ANNUAL
REPORT
[Franklin Templeton Logo]
<PAGE>
[Celebrating over 50 Years Logo]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and 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.
[Photo of Charles B. Johnson]
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
<PAGE>
CONTENTS
Shareholder Letter ....................................................... 1
Fund Reports
Franklin Adjustable
Rate Securities Fund ..................................................... 5
Franklin Adjustable
U.S. Government
Securities Fund .......................................................... 14
Franklin Bond Fund ....................................................... 22
Franklin Convertible
Securities Fund .......................................................... 30
Franklin Equity
Income Fund .............................................................. 42
Franklin Global Government Income Fund ................................... 58
Franklin Short-Intermediate
U.S. Government
Securities Fund .......................................................... 76
Financial Highlights &
Statements of Investments ................................................ 86
Financial Statements ..................................................... 117
Notes to
Financial Statements ..................................................... 126
Independent
Auditors' Report ......................................................... 137
Tax Information .......................................................... 138
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Investors Securities Trust's annual report
for the period ended October 31, 1998.
FOREIGN STORMS BRING RAIN
Although El Nino's effects on domestic weather subsided in June, the U.S. stock
market faced its own version of adverse elements in August. On August 31, storm
clouds rained on American stock markets, washing away much of the first half of
1998's gains. On that day the Dow Jones(R) Industrial Average (DJIA) lost 512.61
points or 6.37% of its value.(1) Many analysts attributed this slide to concerns
about Russia's economic and political stability as well as evidence that the
Asian countries' economic problems are more deep-seated than originally
believed. At home, 1998 U.S. corporate profits, through the end of the reporting
period, fell dramatically from 1997 levels. Those companies with significant
Asian exports, competing with Asian products or those in commodity businesses
like paper, oil and steel were especially hard hit.
Responding to global financial problems, the Federal Reserve Board (the Fed)
gradually eased monetary policy in September and October. The Fed's monetary
policy panel, the Federal Open Market Committee, twice cut the federal funds
target rate by 0.25%, to 5.00%, hoping to stimulate growth. The Fed's move
attempted to prevent a recession by providing liquidity to the financial system
and making it easier for major corporations to obtain favorable lending from
banks. This interest-rate cut
(1) Source: Bloomberg.
<PAGE>
outshone lackluster earnings announcements and fueled October's stock market
rally, where the DJIA jumped 749.48 points, or 9.56% for the month. Of course,
this gain followed on the heels of August's 15.13% DJIA drop, which was the
biggest monthly percentage drop since October 1987.
At the same time, the very factors negatively impacting the U.S. stock market --
the slowing domestic economy and Russian and Asian economic turmoil -- provided
a boost to the U.S. bond market. Low inflation at home and foreign investors
flocking to U.S. bonds, especially U.S. Treasuries seen as a "safe haven" from
stock market volatility abroad, drove bond prices higher. Bond price and yield
move in an inverse relationship, so yields on long-term bonds fell to their
lowest levels in years. The benchmark 30-year U.S. Treasury bond, after falling
as low as 4.72%, ended the reporting period yielding 5.16%, compared with 6.15%
a year earlier.(1)
What is an investor to do faced with steeply fluctuating markets? While the
phrase "investment value may go down as well as up" abounds in financial
literature, the stock market's unusually high gains in the past few years may
have led many investors to believe otherwise. Putting the 1990s into historical
perspective, it is worth noting that the average yearly gain in the S&P 500(R),
which paints a broader picture of the U.S. market than the DJIA, has been
+10.51% since 1930; however, from January 1, 1990, through June 30, 1998, the
S&P 500 rose an average of +17.81% a year.(2) Also, there have been fewer market
corrections during
(2). Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates.
2
<PAGE>
the 1990s than previous decades, with a market correction being defined as a 10%
or greater decline over a period of days, weeks or months.
WEATHERPROOFING YOUR PORTFOLIO
In times like these, it's easy to understand why people can become emotional
about their investments. That's why we believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their goals
and why they made their investment choices in the first place. Two, discuss the
value of diversification, which can help reduce the risk that any one type of
security will have a negative impact on an overall portfolio, and check to
determine whether their investments are still properly diversified. As shown
during the reporting period, the bond and stock markets often behave
differently. In each of the five years since 1973 that stocks posted negative
annual returns, bonds posted positive returns.(3) Three, review their investment
timeframe to help put recent market declines into perspective and avoid turning
what could be only a temporary paper loss into a permanent one. Maintaining a
long-term outlook is one of the keys to weathering market volatility.
"While investment success is the
primary objective of investment
planning, one important
by-product of a good plan can
be peace of mind."
An important component of a long-term approach is setting up a regular
investment plan. Investing on a scheduled basis, regardless of market
directions, can help investors take advantage of market downturns when prices
are low, and benefit from any market rallies. We encourage you to contact your
(3). Source: For bond market statistics based on the Lehman Brothers Government/
Corporate Bond Index - Lehman Brothers; for stock measured by the S&P 500 Index
- -- Standard & Poor's(R).
3
<PAGE>
investment representative to discuss setting up a regular investment plan. While
investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind.
As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ C.B. Johnson
- ----------------
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
4
<PAGE>
FRANKLIN ADJUSTABLE
RATE SECURITIES FUND
FUND CATEGORY
[Pyramid Graphic]
Your Fund's Goal: 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.
ECONOMIC OVERVIEW
Volatility and uncertainty in global financial markets characterized the 12
months under review. The Asian economic crisis that unfolded in late 1997 spread
to Russia and other developing markets. At first, the U.S. economy felt minimal
impact, as the domestic economy enjoyed an unprecedented period of strong growth
coupled with low inflation. However, as 1998 progressed, signs of a slowdown
emerged. In particular, the manufacturing sector started to exhibit signs of
weakness. Bellwether manufacturing indicators, such as durable goods orders and
the National Association of Purchasing Managers' index, showed sharp downturns.
After six consecutive quarters of growth exceeding 3%, gross domestic product
gains finally dipped to an annualized 1.8% in the second quarter of 1998 and is
expected to remain weak through early 1999. The one remaining robust
manufacturing sub-sector is housing, driven by historically low mortgage rates.
Indeed, what strength the economy exhibited came primarily from the consumer
sector, which benefited from low unemployment and several years of
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 87 of
this report.
5
<PAGE>
stock market gains. The recent stock market sell-off put only a small dent in
the consumer's armor, so far.
TOP 5 ISSUERS
Franklin Adjustable Rate
Securities Fund
10/31/98
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ----------------------------------------------
<S> <C>
FNMA 25.80%
GNMA 11.41%
U.S. Treasury 10.45%
Ryland 8.62%
Prudential Home 8.31%
</TABLE>
The weakening economic picture and absence of inflation led to an
unprecedented rally in U.S. Treasury securities. The 30-year Treasury bond yield
declined from 6.15% on October 31, 1997, to 5.15% on October 31, 1998, trading
as low as 4.72% at one point during the period. In September 1998, the Federal
Reserve Board (the Fed) lowered the federal funds target rate from 5.50% to
5.25%, its first such action since it raised rates in March 1997. Furthermore,
only 16 days later in a move that surprised many market experts, on October 15,
the Fed trimmed the federal funds rate and discount rate by another 0.25%.
In addition to low absolute interest rates, for much of the 12-month period the
fixed-income yield curve, the difference between short-term and long-term rates,
has been flat, with short-term rates close to long-term rates. Recently,
however, the curve has begun to steepen, as long-term rates have risen relative
to short-term rates. This yield-curve shape has important implications for
mortgage-backed securities, particularly adjustable-rate mortgages (ARMs).
Prepayments on ARMs are likely to decline as the yield curve steepens, because
homeowners have less incentive to refinance an ARM into a fixed-rate mortgage.
Thus, the high level of prepayments experienced by ARMs through most of the past
year should subside going forward.
PORTFOLIO NOTES
Franklin Adjustable Rate Securities Fund's underlying portfolio consists largely
of ARMs linked to or collateralized by mortgages issued or guaranteed by the
U.S. government, its agencies or instrumentalities. These include obligations of
the Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Home
Loan Mortgage Corporation (FHLMC or Freddie Mac) and the Government National
Mortgage Association
6
<PAGE>
FUND'S DISTRIBUTION RATE VS. TREASURY BILL ANNUALIZED YIELD
Franklin Adjustable Rate Securities Fund vs.
One-Year Constant Maturity T-Bill
(11/1/97 - 10/31/98)
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
RATE SECURITIES FUND ONE-YEAR CONSTANT MATURITY
DATE DISTRIBUTION RATE TREASURY BILL YIELD
- -----------------------------------------------------------------------------
<S> <C> <C>
11/1/97 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%
5/31/98 5.20% 5.42%
6/30/98 4.87% 5.38%
7/31/98 5.24% 5.38%
8/31/98 4.95% 4.95%
9/30/98 5.26% 4.41%
10/31/98 4.80% 4.18%
</TABLE>
Source: Federal Reserve.
(GNMA or Ginnie Mae). The fund also invests in privately issued mortgage-backed
securities, rated AAA or AA by national credit rating agencies, such as S&P(R)
and Moody's.
The fund employs a fiscally responsible strategy of investing in seasoned ARM
securities, which tend to prepay at slower rates than newer-production ARMs,
which have not been through previous refinancing cycles. We choose securities
using a value-oriented approach, emphasizing bonds' fundamental value relative
to comparable securities as well as historical prepayment performance. During
the 12-month review period, the fund underperformed its benchmark, the Lehman
Brothers Short U.S. Government 1-2 Year Index, with a return of +5.47% vs.
+7.18%.(1) There were no major changes to the portfolio's overall mix during the
year. However, we did increase the fund's allocation in GNMA ARMs, from 4.42% to
11.41% of total net assets, which became significantly cheaper versus their
historical averages.
(1). Source: Lehman Brothers Global Family of Indices, October 31, 1998. Index
is unmanaged and includes reinvested dividends. One cannot invest directly in an
index.
7
<PAGE>
At the close of the period, your fund's distribution rate was 4.80%. As shown in
the graph on the previous page, this rate remained competitive, slightly
outperforming the yield of the one-year Treasury bill. Of course, the value and
interest rate of Treasuries, if held to maturity, are fixed, and principal is
guaranteed. In contrast, the investment return and share price of Franklin
Adjustable Rate Securities Fund will fluctuate with market conditions.
Going forward, the current high level of market uncertainty will likely continue
for the near term, as long as the global financial crisis persists. Interest
rates should remain volatile, and further Fed action is possible. We feel the
fund is well-positioned to weather additional financial storms that may appear
on the horizon, as we maintain our fiscally responsible strategy, in an effort
to produce consistent fund performance in all types of interest-rate
environments.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our
8
<PAGE>
strategies and the fund's portfolio composition. Although historical performance
is no guarantee of future results, these insights may help you understand our
investment and management philosophy.
Sincerely,
/s/ T. Anthony Coffey
- ---------------------
T. Anthony Coffey
/s/ Jack Lemein
- ---------------
Jack Lemein
/s/ Roger A. Bayston
- --------------------
Roger A. Bayston
Portfolio Management Team
Franklin Adjustable Rate Securities Fund
9
<PAGE>
PERFORMANCE SUMMARY
Franklin Adjustable Rate Securities Fund's share price, as measured by net asset
value, decreased 1.0 cent, from $9.96 on October 31, 1997, to $9.95 on October
31, 1998.
During the reporting period, shareholders received per-share distributions
totaling 54.16 cents ($0.5416) 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 October 31, 1998, and an
annualization of the current monthly dividend of 4.0149 cents ($0.040149) per
share, your fund's distribution rate was 4.80%.
The fund reported a cumulative total return of +5.47% for the one-year period
ended October 31, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not include
the initial sales charge.
10 Past performance is not predictive of future results.
<PAGE>
The graph on page 12 compares the performance of the fund's shares with that of
the Lehman Brothers Short U.S. Government 1-2 Year Index and the Payden & Rygel
6-Month CD Index.* Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully invested because they need cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as Franklin Adjustable Rate Securities Fund's had been applied to
the indices, their performance would have been lower. Please remember that an
index is simply a measure of performance, and one cannot invest in it directly.
DIVIDEND DISTRIBUTIONS
Franklin Adjustable Rate
Securities Fund
11/1/97 - 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ---------------------------------------
<S> <C>
November 4.7859 cents
December 5.1994 cents
January 4.2668 cents
February 4.6222 cents
March 4.8467 cents
April 4.6129 cents
May 4.2279 cents
June 4.3190 cents
July 4.5315 cents
August 4.3057 cents
September 4.4262 cents
October 4.0149 cents
- ---------------------------------------
TOTAL 54.1591 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
*Six-month certificates of deposit total returns are an average of the top rates
paid by major New York banks. CDs are insured by the FDIC up to $100,000 and
have principal and interest rate guarantees. The unmanaged Lehman Brothers Short
U.S. Government 1-2 Year Index invests in U.S. government securities with
maturities from one to two years.
Past performance is not predictive of future results. 11
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Adjustable Rate Securities Fund
$10,000 Investment (12/26/91 - 10/31/98)
<TABLE>
<CAPTION>
ADJUSTABLE RATE
SECURITIES FUND LB 1-2 US GOVT P&R 6-MONTH CD
--------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
12/26/91 9,775 $10,000 $10,000
12/31/91 9,775 $10,021 0.21% $10,010 0.10%
1/31/92 9,775 $10,022 0.01% $10,051 0.41%
2/29/92 9,804 $10,051 0.29% $10,080 0.29%
3/31/92 9,847 $10,062 0.10% $10,109 0.29%
4/30/92 9,933 $10,148 0.86% $10,159 0.49%
5/31/92 9,981 $10,233 0.84% $10,196 0.37%
6/30/92 10,065 $10,321 0.86% $10,232 0.35%
7/31/92 10,097 $10,427 1.03% $10,288 0.55%
8/31/92 10,165 $10,501 0.71% $10,319 0.30%
9/30/92 10,232 $10,588 0.83% $10,362 0.41%
10/31/92 10,249 $10,540 -0.46% $10,379 0.17%
11/30/92 10,284 $10,529 -0.10% $10,390 0.10%
12/31/92 10,362 $10,620 0.86% $10,438 0.47%
1/31/93 10,409 $10,716 0.91% $10,478 0.38%
2/28/93 10,486 $10,792 0.70% $10,506 0.27%
3/31/93 10,547 $10,821 0.27% $10,535 0.27%
4/30/93 10,602 $10,880 0.55% $10,566 0.30%
5/31/93 10,622 $10,857 -0.22% $10,584 0.17%
6/30/93 10,661 $10,924 0.62% $10,613 0.27%
7/31/93 10,713 $10,951 0.24% $10,644 0.29%
8/31/93 10,754 $11,027 0.70% $10,678 0.32%
9/30/93 10,785 $11,061 0.31% $10,708 0.28%
10/31/93 10,807 $11,085 0.22% $10,734 0.25%
11/30/93 10,826 $11,095 0.09% $10,760 0.24%
12/31/93 10,868 $11,134 0.36% $10,792 0.30%
1/31/94 10,891 $11,197 0.56% $10,828 0.33%
2/28/94 10,865 $11,147 -0.44% $10,827 -0.01%
3/31/94 10,768 $11,119 -0.26% $10,852 0.23%
4/30/94 10,763 $11,089 -0.27% $10,868 0.15%
5/31/94 10,802 $11,107 0.17% $10,896 0.26%
6/30/94 10,821 $11,138 0.28% $10,930 0.31%
7/31/94 10,864 $11,227 0.80% $10,978 0.44%
8/31/94 10,926 $11,265 0.34% $11,021 0.39%
9/30/94 10,897 $11,256 -0.08% $11,049 0.25%
10/31/94 10,927 $11,288 0.28% $11,092 0.39%
11/30/94 10,934 $11,252 -0.32% $11,116 0.22%
12/31/94 10,981 $11,279 0.24% $11,159 0.39%
1/31/95 11,034 $11,416 1.22% $11,238 0.70%
2/28/95 11,131 $11,552 1.19% $11,306 0.61%
3/31/95 11,183 $11,618 0.57% $11,361 0.49%
4/30/95 11,272 $11,712 0.81% $11,427 0.58%
5/31/95 11,403 $11,875 1.39% $11,503 0.66%
6/30/95 11,477 $11,938 0.53% $11,560 0.50%
7/31/95 11,497 $11,994 0.47% $11,624 0.55%
8/31/95 11,602 $12,060 0.55% $11,680 0.48%
9/30/95 11,657 $12,114 0.45% $11,732 0.45%
10/31/95 11,740 $12,204 0.74% $11,794 0.53%
11/30/95 11,809 $12,294 0.74% $11,857 0.53%
12/31/95 11,910 $12,380 0.70% $11,923 0.56%
1/31/96 11,961 $12,478 0.79% $11,988 0.54%
2/29/96 11,958 $12,451 -0.22% $12,034 0.39%
3/31/96 12,001 $12,458 0.06% $12,077 0.35%
4/30/96 12,046 $12,482 0.19% $12,129 0.43%
5/31/96 12,061 $12,519 0.30% $12,179 0.42%
6/30/96 12,148 $12,603 0.67% $12,227 0.39%
7/31/96 12,195 $12,654 0.40% $12,280 0.43%
8/31/96 12,238 $12,705 0.41% $12,345 0.53%
9/30/96 12,324 $12,807 0.80% $12,405 0.49%
10/31/96 12,472 $12,935 1.00% $12,470 0.52%
11/30/96 12,543 $13,018 0.64% $12,529 0.48%
12/31/96 12,568 $13,039 0.16% $12,586 0.45%
1/31/97 12,626 $13,100 0.47% $12,641 0.44%
2/28/97 12,671 $13,138 0.29% $12,692 0.40%
3/31/97 12,769 $13,143 0.04% $12,735 0.34%
4/30/97 12,853 $13,242 0.75% $12,795 0.47%
5/31/97 12,931 $13,331 0.67% $12,861 0.52%
6/30/97 13,031 $13,415 0.63% $12,926 0.50%
7/31/97 13,160 $13,537 0.91% $12,995 0.54%
8/31/97 13,180 $13,564 0.20% $13,054 0.45%
9/30/97 13,274 $13,656 0.68% $13,114 0.46%
10/31/97 13,313 $13,746 0.66% $13,178 0.49%
11/30/97 13,351 $13,783 0.27% $13,234 0.42%
12/31/97 13,434 $13,870 0.63% $13,302 0.52%
1/31/98 13,532 $13,988 0.85% $13,378 0.57%
2/28/98 13,567 $14,010 0.16% $13,430 0.39%
3/31/98 13,620 $14,068 0.41% $13,491 0.45%
4/30/98 13,683 $14,134 0.47% $13,550 0.44%
5/31/98 13,741 $14,206 0.51% $13,617 0.49%
6/30/98 13,815 $14,277 0.50% $13,678 0.45%
7/31/98 13,877 $14,344 0.47% $13,745 0.49%
8/31/98 13,965 $14,492 1.03% $13,818 0.53%
9/30/98 14,069 $14,657 1.14% $13,902 0.61%
10/31/98 14,041-0.20% $14,733 0.52% $13,973 0.51%
Total Return 40.41% 47.33% 39.73%
</TABLE>
* Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends and
capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
12 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Adjustable Rate Securities Fund
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE INCEPTION
1-YEAR 5-YEAR (12/26/91)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.47% +29.93% +43.64%
Average Annual Total Return(2) +3.09% +4.90% +5.08%
Distribution Rate(3) 4.80%
30-Day Standardized Yield(4) 4.65%
</TABLE>
(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 current 4.0149 cent
per share monthly dividend and the maximum offering price of $10.18 on October
31, 1998.
(4) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
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.
Past performance is not predictive of future results. 13
<PAGE>
FUND CATEGORY
[Pyramid Graphic]
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND
Your Fund's Goal: 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.(1)
ECONOMIC OVERVIEW
Volatility and uncertainty in global financial markets characterized the 12
months under review. The Asian economic crisis that unfolded in late 1997 spread
to Russia and other developing markets. At first, the U.S. economy felt minimal
impact, as the domestic economy enjoyed an unprecedented period of strong growth
coupled with low inflation. However, as 1998 progressed, signs of a slowdown
emerged. In particular, the manufacturing sector started to exhibit signs of
weakness. Bellwether manufacturing indicators, such as durable goods orders and
the National Association of Purchasing Managers' index, showed sharp downturns.
After six consecutive quarters of growth exceeding 3%, gross domestic product
gains finally dipped to an annualized 1.8% in the second quarter of 1998 and is
expected to remain weak through early 1999. The one remaining robust
manufacturing sub-sector is housing, driven
(1) 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.
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 89 of
this report.
14
<PAGE>
by historically low mortgage rates. Indeed, what strength the economy exhibited
came primarily from the consumer sector, which benefited from low unemployment
and several years of stock market gains. The recent stock market sell-off put
only a small dent in the consumer's armor, so far.
The weakening economic picture and absence of inflation led to an
unprecedented rally in U.S. Treasury securities. The 30-year Treasury bond
declined in yield from 6.15% on October 31, 1997, to 5.15% on October 31, 1998,
trading as low as 4.70% at one point during the period. In September 1998, the
Federal Reserve Board (the Fed) lowered the federal funds target rate from 5.50%
to 5.25%, its first such action since it raised rates in March 1997.
Furthermore, only 16 days later in a move that surprised many market experts, on
October 15, the Fed trimmed the federal funds rate and discount rate by another
0.25%.
In addition to low absolute interest rates, for much of the 12-month period the
fixed-income yield curve, the difference between short-term and long-term rates,
has been flat, with short-term rates close to long-term rates. Recently,
however, the curve has begun to steepen, as long-term rates have risen relative
to short-term rates. This yield-curve shape has important implications for
mortgage-backed securities, particularly adjustable-rate mortgages (ARMs).
Prepayments on ARMs are likely to decline as the yield curve steepens, because
homeowners have less incentive to refinance an ARM into a fixed-rate mortgage.
Thus, the high level of prepayments experienced by ARMs through most of the past
year should subside going forward.
PORTFOLIO BREAKDOWN
Franklin Adjustable U.S.
Government Securities Fund
Based on Total Net Assets
10/31/98
[Pie Chart]
FNMA 64.2%
FHLMC 19.1%
GNMA 11.6%
Other 5.1%
15
<PAGE>
PORTFOLIO NOTES
Franklin Adjustable U.S. Government Securities Fund's underlying portfolio
consists primarily of ARMs linked to or collateralized by mortgages issued or
guaranteed by the U.S. government, its agencies or instrumentalities. These
include obligations of the Federal National Mortgage Association (FNMA or Fannie
Mae), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and the
Government National Mortgage Association (GNMA or Ginnie Mae).
The fund employs a fiscally responsible strategy of investing in seasoned ARM
securities, which tend to prepay at slower rates than newer-production ARMs,
which have not been through previous refinancing cycles. We choose securities
using a value-oriented approach, emphasizing bonds' fundamental value relative
to comparable securities as well as historical prepayment performance. During
the 12-month review period, the fund underperformed its benchmark, the Lehman
Brothers Short U.S. Government 1-2 Year Index, with a return of +4.26% vs.
+7.18%.(2) There were no major changes to the portfolio's overall mix during the
year. However, we did increase the fund's allocation in GNMA ARMs, from 9.4% to
11.6% of total net assets, which became significantly cheaper versus their
historical averages.
(2). Source: Lehman Brothers Global Family of Indices, October 31, 1998. Index
is unmanaged and includes reinvested dividends. One cannot invest directly in an
index.
16
<PAGE>
FUND'S DISTRIBUTION RATE VS. TREASURY BILL ANNUALIZED YIELD
Franklin Adjustable U.S. Government Securities Fund vs.
One-Year Constant Maturity T-Bill
(11/1/97 - 10/31/98)
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT ONE-YEAR
SECURITIES FUND CONSTANT MATURITY
DATE DISTRIBUTION RATE TREASURY BILL YIELD
<S> <C> <C>
11/1/97 5.59% 5.52%
12/31/97 5.58% 5.51%
1/31/98 5.56% 5.19%
2/28/98 5.58% 5.41%
3/31/98 5.60% 5.41%
4/30/98 5.60% 5.40%
5/31/98 5.61% 5.42%
6/30/98 5.61% 5.38%
7/31/98 5.49% 5.38%
8/31/98 4.74% 4.95%
10/31/98 4.48% 4.41%
10/31/98 4.51% 4.18%
</TABLE>
Source: Federal Reserve.
At the close of the period, your fund's distribution rate was 4.51%. As shown in
the graph above, this rate remained competitive, slightly outperforming the
yield of the one-year Treasury bill. Of course, the value and interest rate of
Treasuries, if held to maturity, are fixed, and principal is guaranteed. In
contrast, the investment return and share price of Franklin Adjustable U.S.
Government Securities Fund will fluctuate with market conditions. In addition,
monthly payments of agency mortgage securities include principal and interest,
while semiannual payments of U.S. Treasury securities represent interest only.
17
<PAGE>
Going forward, the current high level of market uncertainty will likely continue
for the near term, as long as the global financial crisis persists. Interest
rates should remain volatile, and further Fed action is possible. We feel the
fund is well-positioned to weather additional financial storms that may appear
on the horizon, as we maintain our fiscally responsible strategy, in an effort
to produce consistent fund performance in all types of interest-rate
environments.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ T. Anthony Coffey
- ---------------------
T. Anthony Coffey
/s/ Jack Lemein
- ---------------
Jack Lemein
/s/ Roger A. Bayston
- --------------------
Roger A. Bayston
Portfolio Management Team
Franklin Adjustable U.S. Government Securities Fund
18
<PAGE>
PERFORMANCE SUMMARY
Franklin Adjustable U.S. Government Securities Fund's share price, as measured
by net asset value, decreased 12.0 cents, from $9.48 on October 31, 1997, to
$9.36 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
totaling 51.4 cents ($0.514) 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 $9.58 on October 31, 1998, and an
annualization of October's dividend of 3.6 cents ($0.036) per share, your fund's
distribution rate was 4.51%.
The fund reported a cumulative total return of +4.26% for the one-year period
ended October 31, 1998. Cumulative total return measures the change in value of
an investment, assuming reinvestment of all distributions, and does not include
the initial sales charge.
The graph on page 21 compares the performance of the fund's shares, for the past
10 years, with that of the Lehman Brothers Short U.S. Government 1-2 Year Index
and the Payden & Rygel
Past performance is not predictive of future results. 19
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Adjustable U.S. Government
Securities Fund
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.5 cents
December 4.5 cents
January 4.5 cents
February 4.5 cents
March 4.5 cents
April 4.5 cents
May 4.5 cents
June 4.5 cents
July 4.4 cents
August 3.8 cents
September 3.6 cents
October 3.6 cents
TOTAL 51.4 CENTS
</TABLE>
6-Month CD Index.* Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully invested because they need cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as Franklin Adjustable U.S. Government Securities Fund's had been
applied to the indices, their performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.
*Six-month certificates of deposit total returns are an average of the top rates
paid by major New York banks. CDs are insured by the FDIC up to $100,000 and
have principal and interest rate guarantees. The unmanaged Lehman Brothers Short
U.S. Government 1-2 Year Index invests in U.S. government securities with
maturities from one to two years.
