LETTER TO SHAREHOLDERS
Table of Contents Page
Letter to Shareholders 1
Fund Reports
Franklin Global Government
Income Fund. 3
Franklin Short-Intermediate
U.S. Government Securities Fund 11
Franklin Convertible
Securities Fund 17
Franklin Adjustable U.S.
Government Securities Fund. 27
Franklin Equity Income Fund 32
Franklin Adjustable Rate
Securities Fund 42
Glossary 47
Statement of Investments 48
Financial Statements 66
Notes to Financial Statements 72
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December 15, 1996
Dear Shareholder:
It is a pleasure to bring you the Franklin Investors Securities Trust annual
report for the period ended October 31, 1996.
Domestic Market Activity
As you may know, the Federal Reserve Board (the Fed) lowered interest rates
twice in the last half of 1995 to help stimulate the U.S. economy. With the
Gross Domestic Product, a measure of the nation's economic output, posting a
sluggish .3% annual growth rate for the last quarter of 1995, the Fed lowered
rates once again in late January 1996.
Signs of economic improvement began to show in early 1996. The government
reported that job creation in February was the strongest in eight years. Hopes
for further interest-rate reductions died, and long-term rates began to rise on
fears of higher inflation. Even though inflation seemed to be under control
(annualized 2.80% year-to-date September 30, 1996), the yield on the 30-year
Treasury rose to 6.66% by October 31, 1996, up significantly from 5.96% on
January 1, 1996.1
In general, domestic equity markets performed well within this environment. The
Dow Jones Industrial Average(R) ended at 6029.38 on October 31, 1996, up more
than 1,250 points from the beginning of the Trust's fiscal year (4766.68 on
November 1, 1995). This was not without some mid-year back-sliding, however,
with the Dow dipping as low as 5346.55 on July 23.2 On the other hand, prices of
fixed-income securities, which move counter to interest-rate movements,
generally declined during this period.
Foreign Market Activity
Certain foreign economies didn't perform as well as the United States'
performed. In Japan, for example, a rise in consumer and business confidence did
little to help its floundering economy. A recent Tankan report, a report that
covers Japan's economy, suggested that the direction of the economy had yet to
turn and dashed expectations that the Bank of Japan would tighten the money
supply anytime soon. Short-term rates remained at the historically low level of
0.50%, where they have been for more than a year.
The German economy continued to advance at a very slow pace. In early September,
optimistic signs of recovery cooled against a backdrop of planned fiscal
tightening in the 1997 budget. In light of Germany's economic environment and
the effects of implementing the European Monetary Union plan, the deutschemark
seems likely to further weaken against the U.S. dollar and other major
currencies.
The following pages contain specific information concerning your investment and
the other funds contained in the Franklin Investors Securities Trust. While each
fund has distinct investment objectives, fundamental operating principles remain
the same: careful investment selection and professional management.
As always, we appreciate your continued support and look forward to serving your
investment needs in the years ahead.
Sincerely,
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
1. Source: Micropal.
2. Source: Bloomberg.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
Your Fund's Objective:
Seeks a high level of current income consistent with preservation of capital,
with capital appreciation as a secondary consideration, through a portfolio of
domestic and foreign debt securities.*
We are pleased to report the Franklin Global Government Income Fund Class I
generated a cumulative total return of +11.80% for the 12-month period, as
discussed in the Performance Summary on page 5.
During the 12-month period, we employed three primary investment strategies:
First, we reduced the fund's sensitivity to interest rates in the United States
(which we anticipated heading higher) by replacing domestic bonds having longer
maturities with bonds having intermediate maturities. This ultimately limited
losses in bond values when yields moved higher and prices fell.
Second, we maintained the fund's high exposure to dollar-bloc countries
(Australia, Canada, New Zealand and the United States). The fund's heavy
emphasis on dollar-denominated securities was profitable for the fund,
especially since the U.S. dollar rose during the period.
Last, we reallocated our European assets, shifting investments from core
markets, including Germany and France, to peripheral markets such as Italy,
Spain, Sweden and the United Kingdom. This was in accordance with our belief
that improved domestic policies undertaken in the peripheral markets would
generate the strongest returns. This strategy proved successful, ultimately
benefiting our shareholders.
The fund's investment strategies are reflected in the major allocation changes
over the fiscal year, presented in the table on the next page. At the beginning
of the period, exposure to the German and French bond markets, totaling 12.7%
and 4.7%, respectively, were reduced by October 31, 1996, to 2.2% and 0.0%,
respectively. Allocations in Italy, Spain and Sweden, totaling 3.1%, 4.9% and
0.0% at the beginning of the period, were increased to 12.4%, 7.4%, and 3.0%,
respectively. Investment in the United Kingdom was also increased from 0.0% to
7.5% over the period. In addition, Australian holdings were reduced from 11.3%
to 9.5%, and a 2.0% holding in New Zealand was increased to 3.1% by the end of
October.
*The risks of investing in a global fund, such as currency fluctuation and
increased vulnerability to adverse economic, political or regulatory
developments, are described in the fund's prospectus.
Looking Forward
We feel that U.S. inflation will not pose a major threat to interest rates
during the next year, while the continuing deflationary trends in Europe and
Japan should help lower the overall level of interest rates globally.
We do, however, anticipate continued volatility in the bond and currency markets
around the world. We believe a diversified, global bond portfolio can be an
attractive vehicle to help soften this volatility, and we search for attractive
total-return opportunities wherever they may appear. In particular, we see
opportunities for improved returns in slow-growth European economies and
selective emerging-market countries.
This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.
Franklin Global Government Income Fund
Country Distribution
As a Percentage of Total Net Assets
Country 10/31/95 10/31/96
Argentina 6.1% 4.9%
Australia 11.3% 9.5%
Brazil 0.0% 3.1%
Canada 14.9% 11.9%
Denmark 6.3% 4.3%
France 4.7% 0.0%
Germany 12.7% 2.2%
India .5% 0.0%
Irish Republic 0.0% 1.2%
Italy 3.1% 2.4%
Mexico 3.2% 4.5%
New Zealand 2.0% 3.1%
South Africa 1.5% 0.4%
Spain 4.9% 7.4%
Sweden 0.0% 3.0%
Thailand 0.8% 0.0%
United Kingdom 0.0% 7.5%
United States 28.0% 24.7%
For a complete list of portfolio holdings, please see page 48 of this report.
Performance Summary
Class I
The Franklin Global Government Income Fund's Class I share price, as measured by
net asset value, increased 34.0 cents during the reporting period, from $8.31 on
October 31, 1995, to $8.65 on October 31, 1996.
During the reporting period, the fund paid distributions totaling 60.0 cents
($0.60) per share. Based on an annualization of October's monthly dividend of
5.0 cents ($0.05) per share and the maximum offering price of $9.03 on October
31, 1996, your fund's distribution rate was 6.64%. Distributions will vary based
on the earnings of the fund's portfolio, and past distributions are not
predictive of future trends.
The fund posted a cumulative total return of +11.80% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment over the period indicated, assuming reinvestment of all
distributions, and does not include the sales charge. Past performance is not
predictive of future results.
The graph on the next page compares the performance of the fund's shares since
inception, with that of the Salomon Brothers World Government
Franklin Global Government Income Fund
Class I
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
Total 60.0 cents
Hedged Index and the JP Morgan Global Government Bond Index (unhedged). We are
replacing the Salomon Brothers World Government Hedged Index with the JP Morgan
Global Government Bond Index, as we feel the latter better represents the way in
which we have managed the fund more recently. In the past, the fund's portfolio
was hedged much more than it has been during the last few years. The Salomon
Brothers World Government Hedged Index will be omitted beginning with the 1997
annual report.
As you can see from the graph, the fund's performance has slightly
underperformed the indexes. However, a general market index has some inherent
performance differentials over any mutual fund. Indexes do not pay management
fees to cover salaries of security analysts or portfolio managers or pay
commissions or market spreads to buy and sell bonds. Unlike unmanaged indexes,
mutual funds can never be 100% invested, because they need to keep some cash on
hand to redeem shares. The fund's performance figures also include the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as the fund's had been applied to the indexes, their performance would have
been lower. Please remember, an index is simply a measure of performance, and
one cannot invest directly in an index.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Government Income Fund -- Class I
Periods Ended October 31, 1996
Since
Inception
1-Year 5-Year (3/15/88)
CumulativeTotal Return1 11.80% 42.69% 94.76%
Average Annual Total Return2 7.05% 6.43% 7.49%
Distribution Rate3 6.64%
30-Day Standardized Yield4 6.05%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. See Note below.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 5.0 cent per
share monthly dividend and the maximum offering price of $9.03 on October 31,
1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge. Thus, actual total returns for purchasers of shares during that
period would have been somewhat different than noted above. Effective May 1,
1994, the fund eliminated the sales charge on reinvested dividends and
implemented a plan of distribution under Rule 12b-1, which affects subsequent
performance.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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. Past
expense reductions by the fund's manager increased the fund's total returns.
Performance Summary
Class II
The Franklin Global Government Income Fund's Class II share price, as measured
by net asset value, increased 34.0 cents during the reporting period, from $8.31
on October 31, 1995, to $8.65 on October 31, 1996.
During the reporting period, the fund paid income distributions totaling 55.41
cents ($0.5541) per share. Based on an annualization of October's regular
monthly dividend of 4.68 cents ($0.0468) per share, plus an annual dividend
adjustment of +.02 cent, and the maximum offering price of $8.74 on October 31,
1996, your fund's distribution rate was 6.43%. Distributions will vary based on
the earnings of the fund's portfolio, and past distributions are not predictive
of future trends.
The fund posted a cumulative total return of +11.19% for the 12-month period
ended October 31, 1996. Total return measures the
Franklin Global Government Income Fund
Class II
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 4.70 cents
December 4.70 cents
January 4.60 cents
February 4.57 cents
March 4.57 cents
April 4.57 cents
May 4.57 cents
June 4.57 cents
July 4.62 cents
August 4.62 cents
September 4.62 cents
October 4.70 cents++
Total 55.41 cents
++The October distribution consists of a regular dividend of 4.68 cents and an
annual adjustment of +.02 cent to reconcile the 12b-1 differential between Class
I and Class II shares.
change in value of an investment, assuming reinvestment of dividends, and does
not include sales charges. Past performance is not predictive of future results.
The graph on the next page compares the performance of the fund's shares since
inception, with that of the Salomon Brothers World Government Hedged Index and
the JP Morgan Global Government Bond Index (unhedged). We are replacing the
Salomon Brothers World Government Hedged Index with the JP Morgan Global
Government Bond Index, as we feel the latter better represents the way in which
we have managed the fund more recently. In the past, the fund's portfolio was
hedged much more than it has been during the last few years. The Salomon
Brothers World Government Hedged Index will be omitted beginning with the 1997
annual report.
As you can see from the graph, the fund's performance has slightly
underperformed the indexes. However, a general market index has some inherent
performance differentials over any mutual fund. Indexes do not pay management
fees to cover salaries of security analysts or portfolio managers or pay
commissions or market spreads to buy and sell bonds. Unlike unmanaged indexes,
mutual funds can never be 100% invested, because they need to keep some cash on
hand to redeem shares. The fund's performance figures also include the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as the fund's had been applied to the indexes, their performance would have
been lower. Please remember, an index is simply a measure of performance, and
one cannot invest directly in an index.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Global Government
Income Fund -- Class II
Periods Ended October 31, 1996
Since
Inception
1-Year (5/1/95)
Cumulative
Total Return1 11.19% 18.97%
Average Annual
Total Return2 10.08% 10.89%
Distribution Rate3 6.43%
30-Day Standardized Yield4 5.78%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 1.0%
initial sales charge as well as the 1.0% contingent deferred sales charge,
applicable to shares redeemed within the first 18 months of investment.
3. Distribution rate is based on an annualization of the current 4.7 cent per
share monthly dividend, plus an annual dividend adjustment of +.02 cent, and the
maximum offering price of $8.74 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective:
Seeks to provide investors with a high level of current income, while seeking to
preserve shareholders' capital, by investing primarily in U.S. government
securities with maturities between two and five years.
The Franklin Short-Intermediate U.S. Government Securities Fund generated a
cumulative total return of +4.97% for the 12-month period ended October 31,
1996, as discussed in the Performance Summary on page 14.
Interest-rate fluctuations during the fund's fiscal year affected the government
debt securities in which the fund invests. For example, the Federal Reserve
Board lowered the federal funds rate in December 1995 and January 1996, which
lowered yields on one-year Treasuries from 5.36% in November 1995 to 4.90% in
January 1996. Five-year Treasury yields declined from 5.53% to 5.25% during the
same period.*
Then, the government issued a stronger-than-expected employment report in March.
Fear of inflation squelched investors' hopes of further rate reductions, and
yields on government debt instruments began to rise. We viewed this rate
increase as an opportunity to lock in higher yields for the fund and began
purchasing securities with longer maturities. At the end of April, rates on the
one-year T-bill and five-year T-note were 5.62% and 6.40%, respectively. Because
we took advantage of this rate increase to lock in higher yields for the fund,
our weighted average maturity also increased: On April 30, 1996, it was two
years, four months, up from two years on October 31, 1995.
As you can see from the graph on the next page, however, yields quickly peaked.
After rising significantly in March and moderately in April and May, rates began
to drift downward. Falling rates, combined with our increasing concern over
possible inflation, necessitated our move toward shorter maturities. By the end
of the reporting period, the portfolio's weighted average maturity
*Source: Micropal.
was reduced to two years, two months -- close to the two-year minimum allowed in
the fund's prospectus. Additionally, the fund concentrated assets in securities
having less than one year remaining to maturity; more than 35% of the
portfolio's total net assets had a maturity of less than six months on October
31, 1996.
Determining Strategy
In determining our strategy for the fund, especially in relation to its weighted
average maturity, we look closely at economic indicators, attempting to get a
feel for the direction of inflation. Some figures we track include the nation's
gross domestic product (GDP), inflation rate, unemployment rate, and
measurements of consumer confidence, such as new home sales.
Recent figures showed the third-quarter 1996 GDP growth rate was an annualized
2.2%, down significantly from 4.7% in the second quarter, but up significantly
from the .3% in the fourth quarter of 1995. In general, we like to see a growth
rate around 2.5%, which we believe is sustainable and non-inflationary. (If the
GDP growth rate is quite strong, such as the second quarter's 4.7%, the Fed
usually feels pressure to raise interest rates in an attempt to ward off
inflation.)
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The U.S. unemployment level as of September 30, 1996, stood at 5.2%, down from
5.6% in September 1995. Inflation, as measured by the U.S. Consumer Price Index
on a year-over-year basis, rose from 2.5% in September 1995 to 3.0% in September
1996. New home sales for September showed a slight decrease from August, but the
figure was the second-highest in 10 years.
Taken together, we believe these economic indicators suggest inflation may rise
soon. Of particular concern is the low unemployment figure, which may lead to
increased wage pressures and, consequently, higher prices for goods and
services. Likewise, stronger new home sales is good news in terms of economic
growth, but if fourth-quarter 1996 GDP is particularly strong, the Fed may very
well raise interest rates in early 1997.
Looking Forward
Based on our expectations of potentially higher inflation, we anticipate
maintaining the fund's weighted average maturity at around two years. We might
consider extending the portfolio's maturity, even in light of inflation, if
yields on longer-term issues rise sufficiently.
This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.
Performance Summary
The Franklin Short-Intermediate U.S. Government Securities Fund's share price,
as measured by net asset value, decreased 7.0 cents during the reporting period,
from $10.35 on October 31, 1995, to $10.28 on October 31, 1996.
During the reporting period, the fund paid income distributions totaling 57.0
cents ($0.570) per share. Based on an annualization of October's monthly
dividend of 4.8 cents ($0.048) per share and the maximum offering price of
$10.52 on October 31, 1996, your fund's distribution rate was 5.48%.
Distributions will vary based on the earnings of the fund's portfolio, and past
distributions are not predictive of future trends.
The fund posted a cumulative total return of +4.97% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment over the period indicated, assuming reinvestment of all
distributions, and does not include the sales charge.
The graph on the next page compares the performance of the fund's shares since
inception, with that of the Lehman Brothers Short U.S. Treasury 1-5 Year Index**
and the Consumer
Franklin Short-Intermediate
U.S. Government Securities Fund
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 4.7 cents
December 4.7 cents
January 4.7 cents
February 4.7 cents
March 4.7 cents
April 4.7 cents
May 4.8 cents
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
Total 57.0 cents
**The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to five
years.
Price Index (CPI). As you can see, the fund's performance has exceeded the
increase in the CPI, which means your investment returns have surpassed the rate
of inflation, a primary goal of any investment. Although the fund has slightly
underperformed its benchmark index, a general market index has some inherent
performance differentials over any mutual fund. Indexes do not pay management
fees to cover salaries of security analysts or portfolio managers or pay
commissions or market spreads to buy and sell bonds. Unlike unmanaged indexes,
mutual funds can never be 100% invested, because they need to keep some cash on
hand to redeem shares. The fund's performance figures also include the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as the fund's had been applied to the index, the index's performance would
have been lower. Please remember, an index is simply a measure of performance,
and one cannot invest directly in an index.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Short-Intermediate U.S. Government Securities Fund
Periods Ended October 31, 1996
Since
Inception
1-Year 5-Year (4/15/87)
Cumulative Total Return1 4.97% 33.38% 92.49%
Average Annual Total Return2 2.59% 5.45% 6.85%
Distribution Rate3 5.48%
30-Day Standardized Yield4 5.10%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. See Note below.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 2.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $10.52 on October 31,
1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
Note: Prior to July 1, 1994, the fund reinvested dividends at the offering
price. Thus, actual total returns for purchasers of shares during that period
would have been somewhat lower than noted above. Effective May 1, 1994, the fund
eliminated the sales charge on reinvested dividends and implemented a plan of
distribution under Rule 12b-1, which affects subsequent performance.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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. Past
expense reductions by the fund's manager increased the fund's total returns.
FRANKLIN CONVERTIBLE SECURITIES FUND
Your Fund's Objective:
Seeks to maximize total return consistent with reasonable risk through a
portfolio of convertible securities.
The Franklin Convertible Securities Fund Class I generated a cumulative total
return of +16.71% for the 12-month period ended October 31, 1996, as discussed
in the Performance Summary on page 21.
Investing Strategy
During the reporting period, we utilized the same strategy we have employed
since your fund's inception: identify convertible securities offering
above-average total-return potential with favorable risk/reward profiles. We
seek securities that allow us to capture a significant portion of the underlying
equity's price appreciation, while attempting to limit our exposure to potential
price declines. Historically, these convertibles have provided approximately 70%
or more of a stock's gains and only 40% decline in value relative to its
underlying common stock.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
To identify those securities that meet our objectives, we review the entire
convertible-security universe (approximately 550 issues) and select those that
meet our risk/reward criteria. These issues are reviewed by Franklin Templeton's
equity and/or fixed-income analysts, who further narrow the group to those with
superior business prospects and attractive valuation levels. We choose our
purchases for the fund from this select group of securities.
Portfolio Themes
Industry Consolidation
Industry consolidations resulted in the issuance of many securities that helped
the fund's performance during the fiscal year. Certain companies acquire small,
inefficient operators in highly fragmented industries and implement labor-saving
technology, centralize purchasing, and reduce overhead. In doing so, a
consolidator can increase its revenues, profit margins and earnings per share.
One such company is U.S. Diagnostic, which provides health-care services known
as diagnostic imaging. Currently, the company is acquiring its competitors and
improving products and services, thereby gaining more customers. This larger
customer base has allowed the company to lower its prices and, consequently,
secure contracts with HMOs and other large health-care providers.
Our convertible bond holding in United Waste Systems also performed well during
the reporting
Franklin Convertible Securities Fund
Top Five Holdings on October 31, 1996
Based on Total Net Assets
Company (Issue) % of Total
Industry Net Assets
Xilinx (Convertible Bond) 3.01%
Electronics
U.S. Office Products (Convertible Bond) 2.83%
Services
CoIntel (Convertible Preferred Stock) 2.78%
Telecommunications
Dovatron (Convertible Bond) 2.59%
Electronics
Solectron (Convertible Bond) 2.30%
Electronics
For a complete list of portfolio holdings, please see page 53 of this report.
period. This company is a strong player in the waste management business,
especially in owning and operating landfills. The company, which operates in the
Midwestern and Eastern regions of the United States, is acquiring its
competitors and implementing cost-saving programs.
Outsourcing and Cost-Cutting
We found a number of attractive securities in the high-tech industry --
especially in companies capitalizing on trends toward cost-cutting and
outsourcing. Two companies taking advantage of these trends are DII Group and
Solectron, both providers of contract manufacturing. (Many successful companies
rely on contract manufacturing to complete the manufacture, assembly and testing
of their products. Outsourcing such functions allows them to focus on their
particular areas of expertise.)
Altera and Xilinx develop programmable silicon chips, which allow technology
companies to reduce their development costs and get their products to market
faster. Altera performed well during the fiscal year, while Xilinx turned in
more lackluster performance. Stocks of both companies were hurt in late 1995
during an industry-wide inventory buildup in silicon chips. Altera has
meaningfully corrected its inventory imbalance, while Xilinx is taking somewhat
longer. In our opinion, Xilinx has excellent management, and the
telecommunications industry, which purchases many of Xilinx's products, is
growing annually approximately 20%. We believe Xilinx's business should
accelerate, and its security represents good value.
Reduced Positions
Our investment approach usually keeps us away from high-priced securities. If a
holding appreciates significantly, we'll typically capture the gain by selling
it. During the fiscal year, we sold our positions in Danka Business Systems
(average purchase cost $112; last bond sold at $162), Prime Hospitality (average
purchase cost $100; last bond sold at $145) and Eagle Hardware (average purchase
cost $101; last bond sold at $140.)
Mid-way through the fiscal year, we also reduced our position in Altera.
Although the convertible bond's price had risen to $145 (we purchased it at
around $100), we were concerned that the chip-inventory problem might have a
negative effect on Altera's common shares. We sold our position at around $145,
and it subsequently dropped to $95. Expecting the inventory problem to be
temporary, we repurchased the bond at $95. As of October 31, 1996, it had risen
to $135.
We'll also sell a security if the fundamental business conditions for the
underlying company change meaningfully. For example, we had purchased the
convertible bond of Rotech Medical, a home health-care provider. After our
purchase, however, government regulators sought to decrease reimbursement rates
on various products and services. Given the potential for slower-than-expected
earnings growth and increasing regulatory risk, we decided to sell our position
at a loss.
Looking Forward
In managing the fund, we use a "bottom-up" approach. This means we choose
companies based on our evaluations of their intrinsic value, strengths and
potential growth, rather than basing our buy and sell decisions on larger
economic factors (e.g., where we think interest rates may be headed). Our motto
is: "Buy the right convertible, at the right price, at the right time."
We intend to use this same approach as we move into the new year. Since we
believe the domestic market is currently quite expensive, it has become more
difficult to find securities at "the right price." Given this, we may look
increasingly toward the international market to find securities with superior
risk/reward potential.
This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.
Performance Summary
Class I
The Franklin Convertible Securities Fund's Class I share price, as measured by
net asset value, increased 72.0 cents during the reporting period, from $12.73
on October 31, 1995, to $13.45 on October 31, 1996.
In addition to paying out 60.0 cents in dividend income per share during the
reporting period, your fund distributed 57.7 cents ($0.5770) per share in
short-term capital gains and 10.2 cents ($0.1020) per share in long-term capital
gains. Based on an annualization of the current monthly dividend of 5.0 cents
($0.05) per share and the maximum offering price of $14.08 on October 31, 1996,
your fund's distribution rate was 4.26%. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
The fund posted a cumulative total return of +16.71% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment over the period indicated, assuming reinvestment of all
Franklin Convertible Securities Fund
Class I
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
Total 60.0 cents
distributions, and does not include the sales charge. Past performance is not
predictive of future trends.
The graph to the right shows that the fund's shares since inception have
underperformed the Goldman Sachs Convertible 100 Index. Of course, such
unmanaged market indexes have inherent performance differentials in comparison
with any fund. Indexes do not pay management fees to cover salaries of security
analysts or portfolio managers or pay commissions or market spreads to buy and
sell securities. Unlike unmanaged indexes, mutual funds can never be 100%
invested, because they need to keep some cash on hand to redeem shares. The
fund's performance figures also include the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, the index's performance would have been lower. Please
remember, an index is simply a measure of performance, and one cannot invest
directly in an index.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Convertible Securities Fund -- Class I
Periods Ended October 31, 1996
Since
Inception
1-Year 5-Year (4/15/87)
Cumulative Total Return1 16.71% 99.10% 179.12%
Average Annual Total Return2 11.46% 13.72% 10.81%
Distribution Rate3 4.26%
30-Day Standardized Yield4 4.19%
Value of $10,000 Investment5 $11,146 $19,016 $26,643
1992 1993 1994 1995 1996
Fiscal Year Total Return6 13.02% 28.26% 2.17% 15.18% 16.71%
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. See Note below.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.5%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 5.0 cent per
share monthly dividend and the maximum offering price of $14.08 on October 31,
1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
5. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the maximum 4.5% sales charge. See
Note below.
