Semi
Annual
Report
April 30, 1998
Franklin Investors Securities Trust
Franklin Global Government Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Thank you for investing with Franklin Templeton. We encourage our investors
to maintain a long-term perspective, and to expect that mixed in with the
good years can be some bad years. It's important to remember that all
securities markets move both up and down, as do mutual fund share prices. We
appreciate your past support and look forward to serving your investment
needs in the years ahead.
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
CONTENTS
Shareholder Letter ....................... 1
Fund Reports
Franklin Global Government
Income Fund .............................. 4
Franklin Short-Intermediate
U.S. Government
Securities Fund .......................... 14
Franklin Convertible
Securities Fund .......................... 21
Franklin Adjustable
U.S. Government
Securities Fund .......................... 29
Franklin Equity
Income Fund .............................. 35
Franklin Adjustable
Rate Securities Fund ..................... 44
Financial Highlights &
Statement of Investments ................. 50
Financial Statements ..................... 76
Notes to
Financial Statements ..................... 85
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Investors Securities Trust's
semi-annual report for the period ended April 30, 1998.
The U.S. economy remained strong over the Trust's reporting period as
measured by 1998's first quarter, annualized Gross Domestic Product gain of
4.8%. Investors also reacted favorably to first quarter corporate earnings
and pushed stock prices generally higher in the month of April. Although
overall corporate earnings increases were lower than in recent quarters, they
generally exceeded expectations. For the first time in history, The Dow
Jones(R) Industrial Average (the Dow) broke 9000 on April 6. The Dow stood at
9063 on April 30, 1998, up 21.78% from its October 31 closing of 7442.
U.S. interest rate stability characterized the reporting period. The Federal
Reserve Board met in April and left its overnight target rate unchanged at
5.50%. This rate has moved only once since January 1996. Investors and
traders waited for evidence that either the economy would slow down because
of Asian problems and push rates lower; or that inflation would increase,
based on current economic strength, and push rates higher. Neither event
occurred. The yield on the 30-year U.S. Treasury bond varied between 5.7% and
6.25% during the six-month reporting period. The Consumer Price Index (CPI),
a widely used measure of inflation, continued to trend downward. The CPI's
annualized increase for March 1998 was 2.25%, a surprisingly benign showing,
considering the U.S. economy is in its seventh consecutive year of expansion.
While the recent favorable economic indicators and soaring stock market are
cause for celebration, it is wise to keep in mind that markets do fluctuate.
Historically, there are two ways to profit from stock market variations:
timing and pricing. To make money by timing, the investor must, more often
than not, accurately "predict" the market's future course. On the other hand,
the investor who depends on pricing endeavors to buy stocks when they are
quoted below their fair value and to sell them when they rise above such
value. With Franklin Convertible Securities Fund and Franklin Equity Income
Fund's pricing strategies, the market's ups and downs have one significant
meaning: They provide us with the opportunity to buy at a discount when
prices fall sharply and the potential to sell at a profit if they advance a
great deal.
"While the recent favorable economic indicators and soaring stock market are
cause for celebration, it is wise to keep in mind that markets do
fluctuate."
To some investors, the big run-up in the stock market might make bonds seem
comparably less attractive. However, because of this strong stock market
performance, many investors may be over-allocated or over-exposed to
equities. Bond funds can cushion overall returns with monthly dividend
income, add diversification and potentially reduce the volatility of an
equity portfolio.
Franklin Investors Securities Trust is committed to portfolio selection based
on a careful study of companies' operating results and dividend returns, and
the overall quality of the debt and stability of the governments whose
securities we hold.
We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds
offer a level of diversification that is almost impossible for individual
investors to achieve on their own.
Regardless of the market's direction, Franklin Templeton's disciplined
investment strategy remains the same. All of our portfolio managers are
dedicated to providing you with careful securities selection and constant
professional supervision. As always, we appreciate your support, welcome your
questions and comments, and look forward to serving your investment needs in
the years ahead.
Sincerely,
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
Your Fund's Objective: Franklin Global Government Income Fund 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.
Global Economic Review
Developed Markets
During the six-month reporting period, two opposing forces emerged as
possible influences on future interest rate movement. Rapid U.S. and European
economic growth may influence interest rates upward, while the Asian
financial crises may exert downward pressure. Although above-average U.S.
economic growth may temporarily push up global interest rates, we believe
that, overall, rates will move downward over the course of the year.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 53
of this report.
In Japan, slow economic growth should keep interest rates near recent levels,
despite significant stimulus from fiscal spending.
In Europe, on the other hand, the increased economic growth during the
reporting period should cause a modest rate increase.The fund's neutral to
somewhat aggressive interest-rate exposure reflected our outlook for these
markets: The portfolio's U.S. bonds had the longest maturities, while
European positions were somewhat shorter.
In addition to interest rates, currency exchange rates have a big impact on
the fund's performance. The economic outlook favors a strong U.S. dollar,
particularly against the yen. During the several months necessary to gauge
the Asian crises' fallout, we expect the dollar's bullish trend to remain
intact. This could change if the U.S. trade deficit expands significantly
later this year, shaking the market's confidence in the dollar. A shift in
economic momentum between the U.S. and European economies might also exert
downward pressure against the dollar. In the intermediate term, however, we
would expect the dollar to appreciate to the top of the recent trading range
of 1.73 to 1.85 German marks to the dollar.
One immediately discernible impact of the Asian crises was the negative
impact on Australian and New Zealand currency fundamentals. Until this
situation changes, the fund is likely to continue hedging each of these
currencies back to the U.S. dollar.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Emerging Debt Markets
From a historical perspective, emerging market debt offers relatively narrow
yield advantages compared with developed market government debt. In general,
we were somewhat cautious on emerging market debt as it seemed relatively
expensive. We reduced our exposure to the more risky market sectors such as
Asia and longer-duration issues, while concentrating on the big four South
American countries. These countries offered the greatest liquidity as well as
intermediate-term maturities. Among the big four, we preferred Brazil,
Venezuela, and Mexico, but were cautious on Argentina.
Portfolio Notes
Our allocations reflect our beliefs about relative bond performance around
the world. The fund holds approximately 81% in U.S. dollar- and Canadian
dollar-denominated debt. Our country distribution includes approximately
28.9% in North American debt and 21.6% in emerging markets. An additional
5.9% is held in Australian and New Zealand government debt. The balance of
the funds is held in Europe, including government debt of Germany (11.0%),
Italy (9.7%), Spain (6.8%), Sweden (5.2%), the U.K. (3.4%) and Denmark (1.8%).
In keeping with our currency views, we increased our U.S. dollar-denominated
holdings from 39.4% at the beginning of the period to 74.0% on April 30,
1998, as well as the proportion of our non-U.S. holdings hedged to the dollar.
Looking forward, we will maintain our focus on global government securities
offering maximum returns with reduced risk. The fund's security selection
process is based on careful evaluation of the economic and political
conditions, such as inflation rate, growth prospects, trade patterns and
national policies, that affect each country's debt.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
Thomas J. Dickson
Portfolio Manager
Franklin Global Government Income Fund
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Class I
Franklin Global Government Income Fund - Class I share price, as measured by
net asset value, increased 1 cent, from $8.41 on October 31, 1997, to $8.42
on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
31 cents ($0.31) in dividend income. Distributions will vary depending on the
fund's income, and past distributions are not indicative of future trends.
Based on the maximum offering price of $8.79 on April 30, 1998, and an
annualization of April's monthly dividend of 5 cents ($0.05) per share, your
fund's distribution rate was 6.83%.
The fund reported a +3.87% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not
include the sales charge.
Franklin Global Government Income Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year 10-Year (3/15/88)
Cumulative Total Return1 7.75% 37.08% 110.45% 111.50%
Average Annual Total Return2 3.20% 5.58% 7.25% 7.22%
Distribution Rate3 6.83%
30-Day Standardized Yield4 4.92%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current, maximum
4.25% initial sales charge. See Note below.
3. Distribution rate is based on an annualization of April's 5 cent per share
monthly dividend and the maximum offering price of $8.79 on April 30, 1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual
total returns would differ. Effective May 1, 1994, the fund eliminated the
sales charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total returns.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Franklin Global Government Income Fund - Class II share price, as measured by
net asset value, increased 2 cents, from $8.41 on October 31, 1997, to $8.43
on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
28.70 cents ($0.2870) in dividend income. Distributions will vary depending
on the fund's income, and past distributions are not indicative of future
trends.
Based on the maximum offering price of $8.52 on April 30, 1998, and an
annualization of April's monthly dividend of 4.62 cents ($0.0462) per share,
the fund's distribution rate was 6.51%.
The fund reported a +3.71% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not
include sales charges.
Franklin Global Government Income Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (5/1/95)
Cumulative Total Return1 7.28% 28.14%
Average Annual Total Return2 5.29% 8.26%
Distribution Rate3 6.51%
30-Day Standardized Yield4 5.08%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge, applicable to
shares redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of April's 4.62 cent per
share monthly dividend and the maximum offering price of $8.52 on April 30,
1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Advisor Class
Franklin Global Government Income Fund - Advisor Class share price, as
measured by net asset value, increased 2 cents, from $8.41 on October 31,
1997, to $8.43 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
31.42 cents ($0.3142) in dividend income. Distributions will vary depending
on the fund's income, and past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $8.43 on April 30, 1998, and an
annualization of April's monthly dividend of 5.07 cents ($0.0507) per share,
the fund's distribution rate was 7.22%.
The fund reported a +4.04% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions.
Franklin Global Government Income Fund - Advisor Class
Periods ended 4/30/98
Since
Inception
1-Year* 5-Year* 10-Year* (3/15/88)*
Cumulative Total Return1 7.85% 37.42% 111.00% 112.05%
Average Annual Total Return1 7.85% 6.56% 7.75% 7.71%
Distribution Rate2 7.22%
30-Day Standardized Yield3 5.13%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
sales charge, but including the effect of Class I expenses, including Rule
12b-1 fees; and (b) for periods after January 1, 1997, figures reflect actual
Advisor Class performance including the deduction of all fees and expenses
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 6.64%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. Distribution rate is based on an annualization of April's 5.07 cent per
share monthly dividend and the net asset value price of $8.43 on April 30,
1998.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions. You may
have a gain or loss when you sell your shares.
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective: Franklin Short-Intermediate U.S. Government Securities
Fund 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.
Fears that the Asian financial crises would adversely affect the U.S. economy
pushed interest rates to record low levels at the beginning of 1998. The U.S.
bond market rallied as participants projected that Asian problems would
result in slower growth and lower bond prices for the United States. In fact,
the Federal Reserve Board (the Fed) cited the Asian situation as a
justification for relaxing monetary policy. Although they made no changes in
their official target for the federal funds rate, they modified the policy
stance from a tightening bias to a neutral position. Furthermore, the money
supply grew at an accelerated rate during the six-month period.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 58
of this report.
Q: What is the federal funds rate?
A: The federal funds rate is the interest rate charged by banks with excess
reserves at a Federal Reserve district bank to banks needing overnight loans
to meet reserve requirements.*
*Barron's Dictionary of Finance and Investment Terms, 1995.
By April, interest rates were at levels similar to October 1997's. Bond
investors became nervous as the domestic economy continued to grow at an
annual rate above 3%. This put further pressure on an already tight labor
market. Lastly, the stricter tone of speeches from various Federal Reserve
officials during the final weeks of the reporting period fostered speculation
that the Fed would return to a bias toward tightening.
Franklin Short-Intermediate U.S. Government Securities Fund reported a
cumulative total return of +2.63% for the six-month period ended April 30,
1998. Despite the great deal of volatility experienced by the bond market
over the past six months, the fund's risk-averse investment style helped
maintain a relatively stable net asset value.
We made only slight adjustments to the fund's positions during the reporting
period. We extended the weighted average maturity in the portfolio, from two
years, one month, in October, to two years, six months, once the threat of
inflation and interest rate hikes, due to the Asian crises, declined.
However, by the period's end, we allowed the average maturity to shorten to
two years, four months, given the resilience of the U.S. economy.
Looking forward, we feel U.S. Treasury securities should offer risk-averse
investors excellent return opportunities. Although inflation remains very
low, we cannot predict the future course of Federal Reserve policy. With
little difference between short- and long-term rates, any increases in the
federal funds' target rate could negatively affect bond prices. However, the
real rate of return on U.S. Treasury securities is extremely high by historic
standards. Likewise, U.S. interest rates are relatively high compared with
other developed nations.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
David Capurro
Portfolio Manager
Franklin Short-Intermediate U.S. Government Securities Fund
PERFORMANCE SUMMARY
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Franklin Short-Intermediate U.S. Government Securities Fund - Class I share
price, as measured by net asset value, decreased 2 cents, from $10.29 on
October 31, 1997, to $10.27 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
28.8 cents ($0.288) in dividend income. Distributions will vary depending on
the fund's income, and past distributions are not indicative of future trends.
Based on the maximum offering price of $10.51 on April 30, 1998, and an
annualization of the current monthly dividend of 4.8 cents ($0.048) per
share, your fund's distribution rate was 5.48%.
The fund reported a +2.63% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not
include the sales charge.
Franklin Short-Intermediate U.S. Government Securities Fund
Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
Cumulative Total Return1 6.80% 25.63% 94.84% 109.17%
Average Annual Total Return2 4.44% 4.19% 6.65% 6.69%
Distribution Rate3 5.48%
30-Day Standardized Yield4 4.80%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 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 $10.51 on April 30,
1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Note: Effective May 1, 1994, the fund eliminated the sales charge on
reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager
increased the fund's total returns.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Advisor Class
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
share price, as measured by net asset value, decreased 4 cents, from $10.30
on October 31, 1997, to $10.26 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
29.30 cents ($0.2930) in dividend income. Distributions will vary depending
on the fund's income, and past distributions are not indicative of future
trends.
Based on the fund's net asset value price of $10.26 on April 30, 1998, and an
annualization of the current monthly dividend of 4.85 cents ($0.0485) per
share, the fund's distribution rate was 5.67%.
The fund reported a +2.58% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions.
Franklin Short-Intermediate U.S. Government Securities Fund
Advisor Class
Periods ended 4/30/98
Since
Inception
1-Year* 5-Year* 10-Year* (4/15/87)*
Cumulative Total Return1 6.79% 25.61% 94.81% 109.14%
Average Annual Total Return1 6.79% 4.67% 6.90% 6.91%
Distribution Rate2 5.67%
30-Day Standardized Yield3 5.00%
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
sales charge, but including the effect of Class I expenses, including Rule
12b-1 fees; and (b) for periods after January 1, 1997, figures reflect actual
Advisor Class performance, including the deduction of all fees and expenses
applicable only to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 8.07%.
1. Cumulative total return represents the change in value of an investment
over the periods indicated. Average annual total return represents the
average annual change in value of an investment over the periods indicated.
2. Distribution rate is based on an annualization of the current 4.85 cent
per share monthly dividend and the net asset value price of $10.26 on April
30, 1998.
3. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions. You may
have a gain or loss when you sell your shares.
FRANKLIN CONVERTIBLE
SECURITIES FUND
Your Fund's Objective: Franklin Convertible Securities Fund seeks to maximize
total return consistent with reasonable risk through a portfolio of
convertible securities.
Fund Strategy
Franklin Convertible Securities Fund - Class I produced a +5.38% cumulative
total return for the six-month period ended April 30, 1998, as discussed in
the Performance Summary on page 25.
The fund maintained its strategy of identifying convertible securities with
favorable risk/reward profiles. This means that we expect to benefit from the
underlying equity's price appreciation, while attempting to limit our
exposure to possible price declines.
We select the securities that meet these objectives after screening the
entire convertible-security universe. These issues are then reviewed by the
Franklin Templeton equity and/or fixed income analysts, who further narrow
the group to those companies we believe have superior business prospects and
attractive valuation levels. These securities will form the major part of our
portfolio.
Q: What is a convertible security?
A: Convertible securities are corporate securities, usually preferred stock
or bonds, that are exchangeable for a set number of another security,
usually common stock, at a prestated price.*
*Barron's Dictionary of Finance and Investment Terms, 1995.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 61
of this report.
"We continued to pursue investment opportunities in companies that seemed
attractively priced relative to their competitive position, growth
prospects and risk profile."
Economic Update
During the reporting period, the economy continued its slow and steady
advance. The Asian currency crises tempered world growth and helped keep
inflation down. This benign inflationary climate was one of several factors
contributing to declining oil prices which, in turn, allowed for continued
low interest rates, a gradually rising economy, the highest employment in
history, and companies operating at nearly full capacity. Many companies were
able to post superior earnings growth in this environment, causing stock
prices to rise and demand for competing investments, such as money markets
and checking accounts, to fall. With the stock market rising to new heights,
many companies' valuations were at extremes.
Portfolio Activity
We continued to pursue investment opportunities in companies that seemed
attractively priced relative to their competitive position, growth prospects
and risk profile. This approach often leads us to sectors that are out of
favor. This six-month reporting period was no exception. The downside was
that this strategy partially prevented us from participating in the recent
upswing in some stocks. However, we sought to position ourselves to benefit
handsomely from a turnaround and consolidation in the sectors we favored,
namely energy and electronics. In this way, we believe we have built a solid
platform for future growth. Within these sectors, we own the convertibles of
EVI Inc., Cymer, Inc., Motorola, Inc., Baker Hughes, Inc., Kent Electronics
Corp. and Diamond Offshore Drilling, Inc.
As mentioned in prior reports, the fund has had significant positions in
electronics companies whose products allow their customers to lower costs,
reduce inventory, decrease time-to-market and improve customer satisfaction.
Declining personal computer prices and a transition within the computer
industry distribution channel slowed growth in many sectors during the
period, and our holdings in Dovatron International Inc. (DII Group), Kent
Electronics Corp. and Reptron Electronics, Inc. had difficulty maintaining
earnings growth. However, given the outstanding prospects within the contract
electronic manufacturing sector, we believe these companies will prosper in
the future.
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In addition to the companies above, we held on to issues in the economically
sensitive real estate and lodging market where lackluster stock performance
did not reflect the favorable market condition of high demand relative to
supply. Here, the fund has positions in Host Marriott Corp., ShoLodge, Inc.,
Hilton Hotels Corp. and FelCor Suites Hotels, Inc. We also own the
convertibles of real estate investment trusts (REITs) Macerich Co. and
Reckson Associates Realty Corp.
