SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you the Franklin Custodian Funds, Inc. semiannual
report for the period ended March 31, 1999.
Rarely have we witnessed the magnitude of divergence among the U.S. equity, bond
and Treasury markets that we experienced during the period under review. On
October 8, 1998, Treasury bond prices were at heights not seen since 1967, while
the U.S. equity markets were posting negative returns for 1998, and corporate
and municipal securities had seen a temporary decline in their value. This was
due to a number of different factors, ranging from the financial crises that
impacted countries in Asia, Latin America and Eastern Europe, to the liquidity
crisis created by the concerns and uncertainties associated with a number of
unregulated hedge funds' investment activities in third quarter 1998. By the end
of the six-month period, the U.S. markets had reversed course, with equity
markets reaching new highs. Outside the U.S., the global problems affected the
world's major economies, to widely varying degrees. Whereas the U.S. economy
showed surprising resilience, others, most notably many of the European
economies, succumbed to the pressures brought on by the currency crisis.
AN ISLAND OF SOLID GROWTH ...
The U.S. economy was a bastion of growth during the reporting period, responding
enthusiastically to the Federal Reserve Board's (the Fed's) cuts to the federal
funds target rate, which lowered it to 4.75% on November 17, 1998.
CONTENTS
Shareholder Letter ............. 1
Fund Reports
Franklin DynaTech Fund ........ 5
Franklin Growth Fund .......... 9
Franklin Income Fund .......... 14
Franklin U.S. Government
Securities Fund ............... 20
Franklin Utilities Fund ....... 26
Financial Highlights &
Statement of Investments ....... 30
Financial Statements ........... 56
Notes to
Financial Statements ........... 62
<PAGE>
This mountain chart shows the annualized quarterly percentage growth of the
United States gross domestic product for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
QUARTER U.S. GDP GROWTH
------- ---------------
<S> <C>
1Q '96 3.3%
2Q '96 6.1%
3Q '96 2.1%
4Q '96 4.2%
1Q '97 4.2%
2Q '97 4.0%
3Q '97 4.2%
4Q '97 3.0%
1Q '98 5.5%
2Q '98 1.8%
3Q '98 3.7%
4Q '98 6.0%
</TABLE>
(Caption: The U.S. economy was resilient in the face of the world economic
problems.)
*Source: Bureau of Economic Analysis.
The overall economy, as measured by U.S. gross domestic product (GDP), grew at
an annualized rate of 6.0% for the fourth quarter of 1998, and 3.9% for all of
1998.
U.S. consumers continued to fuel the economy. With rising stock prices and
unemployment running at approximately 4.2% -- the lowest in decades -- American
consumers were in the mood to spend, and they did. Retail sales and the housing
market were robust during the period under review.
In the workplace, productivity surged 4.6% in the fourth quarter of 1998, the
strongest showing in six years. The vigorous productivity gains were especially
beneficial to the economy, as increasing productivity is vital to controlling
inflation in a fast-growing economy. As a result, inflation, as measured by the
Consumer Price Index, increased just 1.6% in 1998.
This is not to say that the U.S., and more specifically the U.S. markets, were
immune to the world's problems. The now infamous "Asian contagion" and emerging
market crisis rocked the U.S. equity markets early in the reporting period;
2
<PAGE>
This mountain chart shows the Dow Jones Industrial Average from 9/30/98-3/31/99.
<TABLE>
<CAPTION>
DATE DOW JONES INDUSTRIAL AVERAGE
---- ----------------------------
<S> <C>
9/30/98 7842.62
10/1/98 7632.53
10/2/98 7784.69
10/5/98 7726.24
10/6/98 7742.98
10/7/98 7741.69
10/8/98 7731.91
10/9/98 7899.52
10/12/98 8001.47
10/13/98 7938.14
10/14/98 7968.78
10/15/98 8299.36
10/16/98 8416.76
10/19/98 8466.45
10/20/98 8505.85
10/21/98 8519.23
10/22/98 8533.14
10/23/98 8452.29
10/26/98 8432.21
10/27/98 8366.04
10/28/98 8371.97
10/29/98 8495.03
10/30/98 8592.1
11/2/98 8706.15
11/3/98 8706.15
11/4/98 8783.14
11/5/98 8915.47
11/6/98 8975.46
11/9/98 8897.96
11/10/98 8863.98
11/11/98 8823.82
11/12/98 8829.74
11/13/98 8919.59
11/16/98 9011.25
11/17/98 8986.28
11/18/98 9041.11
11/19/98 9056.05
11/20/98 9159.55
11/23/98 9374.27
11/24/98 9301.15
11/25/98 9314.28
11/27/98 9333.08
11/30/98 9116.55
12/1/98 9133.54
12/2/98 9064.54
12/3/98 8879.68
12/4/98 9016.14
12/7/98 9070.47
12/8/98 9027.98
12/9/98 9009.19
12/10/98 8841.58
12/11/98 8821.76
12/14/98 8695.6
12/15/98 8823.3
12/16/98 8790.6
12/17/98 8875.82
12/18/98 8903.63
12/21/98 8988.85
12/22/98 9044.46
12/23/98 9202.03
12/24/98 9217.99
12/28/98 9226.75
12/29/98 9320.98
12/30/98 9274.64
12/31/98 9181.43
1/4/99 9184.27
1/5/99 9311.19
1/6/99 9544.97
1/7/99 9537.76
1/8/99 9643.32
1/11/99 9619.89
1/12/99 9474.68
1/13/99 9349.56
1/14/99 9120.93
1/15/99 9340.55
1/19/99 9355.22
1/20/99 9335.91
1/21/99 9264.08
1/22/99 9120.67
1/25/99 9203.32
1/26/99 9324.58
1/27/99 9200.23
1/28/99 9281.33
1/29/99 9358.83
2/1/99 9345.7
2/2/99 9274.12
2/3/99 9366.81
2/4/99 9304.5
2/5/99 9304.24
2/8/99 9291.11
2/9/99 9133.03
2/10/99 9177.31
2/11/99 9363.46
2/12/99 9274.89
2/16/99 9297.03
2/17/99 9195.47
2/18/99 9298.63
2/19/99 9339.95
2/22/99 9552.68
2/23/99 9544.42
2/24/99 9399.67
2/25/99 9366.34
2/26/99 9306.58
3/1/99 9324.78
3/2/99 9297.61
3/3/99 9275.88
3/4/99 9467.4
3/5/99 9736.08
3/8/99 9727.61
3/9/99 9693.76
3/10/99 9772.84
3/11/99 9897.44
3/12/99 9876.35
3/15/99 9958.77
3/16/99 9930.47
3/17/99 9879.41
3/18/99 9997.62
3/19/99 9903.55
3/22/99 9890.51
3/23/99 9671.83
3/24/99 9666.84
3/25/99 9836.39
3/26/99 9822.24
3/29/99 10006.78
3/30/99 9913.26
3/31/99 9786.16
</TABLE>
(Caption: The U.S. stock market at first succumbed to the world's problems, only
to surge later.)
*Source: Dow Jones & Company.
however, they soared to all-time highs in the ensuing six months. On March 29,
1999, the Dow Jones(R) Industrial Average closed above the 10000 milestone for
the first time. U.S. Treasury securities, on the other hand, behaved in the
opposite manner. In October, yields fell to 32-year lows as investors sought the
safety of such securities, but climbed, as investors became more comfortable
with the world financial outlook. Bond prices and yields move in opposite
directions so that as bond prices fall, yields rise. On March 31, 1999, the
30-year Treasury bond yield was 5.62%.
... IN A GLOBAL SEA OF ECONOMIC TURBULENCE.
Economic growth elsewhere in the world was sporadic during the six months under
review. European countries experienced strong growth throughout 1998, due to an
increasingly flexible workforce and the anticipation of the launch of the common
currency, the euro, which should make it easier for companies in different
countries to conduct business. The smaller European economies, such as Ireland
and Spain, were particularly strong. However, in the first quarter of 1999,
growth in many European countries slowed dramatically, even raising fears of a
continent-wide recession. In late March, the European Commission, the executive
body of the 15-country European Union (EU), cut its growth forecast for the 1999
EU GDP to 2.2%, from 2.6% it projected in October.
3
<PAGE>
Meanwhile, the emerging economies of Southeast Asia and Latin America,
troublesome regions for international investors over the past two years,
stabilized and even showed signs of improvement during the period under review.
This was most apparent in Asia, where Thailand and Korea began to shake off the
crisis that had overwhelmed them for most of the past two years.
In Latin America, Brazil caused the greatest concern when it devalued its
currency, the real, in January and soon after, let it float freely, causing it
to sink further. However, toward the close of the reporting period, Brazil
passed important legislation designed to improve its financial position and
reached an agreement with the International Monetary Fund (IMF) that allowed the
country to borrow money if and when it was needed. This propelled the Brazilian
market, the Bovespa, to its highest level in eight months, at the end of the
reporting period.
Even Japan, the perennial laggard of the `90s, displayed signs of improvement
during the six-month period. After delaying sorely needed, but painful, reforms
for much of the decade, the Japanese government passed legislation meant to
shore up the country's shaky financial system. Concurrently, the Bank of Japan
drove interest rates nearly to zero, in an effort to provide liquidity to
stimulate the economy.
LOOK TO THE HORIZON
Such uncertainty reinforces the importance of investing for the long term, so
daily market fluctuations and short-term volatility have minimal impact on
overall investment goals. We encourage you to discuss your financial goals with
your investment representative. He or she can address concerns about market
volatility, and help you diversify your investments and stay focused on the long
term.
As always, we appreciate your continued investment in Franklin Custodian Funds,
Inc. and look forward to serving your future investment needs.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
President
Franklin Custodian Funds, Inc.
4
<PAGE>
FRANKLIN DYNATECH FUND
[FUND CATEGORY PYRAMID GRAPHIC]
Your Fund's Goal: Franklin DynaTech Fund seeks capital appreciation by investing
primarily in companies emphasizing technological development.
In the fall 1998, the Federal Reserve Board (the Fed) took action to reignite
U.S. economic growth by lowering the federal funds target rate and the discount
rate. Although economic growth at the time was still slow, many investors'
perceptions of better times ahead propelled the markets to record highs. From
the October 1998 low to the March 1999 high, the Standard & Poor's(R) 500 (S&P
500(R)) Stock Index appreciated 37.2%. Within this environment, Franklin
DynaTech Fund - Class A shares produced a +23.77% cumulative total return for
the six months ended March 31, 1999. Cumulative total return measures the change
in value of an investment, assuming reinvestment of all distributions and does
not include the sales charge. We were pleased with a recent Wall Street Journal
article that reported on the findings of the Modigliani-Modigliani measure, a
methodology that puts funds on a level playing field of risk. The measure found
Franklin DynaTech Fund performed favorably relative to 36 other technology
funds, when taking risk into account. According to the risk-adjustment
methodology, technology funds, by themselves, are about 85% more volatile than
the S&P 500, while Franklin DynaTech Fund was slightly less volatile than the
S&P 500.*
During the reporting period, the fund was quite active, and we purchased a
significant number of companies that fit our criteria -- those we believe have
long-term growth potential. While we were diligently investing our cash
reserves, new money entered the fund faster than we were able to find
appropriate investments because the market was so highly valued. As a result,
the fund had substantial cash reserves at the end of the reporting period,
comprising approximately 58.2% of total net assets.
*Source: The Wall Street Journal, "How to Select a Tech Mutual Fund," 2/26/99.
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 31 of
this report.
5
<PAGE>
This chart shows the portfolio breakdown based on the percentage of total net
assets on 3/31/99 for the Franklin DynaTech Fund.
<TABLE>
<S> <C>
Software 8.67%
Semiconductors 8.59%
Pharmaceuticals 4.09%
Networking 3.96%
Telecommunication Equipment 3.40%
Computers 2.75%
Media & Entertainment 2.11%
Telecommunication Services 2.09%
Data Processing 0.87%
Financial 0.59%
Other 4.68%
Cash And Equivalents 58.20%
</TABLE>
During the six months under review, the Internet was the most exciting area of
technology in which your fund participated. This new information medium, over a
very short period of time, has revolutionized the way people and businesses
worldwide communicate and conduct commerce. Furthermore, Internet usage most
likely will continue its rapid expansion. IDC, an industry market research firm,
estimates that the number of Internet users will increase from 142.9 million
today to more than 328.5 million in 2002. We purchased some larger, well-known
companies in this emerging growth industry, such as America Online Inc. (AOL)
and Amazon.com Inc. AOL is considered by many as the premier company in the
Internet industry. As the leading Internet Service Provider, AOL offers a strong
brand franchise, extensive content and significant commercial opportunities.
Amazon.com is the leading online retailer, offering books, music and video.
We participated in the initial public offerings (IPOs) of a few, smaller, niche
Internet companies, including VerticalNet Inc., Vignette Corp. and iVillage Inc.
VerticalNet, a niche player in the online arena, provides vertical trade
community web sites, catering to professionals by offering industry news,
product information, directories, job listings and discussion forums on specific
industries. Vignette is a developer of Internet relationship management software
that allows companies to personalize and customize web pages. Finally, iVillage
is a leading online women's network, tailored to the interests and needs of
women aged 25 to 49, who traditionally make a majority of household purchases.
We continued to find the cable, wireless communications and satellite-based
communications areas of technology to be interesting. During the reporting
period, we purchased United Pan-Europe Communications N.V., a Netherlands-based
cable company, serving more than 3.5 million subscribers in Europe and Israel.
New holdings in the wireless communications industry were Nextel Communications
Inc. and Sprint Corp. (PCS Group), leaders in providing wireless
telecommunications to businesses and individuals, respectively. We also bought
shares of Hughes Electronics, a subsidiary of General Motors Corp. and a global
provider and manufacturer of communications satellite-based video, data and
telephony services.
6
<PAGE>
This chart shows the top 10 holdings based on the percentage of total net assets
on 3/31/99 for the Franklin DynaTech Fund.
<TABLE>
<S> <C>
Intel Corp. 7.34%
Microsoft Corp. 7.12%
Cisco Systems Inc. 3.26%
Motorola Inc. 2.26%
Hewlett-Packard Co. 1.50%
Warner-Lambert Co. 1.32%
Compaq Computer Corp. 1.26%
MCI WorldCom Inc. 0.98%
Schering-Plough Corp. 0.97%
Liberty Media Group 0.70%
</TABLE>
Looking forward, we believe it will take time for market fundamentals,
specifically gains in corporate earnings, to catch up with the market's rise. We
are closely monitoring corporate earnings growth, as recent earnings have been
lackluster at best, and Wall Street analysts estimate a modest 4%-6% increase
for the S&P 500 Index in 1999. With this in mind, we remain cautious regarding
the market. We are concerned that only a few large companies are propelling the
index averages to new highs, while a majority of stocks remain depressed. For
example, on March 31, 1999, about 37% of the NYSE stocks were 30% below their
1997-1998 market highs and approximately 90% of NASDAQ stocks were below their
previous highs. If history is a guide, then the market may be volatile until
this situation is resolved. Our ample cash reserves may become increasingly
important, as they tend to provide investors with some stability when markets
trend downward and most importantly, buying power for the fund to take advantage
of opportunities as they arise.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
/s/ Lisa Costa
Lisa Costa
Portfolio Management Team
Franklin DynaTech Fund
7
<PAGE>
FRANKLIN DYNATECH FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
PERFORMANCE SUMMARY AS OF 3/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (10/1/98 - 3/31/99)
<TABLE>
<CAPTION>
Class A Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$3.97 $21.81 $17.84
Distributions
----------------------------------
Dividend Income $0.2433
Class C Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
Net Asset Value +$3.91 $21.44 $17.53
Distributions
----------------------------------
Dividend Income $0.1564
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
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.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR (1/1/68)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +23.77% +24.61% +166.56% +408.22% +1947.00%
Average Annual Total Return(2) +16.64% +17.45% +20.23% +16.96% +9.93%
Value of $10,000 Investment(3) $11,664 $11,745 $25,127 $47,914 $192,808
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- ----------------------------------------------------------------------------------------
One-Year Total Return(4) +12.18% +20.90% +25.31% +25.87% +24.61%
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR (9/16/96)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +23.29% +23.58% +73.43%
Average Annual Total Return(2) +21.05% +21.33% +23.74%
Value of $10,000 Investment(3) $12,105 $12,133 $17,167
<CAPTION>
3/31/98 3/31/99
- ----------------------------------------------------------------------------------------
<S> <C> <C>
One-Year Total Return(4) +24.44% +23.58%
</TABLE>
Past performance is not predictive of future results.
8
<PAGE>
FRANKLIN GROWTH FUND
[PYRAMID GRAPHIC]
Your Fund's Goal: 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 period under review, the U.S. economy performed strongly by almost
any measure. Gross domestic product (GDP) grew at an astounding 6.0% annualized
rate in fourth quarter 1998, and 3.9% for all of 1998. Inflation remained
subdued, increasing 1.6% in 1998, and unemployment remained at its lowest level
in 29 years, 4.2%, at the end of the reporting period. The U.S. economic
expansion is now in its eighth year, and growth projections for first quarter
1999 are approximately 3% or slightly more.
The U.S. stock markets performed strongly during the six months under review.
Following two sharp market sell-offs during the summer and early fall, the Dow
Jones Industrial Average soared above 10000, a significant milestone, near the
end of March. The Standard & Poor's (S&P 500) Stock Index, a broader measure of
the market, performed similarly, rising to 1286.37 on March 31, 1999, from
1017.01, at the beginning of the period. However, the averages do not tell the
real story. The markets' advances over the past six months were led by a small
number of stocks, while most stocks were still below their highs set in April
1998. This narrow market breadth meant that it was difficult for us to match the
averages, as we remain committed to a diversified portfolio. In this
environment, Franklin Growth Fund's Class A shares posted a cumulative total
return of +16.17% from September 30, 1998, to March 31, 1999, compared with
27.3% for the S&P 500. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions and does not include
the sales charge. The unmanaged S&P 500 includes reinvested dividends, and 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 36 of
this report.
9
<PAGE>
This chart shows the top 10 industries based on the percentage of total net
assets on 3/31/99 for the Franklin Growth Fund.
<TABLE>
<S> <C>
Pharmaceuticals 13.62%
Transportation 10.72%
Computer Hardware 4.94%
Health Care - Diversified 4.80%
Diversified Manufacturers 4.39%
Aerospace/Defense 4.19%
Data Services 3.37%
Energy/Energy Services 3.03%
Media and Broadcasting 3.03%
Retail 2.22%
</TABLE>
Our sector allocations changed slightly during the period. Pharmaceuticals
remained the fund's largest holding, comprising 13.62% of total net assets at
the end of the reporting period. Pharmaceutical companies Schering-Plough Corp.
and Pfizer Inc. continued to be the fund's largest holdings, making up almost 8%
of total net assets. While these companies' stocks were expensive relative to
their earnings, they have strong earnings growth and are benefiting from the
aging world population.
We made purchases in a wide range of sectors where we perceived there was value.
Positions added to the portfolio in the period included conglomerate Textron
Inc., cruise line operator Carnival Corp., conglomerate Canadian Pacific Ltd.,
American Power Conversion Corp. and Providence and Worcester Railroad Co. We
added to existing positions when we felt the stock did not fully reflect the
company's underlying value. Some important companies in this category included
V.F. Corp., Mattel Inc., Boeing Co., Deere and Co., Teleflex Inc., Tiffany and
Co., Apple Computer Inc., USA Networks Inc., Sun Microsystems Inc. and American
Greetings Corp.
