SHAREHOLDER LETTER
Dear Shareholder:
This annual report for Franklin Investors Securities Trust covers the period
ended October 31, 1999.
A NEW PARADIGM VS. LESSONS FROM THE PAST
The eve of the millennium presents a milestone by which to measure past
achievements as well as an opportunity to ask ourselves what lies ahead. The
reporting period's close finds the United States in its ninth year of economic
expansion, at the tail end of a decade characterized by tremendous technological
advances. The most significant advance of the last ten years, many would argue,
has been the Internet. With its unprecedented capacities for transferring
information and enabling business transactions, the Internet went from being the
domain of a small research and military community at the time of its creation
thirty years ago, to mass-market significance by the end of the 1990s.
The relationship between technology and the past nine years' economic prosperity
occupied a prominent place in economic discussions by the reporting period's
end. Specifically, many economists including Federal Reserve Board (Fed)
Chairman Alan Greenspan questioned whether rapid technological advance had
altered the traditional paradigm for the creation of wealth and could propel the
bull market of recent years into the next century. Appealing as this vision of
continuous upward expansion is, Greenspan and others were also loath to ignore
the lessons of traditional wisdom and past experience, which dictate that what
goes up must come down.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ..................................................... 1
Fund Reports
Franklin Adjustable U.S. Government Securities Fund ................... 4
Franklin Bond Fund .................................................... 10
Franklin Convertible Securities Fund .................................. 17
Franklin Equity Income Fund ........................................... 25
Franklin Global Government Income Fund ................................ 36
Franklin Short-Intermediate U.S. Government Securities Fund ........... 46
Financial Highlights & Statement of Investments ........................ 54
Financial Statements ................................................... 83
Notes to Financial Statements .......................................... 93
Independent Auditors' Report ........................................... 103
Tax Information ........................................................ 104
</TABLE>
<PAGE>
"...Increased economic activity, high levels of consumer confidence and tight
labor markets did not come without revived fears of inflation."
ECONOMIC GROWTH AND THE SPECTER OF INFLATION
During the year under review, the U.S. economy continued to grow at a brisk
pace, stimulated by the Fed's interest-rate cuts in the fall of 1998. Economic
growth, as measured by the gross domestic product (GDP) registered a 5.5%
annualized rate for the third quarter of 1999. At the same time, unemployment
rates, ranging from 4.8% to 3.8% during the 12 months under review, remained
historically low.
As fears of a slowdown, prompted by many foreign economies' problems and
turbulent worldwide financial markets a year earlier, appeared unfounded, stock
market indexes rebounded strongly during the year. These advances were mainly
driven by a narrow list of stocks, primarily in the technology sector, which
tended to mask underlying weakness in individual stocks. Meanwhile, the "wealth
effect" stemming from the general rise in household stock market assets since
1995 buoyed consumer confidence and resulted in greater consumer spending
throughout the reporting period.
However, increased economic activity, high levels of consumer confidence and
tight labor markets did not come without revived fears of inflation. In the
U.S., the overall Consumer Price Index (CPI), one measure of inflation, rose
0.5% in September, propelled largely by higher tobacco, energy and clothing
costs. Rising inflation, which erodes bonds' fixed principal and interest
payments, put upward pressure on interest rates. Addressing this growth and its
potential inflationary implications, the Federal Open Market Committee (FOMC)
commenced a program of tightening. The FOMC twice raised the federal funds
target rate by 0.25%, and it ended the period at 5.25%. Meanwhile, the benchmark
30-year U.S. Treasury bond yield increased to 6.16% on October 31, 1999,
compared with 5.16% a year earlier.
2
<PAGE>
Despite September's slight increase, the CPI's core rate, which excludes food
and energy costs, still remained close to a 33-year low. This and the outlook
for more moderate economic growth should benefit bonds in the year to come.
While we don't have a crystal ball that will predict the course of future
events, we do recommend certain strategies that may reduce shareholder risk.
Specifically, we believe in the importance of investing for the long term so
daily market fluctuations and short-term volatility have minimal impact on
overall investment goals. We also encourage you to discuss your financial goals
with your investment representative. He or she can address concerns about market
volatility, and help you diversify your investments and stay focused on the long
term.
As always, we appreciate your continued investment in Franklin Investors
Securities Trust and look forward to serving your future investment needs.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
3
<PAGE>
[GRAPHIC PYRAMID]
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
The 12 months ended October 31, 1999, were characterized by a period of rising
interest rates and strong economic growth. The 30-year Treasury yield rose from
5.16% on October 31, 1998, to 6.16% on October 31, 1999. As the fund's fiscal
year began, the financial markets were just beginning to recover from the global
financial crisis prompted by events in Asia and Russia. The resulting
"flight-to-quality" purchasing of U.S. Treasury securities had driven yields to
cyclical lows. As the crisis subsided, rates began to move higher. Continued
strong domestic growth and pockets of inflationary pressures pushed up rates to
their recent levels.
Whereas early in the year under review, the consumer sector fueled most of the
economic strength, in recent months the manufacturing sector was a major
contributor to the overall growth picture. Key manufacturing statistics were
evidence of robust growth. For example, the National Association of Purchasing
Managers (NAPM) Index, for which a number above 50.0 indicates an expanding
economy, rose from 48.4% on October 31, 1998, to 56.6 on October 31, 1999.
Growth was also apparent in the industrial production figures.
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 55 of
this report.
4
<PAGE>
The consumer sector did not slack off, however. Despite higher mortgage rates,
housing remained strong nationwide. While refinancing activity fell sharply,
purchase activity remained at a high level. For example, although the average
30-year mortgage rate rose to 7.96% on October 31, 1999, from 6.83% one year
earlier, the Mortgage Bankers' Association (MBA) Purchase Index actually rose
from 237.7 to 265.3 over the same period.
All of this economic strength raised concerns about a possible pickup in
inflation. Indeed, the 12-month year-over-year Consumer Price Index, a commonly
used measure of inflation, through October 31, 1999, stood at 2.6%, up from 1.5%
on October 31, 1998. Much of this can be attributed to a tight labor market and
higher energy prices, especially oil. If growth remains strong and inflation
continues to creep up, the Federal Reserve Board (the Fed) may decide to raise
short-term interest rates further to maintain price stability. The Fed already
raised the federal funds target rate twice in the summer, taking back some of
its decreases of last fall. One or more tightenings could be forthcoming in the
next few months, if more signs of inflationary pressures appear.
PORTFOLIO BREAKDOWN
Franklin Adjustable
U.S. Government Securities Fund
Based on Total Net Assets
10/31/99
[PIE CHART]
<TABLE>
<S> <C>
FNMA 70.9%
FHLMC 13.8%
GNMA 8.8%
Other 6.5%
</TABLE>
5
<PAGE>
"We choose securities using a value-oriented approach, which emphasizes the
bond's fundamental cheapness relative to comparable securities as well as its
historical prepayment performance."
PORTFOLIO NOTES
Franklin Adjustable U.S. Government Securities Fund employs a conservative
strategy of investing primarily in seasoned adjustable rate mortgage (ARM)
securities, which tend to prepay at slower rates than newer-production ARMs that
have not been through previous refinancing cycles. We choose securities using a
value-oriented approach, which emphasizes the bond's fundamental cheapness
relative to comparable securities as well as its historical prepayment
performance. For the 12 months under review, the fund's Class A shares
outperformed the benchmark Lehman Brothers Short U.S. Government 1-2 Year Index,
with a total return of +4.24% vs. +3.38%.(2) There were no major changes to the
fund's overall mix during the reporting period. We selectively added several
seasoned conventional ARMs to our core holdings. We also added multiple
positions in hybrid ARMs. These are securities whose coupons are fixed for a
predetermined number of years, and then adjust annually thereafter. This sector
became attractive and offered a substantial yield advantage over standard
one-year adjustables.
On May 6, 1999, Franklin Adjustable U.S. Government Securities Fund merged with
Franklin Adjustable Rate Securities Fund. The combined portfolio contained
several positions of non-agency ARMs. These are privately issued securities
rated AAA or AA, but they do not have a government agency guarantee. Although,
for the most part, we intend to retain these positions, we do not plan to
increase our exposure in this area.
2. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions and does not include the sales
charge. The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index.
6
<PAGE>
In general, ARMs performed better than comparable fixed-income investments
during the period. As interest rates rose, prepayments on ARMs declined
significantly, enhancing returns on the securities. Continued interest-rate
stability should be beneficial to ARMs, as yield spreads are expected to remain
tight. Going forward, the fund will maintain its conservative strategy, which
should allow it to produce consistent performance in a variety of interest-rate
environments.
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
DIVIDEND DISTRIBUTIONS
Franklin Adjustable U.S. Government Securities Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------
<S> <C>
November 3.6 cents
December 3.8 cents
January 3.8 cents
February 3.8 cents
March 3.8 cents
April 3.8 cents
May 3.8 cents
June 3.8 cents
July 3.7 cents
August 3.6 cents
September 3.6 cents
October 3.6 cents
- -----------------------------
TOTAL 44.7 CENTS
</TABLE>
- --------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
- --------------------------------------------------------------------------------
7
<PAGE>
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
CLASS A:
Subject to the maximum 2.25% initial sales charge. Past expense reductions by
the fund's manager increased the fund's total returns.
- --------------------------------------------------------------------------------
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 applicable, maximum
sales charge.
3. Distribution rate is based on an annualization of October's 3.6 cent per
share dividend and the maximum offering price of $9.51 on October 31, 1999.
4. Yield, calculated as required by the SEC, is based on earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.06 $9.30 $9.36
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
----------------------------------
<S> <C>
Dividend Income $0.447
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (10/20/87)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +4.24% +33.51% +67.87% +94.48%
Average Annual Total Return(2) +1.85% +5.47% +5.08% +5.49%
Distribution Rate(3) 4.54%
30-Day Standardized Yield(4) 4.50%
</TABLE>
Past performance is not predictive of future results.
8
<PAGE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge, fund expenses,
account fees and reinvested distributions. The unmanaged index differs from the
fund in composition, does not pay management fees or expenses and includes
reinvested dividends. One cannot invest directly in an index.
CLASS A (11/1/89 - 10/31/99)
This graph compares the performance of Franklin Adjustable U.S. Government
Securities Fund, as tracked by the growth in value of a $10,000 investment, to
that of Lehman Brothers Short U.S. Government 1-2 Year Index* and Payden & Rygel
6-Month CD Index* from 11/1/89-10/31/99.
Franklin Adjustble Lehman Brothers Payden &
U.S. Government Short U.S. Rygel
Securities Fund Government 1-2 Year 6-Month CD
Index Index
11/01/1989 $9,777 $10,000 $10,000
11/30/1989 $9,867 0.88% $10,088 0.73% $10,073
12/31/1989 $9,968 0.38% $10,127 0.67% $10,140
01/31/1990 $10,021 0.24% $10,151 0.62% $10,203
02/28/1990 $10,094 0.54% $10,206 0.62% $10,267
03/31/1990 $10,175 0.36% $10,243 0.59% $10,327
04/30/1990 $10,244 0.33% $10,276 0.59% $10,388
05/31/1990 $10,335 1.42% $10,422 0.89% $10,481
06/30/1990 $10,414 0.97% $10,524 0.70% $10,554
07/31/1990 $10,511 1.10% $10,639 0.85% $10,644
08/31/1990 $10,585 0.43% $10,684 0.60% $10,708
09/30/1990 $10,670 0.74% $10,764 0.58% $10,770
10/31/1990 $10,745 1.05% $10,877 0.78% $10,854
11/30/1990 $10,821 0.90% $10,974 0.56% $10,914
12/31/1990 $10,919 1.11% $11,096 0.97% $11,020
01/31/1991 $11,014 0.92% $11,198 0.84% $11,113
02/28/1991 $11,108 0.66% $11,272 0.60% $11,180
03/31/1991 $11,200 0.69% $11,350 0.70% $11,258
04/30/1991 $11,271 0.86% $11,447 0.66% $11,332
05/31/1991 $11,339 0.56% $11,512 0.48% $11,386
06/30/1991 $11,382 0.45% $11,563 0.36% $11,427
07/31/1991 $11,502 0.78% $11,653 0.61% $11,497
08/31/1991 $11,588 1.25% $11,799 0.72% $11,580
09/30/1991 $11,693 0.90% $11,905 0.54% $11,642
10/31/1991 $11,763 0.98% $12,022 0.60% $11,712
11/30/1991 $11,797 1.00% $12,141 0.58% $11,780
12/31/1991 $11,865 1.30% $12,300 0.61% $11,852
01/31/1992 $11,891 0.01% $12,301 0.41% $11,901
02/29/1992 $11,952 0.29% $12,337 0.29% $11,935
03/31/1992 $12,000 0.10% $12,350 0.29% $11,970
04/30/1992 $12,034 0.86% $12,455 0.49% $12,028
05/31/1992 $12,113 0.84% $12,559 0.37% $12,073
06/30/1992 $12,192 0.86% $12,667 0.35% $12,115
07/31/1992 $12,202 1.03% $12,798 0.55% $12,182
08/31/1992 $12,253 0.71% $12,889 0.30% $12,218
09/30/1992 $12,304 0.83% $12,996 0.41% $12,269
10/31/1992 $12,268 -0.46% $12,936 0.17% $12,289
11/30/1992 $12,293 -0.10% $12,923 0.10% $12,302
12/31/1992 $12,340 0.86% $13,034 0.47% $12,359
01/31/1993 $12,385 0.91% $13,153 0.38% $12,406
02/28/1993 $12,442 0.70% $13,245 0.27% $12,440
03/31/1993 $12,458 0.27% $13,281 0.27% $12,474
04/30/1993 $12,523 0.55% $13,354 0.30% $12,511
05/31/1993 $12,524 -0.22% $13,324 0.17% $12,532
06/30/1993 $12,592 0.62% $13,407 0.27% $12,566
07/31/1993 $12,634 0.24% $13,439 0.29% $12,603
08/31/1993 $12,675 0.67% $13,529 0.32% $12,643
09/30/1993 $12,660 0.32% $13,572 0.28% $12,678
10/31/1993 $12,631 0.22% $13,602 0.25% $12,710
11/30/1993 $12,538 0.12% $13,619 0.24% $12,740
12/31/1993 $12,507 0.37% $13,669 0.30% $12,779
01/31/1994 $12,551 0.58% $13,748 0.33% $12,821
02/28/1994 $12,477 -0.41% $13,692 -0.01% $12,820
03/31/1994 $12,387 -0.25% $13,658 0.23% $12,849
04/30/1994 $12,307 -0.25% $13,623 0.15% $12,868
05/31/1994 $12,363 0.18% $13,649 0.26% $12,902
06/30/1994 $12,398 0.28% $13,687 0.31% $12,942
07/31/1994 $12,449 0.80% $13,796 0.44% $12,999
08/31/1994 $12,449 0.34% $13,843 0.39% $13,049
09/30/1994 $12,436 -0.08% $13,832 0.25% $13,082
10/31/1994 $12,293 0.28% $13,871 0.39% $13,133
11/30/1994 $12,288 -0.32% $13,826 0.22% $13,162
12/31/1994 $12,261 0.24% $13,860 0.39% $13,213
01/31/1995 $12,360 1.22% $14,029 0.70% $13,306
02/28/1995 $12,501 1.19% $14,196 0.61% $13,387
03/31/1995 $12,574 0.57% $14,277 0.49% $13,453
04/30/1995 $12,691 0.81% $14,393 0.58% $13,531
05/31/1995 $12,959 1.39% $14,593 0.66% $13,620
06/30/1995 $12,913 0.53% $14,670 0.50% $13,688
07/31/1995 $12,994 0.47% $14,739 0.55% $13,763
08/31/1995 $13,103 0.55% $14,819 0.48% $13,829
09/30/1995 $13,170 0.45% $14,886 0.45% $13,892
10/31/1995 $13,224 0.74% $14,997 0.53% $13,965
11/30/1995 $13,349 0.74% $15,108 0.53% $14,039
12/31/1995 $13,386 0.70% $15,214 0.56% $14,118
01/31/1996 $13,481 0.79% $15,334 0.54% $14,194
02/29/1996 $13,489 -0.22% $15,301 0.39% $14,249
03/31/1996 $13,570 0.06% $15,310 0.35% $14,299
04/30/1996 $13,582 0.19% $15,339 0.43% $14,361
05/31/1996 $13,637 0.30% $15,386 0.42% $14,421
06/30/1996 $13,767 0.67% $15,489 0.39% $14,477
07/31/1996 $13,808 0.40% $15,550 0.43% $14,540
08/31/1996 $13,850 0.41% $15,614 0.53% $14,617
09/30/1996 $13,948 0.80% $15,739 0.49% $14,688
10/31/1996 $14,089 1.00% $15,896 0.52% $14,765
11/30/1996 $14,156 0.64% $15,998 0.48% $14,835
12/31/1996 $14,222 0.16% $16,023 0.45% $14,902
01/31/1997 $14,320 0.47% $16,099 0.44% $14,968
02/28/1997 $14,402 0.29% $16,145 0.40% $15,028
03/31/1997 $14,441 0.04% $16,152 0.34% $15,079
04/30/1997 $14,558 0.75% $16,273 0.47% $15,150
05/31/1997 $14,645 0.67% $16,383 0.52% $15,228
06/30/1997 $14,748 0.63% $16,486 0.50% $15,305
07/31/1997 $14,898 0.91% $16,636 0.54% $15,387
08/31/1997 $14,907 0.20% $16,670 0.45% $15,456
09/30/1997 $15,012 0.68% $16,783 0.46% $15,528
10/31/1997 $15,101 0.66% $16,895 0.49% $15,604
11/30/1997 $15,109 0.27% $16,941 0.42% $15,669
12/31/1997 $15,213 0.63% $17,048 0.52% $15,751
01/31/1998 $15,334 0.85% $17,192 0.57% $15,840
02/28/1998 $15,342 0.16% $17,219 0.39% $15,902
03/31/1998 $15,383 0.41% $17,290 0.45% $15,974
04/30/1998 $15,456 0.47% $17,372 0.44% $16,044
05/31/1998 $15,497 0.51% $17,460 0.49% $16,123
06/30/1998 $15,572 0.50% $17,548 0.45% $16,195
07/31/1998 $15,611 0.47% $17,629 0.49% $16,275
08/31/1998 $15,708 1.03% $17,811 0.53% $16,361
09/30/1998 $15,802 1.14% $18,015 0.61% $16,461
10/31/1998 $15,745 0.52% $18,108 0.51% $16,545
11/30/1998 $15,721 -0.03% $18,102 0.34% $16,601
12/31/1998 $15,803 0.38% $18,171 0.47% $16,679
01/31/1999 $15,884 0.37% $18,238 0.45% $16,754
02/28/1999 $15,983 -0.25% $18,192 0.31% $16,806
03/31/1999 $16,031 0.66% $18,311 0.45% $16,881
04/30/1999 $16,097 0.33% $18,372 0.42% $16,952
05/31/1999 $16,145 0.06% $18,382 0.33% $17,008
06/30/1999 $16,159 0.30% $18,436 0.22% $17,046
07/31/1999 $16,206 0.36% $18,503 0.45% $17,122
08/31/1999 $16,269 0.26% $18,552 0.41% $17,193
09/30/1999 $16,332 0.59% $18,662 0.46% $17,272
10/31/1999 $16,413 0.31% $18,720 0.44% $17,348
64.13% 87.20% 73.48%
*Source: Lehman Brothers; Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
9
<PAGE>
[PYRAMID GRAPH]
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.
- --------------------------------------------------------------------------------
The U.S. economy grew at a rapid pace during the one-year reporting period,
stimulated by last fall's Federal Reserve Board (Fed) interest-rate cuts. As
investors regained confidence, they demanded less of a risk premium to invest in
mortgage-backed securities, asset-backed securities and corporate bonds, causing
the yield spread, or difference in yield between these investments and U.S.
Treasury bonds, to narrow. However, near the end of 1998, as it became apparent
that the economy was growing more rapidly than generally anticipated, yields on
U.S. Treasury securities rose in response. The rise in interest rates, while
unfavorable for holders of U.S. Treasury securities, was coupled with positive
performance from several fixed-income sectors that had suffered during last
fall's "flight-to-quality." For instance, some mortgage pass-throughs benefited
from reduced prepayment expectations at the higher interest rates. With
diminished expectations of an economic slowdown, many investors steadily moved
out of Treasuries and into higher-yielding sectors.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 58 of
this report.
10
<PAGE>
Tight labor markets and strong consumer demand, by-products of the vibrant
economy, led to market expectations in the first half of calendar-year 1999 that
the Fed would increase interest rates to dampen inflationary pressures. The Fed
did just that, raising the federal funds target rate to 5.00% on June 30, and to
5.25% on August 24. Although fixed-income securities generally suffer price
declines in a rising interest-rate environment, the fund's increased exposure to
mortgage-backed securities muted this effect on the portfolio. The prevailing
mortgage rates rose with Treasury yields, reducing prepayment risk, as
homeowners had less incentive to refinance their mortgages. Higher-coupon
mortgage pass-throughs especially benefited from this slowdown in prepayment
activity.
At the same time interest rates were rising during the summer, a large amount of
corporate bonds and asset-backed bonds came to market, offering yield advantages
compared to U.S. Treasury securities. This increased supply negatively impacted
their price. Since yields rise when prices fall, the yield spreads between these
securities and Treasuries widened substantially. Treasury yields also continued
to rise toward the end of the reporting period, anticipating further Fed
interest-rate increases. During the reporting period, the 30-year Treasury bond
yield rose from 5.16% on October 31, 1998, to 6.16% on October 31, 1999.
The fund took advantage of the historically wide yield-spread environment at the
end of the reporting period to broaden its sector diversification, as the table
to the right shows, reducing its U.S. Treasury and agency securities allocation,
while increasing its exposure to mortgage-backed, commercial mortgage-backed,
asset-backed, and high yield securities. Even though the fund reduced its
overall percentage of corporate bonds during the period, it increased exposure
to attractively priced high yield bonds within the corporate sector. Over the
near term, we believe that yield spreads should return to more historical levels
once the market turns its attention away from supply and year-end liquidity
concerns.
PORTFOLIO BREAKDOWN
Franklin Bond Fund
Based on Total Net Assets
10/31/99
<TABLE>
<CAPTION>
SECTOR 10/31/99 10/31/98
- ----------------------------------------------------------
<S> <C> <C>
Mortgage-Backed Securities 62.28% 34.51%
Corporate Bonds 43.86% 27.48%
Asset-Backed Securities 10.90% 0.00%
International Bonds 4.89% 0.00%
U.S. Agency Bonds 2.96% 13.34%
U.S. Treasury Securities 0.05% 18.46%
Cash, Assets and Liabilities -24.94% 6.21%
</TABLE>
11
<PAGE>
Sincerely,
/s/ Roger A. Bayston
Roger A. Bayston
Portfolio Manager
Franklin Bond Fund
- --------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
- --------------------------------------------------------------------------------
12
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Bond Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-----------------------------------
MONTH CLASS A ADVISOR CLASS
- ------------------------------------------------------------------------
<S> <C> <C>
November 4.50 cents 4.71 cents
December 10.45 cents** 10.66 cents**
January 4.50 cents 4.71 cents
February 4.50 cents 4.71 cents
March 4.70 cents 5.11 cents
April 4.70 cents 4.90 cents
May 4.80 cents 5.01 cents
June 4.80 cents 5.00 cents
July 4.80 cents 5.00 cents
August 4.80 cents 5.00 cents
September 5.20 cents 5.39 cents
October 5.20 cents 5.40 cents
- ------------------------------------------------------------------------
TOTAL 62.95 CENTS 65.60 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.
**Includes an additional $0.0595 distribution for excise tax purposes.
13
<PAGE>
FRANKLIN BOND FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the maximum 4.25% initial sales charge.*
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.*
*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 6.23% and 6.52% for Class A and Advisor Class shares
respectively. The fee waiver may be discontinued at any time, upon notice to the
fund's Board of Directors.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.75 $9.61 $10.36
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
------------------------------------
<S> <C>
Dividend Income $0.6295
Long-Term Capital Gain $0.0213
Short-Term Capital Gain $0.0261
TOTAL $0.6769
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 10/31/98
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.75 $9.62 $10.37
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
------------------------------------
<S> <C>
Dividend Income $0.6560
Long-Term Capital Gain $0.0213
Short-Term Capital Gain $0.0261
TOTAL $0.7034
</TABLE>
Franklin Bond Fund paid distributions derived from long-term capital gains of
2.13 cents ($0.0213) per share in December 1998. 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.