Since many of our positions appreciated significantly, and we strive to
maintain a profile where potential growth is greater than potential loss,
portfolio turnover was high. We actively took profits and invested in the new
issue marketplace, where we found some of the most attractively valued
securities. We recently purchased new issues from Pride International Inc.,
HNC Software, Inc. and Western Digital Corp.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
In addition to our heavily weighted position in the technology sector, the
fund also has significant exposure to a variety of industries (services,
media and broadcasting, environmental services) that are experiencing
significant consolidation. Some of these include fund holdings Triathlon
Broadcasting, USA Waste Systems, Inc. and Veterinary Centers of America, Inc.
Looking forward, we will maintain our focus on convertible securities of
solid companies, whose attractive valuations, we believe, offer the greatest
possibilities for appreciation, regardless of general economic conditions. It
is our job to adjust to all economic environments, and we are confident that
our value-oriented investment approach should position the fund to perform
favorably over the long term.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
Edward B. Jamieson
Portfolio Manager
Franklin Convertible Securities Fund
PERFORMANCE SUMMARY
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Franklin Convertible Securities Fund - Class I reported a +5.38% cumulative
total return for the six-month period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include the sales charge.
The fund's share price, as measured by net asset value, decreased 66 cents,
from $14.74 on October 31, 1997, to $14.08 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
34.5 cents ($0.345) in dividend income, 79.65 cents ($0.7965) in short-term
capital gains, and 24.55 cents ($0.2455) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $14.74 on April 30, 1998, and an
annualization of April's monthly dividend of 5 cents ($0.05) per share, the
fund's distribution rate was 4.07%.
Franklin Convertible Securities Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
Cumulative Total Return1 22.29% 100.13% 254.38% 260.23%
Average Annual Total Return2 16.80% 13.83% 12.96% 11.83%
Value of $10,000 Investment3 $11,680 $19,111 $33,826 $34,386
Distribution Rate4 4.07%
30-Day Standardized Yield5 3.47%
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return6 10.32% 8.56% 24.02% 10.18% 22.29%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current, maximum
4.5% initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of April's 5 cent per share
monthly dividend and the maximum offering price of $14.74 on April 30, 1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
6. Total return represents the change in value of an investment over the
periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual
total returns would differ. Effective May 1, 1994, the fund eliminated the
sales charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total returns.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Franklin Convertible Securities Fund - Class II reported a +4.98% cumulative
total return for the six-month period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment
of all distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, decreased 66 cents,
from $14.68 on October 31, 1997, to $14.02 on April 30, 1998. During the
reporting period, shareholders received per-share distributions of 28.97
cents ($0.2897) in dividend income, 79.65 cents ($0.7965) in short-term
capital gains, and 24.55 cents ($0.2455) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $14.16 on April 30, 1998, and an
annualization of April's monthly dividend of 4.10 cents ($0.0410) per share,
the fund's distribution rate was 3.47%.
Franklin Convertible Securities Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 21.31% 44.91%
Average Annual Total Return2 19.11% 15.04%
Value of $10,000 Investment3 $11,911 $14,348
Distribution Rate4 3.47%
30-Day Standardized Yield5 2.86%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge, applicable to
shares redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of April's 4.10 cent per
share monthly dividend and the maximum offering price of $14.16 on April 30,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND
Your Fund's Objective: Franklin Adjustable U.S. Government Securities Fund
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.*
*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. Yield
and share price are not guaranteed and will fluctuate with market conditions.
The fund's investment objective is to seek stability of principal with high
current income. It accomplishes this objective by investing in a portfolio of
adjustable-rate mortgage-backed securities (ARMs). These securities have
coupons that adjust with movements in various short-term interest rates. As a
consequence, the prices of these securities remain fairly stable as rates
rise and fall, thus keeping the fund's net asset value stable. Our portfolio
concentrates on seasoned ARMs, with slow and stable prepayment histories.
Such bonds generally produce higher yields and have lower price volatility
relative to other ARM sectors.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 67
of this report.
"The Federal Reserve Board (the Fed) took no actions during the six months,
maintaining a neutral posture in light of the opposing forces of a strong
domestic economy and the Asian situation's possible weakening effects."
Interest rates declined in the six-month period under review. Despite a
continued strong domestic economy, bonds benefited from a combination of
dormant inflation pressures and concerns about the ongoing financial crises
in Asia. In addition, the yield curve became flatter during the period, with
long-term interest rates declining more than short-term rates. When the curve
flattens, the gap between short and long rates narrows. For example, the
yield spread between the 2-year and 30-year Treasuries narrowed from 54 basis
points at the beginning of the period to 36 basis points on April 30, 1998.
The Federal Reserve Board (the Fed) took no actions during the six months,
maintaining a neutral posture in light of the opposing forces of a strong
domestic economy and the Asian situation's possible weakening effects.
The yield curve's flattening in the six-month reporting period has important
implications for ARM securities going forward. In general, a flat yield curve
leads to higher prepayments on ARM securities. This is because most ARMs are
tied to short-term interest rates such as the 1-year Constant Maturity
Treasury (CMT), the 6-month Treasury bill, or the 11th District Cost of Funds
Index. In contrast, fixed-rate mortgages (FRMs) are tied to movements in
longer-term rates, such as the 10-year Treasury. With less difference between
short and long rates, ARM borrowers have an increased economic incentive to
refinance into an FRM.
ARM prepayments have risen substantially in the past few months. If the yield
curve remains flat, or even inverts, ARM prepayments should remain at high
levels, reducing income and limiting price appreciation. This is where our
emphasis on seasoned CMT ARMs could prove most beneficial to shareholders.
The flat yield curve environment will probably have less negative impact on
these securities. Seasoned ARMs have already been through one or more
refinancing cycles, and, thus, are less likely to prepay than newer ARMs,
which are refinanceable for the first time.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Going forward, the stronger of two opposing economic forces seems likely to
determine the direction of interest rates. On the one hand, there is fear
that the recent crises in Asia will spread and create a persistent economic
drag in the U.S., keeping inflation subdued and possibly even leading to
deflation. This should push long-term interest rates lower and force the Fed
to ease. The other argument is that U.S. demand will remain strong and the
Asian situation will prove to have less impact than feared. Meanwhile,
inflation, led by higher wage costs, will finally rear its ugly head, forcing
the Fed to tighten and increase interest rates, leading to higher overall
rate levels. In the near term, it is likely that neither factor will
completely dominate the other and that interest rates will remain in a narrow
trading range, with the 30-year Treasury fluctuating between 5.75% and 6.25%.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
T. Anthony Coffey
Jack Lemein
Roger A. Bayston
Portfolio Management Team
Franklin Adjustable U.S. Government Securities Fund
PERFORMANCE SUMMARY
Franklin Adjustable U.S. Government Securities Fund's share price, as
measured by net asset value, decreased 5 cents, from $9.48 on October 31,
1997, to $9.43 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
27 cents ($0.27) in dividend income. Distributions will vary depending on the
fund's income, and past distributions are not indicative of future trends.
Based on the maximum offering price of $9.65 on April 30, 1998, and an
annualization of April's dividend of 4.5 cents ($0.045) per share, your
fund's distribution rate was 5.60%.
The fund reported a +2.35% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not
include the sales charge.
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Adjustable U.S. Government Securities Fund
Periods ended 4/30/98
Since
Inception
1-Year 5-Year 10-Year (10/20/87)
Cumulative Total Return1 6.17% 23.43% 77.31% 83.15%
Average Annual Total Return2 3.74% 3.82% 5.65% 5.69%
Distribution Rate3 5.60%
30-Day Standardized Yield4 5.30%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 2.25%
initial sales charge.
3. Distribution rate is based on an annualization of April's 4.5 cent per
share monthly dividend and the maximum offering price of $9.65 on April 30,
1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, has agreed in advance to waive a portion of its
fees. Without these reductions, the fund's total return and distribution rate
would have been lower, and the yield would have been 5.13%. The fee waiver
may be discontinued at any time upon notice to the fund's Board of Trustees.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
FRANKLIN EQUITY INCOME FUND
Your Fund's Objective: Franklin Equity Income Fund 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.
Despite moderate U.S. economic growth and modest inflation, the financial
markets experienced some volatility over the past six months. The Asian
crises surfaced in late 1997, which resulted in deepening concerns over a
slowdown in corporate earnings growth. Value-oriented sectors with
above-average dividend yields, such as utilities, performed well during this
period of uncertainty. Early in 1998, however, mild weather in the U.S. and
lower than anticipated demand in Asia adversely affected energy stocks. Oil
prices, in fact, temporarily dropped to their lowest levels in real terms
since World War II. The following months witnessed stronger than expected
economic data. Lower interest rates, stemming from the "Asian flu,"
stimulated consumer spending. Near-term concerns over slowing profit growth
were overshadowed by strong housing and employment data reported in February
and March, providing clear evidence of continued domestic economic growth. As
the stock market responded with a strong advance, growth issues generally
outperformed value stocks over the six months under review. The performance
of Franklin Equity Income Fund, which invests in value stocks that offer
above-average dividend yields, reflected these trends during the reporting
period.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 70
of this report.
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
The fund seeks to invest in stocks selling at attractive prices according to
such measurements as relative dividend yield, book value, revenues and
normalized earnings. This was a more challenging task recently, as general
market valuations rose to the higher end of their historical ranges. For
example, the average dividend yield for companies comprising the S&P 500(R)
Stock Index was at an all-time low of 1.4% on April 30, 1998. Reflecting
these challenges, the fund's asset allocation changed modestly from the
beginning of the period to April 30, 1998. Common stocks declined slightly,
from 89.5% to 88.4% of total net assets, and more defensive convertible
preferred stocks increased, from 4.1% to 5.7%. Short-term investments
remained relatively unchanged, from 6.1% of total net assets, to
approximately 5.6% as of April 30, 1998.
The fund's financial services sector investments were among the strongest
performers during the period. We realized profits in various banks, such as
European based Nordbanken AB, which met our price targets. We also sold
Beneficial Corp. as a result of an acquisition bid from a competitor,
Household Finance Corp. The fund's investments in insurance stocks, on the
other hand, increased during the period, based on more attractive valuations
and our anticipation of accelerated industry consolidation in the future. For
example, Mid Ocean, Ltd., one of the fund's positions, recently signed an
agreement to be acquired by EXEL Ltd.
Investments in real estate stocks, despite strong fundamentals, lagged during
the period. We anticipate that many real estate investment trusts' (REITs)
earnings and dividend growth for the next two to three years should remain
strong. Relative valuation measures reached extremely attractive levels in
early 1998. We responded by adding to existing positions and initiating a new
investment in the convertible preferred stock of Glenborough Realty Trust
Inc., which yielded 7.5% at time of purchase.
We also added to existing positions in the energy sector during the period of
weakness experienced earlier this year. We believe the oil price decline will
prove to be temporary and the growth prospects for major energy companies
remain strong. Electric utility stocks also continued to be an area of
investment focus. For the most part, the deregulation plans, as implemented
by various states, have been favorable to utility investors. We also
anticipate national legislation dealing with deregulation that could
eventually lead to accelerated industry consolidation. Depressed prices,
strong cash flows, high dividend yields, and growth opportunities in
deregulated businesses make many of these stocks attractive investments, in
our opinion.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
"We believe the fund's contrarian nature is well-positioned to take advantage
of the financial markets' higher volatility as various stocks fall in and
out of favor."
Finally, we also initiated investments in Ford Motor Co. and Eastman Kodak
Co. during the period. Both companies experienced recent corporate
restructurings that are expected to lead to significant cost reductions and
favorable earnings growth.
During the period, we sold our holdings in pharmaceutical company
Bristol-Myers Squibb Co., and such telephone companies as France Telecom, SA
and Nortel Inversora, SA (Argentina). Although their fundamentals remained
favorable, their stock prices reached valuation levels deemed too expensive,
according to our analysis. Also, two fund positions did not meet our
expectations, and we subsequently sold them at losses. One of these,
Freeport-McMoRan Copper & Gold, Inc., cut its dividend due to sustained low
commodity prices. We eliminated our small investment position in the other,
Amway Asia Pacific Ltd. because of the company's continued problems,
determining that these problems could result in a future dividend reduction.
Our strategy continues to focus on companies' stocks that we believe are
selling at bargain prices. This generally entails investing at times when a
company or sector is temporarily out of favor, due to depressed fundamentals
or uncertainty about future prospects. It also means selling stocks that
often become investor favorites but no longer sell at attractive valuations.
We believe the fund's contrarian nature is well-positioned to take advantage
of the financial markets' higher volatility as various stocks fall in and out
of favor. Looking forward, we expect this disciplined, value approach to
continue producing consistent and favorable long-term results.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
Frank Felicelli
Portfolio Manager
Franklin Equity Income Fund
PERFORMANCE SUMMARY
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Franklin Equity Income Fund - Class I reported a +15.05% cumulative total
return for the six-month period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge.
The fund's share price, as measured by net asset value, increased $1.68, from
$19.31 on October 31, 1997, to $20.99 on April 30, 1998.
During the reporting period, shareholders received per-share distributions of
33.6 cents ($0.336) in dividend income, 28.71 cents ($0.2871) in short-term
capital gains, and 50.79 cents ($0.5079) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any
profits realized from the sale of securities in the portfolio. Past
distributions are not indicative of future trends.
Based on the maximum offering price of $21.98 on April 30, 1998, and an
annualization of April's monthly dividend of 5.2 cents ($0.052) per share,
the fund's distribution rate was 2.84%.
Franklin Equity Income Fund - Class I
Periods ended 4/30/98
Since
Inception
1-Year 5-Year 10-Year (3/15/88)
Cumulative Total Return1 31.61% 110.26% 305.54% 304.73%
Average Annual Total Return2 25.68% 14.96% 14.50% 14.29%
Value of $10,000 Investment3 $12,568 $20,079 $38,731 $38,657
Distribution Rate4 2.84%
30-Day Standardized Yield5 2.97%
4/30/94 4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return6 4.88% 12.79% 18.54% 13.94% 31.61%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current, maximum
4.5% initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the sales charge.
4. Distribution rate is based on an annualization of April's 5.2 cent per
share monthly dividend and the maximum offering price of $21.98 on April 30,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
6. Total return represents the change in value of an investment over the
periods ended on the specified dates and does not include the sales charge.
Note: Prior to July 1, 1994, Class I shares were offered at a lower initial
sales charge with dividends reinvested at the offering price; thus actual
total returns would differ. Effective May 1, 1994, the fund eliminated the
sales charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense waivers by the fund's manager
increased the fund's total returns.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Franklin Equity Income Fund - Class II reported a +14.60% cumulative total
return for the six-month period ended April 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's share price, as measured by net asset value, increased $1.67, from
$19.26 on October 31, 1997, to $20.93 on April 30, 1998. During the reporting
period, shareholders received per-share distributions of 26.12 cents
($0.2612) in dividend income, 28.71 cents ($0.2871) in short-term capital
gains, and 50.79 cents ($0.5079) in long-term capital gains. Distributions
will vary depending on income earned by the fund and any profits realized
from the sale of securities in the portfolio. Past distributions are not
predictive of future trends.
Based on the maximum offering price of $21.14 on April 30, 1998, and an
annualization of April's monthly dividend of 3.91 cents ($0.0391) per share,
the fund's distribution rate was 2.22%.
Franklin Equity Income Fund - Class II
Periods ended 4/30/98
Since
Inception
1-Year (10/2/95)
Cumulative Total Return1 30.52% 60.89%
Average Annual Total Return2 28.25% 19.82%
Value of $10,000 Investment3 $12,825 $15,933
Distribution Rate4 2.22%
30-Day Standardized Yield5 2.34%
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial
sales charge and the 1.0% contingent deferred sales charge, applicable to
shares redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include sales charges.
4. Distribution rate is based on an annualization of April's 3.91 cent per
share monthly dividend and the maximum offering price of $21.14 on April 30,
1998.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All calculations assume reinvestment of dividends and capital gains at net
asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
FRANKLIN ADJUSTABLE RATE
SECURITIES FUND
Your Fund's Objective: Franklin Adjustable Rate Securities Fund seeks to
provide a high level of current income consistent with lower volatility of
principal than a fund that invests in fixed-rate securities, by investing in
a portfolio of adjustable-rate securities.
The fund's investment objective is to seek stability of principal with high
current income. It accomplishes this objective by investing in a portfolio of
adjustable-rate mortgage-backed securities (ARMs). These securities have
coupons that adjust with movements in various short-term interest rates. As a
consequence, the prices of these securities remain fairly stable as rates
rise and fall, thus keeping the fund's net asset value stable. Our portfolio
concentrates on seasoned ARMs, with slow and stable prepayment histories.
Such bonds generally produce higher yields and have lower price volatility
relative to other ARM sectors.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 75
of this report.
Interest rates declined in the six-month period under review. Despite a
continued strong domestic economy, bonds benefited from a combination of
dormant inflation pressures and concerns about the ongoing financial crises
in Asia. In addition, the yield curve became flatter during the period, with
long-term interest rates declining more than short-term rates. When the curve
flattens, the gap between short and long rates narrows. For example, the
yield spread between the 2-year and 30-year Treasuries narrowed from 54 basis
points at the beginning of the period to 36 basis points on April 30, 1998.
The Federal Reserve Board (the Fed) took no actions during the six months,
maintaining a neutral posture in light of the opposing forces of a strong
domestic economy and the Asian situation's possible weakening effects.
The yield curve's flattening in the six-month reporting period has important
implications for ARM securities going forward. In general, a flat yield curve
leads to higher prepayments on ARM securities. This is because most ARMs are
tied to short-term interest rates such as the 1-year Constant Maturity
Treasury (CMT), the 6-month Treasury bill, or the 11th District Cost of Funds
Index. In contrast, fixed-rate mortgages (FRMs) are tied to movements in
longer-term rates, such as the 10-year Treasury. With less difference between
short and long rates, ARM borrowers have an increased economic incentive to
refinance into an FRM.
ARM prepayments have risen substantially in the past few months. If the yield
curve remains flat, or even inverts, ARM prepayments should remain at high
levels, reducing income and limiting price appreciation. This is where our
emphasis on seasoned CMT ARMs could prove most beneficial to shareholders.