We found value in the airline sector and increased that sector's allocation to
9.66% of total net assets at the end of the period, compared with 5.7% on
September 30, 1998. We felt that the stocks were inexpensive, even given the
possibility of lower earnings in the future. We believe the market did not fully
recognize the airlines' fine job of improving their balance sheets while keeping
ticket prices stable. Specifically, they were conservative about expanding their
fleets in the economic expansion, thus keeping their expenses down. Furthermore,
the airlines improved their finances and lowered their debt, which is important
in the new environment of less government regulation. Given the
stronger-than-expected U.S. economy, we felt the stocks were severely
underpriced, and assuming that economic forecasts are correct, should go higher
as Wall Street confidence in these companies grows. On March 31, 1999, three of
the fund's top ten holdings were airlines -- AMR Corp., UAL Corp. and Delta Air
Lines Inc. We have held positions in these companies for quite some time, and
purchased more during the period. We also increased our positions in KLM Royal
Dutch Air, British Airways PLC and Northwest Airlines Corp., while adding Alaska
Air Group Inc. and U.S. Airways Group Inc. to the portfolio.
10
<PAGE>
Although no particular sector stood out during the reporting period, there were
several individual stocks that increased significantly. The five largest gainers
in the six-month period were Immunex Corp., 201%; Tiffany, 138%; Sun
Microsystems, 151%; Nielsen Media Research Inc., 141%; and USA Networks, 84%.
Looking forward, we are cautious about the market. We see minimal year-over-year
earnings growth in 1999, which we believe cannot support the high prices of some
stocks indefinitely. However, the large amount of new money coming into the
market could propel top-performing companies to even higher prices. With only a
very few number of stocks going up recently, we also see opportunities. We feel
there are many stocks that are well off their highs or have been undeservedly
punished. With 28.9% of the fund's total net assets in cash and cash
equivalents, we are prepared to take advantage of these opportunities.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
/s/ V. Jerry Palmieri
V. Jerry Palmieri
Portfolio Manager
Franklin Growth Fund
This chart shows the top 10 holdings and industry based on the percentage of
total net assets on 3/31/99 for the Franklin Growth Fund.
<TABLE>
<S> <C>
Schering-Plough Corp. 4.05%
Health Technology
Pfizer Inc. 3.61%
Health Technology
Delta Air Lines Inc. 2.83%
Transportation
Time Warner Inc. 2.59%
Consumer Services
AMR Corp. 2.15%
Transportation
Tiffany and Co. 2.13%
Retail Trade
Computer Sciences Corp. 2.02%
Technology Services
International Business Machines Corp. 2.02%
Electronic Technology
UAL Corp. 1.90%
Transportation
Bristol-Myers Squibb Co. 1.67%
Health Technology
</TABLE>
11
<PAGE>
FRANKLIN GROWTH FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 3/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (10/1/98 - 3/31/99)
<TABLE>
<CAPTION>
Class A Change 3/31/99 9/30/98
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$3.94 $32.52 $28.58
Distributions
-----------------------------------
Dividend Income $0.4397
Long-Term Capital Gain $0.1668
Short-Term Capital Gain $0.0418
TOTAL $0.6483
Class B Change 3/31/99 1/1/99
- ----------------------------------------------------------------------------------
Net Asset Value +$1.01 $32.47 $31.46
Class C Change 3/31/99 9/30/98
- ----------------------------------------------------------------------------------
Net Asset Value +$3.91 $32.02 $28.11
Distributions
-----------------------------------
Dividend Income $0.2693
Long-Term Capital Gain $0.1668
Short-Term Capital Gain $0.0418
TOTAL $0.4779
Advisor Class Change 3/31/99 9/30/98
- ----------------------------------------------------------------------------------
Net Asset Value +$3.91 $32.54 $28.63
Distributions
-----------------------------------
Dividend Income $0.5083
Long-Term Capital Gain $0.1668
Short-Term Capital Gain $0.0418
TOTAL $0.7169
</TABLE>
Past performance is not predictive of future results.
12
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR (3/31/48)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +16.17% +13.93% +158.41% +306.06% +24,982.64%
Average Annual Total Return(2) +9.50% +7.37% +19.49% +14.36% +11.31%
Value of $10,000 Investment(3) $10,950 $10,737 $24,358 $38,258 $2,366,955
<CAPTION>
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) +20.43% +33.44% +10.81% +27.36% +13.93%
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +3.24%
Aggregate Total Return(2) -0.76%
Value of $10,000 Investment(3) $9,924
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +15.69% +13.03% +57.10% +102.90%
Average Annual Total Return(2) +13.56% +10.92% +15.86% +19.49%
Value of $10,000 Investment(3) $11,356 $11,092 $15,551 $20,087
3/31/97 3/31/98 3/31/99
- -------------------------------------------------------------------------------------------
One-Year Total Return(4) +9.97% +26.38% +13.03%
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR (3/31/48)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +16.29% +14.17% +159.67% +308.03% +25,104.16%
Average Annual Total Return(2) +16.29% +14.17% +21.03% +15.10% +11.45%
Value of $10,000 Investment(3) $11,629 $11,417 $25,967 $40,803 $2,520,416
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- -------------------------------------------------------------------------------------------
One-Year Total Return(4) +20.43% +33.44% +10.91% +27.60% +14.17%
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less than one year, the
figures for that class represent aggregate total return from inception;
therefore, average annual total returns are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
5. 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and average annual
total returns of Advisor Class shares were +47.25% and +18.85% respectively.
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.
Past performance is not predictive of future results.
13
<PAGE>
FRANKLIN INCOME FUND
[PYRAMID GRAPHIC]
Your Fund's Goal: Franklin Income Fund seeks to maximize income while
maintaining prospects for capital appreciation through a diversified portfolio
of securities.
The U.S. stock market rebounded from weakness in September as investor concerns
over slowing domestic growth and international economic turmoil subsided.
Stronger economic reports, however, weighed on the bond market and drove the
yield on the 30-year Treasury bond up to 5.62% at the end of the reporting
period.
Looking at the fund's asset mix, the corporate and foreign bond sectors
performed well over the period, contributing to an increase in the fund's bond
weighting. The fund's bond weighting increased from 51.5% of total net assets on
September 30, 1998, to 55.5% on March 31, 1999. The stock weighting decreased
from 42.3% of total net assets to 39.6% during the same period, due in large
part to a decrease in value of our utility stock holdings, resulting from an
increase in interest rates. The fund's cash position declined from 6.2% of total
net assets, to 4.9% over the six-month period.
The fund's bond holdings consisted of corporate, foreign and U.S. Treasury
bonds. Corporate bonds, representing our largest fixed-income weighting,
increased to 24.7% of total net assets at the end of the period, compared with
24.0% on September 30, 1998. This was largely a result of the rebound in sector
performance and net purchases during the period. We were active with the fund's
corporate bonds, selling positions that appeared fully valued and selectively
redeploying assets in securities with more attractive valuations, yields and
relatively defensive characteristics. New corporate bond positions include
issues from Revlon Consumer Products Corp., Doane Pet Care Co. and oil services
company R&B Falcon Corp.
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 42 of
this report.
14
<PAGE>
After a strong performance during most of 1998, Treasury bonds reacted
negatively to reports of continued strong economic growth and fading concerns of
international economic turmoil. However, the current absence of inflationary
pressures will likely keep rates from rising significantly. We therefore
maintained the fund's U.S. government bond positions at 15.1% of total net
assets at the end of the reporting period.
Foreign bonds performed well during the reporting period, rebounding from
weakness in 1998 as concerns about international economic problems diminished.
Although challenges remain for many developing countries, important steps have
been taken to reform financial and political systems to provide stability and
sustained growth in the future. South Korea is a good example of the changes
taking place as government officials take steps to reform the country's banking
system and corporate governance structure. The government's success is evidenced
by the recent award of investment grade ratings from three investment rating
firms, causing the fund's Korean bonds to appreciate above par value. We also
hold a position in dollar denominated Brazil Brady Bonds. Brazil is making
progress on fiscal reforms and recent developments are encouraging.
The fund's equity sectors delivered mixed results during the six months under
review. After solid performance over the past two years, utility stocks
retreated as reports of economic strength drove U.S. interest rates higher. We
continue to believe utility stocks offer attractive yields and value relative to
the broader stock market, as well as improving opportunities for growth from
companies that are successfully adapting to a deregulated environment.
The fund's cable and telecommunications stocks turned in a strong performance
during the period, prompting us to take profits in the sector, by selling the
fund's holdings in CSC Holdings Inc. (Cablevision Systems Corp.) and MediaOne
Group, Inc. convertible preferred stocks.
"We continue to believe utility stocks offer attractive yields and value
relative to the broader stock market. ..."
15
<PAGE>
This chart shows the portfolio breakdown based on the percentage of total net
assets on 3/31/99 for the Franklin Income Fund.
<TABLE>
<S> <C>
Corporate Bonds 24.7%
Utility Stocks 24.5%
U.S. Government Bonds & Notes 15.1%
Foreign Bonds 14.0%
Real Estate Stocks 3.7%
Oil & Gas Stocks 3.0%
Gold and other Metal Stocks 2.2%
Consumer Goods Stocks 2.1%
Telecommunication Service Stocks 1.2%
Other Stocks and Bonds 4.6%
Cash 4.9%
</TABLE>
The fund's gold, energy and real estate stock sectors experienced declines
during the period related to supply and demand concerns. However, energy stocks
rebounded in early March on news that OPEC planned to reduce oil production in
an effort to increase oil prices, which rose more than 36%, from $12.28 on
February 28, 1999, to $16.76 at the end of the reporting period. Although the
performance of energy stocks has improved, it is likely that the sector will
continue to experience strong performance at these higher energy prices.
Real estate sector performance remained sluggish during the six-month period
despite solid cash flow growth and historically low valuations. We sought to
take advantage of this weakness by adding to the fund's existing real estate
positions including Meristar Hospitality Corp. and Glenborough Realty Trust, and
initiating a position in Apartment Investment and Management Co. convertible
preferred stock. These companies represented a diverse mix of property types
with attractive dividend yields and valuations.
Going forward, with the stock market near all-time highs amid ongoing economic
uncertainty, we remain selective with respect to new investments. We are seeking
to take profits in those securities that have appreciated and no longer fit our
valuation criteria and redeploy the proceeds in sectors that we believe present
attractive values. We remain committed to our value-oriented approach and we
will continue to be opportunistic, utilizing fundamental research as we look for
investment opportunities across markets.
16
<PAGE>
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
This chart shows the dividend distributions for Franklin Income Fund from
10/1/98 to 3/31/99.
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------------------------------------------
MONTH CLASS A CLASS B* CLASS C ADVISOR
<S> <C> <C> <C> <C>
October 1.5 cents -- 1.4 cents 1.53 cents
November 1.5 cents -- 1.4 cents 1.53 cents
December 1.5 cents -- 1.4 cents 1.53 cents
January 1.5 cents 1.50 cents 1.4 cents 1.53 cents
February 1.5 cents 1.40 cents 1.4 cents 1.53 cents
March 1.5 cents 1.42 cents 1.4 cents 1.53 cents
TOTAL 9.0 CENTS 4.32 CENTS 8.4 CENTS 9.18 CENTS
</TABLE>
*January 1, 1999, the fund began offering Class B shares to investors. See the
prospectus for details.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
/s/ Matt Avery
Matt Avery
Portfolio Management Team
Franklin Income Fund
17
<PAGE>
FRANKLIN INCOME FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 3/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (10/1/98 - 3/31/99)
<TABLE>
<CAPTION>
Class A Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.09 $2.25 $2.34
Distributions
----------------------------------
Dividend Income $0.090
Long-Term Capital Gain $0.012
TOTAL $0.102
CLASS B Change 3/31/99 1/1/99
- ---------------------------------------------------------------------------------
Net Asset Value -$0.11 $2.25 $2.36
Distributions
----------------------------------
Dividend Income $0.0432
CLASS C Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
Net Asset Value -$0.08 $2.26 $2.34
Distributions
----------------------------------
Dividend Income $0.084
Long-Term Capital Gain $0.012
TOTAL $0.096
ADVISOR CLASS Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
Net Asset Value -$0.09 $2.25 $2.34
Distributions
----------------------------------
Dividend Income $0.0918
Long-Term Capital Gain $0.0120
TOTAL $0.1038
</TABLE>
Past performance is not predictive of future results.
18
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR (8/31/48)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.47% -5.09% +51.69% +183.37% +21,344.12%
Average Annual Total Return(2) -3.65% -8.99% +7.77% +10.51% +11.10%
Value of $10,000 Investment(3) $9,635 $9,101 $14,535 $27,156 $2,055,062
Distribution Rate(4) 7.66%
30-Day Standardized Yield(5) 7.53%
</TABLE>
<TABLE>
<CAPTION>
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.78% +17.23% +9.97% +20.62% -5.09%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -2.85%
Aggregate Total Return(2) -6.66%
Value of $10,000 Investment(3) $9,334
Distribution Rate(4) 7.57%
30-Day Standardized Yield(5) 7.36%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.64% -5.17% +23.95% +41.37%
Average Annual Total Return(2) -1.17% -7.13% +7.11% +8.98%
Value of $10,000 Investment(3) $9,883 $9,287 $12,288 $14,008
Distribution Rate(4) 7.37%
30-Day Standardized Yield(5) 7.28%
</TABLE>
<TABLE>
<CAPTION>
3/31/97 3/31/98 3/31/99
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(6) +9.39% +19.49% -5.17%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(7) 6-MONTH 1-YEAR 5-YEAR 10-YEAR (8/31/48)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.55% -4.57% +52.26% +184.43% +21,424.36%
Average Annual Total Return(2) +0.55% -4.57% +8.77% +11.02% +11.20%
Value of $10,000 Investment(3) $10,055 $9,543 $15,226 $28,443 $2,152,436
Distribution Rate(4) 8.16%
30-Day Standardized Yield(5) 8.01%
</TABLE>
<TABLE>
<CAPTION>
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.78% +17.23% +10.01% +20.37% -4.57%
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less than one year, the
figures for that class represent aggregate total return from inception;
therefore, average annual total returns are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. Distribution rate is based on an annualization of the respective class's
March monthly dividend and the maximum offering price (net asset value price for
Advisor Class) per share on March 31, 1999.
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, 1999.
6. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
7. 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and average annual
total returns of Advisor Class shares were +16.11% and +6.89% respectively.
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.
Past performance is not predictive of future results.
19
<PAGE>
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
[PYRAMID GRAPHIC]
Your Fund's Goal: Franklin U.S. Government Securities Fund seeks high, current
income from a portfolio of U.S. government securities.
The U.S. economy grew at a rapid pace during the reporting period, helped along
by two Federal Reserve Board (the Fed) interest rate cuts. Turmoil engulfed
financial markets around the world in early October, causing investors to seek
out the safety and liquidity of U.S. Treasury securities. The disruptions in
global and domestic markets were an outgrowth of the Asian financial crisis that
developed during the summer of 1997. The combination of fragile international
financial markets and reduced availability of capital in the U.S. prompted the
Fed to cut the federal funds target rate to 5.00% on
This point graph compares the average annual total return measured against risk
from 4/94 to 3/99 for Franklin U.S. Government Securities Fund - Class A shares
vs. comparable investments.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Risk Return
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
P&R 1-Year Constant Maturity U.S. Treasury Bill 0.83% 5.63%
P&R 3-Year Constant Maturity U.S. Treasury Note 2.73% 6.43%
P&R 5-Year Constant Maturity U.S. Treasury Note 4.32% 7.24%
P&R 10-Year Constant Maturity U.S. Treasury Note 6.82% 8.76%
- -----------------------------------------------------------------------------------------------------------
Franklin U.S. Government Securities Fund - Class A shares 3.02% 7.50%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard & Poor's Micropal (Payden & Rygel). Indices are unmanaged.
Investors cannot invest directly in an index. Average annual total return
represents the average annual change in value of an investment over the period
indicated. These figures assume reinvestment of interest income and do not
include sales charges. Risk is measured by the annualized standard deviation of
monthly total returns. In general, the higher the standard deviation, the
greater the volatility. The fund's Class A shares' average annual total return
does not include the current, maximum 4.25% sales charge. The value of
Treasuries, if held to maturity, is fixed; principal is guaranteed and interest
is fixed. The fund's investment return and share price will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance is not predictive of future returns.
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.
20
<PAGE>
October 15 and to 4.75% on November 17, 1998. The increased liquidity allowed
the U.S. economy to forge ahead, with gross domestic product (GDP) growing at a
6.0% annualized rate during the fourth quarter of 1998. Unemployment and
inflation remained near historical lows during the reporting period.
Near the end of fourth quarter 1998, it became apparent that the economy was
growing more rapidly than generally anticipated, and yields on U.S. Treasury
securities began to rise in response. By mid-February, concerns mounted that
tight labor markets and strong consumer demand might lead the Fed to increase
interest rates to prevent inflationary pressures from developing. This sent
Treasury yields higher still, with the 30-year bond yield reaching a seven-month
high of 5.69% on March 4, 1999.
The rise in interest rates, while unfavorable for holders of U.S. Treasury
securities, was positive for some mortgage pass-through securities. The
prevailing mortgage rates rose with Treasury yields, reducing the incentive for
homeowners to refinance their mortgages. According to the Federal Home Loan
Mortgage Corporation, the conforming 30-year fixed mortgage rate rose from 6.60%
on October 1, 1998, to 6.98% on March 25, 1999. At these higher rates,
prepayment risk, the risk to mortgage holders that mortgage buyers will
refinance their mortgages at lower rates, was somewhat reduced. Therefore,
higher-coupon pass-throughs outperformed other mortgage securities, as they are
subject to more prepayment risk in a declining interest-rate environment.
This horizontal bar chart compares the yield for Franklin U.S. Government
Securities Fund - Class A shares vs. comparable investments on 3/31/99.
<TABLE>
<S> <C>
Franklin U.S. Government Securities
Fund-Class A 5.89%
Average Ginnie Mae Fund 5.45%
One-Year CD 5.04%
Average Money Market Fund Average 4.35%
</TABLE>
*Sources: Standard and Poor's Micropal (The Wall Street Journal); Lipper
Analytical Services; IBC All Taxable Money Market Fund Average, 3/31/99, which
tracks an average of 912 taxable money market fund monthly yields, excluding
capital gains. Franklin U.S. Government Securities Fund - Class A shares' yield,
calculated as required by the SEC, is based on earnings of the fund's portfolio
for the 30 days ended March 31, 1999. Money funds attempt to maintain a stable
net asset value of $1.00 per share, while shares of Franklin U.S. Government
Securities Fund will fluctuate with market conditions.
CDs are insured by the FDIC for up to $100,000 and offer a fixed rate of return.
21
<PAGE>
During the reporting period, the fund reduced its exposure to higher-coupon
Government National Mortgage Association (GNMA) mortgage pass-throughs. The fund
took advantage of attractive yield spreads to add to its positions of
lower-coupon GNMA pass-throughs, particularly in the 6% coupon range.
Lower-coupon mortgage pass-throughs are less prepayment sensitive than
higher-coupon issues, while providing income advantages relative to other U.S.
government securities.
In the near term, we do not expect interest rates to rise significantly higher,
but remain vigilant regarding any short-term rise in rates. Franklin U.S.
Government Securities Fund will continue to invest primarily in GNMA pass-
through securities as we seek to achieve our goals of providing high, current
income with low risk for the shareholders. The point chart on page 20 displays
the fund's risk and reward profile.