6. Total return represents the change in value of an investment and excludes
sales charges.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge. Thus, actual total returns for purchasers of shares during that
period would have been somewhat higher than noted above. Effective May 1, 1994,
the fund eliminated the sales charge on reinvested dividends and implemented a
plan of distribution under Rule 12b-1, which affects subsequent performance.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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. Past
expense reductions by the fund's manager increased the fund's total returns.
The Franklin Convertible Securities Fund's Class I shares paid per-share
distributions derived from long-term capital gains of 10.2 cents ($0.1020) per
share in December 1995. The fund hereby designates such distributions as
capital-gain dividends per Section 852(b)(3) of the Internal Revenue Code.
Performance Summary
Class II
The Franklin Convertible Securities Fund's Class II share price, as measured by
net asset value, increased 69.0 cents during the reporting period, from $12.72
on October 31, 1995, to $13.41 on October 31, 1996.
In addition to distributing 52.76 cents in dividend income per share during the
reporting period, your fund paid out 57.7 cents ($0.5770) per share in
short-term capital gains and 10.2 cents ($0.1020) per share in long-term capital
gains. Based on an annualization of October's regular monthly dividend of 4.32
cents ($0.0432) per share, plus an annual dividend adjustment of -.72 cent, and
the maximum offering price of $13.55 on October 31, 1996, your fund's
distribution rate was 3.77%. Distributions will vary based on the earnings of
the fund's portfolio, and past distributions are not predictive of future
trends.
The fund posted a cumulative total return of +15.83% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment over the period
Franklin Convertible Securities Fund
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 4.50 cents
December 4.50 cents
January 4.50 cents
February 4.56 cents
March 4.55 cents
April 4.53 cents
May 4.53 cents
June 4.53 cents
July 4.32 cents
August 4.32 cents
September 4.32 cents
October 3.60+ cents
Total 52.76 cents
+The October distribution consisted of a regular dividend of 4.32 cents and an
annual adjustment of -.72 cent to reconcile the 12b-1 fee differential between
Class I and Class II shares.
indicated, assuming reinvestment of dividends, and does not include sales
charges. Past performance is not predictive of future results.
The graph to the right shows that the fund's Class II shares, since inception,
have slightly underperformed the Goldman Sachs Convertible 100 Index. Of couse,
such unmanaged market indexes have inherent performance differentials in
comparison with any fund. Indexes do not pay management fees to cover salaries
of security analysts or portfolio managers or pay commissions or market spreads
to buy and sell securities. Unlike unmanaged indexes, mutual funds can never be
100% invested, because they need to keep some cash on hand to redeem shares. The
fund's performance figures also include the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, the index's performance would have been lower. Please
remember, an index is simply a measure of performance, and one cannot invest
directly in an index.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Convertible Securities Fund -- Class II
Periods Ended October 31, 1996
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 15.83% 13.57%
Average Annual Total Return2 13.67% 10.55%
Distribution Rate3 3.77%
30-Day Standardized Yield4 3.57%
Value of $10,000 Investment5 $11,367 $11,146
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum
initial sales charge as well as the 1.0% contingent deferred sales charge
(CDSC), applicable to share redeemed within the first 18 months of investment.
3. Distribution rate is based on an annualization of the current 4.32 cent per
share monthly dividend, plus the annual dividend adjustment of -.72 cent,and the
maximum offering price of $13.55 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
5. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the maximum 1.0 % initial sales
charge and 1.0% CDSC.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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.
The Franklin Convertible Securities Fund's Class II shares paid per-share
distributions derived from long-term capital gains of 10.2 cents ($0.1020) per
share in December 1995. The fund hereby designates such distributions as
capital-gain dividends per Section 852(b)(3) of the Internal Revenue Code.
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective:
Seeks to provide a high level of current income consistent with lower volatility
of principal by investing in a portfolio consisting primarily of
adjustable-rate, U.S. government agency-guaranteed, mortgage-backed securities.*
The Franklin Adjustable U.S. Government Securities Fund performed well in
meeting its investment objectives, posting a cumulative total return of +6.54%
for the 12-month period ended October 31, 1996, as discussed in the Performance
Summary on page 30.
A combination of slow growth and low inflation prompted the Federal Reserve
Board (the Fed) to lower short-term interest rates two times in the first three
months of this reporting period. By March 1996, various indicators showed
increasing economic strength, which led market participants to conclude that the
Fed had finished its easing cycle and had moved to a more neutral stance.
Long-term interest rates rose as a consequence, leading to lower bond prices,
including those of adjustable-rate mortgage securities (ARMS). In the last six
months of the period, however, ARMS' prices stabilized as interest rates
remained relatively level.
More recently, continued economic strength and concerns about accompanying
inflationary pressure have raised the possibility that the Fed's next move would
be to increase rates. The Board's decision to leave rates alone in its September
meeting caught some analysts by surprise and may signify that a small increase
in rates is due by the beginning of 1997. Despite this speculation, ARMS' price
movements remained modest, as interest rates fluctuated within a narrow band.
Portfolio Notes
Your fund's underlying portfolio consists primarily of ARMS or other securities
collateralized by or representing an interest in mortgages issued or guaranteed
by the U.S. government, its agencies or instrumentalities.+ These include
obligations of the Federal National Mortgage Association
*Individual securities in the underlying portfolio, but not shares of the fund,
are guaranteed by the U.S. government, its agencies, or instrumentalities as to
the timely payment of principal and interest.
+The fund invests a substantial amount of its assets in the U.S. Government
Adjustable Rate Portfolio, whose investment objective is the same as that of the
fund. Individual securities in the underlying portfolio, but not shares of the
fund, are guaranteed by the U.S. government, its agencies or instrumentalities,
as to the timely payment of interest and principal.
(FNMA or Fannie Mae), the Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac) and the Government National Mortgage Association (GNMA or Ginnie
Mae). These securities retain a high credit quality and have earned the fund a
"AAAf" rating -- the highest mutual fund credit rating possible -- from Standard
& Poor's(R), a national rating agency.++
As shown in the graph to the right, the fund's distribution rate remained
competitive with that of the one-year Treasury bill. At the close of the period,
your fund's distribution rate was 5.51%, which slightly outperformed the yield
of the one-year Treasury bill. Of course, the value of Treasuries, if held to
maturity, is fixed; principal is guaranteed and interest is fixed. Investment
return and share price of the Franklin Adjustable U.S. Government Securities
Fund fluctuate with market conditions. In addition, monthly payments of Ginnie
Mae securities include both principal and interest, while semiannual payments of
U.S. Treasury securities represent interest only. Past performance cannot
guarantee future results.
ARMS' coupons reset at periodic intervals to reflect current rates, and are
subject to annual caps which limit how much their coupons can change. In a
relatively stable interest-rate environment, as in the last few months of the
period, these securities can adjust smoothly. As such, your fund's monthly
dividend fluctuated between 4.4 cents ($0.044) and 4.8 cents ($0.048) per share,
settling at 4.4 cents by the close of the reporting period.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
We continue to watch prepayment risk closely. In a declining interest-rate
environment, homeowners tend to replace their adjustable rate mortgage loans
with fixed-rate mortgages to lock in a lower rate. In doing so, they eliminate a
steady source of future income for the lender, in this case our fund. In an
effort to reduce this risk in our portfolio, we have maintained an overweighting
in seasoned, non-convertible ARMS which cannot be replaced by borrowers as
easily as other types of ARMS. In addition, we concentrated on Constant Maturity
Treasury ARMS, which tend to be less price-sensitive in periods of fluctuating
interest rates because their coupons adjust rapidly. By contrast, we remain
underweighted in ARMS tied to the Eleventh District Cost of Funds Index, which
tends to lag market movements.
++The rating reflects Standard & Poor's assessment of the overall credit quality
of the fund's portfolio, does not reflect the yield or market price of the
fund's shares or approval by Standard & Poor's, and is subject to change.
Looking ahead, we anticipate a continuation of the current slower-growth trend
and low-inflation environment. This should lead to stable interest rates, which
may prove beneficial to ARMS in general. Actively positioning the fund to
perform well in this environment, we continue to focus on maintaining stability
of principal while generating a yield competitive with short-term alternatives.
We have always maintained a long-term investment perspective and encourage our
shareholders to do the same. While the fund may experience occasional short-term
volatility, we believe its performance should be rewarding over the long term.
Franklin Adjustable U.S.
Government Securities Fund
Dividend Distributions (11/1/95 - 10/31/96)
Dividend
Amount
Month Per Share
November 4.8 cents
December 4.6 cents
January 4.6 cents
February 4.6 cents
March 4.6 cents
April 4.8 cents
May 4.8 cents
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.6 cents
October 4.4 cents
Total 56.2 cents
Performance Summary
The Franklin Adjustable U.S. Government Securities Fund's share price, as
measured by net asset value, increased 3.0 cents ($0.03) to $9.37 on October 31,
1996, from $9.34 on October 31, 1995.
At the close of the reporting period, your fund's distribution rate was 5.51%,
based on an annualization of October's 4.4 cent ($0.044) per share monthly
dividend and the maximum offering price of $9.59 on October 31, 1996.
Based on a hypothetical $10,000 investment, the graph to the right shows that
your fund's total return slightly underperformed both the Lehman Brothers Short
U.S. Government 1-2 Year Index and the Payden & Rygel 6-Month CD Index.** The
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, its total return would have been lower. Of course,
unmanaged market indices have inherent performance differentials when compared
to any fund. For example, they do not pay commissions or market spreads to buy
and sell securities, nor do they pay management fees to cover salaries. Also,
unlike unmanaged indices, mutual funds are never fully invested because of the
need to have cash on hand to redeem shares. The securities held by the Lehman
Brothers index generally have longer maturities than those held by the fund, and
do not contain a mortgage component. Please remember that an index is simply a
measure of performance, and one cannot invest in an index directly.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
**Six-month certificates of deposit total returns are an average of the top
rates paid by major New York banks. CDs are insured by the FDIC up to $100,000
and have principal and interest rate guarantees. The unmanaged Lehman Brothers
Short U.S. Government 1-2 Year Index invests in U.S. government securities, with
maturities from one to two years.
Franklin Adjustable U.S. Government Securities Fund
Periods Ended October 31, 1996
Since
Inception
1-Year 5-Year (10/20/87)
Cumulative Total Return1 6.54% 19.77% 66.95%
Average Annual Total Return2 4.20% 3.21% 5.57%
Distribution Rate3 5.51%
30-Day Standardized Yield4 5.53%
1. Cumulative total returns reflect the change in value of an investment over
the periods indicated and do not include the current, maximum 2.25% initial
sales charge. See Note below.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated, and include the current, maximum 2.25%
initial sales charge. See Note below.
3. Based on an annualization of the fund's current 4.4 cent per share monthly
dividend and the maximum offering price of $9.59 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Investment return and principal will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance cannot guarantee future results.
Franklin Advisers, Inc., the fund's administrator and the manager of the fund's
underlying portfolio, is voluntarily waiving a portion of its fees, which
reduces expenses and increases distribution rate, yield, and total return to
shareholders. Without these reductions, the fund's total return and distribution
rate would have been somewhat lower, and the yield for the period would have
been 5.37%. The fee waiver may be discontinued at any time upon notice to the
fund's Board of Trustees.
FRANKLIN EQUITY INCOME FUND
Your Fund's Objective:
Seeks to maximize total return, emphasizing high current income and capital
appreciation, consistent with reasonable risk, through a portfolio of common
stocks with above-average yields.
The Franklin Equity Income Fund Class I generated a cumulative total return of
+15.32% for the 12-month period ended October 31, 1996, as discussed in the
Performance Summary on page 36. Additionally, we are pleased to report that the
fund increased its monthly dividend for Class I shares, from 5.0 to 5.2 cents a
share. This translates to a distribution rate of 3.63%, which is especially
noteworthy since the dividend yield of the S&P 500(R) was at an all-time low of
2.1% on October 31, 1996.
Modest economic growth, tame inflation and relatively stable interest rates
during the 12-month period provided an ideal investment climate for stock
investing. During the last year, however, the U.S. stock market continued to
polarize. Traditional value stocks -- those attractively priced on measurements
such as dividend yield, book value, and earnings -- have generally
underperformed relative to stocks with strong price and earnings momentum
(growth stocks). The recent performance of the Franklin Equity Income Fund,
which has a value orientation, reflected this current trend.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In keeping with its fundamental investment approach, the fund seeks to invest in
stocks with attractive valuations -- that is, stocks selling at bargain prices
according to measurements such as relative dividend yield, book value, revenues
and normalized earnings. We often find such stocks in companies that appear to
be fundamentally strong, but have experienced temporary earnings
disappointments, or in companies or industries with uncertain prospects for
near-term earnings growth.
Portfolio Themes
Utilities
During the reporting period, we found many utilities stocks that met our
criteria, including telephone and electric companies. In fact, dur-ing the
fund's fiscal year, both groups of stocks reached their highest yields in over a
decade. Recent uncertainty about industry deregulation has caused the average
electric utility and average telephone-utility stock to underperform the S&P 500
over the past 12 months. We believe, however, that by aggressively reducing
their cost structures, industry leaders should benefit in a deregulated
environment.
In the electric-utility sector, we initiated several new positions during the
reporting period. For example, we recently purchased Unicom, an Illinois-based
utility that offered a 6.5% dividend yield and traded at eight times our
calculations of estimated earnings. In the telephone-utility sector, the fund
increased its holdings in GTE, U.S. West, Nynex, and Southern New England.
These four telephone companies were all trading at attractive valuations at the
time of purchase, and appear to be well-positioned for an increasingly
competitive environment.
Oil Integrated
Oil stocks continued to be a major investment focus. In addition to attractive
fundamentals (e.g., the demand for oil exceeds the current supply), these
companies have above-average dividend yields and strong cash flows. We believe
the rising worldwide demand for oil, in relation to exploration and production
activity could lead to continued, strong oil prices. Newly purchased Amoco and
Occidental Petroleum, combined with additions to current holdings, made the oil
sector the fund's largest on October 31, 1996. Stocks in which we increased our
investments included Atlantic Richfield, Texaco, and YPF, which were among the
fund's 10 largest positions.
International
We initiated new investments in foreign securities, as we believed stocks of
many foreign companies traded at more attractive valuations than those of
comparable U.S.-based companies.
During the period, we purchased British Steel, one of the world's largest and
lowest-cost producers of steel, which offered a 6.2% yield and traded at five
times our estimate of next year's earnings. Glaxo Wellcome, one of the largest
pharmaceutical companies in the world and a leader in the treatment of AIDS, was
purchased with a 5.3% yield. We also acquired Trans De Gas, an Argentina-based
natural gas pipeline company, which offered an 8.0% dividend yield and a
price/earnings ratio of 10.5 times our estimate of next year's earnings. Foreign
stocks represented 14.13% of the fund's total net assets at the close of the
fiscal year.*
Real Estate Investment Trusts (REITS)
The fund also added to its investments in REITS, which comprised 5.8% of assets
on October 31, 1996. A position in Simon DeBartolo Property Group, the nation's
largest owner-operator of shopping centers, was initiated with a 7.9% dividend
yield. Additionally, the fund purchased Arden Realty, a California-based
office-building REIT yielding 8.0% at the time of purchase. Arden should benefit
from the current economic recovery in California.
Consumer Non-Durables
Finally, the fund took advantage of the recent price weakness in consumer
non-durable stocks by making a new investment in Tambrands, an industry leader
in feminine hygiene products. At time of purchase, the company's common stock
offered a 4.5% dividend yield and had underperformed the S&P 500 by over 20%
year-to-date, due to recent earnings disappointments. Management recently
announced a major corporate restructuring, which we expect could result in a
resumption of favorable earnings growth and increased opportunities abroad.
Reduced Positions
During the reporting period, we reduced our holdings in certain stocks that
reached our price objectives. Specifically, we sold Aetna and Cigna in the
insurance industry and Baxter and Pharmacia Upjohn in the health-care sector
with total-return gains ranging between 63% and 98%, over their holding periods.
*Foreign investing involves special risks, including currency fluctuations and
political uncertainty. These special risk considerations are discussed in the
prospectus.
On the other hand, stocks in the retailing industry generally did not perform up
to expectations, due in part to a weak sales season in late 1995. One of our
stocks, Kmart, came under significant financial pressure and eliminated its
dividend. Because we had become increasingly concerned that the company might be
forced into bankruptcy, we decided to sell our position at a loss. This allowed
us to invest the proceeds in stocks we felt offered better total-return
potential.
Looking forward, we will remain committed to our disciplined, value-oriented
investment approach, which has produced consistent and favorable long-term
results, as discussed in the Performance Summary.
This discussion reflects our strategies for the fund and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the fund.
Franklin Equity Income Fund
Top 10 Holdings on October 31, 1996
Based on Total Net Assets
Company % of total
Industry net assets
Atlantic Richfield Co. 2.45%
Oil
Texaco, Inc. 2.32%
Oil
Bristol Myers Squibb 2.21%
Pharmaceuticals
Penney (J.C.) Co. Inc. 2.16%
Retail
GTE Corp. 2.12%
Telephone Utilities
U.S. West Communications Group 2.09%
Telephone Utilities
NYNEX 2.05%
Telephone Utilities
Philip Morris Cos, Inc. 2.02%
Tobacco
Southern New England 1.87%
Telecommunications
Amoco Corp. 1.83%
Oil
For a complete list of portfolio holdings, please see page 60 of this report.
Performance Summary
Class I
The Franklin Equity Income Fund's Class I share price, as measured by net asset
value, increased $1.22 during the reporting period, from $15.19 on October 31,
1995, to $16.41 on October 31, 1996.
In addition to distributing 64.91 cents in dividend income per share, your fund
paid out 13.3 cents ($0.133) in short-term capital gains, 26.6 cents, ($0.266)
in long-term capital gains, and 2.51 cents ($0.0251) in a special 1995 year-end
income distribution.
Based on an annualization of October's monthly dividend of 5.2 cents ($0.052)
per share and the maximum offering price of $17.18 on October 31, 1996, your
fund's distribution rate was 3.63%. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
The fund posted a cumulative total return of +15.32% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include the
sales charge.
Franklin Equity Income Fund
Class I
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 5.2 cents
December 7.71 cents+
January 5.2 cents
February 5.2 cents
March 5.2 cents
April 5.2 cents
May 5.2 cents
June 5.2 cents
July 5.2 cents
August 5.2 cents
September 5.2 cents
October 5.2 cents
Total 64.91 cents
+The December distribution consisted of a regular dividend of 5.2 cents and a
special 1995 year-end income distribution of +2.51 cents.
The graph to the right compares the performance of the fund's shares since
inception, with that of the unmanaged Standard and Poor's 500 Stock Index and
the U.S. Consumer Price Index (CPI). As you can see, the fund's performance
exceeded the increase in the CPI, which means your investment returns have
surpassed the rate of inflation, a primary goal of any investment. Although the
fund has underperformed the S&P 500 Stock Index, a general market index has some
inherent performance differentials over any mutual fund. Indexes do not pay
management fees to cover salaries of security analysts or portfolio managers or
pay commissions or market spreads to buy and sell securities. Unlike unmanaged
indexes, mutual funds can never be 100% invested, because they need to keep some
cash on hand to redeem shares. The fund's performance figures also include the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, the index's
performance would have been lower. Please remember, an index is simply a measure
of performance, and one cannot invest directly in an index.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Since
Inception
1-Year 5-Year (3/15/88)
Cumulative Total Return1 15.32 88.16% 182.79%
Average Annual Total Return2 10.10 11.51% 10.85%
Distribution Rate3 3.63%
30-Day Standardized Yield4 3.67%
Value of $10,000 Investments5 $11,010 $17,965 $27,010
1992 1993 1994 1995 1996
Fiscal Year Total Returns6 12.95% 24.10% 1.95% 14.17% 15.32%
1. Cummulative total returns measure the change in value of an investment over
the periods indicated and do not include the sales charge. See Note below.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 4.5%
initial sales charge. See Note below.
3. Distribution rate based on an annualization of the current 5.2 cent per share
monthly dividend and the maximum offering price of $17.18 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
5. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and includes the maximum 4.5% sales charge. See
Note below.
6. Total return represents the change in value of an investment and excludes
sales charges.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge. Thus, actual total returns for purchasers of shares during that
period would have been somewhat different than noted above. Effective May 1,
1994, the fund eliminated the sales charge on reinvested dividends and
implemented a plan of distribution under Rule 12b-1, which affects subsequent
performance.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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. Past
expense reductions by the fund's manager increased the fund's total returns.
The Franklin Equity Income Fund's Class I shares paid per-share distributions
derived from long-term capital gains of 26.6 cents ($0.266) per share in
December 1995. The fund hereby designates such distributions as capital-gain
dividends per Section 852(b)(3) of the Internal Revenue Code.
Performance Summary
Class II
The Franklin Equity Income Fund's Class II share price, as measured by net asset
value, increased $1.19 during the reporting period, from $15.19 on October 31,
1995, to $16.38 on October 31, 1996.
In addition to distributing 55.82 cents in dividend income per share, your fund
paid out 13.3 cents ($0.133) in short-term capital gains, 26.6 cents ($0.266) in
long-term capital gains, and 2.05 cents ($0.0205) in a special 1995 year-end
income distribution.
Based on an annualization of October's monthly dividend of 4.38 cents ($0.0438)
per share, the annual dividend adjustment of -.82 cent, and the maximum offering
price of $16.55 on October 31, 1996, your fund's distribution rate was 3.13%.
Distributions will vary based on the earnings of the fund's portfolio, and past
distributions are not predictive of future trends.
The fund posted a cumulative total return of +14.46% for the 12-month period
ended October 31, 1996. Total return measures the change in value of an
investment, assuming reinvestment of dividends, and does not include sales
charges.
Franklin Equity Income Fund
Class II
Dividend Distributions 11/1/95 - 10/31/96
Dividend
Month per Share
November 4.60 cents
December 6.65 cents++
January 4.60 cents
February 4.65 cents
March 4.64 cents
April 4.66 cents
May 4.66 cents
June 4.66 cents
July 4.38 cents
August 4.38 cents
September 4.38 cents
October 3.56 cents+
Total 55.82 cents
++The December distribution consisted of a regular dividend of 4.6 cents and a
special 1995 year-end income distribution of +2.05 cents.
+The October distribution consisted of a regular dividend of 4.38 cents and an
annual adjustment of -.82 cent to reconcile the 12b-1 fee differential between
Classes I and II.
The graph to the right compares the performance of the fund's shares since
inception, with that of the unmanaged Standard and Poor's 500 Stock Index and
the U.S. Consumer Price Index (CPI). As you can see, the fund's performance has
exceeded the increase in the CPI, which means your investment returns have
surpassed the rate of inflation, a primary goal of any investment. Although the
fund has underperformed the S&P 500 Stock Index, a general market index has some
inherent performance differentials over any mutual fund. Indexes do not pay
management fees to cover salaries of security analysts or portfolio managers or
pay commissions or market spreads to buy and sell securities. Unlike unmanaged
indexes, mutual funds can never be 100% invested, because they need to keep some
cash on hand to redeem shares. The fund's performance figures also include the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as the fund's had been applied to the index, the index's
performance would have been lower. Please remember, an index is simply a measure
of performance, and one cannot invest directly in an index.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Equity Income Fund -- Class II
Periods Ended October 31, 1996
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 14.46% 13.76%
Average Annual Total Return2 12.35% 22.82%
Distribution Rate3 3.13%
30-Day Standardized Yield4 3.04%
Value of $10,000 Investment5 $11,235 $11,167
1. Cumulative total returns measure the change in value of an investment over
the periods indicated and do not include sales charges.
2. Average annual total returns represent the average annual change in value of
an investment over the specified periods and reflect the current, maximum 1.0%
initial sales charge as well as the 1.0% contingent deferred sales charge
(CDSC), applicable to shares redeemed within the first 18 months of investment.
3. Distribution rate is based on an annualization of the current 4.38 cent per
share monthly dividend, plus the annual dividend adjustment of -.82 cent, and
the maximum offering price of $16.55 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996.
5. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and includes the maximum 1% initial sales charge
and 1.0% CDSC. See Note below.
Note: All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. Your 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.
The Franklin Equity Income Fund's Class I shares paid per-share distributions
derived from long-term capital gains of 26.6 cents ($0.266) per share in
December 1995. The fund hereby designates such distributions as capital-gain
dividends per Section 852(b)(3) of the Internal Revenue Code.