14
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (8/3/98)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -0.73% +3.29%
Average Annual Total Return(2) -4.95% -0.85%
Distribution Rate(3) 6.22%
30-Day Standardized Yield(4) 6.87%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS 1-YEAR (8/3/98)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -0.46% +3.69%
Average Annual Total Return(2) -0.46% +2.93%
Distribution Rate(3) 6.74%
30-Day Standardized Yield(4) 7.44%
</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 applicable, maximum
sales charge(s) for that class.
3. Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (net asset value price
for Advisor Class) per share on October 31, 1999.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
15
<PAGE>
FRANKLIN BOND FUND
AVERAGE ANNUAL TOTAL RETURN 10/31/99
<TABLE>
<CAPTION>
CLASS A
- --------------------------------------
<S> <C>
1-Year -4.95%
Since Inception (8/3/98) -0.85%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN 10/31/99
<TABLE>
<CAPTION>
ADVISOR CLASS
- --------------------------------------
<S> <C>
1-Year -0.46%
Since Inception (8/3/98) +2.93%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the applicable, maximum sales charges, fund expenses, account
fees and reinvested distributions. The unmanaged index differs from the fund in
composition, does not pay management fees or expenses and includes reinvested
dividends. One cannot invest directly in an index. The Consumer Price Index
(CPI) is a commonly used measure of the inflation rate.
CLASS A (8/3/98 - 10/31/99)
This graph compares the performance of Franklin Bond Fund - Class A, as tracked
by the growth in value of a $10,000 investment, to that of the Salomon Brothers
Broad Investment Grade Index* and the CPI from 8/3/98-10/31/99.
Franklin Bond Fund Salomon Brothers CPI
- Class A Broad Investment
Grade Index
- ----------------------------------------------------------------------
08/03/1998 $9,579 $10,000 $10,000
08/31/1998 $9,761 1.53% $10,153 0.12% $10,012
09/30/1998 $10,038 2.36% $10,393 0.12% $10,024
10/31/1998 $9,966 -0.45% $10,346 0.24% $10,048
11/30/1998 $10,010 0.55% $10,403 0.00% $10,048
12/31/1998 $10,031 0.31% $10,435 -0.06% $10,042
01/31/1999 $10,104 0.74% $10,512 0.24% $10,066
02/28/1999 $9,912 -1.75% $10,328 0.12% $10,078
03/31/1999 $9,949 0.57% $10,387 0.30% $10,108
04/30/1999 $9,976 0.33% $10,421 0.73% $10,182
05/31/1999 $9,844 -0.92% $10,326 0.00% $10,182
06/30/1999 $9,812 -0.34% $10,290 0.00% $10,182
07/31/1999 $9,770 -0.40% $10,249 0.30% $10,213
08/31/1999 $9,778 -0.07% $10,242 0.24% $10,237
09/30/1999 $9,862 1.20% $10,365 0.48% $10,286
10/31/1999 $9,894 0.30% $10,396 0.18% $10,305
-1.06% 3.96% 3.05%
*Source: Standard and Poor's Micropal.
ADVISOR CLASS (8/3/98 - 10/31/99)
This graph compares the performance of Franklin Bond Fund -Advisor Class, as
tracked by the growth in value of a $10,000 investment, to that of the Salomon
Brothers Broad Investment Grade Index* and the CPI from 8/3/98-10/31/99.
Franklin Bond Fund Salomon Brothers CPI
- Advisor Class Broad Investment
Grade Index
- ----------------------------------------------------------------------
08/03/1998 $10,000 $10,000 $10,000
08/31/1998 $10,200 1.53% $10,153 0.12% $10,012
09/30/1998 $10,480 2.36% $10,393 0.12% $10,024
10/31/1998 $10,417 -0.45% $10,346 0.24% $10,048
11/30/1998 $10,464 0.55% $10,403 0.00% $10,048
12/31/1998 $10,499 0.31% $10,435 -0.06% $10,042
01/31/1999 $10,567 0.74% $10,512 0.24% $10,066
02/28/1999 $10,369 -1.75% $10,328 0.12% $10,078
03/31/1999 $10,411 0.57% $10,387 0.30% $10,108
04/30/1999 $10,442 0.33% $10,421 0.73% $10,182
05/31/1999 $10,306 -0.92% $10,326 0.00% $10,182
06/30/1999 $10,274 -0.34% $10,290 0.00% $10,182
07/31/1999 $10,232 -0.40% $10,249 0.30% $10,213
08/31/1999 $10,243 -0.07% $10,242 0.24% $10,237
09/30/1999 $10,332 1.20% $10,365 0.48% $10,286
10/31/1999 $10,369 0.30% $10,396 0.18% $10,305
3.69% 3.96% 3.05%
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
16
<PAGE>
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 12-month reporting period, consumer demand for goods and services
kept U.S. economic activity above expectations. Additionally, continued low
inflation, interest rates and unemployment coupled with corporate profits ahead
of analysts' estimates resulted in the financial markets rising appreciably
during the period. Large-capitalization technology and telecommunications
companies, given these sectors' attractive growth prospects, led the advance.
Bonds began the year in a fairly tight trading range with the yield on the
30-year U.S. Treasury bond at 5.16% on November 1, 1998. As the economy
continued to pick up steam, the Federal Reserve Board (the Fed) found it
necessary to make a preemptive strike to help keep growth and inflation levels
in balance. Two 0.25% increases in the federal funds target rate during the
summer gradually helped push interest rates higher toward the end of the period.
On October 31, 1999, the 30-year Treasury bond yielded 6.16%.
Within the convertible securities market, the benchmark Goldman Sachs/Bloomberg
U.S. Convertible 100 Index increased 19.91% during the period, with performance
driven by large-capitalization companies in the technology, telecommunications
and consumer services sectors. The index's large-capitalization component led
the increase, gaining 43.31%. On the opposite side of the spectrum, the
convertibles of small-capitalization companies declined substantially, falling
13.55%. In addition, the convertible securities of lower credit-quality
companies underperformed as corporate credit spreads, the difference in yields
between lower- and higher-rated securities, widened beginning in the fall of
1998. This widening reduced the investment value of convertible securities as
fixed-income instruments, resulting in greater-than-expected downside risk, how
far we believe the securities could potentially decline.
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 63 of
this report.
[PYRAMID GRAPHIC]
17
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Convertible Securities Fund
Based on Total Net Assets
10/31/99
[PIE CHART GRAPHIC]
<TABLE>
<S> <C>
Convertible Preferred Stocks 54.9%
Convertible Bonds 44.4%
Cash & Short-Term Equivalents 0.7%
</TABLE>
The fund underperformed the benchmark during the first half of the reporting
period due to a combination of sector allocation decisions and an overweight
position in the convertible securities of smaller capitalization companies,
relative to the fund's benchmark index. New members joined the fund's portfolio
management team in December 1998, and the new team implemented a change in
investment strategy to make the portfolio more representative of the entire
convertible securities market. As a result, the fund has greater emphasis on
mid- and large-capitalization companies with leading positions in attractive
growth industries.
During the second half of the reporting period, the fund significantly increased
its weighting in the technology and telecommunications sectors while reducing
previously overweight positions in electric utilities and real estate investment
trusts (REITs). Performance improved, with the fund's outpacing its benchmark
during the six months ended October 31, 1999. For the 12-month reporting period,
the fund's Class A shares delivered a +14.25% cumulative total return.(1)
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
18
<PAGE>
We increased our positions in several areas including electronic technology,
where we added EMC Corp., a leading provider of data storage solutions to
companies worldwide. EMC is expected to benefit from the substantial increase in
data storage demand driven in part by the growth of the Internet, e-mail and
e-commerce. Although the EMC convertible bonds trade at a significant premium
when valued strictly as bonds, we felt the remaining call protection provided
favorable exposure to increases in the underlying common stock. The fund
maintained a position in Comverse Technology Inc., a leader in the design and
manufacture of telecommunication systems and software. Demand for the company's
products and services continues to exceed expectations as telecommunications
network operators seek to provide their customers with value-added services such
as messaging, call answering, voice- and fax-mail, and pre-paid services.
Another area of emphasis in telecommunications is among service providers. We
added McLeodUSA Inc., a leading competitive local exchange carrier in the
Midwestern and Rocky Mountain regions, which provides local, long-distance,
data, voice-mail, paging and Internet access to businesses and residential
customers.
During the period, the fund maintained an overweight position in the energy
sector with an emphasis on oil and gas exploration and production as well as
oilfield services and equipment. Holdings in exploration and production
companies, including Devon Energy (Kerr-McGee Corp. convertibles) and Range
Resources Corp., increased as the recovery in crude oil and natural gas prices
continued throughout the year under review. Higher commodity prices and
improving financial performance among exploration and production companies also
benefited the oilfield services sector where fund holdings Diamond Offshore
Drilling and Weatherford International Inc. experienced rising demand for their
goods and services.
19
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Convertible Securities Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------
MONTH CLASS A CLASS C
- -------------------------------------------------------------------
<S> <C> <C>
November 5.0 cents 4.29 cents
December 9.2 cents* 8.49 cents*
January 5.0 cents 4.29 cents
February 5.0 cents 4.29 cents
March 5.0 cents 4.23 cents
April 5.0 cents 4.23 cents
May 5.0 cents 4.23 cents
June 5.0 cents 4.28 cents
July 5.0 cents 4.28 cents
August 5.0 cents 4.28 cents
September 5.0 cents 4.20 cents
October 5.0 cents 4.20 cents
- ------------------------------------------------------------------
TOTAL 64.2 CENTS 55.29 CENTS
</TABLE>
*Includes an additional 4.2 cent per share distribution.
One area of disappointment during the recent period was the negative performance
of interest-rate-sensitive positions including United Rentals Trust and Tower
Automotive Capital. United Rentals, a leading equipment rental company, was
negatively impacted by fears that a higher interest-rate environment would slow
construction activity and reduce demand for the company's services. Similar
sentiment toward automotive suppliers put pressure on the share price of Tower
Automotive. Despite the near-term concerns, we believe these convertible
positions remain attractive given the high, current income and ability to
participate in the positive long-term outlook for both companies.
20
<PAGE>
Looking forward, we remain optimistic about the prospects for U.S. stock and
bond markets given the healthy domestic economy and expectations of continued
improvements in growth abroad. We believe the fund is well positioned to take
advantage of the favorable outlook for the domestic convertible securities
market. Any further price increases in the underlying common stocks provide the
potential for capital appreciation, while the fixed-income nature of convertible
securities provides current income and reduced volatility in a down equity
market relative to the underlying equities.
Sincerely,
/s/ Edward. B. Jamieson
Edward. B. Jamieson
/s/ Edward D. Perks
Edward D. Perks
Portfolio Management Team
Franklin Convertible Securities Fund
- --------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
- --------------------------------------------------------------------------------
"Looking forward, we remain optimistic about the prospects for U.S. stock and
bond markets given the healthy domestic economy and expectations of continued
improvements in growth abroad."
21
<PAGE>
FRANKLIN CONVERTIBLE SECURITIES FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance. Past expense reductions by the
fund's manager increased the fund's total return.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.99 $12.74 $11.75
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
------------------------------------
<S> <C>
Dividend Income $0.642
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 10/31/98
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.99 $12.69 $11.70
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
------------------------------------
<S> <C>
Dividend Income $0.5529
</TABLE>
Past performance is not predictive of future results.
22
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/15/87)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +14.25% +69.40% +209.77% +251.74%
Average Annual Total Return(2) +7.65% +9.81% + 11.31% +10.03%
Value of $10,000 Investment(3) $10,765 $15,970 $29,206 $33,158
Distribution Rate(4) 4.44%
30-Day Standardized Yield(5) 4.61%
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +15.18% +16.71% +22.47% -9.93% +14.25%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (10/2/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +13.48% +23.29% +40.02%
Average Annual Total Return(2) +11.34% +6.86% +8.33%
Value of $10,000 Investment(3) $11,134 $12,202 $13,864
Distribution Rate(4) 3.93%
30-Day Standardized Yield(5) 4.10%
</TABLE>
<TABLE>
<CAPTION>
10/31/96 10/31/97 10/31/98 10/31/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-Year Total Return(6) +15.83% +21.54% -10.61% +13.48%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price per share on October 31, 1999.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
6. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
- --------------------------------------------------------------------------------
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.
23
<PAGE>
FRANKLIN CONVERTIBLE SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS A
- -----------------------------------------------
<S> <C>
1-Year +7.65%
5-Year +9.81%
10-Year +11.31%
Since Inception (4/15/87) +10.03%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS C
- -----------------------------------------------
<S> <C>
1-Year +11.34%
3-Year +6.86%
Since Inception (10/2/95) +8.33%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
CLASS A (11/1/89 - 10/31/99)
This graph compares the performance of Franklin Convertible Securities Fund -
Class A, as tracked by the growth in value of a $10,000 investment, to that of
Goldman Sachs Convertible 100 Bond Index* from 11/1/89-10/31/99.
Date Franklin Goldman Sachs Goldman
Convertible Convertible 100 Bond Sachs
Securities Fund - Index Conv100 $T
Class A
- ---------------------------------------------------------------------
11/01/1989 $9,429 $10,000
11/30/1989 $9,535 $10,130 1.30%
12/31/1989 $9,623 $10,113 -0.17%
01/31/1990 $9,349 $9,591 -5.16%
02/28/1990 $9,407 $9,660 0.72%
03/31/1990 $9,626 $9,810 1.55%
04/30/1990 $9,409 $9,465 -3.51%
05/31/1990 $9,835 $10,056 6.24%
06/30/1990 $9,987 $10,031 -0.25%
07/31/1990 $9,848 $9,921 -1.10%
08/31/1990 $9,231 $9,369 -5.56%
09/30/1990 $8,733 $8,847 -5.57%
10/31/1990 $8,296 $8,369 -5.40%
11/30/1990 $8,676 $8,838 5.60%
12/31/1990 $9,069 $9,073 2.66%
01/31/1991 $9,419 $9,568 5.45%
02/28/1991 $10,002 $10,143 6.01%
03/31/1991 $10,377 $10,369 2.23%
04/30/1991 $10,620 $10,469 0.97%
05/31/1991 $11,023 $10,853 3.66%
06/30/1991 $10,657 $10,514 -3.12%
07/31/1991 $11,109 $10,800 2.72%
08/31/1991 $11,508 $11,149 3.23%
09/30/1991 $11,527 $11,119 -0.27%
10/31/1991 $11,640 $11,339 1.98%
11/30/1991 $11,497 $11,042 -2.62%
12/31/1991 $12,118 $11,586 4.93%
01/31/1992 $12,421 $12,146 4.83%
02/29/1992 $12,619 $12,425 2.30%
03/31/1992 $12,447 $12,281 -1.16%
04/30/1992 $12,493 $12,290 0.07%
05/31/1992 $12,730 $12,329 0.32%
06/30/1992 $12,521 $12,429 0.81%
07/31/1992 $12,969 $12,864 3.50%
08/31/1992 $12,806 $12,857 -0.05%
09/30/1992 $12,999 $13,120 2.04%
10/31/1992 $13,156 $13,145 0.19%
11/30/1992 $13,713 $13,448 2.31%
12/31/1992 $14,086 $13,631 1.36%
01/31/1993 $14,460 $13,941 2.27%
02/28/1993 $14,407 $14,102 1.16%
03/31/1993 $14,975 $14,578 3.37%
04/30/1993 $14,946 $14,551 -0.18%
05/31/1993 $15,353 $14,915 2.50%
06/30/1993 $15,517 $15,140 1.51%
07/31/1993 $15,695 $15,102 -0.25%
08/31/1993 $16,265 $15,522 2.78%
09/30/1993 $16,524 $15,541 0.12%
10/31/1993 $16,875 $15,779 1.53%
11/30/1993 $16,562 $15,722 -0.36%
12/31/1993 $16,979 $15,966 1.55%
01/31/1994 $17,440 $16,358 2.46%
02/28/1994 $17,377 $16,285 -0.45%
03/31/1994 $16,741 $15,798 -2.99%
04/30/1994 $16,488 $15,513 -1.80%
05/31/1994 $16,551 $15,560 0.30%
06/30/1994 $16,531 $15,386 -1.12%
07/31/1994 $16,897 $15,710 2.11%
08/31/1994 $17,307 $16,153 2.82%
09/30/1994 $17,232 $15,934 -1.36%
10/31/1994 $17,241 $15,859 -0.47%
11/30/1994 $16,746 $15,302 -3.51%
12/31/1994 $16,701 $15,190 -0.73%
01/31/1995 $16,596 $15,491 1.98%
02/28/1995 $16,943 $16,004 3.31%
03/31/1995 $17,428 $16,476 2.95%
04/30/1995 $17,899 $16,873 2.41%
05/31/1995 $18,432 $17,357 2.87%
06/30/1995 $18,968 $17,939 3.35%
07/31/1995 $19,737 $18,490 3.07%
08/31/1995 $19,923 $18,721 1.25%
09/30/1995 $20,294 $18,940 1.17%
10/31/1995 $19,857 $18,527 -2.18%
11/30/1995 $20,373 $19,266 3.99%
12/31/1995 $20,742 $19,372 0.55%
01/31/1996 $21,125 $19,924 2.85%
02/29/1996 $21,458 $20,265 1.71%
03/31/1996 $21,677 $20,545 1.38%
04/30/1996 $22,199 $20,738 0.94%
05/31/1996 $22,654 $21,109 1.79%
06/30/1996 $22,298 $20,963 -0.69%
07/31/1996 $21,484 $20,265 -3.33%
08/31/1996 $22,251 $20,910 3.18%
09/30/1996 $23,126 $21,593 3.27%
10/31/1996 $23,176 $21,475 -0.55%
11/30/1996 $24,022 $22,198 3.37%
12/31/1996 $24,129 $22,030 -0.76%
01/31/1997 $25,209 $22,424 1.79%
02/28/1997 $24,947 $22,500 0.34%
03/31/1997 $24,402 $22,327 -0.77%
04/30/1997 $24,459 $22,642 1.41%
05/31/1997 $25,687 $23,701 4.68%
06/30/1997 $26,521 $24,403 2.96%
07/31/1997 $27,910 $25,852 5.94%
08/31/1997 $28,121 $25,658 -0.75%
09/30/1997 $29,309 $26,947 5.02%
10/31/1997 $28,384 $26,300 -2.40%
11/30/1997 $28,616 $26,210 -0.34%
12/31/1997 $29,021 $26,326 0.44%
01/31/1998 $28,603 $26,218 -0.41%
02/28/1998 $29,298 $27,586 5.22%
03/31/1998 $29,551 $28,604 3.69%
04/30/1998 $29,911 $28,919 1.10%
05/31/1998 $29,059 $28,138 -2.70%
06/30/1998 $28,464 $28,304 0.59%
07/31/1998 $27,754 $27,676 -2.22%
08/31/1998 $24,717 $24,471 -11.58%
09/30/1998 $25,213 $24,943 1.93%
10/31/1998 $25,565 $25,926 3.94%
11/30/1998 $26,458 $27,082 4.46%
12/31/1998 $26,994 $28,363 4.73%
01/31/1999 $27,612 $29,262 3.17%
02/28/1999 $26,328 $28,355 -3.10%
03/31/1999 $26,284 $28,857 1.77%
04/30/1999 $27,423 $30,490 5.66%
05/31/1999 $28,005 $30,783 0.96%
06/30/1999 $28,998 $31,254 1.53%
07/31/1999 $28,633 $31,154 -0.32%
08/31/1999 $28,884 $30,980 -0.56%
09/30/1999 $28,792 $30,273 -2.28%
10/31/1999 $29,206 $31,088 2.69%
*Source: Standard and Poor's Micropal.
CLASS C (10/2/95 - 10/31/99)
This graph compares the performance of Franklin Convertible Securities Fund -
Class C, as tracked by the growth in value of a $10,000 investment, to that of
Goldman Sachs Convertible 100 Bond Index* from 10/2/95-10/31/99.
Date Franklin Goldman Sachs Goldman
Convertible Convertible 100 Bond Sachs
Securities Fund - Index Conv100 $T
Class C
- --------------------------------------------------------------------
10/02/1995 $9,901 $10,000
10/31/1995 $9,708 $9,782 -2.18%
11/30/1995 $9,964 $10,172 3.99%
12/31/1995 $10,125 $10,228 0.55%
01/31/1996 $10,317 $10,520 2.85%
02/29/1996 $10,468 $10,700 1.71%
03/31/1996 $10,571 $10,847 1.38%
04/30/1996 $10,822 $10,949 0.94%
05/31/1996 $11,032 $11,145 1.79%
06/30/1996 $10,854 $11,068 -0.69%
07/31/1996 $10,451 $10,700 -3.33%
08/31/1996 $10,812 $11,040 3.18%
09/30/1996 $11,232 $11,401 3.27%
10/31/1996 $11,245 $11,338 -0.55%
11/30/1996 $11,659 $11,720 3.37%
12/31/1996 $11,697 $11,631 -0.76%
01/31/1997 $12,214 $11,840 1.79%
02/28/1997 $12,079 $11,880 0.34%
03/31/1997 $11,807 $11,788 -0.77%
04/30/1997 $11,827 $11,955 1.41%
05/31/1997 $12,416 $12,514 4.68%
06/30/1997 $12,803 $12,884 2.96%
07/31/1997 $13,469 $13,650 5.94%
08/31/1997 $13,564 $13,547 -0.75%
09/30/1997 $14,123 $14,227 5.02%
10/31/1997 $13,667 $13,886 -2.40%
11/30/1997 $13,780 $13,839 -0.34%
12/31/1997 $13,957 $13,900 0.44%
01/31/1998 $13,756 $13,843 -0.41%
02/28/1998 $14,071 $14,565 5.22%
03/31/1998 $14,184 $15,103 3.69%
04/30/1998 $14,348 $15,269 1.10%
05/31/1998 $13,939 $14,857 -2.70%
06/30/1998 $13,643 $14,944 0.59%
07/31/1998 $13,294 $14,613 -2.22%
08/31/1998 $11,826 $12,920 -11.58%
09/30/1998 $12,056 $13,170 1.93%
10/31/1998 $12,217 $13,689 3.94%
11/30/1998 $12,638 $14,299 4.46%
12/31/1998 $12,888 $14,976 4.73%
01/31/1999 $13,176 $15,450 3.17%
02/28/1999 $12,554 $14,971 -3.10%
03/31/1999 $12,535 $15,236 1.77%
04/30/1999 $13,061 $16,099 5.66%
05/31/1999 $13,331 $16,253 0.96%
06/30/1999 $13,798 $16,502 1.53%
07/31/1999 $13,616 $16,449 -0.32%
08/31/1999 $13,717 $16,357 -0.56%
09/30/1999 $13,675 $15,984 -2.28%
10/31/1999 $13,864 $16,414 2.69%
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
24
<PAGE>
FRANKLIN EQUITY INCOME FUND
- --------------------------------------------------------------------------------
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 dividend yields.
- --------------------------------------------------------------------------------
Stock market performance followed divergent trends during the 12-month reporting
period. In the first part of the fund's fiscal year, market indexes rebounded
strongly, and growth stocks, following their pattern of recent years,
outperformed their value counterparts. By mid-year, a large number of companies,
including economically sensitive cyclicals, reported better-than-expected
earnings. This resulted in strong performance for value stocks. However, this
trend proved short-lived. With rising interest rates in 1999, growth sectors
such as technology returned to their pattern of superior returns. Traditional
high dividend-yielding stocks, in particular, underperformed. Within the
Standard & Poor's 500 (S&P 500(R)) Index, the top 25% "growth" stocks in terms
of lowest dividend yields outperformed the top 25% "value" stocks with the
highest dividend yields by 34.3%, according to our calculations for the 12-month
reporting period. Franklin Equity Income Fund, which invests in dividend-paying,
large capitalization value stocks, reflected these trends.
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 69 of
this report.
[PYRAMID GRAPHIC]
25
<PAGE>
TOP FIVE INVESTMENT SECTORS
FRANKLIN EQUITY INCOME FUND
10/31/99
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- ------ ----------
<S> <C>
Utilities 13.1%
Finance 12.4%
Energy Minerals 11.2%
Telecommunications 10.0%
Consumer Non-Durables 8.3%
</TABLE>
For the year ended October 31, 1999, the fund's Class A shares generated a
+4.90% cumulative total return.(1) The fund's disappointing performance can be
attributed largely to its limited investment exposure to technology stocks, as
indicated by the 66.5% gain of the S&P Technology Index during the period.(2)
Also, our traditionally high dividend-yielding stocks, such as utilities and
real estate investment trusts (REITs), were among the stock market's weaker
performing sectors for the year. While the portfolio's strategy of investing in
high dividend-yielding stocks has lowered its returns in the strong markets of
recent years, it is also responsible for a history of less volatile returns. As
of October 31, 1999, Franklin Equity Income Fund placed in the top 5% of Lipper
Equity Income Funds Objective Average's universe of 110 funds in terms of lowest
volatility over the past five years, while its 2.69% distribution yield compared
with 1.54% for Lipper's average equity income fund category of 196 funds for the
same period.(3)
Please note that this year the fund changed its comparative benchmark to the
Wilshire Large Cap Value Index. In our opinion, this index more closely matches
our investment characteristics than the S&P 500 Index. In recent years, the S&P
500 has become increasingly biased toward growth sectors, like technology, with
low dividend yield, while the Wilshire Large Cap Value Index's investment
characteristics, in terms of dividend yield, industry representation and market
capitalization, are more consistent with the portfolio's growth and income
objective.
1. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distributions and does not include the sales
charge.
2. Source: Standard & Poor's Micropal.
3. Lipper Analytical Services, Inc. is a nationally recognized mutual fund
research organization. Lipper calculations do not include sales charges, and
past expense reductions by the fund's manager increased the fund's total
returns. If these factors had been considered, the fund's performance relative
to the average may have differed. Past performance cannot guarantee future
results.
26
<PAGE>
Our highly disciplined approach to value investing focuses on stocks that are
selling at attractive prices according 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. With stock market yields hovering at
historically low levels (1.3% for the S&P 500 as of October 31, 1999), we
increased the use of more defensive convertible securities during the year under
review. Convertible securities represented 9.0% of total net assets on October
31, 1999, versus 6.3% on October 31, 1998.
WHAT ARE BOOK VALUE AND NORMALIZED EARNINGS?
Book value seeks to determine the net asset value of a company's securities,
using the following formula: Total net assets are derived by subtracting
intangible assets and any long-term liabilities and equity issues that have a
prior claim from total assets. This figure is then divided by the number of
bonds, shares of preferred stock, or shares of common stock, to give the net
asset value, or "book value" per bond or per share of preferred or common stock.
Normalized earnings refer to a company's earnings, adjusted for cyclical ups and
downs in the economy.*
*Source: Barron's Dictionary of Finance and Investment Terms, 1995.
One of the portfolio's most notable changes during the year was our decision to
relax our restrictive minimum dividend yield requirements, allowing us to invest
in technology stocks, which typically pay no or low dividends. Despite what we
considered relatively high valuations for many large-cap technology companies,
we were able to uncover some attractive new investments during the period. For
example, we took a convertible bond position in Comverse Technology Inc., a key
provider of telecommunications messaging and information services, and stocks in
companies such as Diebold Inc., a dominant player in the automated teller
machine (ATM) market, and Raytheon Co., a leading defense electronics company.
<TABLE>
<CAPTION>
TOP TEN HOLDINGS
FRANKLIN EQUITY INCOME FUND
10/31/99
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
<S> <C>
Bell Atlantic Corp. 3.1%
Telecommunications
GTE Corp. 2.4%
Telecommunications
U.S. West Inc. 2.4%
Telecommunications
Texaco Inc. 2.3%
Energy Minerals
General Mills Inc. 2.3%
Consumer Non-Durables
AT&T Corp. 2.1%
Telecommunications
Pharmacia & Upjohn Inc. 2.1%
Health Technology
Atlantic Richfield Co. 1.8%
Energy Minerals
St. Paul Cos. Inc. 1.7%
Finance
Chevron Corp. 1.6%
Energy Minerals
</TABLE>
27
<PAGE>
Energy stocks also played a significant role in the fund's investments over the
past year. We took advantage of their stock price volatility, reflecting weak
oil prices, in early 1999 to reposition existing investments and initiate a new
position in Royal Dutch Petroleum Co., one of the world's largest oil and gas
companies. At mid-year, four of our top ten investments were energy companies.
Since then, oil prices and their stocks rebounded sharply. While maintaining a
significant position in this sector, we have since reduced our holdings, such as
Yacimientos Petroliferos Fiscales (YPF) SA, which we sold after they became the
subject of an attractive acquisition bid.
Financial stocks experienced volatility during the period. Banking and insurance
stocks went from generally strong returns during the first half of 1999, to
placing among the poorest performers during the summer months of 1999. We
reacted to Federal Reserve Board interest-rate increases by reducing our overall
investments in this sector. Banks and other financial service stocks usually
react poorly to interest-rate hikes, as even slightly higher interest rates
greatly increase their costs and tend to curtail their lending activity. At the
end of the reporting period, many of these stocks appeared attractive based upon
our valuation analysis. However, a weakening credit cycle may continue to affect
near-term prospects. We look to add to our investments in this area as
opportunities arise. Recent new investments included insurer Allstate Corp. and
Tennessee-based regional bank, Union Planters Corp.
28
<PAGE>
We maintained sizable investment positions in utilities and REITs. Despite their
disappointing performance during the past year, we found their investment
prospects extremely attractive at the reporting period's end. We believe the
outlook for many electric utilities is the best in nearly a decade. Merger
activity among utilities accelerated by the reporting period's close, and should
enable these companies to realize economies of scale. For example, two of the
fund's three gas companies, Consolidated Natural Gas Co. and MCN Energy Group
Inc., were subject to acquisition bids this past year. REITs, likewise, were
selling at historically low valuations. Many were selling below our estimate of
their net asset values and offered, on average, yields greater than 8%. Combined
with generally favorable cash flow growth prospects, we believe such investments
offer excellent total return potential and downside risk protection. As of
October 31, 1999, REITs represented 6.1% of the fund's total net assets, and
utilities 13.1%.
Looking forward, we anticipate continued high levels of financial market
volatility. The economic environment, in terms of moderate growth, and interest
rate and inflation levels, proved excellent for stocks during the reporting
period. However, with the S&P 500 selling at more than 32 times earnings for the
past four quarters, valuations were also at historically high levels. Within
this environment, we still expect to find plentiful investment opportunities, as
many stocks of high-quality, dividend-paying companies were punished for
reporting short-term disappointments, in our opinion. Many of these companies
can be purchased with attractive dividend yields for 10 to 12 times earnings and
below their book values. We are committed to investing in stocks and convertible
securities of undervalued companies that offer attractive dividend yields and
favorable downside risk protection. Thus, we believe this relative yield
discipline positions us well to take advantage of such future volatility.
29
<PAGE>
Sincerely,
/s/ Frank M. Felicelli
Frank M. Felicelli
Portfolio Manager
Franklin Equity Income Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management
philosophy.
30
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Equity Income Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
--------------------------------------------
MONTH CLASS A CLASS B* CLASS C
- -------------------------------------------------------------------------
<S> <C> <C> <C>
November 5.2 cents -- 4.07 cents
December 6.2 cents** -- 5.07 cents**
January 5.2 cents 5.20 cents 4.07 cents
February 5.2 cents 3.98 cents 4.07 cents
March 5.2 cents 3.99 cents 3.98 cents
April 5.2 cents 3.99 cents 3.98 cents
May 5.2 cents 3.99 cents 3.98 cents
June 5.2 cents 4.12 cents 4.01 cents
July 4.3 cents 3.22 cents 3.11 cents
August 4.3 cents 3.22 cents 3.11 cents
September 4.3 cents 3.17 cents 3.12 cents
October 4.3 cents 3.17 cents 3.12 cents
- --------------------------------------------------------------------------
TOTAL 59.8 CENTS 38.05 CENTS 45.69 CENTS
</TABLE>
*January 1, 1999, the fund began offering Class B shares to investors. See the
prospectus for details.
**Includes a 1.0 cent additional distribution.
31
<PAGE>
FRANKLIN EQUITY
INCOME FUND
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund implemented a Rule
12b-1 plan, which affects subsequent performance. Past expense reductions by the
fund's manager increased the fund's total returns.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
<S> <C> <C> <C>
Net Asset Value -$0.73 $19.20 $19.93
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
<S> <C>
Dividend Income $0.5980
Long-Term Capital Gain $0.9786
Short-Term Capital Gain $0.0951
Total $1.6717
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 10/31/99 1/1/99
<S> <C> <C> <C>
Net Asset Value -$0.21 $19.16 $19.37
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (1/1/99 - 10/31/99)
<S> <C>
Dividend Income $0.3805
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 10/31/98
<S> <C> <C> <C>
Net Asset Value -$0.74 $19.14 $19.88
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
<S> <C>
Dividend Income $0.4569
Long-Term Capital Gain $0.9786
Short-Term Capital Gain $0.0951
TOTAL $1.5306
</TABLE>
Franklin Equity Income Fund paid distributions derived from long-term capital
gains of 97.86 cents ($0.9786) per share in December 1998. 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.
32
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/15/88)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.90% +90.64% +214.00% +309.47%
Average Annual Total Return(2) -1.15% +12.44% +11.46% +12.31%
Value of $10,000 Investment(3) $9,885 $17,971 $25,599 $38,593
Distribution Rate(4) 2.53%
30-Day Standardized Yield(5) 2.86%
</TABLE>
<TABLE>
<CAPTION>
10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
<S> <C> <C> <C> <C> <C>
One-Year Total Return(6) +14.17% +15.32% +24.40% +10.96% +4.90%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
<S> <C> <C>
Cumulative Total Return(1) +0.86%
Aggregate Total Return(2) -3.09%
Value of $10,000 Investment(3) $9,691
Distribution Rate(4) 1.99%
30-Day Standardized Yield(5) 2.30%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (10/2/95)
<S> <C> <C> <C>
Cumulative Total Return(1) +4.11% +41.53% +61.00%
Average Annual Total Return(2) +2.12% +11.89% +12.10%
Value of $10,000 Investment(3) $10,212 $14,007 $15,944
Distribution Rate(4) 1.94%
30-Day Standardized Yield(5) 2.28%
</TABLE>
<TABLE>
<CAPTION>
10/31/96 10/31/97 10/31/98 10/31/99
<S> <C> <C> <C> <C>
One-Year Total Return(6) +14.46% +23.40% +10.16% +4.11%
</TABLE>
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class. Since Class B shares have
existed for less than one year, the figures for that class represent aggregate
total return from inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (net asset value price for Class
B) per share on October 31, 1999.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
6. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
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.
33
<PAGE>
FRANKLIN EQUITY
INCOME FUND
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
10/31/99
CLASS A
<S> <C>
1-Year -1.15%
5-Year +12.44%
10-Year +11.46%
Since Inception (3/15/88) +12.31%
</TABLE>
AGGREGATE TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS B
<S> <C>
Since Inception (1/1/99) -3.09%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charges, fund
expenses, account fees and reinvested distributions. The unmanaged indexes
differ from the fund in composition, do not pay management fees or expenses
and include reinvested dividends. One cannot invest directly in an index. The
Consumer Price Index (CPI) is a commonly used measure of the inflation rate.
CLASS A (11/1/89 - 10/31/99)
This graph compares the performance of Franklin Equity Income Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of S&P 500
Index, Russell 3000 Value Index and CPI from 11/1/89-10/31/99.
DATE FRANKLIN S&P 500 RUSSELL LIPPER EQUITY CPI
EQUITY 3000 VALUE INCOME FUNDS
INCOME FUND INDEX AVERAGE
- CLASS A
- --------------------------------------------------------------------------------
11/01/1989 $9,427 $10,000 $10,000 $10,000 $10,000
11/30/1989 $9,564 $10,204 $10,109 $10,133 $10,024
12/31/1989 $9,742 $10,449 $10,314 $10,307 $10,040
01/31/1990 $9,265 $9,748 $9,665 $9,766 $10,143
02/28/1990 $9,413 $9,874 $9,909 $9,869 $10,191
03/31/1990 $9,473 $10,135 $10,025 $9,968 $10,247
04/30/1990 $9,151 $9,883 $9,636 $9,669 $10,264
05/31/1990 $9,750 $10,846 $10,415 $10,269 $10,287
06/30/1990 $9,648 $10,774 $10,193 $10,210 $10,343
07/31/1990 $9,445 $10,739 $10,085 $10,121 $10,382
08/31/1990 $8,725 $9,768 $9,179 $9,390 $10,478
09/30/1990 $8,327 $9,293 $8,718 $8,953 $10,566
10/31/1990 $8,254 $9,253 $8,576 $8,821 $10,629
11/30/1990 $8,783 $9,850 $9,167 $9,326 $10,652
12/31/1990 $8,881 $10,125 $9,403 $9,529 $10,652
01/31/1991 $9,205 $10,567 $9,845 $9,896 $10,716
02/28/1991 $9,772 $11,322 $10,520 $10,517 $10,732
03/31/1991 $9,899 $11,596 $10,705 $10,724 $10,748
04/30/1991 $9,972 $11,624 $10,784 $10,796 $10,765
05/31/1991 $10,382 $12,125 $11,192 $11,225 $10,797
06/30/1991 $9,954 $11,570 $10,717 $10,819 $10,828
07/31/1991 $10,358 $12,109 $11,155 $11,241 $10,844
08/31/1991 $10,666 $12,396 $11,367 $11,498 $10,876
09/30/1991 $10,688 $12,189 $11,289 $11,488 $10,924
10/31/1991 $10,864 $12,352 $11,472 $11,655 $10,940
11/30/1991 $10,633 $11,854 $10,892 $11,254 $10,972
12/31/1991 $11,386 $13,211 $11,791 $12,132 $10,979
01/31/1992 $11,326 $12,965 $11,873 $12,118 $10,996
02/29/1992 $11,487 $13,132 $12,183 $12,331 $11,036
03/31/1992 $11,343 $12,876 $12,010 $12,186 $11,092
04/30/1992 $11,887 $13,255 $12,478 $12,521 $11,107
05/31/1992 $12,004 $13,320 $12,559 $12,637 $11,123
06/30/1992 $12,093 $13,121 $12,459 $12,517 $11,163
07/31/1992 $12,664 $13,658 $12,938 $12,938 $11,186
08/31/1992 $12,460 $13,378 $12,554 $12,745 $11,218
09/30/1992 $12,389 $13,534 $12,732 $12,864 $11,249
10/31/1992 $12,271 $13,580 $12,767 $12,851 $11,288
11/30/1992 $12,611 $14,042 $13,215 $13,188 $11,304
12/31/1992 $12,894 $14,215 $13,549 $13,430 $11,296
01/31/1993 $13,192 $14,334 $13,969 $13,614 $11,352
02/28/1993 $13,580 $14,529 $14,425 $13,882 $11,391
03/31/1993 $13,940 $14,836 $14,860 $14,292 $11,431
04/30/1993 $13,915 $14,477 $14,657 $14,161 $11,463
05/31/1993 $14,119 $14,863 $14,964 $14,359 $11,479
06/30/1993 $14,235 $14,906 $15,279 $14,491 $11,495
07/31/1993 $14,381 $14,847 $15,457 $14,595 $11,495
08/31/1993 $14,902 $15,409 $16,020 $15,105 $11,528
09/30/1993 $14,999 $15,291 $16,078 $15,114 $11,552
10/31/1993 $15,228 $15,607 $16,102 $15,293 $11,599
11/30/1993 $15,070 $15,459 $15,762 $15,072 $11,607
12/31/1993 $15,193 $15,646 $16,077 $15,337 $11,607
01/31/1994 $15,548 $16,178 $16,682 $15,768 $11,639
02/28/1994 $15,118 $15,739 $16,161 $15,386 $11,678
03/31/1994 $14,481 $15,053 $15,549 $14,785 $11,718
04/30/1994 $14,594 $15,246 $15,833 $14,967 $11,734
05/31/1994 $14,777 $15,496 $15,996 $15,106 $11,743
06/30/1994 $14,744 $15,116 $15,611 $14,869 $11,782
07/31/1994 $15,134 $15,612 $16,076 $15,251 $11,814
08/31/1994 $15,732 $16,252 $16,555 $15,724 $11,862
09/30/1994 $15,427 $15,856 $16,045 $15,439 $11,894
10/31/1994 $15,526 $16,212 $16,214 $15,521 $11,902
11/30/1994 $15,087 $15,622 $15,559 $14,947 $11,917
12/31/1994 $15,143 $15,853 $15,767 $15,074 $11,917
01/31/1995 $15,573 $16,264 $16,193 $15,378 $11,965
02/28/1995 $15,878 $16,898 $16,829 $15,899 $12,013
03/31/1995 $16,106 $17,397 $17,169 $16,268 $12,053
04/30/1995 $16,460 $17,908 $17,708 $16,639 $12,092
05/31/1995 $16,803 $18,625 $18,419 $17,162 $12,117
06/30/1995 $16,894 $19,057 $18,706 $17,345 $12,141
07/31/1995 $17,113 $19,689 $19,361 $17,774 $12,141
08/31/1995 $17,275 $19,739 $19,665 $17,958 $12,172
09/30/1995 $17,878 $20,572 $20,333 $18,537 $12,197
10/31/1995 $17,727 $20,498 $20,071 $18,344 $12,237
11/30/1995 $18,325 $21,397 $21,066 $19,146 $12,228
12/31/1995 $19,040 $21,810 $21,608 $19,638 $12,220
01/31/1996 $19,490 $22,552 $22,230 $20,105 $12,292
02/29/1996 $19,310 $22,762 $22,415 $20,270 $12,331
03/31/1996 $19,459 $22,980 $22,805 $20,533 $12,395
04/30/1996 $19,511 $23,318 $22,941 $20,755 $12,444
05/31/1996 $19,659 $23,920 $23,256 $21,062 $12,467
06/30/1996 $19,969 $24,011 $23,246 $21,117 $12,475
07/31/1996 $19,246 $22,949 $22,330 $20,393 $12,499
08/31/1996 $19,557 $23,434 $23,003 $20,909 $12,522
09/30/1996 $20,029 $24,753 $23,886 $21,674 $12,562
10/31/1996 $20,442 $25,436 $24,741 $22,172 $12,603
11/30/1996 $21,379 $27,359 $26,488 $23,403 $12,626
12/31/1996 $21,464 $26,817 $26,271 $23,295 $12,626
01/31/1997 $22,030 $28,493 $27,453 $24,101 $12,667
02/28/1997 $22,469 $28,716 $27,843 $24,465 $12,706
03/31/1997 $22,083 $27,535 $26,868 $23,726 $12,738
04/30/1997 $22,230 $29,179 $27,921 $24,388 $12,753
05/31/1997 $23,399 $30,956 $29,546 $25,786 $12,746
06/30/1997 $24,090 $32,343 $30,838 $26,704 $12,761
07/31/1997 $25,240 $34,918 $33,055 $28,365 $12,776
08/31/1997 $24,851 $32,962 $32,040 $27,554 $12,800
09/30/1997 $26,126 $34,769 $33,994 $28,937 $12,832
10/31/1997 $25,430 $33,607 $33,046 $28,089 $12,865
11/30/1997 $26,555 $35,163 $34,398 $29,002 $12,857
12/31/1997 $27,305 $35,768 $35,419 $29,712 $12,841
01/31/1998 $27,115 $36,165 $34,906 $29,671 $12,866
02/28/1998 $28,156 $38,773 $37,230 $31,282 $12,890
03/31/1998 $29,645 $40,758 $39,434 $32,712 $12,915
04/30/1998 $29,257 $41,169 $39,691 $32,656 $12,938
05/31/1998 $28,813 $40,461 $39,024 $32,160 $12,961
06/30/1998 $28,761 $42,104 $39,457 $32,324 $12,977
07/31/1998 $27,949 $41,654 $38,546 $31,399 $12,992
08/31/1998 $25,728 $35,630 $32,783 $27,656 $13,008
09/30/1998 $27,083 $37,914 $34,661 $29,183 $13,024
10/31/1998 $28,216 $40,997 $37,209 $30,922 $13,055
11/30/1998 $29,126 $43,481 $38,883 $32,199 $13,055
12/31/1998 $29,131 $45,986 $40,198 $32,950 $13,047
01/31/1999 $28,577 $47,908 $40,423 $32,699 $13,078
02/28/1999 $28,083 $46,418 $39,683 $32,088 $13,094
03/31/1999 $28,447 $48,275 $40,421 $32,733 $13,133
04/30/1999 $30,697 $50,143 $44,192 $35,129 $13,229
05/31/1999 $31,034 $48,960 $43,835 $34,813 $13,229
06/30/1999 $31,403 $51,677 $45,132 $35,805 $13,229
07/31/1999 $30,549 $50,064 $43,828 $34,874 $13,269
08/31/1999 $29,818 $49,814 $42,206 $33,964 $13,301
09/30/1999 $28,992 $48,449 $40,775 $32,741 $13,365
10/31/1999 $29,599 $51,516 $42,892 $33,828 $13,389
*Source: Standard and Poor's Micropal.
CLASS B (1/1/99 - 10/31/99)
This graph compares the performance of Franklin Equity Income Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of S&P 500
Index, Russell 3000 Value Index, Lipper Equity Income Funds Average, and CPI
from 1/1/99-10/31/99.
DATE FRANKLIN S&P 500 RUSSELL LIPPER EQUITY CPI
EQUITY 3000 VALUE INCOME FUNDS
INCOME FUND INDEX AVERAGE
- CLASS B
- --------------------------------------------------------------------------------
01/01/1999 $10,000 $10,000 $10,000 $10,000 $10,000
01/31/1999 $9,805 $10,418 $10,056 $9,924 $10,024
02/28/1999 $9,629 $10,094 $9,872 $9,738 $10,036
03/31/1999 $9,748 $10,498 $10,056 $9,934 $10,066
04/30/1999 $10,513 $10,904 $10,994 $10,661 $10,140
05/31/1999 $10,617 $10,647 $10,905 $10,565 $10,140
06/30/1999 $10,732 $11,238 $11,228 $10,867 $10,140
07/31/1999 $10,435 $10,887 $10,903 $10,584 $10,170
08/31/1999 $10,179 $10,833 $10,500 $10,308 $10,194
09/30/1999 $9,885 $10,536 $10,144 $9,937 $10,243
10/31/1999 $9,691 $11,203 $10,670 $10,267 $10,262
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
34
<PAGE>
CLASS C (10/2/95 - 10/31/99)
This graph compares the performance of Franklin Equity Income Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of S&P 500
Index*, Russell 3000 Value Index, Lipper Equity Income Funds Average, and CPI*
from 10/2/95-10/31/99.
DATE FRANKLIN S&P 500 RUSSELL 3000 LIPPER CPI
EQUITY VALUE INDEX EQUITY
INCOME INCOME
FUND - FUNDS
CLASS C AVERAGE
- --------------------------------------------------------------------------------
10/02/1995 $9,903 $10,000 $10,000 $10,000 $10,000
10/31/1995 $9,843 $9,964 $9,871 $9,896 $10,033
11/30/1995 $10,184 $10,401 $10,361 $10,328 $10,026
12/31/1995 $10,548 $10,602 $10,627 $10,594 $10,019
01/31/1996 $10,800 $10,963 $10,933 $10,846 $10,078
02/29/1996 $10,697 $11,065 $11,024 $10,935 $10,110
03/31/1996 $10,775 $11,171 $11,215 $11,077 $10,163
04/30/1996 $10,800 $11,335 $11,283 $11,197 $10,203
05/31/1996 $10,872 $11,627 $11,437 $11,362 $10,222
06/30/1996 $11,040 $11,672 $11,433 $11,392 $10,228
07/31/1996 $10,634 $11,156 $10,982 $11,001 $10,247
08/31/1996 $10,794 $11,391 $11,313 $11,280 $10,267
09/30/1996 $11,049 $12,032 $11,747 $11,692 $10,300
10/31/1996 $11,266 $12,365 $12,168 $11,961 $10,333
11/30/1996 $11,771 $13,299 $13,027 $12,625 $10,352
12/31/1996 $11,815 $13,036 $12,920 $12,567 $10,352
01/31/1997 $12,119 $13,851 $13,501 $13,002 $10,386
02/28/1997 $12,352 $13,959 $13,693 $13,198 $10,418
03/31/1997 $12,140 $13,385 $13,214 $12,800 $10,444
04/30/1997 $12,208 $14,184 $13,732 $13,157 $10,456
05/31/1997 $12,839 $15,048 $14,531 $13,911 $10,450
06/30/1997 $13,206 $15,722 $15,166 $14,406 $10,463
07/31/1997 $13,830 $16,974 $16,257 $15,302 $10,475
08/31/1997 $13,602 $16,023 $15,758 $14,864 $10,495
09/30/1997 $14,301 $16,901 $16,719 $15,611 $10,521
10/31/1997 $13,903 $16,337 $16,252 $15,153 $10,548
11/30/1997 $14,510 $17,093 $16,917 $15,646 $10,541
12/31/1997 $14,912 $17,387 $17,419 $16,029 $10,529
01/31/1998 $14,799 $17,580 $17,167 $16,006 $10,549
02/28/1998 $15,359 $18,848 $18,310 $16,876 $10,569
03/31/1998 $16,163 $19,813 $19,394 $17,647 $10,589
04/30/1998 $15,933 $20,013 $19,520 $17,617 $10,608
05/31/1998 $15,681 $19,668 $19,192 $17,349 $10,627
06/30/1998 $15,650 $20,467 $19,405 $17,438 $10,640
07/31/1998 $15,198 $20,248 $18,957 $16,939 $10,652
08/31/1998 $13,979 $17,320 $16,123 $14,920 $10,665
09/30/1998 $14,707 $18,430 $17,047 $15,743 $10,678
10/31/1998 $15,316 $19,929 $18,300 $16,682 $10,704
11/30/1998 $15,802 $21,136 $19,123 $17,371 $10,704
12/31/1998 $15,787 $22,354 $19,770 $17,775 $10,697
01/31/1999 $15,485 $23,288 $19,880 $17,640 $10,723
02/28/1999 $15,207 $22,564 $19,516 $17,310 $10,736
03/31/1999 $15,395 $23,467 $19,879 $17,658 $10,768
04/30/1999 $16,606 $24,375 $21,734 $18,951 $10,847
05/31/1999 $16,770 $23,799 $21,558 $18,780 $10,847
06/30/1999 $16,960 $25,120 $22,196 $19,316 $10,847
07/31/1999 $16,488 $24,337 $21,555 $18,813 $10,879
08/31/1999 $16,083 $24,215 $20,757 $18,322 $10,905
09/30/1999 $15,626 $23,551 $20,054 $17,663 $10,958
10/31/1999 $15,944 $25,042 $21,094 $18,249 $10,977
*Source: Standard and Poor's Micropal.