This chart shows the dividend distributions for Franklin U.S. Government
Securities Fund from 10/1/98 to 3/31/99.
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------------------------------------------
MONTH CLASS A CLASS B* CLASS C ADVISOR
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
October 3.7 cents -- 3.38 cents 3.75 cents
November 3.7 cents -- 3.38 cents 3.75 cents
December 3.7 cents -- 3.38 cents 3.76 cents
January 3.7 cents 3.70 cents 3.38 cents 3.77 cents
February 3.7 cents 3.37 cents 3.38 cents 3.75 cents
March 3.7 cents 3.43 cents 3.39 cents 3.77 cents
TOTAL 22.2 CENTS 10.50 CENTS 20.29 CENTS 22.55 CENTS
</TABLE>
*January 1, 1999, the fund began offering Class B shares to investors. See the
prospectus for details.
22
<PAGE>
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
/s/ Jack Lemein
Jack Lemein
/s/ Roger A. Bayston
Roger A. Bayston
/s/ T. Anthony Coffey
T. Anthony Coffey
Portfolio Management Team
Franklin U.S. Government Securities Fund
23
<PAGE>
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
CLASS A (FORMERLY CLASS I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may 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.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (FORMERLY CLASS II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 3/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
Price and Distribution Information (10/1/98 - 3/31/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.15 $6.84 $6.99
<CAPTION>
DISTRIBUTIONS
-------------------------------------
<S> <C>
Dividend Income $0.222
<CAPTION>
CLASS B CHANGE 3/31/99 1/1/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.07 $6.84 $6.91
<CAPTION>
DISTRIBUTIONS
-------------------------------------
<S> <C>
Dividend Income $0.105
<CAPTION>
CLASS C CHANGE 3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.15 $6.82 $6.97
<CAPTION>
DISTRIBUTIONS
-------------------------------------
<S> <C>
Dividend Income $0.2029
<CAPTION>
ADVISOR CLASS CHANGE 3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.16 $6.84 $7.00
<CAPTION>
DISTRIBUTIONS
-------------------------------------
<S> <C>
Dividend Income $0.2255
</TABLE>
Past performance is not predictive of future results.
24
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR (5/31/70)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +1.06% +5.75% +43.54% +125.69% +710.74%
Average Annual Total Return(2) -3.24% +1.21% +6.57% +8.01% +7.37%
Distribution Rate(3) 6.22%
30-Day Standardized Yield(4) 5.89%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +0.51%
Aggregate Total Return(2) -3.45%
Distribution Rate(3) 6.02%
30-Day Standardized Yield(4) 5.61%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.78% +5.20% +21.69% +31.43%
Average Annual Total Return(2) -1.19% +3.15% +6.40% +6.94%
Distribution Rate(3) 5.90%
30-Day Standardized Yield(4) 5.55%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR (5/31/70)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.96% +5.70% +43.83% +126.14% +712.35%
Average Annual Total Return(2) +0.96% +5.70% +7.54% +8.50% +7.54%
Distribution Rate(3) 6.61%
30-Day Standardized Yield(4) 6.26%
</TABLE>
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 current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized. Since Class B shares have existed for less than one year, the
figures for that class represent aggregate total return from inception;
therefore, average annual total returns are not provided.
3. Distribution rate is based on an annualization of the respective class's
March monthly dividend and the maximum offering price (net asset value price for
Advisor Class) per share on March 31, 1999.
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, 1999.
5. 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and average annual
total returns of Advisor Class shares were +17.97% and +7.65% respectively.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. 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.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
25
<PAGE>
[PYRAMID GRAPHIC]
This chart shows in pie chart format the portfolio breakdown based on total net
assets on 3/31/99 for the Franklin Utilities Fund.
Utilities Stocks 74.2%
Utilities Bonds 13.3%
Convertible Securities 6.9%
Short-Term Obligations
& Other Net Assets 5.6%
FRANKLIN UTILITIES FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Utilities Fund seeks both capital appreciation and
current income from a portfolio of public utility industry securities.
- --------------------------------------------------------------------------------
After significantly outperforming the S&P 500 Index during the world economic
crisis in the August to October period, utility company stocks lagged other
securities for most of the period under review. The underperformance was due to
expectations for strong economic growth, rising interest rates and investors'
continued preference for growth stocks.
Since 1995, the U.S. economy has grown strongly in the first quarter of the
year, often followed by slower growth in the subsequent three quarters. We are
again beginning to see that unfold for 1999; hence, investors expected strong
economic growth in the first quarter, preferring growth equities and driving up
interest rates. Over the six-month reporting period, the 30-year Treasury bond
yield increased by 65 basis points, to 5.62% on March 31, 1999.
At the end of the reporting period, the fund had approximately 86% of total net
assets in electric utility securities, 6% in telephone securities and 3% in gas.
Although the asset class weightings did not change significantly from October
31, 1998, to March 31, 1999, we carefully repositioned the fund as we sought to
take advantage of developing industry themes. This repositioning focused on two
key themes -- deregulation and diversification -- and resulted in the addition
of several new positions.
Electric industry deregulation is continuing on a state-by-state basis at a
fairly steady pace, and we feel that several key fund positions are poised to
take advantage of near-term legislative and regulatory rulings. We anticipate
that electric industry deregulation, like deregulation of the telephone and gas
industries before it, will be growth enhancing. By removing a portion of the
regulatory umbrella, individual company managements are more inclined to improve
their equity returns, become more efficient and pursue innovative investment
ideas. Recent portfolio additions that we believe were making tremendous strides
in taking advantage of the deregulatory
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.
26
<PAGE>
process include PECO Energy Co., Unicom Corp., DTE Energy Co. and New England
Electric System.
Diversification can be a key performance driver for any company, but it is
particularly relevant to an electric utility company, as it is often difficult
to achieve a significant valuation premium beyond the core electric business.
One company that created an outstanding diversification strategy is Montana
Power Co., a portfolio holding. Unlike many electric companies, Montana Power
chose to exploit its existing right-of-way assets and expertise in constructing
and utilizing utility services by building a nationwide telecommunications
network. Considering the tremendous growth in data and voice transmission
network needs, this strategy resulted in incredible returns for Montana Power's
shareholders. When we first began acquiring the stock in 1998, this asset's
value was hidden. In the past six months, with Montana Power's stock price
having increased around 70%, this hidden value is clearly becoming unlocked. We
are very pleased with our investment in Montana Power and are actively searching
for other companies with such "hidden assets." Other holdings that we feel have
potential include SCANA Corp., Conectiv Inc., Entergy Corp., Northwestern Corp.,
CMS Energy Corp., Kansas City Power & Light Co. and American Electric Power Co.
Inc.
Going forward, we will maintain our fifty-year strategy of buying high-quality
utility companies that we believe possess good earnings per share predictability
and are competitively well-positioned. Relative valuations to the broad market
industries still appear very attractive. Coupled with the continuing improvement
in the regulatory outlook for the companies and an increased motivation to
enhance shareholder value, we believe this sector offers compelling investment
opportunities.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of March 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Sincerely,
/s/ Sally Edwards Haff
Sally Edwards Haff
Portfolio Manager
Franklin Utilities Fund
This chart shows the top 10 holdings based on the percentage of total net assets
on 3/31/99 for the Franklin Utilities Fund.
FPL Group Inc. 4.03%
Duke Energy Corp. 3.80%
Southern Co. 3.53%
Dominion Resources Inc. 3.10%
PG&E Corp. 2.92%
PECO Energy Co. 2.76%
Conectiv Inc. 2.76%
Edison International 2.70%
Sempra Energy 2.61%
Texas Utilities Co. 2.36%
27
<PAGE>
FRANKLIN UTILITIES FUND
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior
to July 1, 1994, fund shares were offered at a lower initial sales charge; thus
actual total returns may differ. Effective May 1, 1994, the fund implemented a
Rule 12b-1 plan, which affects subsequent performance.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 3/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (10/1/98 - 3/31/99)
<TABLE>
<CAPTION>
Class A Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.67 $9.69 $11.36
Distributions
----------------------------------
Dividend Income $0.2620
Long-Term Capital Gain $0.3307
TOTAL $0.5927
</TABLE>
<TABLE>
<CAPTION>
Class B Change 3/31/99 1/1/99
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.36 $9.70 $11.06
Distributions
---------------------------------
Dividend Income $0.1173
</TABLE>
<TABLE>
<CAPTION>
Class C Change 3/31/99 9/30/98
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.66 $9.69 $11.35
Distributions
---------------------------------
Dividend Income $0.2269
Long-Term Capital Gain $0.3307
TOTAL $0.5576
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS Change 3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$1.67 $9.72 $11.39
Distributions
---------------------------------
Dividend Income $0.2691
Long-Term Capital Gain $0.3307
TOTAL $0.5998
</TABLE>
28
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR (9/30/48)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -9.90% -8.13% +55.69% +168.44% +12,814.50%
Average Annual Total Return(2) -13.70% -12.06% +8.32% +9.90% +10.01%
Value of $10,000 Investment(3) $8,630 $8,794 $14,910 $25,712 $1,234,307
Distribution Rate(4) 5.18%
30-Day Standardized Yield(5) 4.84%
</TABLE>
<TABLE>
<CAPTION>
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.25% +24.02% +1.59% +31.55% -8.13%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -11.41%
Aggregate Total Return(2) -14.91%
Value of $10,000 Investment(3) $8,509
Distribution Rate(4) 4.84%
30-Day Standardized Yield(5) 4.52%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -10.11% -8.49% +21.02% +46.76%
Average Annual Total Return(2) -11.82% -10.28% +6.22% +10.00%
Value of $10,000 Investment(3) $8,818 $8,972 $11,984 $14,528
Distribution Rate(4) 4.87%
30-Day Standardized Yield(5) 4.45%
</TABLE>
<TABLE>
<CAPTION>
3/31/97 3/31/98 3/31/99
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(6) +1.00% +30.93% -8.49%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(7) 6-MONTH 1-YEAR 5-YEAR 10-YEAR (9/30/48)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -9.81% -7.73% +56.64% +170.07% +12,892.78%
Average Annual Total Return(2) -9.81% -7.73% +9.39% +10.45% +10.12%
Value of $10,000 Investment(3) $9,019 $9,227 $15,664 $27,007 $1,299,278
Distribution Rate(4) 5.53%
30-Day Standardized Yield(5) 5.18%
</TABLE>
<TABLE>
<CAPTION>
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.25% +24.02% +1.62% +31.73% -7.73%
</TABLE>
(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 current,
applicable, maximum sales charge(s) for that class. Six-month return has not
been annualized. Since Class B shares have existed for less than one year, the
figures for that class represent aggregate total return from inception;
therefore, average annual total returns are not provided.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
(4.) Distribution rate is based on an annualization of the respective class's
March monthly dividend and the maximum offering price (net asset value price for
Advisor Class) per share on March 31, 1999.
(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, 1999.
(6.) One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
(7.) 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
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; 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 and average annual
total returns of Advisor Class shares were +20.80% and +8.80% respectively.
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.
Past performance is not predictive of future results.
29
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN DYNATECH FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999 -----------------------------------------------------------------
CLASS A (UNAUDITED) 1998 1997 1996*** 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ....... $ 17.84 $ 18.48 $ 14.03 $ 12.78 $ 9.85 $ 10.29
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ..................... .13 .27 .10 .06 .12 .07
Net realized and unrealized gains ......... 4.08 .23 4.81 1.54 2.99 .21
-------------------------------------------------------------------------------
Total from investment operations ........... 4.21 .50 4.91 1.60 3.11 .28
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ..................... (.24) (.17) (.06) (.12) (.05) (.12)
Net realized gains ........................ -- (.97) (.40) (.23) (.13) (.60)
-------------------------------------------------------------------------------
Total distributions ........................ (.24) (1.14) (.46) (.35) (.18) (.72)
-------------------------------------------------------------------------------
Net asset value, end of period ............. $ 21.81 $ 17.84 $ 18.48 $ 14.03 $ 12.78 $ 9.85
================================================================================
Total return* .............................. 23.77% 3.06% 35.63% 12.84% 32.10% 2.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .......... $402,182 $215,864 $188,102 $104,508 $92,987 $67,413
Ratios to average net assets:
Expenses .................................. .98%** 1.02% 1.04% 1.05% 1.01% 1.00%
Net investment income ..................... 1.54%** 1.55% .75% .43% 1.11% .69%
Portfolio turnover rate .................... 3.38% 10.84% 5.59% 11.94% 9.83% 9.73%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period $ 17.53 $ 18.30 $14.03 $13.57
--------------------------------------------------
Income from investment operations:
Net investment income ..................... .12 .15 .07 --
Net realized and unrealized gains ......... 3.95 .17 4.66 .46
--------------------------------------------------
Total from investment operations ........... 4.07 .32 4.73 .46
--------------------------------------------------
Less distributions from:
Net investment income ..................... (.16) (.12) (.06) --
Net realized gains ........................ -- (.97) (.40) --
--------------------------------------------------
Total distributions ........................ (.16) (1.09) (.46) --
--------------------------------------------------
Net asset value, end of period ............. $ 21.44 $ 17.53 $18.30 $14.03
==================================================
Total return* .............................. 23.29% 2.03% 34.32% 3.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .......... $52,769 $12,358 $3,386 $--
Ratios to average net assets:
Expenses .................................. 1.72%** 1.79% 1.82% 1.85%**
Net investment income ..................... .86%** .81% .25% (.14%)**
Portfolio turnover rate .................... 3.38% 10.84% 5.59% 11.94%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
** Annualized
*** For the period September 16, 1996 (effective date) to September 30, 1996 for
Class C.
See notes to financial statements.
30
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 41.8%
AIR FREIGHT/DELIVERY SERVICES .1%
Air Express International Corp. ..................................................... 20,000 $ 302,500
C.H. Robinson Worldwide Inc. ........................................................ 10,000 254,375
-----------
556,875
-----------
BIOTECHNOLOGY .7%
(a)Amgen Inc. .......................................................................... 40,000 2,995,000
(a)Noven Pharmaceuticals Inc. .......................................................... 20,400 94,350
-----------
3,089,350
-----------
BROADCASTING 1.1%
(a)Entercom Communications Corp. ....................................................... 48,500 1,715,688
(a)Liberty Media, A .................................................................... 60,000 3,157,500
-----------
4,873,188
-----------
CABLE TELEVISION .1%
(a)United Pan-Europe Communications NV (UPC), ADR (Netherlands) ........................ 16,200 619,650
-----------
CELLULAR TELEPHONE .4%
(a)AirTouch Communications Inc. ........................................................ 20,000 1,932,500
-----------
COMPUTER COMMUNICATIONS 3.4%
(a)3Com Corp. .......................................................................... 30,000 699,375
(a)Cisco Systems Inc. .................................................................. 135,000 14,790,938
-----------
15,490,313
-----------
COMPUTER SOFTWARE 7.8%
(a)i2 Technologies Inc. ................................................................ 30,000 797,814
(a)Intuit Inc. ......................................................................... 25,000 2,543,750
(a)Microsoft Corp. ..................................................................... 360,000 32,265,000
-----------
35,606,564
-----------
EDP PERIPHERALS .3%
Symbol Technologies Inc. ............................................................ 30,000 1,350,000
-----------
EDP SERVICES 1.7%
(a)Computer Sciences Corp. ............................................................. 20,000 1,103,750
(a)Equant NV (Netherlands) ............................................................. 25,000 1,881,250
First Data Corp. .................................................................... 50,000 2,137,500
(a)International Network Services ...................................................... 35,000 2,447,813
-----------
7,570,313
-----------
ELECTRONIC DATA PROCESSING 2.9%
Compaq Computer Corp. ............................................................... 180,000 5,703,750
Hewlett-Packard Co. ................................................................. 100,000 6,781,250
(a)NCR Corp. ........................................................................... 10,000 500,000
-----------
12,985,000
-----------
ELECTRONIC PRODUCTION EQUIPMENT .5%
(a)Applied Materials Inc. .............................................................. 40,000 2,467,500
-----------
ENVIRONMENTAL SERVICES .2%
Browning-Ferris Industries Inc. ..................................................... 20,000 771,250
(a)Casella Waste Systems Inc., A ....................................................... 15,000 338,438
-----------
1,109,688
-----------
FINANCE COMPANIES .1%
Associates First Capital Corp., A ................................................... 7,200 324,000
-----------
FINANCIAL PUBLISHING/SERVICES .2%
(a)ChoicePoint Inc. .................................................................... 2,000 99,750
Equifax Inc. ........................................................................ 20,000 687,500
-----------
787,250
-----------
</TABLE>
31
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
INTERNET SERVICES 1.3%
(a)Allaire Corp. ................................................................. 22,500 $ 1,530,000
(a)Amazon.com Inc. ............................................................... 12,000 2,066,250
(a)America Online Inc. ........................................................... 10,000 1,460,000
(a)Autobytel.com Inc. ............................................................ 2,100 87,937
(a)Autoweb.com Inc. .............................................................. 1,700 60,562
(a)iVillage Inc. ................................................................. 1,000 100,500
(a)RealNetworks Inc. ............................................................. 1,800 219,938
(a)RoweCom Inc. .................................................................. 2,700 117,788
(a)VerticalNet Inc. .............................................................. 1,800 186,975
(a)Vignette Corp. ................................................................ 2,200 165,550
-----------
5,995,500
-----------
INVESTMENT BANKERS/BROKERS/SERVICES .5%
(a)E*Trade Group Inc. ............................................................ 40,000 2,332,500
-----------
MAJOR PHARMACEUTICALS 3.4%
Bristol-Myers Squibb Co. ...................................................... 20,000 1,286,250
Merck & Co. Inc. .............................................................. 30,000 2,405,625
Pfizer Inc. ................................................................... 10,000 1,387,500
Schering-Plough Corp. ......................................................... 80,000 4,425,000
Warner-Lambert Co. ............................................................ 90,000 5,956,875
-----------
15,461,250
-----------
MAJOR U.S. TELECOMMUNICATIONS .5%
AT&T Corp. .................................................................... 15,000 1,197,188
(a)Nextel Communications Inc. .................................................... 10,000 366,250
(a)Sprint Corp. (PCS Group) ...................................................... 20,000 886,250
-----------
2,449,688
-----------
MANAGED HEALTH CARE .6%
(a)PacifiCare Health Systems Inc., B ............................................. 15,000 1,023,750
United Healthcare Corp. ....................................................... 30,000 1,578,750
-----------
2,602,500
-----------
MEDIA CONGLOMERATES .3%
(a)Clear Channel Communications Inc. ............................................. 20,000 1,341,250
-----------
MEDICAL ELECTRONICS 1.0%
Medtronic Inc. ................................................................ 20,000 1,435,000
(a)Uniphase Corp. ................................................................ 25,000 2,878,125
-----------
4,313,125
-----------
MEDICAL/DENTAL DISTRIBUTORS .3%
McKesson HBOC Inc. ............................................................ 22,200 1,465,200
-----------
MOTOR VEHICLES .2%
General Motors Corp., H ....................................................... 20,000 1,008,750
-----------
MOVIES/ENTERTAINMENT .5%
Time Warner Inc. .............................................................. 30,000 2,131,875
-----------
NEWSPAPERS .1%
The News Corp. Ltd., Sponsored ADR (Australia) ................................ 20,000 590,000
-----------
OILFIELD SERVICES/EQUIPMENT .4%
Schlumberger Ltd. ............................................................. 30,000 1,805,625
-----------
OTHER TELECOMMUNICATIONS 1.0%
(a)MCI WorldCom Inc. ............................................................. 50,000 4,428,125
-----------
PACKAGE GOODS/COSMETICS .4%
Estee Lauder Cos., A .......................................................... 20,000 1,890,000
-----------
PRECISION INSTRUMENTS .3%
(a)Waters Corp. .................................................................. 13,800 1,449,861
-----------
</TABLE>
32
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Statement of Investments, March 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
DYNATECH FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RECREATIONAL PRODUCTS/TOYS .1%
(a)Electronic Arts Inc. .............................................................. 10,000 $ 475,000
-----------
SEMICONDUCTORS 8.0%
(a)Broadcom Corp., A ................................................................. 1,600 98,600
Intel Corp. ....................................................................... 280,000 33,285,000
Linear Technology Corp. ........................................................... 40,000 2,050,000
(a)Taiwan Semiconductor Manufacturing Co. Ltd., ADR (Taiwan) ......................... 10,000 236,250
(a)Xilinx Inc. ....................................................................... 20,000 811,250
-----------
36,481,100
-----------
SERVICES TO THE HEALTH INDUSTRY .3%
IMS Health Inc. ................................................................... 40,000 1,325,000
-----------
SPECIALTY CHEMICALS .3%
Sigma-Aldrich Corp. ............................................................... 50,000 1,462,500
-----------
TELECOMMUNICATIONS EQUIPMENT 2.8%
Lucent Technologies Inc. .......................................................... 21,204 2,284,730
Motorola Inc. ..................................................................... 140,000 10,255,000
-----------
12,539,730
-----------
TOTAL COMMON STOCKS (COST $44,931,991) ............................................ 190,310,770
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(C)REPURCHASE AGREEMENTS 57.9%
Barclays Capital Inc., 4.90%, 4/01/99 (Maturity Value $20,002,722)
Collateralized: U.S. Treasury Notes ....................................................... $ 20,000,000 20,000,000
CIBC Oppenheimer Corp.,4.87%, 4/01/99 (Maturity Value $20,002,706)
Collateralized: U.S. Treasury Notes ....................................................... 20,000,000 20,000,000
Credit Suisse First Boston, 4.85%, 4/01/99 (Maturity Value $73,454,895)
Collateralized: U.S. Treasury Notes ....................................................... 73,445,000 73,445,000
Donaldson, Lufkin & Jenrette Securities Corp., 4.90%, 4/01/99
(Maturity Value $20,002,722)
Collateralized: U.S. Treasury Notes ....................................................... 20,000,000 20,000,000
Lehman Brothers Inc., 4.85%, 4/01/99 (Maturity Value $20,002,694)
Collateralized: U.S. Treasury Notes ....................................................... 20,000,000 20,000,000
NationsBanc Montgomery Securities LLC, 4.80%, 4/01/99 (Maturity Value $20,002,667)
Collateralized: U.S. Treasury Notes ....................................................... 20,000,000 20,000,000
Paribas Corp., 4.90%, 4/01/99 (Maturity Value $70,009,528)
Collateralized: U.S. Treasury Notes ....................................................... 70,000,000 70,000,000
Warburg Dillion Read LLC, 4.90%, 4/01/99 (Maturity Value $20,002,722)
Collateralized: U.S. Treasury Notes ....................................................... 20,000,000 20,000,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $263,445,000) ............................................. 263,445,000
------------
TOTAL INVESTMENTS (COST $308,376,991) 99.7% ................................................. 453,755,770
------------
OTHER ASSETS, LESS LIABILITIES .3% .......................................................... 1,195,531
------------
NET ASSETS 100.0% ........................................................................... $454,951,301
============
</TABLE>
(a) Non-income producing.