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
Your Fund's Objective:
Seeks to provide a high level of current income with lower volatility of
principal than a fund that invests in fixed-rate securities by investing in a
portfolio of adjustable-rate securities. The Franklin Adjustable Rate Securities
Fund posted a cumulative total return of +6.23% for the 12-month period ended
October 31, 1996, as discussed in the Performance Summary on page 45.
A combination of slow growth and low inflation prompted the Federal Reserve
Board (the Fed) to lower short-term interest rates two times in the first three
months of this reporting period. By March 1996, various indicators showed
increasing economic strength, which led market participants to conclude that the
Fed had finished its easing cycle and had moved to a more neutral stance.
Long-term interest rates rose as a consequence, leading to lower bond prices,
including those of adjustable-rate mortgage securities (ARMS). In the last six
months of the period, however, ARMS' prices stabilized as interest rates
remained relatively steady.
More recently, continued economic strength and concerns about accompanying
inflationary pressure raised the possibility that the Fed's next move would be
to increase rates. The Fed's decision to leave rates alone in its September
meeting caught some analysts by surprise and may signify that a small increase
in rates is due by the beginning of the year. Despite this speculation, ARMS'
price movements remained modest, as interest rates fluctuated within a narrow
band.
Portfolio Notes
Your fund's underlying portfolio consists primarily of ARMS and other
adjustable-rate securities of high quality, typically AA- and AAA-rated by
national rating agencies.* At the end of the reporting period, 76.65% of the
fund's portfolio was invested in securities rated AAA by rating agencies, while
the remaining 23.35% consisted of AA-rated securities.
*Your fund invests a substantial amount of its assets in the Adjustable Rate
Mortgage Portfolio, whose investment objective is the same as the fund's.
Individual securities in the underlying portfolio, but not shares of the fund,
are guaranteed by the U.S. government, its agencies or instrumentalities.
As shown in the graph to the right, the fund's distribution rate remained
competitive with the one-year Treasury bill yield. At the close of the period,
your fund's distribution rate was 5.68%, which slightly outperformed the yield
of the one-year Treasury bill. Of course, the value of Treasuries, if held to
maturity, is fixed; principal is guaranteed and interest is fixed. Investment
return and share price of the Franklin Adjustable Rate Securities Fund fluctuate
with market conditions. Past performance cannot guarantee future results.
ARMS' coupons reset at periodic intervals to reflect current rates, and are
subject to annual caps which limit how much their coupons can change. In a
relatively stable interest-rate environment, as in the last few months of the
period, these securities can adjust smoothly. Over the reporting period, your
fund's monthly dividend fluctuated between 3.73 cents ($0.0373) and 5.17 cents
($0.0517) per share, settling at 4.78 cents by the close of the reporting
period.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
We continue to watch prepayment risk closely. In a declining interest-rate
environment, homeowners tend to replace their adjustable rate mortgage loans
with fixed-rate mortgages to lock in a lower rate. In doing so, they eliminate a
steady source of income for the lender, in this case our fund. In an effort to
reduce this risk in our portfolio, we have maintained an overweighting in
seasoned, non-convertible ARMS which cannot be replaced by borrowers as easily
as other types of ARMS. In addition, we concentrated on Constant Maturity
Treasury ARMS, which tend to be less price-sensitive in periods of fluctuating
interest rates because their coupons adjust rapidly. By contrast, we remain
underweighted in ARMS tied to the Eleventh District Cost of Funds Index, which
tends to lag market movements.
Looking ahead, we anticipate a continuation of the current slower-growth trend
and low-inflation environment. This should lead to stable interest rates, which
may prove beneficial to ARMS in general. Actively positioning the fund to
perform well in this environment, we continue to focus on maintaining stability
of principal while generating a yield competitive with short-term alternatives.
We have always maintained a long-term investment perspective and encourage our
shareholders to do the same. While the fund may experience occasional short-term
volatility, we believe its performance should be rewarding over the long term.
Franklin Adjustable Rate Securities Fund
Dividend Distributions (11/1/95 - 10/31/96)
Dividend
Amount
Month Per Share
November 3.73 cents
December 4.48 cents
January 5.17 cents
February 4.81 cents
March 4.47 cents
April 4.73 cents
May 4.17 cents
June 4.09 cents
July 4.81 cents
August 4.40 cents
September 4.85 cents
October 4.78 cents
Total 54.49 cents
Performance Summary
The Franklin Adjustable Rate Securities Fund's share price, as measured by net
asset value, increased 5 cents ($0.05) to $9.87 on October 31, 1996, from $9.82
on October 31, 1995.
At the close of the reporting period, your fund's distribution rate was 5.68%,
based on an annualization of October's 4.78 cent ($0.0478) per share monthly
dividend and the maximum offering price of $10.10 on October 31, 1996.
Based on a hypothetical $10,000 investment, the graph to the right shows that
your fund's total return slightly underperformed both the Lehman Brothers Short
U.S. Government 1-2 Year Index and the Payden & Rygel 6-Month CD Index.** The
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the index, its total return would have been lower. Of course,
unmanaged market indices have inherent performance differentials when compared
to any fund. For example, they do not pay commissions or market spreads to buy
and sell securities, nor do they pay management fees to cover salaries. Also,
unlike unmanaged indices, mutual funds are never fully invested because of the
need to have cash on hand to redeem shares. The securities held by the Lehman
Brothers index generally have longer maturities than those held by the fund, and
do not contain a mortgage component. Please remember that an index is simply a
measure of performance, and one cannot invest directly in an index.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
**Six-month certificates of deposit total returns are an average of the top
rates paid by major New York banks. CDs are insured by the FDIC up to $100,000
and have principal and interest rate guarantees. The unmanaged Lehman Brothers
Short U.S. Government 1-2 Year Index invests in U.S. government securities, with
maturities from one to two years.
Franklin Adjustable Rate Securities Fund
Periods Ended October 31, 1996
Since
Inception
1-Year 3-Year (12/26/91)
Cumulative Total Return1 6.23% 15.40% 27.58%
Average Annual Total Return2 3.80% 4.10% 4.66%
Distribution Rate3 5.68%
30-Day Standardized Yield4 5.53%
1. Cumulative total returns reflect the change in value of an investment over
the periods indicated and do not include the current, maximum 2.25% initial
sales charge. See note below.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated, and include the current, maximum 2.25%
initial sales charge. See note below.
3. Based on an annualization of the fund's current 4.78 cent per share monthly
dividend and the maximum offering price of $10.10 on October 31, 1996.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1996. Note:
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. 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 cannot guarantee future results. Franklin Advisers, Inc., the
fund's administrator and the manager of the fund's underlying portfolio, is
voluntarily waiving a portion of its fees, which reduces expenses and increases
distribution rate, yield, and total return to shareholders. Without these
reductions, the fund's total return and distribution rate would have been
somewhat lower, and the yield for the period would have been 5.46%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
Glossary
Terms
Maturity: The date when a debt instrument is due and payable. For example, a
bond that reaches maturity on January 1, 2000, should return the bondholder's
principal and make the final interest payment on that date.
Book Value: The difference between a company's assets and liabilities. Dividing
book value by the number of common shares outstanding results in the book value
per share.
Price/Book Value: Ratio of a stock's price to its book value per share. A stock
that has a low price/book value ratio may be under-priced and thus a good value.
Normalized Earnings: Earnings, either past or future, that are adjusted for
cyclical ups and downs in the economy. Analysts refer to normalized earnings if
a company's current earnings are below or above its long-term trend.
Dividend Yield: Rate of dividend return paid on a stock, calculated by dividing
the annual dividend by the stock price.
Price/Earnings (P/E) Ratio: Price of a stock divided by the company's earnings
per share. For instance, if a stock sold for $40 a share and the company earned
$2 per share last year, the stock has a trailing P/E of 20. Companies with a P/E
greater than 20 tend to be young, faster-growing companies, while low P/E
companies tend to be in mature industries or established blue-chip firms. P/E is
often used to demonstrate how expensive a stock is, i.e., how much investors are
willing to pay for a company's earnings.
Indexes
Goldman Sachs Convertible 100: Index of 100 bonds that are convertible to
stocks.
JP Morgan Global Government Bond Index: Includes only actively traded fixed-rate
bonds with a remaining maturity of at least one year. The index is in U.S.
dollars, and foreign exchange rates are taken at 5 p.m. London time.
Lehman Brothers Short U.S. Government 1-2 Year Index: Includes fixed-rate debt
rated investment grade or higher by Moody's, Standard and Poor's or Fitch, in
that order. All issues have at least one to two years to maturity and an
outstanding par value of at least $100 million for U.S. government issues.
Lehman Brothers Government/Corporate Bond Index: Includes fixed-rate debt rated
investment grade or higher by Moody's, Standard and Poor's or Fitch. Debt is
issued by the U.S. government and its agencies, as well as by domestic
corporations. The index also includes foreign dollar-denominated securities.
Salomon Brothers World Government Hedged Index: Currency-hedged index that uses
rolling one-month forward exchange contracts as hedging instruments. Total
return is in U.S. dollars.
Standard and Poor's 500(R) (S&P 500(R)): Consists of 500 widely held common
stocks within four sectors (industrials, utilities, financial and
transportation). This index, calculated by Standard and Poor's, is a
total-return index with dividends reinvested.
<TABLE>
<CAPTION>
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
Face Value
Country* Amount Franklin Global Government Income Fund (Note 1)
Bonds, Notes, Bills & Debentures 96.0%
Argentina 4.9%
<S> <C> <C> <C>
US 2,500,000 bHidroelectrica Alicura, SA, 8.375%, 03/15/99 .................. $ 2,434,375
AR 1,965,000 gRepublic of Argentina, 10.95%, 11/01/99 ....................... 2,049,741
AR 2,455,000 gRepublic of Argentina, 8.375%, 12/20/03 ....................... 2,181,881
AR 505,000 gRepublic of Argentina, Series L, VRN, 5.25%, 03/31/23 ......... 301,106
-------------
6,967,103
-------------
Australia 9.5%
AU 14,010,000 gRepublic of Australia 12.00%, 11/15/01 ........................ 13,403,375
-------------
Brazil 3.0%
BR 4,370,000 gBrazil Government, 6.50%, 04/15/24 ............................ 3,225,606
BR 1,450,000 gGovernment of Brazil, cvt., Series L, FRN, 6.875%, 04/15/12 ... 1,039,469
-------------
4,265,075
-------------
Canada 11.9%
CA 15,000,000 gGovernment of Canada, 9.50%, 10/01/98 ......................... 12,239,978
CA 5,000,000 gGovernment of Canada, 9.50%, 06/01/10 ......................... 4,633,228
-------------
16,873,206
-------------
Denmark 4.3%
DK 9,689,000 gGovernment of Denmark, 8.00%, 05/15/03 ........................ 1,817,781
DK 22,750,000 gKingdom of Denmark, 8.00%, 11/15/01 ........................... 4,285,806
-------------
6,103,587
-------------
Germany 2.2%
DD 4,115,000 gFederal Republic of Germany, 8.00%, 07/22/02 .................. 3,075,444
-------------
Irish Republic 1.2%
IE 1,070,000 gRepublic of Ireland, 6.25%, 10/18/04 .......................... 1,692,609
-------------
Italy 12.4%
IT 2,725,000,000 gBuoni Poliennali Del Tes, 10.50%, 11/01/00 .................... 1,986,136
IT 7,785,000,000 gBuoni Poliennali Del Tes, 10.50%, 09/01/05 .................... 5,866,671
IT 10,075,000,000 gGovernment of Italy, 10.50%, 07/15/00 ......................... 7,305,034
IT 1,200,000 gGovernment of Italy, 10.50%, 04/28/14 ......................... 2,320,708
-------------
17,478,549
-------------
Mexico 4.5%
US 6,170,000 United Mexican States, 9.75%, 02/06/01 ......................... 6,301,113
-------------
New Zealand 3.1%
NZ 5,600,000 gGovernment of New Zealand, 10.00%, 03/15/02 ................... 4,430,344
-------------
South Africa 0.4%
ZA 3,350,000 gEscom, 11.00%, 06/01/08 ....................................... 524,981
-------------
Spain 7.4%
ES 365,000,000 gGovernment of Spain, 11.60%, 01/15/97 ......................... $ 2,872,342
ES 523,990,000 gGovernment of Spain, 12.25%, 03/25/00 ......................... 4,757,572
ES 307,900,000 gGovernment of Spain, 11.30%, 01/15/02 ......................... 2,828,158
-------------
10,458,072
-------------
Sweden 3.0%
SE 9,700,000 gGovernment of Sweden, 6.00%, 02/09/05 ......................... 1,359,565
SE 7,700,000 gKingdom of Sweden, 10.25%, 05/05/03 ........................... 1,376,263
SE 7,800,000 gSweden Kingdom, 13.00%, 06/15/01 .............................. 1,482,510
-------------
4,218,338
-------------
United Kingdom 7.5%
GB 1,910,000 gUnited Kingdom, 12.00%, 11/20/98 .............................. 3,411,077
GB 1,950,000 gUnited Kingdom, 10.25%, 11/22/99 .............................. 3,454,738
GB 2,010,000 gUnited Kingdom, 10.00%, 09/08/03 .............................. 3,722,580
-------------
10,588,395
-------------
United States 20.7%
US 3,620,000 U.S. Treasury Bonds, 6.375%, 08/15/02 .......................... 3,661,304
US 18,440,000 U.S. Treasury Notes, 6.125%, 07/31/00 .......................... 18,509,150
US 7,050,000 U.S. Treasury Notes, 6.25%, 08/31/00 ........................... 7,104,003
-------------
29,274,457
-------------
Total Long Term Investments (Cost $134,647,851)........... 135,654,648
-------------
cReceivables from Repurchase Agreements0.5%
US 710,000 Bank of America, 5.52%, 11/01/96 (Maturity Value $712,783)
(Cost $704,000)
Collateral: U.S. Treasury Notes, 6.00%, 12/31/97 ............. 704,000
-------------
Total Investments (Cost $135,351,851)96.5% ........... 136,358,648
Other Assets and Liabilities, Net3.5% ................ 4,967,052
-------------
Net Assets100.0% ..................................... $141,325,700
=============
At October 31, 1996, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $135,351,851 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost............. $ 3,292,073
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value............... (2,285,276)
-------------
Net unrealized appreciation................................... $ 1,006,797
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
VRN - Variable Rate Notes
COUNTRY LEGEND:
AR - Argentina
AU - Australia
BR - Brazil
CA - Canada
DD - Germany
DK - Denmark
ES - Spain
GB - United Kingdom
IE - Irish Republic
IT - Italy
MX - Mexico
NZ - New Zealand
SE - Sweden
US - United States
ZA - South Africa
*Securities traded in currency of country indicated and valued in U.S. dollars.
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cFace amount for repurchase agreements is for the underlying collateral.
gFace amount is stated in foreign currency.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
<TABLE>
<CAPTION>
Face Franklin Short-Intermediate Value
Amount U.S. Government Securities Fund (Note 1)
<S> <C> <C>
U.S. Government Securities 98.6%
$25,000,000 U.S. Treasury Notes, 7.50%, 11/15/01 ........................................... $ 26,473,621
31,000,000 U.S. Treasury Notes, 5.875%, 06/30/00 .......................................... 30,854,702
26,000,000 U.S. Treasury Notes, 6.00%, 08/15/99 ........................................... 26,081,250
11,000,000 U.S. Treasury Notes, 6.50%, 04/30/99 ........................................... 11,169,300
23,000,000 U.S. Treasury Notes, 6.375%, 01/15/99 .......................................... 23,273,125
70,000,000 U.S. Treasury Notes, 6.875%, 02/28/97 .......................................... 70,371,833
5,000,000 U.S. Treasury Notes, 6.75%, 02/28/97 ........................................... 5,025,000
-------------
Total U.S. Government Securities (Cost $190,946,708)...................... 193,248,831
-------------
c,dReceivables from Repurchase Agreements 0.2%
427,124 Joint Repurchase Agreement, 5.529%, 11/01/96 (Maturity Value $428,953)
(Cost $428,887)
B.A. Securities, Inc., (Maturity Value $50,795)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $50,795)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $38,096)
Collateral: U.S. Treasury Notes, 5.875%, 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $38,096)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%, 10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $50,795)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%, 07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $44,445)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 - 08/31/97
Lehman Brothers, Inc., (Maturity Value $50,795)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%, 11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $3,546)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%, 10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc., (Maturity Value $50,795)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%, 08/31/98 - 04/30/01
UBS Securities, L.L.C., (Maturity Value $50,795)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 04/30/98 - 09/30/00 ........ 428,887
-------------
Total Investments (Cost $191,375,595)98.8%............................ 193,677,718
Other Assets and Liabilities, Net1.2% ................................ 2,364,078
-------------
Net Assets100.0% ..................................................... $196,041,796
=============
At October 31, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$191,375,595 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................. $ 2,302,123
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ................................................. --
-------------
Net unrealized appreciation .................................................. $ 2,302,123
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(h) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
<TABLE>
<CAPTION>
Value
Shares Franklin Convertible Securities Fund (Note 1)
Common Stocks 3.0%
Chemicals
<S> <C> <C>
1,428 Millennium Chemicals, Inc. ................................................... $ 28,917
-------------
Conglomerates 0.1%
20,000 Hanson, Plc., Sponsored ADR................................................... 127,500
-------------
Electronics 0.4%
10,000 aBay Networks, Inc. .......................................................... 202,500
15,000 aDII Group, Inc. ............................................................. 330,000
-------------
532,500
-------------
Health Care 0.2%
20,000 aU.S. Diagnostic Labs, Inc. .................................................. 240,000
-------------
Media & Broadcasting 0.7%
115,000 aAll American Communications, Inc............................................. 1,020,625
-------------
Retail 1.2%
75,000 aKmart Corp. ................................................................. 731,250
90,000 aMichaels Stores, Inc. ....................................................... 911,250
-------------
1,642,500
-------------
Tobacco
5,000 Imperial Tobacco Group, Plc., ADR ............................................ 58,354
-------------
Transportation 0.4%
40,000 aFritz Cos., Inc. ............................................................ 640,000
-------------
Total Common Stocks (Cost $3,855,396) .................................. 4,290,396
-------------
Convertible Preferred Stocks20.1%
Cable Systems 0.4%
30,000 Cablevision Systems Corp., 8.50% cvt. pfd., Series I ......................... 611,250
-------------
Computers 1.5%
20,000 bVanstar Financing Trust, 6.75% cvt. pfd. .................................... 1,040,000
20,000 bWang Laboratories, Inc., 6.50% cvt. pfd., Series B .......................... 1,060,000
-------------
2,100,000
-------------
Conglomerates 0.6%
60,000 bWestinghouse Electric Co., $1.30 cvt. pfd., Series C......................... 937,500
-------------
Energy 2.1%
35,000 bDevon Financing Trust, $3.25 cvt. pfd. ...................................... 2,218,125
30,000 Enron Corp., 6.25% cvt. pfd. ................................................. 735,000
-------------
2,953,125
-------------
Financial Services 1.3%
35,000 Wendy's Financing I, 5.00% cvt. pfd., Series A................................ $ 1,780,625
-------------
Media & Broadcasting 2.2%
315,000 Triathlon Broadcasting, 9.00% cvt. pfd........................................ 3,150,000
-------------
Metals & Mining 1.0%
13,100 Armco, Inc., $3.625 cvt. pfd., Series A ...................................... 569,850
7,500 Cyprus Amax Minerals Co., $4.00 cvt. pfd., Series A .......................... 400,313
10,000 WHX Corp., 6.50% cvt. pfd., Series A ......................................... 387,500
-------------
1,357,663
-------------
Oil & Gas 0.3%
1,949 Patina Oil & Gas Corp., 7.125% cvt. pfd. ..................................... 53,598
15,000 Snyder Oil Corp., $1.50 cvt. pfd. ............................................ 339,375
-------------
392,973
-------------
Real Estate Investment Trusts 1.7%
40,000 FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A ......................... 1,045,000
20,000 Oasis Residential, Inc., $2.25 cvt. pfd., Series A ........................... 480,000
35,000 Security Capital Pacific Trust, $1.75 cvt. pfd., Series A .................... 940,625
-------------
2,465,625
-------------
Retail 0.7%
20,000 Kmart Financing, 7.75% cvt. pfd. ............................................. 950,000
-------------
Savings & Loans 0.4%
7,900 Roosevelt Financial Group, $3.25 cvt. pfd. ................................... 507,575
-------------
Telecommunications 4.6%
80,600 CoIntel, 7.00% cvt. pfd. .................................................... 3,949,400
67,600 Nortel Inversora, SA, 10.00% cvt. pfd., MEDS ................................. 2,589,925
-------------
6,539,325
-------------
Tobacco 2.0%
500,000 RJR Nabisco Holdings Corp., $0.6012 cvt. pfd., Series C ...................... 2,812,500
-------------
Utilities 1.3%
40,000 Citizens Utility Co., 5.00% cvt. pfd. ........................................ 1,920,000
-------------
Total Convertible Preferred Stocks (Cost $28,687,162) .................. 28,478,161
-------------
Convertible Bonds 63.4%
Commercial Services 4.8%
750,000 eNational Data Corp., cvt. sub. notes, 5.00%, 11/01/03 ....................... 750,000
650,000 Protection One, Inc., cvt. senior sub. notes, 6.75%, 09/15/03 ................ 620,750
750,000 bThermo TerraTech, Inc., cvt. sub. notes, 4.625%, 05/01/03 ................... 693,750
Commercial Services (cont.)