The flat yield curve environment will probably have less negative impact on
these securities. Seasoned ARMs have already been through one or more
refinancing cycles, and, thus, are less likely to prepay than newer ARMs,
which are refinanceable for the first time.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Going forward, the stronger of two opposing economic forces seems likely to
determine the direction of interest rates. On the one hand, there is fear
that the recent crises in Asia will spread and create a persistent economic
drag in the U.S., keeping inflation subdued and possibly even leading to
deflation. This should push long-term interest rates lower and force the Fed
to ease. The other argument is that U.S. demand will remain strong and the
Asian situation will prove to have less impact than feared. Meanwhile,
inflation, led by higher wage costs, will finally rear its ugly head, forcing
the Fed to tighten and increase interest rates, leading to higher overall
rate levels. In the near term, it is likely that neither factor will
completely dominate the other and that interest rates will remain in a narrow
trading range, with the 30-year Treasury fluctuating between 5.75% and 6.25%.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
Sincerely,
T. Anthony Coffey
Jack Lemein
Roger A. Bayston
Portfolio Management Team
Franklin Adjustable Rate Securities Fund
PERFORMANCE SUMMARY
Franklin Adjustable Rate Securities Fund's share price, as measured by net
asset value, decreased 1 cent, from $9.96 on October 31, 1997, to $9.95 on
April 30, 1998.
During the reporting period, shareholders received per-share distributions of
28.3339 cents ($0.283339) in dividend income. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.
Based on the maximum offering price of $10.18 on April 30, 1998, and an
annualization of the current monthly dividend of 4.6129 cents ($0.046129) per
share, your fund's distribution rate was 5.44%.
The fund reported a +2.78% cumulative total return for the six-month period
ended April 30, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not
include the sales charge.
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Adjustable Rate Securities Fund
Periods ended 4/30/98
Since
Inception
1-Year 5-Year (12/26/91)
Cumulative Total Return1 6.46% 29.06% 39.98%
Average Annual Total Return2 4.04% 4.76% 5.07%
Distribution Rate3 5.44%
30-Day Standardized Yield4 5.30%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the maximum 2.25%
initial sales charge.
3. Distribution rate is based on an annualization of the 4.6129 cent per
share monthly dividend and the maximum offering price of $10.18 on April 30,
1998.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, has agreed in advance to waive a portion of its
fees. Without these reductions, the fund's total return and distribution rate
would have been lower, and the yield would have been 5.11%. The fee waiver
may be discontinued at any time upon notice to the fund's Board of Trustees.
All total return calculations assume reinvestment of dividends and capital
gains at net asset value. Since markets can go down as well as up, investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Global Government Income Fund
<TABLE>
<CAPTION>
Class I
Six Months Ended
April 30, 1998 Year Ended October 31,
(UNAUDITED) 1997 1996 1995 1994 1993***
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $8.41 $8.65 $8.31 $8.06 $9.33 $8.61
---------------------------------------------------------------
Income from investment operations:
Net investment income.............. .31 .60 .61 .67 1.30 .58
Net realized and unrealized gains (losses) .01 (.22) .33 .29 (1.81) .72
---------------------------------------------------------------
Total from investment operations.... .32 .38 .94 .96 (.51) 1.30
---------------------------------------------------------------
Less distributions from:
Net investment income.............. (.30) (.61) (.60) (.64) (.08) (.58)
In excess of net investment income (.01) (.01) -- -- -- --
Tax return of capital.............. -- -- -- (.07) (.60) --
Net realized gains................. -- -- -- -- (.08) --
---------------------------------------------------------------
Total distributions ................ (.31) (.62) (.60) (.71) (.76) (.58)
---------------------------------------------------------------
Net asset value, end of period...... $8.42 $8.41 $8.65 $8.31 $8.06 $9.33
===============================================================
Total return*....................... 3.87% 4.31% 11.80% 12.65% (5.72%) 15.14%
Ratios/supplemental data
Net assets, end of period (000's)... $114,102 $118,348 $137,626 $164,970 $187,204 $195,627
Ratios to average net assets:
Expenses........................... .93%** .90% .85% .96% .89% .77%**
Net investment income.............. 7.33%** 6.97% 7.68% 8.29% 8.54% 6.74%**
Portfolio turnover rate............. 19.16% 193.30% 139.71% 103.49% 80.69% 67.36%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***For the nine months ended October 31, 1993.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Global Government Income Fund (cont.)
<TABLE>
<CAPTION>
Class II
------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995***
------------------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $8.41 $8.65 $8.31 $8.03
------------------------------------------------------
Income from investment operations:
Net investment income..................................... .29 .55 .56 .31
Net realized and unrealized gains (losses)................ .02 (.22) .33 .30
Total from investment operations........................... .31 .33 .89 .61
Less distributions from:
Net investment income .................................... (.28) (.56) (.55) (.30)
In excess of net investment income........................ (.01) (.01) -- --
Tax return of capital..................................... -- -- -- (.03)
------------------------------------------------------
Total distributions ....................................... (.29) (.57) (.55) (.33)
------------------------------------------------------
Net asset value, end of period............................. $8.43 $8.41 $8.65 $8.31
======================================================
Total return*.............................................. 3.71% 3.74% 11.19% 7.09%
Ratios/supplemental data
Net assets, end of period (000's).......................... $5,605 $4,473 $3,700 $1,193
Ratios to average net assets:
Expenses.................................................. 1.48%** 1.46% 1.40% 1.54%**
Net investment income .................................... 6.78%** 6.43% 7.17% 7.41%**
Portfolio turnover rate ................................... 19.16% 193.30% 139.71% 103.49%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***For the period May 1, 1995 (effective date) to October 31, 1995.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Global Government Income Fund (cont.)
<TABLE>
<CAPTION>
Advisor Class
-------------------------------
Six Months Ended Year Ended
April 30, 1998 October 31,
(unaudited) 1997***
-------------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................... $8.41 $8.71
-------------------------------
Income from investment operations:
Net investment income.................................................. .31 .49
Net realized and unrealized gains (losses)............................. .02 (.28)
-------------------------------
Total from investment operations........................................ .33 .21
-------------------------------
Less distributions from:
Net investment income.................................................. (.30) (.49)
In excess of net investment income .................................... (.01) (.02)
--------------------------------
Total distributions..................................................... (.31) (.51)
--------------------------------
Net asset value, end of period.......................................... $8.43 $8.41
================================
Total return*........................................................... 4.04% 2.49%
Ratios/supplemental data
Net assets, end of period (000's)....................................... $721 $741
Ratios to average net assets:
Expenses**............................................................. .83% .82%
Net investment income**................................................ 7.43% 7.08%
Portfolio turnover rate................................................. 19.16% 193.30%
</TABLE>
*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (effective date) to October 31, 1997.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
PRINCIPAL
Franklin Global Government Income Fund AMOUNT* VALUE
<S> <C> <C>
Government Bonds 94.3%
Argentina 6.5%
Republic of Argentina
10.95%, 11/01/99.................................................................. $ 3,215,000 $ 3,375,750
8.75%, 5/09/02.................................................................... 3,100,000 3,039,550
8.375%, 12/20/03.................................................................. 510,000 504,263
11.375%, 1/30/17.................................................................. 325,000 360,546
9.75%, 9/19/27.................................................................... 600,000 580,500
------------
7,860,609
------------
Australia 4.1%
Government of Australia, 9.50%, 8/15/03 .......................................... 6,496,000 AUD 4,995,314
------------
Brazil 7.1%
Republic of Brazil
FRN, 6.688%, 4/15/09.............................................................. 3,950,000 3,332,813
FRN, 6.688%, 4/15/12.............................................................. 1,250,000 992,188
8.00%, 4/15/14.................................................................... 3,097,777 2,573,193
10.125%, 5/15/27.................................................................. 1,700,000 1,659,625
------------
8,557,819
------------
Canada 8.3%
Government of Canada
10.50%, 7/01/00................................................................... 4,675,000 CAD 3,621,601
10.50%, 3/01/01................................................................... 5,000,000 CAD 3,976,403
10.00%, 5/01/02................................................................... 3,005,000 CAD 2,457,299
------------
10,055,303
------------
Denmark 1.8%
Kingdom of Denmark
9.00%, 11/15/00................................................................... 3,385,000 DKK 544,863
8.00%, 5/15/03.................................................................... 10,065,000 DKK 1,662,608
------------
2,207,471
------------
Germany 11.0%
Federal Republic of Germany
7.75%, 2/21/00.................................................................... 12,010,000 DEM 7,098,248
8.00%, 7/22/02.................................................................... 9,735,000 DEM 6,110,618
------------
13,208,866
------------
Italy 9.7%
Buoni Poliennali del Tesoro
12.00%, 1/17/99................................................................... 1,925,000,000 ITL 1,134,826
10.50%, 9/01/05................................................................... 1,610,000,000 ITL 1,202,355
Government of Italy
10.50%, 7/15/00................................................................... 10,365,000,000 ITL 6,547,332
10.50%, 4/28/14................................................................... 1,200,000 GBP 2,828,747
------------
11,713,260
------------
Mexico 5.1%
United Mexican States
9.75%, 2/06/01.................................................................... $ 1,950,000 $ 2,069,437
9.875%, 1/15/07................................................................... 1,375,000 1,476,406
11.375%, 9/15/16.................................................................. 1,115,000 1,310,125
6.25%, 12/31/19, Series A, with warrants ......................................... 1,450,000 1,227,063
------------
6,083,031
------------
New Zealand 1.8%
Government of New Zealand, 6.50%, 2/15/00 ........................................ 3,995,000 NZD 2,173,623
------------
Panama .5%
Republic of Panama, 8.875%, 9/30/27............................................... 650,000 638,625
------------
Spain 6.8%
Government of Spain
12.25%, 3/25/00................................................................... 609,440,000 ESP 4,554,756
10.10%, 2/28/01................................................................... 323,900,000 ESP 2,432,624
10.90%, 8/30/03................................................................... 139,140,000 ESP 1,167,146
------------
8,154,526
------------
Sweden 5.2%
Kingdom of Sweden
13.00%, 6/15/01................................................................... 7,800,000 SEK 1,240,090
10.25%, 5/05/03................................................................... 23,300,000 SEK 3,704,792
8.00%, 8/15/07.................................................................... 8,500,000 SEK 1,321,906
------------
6,266,788
------------
United Kingdom 3.4%
United Kingdom, 8.00%, 12/07/00................................................... 2,350,000 GBP 4,085,114
------------
United States 20.6%
U.S. Treasury Bond, 6.375%, 8/15/02 .............................................. 2,760,000 2,832,453
U.S. Treasury Notes
6.625%, 4/30/02................................................................... 4,335,000 4,481,311
7.25%, 8/15/04.................................................................... 6,564,000 7,089,127
6.125%, 8/15/07................................................................... 6,771,000 6,959,322
6.125%, 11/15/27.................................................................. 3,306,000 3,386,587
------------
24,748,800
------------
Venezuela 2.4%
Republic of Venezuela
144A, 9.125%, 6/18/07............................................................. 1,220,000 1,221,585
9.25%, 9/15/27.................................................................... 1,930,000 1,709,256
------------
2,930,841
------------
Total Government Bonds (Cost $116,920,626)........................................ 113,679,990
------------
aRepurchase Agreement 3.9%
Bankers Trust Corp., 5.50%, 5/01/98 (Maturity Value $4,639,709)
(Cost $4,639,000) ............................................................... $ 4,639,000 $ 4,639,000
Collateralized by U.S. Treasury Notes
Total Investments (Cost $121,559,626) 98.2% ...................................... 118,318,990
Other Assets, less Liabilities 2.3%............................................... 2,746,739
Net Equity in Forward Contracts (.5%)............................................. (638,288)
------------
Total Net Assets 100.0% .......................................................... $120,427,441
============
</TABLE>
CURRENCY ABBREVIATIONS:
AUD -Australian Dollar
CAD -Canadian Dollar
DEM -German Mark
DKK -Danish Krone
ESP -Spanish Peseta
GBP -British Pound
ITL -Italian Lira
NZD -New Zealand Dollar
SEK -Swedish Krone
PORTFOLIO ABBREVIATIONS:
FRN -Floating Rate Notes
*Securities traded in U.S. dollars unless otherwise indicated.
aAt April 30, 1998 all repurchase agreements held by the Fund had been entered
into on that date.
<TABLE>
<CAPTION>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Short-Intermediate U.S. Government Securities Fund
Class I
----------------------------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 1993***
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $10.29 $10.28 $10.35 $10.03 $10.80 $10.57
----------------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .27 .57 .58 .56 .49 .38
Net realized and unrealized gains (losses) (.01) .02 (.08) .31 (.70) .25
----------------------------------------------------------------------------
Total from investment operations.... .26 .59 .50 .87 (.21) .63
----------------------------------------------------------------------------
Less distributions from:
Net investment income.............. (.28) (.58) (.57) (.55) (.47) (.39)
Net realized gains................. -- -- -- -- (.09) (.01)
----------------------------------------------------------------------------
Total distributions................. (.28) (.58) (.57) (.55) (.56) (.40)
----------------------------------------------------------------------------
Net asset value, end of period...... $10.27 $10.29 $10.28 $10.35 $10.03 $10.80
============================================================================
Total return*....................... 2.63% 5.88% 4.97% 8.90% (1.99%) 5.90%
Ratios/supplemental data
Net assets, end of period (000's)... $187,528 $192,051 $196,042 $208,057 $225,352 $273,678
Ratios to average net assets:
Expenses........................... .78%** .78% .74% .73% .65% .55%**
Expenses excluding waiver and payments
by affiliate....................... -- -- -- -- .68% .63%**
Net investment income.............. 5.30%** 5.51% 5.64% 5.42% 4.75% 4.75%**
Portfolio turnover rate............. 37.06% 40.56% 72.62% 56.34% 99.09% 31.71%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***For the nine months ended October 31, 1993.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Short-Intermediate U.S. Government Securities Fund (cont.)
<TABLE>
<CAPTION>
Advisor Class
-----------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997***
-----------------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................... $10.30 $10.24
-----------------------------------
Income from investment operations:
Net investment income.................................................. .29 .47
Net realized and unrealized gains (losses)............................. (.03) .07
-----------------------------------
Total from investment operations........................................ .26 .54
Less distributions from net investment income........................... (.30) (.48)
-----------------------------------
Net asset value, end of period.......................................... $10.26 $10.30
===================================
Total return*........................................................... 2.58% 5.45%
Ratios/supplemental data
Net assets, end of period (000's)....................................... $2,512 $385
Ratios to average net assets:
Expenses**............................................................. .68% .70%
Net investment income**................................................ 5.34% 5.35%
Portfolio turnover rate................................................. 37.06% 40.56%
</TABLE>
*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (effective date) to October 31, 1997.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Short-Intermediate U.S. Government Securities Fund AMOUNT VALUE
<S> <C> <C>
U.S. Government Securities 98.5%
U.S. Treasury Notes, 5.875%, 9/30/02 ........................................... $24,000,000 $ 24,180,024
U.S. Treasury Notes, 7.50%, 11/15/01............................................ 25,000,000 26,453,150
U.S. Treasury Notes, 5.625%, 2/28/01............................................ 25,000,000 25,007,825
U.S. Treasury Notes, 5.875%, 6/30/00............................................ 36,000,000 36,202,536
U.S. Treasury Notes, 5.75%, 9/30/99............................................. 20,000,000 20,043,760
U.S. Treasury Notes, 6.00%, 8/15/99............................................. 26,000,000 26,138,138
U.S. Treasury Notes, 6.375%, 5/15/99 ........................................... 20,000,000 20,156,260
U.S. Treasury Notes, 6.50%, 4/30/99 ............................................ 9,000,000 9,084,384
--------------
Total Investments (Cost $185,458,378) .......................................... 187,266,077
Other Assets, less Liabilities 1.5%............................................. 2,774,520
--------------
Net Assets 100.0%............................................................... $190,040,597
==============
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Convertible Securities Fund
<TABLE>
<CAPTION>
Class I
------------------------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 1993****
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $14.74 $13.45 $12.73 $12.34 $12.79 $11.44
------------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .31 .64 .61 .58 .59 .45
Net realized and unrealized gains (losses) .42 2.15 1.39 1.10 (.33) 1.41
------------------------------------------------------------------------
Total from investment operations.... .73 2.79 2.00 1.68 .26 1.86
------------------------------------------------------------------------
Less distributions from:
Net investment income.............. (.35) (.60) (.60) (.59) (.59) (.51)
Net realized gains................. (1.04) (.90) (.68) (.70) (.12) --
------------------------------------------------------------------------
Total distributions ................ (1.39) (1.50) (1.28) (1.29) (.71) (.51)
------------------------------------------------------------------------
Net asset value, end of period...... $14.08 $14.74 $13.45 $12.73 $12.34 $12.79
========================================================================
Total return*....................... 5.38% 22.47% 16.71% 15.18% 2.07% 16.50%
Ratios/supplemental data
Net assets, end of period (000's)... $224,824 $212,631 $130,951 $83,523 $66,869 $47,440
Ratios to average net assets:
Expenses........................... .96%** 1.01% 1.02% 1.03% .84% .25%**
Expenses excluding waiver and payments
by affiliate....................... -- -- -- -- .92% .86%**
Net investment income.............. 4.46%** 4.81% 4.79% 4.82% 4.84% 5.25%**
Portfolio turnover rate............. 45.53% 141.49% 129.83% 108.64% 68.39% 31.05%
Average commission rate paid***..... $.0501 $.0534 $.0495 -- -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the nine months ended October 31, 1993.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Convertible Securities Fund (cont.)