(c) See note 1(c) regarding repurchase agreement.
See notes to financial statements.
33
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999+ ------------------------------------------------------------
CLASS A (UNAUDITED) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(1)
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 28.58 $ 27.09 $ 22.82 $ 19.38 $ 14.96 $ 14.25
---------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .18 .49 .36 .22 .17 .19
Net realized and unrealized gains ................. 4.41 1.71 4.34 3.53 4.43 .90
---------------------------------------------------------------------------
Total from investment operations ................... 4.59 2.20 4.70 3.75 4.60 1.09
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.44) (.47) (.23) (.16) (.14) (.30)
Net realized gains ................................ (.21) (.24) (.20) (.15) (.04) (.08)
---------------------------------------------------------------------------
Total distributions ................................ (.65) (.71) (.43) (.31) (.18) (.38)
---------------------------------------------------------------------------
Net asset value, end of period ..................... $ 32.52 $ 28.58 $ 27.09 $ 22.82 $ 19.38 $ 14.96
===========================================================================
Total return* ...................................... 16.17% 8.22% 20.84% 19.60% 31.11% 7.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $2,055,091 $1,635,780 $1,435,561 $1,020,486 $712,866 $516,620
Ratios to average net assets:
Expenses .......................................... .88%** .88% .89% .87% .90% .77%
Net investment income ............................. 1.12%** 1.78% 1.60% 1.16% 1.08% 1.23%
Portfolio turnover rate ............................ 1.54% .58% 1.77% 2.03% 1.39% 6.52%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
- -----------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE(1)
(for a share outstanding throughout the period)
Net asset value, beginning of period ........................... $31.46
------
Income from investment operations:
Net investment income ......................................... .04
Net realized and unrealized gains ............................. .97
------
Total from investment operations ............................... 1.01
------
Net asset value, end of period ................................. $32.47
======
Total return* .................................................. 3.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $5,064
Ratios to average net assets:
Expenses ...................................................... 1.64%**
Net investment income ......................................... .53%**
Portfolio turnover rate ........................................ 1.54%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
**Annualized
+For the period January 1, 1999 (effective date) to March 31, 1999 for Class B.
(1)Per share amounts have been calculated using the average shares outstanding
for the period ended March 31, 1999.
34
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999 --------------------------------------------------
CLASS C (UNAUDITED) 1998 1997**** 1996 1995***
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(1)
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 28.11 $ 26.70 $ 22.60 $ 19.33 $16.88
------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .06 .29 .20 .12 .02
Net realized and unrealized gains ................. 4.33 1.66 4.25 3.46 2.43
------------------------------------------------------------------
Total from investment operations ................... 4.39 1.95 4.45 3.58 2.45
------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.27) (.30) (.15) (.16) --
Net realized gains ................................ (.21) (.24) (.20) (.15) --
------------------------------------------------------------------
Total distributions ................................ (.48) (.54) (.35) (.31) --
------------------------------------------------------------------
Net asset value, end of period ..................... $ 32.02 $ 28.11 $ 26.70 $ 22.60 $19.33
==================================================================
Total return* ...................................... 15.69% 7.39% 19.91% 18.73% 14.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $329,786 $189,572 $117,218 $43,417 $4,161
Ratios to average net assets:
Expenses .......................................... 1.64%** 1.65% 1.66% 1.63% 1.79%**
Net investment income ............................. .36%** 1.02% .85% .40% .37%**
Portfolio turnover rate ............................ 1.54% .58% 1.77% 2.03% 1.39%
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(1)
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 28.63 $ 27.13 $ 23.24
----------------------------------------
Income from investment operations:
Net investment income ........................ .21 .57 .25
Net realized and unrealized gains ............ 4.42 1.69 3.64
----------------------------------------
Total from investment operations .............. 4.63 2.26 3.89
----------------------------------------
Less distributions from:
Net investment income ........................ (.51) (.52) --
Net realized gains ........................... (.21) (.24) --
----------------------------------------
Total distributions ........................... (.72) (.76) --
----------------------------------------
Net asset value, end of period ................ $ 32.54 $ 28.63 $ 27.13
========================================
Total return* ................................. 16.29% 8.47% 16.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $67,039 $41,871 $25,823
Ratios to average net assets:
Expenses ..................................... .64%** .65% .66%**
Net investment income ........................ 1.36%** 2.01% 1.93%**
Portfolio turnover rate ....................... 1.54% .58% 1.77%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
** Annualized
*** For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
**** For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
(1) Per share amounts have been calculated using the average shares outstanding
for the six months ended March 31, 1999.
See notes to financial statements.
35
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/
GROWTH FUND WARRANTS VALUE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND WARRANTS 71.1%
COMMERCIAL SERVICES 1.6%
(a)ACNielsen Corp. .......................................................................... 81,333 $ 2,206,158
Dun & Bradstreet Corp. ................................................................. 244,000 8,692,500
Equifax Inc. ........................................................................... 400,000 13,750,000
Kelly Services Inc., A ................................................................. 300,000 8,325,000
Nielsen Media Research ................................................................. 81,333 2,007,908
(a)Programming & Systems Inc. ............................................................... 345,300 6,906
R. H. Donnelley Corp. .................................................................. 48,800 753,350
Wallace Computer Services Inc. ......................................................... 200,000 3,962,500
------------
39,704,322
------------
CONSUMER DURABLES 1.4%
Eastman Kodak Co. ...................................................................... 200,000 12,775,000
Genuine Parts Co. ...................................................................... 135,000 3,889,688
Mattel Inc. ............................................................................ 500,000 12,437,500
Polaroid Corp. ......................................................................... 200,000 4,012,500
------------
33,114,688
------------
CONSUMER NON-DURABLES 2.3%
American Greetings Corp., A ............................................................ 500,000 12,687,500
Hershey Foods Corp. .................................................................... 258,200 14,459,200
International Flavors & Fragrances Inc. ................................................ 412,600 15,498,288
Nature's Sunshine Products Inc. ........................................................ 33,000 363,000
V. F. Corp. ............................................................................ 300,000 14,156,250
------------
57,164,238
------------
CONSUMER SERVICES 4.3%
Carnival Corp. ......................................................................... 25,200 1,223,775
(a)Intervisual Books Inc. ................................................................... 100,000 131,250
(a)King World Productions Inc. .............................................................. 20,000 611,250
The Walt Disney Co. .................................................................... 914,796 28,473,026
Time Warner Inc. ....................................................................... 900,000 63,956,250
(a)USA Networks Inc. ........................................................................ 300,100 10,747,331
------------
105,142,882
------------
ELECTRONIC TECHNOLOGY 12.9%
AMP Inc. ............................................................................... 348,900 18,731,569
(a)Apple Computer Inc. ...................................................................... 200,000 7,187,500
Boeing Co. ............................................................................. 600,000 20,475,000
(a)Cabletron Systems Inc. ................................................................... 475,000 3,889,063
(a)Cisco Systems Inc. ....................................................................... 337,500 36,977,344
Compaq Computer Corp. .................................................................. 150,000 4,753,125
(a)Conexant Systems Inc. .................................................................... 50,000 1,384,375
Cordant Technologies Inc. .............................................................. 240,000 9,555,000
(a)Dell Computer Corp. ...................................................................... 40,000 1,635,000
(a)Dionex Corp. ............................................................................. 200,000 7,550,000
Hewlett-Packard Co. .................................................................... 400,000 27,125,000
Intel Corp. ............................................................................ 200,000 23,775,000
International Business Machines Corp. .................................................. 280,000 49,630,000
Lockheed Martin Corp. .................................................................. 325,200 12,255,975
Molex Inc. ............................................................................. 117,187 3,442,368
Molex Inc., A .......................................................................... 117,187 3,032,214
Raytheon Co., B ........................................................................ 500,000 29,312,500
Rockwell International Corp. ........................................................... 100,000 4,243,750
(a)Sun Microsystems Inc. .................................................................... 200,000 25,012,500
United Technologies Corp. .............................................................. 200,000 27,087,500
------------
317,054,783
------------
ENERGY MINERALS 1.3%
Atlantic Richfield Co. ................................................................... 180,000 13,140,000
Murphy Oil Corp. ......................................................................... 40,000 1,660,000
</TABLE>
36
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES/
GROWTH FUND WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
ENERGY MINERALS (CONT.)
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) 280,000 $ 14,560,000
Union Pacific Resources Group Inc. 101,633 1,206,892
-------------
30,566,892
-------------
FINANCE .1%
(a)ChoicePoint Inc. 40,000 1,995,000
-------------
HEALTH SERVICES .8%
Cardinal Health Inc. 62,250 4,108,500
IMS Health Inc. 488,000 16,165,000
(a)MedPartners Inc. 75,625 359,219
-------------
20,632,719
-------------
HEALTH TECHNOLOGY 19.8%
Abbott Laboratories 400,000 18,725,000
Allergan Inc. 200,000 17,575,000
(a)Allergan Specialty Therapeutics Inc., A 10,000 100,000
(a)Alza Corp. 100,000 3,825,000
(a)Alza Corp., wts., 12/31/99 8,000 1,250
American Home Products Corp. 600,000 39,150,000
(a)Amgen Inc. 400,000 29,950,000
Baxter International Inc. 250,000 16,500,000
Bristol-Myers Squibb Co. 640,000 41,160,000
(a)Crescendo Pharmaceuticals Corp. 5,000 71,250
(a)Genentech Inc. 200,000 17,725,000
(a)Immunex Corp. 40,000 3,330,000
Johnson & Johnson 400,000 37,475,000
Lilly (Eli) & Co. 400,000 33,950,000
Mallinckrodt Inc. 116,000 3,088,500
Merck & Co. Inc. 400,000 32,075,000
(a)Perrigo Co. 191,000 1,384,750
Pfizer Inc. 640,000 88,800,000
(a)Respironics Inc. 93,000 1,226,437
Schering-Plough Corp. 1,800,000 99,562,500
-------------
485,674,687
-------------
INDUSTRIAL SERVICES 1.5%
Browning-Ferris Industries Inc. 165,000 6,362,813
Schlumberger Ltd. 400,000 24,075,000
Waste Management Inc. 152,250 6,756,094
-------------
37,193,907
-------------
NON-ENERGY MINERALS
Deltic Timber Corp. 11,428 271,415
-------------
PROCESS INDUSTRIES 3.8%
Air Products & Chemicals Inc. 400,000 13,700,000
Avery Dennison Corp. 220,000 12,650,000
Canadian Pacific Ltd. (Canada) 500,000 9,718,750
Eastman Chemical Co. 25,000 1,051,563
(a)Imation Corp. 37,200 613,800
(a)Ionics Inc. 400,000 12,050,000
Millipore Corp. 400,000 9,650,000
National Service Industries Inc. 100,000 3,406,250
NCH Corp. 200,000 9,550,000
Pall Corp. 500,000 8,281,250
Sigma-Aldrich Corp. 200,000 5,850,000
Textron Inc. 100,000 7,737,500
-------------
94,259,113
-------------
</TABLE>
37
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES
GROWTH FUND WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
PRODUCER MANUFACTURING 4.3%
(a)American Power Conversion Corp. 100,000 $ 2,700,000
Caterpillar Inc. 200,000 9,187,500
Deere & Co. 300,000 11,587,500
Emerson Electric Co. 100,000 5,293,750
Meritor Automotive Inc. 16,666 258,323
Minnesota Mining & Manufacturing Co. 400,000 28,300,000
(a)Osmonics Inc. 300,000 2,381,250
Raychem Corp. 400,000 9,025,000
Teleflex Inc. 250,000 8,515,625
Tyco International Ltd. 400,000 28,700,000
-------------
105,948,948
-------------
RETAIL TRADE 2.2%
Tiffany & Co. 700,000 52,325,000
Weis Markets Inc. 58,218 2,124,957
-------------
54,449,957
-------------
TECHNOLOGY SERVICES 3.7%
Automatic Data Processing Inc. 800,000 33,100,000
(a)Computer Sciences Corp. 900,000 49,668,750
(a)Microsoft Corp. 80,000 7,170,000
-------------
89,938,750
-------------
TRANSPORTATION 10.3%
Air Express International Corp. 300,000 4,537,500
(a)Alaska Air Group Inc. 200,000 9,500,000
(a)AMR Corp. 900,000 52,706,250
British Airways PLC, ADR (United Kingdom) 200,000 13,725,000
(a)Continental Airlines Inc., B 300,000 11,400,000
Delta Air Lines Inc. 1,000,000 69,500,000
KLM Royal Dutch Air, N.Y. shs. (Netherlands) 300,000 8,325,000
(a)Northwest Airlines Corp. 400,000 11,125,000
Providence and Worchester Railroad Co. 30,600 340,424
(a)UAL Corp. 600,000 46,650,000
Union Pacific Corp. 300,000 16,031,249
(a)US Airways Group Inc. 200,000 9,762,499
-------------
253,602,922
-------------
UTILITIES .8%
Coastal Corp. 600,000 19,800,000
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $726,494,396) 1,746,515,223
-------------
</TABLE>
38
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GROWTH FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(d)REPURCHASE AGREEMENT 29.2%
Joint Repurchase Agreement, 4.875%, 4/01/99
(Maturity Value $716,883,971) (COST $716,786,906) $716,786,906 $ 716,786,906
Barclays Capital Inc. (Maturity Value $91,814,562)
Bear, Stearns Securities Corp. (Maturity Value $50,080,672)
Chase Securities Inc. (Maturity Value $24,101,365)
CIBC Oppenheimer Corp. (Maturity Value $91,814,562)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $91,814,562)
Dresdner Kleinworth Benson, North America, LLC (Maturity Value $91,814,562)
Lehman Brothers Inc. (Maturity Value $91,814,562)
Paribas Corp. (Maturity Value $91,814,562)
Warburg Dillon Read, LLC (Maturity Value $91,814,562)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL INVESTMENTS (COST $1,443,281,302) 100.3% 2,463,302,129
--------------
OTHER ASSETS, LESS LIABILITIES (.3)% (6,321,613)
--------------
NET ASSETS 100.0% $2,456,980,516
--------------
</TABLE>
(a) Non-income producing.
(d) See Note 1(c) regarding joint repurchase agreement.
39
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN INCOME FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999+ ---------------------------------------------------------------
CLASS A (UNAUDITED) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 2.34 $ 2.49 $ 2.30 $ 2.30 $ 2.22 $ 2.46
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .09 .17 .18 .19 .18 .17
Net realized and unrealized gains (losses) ... (.08) (.11) .20 .02 .11 (.20)
-------------------------------------------------------------------------------
Total from investment operations .............. .01 .06 .38 .21 .29 (.03)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.09) (.18) (.18) (.18) (.18) (.18)
Net realized gains ........................... (.01) (.03) (.01) (.03) (.03) (.03)
-------------------------------------------------------------------------------
Total distributions ........................... (.10) (.21) (.19) (.21) (.21) (.21)
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 2.25 $ 2.34 $ 2.49 $ 2.30 $ 2.30 $ 2.22
===============================================================================
Total return* ................................. .47% 2.23% 17.31% 9.43% 14.00% (1.52%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $7,208,991 $7,704,983 $7,738,746 $6,780,153 $5,885,788 $4,891,505
Ratios to average net assets:
Expenses ..................................... .73%** .72% .72% .70% .71% .64%
Net investment income ........................ 7.40%** 6.83% 7.45% 8.27% 8.26% 7.37%
Portfolio turnover rate ....................... 5.76% 22.01% 16.15% 25.29% 58.64% 23.37%
CLASS B
- -------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 2.36
----------
Income from investment operations:
Net investment income ........................ .05
Net realized and unrealized loss ............. (.12)
----------
Total from investment operations .............. (.07)
----------
Less distributions from net investment income . (.04)
----------
Net asset value, end of period ................ $ 2.25
----------
Total return* ................................. 2.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 28,807
Ratios to average net assets:
Expenses ..................................... 1.24%**
Net investment income ........................ 7.86%**
Portfolio turnover rate ....................... 5.76%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
**Annualized
+For the period January 1, 1999 (effective date) to March 31, 1999 for Class B.