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS C
<S> <C>
1-Year +2.12%
3-Year +11.89%
Since Inception (10/2/95) +12.10%
</TABLE>
*Source: Standard and Poor's Micropal
Past performance is not predictive of future results.
35
<PAGE>
FUND CATEGORY
[PYRAMID GRAPHIC]
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
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
During the 12 months ended October 31, 1999, the J.P. Morgan Global Government
Bond Index (JPM GGBI), a benchmark index for global bonds, posted a -0.64%
return in local currency terms, outperforming the -1.8% return for the JPM U.S.
Government Bond Index, a benchmark index for U.S. Treasury bonds. We mainly
attribute this performance difference to European and Japanese Central Banks not
raising interest rates as quickly as the U.S. Federal Reserve (the Fed), which
reversed its expansionary monetary policies adopted earlier in our fiscal year
when the global economy faced a liquidity crisis and credit crunch. However, a
stronger U.S. dollar versus the euro resulted in the global index's lower
returns, in U.S. dollar terms. In this environment the JPM GGBI declined 3% in
U.S. dollars during the reporting period.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 76 of
this report.
36
<PAGE>
Early in the fund's fiscal year, with the rise in the Dow Jones(R) Industrial
Average, many investors sold bonds and invested in equity securities. This
resulted in declining prices and increasing yields for shorter-term U.S.
Treasury bonds, as price and yield move in an inverse relationship. Global
markets, for their part, seemed to stabilize and the "flight to quality"
phenomenon of capital being moved from equities to bonds reversed.
Global bond markets benefited from interest-rate cuts in Japan, Europe, and the
U.S. early in the period. However, strong economic data out of the U.S., the
Fed's decision to adopt a tightening bias in May 1999 and subsequent federal
funds target rate hikes in June and August 1999 contributed to declining U.S.
Treasury bond prices. Prior to the Fed's decision, the European Central Bank had
lowered interest rates by 0.5% in early April, in response to that region's
economic weakness and low inflation. European bond prices rose sharply as a
result, largely because the market had expected only a 0.25% rate cut at the
time.
With continued low inflation and weak economic growth for the industrial
economies, many investors maintained a positive outlook for global bond markets
in January 1999, effectively pricing in further interest-rate cuts by monetary
policymakers. In February, this perception changed, partly as a result of
stronger-than-expected economic data. Many investors' reduced expectations for
interest-rate cuts resulted in a temporary selloff in global bond markets. In
March, investors seemed to regain their optimism despite the potential negative
effect of higher oil prices on inflation. The positive bond market outlook
resulted from continued economic weakness in Europe, Japan and some sectors of
the U.S. economy. The bond markets priced in further interest-rate cuts by the
Bank of England, the European Central Bank, and the Bank of Canada, further
monetary easing by the Bank of Japan, as well as a neutral stance by the Fed.
The U.K. and U.S. bond markets also benefited from "flight to quality" inflows
resulting from the Yugoslavian crisis.
COUNTRY DISTRIBUTION
Franklin Global Government
Income Fund
Based on Total Net Assets
<TABLE>
<CAPTION>
COUNTRY 10/31/99 10/31/98
<S> <C> <C>
United States 20.8% 26.4%
Germany 12.2% 11.1%
Brazil 8.0% 5.1%
Italy 7.6% 9.6%
Spain 7.1% 6.6%
Canada 6.4% 7.8%
Argentina 5.5% 6.2%
Venezuela 5.3% 2.7%
Mexico 4.6% 4.4%
New Zealand 4.4% 1.8%
Australia 4.1% 4.2%
United Kingdom 4.0% 4.7%
Turkey 3.9% 2.5%
Sweden 3.3% 2.9%
Denmark 2.2% 2.1%
Panama 0.6% 0.5%
Bulgaria 0.0% 0.9%
Peru 0.0% 0.5%
</TABLE>
37
<PAGE>
However, during the second quarter of 1999, market expectations deteriorated
following strong economic data in the U.S. and the rise in the Consumer Price
Index, which measures inflation, as well as improved business surveys in Europe.
The bond market began to price in a Fed rate hike and no longer expected
interest-rate cuts by the Bank of England and the European Central Bank.
During the portfolio's fiscal year, bond prices increased in most of the
countries that comprise the J.P. Morgan Emerging Markets Bond Index Plus, which
rose 20%. Venezuelan bond prices climbed with oil prices, while Bulgarian bonds
benefited from the easing tensions in neighboring Yugoslavia, placing those
countries' debt instruments among the best performers. Meanwhile, investors'
expectations for Russian and Ecuadorian government debt default placed those
countries' securities among the worst performers.
38
<PAGE>
PORTFOLIO NOTES
In the volatile environment for global fixed-income securities described above,
Franklin Global Government Income Fund - Class A registered a +0.9% cumulative
total return in U.S. dollars for the 12 months ending October 31, 1999, versus a
- -3% return for the J.P. Morgan Global Government Bond Index.(1)
The fund attempted to maximize its return during the period by allocating
approximately 70%-80% of its total net assets to intermediate- and long-term
bonds in the industrial markets and approximately 20%-30% of total net assets to
bonds in emerging markets. We believe that this allocation offers the
opportunity for higher long-term returns, at the cost of modestly higher
short-term volatility.
Overall, the portfolio's emerging markets allocation positively contributed to
its performance since emerging market bonds generally outperformed
higher-quality, industrial market bonds during the period. We believe that the
emerging market positions should offer superior returns over the next two to
five years, despite continued short-term volatility.
Our investment allocations remained relatively stable during the period under
review. We slightly reduced our North American holdings, which stood at 27.2% on
October 31, 1999, down from 34.2% a year earlier. We left the European
allocation essentially unchanged at 36.4% at the end of the reporting period,
versus 37.9% at the beginning. Outside these two regions, the fund added a 2.5%
position to the dollar-bloc (Australia and New Zealand) and 6% to the emerging
market sector.
"Overall, the portfolio's emerging markets allocation positively contributed to
its performance since emerging market bonds generally outperformed
higher-quality, industrial market bonds during the period."
1. Cumulative total return measures the change in value of an investment,
assuming reinvestment of all distribution and does not include the sales charge.
Index is unmanaged and includes reinvested dividends; one cannot invest directly
in an index.
39
<PAGE>
Looking forward, we believe that global inflation will likely pick up slightly
in the period ahead and that world economic growth should continue to increase
in 1999. This is an ideal environment for diversified global fixed-income
portfolios, contributing to our positive intermediate-term outlook for the fund.
Sincerely,
/s/ Thomas J. Dickson
Thomas J. Dickson
/s/ Umran Demirors
Umran Demirors
Portfolio Management Team
Franklin Global Government Income Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
40
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Global Government Income Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-----------------------------------------------
MONTH CLASS A CLASS C ADVISOR CLASS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
November 5 cents 4.65 cents 5.07 cents
December 5 cents 4.65 cents 5.11 cents
January 5 cents 4.65 cents 5.07 cents
February 5 cents 4.65 cents 5.06 cents
March 5 cents 4.64 cents 5.11 cents
April 5 cents 4.64 cents 5.07 cents
May 5 cents 4.64 cents 5.07 cents
June 5 cents 4.60 cents 5.06 cents
July 5 cents 4.60 cents 5.11 cents
August 5 cents 4.60 cents 5.07 cents
September 5 cents 4.71 cents 5.06 cents
October 3 cents 2.71 cents 3.12 cents
- -----------------------------------------------------------------------------
TOTAL 58 CENTS 53.74 CENTS 58.98 CENTS
</TABLE>
41
<PAGE>
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund 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.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
<S> <C> <C> <C>
Net Asset Value -$0.53 $7.72 $8.25
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
<S> <C>
Dividend Income $0.58
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 10/31/99 10/31/98
<S> <C> <C> <C>
Net Asset Value -$0.53 $7.73 $8.26
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
<S> <C>
Dividend Income $0.5374
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 10/31/98
<S> <C> <C> <C>
Net Asset Value -$0.53 $7.73 $8.26
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
<S> <C>
Dividend Income $0.5898
</TABLE>
Past performance is not predictive of future results.
42
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/15/88)
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.90% +39.94% +92.96% +116.40%
Average Annual Total Return(2) -3.43% +6.03% +6.33% +6.46%
Distribution Rate(3) 4.47%
30-Day Standardized Yield(4) 6.40%
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +0.36% +9.44% +30.21%
Average Annual Total Return(2) -1.53% +2.71% +5.80%
Distribution Rate(3) 4.16%
30-Day Standardized Yield(4) 6.30%
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR (3/15/88)
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +1.03% +40.87% +94.24% +117.87%
Average Annual Total Return(2) +1.03% +7.09% +6.86% +6.92%
Distribution Rate(3) 4.84%
30-Day Standardized Yield(4) 6.82%
</TABLE>
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
3. Distribution rate is based on an annualization of the respective class's
October monthly dividend and the maximum offering price (net asset value price
for Advisor Class) per share on October 31, 1999.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
5. On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since January 2, 1997 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +9.56% and +3.28% respectively.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
currency volatility, and the economic, social and political climates of
countries where the fund invests. Emerging markets involve heightened risks
related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
43
<PAGE>
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS A
<S> <C>
1-Year -3.43%
5-Year +6.03%
10-Year +6.33%
Since Inception (3/15/88) +6.46%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
CLASS C
<S> <C>
1-Year -1.53%
3-Year +2.71%
Since Inception (5/1/95) +5.80%
</TABLE>
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charges, fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
CLASS A (11/1/899 - 10/31/99)
This graph compares the performance of Franklin Global Government Income Fund -
Class A, as tracked by the growth in value of a $10,000 investment, to that of
JP Morgan Global Government Bond Index* from 11/1/89-10/31/99.
- -----------------------------------------------------------
Period End Global JP Morgan JP Morgan
Government Global Global
Income Fund A Government Governement
Bond Index Bond Index
11/01/1989 9575 10000
11/30/1989 9667 10089 0.89%
12/31/1989 9820 10207 1.17%
01/31/1990 9742 10055 -1.49%
02/28/1990 9603 9946 -1.08%
03/31/1990 9719 9886 -0.61%
04/30/1990 9660 9848 -0.38%
05/31/1990 9862 10163 3.20%
06/30/1990 10162 10347 1.81%
07/31/1990 10423 10651 2.94%
08/31/1990 10285 10568 -0.78%
09/30/1990 10255 10668 0.94%
10/31/1990 10303 11089 3.95%
11/30/1990 10484 11284 1.76%
12/31/1990 10566 11409 1.11%
01/31/1991 10695 11668 2.27%
02/28/1991 10997 11679 0.09%
03/31/1991 10792 11313 -3.13%
04/30/1991 10960 11343 0.26%
05/31/1991 11093 11461 1.04%
06/30/1991 11001 11307 -1.34%
07/31/1991 11222 11546 2.11%
08/31/1991 11287 11786 2.08%
09/30/1991 11588 12216 3.65%
10/31/1991 11747 12337 0.99%
11/30/1991 11731 12537 1.62%
12/31/1991 12069 13104 4.52%
01/31/1992 12041 12914 -1.45%
02/29/1992 12052 12876 -0.29%
03/31/1992 12037 12756 -0.93%
04/30/1992 12152 12864 0.84%
05/31/1992 12413 13229 2.84%
06/30/1992 12397 13590 2.73%
07/31/1992 12502 13890 2.21%
08/31/1992 12415 14260 2.66%
09/30/1992 11852 14246 -0.10%
10/31/1992 12069 13889 -2.50%
11/30/1992 11824 13644 -1.77%
12/31/1992 12040 13772 0.94%
01/31/1993 12215 14006 1.70%
02/28/1993 12448 14232 1.61%
03/31/1993 12898 14451 1.54%
04/30/1993 13278 14714 1.82%
05/31/1993 13487 14812 0.67%
06/30/1993 13434 14820 0.05%
07/31/1993 13395 14826 0.04%
08/31/1993 13727 15264 2.96%
09/30/1993 13704 15426 1.06%
10/31/1993 14100 15419 -0.05%
11/30/1993 13773 15306 -0.73%
12/31/1993 14283 15462 1.02%
01/31/1994 14566 15607 0.94%
02/28/1994 14123 15436 -1.10%
03/31/1994 13535 15365 -0.46%
04/30/1994 13527 15351 -0.09%
05/31/1994 13628 15225 -0.82%
06/30/1994 12949 15406 1.19%
07/31/1994 13132 15551 0.94%
08/31/1994 13269 15511 -0.26%
09/30/1994 13243 15587 0.49%
10/31/1994 13309 15820 1.50%
11/30/1994 13293 15621 -1.26%
12/31/1994 13175 15657 0.23%
01/31/1995 13092 15973 2.02%
02/28/1995 13279 16385 2.58%
03/31/1995 13552 17219 5.09%
04/30/1995 13879 17493 1.59%
05/31/1995 14243 17981 2.79%
06/30/1995 14296 18095 0.63%
07/31/1995 14418 18180 0.47%
08/31/1995 14455 17674 -2.78%
09/30/1995 14776 18072 2.25%
10/31/1995 14992 18249 0.98%
11/30/1995 15228 18453 1.12%
12/31/1995 15556 18682 1.24%
01/31/1996 15592 18490 -1.03%
02/29/1996 15333 18382 -0.58%
03/31/1996 15390 18355 -0.15%
04/30/1996 15558 18287 -0.37%
05/31/1996 15670 18305 0.10%
06/30/1996 15897 18465 0.87%
07/31/1996 15916 18804 1.84%
08/31/1996 16164 18883 0.42%
09/30/1996 16453 18987 0.55%
10/31/1996 16761 19363 1.98%
11/30/1996 17189 19640 1.43%
12/31/1996 17229 19502 -0.70%
01/31/1997 17012 19015 -2.50%
02/28/1997 16932 18884 -0.69%
03/31/1997 16853 18740 -0.76%
04/30/1997 16893 18635 -0.56%
05/31/1997 17033 19075 2.36%
06/30/1997 17236 19293 1.14%
07/31/1997 17318 19221 -0.37%
08/31/1997 17277 19198 -0.12%
09/30/1997 17628 19624 2.22%
10/31/1997 17524 20040 2.12%
11/30/1997 17587 19800 -1.20%
12/31/1997 17713 19778 -0.11%
01/31/1998 17883 19976 1.00%
02/28/1998 18095 20124 0.74%
03/31/1998 18180 19973 -0.75%
04/30/1998 18202 20280 1.54%
05/31/1998 18158 20367 0.43%
06/30/1998 18115 20425 0.28%
07/31/1998 18159 20480 0.27%
08/31/1998 17142 21045 2.76%
09/30/1998 18031 22143 5.22%
10/31/1998 18499 22639 2.24%
11/30/1998 18702 22384 -1.13%
12/31/1998 18747 22804 1.88%
01/31/1999 18633 22617 -0.82%
02/28/1999 18152 21862 -3.34%
03/31/1999 18520 21917 0.25%
04/30/1999 18983 21910 -0.03%
05/31/1999 18446 21524 -1.76%
06/30/1999 18375 21165 -1.67%
07/31/1999 18447 21631 2.20%
08/31/1999 18329 21687 0.26%
09/30/1999 18641 21999 1.44%
10/31/1999 18666 21973 -0.12%
*Source: Standard and Poor's Micropal.
CLASS C (5/1/95 - 10/31/99)
This graph compares the performance of Franklin Global Government Income Fund -
Class C, as tracked by the growth in value of a $10,000 investment, to that of
JP Morgan Global Government Bond Index* from 5/1/95-10/31/99.
- -----------------------------------------------------------
Period End Global JP Morgan JP Morgan
Government Global Global
Income Fund C Government Governement
Bond Index Bond Index
05/01/1995 9901 10000
05/31/1995 10171 10279 2.79%
06/30/1995 10204 10344 0.63%
07/31/1995 10273 10392 0.47%
08/31/1995 10294 10103 -2.78%
09/30/1995 10518 10331 2.25%
10/31/1995 10670 10432 0.98%
11/30/1995 10834 10549 1.12%
12/31/1995 11063 10680 1.24%
01/31/1996 11084 10570 -1.03%
02/29/1996 10894 10508 -0.58%
03/31/1996 10929 10493 -0.15%
04/30/1996 11029 10454 -0.37%
05/31/1996 11117 10464 0.10%
06/30/1996 11272 10555 0.87%
07/31/1996 11280 10749 1.84%
08/31/1996 11451 10795 0.42%
09/30/1996 11650 10854 0.55%
10/31/1996 11864 11069 1.98%
11/30/1996 12163 11227 1.43%
12/31/1996 12187 11149 -0.70%
01/31/1997 12027 10870 -2.50%
02/28/1997 11979 10795 -0.69%
03/31/1997 11903 10713 -0.76%
04/30/1997 11925 10653 -0.56%
05/31/1997 12033 10904 2.36%
06/30/1997 12170 11029 1.14%
07/31/1997 12222 10988 -0.37%
08/31/1997 12188 10975 -0.12%
09/30/1997 12415 11218 2.22%
10/31/1997 12336 11456 2.12%
11/30/1997 12390 11319 -1.20%
12/31/1997 12474 11306 -0.11%
01/31/1998 12587 11419 1.00%
02/28/1998 12716 11504 0.74%
03/31/1998 12769 11417 -0.75%
04/30/1998 12779 11593 1.54%
05/31/1998 12743 11643 0.43%
06/30/1998 12706 11676 0.28%
07/31/1998 12731 11707 0.27%
08/31/1998 12013 12030 2.76%
09/30/1998 12630 12658 5.22%
10/31/1998 12968 12942 2.24%
11/30/1998 13104 12796 -1.13%
12/31/1998 13130 13036 1.88%
01/31/1999 13030 12929 -0.82%
02/28/1999 12703 12497 -3.34%
03/31/1999 12955 12529 0.25%
04/30/1999 13272 12525 -0.03%
05/31/1999 12875 12305 -1.76%
06/30/1999 12836 12099 -1.67%
07/31/1999 12880 12365 2.20%
08/31/1999 12790 12397 0.26%
09/30/1999 13003 12576 1.44%
10/31/1999 13015 12561 -0.12%
- -----------------------------------------------------------
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
44
<PAGE>
ADVISOR CLASS ** (11/1/89 - 10/31/99)
This graph compares the performance of Franklin Global Government Income Fund -
Advisor Class, as tracked by the growth in value of a $10,000 investment, to
that of JP Morgan Global Government Bond Index* from 11/1/89-10/31/99.
- ----------------------------------------------------------------
Period End Global FundStatiJP Morgan JP Morgan
Government Perform Global Global
Income Government Bond Governement
Fund Index Bond Index
Advisor
11/01/1989 10000 10000
11/30/1989 10096 10089 0.89%
12/31/1989 10256 10207 1.17%
01/31/1990 10174 10055 -1.49%
02/28/1990 10029 9946 -1.08%
03/31/1990 10151 9886 -0.61%
04/30/1990 10088 9848 -0.38%
05/31/1990 10300 10163 3.20%
06/30/1990 10613 10347 1.81%
07/31/1990 10886 10651 2.94%
08/31/1990 10742 10568 -0.78%
09/30/1990 10710 10668 0.94%
10/31/1990 10760 11089 3.95%
11/30/1990 10949 11284 1.76%
12/31/1990 11035 11409 1.11%
01/31/1991 11170 11668 2.27%
02/28/1991 11485 11679 0.09%
03/31/1991 11271 11313 -3.13%
04/30/1991 11446 11343 0.26%
05/31/1991 11585 11461 1.04%
06/30/1991 11490 11307 -1.34%
07/31/1991 11720 11546 2.11%
08/31/1991 11788 11786 2.08%
09/30/1991 12102 12216 3.65%
10/31/1991 12268 12337 0.99%
11/30/1991 12251 12537 1.62%
12/31/1991 12605 13104 4.52%
01/31/1992 12575 12914 -1.45%
02/29/1992 12587 12876 -0.29%
03/31/1992 12571 12756 -0.93%
04/30/1992 12691 12864 0.84%
05/31/1992 12964 13229 2.84%
06/30/1992 12947 13590 2.73%
07/31/1992 13057 13890 2.21%
08/31/1992 12965 14260 2.66%
09/30/1992 12378 14246 -0.10%
10/31/1992 12604 13889 -2.50%
11/30/1992 12349 13644 -1.77%
12/31/1992 12574 13772 0.94%
01/31/1993 12757 14006 1.70%
02/28/1993 13001 14232 1.61%
03/31/1993 13470 14451 1.54%
04/30/1993 13867 14714 1.82%
05/31/1993 14086 14812 0.67%
06/30/1993 14031 14820 0.05%
07/31/1993 13990 14826 0.04%
08/31/1993 14336 15264 2.96%
09/30/1993 14312 15426 1.06%
10/31/1993 14726 15419 -0.05%
11/30/1993 14384 15306 -0.73%
12/31/1993 14917 15462 1.02%
01/31/1994 15212 15607 0.94%
02/28/1994 14749 15436 -1.10%
03/31/1994 14136 15365 -0.46%
04/30/1994 14128 15351 -0.09%
05/31/1994 14232 15225 -0.82%
06/30/1994 13524 15406 1.19%
07/31/1994 13715 15551 0.94%
08/31/1994 13858 15511 -0.26%
09/30/1994 13831 15587 0.49%
10/31/1994 13899 15820 1.50%
11/30/1994 13883 15621 -1.26%
12/31/1994 13760 15657 0.23%
01/31/1995 13673 15973 2.02%
02/28/1995 13868 16385 2.58%
03/31/1995 14154 17219 5.09%
04/30/1995 14495 17493 1.59%
05/31/1995 14876 17981 2.79%
06/30/1995 14930 18095 0.63%
07/31/1995 15058 18180 0.47%
08/31/1995 15096 17674 -2.78%
09/30/1995 15432 18072 2.25%
10/31/1995 15657 18249 0.98%
11/30/1995 15903 18453 1.12%
12/31/1995 16246 18682 1.24%
01/31/1996 16284 18490 -1.03%
02/29/1996 16014 18382 -0.58%
03/31/1996 16073 18355 -0.15%
04/30/1996 16248 18287 -0.37%
05/31/1996 16365 18305 0.10%
06/30/1996 16603 18465 0.87%
07/31/1996 16623 18804 1.84%
08/31/1996 16881 18883 0.42%
09/30/1996 17183 18987 0.55%
10/31/1996 17505 19363 1.98%
11/30/1996 17952 19640 1.43%
12/31/1996 17994 19502 -0.70%
01/31/1997 17891 -0.57% 19015 -2.50%
02/28/1997 17829 -0.35% 18884 -0.69%
03/31/1997 17725 -0.58% 18740 -0.76%
04/30/1997 17791 0.37% 18635 -0.56%
05/31/1997 17940 0.84% 19075 2.36%
06/30/1997 18156 1.20% 19293 1.14%
07/31/1997 18243 0.48% 19221 -0.37%
08/31/1997 18201 -0.23% 19198 -0.12%
09/30/1997 18550 1.92% 19624 2.22%
10/31/1997 18443 -0.58% 20040 2.12%
11/30/1997 18533 0.49% 19800 -1.20%
12/31/1997 18668 0.73% 19778 -0.11%
01/31/1998 18850 0.97% 19976 1.00%
02/28/1998 19053 1.08% 20124 0.74%
03/31/1998 19167 0.60% 19973 -0.75%
04/30/1998 19192 0.13% 20280 1.54%
05/31/1998 19125 -0.35% 20367 0.43%
06/30/1998 19106 -0.10% 20425 0.28%
07/31/1998 19154 0.25% 20480 0.27%
08/31/1998 18085 -5.58% 21045 2.76%
09/30/1998 19000 5.06% 22143 5.22%
10/31/1998 19519 2.73% 22639 2.24%
11/30/1998 19710 0.98% 22384 -1.13%
12/31/1998 19759 0.25% 22804 1.88%
01/31/1999 19641 -0.60% 22617 -0.82%
02/28/1999 19158 -2.46% 21862 -3.34%
03/31/1999 19548 2.04% 21917 0.25%
04/30/1999 20039 2.51% 21910 -0.03%
05/31/1999 19450 -2.94% 21524 -1.76%
06/30/1999 19401 -0.25% 21165 -1.67%
07/31/1999 19479 0.40% 21631 2.20%
08/31/1999 19331 -0.76% 21687 0.26%
09/30/1999 19687 1.84% 21999 1.44%
10/31/1999 19714 0.15% 21973 -0.12%
AVERAGE ANNUAL TOTAL RETURN 10/31/99
<TABLE>
<CAPTION>
ADVISOR CLASS**
<S> <C>
1-Year +1.03%
5-Year +7.09%
10-Year +6.86%
Since Inception (3/15/88) +6.92%
</TABLE>
*Source: Standard and Poor's Micropal.