<TABLE>
<CAPTION>
Class II
-----------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995****
-----------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $14.68 $13.41 $12.71 $13.06
-----------------------------------------------
Income from investment operations:
Net investment income..................................... .25 .54 .51 .07
Net realized and unrealized gains (losses)................ .42 2.13 1.40 (.37)
-----------------------------------------------
Total from investment operations........................... .67 2.67 1.91 (.30)
-----------------------------------------------
Less distributions from:
Net investment income..................................... (.29) (.50) (.53) (.05)
Net realized gains........................................ (1.04) (.90) (.68) --
-----------------------------------------------
Total distributions........................................ (1.33) (1.40) (1.21) (.05)
-----------------------------------------------
Net asset value, end of period............................. $14.02 $14.68 $13.41 $12.71
===============================================
Total return*.............................................. 4.98% 21.54% 15.92% (2.33%)
Ratios/supplemental data
Net assets, end of period (000's).......................... $52,030 $35,282 $10,861 $209
Ratios to average net assets:
Expenses.................................................. 1.70%** 1.74% 1.79% 1.60%**
Net investment income..................................... 3.74%** 4.04% 4.00% 3.64%**
Portfolio turnover rate.................................... 45.53% 141.49% 129.83% 108.64%
Average commission rate paid***............................ $.0501 $.0534 $.0495 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the period October 1, 1995 (effective date) to October 31, 1995.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Convertible Securities Fund SHARES VALUE
<S> <C> <C>
Common Stocks 5.0%
Computers .5%
a JetFax, Inc. ................................................................. 110,000 $ 680,625
a Vanstar Corp. ................................................................ 60,000 798,750
--------------
1,479,375
--------------
Electronics 1.0%
a Kent Electronics Corp. ....................................................... 60,000 1,320,000
a Xilinx, Inc. ................................................................. 30,000 1,372,500
--------------
2,692,500
--------------
Energy 2.1%
Enron Corp. ...................................................................... 70,000 3,443,125
a NRG Generating (U.S.), Inc. .................................................. 148,200 2,241,525
--------------
5,684,650
--------------
Food & Beverages .1%
a Diageo, Plc., B Shares (United Kingdom)....................................... 29,733 247,323
--------------
Metals & Mining .5%
a Atchison Casting Corp. ....................................................... 80,000 1,515,000
--------------
Tobacco .8%
Philip Morris Cos., Inc. ......................................................... 60,000 2,238,750
--------------
Total Common Stocks (Cost $13,980,214) ........................................... 13,857,598
--------------
Convertible Preferred Stocks 30.8%
Consumer Products 2.9%
Cendant Corp., 7.50% cvt. pfd. ................................................... 135,000 5,560,313
Newell Financial Trust I, 5.25% cvt. pfd., 144A .................................. 44,100 2,521,969
--------------
8,082,282
--------------
Energy 7.2%
AES Corp., 5.50% cvt. pfd., 144A ................................................. 60,000 3,510,000
cCMS Energy Trust I, 7.75% cvt. pfd. ............................................. 73,000 4,361,750
El Paso Energy Capital Trust I, 4.75% cvt. pfd. .................................. 128,000 6,728,000
Enron Corp., 6.25% cvt. pfd. ..................................................... 85,000 1,827,500
EVI, Inc., 5.00% cvt. pfd., 144A ................................................. 60,000 2,857,500
Nuevo Financing I, 5.75% cvt. pfd., Series A ..................................... 13,100 615,700
--------------
19,900,450
--------------
Financial Services 2.1%
National Australia Bank, 7.875% cvt. pfd. (Australia)............................. 42,900 1,262,869
WBK STRYPES Trust, 10.00% cvt. pfd. .............................................. 130,000 4,436,250
--------------
5,699,119
--------------
Food & Beverages 1.1%
Ralston Purina/Interstate Bakeries Corp., 7.00% cvt. pfd. ........................ 50,500 3,074,188
--------------
Health Care .5%
GS Financial Products/Oxford Health Plans, 7.00% cvt. pfd. ....................... 60,000 1,455,000
--------------
Insurance 3.2%
American Heritage Life Investment Corp., 8.50% cvt. pfd. ......................... 28,300 $ 1,853,650
Life Re Capital Trust II, 6.00% cvt. pfd. ........................................ 60,600 4,374,563
Protective Life Capital Trust II, 6.50% cvt. pfd. ................................ 40,000 2,500,000
--------------
8,728,213
--------------
Lodging 1.3%
Hilton Hotels Corp., 8.00% cvt. pfd. ............................................. 48,100 1,415,944
Host Marriott Corp., 6.75% cvt. pfd., 144A ....................................... 40,000 2,285,000
--------------
3,700,944
--------------
Media & Broadcasting 1.3%
dTriathlon Broadcasting, 9.00% cvt. pfd. ......................................... 315,300 3,428,888
--------------
Metals & Mining 1.0%
Armco, Inc., $3.625 cvt. pfd., Series A .......................................... 11,400 612,750
WHX Corp., 6.50% cvt. pfd., Series A ............................................. 41,000 2,219,125
--------------
2,831,875
--------------
Paper & Forest Products .4%
International Paper Co., 5.25% cvt. pfd. ......................................... 20,000 1,100,000
--------------
Real Estate Investment Trusts 2.0%
FelCor Suite Hotels, Inc., $1.95 cvt. pfd., Series A ............................. 60,000 1,717,500
Reckson Associates Realty Corp., 7.625% cvt. pfd., Series A ...................... 160,000 3,910,000
--------------
5,627,500
--------------
Retail .5%
Wendy's Financing I, 5.00% cvt. pfd., Series A ................................... 25,000 1,384,375
--------------
Telecommunications 1.9%
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina).......................... 50,000 3,150,000
Salomon Smith Barney Holdings, Inc., 6.25%, cvt. pfd. ............................ 30,000 2,058,750
--------------
5,208,750
--------------
Textiles & Apparel .6%
Designer Holdings, Ltd., 5.00% cvt. pfd. ......................................... 38,000 1,710,000
--------------
Tobacco .5%
DIMON, Inc., 8.50% cvt. pfd. ..................................................... 87,200 1,471,500
--------------
Transportation 4.3%
CNF Transportation, Inc., 5.00% cvt. pfd., Series A .............................. 45,700 2,696,300
Union Pacific Capital Trust, 6.25% cvt. pfd., 144A ............................... 173,400 9,233,550
--------------
11,929,850
--------------
Total Convertible Preferred Stocks (Cost $79,678,721) ............................ 85,332,934
--------------
Convertible Bonds 59.9%
Aerospace/Defense 2.2%
DRS Technologies, Inc., cvt. senior sub. deb., 9.00%, 10/01/03 ................... $ 375,000 $ 619,688
SPACEHAB, Inc., cvt. sub. notes, 144A, 8.00%, 10/15/07............................ 5,000,000 5,375,000
--------------
5,994,688
--------------
Business Services 1.9%
CORESTAFF, Inc., cvt. sub. notes, 2.94%, 8/15/04 ................................. 1,250,000 1,307,812
Danka Business Systems, Plc., cvt. sub. notes, 6.75%, 4/01/02 (United Kingdom).... 1,500,000 1,455,000
Data Processing Resources Corp., cvt. sub. notes, 144A, 5.25%, 4/01/05 ........... 2,500,000 2,550,000
--------------
5,312,812
--------------
Electronics 13.6%
Bay Networks, Inc., cvt. sub. deb., 144A, 5.25%, 5/15/03 ......................... 4,500,000 4,263,750
Cymer, Inc., cvt. sub. deb., 144A, 3.50% coupon to 8/06/00, 7.25% thereafter, 8/06/04 4,250,000 3,548,750
Dovatron International, Inc., cvt. sub. notes, 144A, 6.00%, 10/15/02 ............. 7,100,000 9,176,750
Itron, Inc., cvt. sub. notes, 6.75%, 3/31/04 ..................................... 750,000 703,125
Kent Electronics Corp., cvt. sub. notes, 4.50%, 9/01/04 .......................... 3,500,000 2,961,875
Level One Communications, Inc., cvt. sub. notes, 4.00%, 9/01/04 .................. 1,500,000 2,025,000
Motorola, Inc., cvt. sub. deb., 0.00%, 9/07/09 ................................... 2,000,000 2,050,000
Motorola, Inc., cvt. sub. deb., 0.00%, 9/27/13 ................................... 7,000,000 5,223,750
Reptron Electronics, Inc., cvt. sub. notes, 6.75%, 8/01/04 ....................... 1,300,000 1,001,000
Xilinx, Inc., cvt. sub. notes, 5.25%, 11/01/02 ................................... 6,300,000 6,788,250
--------------
37,742,250
--------------
Energy 9.6%
Baker Hughes, Inc., cvt. notes, 0.00%, 5/05/08 ................................... 5,000,000 4,087,500
Diamond Offshore Drilling, Inc., cvt. sub. notes, 3.75%, 2/15/07.................. 6,800,000 9,197,000
Natwest Enron, cvt. notes, 144A, 3.50%, 9/01/04 .................................. 1,000,000 1,135,000
Pogo Producing Co., cvt. sub. notes, 5.50%, 6/15/06 .............................. 4,000,000 4,020,000
Pride International, Inc., cvt. sub. deb., 0.00%, 4/24/18 ........................ 7,500,000 3,178,125
Seacor Holdings, Inc., cvt. sub. notes, 5.375%, 11/15/06 ......................... 1,900,000 2,104,250
Swift Energy Co., cvt. sub. notes, 6.25%, 11/15/06 ............................... 2,750,000 2,725,937
--------------
26,447,812
--------------
Environmental Services 1.3%
USA Waste Systems, Inc., cvt. sub. notes, 4.00%, 2/01/02 ......................... 3,000,000 3,720,000
--------------
Financial Services 1.4%
Leasing Solutions, Inc., cvt. sub. notes, 6.875%, 10/01/03 ....................... 3,250,000 3,363,750
a,ePIV Investment Finance, cvt. sub. notes, 144A, 4.50%, 12/01/00 (Cayman Islands) 1,000,000 110,000
a,ePIV Investment Finance, cvt. sub. notes, 4.50%, 12/01/00 (Cayman Islands) ..... 3,000,000 330,000
--------------
3,803,750
--------------
Health Care 2.3%
Alza Corp., cvt. sub. notes, 0.00%, 7/14/14 ...................................... 6,000,000 3,862,500
ESC Medical Systems, Ltd., cvt. sub. notes, 144A, 6.00%, 9/01/02 ................. 2,500,000 2,495,312
--------------
6,357,812
--------------
Industrial Services 3.9%
Mark IV Industries, Inc., cvt. sub. notes, 144A, 4.75%, 11/01/04 ................. $3,000,000 $ 2,787,180
Thermo Electron Corp., cvt. sub. deb., 144A, 4.25%, 1/01/03 ...................... 4,000,000 4,645,000
Tower Automotive, Inc., cvt. sub. notes, 144A, 5.00%, 8/01/04 .................... 1,000,000 1,205,000
Tower Automotive, Inc., cvt. sub. notes, 5.00%, 8/01/04 .......................... 1,750,000 2,108,750
--------------
10,745,930
--------------
Lodging 1.0%
ShoLodge, Inc., cvt. sub. deb., 7.50%, 5/01/04 ................................... 3,250,000 2,876,250
--------------
Media & Broadcasting .8%
Tele-Communications International, Inc., cvt. sub. deb., 4.50%, 2/15/06 .......... 2,500,000 2,234,375
--------------
Metals & Mining .8%
Quanex Corp., cvt. sub. deb., 6.88%, 6/30/07...................................... 2,000,000 2,120,000
--------------
Paper & Forest Products .5%
APP Global Finance V, Ltd., 144A, 2.00%, 7/25/00 (Cayman Islands)................. 1,200,000 1,260,000
--------------
Pharmaceuticals 1.8%
Athena Neurosciences, Inc., cvt. notes, 4.75%, 11/15/04 .......................... 2,000,000 2,297,500
Dura Pharmaceuticals, Inc., cvt. sub. notes, 3.50%, 7/15/02 ...................... 3,000,000 2,587,500
--------------
4,885,000
--------------
Real Estate Investment Trusts 1.9%
OMEGA Healthcare Investors, Inc., cvt. sub. deb., 8.50%, 2/01/01.................. 700,000 897,750
The Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02 .......................... 4,500,000 4,471,875
--------------
5,369,625
--------------
Retail 4.4%
Michaels Stores, Inc., cvt. sub. notes, 6.75%, 1/15/03 ........................... 3,200,000 3,188,000
Rent-Way, Inc., cvt. sub. deb., 7.00%, 2/01/07.................................... 2,125,000 5,134,531
Rite Aid Corp., cvt. sub. notes, 144A, 5.25%, 9/15/02 ............................ 3,500,000 3,963,750
--------------
12,286,281
--------------
Savings & Loans .5%
BankAtlantic Bancorp, Inc., cvt. sub. deb., 6.75%, 7/01/06 ....................... 600,000 1,275,750
--------------
Technology Services 5.7%
Activison, Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ........................... 4,000,000 3,460,000
HMT Technology Corp., cvt. sub. notes, 5.75%, 1/15/04 ............................ 1,500,000 1,301,250
HNC Software, Inc., cvt. sub. notes, 4.75%, 3/01/03 .............................. 1,500,000 1,680,000
Read-Rite Corp., cvt. sub. notes, 6.50%, 9/01/04 ................................. 3,000,000 2,431,875
Tecnomatix Technologies, Ltd., cvt. sub. notes, 144A, 5.25%, 8/15/04 (Israel)..... 1,500,000 1,342,500
Vantive Corp., cvt. sub. notes, 144A, 4.75%, 9/01/02 ............................. 1,250,000 1,276,562
Vantive Corp., cvt. sub. notes, 4.75%, 9/01/02 ................................... 1,850,000 1,889,312
Western Digital Corp., cvt. sub. deb., 144A, 0.00%, 2/18/18 ...................... 6,000,000 2,235,000
Wind River Systems, Inc., cvt. sub. notes, 144A, 5.00%, 8/01/02 .................. 300,000 301,500
--------------
15,917,999
--------------
Telecommunications 3.4%
Bell Atlantic Financial Services, cvt. bonds, 144A, 5.75%, 4/01/03 ............... $7,000,000 $ 7,297,500
Tel-Save Holdings, Inc., cvt. sub. notes, 144A, 4.50%, 9/15/02 ................... 1,000,000 1,037,500
Tel-Save Holdings, Inc., cvt. sub. notes, 144A, 5.00%, 12/15/04 .................. 1,000,000 1,025,000
--------------
9,360,000
--------------
Utilities 1.5%
Huaneng Power International, Inc., Sponsored ADR, cvt. bonds,
144A, 1.75%, 5/21/04 (China)...................................................... 4,250,000 4,313,750
--------------
Veterinary Services 1.4%
Veterinary Centers of America, Inc., cvt. sub. deb., 144A, 5.25%, 5/01/06 ........ 4,500,000 3,870,000
--------------
Total Convertible Bonds (Cost $160,228,981) ...................................... 165,894,084
--------------
Total Long-Term Investments (Cost $253,887,916) .................................. 265,084,616
--------------
b Repurchase Agreements .9%
Joint Repurchase Agreement, 5.487%, 5/01/98 (Maturity Value $2,476,254) (Cost $2,475,877) 2,475,877 2,475,877
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns & Co., Inc.
BT Alex Brown, Inc.
Chase Securities, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
Lehman Brothers Inc.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $256,363,793) 96.6% ...................................... 267,560,493
Other Assets, less Liabilities 3.4% .............................................. 9,292,880
--------------
Net Assets 100.0% ................................................................ $276,853,373
==============
</TABLE>
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At April 30,1998, all repurchase agreements had been
entered into on that date.
cSee Note 8 regarding restricted securities.
dThe Investment Company Act of 1940 defines affiliated companies as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at April 30, 1998 were
$3,428,888.
eSee Note 7 regarding defaulted securities.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Adjustable U.S. Government Securities Fund
<TABLE>
<CAPTION>
Class I
-----------------------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 1993***
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $9.48 $9.37 $9.34 $9.20 $9.77 $9.86
----------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .27 .55 .56 .54 .35 .28
Net realized and unrealized gains (losses) (.05) .10 .03 .14 (.61) (.09)
----------------------------------------------------------------------
Total from investment operations.... .22 .65 .59 .68 (.26) .19
Less distributions from net investment income (.27) (.54) (.56) (.54) (.31) (.28)
----------------------------------------------------------------------
Net asset value, end of period...... $9.43 $9.48 $9.37 $9.34 $9.20 $9.77
======================================================================
Total return*....................... 2.35% 7.18% 6.54% 7.57% (2.65%) 1.99%
Ratios/supplemental data
Net assets, end of period (000's)... $310,030 $334,990 $397,078 $509,371 $700,617 $1,813,504
Ratios to average net assets:
Expenses****....................... .74%** .75% .69% .61% .42% .65%**
Expenses excluding waiver and payments
by affiliate****.................. .92%** .93% .86% .86% .82% .79%**
Net investment income.............. 5.64%** 5.81% 5.87% 5.76% 3.67% 3.92%**
Portfolio turnover rate............. 19.60% 43.68% 23.52% 17.81% 5.99% 6.97%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***For the nine months ended October 31, 1993.
****Includes the Fund's share of the Portfolio's allocated expenses.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Adjustable U.S. Government Securities Fund SHARES VALUE
Mutual Funds 100.3%
<S> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1) .................... 32,974,413 $310,948,716
---------------
Total Investments (Cost $331,767,271) 100.3% ................................... 310,948,716
Other Assets, Less Liabilities (.3)% ........................................... (918,664)
---------------
Net Assets 100.0%............................................................... $310,030,052
===============
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Equity Income Fund
<TABLE>
<CAPTION>
Class I
-------------------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 1993****
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $19.31 $16.41 $15.19 $14.14 $14.91 $13.46
-------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .31 .64 .64 .63 .62 .60
Net realized and unrealized gains (losses) 2.51 3.23 1.63 1.27 (.36) 1.44
-------------------------------------------------------------------
Total from investment operations.... 2.82 3.87 2.27 1.90 .26 2.04
-------------------------------------------------------------------
Less distributions from:
Net investment income.............. (.34) (.64) (.65) (.61) (.72) (.50)
Net realized gains................. (.80) (.33) (.40) (.24) (.31) (.09)
-------------------------------------------------------------------
Total distributions................. (1.14) (.97) (1.05) (.85) (1.03) (.59)
-------------------------------------------------------------------
Net asset value, end of period...... $20.99 $19.31 $16.41 $15.19 $14.14 $14.91
===================================================================
Total return*....................... 15.05% 24.40% 15.39% 14.10% 1.83% 15.27%
Ratios/supplemental data
Net assets, end of period (000's)... $440,140 $352,555 $246,952 $168,897 $92,763 $42,177
Ratios to average net assets:
Expenses........................... .90%** .97% .98% 1.00% .77% .25%**
Expenses excluding waiver and payments
by affiliate...................... -- -- -- 1.02% .95% .87%**
Net investment income.............. 3.02%** 3.62% 4.11% 4.44% 4.53% 5.86%**
Portfolio turnover rate............. 14.87% 29.04% 24.15% 27.86% 39.51% 19.33%
Average commission rate paid***..... $.0500 $.0488 $.0514 -- -- --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the nine months ended October 31, 1993.
+Includes distributions in excess of net investment income in the amount of
$.002.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Equity Income Fund (cont.)
<TABLE>
<CAPTION>
Class II
-----------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995****
-----------------------------------------------
<S> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $19.26 $16.38 $15.19 $15.38
-----------------------------------------------
Income from investment operations:
Net investment income..................................... .24 .50 .52 .05
Net realized and unrealized gains (losses)................ 2.49 3.22 1.63 (.19)
-----------------------------------------------
Total from investment operations........................... 2.73 3.72 2.15 (.14)
-----------------------------------------------
Less distributions from:
Net investment income..................................... (.26) (.51) (.56) (.05)
Net realized gains........................................ (.80) (.33) (.40) --
-----------------------------------------------
Total distributions........................................ (1.06) (.84) (.96) (.05)
-----------------------------------------------
Net asset value, end of period............................. $20.93 $19.26 $16.38 $15.19
===============================================
Total return*.............................................. 14.60% 23.40% 14.53% (.93%)
Ratios/supplemental data
Net assets, end of period (000's).......................... $77,348 $45,277 $18,227 $386
Ratios to average net assets:
Expenses.................................................. 1.64%** 1.72% 1.73% 1.99%**
Net investment income..................................... 2.22%** 2.78% 3.33% 3.57%**
Portfolio turnover rate.................................... 14.87% 29.04% 24.15% 27.86%
Average commission rate paid***............................ $.0500 $.0488 $.0514 --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities. Prior to October 31,
1996, disclosure of average commission rate was not required.