40
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN INCOME FUND (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999 -----------------------------------------------------------
CLASS C (UNAUDITED) 1998 1997**** 1996 1995***
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 2.34 $ 2.49 $ 2.30 $ 2.30 $ 2.18
---------------------------------------------------------------------------
Income from investment operations:
Net investment income ......................... .08 .16 .16 .17 .08
Net realized and unrealized gains (losses) .... (.07) (.11) .21 .03 .11
---------------------------------------------------------------------------
Total from investment operations ............... .01 .05 .37 .20 .19
---------------------------------------------------------------------------
Less distributions from:
Net investment income ......................... (.08) (.17) (.17) (.17) (.07)
Net realized gains ............................ (.01) (.03) (.01) (.03) --
---------------------------------------------------------------------------
Total distributions ............................ (.09) (.20) (.18) (.20) (.07)
---------------------------------------------------------------------------
Net asset value, end of period ................. $ 2.26 $ 2.34 $ 2.49 $ 2.30 $ 2.30
===========================================================================
Total return* .................................. .64% 1.70% 16.72% 8.86% 8.96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $1,025,868 $1,014,634 $ 695,355 $343,314 $ 65,822
Ratios to average net assets:
Expenses ...................................... 1.22%** 1.22% 1.22% 1.21% 1.23%**
Net investment income ......................... 6.92%** 6.35% 6.96% 7.84% 7.89%**
Portfolio turnover rate ........................ 5.76% 22.01% 16.15% 25.29% 58.64%
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 2.34 $ 2.48 $ 2.34
-------------------------------------------
Income from investment operations:
Net investment income ......................... .09 .17 .14
Net realized and unrealized gains (losses) .... (.08) (.10) .14
-------------------------------------------
Total from investment operations ............... .01 .07 .28
-------------------------------------------
Less distributions from:
Net investment income ......................... (.09) (.18) (.14)
Net realized gains ............................ (.01) (.03) --
-------------------------------------------
Total distributions ............................ (.10) (.21) (.14)
-------------------------------------------
Net asset value, end of period ................. $ 2.25 $ 2.34 $ 2.48
===========================================
Total return* .................................. .55% 2.82% 12.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $ 17,464 $ 21,851 $ 13,318
Ratios to average net assets:
Expenses ...................................... .58%** .57% .57%**
Net investment income ......................... 7.50%** 7.02% 7.58%**
Portfolio turnover rate ........................ 5.76% 22.01% 16.15%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
**Annualized
***For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
****For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
See notes to financial statements. 41
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (unaudited)
<TABLE>
<CAPTION>
SHARES,
INCOME FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 30.0%
CONSUMER DURABLES .5%
General Motors Corp. ................................ United States 500,000 $ 43,437,500
------------
CONSUMER NON-DURABLES 1.6%
Philip Morris Cos. Inc. ............................. United States 3,300,000 116,118,750
RJR Nabisco Holdings Corp. .......................... United States 600,000 15,000,000
------------
131,118,750
------------
ELECTRONIC TECHNOLOGY .2%
(a)Anacomp Inc. ...................................... United States 600,000 9,637,500
(a)Ladish Co. Inc. ................................... United States 357,333 2,456,664
(a)Ladish Co. Inc., wts., 12/21/05 ................... United States 746,096 4,234,095
------------
16,328,259
------------
ENERGY MINERALS 1.7%
Athabasca Oil Sands Trust ........................... Canada 2,700,000 34,356,822
BP Prudhoe Bay Royalty Trust ........................ United States 500,000 4,312,500
Canadian Oil Sands Trust Units ...................... Canada 2,400,000 31,729,244
Enron Oil & Gas Co. ................................. United States 2,350,000 39,068,750
Pioneer Natural Resources Co. ....................... United States 1,200,015 9,300,116
(a)Santa Fe Energy Resources Inc. .................... United States 1,122,805 8,210,512
Snyder Oil Corp. .................................... United States 60,000 888,750
Ultramar Diamond Shamrock Corp. ..................... United States 625,000 13,515,625
------------
141,382,319
------------
NON-ENERGY MINERALS 1.2%
Anglo American Platinum Corp. Ltd., ADR
South Africa ....................................... 943,691 14,952,595
AngloGold Ltd., ADR ................................. South Africa 2,320,000 46,690,000
De Beers Consolidated Mines AG, ADR ................. South Africa 400,000 7,575,000
Freeport-McMoRan Copper & Gold Inc., A .............. United States 705,000 7,226,250
Impala Platinum Holdings Ltd., ADR .................. South Africa 1,184,200 20,295,056
------------
96,738,901
------------
PROCESS INDUSTRIES .1%
Dan River Inc., A ................................... United States 866,285 7,363,423
------------
PRODUCER MANUFACTURING .5%
(g)Harvard Industries Inc............................. United States 1,428,106 11,424,848
McDermott International Inc. ........................ United States 1,300,000 32,906,250
------------
44,331,098
------------
REAL ESTATE .1%
Meditrust Cos ....................................... United States 720,960 8,966,940
------------
RETAIL TRADE .1%
Saks Inc. ........................................... United States 257,392 6,692,192
------------
TELECOMMUNICATIONS .5%
U.S. West Inc. ...................................... United States 800,000 44,050,000
------------
UTILITIES 23.5%
American Electric Power Co. Inc. .................... United States 2,200,000 87,312,500
Central & South West Corp. .......................... United States 3,800,000 89,062,500
CINergy Corp. ....................................... United States 2,400,000 66,000,000
Conectiv Inc. ....................................... United States 2,800,000 54,250,000
Dominion Resources Inc. ............................. United States 2,500,000 92,343,750
Edison International ................................ United States 3,100,000 68,975,000
Energy East Corp. ................................... United States 1,000,000 52,562,500
Entergy Corp. ....................................... United States 3,700,000 101,750,000
FirstEnergy Corp. ................................... United States 2,100,000 58,668,750
Florida Progress Corp. .............................. United States 2,722,800 102,785,700
FPL Group Inc. ...................................... United States 1,400,000 74,550,000
GPU Inc.............................................. United States 1,700,000 63,431,250
</TABLE>
42
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES,
INCOME FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
UTILITIES (CONT.)
Hawaiian Electric Industries Inc. .................................. United States 610,000 $ 21,388,125
MarketSpan Corp .................................................... United States 1,584,000 39,798,000
Nevada Power Co. ................................................... United States 825,000 20,418,750
New Century Energies Inc. .......................................... United States 1,805,000 61,482,813
New England Electric System ........................................ United States 1,900,000 92,150,000
Northern States Power Co. .......................................... United States 2,020,000 46,838,750
PacifiCorp ......................................................... United States 525,000 9,056,250
PECO Energy Co. .................................................... United States 3,000,000 138,750,000
PG&E Corp. ......................................................... United States 3,200,000 99,400,000
Potomac Electric Power Co. ......................................... United States 2,100,000 48,693,750
Public Service Enterprise Group Inc. ............................... United States 2,350,000 89,740,625
Reliant Energy Inc. ................................................ United States 1,900,000 49,518,750
SCANA Corp. ........................................................ United States 800,000 17,350,000
Sempra Energy ...................................................... United States 3,100,000 59,481,250
Southern Co. ....................................................... United States 2,700,000 62,943,750
Texas Utilities Co. ................................................ United States 2,737,250 114,109,109
Western Resources Inc. ............................................. United States 2,200,000 58,712,500
--------------
1,941,524,372
--------------
MISCELLANEOUS
Miscellaneous ...................................................... 37,727
--------------
Total Common Stocks and Warrants (Cost $2,168,814,797) ............. 2,481,971,481
--------------
PREFERRED STOCKS .2%
NON-ENERGY MINERALS .1%
Freeport-McMoRan Copper & Gold Inc., cum. variable pfd., Series Gold United States 400,000 6,125,000
--------------
TELECOMMUNICATIONS .1%
Nortel Inversora SA, B, ADR ........................................ Argentina 524,000 7,401,500
--------------
Total Preferred Stocks (Cost $21,874,195) .......................... 13,526,500
--------------
CONVERTIBLE PREFERRED STOCKS 9.4%
CONSUMER SERVICES .5%
Host Marriott Corp., 6.75%, cvt. pfd ............................... United States 1,100,000 44,275,000
--------------
ENERGY MINERALS 1.3%
Chesapeake Energy Corp., 7.00%, cvt. pfd., 144A .................... United States 800,000 10,400,000
Devon Financing Trust, $3.25, cvt. pfd., 144A ...................... United States 570,000 29,853,750
Lomak Financing Trust, 5.75%, cvt. pfd ............................. United States 1,500,000 21,562,500
Nuevo Energy Co., 5.75%, cvt. pfd., A .............................. United States 1,450,000 45,675,000
Patina Oil & Gas Corp., 7.125%, cvt. pfd ........................... United States 158,100 3,043,425
--------------
110,534,675
--------------
NON-ENERGY MINERALS 1.0%
Armco Inc., $3.625, cvt. pfd., B ................................... United States 300,000 13,200,000
Armco Inc., $4.50, cvt. pfd., A .................................... United States 114,200 5,738,550
Battle Mountain Gold Co., $3.25, cvt. pfd .......................... United States 295,000 9,845,625
Coeur D'Alene Mines Corp., 7.00%, cvt. pfd ......................... United States 560,000 3,430,000
Cyprus Minerals, $4.00, cvt. pfd., A ............................... United States 300,000 12,112,500
Hecla Mining Co., 7.00%, cvt. pfd., B .............................. United States 375,000 13,312,500
Kinam Gold Inc., $3.75, cvt. pfd., B ............................... United States 650,000 22,831,250
--------------
80,470,425
--------------
PROCESS INDUSTRIES .4%
Asia Pulp & Paper Co. Ltd., pfd., 12.00%, 12/29/49 ................. Indonesia 70,000,000 33,600,000
--------------
PRODUCER MANUFACTURING .5%
EVI, Inc., 5.00% cvt. pfd., 144A ................................... United States 1,200,000 38,550,000
--------------
REAL ESTATE 3.6%
Apartment Investment & Management Co., 8.00% cvt. pfd., K, ......... United States 1,700,000 41,225,000
Archstone Communities Trust, $1.75, cvt. pfd., A ................... United States 1,040,000 28,015,000
Felcor Lodging Trust Inc., $1.95, cvt. pfd., A ..................... United States 2,100,000 44,362,500
</TABLE>
43
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES,
INCOME FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
REAL ESTATE (CONT.)
Glenborough Realty Trust, 7.75%, cvt. pfd., A .......................... United States 3,400,000 $ 56,950,000
Innkeepers USA Trust, 8.625%, cvt. pfd., A ............................. United States 2,000,000 34,250,000
Prologis Trust, 7.00%, cvt. pfd., B .................................... United States 800,000 20,350,000
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A .................. United States 1,750,000 35,656,250
Vornado Realty Trust, 6.50%, cvt. pfd., A .............................. United States 700,000 34,300,000
------------
295,108,750
------------
TELECOMMUNICATIONS .7%
Nortel Inversora SA, 10.00%, cvt. pfd .................................. Argentina 1,200,000 58,650,000
------------
TRANSPORTATION .4%
Union Pacific Capital Trust, 6.25%, cvt. pfd ........................... United States 600,000 30,150,000
------------
UTILITIES 1.0%
CMS Energy Trust, 7.75%, cvt. pfd ...................................... United States 1,600,000 84,200,000
------------
Total Convertible Preferred Stocks (Cost $989,415,587).................. 775,538,850
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
---------
<S> <C> <C> <C>
BONDS 19.6%
CONSUMER DURABLES .4%
American Standard Inc., S.F., senior sub. deb., 9.25%, 12/01/16 ........ United States $ 3,551,000 $ 3,604,265
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ............. United States 32,000,000 11,360,000
Polaroid Corp., senior note, 11.50%, 2/15/06 ........................... United States 20,000,000 20,750,000
------------
35,714,265
------------
CONSUMER NON-DURABLES 3.6%
Compania Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 ........ Argentina 30,000,000 23,400,000
Del Monte Corp., senior sub. note, B, 12.25%, 4/15/07 .................. United States 29,915,000 33,953,525
Doane Pet Care Co., senior sub. note, 144A, 9.75%, 5/15/07 ............. United States 15,381,000 16,419,217
Evenflo Company Inc., senior note, 144A, 11.75%, 8/15/06 ............... United States 28,000,000 28,420,000
Hartmarx Corp., senior sub. note, 144A, 10.875%, 1/15/02 ............... United States 35,000,000 35,875,000
International Home Foods, senior sub. note, 10.375%, 11/01/06 .......... United States 30,000,000 32,775,000
Playtex Family Products Corp., senior sub. note, 9.00%, 12/15/03 ....... United States 38,500,000 39,847,500
Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 ...... United States 20,000,000 18,400,000
RJR Nabisco Inc., notes, 9.25%, 8/15/13 ................................ United States 35,000,000 40,307,785
Simmons Co., senior sub. Note, 144A, 10.25%, 03/15/09 .................. United States 5,500,000 5,692,500
Specialty Foods Corp., senior unsecured notes, B, 10.25%, 8/15/01 ...... United States 20,000,000 18,900,000
The William Carter Co., senior sub. note, A, 10.375%, 12/01/06 ......... United States 6,000,000 6,450,000
------------
300,440,527
------------
CONSUMER SERVICES 3.5%
AMF Bowling Worldwide Inc., senior sub. note, B, 10.875%, 3/15/06 ...... United States 17,000,000 13,600,000
Aztar Corp., senior sub. note, 11.00%, 10/01/02 ........................ United States 60,000,000 60,900,000
Benedek Broadcasting, senior note, 11.875%, 3/01/05 .................... United States 12,250,000 13,291,250
Coast Hotel & Casino Inc., senior sub. note, 144A, 9.50%, 4/01/09 ...... United States 14,000,000 14,140,000
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ................... United States 40,000,000 45,000,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ................ United States 8,000,000 8,460,000
Hard Rock Hotel Inc., senior sub. note, B, 9.25%, 4/01/05 .............. United States 13,000,000 12,675,000
Harvey's Casino Resorts, senior sub. note, 10.625%, 6/01/06 ............ United States 11,000,000 11,687,500
Helicon Group, senior secured note, B, 11.00%, 11/01/03 ................ United States 35,000,000 37,056,250
Rio Hotel & Casino Inc., senior sub. note, 10.625%, 7/15/05 ............ United States 35,000,000 37,975,000
Venetian Casino/Las Vegas Sands, mortgage note, 12.25%, 11/15/04 ....... United States 35,000,000 36,137,500
------------
290,922,500
------------
ELECTRONIC TECHNOLOGY 1.6%
Anacomp Inc., senior sub. note, B, 10.875%, 4/01/04 .................... United States 60,000,000 62,700,000
Samsung Electronics America Inc., company guaranteed notes, 144A, 9.75%,
5/01/03 ............................................................... United States 70,000,000 72,625,000
------------
135,325,000
------------
</TABLE>
44
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
ENERGY MINERALS 3.1%
Bellwether Exploration Co., senior sub. note, 10.875%, 4/01/07 ......... United States $ 39,000,000 $ 34,710,000
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 .......... Mexico 85,000,000 83,300,000
Denbury Management Inc., unsecured senior sub. note, 9.00%, 3/01/08 .... United States 41,000,000 35,055,000
Gerrity Oil & Gas Corp., senior sub. note, 11.75%, 7/15/04 ............. United States 40,000,000 41,000,000
Mesa Operating Co., unsecured senior sub. note, 10.625%, 7/01/06 ....... United States 5,000,000 5,537,500
Plains Resources Inc., senior sub. note, B, 10.25%, 3/15/06 ............ United States 8,000,000 8,000,000
R&B Falcon Corp., senior note, 144A, 12.25%, 04/15/03 .................. United States 16,000,000 16,840,000
R&B Falcon Corp., senior note, 6.50%, 04/15/03 ......................... United States 22,000,000 18,590,000
RBF Finance Co., 144A, 11.00%, 3/15/06 ................................. United States 14,000,000 14,700,000
--------------
257,732,500
--------------
FINANCE .4%
IBJ Preferred Capital Co. LLC, 144A, 8.79%, 12/29/49 ................... United States 4,000,000 28,730,000
--------------
HEALTH TECHNOLOGY .8%
Dade International Inc., senior sub. note, B, 11.125%, 5/01/06 ......... United States 22,000,000 24,090,000
ICN Pharmaceuticals Inc., senior note, B, 9.25%, 8/15/05 ............... United States 37,000,000 37,740,000
--------------
61,830,000
--------------
INDUSTRIAL SERVICES .2%
First Wave Marine Inc., senior note, 11.00%, 2/01/08 ................... United States 10,000,000 9,450,000
Great Lakes Dredge & Dock Corp., senior sub. note, 144A, 11.25%, 8/15/08 United States 10,000,000 10,450,000
--------------
19,900,000
--------------
PROCESS INDUSTRIES 3.8%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 .......... United States 25,000,000 25,625,000
Consoltex Group Inc., senior sub. note, B, 11.00%, 10/01/03 ............ United States 50,000,000 51,062,500
Four M Corp., senior note, B, 12.00%, 6/01/06 .......................... United States 30,000,000 23,100,000
Packaging Corp. of America, senior sub. note, 144A, 9.625%, 04/01/09 ... United States 8,000,000 8,000,000
Packaging Resources Inc., senior note, 11.625%, 5/01/03 ................ United States 42,000,000 44,310,000
Printpack Inc., senior sub. note, B, 10.625%, 8/15/06 .................. United States 45,000,000 41,625,000
RBX Corp., senior sub. note, B, 11.25%, 10/15/05 ....................... United States 60,000,000 17,100,000
Riverwood International, senior sub. note, 10.875%, 4/01/08 ............ United States 55,000,000 54,175,000
Tjiwi Kimia Finance Mauritius, senior unsecured note, 10.00%, 8/01/04 .. Indonesia 68,000,000 37,060,000
UCC Investors, senior note, 10.50%, 5/01/02 ............................ United States 8,900,000 9,656,500
--------------
311,714,000
--------------
PRODUCER MANUFACTURING 1.4%
Collins & Aikman Corp., senior sub. note, 11.50%, 4/15/06 .............. United States 35,000,000 37,362,500
Nortek Inc., senior sub. note, 9.875%, 3/01/04 ......................... United States 18,500,000 19,332,500
Outsourcing Services Group, senior sub. note, 144A, 10.875%, 3/01/06 ... United States 22,000,000 21,670,000
Thermadyne Industries Inc., sub. note, 10.75%, 11/01/03 ................ United States 14,500,000 14,427,500
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 ...... Canada 20,000,000 19,175,000
--------------
111,967,500
--------------
TELECOMMUNICATIONS .6%
Metrocall Inc., senior sub. note, 144A, 11.00%, 9/15/08 ................ United States 32,000,000 29,280,000
Paging Network, senior sub. note, 10.125%, 8/01/07 ..................... United States 25,000,000 21,250,000
--------------
50,530,000
--------------
UTILITIES .2%
Midland CoGeneration Venture, deb., C-91, 10.33%, 7/23/02 .............. United States 4,983,706 5,350,502
Midland Funding Corp. I, deb., C-94, 10.33%, 7/23/02 ................... United States 9,659,466 10,370,393
--------------
15,720,895
--------------
TOTAL BONDS (COST $1,678,787,011) ...................................... 1,620,527,187
--------------
</TABLE>
45
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE BONDS 5.1%
CONSUMER NON-DURABLES
Chock Full O'Nuts Corp., S.F., cvt. sub. deb., 8.00%, 9/15/06 ........ United States $ 2,967,000 $ 2,959,582
--------------
ELECTRONIC TECHNOLOGY .2%
BEA Systems, Inc., cvt., 4.00%, 6/15/05 .............................. United States 9,300,000 7,300,500