**On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class.
Past performance is not predictive of future results.
45
<PAGE>
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
[PYRAMID GRAPH]
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.
For the year ended October 31, 1999, Franklin Short-Intermediate U.S. Government
Securities Fund - Class A shares' +1.51% 12-month cumulative total return was
better than expected considering the period was one of the worst in U.S. bond
market history. October 1998, immediately preceding the fund's fiscal year, saw
foreign economies in crisis and a major financial bailout for hedge funds that
were selling off positions and taking losses at an alarming rate. Even the U.S.
stock market's astonishing bull run took a breather. In response to these
events, the U.S. Federal Reserve Board (the Fed), as well as central banks
around the globe, eased monetary policy. In an effort to avert a recession, they
lowered interest rates to bolster worldwide demand for goods and services.
Historically low inflation and interest-rate levels characterized the economic
environment.
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 81 of
this report.
46
<PAGE>
In the past 12 months, the world economy turned. Strong U.S. consumer demand
helped the Asian economies export their way out of recessions, while Europe also
returned to stronger growth. Tighter labor markets and strengthening commodity
prices, by-products of the worldwide financial market recovery, brought
inflation back to life. By the end of the reporting period, central bankers and
the Fed had returned to a tightening monetary policy, resulting in interest
rates that were at their highest levels since October 1997. These combined
events made for a very challenging 12 months for bond investors.
We met this challenge by expanding our investment parameters in the spring of
1999. The fund now invests in mortgage-backed and government-sponsored agency
debt. Beginning in April, management began buying these higher-yielding
securities, prudently adding to them throughout the following six months. By the
end of the year under review, the portfolio held more than 50% of its total net
assets in such higher yielding securities. We also extended the average life of
the fund's investments during the year under review, finding attractive the
higher rates available for slightly longer-term debt. Despite these adjustments,
we maintained our primary objective of providing a high level of current income
while also seeking preservation of shareholders' capital.
"By the end of the reporting period, central bankers and the Fed had returned to
a tightening monetary policy, resulting in interest rates that were at their
highest levels since October 1997."
47
<PAGE>
Sincerely,
/s/ David Capurro
David Capurro
Portfolio Manager
Franklin Short-Intermediate U.S. Government Securities Fund
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 1999, the end of the reporting period. Our strategies and the fund's
portfolio composition will change depending on market and economic conditions.
Although historical performance is no guarantee of future results, these
insights may help you understand our investment and management philosophy.
48
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Short-Intermediate U.S. Government Securities Fund
11/1/98 - 10/31/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-----------------------------
MONTH CLASS A ADVISOR CLASS
- ----- ------- -------------
<S> <C> <C>
November 4.5 cents 4.56 cents
December 4.1 cents 4.16 cents
January 4.1 cents 4.20 cents
February 4.1 cents 4.22 cents
March 4.1 cents 4.26 cents
April 4.1 cents 4.19 cents
May 4.1 cents 4.17 cents
June 4.1 cents 4.14 cents
July 4.1 cents 4.16 cents
August 4.3 cents 4.39 cents
September 4.3 cents 4.41 cents
October 4.3 cents 4.43 cents
---------- -----------
TOTAL 50.2 CENTS 51.29 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.
49
<PAGE>
FRANKLIN
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
CLASS A (formerly Class I):
Subject to the maximum 2.25% initial 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.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 10/31/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION
<TABLE>
<CAPTION>
CLASS A CHANGE 10/31/99 10/31/98
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.35 $10.11 $10.46
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
----------------------------------
<S> <C>
Dividend Income $0.502
<CAPTION>
ADVISOR CLASS CHANGE 10/31/99 10/31/98
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.35 $10.10 $10.45
<CAPTION>
DISTRIBUTIONS (11/1/98 - 10/31/99)
----------------------------------
<S> <C>
Dividend Income $0.5129
</TABLE>
Past performance is not predictive of future results.
50
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/15/87)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +1.51% +31.93% +85.05% +122.15%
Average Annual Total Return(2) -0.77% +5.22% +6.10% +6.38%
Distribution Rate(3) 4.99%
30-Day Standardized Yield(4) 5.20%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 5-YEAR 10-YEAR (4/15/87)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +1.62% +32.34% +85.49% +122.67%
Average Annual Total Return(2) +1.62% +5.75% +6.37% +6.59%
Distribution Rate(3) 5.26%
30-Day Standardized Yield(4) 5.40%
</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 applicable, maximum
sales charge(s) for that class.
3. Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (net asset value price
for Advisor Class) per share on October 31, 1999.
4. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1999.
5. On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since January 2, 1997 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +14.95% and +5.04% respectively.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
51
<PAGE>
FRANKLIN
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge, fund expenses,
account fees and reinvested distributions. The unmanaged index differs from the
fund in composition, does not pay management fees or expenses and includes
reinvested dividends. One cannot invest directly in an index. Performance of the
fund's shares exceeded the rate of inflation as measured by the Consumer Price
Index (CPI).
AVERAGE ANNUAL TOTAL RETURN
10/31/99
CLASS A
<TABLE>
<S> <C>
1-Year -0.77%
5-Year +5.22%
10-Year +6.10%
Since Inception (4/15/87) +6.38%
</TABLE>
This graph compares the performance for Franklin Short-Intermediate U.S.
Government Securities Fund - Class A, as tracked by the growth in value of a
$10,000 investment, to that of Lehman Brothers Short U.S. Treasury 1-5 Year
Index* and CPI* from 11/1/89-10/31/99.
Franklin Lehman Brothers CPI
Short-Intermediate Short U.S.
U.S. Government Treasury 1-5
Securities Fund - Year Index
Class A
- ----------------------------------------------------------------------
11/01/1989 $9,771 $10,000 $10,000
11/30/1989 $9,850 0.92% $10,092 0.24% $10,024
12/31/1989 $9,880 0.36% $10,128 0.16% $10,040
01/31/1990 $9,892 -0.21% $10,107 1.03% $10,143
02/28/1990 $9,952 0.45% $10,153 0.47% $10,191
03/31/1990 $9,974 0.20% $10,173 0.55% $10,247
04/30/1990 $9,976 0.01% $10,174 0.16% $10,264
05/31/1990 $10,137 1.79% $10,356 0.23% $10,287
06/30/1990 $10,250 1.17% $10,477 0.54% $10,343
07/31/1990 $10,363 1.34% $10,618 0.38% $10,382
08/31/1990 $10,386 0.11% $10,629 0.92% $10,478
09/30/1990 $10,480 0.85% $10,720 0.84% $10,566
10/31/1990 $10,596 1.25% $10,854 0.60% $10,629
11/30/1990 $10,702 1.15% $10,978 0.22% $10,652
12/31/1990 $10,834 1.29% $11,120 0.00% $10,652
01/31/1991 $10,920 0.98% $11,229 0.60% $10,716
02/28/1991 $10,986 0.60% $11,296 0.15% $10,732
03/31/1991 $11,053 0.62% $11,366 0.15% $10,748
04/30/1991 $11,152 1.02% $11,482 0.15% $10,765
05/31/1991 $11,208 0.59% $11,550 0.30% $10,797
06/30/1991 $11,236 0.24% $11,578 0.29% $10,828
07/31/1991 $11,329 1.00% $11,694 0.15% $10,844
08/31/1991 $11,489 1.65% $11,887 0.29% $10,876
09/30/1991 $11,617 1.36% $12,048 0.44% $10,924
10/31/1991 $11,746 1.17% $12,189 0.15% $10,940
11/30/1991 $11,854 1.13% $12,327 0.29% $10,972
12/31/1991 $12,140 1.93% $12,565 0.07% $10,979
01/31/1992 $11,972 -0.51% $12,501 0.15% $10,996
02/29/1992 $12,000 0.26% $12,533 0.36% $11,036
03/31/1992 $11,942 -0.24% $12,503 0.51% $11,092
04/30/1992 $12,047 0.97% $12,624 0.14% $11,107
05/31/1992 $12,223 1.22% $12,778 0.14% $11,123
06/30/1992 $12,411 1.30% $12,945 0.36% $11,163
07/31/1992 $12,673 1.56% $13,146 0.21% $11,186
08/31/1992 $12,804 1.01% $13,279 0.28% $11,218
09/30/1992 $13,028 1.21% $13,440 0.28% $11,249
10/31/1992 $12,818 -1.00% $13,306 0.35% $11,288
11/30/1992 $12,740 -0.34% $13,260 0.14% $11,304
12/31/1992 $12,946 1.12% $13,409 -0.07% $11,296
01/31/1993 $13,187 1.58% $13,620 0.49% $11,352
02/28/1993 $13,416 1.17% $13,780 0.35% $11,391
03/31/1993 $13,471 0.34% $13,827 0.35% $11,431
04/30/1993 $13,552 0.76% $13,932 0.28% $11,463
05/31/1993 $13,506 -0.34% $13,885 0.14% $11,479
06/30/1993 $13,682 1.08% $14,034 0.14% $11,495
07/31/1993 $13,700 0.18% $14,059 0.00% $11,495
08/31/1993 $13,910 1.20% $14,228 0.28% $11,528
09/30/1993 $13,954 0.33% $14,275 0.21% $11,552
10/31/1993 $13,977 0.24% $14,309 0.41% $11,599
11/30/1993 $13,897 -0.22% $14,277 0.07% $11,607
12/31/1993 $13,949 0.40% $14,334 0.00% $11,607
01/31/1994 $14,091 0.83% $14,452 0.27% $11,639
02/28/1994 $13,877 -1.02% $14,305 0.34% $11,678
03/31/1994 $13,689 -0.98% $14,164 0.34% $11,718
04/30/1994 $13,580 -0.58% $14,083 0.14% $11,734
05/31/1994 $13,591 0.11% $14,098 0.07% $11,743
06/30/1994 $13,588 0.15% $14,119 0.34% $11,782
07/31/1994 $13,749 1.09% $14,273 0.27% $11,814
08/31/1994 $13,779 0.31% $14,317 0.40% $11,862
09/30/1994 $13,687 -0.54% $14,241 0.27% $11,894
10/31/1994 $13,706 0.13% $14,259 0.07% $11,902
11/30/1994 $13,630 -0.50% $14,187 0.13% $11,917
12/31/1994 $13,649 0.23% $14,219 0.00% $11,917
01/31/1995 $13,847 1.52% $14,434 0.40% $11,965
02/28/1995 $14,060 1.69% $14,678 0.40% $12,013
03/31/1995 $14,136 0.56% $14,760 0.33% $12,053
04/30/1995 $14,257 1.03% $14,912 0.33% $12,092
05/31/1995 $14,534 2.30% $15,255 0.20% $12,117
06/30/1995 $14,614 0.60% $15,346 0.20% $12,141
07/31/1995 $14,652 0.22% $15,380 0.00% $12,141
08/31/1995 $14,733 0.68% $15,485 0.26% $12,172
09/30/1995 $14,800 0.56% $15,572 0.20% $12,197
10/31/1995 $14,925 0.97% $15,723 0.33% $12,237
11/30/1995 $15,051 1.04% $15,887 -0.07% $12,228
12/31/1995 $15,162 0.87% $16,025 -0.07% $12,220
01/31/1996 $15,260 0.91% $16,170 0.59% $12,292
02/29/1996 $15,197 -0.69% $16,059 0.32% $12,331
03/31/1996 $15,163 -0.32% $16,007 0.52% $12,395
04/30/1996 $15,159 -0.09% $15,993 0.39% $12,444
05/31/1996 $15,171 0.07% $16,004 0.19% $12,467
06/30/1996 $15,287 0.85% $16,141 0.06% $12,475
07/31/1996 $15,329 0.35% $16,197 0.19% $12,499
08/31/1996 $15,371 0.26% $16,239 0.19% $12,522
09/30/1996 $15,504 1.08% $16,415 0.32% $12,562
10/31/1996 $15,667 1.37% $16,640 0.32% $12,603
11/30/1996 $15,801 0.93% $16,796 0.19% $12,626
12/31/1996 $15,768 -0.25% $16,753 0.00% $12,626
01/31/1997 $15,826 0.44% $16,827 0.32% $12,667
02/28/1997 $15,854 0.18% $16,858 0.31% $12,706
03/31/1997 $15,820 -0.31% $16,806 0.25% $12,738
04/30/1997 $15,942 0.96% $16,967 0.12% $12,753
05/31/1997 $16,048 0.72% $17,089 -0.06% $12,746
06/30/1997 $16,155 0.77% $17,221 0.12% $12,761
07/31/1997 $16,342 1.47% $17,473 0.12% $12,776
08/31/1997 $16,339 -0.13% $17,450 0.19% $12,800
09/30/1997 $16,463 0.91% $17,609 0.25% $12,832
10/31/1997 $16,589 0.95% $17,776 0.25% $12,865
11/30/1997 $16,601 0.20% $17,812 -0.06% $12,857
12/31/1997 $16,728 0.75% $17,945 -0.12% $12,841
01/31/1998 $16,904 1.18% $18,157 0.19% $12,866
02/28/1998 $16,900 -0.04% $18,150 0.19% $12,890
03/31/1998 $16,946 0.33% $18,210 0.19% $12,915
04/30/1998 $17,025 0.48% $18,298 0.18% $12,938
05/31/1998 $17,105 0.60% $18,408 0.18% $12,961
06/30/1998 $17,185 0.57% $18,513 0.12% $12,977
07/31/1998 $17,265 0.43% $18,593 0.12% $12,992
08/31/1998 $17,492 1.59% $18,888 0.12% $13,008
09/30/1998 $17,737 1.89% $19,244 0.12% $13,024
10/31/1998 $17,813 0.41% $19,324 0.24% $13,055
11/30/1998 $17,771 -0.27% $19,272 0.00% $13,055
12/31/1998 $17,824 0.34% $19,337 -0.06% $13,047
01/31/1999 $17,894 0.42% $19,419 0.24% $13,078
02/28/1999 $17,741 -0.90% $19,243 0.12% $13,094
03/31/1999 $17,846 0.70% $19,378 0.30% $13,133
04/30/1999 $17,883 0.29% $19,434 0.73% $13,229
05/31/1999 $17,797 -0.34% $19,368 0.00% $13,229
06/30/1999 $17,834 0.29% $19,424 0.00% $13,229
07/31/1999 $17,818 0.22% $19,468 0.30% $13,269
08/31/1999 $17,859 0.28% $19,523 0.24% $13,301
09/30/1999 $18,024 0.71% $19,662 0.48% $13,365
10/31/1999 $18,082 0.17% $19,695 0.18% $13,389
80.82% 96.95% 33.89%
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
52
<PAGE>
ADVISOR CLASS** (11/1/89-10/31/99)
This graph compares the performance for Franklin Short-Intermediate U.S.
Government Securities Fund - Advisor Class**, as tracked by the growth in value
of a $10,000 investment, to that of Lehman Brothers Short U.S. Treasury 1-5 Year
Index* and CPI* from 11/1/89-10/31/99.
Franklin Lehman Brothers CPI
Short-Intermediate Short U.S.
U.S. Government Treasury 1-5
Securities Fund - Year Index
Advisor Class
- ----------------------------------------------------------------------
11/01/1989 $10,000 $10,000 $10,000
11/30/1989 $10,080 0.92% $10,092 0.24% $10,024
12/31/1989 $10,112 0.36% $10,128 0.16% $10,040
01/31/1990 $10,123 -0.21% $10,107 1.03% $10,143
02/28/1990 $10,185 0.45% $10,153 0.47% $10,191
03/31/1990 $10,208 0.20% $10,173 0.55% $10,247
04/30/1990 $10,210 0.01% $10,174 0.16% $10,264
05/31/1990 $10,375 1.79% $10,356 0.23% $10,287
06/30/1990 $10,490 1.17% $10,477 0.54% $10,343
07/31/1990 $10,606 1.34% $10,618 0.38% $10,382
08/31/1990 $10,629 0.11% $10,629 0.92% $10,478
09/30/1990 $10,726 0.85% $10,720 0.84% $10,566
10/31/1990 $10,844 1.25% $10,854 0.60% $10,629
11/30/1990 $10,952 1.15% $10,978 0.22% $10,652
12/31/1990 $11,087 1.29% $11,120 0.00% $10,652
01/31/1991 $11,176 0.98% $11,229 0.60% $10,716
02/28/1991 $11,243 0.60% $11,296 0.15% $10,732
03/31/1991 $11,311 0.62% $11,366 0.15% $10,748
04/30/1991 $11,413 1.02% $11,482 0.15% $10,765
05/31/1991 $11,471 0.59% $11,550 0.30% $10,797
06/30/1991 $11,499 0.24% $11,578 0.29% $10,828
07/31/1991 $11,594 1.00% $11,694 0.15% $10,844
08/31/1991 $11,758 1.65% $11,887 0.29% $10,876
09/30/1991 $11,889 1.36% $12,048 0.44% $10,924
10/31/1991 $12,021 1.17% $12,189 0.15% $10,940
11/30/1991 $12,131 1.13% $12,327 0.29% $10,972
12/31/1991 $12,424 1.93% $12,565 0.07% $10,979
01/31/1992 $12,253 -0.51% $12,501 0.15% $10,996
02/29/1992 $12,281 0.26% $12,533 0.36% $11,036
03/31/1992 $12,222 -0.24% $12,503 0.51% $11,092
04/30/1992 $12,329 0.97% $12,624 0.14% $11,107
05/31/1992 $12,509 1.22% $12,778 0.14% $11,123
06/30/1992 $12,702 1.30% $12,945 0.36% $11,163
07/31/1992 $12,970 1.56% $13,146 0.21% $11,186
08/31/1992 $13,104 1.01% $13,279 0.28% $11,218
09/30/1992 $13,333 1.21% $13,440 0.28% $11,249
10/31/1992 $13,118 -1.00% $13,306 0.35% $11,288
11/30/1992 $13,039 -0.34% $13,260 0.14% $11,304
12/31/1992 $13,249 1.12% $13,409 -0.07% $11,296
01/31/1993 $13,495 1.58% $13,620 0.49% $11,352
02/28/1993 $13,730 1.17% $13,780 0.35% $11,391
03/31/1993 $13,787 0.34% $13,827 0.35% $11,431
04/30/1993 $13,869 0.76% $13,932 0.28% $11,463
05/31/1993 $13,823 -0.34% $13,885 0.14% $11,479
06/30/1993 $14,003 1.08% $14,034 0.14% $11,495
07/31/1993 $14,021 0.18% $14,059 0.00% $11,495
08/31/1993 $14,236 1.20% $14,228 0.28% $11,528
09/30/1993 $14,280 0.33% $14,275 0.21% $11,552
10/31/1993 $14,304 0.24% $14,309 0.41% $11,599
11/30/1993 $14,222 -0.22% $14,277 0.07% $11,607
12/31/1993 $14,276 0.40% $14,334 0.00% $11,607
01/31/1994 $14,421 0.83% $14,452 0.27% $11,639
02/28/1994 $14,202 -1.02% $14,305 0.34% $11,678
03/31/1994 $14,010 -0.98% $14,164 0.34% $11,718
04/30/1994 $13,898 -0.58% $14,083 0.14% $11,734
05/31/1994 $13,909 0.11% $14,098 0.07% $11,743
06/30/1994 $13,906 0.15% $14,119 0.34% $11,782
07/31/1994 $14,071 1.09% $14,273 0.27% $11,814
08/31/1994 $14,102 0.31% $14,317 0.40% $11,862
09/30/1994 $14,007 -0.54% $14,241 0.27% $11,894
10/31/1994 $14,027 0.13% $14,259 0.07% $11,902
11/30/1994 $13,949 -0.50% $14,187 0.13% $11,917
12/31/1994 $13,968 0.23% $14,219 0.00% $11,917
01/31/1995 $14,171 1.52% $14,434 0.40% $11,965
02/28/1995 $14,390 1.69% $14,678 0.40% $12,013
03/31/1995 $14,467 0.56% $14,760 0.33% $12,053
04/30/1995 $14,591 1.03% $14,912 0.33% $12,092
05/31/1995 $14,874 2.30% $15,255 0.20% $12,117
06/30/1995 $14,956 0.60% $15,346 0.20% $12,141
07/31/1995 $14,995 0.22% $15,380 0.00% $12,141
08/31/1995 $15,078 0.68% $15,485 0.26% $12,172
09/30/1995 $15,147 0.56% $15,572 0.20% $12,197
10/31/1995 $15,275 0.97% $15,723 0.33% $12,237
11/30/1995 $15,403 1.04% $15,887 -0.07% $12,228
12/31/1995 $15,517 0.87% $16,025 -0.07% $12,220
01/31/1996 $15,617 0.91% $16,170 0.59% $12,292
02/29/1996 $15,553 -0.69% $16,059 0.32% $12,331
03/31/1996 $15,518 -0.32% $16,007 0.52% $12,395
04/30/1996 $15,514 -0.09% $15,993 0.39% $12,444
05/31/1996 $15,526 0.07% $16,004 0.19% $12,467
06/30/1996 $15,645 0.85% $16,141 0.06% $12,475
07/31/1996 $15,688 0.35% $16,197 0.19% $12,499
08/31/1996 $15,731 0.26% $16,239 0.19% $12,522
09/30/1996 $15,867 1.08% $16,415 0.32% $12,562
10/31/1996 $16,034 1.37% $16,640 0.32% $12,603
11/30/1996 $16,171 0.93% $16,796 0.19% $12,626
12/31/1996 $16,137 -0.25% $16,753 0.00% $12,626
01/31/1997 0.44% $16,208 0.44% $16,827 0.32% $12,667
02/28/1997 0.18% $16,237 0.18% $16,858 0.31% $12,706
03/31/1997-0.21% $16,203 -0.31% $16,806 0.25% $12,738
04/30/1997 0.78% $16,329 0.96% $16,967 0.12% $12,753
05/31/1997 0.67% $16,439 0.72% $17,089 -0.06% $12,746
06/30/1997 0.67% $16,549 0.77% $17,221 0.12% $12,761
07/31/1997 1.16% $16,741 1.47% $17,473 0.12% $12,776
08/31/1997-0.01% $16,739 -0.13% $17,450 0.19% $12,800
09/30/1997 0.77% $16,868 0.91% $17,609 0.25% $12,832
10/31/1997 0.77% $16,998 0.95% $17,776 0.25% $12,865
11/30/1997 0.18% $17,029 0.20% $17,812 -0.06% $12,857
12/31/1997 0.77% $17,160 0.75% $17,945 -0.12% $12,841
01/31/1998 1.06% $17,342 1.18% $18,157 0.19% $12,866
02/28/1998-0.01% $17,340 -0.04% $18,150 0.19% $12,890
03/31/1998 0.18% $17,371 0.33% $18,210 0.19% $12,915
04/30/1998 0.37% $17,435 0.48% $18,298 0.18% $12,938
05/31/1998 0.57% $17,535 0.60% $18,408 0.18% $12,961
06/30/1998 0.47% $17,617 0.57% $18,513 0.12% $12,977
07/31/1998 0.48% $17,702 0.43% $18,593 0.12% $12,992
08/31/1998 1.23% $17,920 1.59% $18,888 0.12% $13,008
09/30/1998 1.51% $18,190 1.89% $19,244 0.12% $13,024
10/31/1998 0.34% $18,252 0.41% $19,324 0.24% $13,055
11/30/1998-0.23% $18,210 -0.27% $19,272 0.00% $13,055
12/31/1998 0.30% $18,265 0.34% $19,337 -0.06% $13,047
01/31/1999 0.41% $18,340 0.42% $19,419 0.24% $13,078
02/28/1999-0.85% $18,184 -0.90% $19,243 0.12% $13,094
03/31/1999 0.61% $18,295 0.70% $19,378 0.30% $13,133
04/30/1999 0.21% $18,333 0.29% $19,434 0.73% $13,229
05/31/1999-0.47% $18,247 -0.34% $19,368 0.00% $13,229
06/30/1999 0.21% $18,285 0.29% $19,424 0.00% $13,229
07/31/1999-0.08% $18,270 0.22% $19,468 0.30% $13,269
08/31/1999 0.24% $18,314 0.28% $19,523 0.24% $13,301
09/30/1999 0.94% $18,486 0.71% $19,662 0.48% $13,365
10/31/1999 0.34% $18,549 0.17% $19,695 0.18% $13,389
85.49% 96.95% 33.89%
AVERAGE ANNUAL TOTAL RETURN
10/31/99
<TABLE>
<CAPTION>
ADVISOR CLASS**
<S> <C>
1-Year +1.62%
5-Year +5.75%
10-Year +6.37%
Since Inception (4/15/87) +6.59%
</TABLE>
*Source: Lehman Brothers; Standard and Poor's Micropal.