20 Past performance is not predictive of future results.
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Adjustable U.S. Government Securities Fund
$10,000 Investment (11/1/88 - 10/31/98)
<TABLE>
<CAPTION>
ADJUSTABLE RATE U.S. LEHMAN BROTHERS SHORT 1-2 P&R 6 MO. CD
GOVERNMENT FUND US GOVT
--------------- -------
<S> <C> <C> <C>
11/1/88 $9,778 $10,000 $10,000
Nov-88 $9,816 $9,986 -0.14% $10,038 0.38%
Dec-88 $9,854 $10,014 0.28% $10,112 0.74%
Jan-89 $9,922 $10,091 0.76% $10,187 0.74%
Feb-89 $9,942 $10,096 0.06% $10,218 0.30%
Mar-89 $9,986 $10,143 0.46% $10,297 0.78%
Apr-89 $10,100 $10,265 1.21% $10,412 1.11%
May-89 $10,185 $10,402 1.33% $10,514 0.98%
Jun-89 $10,288 $10,574 1.65% $10,614 0.95%
Jul-89 $10,363 $10,718 1.36% $10,720 1.00%
Aug-89 $10,438 $10,673 -0.42% $10,771 0.48%
Sep-89 $10,535 $10,738 0.61% $10,840 0.64%
Oct-89 $10,664 $10,880 1.32% $10,946 0.98%
Nov-89 $10,763 $10,976 0.88% $11,026 0.73%
Dec-89 $10,873 $11,018 0.38% $11,100 0.67%
Jan-90 $10,930 $11,044 0.24% $11,169 0.62%
Feb-90 $11,010 $11,104 0.54% $11,238 0.62%
Mar-90 $11,098 $11,144 0.36% $11,305 0.59%
Apr-90 $11,174 $11,180 0.33% $11,371 0.59%
May-90 $11,273 $11,339 1.42% $11,472 0.89%
Jun-90 $11,359 $11,450 0.97% $11,553 0.70%
Jul-90 $11,465 $11,575 1.10% $11,651 0.85%
Aug-90 $11,546 $11,624 0.43% $11,721 0.60%
Sep-90 $11,638 $11,711 0.74% $11,789 0.58%
Oct-90 $11,720 $11,834 1.05% $11,881 0.78%
Nov-90 $11,803 $11,940 0.90% $11,947 0.56%
Dec-90 $11,909 $12,072 1.11% $12,063 0.97%
Jan-91 $12,014 $12,183 0.92% $12,164 0.84%
Feb-91 $12,116 $12,264 0.66% $12,237 0.60%
Mar-91 $12,217 $12,348 0.69% $12,323 0.70%
Apr-91 $12,294 $12,454 0.86% $12,404 0.66%
May-91 $12,368 $12,525 0.56% $12,464 0.48%
Jun-91 $12,415 $12,581 0.45% $12,509 0.36%
Jul-91 $12,546 $12,678 0.78% $12,585 0.61%
Aug-91 $12,639 $12,836 1.25% $12,676 0.72%
Sep-91 $12,754 $12,952 0.90% $12,744 0.54%
Oct-91 $12,831 $13,079 0.98% $12,821 0.60%
Nov-91 $12,868 $13,209 1.00% $12,895 0.58%
Dec-91 $12,941 $13,382 1.30% $12,974 0.61%
Jan-92 $12,970 $13,383 0.01% $13,027 0.41%
Feb-92 $13,037 $13,422 0.29% $13,065 0.29%
Mar-92 $13,089 $13,436 0.10% $13,103 0.29%
Apr-92 $13,126 $13,551 0.86% $13,167 0.49%
May-92 $13,212 $13,664 0.84% $13,216 0.37%
Jun-92 $13,298 $13,782 0.86% $13,262 0.35%
Jul-92 $13,309 $13,924 1.03% $13,335 0.55%
Aug-92 $13,365 $14,023 0.71% $13,375 0.30%
Sep-92 $13,420 $14,139 0.83% $13,430 0.41%
Oct-92 $13,381 $14,074 -0.46% $13,452 0.17%
Nov-92 $13,408 $14,061 -0.10% $13,466 0.10%
Dec-92 $13,460 $14,181 0.86% $13,529 0.47%
Jan-93 $13,509 $14,310 0.91% $13,581 0.38%
Feb-93 $13,571 $14,411 0.70% $13,617 0.27%
Mar-93 $13,589 $14,450 0.27% $13,654 0.27%
Apr-93 $13,659 $14,529 0.55% $13,695 0.30%
May-93 $13,661 $14,498 -0.22% $13,718 0.17%
Jun-93 $13,734 $14,588 0.62% $13,755 0.27%
Jul-93 $13,780 $14,623 0.24% $13,795 0.29%
Aug-93 $13,825 $14,725 0.70% $13,839 0.32%
Sep-93 $13,808 $14,770 0.31% $13,878 0.28%
Oct-93 $13,777 $14,802 0.22% $13,913 0.25%
Nov-93 $13,676 $14,815 0.09% $13,946 0.24%
Dec-93 $13,642 $14,868 0.36% $13,988 0.30%
Jan-94 $13,690 $14,952 0.56% $14,034 0.33%
Feb-94 $13,609 $14,886 -0.44% $14,033 -0.01%
Mar-94 $13,511 $14,847 -0.26% $14,065 0.23%
Apr-94 $13,424 $14,808 -0.27% $14,086 0.15%
May-94 $13,485 $14,832 0.17% $14,123 0.26%
Jun-94 $13,523 $14,873 0.28% $14,167 0.31%
Jul-94 $13,579 $14,992 0.80% $14,229 0.44%
Aug-94 $13,579 $15,043 0.34% $14,284 0.39%
Sep-94 $13,564 $15,031 -0.08% $14,320 0.25%
Oct-94 $13,409 $15,074 0.28% $14,376 0.39%
Nov-94 $13,403 $15,025 -0.32% $14,408 0.22%
Dec-94 $13,374 $15,061 0.24% $14,464 0.39%
Jan-95 $13,481 $15,245 1.22% $14,565 0.70%
Feb-95 $13,635 $15,426 1.19% $14,654 0.61%
Mar-95 $13,715 $15,514 0.57% $14,726 0.49%
Apr-95 $13,842 $15,640 0.81% $14,811 0.58%
May-95 $14,135 $15,857 1.39% $14,909 0.66%
Jun-95 $14,085 $15,942 0.53% $14,983 0.50%
Jul-95 $14,173 $16,016 0.47% $15,066 0.55%
Aug-95 $14,292 $16,105 0.55% $15,138 0.48%
Sep-95 $14,365 $16,177 0.45% $15,206 0.45%
Oct-95 $14,424 $16,297 0.74% $15,287 0.53%
Nov-95 $14,560 $16,417 0.74% $15,368 0.53%
Dec-95 $14,601 $16,532 0.70% $15,454 0.56%
Jan-96 $14,704 $16,663 0.79% $15,537 0.54%
Feb-96 $14,713 $16,626 -0.22% $15,598 0.39%
Mar-96 $14,802 $16,636 0.06% $15,652 0.35%
Apr-96 $14,814 $16,668 0.19% $15,720 0.43%
May-96 $14,875 $16,718 0.30% $15,786 0.42%
Jun-96 $15,016 $16,830 0.67% $15,847 0.39%
Jul-96 $15,061 $16,897 0.40% $15,915 0.43%
Aug-96 $15,106 $16,966 0.41% $16,000 0.53%
Sep-96 $15,214 $17,102 0.80% $16,078 0.49%
Oct-96 $15,368 $17,273 1.00% $16,162 0.52%
Nov-96 $15,440 $17,384 0.64% $16,239 0.48%
Dec-96 $15,513 $17,412 0.16% $16,313 0.45%
Jan-97 $15,619 $17,493 0.47% $16,384 0.44%
Feb-97 $15,709 $17,544 0.29% $16,450 0.40%
Mar-97 $15,751 $17,551 0.04% $16,506 0.34%
Apr-97 $15,879 $17,683 0.75% $16,583 0.47%
May-97 $15,974 $17,801 0.67% $16,670 0.52%
Jun-97 $16,086 $17,913 0.63% $16,753 0.50%
Jul-97 $16,250 $18,076 0.91% $16,843 0.54%
Aug-97 $16,260 $18,113 0.20% $16,919 0.45%
Sep-97 $16,374 $18,236 0.68% $16,997 0.46%
Oct-97 $16,471 $18,356 0.66% $17,080 0.49%
Nov-97 $16,480 $18,406 0.27% $17,152 0.42%
Dec-97 $16,594 $18,522 0.63% $17,241 0.52%
Jan-98 $16,725 $18,679 0.85% $17,339 0.57%
Feb-98 $16,734 $18,709 0.16% $17,407 0.39%
Mar-98 $16,778 $18,786 0.41% $17,485 0.45%
Apr-98 $16,859 $18,874 0.47% $17,562 0.44%
May-98 $16,904 $18,970 0.51% $17,648 0.49%
Jun-98 $16,985 $19,065 0.50% $17,728 0.45%
Jul-98 $17,028 $19,155 0.47% $17,815 0.49%
Aug-98 $17,133 $19,352 1.03% $17,909 0.53%
Sep-98 $17,235 $19,572 1.14% $18,018 0.61%
Oct-98 $17,174 -0.36% $19,674 0.52% $18,110 0.51%
Total Return 71.74% 96.74% 81.10%
</TABLE>
*Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends and
capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
PERFORMANCE
Franklin Adjustable U.S. Government Securities Fund
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/20/87)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +4.26% +24.65% +75.63% +86.57%
Average Annual Total Return(2) +1.90% +4.04% +5.56% +5.60%
Distribution Rate(3) 4.51%
30-Day Standardized Yield(4) 4.81%
</TABLE>
(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 October's 3.6 cent per
share monthly dividend and the maximum offering price of $9.58 on October 31,
1998.
(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
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.
Past performance is not predictive of future results. 21
<PAGE>
FUND CATEGORY
[Pyramid Graphic]
FRANKLIN BOND FUND
Your Fund's Goal: Franklin Bond Fund seeks to provide investors with a high
level of income consistent with preservation of capital. Capital appreciation
over the long term is a secondary goal.
It's a pleasure to bring you Franklin Bond Fund's inaugural annual report,
covering the period since the fund's inception on August 3, 1998, through the
fund's fiscal year-end on October 31, 1998. Investor uncertainty and anxiety
strongly influenced financial markets around the world during the three months
under review, causing investors to generally avoid all classes of securities
except for the most widely traded U.S. Treasury issues. Global and domestic
market volatility was an outgrowth of the Asian financial crisis that developed
during the summer of 1997. The U.S. was somewhat insulated from the "Asian flu"
until recently, with tremendous consumer demand that offset weakening export and
manufacturing activity. However, as global demand diminished, the economy fought
stronger headwinds. The erosion so evident in the manufacturing sector began to
trickle into the service sector, notably impacting financial firms. In spite of
this, the labor market has not yet displayed significant weakness, and consumer
confidence remains near historically high levels. It is likely, however, that
continued slowing of the economy, and further equity market declines, will
translate into reduced employment and falling consumer confidence. The Federal
Reserve Board (the Fed), focused on
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 92 of
this report.
22
<PAGE>
this very possibility, cut the federal funds target rate to 5.25% on September
29, and then again to 5.00% on October 15, in an effort to sustain economic
growth going forward.
As of October 31, 1998, Franklin Bond Fund held 18.46% of total net
assets in U.S. Treasury securities. Low inflation coupled with a federal budget
surplus provided a favorable backdrop for U.S. Treasury securities during the
reporting period. Furthermore, as financial markets worldwide suffered from a
lack of confidence, investors ignored most other financial instruments and fled
to the relative safety of U.S. Treasuries. This sent Treasury yields plummeting
and prices jumping, in an already favorable environment. The 30-year Treasury
bond yield declined 52 basis points, from 5.67% on August 3, the fund's
inception date, to 5.15% on October 31. The 10-year Treasury note yield fell
from 5.46% to 4.64%, while the 5-year Treasury note yield dropped from 5.46% to
4.24%, during the three-month period.
Non-callable agency bonds comprised 13.34% of the fund's total net assets on
October 31, 1998. Non-callable U.S. government agency bonds, bonds that cannot
be redeemed until maturity, generally appreciated in price during the reporting
period. However, although agency bond prices tend to move in the same direction
as U.S. Treasuries, they were unable to keep pace with the enormous Treasury
market rally. Therefore, agency bond yield spreads, the difference between the
higher agency bond yields and Treasury yields, widened, enabling us to purchase
the bonds at a historically high-yield advantage relative to Treasuries.
Although yield spreads also widened on corporate bonds and mortgage pass-through
securities, agency bonds, as a sector, generally have lower cash-flow risk.
23
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Bond Fund
10/31/98
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ------------------------------------------------------------
<S> <C>
Mortgage-backed Securities 34.51%
Corporate Bonds 27.48%
U.S. Treasury Securities 18.46%
U.S. Agency Bonds 13.34%
Cash, assets and liabilities 6.21%
</TABLE>
Mortgage-backed securities accounted for 34.51% of the fund's total net assets
on October 31, 1998. Mortgage pass-through securities, bonds backed by
mortgages, underperformed comparable U.S. Treasury securities during the
reporting period, owing to the overwhelming flight-to-quality mentality. Even
so, lower-coupon mortgage bonds, which account for the majority of Franklin Bond
Fund's holdings in this sector, benefited from price appreciation during the
reporting period. The fund maintained little exposure to higher-coupon
mortgages, which have greater prepayment risk than lower-coupons. As the prices
of higher-coupon pass-through securities increasingly reflect the prepayment
risk associated with declining interest rates, we may increase our allocation to
these securities. If, in our view, higher-coupon pass-through securities' prices
begin decreasing due to an excessive amount of prepayments, then we may
overweight this sector.
As of October 31, 1998, corporate bonds comprised 27.48% of the fund's total net
assets. Corporate bonds came under pressure fundamentally and technically during
the reporting period. The lack of global demand for goods and services fueled
concern over earnings growth for the corporate sector. Turbulence in the
Russian, Asian, Latin American and domestic equity markets combined with fears
of weaker profitability and record issuance levels to push corporate bond prices
lower. Due to the concurrent Treasury market rally, yield spreads on
investment-grade corporate bonds approached levels not seen since the 1990-1991
recession. High-yield corporate bonds witnessed spreads, the difference between
corporate bond yields and U.S. Treasuries' yields, reaching wider levels than
their averages over the last 10 years. In this environment, we increased our
holdings throughout the period as opportunities to add value arose.
24
<PAGE>
The corporate bonds purchased for the fund emphasize short- to-intermediate-term
maturities from well-managed, profitable companies that are defensive in nature,
as we seek to position the fund to weather additional financial storms on the
horizon. We will continue to scan the corporate bond market for individual
securities that suffered declines we feel were unjustifiable in the sector
sell-off.
Going forward, we expect the Fed to lower short-term interest rates further in
the months ahead. In this declining interest-rate environment, Franklin Bond
Fund is well-positioned to benefit through our diversification in different
sectors, as well as our commitment to maintaining a value-oriented investment
approach.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Roger A. Bayston
- --------------------
Roger A. Bayston
Portfolio Manager
Franklin Bond Fund
25
<PAGE>
PERFORMANCE SUMMARY
DIVIDEND DISTRIBUTIONS
Franklin Bond Fund - Class I
8/3/98 - 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
August 0.0 cents
September 0.0 cents
October 4.5 cents
- ------------------------------------------------------
TOTAL 4.5 CENTS
</TABLE>
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
CLASS I
Franklin Bond Fund - Class I share price, as measured by net asset value,
increased 36.0 cents, from $10.00 since inception on August 3, 1998, to $10.36
on October 31, 1998.
The fund began paying dividends in October, and shareholders received per-share
distributions of 4.5 cents ($0.045) 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 $10.82 on October 31, 1998, and an
annualization of the current monthly dividend of 4.5 cents ($0.045) per share,
your fund's distribution rate was 4.99%.
The fund reported a +4.05% cumulative total return for the period ended October
31, 1998. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions, and does not include the initial
sales charge.
26 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Bond Fund - Class I
Period ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
(8/3/98)
- -------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.05%
Aggregate Total Return(2) -0.34%
Distribution Rate(3) 4.99%
30-Day Standardized Yield(4) 4.40%
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the period indicated and does not include the sales charge.
(2). Aggregate total return represents the average annual change in value of an
investment over the period indicated and includes the current, maximum 4.25%
initial sales charge. Since the fund has existed for less than one year, the
figures represent aggregate total return from inception; therefore, average
annual total returns are not provided.
(3). Distribution rate is based on an annualization of the current 4.5 cent per
share monthly dividend and the maximum offering price of $10.82 on October 31,
1998.
(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
The fund's manager has agreed in advance to waive a portion of its
management fees, which reduces expenses and increases distribution rate, yield
and total return to shareholders. If the manager had not taken this action, the
fund's distribution rate and total return would have been lower and yield for
the period would have been 4.12%. The fee waiver may be discontinued at any
time, upon notice to the funds Board of Directors. 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.
Past performance is not predictive of future results. 27
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Bond Fund - Advisor Class
8/3/98 - 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------------------------------
<S> <C>
August 0.00 cents
September 0.00 cents
October 4.71 cents
- -----------------------------------------------------
Total 4.71 cents
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
ADVISOR CLASS
Franklin Bond Fund - Advisor Class share price, as measured by net asset value,
increased 37.0 cents, from $10.00 on August 3, 1998, to $10.37 on October 31,
1998.
The fund began paying dividends in October, and shareholders received per-share
distributions of 4.71 cents ($0.0471) 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 $10.37 on October 31, 1998, and an
annualization of the current monthly dividend of 4.71 cents ($0.0471) per share,
the fund's distribution rate was 5.45%.
The fund reported a +4.17% cumulative total return for the period ended October
31, 1998. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions.
28 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Bond Fund - Advisor Class
Period ended 10/31/98
<TABLE>
<CAPTION>
Since
Inception
(8/3/98)
- --------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +4.17%
Aggregate Total Return(1) +4.17%
Distribution Rate(2) 5.45%
30-Day Standardized Yield(3) 4.84%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated. Aggregate total return represents the average annual
change in value of an investment over the period indicated. Since the fund has
existed for less than one year, the figures represent aggregate total return
from inception; therefore, average annual total returns are not provided.
(2) Distribution rate is based on an annualization of the current 4.71 cent per
share monthly dividend and the net asset value price of $10.37 on October 31,
1998.
(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces expenses and increases distribution rate, yield and total
return to shareholders. If the manager had not taken this action, the fund's
distribution rate and total return would have been lower and yield for the
period would have been 4.55%. The fee waiver may be discontinued at any time,
upon notice to the funds Board of Directors. 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.
Past performance is not predictive of future results. 29
<PAGE>
FUND CATEGORY
[Pyramid Graphic]
FRANKLIN CONVERTIBLE
SECURITIES FUND
Your Fund's Goal: Franklin Convertible Securities Fund seeks to maximize total
return consistent with reasonable risk through a portfolio of convertible
securities.
During the reporting period, concerns about the timing and extent of the global
economic slowdown produced increased market volatility. In particular, the
economic and political turmoil in Asia, Latin America and Russia raised concerns
about the health of corporate profits and future growth opportunities for
companies at home and abroad. The resulting market volatility and uncertainty
regarding economic and market conditions over the near term was one of the
principal reasons for the fund's underperformance. For the year ended October
31, 1998, the fund's Class I shares produced a -9.93% cumulative total return.
The behavior of the fund's key asset classes also contributed to its lackluster
performance. The fund has historically had a disposition to small-cap growth
companies, which enabled it to produce a strong +20.3% average annual total
return for the three-year period ending October 31, 1997. However, for the
current one-year period ended October 31, 1998, the fund's small-cap disposition
was one of the primary reasons for the fund's underperformance. Due to the large
positions in small-cap stocks, the fund was underweight the larger-cap Consumer
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 98 of
this report.
30
<PAGE>
Cyclical Growth sector, the second-best performing sector in the Goldman Sachs
Convertible 100 Bond Index during the first six months of 1998. In addition, the
fund was hurt in August's correction, as small-cap stocks suffered greater
declines than larger-cap stocks.
Earlier in the fund's fiscal year, we believed oil and energy companies fit our
investment profile, as they were attractively priced relative to their growth
prospects and risk profiles. Nonetheless, these positions negatively impacted
the fund, as oil prices continued to decline, falling to $11.61 a barrel on June
15, 1998, a 12-year low. The prolonged weakness in oil prices continued to
hamper the performance of several of the fund's investments, specifically those
in companies engaged in oil and gas exploration, and production and oilfield
services. However, recent evidence of OPEC production cutbacks and non-OPEC
production declines, associated with the lack of investment in high-cost
properties, adds to our confidence that oil and energy companies offer
significant value under current depressed industry conditions. At recent levels,
oil and energy companies look very attractive, given our expectation that supply
and demand will soon move back into equilibrium. The fund continues to have an
overweight position in these companies and should benefit as fundamental
conditions improve.
The fund had sizable investments in the real estate sector, as well. In the
third quarter of 1998, while the real estate industry continued to benefit from
strong operating fundamentals and low interest rates, the performance of certain
real estate securities, called real estate investment trusts (REITs), weakened,
PORTFOLIO BREAKDOWN
Franklin Convertible Securities Fund
10/31/98
<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
- ---------------------------------------------------
<S> <C>
Convertible Bonds 43.3%
Convertible Preferred Stocks 39.9%
Common Stocks 2.6%
Cash & Short-Term Equivalents 14.2%
</TABLE>
31
<PAGE>
TOP FIVE HOLDINGS
Franklin Convertible
Securities Fund
10/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECURITY NET ASSETS
- ----------------------------------------------------
<S> <C>
Bell Atlantic Financial Services 3.4%
Convertible Bond
Xilinx,Inc. 3.0%
Convertible Bond
El Paso Energy Capital Trust I 2.9%
Convertible Preferred Stock
McKesson Financing Trust 2.5%
Convertible Preferred Stock
Diamond Offshore Drilling, Inc. 2.3%
Convertible Bond
</TABLE>
slightly underperforming the S&P 500. Investors reacted negatively to general
concerns about the U.S. economy and the slowdown in REIT acquisitions, stemming
from the inability to obtain financing, and pushed down REIT stock prices.
However, we believe that earnings visibility in 1999 could be excellent for the
real estate industry relative to the overall market, given strong sector
fundamentals and stable cash flows derived from real estate leases. As a result
of lower stock prices, REITs now trade at the most attractive valuations seen in
the last several years. We believe this growing sector should continue to
attract investors, as earnings consistency improves and REITs begin to benefit
from their diversified portfolios.
As a consequence of the past year's market volatility, we positioned the fund in
higher-quality, more widely traded securities in all sectors. While still
maintaining our strict investment criteria, we actively concentrated on names
with more defensive qualities, such as convertible securities in the utilities
sector, or in selective securities that offered attractive valuations and
allowed us to capitalize on favorable trends. Texas Utilities Co., for example,
was one of our favorite companies in the utilities sector. The Texas Utilities
convertible preferred stock was attractively priced and allowed us not only to
invest in a defensive industry, but earn a higher dividend than the common stock
as well.
The increased market volatility had an upside; it presented some attractive
investment opportunities. We recently purchased bonds issued by Omnicare, Inc.,
a leading provider of pharmaceuticals and other related services to the nursing
home
32
<PAGE>
sector. Although some uncertainty exists, we felt Omnicare has made more than
adequate allowances, and are further comforted by Omnicare's superior
technology, excellent management and extremely consistent operating performance.
McKesson Corp., the largest provider of drugs and medical supplies to hospitals,
nursing homes and physician clinics, was another attractive investment. The
company augments its core distribution with pharmacy management services,
automated drug-dispensing tools and a variety of information systems for
implementation in administrative and clinical environments. After announcing its
intent to acquire HBO & Co., a leading health care information systems company,
on October 18, 1998, investor skepticism drove McKesson's convertible preferred
stock down. However, given McKesson's superior management and market position,
we felt the merger's long-term results would be very favorable and were able to
purchase shares at attractive levels.
During the reporting period, we reduced our position in Union Pacific Corp., a
leading rail transportation and trucking company. Although we believe Union
Pacific will continue to make operational progress in absorbing Southern
Pacific, we determined that the company's bonds began to approach our target
price. Given Union Pacific's high relative position versus other securities, we
decided to decrease our exposure. However, we continue to feel the company
possesses one of the strongest positions in the railroad industry and will
monitor its convertible preferred stock for future investment opportunities.
33
<PAGE>
Going forward, our focus will remain value-driven, concentrating on high-quality
names that allow us to capture a significant portion of the underlying equity's
price appreciation, while attempting to limit our exposure to price declines. To
identify investments that meet our criteria, we analyze a large number of
convertible securities, narrowing our options to those companies we believe have
superior business prospects and attractive valuation levels. We will continue to
work closely with our team of equity analysts in identifying investment ideas
with the most favorable risk/reward characteristics.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Edward B. Jamieson
- ----------------------
Edward B. Jamieson
Portfolio Manager
Franklin Convertible Securities Fund
34
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Franklin Convertible Securities Fund - Class I reported a -9.93% cumulative
total return for the one-year period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 37, the fund delivered a +207.88% cumulative total return
since inception on April 15, 1987.
The fund's share price, as measured by net asset value, decreased $2.99, from
$14.74 on October 31, 1997, to $11.75 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 64.5 cents ($0.645) including a 4.5 cent
($0.045) special year-end distribution, 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.
Past performance is not predictive of future results. 35
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Convertible
Securities Fund - Class I
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------------------------------
<S> <C>
November 5.0 cents
December 9.5 cents*
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
TOTAL 64.5 CENTS
</TABLE>
*Includes a special 4.5 cent distribution.
TOTAL RETURN INDEX COMPARISON
Franklin Convertible Securities Fund - Class I
$10,000 Investment (11/1/88 - 10/31/98)
<TABLE>
<CAPTION>
DATE FRANKLIN CONVERTIBLE GOLDMAN SACHS CONVERTIBLE 100 GOLDMAN SACHS
SECURITIES FUND - CLASS I BOND INDEX CONV100 $T
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $9,422 $10,000
11/30/88 $9,339 $9,799 -2.01%
12/31/88 $9,316 $9,964 1.68%
1/31/89 $9,748 $10,454 4.92%
2/28/89 $9,775 $10,488 0.33%
3/31/89 $9,721 $10,560 0.68%
4/30/89 $10,068 $10,844 2.69%
5/31/89 $10,282 $10,976 1.22%
6/30/89 $10,247 $10,863 -1.03%
7/31/89 $10,474 $11,009 1.34%
8/31/89 $10,714 $11,245 2.15%
9/30/89 $10,626 $11,035 -1.87%
10/31/89 $10,239 $10,586 -4.07%
11/30/89 $10,354 $10,723 1.30%
12/31/89 $10,449 $10,705 -0.17%
1/31/90 $10,152 $10,153 -5.16%
2/28/90 $10,215 $10,226 0.72%
3/31/90 $10,453 $10,384 1.55%
4/30/90 $10,217 $10,020 -3.51%
5/31/90 $10,680 $10,645 6.24%
6/30/90 $10,845 $10,619 -0.25%
7/31/90 $10,694 $10,502 -1.10%
8/31/90 $10,024 $9,918 -5.56%
9/30/90 $9,483 $9,365 -5.57%
10/31/90 $9,009 $8,860 -5.40%
11/30/90 $9,422 $9,356 5.60%
12/31/90 $9,848 $9,605 2.66%
1/31/91 $10,228 $10,128 5.45%
2/28/91 $10,861 $10,737 6.01%
3/31/91 $11,269 $10,976 2.23%
4/30/91 $11,532 $11,083 0.97%
5/31/91 $11,970 $11,488 3.66%
6/30/91 $11,572 $11,130 -3.12%
7/31/91 $12,063 $11,433 2.72%
8/31/91 $12,496 $11,802 3.23%
9/30/91 $12,518 $11,770 -0.27%
10/31/91 $12,640 $12,003 1.98%
11/30/91 $12,485 $11,689 -2.62%
12/31/91 $13,159 $12,265 4.93%
1/31/92 $13,488 $12,857 4.83%
2/29/92 $13,703 $13,153 2.30%
3/31/92 $13,517 $13,000 -1.16%
4/30/92 $13,566 $13,010 0.07%
5/31/92 $13,824 $13,292 2.17%
6/30/92 $13,597 $13,158 -1.01%
7/31/92 $14,083 $13,618 3.50%
8/31/92 $13,906 $13,611 -0.05%
9/30/92 $14,115 $13,889 2.04%
10/31/92 $14,286 $13,915 0.19%
11/30/92 $14,891 $14,237 2.31%
12/31/92 $15,296 $14,430 1.36%
1/31/93 $15,703 $14,758 2.27%
2/28/93 $15,644 $14,929 1.16%
3/31/93 $16,261 $15,432 3.37%
4/30/93 $16,230 $15,405 -0.18%
5/31/93 $16,672 $15,790 2.50%
6/30/93 $16,850 $16,028 1.51%
7/31/93 $17,044 $15,988 -0.25%
8/31/93 $17,662 $16,432 2.78%
9/30/93 $17,943 $16,452 0.12%
10/31/93 $18,324 $16,704 1.53%
11/30/93 $17,984 $16,644 -0.36%
12/31/93 $18,438 $16,902 1.55%
1/31/94 $18,938 $17,318 2.46%
2/28/94 $18,870 $17,240 -0.45%
3/31/94 $18,180 $16,724 -2.99%
4/30/94 $17,904 $16,423 -1.80%
5/31/94 $17,973 $16,472 0.30%
6/30/94 $17,951 $16,311 -0.98%
7/31/94 $18,349 $16,650 2.08%
8/31/94 $18,794 $17,120 2.82%
9/30/94 $18,713 $16,868 -1.47%
10/31/94 $18,722 $16,789 -0.47%
11/30/94 $18,184 $16,199 -3.51%
12/31/94 $18,136 $16,081 -0.73%
1/31/95 $18,022 $16,400 1.98%
2/28/95 $18,398 $16,942 3.31%
3/31/95 $18,925 $17,442 2.95%
4/30/95 $19,436 $17,863 2.41%
5/31/95 $20,016 $18,375 2.87%
6/30/95 $20,597 $18,991 3.35%
7/31/95 $21,432 $19,574 3.07%
8/31/95 $21,634 $19,819 1.25%
9/30/95 $22,037 $20,050 1.17%
10/31/95 $21,563 $19,613 -2.18%
11/30/95 $22,123 $20,396 3.99%
12/31/95 $22,524 $20,508 0.55%
1/31/96 $22,940 $21,093 2.85%
2/29/96 $23,302 $21,453 1.71%
3/31/96 $23,539 $21,749 1.38%
4/30/96 $24,106 $21,952 0.93%
5/31/96 $24,600 $22,345 1.79%
6/30/96 $24,213 $22,190 -0.69%
7/31/96 $23,329 $21,451 -3.33%
8/31/96 $24,163 $22,136 3.19%
9/30/96 $25,112 $22,857 3.26%
10/31/96 $25,167 $22,732 -0.55%
11/30/96 $26,085 $23,498 3.37%
12/31/96 $26,202 $23,319 -0.76%
1/31/97 $27,374 $23,736 1.79%
2/28/97 $27,090 $23,817 0.34%
3/31/97 $26,498 $23,634 -0.77%
4/30/97 $26,560 $23,967 1.41%
5/31/97 $27,893 $25,089 4.68%
6/30/97 $28,799 $25,831 2.96%
7/31/97 $30,308 $27,366 5.94%
8/31/97 $30,537 $27,160 -0.75%
9/30/97 $31,827 $28,524 5.02%
10/31/97 $30,822 $27,839 -2.40%
11/30/97 $31,074 $27,745 -0.34%
12/31/97 $31,514 $27,867 0.44%
1/31/98 $31,061 $27,752 -0.41%
2/28/98 $31,815 $29,201 5.22%
3/31/98 $32,090 $30,226 3.51%
4/30/98 $32,481 $30,610 1.27%
5/31/98 $31,556 $29,784 -2.70%
6/30/98 $30,909 $29,959 0.59%
7/31/98 $30,139 $29,294 -2.22%
8/31/98 $26,840 $25,902 -11.58%
9/30/98 $27,379 $26,402 1.93%
10/31/98 $27,761 $27,313 3.45%
</TABLE>
The historical performance data shown pertains only to the fund's Class I
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
Based on the maximum offering price of $12.47 on October 31, 1998, and an
annualization of October's monthly dividend of 5.0 cents ($0.05) per share, the
fund's distribution rate was 4.81%.
The graph above compares the performance of the fund's Class I shares with that
of the Goldman Sachs Convertible 100 Bond Index. Keep in mind that an unmanaged
market index has inherent performance differentials in comparison with any fund.
An index doesn't pay management fees to cover salaries of securities analysts or
portfolio managers, or pay commissions or market spreads to buy and sell
securities. Unlike an index, mutual funds are never fully invested because they
need cash on hand to redeem shares. In addition, the performance shown for the
fund includes the maximum initial sales charge, all fund expenses and account
fees. If operating expenses such as Franklin Convertible Securities Fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.
36 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Convertible Securities Fund - Class I
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (4/15/87)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -9.93% +51.50% +194.65% +207.88%
Average Annual Total Return(2) -15.12% +7.38% +10.75% +9.67%
Value of $10,000 Investment(3) $8,488 $14,279 $27,761 $29,024
Distribution Rate(4) 4.81%
30-Day Standardized Yield(5) 5.67%
</TABLE>
<TABLE>
<CAPTION>
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +2.17% +15.18% +16.71% +22.47% -9.93%
</TABLE>
(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 has been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and have been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
(4) Distribution rate is based on an annualization of October's 5.0 cent per
share monthly dividend and the maximum offering price of $12.47 on October 31,
1998.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
(6) One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
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.
Franklin Convertible Securities Fund - Class I paid distributions derived from
long-term capital gains of 24.55 cents per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results. 37
<PAGE>
CLASS II
Franklin Convertible Securities Fund - Class II reported a -10.61% cumulative
total return for the one-year period ended October 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include sales charges. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 41, the fund delivered a +23.39% cumulative total return since inception on
October 2, 1995.
The fund's share price, as measured by net asset value, decreased $2.98, from
$14.68 on October 31, 1997, to $11.70 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 54.12 cents ($0.5412) including a 4.5
cent ($0.045) special year-end distribution, 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.
38 Past performance is not predictive of future results.
<PAGE>
Based on the maximum offering price of $11.82 on October 31, 1998, and an
annualization of October's monthly dividend of 4.29 cents ($0.0429) per share,
the fund's distribution rate was 4.36%.
The graph on page 40 compares the performance of the fund's Class II shares,
since inception, with that of the Goldman Sachs Convertible 100 Bond Index. Keep
in mind that an unmanaged market index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never
fully invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes sales charges, all fund expenses and
account fees. If operating expenses such as Franklin Convertible Securities
Fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in it directly.
DIVIDEND DISTRIBUTIONS
Franklin Convertible
Securities Fund - Class II
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.08 cents
December 8.58 cents*
January 4.07 cents
February 4.07 cents
March 4.07 cents
April 4.10 cents
May 4.10 cents
June 4.10 cents
July 4.22 cents
August 4.22 cents
September 4.22 cents
October 4.29 cents
- ------------------------------------------------------
TOTAL 54.12 CENTS
</TABLE>
*Includes a special 4.5 cent distribution.