Trans-Lux Corp., cvt. sub. note, 7.50%, 12/01/06 ..................... United States 8,000,000 7,800,000
--------------
15,100,500
--------------
ENERGY MINERALS 1.2%
Key Energy Services Inc., cvt., 5.00%, 9/15/04 ....................... United States 43,000,000 21,822,500
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 ...................... United States 30,000,000 29,962,500
Swift Energy Co., cvt. sub. note, 6.25%, 11/15/06 .................... United States 57,000,000 44,175,000
--------------
95,960,000
--------------
HEALTH SERVICES .1%
Continucare Corp., cvt. sub. note, 144A, 8.00%, 10/31/02 ............. United States 9,500,000 3,087,500
Medical Care International Inc., cvt. sub. deb., 144A, 6.75%, 10/01/06 United States 8,500,000 7,395,000
--------------
10,482,500
--------------
INDUSTRIAL SERVICES .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 ......... United States 22,000,000 14,657,500
--------------
NON-ENERGY MINERALS 1.2%
Ashanti Capital Ltd., cvt., 5.50%, 3/15/03 ........................... Ghana 50,000,000 42,750,000
Coeur D'Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 ..... United Kingdom 900,000 549,000
Coeur D'Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ........... United States 20,000,000 11,775,000
Trizec Hahn Corp., cvt. senior deb., 3.00%, 1/29/21 .................. Canada 70,000,000 47,775,000
--------------
102,849,000
--------------
PROCESS INDUSTRIES .3%
APP Finance VI Mauritius, cvt., 11/18/12 ............................. Singapore 150,000,000 23,250,000
--------------
PRODUCER MANUFACTURING .3%
Exide Corp., cvt. senior sub. note, 144A, 2.90%, 12/15/05 ............ United States 50,000,000 28,500,000
--------------
REAL ESTATE 1.5%
Macerich Co., cvt., senior sub. note, 144A, 7.25%, 12/15/02 .......... United States 58,000,000 53,650,000
Meristar Hospitality Corp., cvt. sub. note, 4.75%, 10/15/04 .......... United States 82,000,000 60,372,500
Rouse Co., cvt. sub. deb., 5.75%, 7/23/02 ............................ United States 9,000,000 8,977,500
--------------
123,000,000
--------------
RETAIL TRADE .1%
Drug Emporium Inc., S. cvt. sub. deb., 7.75%, 10/01/14 ............... United States 9,000,000 6,727,500
--------------
TOTAL CONVERTIBLE BONDS (COST $471,683,786) .......................... 423,486,582
--------------
FOREIGN GOVERNMENT BONDS 14.0%
ESCOM, E168, 11.00%, 6/01/08 ......................................... South Africa 400,000,000ZAR 51,253,032
Republic of Argentina, L-GP, step coupon, 5.75%, 3/31/23 ............. Argentina 520,000,000 362,375,000
Republic of Brazil, FRN, 6.062%, 1/01/01 ............................. Brazil 29,643,000 27,271,560
Republic of Brazil, FRN, 6.125%, 4/15/06 ............................. Brazil 225,600,000 163,560,000
Republic of Brazil, FRN, 5.50%, 4/15/24 .............................. Brazil 280,000,000 169,750,000
Republic of Korea, 8.875%, 4/15/08 ................................... South Korea 245,000,000 261,843,750
Republic of South Africa, 12.00%, 2/28/05 ............................ South Africa 335,000,000ZAR 48,746,968
Russia Ministry of Finance, 11.75%, 6/10/03 .......................... Russia 125,000,000 40,500,000
Russia Ministry of Finance, 10.00%, 6/26/07 .......................... Russia 125,000,000 34,610,000
--------------
TOTAL FOREIGN GOVERNMENT BONDS (COST $1,268,232,658) ................. 1,159,910,310
--------------
U.S. GOVERNMENT SECURITIES 15.1%
Freddie Mac, 5.75%, 4/15/08 .......................................... United States 325,000,000 322,624,575
U.S. Treasury Bonds, 7.125%, 2/15/23 ................................. United States 250,000,000 288,750,000
U.S. Treasury Bonds, 6.25%, 8/15/23 .................................. United States 506,000,000 529,877,128
U.S. Treasury Notes, 6.375%, 8/15/02 ................................. United States 110,000,000 114,021,930
--------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $1,164,477,300) ............... 1,255,273,633
--------------
</TABLE>
46
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME FUND COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ZERO COUPON/STEP-UP BONDS 1.7%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to 3/15/01,
12.25% thereafter, 3/15/06 .................................................. United States $ 26,294,000 $ 15,250,520
(b)International Wireless Communications, senior disc. note, 8/15/01 .......... United States 13,500,000 1,147,500
Loral Space and Communications Ltd., senior disc. notes, zero cpn. to 1/15/02,
12.50% thereafter, 1/15/07 .................................................. United States 5,500,000 3,162,500
Mesa Operating Co., unsecured senior sub. notes, zero cpn. to 7/01/01,11.625%
thereafter, 7/01/06 ......................................................... United States 15,000,000 11,512,500
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03, 9.95%
thereafter, 2/15/08 ......................................................... United States 90,000,000 63,900,000
Nextel International Inc., senior disc. note, zero cpn. to 4/15/03, 12.125%
thereafter, 4/15/08 ......................................................... United States 50,000,000 23,750,000
Revlon Worldwide Corp., senior disc. note, B, 3/15/01 ........................ United States 42,000,000 25,410,000
--------------
TOTAL ZERO COUPON/STEP-UP BONDS (Cost $172,963,591) .......................... 144,133,020
--------------
TOTAL LONG TERM INVESTMENT (Cost $7,936,248,925) ............................. 7,874,367,563
--------------
(d)REPURCHASE AGREEMENT 3.6%
Joint Repurchase Agreement, 4.875%, 04/01/99 (Maturity Value $295,272,592)
(COST $295,232,613) ......................................................... 295,232,613
Barclays Capital Inc. (Maturity Value $37,816,892)
Bear, Stearns Securities Corp. (Maturity Value $20,627,397)
Chase Securities Inc. (Maturity Value $9,926,951)
CIBC Oppenheimer Corp. (Maturity Value $37,816,892)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $37,816,892)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $37,816,892)
Lehman Brothers Inc. (Maturity Value $37,816,892)
Paribas Corp. (Maturity Value $37,816,892)
Warburg Dillon Read LLC (Maturity Value $37,816,892)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL INVESTMENTS (COST $8,231,481,538) 98.7% ................................ 8,169,600,176
--------------
OTHER ASSETS, LESS LIABILITIES 1.3% .......................................... 111,529,262
--------------
NET ASSETS 100.0% ............................................................ $8,281,129,438
==============
</TABLE>
CURRENCY ABBREVIATIONS
ZAR - South African Rand
* Securities traded in U.S. Dollars unless otherwise indicated.
(a) Non-income producing.
(b) See Note 6 regarding defaulted securities.
(d) See Note 1(c) regarding joint repurchase agreement.
(g) The 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 non-controlled "affiliated
companies" at March 31, 1999 were $11,424,848.
See Notes To Financial Statements. 47
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999+ -----------------------------------------------------------------
CLASS A (UNAUDITED) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .......... $ 6.99 $ 6.89 $ 6.72 $ 6.87 $ 6.51 $ 7.20
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .22 .46 .48 .49 .50 .50
Net realized and unrealized gains (losses) ... (.15) .10 .17 (.15) .35 (.68)
--------------------------------------------------------------------------------
Total from investment operations .............. .07 .56 .65 .34 .85 (.18)
--------------------------------------------------------------------------------
Less distributions from net investment income.. (.22) (.46) (.48) (.49) (.49) (.51)
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.84 $ 6.99 $ 6.89 $ 6.72 $ 6.87 $ 6.51
================================================================================
Total return* ................................. 1.06% 8.41% 10.08% 5.15% 13.56% (2.75%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $8,601,347 $9,049,829 $9,350,751 $10,129,483 $11,101,605 $11,668,747
Ratios to average net assets:
Expenses ..................................... .66%** .65% .64% .61% .61% .55%
Net investment income ........................ 6.40%** 6.67% 7.01% 7.18% 7.50% 7.37%
Portfolio turnover rate++ ..................... 12.33% 25.98% 1.74% 8.01% 5.48% 18.28%
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period .......... $ 6.91
----------
Income from investment operations:
Net investment income ........................ .12
Net realized and unrealized loss ............. (.08)
----------
Total from investment operations .............. .04
----------
Less distributions from net investment income.. (.11)
----------
Net asset value, end of period ................ $6.84
==========
Total return* ................................. .51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 18,020
Ratios to average net assets:
Expenses ..................................... 1.23%**
Net investment income ........................ 5.98%**
Portfolio turnover rate++ ..................... 12.33%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
**Annualized
+ For the period January 1, 1999 (effective date)to March 31, 1999 for Class B.
++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.
48
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999 --------------------------------------------------------
CLASS C (UNAUDITED) 1998 1997**** 1996 1995***
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 6.97 $ 6.87 $ 6.70 $ 6.85 $ 6.67
------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .20 .42 .44 .45 .21
Net realized and unrealized gains (losses) ... (.15) .10 .17 (.15) .16
------------------------------------------------------------------------
Total from investment operations .............. .05 .52 .61 .30 .37
------------------------------------------------------------------------
Less distributions from net investment income . (.20) (.42) (.44) (.45) (.19)
------------------------------------------------------------------------
Net asset value, end of period ................ $ 6.82 $ 6.97 $ 6.87 $ 6.70 $ 6.85
------------------------------------------------------------------------
Total return* ................................. .78% 7.85% 9.48% 4.55% 5.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $312,716 $271,665 $120,818 $ 57,657 $ 11,695
Ratios to average net assets:
Expenses ..................................... 1.22%** 1.21% 1.20% 1.17% 1.18%**
Net investment income ........................ 5.86%** 6.10% 6.44% 6.80% 6.48%**
Portfolio turnover rate++ ..................... 12.33% 25.98% 1.74% 8.01% 5.48%
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 7.00 $ 6.90 $ 6.76
----------------------------------------
Income from investment operations:
Net investment income ........................ .22 .47 .38
Net realized and unrealized gains (losses) ... (.15) .10 .12
----------------------------------------
Total from investment operations .............. .07 .57 .50
----------------------------------------
Less distributions from net investment income . (.23) (.47) (.36)
----------------------------------------
Net asset value, end of period ................ $ 6.84 $ 7.00 $ 6.90
----------------------------------------
Total return* ................................. .96% 8.51% 7.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 24,495 $ 36,308 $ 14,469
Ratios to average net assets:
Expenses ..................................... .56%** .56% .56%**
Net investment income ........................ 6.50%** 6.75% 7.01%**
Portfolio turnover rate++ ..................... 12.33% 25.98% 1.74%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
**Annualized
***For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
****For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
++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 49
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 97.7%
GNMA I, SF, 5.50%, 5/15/28 - 1/15/29 ...................................... $ 14,997,453 $ 14,242,027
GNMA II, 5.50%, 11/20/28 - 12/20/28 ....................................... 19,833,332 18,737,328
GNMA I, SF, 6.00%, 9/15/23 - 12/15/28 ..................................... 268,394,982 261,421,645
GNMA II, 6.00%, 10/20/23 - 2/20/29 ........................................ 923,112,554 893,672,447
(e)GNMA I, SF, 6.50%, 3/15/03 - 4/01/29 .................................... 1,827,988,959 1,824,772,480
GNMA II, 6.50%, 6/20/24 - 7/20/28 ......................................... 396,545,669 393,316,222
GNMA I, SF, 6.75%, 3/15/26 - 5/15/26 ...................................... 3,221,947 3,237,837
GNMA PL, 6.75%, 1/15/34 ................................................... 35,821,789 36,050,007
GNMA I, SF, 7.00%, 4/15/16 - 5/15/28 ...................................... 1,859,895,089 1,894,672,459
GNMA PL, 7.00%, 9/15/35 ................................................... 8,902,405 9,071,718
GNMA I, SF, 7.25%, 10/15/25 - 1/15/26 ..................................... 6,633,195 6,782,813
GNMA PL, 7.375%, 4/15/29 .................................................. 34,773,609 35,495,458
GNMA I, SF, 7.50%, 6/15/05 - 6/15/28 ...................................... 1,056,569,982 1,091,319,477
GNMA II, 7.50%, 10/20/22 - 12/20/26 ....................................... 121,894,150 125,091,814
GNMA PL, 7.75%, 10/15/12 .................................................. 5,259,894 5,493,523
GNMA I, SF, 8.00%, 10/15/07 - 5/15/26 ..................................... 742,275,427 778,640,739
GNMA II, 8.00%, 8/20/16 - 10/20/26 ........................................ 47,276,320 49,052,533
GNMA PL, 8.00%, 1/15/32 - 5/15/32 ......................................... 14,061,309 14,436,403
GNMA I, GPM, 8.25%, 3/15/17 - 11/15/17 .................................... 5,040,173 5,304,633
GNMA PL, 8.25%, 2/15/28 ................................................... 12,806,205 13,673,739
GNMA I, SF, 8.50%, 5/15/16 - 11/15/24 ..................................... 162,147,609 172,416,360
GNMA II, 8.50%, 4/20/16 - 6/20/25 ......................................... 30,456,739 32,116,507
GNMA II, GPM, 8.75%, 3/20/17 - 7/20/17 .................................... 717,329 762,994
GNMA I, SF, 9.00%, 10/15/04 - 7/15/23 ..................................... 200,371,058 215,695,364
GNMA II, 9.00%, 5/20/16 - 11/20/21 ........................................ 10,588,360 11,287,759
GNMA I, GPM, 9.25%, 5/15/16 - 1/15/17 ..................................... 3,358,585 3,608,702
GNMA I, SF, 9.50%, 5/15/09 - 2/15/23 ...................................... 111,698,849 120,748,306
GNMA II, 9.50%, 9/20/15 - 4/20/25 ......................................... 8,543,135 9,120,937
GNMA I, GPM, 10.00%, 11/15/09 - 11/15/13 .................................. 3,613,915 3,940,672
GNMA I, SF, 10.00%, 4/15/12 - 4/15/25 ..................................... 131,367,382 145,060,700
GNMA II, 10.00%, 8/20/13 - 3/20/21 ........................................ 15,103,559 16,448,470
GNMA I, GPM, 10.25%, 2/15/16 - 2/15/21 .................................... 1,351,370 1,472,817
GNMA I, SF, 10.50%, 8/15/00 - 10/15/21 .................................... 96,950,863 107,969,803
GNMA II, 10.50%, 9/20/13 - 3/20/21 ........................................ 25,993,247 28,490,502
GNMA I, GPM, 11.00%, 12/15/09 - 3/15/11 ................................... 6,950,019 7,606,067
GNMA I, SF, 11.00%, 1/15/01 - 5/15/21 ..................................... 82,189,885 92,267,803
GNMA II, 11.00%, 7/20/13 - 1/20/21 ........................................ 6,463,713 7,170,815
GNMA I, GPM, 11.25%, 6/15/13 - 1/15/16 .................................... 3,179,303 3,501,908
GNMA I, GPM, 11.50%, 3/15/10 - 6/15/13 .................................... 1,116,429 1,236,918
GNMA I, SF, 11.50%, 2/15/13 - 12/15/17 .................................... 17,806,107 20,150,419
GNMA II, 11.50%, 8/20/13 - 4/20/18 ........................................ 1,272,069 1,418,883
GNMA II, GPM, 11.50%, 7/20/13 - 1/20/14 ................................... 130,307 145,763
GNMA I, GPM, 11.75%, 7/15/13 - 12/15/15 ................................... 711,710 791,492
GNMA I, GPM, 12.00%, 10/15/10 - 3/15/13 ................................... 303,734 337,286
GNMA I, SF, 12.00%, 5/15/11 - 7/15/18 ..................................... 80,451,998 91,407,042
GNMA II, 12.00%, 9/20/13 - 2/20/16 ........................................ 3,719,384 4,162,191
GNMA I, GPM, 12.50%, 4/15/10 - 10/15/12 ................................... 685,637 767,475
GNMA I, SF, 12.50%, 1/15/10 - 8/15/18 ..................................... 73,411,992 84,095,656
GNMA II, 12.50%, 9/20/13 - 11/20/15 ....................................... 3,463,335 3,916,072
GNMA I, GPM, 12.75%, 5/15/14 - 6/15/15 .................................... 9,430 10,637
GNMA I, SF, 13.00%, 7/15/10 - 1/15/16 ..................................... 70,068,470 80,971,847
GNMA II, 13.00%, 11/20/13 - 9/20/15 ....................................... 2,307,942 2,636,598
--------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) (COST $8,604,355,195) 8,746,220,067
--------------
U.S. GOVERNMENT SECURITIES 1.1%
U.S. Treasury Bonds, 6.00% 2/15/26 (COST $96,343,750) ..................... 100,000,000 101,781,300
--------------
TOTAL LONG TERM INVESTMENTS (COST $8,700,698,945) ......................... 8,848,001,367
--------------
</TABLE>
50
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS 1.4%
(f)U.S. Treasury Bills, 0.00%, 4/22/99 .......... $ 75,260,000 $ 75,050,627
U.S. Treasury Notes, 5.75%, 9/30/99 ............ 15,000,000 15,079,695
U.S. Treasury Notes, 5.875%, 11/15/99 .......... 14,000,000 14,091,882
U.S. Treasury Notes, 7.125%, 9/30/99 ........... 15,000,000 15,178,125
U.S. Treasury Notes, 7.75%, 12/31/99 ........... 10,000,000 10,212,500
---------------
TOTAL SHORT TERM INVESTMENTS (COST $129,841,807) 129,612,829
---------------
TOTAL INVESTMENTS (COST $8,830,540,752) 100.2% . 8,977,614,196
OTHER ASSETS, LESS LIABILITIES (.2)% ........... (21,036,486)
---------------
NET ASSETS 100.0% .............................. $ 8,956,577,710
===============
</TABLE>
(e)Sufficient collateral has been segregated for securities issued on a
when-issued or delayed delivery basis.
(f)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
See notes to financial statements. 51
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights
FRANKLIN UTILITIES FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999+ ---------------------------------------------------------------
CLASS A (UNAUDITED) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $ 11.36 $ 10.04 $ 9.73 $ 9.75 $ 8.33 $ 10.78
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .26 .52 .53 .54 .53 .55
Net realized and unrealized gains (losses).. (1.34) 1.58 .73 .03 1.42 (2.44)
-----------------------------------------------------------------------------
Total from investment operations ............ (1.08) 2.10 1.26 .57 1.95 (1.89)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.26) (.52) (.52) (.52) (.52) (.52)
Net realized gains ......................... (.33) (.26) (.43) (.07) (.01) (.04)
-----------------------------------------------------------------------------
Total distributions ......................... (.59) (.78) (.95) (.59) (.53) (.56)
-----------------------------------------------------------------------------
Net asset value, end of period .............. $ 9.69 $ 11.36 $ 10.04 $ 9.73 $ 9.75 $ 8.33
=============================================================================
Total return* ............................... (9.90%) 21.71% 13.72% 5.94% 24.19% (17.94%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $1,812,981 $2,054,546 $1,953,273 $2,400,561 $2,765,976 $2,572,508
Ratios to average net assets:
Expenses ................................... .76%** .76% .75% .71% .73% .64%
Net investment income ...................... 4.66%** 4.73% 5.26% 5.24% 5.88% 5.76%
Portfolio turnover rate ..................... 28.35% 11.77% 7.24% 17.05% 5.55% 6.34%
CLASS B
- --------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ........ $ 11.06
----------
Income from investment operations:
Net investment income ...................... .10
Net realized and unrealized loss ........... (1.34)
----------
Total from investment operations ............ (1.24)
----------
Less distributions from net investment
income ..................................... (.12)
----------
Net asset value, end of period .............. $ 9.70
==========
Total return* ............................... (11.41%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 1,367
Ratios to average net assets:
Expenses ................................... 1.29%**
Net investment income ...................... 4.68%**
Portfolio turnover rate ..................... 28.35%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to
May 1, 1994, dividends from net investment income were reinvested at the
offering price.