**On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class.
Past performance is not predictive of future results.
53
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
1999(3) 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 9.36 $ 9.48 $ 9.37 $ 9.34 $ 9.20
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income ........................ .45 .51 .55 .56 .54
Net realized and unrealized gains (losses) ... (.06) (.12) .10 .03 .14
-------- -------- -------- -------- --------
Total from investment operations .............. .39 .39 .65 .59 .68
-------- -------- -------- -------- --------
Less distributions from net investment income.. (.45) (.51) (.54) (.56) (.54)
-------- -------- -------- -------- --------
Net asset value, end of year .................. $ 9.30 $ 9.36 $ 9.48 $ 9.37 $ 9.34
======== ======== ======== ======== ========
Total return(1) ............................... 4.24% 4.26% 7.18% 6.54% 7.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $282,685 $298,298 $334,990 $397,078 $509,371
Ratios to average net assets:
Expenses(2) .................................. .96% .76% .75% .69% .61%
Expense excluding waiver and payments by
affiliate(2) ............................... .96% .93% .93% .86% .86%
Net investment income ........................ 4.80% 5.38% 5.81% 5.87% 5.76%
Portfolio turnover rate(4) .................... 23.23% 38.92% 20.84% 24.63% 20.16%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Includes the Fund's share of the Portfolio's allocated expenses.
(3) Based on average shares outstanding.
(4) Represents the Portfolio's rate of turnover.
See notes to financial statements.
54
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 99.7%
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1) 30,278,780 $281,895,440
------------
TOTAL INVESTMENTS (COST $303,408,647) 99.7% 281,895,440
OTHER ASSETS, LESS LIABILITIES .3% 789,391
------------
NET ASSETS 100.0% $282,684,831
============
</TABLE>
See notes to financial statements.
55
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN BOND FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------
YEAR ENDED OCTOBER 31,
-------------------------
1999 1998(3)
------- -------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.37 $ 10.00
------- -------
Income from investment operations:
Net investment income .............................. .63 .12
Net realized and unrealized gains (losses) ......... (.71) .30
------- -------
Total from investment operations .................... (.08) .42
------- -------
Less distributions from:
Net investment income .............................. (.63) (.05)
Net realized gains ................................. (.05) --
------- -------
Total distributions ................................. (.68) (.05)
------- -------
Net asset value, end of year ........................ $ 9.61 $ 10.37
======= =======
Total return(1) ..................................... (.73%) 4.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 7,870 $ 4,232
Ratios to average net assets:
Expenses ........................................... .50% .50%(2)
Expense excluding waiver and payments by affiliate.. 1.18% 1.29%(2)
Net investment income .............................. 6.32% 5.21%(2)
Portfolio turnover rate ............................. 96.38% 23.19%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) For the period August 3, 1998 (effective date) to October 31, 1998.
(4) Based on average shares outstanding.
56
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN BOND FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------
YEAR ENDED OCTOBER 31,
------------------------
1999 1998(3)
--------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 10.38 $ 10.00
--------- ---------
Income from investment operations:
Net investment income ................................ .66 .12
Net realized and unrealized gains (losses) ........... (.71) .31
--------- ---------
Total from investment operations ...................... (.05) .43
--------- ---------
Less distributions from:
Net investment income ................................ (.66) (.05)
Net realized gains ................................... (.05) --
--------- ---------
Total distributions ................................... (.71) (.05)
--------- ---------
Net asset value, end of year .......................... $ 9.62 $ 10.38
========= =========
Total return(1) ....................................... (.46%) 4.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 12,099 $ 31,588
Ratios to average net assets:
Expenses ............................................. .25% .25%(2)
Expense excluding waiver and payments by affiliate ... .93% 1.04%(2)
Net investment income ................................ 6.57% 5.46%(2)
Portfolio turnover rate ............................... 96.38% 23.19%
</TABLE>
(1) Total return is not annualized for periods less than one year.
(2) Annualized
(3) For the period August 3, 1998 (effective date) to October 31, 1998.
(4) Based on average shares outstanding.
See notes to financial statements.
57
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 119.9%
CORPORATE BONDS 58.2%
ADJUSTABLE RATE MORTGAGE SECURITIES 4.8%
PHMS, 1988-4 A, 7.187%, 7/25/18 .................................... $ 670,749 $ 666,766
RYMS, 1992-3 A2, 6.643%, 6/25/20 ................................... 128,800 128,940
Saxon Mortgage Securities Corp., 8.074%, 5/25/24 ................... 164,356 170,109
----------
965,815
----------
ASSET BACKED SECURITIES 10.9%
Countrywide Asset-backed Certificates, 6.78%, 11/25/27 ............. 500,000 486,113
Green Tree Financial Corp., 8.37%, 2/01/31 ......................... 500,000 466,721
Saxon Asset Security Trust, 6.365%,10/25/13 ........................ 553,478 551,253
Saxon Asset Security Trust, 7.00%, 3/25/27 ......................... 552,000 536,831
Saxon Asset Security Trust, 6.93%, 1/25/30 ......................... 150,000 136,617
----------
2,177,535
----------
COMMERCIAL MORTGAGE BACKED SECURITIES 4.9%
BSCMS, 1998-C1 CL A1, 6.34%, 10/16/07 .............................. 392,603 382,052
BSCMS, 1998-C1 CL A2, 6.44%, 6/16/08 ............................... 360,000 341,550
BSCMS, 1999-WF2 A2, 7.08%, 6/15/09 ................................. 250,000 247,500
----------
971,102
----------
CONSUMER DURABLES 2.2%
Ford Motor Co., 6.375%, 2/01/29 .................................... 500,000 432,427
----------
CONSUMER NON-DURABLES 4.8%
Grand Metropolitan Investment, 7.125%, 9/15/04 ..................... 200,000 202,400
Pepsi Bottling Group Inc., 7.00%, 3/01/29 .......................... 500,000 463,740
Scotts Co., senior sub. note, 144A, 8.625%, 1/15/09 ................ 300,000 285,000
----------
951,140
----------
CONSUMER SERVICES 7.3%
AMFM Inc., 9.00%, 10/01/08 ......................................... 300,000 308,250
CSC Holdings Inc., senior note, 7.25%, 7/15/08 ..................... 300,000 285,504
Harrah's Operating Co. Inc., senior sub. note, 7.875%, 12/15/05 .... 300,000 285,750
Horseshoe Gaming Holding, senior sub. note, 8.625%, 5/15/09 ........ 300,000 288,750
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ........ 300,000 288,000
----------
1,456,254
----------
ELECTRONIC TECHNOLOGY 1.5%
L-3 Communications Holdings Inc., senior sub. note, 10.375%, 5/01/07 300,000 310,875
----------
ENERGY 1.5%
P&L Coal Holdings Corp., senior note, B, 8.875%, 5/15/08 ........... 300,000 292,500
----------
FINANCE 5.0%
First Chicago NBD Corp., sub. note, 7.625%, 1/15/03 ................ 291,000 299,730
HMH Properties Inc., senior secured note, B, 7.875%, 8/01/08 ....... 300,000 264,000
Paine Webber Group Inc., senior note, 6.55%, 4/15/08 ............... 150,000 139,227
Societe Generale-New York, sub. note, 7.40%, 6/01/06 ............... 300,000 298,779
----------
1,001,736
----------
</TABLE>
58
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
CORPORATE BONDS (CONT.)
INDUSTRIAL SERVICES 6.3%
Allied Waste North America Inc., senior note, B, 7.875%, 1/01/09 .. $ 300,000 $ 254,250
Browning-Ferris Industries Inc., senior note, 6.08%, 1/18/00 ...... 1,000,000 995,534
-----------
1,249,784
-----------
PROCESS INDUSTRIES 1.5%
Lyondell Chemical Co., 9.875%, 5/01/07 ............................ 300,000 297,750
-----------
TRANSPORTATION 2.0%
Gearbulk Holding Ltd., senior note, 11.25%, 12/01/04 (Bermuda) .... 100,000 101,250
Sea Containers Ltd., senior note, 144A, 10.75%, 10/15/06 .......... 300,000 301,500
-----------
402,750
-----------
UTILITIES 5.5%
CMS Energy Corp., senior note, 7.50%, 1/15/09 ..................... 100,000 89,750
Duquesne Light Co., 6.625%, 6/15/04 ............................... 300,000 297,438
McLeodusa Inc., 8.125%, 2/15/09 ................................... 300,000 279,000
Sprint Capital Corp., 6.875%, 11/15/28 ............................ 500,000 459,120
-----------
1,125,308
-----------
TOTAL CORPORATE BONDS (COST $12,018,993) .......................... 11,634,976
-----------
U.S. GOVERNMENT SECURITIES 52.6%
(d)FHLMC, 7.50%, 11/01/28 ............................................ 808,486 811,265
FNMA, 5.50%, 1/01/14 .............................................. 475,854 448,850
(d)FNMA, 6.50%, 11/01/28 ............................................. 1,994,000 1,909,878
(d)FNMA, 7.00%, 11/01/28 ............................................. 1,000,000 981,250
(d)FNMA, 6.00%, 11/01/29 ............................................. 1,000,000 931,250
FNMA, ARM, 7.437%, 12/01/24 ....................................... 561,268 566,780
GNMA, ARM, 6.125%, 10/20/26 ....................................... 101,291 103,030
GNMA, SF, 7.00%, 2/15/09 .......................................... 408,276 408,829
GNMA, SF, 7.00%, 12/15/28 ......................................... 499,200 490,190
GNMA, SF, 6.50%, 1/15/29 .......................................... 140,945 134,844
GNMA, SF, 6.50%, 4/15/29 .......................................... 526,069 503,295
GNMA, SF, 6.50%, 5/15/29 .......................................... 155,939 149,188
GNMA, SF, 6.50%, 7/15/29 .......................................... 964,644 922,883
(d)GNMA, SF, 7.50%, 11/01/29 ......................................... 430,000 430,941
(d)GNMA, SF, 8.00%, 11/01/29 ......................................... 1,240,000 1,266,733
GNMA II, 6.00%, 3/20/28 ........................................... 474,284 439,705
-----------
TOTAL U.S. GOVERNMENT SECURITIES (COST $10,650,415) ............... 10,498,911
-----------
OTHER GOVERNMENT AND AGENCY SECURITIES 3.0%
Tennessee Valley Authority, 5.28%, 9/14/01 (COST $601,710) ........ 600,000 591,047
-----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 4.9%
Republic of Argentina, Bonos Del Tesoro, 8.75%, 5/09/02 (Argentina) 350,000 325,763
Republic of Turkey, Reg S, 10.00%, 9/19/07 (Turkey) ............... 350,000 324,188
United Mexican States, 8.625%, 3/12/08 (Mexico) ................... 350,000 326,288
-----------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $1,008,562) .. 976,239
-----------
</TABLE>
59
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS 1.2%
Charter Communications Holdings LLC, senior disc. note, 144A, zero cpn.
to 4/01/04, 9.92% thereafter, 4/01/11 (COST $264,910) ................. $ 400,000 $ 238,000
------------
TOTAL LONG TERM INVESTMENTS (COST $24,544,590) ......................... 23,939,173
------------
SHORT TERM INVESTMENTS 5.0%
General Electric Capital Corp., 6.073%, 1/18/00 ........................ 1,000,000 1,000,111
(c)U.S. Treasury Bills, 1/13/00 ........................................... 10,000 9,900
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,009,901) ......................... 1,010,011
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $25,554,491) ...... 24,949,184
------------
(b)REPURCHASE AGREEMENT 5.9%
Joint Repurchase Agreement, 5.199%, 11/01/99 (Maturity Value $1,171,305)
(COST $1,170,798) ...................................................... 1,170,798 1,170,798
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC World Markets Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Goldman, Sachs & Co.
Paine Webber Inc.
Paribas Corporation
Warburg Dillon Read LLC
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $26,725,289) 130.8% ............................ 26,119,982
OTHER ASSETS, LESS LIABILITIES (30.8%) ................................. (6,151,553)
------------
NET ASSETS 100.0% ...................................................... $ 19,968,429
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
ARM - Adjustable Rate Mortgage
BSCMS - Bear Stearns Commercial Mortgage Securities
PHMS - Prudential Home Mortgage Securities
RYMS - Ryland Mortgage Securities Corporation
SF - Single Family
* Securities denominated in U.S. dollars unless otherwise indicated.
(b) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
(c) On deposit with broker for initial margin on futures contracts (Note 1d).
(d) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
60
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
1999(2) 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.75 $ 14.74 $ 13.45 $ 12.73 $ 12.34
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ...................... .61 .62 .64 .61 .58
Net realized and unrealized gains (losses) . 1.03 (1.92) 2.15 1.39 1.10
--------- --------- --------- --------- ---------
Total from investment operations ............ 1.64 (1.30) 2.79 2.00 1.68
--------- --------- --------- --------- ---------
Less distributions from:
Net investment income ...................... (.64) (.65) (.60) (.60) (.59)
Net realized gains ......................... -- (1.04) (.90) (.68) (.70)
--------- --------- --------- --------- ---------
Total distributions ......................... (.64) (1.69) (1.50) (1.28) (1.29)
--------- --------- --------- --------- ---------
Net asset value, end of year ................ $ 12.75 $ 11.75 $ 14.74 $ 13.45 $ 12.73
========= ========= ========= ========= =========
Total return(1) ............................. 14.25% (9.93%) 22.47% 16.71% 15.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 129,908 $ 170,569 $ 212,631 $ 130,951 $ 83,523
Ratios to average net assets:
Expenses ................................... 1.05% .98% 1.01% 1.02% 1.03%
Net investment income ...................... 4.92% 4.63% 4.81% 4.79% 4.82%
Portfolio turnover rate ..................... 147.75% 79.17% 141.49% 129.83% 108.64%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Based on average shares outstanding.
61
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CONVERTIBLE SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
1999(4) 1998 1997 1996 1995(3)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.70 $ 14.68 $ 13.41 $ 12.71 $ 13.06
-----------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .51 .51 .54 .51 .07
Net realized and unrealized gains (losses) . 1.04 (1.91) 2.13 1.40 (.37)
-----------------------------------------------------------------
Total from investment operations ............ 1.55 (1.40) 2.67 1.91 (.30)
-----------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.55) (.54) (.50) (.53) (.05)
Net realized gains ......................... -- (1.04) (.90) (.68) --
-----------------------------------------------------------------
Total distributions ......................... (.55) (1.58) (1.40) (1.21) (.05)
-----------------------------------------------------------------
Net asset value, end of year ................ $ 12.70 $ 11.70 $ 14.68 $ 13.41 $ 12.71
=================================================================
Total return(1) ............................. 13.48% (10.61)% 21.54% 15.92% (2.33)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 29,148 $ 41,533 $ 35,282 $ 10,861 $ 209
Ratios to average net assets:
Expenses ................................... 1.80% 1.73% 1.74% 1.79% 1.60%(2)
Net investment income ...................... 4.16% 3.93% 4.04% 4.00% 3.64%(2)
Portfolio turnover rate ..................... 147.75% 79.17% 141.49% 129.83% 108.64%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) For the period October 1, 1995 (effective date) to October 31, 1995.
(4) Based on average shares outstanding.
See notes to financial statements.
62
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS 54.9%
COMMERCIAL SERVICES 2.6%
United Rentals Trust I, 6.50%, cvt. pfd ........................................ 50,000 $ 1,687,500
United Rentals Trust I, 6.50%, cvt. pfd., 144A ................................. 74,500 2,514,375
-----------
4,201,875
-----------
CONSUMER NON-DURABLES 2.1%
Ralston Purina Group/Interstate Bakeries, 7.00%, cvt. pfd ...................... 80,500 3,345,781
-----------
CONSUMER SERVICES 2.0%
Host Marriott Corp., 6.75%, cvt. pfd ........................................... 94,000 3,172,500
-----------
ELECTRONIC TECHNOLOGY 4.7%
DECS Trust IV, 7.00%, cvt. pfd ................................................. 350,000 2,253,125
Loral Space & Communication, 6.00%, cvt. pfd., C (Bermuda) ..................... 45,000 1,957,500
Morgan Stanley Dean Witter & Co., 6.00%, cvt. pfd., Series Sun Microsystems Inc. 400,000 3,175,000
-----------
7,385,625
-----------
ENERGY MINERALS 6.0%
Kerr-McGee Corp., 5.50%, cvt. pfd .............................................. 151,200 5,688,900
Newfield Financial Trust I, 6.50%, cvt. pfd .................................... 75,000 3,862,500
-----------
9,551,400
-----------
FINANCE 8.5%
Apartment Investment & Management Co., 8.00%, cvt. pfd., K ..................... 125,000 3,062,500
Bank United Corp., 8.00%, cvt. pfd ............................................. 80,000 4,060,000
Equity Office Properties Trust, 5.25%, cvt. pfd., B ............................ 70,000 2,598,750
Protective Life Capital Trust II, 6.50%, cvt. pfd .............................. 65,700 3,827,025
-----------
13,548,275
-----------
INDUSTRIAL SERVICES 2.0%
Weatherford International Inc., 5.00%, cvt. pfd ................................ 25,000 925,000
Weatherford International Inc., 5.00%, cvt. pfd., 144A ......................... 60,000 2,220,000
-----------
3,145,000
-----------
NON-ENERGY MINERALS 1.9%
Georgia Pacific Corp., 7.50%, cvt. pfd ......................................... 69,500 3,005,875
-----------
PROCESS INDUSTRIES 3.1%
Hercules Inc. Trust II, 6.50%, cvt. pfd., CRESTS Unit .......................... 4,000 3,000,000
IMC Global/Merrill Lynch, 6.25%, cvt. pfd., IGL ................................ 125,000 1,976,563
-----------
4,976,563
-----------
PRODUCER MANUFACTURING 3.3%
Tower Automotive Capital, 6.75%, cvt. pfd ...................................... 135,000 5,265,000
-----------
TECHNOLOGY SERVICES 1.5%
Verio Inc., 6.75%, cvt. pfd., 144A ............................................. 50,000 2,312,500
-----------
TRANSPORTATION 1.8%
Canadian National Railway Co., 5.25%, cvt. pfd. (Canada) ....................... 57,400 2,898,700
-----------
UTILITIES 15.4%
AES Trust II, 5.50%, cvt. pfd., B .............................................. 48,400 2,662,000
AES Trust III, 6.75%, cvt. pfd ................................................. 13,800 696,038
</TABLE>
63
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
UTILITIES (CONT.)
Calpine Capital Trust, 5.75%, cvt. pfd ......................... 40,000 $ 2,190,000
CMS Energy Trust I, 7.75%, cvt. pfd ............................ 73,000 3,577,000
Coastal Corp., 6.625%, cvt. pfd ................................ 110,000 2,915,000
Intermedia Communications, cvt. pfd., E ........................ 100,000 2,412,500
McLeodUSA Inc., 6.75%, cvt. pfd., A ............................ 10,000 4,000,000
MediaOne Group Inc., 6.25%, cvt. pfd ........................... 14,100 1,466,400
MediaOne Group Inc., 7.00%, cvt. pfd ........................... 66,700 3,047,356
Utilicorp United Inc., 9.75%, cvt. pfd ......................... 60,000 1,522,500
-----------
24,488,794
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $91,697,172) .......... 87,297,888
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS 44.4%
COMMERCIAL SERVICES 1.2%
Interpublic Group Cos. Inc., cvt., 144A, 1.87%, 6/01/06 ......... $ 2,000,000 1,872,500
----------
ELECTRONIC TECHNOLOGY 11.8%
Benchmark Electronics Inc., cvt., 144A, 6.00%, 8/15/06 .......... 4,500,000 3,105,000
Comverse Technology Inc., cvt. sub. deb., 144A, 4.50%, 7/01/05 .. 2,000,000 5,445,000
EMC Corp., cvt. sub. note, 3.25%, 3/15/02 ....................... 300,000 1,937,250
Lattice Semiconductor Corp., cvt., 144A, 4.75%, 11/01/06 ........ 2,000,000 2,147,500
Motorola Inc., cvt., zero cpn., 9/27/13 ......................... 500,000 565,000
Sanmina Corp., cvt., 144A, 4.25%, 5/01/04 ....................... 3,000,000 3,686,250
Western Digital Corp., cvt., zero cpn., 2/18/18 ................. 14,000,000 1,846,250
----------
18,732,250
----------
ENERGY MINERALS 2.4%
Range Resources Corp., cvt. sub. deb., 6.00%, 2/01/07 ........... 6,340,000 3,804,000
----------
HEALTH SERVICES 3.4%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 .................. 8,650,000 5,353,485
----------
HEALTH TECHNOLOGY 5.2%
Centocor Inc., cvt., 4.75%, 2/15/05 ............................. 1,500,000 2,186,250
Elan Finance Corp., cvt., 144A, zero cpn., 12/14/18 ............. 4,000,000 2,025,000
Inhale Therapeutic Systems Inc., cvt., 144A, 6.75%, 10/13/06 .... 4,000,000 4,107,500
----------
8,318,750
----------
INDUSTRIAL SERVICES 1.5%
Diamond Offshore Drilling, cvt. sub. note, 3.75%, 2/15/07 ....... 2,300,000 2,357,500
----------
RETAIL TRADE 2.2%
Ann Taylor Stores Corp., 144A, cvt., 0.55%, 6/18/19 ............. 6,000,000 3,573,240
----------
TECHNOLOGY SERVICES 8.5%
Affiliated Computer Services, cvt. sub. note, 4.00%, 3/15/05 .... 5,200,000 5,642,000
Citrix Systems Inc., cvt. sub. deb., 144A, zero cpn., 3/22/19 ... 4,000,000 2,085,760
CNET Inc., cvt. sub. note, 144A, 5.00%, 3/01/06 ................. 1,000,000 1,411,250
</TABLE>
64
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
TECHNOLOGY SERVICES (CONT.)
Morgan Stanley Dean Witter & Co., cvt., 144A, zero cpn., 10/19/06, Oracle Corp... $ 1,500,000 $ 1,494,375
Siebel System Inc., cvt., 144A, 5.50%, 9/15/06 .................................. 1,500,000 2,070,937
VerticalNet Inc., cvt., 144A, 5.25%, 9/27/04 .................................... 500,000 750,000
-------------
13,454,322
-------------
UTILITIES 8.2%
Global Telesystems Group Inc., cvt., 5.75%, 7/01/10 (Luxembourg) ................ 5,550,000 5,820,562
Level 3 Communications Inc., cvt., 6.00%, 9/15/09 ............................... 3,000,000 3,665,625
Natwest Enron Corp. Nets, cvt., 144A, 3.50%, 9/01/04 ............................ 1,000,000 1,785,000
UBS AG Stamford, cvt., 1.50%, 7/12/06 ........................................... 2,000,000 1,835,000
-------------
13,106,187
-------------
TOTAL CONVERTIBLE BONDS (COST $70,389,057) ...................................... 70,572,234
-------------
TOTAL LONG TERM INVESTMENTS (COST $162,086,229) ................................. 157,870,122
-------------
(b)REPURCHASE AGREEMENT .7%
Joint Repurchase Agreement, 5.199%, 11/01/99 (Maturity Value $1,193,668)
(COST $1,193,151) .............................................................. 1,193,151 1,193,151
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC World Markets Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Goldman, Sachs & Co.