Past performance is not predictive of future results. 39
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Convertible Securities Fund - Class II
$10,000 Investment (10/2/95 - 10/31/98)
<TABLE>
<CAPTION>
DATE FRANKLIN CONVERTIBLE GOLDMAN SACHS CONVERTIBLE 100 GOLDMAN SACHS
SECURITIES FUND - CLASS II BOND INDEX CONV100 $T
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10/2/95 $9,901 $10,000
10/31/95 $9,708 $9,782 -2.18%
11/30/95 $9,964 $10,172 3.99%
12/31/95 $10,125 $10,228 0.55%
1/31/96 $10,317 $10,520 2.85%
2/29/96 $10,468 $10,700 1.71%
3/31/96 $10,571 $10,847 1.38%
4/30/96 $10,822 $10,948 0.93%
5/31/96 $11,032 $11,144 1.79%
6/30/96 $10,854 $11,067 -0.69%
7/31/96 $10,451 $10,699 -3.33%
8/31/96 $10,812 $11,040 3.19%
9/30/96 $11,232 $11,400 3.26%
10/31/96 $11,245 $11,337 -0.55%
11/30/96 $11,659 $11,719 3.37%
12/31/96 $11,697 $11,630 -0.76%
1/31/97 $12,214 $11,838 1.79%
2/28/97 $12,079 $11,879 0.34%
3/31/97 $11,807 $11,787 -0.77%
4/30/97 $11,827 $11,953 1.41%
5/31/97 $12,416 $12,513 4.68%
6/30/97 $12,803 $12,883 2.96%
7/31/97 $13,469 $13,648 5.94%
8/31/97 $13,564 $13,546 -0.75%
9/30/97 $14,123 $14,226 5.02%
10/31/97 $13,667 $13,885 -2.40%
11/30/97 $13,780 $13,837 -0.34%
12/31/97 $13,957 $13,898 0.44%
1/31/98 $13,756 $13,841 -0.41%
2/28/98 $14,071 $14,564 5.22%
3/31/98 $14,184 $15,075 3.51%
4/30/98 $14,348 $15,267 1.27%
5/31/98 $13,939 $14,854 -2.70%
6/30/98 $13,643 $14,942 0.59%
7/31/98 $13,294 $14,610 -2.22%
8/31/98 $11,826 $12,918 -11.58%
9/30/98 $12,056 $13,168 1.93%
10/31/98 $12,217 $13,622 3.45%
</TABLE>
The historical performance data shown pertains only to the fund's Class II
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
40 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Convertible Securities Fund - Class II
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -10.61% +25.84% +23.39%
Average Annual Total Return(2) -12.30% +7.60% +6.72%
Value of $10,000 Investment(3) $8,770 $12,457 $12,217
Distribution Rate(4) 4.36%
30-Day Standardized Yield(5) 5.23%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.
(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 October's 4.29 cent per
share monthly dividend and the maximum offering price of $11.82 on October 31,
1998.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Franklin Convertible Securities Fund - Class II paid distributions derived from
long-term capital gains of 24.55 cents per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results. 41
<PAGE>
FRANKLIN EQUITY INCOME FUND
FUND CATEGORY [PYRAMID GRAPHIC]
- --------------------------------------------------------------------------------
Your Fund's Goal: 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.
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
The fiscal year ending October 31, 1998, witnessed increased volatility in the
world's stock markets. During the period, the Asian currency crisis, which
surfaced in late 1997, caused declines of 40% or more in many emerging markets.
However, the crisis paradoxically stimulated the U.S. economy and financial
markets in early 1998. Lower interest rates stemming from the "Asian flu"
boosted consumer spending in the U.S. while corporate profit growth remained
solid. Real gross domestic product grew by a surprisingly strong 5.5% annualized
rate, and the S&P 500 Index, driven by large-cap growth stocks, gained nearly
14% during the first quarter of 1998.
While the U.S. economy appeared to continue on a stable track of moderate
expansion with low inflation, the global economic environment deteriorated
during the summer months. The Asian crisis expanded to other regions, most
notably Russia and Latin America. Also, many economies of developed countries,
such as Canada and the U.K., reported slowing trends. This global weakness put
downward pricing pressure on many tradable
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 104 of
this report.
42
<PAGE>
goods, while at the same time reducing demand for these products. The result was
a slowing of corporate profit growth for many U.S.-based companies.
During the third quarter of 1998, these trends strongly influenced the U.S.
financial markets. The S&P 500 Index declined by more than 10%.
Smaller-capitalization stocks were especially hard hit, while traditional
large-capitalization value stocks, such as utilities, performed very well during
the market turmoil. The Federal Reserve Board reacted to these conditions by
lowering its federal funds target rate before quarter's end and again in
October, to 5.0%. Central banks outside the U.S. also announced similar
interest-rate cuts in an effort to stimulate economic growth.
TOP FIVE INVESTMENT SECTORS
FRANKLIN EQUITY INCOME FUND
10/31/98
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ----------------------------------
<S> <C>
Utilities 15.8%
Financial Services 15.7%
Consumer Staples 13.7%
Energy 12.3%
Basic Materials 9.8%
</TABLE>
PORTFOLIO NOTES
The recent performance of Franklin Equity Income Fund, which invests in
large-capitalization value stocks, reflected these trends. The fund's investment
returns lagged the major market indices during early 1998 but registered
favorable relative results throughout the volatile later part of the year. For
the one-year period ended October 31, 1998, the fund's Class I shares generated
a cumulative +10.96% total return. This compares favorably with the +10.5%
return for the Lipper Analytical Equity Income Funds Index, although the fund
underperformed its benchmark, the S&P 500 Index.* The S&P 500 is a broad-based
index consisting entirely of common stocks of 500 widely held, domestic
companies, while the Lipper Analytical Equity Income Funds Index, which tracks
the performance of 30 equity income funds, resembles the fund more closely.
The fund maintains a value-oriented investment philosophy, utilizing a highly
disciplined approach to investing. We seek to invest in stocks that are selling
at attractive prices according
*Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
43
<PAGE>
to measurements such as relative dividend yield, book value, revenues and
normalized earnings. This generally entails investing in stocks at temporarily
depressed prices while collecting current, steady investment returns in the form
of dividends, which can provide a cushion against possible price declines.
Despite the financial market's recent volatility, we feel overall stock
valuations remain at the expensive end of their historical range. For example,
the average dividend yield for companies comprising the S&P 500 Stock Index was
a low 1.5% on October 31, 1998, compared with an average 3.6% over the past 35
years. The fund's asset allocation changed modestly during the year, reflecting
these valuation levels. Common stocks declined slightly from 89.5% to 86.2% of
total net assets, and more defensive, convertible preferred stocks increased
from 4.1% to 6.3%. Short-term investments also grew from 6.1% to 7.7%, as of
October 31, 1998. Stocks of internationally based companies fell from 15.9% to
9.7% of total net assets.
TOP TEN HOLDINGS
FRANKLIN EQUITY INCOME FUND
10/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- ----------------------------------------------------
<S> <C>
Bell Atlantic Corp. 2.79%
Telecommunications
Atlantic Richfield Co. 2.56%
Oil
J.C. Penney Inc. 2.33%
Retail Trade
Pharmacia & Upjohn Inc. 2.20%
Health Technology
UST Inc. 1.88%
Consumer Non-Durables
Texaco Inc. 1.86%
Energy Minerals
Sempra Energy 1.83%
Electric Utilities
YPF SA, Sponsored
ADR (Argentina) 1.76%
Energy Minerals
US West, Inc. 1.76%
Telecommunications
Chevron Corp. 1.74%
Energy Minerals
</TABLE>
We often find compelling value in stocks of companies that appear to be
fundamentally strong but have experienced temporary disappointments, or in
companies whose industries have uncertain prospects for near-term earnings
growth. The fund's accumulation of a sizeable investment weighting of electric
utility stocks serves as a good example. The uncertainty that accompanied the
electric utility sector deregulation caused electric utility stocks to
underperform the broader market from late 1993 through 1997. Cumulative total
returns for the S&P 500 Index over this period were approximately triple that of
the Dow Jones Electric Utility Index, and relative valuations such as price
earnings ratios and yields reached their most attractive levels in years. Since
then, deregulation's effects have become more clearly defined, in turn making
utility companies' earnings growth prospects and balance sheets more easily
understood. One of the fund's investments, Iowa-based MidAmerican
44
<PAGE>
Energy Holdings, agreed to be acquired at an attractive premium to its market
price. We sold the position and initiated an investment in the 9.25% convertible
preferred stock of Texas Utilities Co. Electric utility stocks continue to
represent one of the fund's largest sectors, representing 12.3% of total net
assets as of fiscal year end.
Energy stocks remain an area of investment focus. Holdings were 12.3% of the
fund's total net assets on October 31, 1998. Early in 1998, mild weather in the
U.S. and lower than anticipated demand in Asia resulted in crude oil prices
temporarily dropping to their lowest levels in 12 years. Since then, OPEC
production has been curtailed, pushing prices up. We took advantage of the
short-term price weakness by adding to our existing positions. One of those
positions, Amoco Corp., subsequently announced an agreement to be acquired by
British Petroleum, Co. PLC at a significantly higher price.
Our investments in real estate investment trusts (REITs), comprising 7.1% of the
fund's total net assets on October 31, 1998, registered disappointing returns,
with most investments in the sector experiencing negative performance for the
12-month period. This was largely due to non-fundamental reasons in our opinion.
One bright spot was our investment in Equity Office Properties Trust, which we
purchased in July 1997. The stock reached our price target in late 1997 and was
sold at a total return in excess of +45%. In the near future, most industry
participants will likely face slower growth rates and any U.S. recession would
negatively affect them. However, we believe that the historical lows recently
reached in many REIT stocks' prices more than adequately reflect the prospects
for slower future growth rates and are now considered inexpensive. Several of
these stocks are selling at prices below their companies' net asset values and
at very attractive multiples to cash flow. Accordingly, we have added to our
existing holdings and started
45
<PAGE>
new positions in the 7.75% convertible preferred stock of Glenborough Realty
Trust, Inc. and in MeriStar Hospitality Corp, Inc., a hotel REIT that owns and
leases properties under such names as Hilton, Sheraton, Marriott and Westin.
Financial stocks experienced favorable returns early in the period but were
among the stock market's worst performers during the summer correction. Holdings
were 15.7% of the fund's total net assets as of October 31, 1998. The fund sold
its positions in Beneficial Finance, acquired in August 1997, and Swedish bank
Norbanken, which we began purchasing in October 1995, at returns in excess of
+90% and +150% respectively. Yet, we maintained a below-market investment
weighting in this area throughout the year. Our investments in insurance stocks,
however, increased from 5.1% to 8.0% over the 12-month reporting period. We
initiated positions in Safeco Corp. and St. Paul Corp. in recent months. Both
stocks offered attractive relative dividend yields and were selling near their
book values at time of purchase. Three of our investments, U.K.-based insurance
broker Willis Corroon Group PLC, as well as Bermuda-based reinsurance companies
Mid Ocean Ltd. and U.S.-based Life Re Corp. agreed to acquisitions during the
year under review.
Among our consumer stock investments, we continued to realize profits in the
pharmaceutical sector. We sold our remaining investment in Bristol-Myers Squibb
Co. at a total return of more than +200%. While the company's growth prospects
continued to look favorable, the stock had become expensive relative to its
growth rate, with valuations near 30 times earnings at time of sale, compared
with approximately 14 times earnings when much of the position was acquired in
1994. Within the food and beverage industries, we realized modest profits in
U.K.-based Cadbury Schweppes PLC and started an investment in Anheuser-Busch
Cos. Inc., based on stock price weakness. The stock has since performed well, as
beer prices have stayed
46
<PAGE>
approximately the same and the company successfully settled a strike with
employees. An adverse litigation environment and threat of future legislative
action caused tobacco stocks to suffer early in the year. We responded by taking
profits in British Imperial Tobacco, which was not affected, and reinvesting the
proceeds into Phillip Morris Cos. Inc. common stock. Phillip Morris' stock price
has since rebounded more than 40% and the company raised its dividend 10%.
In addition, we capitalized on investment opportunities in the stocks of
retailers during the summer market decline. We initiated an investment in the
convertible preferred of K Mart, Corp. at a near 8% dividend yield, and we added
to our investment in J.C. Penney Co. Inc., when the stock offered an approximate
5% dividend yield. Finally, we added to our investments in the auto sector with
the purchase of General Motors Corp. (GM). The world's largest auto company, GM
has dramatically lagged the investment performance of Ford Motor Co. and
Chrysler Corp. in recent years. The company recently announced a restructuring
that we believe will help investors better understand the value of its
attractive assets. On the other hand, we significantly reduced our investment in
Chrysler after its announced merger with Daimler Benz AG, which resulted in
sharp appreciation in its share price.
Our investments in economically sensitive basic material stocks, such as steel,
chemicals and forest products fared poorly during the year, largely due to weak
worldwide commodity prices. We reduced overall weightings from 11.2% to 9.8% of
total net assets, and we sold two positions, Arco Chemical Co. and Millenium
Chemicals, as they met price targets early in the year. We took losses when we
sold investments in Portugal-based, forest-product company Portucel SGPS,
diversified chemical company Chemed Corp., and Freeport McMoran Copper and Gold,
Inc. because of continued worsening fundamentals.
47
<PAGE>
"We remain committed to our disciplined value-oriented approach, which
historically produced consistent and favorable long-term results."
We also reduced the fund's overall investment holdings in telephone companies to
6.4% from 9.3% of the fund's total net assets, during the reporting period.
Overall, these stocks performed extremely well. We sold positions in AT&T Corp.,
France Telecom, and Argentina-based Nortel Inversora SA at attractive profits.
AT&T, for example, gained more than 65% during its approximate 18-month holding
period. Our investment in New Zealand Telecom, conversely, did not work out as
planned, because the stock suffered from the Asian crisis' effects. Two of the
fund's positions, GTE Corp. and Southern New England Telephone (SNG), were
subject to acquisition bids. We accordingly reduced our investment in SNG as it
reached our price target.
Finally, weakness in the technology sector during the period provided the fund
with some unique investment opportunities. Many of these stocks have been strong
performers over the years but did not previously meet our strict value
disciplines. Examples of new positions acquired on weakness with attractive
dividend yields include Eastman Kodak Co., filter company Pall, Corp. and
electronic connector company AMP, Inc. Pall should benefit as countries
increasingly mandate use of filtered blood for transfusions. AMP and Eastman
Kodak are undergoing major restructurings that we believe should lead to
resumption of above-average earnings growth.
Looking forward, we anticipate continued high levels of financial market
volatility. Corporate America will likely face earnings growth challenges
near-term, while overall valuations
48
<PAGE>
remain high. Importantly, volatility can offer opportunities to invest in
quality companies at bargain levels as widely fluctuating stock prices often
reflect emotional swings rather than long-term fundamentals. We remain committed
to our disciplined value-oriented approach, which historically produced
consistent and favorable long-term results. We thank you for your participation
in Franklin Equity Income Fund, and we look forward to serving you in the
future.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Frank M. Felicelli
Frank M. Felicelli
Portfolio Manager
Franklin Equity Income Fund
49
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Franklin Equity Income Fund - Class I reported +10.96% cumulative total return
for the one-year period ended October 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 53, the fund delivered a +290.34% cumulative total return
since inception on March 15, 1988.
The fund's share price, as measured by net asset value, increased 62 cents from
$19.31 on October 31, 1997, to $19.93 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 64.8 cents ($0.648) including a special
2.4 ($0.024) cent year-end distribution, 28.71 cents ($0.2871) in short-term
capital gains and 50.79 cents ($0.5079) in long-term capital gains.
Distributions
50 Past performance is not predictive of future results.
<PAGE>
will vary depending on income earned by the fund and any profits realized from
the sale of securities in the fund's portfolio. Past distributions are not
indicative of future trends.
Based on the maximum offering price of $21.15 on October 31, 1998, and an
annualization of October's monthly dividend of 5.2 cents ($0.052) per share, the
fund's distribution rate was 2.95%.
The graph on page 52 compares the performance of the fund's Class I shares with
that of the unmanaged Standard & Poor's 500 Stock Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as Franklin Equity Income Fund's had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
DIVIDEND DISTRIBUTIONS
FRANKLIN EQUITY INCOME FUND
CLASS I
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------
<S> <C>
November 5.2 cents
December 7.6 cents*
January 5.2 cents
February 5.2 cents
March 5.2 cents
April 5.2 cents
May 5.2 cents
June 5.2 cents
July 5.2 cents
August 5.2 cents
September 5.2 cents
October 5.2 cents
- ----------------------------
Total 64.8 cents
</TABLE>
*Includes a special 2.4 cent distribution.
Past performance is not predictive of future results. 51
<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN EQUITY INCOME FUND - CLASS I
$10,000 INVESTMENT (11/1/88-10/31/98)
<TABLE>
<CAPTION>
Date Franklin Equity S&P 500 CPI S&P 500 % CPI %
Income Fund -
Class I
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/1/88 $9,423 $10,000 $10,000
11/30/88 $9,303 $9,857 $10,008 -1.43% 0.08%
12/31/88 $9,367 $10,029 $10,025 1.75% 0.17%
1/31/89 $9,889 $10,764 $10,075 7.32% 0.50%
2/28/89 $9,764 $10,496 $10,116 -2.49% 0.41%
3/31/89 $9,974 $10,740 $10,175 2.33% 0.58%
4/30/89 $10,349 $11,298 $10,241 5.19% 0.65%
5/31/89 $10,660 $11,755 $10,300 4.05% 0.57%
6/30/89 $10,699 $11,688 $10,324 -0.57% 0.24%
7/31/89 $11,421 $12,744 $10,349 9.03% 0.24%
8/31/89 $11,565 $12,993 $10,366 1.96% 0.16%
9/30/89 $11,559 $12,940 $10,399 -0.41% 0.32%
10/31/89 $11,236 $12,640 $10,449 -2.32% 0.48%
11/30/89 $11,400 $12,898 $10,474 2.04% 0.24%
12/31/89 $11,612 $13,207 $10,491 2.40% 0.16%
1/31/90 $11,044 $12,321 $10,599 -6.71% 1.03%
2/28/90 $11,220 $12,480 $10,648 1.29% 0.47%
3/31/90 $11,291 $12,811 $10,707 2.65% 0.55%
4/30/90 $10,908 $12,492 $10,724 -2.49% 0.16%
5/31/90 $11,621 $13,710 $10,749 9.75% 0.23%
6/30/90 $11,499 $13,618 $10,807 -0.67% 0.54%
7/31/90 $11,258 $13,574 $10,848 -0.32% 0.38%
8/31/90 $10,400 $12,347 $10,948 -9.04% 0.92%
9/30/90 $9,925 $11,746 $11,040 -4.87% 0.84%
10/31/90 $9,839 $11,695 $11,106 -0.43% 0.60%
11/30/90 $10,469 $12,451 $11,130 6.46% 0.22%
12/31/90 $10,585 $12,798 $11,130 2.79% 0.00%
1/31/91 $10,972 $13,356 $11,197 4.36% 0.60%
2/28/91 $11,648 $14,311 $11,214 7.15% 0.15%
3/31/91 $11,799 $14,658 $11,231 2.42% 0.15%
4/30/91 $11,887 $14,693 $11,248 0.24% 0.15%
5/31/91 $12,375 $15,326 $11,281 4.31% 0.30%
6/30/91 $11,865 $14,624 $11,314 -4.58% 0.29%
7/31/91 $12,346 $15,306 $11,331 4.66% 0.15%
8/31/91 $12,713 $15,668 $11,364 2.37% 0.29%
9/30/91 $12,740 $15,407 $11,414 -1.67% 0.44%
10/31/91 $12,949 $15,613 $11,431 1.34% 0.15%
11/30/91 $12,675 $14,984 $11,464 -4.03% 0.29%
12/31/91 $13,571 $16,698 $11,472 11.44% 0.07%
1/31/92 $13,500 $16,387 $11,489 -1.86% 0.15%
2/29/92 $13,692 $16,599 $11,531 1.29% 0.36%
3/31/92 $13,521 $16,275 $11,590 -1.95% 0.51%
4/30/92 $14,169 $16,754 $11,606 2.94% 0.14%
5/31/92 $14,308 $16,836 $11,622 0.49% 0.14%
6/30/92 $14,415 $16,585 $11,664 -1.49% 0.36%
7/31/92 $15,095 $17,263 $11,688 4.09% 0.21%
8/31/92 $14,852 $16,909 $11,721 -2.05% 0.28%
9/30/92 $14,768 $17,107 $11,754 1.17% 0.28%
10/31/92 $14,626 $17,165 $11,795 0.34% 0.35%
11/30/92 $15,032 $17,749 $11,812 3.40% 0.14%
12/31/92 $15,369 $17,967 $11,803 1.23% -0.07%
1/31/93 $15,725 $18,118 $11,861 0.84% 0.49%
2/28/93 $16,187 $18,365 $11,903 1.36% 0.35%
3/31/93 $16,616 $18,752 $11,944 2.11% 0.35%
4/30/93 $16,586 $18,298 $11,978 -2.42% 0.28%
5/31/93 $16,829 $18,787 $11,995 2.67% 0.14%
6/30/93 $16,968 $18,841 $12,011 0.29% 0.14%
7/31/93 $17,142 $18,766 $12,011 -0.40% 0.00%
8/31/93 $17,763 $19,477 $12,045 3.79% 0.28%
9/30/93 $17,879 $19,327 $12,070 -0.77% 0.21%
10/31/93 $18,152 $19,727 $12,120 2.07% 0.41%
11/30/93 $17,963 $19,540 $12,128 -0.95% 0.07%
12/31/93 $18,109 $19,776 $12,128 1.21% 0.00%
1/31/94 $18,533 $20,449 $12,161 3.40% 0.27%
2/28/94 $18,020 $19,895 $12,202 -2.71% 0.34%
3/31/94 $17,261 $19,027 $12,244 -4.36% 0.34%
4/30/94 $17,395 $19,271 $12,261 1.28% 0.14%
5/31/94 $17,613 $19,587 $12,270 1.64% 0.07%
6/30/94 $17,574 $19,107 $12,311 -2.45% 0.34%
7/31/94 $18,039 $19,734 $12,345 3.28% 0.27%
8/31/94 $18,752 $20,543 $12,394 4.10% 0.40%
9/30/94 $18,388 $20,041 $12,427 -2.44% 0.27%
10/31/94 $18,506 $20,492 $12,436 2.25% 0.07%
11/30/94 $17,983 $19,746 $12,452 -3.64% 0.13%
12/31/94 $18,050 $20,039 $12,452 1.48% 0.00%
1/31/95 $18,562 $20,558 $12,502 2.59% 0.40%
2/28/95 $18,926 $21,359 $12,552 3.90% 0.40%
3/31/95 $19,198 $21,989 $12,593 2.95% 0.33%
4/30/95 $19,619 $22,636 $12,635 2.94% 0.33%
5/31/95 $20,028 $23,541 $12,660 4.00% 0.20%
6/30/95 $20,138 $24,088 $12,686 2.32% 0.20%
7/31/95 $20,398 $24,887 $12,686 3.32% 0.00%
8/31/95 $20,592 $24,949 $12,719 0.25% 0.26%
9/30/95 $21,310 $26,002 $12,744 4.22% 0.20%
10/31/95 $21,129 $25,909 $12,786 -0.36% 0.33%
11/30/95 $21,842 $27,046 $12,777 4.39% -0.07%
12/31/95 $22,695 $27,568 $12,768 1.93% -0.07%
1/31/96 $23,231 $28,505 $12,844 3.40% 0.59%
2/29/96 $23,017 $28,771 $12,885 0.93% 0.32%
3/31/96 $23,195 $29,047 $12,952 0.96% 0.52%
4/30/96 $23,256 $29,474 $13,002 1.47% 0.39%
5/31/96 $23,433 $30,234 $13,027 2.58% 0.19%
6/30/96 $23,803 $30,349 $13,035 0.38% 0.06%
7/31/96 $22,940 $29,008 $13,059 -4.42% 0.19%
8/31/96 $23,311 $29,620 $13,084 2.11% 0.19%
9/30/96 $23,874 $31,287 $13,126 5.63% 0.32%
10/31/96 $24,366 $32,151 $13,168 2.76% 0.32%
11/30/96 $25,483 $34,581 $13,193 7.56% 0.19%
12/31/96 $25,585 $33,897 $13,193 -1.98% 0.00%
1/31/97 $26,259 $36,015 $13,235 6.25% 0.32%
2/28/97 $26,782 $36,296 $13,276 0.78% 0.31%
3/31/97 $26,322 $34,804 $13,310 -4.11% 0.25%
4/30/97 $26,497 $36,882 $13,326 5.97% 0.12%
5/31/97 $27,891 $39,128 $13,318 6.09% -0.06%
6/30/97 $28,714 $40,881 $13,334 4.48% 0.12%
7/31/97 $30,085 $44,135 $13,350 7.96% 0.12%
8/31/97 $29,622 $41,664 $13,375 -5.60% 0.19%
9/30/97 $31,142 $43,947 $13,408 5.48% 0.25%
10/31/97 $30,312 $42,479 $13,442 -3.34% 0.25%
11/30/97 $31,652 $44,446 $13,434 4.63% -0.06%
12/31/97 $32,546 $45,210 $13,418 1.72% -0.12%
1/31/98 $32,320 $45,712 $13,443 1.11% 0.19%
2/28/98 $33,561 $49,008 $13,469 7.21% 0.19%
3/31/98 $35,335 $51,517 $13,494 5.12% 0.19%
4/30/98 $34,873 $52,038 $13,519 1.01% 0.18%
5/31/98 $34,344 $51,143 $13,543 -1.72% 0.18%
6/30/98 $34,282 $53,219 $13,559 4.06% 0.12%
7/31/98 $33,314 $52,650 $13,575 -1.07% 0.12%
8/31/98 $30,667 $45,036 $13,592 -14.46% 0.12%
9/30/98 $32,282 $47,923 $13,608 6.41% 0.12%
10/31/98 $33,633 $51,819 $13,641 8.13% 0.24%
</TABLE>
The historical performance data shown pertains only to the fund's Class I
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
* Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
** Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
52 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
FRANKLIN EQUITY INCOME FUND - CLASS I
PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (3/15/88)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +10.96% +85.29% +256.92% +290.34%
Average Annual Total Return(2) +4.57% +11.80% +12.90% +13.04%
Value of $10,000 Investment(3) $10,457 $17,463 $33,633 $36,790
Distribution Rate(4) 2.95%
30-Day Standardized Yield(5) 3.11%
</TABLE>
<TABLE>
<CAPTION>
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +1.83% +14.10% +15.39% +24.40% +10.96%
</TABLE>
(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 has been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
(3) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and have been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
(4) Distribution rate is based on an annualization of October's 5.2 cent per
share monthly dividend and the maximum offering price of $21.15 on October 31,
1998.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
(6) One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
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.
Franklin Equity Income Fund - Class I paid distributions derived from long-term
capital gains of 50.79 cents per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results. 53
<PAGE>
CLASS II
Franklin Equity Income Fund - Class II reported a +10.16% cumulative total
return for the one-year period ended October 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges. We have always maintained a
long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 57, the fund delivered a +54.65% cumulative total return since inception on
October 2, 1995.
The fund's share price, as measured by net asset value, increased 62 cents, from
$19.26 on October 31, 1997, to $19.88 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 49.89 cents ($0.4989) including a special
2.4 ($0.024) cent year-end distribution, 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 fund's portfolio. Past distributions
are not predictive of future trends.
DIVIDEND DISTRIBUTIONS
FRANKLIN EQUITY
INCOME FUND - CLASS II
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------
<S> <C>
November 4.01 cents
December 6.41 cents*
January 3.93 cents
February 3.93 cents
March 3.93 cents
April 3.91 cents
May 3.91 cents
June 3.91 cents
July 3.96 cents
August 3.96 cents
September 3.96 cents
October 4.07 cents
- ------------------------------
TOTAL 49.89 CENTS
</TABLE>
*Includes a special 2.4 cent distribution.
54 Past performance is not predictive of future results.
<PAGE>
Based on the maximum offering price of $20.08 on October 31, 1998, and an
annualization of October's monthly dividend of 4.07 cents ($0.0407) per share,
the fund's distribution rate was 2.43%.
The graph on page 56 compares the performance of the fund's Class II shares with
that of the unmanaged Standard & Poor's 500 Stock Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes sales charges, all fund expenses and account fees. If
operating expenses such as Franklin Equity Income Fund's had been applied to the
index, its performance would have been lower. Please remember that an index is
simply a measure of performance, and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
Past performance is not predictive of future results. 55
<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN EQUITY INCOME FUND - CLASS II
$10,000 INVESTMENT (10/2/95 - 10/31/98)
<TABLE>
<CAPTION>
DATE FRANKLIN EQUITY INCOME S&P 500 CPI S&P 500 %** CPI %**
FUND* - CLASS II
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/2/95 $9,903 $10,000 $10,000
10/31/95 $9,843 $9,964 $10,033 -0.36% 0.33%
11/30/95 $10,184 $10,401 $10,026 4.39% -0.07%
12/31/95 $10,548 $10,602 $10,019 1.93% -0.07%
1/31/96 $10,800 $10,963 $10,078 3.40% 0.59%
2/29/96 $10,697 $11,065 $10,110 0.93% 0.32%
3/31/96 $10,775 $11,171 $10,163 0.96% 0.52%
4/30/96 $10,800 $11,335 $10,203 1.47% 0.39%
5/31/96 $10,872 $11,627 $10,222 2.58% 0.19%
6/30/96 $11,040 $11,672 $10,228 0.38% 0.06%
7/31/96 $10,634 $11,156 $10,247 -4.42% 0.19%
8/31/96 $10,794 $11,391 $10,267 2.11% 0.19%
9/30/96 $11,049 $12,032 $10,300 5.63% 0.32%
10/31/96 $11,266 $12,365 $10,333 2.76% 0.32%
11/30/96 $11,771 $13,299 $10,352 7.56% 0.19%
12/31/96 $11,815 $13,036 $10,352 -1.98% 0.00%
1/31/97 $12,119 $13,851 $10,386 6.25% 0.32%
2/28/97 $12,352 $13,959 $10,418 0.78% 0.31%
3/31/97 $12,140 $13,385 $10,444 -4.11% 0.25%
4/30/97 $12,208 $14,184 $10,456 5.97% 0.12%
5/31/97 $12,839 $15,048 $10,450 6.09% -0.06%
6/30/97 $13,206 $15,722 $10,463 4.48% 0.12%
7/31/97 $13,830 $16,974 $10,475 7.96% 0.12%
8/31/97 $13,602 $16,023 $10,495 -5.60% 0.19%
9/30/97 $14,301 $16,901 $10,521 5.48% 0.25%
10/31/97 $13,903 $16,337 $10,548 -3.34% 0.25%
11/30/97 $14,510 $17,093 $10,541 4.63% -0.06%
12/31/97 $14,912 $17,387 $10,529 1.72% -0.12%
1/31/98 $14,799 $17,580 $10,549 1.11% 0.19%
2/28/98 $15,359 $18,848 $10,569 7.21% 0.19%
3/31/98 $16,163 $19,813 $10,589 5.12% 0.19%
4/30/98 $15,933 $20,013 $10,608 1.01% 0.18%
5/31/98 $15,681 $19,668 $10,627 -1.72% 0.18%
6/30/98 $15,650 $20,467 $10,640 4.06% 0.12%
7/31/98 $15,198 $20,248 $10,652 -1.07% 0.12%
8/31/98 $13,979 $17,320 $10,665 -14.46% 0.12%
9/30/98 $14,707 $18,430 $10,678 6.41% 0.12%
10/31/98 $15,316 $19,929 $10,704 8.13% 0.24%
</TABLE>
The historical performance data shown pertains only to the fund's Class II
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
56 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
FRANKLIN EQUITY INCOME FUND - CLASS II
PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (10/2/95)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +10.16% +55.60% +54.65%
Average Annual Total Return(2) +8.10% +15.50% +14.85%
Value of $10,000 Investment(3) $10,810 $15,408 $15,316
Distribution Rate(4) 2.43%
30-Day Standardized Yield(5) 2.54%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.
(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 October's 4.07 cent per
share monthly dividend and the maximum offering price of $20.08 on October 31,
1998.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
Franklin Equity Income Fund - Class II paid distributions derived from long-term
capital gains of 50.79 cents per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results. 57
<PAGE>
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
FUND CATEGORY [PYRAMID GRAPHIC]
- --------------------------------------------------------------------------------
Your Fund's Goal: 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.
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
For global bond investors, the year under review was marked by three dominant
trends. Most importantly, the persistent decline in raw materials' and
commodities' prices contributed to a very positive global inflation environment.
Partly as a result of this trend, the period saw intermittent yet continuing
crises develop in emerging market countries while at the same time, bond yields
in the world's major industrial markets fell just as persistently. These
divergent market trends meant that in this difficult period fund managers had to
be selective about their investment allocations.
Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth. In the U. S., the economic
expansion continued for the sixth consecutive year, while unemployment fell to
levels not seen since the early 1970s. European economies also emerged from a
sluggish growth environment to post impressive economic gains. In particular,
smaller European economies, such as Finland, Spain and the Netherlands, began to
expand quite
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 111 of
this report.
58
<PAGE>
rapidly during the year, as the delayed impact of low, long-term interest rates
stimulated economic activity. By the end of the reporting period, accelerating
economic growth spread to the larger European economies of Germany, France and
Italy.
The official agreement to launch a common European currency, the euro, at the
beginning of 1999 had several favorable effects on the markets of participating
Continental European countries. The conversion of interest rates among European
countries, as the agreement required, enabled countries with higher rates, such
as Spain and Portugal, to enjoy the added economic boost of lowering their
rates. Currency risk among member countries also declined, as the euro will set
the exchange rate among individual currencies.
Consumer price inflation in the United States and Europe was rather tame during
the period, surprising many economists because economic growth at the recent
pace often generates at least modest price pressures. The relatively soft price
environment was much of the reason for global interest rate declines. For
example, ten-year government bond yields in the U.S. declined 1.20%, from 5.84%
to 4.64% during the reporting period, while similar bonds in Germany fell 1.44%,
from 5.58% to 4.14%.
Japan was an exception to this healthy global environment. Approximately nine
years after the Japanese stock market bubble burst, Japanese banks are still
hampered by an enormous load of bad debt. During the year under review,
government policy-makers were unable to craft a solution to Japan's banking and
economic woes. As of October 31, Japan remains in a recession with little
near-term prospects of emerging again into positive growth territory.
Japan's ongoing troubles contributed greatly to the emerging markets crisis that
arose during the 12-month reporting period.
59
<PAGE>
The yen's persistent weakness and country's poor domestic demand for exports
from other Asian markets put enormous pressure on developing Asian economies.
Furthermore, once the crisis engulfed Thailand, Malaysia, South Korea and
Indonesia, Japanese banks were so overloaded with bad debt that they could not
lend to those in need.
Toward the end of the 12-month period under review, the crisis spread out of
Asia and began to affect other emerging markets. In particular, Russia, with its
precarious debt-financing needs, came under tremendous pressure. Russia declared
a moratorium on debt service and ultimately devalued its currency, the ruble,
seeking some stability. Naturally, these conditions negatively influenced the
debt instruments of other developing markets, especially those in Latin and
Central America.
The crisis also affected such industrialized economies as Canada, Australia and
New Zealand, which are highly dependent on commodity exports, or those that
conduct a high-level of trade with the emerging economies in crisis. They
experienced moderate declines in their currencies compared to the U.S. dollar,
and interest rates in these countries rose relative to U.S. rates to protect the
value of their currencies.
In general, over the annual period, global bond investors reacted to these
conditions by progressively reducing their exposure to emerging markets debt
securities, preferring to increase their holdings of high-quality, industrial
market government bonds.
60
<PAGE>
PORTFOLIO NOTES
Franklin Global Government Income Fund attempted to maximize its return during
the reporting period by allocating approximately 70%-80% of its assets to
intermediate- and long-term bonds in the industrial markets and about 20%-30% of
its assets to the highest-quality and most-widely traded bonds in the emerging
markets. We believed this combination of bonds offered the greatest opportunity
for higher, long-term returns at the cost of only modestly higher, short-term
volatility.
In general, the fund's allocation to emerging markets exerted a drag on
performance. Emerging market bonds underperformed higher-quality,
industrial-market bonds during the period and this, in turn, caused the fund to
underperform its benchmark index, the J.P. Morgan Global Government Bond Index,
for the 12-month period. However, the portfolio management team believes that
the fund's emerging markets' positions should offer superior returns over the
next three to five years, but may be volatile in the meantime.
The fund's geographic allocation was relatively stable during the period. As the
chart to the right indicates, the percentage of holdings in the North American
and European regions remained approximately the same at about 27% and 38%,
respectively. The allocation within Europe, however, did change slightly as we
reduced our positions in Sweden by approximately 3% and increased our allocation
in the U.K. by approximately 2%.
COUNTRY DISTRIBUTION
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
BASED ON TOTAL NET ASSETS
<TABLE>
<CAPTION>
COUNTRY 10/31/97 10/31/98
- --------------------------------------------
<S> <C> <C>
United States 24.3% 26.4%
Germany 12.3% 11.1%
Italy 11.7% 9.6%
Canada 8.5% 7.8%
Spain 7.0% 6.6%
Argentina 6.0% 6.2%
Brazil 5.8% 5.1%
United Kingdom 3.3% 4.7%
Mexico 5.0% 4.4%
Australia 4.2% 4.2%
Sweden 5.7% 2.9%
Venezuela 2.2% 2.7%
Turkey 0.0% 2.5%
Denmark 1.8% 2.1%
New Zealand 2.0% 1.8%
Bulgaria 0.0% 0.9%
Panama 0.2% 0.5%
Peru 0.0% 0.5%
</TABLE>
61
<PAGE>
The largest change in the fund's composition involved the amount of foreign
exchange hedging we conducted for the fund's European holdings. We designed
currency-hedging activities seeking to minimize the loss of value arising from
the decline in the fund's European currency-denominated bond holdings. At the
end of the reporting period, the fund's net U.S. dollar exposure (combining the
holding of securities plus the effect of foreign currency hedging) stood at 49%
of total net assets, up from 44% at the end of the previous fiscal year. The net
exposure to European currencies stood at 41% versus 46% for the same period.
Increased foreign currency hedging primarily resulted from the U.S. dollar's
appreciation from last year, as well as the portfolio manager's belief that the
global crisis atmosphere increased the likelihood that certain European
currencies would lose value against the dollar.
Near the end of the period, the fund took advantage of steep price declines of
selected emerging markets bonds and purchased bonds issued by Turkey, Bulgaria
and Peru.
MARKET OUTLOOK
From our current vantage point, the crisis in the emerging markets does not
appear to be over. Ongoing market volatility in emerging and developed markets
is likely until the real economic impact of the emerging markets crisis is
better understood. We see this period of increased volatility in lower-rated
bond issues as an attractive investment opportunity for those investors with
medium-term investment horizons and the willingness to tolerate moderately
higher risk. With that in mind, it
62
<PAGE>
is likely that we will add lower-rated bonds to our holdings in periods of
excessive pessimism.
Outside of the emerging markets crisis, the critical issue for global interest
rates will continue to be concern over the balance between global growth and
inflation. We believe that global inflation probably will be mild in the period
ahead, while global economic growth is likely to decline modestly but not enough
to lead to a recession. We consider this an ideal environment for high-quality
bonds, the fund's primary investments, and thus, we are positive for the
intermediate-term outlook for the fund.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ Thomas J. Dickson
Thomas J. Dickson
Portfolio Manager
Franklin Global Government Income Fund
63
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Franklin Global Government Income Fund - Class I share price, as measured by net
asset value, decreased 16.0 cents, from $8.41 on October 31, 1997, to $8.25 on
October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 61.0 cents ($0.61), including a special
1.0 cent ($0.01) year-end distribution. 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 $8.62 on October 31, 1998, and an
annualization of October's monthly dividend of 5.0 cents ($0.05) per share, your
fund's distribution rate was 6.96%.
The fund reported a +5.57% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total
64 Past performance is not predictive of future results.
<PAGE>
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 67, the fund delivered a +114.47% cumulative total return
since inception on March 15, 1988.
The graph on page 66 compares the performance of the fund's Class I shares with
that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes the maximum initial sales charge, all fund expenses and
account fees. If operating expenses such as Franklin Global Government Income
Fund's had been applied to the index, its performance would have been lower.
Please remember that an index is simply a measure of performance, and one cannot
invest in it directly.
DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME
FUND - CLASS I
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------
<S> <C>
November 5.0 cents
December 6.0 cents*
January 5.0 cents
February 5.0 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
- ----------------------------
TOTAL 61.0 CENTS
</TABLE>
* Includes a special 1.0 cent distribution.
Past performance is not predictive of future results. 65
<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
$10,000 INVESTMENT (11/1/88 - 10/31/98)
<TABLE>
<CAPTION>
Franklin Global
Government JP Morgan Global
Income Fund* Government
Class I Bond Index**
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $9,577 $10,000 JPM Global Govt $
TR
11/30/88 $9,746 $10,087 0.87%
12/31/88 $9,676 $10,026 -0.60%
1/31/89 $9,828 $9,927 -0.99%
2/28/89 $9,688 $9,911 -0.16%
3/31/89 $9,691 $9,827 -0.85%
4/30/89 $9,742 $9,990 1.66%
5/31/89 $9,599 $9,881 -1.09%
6/30/89 $9,916 $10,107 2.28%
7/31/89 $10,118 $10,509 3.98%
8/31/89 $10,170 $10,199 -2.95%
9/30/89 $10,062 $10,359 1.57%
10/31/89 $9,963 $10,493 1.29%
11/30/89 $10,059 $10,586 0.89%
12/31/89 $10,219 $10,709 1.16%
1/31/90 $10,137 $10,549 -1.49%
2/28/90 $9,992 $10,435 -1.08%
3/31/90 $10,113 $10,372 -0.61%
4/30/90 $10,051 $10,331 -0.39%
5/31/90 $10,262 $10,662 3.20%
6/30/90 $10,574 $10,855 1.81%
7/31/90 $10,846 $11,174 2.94%
8/31/90 $10,702 $11,087 -0.78%
9/30/90 $10,671 $11,190 0.93%
10/31/90 $10,720 $11,632 3.95%
11/30/90 $10,909 $11,838 1.77%
12/31/90 $10,995 $11,969 1.11%
1/31/91 $11,129 $12,241 2.27%
2/28/91 $11,443 $12,252 0.09%
3/31/91 $11,230 $11,868 -3.13%
4/30/91 $11,404 $12,012 1.21%
5/31/91 $11,542 $12,023 0.09%
6/30/91 $11,447 $11,863 -1.33%
7/31/91 $11,677 $12,114 2.12%
8/31/91 $11,745 $12,365 2.07%
9/30/91 $12,057 $12,816 3.65%
10/31/91 $12,223 $12,942 0.98%
11/30/91 $12,206 $13,153 1.63%
12/31/91 $12,559 $13,817 5.05%
1/31/92 $12,529 $13,546 -1.96%
2/29/92 $12,540 $13,507 -0.29%
3/31/92 $12,525 $13,383 -0.92%
4/30/92 $12,645 $13,494 0.83%
5/31/92 $12,916 $13,877 2.84%
6/30/92 $12,900 $14,256 2.73%
7/31/92 $13,009 $14,570 2.20%
8/31/92 $12,918 $14,957 2.66%
9/30/92 $12,332 $14,942 -0.10%
10/31/92 $12,558 $14,569 -2.50%
11/30/92 $12,303 $14,311 -1.77%
12/31/92 $12,528 $14,447 0.95%
1/31/93 $12,710 $14,691 1.69%
2/28/93 $12,953 $14,927 1.61%
3/31/93 $13,421 $15,157 1.54%
4/30/93 $13,817 $15,433 1.82%
5/31/93 $14,034 $15,532 0.64%
6/30/93 $13,979 $15,544 0.08%
7/31/93 $13,938 $15,551 0.04%
8/31/93 $14,284 $16,011 2.96%
9/30/93 $14,260 $16,181 1.06%
10/31/93 $14,672 $16,173 -0.05%
11/30/93 $14,332 $16,054 -0.73%
12/31/93 $14,862 $16,218 1.02%
1/31/94 $15,156 $16,371 0.94%
2/28/94 $14,695 $16,191 -1.10%
3/31/94 $14,084 $16,116 -0.46%
4/30/94 $14,076 $16,103 -0.08%
5/31/94 $14,180 $15,971 -0.82%
6/30/94 $13,474 $16,160 1.18%
7/31/94 $13,665 $16,312 0.94%
8/31/94 $13,807 $16,269 -0.26%
9/30/94 $13,780 $16,350 0.50%
10/31/94 $13,848 $16,596 1.50%
11/30/94 $13,832 $16,387 -1.26%
12/31/94 $13,709 $16,424 0.23%
1/31/95 $13,623 $16,756 2.02%
2/28/95 $13,817 $17,188 2.58%
3/31/95 $14,102 $18,063 5.09%
4/30/95 $14,442 $18,352 1.60%
5/31/95 $14,821 $18,864 2.79%
6/30/95 $14,875 $18,981 0.62%
7/31/95 $15,003 $19,071 0.47%
8/31/95 $15,041 $18,540 -2.78%
9/30/95 $15,375 $18,959 2.26%
10/31/95 $15,600 $19,145 0.98%
11/30/95 $15,845 $19,358 1.11%
12/31/95 $16,187 $19,598 1.24%
1/31/96 $16,224 $19,398 -1.02%
2/29/96 $15,955 $19,283 -0.59%
3/31/96 $16,014 $19,254 -0.15%
4/30/96 $16,189 $19,183 -0.37%
5/31/96 $16,305 $19,202 0.10%
6/30/96 $16,542 $19,371 0.88%
7/31/96 $16,562 $19,728 1.84%
8/31/96 $16,819 $19,811 0.42%
9/30/96 $17,120 $19,920 0.55%
10/31/96 $17,441 $20,314 1.98%
11/30/96 $17,886 $20,605 1.43%
12/31/96 $17,928 $20,460 -0.70%
1/31/97 $17,702 $19,949 -2.50%
2/28/97 $17,619 $19,811 -0.69%
3/31/97 $17,536 $19,661 -0.76%
4/30/97 $17,578 $19,550 -0.56%
5/31/97 $17,724 $20,012 2.36%
6/30/97 $17,935 $20,240 1.14%
7/31/97 $18,020 $20,165 -0.37%
8/31/97 $17,978 $20,141 -0.12%
9/30/97 $18,343 $20,588 2.22%
10/31/97 $18,234 $21,025 2.12%
11/30/97 $18,300 $20,772 -1.20%
12/31/97 $18,431 $20,749 -0.11%
1/31/98 $18,608 $20,957 1.00%
2/28/98 $18,829 $21,112 0.74%
3/31/98 $18,917 $20,954 -0.75%
4/30/98 $18,940 $21,276 1.54%
5/31/98 $18,895 $21,368 0.43%
6/30/98 $18,850 $21,428 0.28%
7/31/98 $18,895 $21,485 0.27%
8/31/98 $17,837 $22,078 2.76%
9/30/98 $18,762 $23,231 5.22%
10/31/98 $19,250 $23,751 2.24%
</TABLE>
The historical performance data shown pertains only to the fund's Class I
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
66 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (3/15/88)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.57% +30.76% +109.44% +114.47%
Average Annual Total Return(2) +1.12% +4.59% +7.20% +7.03%
Distribution Rate(3) 6.96%
30-Day Standardized Yield(4) 5.31%
</TABLE>
(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. Prior to July 1, 1994, fund shares were offered at a
lower initial sales charge with dividends reinvested at the offering price; thus
actual total returns would differ.
(3). Distribution rate is based on an annualization of October's 5.0 cent per
share monthly dividend and the maximum offering price of $8.62 on October 31,
1998.
(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
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.
Past performance is not predictive of future results. 67
<PAGE>
CLASS II
DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -------------------------------------------------------
<S> <C>
November 4.64 cents
December 5.64 cents*
January 4.60 cents
February 4.60 cents
March 4.60 cents
April 4.62 cents
May 4.62 cents
June 4.62 cents
July 4.63 cents
August 4.63 cents
September 4.63 cents
October 4.65 cents
- -------------------------------------------------------
TOTAL 56.48 CENTS
</TABLE>
* Includes a special 1.0 cent distribution.
Franklin Global Government Income Fund - Class II share price, as measured by
net asset value, decreased 15.0 cents, from $8.41 on October 31, 1997, to $8.26
on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 56.48 cents ($0.5648), including a
special 1.0 cent ($0.01) year-end distribution. 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 $8.34 on October 31, 1998, and an
annualization of October's monthly dividend of 4.65 cents ($0.0465) per share,
the fund's distribution rate was 6.69%.
The fund reported a +5.12% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include
sales charges. We have always maintained a long-term perspective when managing
the fund, and we encourage shareholders to
68 Past performance is not predictive of future results.
<PAGE>
view their investments in a similar manner. As you can see from the table on
page 71, the fund delivered a +29.74% cumulative total return since inception on
May 1, 1995.
The graph on page 70 compares the performance of the fund's Class II shares with
that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes sales charges, all fund expenses and account fees. If
operating expenses such as Franklin Global Government Income Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.
Past performance is not predictive of future results. 69
<PAGE>
TOTAL RETURN INDEX COMPARISON
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
$10,000 INVESTMENT (5/1/95 - 10/31/98)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL
GOVERNMENT JP MORGAN GLOBAL
INCOME FUND* GOVERNMENT
CLASS II BOND INDEX**
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/95 $9,901 $10,000 JPM Global Govt $
TR
5/31/95 $10,171 $10,279 2.79%
6/30/95 $10,204 $10,343 0.62%
7/31/95 $10,273 $10,391 0.47%
8/31/95 $10,294 $10,102 -2.78%
9/30/95 $10,518 $10,331 2.26%
10/31/95 $10,670 $10,432 0.98%
11/30/95 $10,834 $10,548 1.11%
12/31/95 $11,063 $10,679 1.24%
1/31/96 $11,084 $10,570 -1.02%
2/29/96 $10,894 $10,507 -0.59%
3/31/96 $10,929 $10,492 -0.15%
4/30/96 $11,029 $10,453 -0.37%
5/31/96 $11,117 $10,463 0.10%
6/30/96 $11,272 $10,555 0.88%
7/31/96 $11,280 $10,749 1.84%
8/31/96 $11,451 $10,795 0.42%
9/30/96 $11,650 $10,854 0.55%
10/31/96 $11,864 $11,069 1.98%
11/30/96 $12,163 $11,227 1.43%
12/31/96 $12,187 $11,149 -0.70%
1/31/97 $12,027 $10,870 -2.50%
2/28/97 $11,979 $10,795 -0.69%
3/31/97 $11,903 $10,713 -0.76%
4/30/97 $11,925 $10,653 -0.56%
5/31/97 $12,033 $10,904 2.36%
6/30/97 $12,170 $11,029 1.14%
7/31/97 $12,222 $10,988 -0.37%
8/31/97 $12,188 $10,975 -0.12%
9/30/97 $12,415 $11,218 2.22%
10/31/97 $12,336 $11,456 2.12%
11/30/97 $12,390 $11,319 -1.20%
12/31/97 $12,474 $11,306 -0.11%
1/31/98 $12,587 $11,419 1.00%
2/28/98 $12,716 $11,504 0.74%
3/31/98 $12,769 $11,417 -0.75%
4/30/98 $12,779 $11,593 1.54%
5/31/98 $12,743 $11,643 0.43%
6/30/98 $12,706 $11,676 0.28%
7/31/98 $12,731 $11,707 0.27%
8/31/98 $12,013 $12,030 2.76%
9/30/98 $12,630 $12,658 5.22%
10/31/98 $12,968 $12,942 2.24%
</TABLE>
The historical performance data shown pertains only to the fund's Class II
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
70 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.12% +21.25% +29.74%
Average Annual Total Return(2) +3.14% +6.27% +7.40%
Distribution Rate(3) 6.69%
30-Day Standardized Yield(4) 4.96%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.
(3). Distribution rate is based on an annualization of October's 4.65 cent per
share monthly dividend and the maximum offering price of $8.34 on October 31,
1998.
(4). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 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.
Past performance is not predictive of future results. 71
<PAGE>
ADVISOR CLASS
Franklin Global Government Income Fund - Advisor Class share price, as measured
by net asset value, decreased 15.0 cents, from $8.41 on October 31, 1997, to
$8.26 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
consisting of dividend income totaling 61.91 cents ($0.6191), including a
special 1.0 cent ($0.01) year-end distribution. Distributions will vary
depending on the fund's income, and past distributions are not indicative of
future trends.
Based on the net asset value price of $8.26 on October 31, 1998, and an
annualization of October's monthly dividend of 5.1 cents ($0.051) per share, the
fund's distribution rate was 7.41%.
The fund reported a +5.81% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
DIVIDEND DISTRIBUTIONS
FRANKLIN GLOBAL GOVERNMENT INCOME
FUND - ADVISOR CLASS
11/1/97 - 10/31/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----------------------------------------
<S> <C>
November 5.07 cents
December 6.08 cents*
January 5.07 cents
February 5.06 cents
March 5.07 cents
April 5.07 cents
May 5.07 cents
June 5.12 cents
July 5.07 cents
August 5.07 cents
September 5.06 cents
October 5.10 cents
- ----------------------------------------
TOTAL 61.91 CENTS
</TABLE>
* Includes a special 1.0 cent distribution.
72 Past performance is not predictive of future results.
<PAGE>
The graph on page 74 compares the performance of the fund's Advisor Class shares
with that of the JP Morgan Global Government Bond Index. Keep in mind that an
unmanaged market index has inherent performance differentials in comparison with
any fund. An index doesn't pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike an index, mutual funds are never fully invested because
they need cash on hand to redeem shares. In addition, the performance shown for
the fund includes all fund expenses and account fees. If operating expenses such
as Franklin Global Government Income Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
Past performance is not predictive of future results. 73
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Global
Government Income Fund -
Advisor Class
$10,000 Investment (11/1/88 - 10/31/98)
<TABLE>
<CAPTION>
Franklin Global JP Morgan Global
Government Income Fund Government
- Advisor Class Bond Index
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/88 $10,000 $10,000 JPM Global Govt $
TR
11/30/88 $10,176 $10,087 0.87%
12/31/88 $10,104 $10,026 -0.60%
1/31/89 $10,262 $9,927 -0.99%
2/28/89 $10,116 $9,911 -0.16%
3/31/89 $10,119 $9,827 -0.85%
4/30/89 $10,172 $9,990 1.66%
5/31/89 $10,023 $9,881 -1.09%
6/30/89 $10,354 $10,107 2.28%
7/31/89 $10,565 $10,509 3.98%
8/31/89 $10,620 $10,199 -2.95%
9/30/89 $10,507 $10,359 1.57%
10/31/89 $10,404 $10,493 1.29%
11/30/89 $10,504 $10,586 0.89%
12/31/89 $10,670 $10,709 1.16%
1/31/90 $10,585 $10,549 -1.49%
2/28/90 $10,433 $10,435 -1.08%
3/31/90 $10,560 $10,372 -0.61%
4/30/90 $10,495 $10,331 -0.39%
5/31/90 $10,715 $10,662 3.20%
6/30/90 $11,042 $10,855 1.81%
7/31/90 $11,325 $11,174 2.94%
8/31/90 $11,175 $11,087 -0.78%
9/30/90 $11,142 $11,190 0.93%
10/31/90 $11,194 $11,632 3.95%
11/30/90 $11,391 $11,838 1.77%
12/31/90 $11,480 $11,969 1.11%
1/31/91 $11,621 $12,241 2.27%
2/28/91 $11,949 $12,252 0.09%
3/31/91 $11,726 $11,868 -3.13%
4/30/91 $11,908 $12,012 1.21%
5/31/91 $12,052 $12,023 0.09%
6/30/91 $11,953 $11,863 -1.33%
7/31/91 $12,193 $12,114 2.12%
8/31/91 $12,264 $12,365 2.07%
9/30/91 $12,590 $12,816 3.65%
10/31/91 $12,763 $12,942 0.98%
11/30/91 $12,746 $13,153 1.63%
12/31/91 $13,114 $13,817 5.05%
1/31/92 $13,083 $13,546 -1.96%
2/29/92 $13,095 $13,507 -0.29%
3/31/92 $13,078 $13,383 -0.92%
4/30/92 $13,204 $13,494 0.83%
5/31/92 $13,487 $13,877 2.84%
6/30/92 $13,470 $14,256 2.73%
7/31/92 $13,583 $14,570 2.20%
8/31/92 $13,489 $14,957 2.66%
9/30/92 $12,877 $14,942 -0.10%
10/31/92 $13,113 $14,569 -2.50%
11/30/92 $12,847 $14,311 -1.77%
12/31/92 $13,082 $14,447 0.95%
1/31/93 $13,272 $14,691 1.69%
2/28/93 $13,525 $14,927 1.61%
3/31/93 $14,014 $15,157 1.54%
4/30/93 $14,427 $15,433 1.82%
5/31/93 $14,654 $15,532 0.64%
6/30/93 $14,597 $15,544 0.08%
7/31/93 $14,554 $15,551 0.04%
8/31/93 $14,915 $16,011 2.96%
9/30/93 $14,890 $16,181 1.06%
10/31/93 $15,320 $16,173 -0.05%
11/30/93 $14,965 $16,054 -0.73%
12/31/93 $15,519 $16,218 1.02%
1/31/94 $15,826 $16,371 0.94%
2/28/94 $15,345 $16,191 -1.10%
3/31/94 $14,707 $16,116 -0.46%
4/30/94 $14,698 $16,103 -0.08%
5/31/94 $14,807 $15,971 -0.82%
6/30/94 $14,070 $16,160 1.18%
7/31/94 $14,268 $16,312 0.94%
8/31/94 $14,417 $16,269 -0.26%
9/30/94 $14,389 $16,350 0.50%
10/31/94 $14,460 $16,596 1.50%
11/30/94 $14,443 $16,387 -1.26%
12/31/94 $14,315 $16,424 0.23%
1/31/95 $14,225 $16,756 2.02%
2/28/95 $14,427 $17,188 2.58%
3/31/95 $14,725 $18,063 5.09%
4/30/95 $15,080 $18,352 1.60%
5/31/95 $15,476 $18,864 2.79%
6/30/95 $15,533 $18,981 0.62%
7/31/95 $15,665 $19,071 0.47%
8/31/95 $15,706 $18,540 -2.78%
9/30/95 $16,055 $18,959 2.26%
10/31/95 $16,289 $19,145 0.98%
11/30/95 $16,545 $19,358 1.11%
12/31/95 $16,902 $19,598 1.24%
1/31/96 $16,941 $19,398 -1.02%
2/29/96 $16,660 $19,283 -0.59%
3/31/96 $16,721 $19,254 -0.15%
4/30/96 $16,904 $19,183 -0.37%
5/31/96 $17,026 $19,202 0.10%
6/30/96 $17,273 $19,371 0.88%
7/31/96 $17,293 $19,728 1.84%
8/31/96 $17,563 $19,811 0.42%
9/30/96 $17,876 $19,920 0.55%
10/31/96 $18,212 $20,314 1.98%
11/30/96 $18,676 $20,605 1.43%
12/31/96 $18,720 $20,460 -0.70%
1/31/97 $18,486 $19,949 -2.50%
2/28/97 $18,422 $19,811 -0.69%
3/31/97 $18,315 $19,661 -0.76%
4/30/97 $18,382 $19,550 -0.56%
5/31/97 $18,537 $20,012 2.36%
6/30/97 $18,758 $20,240 1.14%
7/31/97 $18,849 $20,165 -0.37%
8/31/97 $18,806 $20,141 -0.12%
9/30/97 $19,167 $20,588 2.22%
10/31/97 $19,055 $21,025 2.12%
11/30/97 $19,148 $20,772 -1.20%
12/31/97 $19,288 $20,749 -0.11%
1/31/98 $19,474 $20,957 1.00%
2/28/98 $19,683 $21,112 0.74%
3/31/98 $19,801 $20,954 -0.75%
4/30/98 $19,826 $21,276 1.54%
5/31/98 $19,757 $21,368 0.43%
6/30/98 $19,737 $21,428 0.28%
7/31/98 $19,786 $21,485 0.27%
8/31/98 $18,681 $22,078 2.76%
9/30/98 $19,626 $23,231 5.22%
10/31/98 $20,162 $23,751 2.24%
</TABLE>
Franklin Global
Government Income Fund JP Morgan Global Government Bond Index
The historical performance data shown pertains only to the fund's Advisor Class
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.
*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 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.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
74 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Global Government Income Fund - Advisor Class
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR* 10-YEAR* (3/15/88)*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.81% +31.45% +110.56% +115.65%
Average Annual Total Return(1) +5.81% +5.62% +7.73% +7.50%
Distribution Rate(2) 7.41%
30-Day Standardized Yield(3) 5.64%
</TABLE>
*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 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 +8.44%.
(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 October's 5.1 cent per
share monthly dividend and the net asset value price of $8.26 on October 31,
1998.
(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 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.
Past performance is not predictive of future results. 75
<PAGE>
[FUND CATEGORY PYRAMID GRAPHIC]
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: 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.
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
The economic climate for bond investors was close to ideal for the 12 months
under review. Slower growth, lower inflation, evaporating federal budget
deficits and price stability relative to equity and overseas investments helped
U.S. Treasury note and bond prices. The economy, which grew at a better than 4%
rate during the third quarter of 1997, slowed to an annualized growth rate of
only 1.8% in the second quarter of 1998, easing some building pressures in the
labor market and allaying fears of higher inflation in the future. The economy
added an average of 199,000 jobs per month over the three months ending
September 1998, down substantially from the beginning of the year when jobs
increased by approximately 350,000 per month. Consequently, the unemployment
rate, which was as low as 4.3% in May 1998, rose to 4.6% at the end of the
reporting period. Meanwhile, inflation fell. Prices at the consumer level, as
measured by the Consumer Price Index on a
You will find a complete listing of the fund's portfolio holdings,
including dollar value and number of shares or principal amount,
76 beginning on page 116 of this report.
<PAGE>
year-over-year basis, rose only 1.5% as of September 30, 1998, down from an
already low 2.1% in October 1997.
Indeed, slower growth and declining inflation enabled the Federal Reserve Board
to lower the federal funds target rate twice by 0.25%, to 5.00%, since September
29, as the bigger risk to the economy was slower-than-desired growth, not
inflation. Short-to-intermediate market interest rates fell approximately 1.5%
or 150 basis points over the year ended October 31, 1998. As of October 31,
1998, the yields on the U.S. Treasury 2-year note and the U.S. Treasury 5-year
note were 4.12% and 4.24%, respectively. Although these nominal yields are not
as high as in recent years, the current, low-inflation environment, excellent
inflation outlook going forward and federal budget surplus, which should reduce
the government's borrowing needs, help to justify these market rates.
PORTFOLIO NOTES
We are pleased to report Franklin Short-Intermediate U.S. Government Securities
Fund's Class I shares had a cumulative total return of +7.38% for the 12-month
period ended October 31, 1998. Although this is slightly below the Lehman
Brothers Short U.S. Treasury 1-5 Year Index's return of +8.70%, it far exceeded
the rate of inflation. The fund underperformed relative to the Lehman index
mainly because at times throughout the year, the fund may have invested more
conservatively than the index, as preservation of capital is the fund's
secondary investment goal. Also, the index is unmanaged, has no expenses, and
one cannot invest in it directly.
"The economic climate for bond investors was close to ideal for the 12 months
under review."
77
<PAGE>
In an effort to maintain value during the past few turbulent months, the fund
invested entirely in U.S. Treasury securities, and on October 31, 1998, had an
average weighted maturity of a little more than two years. This average maturity
is slightly conservative given our prospectus mandate to stay between two and
five years. However, we feel the caution is necessary at this time due to the
recent high volatility in Treasury prices and yields. Going forward, we may
extend the maturity of the portfolio holdings once financial market conditions
settle, given the excellent economic environment for fixed-income investments.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Sincerely,
/s/ David Capurro
David Capurro
Portfolio Manager
Franklin Short-Intermediate
U.S. Government Securities Fund
78
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Franklin Short-Intermediate U.S. Government Securities Fund - Class I share
price, as measured by net asset value, increased 17.0 cents, from $10.29 on
October 31, 1997, to $10.46 on October 31, 1998.
During the reporting period, shareholders received per-share distributions
totaling 56.7 cents ($0.567) 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 $10.70 on October 31, 1998, and an
annualization of the current monthly dividend of 4.5 cents ($0.045) per share,
your fund's distribution rate was 5.05%.