$ 4,500,000 bU.S. Office Products Co., cvt. sub. notes, 5.50%, 02/01/01 .................. $ 4,010,625
600,000 bYouth Services International, Inc., cvt. sub. deb., 7.00%, 02/01/06 ......... 750,000
-------------
6,825,125
-------------
Computers 0.5%
750,000 bApple Computer, Inc., cvt. sub. notes, 6.00%, 06/01/01 ...................... 768,750
-------------
Conglomerates 1.2%
500,000 ALFA, SA, de C.V., cvt. sub. notes, 8.00%, 09/15/00 .......................... 532,500
1,000,000 bThermo Electron Corp., cvt. sub. deb., 4.25%, 01/01/03 ...................... 1,126,250
-------------
1,658,750
-------------
Electronics 16.8%
1,100,000 bAltera Corp., cvt. sub. notes, 5.75%, 06/15/02 .............................. 1,487,750
750,000 Analog Devices, cvt. sub. notes, 3.50%, 12/01/00 ............................. 875,625
2,200,000 bBay Networks, Inc., cvt. sub. deb., 5.25%, 05/15/03 ......................... 1,938,750
750,000 bDiagnostic Retrieval Systems, cvt. senior sub. deb., 9.00%, 10/01/03 ........ 945,000
4,000,000 bDovatron International, Inc., cvt. sub notes, 6.00%, 10/15/02 ............... 3,675,000
950,000 EMC Corp., cvt. sub. notes, 4.25%, 01/01/01 .................................. 1,282,500
1,850,000 Motorola, Inc., cvt. sub. deb., (original accretion rate 6.00%), 0.00%, 09/27/13 1,258,000
2,500,000 Park Electrochemical Corp., cvt. sub. notes, 5.50%, 03/01/06 ................. 2,093,750
2,500,000 bQuantum Corp., cvt. sub. notes, 5.00%, 03/01/03 ............................. 2,759,375
3,000,000 bSolectron Corp., cvt. sub. notes, 6.00%, 03/01/06 ........................... 3,255,000
4,500,000 bXilinx, Inc., cvt. sub. notes, 5.25%, 11/01/02 .............................. 4,275,000
-------------
23,845,750
-------------
Entertainment 0.7%
1,000,000 bImax Corp., cvt. deb., 5.75%, 04/01/03 ...................................... 985,000
-------------
Environmental Services 0.9%
1,000,000 bUnited Waste Systems, Inc., cvt. sub. notes, 14.50%, 06/01/01 ............... 1,215,000
-------------
Financial Services 4.2%
1,750,000 Leasing Solutions, Inc., cvt. sub. notes, 6.875%, 10/01/03 ................... 1,944,688
2,000,000 Mitsubishi Bank, Ltd., cvt. company guaranteed, 3.00%, 11/30/02 .............. 2,182,500
600,000 bPeregrine Investment Finance, cvt. company guaranteed, 4.50%, 12/01/00 ...... 519,000
1,500,000 PIV Investment Finance, cvt. company guaranteed, 4.50%, 12/01/00 ............. 1,297,500
-------------
5,943,688
-------------
Food & Beverages 1.8%
1,000,000 Chock Full O'Nuts, cvt. deb., 7.00%, 04/01/12 ................................ 835,000
1,500,000 bGrand Metropolitan, Plc., cvt. unsub. notes, 6.50%, 01/31/00 ................ 1,766,250
-------------
2,601,250
-------------
Forest & Paper Products 0.7%
$ 1,000,000 bSappi BVI Finance, Ltd., cvt. company guaranteed, 7.50%, 08/01/02 ........... $ 932,500
-------------
Health Care 6.8%
2,000,000 Alza Corp., cvt. sub. notes, (original accretion rate 4.62%), 0.00%, 07/14/14 830,000
2,000,000 bHealthsource, Inc., cvt. sub. notes, 5.00%, 03/01/03 ........................ 1,585,000
1,500,000 bNabi, Inc., cvt. sub. notes, 6.50%, 02/01/03 ................................ 1,417,500
1,000,000 bRoTech Medical Corp., cvt. sub. deb., 5.25%, 06/01/03 ....................... 835,000
2,000,000 bSandoz Capital BVI, Ltd., cvt. company guaranteed, 2.00%, 10/06/02 .......... 2,202,500
1,855,000 bU.S. Diagnostic Labs, Inc., cvt. sub. deb., 9.00%, 03/31/03 ................. 2,791,775
-------------
9,661,775
-------------
Home Appliances 0.5%
1,750,000 Whirlpool Corp., cvt. deb., LYONs, (original accretion rate 7.00%), 0.00%, 05/14/11 658,438
-------------
Industrial Services3.7%
2,000,000 Cooper Industries, Inc., cvt. sub. notes, 7.05%, 01/01/15 .................... 2,120,000
1,050,000 Mercury Air Group, Inc., cvt. sub. deb., 7.75%, 02/01/06 ..................... 1,074,937
100,000 Raymond Corp., cvt. sub. deb., 6.50%, 12/15/03 ............................... 113,750
1,100,000 Robbins & Myers, Inc., cvt. sub. notes, 6.50%, 09/01/03 ...................... 1,138,500
800,000 bThermo Instrument Systems, Inc., cvt. deb., 4.50%, 10/15/03 ................. 801,000
-------------
5,248,187
-------------
Lodging 1.9%
1,000,000 HFS, Inc., cvt. senior notes, 4.75%, 03/01/03 ................................ 1,290,000
1,250,000 Hilton Hotels Corp., cvt. sub. notes, 5.00%, 05/15/06 ........................ 1,387,500
-------------
2,677,500
-------------
Media & Broadcasting 2.0%
2,550,000 bAll American Communications, Inc., cvt. deb., 6.50%, 10/01/03 ............... 2,664,750
500,000 Jacor Communications, Inc., cvt. senior notes, (original accretion rate 5.50%), 0.00%,
06/12/11 .................................................................... 226,250
-------------
2,891,000
-------------
Metals & Mining 1.1%
1,750,000 Ashanti Capital, Ltd., cvt. notes, 5.50%, 03/15/03 ........................... 1,557,500
-------------
Oil & Gas 2.6%
1,300,000 Baker Hughes, Inc., cvt. notes, (original accretion rate 3.01%), 0.00%, 05/05/08 966,874
1,000,000 Nabors Industries, Inc., cvt. sub. notes, 5.00%, 05/15/06 .................... 1,145,000
1,250,000 bPogo Producing Co., cvt. sub. notes, 5.50%, 06/15/06 ........................ 1,512,500
-------------
3,624,374
-------------
Real Estate Investment Trusts 3.9%
$ 2,605,000 Liberty Property Trust, cvt. sub. deb., 8.00%, 07/01/01 ...................... $ 2,813,400
2,500,000 OMEGA Healthcare Investors, Inc., cvt. sub. deb., 8.50%, 02/01/01 ............ 2,675,000
-------------
5,488,400
-------------
Restaurants 0.4%
500,000 HomeTown Buffet, cvt. sub. notes, 7.00%, 12/01/02 ............................ 573,750
-------------
Retail 6.0%
1,850,000 Men's Wearhouse, Inc., cvt. sub. notes, 5.25%, 03/01/03 ...................... 1,655,750
3,000,000 Michaels Stores, Inc., cvt. sub. notes, 6.75%, 01/15/03 ...................... 2,100,000
1,500,000 Pier 1 Imports, Inc., cvt. sub. notes, 5.75%, 10/01/03 ....................... 1,515,000
100,000 bStaples, Inc., cvt. sub. deb., 4.50%, 10/01/00 .............................. 108,750
1,500,000 bSunglass Hut International, Inc., cvt. sub. notes, 5.25%, 06/15/03 .......... 1,149,374
2,000,000 bThe Sports Authority, Inc., cvt. sub. notes, 5.25%, 09/15/01 ................ 1,990,000
-------------
8,518,874
-------------
Savings & Loans 0.9%
1,150,000 BankAtlantic Bancorp, Inc., cvt. sub. deb., 6.75%, 07/01/06 .................. 1,265,000
-------------
Telecommunications 0.9%
4,000,000 U.S. Cellular Corp., cvt. notes, (original accretion rate 6.00%), 0.00%, 06/15/15 1,330,000
-------------
Veterinary Services 1.1%
2,000,000 Veterinary Centers of America, Inc., cvt. sub. deb., 5.25%, 05/01/06 ......... 1,630,000
-------------
Total Convertible Bonds (Cost $86,225,471).............................. 89,900,611
-------------
Non-Convertible Bonds3.1%
Media & Broadcasting1.8%
2,500,000 bAll American Communications, Inc., senior sub. notes, 10.875%, 10/15/01 ..... 2,487,500
-------------
Retail 0.6%
1,000,000 Michaels Stores, Inc., senior notes, 10.875%, 06/15/06 ....................... 880,000
-------------
Savings & Loans 0.7%
1,000,000 Ocwen Financial Corp., notes, 11.875%, 10/01/03 .............................. 1,065,000
-------------
Total Non-Convertible Bonds (Cost $4,380,000)........................... 4,432,500
-------------
Total Long Term Investments (Cost $123,148,029)......................... 127,101,668
-------------
c,dReceivables from Repurchase Agreements9.6%
13,493,086 Joint Repurchase Agreement, 5.529%, 11/01/96, (Maturity Value $13,554,876)
(Cost $13,552,795)
B. A. Securities, Inc., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $1,203,834)
Collateral: U.S. Treasury Notes, 5.875%, 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $1,203,834)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%, 10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%, 07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $1,404,473)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 - 08/31/97
Lehman Brothers, Inc., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%, 11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $112,063)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%, 10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%, 08/31/98 - 04/30/01
UBS Securities L.L.C., (Maturity Value $1,605,112)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 04/30/98 - 09/30/00 ...... $ 13,552,795
-------------
Total Investments (Cost $136,700,824)99.2%.......................... 140,654,463
Other Assets and Liabilities, Net0.8 %.............................. 1,157,995
-------------
Net Assets100.0% ................................................... $141,812,458
=============
At October 31, 1996, the net unrealized appreciation based on
the cost of investment for income tax purposes of
$136,942,999 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ............................................... $ 7,201,185
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ............................................... (3,489,721)
-------------
Net unrealized appreciation ................................................ $ 3,711,464
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
LYONs - Liquid Yield Option Notes
MEDS - Mandatorially Exchangeable Debt Security
aNon-income producing.
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(h) regarding joint repurchase agreement.
eSee Note (i) regarding securities purchased on a when-issued basis.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
<TABLE>
<CAPTION>
Value
Shares Franklin Adjustable U.S. Government Securities Fund (Note 1)
Mutual Funds 100.1%
<S> <C> <C>
42,420,398 U.S. Government ARM Portfolio (Note 1) ........................................... $397,479,127
-------------
Total Investments (Cost $426,650,050)100.1% ............................ 397,479,127
Liabilities in Excess of Other Assets(0.1)% ............................ (400,743)
-------------
Net Assets100.0% ....................................................... $397,078,384
=============
At October 31, 1996, the net unrealized depreciation based on the
cost of investments for income tax purposes of $426,822,022 was
as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................. $--
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ................................................. (29,342,895)
-------------
Net unrealized depreciation .................................................... $ (29,342,895)
=============
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
Value
Shares Franklin Equity Income Fund (Note 1)
Common Stocks 87.2%
<C> <S> <C>
Chemicals 2.8%
80,000 Chemed Corp. .................................................................. $ 3,120,000
50,000 Dow Chemical Co. .............................................................. 3,887,500
22,249 Millennium Chemicals, Inc. .................................................... 450,542
-------------
7,458,042
-------------
Conglomerates 1.8%
351,500 Hanson, Plc., Sponsored ADR.................................................... 2,240,813
139,900 Ogden Corp. ................................................................... 2,535,688
-------------
4,776,501
-------------
Consumer Products3.1%
91,500 American Brands, Inc. ......................................................... 4,369,125
93,100 Tambrands, Inc. ............................................................... 3,968,388
-------------
8,337,513
-------------
Financial Services6.5%
48,300 bChristiania Bank Og Kreditkasse, ADR ......................................... 1,325,135
454,000 fChristiania Bank Og Kreditkasse (Norway) ..................................... 1,245,571
100,000 Great Western Financial Corp. ................................................. 2,800,000
30,500 Morgan (J.P.) & Co., Inc. ..................................................... 2,634,438
70,000 National City Corp. ........................................................... 3,036,250
37,800 bNordbanken AB, Sponsored ADR ................................................. 1,990,382
21,200 fNordbanken AB (Sweden)........................................................ 558,149
98,300 PNC Bank Corp. ................................................................ 3,563,375
-------------
17,153,300
-------------
Industrial Services0.7%
49,200 Cooper Industries, Inc. ....................................................... 1,980,300
-------------
Insurance3.7%
140,000 IPC Holdings, Ltd. ............................................................ 3,010,000
85,500 Lincoln National Corp. ........................................................ 4,146,750
67,500 fScor, SA (France)............................................................. 2,594,757
-------------
9,751,507
-------------
Oil-Integrated15.8%
64,000 Amoco Corp. ................................................................... 4,848,000
49,000 Atlantic Richfield Co. ........................................................ 6,492,500
69,900 Chevron Corp. ................................................................. 4,595,925
49,700 Exxon Corp. ................................................................... 4,404,663
29,800 Mobil Corp. ................................................................... 3,479,150
105,400 Occidental Petroleum Corp. .................................................... 2,582,300
Oil-Integrated (cont.)
15,200 Royal Dutch Petroleum Co., New York Shares, ADR ............................... $ 2,513,700
60,500 Texaco, Inc. .................................................................. 6,148,313
74,900 Ultramar Corp. ................................................................ 2,144,013
202,200 YPF, SA, ADR .................................................................. 4,600,050
-------------
41,808,614
-------------
Paper & Forest Products4.6%
245,000 bPortucel Industrial, SA ...................................................... 1,509,543
96,000 Potlatch Corp. ................................................................ 4,104,000
67,000 Union Camp Corp. .............................................................. 3,266,250
70,000 Weyerhaeuser Co. .............................................................. 3,211,250
-------------
12,091,043
-------------
Pharmaceuticals3.8%
20,000 American Home Products Corp. .................................................. 1,225,000
55,300 Bristol-Myers Squibb Co. ...................................................... 5,847,975
91,200 Glaxo Wellcome, Plc., Sponsored ADR ........................................... 2,872,800
-------------
9,945,775
-------------
Publishing1.3%
60,900 Dun & Bradstreet Corp. ........................................................ 3,524,588
-------------
Real Estate Investment Trusts5.8%
90,200 Arden Realty Group, Inc. ...................................................... 2,040,775
103,300 Equity Residential Properties Trust ........................................... 3,796,275
125,000 Felcor Suite Hotels, Inc....................................................... 4,093,750
90,000 Highwoods Properties, Inc. .................................................... 2,587,500
83,000 Oasis Residential, Inc. ....................................................... 1,763,750
43,800 Simon DeBartolo Group, Inc. ................................................... 1,155,225
-------------
15,437,275
-------------
Retail2.1%
109,000 Penney (J.C.) Co., Inc. ....................................................... 5,722,500
-------------
Steel2.0%
89,500 British Steel, Plc., Sponsored ADR ............................................ 2,461,250
89,000 Carpenter Technology Corp. .................................................... 2,903,625
-------------
5,364,875
-------------
Telecommunications10.2%
29,400 BellSouth Corp. .............................................................. 1,198,050
26,700 British Telecommunications, Plc., Sponsored ADR ............................... 1,538,587
133,500 GTE Corp. ..................................................................... 5,623,687
150,000 Hong Kong Telecommunications, Ltd., Sponsored ADR ............................. 2,643,750
Telecommunications (cont.)
122,100 NYNEX Corp. ................................................................... $ 5,433,450
132,800 Southern New England Telecommunications Corp. ................................. 4,946,800
182,800 US West Communications Group .................................................. 5,552,550
-------------
26,936,874
-------------
Tobacco3.9%
77,875 Imperial Tobacco Group, Plc., ADR.............................................. 908,856
57,700 Philip Morris Cos., Inc. ...................................................... 5,344,463
139,000 UST, Inc. ..................................................................... 4,013,625
-------------
10,266,944
-------------
Utilities - Electric14.7%
138,800 Central & South West Corp. .................................................... 3,678,200
110,800 CINergy Corp. ................................................................. 3,670,250
105,000 Dominion Resources, Inc. ...................................................... 3,963,750
140,000 Enova Corp. ................................................................... 3,150,000
117,000 New England Electric System ................................................... 3,948,750
102,000 Oklahoma Gas and Electric Co. ................................................. 3,990,750
91,600 Pacific Gas & Electric Co. .................................................... 2,152,600
108,000 PacifiCorp .................................................................... 2,281,500
126,100 PECO Energy Co. ............................................................... 3,184,024
73,000 Public Service Co. of Colorado ................................................ 2,701,000
72,000 Public Service Enterprise Group, Inc. ......................................... 1,935,000
30,500 Texas Utilities Co. ........................................................... 1,235,250
123,500 Unicom Corp. .................................................................. 3,211,000
-------------
39,102,074
-------------
Utilities - Natural Gas4.4%
55,300 Consolidated Natural Gas Co. .................................................. 2,937,812
70,000 National Fuel Gas Co. ......................................................... 2,607,500
120,200 Pacific Enterprises ........................................................... 3,696,150
210,000 Transportadora de Gas del Sur, SA, Sponsored ADR .............................. 2,441,250
-------------
11,682,712
-------------
Total Common Stocks (Cost $204,932,204).................................. 231,340,437
-------------
Convertible Preferred Stocks6.1%
36,300 Battle Mountain Gold Co., $3.25 cvt. pfd. ..................................... 1,810,462
88,000 Browning-Ferris Industries, Inc., 7.25% cvt. pfd., ACES ....................... 2,585,000
46,200 bCatellus Development Corp., $3.625 cvt. pfd., Series B ....................... 2,437,050
76,900 Nortel Inversora, SA, 10.00% cvt. pfd., MEDS................................... 2,946,231
460,000 RJR Nabisco Holdings Corp., $0.6012 cvt. pfd., Series C ....................... 2,587,500
28,500 Roosevelt Financial Group, $3.25 cvt. pfd. .................................... $ 1,831,124
118,000 bWestinghouse Electric Co., $1.30 cvt. pfd., Series C.......................... 1,843,750
-------------
Total Convertible Preferred Stocks (Cost $16,159,877) ................... 16,041,117
-------------
Total Long Term Investments (Cost $223,092,081).......................... 247,381,554
-------------
Face
Amount
c,dReceivables from Repurchase Agreements6.3%
$16,548,537 Joint Repurchase Agreement, 5.529%, 11/01/96 (Maturity Value $16,624,308)
(Cost $16,621,755)
B.A. Securities, Inc., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $1,476,436)
Collateral: U.S. Treasury Notes, 5.875%, 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $1,476,436)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%, 10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%, 07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $1,722,508)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 - 08/31/97
Lehman Brothers, Inc., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%, 11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $137,442)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%, 10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%, 08/31/98 - 04/30/01
UBS Securities, L.L.C., (Maturity Value $1,968,581)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 04/30/98 - 09/30/00 ....... 16,621,755
-------------
Total Investments (Cost $239,713,836)99.6%........................... 264,003,309
Other Assets and Liabilities, Net0.4% ............................... 1,175,776
-------------
Net Assets100.0% .................................................... $265,179,085
=============
At October 31, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$239,742,026 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................ $ 28,964,005
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value................................................. (4,702,722)
-------------
Net unrealized appreciation.................................................. $ 24,261,283
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
ACES - Adjustable Convertible Exempt Securities
L.L.C. - Limited Liability Corp.
MEDS - Mandatorially Exchangeable Debt Security
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(h) regarding joint repurchase agreement.
fSecurities traded in foreign currency and value is stated in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments in Securities and Net Assets, October 31, 1996
<TABLE>
<CAPTION>
Value
Shares Franklin Adjustable Rate Securities Fund (Note 1)
Mutual Funds 100.2%
<S> <C> <C>
1,596,361 Adjustable Rate Securities Portfolio (Note 1)....................................... $15,740,121
-------------
Total Investments (Cost $15,982,926)100.2% ............................... 15,740,121
Liabilities in Excess of Other Assets(0.2)%............................... (32,748)
-------------
Net Assets100.0%.......................................................... $15,707,373
=============
At October 31, 1996, the net unrealized depreciation based on the
cost of investments for income tax purposes of $16,001,823 was as
follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ..................................................... $--
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ..................................................... (261,702)
-------------
Net unrealized depreciation ...................................................... $ (261,702)
=============
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements
Statements of Assets and Liabilities
October 31, 1996
Franklin
Franklin GlobalShort-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities Fund Securities Fund
---------- ----------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
At identified cost .......................................... $134,647,851 $190,946,708 $123,148,029
========== ========== ============
At value .................................................... 135,654,648 193,248,831 127,101,668
Receivables from repurchase agreements, at value and cost .... 704,000 428,887 13,552,795
Cash ......................................................... 488 -- 36,778
Receivables:
Dividends and interest ...................................... 4,404,973 3,128,819 1,429,656
Investment securities sold .................................. 1,226,194 -- 1,804,391
Capital shares sold ......................................... 79,922 694,284 517,820
---------- ----------- -----------
Total assets ............................................ 142,070,225 197,500,821 144,443,108
---------- ----------- -----------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery ........................................... -- -- 1,646,729
When-issued basis (Note 1) ................................. -- -- 750,000
Distributions payable to shareholders ....................... -- 912,484 450
Capital shares repurchased .................................. 195,093 397,227 47,585
Management fees ............................................. 75,898 92,003 69,403
Distribution fees ........................................... 38,698 39,911 97,682
Shareholder servicing costs ................................. 11,896 6,300 8,300
Unrealized losses on forward foreign currency contracts (Note 2) 331,292 -- --
Accrued expenses and other liabilities ....................... 91,648 11,100 10,501
---------- ---------- ------------
Total liabilities ....................................... 744,525 1,459,025 2,630,650
---------- ---------- ------------
Net assets, at value .......................................... $141,325,700 $196,041,796 $141,812,458
========== ========== ============
Net assets consist of:
Undistributed net investment income .......................... $ 259,884 $ 701,887 $ 360,304
Unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign currencies . 679,851 2,302,123 3,953,639
Net realized gain (loss) from investments .................... (3,035,705) (6,299,265) 9,615,665
Class I capital shares ....................................... 139,856,369 199,337,051 117,341,746
Class II capital shares ...................................... 3,565,301 -- 10,541,104
---------- ------------ ----------
Net assets, at value .......................................... $141,325,700 $196,041,796 $141,812,458
========== ============ ==========
Class I shares:
Net assets, at value ......................................... $137,625,655 $196,041,796 $130,951,220
========== ============ ==========
Shares outstanding ........................................... 15,904,735 19,068,446 9,738,551
========== ============ ==========
Net asset value per share* ................................... $8.65 $10.28 $13.45
========== ============ ==========
Maximum offering price per share (100/95.75, 100/97.75, 100/95.50
of net asset value per share, respectively) ................. $9.03 $10.52 $14.08
========== ============= =========
Class II shares:
Net assets, at value ......................................... $3,700,045 $10,861,238
========== ==========
Shares outstanding ........................................... 427,618 809,797
========== ==========
Net asset value per share* ................................... $8.65 $13.41
========== ==========
Maximum offering price per share (100/99 of net asset value per share) $8.74 $13.55
========== ==========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORSSECURITIESTRUST
Financial Statements (cont.)
Statements of Assets and Liabilities (cont.)
October 31, 1996
Franklin
Adjustable Franklin
U.S. Government Franklin Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
-------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
At identified cost ........................................... $426,650,050 $223,092,081 $15,982,926
============ =========== ========
At value ..................................................... 397,479,127 247,381,554 15,740,121
Receivables from repurchase agreements, at value and cost ..... -- 16,621,755 --
Cash .......................................................... 53,725 469,359 --
Receivables:
Dividends and interest ....................................... -- 845,044 2,172
Investment securities sold ................................... -- 120,404 --
Capital shares sold .......................................... 86,824 493,842 --
------------- --------- ---------
Total assets ............................................. 397,619,676 265,931,958 15,742,293
------------- --------- ---------
Liabilities:
Payables:
Investment securities purchased .............................. -- 373,976 --
Capital shares repurchased ................................... 260,122 34,695 --
Management fees .............................................. -- 120,062 --
Administration fees .......................................... 34,162 -- 1,315
Distribution fees ............................................ 201,378 187,991 8,870
Shareholder servicing costs .................................. 19,600 17,800 866
Accrued expenses and other liabilities ........................ 26,030 18,349 23,869
------------ ------- ------------
Total liabilities ........................................ 541,292 752,873 34,920
------------ ------- ------------
Net assets, at value ........................................... $397,078,384 $265,179,085 $15,707,373
============ ======== ===========
Net assets consist of:
Undistributed net investment income ........................... $ 757,513 $ 620,202 $ --
Unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies .. (29,170,923) 24,289,473 (242,805)
Net realized gain (loss) from investments ..................... (78,584,422) 5,349,790 (785,702)
Class I capital shares ........................................ 504,076,216 217,169,422 16,735,880
Class II capital shares ....................................... -- 17,750,198 --
------------- --------- ---------
Net assets, at value ........................................... $397,078,384 $265,179,085 15,707,373
============= ======== =========
Class I shares:
Net assets, at value .......................................... $397,078,384 $246,952,388 $15,707,373
============ ========= ==========
Shares outstanding ............................................ 42,381,783 15,050,554 1,591,286
============ ========== =========
Net asset value per share* .................................... $9.37 $16.41 $9.87
============ ========= ==========
Maximum offering price per share (100/97.75, 100/95.50, 100/97.75
of net asset value per share, respectively) .................. $9.59 $17.18 $10.10
============ ======= ===========
Class II shares:
Net assets, at value .......................................... $18,226,697
==========
Shares outstanding ............................................ 1,112,763
==========
Net asset value per share* .................................... $16.38
==========
Maximum offering price per share (100/99 of net asset value per share) $16.55
==========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (cont.)
Statements of Operations
for the year ended October 31, 1996
Franklin
Franklin GlobalShort-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities Fund Securities Fund
---------- ----------------------
Investment income:
<S> <C> <C> <C>
Dividends .................................................... $ -- $ -- $1,994,722
Interest (net of foreign taxes withheld
of $152,640 in the Global Fund) ............................. 12,642,863 12,991,174 4,561,747
---------- ---------- ------------
Total income ............................................ 12,642,863 12,991,174 6,556,469
---------- ---------- ------------
Expenses:
Management fees (Note 6) ..................................... 866,730 1,142,250 699,545
Distribution fees- Class I (Note 6) .......................... 148,415 165,456 246,129
Distribution fees- Class II (Note 6) ......................... 15,862 -- 45,067
Shareholder servicing costs (Note 6) ......................... 121,500 80,938 95,467
Reports to shareholders ...................................... 47,400 53,523 46,790
Registration and filing fees ................................. 30,530 18,617 22,233
Trustees' fees and expenses .................................. 16,500 22,471 12,079
Custodian fees ............................................... 15,500 6,786 6,376
Professional fees ............................................ 11,050 13,506 8,038
Other ........................................................ -- 5,120 4,992
---------- --------- -------------
Total expenses .......................................... 1,273,487 1,508,667 1,186,716
---------- --------- -------------
Net investment income .................................. 11,369,376 11,482,507 5,369,753
---------- --------- -------------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) from:
Investments ................................................ 1,422,713 (300,618) 9,634,023
Foreign currency transactions .............................. (459,972) -- --
Net unrealized appreciation (depreciation) on:
Investments ................................................ 4,045,916 (1,357,852) 1,567,232
Translation of assets and liabilities denominated
in foreign currencies ..................................... (28,866) -- --
---------- ----------- -----------
Net realized and unrealized gain (loss) on investments
and foreign currency ......................................... 4,979,791 (1,658,470) 11,201,255
---------- ----------- -----------
Net increase in net assets resulting from operations .......... $16,349,167 $ 9,824,037 $16,571,008
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORSSECURITIESTRUST
Financial Statements (cont.)