Paine Webber Inc.
Paribas Corporation
Warburg Dillon Read LLC
Collateralized by U.S. Treasury Bills & Notes
-------------
TOTAL INVESTMENTS (COST $163,279,380) 100.0% .................................. 159,063,273
OTHER ASSETS, LESS LIABILITIES ................................................ (7,651)
-------------
NET ASSETS 100.0% ............................................................. $ 159,055,622
=============
</TABLE>
* Securities denominated in U.S. dollars unless otherwise indicated.
(b) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
See notes to financial statements.
65
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
1999(2) 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.93 $ 19.31 $ 16.41 $ 15.19 $ 14.14
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ...................... .58 .64 .64 .64 .63
Net realized and unrealized gains .......... .36 1.42 3.23 1.63 1.27
--------- --------- --------- --------- ---------
Total from investment operations ............ .94 2.06 3.87 2.27 1.90
Less distributions from:
Net investment income ...................... (.60) (.65) (.64) (.65) (.61)
Net realized gains ......................... (1.07) (.79) (.33) (.40) (.24)
--------- --------- --------- --------- ---------
Total distributions ......................... (1.67) (1.44) (.97) (1.05) (.85)
--------- --------- --------- --------- ---------
Net asset value, end of year ................ $ 19.20 $ 19.93 $ 19.31 $ 16.41 $ 15.19
========= ========= ========= ========= =========
Total return(1) ............................. 4.90% 10.96% 24.40% 15.39% 14.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 385,968 $ 428,228 $ 352,555 $ 246,952 $ 168,897
Ratios to average net assets:
Expenses .94% .94% .97% .98% 1.00%
Expense excluding waiver and payments by affiliate .94% .94% .97% .98% 1.02%
Net investment income 2.95% 3.20% 3.62% 4.11% 4.44%
Portfolio turnover rate 50.20% 30.65% 29.04% 24.15% 27.86%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Based on average shares outstanding.
66
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN EQUITY INCOME FUND (CONT.)
<TABLE>
<CAPTION>
Class B
---------
1993(3)
---------
<S> <C>
PER SHARE OPERATING PERFORMANCE(4)
(for a share outstanding throughout the period)
Net asset value, beginning of year ........................ $ 19.37
---------
Income from investment operations:
Net investment income .................................... .33
Net realized and unrealized losses ....................... (.16)
---------
Total from investment operations .......................... .17
---------
Less distributions from net investment income ............. (.38)
Net asset value, end of year .............................. $ 19.16
=========
Total return(1) ........................................... .86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 2,493
Ratios to average net assets:
Expenses ................................................. 1.69%(2)
Net investment income .................................... 2.03%(2)
Portfolio turnover rate ................................... 50.20%
</TABLE>
(1) Total return does not reflect the contingent deferred sales charge, and is
not annualized for periods less than one year.
(2) Annualized
(3) For the period January 1, 1999 (effective date) to October 31, 1999.
(4) Based on average shares outstanding.
67
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN EQUITY INCOME FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1999(4) 1998 1997 1996 1995(3)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 19.88 $ 19.26 $ 16.38 $ 15.19 $ 15.38
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................... .43 .50 .50 .52 .05
Net realized and unrealized gains (losses) ...... .36 1.41 3.22 1.63 (.19)
-----------------------------------------------------------------------------
Total from investment operations ................. .79 1.91 3.72 2.15 (.14)
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... (.46) (.50) (.51) (.56) (.05)
Net realized gains .............................. (1.07) (.79) (.33) (.40) --
-----------------------------------------------------------------------------
Total distributions .............................. (1.53) (1.29) (.84) (.96) (.05)
-----------------------------------------------------------------------------
Net asset value, end of year ..................... $ 19.14 $ 19.88 $ 19.26 $ 16.38 $ 15.19
=============================================================================
Total return(1) .................................. 4.11% 10.16% 23.40% 14.53% (.93%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 82,353 $ 81,078 $ 45,277 $ 18,227 $ 386
Ratios to average net assets:
Expenses ........................................ 1.69% 1.69% 1.72% 1.73% 1.99%(2)
Net investment income ........................... 2.20% 2.45% 2.78% 3.33% 3.57%(2)
Portfolio turnover rate .......................... 50.20% 30.65% 29.04% 24.15% 27.86%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) For the period October 1, 1995 (effective date) to October 31, 1995.
(4) Based on average shares outstanding.
See notes to financial statements.
68
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 87.6%
COMMERCIAL SERVICES 1.1%
Dun & Bradstreet Corp. ............................... 168,200 $ 4,940,875
-----------
CONSUMER DURABLES 3.6%
Eastman Kodak Co. .................................... 85,000 5,859,688
Ford Motor Co. ....................................... 130,500 7,161,188
General Motors Corp. ................................. 57,500 4,039,375
-----------
17,060,251
-----------
CONSUMER NON-DURABLES 8.3%
Anheuser-Busch Cos. Inc. ............................. 50,300 3,612,169
Bestfoods ............................................ 120,000 7,050,000
General Mills Inc. ................................... 122,500 10,680,469
H.J. Heinz Co. ....................................... 147,000 7,019,250
Philip Morris Cos. Inc. .............................. 211,200 5,319,600
UST Inc. ............................................. 197,000 5,454,438
-----------
39,135,926
-----------
ELECTRONIC TECHNOLOGY 4.2%
Diebold Inc. ......................................... 155,000 4,068,750
Hewlett-Packard Co. .................................. 46,000 3,406,875
Motorola Inc. ........................................ 60,500 5,894,969
PerkinElmer Inc. ..................................... 83,000 3,387,438
Raytheon Co., B ...................................... 100,000 2,912,500
-----------
19,670,532
-----------
ENERGY MINERALS 11.2%
Atlantic Richfield Co. ............................... 89,400 8,330,963
Chevron Corp. ........................................ 83,900 7,661,119
Conoco Inc., B ....................................... 130,131 3,529,803
Exxon Corp. .......................................... 64,400 4,769,625
Mobil Corp. .......................................... 55,600 5,365,400
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) ... 125,000 7,492,188
Texaco Inc. .......................................... 180,000 11,047,500
Ultramar Diamond Shamrock Corp. ...................... 192,400 4,713,800
-----------
52,910,398
-----------
FINANCE 12.4%
Allstate Corp. ..................................... 105,000 3,018,750
Arthur J. Gallagher & Co. .......................... 96,900 5,014,575
Bank of America Corp. .............................. 68,000 4,377,500
Bank One Corp. ..................................... 170,680 6,411,168
First Union Corp. .................................. 95,300 4,068,119
Fleet Boston Corp. ................................. 132,415 5,776,604
J.P. Morgan & Co. Inc. ............................. 37,500 4,907,813
Lincoln National Corp. ............................. 161,000 7,426,125
National City Corp. ................................ 178,400 5,262,800
St. Paul Cos. Inc. ................................. 250,700 8,022,400
Union Planters Corp. ............................... 91,000 4,049,500
-----------
58,335,354
-----------
</TABLE>
69
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY 5.0%
Baxter International Inc. .............................. 95,000 $ 6,163,125
Glaxo Wellcome PLC, ADR (United Kingdom) ............... 125,200 7,496,350
Pharmacia & Upjohn Inc. ................................ 182,000 9,816,625
-----------
23,476,100
-----------
NON-ENERGY MINERALS 3.2%
Corus Group PLC, ADR (United Kingdom) .................. 149,500 2,887,219
De Beers Consolidated Mines AG, ADR (South Africa) ..... 217,000 5,872,563
Weyerhaeuser Co. ....................................... 102,500 6,117,969
-----------
14,877,751
-----------
PROCESS INDUSTRIES 4.3%
American National Can Group Inc. ....................... 300,000 3,750,000
Dow Chemical Co. ....................................... 32,500 3,843,125
E. I. du Pont de Nemours and Co. ....................... 43,769 2,820,365
Imperial Chemical Industries PLC, ADR (United Kingdom) . 114,200 4,589,413
Pall Corp. ............................................. 245,000 5,374,688
-----------
20,377,591
-----------
PRODUCER MANUFACTURING 6.4%
Dana Corp. ............................................. 150,400 4,446,200
Deere & Co. ............................................ 139,500 5,056,875
Delphi Automotive Systems Corp. ........................ 40,188 660,590
Emerson Electric Co. ................................... 75,000 4,504,688
Federal Signal Corp. ................................... 187,000 3,517,938
Minnesota Mining & Manufacturing Co. ................... 67,500 6,416,719
Pitney Bowes Inc. ...................................... 124,200 5,658,863
-----------
30,261,873
-----------
REAL ESTATE 5.0%
Arden Realty Inc. ...................................... 265,000 5,333,125
Equity Office Properties Trust ......................... 100,000 2,212,500
Equity Residential Properties Trust .................... 141,300 5,908,106
Meristar Hospitality Corp. ............................. 310,000 4,979,375
Simon Property Group Inc. .............................. 229,400 5,290,538
-----------
23,723,644
-----------
RETAIL TRADE 1.7%
J.C. Penney Co. Inc. ................................... 140,000 3,552,500
May Department Stores Co. .............................. 129,000 4,474,688
-----------
8,027,188
-----------
TECHNOLOGY SERVICES 1.0%
Automatic Data Processing Inc. ......................... 101,000 4,866,938
-----------
TELECOMMUNICATIONS 10.0%
AT&T Corp. ............................................. 216,250 10,109,688
Bell Atlantic Corp. .................................... 222,120 14,423,918
</TABLE>
70
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
GTE Corp. .............................................................................. 151,500 $ 11,362,500
U.S. West Inc. ......................................................................... 185,800 11,345,413
------------
47,241,519
------------
UTILITIES 10.2%
Cinergy Corp. .......................................................................... 121,000 3,418,250
Consolidated Natural Gas Co. ........................................................... 70,300 4,499,200
Constellation Energy Group Inc. ........................................................ 176,000 5,401,000
Dominion Resources Inc. ................................................................ 127,100 6,116,688
Kansas City Power & Light Co. .......................................................... 210,000 5,145,000
MCN Energy Group Inc. .................................................................. 210,000 5,131,875
National Fuel Gas Co. .................................................................. 106,600 5,210,075
New Century Energies Inc. .............................................................. 111,000 3,614,438
Northern States Power Co. .............................................................. 160,000 3,440,000
Sempra Energy .......................................................................... 289,909 5,925,015
------------
47,901,541
------------
TOTAL COMMON STOCKS (COST $363,020,624) ................................................ 412,807,481
------------
CONVERTIBLE PREFERRED STOCKS 7.0%
NON-ENERGY MINERALS 1.2%
Georgia Pacific Corp., 7.50%, cvt. pfd ................................................. 130,000 5,622,500
------------
REAL ESTATE 1.1%
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ..................................... 324,200 4,964,313
------------
TRANSPORTATION 1.8%
Canadian National Railway Co., 5.25%, cvt. pfd. (Canada) ............................... 94,400 4,767,200
Union Pacific Capital Trust, 6.25%, cvt. pfd ........................................... 75,800 3,695,250
------------
8,462,450
------------
UTILITIES 2.9%
AES Trust III, 6.75%, cvt. pfd ......................................................... 68,700 3,465,056
CMS Energy Trust I, 7.75%, cvt. pfd .................................................... 80,000 3,920,000
Texas Utilities Co., 9.25%, cvt. pfd ................................................... 125,100 6,356,632
------------
13,741,688
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $37,171,844) .................................. 32,790,951
------------
CONVERTIBLE BONDS 2.0%
ELECTRONIC TECHNOLOGY 1.3%
Comverse Technology Inc., cvt. sub. deb., 4.50%, 7/01/05 ............................... 2,250,000 6,125,625
------------
HEALTH SERVICES .7%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 ......................................... 5,000,000 3,094,500
------------
TOTAL CONVERTIBLE BONDS (COST $7,678,516) .............................................. 9,220,125
------------
TOTAL LONG TERM INVESTMENTS (COST $407,870,983) ........................................ 454,818,557
------------
SHORT TERM INVESTMENTS 3.6%
FHLMC, 1/20/00 ......................................................................... 17,000,000 16,805,452
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $424,665,095) ...................... 471,624,009
------------
</TABLE>
71
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN EQUITY INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(b)REPURCHASE AGREEMENT .9%
Joint Repurchase Agreement, 5.199%, 11/01/99, (Maturity Value $4,171,253) (COST $4,169,447) ... $ 4,169,447 $ 4,169,447
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC World Markets Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Goldman, Sachs & Co.
Paine Webber Inc.
Paribas Corporation
Warburg Dillon Read LLC
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $428,834,542) 101.1% .................................................. 475,793,456
OTHER ASSETS, LESS LIABILITIES (1.1%) ......................................................... (4,979,632)
------------
NET ASSETS 100.0% ............................................................................. $470,813,824
============
</TABLE>
(b) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
See notes to financial statements.
72
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1999(2) 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 8.25 $ 8.41 $ 8.65 $ 8.31 $ 8.06
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .61 .62 .60 .61 .67
Net realized and unrealized gains (losses) . (.54) (.17) (.22) .33 .29
-----------------------------------------------------------------------------
Total from investment operations ............ .07 .45 .38 .94 .96
-----------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.58) (.57) (.61) (.60) (.64)
In excess of net investment income ......... -- (.04) (.01) -- --
Tax return of capital ...................... -- -- -- -- (.07)
Net realized gains ......................... (.02) -- -- -- --
-----------------------------------------------------------------------------
Total distributions ......................... (.60) (.61) (.62) (.60) (.71)
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 7.72 $ 8.25 $ 8.41 $ 8.65 $ 8.31
=============================================================================
Total return(1) ............................. .90% 5.57% 4.31% 11.80% 12.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 85,004 $ 110,876 $ 118,348 $ 137,626 $ 164,970
Ratios to average net assets:
Expenses ................................... 1.06% .96% .90% .85% .96%
Net investment income ...................... 7.63% 7.49% 6.97% 7.68% 8.29%
Portfolio turnover rate ..................... 61.50% 49.93% 193.30% 139.71% 103.49%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Based on average shares outstanding.
73
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
1999(4) 1998(4) 1997 1996 1995(3)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of period ............. $ 8.26 $ 8.41 $ 8.65 $ 8.31 $ 8.03
---------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................... .57 .58 .55 .56 .31
Net realized and unrealized gains (losses) ...... (.54) (.17) (.22) .33 .30
---------------------------------------------------------------------------
Total from investment operations ................. .03 .41 .33 .89 .61
---------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... (.54) (.52) (.56) (.55) (.30)
In excess of net investment income .............. -- (.04) (.01) -- --
Tax return of capital ........................... -- -- -- -- (.03)
Net realized gains .............................. (.02) -- -- -- --
---------------------------------------------------------------------------
Total distributions .............................. (.56) (.56) (.57) (.55) (.33)
---------------------------------------------------------------------------
Net asset value, end of year ..................... $ 7.73 $ 8.26 $ 8.41 $ 8.65 $ 8.31
===========================================================================
Total return(1) .................................. .36% 5.12% 3.74% 11.19% 7.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $ 4,744 $ 5,710 $ 4,473 $ 3,700 $ 1,193
Ratios to average net assets:
Expenses ........................................ 1.59% 1.49% 1.46% 1.40% 1.54%(2)
Net investment income ........................... 7.12% 6.96% 6.43% 7.17% 7.41%(2)
Portfolio turnover rate .......................... 61.50% 49.93% 193.30% 139.71% 103.49%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) For the period May 1, 1995 (effective date) to October 31, 1995.
(4) Based on average shares outstanding.
74
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
Franklin Global Government Income Fund (cont.)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------
1999(4) 1998(4) 1997(3)
------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $8.26 $8.41 $8.71
------------------------------------
Income from investment operations:
Net investment income ......................... .62 .63 .49
Net realized and unrealized losses ............. (.54) (.16) (.28)
------------------------------------
Total from investment operations ............... .08 .47 .21
------------------------------------
Less distributions from:
Net investment income .......................... (.59) (.58) (.49)
In excess of net investment income ............. -- (.04) (.02)
Net realized gains ............................. (.02) -- --
------------------------------------
Total distributions ............................. (.61) (.62) (.51)
------------------------------------
Net asset value, end of year .................... $7.73 $8.26 $8.41
====================================
Total return(1).................................. 1.03% 5.81% 2.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $694 $829 $741
Ratios to average net assets:
Expenses ....................................... .94% .85% .82%(2)
Net investment income .......................... 7.78% 7.62% 7.08%(2)
Portfolio turnover rate ......................... 61.50% 49.93% 193.30%
</TABLE>
(1)Total return is not annualized for periods less than one year.
(2)Annualized
(3)For the period January 2, 1997 (effective date) to October 31, 1997.
(4)Based on average shares outstanding.
See notes to financial statements.
75
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 93.6%
ARGENTINA 5.5%
Republic of Argentina:
10.95%, 11/01/99 .................................. $ 3,215,000 $ 3,215,000
8.87%, 5/09/02 .................................... 1,100,000 1,023,825
11.00%, 10/09/06 .................................. 250,000 239,375
9.75%, 9/19/27 .................................... 600,000 505,500
---------
4,983,700
---------
AUSTRALIA 4.1%
Government of Australia, 10.00%, 10/15/07 ......... 2,438,000 AUD 1,877,773
Queensland Treasury Corp., 6.50%, 6/14/05 ......... 2,979,000 AUD 1,876,920
---------
3,754,693
---------
BRAZIL 8.0%
Government of Brazil:
FRN, 7.00%, 4/15/09 ............................... 3,950,000 2,893,375
Series L, cvt., FRN, 7.00%, 4/15/12 ............... 1,250,000 819,537
8.00%, 4/15/14 .................................... 3,239,271 2,171,578
10.125%, 5/15/27 .................................. 1,700,000 1,335,350
---------
7,219,840
---------
CANADA 6.4%
Government of Canada:
10.50%, 3/01/01 ................................... 5,000,000 CAD 3,605,616
10.00%, 5/01/02 ................................... 3,005,000 CAD 2,231,185
---------
5,836,801
---------
DENMARK 2.2%
Kingdom of Denmark:
9.00%, 11/15/00 ................................... 3,385,000 DKK 502,748
8.00%, 3/15/06 .................................... 9,357,000 DKK 1,501,989
---------
2,004,737
---------
GERMANY 12.2%
Federal Republic of Germany:
Bundesrep, 7.75%, 2/21/00 ......................... 3,067,751 EUR 3,268,210
Series 96, 6.00%, 1/05/06 ......................... 2,914,364 EUR 3,220,892
Series 97, 6.00%, 1/04/07 ......................... 4,080,109 EUR 4,507,105
---------
10,996,207
----------
ITALY 7.6%
Buoni Poliennali del Tesoro:
10.50%, 7/15/00 ................................... 2,065,824 EUR 2,272,248
10.50%, 4/01/05 ................................... 2,763,040 EUR 3,637,084
6.75%, 7/01/07 .................................... 825,000 EUR 942,208
---------
6,851,540
---------
</TABLE>
76
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MEXICO 4.6%
United Mexican States:
9.75%, 2/06/01 .................................... $ 1,560,000 $ 1,612,650
9.875%, 1/15/07 ................................... 1,375,000 1,381,188
11.375%, 9/15/16 .................................. 390,000 417,007
6.25%, 12/31/19 ................................... 1,000,000 750,938
---------
4,161,783
---------
NEW ZEALAND 4.4%
Government of New Zealand:
6.50%, 2/15/00 .................................... 3,995,000 NZD 2,031,519
Series 1106, 8.00%, 11/15/06 ...................... 3,623,000 NZD 1,934,497
---------
3,966,016
---------
PANAMA .6%
Republic of Panama, 8.875%, 9/30/27 ............... 650,000 526,500
---------
SPAIN 7.1%
Bonos Y Oblig del Estado, 8.80%, 4/30/06 .......... 1,932,855 EUR 2,435,089
Government of Spain, 12.25%, 3/25/00 .............. 3,662,808 EUR 3,977,798
---------
6,412,887
---------
SWEDEN 3.3%
Kingdom of Sweden, 10.25%, 5/05/03 ................ 21,500,000 SEK 3,020,544
---------
TURKEY 3.9%
Cellco Finance NV, 144A, Reg S,
15.00%, 8/01/05.................................... 1,300,000 1,332,500
Republic of Turkey:
Reg S, 9.875%, 2/23/05 ............................ 550,000 510,125
Reg S, 10.00%, 9/19/07 ............................ 550,000 509,437
12.375%, 6/15/09 .................................. 1,200,000 1,210,800
---------
3,562,862
---------
UNITED KINGDOM 4.0%
United Kingdom:
8.00%, 12/07/00 ................................... 1,000,000 GBP 1,677,989
8.50%, 7/16/07 .................................... 1,005,000 GBP 1,912,966
---------
3,590,955
---------
UNITED STATES 14.4%
Fannie Mae, 5.25%, 1/15/09 ........................ 3,609,000 3,259,183
U.S. Treasury Bond, 5.25%, 11/15/28 ............... 8,000,000 6,880,000
U.S. Treasury Note, 7.25%, 8/15/04 ................ 2,714,000 2,848,004
----------
12,987,187
----------
VENEZUELA 5.3%
Republic of Venezuela:
144A, 9.125%, 6/18/07 ............................. 1,220,000 908,900
9.25%, 9/15/27 .................................... 5,805,000 3,918,375
---------
4,827,275
---------
TOTAL LONG TERM INVESTMENTS (COST $99,295,027)..... 84,703,527
----------
</TABLE>
77
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
(a) REPURCHASE AGREEMENT (COST $1,618,000) 1.8%
Deutsche Morgan Grenfell, 5.23%, 11/01/99,
(Maturity Value $1,618,705)
Collateralized by U.S. Treasury Notes and Bonds ............. $ 1,618,000 $ 1,618,000
-----------
TOTAL INVESTMENTS (COST $100,913,027) 95.4% .................. 86,321,527
NET EQUITY IN FORWARD CONTRACTS .............................. 759
OTHER ASSETS, LESS LIABILITIES 4.6% .......................... 4,120,423
-----------
TOTAL NET ASSETS 100.0% ...................................... $90,442,709
===========
</TABLE>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Unit
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krone
PORTFOLIO ABBREVIATION:
FRN - Floating Rate Note
* Securities denominated in U.S. dollars unless otherwise indicated.
(a) At October 31, 1999, all repurchase agreements held by the fund had been
entered into on October 29, 1999.
78 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1999(2) 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $10.46 $10.29 $10.28 $10.35 $10.03
---------------------------------------------------------------
Income from investment operations:
Net investment income ......................... .53 .54 .57 .58 .56
Net realized and unrealized gains (losses) .... (.38) .19 .02 (.08) .31
---------------------------------------------------------------
Total from investment operations ............... .15 .73 .59 .50 .87
---------------------------------------------------------------
Less distributions from net investment income .. (.50) (.56) (.58) (.57) (.55)
---------------------------------------------------------------
Net asset value, end of year ................... $10.11 $10.46 $10.29 $10.28 $10.35
===============================================================
Total return(1) ................................ 1.51% 7.38% 5.88% 4.97% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $176,114 $224,132 $192,051 $196,042 $208,057
Ratios to average net assets:
Expenses ...................................... .79% .78% .78% .74% .73%
Net investment income ......................... 5.18% 5.24% 5.51% 5.64% 5.42%
Portfolio turnover rate ........................ 64.26% 37.70% 40.56% 72.62% 56.34%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Based on average shares outstanding.
79
<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,
----------------------------
1999(4) 1998 1997(3)
----------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................ $10.45 $10.30 $10.24
Income from investment operations: ---------------------------
Net investment income ............................ .54 .57 .47
Net realized and unrealized gains (losses) ....... (.38) .16 .07
---------------------------
Total from investment operations .................. .16 .73 .54
---------------------------
Less distributions from net investment income ..... (.51) (.58) (.48)
---------------------------
Net asset value, end of year ...................... $10.10 $10.45 $10.30
---------------------------
Total return(1).................................... 1.62% 7.38% 5.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................... $1,367 $3,644 $385
Ratios to average net assets:
Expenses ......................................... .69% .69% .70%(2)
Net investment income ............................ 5.26% 5.28% 5.35%(2)
Portfolio turnover rate ........................... 64.26% 37.70% 40.56%
</TABLE>
(1) Total return is not annualized for periods less than one year.
(2) Annualized
(3) For the period January 2, 1997 (effective date) to October 31, 1997.
(4) Based on average shares outstanding.