The fund reported a +7.38% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions, and does not include the
initial sales charge. We have always maintained a long-term perspective when
managing the fund, and we encourage shareholders to view their investments in a
similar manner. As you can see from the table on page 81, the fund delivered a
+118.84% cumulative total return since inception on April 15, 1987.
DIVIDEND DISTRIBUTIONS
Franklin Short-Intermediate
U.S. Government Securities Fund
Class I
11/1/97 to 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------
<S> <C>
November 4.8 cents
December 4.8 cents
January 4.8 cents
February 4.8 cents
March 4.8 cents
April 4.8 cents
May 4.8 cents
June 4.8 cents
July 4.8 cents
August 4.5 cents
September 4.5 cents
October 4.5 cents
- -----------------------------------------------------
TOTAL 56.7 CENTS
</TABLE>
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
Past performance is not predictive of future results. 79
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Short-Intermediate U.S. Government Securities Fund - Class I
$10,000 Investment (11/1/88-10/31/98)
<TABLE>
<CAPTION>
Short- Lehman Brothers
Intermediate Short 1-5
USG - Class I US Tsy CPI
------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
11/1/88 $ 9,771 $10,000 $ 10,000
Nov-88 $ 9,736 $ 9,948 -0.52% $10,008 0.08%
Dec-88 $ 9,758 $ 9,960 0.12% $10,025 0.17%
Jan-89 $ 9,829 $10,043 0.83% $10,075 0.50%
Feb-89 $ 9,832 $10,026 -0.17% $10,116 0.41%
Mar-89 $ 9,874 $10,069 0.43% $10,175 0.58%
Apr-89 $10,025 $10,255 1.85% $10,241 0.65%
May-89 $10,146 $10,415 1.56% $10,300 0.57%
Jun-89 $10,307 $10,642 2.18% $10,324 0.24%
Jul-89 $10,440 $10,829 1.76% $10,349 0.24%
Aug-89 $10,352 $10,723 -0.98% $10,366 0.16%
Sep-89 $10,404 $10,779 0.52% $10,399 0.32%
Oct-89 $10,581 $10,974 1.81% $10,449 0.48%
Nov-89 $10,666 $11,075 0.92% $10,474 0.24%
Dec-89 $10,699 $11,115 0.36% $10,491 0.16%
Jan-90 $10,712 $11,091 -0.21% $10,599 1.03%
Feb-90 $10,777 $11,141 0.45% $10,648 0.47%
Mar-90 $10,801 $11,164 0.20% $10,707 0.55%
Apr-90 $10,803 $11,165 0.01% $10,724 0.16%
May-90 $10,977 $11,365 1.79% $10,749 0.23%
Jun-90 $11,099 $11,498 1.17% $10,807 0.54%
Jul-90 $11,222 $11,652 1.34% $10,848 0.38%
Aug-90 $11,246 $11,664 0.11% $10,948 0.92%
Sep-90 $11,349 $11,764 0.85% $11,040 0.84%
Oct-90 $11,474 $11,911 1.25% $11,106 0.60%
Nov-90 $11,589 $12,048 1.15% $11,130 0.22%
Dec-90 $11,732 $12,203 1.29% $11,130 0.00%
Jan-91 $11,825 $12,323 0.98% $11,197 0.60%
Feb-91 $11,896 $12,397 0.60% $11,214 0.15%
Mar-91 $11,968 $12,473 0.62% $11,231 0.15%
Apr-91 $12,076 $12,601 1.02% $11,248 0.15%
May-91 $12,137 $12,675 0.59% $11,281 0.30%
Jun-91 $12,167 $12,705 0.24% $11,314 0.29%
Jul-91 $12,268 $12,832 1.00% $11,331 0.15%
Aug-91 $12,441 $13,044 1.65% $11,364 0.29%
Sep-91 $12,580 $13,222 1.36% $11,414 0.44%
Oct-91 $12,720 $13,376 1.17% $11,431 0.15%
Nov-91 $12,836 $13,527 1.13% $11,464 0.29%
Dec-91 $13,146 $13,789 1.93% $11,472 0.07%
Jan-92 $12,964 $13,718 -0.51% $11,489 0.15%
Feb-92 $12,994 $13,754 0.26% $11,531 0.36%
Mar-92 $12,932 $13,721 -0.24% $11,590 0.51%
Apr-92 $13,045 $13,854 0.97% $11,606 0.14%
May-92 $13,236 $14,023 1.22% $11,622 0.14%
Jun-92 $13,440 $14,205 1.30% $11,664 0.36%
Jul-92 $13,723 $14,427 1.56% $11,688 0.21%
Aug-92 $13,865 $14,573 1.01% $11,721 0.28%
Sep-92 $14,107 $14,749 1.21% $11,754 0.28%
Oct-92 $13,880 $14,601 -1.00% $11,795 0.35%
Nov-92 $13,796 $14,552 -0.34% $11,812 0.14%
Dec-92 $14,018 $14,715 1.12% $11,803 -0.07%
Jan-93 $14,279 $14,947 1.58% $11,861 0.49%
Feb-93 $14,528 $15,122 1.17% $11,903 0.35%
Mar-93 $14,588 $15,174 0.34% $11,944 0.35%
Apr-93 $14,675 $15,289 0.76% $11,978 0.28%
May-93 $14,626 $15,237 -0.34% $11,995 0.14%
Jun-93 $14,816 $15,401 1.08% $12,011 0.14%
Jul-93 $14,835 $15,429 0.18% $12,011 0.00%
Aug-93 $15,063 $15,614 1.20% $12,045 0.28%
Sep-93 $15,110 $15,666 0.33% $12,070 0.21%
Oct-93 $15,135 $15,703 0.24% $12,120 0.41%
Nov-93 $15,048 $15,669 -0.22% $12,128 0.07%
Dec-93 $15,105 $15,732 0.40% $12,128 0.00%
Jan-94 $15,259 $15,862 0.83% $12,161 0.27%
Feb-94 $15,027 $15,700 -1.02% $12,202 0.34%
Mar-94 $14,824 $15,546 -0.98% $12,244 0.34%
Apr-94 $14,706 $15,456 -0.58% $12,261 0.14%
May-94 $14,717 $15,473 0.11% $12,270 0.07%
Jun-94 $14,714 $15,497 0.15% $12,311 0.34%
Jul-94 $14,889 $15,665 1.09% $12,345 0.27%
Aug-94 $14,921 $15,714 0.31% $12,394 0.40%
Sep-94 $14,821 $15,629 -0.54% $12,427 0.27%
Oct-94 $14,842 $15,649 0.13% $12,436 0.07%
Nov-94 $14,759 $15,571 -0.50% $12,452 0.13%
Dec-94 $14,780 $15,607 0.23% $12,452 0.00%
Jan-95 $14,995 $15,844 1.52% $12,502 0.40%
Feb-95 $15,226 $16,112 1.69% $12,552 0.40%
Mar-95 $15,307 $16,202 0.56% $12,593 0.33%
Apr-95 $15,439 $16,369 1.03% $12,635 0.33%
May-95 $15,738 $16,746 2.30% $12,660 0.20%
Jun-95 $15,825 $16,846 0.60% $12,686 0.20%
Jul-95 $15,866 $16,883 0.22% $12,686 0.00%
Aug-95 $15,954 $16,998 0.68% $12,719 0.26%
Sep-95 $16,027 $17,093 0.56% $12,744 0.20%
Oct-95 $16,162 $17,259 0.97% $12,786 0.33%
Nov-95 $16,298 $17,438 1.04% $12,777 -0.07%
Dec-95 $16,419 $17,590 0.87% $12,768 -0.07%
Jan-96 $16,524 $17,750 0.91% $12,844 0.59%
Feb-96 $16,456 $17,628 -0.69% $12,885 0.32%
Mar-96 $16,420 $17,571 -0.32% $12,952 0.52%
Apr-96 $16,415 $17,556 -0.09% $13,002 0.39%
May-96 $16,428 $17,568 0.07% $13,027 0.19%
Jun-96 $16,554 $17,717 0.85% $13,035 0.06%
Jul-96 $16,599 $17,779 0.35% $13,059 0.19%
Aug-96 $16,644 $17,825 0.26% $13,084 0.19%
Sep-96 $16,788 $18,018 1.08% $13,126 0.32%
Oct-96 $16,966 $18,265 1.37% $13,168 0.32%
Nov-96 $17,111 $18,435 0.93% $13,193 0.19%
Dec-96 $17,075 $18,389 -0.25% $13,193 0.00%
Jan-97 $17,138 $18,469 0.44% $13,235 0.32%
Feb-97 $17,168 $18,503 0.18% $13,276 0.31%
Mar-97 $17,131 $18,445 -0.31% $13,310 0.25%
Apr-97 $17,263 $18,622 0.96% $13,326 0.12%
May-97 $17,378 $18,756 0.72% $13,318 -0.06%
Jun-97 $17,494 $18,901 0.77% $13,334 0.12%
Jul-97 $17,696 $19,179 1.47% $13,350 0.12%
Aug-97 $17,693 $19,154 -0.13% $13,375 0.19%
Sep-97 $17,828 $19,328 0.91% $13,408 0.25%
Oct-97 $17,963 $19,512 0.95% $13,442 0.25%
Nov-97 $17,977 $19,551 0.20% $13,434 -0.06%
Dec-97 $18,114 $19,697 0.75% $13,418 -0.12%
Jan-98 $18,304 $19,930 1.18% $13,443 0.19%
Feb-98 $18,301 $19,922 -0.04% $13,469 0.19%
Mar-98 $18,351 $19,988 0.33% $13,494 0.19%
Apr-98 $18,436 $20,084 0.48% $13,519 0.18%
May-98 $18,523 $20,204 0.60% $13,543 0.18%
Jun-98 $18,609 $20,319 0.57% $13,559 0.12%
Jul-98 $18,696 $20,407 0.43% $13,575 0.12%
Aug-98 $18,942 $20,731 1.59% $13,592 0.12%
Sep-98 $19,207 $21,123 1.89% $13,608 0.12%
Oct-98 $19,289 $21,209 0.41% $13,641 0.24%
Total Return 92.89% 112. 09% 36.41%
</TABLE>
The historical performance data shown pertains only to the fund's Class I
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value of
an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
The graph above compares the performance of the fund's Class I shares with that
of the Lehman Brothers Short U.S. Treasury 1-5 Year Index.+ Keep in mind
that an unmanaged market index has inherent performance differentials in
comparison with any fund. An index doesn't pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never
fully invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes the initial maximum sales charge, all
fund expenses and account fees. If operating expenses such
+The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests
in U.S. government securities and Treasuries with maturities from one to five
years.
80 Past performance is not predictive of future results.
<PAGE>
Performance
Franklin Short-Intermediate U.S. Government Securities Fund - Class I
Periods ended 10/31/98
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year 10-Year (4/15/87)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +7.38% +27.45% +97.40% +118.84%
Average Annual Total Return(2) +4.94% +4.49% +6.79% +6.81%
Distribution Rate(3) 5.05%
30-Day Standardized Yield(4) 3.73%
</TABLE>
(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 current 4.5 cent per
share monthly dividend and the maximum offering price of $10.70 on October 31,
1998.
(4) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
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.
as Franklin Short-Intermediate U.S. Government Securities Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
Past performance is not predictive of future results. 81
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Short-Intermediate
U.S. Government Securities Fund
11/1/97 - 10/31/98*
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------------------------------
<S> <C>
November 4.88 cents
December 4.87 cents
January 4.94 cents
February 4.88 cents
March 4.88 cents
April 4.85 cents
May 4.85 cents
June 4.86 cents
July 4.88 cents
August 4.59 cents
September 4.59 cents
October 4.58 cents
- ------------------------------------------------------
TOTAL 57.65 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
ADVISOR CLASS
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
share price, as measured by net asset value, increased 15.0 cents, from $10.30
on October 31, 1997, to $10.45 on October 31, 1998.
During the reporting period, shareholders received per-share distributions of
57.65 cents ($0.5765) in dividend income. Distributions will vary depending on
the fund's income and past distributions are not indicative of future trends.
Based on the net asset value price of $10.45 on October 31, 1998, and an
annualization of the current monthly dividend of 4.58 cents ($0.0458) per share,
the fund's distribution rate was 5.27%.
The fund reported a +7.38% cumulative total return for the one-year period ended
October 31, 1998. Cumulative total return measures the change in value of an
investment, assuming reinvestment of all distributions.
The graph on page 84 compares the performance of the fund's Advisor Class shares
with that of the Lehman Brothers Short
82 Past performance is not predictive of future results.
<PAGE>
U.S. Treasury 1-5 Year Index.* Keep in mind that an unmanaged market index has
inherent performance differentials in comparison with any fund. An index doesn't
pay management fees to cover salaries of securities analysts or portfolio
managers, or pay commissions or market spreads to buy and sell securities.
Unlike an index, mutual funds are never fully invested because they need cash on
hand to redeem shares. In addition, the performance shown for the fund includes
all fund expenses and account fees. If operating expenses such as Franklin
Short-Intermediate U.S. Government Securities Fund's had been applied to the
index, its performance would have been lower. Please remember that an index is
simply a measure of performance, and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
*The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to five
years.
Past performance is not predictive of future results. 83
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Short-Intermediate U.S. Government
Securities Fund - Advisor Class
$10,000 Investment (11/1/88 - 10/31/98)
<TABLE>
<CAPTION>
Short- Lehman Brothers
Intermediate Short 1-5
USG - Adv. Class US Tsy CPI
---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
11/1/88 $10,000 $10,000 $10,000
Nov-88 $9,964 $9,948 -0.52% $10,008 0.08%
Dec-88 $9,987 $9,960 0.12% $10,025 0.17%
Jan-89 $10,059 $10,043 0.83% $10,075 0.50%
Feb-89 $10,062 $10,026 -0.17% $10,116 0.41%
Mar-89 $10,105 $10,069 0.43% $10,175 0.58%
Apr-89 $10,259 $10,255 1.85% $10,241 0.65%
May-89 $10,383 $10,415 1.56% $10,300 0.57%
Jun-89 $10,549 $10,642 2.18% $10,324 0.24%
Jul-89 $10,685 $10,829 1.76% $10,349 0.24%
Aug-89 $10,594 $10,723 -0.98% $10,366 0.16%
Sep-89 $10,648 $10,779 0.52% $10,399 0.32%
Oct-89 $10,829 $10,974 1.81% $10,449 0.48%
Nov-89 $10,915 $11,075 0.92% $10,474 0.24%
Dec-89 $10,949 $11,115 0.36% $10,491 0.16%
Jan-90 $10,962 $11,091 -0.21% $10,599 1.03%
Feb-90 $11,029 $11,141 0.45% $10,648 0.47%
Mar-90 $11,054 $11,164 0.20% $10,707 0.55%
Apr-90 $11,056 $11,165 0.01% $10,724 0.16%
May-90 $11,234 $11,365 1.79% $10,749 0.23%
Jun-90 $11,359 $11,498 1.17% $10,807 0.54%
Jul-90 $11,485 $11,652 1.34% $10,848 0.38%
Aug-90 $11,510 $11,664 0.11% $10,948 0.92%
Sep-90 $11,614 $11,764 0.85% $11,040 0.84%
Oct-90 $11,743 $11,911 1.25% $11,106 0.60%
Nov-90 $11,860 $12,048 1.15% $11,130 0.22%
Dec-90 $12,006 $12,203 1.29% $11,130 0.00%
Jan-91 $12,102 $12,323 0.98% $11,197 0.60%
Feb-91 $12,175 $12,397 0.60% $11,214 0.15%
Mar-91 $12,249 $12,473 0.62% $11,231 0.15%
Apr-91 $12,359 $12,601 1.02% $11,248 0.15%
May-91 $12,421 $12,675 0.59% $11,281 0.30%
Jun-91 $12,452 $12,705 0.24% $11,314 0.29%
Jul-91 $12,555 $12,832 1.00% $11,331 0.15%
Aug-91 $12,733 $13,044 1.65% $11,364 0.29%
Sep-91 $12,875 $13,222 1.36% $11,414 0.44%
Oct-91 $13,018 $13,376 1.17% $11,431 0.15%
Nov-91 $13,136 $13,527 1.13% $11,464 0.29%
Dec-91 $13,454 $13,789 1.93% $11,472 0.07%
Jan-92 $13,268 $13,718 -0.51% $11,489 0.15%
Feb-92 $13,299 $13,754 0.26% $11,531 0.36%
Mar-92 $13,235 $13,721 -0.24% $11,590 0.51%
Apr-92 $13,351 $13,854 0.97% $11,606 0.14%
May-92 $13,546 $14,023 1.22% $11,622 0.14%
Jun-92 $13,754 $14,205 1.30% $11,664 0.36%
Jul-92 $14,044 $14,427 1.56% $11,688 0.21%
Aug-92 $14,190 $14,573 1.01% $11,721 0.28%
Sep-92 $14,438 $14,749 1.21% $11,754 0.28%
Oct-92 $14,205 $14,601 -1.00% $11,795 0.35%
Nov-92 $14,119 $14,552 -0.34% $11,812 0.14%
Dec-92 $14,347 $14,715 1.12% $11,803 -0.07%
Jan-93 $14,614 $14,947 1.58% $11,861 0.49%
Feb-93 $14,868 $15,122 1.17% $11,903 0.35%
Mar-93 $14,929 $15,174 0.34% $11,944 0.35%
Apr-93 $15,018 $15,289 0.76% $11,978 0.28%
May-93 $14,968 $15,237 -0.34% $11,995 0.14%
Jun-93 $15,163 $15,401 1.08% $12,011 0.14%
Jul-93 $15,183 $15,429 0.18% $12,011 0.00%
Aug-93 $15,415 $15,614 1.20% $12,045 0.28%
Sep-93 $15,464 $15,666 0.33% $12,070 0.21%
Oct-93 $15,489 $15,703 0.24% $12,120 0.41%
Nov-93 $15,401 $15,669 -0.22% $12,128 0.07%
Dec-93 $15,459 $15,732 0.40% $12,128 0.00%
Jan-94 $15,616 $15,862 0.83% $12,161 0.27%
Feb-94 $15,379 $15,700 -1.02% $12,202 0.34%
Mar-94 $15,171 $15,546 -0.98% $12,244 0.34%
Apr-94 $15,050 $15,456 -0.58% $12,261 0.14%
May-94 $15,062 $15,473 0.11% $12,270 0.07%
Jun-94 $15,059 $15,497 0.15% $12,311 0.34%
Jul-94 $15,237 $15,665 1.09% $12,345 0.27%
Aug-94 $15,270 $15,714 0.31% $12,394 0.40%
Sep-94 $15,168 $15,629 -0.54% $12,427 0.27%
Oct-94 $15,189 $15,649 0.13% $12,436 0.07%
Nov-94 $15,105 $15,571 -0.50% $12,452 0.13%
Dec-94 $15,126 $15,607 0.23% $12,452 0.00%
Jan-95 $15,346 $15,844 1.52% $12,502 0.40%
Feb-95 $15,582 $16,112 1.69% $12,552 0.40%
Mar-95 $15,665 $16,202 0.56% $12,593 0.33%
Apr-95 $15,800 $16,369 1.03% $12,635 0.33%
May-95 $16,106 $16,746 2.30% $12,660 0.20%
Jun-95 $16,196 $16,846 0.60% $12,686 0.20%
Jul-95 $16,238 $16,883 0.22% $12,686 0.00%
Aug-95 $16,328 $16,998 0.68% $12,719 0.26%
Sep-95 $16,402 $17,093 0.56% $12,744 0.20%
Oct-95 $16,541 $17,259 0.97% $12,786 0.33%
Nov-95 $16,680 $17,438 1.04% $12,777 -0.07%
Dec-95 $16,803 $17,590 0.87% $12,768 -0.07%
Jan-96 $16,911 $17,750 0.91% $12,844 0.59%
Feb-96 $16,842 $17,628 -0.69% $12,885 0.32%
Mar-96 $16,804 $17,571 -0.32% $12,952 0.52%
Apr-96 $16,799 $17,556 -0.09% $13,002 0.39%
May-96 $16,812 $17,568 0.07% $13,027 0.19%
Jun-96 $16,941 $17,717 0.85% $13,035 0.06%
Jul-96 $16,988 $17,779 0.35% $13,059 0.19%
Aug-96 $17,034 $17,825 0.26% $13,084 0.19%
Sep-96 $17,181 $18,018 1.08% $13,126 0.32%
Oct-96 $17,363 $18,265 1.37% $13,168 0.32%
Nov-96 $17,512 $18,435 0.93% $13,193 0.19%
Dec-96 $17,474 $18,389 -0.25% $13,193 0.00%
Jan-97 $17,535 $18,469 0.44% $13,235 0.32%
Feb-97 $17,567 $18,503 0.18% $13,276 0.31%
Mar-97 $17,530 $18,445 -0.31% $13,310 0.25%
Apr-97 $17,666 $18,622 0.96% $13,326 0.12%
May-97 $17,785 $18,756 0.72% $13,318 -0.06%
Jun-97 $17,903 $18,901 0.77% $13,334 0.12%
Jul-97 $18,112 $19,179 1.47% $13,350 0.12%
Aug-97 $18,109 $19,154 -0.13% $13,375 0.19%
Sep-97 $18,249 $19,328 0.91% $13,408 0.25%
Oct-97 $18,389 $19,512 0.95% $13,442 0.25%
Nov-97 $18,423 $19,551 0.20% $13,434 -0.06%
Dec-97 $18,564 $19,697 0.75% $13,418 -0.12%
Jan-98 $18,762 $19,930 1.18% $13,443 0.19%
Feb-98 $18,759 $19,922 -0.04% $13,469 0.19%
Mar-98 $18,794 $19,988 0.33% $13,494 0.19%
Apr-98 $18,864 $20,084 0.48% $13,519 0.18%
May-98 $18,972 $20,204 0.60% $13,543 0.18%
Jun-98 $19,061 $20,319 0.57% $13,559 0.12%
Jul-98 $19,152 $20,407 0.43% $13,575 0.12%
Aug-98 $19,387 $20,731 1.59% $13,592 0.12%
Sep-98 $19,679 $21,123 1.89% $13,608 0.12%
Oct-98 $19,752 $21,209 0.41% $13,641 0.24%
Total Return 97.52% 112.09% 36.41%
</TABLE>
The historical performance data shown pertains only to the fund's Advisor Class
shares. The fund offers another share class subject to different fees and
expenses, which affect its performance. See the prospectus for details.
*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.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
84 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Periods ended 10/31/98
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year* 10-Year* (4/15/87)*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +7.38% +27.52% +97.52% +118.97%
Average Annual Total Return(1) +7.38% +4.98% +7.04% +7.02%
Distribution Rate(2) 5.27%
30-Day Standardized Yield(3) 3.91%
</TABLE>
*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 +13.12%.
(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 4.58 cent per
share monthly dividend and the net asset value price of $10.45 on October 31,
1998.
(3) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 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.
Past performance is not predictive of future results.
85
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 9.96 $ 9.87 $ 9.82 $ 9.70 $ 10.04
----------------------------------------------------------------
Income from investment operations:
Net investment income ............................... .54 .56 .54 .58 .45
Net realized and unrealized gains (losses) .......... (.01) .09 .06 .12 (.34)
----------------------------------------------------------------
Total from investment operations ..................... .53 .65 .60 .70 .11
----------------------------------------------------------------
Less distributions from net investment income ........ (.54) (.56) (.55) (.58) (.45)
----------------------------------------------------------------
Net asset value, end of year ......................... $ 9.95 $ 9.96 $ 9.87 $ 9.82 $ 9.70
================================================================
Total return* ........................................ 5.47% 6.75% 6.23% 7.57% 1.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 28,892 $ 21,137 $ 15,707 $17,014 $24,564
Ratios to average net assets:
Expenses** .......................................... .84% .81% .90% .70% .45%
Expenses excluding waiver and payments by affiliate** 1.03% 1.00% 1.12% .99% .85%
Net investment income ............................... 5.35% 5.64% 5.54% 5.82% 4.45%
================================================================
</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.
**Includes the Fund's share of the Portfolio's allocated expenses.
See notes to financial statements.
86
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE RATE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.3%
Adjustable Rate Securities Portfolio (Note 1) 2,911,787 $28,943,162
-----------
TOTAL INVESTMENTS (COST $28,862,032) 100.2% 28,943,162
-----------
OTHER ASSETS, LESS LIABILITIES (.2)% (50,782)
-----------
NET ASSETS 100.0% $28,892,380
===========
</TABLE>
See notes to financial statements. 87
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 9.48 $ 9.37 $ 9.34 $ 9.20 $ 9.77
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .51 .55 .56 .54 .35
Net realized and unrealized gains (losses) . (.12) .10 .03 .14 (.61)
-------------------------------------------------------------------------------
Total from investment operations ............ .39 .65 .59 .68 (.26)
-------------------------------------------------------------------------------
Less distributions from net investment income (.51) (.54) (.56) (.54) (.31)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 9.36 $ 9.48 $ 9.37 $ 9.34 $ 9.20
===============================================================================
Total return* ............................... 4.26% 7.18% 6.54% 7.57% (2.65%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 298,298 $ 334,990 $ 397,078 $ 509,371 $ 700,617
Ratios to average net assets:
Expenses** ................................. .76% .75% .69% .61% .42%
Expenses excluding waiver and payments by
affiliate** ............................. .93% .93% .86% .86% .82%
Net investment income ...................... 5.38% 5.81% 5.87% 5.76% 3.67%
</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.
**Includes the Fund's share of the Portfolio's allocated expenses.
88 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
MUTUAL FUNDS 100.4%
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------
MUTUAL FUNDS 100.4%
<S> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1) 31,958,938 $ 299,455,245
-------------
TOTAL INVESTMENTS (COST $321,282,773) 100.4% .............. 299,455,245
-------------
OTHER ASSETS, LESS LIABILITIES (.4)% ...................... (1,157,654)
------------
NET ASSETS 100.0% ......................................... $ 298,297,591
=============
</TABLE>
See notes to financial statements. 89
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN BOND FUND
<TABLE>
<CAPTION>
Class I
1998***
-------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................................. $ 10.00
Income from investment operations:
Net investment income ............................................... .12
Net realized and unrealized gains ................................... .30
--------
Total from investment operations ..................................... .42
--------
Less distributions from net investment income ........................ (.05)
--------
Net asset value, end of period ....................................... $ 10.37
========
Total return* ........................................................ 4.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $4,232
Ratios to average net assets:
Expenses ............................................................ .50%**
Expenses excluding waiver and payments by affiliate ................. 1.29%**
Net investment income ............................................... 5.21%**
Portfolio turnover rate .............................................. 23.19%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***For the period August 3, 1998 (effective date) to October 31, 1998. Based on
average weighted shares outstanding.
90
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN BOND FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
1998***
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.00
--------
Income from investment operations:
Net investment income ........................ .12
Net realized and unrealized gains ............ .31
--------
Total from investment operations .............. .43
--------
Less distributions from net investment income . (.05)
--------
Net asset value, end of period ................ $ 10.38
========
Total return* ................................. 4.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $ 31,588
Ratios to average net assets:
Expenses .......................................... .25%**
Expenses excluding waiver and payments by affiliate 1.04%**
Net investment income ............................. 5.46%**
Portfolio turnover rate ............................ 23.19%
</TABLE>
*Total return is not annualized.
**Annualized.
***For the period August 3, 1998 (effective date) to October 31, 1998. Based on
average weighted shares outstanding.
See notes to financial statements. 91
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS 93.6%
BONDS 34.2%
ADJUSTABLE RATE MORTGAGES SECURITIES 4.8%
PHMS 1988-4 A, 7.915%, 7/25/18 $1,124,000 $1,131,026
RYMS 1991-B1 1, 7.184%, 3/25/20 406,679 406,044
RYMS 1992-3 A2, 7.296%, 6/25/20 196,384 196,752
----------
1,733,822
----------
COMMERCIAL MORTGAGE BACKED SECURITIES 3.6%
BSCMS 1998-C1 A1, 6.34%, 10/16/07 421,119 422,698
BSCMS 1998-C1 A2, 6.44%, 6/16/08 360,000 353,025
MLMI 1998-C2 A2, 6.39%, 2/15/30 500,000 508,403
----------
1,284,126
----------
COMMERCIAL SERVICES .3%
Outdoor Systems, Inc., 8.875%, 6/15/07 100,000 104,500
----------
CONSUMER DURABLES .3%
American Standard Cos, Inc., 7.375%, 2/01/08 100,000 98,750
----------
CONSUMER NON-DURABLES .5%
Grand Metropolitan Investments, 7.125%, 9/15/04 200,000 214,904
----------
CONSUMER SERVICES 2.6%
Chancellor Media Corp, 144A, 9.00%, 10/01/98 100,000 101,000
CSC Holdings, Inc., 7.25%, 7/15/08 100,000 98,015
Hollinger International Publishing, 9.25%, 2/01/06 100,000 104,750
Sun International Hotels, 9.00%, 3/15/07 100,000 104,000
TCI Communications, Inc., 6.875%, 2/15/06 500,000 534,017
----------
941,782
----------
ELECTRONIC TECHNOLOGY 1.8%
Lockheed Corp., 9.375%, 10/15/99 101,000 104,655
Raytheon Co., 6.50%, 7/15/05 500,000 524,386
----------
629,041
----------
ENERGY MINERALS .3%
P&L Coal Holdings Corp., 144A, 8.875%, 5/15/08 100,000 101,250
----------
FINANCE 8.2%
American General Corp., 7.75% 4/01/05 500,000 550,770
Chase Manhattan Corp., 7.875%, 8/01/04 400,000 402,914
Chase Manhattan Corp., 7.875%, 7/15/06 200,000 221,961
First Chicago NBD Corp., 7.625%, 1/15/03 291,000 314,614
HMH Properties, 7.875%, 8/01/08 100,000 96,500
Lincoln National Corp., 7.125%, 7/15/99 550,000 557,185
Paine Webber Group, Inc., 6.55%, 4/15/08 150,000 147,520
Salomon Inc., 7.00%, 5/15/99 300,000 302,731
Societe Generale-NY, 7.40%, 6/01/06 300,000 315,189
----------
2,909,384
----------
HEALTH SERVICES .3%
Tenet Healthcare, 144A, 7.625%, 6/01/08 100,000 98,667
----------
</TABLE>
92
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS (CONT.)
BONDS (CONT.)
HEALTH TECHNOLOGY 1.6%
American Home Products, 7.90%, 2/15/05 $ 500,000 $ 566,654
----------
PRODUCER MANUFACTURING .8%
Hayes Wheels Lemmerz International Inc., 9.125%, 7/15/07 100,000 101,000
Owens, 7.35%, 5/15/08 100,000 100,542
Westpoint Stevens, Inc., 7.875%, 06/15/05 100,000 101,750
----------
303,292
----------
RETAIL TRADE 1.8%
Dayton Hudson Corp., 7.25%, 9/01/04 500,000 541,950
Penney (J.C.) Co., Inc., 6.875%, 6/15/99 115,000 115,908
----------
657,858
----------
TRANSPORTATION 1.7%
Gearbulk Holding, LTD., senior notes, 11.25%, 12/01/04 100,000 104,000
Hertz Corp., 6.625%, 5/15/08 500,000 517,650
----------
621,650
----------
UTILITIES 5.6%
Calenergy Co., Inc., 7.52%, 9/15/08 100,000 102,265
Duquesne Light Co., 6.625%, 6/15/04 300,000 305,030
United Utilities, 6.45%, 4/01/08 500,000 511,354
US West Cap Funding, Inc., 6.375%, 7/15/08 500,000 528,422
Wisconsin Power & Light, 7.00%, 6/15/07 500,000 552,570
----------
1,999,641
----------
TOTAL BONDS (COST $12,157,787) 12,265,321
----------
FOREIGN GOVERNMENT SECURITIES AND AGENCIES 1.5%
Ontario Providence, 6.00%, 2/21/06 (Canada) (COST $514,165) 500,000 521,085
----------
OTHER GOVERNMENT & AGENCY SECURITIES 3.7%
Tennessee Valley Authority, 5.28%, 9/14/01 (COST $1,303,705) 1,300,000 1,318,938
----------
U.S. GOVERNMENT SECURITIES 54.0%
FHLMC, 7.50%, 4/01/28 504,999 516,736
FHLMC, 7.50%, 11/01/28 500,000 512,188
FNMA, 5.625%, 3/15/01 1,150,000 1,173,490
FNMA, 5.75%, 4/15/03 700,000 726,828
FNMA, 5.75%, 6/15/05 500,000 517,338
FNMA, 5.75%, 2/15/08 1,000,000 1,041,147
FNMA, 6.00%, 4/01/13 493,250 495,755
FNMA, 5.50%, 9/1/13 493,211 487,971
FNMA, 6.00%, 10/01/13 493,063 495,568
FNMA, 6.00%, 5/01/28 494,452 489,083
FNMA, 6.00%, 8/01/28 494,540 489,170
FNMA, 6.00%, 10/01/28 1,010,000 999,032
FNMA, 7.00%, 10/01/28 505,000 516,639
FNMA, 6.50%, 11/01/28 500,000 503,906
FNMA, 7.00%, 11/01/28 1,000,000 1,021,875
</TABLE>
93
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
**LONG-TERM INVESTMENTS (CONT.)
U.S. GOVERNMENT SECURITIES (CONT.)