****For the period October 1, 1995 (effective date) to October 31, 1995.
+Includes distributions in excess of net investment income in the amount of
$.002.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Equity Income Fund SHARES VALUE
<S> <C> <C>
Common Stocks 88.4%
Chemicals 4.5%
ARCO Chemical Co. ................................................................ 75,000 $ 3,984,375
Chemed Corp. ..................................................................... 130,000 5,208,125
Dow Chemical Co. ................................................................. 65,000 6,284,688
Imperial Chemical Industries, Plc., Sponsored ADR (United Kingdom)................ 104,000 7,559,500
-------------
23,036,688
-------------
Consumer Products 1.9%
Eastman Kodak Co. ................................................................ 91,000 6,569,063
Fortune Brands, Inc. ............................................................. 91,500 3,374,063
-------------
9,943,126
-------------
Financial Services 7.0%
Associates First Capital Corp., Class A .......................................... 31,583 2,360,833
Banc One Corp. ................................................................... 70,180 4,127,461
BankBoston Corp. ................................................................. 48,400 5,224,175
Mercantile Bancorp., Inc. ........................................................ 70,526 3,905,377
Morgan (J.P.) & Co., Inc. ........................................................ 30,500 4,003,125
National City Corp. .............................................................. 96,700 6,696,475
PNC Bank Corp. ................................................................... 87,300 5,276,194
Westpac Banking Corp., Ltd. (Australia)........................................... 686,015 4,607,009
-------------
36,200,649
-------------
Food & Beverage 2.2%
Anheuser-Busch Cos., Inc. ........................................................ 135,300 6,198,431
Heinz (H.J.) Co. ................................................................. 92,000 5,014,000
-------------
11,212,431
-------------
Industrial Services 2.1%
Cooper Industries, Inc. .......................................................... 71,700 4,794,938
Pall Corp. ....................................................................... 299,000 5,867,875
-------------
10,662,813
-------------
Insurance 6.5%
Gallagher (Arthur J.) & Co. ...................................................... 187,300 8,217,788
IPC Holdings, Ltd. (Bermuda)...................................................... 65,000 2,104,375
Lincoln National Corp. ........................................................... 85,500 7,593,469
Mid Ocean, Ltd. (Bermuda)......................................................... 87,300 6,580,238
Scor, SA (France)................................................................. 80,500 4,960,226
Willis Corroon Group, Plc., Sponsored ADS (United Kingdom)........................ 300,000 4,162,500
-------------
33,618,596
-------------
Manufacturing 1.0%
Federal Signal Corp. ............................................................. 237,000 5,080,688
-------------
Metals & Mining 1.1%
DeBeers Consolidated Mines, Ltd., Sponsored ADR (South Africa).................... 227,000 5,845,250
-------------
Oil 13.7%
Amoco Corp. ...................................................................... 203,400 9,000,450
Atlantic Richfield Co. ........................................................... 179,400 13,993,200
Oil (cont.)
Chevron Corp. .................................................................... 108,900 $ 9,004,669
Exxon Corp. ...................................................................... 99,400 7,249,988
Mobil Corp. ...................................................................... 100,600 7,947,400
Texaco, Inc. ..................................................................... 170,000 10,455,000
Ultramar Corp. ................................................................... 147,400 4,762,863
YPF, SA, Sponsored ADR (Argentina)................................................ 249,200 8,690,850
-------------
71,104,420
-------------
Paper & Forest Products 4.2%
Georgia Pacific Corp. (Timber Group) ............................................. 220,800 5,658,000
Potlatch Corp. ................................................................... 108,000 5,116,500
Union Camp Corp. ................................................................. 86,000 5,192,250
Weyerhaeuser Co. ................................................................. 100,000 5,762,500
-------------
21,729,250
-------------
Pharmaceuticals 2.9%
Glaxo Wellcome, Plc., Sponsored ADR (United Kingdom).............................. 111,200 6,289,750
Pharmacia & Upjohn, Inc. ......................................................... 212,000 8,917,250
-------------
15,207,000
-------------
Publishing .6%
Dun & Bradstreet Corp. ........................................................... 93,900 3,333,450
-------------
Real Estate Investment Trusts 7.8%
Arden Realty Group, Inc. ......................................................... 295,000 8,278,438
Equity Residential Properties Trust .............................................. 161,300 7,923,863
FelCor Suite Hotels, Inc. ........................................................ 245,000 8,575,000
Highwoods Properties, Inc. ....................................................... 231,600 7,874,400
Simon DeBartolo Group, Inc. ...................................................... 241,400 7,951,113
-------------
40,602,814
-------------
Retail 2.0%
Penney (J.C.) Co., Inc. .......................................................... 145,000 10,304,063
-------------
Steel 2.2%
British Steel, Plc., Sponsored ADR (United Kingdom)............................... 139,500 3,792,656
Carpenter Technology Corp. ....................................................... 131,000 7,606,188
-------------
11,398,844
-------------
Telecommunications 8.6%
AT&T Corp. ....................................................................... 60,000 3,603,750
Bell Atlantic Corp. .............................................................. 101,060 9,455,426
GTE Corp. ........................................................................ 131,500 7,684,531
Southern New England Telecommunications Corp. .................................... 124,800 8,736,000
Telecom Corp. of New Zealand, Ltd., Sponsored ADR (New Zealand)................... 282,000 6,063,000
US West Communications Group ..................................................... 166,800 8,798,700
-------------
44,341,407
-------------
Tobacco 3.6%
Imperial Tobacco Group, Plc. (United Kingdom)..................................... 328,000 $ 2,381,481
Imperial Tobacco Group, Plc., ADR (United Kingdom)................................ 138,075 2,005,015
Philip Morris Cos., Inc. ......................................................... 136,200 5,081,963
RJR Nabisco Holdings Corp. ....................................................... 93,500 2,600,469
UST, Inc. ........................................................................ 247,000 6,807,938
-------------
18,876,866
-------------
Transportation 1.9%
Chrysler Corp. ................................................................... 108,000 4,340,250
Ford Motor Co. ................................................................... 120,500 5,520,405
-------------
9,860,655
-------------
Utilities - Electric 11.4%
CINergy Corp. .................................................................... 186,000 6,486,750
Dominion Resources, Inc. ......................................................... 212,700 8,414,943
Enova Corp. ...................................................................... 163,000 4,360,250
Entergy Corp. .................................................................... 296,000 7,363,000
MidAmerican Energy Holdings Co. .................................................. 218,600 4,617,924
New Century Energies, Inc. ....................................................... 110,000 5,225,000
Northern States Power Co. ........................................................ 140,000 7,892,500
OGE Energy Corp. ................................................................. 95,000 5,219,062
PacifiCorp ....................................................................... 180,000 4,185,000
PG&E Corp. ....................................................................... 153,100 4,956,612
-------------
58,721,041
-------------
Utilities - Natural Gas 3.2%
Consolidated Natural Gas Co. ..................................................... 95,300 5,479,750
National Fuel Gas Co. ............................................................ 124,600 5,731,600
Pacific Enterprises .............................................................. 134,200 5,225,412
-------------
16,436,762
-------------
Total Common Stocks (Cost $354,021,228) .......................................... 457,516,813
-------------
Convertible Preferred Stocks 5.7%
Browning-Ferris Industries, Inc., 7.25% cvt. pfd., ACES .......................... 111,100 3,763,512
bCMS Energy Trust I, 7.75% cvt. pfd. ............................................. 80,000 4,780,000
Glenborough Realty Trust, 7.75% cvt. pfd., Series A .............................. 289,000 7,369,500
Life Re Capital Trust II, 6.00% cvt. pfd. ........................................ 19,400 1,400,437
National Australia Bank, 7.875% cvt. pfd. (Australia)............................. 170,100 5,007,318
Union Pacific Capital Trust, 6.25% cvt. pfd., 144A ............................... 133,300 7,098,224
-------------
Total Convertible Preferred Stocks (Cost $26,966,670) ............................ 29,418,991
-------------
Total Long-Term Investments (Cost $380,987,898) .................................. 486,935,804
-------------
PRINCIPAL
Franklin Equity Income Fund AMOUNT VALUE
aRepurchase Agreements 5.6%
Joint Repurchase Agreement, 5.487%, 5/01/98 (Maturity Value $29,123,232)
(Cost $29,118,794)............................................................... $29,118,794 $ 29,118,794
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns & Co., Inc.
BT Alex Brown, Inc.
Chase Securities, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
Lehman Brothers Inc.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $410,106,692) 99.7% ...................................... 516,054,598
Other Assets, less Liabilities .3% ............................................... 1,433,579
-------------
Net Assets 100.0% ................................................................ $517,488,177
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
ACES - Adjustable Convertible Exempt Securities
aInvestment is through participation in a joint account with other funds managed
by the investment advisor. At April 30, 1998, all repurchase agreements had been
entered into on that date.
bSee Note 8 regarding restricted securities.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
Franklin Adjustable Rate Securities Fund
<TABLE>
<CAPTION>
Class I
------------------------------------------------------------------
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 1993***
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $9.96 $9.87 $9.82 $9.70 $10.04 $10.03
------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .28 .56 .54 .58 .45 .37
Net realized and unrealized gains (losses) (.01) .09 .06 .12 (.34) .01
------------------------------------------------------------------
Total from investment operations.... .27 .65 .60 .70 .11 .38
Less distributions from net investment income (.28) (.56) (.55) (.58) (.45) (.37)
------------------------------------------------------------------
Net asset value, end of period...... $9.95 $9.96 $9.87 $9.82 $9.70 $10.04
==================================================================
Total return*....................... 2.78% 6.75% 6.23% 7.57% 1.11% 3.83%
Ratios/supplemental data
Net assets, end of period (000's)... $25,526 $21,137 $15,707 $17,014 $24,564 $37,809
Ratios to average net assets:
Expenses****....................... .83%** .81% .90% .70% .45% .11%**
Expenses excluding waiver and payments
by affiliate****.................. 1.03%** 1.00% 1.12% .99% .85% 1.01%**
Net investment income.............. 5.58%** 5.64% 5.54% 5.82% 4.45% 4.69%**
Portfolio turnover rate............. 24.21% 86.71% 41.67% 53.30% 84.67% 49.11%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
***For the nine months ended October 31, 1993.
****Includes the Fund's share of the Portfolio's allocated expenses.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Adjustable Rate Securities Fund SHARES VALUE
Mutual Funds 99.9%
<S> <C> <C>
Adjustable Rate Securities Portfolio (Note 1) .................................... 2,564,898 $25,495,090
---------------
Total Investments (Cost $25,384,816) 99.9% ....................................... 25,495,090
Other Assets, less Liabilities .1% ............................................... 30,708
---------------
Net Assets 100.0% ................................................................ $25,525,798
===============
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements
Statements of Assets and Liabilities
April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Franklin
Global Short-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities Fund Securities Fund
--------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost......................................................... $121,559,626 $185,458,378 $256,363,793
===========================================
Value........................................................ 118,318,990 187,266,077 267,560,493
Cash ....................................................... 478 -- 2,919,649
Receivables:
Investment securities sold .................................. -- 2,018,635 5,488,351
Capital shares sold ......................................... 521,115 697,079 1,065,549
Dividends and interest....................................... 2,879,161 2,938,672 2,219,161
Unrealized gain on forward currency contracts (Note 6)...... 152,251 -- --
--------------------------------------------
Total assets................................................. 121,871,995 192,920,463 279,253,203
--------------------------------------------
Liabilities:
Payables:
Investment securities purchased.............................. -- -- 1,613,375
Capital shares redeemed...................................... 316,968 579,967 212,082
Affiliates................................................... 115,867 136,483 391,295
Shareholders................................................. 188,089 305,250 177,903
Funds advanced by custodian................................. -- 1,843,137 --
Unrealized loss on forward exchange contracts (Note 6)...... 790,539 -- --
Other liabilities........................................... 33,091 15,029 5,175
--------------------------------------------
Total liabilities............................................ 1,444,554 2,879,866 2,399,830
--------------------------------------------
Net assets, at value........................................ $120,427,441 $190,040,597 $276,853,373
===========================================
Net assets consist of:
Undistributed net investment income ........................ $-- $ 212,716 $ 779,689
Accumulated distributions in excess of net investment income (236,558) -- --
Net unrealized appreciation (depreciation).................. (3,874,336) 1,807,699 11,196,700
Accumulated net realized gain (loss)........................ (1,475,036) (5,654,776) 9,624,122
Capital shares.............................................. 126,013,371 193,674,958 255,252,862
--------------------------------------------
Net assets, at value......................................... $120,427,441 $190,040,597 $276,853,373
===========================================
Franklin Franklin
GlobalShort- Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities Fund Securities Fund
----------------------------------------------
<S> <C> <C> <C>
Class I:
Net assets, at value........................................ $114,101,749 $187,528,399 $224,823,605
===========================================
Shares outstanding.......................................... 13,547,009 18,267,225 15,968,719
===========================================
Net asset value per share*.................................. $8.42 $10.27 $14.08
===========================================
Maximum offering price per share (net asset value
per share O 95.75%, 97.75%, 95.50%, respectively).......... $8.79 $10.51 $14.74
===========================================
Class II:
Net assets, at value........................................ $ 5,604,785 -- $ 52,029,768
===========================================
Shares outstanding.......................................... 665,244 -- 3,710,249
===========================================
Net asset value per share*.................................. $8.43 -- $14.02
===========================================
Maximum offering price per share
(net asset value per share O 99%)........................... $8.52 -- $14.16
===========================================
Advisor Class:
Net assets, at value........................................ $ 720,907 $ 2,512,198 --
===========================================
Shares outstanding.......................................... 85,546 244,745 --
===========================================
Net asset value and maximum
offering price per share.................................... $8.43 $10.26 --
===========================================
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
---------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost......................................................... $331,767,271 $410,106,692 $25,384,816
===========================================
Value........................................................ 310,948,716 516,054,598 25,495,090
Cash........................................................ -- 234,012 3,607
Receivables:
Investment securities sold................................... 126,536 2,834,520 --
Capital shares sold.......................................... 423,599 699,769 125,422
Dividends and interest..................................... -- 1,111,239 --
Other assets................................................ -- -- --
------------------------------------------
Total assets................................................. 311,498,851 520,934,138 25,624,119
------------------------------------------
Liabilities:
Payables:
Investment securities purchased.............................. -- 1,645,503 --
Capital shares redeemed...................................... 682,986 434,270 59,096
Affiliates................................................... 189,293 635,388 15,303
Shareholders................................................. 542,746 730,800 12,884
Other liabilities........................................... 53,774 -- 11,038
------------------------------------------
Total liabilities............................................ 1,468,799 3,445,961 98,321
------------------------------------------
Net assets, at value........................................ $310,030,052 $517,488,177 $25,525,798
===========================================
Net assets consist of:
Undistributed net investment income......................... $ 822,385 $-- $--
Accumulated distributions in
excess of net investment income ...........................-- (55,084) --
Net unrealized appreciation (depreciation).................. (20,818,555) 105,947,906 110,274
Accumulated net realized gain (loss)........................ (84,519,070) 15,780,374 (937,079)
Capital shares.............................................. 414,545,292 395,814,981 26,352,603
------------------------------------------
Net assets, at value......................................... $310,030,052 $517,488,177 $25,525,798
===========================================
Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities Fund Income Fund Securities Fund
------------------------------------------
Class I:
<S> <C> <C> <C>
Net assets, at value........................................ $310,030,052 $440,140,133 $25,525,798
===========================================
Shares outstanding.......................................... 32,881,364 20,973,189 2,565,034
===========================================
Net asset value per share*.................................. $9.43 $20.99 $9.95
===========================================
Maximum offering price per share (net asset value
per share O 97.75%, 95.50%, 97.75%, respectively) .......... $9.65 $21.98 $10.18
===========================================
Class II:
Net assets, at value........................................ -- $ 77,348,044 --
===========================================
Shares outstanding.......................................... -- 3,694,865 --
===========================================
Net asset value per share*.................................. -- $20.93 --
===========================================
Maximum offering price per share
(net asset value per share O 99%) ......................... -- $21.14 --
===========================================
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Operations
for the six months ended April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin Franklin
Global Short-Intermediate Franklin
Government U.S. Government Convertible
Income Fund Securities FundSecurities Fund
--------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends..................................................... $ 2,226 $-- $ 2,270,163
Interest...................................................... 5,025,507 5,798,146 4,835,381
------------------------------------------
Total investment income........................................ 5,027,733 5,798,146 7,105,544
------------------------------------------
Expenses:
Management fees (Note 3)...................................... 368,285 536,860 723,648
Distribution fees (Note 3)
Class I...................................................... 59,550 79,599 275,206
Class II..................................................... 16,895 -- 215,225
Transfer agent fees (Note 3).................................. 74,000 59,205 122,661
Custodian fees................................................ 19,000 1,063 2,983
Reports to shareholders....................................... 24,000 23,721 36,615
Registration and filing fees.................................. 12,647 17,422 12,832
Professional fees............................................. 1,600 4,572 5,278
Trustees' fees and expenses................................... 4,700 9,023 10,123
Other......................................................... 360 8,334 6,270
------------------------------------------
Total expenses................................................. 581,037 739,799 1,410,841
------------------------------------------
Net investment income......................................... 4,446,696 5,058,347 5,694,703
------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments.................................................. (171,574) 546,007 9,738,806
Foreign currency transactions................................ 1,667,823 -- 5,263
------------------------------------------
Net realized gain ............................................. 1,496,249 546,007 9,744,069
Net unrealized depreciation on:
Investments.................................................. (967,169) (723,810) (1,829,592)
Translation of assets and liabilities
denominated in foreign currencies.............................. (257,119) -- --
------------------------------------------
Net unrealized depreciation ................................... (1,224,288) (723,810) (1,829,592)
------------------------------------------
Net realized and unrealized gain (loss)........................ 271,961 (177,803) 7,914,477
------------------------------------------
Net increase in net assets
resulting from operations..................................... $4,718,657 $4,880,544 $13,609,180
==========================================
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Operations (cont.)
for the six months ended April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Franklin
Adjustable Franklin Franklin
U.S. Government Equity Adjustable Rate
Securities FundIncome Fund Securities Fund
-------------------------------------------
<S> <C> <C> <C>
Investment income:*
Dividends..................................................... $9,935,623 $ 8,159,433 $648,245
Interest...................................................... -- 904,280 --
------------------------------------------
Total investment income........................................ 9,935,623 9,063,713 648,245
------------------------------------------
Expenses:
Management fees (Note 3)...................................... -- 1,186,664 --
Administrative fees (Note 3).................................. 161,790 -- 10,528
Distribution fees (Note 3)
Class I...................................................... 368,953 499,483 27,010
Class II..................................................... -- 304,993 --
Transfer agent fees (Note 3).................................. 152,433 205,358 8,384
Custodian fees................................................ -- 6,284 --
Reports to shareholders....................................... 71,863 57,649 3,482
Registration and filing fees.................................. 13,425 18,894 7,753
Professional fees............................................. 8,709 9,106 1,469
Trustees' fees and expenses................................... 15,524 17,149 861
Other......................................................... 10,720 4,890 789
------------------------------------------
Total expenses ................................................ 803,417 2,310,470 60,276
------------------------------------------
Net investment income......................................... 9,132,206 6,753,243 587,969
------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments.................................................. (1,551,652) 15,783,567 (6,834)
Foreign currency transactions................................ -- 716 --
------------------------------------------
Net realized gain (loss)....................................... (1,551,652) 15,784,283 (6,834)
Net unrealized appreciation (depreciation) on:
Investments.................................................... (192,834) 40,075,680 (16,357)
Translation of assets and liabilities
denominated in foreign currencies............................. -- (1,103) --
------------------------------------------
Net unrealized appreciation (depreciation)..................... (192,834) 40,074,577 (16,357)
------------------------------------------
Net realized and unrealized gain (loss)........................ (1,744,486) 55,858,860 (23,191)
------------------------------------------
Net increase in net assets
resulting from operations..................................... $7,387,720 $62,612,103 $564,778
==========================================
</TABLE>
*Net of foreign taxes of $63,363 for the Franklin Equity Income Fund.