**Annualized
+For the period January 1, 1999 (effective date) to March 31, 1999 for Class B.
52
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
Financial Highlights (continued)
FRANKLIN UTILITIES FUND (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, 1999 -----------------------------------------------------
CLASS C (UNAUDITED) 1998 1997**** 1996 1995***
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $ 11.35 $ 10.02 $ 9.72 $ 9.75 $ 8.89
--------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .23 .46 .45 .46 .23
Net realized and unrealized gains (losses).. (1.33) 1.60 .76 .06 .88
--------------------------------------------------------------------
Total from investment operations ............ (1.10) 2.06 1.21 .52 1.11
--------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.23) (.47) (.48) (.48) (.25)
Net realized gains ......................... (.33) (.26) (.43) (.07) --
--------------------------------------------------------------------
Total distributions ......................... (.56) (.73) (.91) (.55) (.25)
--------------------------------------------------------------------
Net asset value, end of period .............. $ 9.69 $ 11.35 $ 10.02 $ 9.72 $ 9.75
====================================================================
Total return* ............................... (10.11%) 21.24% 13.06% 5.39% 13.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 39,754 $ 40,628 $ 21,906 $ 19,655 $ 8,369
Ratios to average net assets:
Expenses ................................... 1.28%** 1.28% 1.27% 1.23% 1.21%**
Net investment income ...................... 4.14%** 4.19% 4.78% 4.86% 5.15%**
Portfolio turnover rate ..................... 28.35% 11.77% 7.24% 17.05% 5.55%
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ........ $ 11.39 $ 10.04 $ 9.55
---------------------------------------
Income from investment operations:
Net investment income ...................... .26 .58 .36
Net realized and unrealized gains (losses).. (1.33) 1.57 .53
---------------------------------------
Total from investment operations ............ (1.07) 2.15 .89
---------------------------------------
Less distributions from:
Net investment income ...................... (.27) (.54) (.40)
Net realized gains ......................... (.33) (.26) --
---------------------------------------
Total distributions ......................... (.60) (.80) (.40)
---------------------------------------
Net asset value, end of period .............. $ 9.72 $ 11.39 $ 10.04
=======================================
Total return* ............................... (9.81%) 22.20% 9.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 13,855 $ 13,651 $ 8,719
Ratios to average net assets:
Expenses ................................... .62%** .63% .62%**
Net investment income ...................... 4.86%** 4.93% 5.33%**
Portfolio turnover rate ..................... 28.35% 11.77% 7.24%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
**Annualized
***For the period May 1, 1995 (effective date) to September 30, 1995 for Class
C.
****For the period January 2, 1997 (effective date) to September 30, 1997 for
Advisor Class.
See notes to financial statements. 53
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
UTILITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 74.2%
AGL Resources Inc. ................................... 302,400 $ 5,310,900
Allegheny Energy Inc. ................................ 700,000 20,650,000
American Electric Power Co. Inc. ..................... 439,100 17,426,781
Baltimore Gas and Electric Co. ....................... 507,900 12,887,963
Bell Atlantic Corp. .................................. 400,000 20,675,000
Central & South West Corp. ........................... 1,429,100 33,494,531
CINergy Corp. ........................................ 1,300,000 35,750,000
CMS Energy Corp. ..................................... 500,000 20,031,250
Conectiv Inc. ........................................ 2,659,800 51,533,625
Dominion Resources Inc. .............................. 1,568,950 57,953,091
DQE Inc. ............................................. 600,000 23,025,000
DTE Energy Co. ....................................... 1,100,000 42,281,250
Duke Energy Corp. .................................... 1,300,000 71,012,500
Edison International ................................. 2,271,000 50,529,750
Entergy Corp. ........................................ 1,300,000 35,750,000
FirstEnergy Corp. .................................... 200,000 5,587,500
Florida Progress Corp. ............................... 800,000 30,200,000
FPL Group Inc. ....................................... 1,415,000 75,348,750
GPU Inc. ............................................. 737,000 27,499,313
GTE Corp. ............................................ 300,000 18,150,000
Hawaiian Electric Industries Inc. .................... 500,000 17,531,250
Kansas City Power & Light Co. ........................ 1,000,000 24,625,000
Montana Power Co. .................................... 556,600 40,944,888
Nevada Power Co. ..................................... 1,000,000 24,750,000
New Century Energies Inc. ............................ 937,145 31,921,502
New England Electric System .......................... 300,000 14,550,000
NIPSCO Industries Inc. ............................... 1,340,600 36,196,200
Northern States Power Co. ............................ 535,500 13,717,725
Northwestern Corp. ................................... 809,600 20,999,000
PECO Energy Co. ...................................... 1,116,700 51,647,375
PG&E Corp. ........................................... 1,760,000 54,670,000
Pinnacle West Capital Corp. .......................... 768,485 27,953,642
Puget Sound Energy Inc. .............................. 1,000,000 23,062,500
SBC Communications Inc. .............................. 264,200 12,450,425
SCANA Corp. .......................................... 900,000 19,518,750
Sempra Energy ........................................ 2,546,811 48,866,936
Sierra Pacific Resources ............................. 350,000 12,315,625
SIGCORP Inc. ......................................... 747,300 20,457,338
Southern Co. ......................................... 2,829,300 65,958,056
TECO Energy Inc. ..................................... 1,840,800 36,585,900
Texas Utilities Co. .................................. 1,057,750 44,094,951
Unicom Corp. ......................................... 1,100,000 40,218,750
Washington Gas Light Co. ............................. 600,000 13,575,000
Washington Water Power Co. ........................... 500,000 8,125,000
Western Resources Inc. ............................... 1,000,000 26,687,500
--------------
TOTAL COMMON STOCKS (COST $1,269,853,466) ............ 1,386,520,517
--------------
CONVERTIBLE PREFERRED STOCKS 6.9%
AES Trust I, 5.375%, 3/31/27, cvt. pfd., A ........... 400,000 22,225,000
CMS Energy Corp., 7.75%, cvt. pfd. ................... 705,000 37,100,625
K N Energy Inc., 8.25%, 11/30/01, cvt. pfd. .......... 250,000 8,453,125
Nipsco Industries Inc., 7.75%, cvt. pfd. ............. 200,000 10,100,000
Nortel Inversora SA, 10.00%, cvt. pfd. (Argentina) ... 350,000 17,106,250
Texas Utilities Co., 9.25%, 8/16/01, cvt. pfd. ....... 647,600 34,525,175
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $124,305,098) 129,510,175
--------------
</TABLE>
54
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
STATEMENT OF INVESTMENTS, MARCH 31, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
Utilities Fund AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 13.3%
Arizona Public Service Co., 10.25%, 5/15/20 ........................................................ $ 10,500,000 $ 11,409,510
Arizona Public Service Co., 9.00%, 12/15/21 ........................................................ 14,500,000 15,676,211
CalEnergy Co. Inc., senior note, 8.48%, 9/15/28 .................................................... 25,000,000 28,778,000
CMS Energy Corp., senior note, 7.50%, 1/15/09 ...................................................... 8,250,000 8,332,500
Commonwealth Edison Co., 8.50%, 7/15/22 ............................................................ 5,000,000 5,284,080
Commonwealth Edison Co., 8.375%, 9/15/22 ........................................................... 10,000,000 10,503,150
Consolidated Edison Inc., 7.10%, 2/01/28 ........................................................... 15,000,000 14,799,450
Duquesne Light Co., 8.375%, 5/15/24 ................................................................ 5,000,000 5,262,000
Enron Corp., 7.00%, 8/15/23 ........................................................................ 19,000,000 17,885,650
Midland Funding Corp. I, C-94, 10.33%, 7/23/02 ..................................................... 9,391,148 10,082,327
Niagara Mohawk Power Corp., senior disc. note, H, zero cpn. to 7/01/03, 8.50% thereafter, 7/01/10... 6,000,000 4,620,000
Niagara Mohawk Power Corp., senior note, D, 7.25%, 10/01/02 ........................................ 4,000,000 4,080,000
Niagara Mohawk Power Corp., senior note, G, 7.75%, 10/01/08 ........................................ 4,600,000 4,945,000
Niagara Mohawk Power Corp., 9.50%, 3/01/21 ......................................................... 7,500,000 7,956,885
Niagara Mohawk Power Corp., 8.75%, 4/01/22 ......................................................... 5,000,000 5,458,110
Northwest Pipeline Corp., 7.125%, 12/01/25 ......................................................... 3,000,000 2,894,820
Ohio Edison Co., 8.75%, 6/15/22 .................................................................... 8,000,000 8,479,920
Panhandle Eastern Co., 7.20%, 8/15/24 .............................................................. 20,000,000 19,456,100
Sprint Capital Corp., 6.875%, 11/15/28 ............................................................. 20,000,000 19,761,800
Texas Utilities Co., 8.75%, 11/01/23 ............................................................... 10,000,000 10,886,440
Texas Utilities Co., 8.50%, 8/01/24 ................................................................ 10,000,000 10,599,400
US West Communications Group, 6.875%, 9/15/33 ...................................................... 21,000,000 20,142,990
--------------
TOTAL BONDS (COST $237,326,735) .................................................................... 247,294,343
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,631,485,299) .................................................. 1,763,325,035
--------------
(d)REPURCHASE AGREEMENT 2.0%
Joint Repurchase Agreement, 4.875%, 4/01/99 (Maturity Value $36,736,591) (COST $36,731,617) ........ 36,731,617 36,731,617
Barclays Capital Inc. (Maturity Value $4,705,021)
Bear, Stearns Securities Corp. (Maturity Value $2,566,375)
Chase Securities Inc. (Maturity Value $1,235,069)
CIBC Oppenheimer Corp. (Maturity Value $4,705,021)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $4,705,021)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $4,705,021)
Lehman Brothers Inc. (Maturity Value $4,705,021)
Paribas Corp. (Maturity Value $4,705,021)
Warburg Dillon Read LLC (Maturity Value $4,705,021)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL INVESTMENTS (COST $1,668,216,916) 96.4% ...................................................... 1,800,056,652
--------------
OTHER ASSETS, LESS LIABILITIES 3.6% ................................................................ 67,900,748
--------------
NET ASSETS 100.0% .................................................................................. $1,867,957,400
==============
</TABLE>
(d) See Note 1(c) regarding joint repurchase agreement.
See notes to financial statements.
55
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ....................................... $ 44,931,991 $ 726,494,396 $ 7,936,248,925 $ 8,830,540,752 $1,631,485,299
====================================================================================
Value ...................................... 190,310,770 1,746,515,223 $ 7,874,367,563 8,977,614,196 1,763,325,035
Repurchase agreements, at value and cost .... 263,445,000 716,786,906 295,232,613 -- 36,731,617
Cash ........................................ -- -- -- 11,999 --
Receivables:
Investment securities sold ................. 628,143 133,748 8,339,478 -- 65,773,671
Capital shares sold ........................ 2,789,513 5,694,475 14,185,921 15,805,174 1,257,165
Dividends and interest ..................... 70,607 1,600,316 144,504,641 53,412,487 11,090,792
------------------------------------------------------------------------------------
Total assets ............................ 457,244,033 2,470,730,668 8,336,630,216 9,046,843,856 1,878,178,280
------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............ 529,350 -- 8,000,000 47,825,516 --
Capital shares redeemed .................... 914,972 7,947,472 22,997,189 18,117,253 4,302,625
Affiliates ................................. 383,204 2,403,338 6,725,852 5,773,504 1,334,277
Shareholders ............................... 465,206 3,373,417 16,495,850 18,226,016 4,500,223
Payable upon return of securities loaned
(Note 7) ................................... -- -- 724,959 -- --
Other liabilities ........................... -- 25,925 556,928 323,857 83,755
------------------------------------------------------------------------------------
Total liabilities ....................... 2,292,732 13,750,152 55,500,778 90,266,146 10,220,880
------------------------------------------------------------------------------------
Net assets, at value ................... $ 454,951,301 $ 2,456,980,516 $ 8,281,129,438 $ 8,956,577,710 $1,867,957,400
====================================================================================
Net assets consist of:
Undistributed net investment income ......... $ 1,519,370 $ 6,071,593 $ 6,832,342 $ 7,749,283 $ 6,039,592
Net unrealized appreciation (depreciation) .. 145,378,779 1,020,020,827 (61,935,114) 147,073,444 131,839,736
Accumulated net realized gain (loss) ........ (806,005) (11,991) 78,160,926 (350,510,604) 66,813,694
Capital shares .............................. 308,859,157 1,430,900,087 8,258,071,284 9,152,265,587 1,663,264,378
------------------------------------------------------------------------------------
Net assets, at value ................... $ 454,951,301 $ 2,456,980,516 $ 8,281,129,438 $ 8,956,577,710 $1,867,957,400
------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
56
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A:
Net assets, at value ............................ $402,182,283 $2,055,091,429 $7,208,990,619 $8,601,346,629 $1,812,981,105
================================================================================
Shares outstanding .............................. 18,444,258 63,202,726 3,204,245,625 1,257,625,277 187,023,907
================================================================================
Net asset value per share* ...................... $ 21.81 $ 32.52 $ 2.25 $ 6.84 $ 9.69
================================================================================
Maximum offering price per share
(net asset value per share / 94.25%, 94.25%,
95.75%, 95.75%, and 95.75%, respectively) ..... $ 23.14 $ 34.50 $ 2.35 $ 7.14 $ 10.12
================================================================================
CLASS B:
Net assets, at value ............................ -- $ 5,063,982 $ 28,806,705 $ 18,020,403 $ 1,367,321
================================================================================
Shares outstanding .............................. -- 155,974 12,803,590 2,636,323 140,917
================================================================================
Net asset value and maximum offering price per
share* ......................................... -- $ 32.47 $ 2.25 $ 6.84 $ 9.70
================================================================================
CLASS C:
Net assets, at value ............................ $ 52,769,018 $ 329,785,979 $1,025,868,267 $ 312,715,591 $ 39,754,256
================================================================================
Shares outstanding .............................. 2,461,066 10,298,255 454,467,469 45,865,688 4,104,416
================================================================================
Net asset value per share* ...................... $ 21.44 $ 32.02 $ 2.26 $ 6.82 $ 9.69
================================================================================
Maximum offering price per share
(net asset value per share / 99.00%) ............ $ 21.66 $ 32.34 $ 2.28 $ 6.89 $ 9.79
================================================================================
ADVISOR CLASS:
Net assets, at value ............................ -- $ 67,039,126 $ 17,463,847 $ 24,495,087 $ 13,854,718
================================================================================
Shares outstanding .............................. -- 2,060,372 7,766,668 3,579,335 1,425,692
================================================================================
Net asset value and maximum offering price per
share .......................................... -- $ 32.54 $ 2.25 $ 6.84 $ 9.72
================================================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
57
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends ......................................... $ 238,172 $ 8,043,147 $ 96,752,462 $ -- $ 45,710,347
Interest .......................................... 3,809,251 13,800,077 256,397,292 322,732,768 11,161,323
-----------------------------------------------------------------------------
Total investment income ....................... 4,047,423 21,843,224 353,149,754 322,732,768 56,871,670
Expenses:
Management fees (Note 3) .......................... 890,338 5,177,794 19,584,451 20,635,694 4,765,126
Distribution fees (Note 3)
Class A .......................................... 355,154 2,098,934 5,655,846 4,515,959 1,348,858
Class B .......................................... -- 4,917 21,701 13,589 1,142
Class C .......................................... 129,541 1,280,227 3,393,845 960,609 148,669
Transfer agent fees (Note 3) ...................... 200,820 1,512,923 4,009,130 3,746,597 1,388,647
Custodian fees .................................... 1,406 5,568 292,888 47,713 14,465
Reports to shareholders ........................... 75,950 296,590 941,753 978,485 318,526
Registration and filing fees ...................... 19,108 62,537 131,096 78,897 31,711
Professional fees (Note 3) ........................ 2,222 16,156 108,087 114,272 18,696
Directors' fees and expenses ...................... 817 6,014 28,835 30,705 6,996
Other ............................................. 2,149 19,576 92,623 104,798 25,844
-----------------------------------------------------------------------------
Total expenses ................................ 1,677,505 10,481,236 34,260,255 31,227,318 8,068,680
-----------------------------------------------------------------------------
Net investment income ........................ 2,369,918 11,361,988 318,889,499 291,505,450 48,802,990
-----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................... (150,017) 11,822,261 58,903,377 (14,242,659) 66,817,073
Foreign currency transactions .................... -- -- (321,872) -- --
-----------------------------------------------------------------------------
Net realized gain (loss) ..................... (150,017) 11,822,261 58,581,505 (14,242,659) 66,817,073
Net unrealized appreciation (depreciation) on:
Investments ...................................... 58,480,860 289,083,820 (324,633,314) (185,989,099) (326,004,321)
Translation of assets and liabilities denominated
in foreign currencies ........................... -- -- (161,673) -- --
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ..... 58,480,860 289,083,820 (324,794,987) (185,989,099) (326,004,321)
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) ............ 58,330,843 300,906,081 (266,213,482) (200,231,758) (259,187,248)
-----------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ................................... $ 60,700,761 $312,268,069 $ 52,676,017 $ 91,273,692 $(210,384,258)
=============================================================================
</TABLE>
See notes to financial statements.
58
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
AND THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DynaTech Fund Growth Fund
--------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
March 31, 1999 September 30, 1998 March 31, 1999 September 30, 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 2,369,918 $ 3,166,004 $ 11,361,988 $ 30,643,649
Net realized gain (loss) from investments and foreign
currency transactions ............................... (150,017) 2,646,405 11,822,261 2,337,429
Net unrealized appreciation on investments
and translation of assets and liabilities
denominated in foreign currencies ................... 58,480,860 55,304 289,083,820 98,696,494
--------------------------------------------------------------------------
Net increase in net assets resulting from
operations ....................................... 60,700,761 5,867,713 312,268,069 131,677,572
Distributions to shareholders from:
Net investment income:
Class A ............................................. (3,135,838) (1,752,624) (25,641,910) (25,162,491)
Class C ............................................. (124,904) (30,919) (2,012,481) (1,440,530)
Advisor Class ....................................... -- -- (1,007,150) (559,926)
Net realized gains:
Class A ............................................. -- (9,999,974) (12,164,706) (12,689,864)
Class C ............................................. -- (253,737) (1,558,870) (1,116,441)
Advisor Class ....................................... -- -- (412,809) (251,592)
--------------------------------------------------------------------------
Total distributions to shareholders ................... (3,260,742) (12,037,254) (42,797,926) (41,220,844)
Capital share transactions: (Note 2)
Class A ............................................. 132,862,760 33,897,043 187,211,027 118,026,556
Class B ............................................. -- -- 4,989,965 --
Class C ............................................. 36,425,701 9,007,974 109,724,371 65,767,634
Advisor Class ....................................... -- -- 18,361,497 14,371,083
--------------------------------------------------------------------------
Total capital share transactions ...................... 169,288,461 42,905,017 320,286,860 198,165,273
Net increase in net assets ........................ 226,728,480 36,735,476 589,757,003 288,622,001
Net assets:
Beginning of period ................................... 228,222,821 191,487,345 1,867,223,513 1,578,601,512
--------------------------------------------------------------------------
End of period ......................................... $ 454,951,301 $ 228,222,821 $2,456,980,516 $1,867,223,513
==========================================================================
Undistributed net investment income included in net
assets:
End of period ......................................... $ 1,519,370 $ 2,410,194 $ 6,071,593 $ 23,371,146
==========================================================================
</TABLE>
See notes to financial statements.