FNMA, ARM, 7.41%, 5/01/20 $ 281,352 $ 289,114
GNMA I, 7.00%, 11/15/12 490,710 504,550
GNMA II, 6.00%, 3/20/28 498,119 490,648
GNMA I, 8.00%, 07/15/28 497,467 515,967
GNMA I, 7.50%, 8/15/28 500,000 515,782
GNMA I, 6.50%, 9/15/28 494,593 500,698
U.S. Treasury Notes, 5.375%, 7/31/00 1,000,000 1,017,501
U.S. Treasury Notes, 6.375%, 9/30/01 2,500,000 2,636,720
U.S. Treasury Notes, 5.75%, 11/30/02 1,500,000 1,575,002
U.S. Treasury Notes, 5.875%, 2/15/04 1,000,000 1,070,312
U.S. Treasury Notes, 6.125%, 11/15/27 200,000 225,000
----------
TOTAL US GOVERNMENT SECURITIES (COST $19,058,112) 19,328,020
----------
Zero Coupon Bonds .2%
Niagara Mohawk Power Corp., Series H, zero coupon to 7/01/03, 8.50%,
thereafter, 7/01/10 (COST $71,225) 100,000 73,750
----------
TOTAL LONG TERM INVESTMENTS (COST $33,208,994) 33,507,114
----------
SHORT TERM INVESTMENTS 2.4%
FINANCE 2.4%
American Express Credit Corp., 5/24/99 150,000 145,737
Deutsche Bank AG, 5.685%, 6/03/99 150,000 150,609
General Electric Capital Co., 2/24/99 200,000 196,772
General Electric Capital Co., 3/15/99 150,000 147,202
Morgan Stanley, 2/26/99 150,000 147,539
----------
787,859
----------
U.S. GOVERNMENT CASH EQUIVALENTS .2%
(c) U.S. Treasury Bills, 1/07/99 90,000 89,340
----------
TOTAL SHORT TERM INVESTMENTS (COST $875,831) 877,199
----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $34,084,825) 34,384,313
----------
</TABLE>
94
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------
(b) REPURCHASE AGREEMENT 8.7%
<S> <C> <C>
Joint Repurchase Agreement, 5.35%, 11/02/98, (Maturity Value $3,119,789) $ 3,118,399 $ 3,118,399
(Cost $3,118,399)
Barclays Capital Group, Inc. (Maturity Value $320,665)
Chase Securities, Inc. (Maturity Value $320,665)
CIBC Wood Gundy Securities Corp. (Maturity Value $320,665)
Deutsche Morgan Grenfell/C.J.Lawrence, Inc.(Maturity Value $320,665)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $320,665)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $233,807)
Greenwich Capital Markets, Inc. (Maturity Value $320,664)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $320,665)
Paribas Corp. (Maturity Value $320,664)
SBC Warburg Dillon Read, Inc. (Maturity Value $320,664)
Collateralized by U.S. Treasury Bills and Notes -----------
TOTAL INVESTMENTS (COST $37,203,224) 104.7% 37,502,712
-----------
OTHER ASSETS, LESS LIABILITIES (4.7%) (1,682,126)
-----------
NET ASSETS 100.0% $35,820,586
===========
</TABLE>
PORTFOLIO ABBREVIATIONS:
ARM - Adjustable Rate Mortgage
BSCMS - Bear Stearns Commercial Mortgage Securities
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
MLMI - Merrill Lynch Mortgage Investors, Inc.
PHMS - Prudential Home Mortgage Securities
RYMS - Ryland Mortgage Securities Corporation
*Securities traded in U.S. dollars unless otherwise indicated.
(b) See Note 1(c) regarding joint repurchase agreement.
(c) On deposit with broker for initial margin on futures contracts (Note 1(d)).
See notes to financial statements. 95
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 14.74 $ 13.45 $ 12.73 $ 12.34 $ 12.79
-------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .62 .64 .61 .58 .59
Net realized and unrealized gains (losses) ........ (1.92) 2.15 1.39 1.10 (.33)
-------------------------------------------------------------------
Total from investment operations ................... (1.30) 2.79 2.00 1.68 .26
-------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.65) (.60) (.60) (.59) (.59)
Net realized gains ................................ (1.04) (.90) (.68) (.70) (.12)
-------------------------------------------------------------------
Total distributions ................................ (1.69) (1.50) (1.28) (1.29) (.71)
-------------------------------------------------------------------
Net asset value, end of year ....................... $ 11.75 $ 14.74 $ 13.45 $ 12.73 $ 12.34
===================================================================
Total return* ...................................... (9.93%) 22.47% 16.71% 15.18% 2.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 170,569 $ 212,631 $ 130,951 $ 83,523 $ 66,869
Ratios to average net assets:
Expenses .......................................... .98% 1.01% 1.02% 1.03% .84%
Expenses excluding waiver and payments by affiliate -- -- -- -- .92%
Net investment income ............................. 4.63% 4.81% 4.79% 4.82% 4.84%
Portfolio turnover rate ............................ 79.17% 141.49% 129.83% 108.64% 68.39%
</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.
96
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONVERTIBLE SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS II
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1998 1997 1996 1995***
-------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 14.68 $ 13.41 $ 12.71 $ 13.06
-------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .51 .54 .51 .07
Net realized and unrealized gains (losses) . (1.91) 2.13 1.40 (.37)
-------------------------------------------------------------
Total from investment operations ............ (1.40) 2.67 1.91 (.30)
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.54) (.50) (.53) (.05)
Net realized gains ......................... (1.04) (.90) (.68) --
-------------------------------------------------------------
Total distributions ......................... (1.58) (1.40) (1.21) (.05)
-------------------------------------------------------------
Net asset value, end of year ................ $ 11.70 $ 14.68 $ 13.41 $ 12.71
=============================================================
Total return* ............................... (10.61%) 21.54% 15.92% (2.33%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 41,533 $ 35,282 $ 10,861 $ 209
Ratios to average net assets:
Expenses ................................... 1.73% 1.74% 1.79% 1.60%**
Net investment income ...................... 3.93% 4.04% 4.00% 3.64%**
Portfolio turnover rate ..................... 79.17% 141.49% 129.83% 108.64%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***For the period October 1, 1995 (effective date) to October 31, 1995.
See notes to financial statements. 97
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCKS 2.6%
<S> <C> <C>
CONSUMER NON-DURABLES 1.5%
Philip Morris Cos., Inc. .................................. 60,000 $ 3,067,500
-----------
ELECTRONIC TECHNOLOGY .6%
(a)Xilinx, Inc. .............................................. 30,000 1,339,689
-----------
INDUSTRIAL SERVICES .5%
(a)Cogeneration Corp. of America ............................. 122,700 1,096,631
-----------
TOTAL COMMON STOCKS (COST $6,004,672) ..................... 5,503,820
-----------
CONVERTIBLE PREFERRED STOCKS 39.9%
CONSUMER DURABLES 1.2%
Newell Financial Trust I, 5.25% cvt. pfd., 144A ............ 44,100 2,447,550
-----------
CONSUMER NON-DURABLES 1.9%
Designer Holdings, Ltd., 5.00% cvt. pfd .................... 38,000 1,505,750
Ralston Purina/Interstate Bakeries Corp., 7.00% cvt. pfd .. 50,500 2,502,906
-----------
4,008,656
-----------
CONSUMER SERVICES 4.4%
Cendant Corp., 7.50% cvt. pfd .............................. 135,000 3,349,688
Host Marriott Financial Trust, 6.75% cvt. pfd., 144A ...... 40,000 1,615,000
(d)Triathlon Broadcasting, 9.00% cvt. pfd .................... 315,300 3,054,469
Wendys Financing I, 5.00% cvt. pfd., Series A ............. 25,000 1,225,000
-----------
9,244,157
-----------
ENERGY MINERALS .2%
Nuevo Financing I, 5.75% cvt. pfd., Series A .............. 13,100 481,425
-----------
FINANCE 10.9%
American Heritage Life Investment Corp., 8.50% cvt. pfd .... 28,300 1,683,850
FelCor Lodging Trust, Inc., $1.95 cvt. pfd., Series A ..... 60,000 1,188,750
Lincoln National Corp., 7.75% cvt. pfd .................... 186,600 4,618,350
National Australia Bank, 7.875% cvt. pfd. (Australia) ..... 42,900 1,134,169
Protective Life Capital Trust II, 6.50% cvt. pfd .......... 42,900 2,670,525
Reckson Associates Realty Corp., 7.625% cvt. pfd., Series A 170,000 3,591,250
SL Green Realty Corp., 8.00% cvt. pfd ..................... 80,000 1,782,504
United Rentals Trust I, 6.50% cvt. pfd., 144A ............. 70,000 2,769,375
WBK STRYPES Trust, 10.00% cvt. pfd ........................ 130,000 3,729,375
-----------
23,168,148
-----------
HEALTH SERVICES 2.9%
GS Financial Products/Oxford Health Plans, 7.00% cvt. pfd .. 60,000 975,000
McKesson Financing Trust, 5.00% cvt. pfd .................. 49,000 5,212,375
-----------
6,187,375
-----------
INDUSTRIAL SERVICES 2.4%
AES Trust II, 5.50% cvt. pfd., 144A ........................ 60,000 2,685,000
AES Trust II, 5.50% cvt. pfd, Series B .................... 8,400 375,900
EVI, Inc., 5.00% cvt. pfd., 144A .......................... 60,000 1,950,000
-----------
5,010,900
-----------
</TABLE>
98
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
NON-ENERGY MINERALS .5%
WHX Corp., 6.50% cvt. pfd., Series A .................................... 26,000 $ 1,111,500
-----------
PROCESS INDUSTRIES 1.8%
International Paper Co., 5.25% cvt. pfd ................................. 20,000 950,000
Owens-Illinois, Inc., 4.75% cvt. pfd ................................... 70,000 2,808,750
-----------
3,758,750
-----------
TRANSPORTATION 1.9%
Union Pacific Capital Trust, 6.25% cvt. pfd ............................. 86,700 4,031,550
-----------
UTILITIES 11.8%
(c)CMS Energy Trust I, 7.75% cvt. pfd ..................................... 73,000 3,946,563
El Paso Energy Capital Trust I, 4.75% cvt. pfd ......................... 128,000 6,208,000
Enron Corp., 6.25% cvt. pfd ............................................ 85,000 1,413,125
MediaOne Group, Inc., 6.25% cvt. pfd ................................... 81,100 4,369,263
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina) ............... 50,000 2,818,750
Salomon Smith Barney Holdings, Inc., 6.25% cvt. pfd .................... 30,000 1,481,250
Texas Utilities Co., 9.25% cvt. pfd .................................... 86,500 4,876,438
-----------
25,113,389
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $93,186,193) .................. 84,563,400
-----------
</TABLE>
<TABLE>
PRINCIPAL
AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS 43.3%
COMMERCIAL SERVICES .5%
Metamore Worldwide, Inc., cvt. sub. notes, 2.94%, 8/15/04 .................... $1,250,000 1,015,625
----------
CONSUMER DURABLES 1.6%
Activision, Inc., cvt. sub. notes, 144A, 6.75%, 1/01/05 ...................... 4,000,000 3,500,000
----------
CONSUMER SERVICES 3.4%
AMF Bowling, Inc., cvt. sub. deb., 144A, 0.00%, 5/12/18 ...................... 4,000,000 355,000
ShoLodge, Inc., cvt. sub. deb., 7.50%, 5/01/04 .............................. 2,595,000 1,518,075
Tele-Communications International, Inc., cvt. sub. deb., 4.50%, 2/15/06 ..... 2,500,000 2,506,250
Veterinary Centers of America, Inc., cvt. sub. deb., 144A, 5.25%, 5/01/06 ... 3,500,000 2,765,000
----------
7,144,325
----------
ELECTRONIC TECHNOLOGY 8.6%
Comverse Technology, Inc., cvt. sub. notes, 144A, 4.50%, 7/01/05 ............. 2,500,000 2,325,000
Cymer, Inc., cvt. sub. deb., 144A, 3.50% coupon to 8/06/00, 7.25% thereafter;
8/06/04 ................................................................... 4,250,000 2,836,874
Dovatron International, Inc., cvt. sub. notes, 144A, 6.00%, 10/15/02 ........ 1,800,000 1,719,000
Itron, Inc., cvt. sub. notes, 6.75%, 3/31/04 ................................ 750,000 487,500
Level One Communications, Inc., cvt. sub. notes, 4.00%, 9/01/04 ............. 1,500,000 1,734,374
Motorola, Inc., cvt. sub. deb., 0.00%, 9/07/09 .............................. 2,000,000 1,910,000
Western Digital Corp., cvt. sub. deb., 144A, 0.00%, 2/18/18 ................. 4,000,000 860,000
Xilinx, Inc., cvt. sub. notes, 5.25%, 11/01/02 .............................. 6,300,000 6,457,500
----------
18,330,248
----------
</TABLE>
99
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
ENERGY MINERALS 1.0%
Swift Energy Co., cvt. sub. notes, 6.25%, 11/15/06 ................ $ 2,750,000 $ 2,196,563
-----------
FINANCE 3.7%
OMEGA Healthcare Investors, Inc., cvt. sub. deb., 8.50%,
2/01/01 ....................................................... 700,000 823,374
Rent-Way, Inc., cvt. sub. deb., 7.00%, 2/01/07 ..................... 1,425,000 2,686,125
The Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02............. 4,500,000 4,297,500
----------
7,806,999
----------
HEALTH SERVICES 2.0%
Omnicare, Inc., cvt. deb., 5.00%, 12/01/07 ......................... 4,000,000 4,300,000
----------
Health Technology 4.8%
Alza Corp., cvt. sub. notes, 0.00%, 7/14/14 ........................ 6,000,000 3,847,500
Athena Neurosciences, Inc., cvt. notes, 4.75%,
11/15/04 ........................................................ 2,000,000 2,430,000
Dura Pharmaceuticals, Inc., cvt. sub. notes, 3.50%,
7/15/02 ......................................................... 3,000,000 2,175,000
ESC Medical Systems, Ltd., cvt. sub. notes, 144A, 6.00%,
9/01/02 ......................................................... 2,500,000 1,775,000
----------
10,227,500
----------
INDUSTRIAL SERVICES 5.5%
Baker Hughes, Inc., cvt. notes, 0.00%, 5/05/08 ..................... 5,000,000 3,406,250
Diamond Offshore Drilling, Inc., cvt. sub. notes, 3.75%,
2/15/07 ......................................................... 4,800,000 4,818,000
Waste Management, Inc., cvt. sub. notes, 4.00%, 2/01/02 ........... 3,000,000 3,487,500
----------
11,711,750
----------
PROCESS INDUSTRIES .7%
APP Global Finance V, Ltd., 2.00%, 7/25/00 (United Kingdom) ........ 1,000,000 645,000
APP Global Finance V, Ltd., 144A, 2.00%, 7/25/00 (United
Kingdom) ........................................................ 1,200,000 774,000
----------
1,419,000
----------
PRODUCER MANUFACTURING 2.5%
Mark IV Industries, Inc., cvt. sub. notes, 144A, 4.75%,
11/01/04 ......................................................... 3,000,000 2,463,750
Tower Automotive, Inc., cvt. sub. notes, 144A, 5.00%,
8/01/04 ........................................................ 1,000,000 1,030,000
Tower Automotive, Inc., cvt. sub. notes, 5.00%,
8/01/04 ........................................................ 1,750,000 1,802,500
----------
5,296,250
----------
RETAIL TRADE 2.1%
Rite Aid Corp., cvt. sub. notes, 144A, 5.25%, 9/15/02 .............. 3,500,000 4,469,062
----------
TECHNOLOGY SERVICES 2.9%
Data Processing Resources Corp., cvt. sub
notes, 144A, 5.25%, 4/01/05 ...................................... 2,500,000 2,187,500
HNC Software, Inc., cvt. sub. notes, 4.75%, 3/01/03 ............... 1,500,000 1,481,250
Wind River Systems, Inc., cvt. sub. notes, 144A, 5.00%,
8/01/02 ......................................................... 300,000 322,500
Wind River Systems, Inc., cvt. sub. notes, 5.00%,
8/01/02 ......................................................... 2,000,000 2,150,000
----------
6,141,250
----------
</TABLE>
100
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS (CONT.)
UTILITIES 4.0%
<S> <C> <C>
Bell Atlantic Financial Service, cvt. bonds, 144A, 5.75%, 4/01/03 $7,000,000 $ 7,201,250
Natwest Enron, cvt. notes, 144A, 3.50%, 9/01/04 1,000,000 1,252,500
------------
8,453,750
------------
TOTAL CONVERTIBLE BONDS (COST $98,293,071) 92,012,322
------------
TOTAL LONG-TERM INVESTMENTS (COST $197,483,936) 182,079,542
------------
(b) REPURCHASE AGREEMENT 13.2%
Joint Repurchase Agreement, 5.35%, 11/02/98 (Maturity Value $27,995,841)
(COST $27,983,365) 27,983,365 27,983,365
Barclays Capital Group, Inc. (Maturity Value $2,877,526)
Chase Securities, Inc. (Maturity Value $2,877,526)
CIBC Wood Gundy Securities Corp. (Maturity Value $2,877,526)
Deutsche Morgan Grenfell/C. J. Lawrence, Inc. (Maturity Value $2,877,526)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,877,526)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $2,098,104)
Greenwich Capital Markets, Inc. (Maturity Value $2,877,527)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $2,877,526)
Paribas Corp. (Maturity Value $2,877,527)
SBC Warburg Dillon Read, Inc. (Maturity Value $2,877,527)
Collateralized by U.S. Treasury Bills and Notes
TOTAL INVESTMENTS (COST $225,467,301) 99.0% 210,062,907
------------
OTHER ASSETS, LESS LIABILITIES 1.0% 2,038,871
------------
NET ASSETS 100.0% $212,101,778
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
(a) Non-income producing.
(b) See Note 1(c) regarding joint repurchase agreement.
(c) See Note 8 regarding restricted securities.
(d) The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in non-controlled "affiliated
companies" at October 31, 1998 were $3,054,469.
See notes to financial statements. 101
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 19.31 $ 16.41 $ 15.19 $ 14.14 $ 14.91
------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .64 .64 .64 .63 .62
Net realized and unrealized gains (losses) ........ 1.42 3.23 1.63 1.27 (.36)
------------------------------------------------------------------
Total from investment operations ................... 2.06 3.87 2.27 1.90 .26
------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.65) (.64) (.65) (.61) (.72)
Net realized gains ................................ (.79) (.33) (.40) (.24) (.31)
------------------------------------------------------------------
Total distributions ................................ (1.44) (.97) (1.05) (.85) (1.03)
------------------------------------------------------------------
Net asset value, end of year ....................... $ 19.93 $ 19.31 $ 16.41 $ 15.19 $ 14.14
==================================================================
Total return* ...................................... 10.96% 24.40% 15.39% 14.10% 1.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 428,228 $ 352,555 $246,952 $168,897 $ 92,763
Ratios to average net assets:
Expenses .......................................... .94% .97% .98% 1.00% .77%
Expenses excluding waiver and payments by affiliate -- -- -- 1.02% .95%
Net investment income ............................. 3.20% 3.62% 4.11% 4.44% 4.53%
Portfolio turnover rate ............................ 30.65% 29.04% 24.15% 27.86% 39.51%
</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.
102
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
<TABLE>
FRANKLIN EQUITY INCOME FUND (CONT.)
CLASS II
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
1998 1997 1996 1995***
-------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.26 $ 16.38 $ 15.19 $ 15.38
-------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .50 .50 .52 .05
Net realized and unrealized gains (losses) . 1.41 3.22 1.63 (.19)
-------------------------------------------------------------
Total from investment operations ............ 1.91 3.72 2.15 (.14)
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.50) (.51) (.56) (.05)
Net realized gains ......................... (.79) (.33) (.40) --
-------------------------------------------------------------
Total distributions ......................... (1.29) (.84) (.96) (.05)
-------------------------------------------------------------
Net asset value, end of year ................ $ 19.88 $ 19.26 $ 16.38 $ 15.19
=============================================================
Total return* ............................... 10.16% 23.40% 14.53% (.93%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 81,078 $ 45,277 $ 18,227 $ 386
Ratios to average net assets:
Expenses ................................... 1.69% 1.72% 1.73% 1.99%**
Net investment income ...................... 2.45% 2.78% 3.33% 3.57%**
Portfolio turnover rate ..................... 30.65% 29.04% 24.15% 27.86%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***For the period October 1, 1995 (effective date) to October 31, 1995.
See notes to financial statements. 103
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 86.2%
COMMERCIAL SERVICES .6%
Dun & Bradstreet Corp. ................ 104,200 $ 2,956,675
-----------
Consumer Durables 4.7%
Chrysler Corp. ........................ 55,000 2,646,875
Eastman Kodak Co. ..................... 86,000 6,665,000
Ford Motor Co. ........................ 120,500 6,537,125
General Motors Corp. .................. 125,000 7,882,813
-----------
23,731,813
-----------
CONSUMER NON-DURABLES 9.0%
Anheuser-Busch Cos., Inc. ............. 125,300 7,447,519
DIMON, Inc. ........................... 14,800 191,475
Fortune Brands, Inc. .................. 121,500 4,017,094
General Mills, Inc. ................... 107,500 7,901,250
Heinz (H.J.) Co. ...................... 97,000 5,638,125
Philip Morris Cos., Inc. .............. 166,200 8,496,975
RJR Nabisco Holdings Corp. ............ 93,500 2,670,594
UST, Inc. ............................. 282,000 9,588,000
----------
45,951,032
----------
ELECTRONIC TECHNOLOGY .5%
AMP, Inc. ............................. 60,000 2,463,750
----------
ENERGY MINERALS 12.3%
Amoco Corp. ........................... 90,400 5,073,700
Atlantic Richfield Co. ................ 189,400 13,044,925
Chevron Corp. ......................... 108,900 8,875,350
Exxon Corp. ........................... 79,400 5,657,250
Mobil Corp. ........................... 100,600 7,614,163
Texaco, Inc. .......................... 160,000 9,490,000
Ultramar Diamond Shamrock Corp. ....... 157,400 4,239,963
YPF, SA, Sponsored ADR (Argentina) .... 309,200 8,947,475
----------
62,942,826
----------
FINANCE 13.8%
Bank One Corp. ........................ 77,180 3,772,173
BankBoston Corp. ...................... 106,800 3,931,575
Exel Limited, Class A (Bermuda) ....... 89,176 6,816,391
Gallagher (Arthur J.) & Co. ........... 187,300 7,936,838
IPC Holdings, Ltd. (Bermuda) .......... 160,000 3,720,000
J.P. Morgan & Co., Inc. ............... 38,000 3,581,500
Lincoln National Corp. ................ 98,500 7,473,688
Mercantile Bancorporation, Inc. ....... 70,526 3,222,157
National City Corp. ................... 96,700 6,219,019
PNC Bank Corp. ........................ 87,300 4,365,000
Safeco Corp. .......................... 150,000 6,496,875
Scor, SA (France) ..................... 50,500 2,895,321
St. Paul Cos., Inc. ................... 190,700 6,316,938
Westpac Banking Corp., Ltd. (Australia) 611,015 3,699,388
----------
70,446,863
----------
</TABLE>
104
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY 3.4%
Glaxo Wellcome, Plc., Sponsored ADR (United Kingdom) 100,200 $ 6,237,450
Pharmacia & Upjohn, Inc. ........................... 212,000 11,222,750
-----------
17,460,200
-----------
INDUSTRIAL SERVICES .8%
Browning-Ferris Industries, Inc. ................... 111,100 3,937,106
-----------
NON-ENERGY MINERALS 3.9%
British Steel, PLC., Sponsored ADR (United Kingdom) 154,500 2,703,750
Carpenter Technology Corp. ......................... 131,000 4,593,188
De Beers Consolidated Mines, AG, Sponsored ADR
(South Africa) ................................... 292,000 4,197,500
Georgia-Pacific Corp. (Timber Group) ............... 133,100 2,953,156
Weyerhaeuser Co. ................................... 120,000 5,617,500
----------
20,065,094
----------
PROCESS INDUSTRIES 5.9%
Dow Chemical Co. ................................... 70,000 6,553,750
Imperial Chemical Industries, Plc., Sponsored ADR
(United Kingdom) ................................. 186,700 6,767,875
Pall Corp. ......................................... 319,000 8,054,750
Potlatch Corp. ..................................... 78,000 2,847,000
Union Camp Corp. ................................... 135,000 5,805,000
----------
30,028,375
----------
PRODUCER MANUFACTURING 1.9%
Cooper Industries, Inc. ............................ 86,700 3,825,638
Federal Signal Corp. ............................... 237,000 5,702,813
----------
9,528,451
----------
REAL ESTATE INVESTMENT TRUSTS 7.1%
Arden Realty, Inc. ................................. 305,000 6,595,625
Equity Residential Properties Trust ................ 161,300 6,774,600
FelCor Lodging Trust, Inc. ......................... 253,900 5,982,519
Highwoods Properties, Inc. ......................... 236,600 6,610,013
MeriStar Hospitality Corp. ......................... 150,000 2,775,000
Simon Property Group, Inc. ......................... 241,400 7,226,913
----------
35,964,670
----------
RETAIL TRADE 2.3%
Penney (J.C.) Co., Inc. ............................ 250,000 11,875,000
----------
TELECOMMUNICATIONS 6.4%
Bell Atlantic Corp. ................................ 267,120 14,190,750
GTE Corp. .......................................... 131,500 7,717,406
SBC Communications, Inc. ........................... 36,541 1,692,325
U S West, Inc. ..................................... 155,800 8,939,025
----------
32,539,506
----------
UTILITIES 13.6%
CINergy Corp. ...................................... 186,000 6,417,000
Consolidated Natural Gas Co. ....................... 95,300 5,033,030
</TABLE>
105
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.
UTILITIES (CONT.)
Dominion Resources, Inc. ............................ 187,700 $ 8,669,393
Entergy Corp. ....................................... 136,000 3,910,000
National Fuel Gas Co. ............................... 124,600 5,887,350
New Century Energies, Inc. .......................... 135,000 6,522,187
Northern States Power Co. ........................... 280,000 7,560,000
OGE Energy Corp. .................................... 190,000 5,046,875
Pacific Gas & Electric Co. .......................... 153,100 4,659,980
PacifiCorp .......................................... 320,000 6,100,000
Sempra Energy ....................................... 358,609 9,323,833
------------
69,129,648
------------
TOTAL COMMON STOCKS (COST $370,560,660) ............. 439,021,009
------------
PREFERRED STOCKS 6.3%
FINANCE 1.9%
Glenborough Realty Trust, 7.75% cvt. pfd., Series A . 324,200 6,220,587
National Australia Bank, 7.875% cvt. pfd. (Australia) 127,600 3,373,425
------------
9,594,012
------------
TRANSPORTATION 1.4%
Union Pacific Capital Trust, 6.25% cvt. pfd., 144A .. 158,300 7,360,950
------------
Retail Trade .8%
Kmart Financing, 7.75% cvt. pfd ..................... 75,000 4,157,812
------------
UTILITIES 2.2%
(c)CMS Energy Trust I, 7.75% cvt. pfd .................. 80,000 4,325,000
Texas Utilities Co., 9.25% cvt. pfd ................. 117,100 6,601,512
------------
10,926,512
------------
TOTAL PREFERRED STOCKS (COST $33,030,122) ........... 32,039,286
------------
TOTAL LONG TERM INVESTMENTS (COST $403,590,782) ..... 471,060,295
------------
</TABLE>
106
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
(b)REPURCHASE AGREEMENT 7.7%
<S> <C> <C>
Joint Repurchase Agreement, 5.35%, 11/02/98 (Maturity Value $39,382,924) (COST $39,365,375) $39,365,375 $39,365,375
Barclays Capital Group, Inc. (Maturity Value $4,047,937)
Chase Securities, Inc. (Maturity Value $4,047,937)
CIBC Wood Gundy Securities Corp. (Maturity Value $4,047,937)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $4,047,937)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $4,047,937)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $2,951,491)
Greenwich Capital Markets, Inc. (Maturity Value $4,047,937)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $4,047,937)
Paribas Corp. (Maturity Value $4,047,937)
SBC Warburg Dillon Read, Inc. (Maturity Value $4,047,937)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $442,956,157) 100.2% 510,425,670
------------
OTHER ASSETS, LESS LIABILITIES (.2%) (1,119,545)
------------
NET ASSETS 100.0% $509,306,125
============
</TABLE>
(b)See Note 1(c) regarding joint repurchase agreement.
(c)See Note 8 regarding restricted securities.
See notes to financial statements. 107
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS I
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.65 $ 8.31 $ 8.06 $ 9.33
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .62 .60 .61 .67 1.30
Net realized and unrealized gains (losses) . (.17) (.22) .33 .29 (1.81)
-------------------------------------------------------------------------------
Total from investment operations ............ .45 .38 .94 .96 (.51)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.57) (.61) (.60) (.64) (.08)
In excess of net investment income ......... (.04) (.01) -- -- --
Tax return of capital ...................... -- -- -- (.07) (.60)
Net realized gains ......................... -- -- -- -- (.08)
-------------------------------------------------------------------------------
Total distributions ......................... (.61) (.62) (.60) (.71) (.76)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 8.25 $ 8.41 $ 8.65 $ 8.31 $ 8.06
===============================================================================
Total return* ............................... 5.57% 4.31% 11.80% 12.65% (5.72%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 110,876 $ 118,348 $ 137,626 $ 164,970 $ 187,204
Ratios to average net assets:
Expenses ................................... .96% .90% .85% .96% .89%
Net investment income ...................... 7.49% 6.97% 7.68% 8.29% 8.54%
Portfolio turnover rate ..................... 49.93% 193.30% 139.71% 103.49% 80.69%
</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.
108
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
CLASS II
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1998(1) 1997 1996 1995***
----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.65 $ 8.31 $ 8.03
----------------------------------------------------------
Income from investment operations:
Net investment income ...................... .58 .55 .56 .31
Net realized and unrealized gains (losses) . (.17) (.22) .33 .30
----------------------------------------------------------
Total from investment operations ............ .41 .33 .89 .61
----------------------------------------------------------
Less distributions from:
Net investment income ...................... (.52) (.56) (.55) (.30)
In excess of net investment income ......... (.04) (.01) -- --
Tax return of capital ...................... -- -- -- (.03)
----------------------------------------------------------
Total distributions ......................... (.56) (.57) (.55) (.33)
----------------------------------------------------------
Net asset value, end of year ................ $ 8.26 $ 8.41 $ 8.65 $ 8.31
==========================================================
Total return* ............................... 5.12% 3.74% 11.19% 7.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 5,710 $ 4,473 $ 3,700 $ 1,193
Ratios to average net assets:
Expenses ................................... 1.49% 1.46% 1.40% 1.54%**
Net investment income ...................... 6.96% 6.43% 7.17% 7.41%**
Portfolio turnover rate ..................... 49.93% 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.