Statements of Operations (cont.)
for the year ended October 31, 1996
Franklin
Adjustable Franklin
U.S. Government Franklin Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
-------------------------------
Investment income:
<S> <C> <C> <C>
Dividends ..................................................... $29,156,206 $ 9,756,197 $952,752
Interest ...................................................... -- 1,489,651 --
----------- --------- -----------
Total income ............................................. 29,156,206 11,245,848 952,752
----------- --------- -----------
Expenses:
Management fees (Note 6) ...................................... -- 1,251,297 --
Administration fees (Note 6) .................................. 462,426 -- 15,384
Distribution fees- Class I (Note 6) ........................... 1,008,077 532,335 34,444
Distribution fees- Class II (Note 6) .......................... -- 75,641 --
Shareholder servicing costs (Note 6) .......................... 284,797 193,822 11,012
Reports to shareholders ....................................... 170,686 89,063 15,674
Trustees' fees and expenses ................................... 51,455 23,786 1,700
Registration and filing fees .................................. 18,846 34,089 14,277
Professional fees ............................................. 13,549 16,843 7,300
Custodian fees ................................................ -- 6,269 --
Other ......................................................... 18,264 6,283 967
----------- --------- -----------
Total expenses ........................................... 2,028,100 2,229,428 100,758
----------- --------- -----------
Net investment income ................................... 27,128,106 9,016,420 851,994
----------- --------- -----------
Realized and unrealized gain (loss) on investments and foreign currency:
Net realized gain (loss) from:
Investments ................................................. (8,331,753) 5,502,581 (67,763)
Foreign currency transactions ............................... -- (2,030) --
Net unrealized appreciation on investments ................... 10,070,322 15,107,182 163,341
----------- --------- -----------
Net realized and unrealized gain on investments
and foreign currency .......................................... 1,738,569 20,607,733 95,578
----------- --------- -----------
Net increase in net assets resulting from operations ........... $28,866,675 $29,624,153 $947,572
=========== ========= ===========
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORSSECURITIESTRUST
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended October 31, 1996 and 1995
Franklin Global Franklin Short-intermediate Franklin Convertible
Government Income Fund U.S. Government Securities Fund Securities Fund
-------------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995
--------- --------- ----------- ---------- -------- --------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income .........$ 11,369,376$ 14,174,118 $ 11,482,507$ 11,582,237$ 5,369,753$ 3,474,158
Net realized gain (loss) from
investments and foreign
currency transactions ........ 962,741 (4,205,563) (300,618) (3,564,637) 9,634,023 4,651,306
Net unrealized appreciation (de-
preciation) on investments and
translation of assets and liabilities
denominated in foreign currencies 4,017,050 9,792,417 (1,357,852) 10,082,805 1,567,232 2,080,220
--------- --------- ----------- -------- --------- ---------
Net increase in net assets
resulting from operations 16,349,167 19,760,972 9,824,037 18,100,405 16,571,008 10,205,684
Distributions to shareholders from:
Undistributed net investment income:
Class I (Note 9)............. (10,401,793) (13,730,112) (11,299,126) (11,517,255) (5,000,306) (3,522,594)
Class II (Note 9)............ (159,145) (18,628) -- -- (174,577) (593)
Net realized capital gains:
Class I ...................... -- -- -- -- (4,634,096) (3,804,886)
Class II ..................... -- -- -- -- (30,571) --
Return of capital distribution for tax purposes:
Class I ...................... -- (1,386,320) -- -- -- --
Class II ..................... -- (1,753) -- -- -- --
Increase (decrease) in net assets from
capital share transactions (Note 3)(30,625,436)(25,665,095) (10,540,555) (23,877,441) 51,348,182 13,986,181
--------- --------- ----------- ---------- --------- -------
Net increase (decrease)
in net assets............ (24,837,207) (21,040,936) (12,015,644) (17,294,291) 58,079,640 16,863,792
Net assets:
Beginning of period ........... $166,162,907 $187,203,843 $208,057,440 $225,351,731 $ 83,732,818 $66,869,026
--------- --------- ----------- ----------- ------- --------
End of period ................. $141,325,700 $166,162,907 $196,041,796 $208,057,440 $141,812,458 $83,732,818
========= ========= =========== ======== ========= =========
Undistributed net investment income included in net assets:
Beginning of period .......... $ 100,998$ 16,291,164 $ 613,089 $ 548,107 $ 152,947 $ 201,976
========= ========= =========== ======== ======== ==========
End of period ................ $ 259,884 $ 100,998 $ 701,887 $ 613,089 $ 360,304 $ 152,947
========= ========= =========== ======== ======== ==========
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORSSECURITIESTRUST
Financial Statements (cont.)
Statements of Changes in Net Assets (cont.)
for the years ended October 31, 1996 and 1995
Franklin Adjustable U.S. Franklin Adjustable Rate
Government Securities Fund Franklin Equity Income Fund Securities Fund
---------------------------------------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- --------- -------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income ...........$ 27,128,106$ 33,692,413 $ 9,016,420 $ 5,478,624 $ 851,994 $ 1,186,226
Net realized gain (loss) from
investments and foreign
currency transactions .......... (8,331,753) (18,757,683) 5,500,551 4,616,219 (67,763) (298,102)
Net unrealized appreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies........... 10,070,322 26,814,593 15,107,182 6,569,952 163,341 508,371
---------- ---------- --------- ---------- -------- -------
Net increase in net assets
resulting from operations ....... 28,866,675 41,749,323 29,624,153 16,664,795 947,572 1,396,495
Distributions to shareholders from:
Undistributed net investment income:
Class I (Note 9)............... (27,723,298) (33,597,566) (8,653,540) (5,162,293) (851,994) (1,186,226)
Class II (Note 9).............. -- -- (244,243) (644) -- --
Net realized capital gains:
Class I......................... -- -- (4,623,214) (1,652,725) -- --
Class II........................ -- -- (30,854) -- -- --
Increase (decrease) in net assets from
capital share transactions (Note 3)(113,435,575)(199,397,997) 79,822,947 66,671,939 (1,401,961)(7,760,753)
---------- ---------- --------- ---------- ------- --------
Net increase (decrease)
in net assets ................... (112,292,198) (191,246,240) 95,895,249 76,521,072 (1,306,383) (7,550,484)
Net assets:
Beginning of period .............$ 509,370,582 $ 700,616,822 $169,283,836$ 92,762,764 $17,013,756 $24,564,240
---------- ---------- --------- --------- -------- --------
End of period ...................$ 397,078,384 $ 509,370,582 $265,179,085 $169,283,836 $15,707,373 $17,013,756
========== ========== ========= ========= ======== ========
Undistributed net investment income included in net assets:
Beginning of period ............ $ 1,352,705 $ 1,257,858 $ 399,686 $ 83,999 $-- $--
========== ========== ========= ========= ======== ========
End of period .................. $ 757,513 $ 1,352,705 $ 620,202 $ 399,686 $-- $--
========== ========== ========= ========= ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund), registered under the Investment Company Act of
1940, as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund), and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
Each of the Funds issues a separate series of the Trust's shares and maintains a
totally separate investment portfolio. The investment objectives of the Funds
are as follows:
Global Income Growth and Income Income
- --------- -------------- ------------------------
Global Fund Convertible Fund Short-Intermediate Fund
Equity Income Fund Adjustable U.S. Government Fund
Adjustable Rate Fund
The Adjustable Rate Fund and the Adjustable U.S. Government Fund invest
substantially all of their assets in the Adjustable Rate Securities Portfolio
(the Securities Portfolio) and the U.S. Government Adjustable Rate Mortgage
Portfolio (the Mortgage Portfolio), respectively. Both are no load, open-end,
diversified management investment companies having the same investment objective
as the Adjustable Rate Fund and the Adjustable U.S. Government Fund. The
financial statements of the Securities Portfolio and the Mortgage Portfolio,
including the Statements of Investments in Securities and Net Assets, are
included elsewhere in this report and should be read in conjunction with the
financial statements of the Adjustable Rate Fund and Adjustable U.S. Government
Fund.
On June 15, 1993, the Board of Trustees (the Board) authorized a change in the
fiscal year end of the Trust from January 31 of each year to October 31.
The Global Fund, the Convertible Fund and the Equity Income Fund offer two
classes of shares, Class I and Class II. Class I shares are sold with a higher
front-end sales charge than Class II shares. Each class of shares may be subject
to a contingent deferred sales charge and has the same rights, except with
respect to the effect of the respective sales charges, the distribution fees
borne by each class, voting rights on matters affecting a single class and the
exchange privilege of each class.
The offering of Class II shares in the Global Fund began May 1, 1995; the
offering of Class II shares in the Convertible Fund and the Equity Income Fund
began October 1, 1995, at which time all previously outstanding shares became
Class I shares.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. Portfolio securities which are traded both in the over the counter
market and on a securities exchange are valued according to the broadest and
most representative market as determined by the manager. The Trust may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board. Securities
for which market quotations are not available and securities restricted as to
resale are valued in accordance with procedures established by the Board.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
a. Security Valuation: (cont.)
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange (Exchange). That value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and asked prices is
used. Occasionally, events which affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the Exchange and will, therefore, not be reflected in the
computation of the Funds' net asset values, unless material. If events which
materially affect the value of these foreign securities occur during such
period, these securities will be valued in accordance with procedures
established by the Board.
The Adjustable Rate Fund and the Adjustable U.S. Government Fund hold Portfolio
shares that are valued at their proportionate interest in the net assets of the
Securities Portfolio and the Mortgage Portfolio (the Portfolios), respectively.
At October 31, 1996, the Adjustable Rate Fund owns 77% of the Securities
Portfolio and the Adjustable U.S. Government Fund owns 98% of the Mortgage
Portfolio. The Portfolios' shares held by the Funds are valued at the net asset
value of the Portfolios.
b. Income Taxes:
The Funds intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to shareholders which will be sufficient to relieve the
Funds from income and excise taxes. Each Fund is treated as a separate entity in
the determination of compliance with the Internal Revenue Code.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Original issue discount is amortized as required by the Internal Revenue Code.
Realized and unrealized gains or 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.
The Short-Intermediate Fund and the Adjustable Rate Fund normally declare
dividends from their net investment income daily and distribute monthly. Daily
allocations of net investment income will commence on the day following the
receipt of an investor's funds. Dividends declared by the Short-Intermediate
Fund equal an amount set from time to time by the Board of Trustees. Dividends
declared by the Adjustable Rate Fund equal its net investment income.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatments of wash sale and foreign currency
transactions.
A portion of the distributions received by the Convertible Fund and the Equity
Income Fund from investments in Real Estate Investment Trust (REIT) securities
may be characterized as tax basis return of capital (ROC) distributions, which
are not recorded as dividend income, but reduce the cost basis of the REIT
securities. ROC distributions exceeding the cost basis of the REIT security are
recognized by the Funds as capital gain.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Expense Allocation:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
f. Foreign Currency Translation:
The accounting records of the Funds are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends and interest, and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arises
from changes in the value of assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. 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.
h. Joint Repurchase Agreements:
The Funds may enter into a joint repurchase agreement whereby their uninvested
cash balances are deposited into a joint cash account to be used to invest in
one or more repurchase agreements with government securities dealers recognized
by the Federal Reserve Board and/or member banks of the Federal Reserve System.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest. A repurchase agreement is accounted for
as a loan by the Funds to the seller, collateralized by underlying U.S.
government securities, which are delivered to the Funds' custodian. The market
value, including accrued interest, of the initial collateralization is required
to be at least 102% of the dollar amount invested by the Funds, with the value
of the underlying securities marked to market daily to maintain coverage of at
least 100%. At October 31, 1996, all outstanding repurchase agreements held by
the Funds had been entered into on that date.
i. Securities Purchased on a When-Issued or Delayed Delivery Basis:
The Funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. These
securities are identified on the accompanying Statement of Investments in
Securities and Net Assets. The Funds have set aside sufficient investment
securities as collateral for these purchase commitments.
2. FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract, which is individually negotiated and
privately traded by currency traders and their customers, is a commitment to
purchase or sell a specific currency for an agreed-upon price at a future date.
The Global Fund may enter into forward contracts with the objective of
minimizing the risk to the Fund from adverse changes in the relationship between
currencies or to enhance fund value. The Fund may also enter into a forward
contract in relation to a security denominated in a foreign currency or when it
anticipates receipt in a foreign currency of dividends or interest payments in
order to "lock in" the U.S. dollar price of a security or the U.S. dollar
equivalent of such dividend or interest payments.
Any gain or loss realized from a forward currency contract is recorded as a
realized gain or loss from investments.
The Fund segregates sufficient cash, cash equivalents or readily marketable debt
securities as collateral for commitments created by open forward contracts. The
Fund could be exposed to risk if counterparties to the contracts are unable to
meet the terms of their contracts or if the value of the foreign currency
changes unfavorably.
As of October 31, 1996, the Global Fund had the following forward foreign
currency contracts outstanding:
<TABLE>
<CAPTION>
In Unrealized
Contracts to Sell Exchange for Settlement Date Gain (Loss)
------------------------------- --------- ---------- --------
<C> <C> <C> <C> <C>
13,200,000 German Deutschemarks....... U.S.$ 8,659,429 11/12/96 U.S.$ (67,406)
5,200,000 German Deutschemarks....... 3,385,968 11/18/96 (53,154)
6,096,000 New Zealand Dollars........ 4,236,025 11/20/96 (67,024)
3,311,000 German Deutschemarks....... 2,150,698 11/22/96 (39,639)
3,900,000 German Deutschemarks....... 2,552,189 11/22/96 (27,791)
5,300,000 German Deutschemarks....... 3,451,712 11/25/96 (55,067)
6,621,000 German Deutschemarks....... 4,360,224 11/25/96 (20,603)
6,900,000 German Deutschemarks....... 4,548,901 11/29/96 (17,661)
--------
(348,345)
Contracts to Buy
-------------------------------
2,950,000 New Zealand Dollars........ 2,065,295 11/20/96 17,053
--------
Net unrealized loss on forward foreign currency contracts U.S. $(331,292)
========
</TABLE>
3. TRUST SHARES
At October 31, 1996, there was an unlimited number of shares of beneficial
interest authorized with a par value of $0.01 per share. Transactions in each of
the Trust's shares were as follows:
<TABLE>
<CAPTION>
Franklin
Franklin Global Short-Intermediate U.S. Franklin Convertible
Government Income Fund Government Securities Fund Securities Fund
--------------------- ---------------------- ---------------
Class I Shares: Shares Amount Shares Amount Shares Amount
--------- ---------- -------- ---------- --------- ---------
1996
<S> <C> <C> <C> <C> <C> <C>
Shares sold ................... 4,025,707 $ 33,831,552 7,187,123 $ 73,976,114 4,365,828 $ 56,759,465
Shares issued in reinvestment
of distributions ............. 627,075 5,249,077 656,342 6,749,593 544,756 6,898,946
Shares redeemed ............... (8,597,709) (72,097,101) (8,876,550) (91,266,262) (1,733,409) (22,632,385)
--------- ---------- -------- ----------- -------- ---------
Net increase (decrease)......... (3,944,927) $(33,016,472) (1,033,085) $(10,540,555) 3,177,175 $ 41,026,026
========= ========== ======== =========== ======== =========
1995
Shares sold ................... 5,432,041 $ 43,664,912 4,024,376 $ 40,822,597 2,010,356 $ 24,397,204
Shares issued in reinvestment
of distributions ............. 914,639 7,301,870 687,236 6,990,998 438,817 5,039,171
Shares redeemed ............... (9,709,607) (77,805,254) (7,081,035) (71,691,036) (1,305,974) (15,669,142)
--------- ---------- -------- ---------- --------- ---------
Net increase (decrease)......... (3,362,927) $(26,838,472) (2,369,423) $(23,877,441) 1,143,199 $ 13,767,233
========= ========== ======== ========== ========= =========
Franklin Adjustable Franklin Franklin Adjustable
U.S. Government Securities Fund Equity Income Fund Rate Securities Fund
-------------------------- ----------------- ----------------
Class I Shares: Shares Amount Shares Amount Shares Amount
--------- ----------- -------- ---------- --------- ---------
1996
Shares sold .................. 14,565,477 $ 136,048,405 6,911,802 $110,237,707 686,370 $ 6,733,448
Shares issued in reinvestment
of distributions ............ 1,655,133 15,418,849 674,366 10,650,968 65,447 642,723
Shares redeemed............... (28,356,704) (264,902,829) (3,657,228) (58,425,562) (892,821) (8,778,132)
--------- ----------- -------- ----------- -------- ---------
Net increase (decrease)........ (12,136,094) $(113,435,575) 3,928,940 $ 62,463,113 (141,004) $ (1,401,961)
========= =========== ======== =========== ======== =========
1995
Shares sold .................. 14,029,557 $ 129,980,548 6,072,743 $ 88,034,510 1,190,439 $ 11,515,704
Shares issued in reinvestment
of distributions ............. 2,216,085 20,454,537 366,679 5,193,976 92,210 897,246
Shares redeemed .............. (37,854,275) (349,833,082) (1,878,096) (26,946,913) (2,082,373) (20,173,703)
--------- ----------- -------- ----------- ------- ----------
Net increase (decrease)........ (21,608,633) $(199,397,997) 4,561,326 $ 66,281,574 (799,724) $ (7,760,753)
========= =========== ======== =========== ======== =========
3. TRUST SHARES (cont.)
Franklin Global
Government Franklin Convertible Franklin
Income Fund Securities Fund Equity Income Fund
----------------------------------------------------
Class II Shares: Shares Amount Shares Amount Shares Amount
------ --------- ------ ----------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
Shares sold ............................. 346,306 $2,915,042 804,020 $10,462,164 1,133,269 $18,099,689
Shares issued in reinvestment
of distributions ........................ 11,601 97,238 12,211 157,571 15,808 251,793
Shares redeemed ......................... (73,846) (621,244) (22,905) (297,579) (61,758) (991,648)
------ --------- ------ ----------- ------- ----------
Net increase.............................. 284,061 $2,391,036 793,326 $10,322,156 1,087,319 $17,359,834
====== ========= ====== =========== ======= ==========
1995*
Shares sold ............................. 145,023 $1,185,498 47,208 $ 608,063 25,828 $ 396,234
Shares issued in reinvestment
of distributions ....................... 1,742 14,236 46 593 41 629
Shares redeemed ......................... (3,208) (26,357) (30,783) (389,708) (425) (6,498)
------ --------- ------ ------------ ------- ---------
Net increase.............................. 143,557 $1,173,377 16,471 $ 218,948 25,444 $ 390,365
====== ========= ====== ============ ======= =========
*For the period May 1, 1995 to October 31, 1995 with respect to the Global Fund
and the period October 1, 1995 to October 31, 1995 with respect to the
Convertible Fund and the Equity Income Fund.
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1996, for tax purposes, the Funds had accumulated net realized
gains or capital loss carryovers as follows:
Franklin Franklin Franklin
Global Short-Intermediate Franklin Adjustable Franklin Franklin
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities FundSecurities FundSecurities Fund Income FundSecurities Fund
-------- ------------ ---------- -----------------------------
Accumulated net realized
<S> <C> <C> <C> <C> <C> <C>
gains...................... $-- $-- $9,857,840 $ -- $5,377,980 $ --
======== ============ ========== ======== ========== ===========
Capital loss carryovers
Expiring in: 2000.......... $-- $-- $-- $ 1,925,614 $-- $ --
2001.......... -- -- -- 7,701,615 -- --
2002.......... -- 2,434,010 -- 41,867,757 -- 414,821
2003.......... 3,035,705 3,564,637 -- 18,176,270 -- 286,740
2004.......... -- 300,618 -- 8,741,194 -- 66,100
-------- ------------ ---------- ----------- --------- ---------
$3,035,705 $6,299,265 -- $78,412,450 -- $767,661
======== ============ ========== =========== ========= =========
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower or unrealized depreciation is higher) than for financial
reporting purposes at October 31, 1996, by $242,175 in the Convertible Fund,
$171,972 in the Adjustable U.S. Government Securities Fund, $28,190 in the
Equity Income Fund, and $18,897 in the Adjustable Rate Fund.
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended October 31, 1996, were as follows:
Franklin Franklin Franklin
Global Short-Intermediate Franklin Adjustable Franklin Franklin
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities Fund Securities FundSecurities Fund Income Fund Securities Fund
---------- ------------ ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Purchases ............. $194,848,518 $145,611,252 $171,035,619 $108,635,089 $141,568,746 $6,442,883
Sales ................. $221,498,326 $156,023,853 $133,254,211 $222,647,379 $ 46,695,615 $7,836,145
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management/Administration Agreement:
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers),
provides investment advice, administrative services, office space and facilities
to each Fund, and receives fees computed monthly based on the net assets of each
Fund on the last day of the month, except for the Adjustable U.S. Government
Fund and the Adjustable Rate Fund, as follows:
Annualized Fee RateMonth End Net Assets
------------- ----------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million
Under the terms of a separate administration agreement with the Adjustable U.S.
Government Fund and the Adjustable Rate Fund, Advisers provides various
administrative, statistical, and other services, and receives fees computed
monthly based on each Fund's average daily net assets as follows:
Annualized Fee RateAverage Daily Net Assets
------------- ----------------------------------
0.10% First $5 billion
0.09% Over $5 billion, up to and including $10 billion
0.08% Over $10 billion
The terms of the management/administration agreements provide that aggregate
annual expenses of each Fund be limited to the extent necessary to comply with
the limitations set forth in the laws, regulations and administrative
interpretations of the states in which the Funds' shares are registered. For the
year ended October 31, 1996, the Funds' expenses did not exceed these
limitations.
b. Shareholders Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Funds pay costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Funds for
the year ended October 31, 1996, aggregated $787,536 all of which $725,742 was
paid to Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Short-Intermediate Fund, the Adjustable
U.S. Government Fund and the Adjustable Rate Fund reimburse Franklin/Templeton
Distributors, Inc. (Distributors), in an amount up to a maximum of 0.10%, 0.25%,
0.25%, respectively, per annum of each Fund's average daily net assets for costs
incurred in the promotion, offering and marketing of the funds' shares. The
Plans do not permit nor require payments of excess costs after termination. Fees
incurred by the funds under the Plans aggregated $1,207,977 for the year ended
October 31, 1996.
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
c. Distribution Plans and Underwriting Agreement: (cont.)
Under the terms of the Plans, the Global Fund will reimburse Distributors in an
amount up to a maximum of 0.15% per annum for Class I and 0.65% per annum for
Class II, the Convertible Fund and Equity Income Fund will reimburse
Distributors in an amount up to a maximum of 0.25% per annum for Class I and
1.00% per annum for Class II of the average daily net assets of such class for
costs incurred in the promotion, offering and marketing of the Funds' shares.
Fees incurred by the Funds under the Plans aggregated $1,063,449 for the year
ended October 31, 1996.
In its capacity as underwriter for the shares of the Funds, Distributors
receives commissions on sales of the Funds' shares of beneficial interest.
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Funds, and as such are not expenses of the Funds. Distributors may
also make payments, out of its own resources, to the dealers for certain sales
of the Funds' shares. Commissions received by Distributors, the amounts paid to
other dealers, and any applicable contingent deferred sales charges for the year
ended October 31,1996, were as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Global Short-Intermediate Franklin Adjustable Franklin Franklin
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities FundSecurities FundSecurities Fund Income Fund Securities Fund
--------- ------------ ---------- ------------------------------
Class I
Total commissions
<S> <C> <C> <C> <C> <C> <C>
received................. $207,185 $229,997 $1,033,701 $151,615 $1,647,237 $24,584
Paid to other dealers .... 199,132 245,142 935,085 145,535 1,534,932 23,566
Class II
Total commissions
received................. 18,380 97,149 170,506
Paid to other dealers .... 38,342 196,685 339,898
Contingent deferred
sales charge ............ 813 1,285 1,595
</TABLE>
d. Other Affiliated Parties and Transactions:
Certain officers and trustees of the Trust are also officers and/or directors of
Distributors, Advisers, and Investor Services, (all wholly-owned subsidiaries of
Franklin Resources, Inc.,) and the Securities Portfolio and the Mortgage
Portfolio.
7. CREDIT RISKS
Although each of the Funds has a diversified investment portfolio, there are
certain credit risks, foreign currency exchange risk, or event risk due to the
manner in which certain Funds are invested, which may subject the Funds more
significantly to economic changes occurring in certain industries, or sectors as
follows:
Although the Convertible Fund has a diversified portfolio, 72.82% of its
portfolio is invested in lower rated and comparable quality unrated high yield
securities. Investments in high yield securities are accompanied by a greater
degree of credit risk and such lower quality securities 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 yield securities, because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
The Global Fund has investments in excess of 10% of its total net assets in debt
securities denominated in Canadian dollars, and Italian lira.
The Convertible Fund has investments in excess of 10% of its total net assets in
the Electronics industry.