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended April 30, 1998 (unaudited)
and the year ended October 31, 1997
<TABLE>
<CAPTION>
Franklin Global Franklin Short-Intermediate
Government Income Fund U.S. Government Securities Fund
--------------------------------------------------------------------
April 30, 1998October 31, 1997 April 30, 1998 October 31, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................... $ 4,446,696 $ 9,191,413 $ 5,058,347 $ 10,505,611
Net realized gain (loss)
from investments and
foreign currency transactions........... 1,496,249 (76) 546,007 98,482
Net unrealized appreciation
(depreciation) on
investments and
translation of assets and
liabilities denominated
in foreign currencies..................... (1,224,288) (3,329,899) (723,810) 229,386
--------------------------------------------------------------------
Net increase in net assets resulting
from operations........................... 4,718,657 5,861,438 4,880,544 10,833,479
Distributions to shareholders from:
Net investment income:
Class I................................... (4,242,655) (9,096,985) (5,310,095) (10,697,486)
Class II.................................. (176,670) (249,829) -- --
Advisor Class............................. (27,371) (39,987) (33,080) (12,468)
In excess of net investment income:
Class I................................... (49,533) (178,945) -- --
Class II.................................. (2,062) (4,914) -- --
Advisor Class............................. (317) (787) -- --
--------------------------------------------------------------------
Total distributions to shareholders....... (4,498,608) (9,571,447) (5,343,175) (10,709,954)
Capital share transactions: (Note 2)
Class I.................................. (4,459,096) (15,684,110) (4,066,470) (4,111,244)
Class II................................. 1,125,177 869,332 -- --
Advisor Class............................ (21,633) 762,031 2,134,523 381,098
--------------------------------------------------------------------
Total capital share transactions.......... (3,355,552) (14,052,747) (1,931,947) (3,730,146)
--------------------------------------------------------------------
Net decrease in net assets................. (3,135,503) (17,762,756) (2,394,578) (3,606,621)
Net assets:
Beginning of period....................... 123,562,944 141,325,700 192,435,175 196,041,796
--------------------------------------------------------------------
End of period............................. $120,427,441 $123,562,944 $190,040,597 $192,435,175
====================================================================
Undistributed net investment
income (Accumulated
distributions in excess of net
investment income)
included in net assets:
End of period............................ $ (236,558) $ (184,646) $ 212,716 $ 497,544
====================================================================
See notes to financial statements.
</TABLE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended April 30, 1998 (unaudited)
and the year ended October 31, 1997
<TABLE>
<CAPTION>
Franklin Convertible Franklin Adjustable
Securities Fund U.S. Government Securities Fund
April 30, 1998 October 31, 1997 April 30, 1998 October 31, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................... $ 5,694,703 $ 8,839,586 $ 9,132,206 $ 21,143,881
Net realized gain (loss) from investments and
foreign currency transactions........... 9,744,069 18,354,800 (1,551,652) (4,382,996)
Net unrealized appreciation (depreciation)
on investments ......................... (1,829,592) 9,072,653 (192,834) 8,545,202
--------------------------------------------------------------------
Net increase in net assets resulting
from operations........................... 13,609,180 36,267,039 7,387,720 25,306,087
Distributions to shareholders from:
Net investment income:
Class I................................... (5,325,434) (7,148,153) (9,264,877) (20,946,338)
Class II.................................. (877,553) (764,202) -- --
Net realized gains:
Class I................................... (15,493,732) (9,004,822) -- --
Class II.................................. (2,734,235) (857,185) -- --
--------------------------------------------------------------------
Total distributions to shareholders....... (24,430,954) (17,774,362) (9,264,877) (20,946,338)
Capital share transactions: (Note 2)
Class I.................................. 21,595,981 65,369,154 (23,083,252) (66,447,672)
Class II................................. 18,165,670 22,239,207 -- --
--------------------------------------------------------------------
Total capital share transactions.......... 39,761,651 87,608,361 (23,083,252) (66,447,672)
--------------------------------------------------------------------
Net increase (decrease) in net assets...... 28,939,877 106,101,038 (24,960,409) (62,087,923)
Net assets:
Beginning of period....................... 247,913,496 141,812,458 334,990,461 397,078,384
--------------------------------------------------------------------
End of period............................. $276,853,373 $247,913,496 $310,030,052 $334,990,461
====================================================================
Undistributed net investment income included
in net assets:
End of period............................ $ 779,689 $ 1,287,973 $ 822,385 $ 955,056
====================================================================
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
Statements of Changes in Net Assets (cont.)
for the six months ended April 30, 1998 (unaudited)
and the year ended October 31, 1997
<TABLE>
<CAPTION>
Franklin Equity Franklin Adjustable
Income Fund Rate Securities Fund
April 30, 1998 October 31, 1997 April 30, 1998 October 31, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................... $ 6,753,243 $ 11,811,637 $ 587,969 $ 1,127,160
Net realized gain (loss) from investments and
foreign currency transactions............. 15,784,283 16,999,297 (6,834) (144,543)
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies 40,074,577 41,583,856 (16,357) 369,436
--------------------------------------------------------------------
Net increase in net assets resulting
from operations........................... 62,612,103 70,394,790 564,778 1,352,053
Distributions to shareholders from:
Net investment income:
Class I................................... (6,587,775) (10,821,047) (587,969) (1,127,160)
Class II.................................. (769,224) (874,988) -- --
In excess of net investment income:
Class I................................... (49,325) -- -- --
Class II.................................. (5,759) -- -- --
Net realized gains:
Class I................................... (15,051,119) (5,098,255) -- --
Class II.................................. (1,938,931) (396,739) -- --
--------------------------------------------------------------------
Total distributions to shareholders....... (24,402,133) (17,191,029) (587,969) (1,127,160)
Capital share transactions: (Note 2)
Class I.................................. 54,499,385 57,149,819 4,411,650 5,205,073
Class II................................. 26,947,171 22,298,986 -- --
--------------------------------------------------------------------
Total capital share transactions.......... 81,446,556 79,448,805 4,411,650 5,205,073
--------------------------------------------------------------------
Net increase in net assets................. 119,656,526 132,652,566 4,388,459 5,429,966
Net assets:
Beginning of period....................... 397,831,651 265,179,085 21,137,339 15,707,373
--------------------------------------------------------------------
End of period............................. $517,488,177 $397,831,651 $25,525,798 $21,137,339
====================================================================
Undistributed net investment income (Accumulated
distributions in excess of net investment income)
included in net assets:
End of period............................ $ (55,084) $ 603,756 $-- $--
</TABLE>
See notes to financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end investment company, consisting of
six separate series (the Funds). All Funds are diversified except Franklin
Global Government Income Fund. The Funds and their investment objectives are:
<TABLE>
<CAPTION>
<S> <C> <C>
Global Income Growth and Income Income
Global Government Income Fund Convertible Securities Fund Short-Intermediate U.S. Government Securities Fund
Equity Income Fund Adjustable U.S. Government Securities Fund
Adjustable Rate Securities Fund
</TABLE>
The Adjustable U.S. Government Securities Fund and the Adjustable Rate
Securities Fund invest substantially all of their assets in the U.S. Government
Adjustable Rate Mortgage Portfolio and the Adjustable Rate Securities Portfolio
(the Portfolios), respectively. Both are registered under the Investment Company
Act of 1940 as a diversified, open end investment company having the same
investment objectives as The Adjustable U.S. Government Securities Fund and the
Adjustable Rate Securities Fund. The financial statements of the Portfolios,
including the Statement of Investments, are included elsewhere in this report
and should be read in conjunction with the Funds financial statements.
The following summarizes the Funds' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
The values of the Adjustable U.S. Government Securities Fund and the Adjustable
Rate Securities Fund reflect their proportionate interest in the net assets of
the U.S. Government Adjustable Rate Mortgage Portfolio and the Adjustable Rate
Securities Portfolio, respectively. At April 30, 1998, the Adjustable U.S.
Government Securities Fund owns 99% of the U.S. Government Adjustable Rate
Mortgage Portfolio and the Adjustable Rate Securities Fund owns 96% of the
Adjustable Rate Securities Portfolio. The Portfolios' shares held by the Funds
are valued at the net asset value of the Portfolios.
b. Foreign Currency Translation:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
c. Forward Exchange Contracts:
The Global Government Income Fund may enter into forward exchange contracts to
hedge against foreign exchange risks. These contracts are valued daily and the
Fund's equity therein is included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses are included in the Statement of
Operations. (see Note 6 for details)
d. Income Taxes:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
e. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
f. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares have the same rights, except for their initial sales load, distribution
fees, voting rights on matters affecting a single class and exchange privilege
of each class.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class I, Class II,
Class I Class I & Class II Class I & Advisor Class & Advisor Class
Adjustable U.S. Government Securities Fund Convertible Securities Fund Short-Intermediate U.S. Government Global Government
Adjustable Rate Securities Fund Equity Income Fund Securities Fund Income Fund
2. SHARES OF BENEFICIAL INTEREST (cont.)
At April 30, 1998, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Funds'
shares were as follows:
Global Government Short-Intermediate Convertible
Income Fund U.S. Government Securities Fund Securities Fund
-------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I Shares:
Six months ended April 30, 1998
Shares sold........... 1,204,998 $10,155,305 5,932,009 $ 61,047,939 3,111,342 $43,665,661
Shares issued in reinvestment
of distributions..... 281,714 2,367,033 308,622 3,173,636 1,137,498 15,531,476
Shares redeemed....... (2,014,000) (16,981,434) (6,638,733) (68,288,045) (2,707,881) (37,601,156)
-------------------------------------------------------------------------------------
Net increase (decrease) (527,288) $ (4,459,096) (398,102) $ (4,066,470) 1,540,959 $21,595,981
=====================================================================================
Year ended October 31, 1997
Shares sold........... 2,472,734 $20,945,795 9,455,984 $ 96,723,865 7,074,889 $98,888,262
Shares issued in reinvestment
of distributions...... 576,140 4,904,638 610,793 6,250,094 916,933 12,136,488
Shares redeemed....... (4,879,312) (41,534,543) (10,469,896) (107,085,203) (3,302,613) (45,655,596)
-------------------------------------------------------------------------------------
Net increase (decrease) (1,830,438) $(15,684,110) (403,119) $ (4,111,244) 4,689,209 $65,369,154
=====================================================================================
Class II Shares:
Six months ended April 30, 1998
Shares sold........... 234,248 $ 1,976,627 -- -- 1,308,278 $18,253,855
Shares issued in reinvestment
of distributions..... 12,951 108,889 -- -- 209,935 2,854,609
Shares redeemed....... (113,779) (960,339) -- -- (210,636) (2,942,794)
-------------------------------------------------------------------------------------
Net increase.......... 133,420 $ 1,125,177 -- -- 1,307,577 $18,165,670
=====================================================================================
Year ended October 31, 1997
Shares sold........... 314,368 $ 2,666,891 -- -- 1,693,202 $23,703,881
Shares issued in reinvestment
of distributions..... 18,565 157,895 -- -- 96,754 1,282,945
Shares redeemed....... (228,727) (1,955,454) -- -- (197,081) (2,747,619)
-------------------------------------------------------------------------------------
Net increase.......... 104,206 $ 869,332 -- -- 1,592,875 $22,239,207
=====================================================================================
Advisor Class Shares:
Six months ended April 30, 1998
Shares sold........... 10,688 $ 90,010 210,761 $ 2,169,184 -- --
Shares issued in reinvestment
of distributions..... 2,998 25,216 2,516 25,853 -- --
Shares redeemed....... (16,255) (136,859) (5,881) (60,514) -- --
-------------------------------------------------------------------------------------
Net increase (decrease) (2,569) $ (21,633) 207,396 $ 2,134,523 -- --
=====================================================================================
Year ended October 31, 1997
Shares sold........... 102,752 $ 885,499 37,960 $ 387,372 -- --
Shares issued in reinvestment
of distributions..... 4,741 40,043 393 4,015 -- --
Shares redeemed....... (19,378) (163,511) (1,004) (10,289) -- --
-------------------------------------------------------------------------------------
Net increase.......... 88,115 $ 762,031 37,349 $ 381,098 -- --
=====================================================================================
+For the period January 2, 1997 (effective date) to October 31, 1997 for the Advisor Class of shares.
2. SHARES OF BENEFICIAL INTEREST (cont.)
Adjustable U.S. Government Adjustable Rate
Securities Fund Equity Income Fund Securities Fund
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class I Shares:
Six months ended April 30, 1998
Shares sold........... 8,354,015 $ 79,012,970 4,930,881 $ 99,290,326 1,195,237 $11,901,458
Shares issued in reinvestment
of distributions .... 582,711 5,498,928 961,121 18,831,511 45,253 450,465
Shares redeemed....... (11,383,545) (107,595,150) (3,179,127) (63,622,452) (797,535) (7,940,273)
-------------------------------------------------------------------------------------
Net increase (decrease) (2,446,819) (23,083,252) 2,712,875 54,499,385 442,955 4,411,650
=====================================================================================
Year ended October 31, 1997
Shares sold........... 19,504,396 $183,679,079 6,936,844 $125,149,684 2,515,583 $24,890,014
Shares issued in reinvestment
of distributions..... 1,309,703 12,299,705 762,734 13,249,367 91,780 910,284
Shares redeemed....... (27,867,699) (262,426,456) (4,489,818) (81,249,232) (2,076,570) (20,595,225)
-------------------------------------------------------------------------------------
Net increase (decrease) (7,053,600) $ (66,447,672) 3,209,760 $ 57,149,819 530,793 $ 5,205,073
=====================================================================================
Class II Shares:
Six months ended April 30, 1998
Shares sold........... -- -- 1,483,633 $ 29,835,509 -- --
Shares issued in reinvestment
of distributions .... -- -- 126,438 2,472,810 -- --
Shares redeemed....... -- -- (265,882) (5,361,148) -- --
-------------------------------------------------------------------------------------
Net increase.......... -- -- 1,344,189 $ 26,947,171 -- --
=====================================================================================
Year ended October 31, 1997
Shares sold........... -- -- 1,537,907 $ 27,820,253 -- --
Shares issued in reinvestment
of distributions..... -- -- 64,902 1,133,280 -- --
Shares redeemed....... -- -- (364,896) (6,654,547) -- --
-------------------------------------------------------------------------------------
Net increase.......... -- -- 1,237,913 $ 22,298,986 -- --
=====================================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers) and Templeton Investment Counsel, Inc.
(TICI), Franklin/Templeton Distributors, Inc. (Distributors), Franklin Templeton
Services, Inc. (FT Services), Franklin/Templeton Investor Services, Inc.
(Investor Services), and of the Portfolios, the Trust's investment managers,
principal underwriter, administrative manager, transfer agent, and the Funds in
which the Adjustable U.S. Government Securities Fund and the Adjustable Rate
Securities Fund invest, respectively.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds, except the Adjustable U.S. Government Securities Fund and
the Adjustable Rate Securities Fund, as follows:
Annualized
Fee Rate Month End Net Assets
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million
The Adjustable U.S. Government Securities Fund and the Adjustable Rate
Securities Fund pay an administrative fee to Advisers based on the average net
assets of the Funds, as follows:
Annualized
Fee Rate Average Daily Net Assets
0.10% First $5 billion
0.09% Over $5 billion, up to and including $10 billion
0.08% Over $10 billion
Under an agreement with Advisers, FT Services provides administrative services
to the Global Government Income Funds, the Short-Intermediate U.S. Government
Securities Fund, the Convertible Securities Fund and the Equity Income Fund. The
fee is paid by Advisers based on average daily net assets, and is not an
additional expense of the Funds.
Under a subadvisory agreement, TICI provides subadvisory services to the Global
Government Income Fund and receives from Advisers fees based on the month end
net assets of the Fund.
The Adjustable U.S. Government Securities Fund and the Adjustable Rate
Securities Fund reimburse Distributors up to 0.25% per year of its average daily
net assets, the Short-Intermediate U.S. Government Securities Fund reimburses
Distributors up to 0.10% per year of the Funds average daily net assets of Class
I, the Global Government Income Fund reimburses Distributors up to 0.15% and
0.65% per year of the average daily net assets of Class I and Class II,
respectively, the Convertible Securities Fund and the Equity Income Fund
reimburse Distributors up to 0.25% and 1.00% per year of the average daily net
assets of Class I and Class II, respectively, for costs incurred in marketing
the Funds' shares.