(1)Based on average weighted shares outstanding.
109
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------
YEAR ENDED OCTOBER 31,
------------------------
1998(1) 1997***
------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.41 $ 8.71
------------------------
Income from investment operations:
Net investment income ...................... .63 .49
Net realized and unrealized losses ......... (.16) (.28)
------------------------
Total from investment operations ............ .47 .21
------------------------
Less distributions from:
Net investment income ...................... (.58) (.49)
In excess of net investment income ......... (.04) (.02)
------------------------
Total distributions ......................... (.62) (.51)
------------------------
Net asset value, end of year ................ $ 8.26 $ 8.41
========================
Total return* ............................... 5.81% 2.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 829 $ 741
Ratios to average net assets:
Expenses ................................... .85% .82%**
Net investment income ...................... 7.62% 7.08%**
Portfolio turnover rate ..................... 49.93% 193.30%
</TABLE>
*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (effective date) to October 31, 1997.
(1)Based on average weighted shares outstanding.
110 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Statement of Investments, October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Global Government Income Fund AMOUNT* VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
BONDS - CORPORATE (COST $1,250,000)
TURKEY .8%
Cellco Finance NV, 144A, 15.00%, 8/01/05 $ 1,250,000 $ 996,875
-----------
BONDS - GOVERNMENT & GOVERNMENT AGENCIES 91.6%
ARGENTINA 6.2%
Republic of Argentina
10.95%, 11/01/99 3,215,000 3,215,000
8.75%, 5/09/02 3,100,000 2,756,675
8.375%, 12/20/03 260,000 234,975
11.00%, 10/09/06 250,000 248,750
11.375%, 1/30/17 325,000 315,250
9.75%, 9/19/27 600,000 520,875
-----------
7,291,525
-----------
AUSTRALIA 4.2%
Government of Australia, 7.50%, 7/15/05 6,855,000 AUD 4,923,228
-----------
BRAZIL 5.1%
Brazil C-Bond, 8.00%, 4/15/14 3,144,243 1,968,238
Government of Brazil
FRN, 6.188%, 4/15/09 3,950,000 2,170,031
Series L, FRN, 6.188%, 4/15/12 1,250,000 663,288
10.125%, 5/15/27 1,700,000 1,178,100
-----------
5,979,657
-----------
BULGARIA .9%
Republic of Bulgaria
FRN, 6.688%, 7/28/11 1,460,000 980,025
REGD, 6.688%, 7/28/11 120,000 80,550
-----------
1,060,575
-----------
CANADA 7.8%
Government of Canada
10.50%, 7/01/00 4,675,000 CAD 3,298,353
10.50%, 3/01/01 5,000,000 CAD 3,635,262
10.00%, 5/01/02 3,005,00 CAD 2,260,743
-----------
9,194,358
-----------
DENMARK 2.1%
Kingdom of Denmark
9.00%, 11/15/00 3,385,000 DKK 588,280
8.00%, 5/15/03 10,065,000 DKK 1,841,437
-----------
2,429,717
-----------
GERMANY 11.1%
Federal Republic of Germany
7.75%, 2/21/00 6,000,000 DEM 3,820,553
6.00%, 1/05/06 5,700,000 DEM 3,847,724
6.00%, 1/04/07 7,980,000 DEM 5,408,495
-----------
13,076,772
-----------
</TABLE>
111
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
BONDS - GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
ITALY 9.6%
Buoni Poliennali Del Tesoro
12.00%, 1/17/99 1,925,000,000 ITL $ 1,186,781
10.50%, 7/15/00 4,000,000,000 ITL 2,709,721
10.50%, 4/01/05 5,350,000,000 ITL 4,397,891
10.50%, 4/28/14 1,200,000 GBP 2,927,338
-----------
11,221,731
-----------
MEXICO 4.4%
United Mexican States
9.75%, 2/06/01 1,950,000 2,013,375
9.875%, 1/15/07 1,375,000 1,306,250
11.375%, 9/15/16 1,115,000 1,110,819
Series A, with warrants, 6.25%, 12/31/19 1,000,000 754,375
-----------
5,184,819
-----------
NEW ZEALAND 1.8%
Government of New Zealand, 6.50%, 2/15/00 3,995,000 NZD 2,150,033
-----------
PANAMA .5%
Republic of Panama, 8.875%, 9/30/27 650,000 599,625
-----------
PERU .5%
Republic of Peru, FRN, 4.00%, 3/07/17 910,000 523,250
-----------
SPAIN 6.6%
Bonos Y Oblig Del Estado, 8.80%, 4/30/06 321,600,000 ESP 2,922,134
Government of Spain, 12.25%, 3/25/00 609,440,000 ESP 4,820,415
-----------
7,742,549
-----------
SWEDEN 2.9%
Kingdom of Sweden, 10.25%, 5/05/03 21,500,000 SEK 3,425,856
-----------
TURKEY 1.7%
Republic of Turkey
144A, 10.00%, 9/19/07 170,000 146,838
Reg S, 9.875%, 2/23/05 1,040,000 865,800
Reg S, 10.00%, 9/19/07 1,010,000 872,388
-----------
1,885,026
-----------
UNITED KINGDOM 4.7%
United Kingdom
8.00%, 12/07/00 1,950,000 GBP 3,435,049
cvt. stk., 9.50%, 4/18/05 1,000,000 GBP 2,069,197
-----------
5,504,246
-----------
UNITED STATES 18.8%
Fannie Mae, 6.00%, 5/15/08 3,390,000 3,594,346
U.S. Treasury Bond, 6.375%, 8/15/02 1,330,000 1,421,023
U.S. Treasury Notes:
6.625%, 4/30/02 4,335,000 4,645,226
7.25%, 8/15/04 5,214,000 5,940,706
</TABLE>
112
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
BONDS - GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
UNITED STATES (CONT.)
U.S. Treasury Notes (cont.)
<S> <C> <C>
6.125%, 8/15/07 ............................................... $ 3,466,000 $ 3,823,435
6.125%, 11/15/27 .............................................. 2,386,000 2,684,252
-------------
22,108,988
-------------
VENEZUELA 2.7%
Republic of Venezuela
144A, 9.125%, 6/18/07 ......................................... 1,220,000 820,450
9.25%, 9/15/27 ................................................ 3,895,000 2,395,425
-------------
3,215,875
-------------
TOTAL BONDS - GOVERNMENT & GOVERNMENT AGENCIES (COST $112,595,936) 107,517,830
-------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $113,845,936) 108,514,705
-------------
(a)REPURCHASE AGREEMENTS 5.1%
Deutsche Bank AG, 5.40%,11/02/98 (Maturity Value $3,433,544)
Collateralized by U.S. Treasury Notes and Bonds .................. 3,432,000 3,432,000
Warburg Dillon Read, 5.37%,11/02/98 (Maturity Value $2,511,123)
Collateralized by U.S. Treasury Notes and Bonds ................. 2,510,000 2,510,000
-------------
TOTAL REPURCHASE AGREEMENTS (COST $5,942,000) ..................... 5,942,000
TOTAL INVESTMENTS (COST $119,787,936) 97.5% ....................... 114,456,705
-------------
NET EQUITY IN FORWARD CONTRACTS .................................. (5,747)
OTHER ASSETS, LESS LIABILITIES 2.5% .............................. 2,964,734
-------------
TOTAL NET ASSETS 100.0% .......................................... $ 117,415,692
=============
</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.
(a)At October 31, 1998, all repurchase agreements held by the Fund had been
entered into on October 30, 1998.
See notes to financial statements. 113
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.29 $ 10.28 $ 10.35 $ 10.03 $ 10.80
------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .54 .57 .58 .56 .49
Net realized and unrealized gains (losses) ........ .19 .02 (.08) .31 (.70)
------------------------------------------------------------------------
Total from investment operations ................... .73 .59 .50 .87 (.21)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.56) (.58) (.57) (.55) (.47)
Net realized gains ................................ -- -- -- -- (.09)
------------------------------------------------------------------------
Total distributions ................................ (.56) (.58) (.57) (.55) (.56)
------------------------------------------------------------------------
Net asset value, end of year ....................... $ 10.46 $ 10.29 $ 10.28 $ 10.35 $ 10.03
========================================================================
Total return* ...................................... 7.38% 5.88% 4.97% 8.90% (1.99%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 224,132 $ 192,051 $ 196,042 $208,057 $ 225,352
Ratios to average net assets:
Expenses .......................................... .78% .78% .74% .73% .65%
Expenses excluding waiver and payments by affiliate -- -- -- -- .68%
Net investment income ............................. 5.24% 5.51% 5.64% 5.42% 4.75%
Portfolio turnover rate ............................ 37.70% 40.56% 72.62% 56.34% 99.09%
</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.
114
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------------------
YEAR ENDED OCTOBER 31,
-------------------------
1998 1997***
-------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.30 $ 10.24
-------------------------
Income from investment operations:
Net investment income ...................... .57 .47
Net realized and unrealized gains .......... .16 .07
-------------------------
Total from investment operations ............ .73 .54
-------------------------
Less distributions from net investment income (.58) (.48)
-------------------------
Net asset value, end of year ................ $ 10.45 $ 10.30
=========================
Total return* ............................... 7.38% 5.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 3,644 $ 385
Ratios to average net assets:
Expenses ................................... .69% .70%**
Net investment income ...................... 5.28% 5.35%**
Portfolio turnover rate ..................... 37.70% 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. 115
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES 98.1%
U.S. Treasury Notes, 5.50%, 1/31/03 $23,000,000 $ 23,999,074
U.S. Treasury Notes, 5.875%, 9/30/02 34,000,000 35,806,284
U.S. Treasury Notes, 7.50%, 11/15/01 25,000,000 27,203,150
U.S. Treasury Notes, 5.625%, 2/28/01 25,000,000 25,718,775
U.S. Treasury Notes, 5.875%, 6/30/00 36,000,000 36,888,768
U.S. Treasury Notes, 5.75%, 9/30/99 20,000,000 20,237,520
U.S. Treasury Notes, 6.00%, 8/15/99 26,000,000 26,309,660
U.S. Treasury Notes, 6.375%, 5/15/99 20,000,000 20,200,020
U.S. Treasury Notes, 6.50%, 4/30/99 7,000,000 7,072,191
------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $217,518,738) 223,435,442
------------
REPURCHASE AGREEMENT 2.0%
(b)Joint Repurchase Agreement, 5.35%, 11/02/98
(Maturity Value $4,464,925) (COST $4,462,936) 4,462,936 4,462,936
Barclays Capital Group, Inc. (Maturity Value $458,923)
Chase Securities, Inc. (Maturity Value $458,923)
CIBC Wood Gundy Securities Corp. (Maturity Value
$458,923)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
(Maturity Value $458,923)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity
Value $458,923)
Dresdner Kleinwort Benson, North America, L.L.C.
(Maturity Value $334,617)
Greenwich Capital Markets, Inc. (Maturity Value
$458,923)
NationsBanc Montgomery Securities, L.L.C.
(Maturity Value $458,923)
Paribas Corp. (Maturity Value $458,923)
SBC Warburg Dillon Read, Inc. (Maturity Value $458,924)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $221,981,674) 100.1% 227,898,378
------------
OTHER ASSETS, LESS LIABILITIES (.1%) (122,120)
------------
NET ASSETS 100.0% $227,776,258
============
</TABLE>
(b)See Note 1(c) regarding joint repurchase agreement.
116 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT FRANKLIN
SECURITIES FUND SECURITIES FUND BOND FUND
-------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .................................... $ 28,862,032 $ 321,282,773 $ 34,084,825
=================================================
Value ................................... 28,943,162 299,455,245 34,384,313
Repurchase agreements, at value and cost . -- -- 3,118,399
Receivables:
Investment securities sold .............. 11,566 260,317 --
Capital shares sold ..................... 47,035 855,821 76,570
Dividends and interest .................. -- -- 364,059
Offering Costs ........................... -- -- 59,404
-------------------------------------------------
Total assets ............................ 29,001,763 300,571,383 38,002,745
-------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......... -- -- 2,035,372
Capital shares redeemed ................. 35,975 1,244,598 23,835
Affiliates .............................. 21,730 248,807 --
Shareholders ............................ 8,021 765,440 --
Variation margin (Note 1) ............... -- -- 47,626
Distributions to shareholders ............ 32,860 -- --
Other liabilities ........................ 10,797 14,947 75,326
-------------------------------------------------
Total liabilities ....................... 109,383 2,273,792 2,182,159
-------------------------------------------------
Net assets, at value ...................... $ 28,892,380 $ 298,297,591 $ 35,820,586
=================================================
Net assets consist of:
Undistributed net investment income ...... $ -- $ 687,275 $ 172,883
Net unrealized appreciation (depreciation) 81,130 (21,827,528) 305,917
Accumulated net realized gain (loss) ..... (933,420) (85,478,611) 175,522
Capital shares ........................... 29,744,670 404,916,455 35,166,264
-------------------------------------------------
Net assets, at value ...................... $ 28,892,380 $ 298,297,591 $ 35,820,586
=================================================
</TABLE>
See notes to financial statements. 117
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT FRANKLIN
SECURITIES FUND SECURITIES FUND BOND FUND
-------------------------------------------------
<S> <C> <C> <C>
CLASS I:
Net assets, at value ................................ $ 28,892,380 $ 298,297,591 $ 4,232,473
=================================================
Shares outstanding .................................. 2,903,576 31,854,776 408,284
=================================================
Net asset value per share* .......................... $ 9.95 $ 9.36 $ 10.37
=================================================
Maximum offering price per share (net asset value per
share / 97.75%, 97.75%, 95.75%, respectively) ...... $ 10.18 $ 9.58 $ 10.83
=================================================
ADVISOR CLASS:
Net assets, at value ................................ -- -- $ 31,588,113
=================================================
Shares outstanding .................................. -- -- 3,043,142
=================================================
Net asset value and maximum offering price per share -- -- $ 10.38
=================================================
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
118 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ................................................ $ 197,483,936 $ 403,590,782 $ 113,845,936 $ 217,518,738
=====================================================================
Value ............................................... 182,079,542 471,060,295 108,514,705 223,435,442
Repurchase agreements, at value and cost ............. 27,983,365 39,365,375 5,942,000 4,462,936
Cash ................................................. -- -- 568 --
Receivables:
Investment securities sold .......................... 3,444,232 1,502,022 -- --
Capital shares sold ................................. 436,737 1,123,518 373,179 740,023
Dividends and interest .............................. 1,746,185 1,198,306 3,234,929 3,564,475
Unrealized gain on forward exchange contracts (Note 6) -- -- 121,093 --
---------------------------------------------------------------------
Total assets ........................................ 215,690,061 514,249,516 118,186,474 232,202,876
---------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..................... 2,137,603 3,119,582 -- --
Capital shares redeemed ............................. 828,524 620,231 234,271 3,677,328
Affiliates .......................................... 353,737 729,888 112,862 172,778
Shareholders ........................................ 245,821 431,698 235,554 188,624
Distributions to shareholders ........................ -- -- 229 373,190
Unrealized loss on forward exchange contracts (Note 6) -- -- 126,840
Other liabilities .................................... 22,598 41,992 61,026 14,698
---------------------------------------------------------------------
Total liabilities ..................................... 3,588,283 4,943,391 770,782 4,426,618
---------------------------------------------------------------------
Net assets, at value .................................. $ 212,101,778 $ 509,306,125 $ 117,415,692 $ 227,776,258
=====================================================================
Net assets consist of:
Undistributed net investment income .................. $ 916,488 $ 581,251 $ -- $ 11,371
Accumulated distributions in excess
of net investment income ............................ -- -- (792,503) --
Net unrealized appreciation (depreciation) ........... (15,404,394) 67,469,513 (5,305,107) 5,916,704
Accumulated net realized gain (loss) ................. (8,652,572) 27,863,957 (1,961,405) (5,654,073)
Capital shares ....................................... 235,242,256 413,391,404 125,474,707 227,502,256
---------------------------------------------------------------------
Net assets, at value ................................ $ 212,101,778 $ 509,306,125 $ 117,415,692 $ 227,776,258
=====================================================================
</TABLE>
See notes to financial statements 119
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I:
Net assets, at value .................................... $170,568,669 $428,228,078 $110,875,979 $224,132,419
============================================================
Shares outstanding ...................................... 14,519,796 21,485,042 13,436,494 21,430,138
============================================================
Net asset value per share* .............................. $ 11.75 $ 19.93 $ 8.25 $ 10.46
============================================================
Maximum offering price per share (net asset value
per share / 94.25%, 94.25%, 95.75%, 97.75%, respectively) $ 12.47 $ 21.15 $ 8.62 $ 10.70
============================================================
CLASS II:
Net assets, at value .................................... $ 41,533,109 $ 81,078,047 $ 5,710,248 --
============================================================
Shares outstanding ...................................... 3,549,740 4,078,328 691,521 --
============================================================
Net asset value per share* .............................. $ 11.70 $ 19.88 $ 8.26 --
============================================================
Maximum offering price per share (net asset value
per share / 99%) ........................................ $ 11.82 $ 20.08 $ 8.34 --
============================================================
ADVISOR CLASS:
Net assets, at value .................................... -- -- $ 829,465 $ 3,643,839
============================================================
Shares outstanding ...................................... -- -- 100,477 348,555
============================================================
Net asset value and maximum offering price per share .... -- -- $ 8.26 $ 10.45
============================================================
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
120 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT FRANKLIN
SECURITIES FUND SECURITIES FUND BOND FUND+
-------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends ............................................... $ 1,373,011 $ 18,453,876 $ --
Interest ................................................ -- -- 334,080
-------------------------------------------------
Total investment income .................................. 1,373,011 18,453,876 334,080
-------------------------------------------------
Expenses:
Management fees (Note 3) ................................ -- -- 24,877
Administrative fees (Note 3) ............................ 23,128 313,856 11,707
Distribution fees Class I (Note 3) ...................... 58,759 809,874 2,075
Transfer agent fees (Note 3) ............................ 22,304 313,982 182
Custodian fees .......................................... 97 -- 45
Reports to shareholders ................................. 4,110 83,140 567
Registration and filing fees ............................ 23,979 19,025 --
Professional fees ....................................... 827 8,840 2,266
Trustees' fees and expenses ............................. 1,657 23,657 1,100
Amortization of offering costs (Note 1) ................. -- -- 19,801
Other ................................................... 233 6,182 500
-------------------------------------------------
Total expenses ........................................... 135,094 1,578,556 63,120
Expenses waived/paid by affiliate (Note 3) ............... -- -- (46,412)
-------------------------------------------------
Net expenses ............................................ 135,094 1,578,556 16,708
-------------------------------------------------
Net investment income .................................... 1,237,917 16,875,320 317,372
-------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................ (2,319) (2,511,193) 45,853
Financial futures contracts ............................ -- -- 129,669
-------------------------------------------------
Net realized gain (loss) ................................. (2,319) (2,511,193) 175,522
Net unrealized appreciation (depreciation) on investments (45,501) (1,201,807) 305,917
-------------------------------------------------
Net realized and unrealized gain (loss) .................. (47,820) (3,713,000) 481,439
-------------------------------------------------
Net increase in net assets resulting from operations ..... $ 1,190,097 $ 13,162,320 $ 798,811
=================================================
</TABLE>
+ For the period August 3, 1998 (effective date) to October 31, 1998.
See notes to financial statements. 121
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:*
Dividends .................................... $ 5,318,127 $ 18,152,795 $ 2,226 $ --
Interest ..................................... 8,817,126 1,793,468 10,086,769 11,919,283
------------------------------------------------------------------
Total investment income ............... 14,135,253 19,946,263 10,088,995 11,919,283
------------------------------------------------------------------
Expenses:
Management fees (Note 3) ..................... 1,377,487 2,419,689 722,502 1,118,373
Distribution fees (Note 3)
Class I ..................................... 517,505 1,042,557 125,026 174,534
Class II .................................... 453,456 684,791 34,970 --
Transfer agent fees (Note 3) ................. 303,885 589,860 142,000 139,669
Custodian fees ............................... 6,262 16,569 33,000 2,538
Reports to shareholders ...................... 70,161 154,192 56,960 38,143
Registration and filing fees ................. 33,298 81,426 36,647 33,097
Professional fees ............................ 12,772 23,339 8,100 10,054
Trustees' fees and expenses .................. 19,167 35,140 9,200 14,424
Other ........................................ 8,377 9,764 2,134 6,406
------------------------------------------------------------------
Total expense ......................... 2,802,370 5,057,327 1,170,539 1,537,238
------------------------------------------------------------------
Net investment income ............... 11,332,883 14,888,936 8,918,456 10,382,045
------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................. (8,543,572) 27,867,847 598,149 546,710
Foreign currency transactions ............... 5,033 (8,225) (372,948) --
------------------------------------------------------------------
Net realized gain (loss) .............. (8,538,539) 27,859,622 225,201 546,710
Net unrealized appreciation (depreciation) on:
Investments ................................. (28,430,686) 1,597,287 (2,347,713) 3,385,195
Translation of assets and liabilities
denominated in foreign currencies .......... -- (1,103) (307,346) --
------------------------------------------------------------------
Net unrealized appreciation (depreciation) .... (28,430,686) 1,596,184 (2,655,059) 3,385,195
------------------------------------------------------------------
Net realized and unrealized gain (loss) ....... (36,969,225) 29,455,806 (2,429,858) 3,931,905
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .............................. $(25,636,342) $ 44,344,742 $ 6,488,598 $ 14,313,950
==================================================================
</TABLE>
* Net of foreign taxes of $149,292 for the Franklin Equity Income Fund.
122 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
FRANKLIN ADJUSTABLE U.S. GOVERNMENT FRANKLIN
RATE SECURITIES FUND SECURITIES FUND BOND FUND
------------------------------------------------------------------------
1998 1997 1998 1997 1998+
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,237,917 $ 1,127,160 $ 16,875,320 $ 21,143,881 $ 317,372
Net realized gain (loss) from investments (2,319) (144,543) (2,511,193) (4,382,996) 175,522
Net unrealized appreciation (depreciation)
on investments (45,501) 369,436 (1,201,807) 8,545,202 305,917
------------------------------------------------------------------------
Net increase in net assets
resulting from operations 1,190,097 1,352,053 13,162,320 25,306,087 798,811
Distributions to shareholders from:
Net investment income:
Class I (1,237,917) (1,127,160) (17,143,101) (20,946,338) (17,709)
Advisor Class -- -- -- -- (140,700)
------------------------------------------------------------------------
Total distributions to shareholders (1,237,917) (1,127,160) (17,143,101) (20,946,338) (158,409)
Capital share transactions: (Note 2)
Class I 7,802,861 5,205,073 (32,712,089) (66,447,672) 4,124,727
Advisor Class -- -- -- -- 31,055,457
------------------------------------------------------------------------
Total capital share transactions 7,802,861 5,205,073 (32,712,089) (66,447,672) 35,180,184
------------------------------------------------------------------------
Net increase (decrease) in net assets 7,755,041 5,429,966 (36,692,870) (62,087,923) 35,820,586
Net assets:
Beginning of year $21,137,339 $15,707,373 $334,990,461 $397,078,384 $ --
------------------------------------------------------------------------
End of year $28,892,380 $21,137,339 $298,297,591 $334,990,461 $ 35,820,586
========================================================================
Undistributed net investment income
included in net assets:
End of year $ -- $ -- $ 687,275 $ 955,056 $ 172,883
========================================================================
</TABLE>
+ For the period August 3, 1998 (effective date) to October 31, 1998.
See notes to financial statements. 123
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
SECURITIES FUND INCOME FUND
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 11,332,883 $ 8,839,586 $ 14,888,936 $ 11,811,637
Net realized gain (loss) from investments and
foreign currency transactions ........................... (8,538,539) 18,354,800 27,859,622 16,999,297
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ........... (28,430,686) 9,072,653 1,596,184 41,583,856
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ (25,636,342) 36,267,039 44,344,742 70,394,790
Distributions to shareholders from:
Net investment income:
Class I ................................................ (9,877,888) (7,148,153) (13,224,776) (10,821,047)
Class II ............................................... (1,820,566) (764,202) (1,678,440) (874,988)
Net realized gains:
Class I ................................................ (15,493,732) (9,004,822) (15,051,100) (5,098,255)
Class II ............................................... (2,734,235) (857,185) (1,938,931) (396,739)
-------------------------------------------------------------------
Total distributions to shareholders ...................... (29,926,421) (17,774,362) (31,893,247) (17,191,029)
Capital share transactions: (Note 2)
Class I ................................................. 3,266,565 65,369,154 64,638,393 57,149,819
Class II ................................................ 16,484,480 22,239,207 34,384,586 22,298,986
-------------------------------------------------------------------
Total capital share transactions ......................... 19,751,045 87,608,361 99,022,979 79,448,805
-------------------------------------------------------------------
Net increase (decrease) in net assets ............. (35,811,718) 106,101,038 111,474,474 132,652,566
Net assets:
Beginning of year ........................................ $ 247,913,496 $ 141,812,458 $ 397,831,651 $ 265,179,085
-------------------------------------------------------------------
End of year .............................................. $ 212,101,778 $ 247,913,496 $ 509,306,125 $ 397,831,651
===================================================================
Undistributed net investment income included in net assets:
End of year ........................................... $ 916,488 $ 1,287,973 $ 581,251 $ 603,756
===================================================================
</TABLE>
124 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
FRANKLIN GLOBAL GOVERNMENT FRANKLIN SHORT-INTERMEDIATE
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 8,918,456 $ 9,191,413 $ 10,382,045 $ 10,505,611
Net realized gain (loss) from investments and
foreign currency transactions ................. 225,201 (76) 546,710 98,482
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies . (2,655,059) (3,329,899) 3,385,195 229,386
-------------------------------------------------------------------
Net increase in net assets resulting
from operations ......................... 6,488,598 5,861,438 14,313,950 10,833,479
Distributions to shareholders from:
Net investment income:
Class I ....................................... (7,742,300) (9,096,985) (10,749,725) (10,697,486)
Class II ...................................... (339,885) (249,829) -- --
Advisor Class ................................. (51,592) (39,987) (118,627) (12,468)
In excess of net investment income:
Class I ....................................... (578,601) (178,945) -- --
Class II ...................................... (25,400) (4,914) -- --
Advisor Class ................................. (3,856) (787) -- --
-------------------------------------------------------------------
Total distributions to shareholders ............. (8,741,634) (9,571,447) (10,868,352) (10,709,954)
Capital share transactions: (Note 2)
Class I ....................................... (5,329,387) (15,684,110) 28,693,996 (4,111,244)
Class II ...................................... 1,335,288 869,332 -- --
Advisor Class ................................. 99,883 762,031 3,201,489 381,098
-------------------------------------------------------------------
Total capital share transactions ................ (3,894,216) (14,052,747) 31,895,485 (3,730,146)
-------------------------------------------------------------------
Net increase (decrease) in net assets .... (6,147,252) (17,762,756) 35,341,083 (3,606,621)
Net assets:
Beginning of year ............................... $ 123,562,944 $ 141,325,700 $ 192,435,175 $ 196,041,796
-------------------------------------------------------------------
End of year ..................................... $ 117,415,692 $ 123,562,944 $ 227,776,258 $ 192,435,175
===================================================================
Undistributed net investment income (Accumulated
distributions in excess of net investment income)
included in net assets:
End of year .................................... $ (792,503) $ (184,646) $ 11,371 $ 497,678
===================================================================
</TABLE>
See notes to financial statements. 125
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements
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
seven separate series (the Funds). All Funds included in this report are
diversified except Franklin Global Government Income Fund. The Funds and their
investment objectives are:
<TABLE>
<CAPTION>
GLOBAL INCOME GROWTH AND INCOME INCOME
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Global Government Convertible Securities Fund Adjustable Rate Securities Fund
Income Fund Equity Income Fund Adjustable U.S. Government Securities Fund
Bond Fund
Short-Intermediate U.S. Government
Securities Fund
</TABLE>
The Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund invest substantially all of their assets in the Adjustable Rate
Securities Portfolio and the U.S. Government Adjustable Rate Mortgage Portfolio
(the Portfolios), respectively. Both are registered under the Investment Company
Act of 1940 as diversified, open-end investment companies having the same
investment objectives as the Adjustable Rate Securities Fund and the Adjustable
U.S. Government Securities Fund, respectively. The financial statements of the
Portfolios, including the Statements 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 Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund hold portfolio shares that are valued at their proportionate
interest in the net asset values of the Adjustable Rate Securities Portfolio and
the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. At October
31, 1998, the Adjustable Rate Securities Fund owns 99% of the Adjustable Rate
Securities Portfolio and the Adjustable U.S. Government Securities Fund owns 99%
of the U.S. Government Adjustable Rate Mortgage 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 Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest,
126
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
b. FOREIGN CURRENCY TRANSLATION: (CONT.)
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.
c. JOINT REPURCHASE AGREEMENT:
The Bond Fund, the Convertible Securities Fund, the Equity Income Fund and the
Short-Intermediate U.S. Government Securities Fund may enter into a joint
repurchase agreement whereby their uninvested cash balances are deposited into a
joint cash account to be used to invest in one or more repurchase agreements.
The value and face amount of the joint repurchase agreement are allocated to the
Funds based on their pro-rata interest. A repurchase agreement is accounted for
as a loan by the Fund to the seller, collateralized by securities which are
delivered to the Fund's custodian. The market value, including accrued interest,
of the initial collateralization is required to be at least 102% of the dollar
amount invested by the Funds, with the value of the underlying securities marked
to market daily to maintain coverage of at least 100%. At October 31, 1998, all
outstanding repurchase agreements had been entered into on October 30, 1998.
d. FUTURES CONTRACT:
The Bond Fund may enter into financial futures contacts and options on futures
contracts to hedge the risk of changes in interest rates. Required initial
margin deposits of cash or securities are maintained by the Fund's custodian in
segregated accounts as disclosed in the Statement of Investments. Subsequent
payments, known as variation margin are made or received by the Fund depending
on the daily fluctuations in the value of the underlying securities. Such
variation margin is accounted for as unrealized gains or losses until the
contract is closed, at which time the gains or losses are reclassified to
realized. Realized and unrealized gains and losses are included in the Statement
of Operations.
e. FORWARD EXCHANGE CONTRACT:
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.
f. 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.
127
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
g. 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.
h. 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.
i. OFFERING COSTS:
Offering costs are amortized on a straight-line basis over twelve months.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS I CLASS I & CLASS II CLASS I & ADVISOR CLASS CLASS I, CLASS II, & ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjustable Rate Securities Fund Convertible Securities Fund Bond Fund Global Government Income Fund
Adjustable U.S. Government Securities Fund Equity Income Fund Short-Intermediate U.S.
Government Securities Fund
</TABLE>
128
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
At October 31, 1998, there was an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
ADJUSTABLE
ADJUSTABLE RATE U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND*
--------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I SHARES:
1998
Shares sold ..................... 2,428,247 $ 24,202,326 17,728,448 $ 167,216,987 428,859 $ 4,337,530
Shares issued in reinvestment
of distributions ............... 95,071 947,120 1,090,772 10,268,136 545 5,651
Shares redeemed ................. (1,741,821) (17,346,585) (22,292,627) (210,197,212) (21,120) (218,454)
--------------------------------------------------------------------------------------
Net increase (decrease) ......... 781,497 $ 7,802,861 (3,473,407) $ (32,712,089) 408,284 $ 4,124,727
======================================================================================
1997
Shares sold ..................... 2,515,583 $ 24,890,014 19,504,396 $ 183,679,079
Shares issued in reinvestment
of distributions ............... 91,780 910,284 1,309,703 12,299,705
Shares redeemed ................. (2,076,570) (20,595,225) (27,867,699) (262,426,456)
------------------------------------------------------------
Net increase (decrease) ......... 530,793 $ 5,205,073 (7,053,600) $ (66,447,672)
============================================================
ADVISOR CLASS:
1998
Shares sold ..................... 3,061,438 $31,245,247
Shares issued in reinvestment
of distributions ............... 12,432 128,923
Shares redeemed ................. (30,728) (318,713)
------------------------
Net increase .................... 3,043,142 $31,055,457
========================
</TABLE>
*For the period August 3, 1998 (effective date) to October 31, 1998.