8. SUBSEQUENT EVENTS
On October 18, 1996, the Board declared distributions per share as follows:
<TABLE>
<CAPTION>
From Net
Record Date Payment Date Investment Income
-------- --------- ------------
Franklin Global Government Income Fund
<S> <C> <C> <C>
Class I.................................. 11/14/96 11/29/96 0.0500
Class II................................. 11/14/96 11/29/96 0.0468
Franklin Convertible Securities Fund
Class I.................................. 11/14/96 11/29/96 0.0500
Class II................................. 11/14/96 11/29/96 0.0432
Franklin Adjustable U.S.
Government Securities Fund............... 11/14/96 11/29/96 0.0440
Franklin Equity Income Fund
Class I.................................. 11/14/96 11/29/96 0.0520
Class II................................. 11/14/96 11/29/96 0.0438
9. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
period, by Fund, are as follows:
Per Share Operating Performance Ratios/Supplemental Data
-------------------------------------------------- ----------------------------
Net Distri- Ratio
Net Realized Total butions Distri- Distri- of Net
Asset & Un- From From butions butions Net Net Ratio of Invest- Port-
Value at Net realized Invest-Net From From Asset Assets Expenses ment folio Average
Year Begin- Invest- Gain ment Invest- Realized Return Total Value at at End to Aver- Income to Turn- Com-
Ended ning of ment (Loss) on Oper- ment Capital of Distri- End of Total of Period age Net Average over mission
Oct. 31Period Income Securities ations Income Gains Capital butions Period Return**(in 000's)Assets***Net Assets Rate Rate5
Franklin Global Government Income Fund
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19922 $ 9.34 $0.86 $0.246 $1.106 $(0.900)$(0.156)$ -- $(1.056) $ 9.39 12.15% $ 78,911 0.50% 7.87% 155.40% --
19932 9.39 0.83 (0.698) 0.132 (0.713) (0.075) (0.124) (0.912) 8.61 1.08 153,899 0.72 7.08 49.20 --
19933 8.61 0.58 0.716 1.296 (0.576) -- -- (0.576) 9.33 15.14 195,627 0.77* 6.74* 67.36 --
1994 9.33 1.30 (1.806) (0.506) (0.078) (0.083) (0.603) (0.764) 8.06 (5.72) 187,204 0.89 8.54 80.69 --
1995 8.06 0.67 0.290 0.960 (0.645) -- (0.065) (0.710) 8.31 12.65 164,970 0.96 8.29 103.49 --
1996 8.31 0.61 0.330 0.940 (0.600) -- -- (0.600) 8.65 11.80 137,626 0.85 7.68 139.71 --
Class II Shares:+++
1995+ 8.03 0.31 0.301 0.611 (0.301) -- (0.030) (0.331) 8.31 7.09 1,193 1.54* 7.41* 103.49 --
1996 8.31 0.56 0.334 0.894 (0.554) -- -- (0.554) 8.65 11.19 3,700 1.40 7.17 139.71 --
Franklin Short-Intermediate U.S. Government Securities Fund:
19922 10.30 0.58 0.374 0.954 (0.786) (0.078) -- (0.864) 10.39 9.44 163,690 0.71 5.90 102.05 --
19932 10.39 0.57 0.432 1.002 (0.565) (0.257) -- (0.822) 10.57 10.01 235,382 0.56 5.40 78.96 --
19933 10.57 0.38 0.245 0.625 (0.390) (0.005) -- (0.395) 10.80 5.90 273,678 0.55* 4.75* 31.71 --
1994 10.80 0.49 (0.696) (0.206) (0.472) (0.092) -- (0.564) 10.03 (1.99) 225,352 0.65 4.75 99.09 --
1995 10.03 0.56 0.309 0.869 (0.549) -- -- (0.549) 10.35 8.90 208,057 0.73 5.42 56.34 --
1996 10.35 0.58 (0.080) 0.500 (0.570) -- -- (0.570) 10.28 4.97 196,042 0.74 5.64 72.62 --
Franklin Convertible Securities Fund
Class I Shares:
19922 8.53 0.44 2.194 2.634 (0.684) -- -- (0.684) 10.48 31.50 20,282 0.26 6.84 64.90 --
19932 10.48 0.61 1.034 1.644 (0.684) -- -- (0.684) 11.44 16.12 28,307 0.25 6.01 60.00 --
19933 11.44 0.45 1.413 1.863 (0.513) -- -- (0.513) 12.79 16.50 47,440 0.25* 5.25* 31.05 --
1994 12.79 0.59 (0.327) 0.263 (0.594) (0.119) -- (0.713) 12.34 2.07 66,869 0.84 4.84 68.39 --
1995 12.34 0.58 1.099 1.679 (0.592) (0.697) -- (1.289) 12.73 15.18 83,523 1.03 4.82 108.64 --
1996 12.73 0.61 1.389 1.999 (0.600) (0.679) -- (1.279) 13.45 16.71 130,951 1.02 4.79 129.83 0.0495
Class II Shares:+++
1995++ 13.06 0.07 (0.373) (0.303) (.047) -- -- (0.047) 12.71 (2.33) 209 1.60* 3.64* 108.64 --
1996 12.71 0.51 1.397 1.907 (.528) (0.679) -- (1.207) 13.41 15.92 10,861 1.79 4.00 129.83 0.0495
Franklin Adjustable U.S. Government Securities Fund:
19922 9.99 0.74 0.027 0.767 (0.777) -- -- (0.777) 9.98 7.96 3,513,415 0.684 7.10 30.89 --
19932 9.98 0.51 (0.105) 0.405 (0.522) (0.003) -- (0.525) 9.86 4.16 2,971,424 0.664 5.10 30.36 --
19933 9.86 0.28 (0.086) 0.194 (0.284) -- -- (0.284) 9.77 1.99 1,813,504 0.654* 3.92* 6.97 --
1994 9.77 0.35 (0.606) (0.256) (0.314) -- -- (0.314) 9.2 (2.65) 700,617 0.424 3.67 5.99 --
1995 9.20 0.54 0.136 0.676 (0.536) -- -- (0.536) 9.34 7.57 509,371 0.614 5.76 17.81 --
1996 9.34 0.56 0.032 0.592 (0.562) -- -- (0.562) 9.37 6.54 397,078 0.694 5.87 23.52 --
Per Share Operating Performance Ratios/Supplemental Data
-------------------------------------------------- ----------------------------
Net Distri- Ratio
Net Realized Total butions Distri- Distri- of Net
Asset & Un- From From butions butions Net Net Ratio of Invest- Port-
Value at Net realized Invest-Net From From Asset Assets Expenses ment folio Average
Year Begin- Invest- Gain ment Invest- Realized Return Total Value at at End to Aver- Income to Turn- Com-
Ended ning of ment (Loss) on Oper- ment Capital of Distri- End of Total of Period age Net Average over mission
Oct. 31Period Income Securities ations Income Gains Capital butions Period Return**(in 000's)Assets***Net Assets Rate Rate5
Franklin Equity Income Fund
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19922 $10.64 $0.42 $ 1.967 $ 2.387 $(0.660)$(0.057)$ -- $(0.717) $12.31 22.76%$ 16,144 0.25% 5.77% 40.59% --
19932 12.31 0.66 1.307 1.967 (0.682) (0.135) -- (0.817) 13.46 16.23 26,092 0.25 5.18 31.05 --
19933 13.46 0.60 1.435 2.035 (0.495) (0.090) -- (0.585) 14.91 15.27 42,177 0.25* 5.86* 19.33 --
1994 14.91 0.62 (0.358) 0.262 (0.725) (0.307) -- (1.032) 14.14 1.83 92,763 0.77 4.53 39.51 --
1995 14.14 0.63 1.272 1.902 (0.609) (0.243) -- (0.852) 15.19 14.10 168,897 1.00 4.44 27.86 --
1996 15.19 0.64 1.628 2.268 (0.649) (0.399) -- (1.048) 16.41 15.39 246,952 0.98 4.11 24.15 0.0514
Class II Shares:+++
1995++ 15.38 0.05 (.193) (.143) (0.047) -- -- (0.047) 15.19 (0.93) 386 1.99* 3.57* 27.86 --
1996 15.19 0.52 1.627 2.147 (0.558) (0.399) -- (0.957) 16.38 14.53 18,227 1.73 3.33 24.15 0.0514
Franklin Adjustable Rate Securities Fund:
19921 10.00 -- -- -- -- -- -- -- 10.00 -- -- -- -- -- --
19932 10.00 0.60 0.031 0.631 (0.601) -- -- (0.601) 10.03 6.48 12,521 -- 5.84 48.95 --
19933 10.03 0.37 0.009 0.379 (0.369) -- -- (0.369) 10.04 3.83 37,809 0.114* 4.69* 49.11 --
1994 10.04 0.45 (0.341) 0.109 (0.449) -- -- (0.449) 9.70 1.11 24,564 0.454 4.45 84.67 --
1995 9.70 0.58 0.120 0.700 (0.580) -- -- (0.580) 9.82 7.57 17,014 0.704 5.82 53.30 --
1996 9.82 0.54 0.055 0.595 (0.545) -- -- (0.545) 9.87 6.23 15,707 0.904 5.54 41.67 --
</TABLE>
1For the period December 26, 1991 (effective date of registration) to January
31, 1992.
2For the year ended January 31.
3For the nine months ended October 31, 1993.
4Includes the Funds' share of the Portfolios' allocated expenses.
5Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
+For the period May 1, 1995 to October 31, 1995.
++For the period October 1, 1995 to October 31, 1995.
+++Ratios have been calculated using daily average net assets during the period.
*Annualized
**Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains at net asset value. Prior to May 1, 1994, dividends
were reinvested at the maximum offering price,and capital gains at net asset
value. Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan for Class I shares, the sales charge on reinvested dividends
was eliminated. The total return may differ from that reported in the Manager's
Discussion due to differences between the net asset values quoted and the net
asset values calculated for financial reporting purposes.
***During the periods indicated below, Advisers, the investment manager, agreed
to waive in advance a portion of its administration and management fees and made
payments of other expenses incurred by the Funds in the Trust. Had such action
not been taken, the ratio of expenses to average net assets would have been as
follows:
Ratio of Expenses to
Average Net Assets
Franklin Global Government Income Fund
Class I
19922 ................................. 0.80%
19932 ................................ 0.73
Franklin Short-Intermediate
U.S. Government Securities Fund
19932 ................................. 0.65
19933.................................. 0.63*
1994 .................................. 0.68
Franklin Convertible Securities Fund
Class I
19922 ................................. 0.94
19932 ................................. 0.81
19933.................................. 0.86*
1994 .................................. 0.92
....................Ratio of Expenses to
......................Average Net Assets
Franklin Adjustable
U.S. Government Securities Fund
19922 ................................. 0.89%4
19932 ................................. 0.804
19933 ................................. 0.794*
1994 .................................. 0.824
1995 .................................. 0.864
1996 .................................. 0.864
Franklin Equity Income Fund
Class I
19922 ................................. 0.84
19932 ................................. 0.81
19933 ................................. 0.87*
1994 .................................. 0.95
1995 .................................. 1.02
Franklin Adjustable Rate Securities Fund
19921 ................................. --
19932 ................................. 1.914
19933 ................................. 1.014*
1994 .................................. 0.854
1995 .................................. 0.994
1996 .................................. 1.124
Under IRC 854(b)(2) of the Internal Revenue Code, the Funds hereby designate the
following percentage amounts of their ordinary income dividends paid by the
Funds during the fiscal year ended October 31, 1996, as income qualifying for
the dividends received deduction.
Convertible Securities Fund.................................. 19.05%
Equity Income Fund........................................... 68.66%
FRANKLIN INVESTORSSECURITIESTRUST
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:
We have audited the accompanying statements of assets and liabilities of the six
Funds comprising the Franklin Investors Securities Trust, including each Fund's
statement of investments in securities and net assets, as of October 31, 1996,
and the related statements of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the six Funds comprising the Franklin Investors Securities Trust as of
October 31, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 4, 1996
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments in Securities and Net Assets, October 31, 1996
<TABLE>
<CAPTION>
Face Value
Amount U.S. Government Adjustable Rate Mortgage Portfolio (Note 1)
Adjustable Rate Mortgage Securities 93.7%
Federal Home Loan Mortgage Corp. (FHLMC) 24.6%
<C> <S> <C>
$ 5,469,835 FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.375%, 11/01/16 ..... $ 5,618,157
2,021,013 FHLMC, Cap 11.939%, Margin 2.127% + CMT, Resets Annually, 7.675%, 07/01/20 .... 2,073,337
713,733 FHLMC, Cap 12.176%, Margin 2.015% + CMT, Resets Annually, 7.351%, 04/01/20 .... 729,314
3,399,699 FHLMC, Cap 12.177%, Margin 2.265% + CMT, Resets Annually, 7.558%, 07/01/20 .... 3,501,554
730,730 FHLMC, Cap 12.68%, Margin 2.195% + CMT, Resets Annually, 7.851%, 02/01/19 ..... 759,696
2,343,248 FHLMC, Cap 12.723%, Margin 2.189% + CMT, Resets Annually, 7.667%, 04/01/19 .... 2,433,932
5,163,270 FHLMC, Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 7.259%, 07/01/18 ..... 5,317,961
821,472 FHLMC, Cap 12.80%, Margin 2.05% + CMT, Resets Annually, 7.804%, 11/01/18 ...... 838,123
7,409,661 FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.74%, 04/01/18 ...... 7,745,096
6,214,618 FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.577%, 09/01/19 ..... 6,397,283
2,999,572 FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.587%, 12/01/16 .... 3,083,384
2,096,459 FHLMC, Cap 13.16%, Margin 2.115% + CMT, Resets Annually, 7.673%, 07/01/19 ..... 2,161,653
3,094,767 FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.956%, 10/01/18 .... 3,199,599
1,068,116 FHLMC, Cap 13.269%, Margin 2.249% + CMT, Resets Annually, 7.553%, 05/01/19 .... 1,111,130
421,352 FHLMC, Cap 13.286%, Margin 2.164% + CMT, Resets Annually, 7.651%, 10/01/19 .... 431,599
2,347,713 FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.653%, 03/01/19 .... 2,419,919
745,516 FHLMC, Cap 13.302%, Margin 2.04% + CMT, Resets Annually, 7.615%, 04/01/18 ..... 767,574
1,461,323 FHLMC, Cap 13.306%, Margin 2.057% + CMT, Resets Annually, 7.569%, 12/01/18 .... 1,504,027
2,158,401 FHLMC, Cap 13.36%, Margin 2.242% + CMT, Resets Annually, 7.587%, 07/01/20 ..... 2,244,629
4,489,233 FHLMC, Cap 13.364%, Margin 2.225% + CMT, Resets Annually, 7.587%, 07/01/19 .... 4,625,730
4,793,233 FHLMC, Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.546%, 03/01/18 .... 4,931,669
9,712,385 FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.542%, 04/01/19 ...... 10,094,276
6,994,333 FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.669%, 07/01/20 ..... 7,275,995
447,209 FHLMC, Cap 13.77%, Margin 2.057% + CMT, Resets Annually, 7.561%, 02/01/19 ..... 456,408
3,540,768 FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.788%, 11/01/19 .... 3,682,222
8,712,759 FHLMC, Cap 13.879%, Margin 2.089% + CMT, Resets Annually, 7.63%, 04/01/18 ..... 9,063,622
2,174,620 FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 8.597%,
12/01/21 ..................................................................... 2,252,668
1,547,308 FHLMC, Cap 14.451%, Margin 2.00% + CMT, Resets Annually, 7.771%, 12/01/18 ..... 1,603,336
3,545,491 FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 7.955%, 02/01/19 ..... 3,721,489
-------------
Total Federal Home Loan Mortgage Corp. (Cost $99,710,019) ............... 100,045,382
-------------
Federal National Mortgage Association (FNMA)65.1%
2,682,655 FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually,
7.606%, 11/01/18 ............................................................. 2,793,181
17,354,190 FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.924%, 11/01/17 ...... 17,537,798
4,666,968 FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.655%, 03/01/19 ....... 4,830,125
12,607,069 FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually,
6.902%, 01/01/19 ............................................................. 12,858,580
3,019,706 FNMA, Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.888%, 01/01/19 ...... 3,016,717
11,457,003 FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.059%, 09/01/18 ...... 11,392,042
Federal National Mortgage Association (FNMA) (cont.)
$ 4,761,287 FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.486%, 01/01/19 ...... $ 4,816,089
4,141,631 FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 7.587%, 11/01/20 ...... 4,331,690
6,161,824 FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.321%, 05/01/19 ...... 6,363,273
3,446,028 FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually,
7.846%, 06/01/17 ............................................................. 3,616,021
6,019,772 FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 7.984%,
10/01/17 ..................................................................... 6,186,941
7,717,445 FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually,
7.197%, 07/01/17 ............................................................. 7,914,857
2,038,793 FNMA, Cap 12.911%, Margin 2.00% + 6 Month DR, Resets Semi-Annually,
7.34%, 02/01/18 .............................................................. 2,085,216
10,387,280 FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.059%, 02/01/19 ...... 10,328,384
3,916,387 FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 7.671%, 12/01/19 ..... 4,062,722
5,918,532 FNMA, Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 8.167%,
11/01/17 ..................................................................... 6,092,064
5,867,747 FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.699%, 06/01/19 ....... 6,089,627
8,935,414 FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.917%, 02/01/20 ....... 8,926,567
5,801,536 FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually,
7.025%, 12/01/20 ............................................................. 5,922,730
6,719,383 FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.646%, 04/01/19 ..... 7,046,415
6,097,744 FNMA, Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.445%, 06/01/19 ..... 6,300,582
4,970,448 FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 7.435%, 04/01/19 ..... 5,135,550
2,998,185 ..........FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually,
7.64%, 11/01/26 .............................................................. 3,120,781
3,186,936 FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 7.222%, 06/01/19 ...... 3,292,360
8,384,545 FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.756%, 10/01/19 ...... 8,712,883
8,349,234 FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.425%, 04/01/03 ....... 8,414,024
13,470,394 FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 7.626%, 09/01/22 ..... 14,029,685
6,517,556 FNMA, Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 7.581%, 06/01/18 ..... 6,745,274
6,419,986 FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 7.649%, 03/01/21 ..... 6,660,198
9,093,045 FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 7.651%, 12/01/20 ..... 9,521,690
3,341,243 FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.515%, 03/01/19 ...... 3,485,184
5,081,477 FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually,
6.793%, 07/01/24 ............................................................. 5,084,425
4,724,670 FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.756%, 02/01/19 ...... 4,940,020
3,408,935 FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.89%, 12/01/18 ....... 3,543,201
6,827,171 FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.639%, 01/01/19 ..... 7,076,138
2,176,616 FNMA, Cap 14.142%, Margin 2.118% + CMT, Resets Annually, 7.699%, 03/01/21 ..... 2,265,618
11,539,668 FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.026%,
05/01/21 ..................................................................... 11,820,312
3,491,653 FNMA, Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 7.646%, 03/01/20 ...... 3,648,638
Federal National Mortgage Association (FNMA) (cont.)
$ 9,064,700 FNMA, Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.073%, 01/01/16 ...... $ 9,262,491
3,469,132 FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 7.838%, 05/01/19 ..... 3,639,155
1,679,183 FNMA, Cap 15.381%, Margin 2.168% + CMT, Resets Annually, 7.681%, 02/01/20 ..... 1,742,952
-------------
Total Federal National Mortgage Association (Cost $265,816,131).......... 264,652,200
-------------
Government National Mortgage Association (GNMA)4.0%
8,050,679 GNMA, Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 6.50%, 01/20/24 ........ 8,200,342
7,649,805 GNMA, Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 6.00%, 07/20/25 ........ 7,859,793
-------------
Total Government National Mortgage Association (Cost $15,841,011)........ 16,060,135
-------------
Total Long Term Investments (Cost $381,367,161).......................... 380,757,717
-------------
c,dReceivables from Repurchase Agreements5.6%
22,683,326 Joint Repurchase Agreement, 5.529%, 11/01/96 (Maturity Value $22,786,276)
(Cost $22,782,777)
B.A. Securities, Inc., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $2,023,692)
Collateral: U.S. Treasury Notes, 5.875%, 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $2,023,692)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%, 10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%, 07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $2,360,973)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 - 08/31/97
Lehman Brothers, Inc., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%, 11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $188,389)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%, 10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%, 08/31/98 - 04/30/01
UBS Securities, L.L.C., (Maturity Value $2,698,255)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 04/30/98 - 09/30/00 ....... 22,782,777
-------------
Total Investments (Cost $404,149,938)99.3% .......................... 403,540,494
Other Assets and Liabilities, Net0.7% ............................... 2,890,503
-------------
Net Assets100.0% .................................................... $406,430,997
=============
At October 31, 1996, the net unrealized depreciation based on
the cost of investment for income tax purposes of $404,149,938
was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost ............................................. $ 2,073,103
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value ............................................. (2,682,547)
-------------
Net unrealized depreciation ................................................. $ (609,444)
=============
PORTFOLIO ABBREVIATIONS :
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
L.L.C. - Limited Liability Corp.
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate
</TABLE>
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(g) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments in Securities and Net Assets, October 31, 1996 (cont.)
<TABLE>
<CAPTION>
Face Value
Amount Adjustable Rate Securities Portfolio (Note 1)
Adjustable Rate Mortgage Securities 74.2%
<C> <S> <C>
$ 859,602 FNMA, Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%,
10/01/28 ....................................................................... $ 859,027
421,576 FNMA, Cap 13.86%, Margin 1.84% + CMT, Resets Annually, 7.304%, 08/01/16 ......... 434,767
1,043,468 Homeowners Federal Savings, Cap 13.00%, Margin 1.75% + CMT, Resets Annually,
7.269%, 01/25/18 ............................................................... 1,060,099
1,273,625 PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 7.811%, 07/25/22 ......... 1,269,645
814,539 PHMS, Cap 12.02%, Margin 2.55% + CMT, Resets Annually, 8.049%, 04/25/22 ......... 833,885
1,787,466 RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.984%, 11/25/22 .......... 1,839,912
1,307,837 RTC, Cap 12.66%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.377%,
04/26/21 ....................................................................... 1,244,898
1,880,129 RTC, Cap 14.69%, Margin 1.55% + 3CMT, Resets Every 3 Years, 7.607%, 06/25/22 .... 1,872,492
1,303,687 RTC, Cap 16.48%, Margin NACR -0.15%, Resets Annually, 7.507%, 07/25/20 .......... 1,244,126
870,156 Ryland Mortgage Securities Corp., Cap 11.00%, Margin 1.00% + COFI, Resets
Monthly, 5.819%, 04/25/21....................................................... 865,805
2,021,632 Salomon Brothers Mortgage Securities, Cap 14.00%, Margin 0.96% + NACR,
Resets Annually, 7.897%, 10/25/16 .............................................. 2,017,842
777,566 Saxon Mortgage Securities Corp., Cap 10.78%, Margin 2.78% + 6 Month LIBOR,
Resets Semi-Annually, 8.378%, 05/25/24 ......................................... 803,109
875,376 Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25% + CMT, Resets
Annually, 7.932%, 12/25/18 ..................................................... 889,875
-------------
Total Adjustable Rate Mortgage Securities (Cost $15,650,299) .............. 15,235,482
-------------
Fixed Rate Mortgage Securities5.6%
1,176,027 Countrywide Mortgage-Backed Securities, Inc., Series 1994-I, Class A8, 6.25%,
07/25/09 (Cost $1,143,687)...................................................... 1,148,909
-------------
Other Adjustable Rate Securities 6.2%
1,186,041 SBA, Cap 12.625%, Margin -0.125% + Prime, Resets Quarterly, 8.125%, 08/25/20
(Cost $1,278,701)............................................................... 1,278,701
-------------
U.S. Government Securities4.8%
1,000,000 U.S. Treasury Notes, 4.75%, 08/31/98 (Cost $977,366) ............................ 982,810
-------------
Total Long Term Investments (Cost $19,050,053) ............................ 18,645,902
-------------
c,dReceivables from Repurchase Agreements8.7%
1,770,715 Joint Repurchase Agreement, 5.529%, 11/01/96 (Maturity Value $1,779,370)
(Cost $1,779,097)
B.A. Securities, Inc., (Maturity Value $210,706)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $210,706)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $158,029)
Collateral: U.S. Treasury Notes, 5.875%, 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $158,029)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%, 10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $210,706)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%, 07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $184,367)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 - 08/31/97
Lehman Brothers, Inc., (Maturity Value $210,706)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%, 11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $14,709)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%, 10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc., (Maturity Value $210,706)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%, 08/31/98 - 04/30/01
UBS Securities L.L.C., (Maturity Value $210,706)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 04/30/98 - 09/30/00 ......... $ 1,779,097
-------------
Total Investments (Cost $20,829,150)99.5% ............................. 20,424,999
Other Assets and Liabilities, Net0.5%.................................. 109,248
-------------
Net Assets100.0%....................................................... $20,534,247
=============
At October 31, 1996, the net unrealized depreciation based on
the cost of investments for income tax purposes of $20,829,150
was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................... $ 32,899
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value .................................................. (437,050)
-------------
Net unrealized depreciation ................................................... $ (404,151)
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
3CMT - 3 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
FNMA - Federal National Mortgage Association
LIBOR - London Interbank Offered Rate
L.L.C. - Limited Liability Corp.