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
Global Short-Intermediate Adjustable
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund Income Fund Securities Fund
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Commissions received (paid). $7,947 $(23,689) $(123,340) $(10,700) $(207,389) $(19,455)
Contingent Deferred Sales Charge $ 150 $-- $ 886 $-- $ 1,030 $ --
4. INCOME TAXES
At October 31, 1997, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
Global Short-Intermediate Adjustable
Government U.S. Government U.S. Government Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund
-------------------------------------------------------------------
Capital loss carryovers expiring in:
<S> <C> <C> <C> <C>
2000 ........................................... $-- $-- $ 1,925,614 $ --
2001 ........................................... -- -- 7,701,615 --
2002 ........................................... -- 2,335,528 41,867,757 414,821
2003 ........................................... 2,971,284 3,564,637 18,176,270 286,740
2004 ........................................... -- 300,618 8,741,194 66,100
2005 ........................................... -- -- 4,484,844 95,706
-------------------------------------------------------------------
$2,971,284 $6,200,783 $82,897,294 $863,367
===================================================================
At April 30, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes were as follows:
Global Short-Intermediate Adjustable
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund Income Fund Securities Fund
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment at cost...... $121,559,626 $185,458,378 $256,562,543 $331,871,457 $410,106,692 $25,443,619
============================================================================================
Unrealized appreciation. 1,464,255 1,811,593 20,399,236 -- 108,804,128 51,471
Unrealized depreciation. (5,338,591) (3,894) (9,401,286) (20,922,741) (2,856,222) --
--------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation)......... $ (3,874,336) $ 1,807,699 $ 10,997,950 $(20,922,741) $105,947,906 $ 51,471
============================================================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and defaulted
securities.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
Global Short-Intermediate Adjustable
Government U.S. Government Convertible U.S. Government Equity Adjustable Rate
Income Fund Securities Fund Securities Fund Securities Fund Income Fund Securities Fund
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases............... $21,868,240 $69,027,031 $142,187,525 $63,367,897 $122,877,006 $9,506,611
Sales................... $26,550,001 $70,359,141 $110,716,290 $86,973,493 $ 64,075,040 $5,198,537
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Global Government Income Fund has been a party to financial instruments with
off-balance-sheet risk, primarily forward exchange contracts in order to
minimize the impact on the Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At April 30,
1998, the Global Government Income Fund has outstanding forward exchange
contracts for the sale and the purchase of currencies as set out below. The
contracts are reported in the financial statements at the Fund's net equity, as
measured by the difference between the forward exchange rates at the reporting
date and the forward exchange rates at the day of entry into the contract.
As of April 30, 1998, the Franklin Global Government Income Fund had the
following forward exchange contracts outstanding:
<TABLE>
<CAPTION>
In Settlement Unrealized
Contracts to Buy Exchange for Date Gain/(Loss)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,504,000 Canadian Dollars..........................................U.S.$ 1,048,449 5/4/98 $ 3,135
Contracts to Sell
- ------------------------------------------------------------------------------------------------------------
850,000 Canadian Dollars..........................................U.S. $ 600,282 5/4/98 5,970
3,489,000 Canadian Dollars.......................................... 2,464,853 5/4/98 25,374
2,597,000 Australian Dollars........................................ 1,721,097 5/4/98 27,733
6,660,000 German Deutschemarks...................................... 3,722,334 5/28/98 4,942
--------------------------------
U.S.$ 8,508,566 64,019
Net unrealized gain on offsetting forward exchange contracts......... 85,097
----------
Net unrealized gain on forward exchange contracts................... 152,251
----------
Contracts to Sell
- ------------------------------------------------------------------------------------------------------------
13,320,000 German Deutschemarks......................................U.S. $ 7,222,761 5/5/98 (202,077)
6,660,000 German Deutschemarks...................................... 3,608,172 5/7/98 (104,679)
6,660,000 German Deutschemarks...................................... 3,608,446 5/7/98 (104,406)
6,660,000 German Deutschemarks...................................... 3,622,124 5/11/98 (91,591)
5,250,000 German Deutschemarks...................................... 2,896,072 5/15/98 (32,087)
5,600,000 German Deutschemarks...................................... 3,103,353 5/22/98 (21,290)
--------------------------------
U.S. $24,060,928 (556,130)
Net unrealized loss on offsetting forward exchange contracts......... (234,409)
----------
Unrealized loss on forward exchange contracts....................... (790,539)
----------
Net unrealized loss on forward exchange contracts.................. U.S. ($638,288)
==========
</TABLE>
7. CREDIT RISK AND DEFAULTED SECURITIES
The Convertible Securities Fund has 61.2% of its portfolio invested in lower
rated and comparable quality unrated high yield securities, which tend to be
more sensitive to economic conditions than higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. At April 30, 1998, the
Convertible Securities Fund held defaulted securities with a value aggregating
$440,000 representing 0.2% of the Fund's net assets. For information as to
specific securities, see the accompanying Statement of Investment.
For financial statement reporting purposes, the Fund discontinues accruing
income on defaulted bonds and provides an estimate for losses on interest
receivable.
The Global Government Income Fund has investments in excess of 10% of its total
net assets in Germany. Such concentration may subject the Fund more
significantly to economic changes occurring within that country. The Convertible
Securities Fund has investments in excess of 10% of its total net assets in the
Electronics industry. Such concentration may subject the Fund more significantly
to economic changes occurring within that industry/sector.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at April 30, 1998 are as follows:
<TABLE>
<CAPTION>
Shares Issuer Acquisition Date Cost Value
- ------------------------------------------------------------------------------------------------------------
Convertible Securities Fund
<C> <C> <C> <C>
73,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.58% of Net Assets)... 06/18/97 $3,650,000 $4,361,750
Equity Income Fund
80,000 CMS Energy Trust I, 7.75%, cvt. pfd. (.92% of Net Assets).... 06/18/97 4,000,000 4,780,000
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
U.S. Government Adjustable Rate Mortgage Portfolio
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 19931
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period $9.48 $9.37 $9.33 $9.19 $9.82 $9.91
--------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .290 .593 .589 .572 .415 .313
Net realized and unrealized gain (loss) (.050) .110 .040 .140 (.630) (.090)
--------------------------------------------------------------------
Total from investment operations.... .240 .703 .629 .712 (.215) .223
Less distributions from net investment income (.290) (.593) (.589) (.572) (.415) (.313)
--------------------------------------------------------------------
Net asset value, end of period...... $9.43 $9.48 $9.37 $9.33 $9.19 $9.82
====================================================================
Total Return*....................... 2.56% 7.74% 6.95% 7.99% (2.22)% 2.28%
Ratios/supplemental data
Net assets, end of period (000's)... $315,213 $342,541 $406,431 $522,802 $747,471 $2,130,229
Ratios to average net assets:
Expenses........................... .24%** .25% .25% .18% .02% .27%**
Expenses excluding waiver and payments
by affiliate....................... .42%** .43% .42% .43% .42% .41%**
Net investment income.............. 6.14%** 6.31% 6.31% 6.17% 4.01% 4.15%**
Portfolio turnover rate............. 21.46% 20.84% 24.63% 20.16% 56.43% 76.55%
</TABLE>
1For the nine months ended October 31, 1993.
*Total return is not annualized.
**Annualized
See notes to financial statements.
<TABLE>
<CAPTION>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, April 30, 1998 (unaudited)
PRINCIPAL
U.S. Government Adjustable Rate Mortgage Portfolio AMOUNT VALUE
<S> <C> <C>
Adjustable Rate Mortgage Securities 97.8%
Federal Home Loan Mortgage Corp. (FHLMC) 18.8%
FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.375%, 11/01/16 ............. $ 4,460,532 $ 4,446,361
FHLMC, Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 7.674%, 7/01/18............... 4,075,746 4,061,136
FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.768%, 4/01/18 .............. 6,374,555 6,432,752
FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.582%, 9/01/19............... 5,316,869 5,254,296
FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.467%, 12/01/16 ............ 2,619,334 2,656,982
FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.787%, 10/01/18 ............ 2,402,833 2,426,567
FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.64%, 3/01/19............... 2,201,915 2,221,195
FHLMC, Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.526%, 3/01/18 ............. 4,002,682 4,038,349
FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.588%, 4/01/19................ 8,350,842 8,366,249
FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.917%, 7/01/20 .............. 5,270,976 5,283,955
FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.897%, 11/01/19 ............ 2,528,827 2,562,884
FHLMC, Cap 13.879%, Margin 2.089% + CMT, Resets Annually, 7.692%, 4/01/18.............. 7,306,871 7,365,760
FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.769%, 12/01/21 ...... 1,492,497 1,461,948
FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.119%, 2/01/19 .............. 2,527,219 2,587,741
-------------
Total Federal Home Loan Mortgage Corp. (Cost $58,931,698) ............................. 59,166,175
-------------
Federal National Mortgage Association (FNMA) 72.9%
bFNMA, Cap 12.00%, Margin 1.25% + COFI, Resets Monthly, 6.22%, 6/01/28.................. 9,028,125 9,043,594
FNMA, Cap 12.097%, Margin 2.135% + CMT, Resets Annually, 7.022%, 11/01/23.............. 18,978,016 19,231,602
FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 7.698%, 11/01/18.. 2,145,164 2,186,024
FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.963%, 11/01/17............... 15,264,342 14,897,274
FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.619%, 3/01/19................. 3,722,731 3,753,285
FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 6.888%, 1/01/19 .... 9,486,438 9,467,152
FNMA, Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.888%, 1/01/19 ............... 2,942,828 2,965,651
FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.213%, 9/01/18................ 11,284,987 11,138,791
FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.477%, 1/01/19 ............... 2,898,587 2,945,235
FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 7.777%, 11/01/20 .............. 3,501,388 3,540,141
FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.355%, 5/01/19 ............... 4,379,010 4,451,849
FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.933%, 6/01/17.... 2,798,992 2,846,027
FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.241%, 10/01/17 ........ 4,267,576 4,310,198
FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 7.299%, 7/01/17 ... 6,441,448 6,496,533
FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.213%, 2/01/19 ............... 7,007,630 7,013,556
FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 7.723%, 12/01/19 ............. 2,843,192 2,900,070
FNMA, Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 8.111%, 11/01/17 ........ 4,520,776 4,674,784
FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.646%, 6/01/19 ................ 4,413,013 4,427,593
FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.923%, 2/01/20 ................ 8,737,512 8,476,254
FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.100%, 12/01/20 ... 4,713,676 4,754,219
FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.693%, 4/01/19............... 5,276,026 5,366,615
FNMA, Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.597%, 6/01/19............... 4,212,649 4,212,231
FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 7.558%, 4/01/19............... 4,381,694 4,462,284
FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 7.618%, 11/01/26.. 2,304,717 2,354,204
FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 7.589%, 6/01/19 ............... 2,608,317 2,616,968
FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.562%, 10/01/19 .............. 6,906,657 7,022,147
FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.438%, 4/01/03 ................ 6,126,869 5,976,868
FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 7.752%, 9/01/22............... 11,039,203 10,977,218
FNMA, Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 7.532%, 6/01/18............... 5,017,174 4,959,684
FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 7.83%, 3/01/21................ 4,313,713 4,397,935
cFederal National Mortgage Association (FNMA) (cont.)
FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 7.871%, 12/01/20.............. $ 6,724,719 $ 6,808,641
FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.617%, 3/01/19 ............... 2,285,610 2,312,966
FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.771%, 7/01/24 .... 4,880,585 4,930,246
FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.75%, 2/01/19 ................ 3,465,240 3,471,555
FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.811%, 12/01/18............... 2,705,118 2,748,199
FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.692%, 1/01/19............... 5,534,303 5,611,551
FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.105%, 5/01/21 ......... 9,181,585 9,163,187
FNMA, Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 7.757%, 3/01/20................ 2,710,197 2,730,153
FNMA, Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.386%, 1/01/16................ 7,402,729 7,375,024
FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.374%, 5/01/19............... 2,616,577 2,688,528
-------------
Total Federal National Mortgage Association (Cost $229,069,113) ....................... 229,706,036
-------------
Government National Mortgage Association (GNMA) 6.1%
GNMA, Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 7.00%, 1/20/24 ................. 5,896,304 5,984,814
bGNMA, Cap 11.00%, Margin 1.50% + CMT, Resets Annually, 6.00%, 5/01/28.................. 9,099,844 9,106,875
GNMA, Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 8.00%, 7/20/25 ................. 3,883,125 4,033,050
-------------
Total Government National Mortgage Association (Cost $18,879,273) ..................... 19,124,739
-------------
Total Long Term Investments (Cost $306,880,084)........................................ 307,996,950
-------------
aRepurchase Agreement 7.2%
Joint Repurchase Agreement, 5.4874%, 5/01/98, (Maturity Value $22,630,405) (Cost $22,626,956) 22,626,956
22,626,956
BancAmerica Robertson Stephens (Maturity Value $2,017,747)
Barclays Capital Group, Inc. (Maturity Value $2,017,747)
Bear, Stearns & Co. (Maturity Value $1,100,591)
BT Alex Brown, Inc. (Maturity Value $2,017,747)
Chase Securities, Inc. (Maturity Value $1,352,344)
Donaldson, Lufkins & Jenrette Securities Corp. (Maturity Value $2,017,747)
Dresdner Kleinwort Benson North America, L.L.C. (Maturity Value $2,017,747)
Greenwich Capital Markets, Inc. (Maturity Value $2,017,747)
Lehman Brothers, Inc. (Maturity Value $2,017,747)
Paribas Corp. (Maturity Value $2,017,747)
SBC Warburg, Inc. (Maturity Value $2,017,747)
UBS Securities, L.L.C. (Maturity Value $2,017,747)
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $329,507,040) 105.0%........................................... 330,623,906
Other Assets, less Liabilities (5.0)%.................................................. (15,410,776)
-------------
Net Assets 100.0% ..................................................................... $315,213,130
-------------
</TABLE>
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
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate
aSee note 1(b) regarding joint repurchase agreement.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
Adjustable Rate Securities Portfolio
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1998 Year Ended October 31,
(unaudited) 1997 1996 1995 1994 19931
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period .... $9.95 $9.86 $9.81 $9.69 $10.03 $10.02
----------------------------------------------------------------------
Income from investment operations:
Net investment income................... .308 .616 .607 .625 .469 .368
Net realized and unrealized gain (loss). (.010) .090 .050 .120 (.340) .010
----------------------------------------------------------------------
Total from investment operations......... .298 .706 .657 .745 .129 .378
Less distributions from net investment income (.308) (.616) (.607) (.625) (.469) (.368)
----------------------------------------------------------------------
Net asset value, end of period........... $9.94 $9.95 $9.86 $9.81 $9.69 $10.03
======================================================================
Total Return *........................... 3.03% 7.38% 6.91% 7.94% 1.32% 3.83%
Ratios/supplemental data
Net assets, end of period (000's)........ $26,483 $22,540 $20,534 $27,079 $41,619 $124,309
Ratios to average net assets:
Expenses................................ .25%** .25% .25% .25% .25% .11%**
Expenses excluding waiver and payments
by affiliate........................... .45%** .44% .47% .47% .43% .47%**
Net investment income................... 6.18%** 6.20% 6.19% 6.36% 4.55% 4.76%**
Portfolio turnover rate.................. 37.19% 138.32% 46.78% 50.29% 192.06% 158.70%
</TABLE>
1For the nine months ended October 31, 1993.
*Total return is not annualized.
**Annualized
See notes to financial statements.