59
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
AND THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1999 SEPTEMBER 30, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................ $ 318,889,499 $ 601,278,083 $ 291,505,450 $ 620,560,396
Net realized gain (loss) from investments and
foreign currency transactions ....................... 58,581,505 61,914,434 (14,242,659) (19,483,269)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ....... (324,794,987) (499,281,870) (185,989,099) 153,127,093
--------------------------------------------------------------------------
Net increase in net assets resulting from
operations ....................................... 52,676,017 163,910,647 91,273,692 754,204,220
Distributions to shareholders from:
Net investment income:
Class A ............................................. (295,858,985) (580,116,095) (284,242,488) (605,836,717)
Class B ............................................. (175,921) -- (85,034) --
Class C ............................................. (37,721,861) (59,901,819) (8,629,733) (10,286,891)
Advisor Class ....................................... (781,300) (1,149,906) (843,981) (1,427,760)
Net realized gains:
Class A ............................................. (39,570,441) (87,786,345) -- --
Class C ............................................. (5,374,627) (8,459,296) -- --
Advisor Class ....................................... (111,728) (152,675) -- --
--------------------------------------------------------------------------
Total distributions to shareholders ................... (379,594,863) (737,566,136) (293,801,236) (617,551,368)
Capital share transactions: (Note 2)
Class A ............................................. (210,283,913) 476,200,885 (253,048,537) (433,557,135)
Class B ............................................. 29,223,349 -- 18,064,184 --
Class C ............................................. 51,399,882 381,864,680 47,392,007 147,302,002
Advisor Class ......................................... (3,758,680) 9,638,333 (11,104,593) 21,365,919
--------------------------------------------------------------------------
Total capital share transactions ...................... (133,419,362) 867,703,898 (198,696,939) (264,889,214)
Net increase (decrease) in net assets ............. (460,338,208) 294,048,409 (401,224,483) (128,236,362)
Net assets:
Beginning of period ................................... 8,741,467,646 8,447,419,237 9,357,802,193 9,486,038,555
--------------------------------------------------------------------------
End of period ......................................... $8,281,129,438 $8,741,467,646 $8,956,577,710 $9,357,802,193
==========================================================================
Undistributed net investment income included in net
assets:
End of period ......................................... $ 6,832,342 $ 42,789,225 $ 7,749,283 $ 10,045,069
==========================================================================
</TABLE>
See notes to financial statements.
60
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
AND THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
UTILITIES FUND
------------------------------------
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1999 SEPTEMBER 30, 1998
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................... $ 48,802,990 $ 97,710,050
Net realized gain from investments and foreign currency transactions ....... 66,817,073 64,441,884
Net unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies .................. (326,004,321) 243,719,485
------------------------------------
Net increase (decrease) in net assets resulting from operations .............. (210,384,258) 405,871,419
Distributions to shareholders from:
Net investment income:
Class A ................................................................... (49,105,956) (97,138,958)
Class B ................................................................... (10,282) --
Class C ................................................................... (959,241) (1,326,251)
Advisor Class ............................................................. (349,384) (572,152)
Net realized gains:
Class A ................................................................... (61,725,940) (49,822,909)
Class C ................................................................... (1,415,891) (578,595)
Advisor Class ............................................................. (393,447) (244,503)
------------------------------------
Total distributions to shareholders ......................................... (113,960,141) (149,683,368)
Capital share transactions: (Note 2)
Class A ................................................................... 73,255,718 (150,106,983)
Class B ................................................................... 1,464,883 --
Class C ................................................................... 6,346,254 15,244,227
Advisor Class ............................................................. 2,409,937 3,601,051
------------------------------------
Total capital share transactions ............................................ 83,476,792 (131,261,705)
Net increase (decrease) in net assets ................................... (240,867,607) 124,926,346
Net assets:
Beginning of period ......................................................... 2,108,825,007 1,983,898,661
------------------------------------
End of period ............................................................... $ 1,867,957,400 $ 2,108,825,007
====================================
Undistributed net investment income included in net assets:
End of period ............................................................... $ 6,039,592 $ 7,661,465
====================================
</TABLE>
See notes to financial statements.
61
<PAGE>
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 objectives are:
CAPITAL GROWTH GROWTH AND INCOME CURRENT INCOME
- -------------------------------------------------------------------------------
DynaTech Fund Income Fund U.S. Government Securities Fund
Growth Fund Utilities 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 gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on the 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 AGREEMENTS
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Funds based on their pro-rata
interest. Certain Funds may enter into repurchase agreements which are accounted
for as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At March 31, 1999, all
outstanding repurchase agreements held by the Funds 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.
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.
62
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
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.
2. CAPITAL STOCK
The Funds, except the DynaTech Fund, offer four classes of shares: Class A,
Class B, Class C, and Advisor Class. The DynaTech Fund offers two classes of
shares: Class A and Class C. Effective January 1, 1999, Class I and Class II
were renamed Class A and Class C, respectively, and the Funds began offering a
new class of shares, Class B. Each class of shares differs by its initial sales
load, distribution fees, voting rights on matters affecting a single class and
its exchange privilege.
At March 31, 1999, there were 23 billion shares authorized ($0.01 par value),
allocated to the Funds as follows (in millions):
<TABLE>
<CAPTION>
U.S. Government
DynaTech Fund Growth Fund Income Fund Securities Fund Utilities Fund
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A .............. 250 250 4,600 2,500 400
Class B .............. 500 750 1,000 1,000 750
Class C .............. 250 250 3,600 2,500 400
Advisor Class ........ -- 1,000 1,000 1,000 1,000
</TABLE>
Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
DYNATECH FUND GROWTH FUND
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended March 31, 1999
Shares sold .................................... 10,444,826 $ 216,560,956 15,216,524 $ 473,438,104
Shares issued in reinvestment of distributions.. 127,526 2,500,791 1,118,742 34,680,808
Shares redeemed ................................ (4,230,811) (86,198,987) (10,371,257) (320,907,885)
--------------------------------------------------------------------
Net increase ................................... 6,341,541 $ 132,862,760 5,964,009 $ 187,211,027
====================================================================
Year ended September 30, 1998
Shares sold .................................... 6,750,544 $ 118,551,094 16,876,245 $ 478,773,933
Shares issued in reinvestment of distributions.. 600,645 10,126,853 1,274,095 34,617,093
Shares redeemed ................................ (5,425,966) (94,780,904) (13,907,716) (395,364,470)
--------------------------------------------------------------------
Net increase ................................... 1,925,223 $ 33,897,043 4,242,624 $ 118,026,556
====================================================================
CLASS B SHARES:
Period ended March 31, 1999(1)
Shares sold .................................... -- -- 156,973 $ 5,022,361
Shares issued in reinvestment of distributions.. -- -- -- --
Shares redeemed ................................ -- -- (999) (32,396)
--------------------------------------------------------------------
Net increase ................................... -- -- 155,974 $ 4,989,965
====================================================================
</TABLE>
(1) For the period January 1, 1999 (effective date) to March 31, 1999.
63
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (cont.)
<TABLE>
<CAPTION>
DYNATECH FUND GROWTH FUND
-------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Six months ended March 31, 1999
Shares sold ..................................... 1,986,711 $ 41,131,933 4,659,963 $ 143,834,310
Shares issued in reinvestment of distributions .. 6,124 118,381 108,413 3,318,538
Shares redeemed ................................. (236,891) (4,824,613) (1,214,337) (37,428,477)
-------------------------------------------------------------------------------
Net increase .................................... 1,755,944 $ 36,425,701 3,554,039 $ 109,724,371
===============================================================================
Year ended September 30, 1998
Shares sold ..................................... 664,798 $ 11,517,361 3,446,754 $ 96,492,539
Shares issued in reinvestment of distributions .. 16,410 274,674 88,123 2,369,656
Shares redeemed ................................. (161,064) (2,784,061) (1,181,670) (33,094,561)
-------------------------------------------------------------------------------
Net increase .................................... 520,144 $ 9,007,974 2,353,207 $ 65,767,634
===============================================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 1999
Shares sold ..................................... -- -- 760,535 $ 23,484,992
Shares issued in reinvestment of distributions .. -- -- 45,473 1,409,672
Shares redeemed ................................. -- -- (208,246) (6,533,167)
-------------------------------------------------------------------------------
Net increase .................................... -- -- 597,762 $ 18,361,497
===============================================================================
Year ended September 30, 1998
Shares sold ..................................... -- -- 742,913 $ 21,088,014
Shares issued in reinvestment of distributions .. -- -- 29,525 801,892
Shares redeemed ................................. -- -- (261,759) (7,518,823)
-------------------------------------------------------------------------------
Net increase .................................... -- -- 510,679 $ 14,371,083
===============================================================================
<CAPTION>
U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
-------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Six months ended March 31, 1999
Shares sold ..................................... 199,542,466 $ 462,309,795 134,037,900 $ 922,018,527
Shares issued in reinvestment of distributions .. 87,333,450 202,310,539 21,067,898 144,871,480
Shares redeemed ................................. (379,349,517) (874,904,247) (191,936,936) (1,319,938,544)
-------------------------------------------------------------------------------
Net decrease .................................... (92,473,601) $ (210,283,913) (36,831,138) $ (253,048,537)
===============================================================================
Year ended September 30, 1998
Shares sold ..................................... 630,074,991 $ 1,551,286,174 166,821,011 $ 1,151,492,514
Shares issued in connection with tax-free merger* 83,468,440 205,332,362 -- --
Shares issued in reinvestment of distributions .. 164,917,373 405,797,953 42,846,891 294,856,000
Shares redeemed ................................. (688,362,366) (1,686,215,604) (272,493,464) (1,879,905,649)
-------------------------------------------------------------------------------
Net increase (decrease) ......................... 190,098,438 $ 476,200,885 (62,825,562) $ (433,557,135)
===============================================================================
CLASS B SHARES:
Period ended March 31, 1999(1)
Shares sold ..................................... 12,846,709 $ 29,322,186 2,668,349 $ 18,283,754
Shares issued in reinvestment of distributions .. 42,693 95,570 8,026 54,647
Shares redeemed ................................. (85,812) (194,407) (40,052) (274,217)
-------------------------------------------------------------------------------
Net increase .................................... 12,803,590 $ 29,223,349 2,636,323 $ 18,064,184
===============================================================================
</TABLE>
(1) For the period January 1, 1999 (effective date) to March 31, 1999.
* During the year ended September 30, 1998, the Income Fund acquired the net
assets of the Franklin Principal Maturity Trust pursuant to a plan of
reorganization approved by the Fund's shareholders.
64
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (cont.)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Six months ended March 31, 1999
Shares sold ..................................... 67,372,261 $ 156,914,488 15,962,521 $ 109,612,475
Shares issued in reinvestment of distributions .. 12,116,631 28,175,019 870,715 5,968,316
Shares redeemed ................................. (57,819,469) (133,689,625) (9,944,418) (68,188,784)
----------------------------------------------------------------------
Net increase .................................... 21,669,423 $ 51,399,882 6,888,818 $ 47,392,007
======================================================================
Year ended September 30, 1998
Shares sold ..................................... 195,225,220 $ 482,543,161 28,331,456 $ 195,095,336
Shares issued in reinvestment of distributions .. 18,087,826 44,486,191 1,020,467 7,008,019
Shares redeemed ................................. (59,466,410) (145,164,672) (7,961,919) (54,801,353)
----------------------------------------------------------------------
Net increase .................................... 153,846,636 $ 381,864,680 21,390,004 $ 147,302,002
======================================================================
ADVISOR CLASS SHARES:
Six months ended March 31, 1999
Shares sold ..................................... 843,392 $ 1,952,810 1,742,093 $ 11,995,728
Shares issued in reinvestment of distributions .. 353,135 817,902 107,105 737,654
Shares redeemed ................................. (2,784,388) (6,529,392) (3,457,649) (23,837,975)
----------------------------------------------------------------------
Net decrease .................................... (1,587,861) $ (3,758,680) (1,608,451) $ (11,104,593)
======================================================================
Year ended September 30, 1998
Shares sold ..................................... 4,656,243 $ 11,256,541 6,196,861 $ 42,832,286
Shares issued in reinvestment of distributions .. 488,818 1,197,290 176,791 1,217,749
Shares redeemed ................................. (1,156,742) (2,815,498) (3,283,856) (22,684,116)
----------------------------------------------------------------------
Net increase .................................... 3,988,319 $ 9,638,333 3,089,796 $ 21,365,919
======================================================================
</TABLE>
<TABLE>
<CAPTION>
UTILITIES FUND
-----------------------------
SHARES AMOUNT
-----------------------------
<S> <C> <C>
CLASS A SHARES:
Six months ended March 31, 1999
Shares sold ............................................................................. 21,688,655 $ 240,374,765
Shares issued in reinvestment of distributions........................................... 7,812,205 83,287,273
Shares redeemed ......................................................................... (23,279,322) (250,406,320)
-----------------------------
Net increase ............................................................................ 6,221,538 $ 73,255,718
=============================
Year ended September 30, 1998
Shares sold ............................................................................. 20,202,105 $ 216,397,168
Shares issued in reinvestment of distributions........................................... 10,580,531 112,600,891
Shares redeemed ......................................................................... (44,515,255) (479,105,042)
-----------------------------
Net decrease ............................................................................ (13,732,619) $(150,106,983)
=============================
CLASS B SHARES:
Period ended March 31, 1999(1)
Shares sold ............................................................................. 140,122 $ 1,457,067
Shares issued in reinvestment of distributions........................................... 812 7,982
Shares redeemed ......................................................................... (17) (166)
-----------------------------
Net increase ............................................................................ 140,917 $ 1,464,883
=============================
</TABLE>
(1) For the period January 1, 1999 (effective date) to March 31, 1999.
65
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. CAPITAL STOCK (cont.)
<TABLE>
<CAPTION>
UTILITIES FUND
------------------------------
SHARES AMOUNT
------------------------------
<S> <C> <C>
CLASS C SHARES:
Six months ended March 31, 1999
Shares sold .................................. 1,595,033 $ 17,591,808
Shares issued in reinvestment of distributions 178,623 1,906,108
Shares redeemed .............................. (1,250,105) (13,151,662)
------------------------------
Net increase ................................. 523,551 $ 6,346,254
==============================
Year ended September 30, 1998
Shares sold .................................. 2,055,247 $ 22,366,990
Shares issued in reinvestment of distributions 139,963 1,492,613
Shares redeemed .............................. (799,899) (8,615,376)
------------------------------
Net increase ................................. 1,395,311 $ 15,244,227
==============================
ADVISOR CLASS SHARES:
Six months ended March 31, 1999
Shares sold .................................. 600,312 $ 6,498,609
Shares issued in reinvestment of distributions 61,085 649,057
Shares redeemed .............................. (434,121) (4,737,729)
------------------------------
Net increase ................................. 227,276 $ 2,409,937
==============================
Year ended September 30, 1998
Shares sold .................................. 1,530,293 $ 16,618,957
Shares issued in reinvestment of distributions 61,776 659,656
Shares redeemed .............................. (1,262,420) (13,677,562)
------------------------------
Net increase ................................. 329,649 $ 3,601,051
==============================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Funds are also officers or directors of
Franklin Advisers, Inc. (Advisers), Franklin Investment Advisory Services, LLC
(Investment Advisory), Franklin/Templeton Distributors, Inc. (Distributors),
Franklin Templeton Services, Inc. (FT Services) and Franklin/Templeton Investor
Services, Inc. (Investor Services), investment manager of all Funds except the
Growth Fund, the Growth Fund's investment manager, principal underwriter,
administrative manager, and transfer agent, respectively.
The Funds, except the Growth Fund, pay an investment management fee to Advisers,
and the Growth Fund pays an investment management fee to Investment Advisory
based on the 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 and Investment Advisory, FT Services provides
administrative services to the Funds. The fee is paid by Advisers and Investment
Advisory based on average daily net assets, and is not an additional expense of
the Funds.
The Income, Utilities and U.S. Government Securities Funds reimburse
Distributors up to .15%, .65%, and .65% per year of their average daily net
assets of Class A, Class B, and Class C, respectively and the Growth and
DynaTech Funds reimburse Distributors up to .25%, 1.00%, and 1.00% per year of
the average daily net assets of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Funds' shares.
66
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions paid ............ $ 108,182 $ 749,463 $ 1,779,893 $ 2,536,405 $ 141,403
Contingent deferred sales charges $ 14,915 $ 94,377 $ 337,530 $ 130,027 $ 23,223
</TABLE>
Included in professional fees are legal fees of $37,936 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
At September 30, 1998, the U.S. Government Securities Fund had tax basis capital
losses of $318,019,444 which may be carried over to offset future capital gains.
Such losses expire as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
SECURITIES FUND
---------------
<S> <C>
Capital loss carryovers expiring in: 1999 ................... $ 67,082,683
2002 ................... 111,364,839
2003 ................... 3,698,366
2004 ................... 57,539,178
2005 ................... 50,054,906
2006 ................... 28,279,472
---------------
$318,019,444
===============
</TABLE>
At September 30, 1998 the DynaTech Fund and the U.S. Government Securities Fund
have deferred capital losses occurring subsequent to October 31, 1997 of
$655,988 and $18,248,501, respectively. For tax purposes, such losses will be
reflected in the year ending September 30, 1999.
On September 30, 1998, the U.S. Government Securities Fund had expired capital
loss carryovers of $74,910,973, which were reclassified to paid-in-capital.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of 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, 1999, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ...................... $ 308,376,991 $ 1,443,281,302 $ 8,231,481,538 $8,830,540,75 $ 1,668,219,316
========================================================================================
Unrealized appreciation .................. 145,874,251 1,030,339,988 778,849,446 175,433,024 198,063,857
Unrealized depreciation .................. (495,472) (10,319,161) (840,730,808) (28,359,580) (66,226,521)
----------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 145,378,779 $ 1,020,020,827 $ (61,881,362) $ 147,073,444 $ 131,837,336
========================================================================================
</TABLE>
67
<PAGE>
FRANKLIN CUSTODIAN FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended March 31, 1999 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
DYNATECH FUND GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases ..... $14,657,252 $168,939,409 $471,601,868 $1,135,329,568 $578,696,105
Sales ......... $ 5,432,871 $ 24,796,097 $632,193,995 $1,116,440,744 $571,122,671
</TABLE>
6. CREDIT RISK AND DEFAULTED SECURITIES
The Income Fund has 38.1% 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, 1999, the
Income Fund held defaulted securities with a value aggregating $1,147,500,
representing .01% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides 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.
7. 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 $28,985 for the period ended
March 31, 1999. The value of the loaned securities was $781,425 at March 31,
1999. The Fund has received sufficient cash collateral to meet these
commitments.
68