NACR - National Average Contract Rate
NCI - National Median Cost of Funds Index
PHMS - Prudential Home Mortgage Securities
RFC - Residential Finance Corp.
RTC - Resolution Trust Corp.
SBA - Small Business Administration
TB -Treasury Bill Rate
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(g) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements
Statements of Assets and Liabilities
October 31, 1996
<TABLE>
<CAPTION>
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage PortfolioSecurities Portfolio
------------ ------------
<S> <C> <C>
Assets:
Investments in securities:
At identified cost ...................................................... $ 381,367,161 $19,050,053
============ ============
At value ................................................................ 380,757,717 18,645,902
Receivables from repurchase agreements, at value and cost ................ 22,782,777 1,779,097
Receivables:
Interest ................................................................ 2,899,056 109,504
Investment securities sold .............................................. 1,223,499 --
Capital shares sold ..................................................... -- 31,797
------------ ------------
Total assets ........................................................ 407,663,049 20,566,300
------------ ------------
Liabilities:
Payables:
Capital shares repurchased .............................................. 1,105,688 20,795
Management fees ......................................................... 67,001 8,104
Accrued expenses and other liabilities ................................... 59,363 3,154
------------ ------------
Total liabilities ................................................... 1,232,052 32,053
------------ ------------
Net assets, at value ...................................................... $ 406,430,997 $20,534,247
============ ============
Net assets consist of:
Net unrealized depreciation on investments ............................... $ (609,444) $ (404,151)
Net realized loss ........................................................ (137,820,589) (2,743,716)
Capital shares ........................................................... 544,861,030 23,682,114
------------ ------------
Net assets, at value ...................................................... $ 406,430,997 $20,534,247
============ ============
Shares outstanding ........................................................ 43,397,073 2,083,336
============ ============
Net asset value per share.................................................. $9.37 $9.86
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (cont.)
Statements of Operations
for the year ended October 31, 1996
<TABLE>
<CAPTION>
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage PortfolioSecurities Portfolio
------------ ------------
Investment income:
<S> <C> <C>
Interest ................................................................. $30,994,231 $1,447,481
------------ ------------
Expenses:
Management fees (Note 5) ................................................. 1,891,159 89,969
Professional fees ........................................................ 49,542 7,416
Custodian fees ........................................................... 15,719 837
Trustees' fees and expenses .............................................. 7,003 336
Reports to shareholders .................................................. 1,231 550
Other .................................................................... 16,043 5,855
Management fees waived by manager (Note 5) ............................... (800,283) (48,591)
------------ ------------
Total expenses ...................................................... 1,180,414 56,372
------------ ------------
Net investment income ............................................... 29,813,817 1,391,109
------------ ------------
Realized and unrealized gain (loss) on investments:
Net realized loss ........................................................ (419,303) (37,828)
Net unrealized appreciation .............................................. 2,011,283 139,862
------------ ------------
Net realized and unrealized gain on investments ........................... 1,591,980 102,034
------------ ------------
Net increase in net assets resulting from operations ...................... $31,405,797 $1,493,143
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
U.S. Government Adjustable Rate
Adjustable Rate Mortgage Portfolio Securities Portfolio
-----------------------------------------------------------------
1996 1995 1996 1995
---------- ----------- --------- -----------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income ......................... $ 29,813,817 $ 37,919,267 $ 1,391,109 $ 1,896,437
Net realized loss from security transactions .. (419,303) (7,672,691) (37,828) (602,782)
Net unrealized appreciation on investments .... 2,011,283 16,342,196 139,862 913,301
---------- ------------ ---------- ---------
Net increase in net assets from operations 31,405,797 46,588,772 1,493,143
2,206,956
Distributions to shareholders from undistributed
net investment income (Note 1) ................ (29,813,817) (37,919,267) (1,391,109) (1,896,437)
Decrease in net assets from capital share
transactions (Note 3) ......................... (117,962,940) (233,338,662) (6,646,687) (14,850,372)
---------- ------------ ---------- ---------
Net decrease in net assets ................ (116,370,960) (224,669,157) (6,544,653) (14,539,853)
Net assets (there is no undistributed net investment
income at beginning or end of the year):
Beginning of year ............................. 522,801,957 747,471,114 27,078,900 41,618,753
---------- ------------ ---------- ---------
End of year ................................... $406,430,997 $ 522,801,957 $20,534,247 $ 27,078,900
========== ============ ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is a no load, open-end,
diversified management investment company (mutual fund), registered under the
Investment Company Act of 1940, as amended. The Trust currently has two separate
portfolios (the Portfolios) consisting of the U.S. Government Adjustable Rate
Mortgage Portfolio (Mortgage Portfolio) and the Adjustable Rate Securities
Portfolio (Securities Portfolio). The shares of the Trust are issued in private
placements and are thus exempt from registration under the Securities Act of
1933. The investment objective of each Portfolio is to seek current income.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. Portfolio securities which are traded both in the over the counter
market and on a securities exchange are valued according to the broadest and
most representative market as determined by the manager. The Portfolios may
utilize a pricing service, bank or broker/dealer experienced in such matters to
perform any of the pricing functions, under procedures approved by the Board of
Trustees (the Board). Securities for which market quotations are not available
are valued in accordance with procedures established by the Board.
b. Income Taxes:
The Portfolios intend to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to shareholders which will be sufficient to relieve the
Portfolios from income and excise taxes. Each Portfolio is treated as a separate
entity in the determination of compliance with the Internal Revenue Code.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. The Portfolios normally declare
dividends from their net investment income daily and distribute monthly. Daily
allocations of net investment income will commence on the date following receipt
of an investor's funds. Dividends declared by the Portfolios equal their net
investment income.
e. 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.
f. Expense Allocation:
Common expenses incurred by the Trust are allocated among the Portfolios based
on the ratio of net assets of each Portfolio to the combined net assets. In all
other respects, expenses are charged to each Portfolio as incurred on a specific
identification basis.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
g. Repurchase Agreements:
The Portfolios may enter into a joint repurchase agreement whereby their
uninvested cash balances are deposited into a joint cash account to be used to
invest in one or more repurchase agreements with government securities dealers
recognized by the Federal Reserve Board and/or member banks of the Federal
Reserve System. The value and face amount of the joint repurchase agreement are
allocated to the Portfolios based on their pro-rata interest. A repurchase
agreement is accounted for as a loan by the Portfolios to the seller,
collateralized by underlying U.S. government securities, which are delivered to
the Portfolios' 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 Portfolios, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At October 31, 1996, all
outstanding repurchase agreements held by the Portfolios had been entered into
on that date.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1996, for tax purposes, the Portfolios had accumulated capital
loss carryovers as follows:
<TABLE>
<CAPTION>
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
----------- ------------
Capital loss carryovers
<S> <C> <C>
Expiring in:2000..................... $ 45,439,616 $ 57,701
2001..................... 17,182,002 50,908
2002..................... 67,102,060 1,987,888
2003..................... 7,677,608 609,391
2004..................... 419,303 37,828
----------- ------------
$137,820,589 $2,743,716
=========== ============
</TABLE>
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Portfolios are the same as for financial statement purposes at October
31, 1996.
3. TRUST SHARES
At October 31, 1996, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in each of the Portfolios' shares
for the years ended October 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
U.S Government Adjustable Rate
Adjustable Rate Mortgage Portfolio Securities Portfolio
-----------------------------------------------------------------
Shares Amount Shares Amount
--------- ----------- --------- ---------
1996
<S> <C> <C> <C> <C>
Shares sold ....................................... 8,516,434 $ 79,504,622 741,450 $ 7,267,077
Shares issued in reinvestment of distributions .... 3,196,067 29,832,645 141,790 1,391,107
Shares redeemed ................................... (24,351,072) (227,300,207) (1,560,875) (15,304,871)
--------- ----------- ---------- --------
Net decrease.................................. (12,638,571) $(117,962,940) (677,635) $ (6,646,687)
========= =========== ========== ========
3. TRUST SHARES (cont.)
U.S Government Adjustable Rate
Adjustable Rate Mortgage Portfolio Securities Portfolio
---------------------------------------------------------------
Shares Amount Shares Amount
--------- ----------- --------- ---------
1995
<S> <C> <C> <C> <C>
Shares sold ....................................... 8,454,626 $ 78,435,001 1,241,431 $ 12,019,117
Shares issued in reinvestment of distributions .... 4,106,743 37,916,533 196,161 1,906,803
Shares redeemed ................................... (37,893,534) (349,690,196) (2,973,631) (28,776,292)
--------- ----------- ---------- --------
Net decrease.................................. (25,332,165) $(233,338,662) (1,536,039) $(14,850,372)
========= =========== ========== ========
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended October 31, 1996, were as follows:
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
-----------------------------------------
Purchases .............................. $111,882,444 $10,068,072
Sales .................................. $235,782,991 $17,653,846
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers),
provides investment advice, administrative services, office space and facilities
to each Portfolio, and receives fees computed monthly based on the average daily
net assets of each Portfolio as follows:
Annualized Fee Rate Average Daily Net Assets
------------- ---------------------------------
0.400% First $5 billion
0.350% Over $5 billion, up to and including $10 billion
0.330% Over $10 billion, up to and including $15 billion
Fees are further reduced on net assets over $15 billion. Advisers agreed in
advance to waive management fees for the Portfolios aggregating $848,874.
b. Other Affiliated Parties and Transactions:
As of October 31, 1996, 42,420,398 shares of the Mortgage Portfolio were owned
by the Franklin Adjustable U.S. Government Securities Fund, and 976,675 shares
were owned by the Franklin Institutional Adjustable U.S. Government Securities
Fund. This represents 98% and 2%, respectively, of the outstanding shares of the
Mortgage Portfolio.
As of October 31, 1996, 1,596,361 shares of the Securities Portfolio were owned
by the Franklin Adjustable Rate Securities Fund and 485,550 shares were owned by
the Franklin Institutional Adjustable Securities Fund. This represents 77% and
23%, respectively, of the outstanding shares of the Securities Portfolio. The
remaining 1,425 shares of the Securities Portfolio were owned by Franklin
Resources, Inc. (Resources).
Certain officers and trustees of the Trust are also officers and/or directors of
Advisers (a wholly-owned subsidiary of Resources), and of the Franklin
Adjustable U.S. Government Securities Fund and the Franklin Adjustable Rate
Securities Fund.
6 FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period by Portfolio are as follows:
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
---------------------------------------------------------------------
Ratio of Net
Net Asset Net Realized Distributions Ratio of Investment
Year Value at Net & Unrealized Total From From Net Net Asset Net Assets at Expenses to Income to Portfolio
Ended Beginning Investment Gain (Loss) Investment InvestmentValue at End Total End of Period Average NetAverage NetTurnover
Oct. 31, of Period Income on Securities Operations Income of Period Return+ (in 000's) Assets++ Assets Rate
U.S. Government Adjustable Rate Mortgage Portfolio:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19931 $10.01 $.544 $(.100) $ .444 $(.544) $ 9.91 4.53% $4,201,411 .30% 5.49% 66.44%
19932 9.91 .313 (.090) .223 (.313) 9.82 2.28 2,130,229 .27* 4.15* 76.55
1994 9.82 .415 (.630) (.215) (.415) 9.19 (2.22) 747,471 .02 4.01 56.43
1995 9.19 .572 .140 .712 (.572) 9.33 7.99 522,802 .18 6.17 20.16
1996 9.33 .589 .040 .629 (.589) 9.37 6.95 406,431 .25 6.31 24.63
Adjustable Rate Securities Portfolio:
19931 10.00 .599 .020 .619 (.599) 10.02 6.36 44,656 -- 5.80 88.92
19932 10.02 .368 .010 .378 (.368) 10.03 3.83 124,309 .11* 4.76* 158.70
1994 10.03 .469 (.340) .129 (.469) 9.69 1.32 41,619 .25 4.55 192.06
1995 9.69 .625 .120 .745 (.625) 9.81 7.94 27,079 .25 6.36 50.29
1996 9.81 .607 .050 .657 (.607) 9.86 6.91 20,534 .25 6.19 46.78
</TABLE>
*Annualized
1For the year ended January 31, 1993.
2For the nine months ended October 31, 1993
+Total return measures the change in value of an investment over the period
indicated. It is not annualized. It assumes reinvestment of dividends and
capital gains, if any, at net asset value.
++During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and to make payments of other expenses incurred by the
Portfolios. Had such action not been taken, the ratios of expenses to average
net assets would have been as follows:
Ratio of Expenses to
Average Net Assets
U.S. Government Adjustable
Rate Mortgage Portfolio:
19931................................. .42%
19932................................. .41*
1994.................................. .42
1995.................................. .43
1996.................................. .42
Ratio of Expenses to
Average Net Assets
Adjustable Rate Securities Portfolio:
19931................................. .64%
19932................................. .47*
1994.................................. .43
1995.................................. .47
1996.................................. .47
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Adjustable Rate Securities Portfolios:
We have audited the accompanying statements of assets and liabilities of the two
Portfolios comprising the Adjustable Rate Securities Portfolios (the Trust),
including each Portfolio's statement of investments in securities and net
assets, as of October 31, 1996, and the related statements of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the two Portfolios comprising the Adjustable Rate Securities Portfolios as of
October 31, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and the financial highlights for the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 4, 1996
Franklin Investors Securities Trust Annual Report 10/31/96.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the Salomon Brothers World Government Hedged Index and the
JP Morgan Global Government Bond Index, based on a $10,000 investment from
3/15/88 to 10/31/96.
Period Ending Fund Index Index
3/15/88 $9,579 $10,000 $10,000
3/31/88 $9,607 $10,000 $10,041
4/30/88 $9,626 $9,988 $9,995
5/31/88 $9,799 $9,962 $9,888
6/30/88 $9,866 $10,054 $9,800
7/31/88 $9,933 $10,048 $9,724
8/31/88 $9,868 $10,031 $9,654
9/30/88 $9,949 $10,234 $9,895
10/31/88 $10,245 $10,439 $10,284
11/30/88 $10,425 $10,393 $10,374
12/31/88 $10,351 $10,444 $10,312
1/31/89 $10,513 $10,539 $10,210
2/28/89 $10,364 $10,451 $10,193
3/31/89 $10,366 $10,521 $10,107
4/30/89 $10,421 $10,668 $10,274
5/31/89 $10,268 $10,795 $10,162
6/30/89 $10,608 $11,023 $10,394
7/31/89 $10,823 $11,261 $10,808
8/31/89 $10,880 $11,172 $10,489
9/30/89 $10,764 $11,166 $10,654
10/31/89 $10,658 $11,304 $10,791
11/30/89 $10,761 $11,343 $10,887
12/31/89 $10,931 $11,369 $11,013
1/31/90 $10,844 $11,173 $10,849
2/28/90 $10,689 $11,091 $10,732
3/31/90 $10,819 $11,093 $10,667
4/30/90 $10,752 $11,039 $10,625
5/31/90 $10,978 $11,326 $10,965
6/30/90 $11,312 $11,446 $11,163
7/31/90 $11,602 $11,543 $11,492
8/31/90 $11,449 $11,380 $11,402
9/30/90 $11,415 $11,406 $11,508
10/31/90 $11,468 $11,665 $11,963
11/30/90 $11,670 $11,885 $12,174
12/31/90 $11,761 $12,037 $12,310
1/31/91 $11,905 $12,216 $12,589
2/28/91 $12,241 $12,332 $12,600
3/31/91 $12,013 $12,369 $12,206
4/30/91 $12,199 $12,472 $12,354
5/31/91 $12,347 $12,530 $12,365
6/30/91 $12,246 $12,492 $12,200
7/31/91 $12,491 $12,628 $12,459
8/31/91 $12,564 $12,849 $12,717
9/30/91 $12,898 $13,094 $13,181
10/31/91 $13,076 $13,192 $13,310
11/30/91 $13,058 $13,282 $13,527
12/31/91 $13,435 $13,627 $14,210
1/31/92 $13,403 $13,581 $13,932
2/29/92 $13,415 $13,631 $13,891
3/31/92 $13,399 $13,551 $13,763
4/30/92 $13,527 $13,620 $13,878
5/31/92 $13,817 $13,811 $14,272
6/30/92 $13,799 $13,939 $14,661
7/31/92 $13,916 $14,156 $14,984
8/31/92 $13,819 $14,250 $15,383
9/30/92 $13,193 $14,468 $15,367
10/31/92 $13,434 $14,524 $14,983
11/30/92 $13,162 $14,516 $14,718
12/31/92 $13,402 $14,700 $14,858
1/31/93 $13,597 $14,929 $15,109
2/28/93 $13,856 $15,210 $15,352
3/31/93 $14,357 $15,202 $15,588
4/30/93 $14,780 $15,254 $15,872
5/31/93 $15,013 $15,286 $15,974
6/30/93 $14,954 $15,595 $15,986
7/31/93 $14,910 $15,735 $15,993
8/31/93 $15,280 $16,061 $16,466
9/30/93 $15,254 $16,154 $16,641
10/31/93 $15,695 $16,296 $16,633
11/30/93 $15,331 $16,308 $16,511
12/31/93 $15,899 $16,523 $16,679
1/31/94 $16,213 $16,535 $16,836
2/28/94 $15,720 $16,202 $16,651
3/31/94 $15,067 $15,996 $16,574
4/30/94 $15,057 $15,896 $16,561
5/31/94 $15,169 $15,813 $16,425
6/30/94 $14,414 $15,693 $16,619
7/31/94 $14,618 $15,861 $16,775
8/31/94 $14,770 $15,769 $16,732
9/30/94 $14,741 $15,717 $16,816
10/31/94 $14,814 $15,745 $17,068
11/30/94 $14,796 $15,863 $16,853
12/31/94 $14,665 $15,906 $16,891
1/31/95 $14,573 $16,125 $17,233
2/28/95 $14,781 $16,377 $17,677
3/31/95 $15,085 $16,644 $18,577
4/30/95 $15,449 $16,892 $18,874
5/31/95 $15,855 $17,481 $19,401
6/30/95 $15,913 $17,509 $19,521
7/31/95 $16,049 $17,627 $19,613
8/31/95 $16,090 $17,775 $19,068
9/30/95 $16,448 $18,020 $19,499
10/31/95 $16,688 $18,240 $19,690
11/30/95 $16,950 $18,586 $19,908
12/31/95 $17,315 $18,778 $20,155
1/31/96 $17,356 $18,956 $19,950
2/29/96 $17,068 $18,687 $19,832
3/31/96 $17,131 $18,751 $19,802
4/30/96 $17,318 $18,824 $19,729
5/31/96 $17,443 $18,916 $19,749
6/30/96 $17,695 $19,098 $19,922
7/31/96 $17,717 $19,197 $20,289
8/31/96 $17,993 $19,364 $20,374
9/30/96 $18,314 $19,732 $20,486
10/31/96 $18,657 $20,095 $20,892
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the Salomon Brothers World Government Hedged Index and the
JP Morgan Global Government Bond Index, based on a $10,000 investment from
5/1/95 to 10/31/96.
Period Ending Fund Index Index
5/1/95 $9,901 $10,000 $10,000
5/31/95 $10,171 $10,349 $10,279
6/30/95 $10,204 $10,366 $10,343
7/31/95 $10,273 $10,435 $10,391
8/31/95 $10,294 $10,523 $10,102
9/30/95 $10,518 $10,668 $10,331
10/31/95 $10,670 $10,798 $10,432
11/30/95 $10,834 $11,003 $10,548
12/31/95 $11,063 $11,117 $10,679
1/31/96 $11,084 $11,222 $10,570
2/29/96 $10,895 $11,063 $10,507
3/31/96 $10,929 $11,100 $10,492
4/30/96 $11,029 $11,144 $10,453
5/31/96 $11,117 $11,198 $10,463
6/30/96 $11,272 $11,306 $10,555
7/31/96 $11,280 $11,365 $10,749
8/31/96 $11,451 $11,463 $10,795
9/30/96 $11,650 $11,681 $10,854
10/31/96 $11,766 $11,896 $11,069
GRAPHIC MATERIAL (3)
The following line graph illustrates the fluctuating yields of the one-year and
five-year U.S. Treasuries from 11/30/95 through 10/31/96.
Period Ending Five-Year One-Year
Nov-95 5.53% 5.36%
Dec-95 5.38% 5.18%
Jan-96 5.25% 4.90%
Feb-96 5.73% 5.23%
Mar-96 6.10% 5.41%
Apr-96 6.40% 5.62%
May-96 6.64% 5.77%
Jun-96 6.47% 5.70%
Jul-96 6.57% 5.85%
Aug-96 6.73% 5.91%
Sep-96 6.46% 5.71%
Oct-96 6.10% 5.44%
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of the fund
with the Lehman Brothers Short U.S. Treasury 1-5 Year Index and the Consumer
Price Index, based on a $10,000 investment from 4/15/87 through 10/31/96.
Period Ending Fund Index Index
4/15/87 9776 $10,000 $10,000
Apr-87 9,796 $9,945 $10,027
May-87 9,825 $9,947 $10,062
Jun-87 9,912 $10,060 $10,097
Jul-87 9,942 $10,105 $10,124
Aug-87 9,942 $10,106 $10,177
Sep-87 9,894 $10,034 $10,230
Oct-87 10,111 $10,277 $10,257
Nov-87 10,161 $10,344 $10,266
Dec-87 10,231 $10,423 $10,266
Jan-88 10,402 $10,617 $10,293
Feb-88 10,483 $10,715 $10,319
Mar-88 10,495 $10,710 $10,364
Apr-88 10,496 $10,713 $10,418
May-88 10,486 $10,687 $10,453
Jun-88 10,590 $10,816 $10,498
Jul-88 10,591 $10,808 $10,542
Aug-88 10,603 $10,819 $10,586
Sep-88 10,729 $10,968 $10,657
Oct-88 10,838 $11,094 $10,693
Nov-88 10,799 $11,036 $10,701
Dec-88 10,823 $11,049 $10,719
Jan-89 10,902 $11,141 $10,773
Feb-89 10,905 $11,122 $10,817
Mar-89 10,952 $11,170 $10,880
Apr-89 11,119 $11,377 $10,950
May-89 11,253 $11,554 $11,013
Jun-89 11,433 $11,806 $11,039
Jul-89 11,580 $12,014 $11,066
Aug-89 11,482 $11,896 $11,084
Sep-89 11,540 $11,958 $11,119
Oct-89 11,736 $12,174 $11,172
Nov-89 11,830 $12,286 $11,199
Dec-89 11,867 $12,330 $11,217
Jan-90 11,881 $12,305 $11,333
Feb-90 11,954 $12,360 $11,386
Mar-90 11,980 $12,385 $11,449
Apr-90 11,982 $12,386 $11,467
May-90 12,176 $12,608 $11,493
Jun-90 12,311 $12,755 $11,555
Jul-90 12,447 $12,926 $11,599
Aug-90 12,474 $12,940 $11,706
Sep-90 12,587 $13,050 $11,804
Oct-90 12,726 $13,213 $11,875
Nov-90 12,854 $13,365 $11,901
Dec-90 13,012 $13,538 $11,901
Jan-91 13,116 $13,670 $11,973
Feb-91 13,195 $13,752 $11,991
Mar-91 13,275 $13,838 $12,009
Apr-91 13,394 $13,979 $12,027
May-91 13,462 $14,061 $12,063
Jun-91 13,495 $14,095 $12,098
Jul-91 13,607 $14,236 $12,116
Aug-91 13,800 $14,471 $12,151
Sep-91 13,953 $14,668 $12,204
Oct-91 14,108 $14,839 $12,223
Nov-91 14,237 $15,007 $12,258
Dec-91 14,581 $15,297 $12,267
Jan-92 14,380 $15,219 $12,285
Feb-92 14,413 $15,258 $12,329
Mar-92 14,344 $15,222 $12,392
Apr-92 14,470 $15,369 $12,410
May-92 14,680 $15,557 $12,427
Jun-92 14,907 $15,759 $12,472
Jul-92 15,221 $16,005 $12,498
Aug-92 15,379 $16,167 $12,533
Sep-92 15,647 $16,362 $12,568
Oct-92 15,395 $16,198 $12,612
Nov-92 15,302 $16,143 $12,630
Dec-92 15,549 $16,324 $12,621
Jan-93 15,838 $16,582 $12,683
Feb-93 16,114 $16,776 $12,727
Mar-93 16,180 $16,833 $12,772
Apr-93 16,277 $16,961 $12,807
May-93 16,222 $16,903 $12,825
Jun-93 16,434 $17,086 $12,843
Jul-93 16,455 $17,117 $12,843
Aug-93 16,707 $17,322 $12,879
Sep-93 16,759 $17,379 $12,906
Oct-93 16,787 $17,421 $12,959
Nov-93 16,691 $17,383 $12,968
Dec-93 16,754 $17,452 $12,968
Jan-94 16,924 $17,597 $13,003
Feb-94 16,668 $17,418 $13,047
Mar-94 16,442 $17,247 $13,092
Apr-94 16,311 $17,147 $13,110
May-94 16,324 $17,166 $13,119
Jun-94 16,321 $17,192 $13,164
Jul-94 16,514 $17,379 $13,199
Aug-94 16,550 $17,433 $13,252
Sep-94 16,439 $17,339 $13,288
Oct-94 16,462 $17,361 $13,297
Nov-94 16,370 $17,274 $13,315
Dec-94 16,393 $17,314 $13,315
Jan-95 16,632 $17,577 $13,368
Feb-95 16,888 $17,874 $13,421
Mar-95 16,978 $17,974 $13,466
Apr-95 17,124 $18,160 $13,510
May-95 17,456 $18,577 $13,537
Jun-95 17,553 $18,689 $13,564
Jul-95 17,599 $18,730 $13,564
Aug-95 17,696 $18,857 $13,599
Sep-95 17,777 $18,963 $13,627
Oct-95 17,927 $19,147 $13,672
Nov-95 18,077 $19,346 $13,662
Dec-95 18,211 $19,514 $13,652
Jan-96 18,328 $19,692 $13,733
Feb-96 18,253 $19,556 $13,777
Mar-96 18,212 $19,493 $13,849
Apr-96 18,207 $19,476 $13,903
May-96 18,221 $19,489 $13,929
Jun-96 18,361 $19,655 $13,937
Jul-96 18,411 $19,724 $13,964
Aug-96 18,462 $19,775 $13,990
Sep-96 18,621 $19,989 $14,035
Oct-96 18,818 $20,263 $14,080
Total Return 88.18% 102.63% 40.80%
GRAPHIC MATERIAL (5)
This chart demonstrates in bar format the breakdown of the fund's securities
based on total net assets, contrasting 10/31/95 and 10/31/96 holdings.