<TABLE>
<CAPTION>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, April 30, 1998 (unaudited)
PRINCIPAL
Adjustable Rate Securities Portfolio AMOUNT VALUE
<S> <C> <C>
cAdjustable Rate Mortgage Securities 75.6%
FNMA, Cap 11.06%, Margin 1.98% + CMT, Resets Annually, 7.418%, 3/01/22................. $ 915,875 $ 949,721
bFNMA, Cap 12.00%, Margin 1.25% + COFI, Resets Annually, 6.22%, 6/01/28................. 1,000,000 1,004,844
FNMA, Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.75%, 10/01/28 ................. 826,020 841,467
FNMA, Cap 13.85%, Margin 2.13% + 3CMT, Resets Every 3 Years, 8.218%, 3/01/22 .......... 928,311 969,717
FNMA, Cap 13.86%, Margin 1.84% + CMT, Resets Annually, 7.452%, 8/01/16 ................ 331,769 344,844
FNMA, Cap 14.68%, Margin 2.125% + 3CMT, Resets Every 3 Years, 8.257%, 8/01/22.......... 1,719,795 1,797,331
bGNMA TBA, Cap 11.00%, Margin 1.50% + CMT, Resets Annually, 6.00%, 5/01/28.............. 1,000,000 1,011,875
Homeowners Federal Savings, Cap 13.00%, Margin 1.75% + CMT,
Resets Annually, 7.353%, 1/25/18....................................................... 773,606 784,485
PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 8.336%, 7/25/22 ................ 901,674 911,819
PHMS, Cap 13.00%, Margin 2.53% + CMT, Resets Monthly, 8.22%, 8/25/21 .................. 890,075 889,519
RFC, Cap 10.00%, Margin 0.85% + COFI, Resets Monthly, 5.702%, 2/25/22.................. 621,960 620,980
bRFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.815%, 11/25/22 ................ 1,147,087 1,160,573
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 6.879%, 1/25/25...... 1,032,415 1,032,201
RTC, Cap 13.82%, Margin 0.92% + 3CMT, Resets Every 3 Years, 7.044%, 4/25/22............ 1,116,214 1,115,516
RTC, Cap 14.69%, Margin 1.55% + 3CMT, Resets Every 3 Years, 7.479%, 6/25/22 ........... 1,326,873 1,305,726
RTC, Cap 16.48%, Margin NACR - 0.15%, Resets Annually, 7.486%, 7/25/20 ................ 957,711 960,105
Salomon Brothers Mortgage Securities, Cap 14.00%, Margin 0.96%
+ NACR, Resets Annually, 7.972%, 10/25/16 ............................................. 1,241,414 1,238,311
Saxon Mortgage Securities Corp., Cap 10.78%, Margin 2.78% + 6 Month
LIBOR, Resets Semi-Annually, 8.71%, 5/25/24 ........................................... 748,316 767,539
bSears Mortgage Securities, Cap 12.34%, Margin 1.10% + COFI,
Resets Monthly, 6.049%, 7/25/21......................................................... 526,320 516,123
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25% + CMT,
Resets Annually, 7.604%, 12/25/18....................................................... 653,471 648,162
bWestern Federal Savings and Loan Association, Cap 12.25%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 6.375%, 6/25/20............................................ 472,327 470,114
bWestern Federal Savings and Loan Association, Cap 12.75%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 6.375%, 7/25/20............................................ 402,711 400,824
Western Federal Savings and Loan Association, Cap 13.00%, Margin 1.80% + COFI,
Resets Monthly, 6.664%, 3/25/19......................................................... 270,539 270,452
-----------
Total Adjustable Rate Mortgage Securities (Cost $20,187,282) .......................... 20,012,248
-----------
Fixed Rate Mortgage Securities 2.5%
Countrywide Mortgage-Backed Securities, Inc., Series 1994-I, Class A8,
6.25%, 7/25/09 (Cost $662,837).......................................................... 681,580 674,412
-----------
Other Adjustable Rate Securities 3.7%
SBA, Cap 12.625%, Margin - 0.125% + Prime, Resets Quarterly,
8.375%, 8/25/20 (Cost $968,576)......................................................... 898,389 970,822
-----------
U.S. Government Securities 11.3%
U.S. Treasury Notes, 5.375%, 1/31/00................................................... 1,000,000 996,251
U.S. Treasury Notes, 5.75%, 9/30/99.................................................... 1,000,000 1,002,188
U.S. Treasury Notes, 5.875%, 2/15/00................................................... 1,000,000 1,004,688
-----------
Total U.S. Government Securities (Cost $3,005,937)..................................... 3,003,127
-----------
Total Long Term Investments (Cost $24,824,632)......................................... 24,660,609
-----------
aRepurchase Agreement 20.3%
Joint Repurchase Agreement, 5.487%, 5/01/98, (Maturity Value $5,383,984) (Cost $5,383,164) $5,383,164 $ 5,383,164
BancAmerica Robertson Stephens (Maturity Value $480,036)
Barclays Capital Group, Inc. (Maturity Value $480,036)
Bear, Stearns & Co., Inc. (Maturity Value $261,850)
BT Alex. Brown, Inc. (Maturity Value $480,036)
Chase Securities, Inc. (Maturity Value $321,774)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $480,036)
Dresdner Kleinwort Benson North America, L.L.C. (Maturity Value $480,036)
Greenwich Capital Markets, Inc. (Maturity Value $480,036)
Lehman Brothers, Inc. (Maturity Value $480,036)
Paribas Corp. (Maturity Value $480,036)
SBC Warburg Dillon Read, Inc. (Maturity Value $480,036)
UBS Securities, L.L.C. (Maturity Value $480,036)
Collateralized by U.S. Treasury Bills and Notes
Total Investments (Cost $30,207,796) 113.4% ........................................... 30,043,773
Other Assets, less Liabilities (13.4%)................................................. (3,561,208)
-----------
Net Assets 100.0% ..................................................................... $26,482,565
===========
</TABLE>
GLOSSARY OF ABBREVIATIONS
3CMT - 3 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
LIBOR - London Interbank Offered Rate
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
aSee Note 1(b) regarding joint repurchase agreement.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements
Statements of Assets and Liabilities
April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
---------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost.................................................................... $306,880,084 $24,824,632
=======================================
Value................................................................... 307,996,950 24,660,609
Repurchase agreements, at value and cost................................. 22,626,956 5,383,164
Receivables:
Investment securities sold.............................................. 784,384 1,152
Interest ............................................................... 2,181,389 162,411
---------------------------------------
Total assets............................................................. 333,589,679 30,207,336
---------------------------------------
Liabilities:
Payables:
Investment securities purchased......................................... 18,199,679 3,674,574
Capital shares redeemed................................................. 143,267 39,902
Affiliates.............................................................. 33,603 3,686
Other liabilities........................................................ -- 6,609
---------------------------------------
Total liabilities........................................................ 18,376,549 3,724,771
---------------------------------------
Net assets, at value.................................................... $315,213,130 $26,482,565
=======================================
Net assets consist of:
Net unrealized appreciation (depreciation) ............................. $ 1,116,866 $ (164,023)
Accumulated net realized loss........................................... (136,901,832) (2,728,604)
Capital shares.......................................................... 450,998,096 29,375,192
---------------------------------------
Net assets, at value..................................................... $315,213,130 $26,482,565
=======================================
Shares outstanding....................................................... 33,429,511 2,664,405
=======================================
Net asset value and maximum offering price per share
(net asset value O shares outstanding).................................. $9.43 $9.94
=======================================
</TABLE>
See notes to financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)
Statements of Operations
for the six months ended April 30, 1998 (unaudited)
<TABLE>
<CAPTION>
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
---------------------------------------
<S> <C> <C>
Investment income:
Interest ............................................................... $10,497,096 $714,430
---------------------------------------
Expenses:
Management fees (Note 3)................................................ 657,991 44,405
Professional fees ...................................................... 27,542 2,015
Other................................................................... 18,596 2,605
---------------------------------------
Total expenses .......................................................... 704,129 49,025
Expenses waived/paid by affiliate (Note 3) .............................. (296,056) (21,551)
---------------------------------------
Net expenses ........................................................... 408,073 27,474
---------------------------------------
Net investment income ................................................. 10,089,023 686,956
---------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments............................... 225,049 (451)
Net unrealized depreciation on investments ............................. (1,949,369) (20,478)
---------------------------------------
Net realized and unrealized loss ........................................ (1,724,320) (20,929)
---------------------------------------
Net increase in net assets resulting from operations .................... $ 8,364,703 $666,027
=======================================
</TABLE>
See notes to financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)
Statements of Changes in Net Assets
for the six months ended April 30, 1998 (unaudited)
and the year ended October 31, 1997
<TABLE>
<CAPTION>
U.S. Government Adjustable Rate
Adjustable Rate Mortgage Portfolio Securities Portfolio
Six Months Year Six Months Year
Ended 4/30/98 Ended 10/31/97 Ended 4/30/98 Ended 10/31/97
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income...................... $ 10,089,023 $ 23,464,424 $ 686,956 $ 1,500,611
Net realized gain (loss) from investments.. 225,049 693,708 (451) 14,469
Net unrealized appreciation (depreciation)
on investments.............................. (1,949,369) 3,675,679 (20,478) 260,606
Net increase in net assets resulting
from operations............................. 8,364,703 27,833,811 666,027 1,775,686
Distributions to shareholders from:
Net investment income........................ (10,089,023) (23,464,424) (685,862) (1,500,611)
Capital share transactions (Note 2) ........ (25,603,640) (68,259,294) 3,962,538 1,730,540
Net increase (decrease) in net assets........ (27,327,960) (63,889,907) 3,942,703 2,005,615
Net assets (there is no undistributed net investment
income at beginning or end of period):
Beginning of period ......................... 342,541,090 406,430,997 22,539,862 20,534,247
End of period................................ $315,213,130 $342,541,090 $26,482,565 $22,539,862
</TABLE>
See notes to financial statements.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, diversified investment company,
consisting of two separate portfolios (the Portfolios) 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 summarizes the Portfolios' significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. Joint Repurchase Agreement:
The Portfolios may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Portfolios based on their
pro-rata interest. A repurchase agreement is accounted for as a loan by the
Portfolios to the seller, collateralized by securities which are delivered to
the Trust's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Portfolios, with the value of the underlying securities marked
to market daily to maintain coverage of a least 100%. At April 30, 1998, all
outstanding repurchase agreements had been entered into on that date.
c. Income Taxes:
No provision has been made for income taxes because each Portfolio's policy is
to qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
d. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividends from net
investment income are normally declared daily and distributed monthly to
shareholders.
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. Other
expenses are charged to each Portfolio on a specific identification basis.
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.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 1998, there were an unlimited number of shares authorized ($0.01
par value). Transactions in each of the Portfolios' shares were as follows:
<TABLE>
<CAPTION>
U.S. Government Adjustable Adjustable Rate
Rate Mortgage Portfolio Securities Portfolio
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Six months ended April 30, 1998
Shares sold........................................ 5,661,927 $ 53,538,361 891,067 $ 8,860,412
Shares issued in reinvestment of distributions..... 1,067,600 10,089,044 68,968 685,863
Shares redeemed.................................... (9,440,987) (89,231,045) (561,533) (5,583,737)
----------------------------------------------------
Net Increase (decrease)............................. (2,711,460)$ (25,603,640) 398,502 $ 3,962,538
===================================================
Year Ended October 31, 1997
Shares sold........................................ 14,468,647 $136,195,699 2,195,631 $21,698,569
Shares issued in reinvestment of distributions..... 2,492,654 23,464,406 151,507 1,500,610
Shares redeemed....................................(24,217,403) (227,919,399) (2,164,571) (21,468,639)
----------------------------------------------------
Net Increase (decrease)............................. (7,256,102)$ (68,259,294) 182,567 $ 1,730,540
===================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Trust are also officers and/or directors
of Franklin Advisers, Inc. (Advisers), the Portfolios' investment manager (a
wholly-owned subsidiary of Franklin Resources, Inc.) and of Franklin Investors
Securities Trust and Institutional Fiduciary Trust.
The Portfolios pay an investment management fee to Advisers based on the average
net assets of the Portfolios as follows:
Annualized
Fee Rate Month End 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 as noted in the Statement of
Operations.
At April 30, 1998, 33,429,511 shares of the Mortgage Portfolio were owned by the
following:
<TABLE>
<CAPTION>
Shares Percentage of
Name Owned Outstanding Shares
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Adjustable U.S. Government Securities Fund ......................... 32,974,413 99%
Franklin Institutional Adjustable U.S. Government Securities Fund ........... 455,098 1%
3. TRANSACTIONS WITH AFFILIATES (cont.)
At April 30, 1998, 2,664,405 shares of the Securities Portfolio were owned by the following:
Shares Percentage of
Name Owned Outstanding Shares
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Adjustable Rate Securities Fund .................................... 2,564,898 96%
Franklin Institutional Adjustable Rate Securities Fund ...................... 97,943 4%
Franklin Resources, Inc. .................................................... 1,564 --
</TABLE>
4. INCOME TAXES
At October 31, 1997, the Portfolios had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
----------------------------------------
Capital loss carryovers
Expiring in:
2000 ......................... $ 44,745,908 $ 42,138
2001 ......................... 17,182,002 50,908
2002 ......................... 67,102,060 1,987,888
2003 ......................... 7,677,608 609,391
2004 ......................... 419,303 37,828
----------------------------------------
$137,126,881 $2,728,153
----------------------------------------
At April 30, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes were as follows:
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
----------------------------------------
Investments at cost ........... $329,507,040 $30,207,796
----------------------------------------
Unrealized appreciation ....... $ 2,348,574 $ 74,698
Unrealized depreciation ...... (1,231,708) (238,721)
----------------------------------------
Net unrealized appreciation (depreciation) $ 1,116,866 $ (164,023)
----------------------------------------
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended April 30, 1998 were as follows:
U.S. Government
Adjustable Rate Adjustable Rate
Mortgage Portfolio Securities Portfolio
----------------------------------------
Purchases ...................... $68,406,119 $11,048,784
Sales .......................... $90,904,892 $ 8,272,555
Franklin Investors Securities Trust, Inc.
Annual Report
April 30, 1998.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows the country distribution as a percentage of total net assets
on 4/30/98 for the Franklin Global Government Fund.
Country 10/31/97 4/30/98
United States 24.3% 26.3%
Germany 12.3% 11.0%
Italy 11.7% 9.7%
Canada 8.5% 8.3%
Spain 7.0% 6.8%
Argentina 6.0% 6.5%
Brazil 5.8% 7.1%
Sweden 5.7% 5.2%
Mexico 5.0% 5.1%
Australia 4.2% 4.1%
United Kingdom 3.3% 3.4%
Venezuela 2.2% 2.4%
New Zealand 2.0% 1.8%
Denmark 1.8% 1.8%
Panama 0.2% 0.5%
GRAPHIC MATERIAL (2)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Global Government Income Fund - Class I.
Dividend
Month per Share
November 5.0 cents
December 6.0 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
Total 31.0 cents
GRAPHIC MATERIAL (3)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Global Government Income Fund - Class II.
Dividend
Month per Share
November 4.64 cents
December 5.64 cents
January 4.60 cents
February 4.60 cents
March 4.60 cents
April 4.62 cents
Total 28.70 cents
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Global Government Income Fund - Advisor Class.
Dividend
Month per Share
November 5.07 cents
December 6.08 cents
January 5.07 cents
February 5.06 cents
March 5.07 cents
April 5.07 cents
Total 31.42 cents
GRAPHIC MATERIAL (5)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Short-Intermediate U.S. Government Securities Fund - Class I.
Dividend
Month per Share
November 4.8 cents
December 4.8 cents
January 4.8 cents
February 4.8 cents
March 4.8 cents
April 4.8 cents
Total 28.8 cents
GRAPHIC MATERIAL (6)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class.
Dividend
Month per Share
November 4.88 cents
December 4.87 cents
January 4.94 cents
February 4.88 cents
March 4.88 cents
April 4.85 cents
Total 29.30 cents
GRAPHIC MATERIAL (7)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments for 10/31/97 vs. 4/30/98 for the Franklin
Convertible Securities Fund.
Portfolio
Sector 10/31/97 4/30/98
Convertible
Bonds 57.8% 59.9%
Convertible
Preferred Stocks 23.0% 30.8%
Common Stocks
& Warrants 10.1% 5.0%
Cash &
Short-Term
Equivalents 9.1% 4.3%
GRAPHIC MATERIAL (8)
This chart details the top five holdings as a percentage of total net assets
for the Franklin Convertible Securities Fund on 4/30/98.
Company
(Type of Security) %of Total
Industry Net Assets
Union Pacific Capital Trust
Convertible preferred stock
Transportation 3.34%
Diamond Offshore
Convertible bond
Energy 3.32%
Dovatron International, Inc.
(DII Group)
convertible bond
Electronics 3.31%
Bell Atlantic Financial Services
Convertible bond
Telecommunications 2.64%
El Paso Energy Capital Trust
Convertible preferred stock
Energy 2.43%
GRAPHIC MATERIAL (9)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Convertible Securities Fund - Class I.
Dividend
Month per Share
November 5.0 cents
December 9.5 cents
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
Total 34.5 cents
GRAPHIC MATERIAL (10)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Convertible Securities Fund - Class II.
Dividend
Month per Share
November 4.08 cents
December 8.58 cents
January 4.07 cents
February 4.07 cents
March 4.07 cents
April 4.10 cents
Total 28.97 cents
GRAPHIC MATERIAL (11)
This graph shows the fund's distribution rate vs. T-Bill annualized yield
from 5/1/97 through 4/30/98 for the Franklin Adjustable U.S. Government
Securities Fund vs. One-Year Constant Maturity T-Bill.
Adjustable U.S.
Govt. Sec DR 1 Year T-Bill
Date (Based on (Constant Maturity)
full offer)
5/1/97 5.73% 5.89%
5/31/97 5.73% 5.78%
6/30/97 5.71% 5.67%
7/31/97 5.68% 5.45%
8/31/97 5.71% 5.59%
9/30/97 5.70% 5.47%
10/31/97 5.69% 5.36%
11/30/97 5.59% 5.52%
12/31/97 5.58% 5.51%
1/31/98 5.56% 5.19%
2/28/98 5.59% 5.41%
3/31/98 5.60% 5.41%
4/30/98 5.60% 5.40%
GRAPHIC MATERIAL (12)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Adjustable U.S. Government Securities Fund.
Dividend
Month per Share
November 4.5 cents
December 4.5 cents
January 4.5 cents
February 4.5 cents
March 4.5 cents
April 4.5 cents
Total 27.0 cents
GRAPHIC MATERIAL (13)
This chart shows the top 10 holdings as a percent of total net assets for the
Franklin Equity Income Fund as of 4/30/98.
Company % of Total
Industry Sector Net Assets
Atlantic Richfield Co.
Oil 2.70%
Texaco, Inc.
Oil 2.02%
Penney (J.C.) Co., Inc.
Retail 1.99%
Bell Atlantic Corp.
Telecommunications 1.83%
Amoco Corp.
Oil 1.74%
Chevron Corp.
Oil 1.74%
Pharmacia & Upjohn, Inc.
Pharmaceutical 1.72%
US West Communications Group
Telecommunications 1.70%
Southern New England
Telecommunications Corp.
Telecommunications 1.69%
YPF, SA, Sponsored ADR
Oil 1.68%
GRAPHIC MATERIAL (14)
Top five investment sectors as a percentage of total net assets on 10/31/97
vs. 4/30/98 for the Franklin Equity Income Fund
10/31/97 % Total
Net Assets
Oil Integrated 14.1%
Electric Utilities 11.2%
Telecommunications 9.3%
Financial Services 8.4%
REITs 7.7%
4/30/98 % Total
Net Assets
Oil Integrated 13.7%
Electric Utilities 11.4%
REITs 9.3%
Telecommunications 8.6%
Financial Services 8.0%
GRAPHIC MATERIAL (15)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Equity Income Fund - Class I.
Dividend
Month per Share
November 5.2 cents
December 7.6 cents
January 5.2 cents
February 5.2 cents
March 5.2 cents
April 5.2 cents
Total 33.6 cents
GRAPHIC MATERIAL (16)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Equity Income Fund - Class II.
Dividend
Month per Share
November 4.01 cents
December 6.41 cents
January 3.93 cents
February 3.93 cents
March 3.93 cents
April 3.91 cents
Total 26.12 cents
GRAPHIC MATERIAL (17)
This graph shows the fund's distribution rate vs. T-Bill annualized yield
from 5/1/97 through 4/30/98 for the Franklin Adjustable Rate Securities Fund
vs. One-Year Constant Maturity T-Bill.
Adjustable
Rate 1 Year T-Bill
Date Sec DR (Based (Constant Maturity)
on full offer)
5/1/97 5.33% 5.89%
5/31/97 4.78% 5.78%
6/30/97 5.37% 5.67%
7/31/97 5.65% 5.45%
8/31/97 5.61% 5.59%
9/30/97 5.75% 5.47%
10/31/97 5.68% 5.36%
11/30/97 6.14% 5.52%
12/31/97 5.68% 5.51%
1/31/98 5.08% 5.19%
2/28/98 5.76% 5.41%
3/31/98 5.36% 5.41%
4/30/98 5.51% 5.40%
GRAPHICS MATERIAL (18)
This chart shows the dividend distributions from 11/1/97 to 4/30/98 for the
Franklin Adjustable Rate Securities Fund.
Dividend
Month per Share
November 4.7859 cents
December 5.1994 cents
January 4.6222 cents
February 4.6467 cents
March 4.8467 cents
April 4.6129 cents
Total 28.3339 cents