129
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
CONVERTIBLE EQUITY GLOBAL GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I SHARES:
1998
Shares sold ................. 4,772,514 $ 64,822,630 9,015,338 $ 180,490,789 2,683,291 $ 22,280,584
Shares issued in reinvestment
of distributions ........... 1,402,784 18,865,612 1,236,040 24,317,467 556,177 4,608,867
Shares redeemed ............. (6,083,262) (80,421,677) (7,026,650) (140,169,863) (3,877,271) (32,218,838)
-----------------------------------------------------------------------------------------------
Net increase (decrease) ..... 92,036 $ 3,266,565 3,224,728 $ 64,638,393 (637,803) $ (5,329,387)
===============================================================================================
1997
Shares sold ................. 7,074,889 $ 98,888,262 6,936,844 $ 125,149,684 2,472,734 $ 20,945,795
Shares issued in reinvestment
of distributions ........... 916,933 12,136,488 762,734 13,249,367 576,140 4,904,638
Shares redeemed ............. (3,302,613) (45,655,596) (4,489,818) (81,249,232) (4,879,312) (41,534,543)
-----------------------------------------------------------------------------------------------
Net increase (decrease) ..... 4,689,209 $ 65,369,154 3,209,760 $ 57,149,819 (1,830,438) $ (15,684,110)
===============================================================================================
CLASS II SHARES:
1998
Shares sold ................. 1,925,827 $ 26,217,204 2,664,562 $ 53,316,585 405,491 $ 3,372,424
Shares issued in reinvestment
of distributions ........... 267,020 3,567,903 166,092 3,261,574 27,768 229,929
Shares redeemed ............. (1,045,779) (13,300,627) (1,103,002) (22,193,573) (273,562) (2,267,065)
-----------------------------------------------------------------------------------------------
Net increase ................ 1,147,068 $ 16,484,480 1,727,652 $ 34,384,586 159,697 $ 1,335,288
===============================================================================================
1997
Shares sold ................. 1,693,202 $ 23,703,881 1,537,907 $ 27,820,253 314,368 $ 2,666,891
Shares issued in reinvestment
of distributions ........... 96,754 1,282,945 64,902 1,133,280 18,565 157,895
Shares redeemed ............. (197,081) (2,747,619) (364,896) (6,654,547) (228,727) (1,955,454)
-----------------------------------------------------------------------------------------------
Net increase ................ 1,592,875 $ 22,239,207 1,237,913 $ 22,298,986 104,206 $ 869,332
===============================================================================================
</TABLE>
130
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
GLOBAL GOVERNMENT
INCOME FUND
---------------------
SHARES AMOUNT
---------------------
<S> <C> <C>
ADVISOR CLASS:
1998
Shares sold ........................................ 30,190 $ 249,021
Shares issued in reinvestment
of distributions .................................. 6,299 52,063
Shares redeemed ................................... (24,127) (201,201)
---------------------
Net increase ....................................... 12,362 $ 99,883
=====================
1997+
Shares sold ........................................ 102,752 $ 885,499
Shares issued in reinvestment
of distributions .................................. 4,741 40,043
Shares redeemed .................................... (19,378) (163,511)
---------------------
Net increase ....................................... 88,115 $ 762,031
=====================
</TABLE>
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
CLASS I SHARES:
1998
Shares sold .................................... 21,448,883 $ 221,708,093
Shares issued in reinvestment
of distributions .............................. 627,776 6,477,086
Shares redeemed ................................ (19,311,848) (199,491,183)
----------------------------
Net increase ................................... 2,764,811 $ 28,693,996
============================
1997
Shares sold .................................... 9,455,984 $ 96,723,865
Shares issued in reinvestment
of distributions .............................. 610,793 6,250,094
Shares redeemed ................................ (10,469,896) (107,085,203)
----------------------------
Net decrease ................................... (403,119) $ (4,111,244)
============================
</TABLE>
+For the period January 2, 1997 (effective date) to October 31, 1997.
131
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
-----------------------
SHARES AMOUNT
-----------------------
<S> <C> <C>
Advisor Class:
1998
Shares sold ...................................... 312,657 $ 3,216,468
Shares issued in reinvestment
of distributions ................................ 10,199 105,389
Shares redeemed .................................. (11,650) (120,368)
-----------------------
Net increase ..................................... 311,206 $ 3,201,489
=======================
1997+
Shares sold ...................................... 37,960 $ 387,372
Shares issued in reinvestment
of distributions ................................ 393 4,015
Shares redeemed .................................. (1,004) (10,289)
-----------------------
Net increase ..................................... 37,349 $ 381,098
=======================
</TABLE>
+For the period January 2, 1997 (effective date) to October 31, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers and/or directors of
the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, Inc. (FTServices) Administrative manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer agent
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Templeton Investment Counsel, Inc. (TICI) Investment manager
The Adjustable Rate Securities Portfolio The Fund in which the Adjustable Rate Securities Fund invests
The U.S. Government Adjustable Rate Mortgage Portfolio The Fund in which the Adjustable U.S. Government Securities
Fund invests
</TABLE>
The Convertible Securities Fund, the Equity Income Fund, the Global Government
Income Fund and the Short-Intermediate U.S. Government Securities Fund pay an
investment management fee to Advisers based on the average net assets of the
Funds, as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE MONTH END NET ASSETS
----------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
</TABLE>
132
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Bond Fund pays an investment management fee to Advisers of .425% of the
first $500 million of the Fund's average daily net assets. Fees are further
reduced on net assets over $500 million.
The Bond Fund pays an administrative fee to FT Services of .20% per year of the
Fund's average daily net assets.
The Adjustable Rate Securities Fund and the Adjustable U.S. Government
Securities Fund pay an administrative fee to Advisers based on the average net
assets of the Funds, as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-------------------------------------------------------------
<S> <C>
.10% First $5 billion
.09% Over $5 billion, up to and including $10 billion
.08% Over $10 billion
</TABLE>
Under an agreement with Advisers, FT Services provides administrative services
to the Convertible Securities Fund, the Equity Income Fund, the Global
Government Income Fund and the Short-Intermediate U.S Government Securities
Fund. The fee is paid by Advisers based on the average daily net assets, and is
not an additional expense of the Funds.
Under a subadvisory agreement, TICl 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 Rate Securities Fund, the Adjustable U.S. Government Securities
Fund, and the Bond Fund reimburse Distributors up to .25% per year of their
average daily net assets of Class I, the Short-Intermediate U.S. Government
Securities Fund reimburses Distributors up to .10% per year of the average daily
net assets of Class I, the Convertible Securities Fund and the Equity Income
Fund reimburse Distributors up to .25% and 1.00% per year of the average daily
net assets of Class I and Class II, respectively, the Global Government Income
Fund reimburses Distributors up to .15% and .65% 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 year as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net commissions
received (paid) .... $ (17,543) $ (38,816) $ 30,383 $ (180,101) $ (350,550) $ 13,932 $ (64,891)
Contingent deferred
sales charges ...... $ 4,402 $ -- $ -- $ 24,871 $ 25,388 $ 2,369 $ --
</TABLE>
133
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 1998, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 ............. $ -- $ 1,925,614 $ -- $ -- $ --
2001 ............. -- 7,701,615 -- -- --
2002 ............. 414,821 41,867,757 -- -- 1,788,818
2003 ............. 286,740 18,176,270 -- 1,959,011 3,564,637
2004 ............. 66,100 8,741,194 -- -- 300,618
2005 ............. 95,706 4,484,844 -- -- --
2006 ............. 21,042 2,564,334 8,652,572 -- --
==================================================================================
$ 884,409 $ 85,461,628 $ 8,652,572 $ 1,959,011 $ 5,654,073
==================================================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and offering costs.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
At October 31, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments at
cost ........... $28,911,041 $321,299,756 $37,203,224 $ 225,467,301 $442,967,637 $119,790,330 $221,981,674
===============================================================================================================
Unrealized
appreciation ... 32,121 -- 367,192 8,273,285 81,705,544 2,509,259 5,916,704
Unrealized
depreciation ... -- (21,844,511) (67,704) (23,677,679) (14,247,511) (7,842,884) --
-----------------------------------------------------------------------------------------------------------------
Net unrealized
appreciation
(depreciation) . $ 32,121 $ (21,844,511) $ 299,488 $ (15,404,394) $ 67,458,033 $ (5,333,625) $ 5,916,704
==================================================================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
ADJUSTABLE RATE U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases .... $20,056,217 $125,538,557 $39,192,993 $184,427,332 $205,795,206 $56,591,230 $103,061,406
Sales ........ $12,275,442 $158,669,111 $ 6,030,076 $191,609,323 $136,228,278 $64,831,959 $ 72,374,531
</TABLE>
134
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bond Fund and the Global Government Income Fund have been parties to
financial instruments with off-balance sheet risk, primarily financial futures
contracts and forward exchange contracts in order to minimize the impact on the
Funds from adverse changes in interest rates and in the relationship between the
U.S. dollar and foreign currencies. These instruments involve market risk in
excess of the amount recognized on the Statements of Assets and Liabilities.
A financial futures contract is an agreement between two parties to buy or sell
a security for a set price on a future date. The use of futures transactions
involves risk of imperfect correlation in movements in the price of futures
contracts, interest rates, and the underlying hedged assets.
At October 31, 1998, the Bond Fund had the following contracts outstanding:
<TABLE>
<CAPTION>
NUMBER OF DELIVERY UNREALIZED
CONTRACTS TO BUY CONTRACTS DATES GAIN
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. 5YR Treasury Notes (CBT)Dec98 35 12/1/98 - 12/31/98 $ 2,344
U.S. Treasury Notes (CBT)Dec98 26 12/1/98 - 12/31/98 4,085
----------
Net unrealized gain on future contracts $ 6,429
==========
</TABLE>
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. Some of the
market risks associated with forward exchange contracts are minimized by
offsetting contracts. Risks arise from the possible inability of counterparties
to meet the terms of their contracts, future movement in currency values,
interest rates and contract positions that are not exact offsets. 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.
At October 31, 1998, all forward exchange contracts in the Global Government
Income Fund were offset.
7. CREDIT RISK
The Convertible Securities Fund has 45.2% 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.
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.
135
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
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 October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Shares Issuer Acquisition Date Cost Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Securities Fund
73,000 CMS Energy Trust I, 7.75%, cvt. pfd. (1.86% of Net Assets) .... 6/18/97 $ 3,650,000 $ 3,946,563
-----------
Equity Income Fund
80,000 CMS Energy Trust I, 7.75%, cvt. pfd. (.85% of Net Assets) ..... 6/18/97 4,000,000 4,325,000
-----------
</TABLE>
136
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF FRANKLIN INVESTORS SECURITIES TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds constituting the
Franklin Investors Securities Trust (hereafter referred to as the "Trust") at
October 31, 1998, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
December 9, 1998
137
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Funds hereby
designates the following amounts as capital gain dividends for the fiscal year
ended October 31, 1998.
<TABLE>
<CAPTION>
Capital
Gains
------------
<S> <C>
Franklin Bond Fund .............................................. $ 81,659
Franklin Equity Income Fund ..................................... $ 25,407,218
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the following percentage amounts of the ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
October 31, 1998.
<TABLE>
<CAPTION>
Convertible Equity
Securities Fund Income Fund
---------------------------------
<S> <C>
17.37% 61.90%
</TABLE>
138
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
U.S. Government Adjustable Rate Mortgage Portfolio
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 9.48 $ 9.37 $ 9.33 $ 9.19 $ 9.82
----------------------------------------------------------
Income from investment operations:
Net investment income ............................. .553 .593 .589 .572 .415
Net realized and unrealized gain (loss) ........... (.110) .110 .040 .140 (.630)
----------------------------------------------------------
Total from investment operations ................... .443 .703 .629 .712 (.215)
Less distributions from net investment income ...... (.553) (.593) (.589) (.572) (.415)
----------------------------------------------------------
Net asset value, end of year ....................... $ 9.37 $ 9.48 $ 9.37 $ 9.33 $ 9.19
==========================================================
Total return* ...................................... 4.80% 7.74% 6.95% 7.99% (2.22)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 302,434 $ 342,541 $ 406,431 $ 522,802 $ 747,471
Ratios to average net assets:
Expenses .......................................... .26% .25% .25% .18% .02%
Expenses excluding waiver and payments by affiliate .43% .43% .42% .43% .42%
Net investment income ............................. 5.88% 6.31% 6.31% 6.17% 4.01%
Portfolio turnover rate ............................ 38.92% 20.84% 24.63% 20.16% 56.43%
</TABLE>
*Total return is not annualized.
See notes to financial statements
139
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 94.9%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 19.1%
FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.375%, 11/01/16 $ 3,604,698 $ 3,652,503
FHLMC, Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 7.311%, 7/01/18 3,035,450 3,106,513
FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.636%, 4/01/18 5,125,530 5,274,679
FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.42%, 9/01/19 4,294,753 4,398,236
FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.464%, 12/01/16 2,291,885 2,332,384
FHLMC, Cap 13.175%, Margin 2.223% + CMT, Resets Annually, 7.637%, 5/01/25 4,422,891 4,556,221
FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.591%, 10/01/18 1,591,122 1,639,216
FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.589%, 3/01/19 1,841,423 1,887,464
FHLMC, Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.528%, 3/01/18 3,200,924 3,279,511
FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.502%, 4/01/19 7,409,563 7,590,059
FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.607%, 7/01/20 4,653,200 4,796,345
FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.586%, 11/01/19 2,318,521 2,392,596
FHLMC, Cap 13.879%, Margin 2.089% + CMT, Resets Annually, 7.486%, 4/01/18 6,411,605 6,582,541
FHLMC, Cap 13.948%, Margin 2.133% + CMT, Resets Annually, 7.533%, 11/01/19 2,879,655 2,996,227
FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.781%, 12/01/21 1,224,667 1,279,504
FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.113%, 2/01/19 1,819,653 1,888,873
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $57,967,294) 57,652,872
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 64.2%
FNMA, Cap 12.097%, Margin 2.135% + CMT, Resets Annually, 7.37%, 11/01/23 12,503,875 12,937,266
FNMA, Cap 12.233%, Margin 1.702% + COFI, Resets Monthly, 6.636%, 1/01/19 7,627,846 7,774,310
FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 7.639%, 11/01/18 1,818,913 1,900,661
FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.926%, 11/01/17 13,316,154 13,677,421
FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.437%, 3/01/19 2,706,530 2,787,983
FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 6.83%, 1/01/19 8,005,270 8,154,460
FNMA, Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.888%, 1/01/19 2,911,071 2,938,174
FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 9/01/18 8,747,026 8,792,948
FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.445%, 1/01/19 2,340,008 2,398,345
FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 7.487%, 11/01/20 2,670,043 2,755,003
FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.186%, 5/01/19 3,744,336 3,823,498
FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.869%, 6/01/17 2,127,134 2,239,676
FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.243%, 10/01/17 3,405,770 3,602,845
FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 7.246%, 7/01/17 5,143,467 5,324,170
FNMA, Cap 12.93%, Margin 2.24% + CMT, Resets Annually, 7.101%, 2/01/27 4,547,275 4,717,041
FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 2/01/19 3,113,374 3,129,719
FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 7.496%, 12/01/19 2,405,758 2,478,998
FNMA, Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 7.769%, 11/01/17 3,858,901 4,012,140
FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.585%, 6/01/19 3,342,419 3,441,680
FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.914%, 2/01/20 7,988,252 8,060,147
FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.034%, 12/01/20 4,157,151 4,246,497
FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.672%, 4/01/19 4,633,126 4,769,624
FNMA, Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.418%, 6/01/19 3,611,211 3,720,183
FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 7.285%, 4/01/19 4,040,723 4,149,964
FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 7.53%, 11/01/26 1,938,541 2,027,911
FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 7.354%, 6/01/19 1,945,517 1,999,732
FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.445%, 10/01/19 5,472,332 5,641,528
FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.216%, 4/01/03 4,226,775 4,275,383
FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 7.528%, 9/01/22 9,229,324 9,517,144
</TABLE>
140
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (cont.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
FNMA, Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 7.364%, 6/01/18 $ 4,247,553 $ 4,351,882
FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 7.61%, 3/01/21 3,557,021 3,673,313
FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 7.602%, 12/01/20 5,551,506 5,734,770
FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.628%, 3/01/19 1,779,340 1,834,235
FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.777%, 7/01/24 4,432,225 4,529,487
FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.75%, 2/01/19 3,113,508 3,210,499
FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.804%, 12/01/18 2,030,337 2,093,964
FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.51%, 1/01/19 4,614,293 4,754,997
FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.175%, 5/01/21 6,890,219 7,272,025
FNMA, Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 7.489%, 3/01/20 2,787,614 2,906,943
FNMA, Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.100%, 1/01/16 6,214,005 6,317,544
FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.008%, 5/01/19 2,237,458 2,335,072
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $194,697,467) 194,309,182
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 11.6%
GNMA, Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/24 4,917,984 4,986,199
GNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 8/20/22 6,919,159 6,991,399
GNMA, Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 9/20/22 6,032,008 6,094,281
GNMA, Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 8.00%, 7/20/25 2,919,555 3,027,308
GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/23 4,239,605 4,302,388
GNMA, Cap 12.00%, Margin 1.50% + CMT, Resets Annually, 7.00%, 10/20/24 9,649,531 9,758,939
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $35,358,726) 35,160,514
------------
(a)REPURCHASE AGREEMENTS 3.9%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $11,723,622) (Cost $11,718,397) 11,718,397 11,718,397
Barclays Capital Group, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Deutsche Morgan Granfell/C.J. Lawrence, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
NationsBanc Montgomery Securities, L.L.C.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $299,741,884) 98.8% 298,840,965
OTHER ASSETS, LESS LIABILITIES 1.2% 3,592,778
------------
NET ASSETS 100.0% $302,433,743
============
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ABBREVIATIONS:
<S> <C>
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
</TABLE>
(a) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1998, all repurchase
agreements held by the Fund had been entered into on October 30, 1998.
See notes to financial statements. 141
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
ADJUSTABLE RATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 9.95 $ 9.86 $ 9.81 $ 9.69 $ 10.03
-------------------------------------------------------
Income from investment operations:
Net investment income ............................. .595 .616 .607 .625 .469
Net realized and unrealized gain (loss) ........... (.011) .090 .050 .120 (.340)
-------------------------------------------------------
Total from investment operations ................... .584 .706 .657 .745 .129
Less distributions from net investment income ...... (.594) (.616) (.607) (.625) (.469)
-------------------------------------------------------
Net asset value, end of year ....................... $ 9.94 $ 9.95 $ 9.86 $ 9.81 $ 9.69
=======================================================
Total return* ...................................... 6.03% 7.38% 6.91% 7.94% 1.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 29,287 $ 22,540 $ 20,534 $ 27,079 $ 41,619
Ratios to average net assets:
Expenses .......................................... .26% .25% .25% .25% .25%
Expenses excluding waiver and payments by affiliate .45% .44% .47% .47% .43%
Net investment income ............................. 5.95% 6.20% 6.19% 6.36% 4.55%
Portfolio turnover rate ............................ 76.41% 138.32% 46.78% 50.29% 192.06%
</TABLE>
*Total return is not annualized
142 See notes to financial statements.
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ADJUSTABLE RATE SECURITIES PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 77.4%
FNMA, Cap 11.10%, Margin 2.00% + CMT, Resets Annually, 7.397%, 3/01/22 $ 740,499 $ 760,103
FNMA, Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%, 10/01/28 682,783 697,201
FNMA, Cap 12.85%, Margin 1.97% + CMT, Resets Annually, 7.41%, 12/01/17 703,380 722,786
FNMA, Cap 13.54%, Margin 1.25% + COFI, Resets Monthly, 6.131%, 8/01/26 899,637 907,649
FNMA, Cap 13.69%, Margin 1.88% + CMT, Resets Annually, 7.266%, 8/01/16 286,645 293,628
FNMA, Cap 13.77%, Margin 2.13% + 3CMT, Resets Every 3 Years, 8.192%, 3/01/22 746,559 780,529
FNMA, Cap 13.87%, Margin 1.98% + CMT, Resets Annually, 7.385%, 3/01/18 1,670,926 1,713,532
FNMA, Cap 14.78%, Margin 2.130% + 3CMT, Resets Every 3 Years, 7.978%, 8/01/22 1,578,934 1,648,612
GNMA, Cap 10.50%, Margin 1.50% +CMT, Resets Annually, 7.00%, 8/20/22 1,884,411 1,904,086
GNMA, Cap 11.00%, Margin 1.50% +CMT, Resets Annually, 7.00%, 11/20/21 1,403,054 1,423,647
Home Owners Federal Savings, Cap 13.00%, Margin 1.75% + CMT, Resets
Annually, 7.171%, 1/25/18 684,077 688,780
Merrill Lynch Mortgage Investors, Inc., Margin 0.40% + 1 Month LIBOR, Resets
Monthly, 6.087%, 6/15/18 788,440 780,310
PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 7.971%, 7/25/22 528,745 527,423
PHMS, Cap 13.00%, Margin 2.53% + CMT, Resets Annually, 7.962%, 8/25/21 487,324 484,583
PHMS, Cap 13.40%, Margin 2.50% + CMT, Resets Annually, 7.914%, 7/25/18 1,402,704 1,411,472
RFC, Cap 10.00%, Margin 0.85% + COFI, Resets Monthly, 5.749%, 2/25/22 365,397 365,469
RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.704%, 11/25/22 809,512 807,615
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 6.759%, 1/25/25 933,989 931,193
Ryland Mortgage Securities Corp., Cap 12.41%, Margin 1.80% + CMT, Resets
Annually, 7.183%, 3/25/20 1,169,365 1,167,538
Ryland Mortgage Securities Corp., Cap 14.82%, Margin 2.29% + 6 Month TB, Resets
Semi-Annually, 7.398%, 8/25/23 757,180 755,557
Ryland Mortgage Securities Corp., Cap 15.34%, Margin 1.83% + CMT, Resets
Annually, 7.281%, 6/25/20 589,154 590,259
Salomon Brothers Mortgage Securities VII, Cap 14.00%, Margin 0.96% + NACR, Resets
Annually, 7.761%, 12/25/17 953,794 951,708
Saxon Mortgage Securities Corp., Cap 10.78%, Margin 2.78%, + 6 Month LIBOR, Resets
Semi-Annually, 8.611%, 5/25/24 482,463 485,931
Sears Mortgage Securities, Cap 10.78%, Margin 1.10% + COFI, Resets Monthly,
6.011%, 7/25/21 414,444 404,990
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25% + CMT, Resets
Annually, 7.724%, 12/25/18 588,382 585,624
Western Federal Savings and Loan Association, Cap 12.25%, Margin 0.75%
+ 1 Month LIBOR, Resets Monthly, 6.398%, 6/25/20 370,004 364,570
Western Federal Savings and Loan Association, Cap 12.75%, Margin 0.75%
+ 1 Month LIBOR, Resets Monthly, 6.398%, 7/25/20 344,508 338,587
Western Federal Savings and Loan Association, Cap 13.00%, Margin 1.80%
+ COFI, Resets Monthly, 6.681%, 3/25/19 175,873 175,654
-----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (Cost $22,821,120) 22,669,036
-----------
FIXED RATE MORTGAGE SECURITIES 1.4%
Countrywide Mortgage-Backed Securities, Inc., Series 1994-I, Class A8,
6.25%, 7/25/09 (Cost $395,892) 407,086 405,766
-----------
OTHER ADJUSTABLE RATE SECURITIES 3.3%
SBA, Cap 12.62%, Margin -0.12% + Prime, Resets Quarterly, 8.125%,
8/25/20 (Cost $960,939) 891,305 957,039
-----------
U.S. GOVERNMENT SECURITIES 10.4%
U.S. Treasury Notes, 5.375%, 1/31/00 1,000,000 1,012,188
U.S. Treasury Notes, 5.375%, 7/31/00 1,000,000 1,017,501
U.S. Treasury Notes, 5.875%, 2/15/00 1,000,000 1,018,751
-----------
TOTAL U.S. GOVERNMENT SECURITIES (COST $3,005,000) 3,048,440
-----------
</TABLE>
143
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Statement of Investments, October 31, 1998 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
ADJUSTABLE RATE SECURITIES PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)REPURCHASE AGREEMENTS 3.7%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity
Value $1,093,243) (Cost $1,092,756) $1,092,756 $ 1,092,756
Barclays Capital Group, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Deutsche Morgan Grenfell/C.J. Lawrence, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
NationsBanc Montgomery Securities, L.L.C.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills and Notes
-----------
TOTAL INVESTMENTS (COST $28,275,707) 96.2% 28,173,037
OTHER ASSETS, LESS LIABILITIES 3.8% 1,114,270
-----------
NET ASSETS 100.0% $ 29,287,307
============
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ABBREVIATIONS
<S> <C>
3CMT - 3 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
LIBOR - London Interbank Contract 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
TB - Treasury Bill Rate
</TABLE>
(a)Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1998, all repurchase
agreements held by the Fund had been entered into on October 30, 1998.
144 See notes to financial statements.
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
----------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost ................................................... $ 299,741,884 $ 28,275,707
==================================
Value .................................................. 298,840,965 28,173,037
Receivables:
Investment securities sold ............................. 1,865,682 963,022
Interest ............................................... 2,068,672 185,936
Affiliates ............................................. 51,559 --
----------------------------------
Total assets ........................................ 302,826,878 29,321,995
----------------------------------
Liabilities:
Payables:
Capital shares redeemed ................................ 270,188 12,537
Affiliates ............................................. 101,886 9,956
Other liabilities ....................................... 21,061 12,195
----------------------------------
Total liabilities ................................... 393,135 34,688
----------------------------------
Net assets, at value ................................ $ 302,433,743 $ 29,287,307
==================================
Net assets consist of:
Net unrealized depreciation ............................ $ (900,919) $ (102,670)
Accumulated net realized loss .......................... (136,855,767) (2,803,982)
Capital shares ......................................... 440,190,429 32,193,959
----------------------------------
Net assets, at value .................................... $ 302,433,743 $ 29,287,307
==================================
Shares outstanding ...................................... 32,277,857 2,945,779
==================================
Net asset value and maximum offering price per share .... $ 9.37 $ 9.94
==================================
</TABLE>
See notes to financial statements. 145
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)
STATEMENTS OF OPERATIONS
for the year ended October 31, 1998
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------------------------
<S> <C> <C>
Investment income:
Interest .......................................................... $ 19,548,300 $ 1,503,199
-------------------------------------------
Expenses: ..........................................................
Management fees (Note 3) .......................................... 1,272,933 96,734
Custodian fees .................................................... 3,254 247
Professional fees ................................................. 51,080 5,568
Trustee's fees and expenses ....................................... 8,519 694
Other ............................................................. 17,381 6,027
-------------------------------------------
Total expenses ................................................... 1,353,167 109,270
Expenses waived/paid by affiliate (Note 3) ....................... (514,508) (45,345)
-------------------------------------------
Net expenses .................................................... 838,659 63,925
-------------------------------------------
Net investment income .......................................... 18,709,641 1,439,274
-------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ......................... 271,114 (75,829)
Net unrealized appreciation (depreciation) on investments ......... (3,967,154) 40,875
-------------------------------------------
Net realized and unrealized loss ................................... (3,696,040) (34,954)
-------------------------------------------
Net increase in net assets resulting from operations ............... $ 15,013,601 $ 1,404,320
===========================================
</TABLE>
146 See notes to financial statements.
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended October 31, 1998 and 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
--------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 18,709,641 $ 23,464,424 $ 1,439,274 $ 1,500,611
Net realized gain (loss) from investments ........ 271,114 693,708 (75,829) 14,469
Net unrealized appreciation
(depreciation) on investments ................... (3,967,154) 3,675,679 40,875 260,606
--------------------------------------------------------------------
Net increase in net assets
resulting from operations ......................... 15,013,601 27,833,811 1,404,320 1,775,686
Distributions to shareholders from:
Net investment income ............................ (18,709,641) (23,464,424) (1,438,180) (1,500,611)
Capital share transactions (Note 2) .............. (36,411,307) (68,259,294) 6,781,305 1,730,540
--------------------------------------------------------------------
Net increase (decrease) in net assets .............. (40,107,347) (63,889,907) 6,747,445 2,005,615
Net assets (there is no undistributed net investment
income at beginning or end of year):
Beginning of year ................................ 342,541,090 406,430,997 22,539,862 20,534,247
--------------------------------------------------------------------
End of year ...................................... $ 302,433,743 $ 342,541,090 $ 29,287,307 $ 22,539,862
====================================================================
</TABLE>
See notes to financial statements. 147
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements
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. 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.
c. 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.
d. 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.
148
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 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 RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
--------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended October 31, 1998
Shares sold .................................... 11,366,772 $ 107,271,915 1,878,813 $ 18,706,872
Shares issued on reinvestment of distributions . 1,982,722 18,703,706 144,487 1,437,947
Shares redeemed ................................ (17,212,608) (162,386,928) (1,343,424) (13,363,514)
--------------------------------------------------------------------------
Net increase (decrease) ..................... (3,863,114) $ (36,411,307) 679,876 $ 6,781,305
==========================================================================
Year ended October 31, 1997
Shares sold .................................... 14,468,647 $ 136,195,699 2,195,631 $ 21,698,569
Shares issued on 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 trustees 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 trustees 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:
<TABLE>
<CAPTION>
Annualized
Fee Rate Average Daily Net Assets
--------------------------------------------------------------------
<S> <C>
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
</TABLE>
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.
149
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
At October 31, 1998, 32,277,857 shares of the Mortgage Portfolio were owned by
the following:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME SHARES OWNED OUTSTANDING SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Franklin Adjustable U.S. Government Securities Fund 31,958,938 99%
Franklin Institutional Adjustable U.S. Government Securities Fund 318,919 1%
</TABLE>
At October 31, 1998, 2,945,779 shares of the Securities Portfolio were owned by
the following:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME SHARES OWNED OUTSTANDING SHARES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Fund 2,911,787 99%
Franklin Institutional Adjustable Securities Fund 32,386 1%
Franklin Resources, Inc. 1,606 --
</TABLE>
4. INCOME TAXES
At October 31, 1998, the Portfolios had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2000 ................................. $ 44,474,794 $ 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
2006 ................................. -- 75,829
------------------------------------------
$ 136,855,767 $ 2,803,982
==========================================
</TABLE>
At October 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------------------
<S> <C> <C>
Investment at cost $ 299,741,884 $ 28,275,707
============= ============
Unrealized appreciation 1,117,279 95,367
Unrealized depreciation (2,018,198) (198,037)
------------- ------------
Net unrealized depreciation $ (900,919) $ (102,670)
============= ============
</TABLE>
150
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-----------------------------------------
<S> <C> <C>
Purchases $119,138,749 $23,002,344
Sales $159,164,467 $17,721,533
</TABLE>
151
<PAGE>
FRANKLIN ADJUSTABLE RATE SECURITIES PORTFOLIOS
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
ADJUSTABLE RATE SECURITIES PORTFOLIOS
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the two Portfolios constituting the
Adjustable Rate Securities Portfolios, (hereafter referred to as the "Trust") at
October 31, 1998, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
December 9, 1998
152