Portfolio Breakdown on October 31, 1995 vs. October 31, 1996
Convertible Bonds 65.9% 63.0%
Convertible Preferred Stocks 27.0% 20.5%
Corporate Bonds 0.0% 3.1%
Common Stocks 0.0% 3.0%
Cash & Short-Term Investments 7.1% 10.4%
GRAPHIC MATERIAL (6)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the Goldman Sachs Convertible 100 Index, based on a $10,000
investment from 4/15/87 to 10/31/96.
Period Ending Fund Index Index
4/15/87 $9,545 $10,000
4/30/87 $9,555 $9,981
5/31/87 $9,642 $9,942
6/30/87 $9,691 $10,146
7/31/87 $9,932 $10,578
8/31/87 $10,126 $10,799
9/30/87 $9,922 $10,540
10/31/87 $8,690 $8,610
11/30/87 $8,572 $8,404
12/31/87 $8,864 $8,771
1/31/88 $9,100 $9,217
2/29/88 $9,477 $9,594
3/31/88 $9,584 $9,681
4/30/88 $9,703 $9,790
5/31/88 $9,639 $9,721
6/30/88 $10,015 $10,101
7/31/88 $9,878 $9,947
8/31/88 $9,740 $9,737
9/30/88 $9,810 $9,821
10/31/88 $9,974 $9,980
11/30/88 $9,887 $9,779
12/31/88 $9,863 $9,944
1/31/89 $10,320 $10,433
2/28/89 $10,349 $10,467
3/31/89 $10,291 $10,538
4/30/89 $10,658 $10,822
5/31/89 $10,885 $10,954
6/30/89 $10,848 $10,841
7/31/89 $11,088 $10,986
8/31/89 $11,342 $11,223
9/30/89 $11,249 $11,013
10/31/89 $10,839 $10,565
11/30/89 $10,961 $10,702
12/31/89 $11,062 $10,684
1/31/90 $10,748 $10,132
2/28/90 $10,814 $10,205
3/31/90 $11,066 $10,364
4/30/90 $10,816 $10,000
5/31/90 $11,307 $10,624
6/30/90 $11,481 $10,597
7/31/90 $11,322 $10,481
8/31/90 $10,611 $9,898
9/30/90 $10,039 $9,347
10/31/90 $9,537 $8,842
11/30/90 $9,974 $9,337
12/31/90 $10,425 $9,585
1/31/91 $10,828 $10,108
2/28/91 $11,498 $10,715
3/31/91 $11,930 $10,954
4/30/91 $12,208 $11,061
5/31/91 $12,672 $11,465
6/30/91 $12,251 $11,108
7/31/91 $12,771 $11,410
8/31/91 $13,229 $11,778
9/30/91 $13,252 $11,746
10/31/91 $13,382 $11,979
11/30/91 $13,217 $11,665
12/31/91 $13,931 $12,240
1/31/92 $14,279 $12,832
2/29/92 $14,506 $13,127
3/31/92 $14,309 $12,974
4/30/92 $14,361 $12,983
5/31/92 $14,634 $13,265
6/30/92 $14,394 $13,131
7/31/92 $14,909 $13,591
8/31/92 $14,722 $13,584
9/30/92 $14,943 $13,861
10/31/92 $15,124 $13,887
11/30/92 $15,765 $14,208
12/31/92 $16,193 $14,401
1/31/93 $16,624 $14,728
2/28/93 $16,562 $14,899
3/31/93 $17,215 $15,401
4/30/93 $17,181 $15,374
5/31/93 $17,649 $15,758
6/30/93 $17,839 $15,996
7/31/93 $18,043 $15,956
8/31/93 $18,698 $16,400
9/30/93 $18,995 $16,419
10/31/93 $19,399 $16,670
11/30/93 $19,039 $16,610
12/31/93 $19,519 $16,868
1/31/94 $20,049 $17,283
2/28/94 $19,976 $17,205
3/31/94 $19,246 $16,691
4/30/94 $18,954 $16,390
5/31/94 $19,027 $16,439
6/30/94 $19,004 $16,278
7/31/94 $19,425 $16,617
8/31/94 $19,896 $17,085
9/30/94 $19,810 $16,834
10/31/94 $19,820 $16,755
11/30/94 $19,251 $16,167
12/31/94 $19,200 $16,049
1/31/95 $19,079 $16,367
2/28/95 $19,477 $16,909
3/31/95 $20,035 $17,407
4/30/95 $20,576 $17,827
5/31/95 $21,190 $18,338
6/30/95 $21,805 $18,953
7/31/95 $22,689 $19,535
8/31/95 $22,903 $19,779
9/30/95 $23,330 $20,010
10/31/95 $22,828 $19,574
11/30/95 $23,421 $20,355
12/31/95 $23,845 $20,467
1/31/96 $24,286 $21,050
2/29/96 $24,668 $21,410
3/31/96 $24,919 $21,706
4/30/96 $25,519 $21,908
5/31/96 $26,043 $22,300
6/30/96 $25,633 $22,146
7/31/96 $24,697 $21,408
8/31/96 $25,580 $22,091
9/30/96 $26,585 $22,812
10/31/96 $26,643 $22,686
GRAPHIC MATERIAL (7)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the Goldman Sachs Convertible 100 Index, based on a $10,000
investment from 10/2/95 to 10/31/96.
Period Ending Fund Index Index
10/2/95 $9,901 $10,000
10/31/95 $9,708 $9,782
11/30/95 $9,964 $10,172
12/31/95 $10,125 $10,228
1/31/96 $10,317 $10,520
2/29/96 $10,468 $10,700
3/31/96 $10,571 $10,847
4/30/96 $10,822 $10,948
5/31/96 $11,032 $11,144
6/30/96 $10,854 $11,067
7/31/96 $10,451 $10,699
8/31/96 $10,812 $11,040
9/30/96 $11,232 $11,400
10/31/96 $11,146 $11,337
GRAPHIC MATERIAL (8)
The following line graph compares the fund's distribution rate against the
T-Bill Annualized Yield, from 11/1/95 through 10/31/96.
Period Ending Fund T-BIll
11/1/95 6.02% 5.46%
11/30/95 6.00% 5.36%
12/31/95 5.76% 5.18%
1/31/96 5.75% 4.90%
2/29/96 5.78% 5.23%
3/31/96 5.77% 5.41%
4/30/96 6.05% 5.62%
5/31/96 6.05% 5.77%
6/30/96 6.03% 5.70%
7/31/96 6.04% 5.85%
8/31/96 6.06% 5.91%
9/30/96 5.79% 5.71%
10/31/96 5.51% 5.44%
GRAPHIC MATERIAL (9)
The following line graph hypothetically compares the performance of the fund
with the Lehman Brothers Short U.S. Government 1-2 Year Index and the Payden &
Rygel 6 month CD Index, based on a $10,000 investment from 10/20/87 through
10/31/96.
Period Ending Fund Index Index
10/20/87 9775 10000 10000
Oct-87 9,775 $10,065 $10,034
Nov-87 9,775 $10,126 $10,085
Dec-87 9,834 $10,189 $10,170
Jan-88 9,941 $10,331 $10,249
Feb-88 10,020 $10,412 $10,307
Mar-88 10,078 $10,443 $10,355
Apr-88 10,097 $10,464 $10,396
May-88 10,076 $10,463 $10,439
Jun-88 10,164 $10,560 $10,505
Jul-88 10,183 $10,576 $10,546
Aug-88 10,203 $10,602 $10,605
Sep-88 10,283 $10,716 $10,689
Oct-88 10,384 $10,817 $10,769
Nov-88 10,424 $10,802 $10,810
Dec-88 10,464 $10,832 $10,890
Jan-89 10,537 $10,915 $10,970
Feb-89 10,558 $10,921 $11,003
Mar-89 10,605 $10,972 $11,089
Apr-89 10,726 $11,104 $11,212
May-89 10,816 $11,252 $11,322
Jun-89 10,925 $11,438 $11,430
Jul-89 11,004 $11,593 $11,544
Aug-89 11,085 $11,545 $11,599
Sep-89 11,187 $11,615 $11,674
Oct-89 11,325 $11,768 $11,788
Nov-89 11,429 $11,872 $11,874
Dec-89 11,546 $11,918 $11,954
Jan-90 11,607 $11,946 $12,028
Feb-90 11,692 $12,011 $12,102
Mar-90 11,786 $12,054 $12,174
Apr-90 11,866 $12,094 $12,246
May-90 11,972 $12,265 $12,355
Jun-90 12,063 $12,385 $12,441
Jul-90 12,175 $12,521 $12,547
Aug-90 12,261 $12,574 $12,622
Sep-90 12,359 $12,667 $12,695
Oct-90 12,446 $12,800 $12,794
Nov-90 12,534 $12,915 $12,866
Dec-90 12,647 $13,058 $12,991
Jan-91 12,758 $13,178 $13,100
Feb-91 12,866 $13,265 $13,178
Mar-91 12,973 $13,357 $13,271
Apr-91 13,055 $13,472 $13,358
May-91 13,134 $13,548 $13,422
Jun-91 13,184 $13,608 $13,471
Jul-91 13,323 $13,714 $13,553
Aug-91 13,422 $13,885 $13,650
Sep-91 13,544 $14,011 $13,724
Oct-91 13,626 $14,148 $13,807
Nov-91 13,665 $14,289 $13,887
Dec-91 13,743 $14,475 $13,971
Jan-92 13,773 $14,476 $14,029
Feb-92 13,844 $14,518 $14,069
Mar-92 13,900 $14,534 $14,110
Apr-92 13,939 $14,658 $14,179
May-92 14,030 $14,780 $14,232
Jun-92 14,122 $14,908 $14,281
Jul-92 14,133 $15,062 $14,360
Aug-92 14,193 $15,169 $14,403
Sep-92 14,251 $15,294 $14,462
Oct-92 14,210 $15,224 $14,487
Nov-92 14,239 $15,209 $14,501
Dec-92 14,294 $15,339 $14,569
Jan-93 14,346 $15,479 $14,625
Feb-93 14,411 $15,588 $14,664
Mar-93 14,430 $15,631 $14,704
Apr-93 14,505 $15,716 $14,748
May-93 14,507 $15,682 $14,773
Jun-93 14,585 $15,780 $14,813
Jul-93 14,634 $15,818 $14,856
Aug-93 14,681 $15,928 $14,903
Sep-93 14,664 $15,977 $14,945
Oct-93 14,631 $16,012 $14,982
Nov-93 14,523 $16,026 $15,018
Dec-93 14,487 $16,083 $15,064
Jan-94 14,538 $16,173 $15,113
Feb-94 14,452 $16,102 $15,112
Mar-94 14,348 $16,060 $15,146
Apr-94 14,255 $16,017 $15,169
May-94 14,320 $16,044 $15,209
Jun-94 14,360 $16,088 $15,256
Jul-94 14,420 $16,217 $15,323
Aug-94 14,420 $16,272 $15,383
Sep-94 14,404 $16,259 $15,421
Oct-94 14,240 $16,305 $15,481
Nov-94 14,233 $16,253 $15,515
Dec-94 14,202 $16,292 $15,576
Jan-95 14,316 $16,490 $15,685
Feb-95 14,480 $16,687 $15,781
Mar-95 14,565 $16,782 $15,858
Apr-95 14,700 $16,918 $15,950
May-95 15,011 $17,153 $16,055
Jun-95 14,958 $17,244 $16,135
Jul-95 15,051 $17,325 $16,224
Aug-95 15,177 $17,420 $16,302
Sep-95 15,255 $17,499 $16,375
Oct-95 15,317 $17,628 $16,462
Nov-95 15,462 $17,758 $16,549
Dec-95 15,505 $17,883 $16,642
Jan-96 15,615 $18,024 $16,732
Feb-96 15,625 $17,984 $16,797
Mar-96 15,719 $17,995 $16,856
Apr-96 15,732 $18,029 $16,928
May-96 15,796 $18,083 $17,000
Jun-96 15,946 $18,205 $17,066
Jul-96 15,994 $18,277 $17,139
Aug-96 16,042 $18,352 $17,230
Sep-96 16,156 $18,499 $17,315
Oct-96 16,320 $18,684 $17,405
Total Return 63.20% 86.84% 74.05%
GRAPHIC MATERIAL (10)
This chart shows in bar format the fund's top five investment sectors on
10/31/96, based on total net assets.
Top Five Investment Sectors on October 31, 1996
Oil Integrated 15.8%
Electric Utilities 14.7%
Telephone Utilities 10.2%
Financial Services 6.5%
Real Estate Investment Trusts 5.8%
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the Standard & Poor's 500 Stock Index and the Consumer Price
Index, based on a $10,000 investment from 3/15/88 to 10/31/96.
Period Ending Fund Index Index
3/15/88 $9,551 $10,000 $10,000
3/31/96 $9,561 $9,841 $10,022
4/30/88 $9,532 $9,950 $10,074
5/31/88 $9,694 $10,036 $10,108
6/30/88 $10,029 $10,496 $10,152
7/31/88 $10,057 $10,457 $10,194
8/31/88 $9,943 $10,101 $10,237
9/30/88 $10,251 $10,531 $10,306
10/31/88 $10,445 $10,824 $10,340
11/30/88 $10,313 $10,669 $10,348
12/31/88 $10,384 $10,856 $10,366
1/31/89 $10,962 $11,651 $10,418
2/28/89 $10,824 $11,361 $10,460
3/31/89 $11,057 $11,625 $10,521
4/30/89 $11,472 $12,229 $10,589
5/31/89 $11,817 $12,724 $10,650
6/30/89 $11,860 $12,651 $10,675
7/31/89 $12,660 $13,794 $10,701
8/31/89 $12,819 $14,064 $10,718
9/30/89 $12,813 $14,007 $10,752
10/31/89 $12,455 $13,682 $10,804
11/30/89 $12,637 $13,961 $10,830
12/31/89 $12,872 $14,296 $10,847
1/31/90 $12,242 $13,336 $10,959
2/28/90 $12,438 $13,509 $11,010
3/31/90 $12,516 $13,866 $11,071
4/30/90 $12,091 $13,521 $11,089
5/31/90 $12,882 $14,840 $11,114
6/30/90 $12,747 $14,740 $11,174
7/31/90 $12,479 $14,693 $11,217
8/31/90 $11,528 $13,365 $11,320
9/30/90 $11,002 $12,714 $11,415
10/31/90 $10,907 $12,659 $11,483
11/30/90 $11,605 $13,477 $11,509
12/31/90 $11,734 $13,853 $11,509
1/31/91 $12,162 $14,457 $11,578
2/28/91 $12,911 $15,491 $11,595
3/31/91 $13,079 $15,865 $11,613
4/30/91 $13,176 $15,904 $11,630
5/31/91 $13,718 $16,589 $11,665
6/30/91 $13,152 $15,829 $11,699
7/31/91 $13,686 $16,567 $11,716
8/31/91 $14,092 $16,960 $11,750
9/30/91 $14,122 $16,676 $11,802
10/31/91 $14,354 $16,900 $11,820
11/30/91 $14,050 $16,219 $11,854
12/31/91 $15,044 $18,074 $11,862
1/31/92 $14,965 $17,738 $11,880
2/29/92 $15,178 $17,967 $11,923
3/31/92 $14,988 $17,616 $11,984
4/30/92 $15,706 $18,134 $12,000
5/31/92 $15,861 $18,223 $12,017
6/30/92 $15,979 $17,952 $12,060
7/31/92 $16,732 $18,686 $12,086
8/31/92 $16,464 $18,303 $12,120
9/30/92 $16,370 $18,517 $12,153
10/31/92 $16,213 $18,580 $12,196
11/30/92 $16,663 $19,212 $12,213
12/31/92 $17,037 $19,448 $12,205
1/31/93 $17,431 $19,611 $12,264
2/28/93 $17,944 $19,878 $12,307
3/31/93 $18,419 $20,297 $12,350
4/30/93 $18,385 $19,806 $12,385
5/31/93 $18,655 $20,335 $12,402
6/30/93 $18,809 $20,394 $12,420
7/31/93 $19,002 $20,312 $12,420
8/31/93 $19,690 $21,082 $12,454
9/30/93 $19,818 $20,920 $12,481
10/31/93 $20,121 $21,353 $12,532
11/30/93 $19,912 $21,150 $12,540
12/31/93 $20,074 $21,406 $12,540
1/31/94 $20,543 $22,134 $12,574
2/28/94 $19,975 $21,534 $12,617
3/31/94 $19,133 $20,595 $12,660
4/30/94 $19,282 $20,859 $12,678
5/31/94 $19,524 $21,201 $12,687
6/30/94 $19,481 $20,681 $12,730
7/31/94 $19,996 $21,360 $12,764
8/31/94 $20,787 $22,236 $12,815
9/30/94 $20,383 $21,693 $12,850
10/31/94 $20,514 $22,181 $12,859
11/30/94 $19,934 $21,374 $12,875
12/31/94 $20,009 $21,690 $12,875
1/31/95 $20,576 $22,252 $12,927
2/28/95 $20,980 $23,120 $12,979
3/31/95 $21,281 $23,802 $13,021
4/30/95 $21,748 $24,501 $13,064
5/31/95 $22,201 $25,481 $13,091
6/30/95 $22,322 $26,073 $13,117
7/31/95 $22,612 $26,938 $13,117
8/31/95 $22,826 $27,006 $13,151
9/30/95 $23,622 $28,145 $13,177
10/31/95 $23,422 $28,044 $13,221
11/30/95 $24,212 $29,275 $13,211
12/31/95 $25,157 $29,840 $13,202
1/31/96 $25,752 $30,855 $13,280
2/29/96 $25,514 $31,142 $13,323
3/31/96 $25,711 $31,441 $13,392
4/30/96 $25,779 $31,903 $13,444
5/31/96 $25,976 $32,726 $13,470
6/30/96 $26,385 $32,850 $13,478
7/31/96 $25,429 $31,398 $13,503
8/31/96 $25,840 $32,061 $13,529
9/30/96 $26,464 $33,866 $13,572
10/31/96 $27,010 $34,800 $13,616
GRAPHIC MATERIAL (12)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the Standard & Poor's 500 Stock Index and the Consumer
Price Index, based on a $10,000 investment from 10/2/95 to 10/31/96.
Period Ending Fund Index Index
10/2/95 $9,903 $10,000 $10,000
10/31/95 $9,843 $9,964 $10,033
11/30/95 $10,184 $10,401 $10,026
12/31/95 $10,548 $10,602 $10,019
1/31/96 $10,800 $10,963 $10,078
2/29/96 $10,697 $11,065 $10,110
3/31/96 $10,775 $11,171 $10,163
4/30/96 $10,800 $11,335 $10,203
5/31/96 $10,872 $11,627 $10,222
6/30/96 $11,040 $11,672 $10,228
7/31/96 $10,634 $11,156 $10,247
8/31/96 $10,794 $11,391 $10,267
9/30/96 $11,049 $12,032 $10,300
10/31/96 $11,167 $12,365 $10,333
GRAPHIC MATERIAL (13)
The following line graph compares the fund's distribution rate against the
T-Bill Annualized Yield, from 11/1/95 through 10/31/96.
Period Ending Fund T-Bill
11/1/95 5.62% 5.46%
11/30/95 4.50% 5.36%
12/31/95 5.61% 5.18%
1/31/96 5.55% 4.90%
2/29/96 6.04% 5.23%
3/31/96 5.52% 5.41%
4/30/96 5.42% 5.62%
5/31/96 4.93% 5.77%
6/30/96 5.24% 5.70%
7/31/96 5.34% 5.85%
8/31/96 5.36% 5.91%
9/30/96 5.69% 5.71%
10/31/96 5.58% 5.44%
GRAPHIC MATERIAL (14)
The following line graph hypothetically compares the performance of the fund
with the Lehman Brothers Short U.S. Government 1-2 Year Index and the Payden &
Rygel 6 month CD Index, based on a $10,000 investment from 10/20/87 through
10/31/96.
Period Ending Fund Index Index
12/26/91 9775 $10,000 $10,000
12/31/91 9,775 $10,021 $10,010
1/31/92 9,775 $10,022 $10,051
2/29/92 9,804 $10,051 $10,080
3/31/92 9,847 $10,062 $10,109
4/30/92 9,933 $10,148 $10,159
5/31/92 9,981 $10,233 $10,196
6/30/92 10,065 $10,321 $10,232
7/31/92 10,097 $10,427 $10,288
8/31/92 10,165 $10,501 $10,319
9/30/92 10,232 $10,588 $10,362
10/31/92 10,249 $10,540 $10,379
11/30/92 10,284 $10,529 $10,390
12/31/92 10,362 $10,620 $10,438
1/31/93 10,409 $10,716 $10,478
2/28/93 10,486 $10,792 $10,506
3/31/93 10,547 $10,821 $10,535
4/30/93 10,602 $10,880 $10,566
5/31/93 10,622 $10,857 $10,584
6/30/93 10,661 $10,924 $10,613
7/31/93 10,713 $10,951 $10,644
8/31/93 10,754 $11,027 $10,678
9/30/93 10,785 $11,061 $10,708
10/31/93 10,807 $11,085 $10,734
11/30/93 10,826 $11,095 $10,760
12/31/93 10,868 $11,134 $10,792
1/31/94 10,891 $11,197 $10,828
2/28/94 10,865 $11,147 $10,827
3/31/94 10,768 $11,119 $10,852
4/30/94 10,763 $11,089 $10,868
5/31/94 10,802 $11,107 $10,896
6/30/94 10,821 $11,138 $10,930
7/31/94 10,864 $11,227 $10,978
8/31/94 10,926 $11,265 $11,021
9/30/94 10,897 $11,256 $11,049
10/31/94 10,927 $11,288 $11,092
11/30/94 10,934 $11,252 $11,116
12/31/94 10,981 $11,279 $11,159
1/31/95 11,034 $11,416 $11,238
2/28/95 11,131 $11,552 $11,306
3/31/95 11,183 $11,618 $11,361
4/30/95 11,272 $11,712 $11,427
5/31/95 11,403 $11,875 $11,503
6/30/95 11,477 $11,938 $11,560
7/31/95 11,497 $11,994 $11,624
8/31/95 11,602 $12,060 $11,680
9/30/95 11,657 $12,114 $11,732
10/31/95 11,740 $12,204 $11,794
11/30/95 11,809 $12,294 $11,857
12/31/95 11,910 $12,380 $11,923
1/31/96 11,961 $12,478 $11,988
2/29/96 11,958 $12,451 $12,034
3/31/96 12,001 $12,458 $12,077
4/30/96 12,046 $12,482 $12,129
5/31/96 12,061 $12,519 $12,179
6/30/96 12,148 $12,603 $12,227
7/31/96 12,195 $12,654 $12,280
8/31/96 12,238 $12,705 $12,345
9/30/96 12,324 $12,807 $12,405
10/31/96 12,472 $12,935 $12,470
Total Return 24.72% 29.35% 24.70%
