities Stocks 80.3%
Utilities Bonds 12.4%
Convertible Securities 5.6%
Short-Term Obligations
& Other Net Assets 1.7%
GRAPHIC MATERIAL (2)
This point graph compares the average annual total return measured against risk
from 4/93 to 3/98 for Franklin U.S. Government Securities Fund - Class I vs.
comparable investments.
Investment return risk
1-year CD 5.02 .29
Franklin U.S.
Govt. Secs. Fund 6.49 3.40
Merril Lynch
10-Year Treasury 6.21 6.65
Merril Lynch
30-year Treasury 7.91 10.21
GRAPHIC MATERIAL (3)
This horizontal bar chart compares the yield for Franklin U.S. Government
Securities Fund - Class I vs. comparable investments on 3/31/98.
Investment Yield
Franklin U.S.
Govt. Secs. Fund 6.1%
One year CD 5.72%
Average Ginnie
Mae Fund 5.65%
Average Money
Market Fund 5.03%