80 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
AGENCY BONDS 26.5%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 13.8%
6.52%, 1/02/02 ................................................... $ 5,000,000 $5,034,160
5.50%, 5/15/02 ................................................... 10,000,000 9,831,360
6.625%, 3/12/08 .................................................. 10,000,000 9,637,500
----------
24,503,020
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 12.7%
5.60%, 2/02/01 ................................................... 9,500,000 9,446,895
5.70%, 5/15/02 ................................................... 10,000,000 9,825,140
6.19%, 2/19/09 ................................................... 3,500,000 3,293,364
----------
22,565,399
----------
TOTAL AGENCY BONDS (COST 47,085,544) ............................. 47,068,419
----------
MORTGAGE BACKED SECURITIES 29.0%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 7.7%
7.00%, 3/01/07 ................................................... 380,531 383,379
7.00%, 4/01/07 ................................................... 149,127 150,243
7.00%, 8/01/07 ................................................... 298,551 300,785
7.00%, 12/01/10 .................................................. 1,435,537 1,438,766
7.00%, 7/01/11 ................................................... 400,977 401,663
7.00%, 10/01/11 .................................................. 787,334 788,682
7.00%, 11/01/11 .................................................. 124,620 124,833
7.00%, 4/01/12 ................................................... 173,333 173,546
7.00%, 5/01/12 ................................................... 549,010 549,682
7.00%, 8/01/12 ................................................... 1,703,894 1,705,982
7.00%, 9/01/12 ................................................... 131,903 132,065
7.00%, 10/01/12 .................................................. 326,717 327,118
7.00%, 8/01/13 ................................................... 443,185 443,628
7.00%, 9/01/13 ................................................... 1,902,143 1,903,580
6.50%, 7/01/14 ................................................... 3,659,668 3,592,307
6.50%, 8/01/14 ................................................... 759,182 745,208
6.50%, 9/01/14 ................................................... 559,723 549,420
------------
13,710,887
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 15.8%
6.50%, 5/01/11 ................................................... 8,263,237 8,139,661
6.50%, 2/01/12 ................................................... 6,174,986 6,074,088
7.00%, 7/01/12 ................................................... 743,795 743,899
7.00%, 8/01/12 ................................................... 213,921 213,951
7.00%, 9/01/12 ................................................... 256,875 256,911
7.00%, 10/01/12 .................................................. 3,063,368 3,063,800
7.00%, 11/01/12 .................................................. 3,099,398 3,099,833
7.00%, 12/01/12 .................................................. 453,253 453,317
7.00%, 1/01/13 ................................................... 478,265 478,332
7.00%, 5/01/13 ................................................... 621,088 621,175
7.00%, 8/01/13 ................................................... 232,430 232,365
6.50%, 5/01/14 ................................................... 4,616,243 4,529,833
7.00%, 7/01/14 ................................................... 90,751 90,700
----------
27,997,865
----------
</TABLE>
81
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE BACKED SECURITIES (CONT.)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA), SF, 5.5%
6.50%, 10/15/13 ............................................................. $ 859,696 $ 844,005
6.50%, 4/15/14 .............................................................. 1,954,705 1,920,559
6.50%, 6/15/14 .............................................................. 861,871 846,815
6.50%, 7/15/14 .............................................................. 6,215,414 6,106,838
------------
9,718,217
------------
TOTAL MORTGAGE BACKED SECURITIES (COST $52,038,488) ......................... 51,426,969
------------
U.S. GOVERNMENT SECURITIES 43.2%
U.S. Treasury Notes, 5.875%, 6/30/00 ........................................ 6,000,000 6,020,628
U.S. Treasury Notes, 5.625%, 2/28/01 ........................................ 10,000,000 9,990,630
U.S. Treasury Notes, 7.50%, 11/15/01 ........................................ 25,000,000 25,789,076
U.S. Treasury Notes, 5.875%, 11/30/01 ....................................... 15,000,000 15,018,750
U.S. Treasury Notes, 5.875%, 9/30/02 ........................................ 10,000,000 9,996,880
U.S. Treasury Notes, 5.50%, 1/31/03 ......................................... 10,000,000 9,875,000
------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $77,911,495) ......................... 76,690,964
------------
TOTAL LONG TERM INVESTMENTS (COST $177,035,527) ............................. 175,186,352
------------
(b)REPURCHASE AGREEMENT .1%
Joint Repurchase Agreement, 5.199%, 11/01/99
(Maturity Value $204,697) (COST $204,608) .................................. 204,608 204,608
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC World Markets Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Goldman, Sachs & Co.
Paine Webber Inc.
Paribas Corporation
Warburg Dillion Read LLC
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $177,240,135) 98.8% ................................. 175,390,960
OTHER ASSETS, LESS LIABILITIES 1.2% ......................................... 2,089,952
------------
NET ASSETS 100.0% ........................................................... $177,480,912
============
</TABLE>
(b) Investment is through participation in a joint account with other funds
managed by the investment adviser. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
82 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE FRANKLIN
U.S. GOVERNMENT FRANKLIN CONVERTIBLE
SECURITIES FUND BOND FUND SECURITIES FUND
-------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ................................ $303,408,647 $26,725,289 $163,279,380
==============================================
Value ............................... 281,895,440 26,119,982 159,063,273
Receivables:
Investment securities sold .......... -- -- 7,427,331
Capital shares sold ................. 2,407,649 2,357 191,494
Dividends and interest .............. -- 283,385 1,340,246
Variation margin (Note 1) ........... -- 3,234 --
----------------------------------------------
Total assets ...................... 284,303,089 26,408,958 168,022,344
----------------------------------------------
Liabilities:
Payables:
Investment securities purchased ..... -- 6,317,113 8,205,359
Capital shares redeemed ............. 1,303,088 47,826 521,247
Affiliates .......................... 110,020 41,081 162,797
Shareholders ........................ 178,860 -- 37,473
Other liabilities ................... 26,290 34,509 39,846
----------------------------------------------
Total liabilities ................. 1,618,258 6,440,529 8,966,722
----------------------------------------------
Net assets, at value .............. $282,684,831 $19,968,429 $159,055,622
==============================================
Net assets consist of:
Undistributed net investment income .. $ 731,603 $ 206,188 $ 274,624
Net unrealized depreciation .......... (21,513,207) (600,526) (4,216,107)
Accumulated net realized loss ........ (88,539,911) (1,675,605) (3,903,164)
Capital shares ....................... 392,006,346 22,038,372 166,900,269
----------------------------------------------
Net assets, at value .............. $282,684,831 $19,968,429 $159,055,622
==============================================
</TABLE>
See notes to financial statements. 83
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE FRANKLIN
U.S. GOVERNMENT FRANKLIN CONVERTIBLE
SECURITIES FUND BOND FUND SECURITIES FUND
----------------------------------------------------
<S> <C> <C> <C>
CLASS A:
Net assets, at value .................. $282,684,831 $ 7,869,617 $129,907,802
===================================================
Shares outstanding .................... 30,388,597 818,697 10,185,182
====================================================
Net asset value per share* ............ $9.30 $ 9.61 $12.75
====================================================
Maximum offering price per share
(net asset value per share / 97.75%,
95.75%, 94.25%, respectively) ........ $9.51 $10.04 $13.53
====================================================
CLASS C:
Net assets, at value .................. -- -- $ 29,147,820
====================================================
Shares outstanding .................... -- -- 2,294,597
====================================================
Net asset value per share*............. -- -- $12.70
====================================================
Maximum offering price per share
(net asset value per share/99.00%,) .. -- -- $12.83
====================================================
ADVISOR CLASS:
Net assets, at value .................. -- $12,098,812 --
====================================================
Shares outstanding .................... -- 1,257,399 --
====================================================
Net asset value and maximum offering
price per share ...................... -- $ 9.62 --
====================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
84 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE
EQUITY GOVERNMENT U.S. GOVERNMENT
INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost .................................. $428,834,542 $100,913,027 $177,240,135
--------------------------------------------------
Value ................................. 475,793,456 86,321,527 175,390,960
Receivables:
Investment securities sold ............ 2,664,303 1,703,339 --
Capital shares sold ................... 336,313 129,013 1,218,327
Dividends and interest ................ 2,019,386 2,629,254 2,823,846
Unrealized gain on forward exchange
contracts (Note 6) .................... -- 759 --
--------------------------------------------------
Total assets ....................... 480,813,458 90,783,892 179,433,133
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ...... 2,595,528 -- --
Capital shares redeemed .............. 6,784,423 140,294 1,696,762
Affiliates ........................... 458,935 113,098 120,632
Shareholders ......................... 85,312 -- 107,008
Funds advanced by custodian .......... -- 4,706 --
Other liabilities ...................... 75,436 83,085 27,819
--------------------------------------------------
Total liabilities .................. 9,999,634 341,183 1,952,221
--------------------------------------------------
Net assets, at value ............... $470,813,824 $ 90,442,709 $177,480,912
==================================================
Net assets consist of:
Undistributed net investment income ... $ 42,323 $ -- $ 587,841
Accumulated distributions in excess
of net investment income ............. -- (764) --
Net unrealized appreciation
(depreciation) ....................... 46,958,914 (14,606,115) (1,849,175)
Accumulated net realized gain (loss) .. 30,229,420 (17,794) (5,675,077)
Capital shares ........................ 393,583,167 105,067,382 184,417,323
--------------------------------------------------
Net assets, at value ............... $470,813,824 $ 90,442,709 $177,480,912
==================================================
</TABLE>
See notes to financial statements. 85
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE
EQUITY GOVERNMENT U.S. GOVERNMENT
INCOME FUND INCOME FUND SECURITIES FUND
------------ ------------ ------------
<S> <C> <C> <C>
CLASS A:
Net assets, at value ................................................ $385,967,867 $ 85,004,383 $176,113,646
==================================================
Shares outstanding .................................................. 20,100,534 11,008,015 17,427,056
==================================================
Net asset value per share* .......................................... $ 19.20 $ 7.72 $ 10.11
==================================================
Maximum offering price per share (net asset value per share / 94.25%,
95.75%, 97.75%, respectively) ...................................... $ 20.37 $ 8.06 $ 10.34
==================================================
CLASS B:
Net assets, at value ................................................ $ 2,492,816 -- --
==================================================
Shares outstanding .................................................. 130,099 -- --
==================================================
Net asset value and maximum offering price per share* ............... $ 19.16 -- --
==================================================
CLASS C:
Net assets, at value ................................................ $ 82,353,141 $ 4,743,857 --
==================================================
Shares outstanding .................................................. 4,302,172 613,689 --
==================================================
Net asset value per share* .......................................... $ 19.14 $ 7.73 --
==================================================
Maximum offering price per share
(net asset value per share / 99.00%) ............................... $ 19.33 $ 7.81 --
==================================================
ADVISOR CLASS:
Net assets, at value ................................................ -- $ 694,469 $ 1,367,266
==================================================
Shares outstanding .................................................. -- 89,885 135,439
==================================================
Net asset value and maximum offering price per share ................ -- $ 7.73 $ 10.10
==================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
86
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE FRANKLIN
U.S. GOVERNMENT FRANKLIN CONVERTIBLE
SECURITIES FUND BOND FUND SECURITIES FUND
--------------- --------- ---------------
<S> <C> <C> <C>
Investment income:
Dividends .................................................... $ 15,264,173 $ -- $ 5,705,402
Interest ..................................................... -- 2,292,191 5,183,674
-------------------------------------------------------
Total investment income .................................... 15,264,173 2,292,191 10,889,076
-------------------------------------------------------
Expenses:
Management fees (Note 3) ..................................... -- 142,878 1,026,060
Administrative fees (Note 3) ................................. 286,655 67,330 --
Distribution fees (Note 3)
Class A ..................................................... 716,748 16,097 368,090
Class C ..................................................... -- -- 349,772
Transfer agent fees (Note 3) ................................. 328,279 4,595 312,004
Custodian fees ............................................... 1,212 583 2,378
Reports to shareholders ...................................... 88,262 1,844 63,653
Registration and filing fees ................................. 33,279 17,276 25,270
Professional fees ............................................ 29,223 9,955 11,161
Trustees' fees and expenses .................................. 15,455 -- 9,770
Amortization of offering costs (Note 1) ...................... -- 59,404 --
Other ........................................................ 11,196 7,142 11,892
-------------------------------------------------------
Total expenses ............................................. 1,510,309 327,104 2,180,050
Expenses waived/paid by affiliate (Note 3) ................. -- (226,626) --
-------------------------------------------------------
Net expenses .............................................. 1,510,309 100,478 2,180,050
-------------------------------------------------------
Net investment income .................................... 13,753,864 2,191,713 8,709,026
-------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. (2,239,106) (1,224,917) 4,749,408
Financial futures contracts ................................. -- (444,325) --
-------------------------------------------------------
Net realized gain (loss) .................................. (2,239,106) (1,669,242) 4,749,408
Net unrealized appreciation (depreciation) from investments .. 168,036 (906,443) 11,188,287
-------------------------------------------------------
Net realized and unrealized gain (loss) ....................... (2,071,070) (2,575,685) 15,937,695
-------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................................... $ 11,682,794 $ (383,972) $ 24,646,721
======================================================
</TABLE>
See notes to financial statements.
87
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE
EQUITY GOVERNMENT U.S. GOVERNMENT
INCOME FUND INCOME FUND SECURITIES FUND
----------- ----------- ---------------
<S> <C> <C> <C>
Investment income:+
Dividends ............................................................. $ 18,251,944 $ -- $ --
Interest .............................................................. 1,752,313 8,933,193 12,048,699
---------------------------------------------------
Total investment income ............................................. 20,004,257 8,933,193 12,048,699
---------------------------------------------------
Expenses:
Management fees (Note 3) .............................................. 2,549,864 639,062 1,128,453
Distribution fees (Note 3)
Class A .............................................................. 1,063,303 118,056 193,040
Class B .............................................................. 11,670 -- --
Class C .............................................................. 861,625 34,553 --
Transfer agent fees (Note 3) .......................................... 718,566 195,455 163,344
Custodian fees ........................................................ 7,246 47,300 2,698
Reports to shareholders ............................................... 145,325 20,500 41,325
Registration and filing fees .......................................... 52,252 52,600 35,798
Professional fees ..................................................... 26,446 5,200 12,086
Trustees' fees and expenses ........................................... 29,079 4,700 10,989
Other ................................................................. 10,578 -- 6,326
---------------------------------------------------
Total expenses ..................................................... 5,475,954 1,117,426 1,594,059
---------------------------------------------------
Net investment income ............................................ 14,528,303 7,815,767 10,454,640
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .......................................................... 30,242,546 2,175,021 (21,004)
Foreign currency transactions ........................................ (80,814) 117,653 --
---------------------------------------------------
Net realized gain (loss) ........................................... 30,161,732 2,292,674 (21,004)
Net unrealized depreciation on:
Investments ........................................................... (20,510,599) (9,260,269) (7,765,879)
Translation of assets and liabilities
denominated in foreign currencies .................................... -- (40,739) --
---------------------------------------------------
Net unrealized depreciation ......................................... (20,510,599) (9,301,008) (7,765,879)
---------------------------------------------------
Net realized and unrealized gain (loss) ................................ 9,651,133 (7,008,334) (7,786,883)
---------------------------------------------------
Net increase in net assets resulting from operations ................... $ 24,179,436 $ 807,433 $ 2,667,757
====================================================
</TABLE>
+ Net of foreign taxes and fees of $96,368 and $5,674 for the Franklin Equity
Income Fund and Franklin Global Government Income Fund, respectively.
See notes to financial statements.
88
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT
SECURITIES FUND FRANKLIN BOND FUND
-------------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 13,753,864 $ 16,875,320 $ 2,191,713 $ 317,372
Net realized gain (loss) from investments and
financial futures transactions .................. (2,239,106) (2,511,193) (1,669,242) 175,522
Net unrealized appreciation (depreciation)
on investments .................................. 168,036 (1,201,807) (906,443) 305,917
-------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations .............................. 11,682,794 13,162,320 (383,972) 798,811
Distributions to shareholders from:
Net investment income:
Class A ......................................... (13,725,049) (17,143,101) (403,205) (17,709)
Advisor Class ................................... -- -- (1,804,997) (140,700)
Net realized gains:
Class A ......................................... -- -- (23,840) --
Advisor Class ................................... -- -- (158,045) --
-------------------------------------------------------------------------
Total distributions to shareholders ............... (13,725,049) (17,143,101) (2,390,087) (158,409)
Capital share transactions: (Note 2)
Class A ......................................... (13,570,505) (32,712,089) 4,122,424 4,124,727
Advisor Class ................................... -- -- (17,200,522) 31,055,457
-------------------------------------------------------------------------
Total capital share transactions .................. (13,570,505) (32,712,089) (13,078,098) 35,180,184
Net increase (decrease) in net assets .......... (15,612,760) (36,692,870) (15,852,157) 35,820,586
Net assets:
Beginning of year ................................. 298,297,591 334,990,461 35,820,586 --
-------------------------------------------------------------------------
End of year ....................................... $ 282,684,831 $ 298,297,591 $ 19,968,429 $ 35,820,586
=========================================================================
Undistributed net investment income included
in net assets:
End of year ...................................... $ 731,603 $ 687,275 $ 206,188 $ 172,883
=========================================================================
</TABLE>
See notes to financial statements.
89
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
SECURITIES FUND INCOME FUND
--------------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 8,709,026 $ 11,332,883 $ 14,528,303 $ 14,888,936
Net realized gain (loss) from investments and
foreign currency transactions ................. 4,749,408 (8,538,539) 30,161,732 27,859,622
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. 11,188,287 (28,430,686) (20,510,599) 1,596,184
--------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ................. 24,646,721 (25,636,342) 24,179,436 44,344,742
Distributions to shareholders from:
Net investment income:
Class A ....................................... (7,743,319) (9,877,888) (12,960,968) (13,224,776)
Class B ....................................... -- -- (24,744) --
Class C ....................................... (1,607,571) (1,820,566) (2,000,705) (1,678,440)
Net realized gains:
Class A ....................................... -- (15,493,732) (23,373,432) (15,051,100)
Class C ....................................... -- (2,734,235) (4,503,651) (1,938,931)
--------------------------------------------------------------------------
Total distributions to shareholders ............. (9,350,890) (29,926,421) (42,863,500) (31,893,247)
Capital share transactions: (Note 2)
Class A ....................................... (53,014,023) 3,266,565 (26,849,718) 64,638,393
Class B ....................................... -- -- 2,574,198 --
Class C ....................................... (15,327,964) 16,484,480 4,467,283 34,384,586
--------------------------------------------------------------------------
Total capital share transactions ................ (68,341,987) 19,751,045 (19,808,237) 99,022,979
Net increase (decrease) in net assets ........ (53,046,156) (35,811,718) (38,492,301) 111,474,474
Net assets:
Beginning of year ............................... 212,101,778 247,913,496 509,306,125 397,831,651
--------------------------------------------------------------------------
End of year ..................................... $ 159,055,622 $ 212,101,778 $ 470,813,824 $ 509,306,125
==========================================================================
Undistributed net investment income included
in net assets:
End of year .................................... $ 274,624 $ 916,488 $ 42,323 $ 581,251
==========================================================================
</TABLE>
See notes to financial statements.
90
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN GLOBAL GOVERNMENT FRANKLIN SHORT-INTERMEDIATE
INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 7,815,767 $ 8,918,456 $ 10,454,640 $ 10,382,045
Net realized gain (loss) from investments and
foreign currency transactions ................. 2,292,674 225,201 (21,004) 546,710
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies.. (9,301,008) (2,655,059) (7,765,879) 3,385,195
-------------------------------------------------------------------------
Net increase in net assets resulting
from operations ............................ 807,433 6,488,598 2,667,757 14,313,950
Distributions to shareholders from:
Net investment income:
Class A ....................................... (7,040,581) (7,742,300) (9,778,284) (10,749,725)
Class C ....................................... (358,541) (339,885) -- --
Advisor Class ................................. (56,550) (51,592) (99,886) (118,627)
In excess of net investment income:
Class A ....................................... -- (578,601) -- --
Class C ....................................... -- (25,400) -- --
Advisor Class ................................. -- (3,856) -- --
Net realized gains:
Class A ....................................... (221,141) -- -- --
Class C ....................................... (12,401) -- -- --
Advisor Class ................................. (1,793) -- -- --
-------------------------------------------------------------------------
Total distributions to shareholders ............. (7,691,007) (8,741,634) (9,878,170) (10,868,352)
Capital share transactions: (Note 2)
Class A ....................................... (19,386,030) (5,329,387) (40,875,576) 28,693,996
Class C ....................................... (618,502) 1,335,288 -- --
Advisor Class ................................. (84,877) 99,883 (2,209,357) 3,201,489
-------------------------------------------------------------------------
Total capital share transactions ................ (20,089,409) (3,894,216) (43,084,933) 31,895,485
Net increase (decrease) in net assets ........ (26,972,983) (6,147,252) (50,295,346) 35,341,083
Net assets:
Beginning of year ............................... 117,415,692 123,562,944 227,776,258 192,435,175
-------------------------------------------------------------------------
End of year ..................................... $ 90,442,709 $ 117,415,692 $ 177,480,912 $ 227,776,258
=========================================================================
Undistributed net investment income (accumulated
distributions in excess of net investment
income) included in net assets:
End of year .................................... $ (764) $ (792,503) $ 587,841 $ 11,371
=========================================================================
</TABLE>
See notes to financial statements.
91
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
FRANKLIN
BOND FUND
-------------
<S> <C>
Cash flow from operating activities:
Interest received ....................................................... $ 2,241,772
Operating expenses paid ................................................. (40,810)
-------------
Cash provided - operations ........................................... 2,200,962
=============
Cash flow from investing activities:
Investment purchases .................................................... (943,252,216)
Investment sales and maturities ......................................... 956,871,535
Net payments for futures contracts (Note 1) ............................. (541,224)
-------------
Cash provided - investments .......................................... 13,078,095
=============
Cash flow from financing activities:
Proceeds from shares sold ............................................... 13,893,080
Payment on shares redeemed .............................................. (28,855,967)
Distributions to shareholders ........................................... (407,094)
Net dollar roll transactions (Note 1) ................................... 90,924
-------------
Cash used - financing ................................................ (15,279,057)
=============
Net change in cash ....................................................... --
Cash at beginning of year ................................................ --
-------------
Cash at end of year ...................................................... $ --
=============
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
Net investment income .................................................... $ 2,191,713
Amortization income ..................................................... (40,169)
Net dollar roll transactions (Note 1) ................................... (90,924)
Amortization of offering costs (Note 1) ................................. 59,404
Decrease in dividends and interest receivable ........................... 80,674
Increase in other liabilities ........................................... 264
-------------
Cash provided - operations ............................................... $ 2,200,962
=============
</TABLE>
See notes to financial statements.
92
<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
six separate series (the Funds). All Funds 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 Income Fund Convertible Securities Fund Adjustable U.S. Government Securities Fund
Equity Income Fund Bond Fund
Short-Intermediate U.S. Government Securities Fund
</TABLE>
The Adjustable U.S. Government Securities Fund invests substantially all of its
assets in the U.S. Government Adjustable Rate Mortgage Portfolio (the
Portfolio), which is registered under the Investment Company Act of 1940 as a
diversified, open-end investment company having the same investment objectives
as the Fund. The financial statements of the Portfolio, including the Statement
of Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's 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. 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 U.S. Government Securities Fund holds Portfolio shares that are
valued at their proportionate interest in the net asset value of the Portfolio.
At October 31, 1999, the Adjustable U.S. Government Securities Fund owns 100% of
the Portfolio.
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.
93
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. FOREIGN CURRENCY TRANSLATION: (CONT.)
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. MORTGAGE DOLLAR ROLLS:
The Bond Fund may enter into dollar roll transactions under which it sells
mortgage backed securities and agrees to repurchase substantially similar
securities at an agreed upon price in the future. Such transactions are
accounted for as financing by the Fund and the difference between the sale and
repurchase price is treated as interest income.
d. FUTURES CONTRACTS:
The Bond Fund may enter into futures contracts 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 CONTRACTS:
The Global Government Income Fund may enter into forward exchange contracts to
hedge against foreign exchange risks. These contracts are valued daily and the
Fund's equity therein is included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses are included in the Statement of
Operations.
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 substantially all of its taxable income.
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.
94
<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: (CONT.)
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. OFFERING COSTS:
Offering costs are amortized on a straight-line basis over twelve months.
i. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and II were renamed Class A and C,
respectively, and the Equity Income Fund began offering a new class of shares,
Class B. Each class of shares differs by its initial sales load, distribution
fees, voting rights on matters affecting a single class and its exchange
privilege.
<TABLE>
<CAPTION>
FUND CLASS
- --------------------------------------------------------------------------------
<S> <C>
Adjustable U.S. Government Securities Fund A
Bond Fund A & Advisor
Convertible Securities Fund A & C
Equity Income Fund A, B & C
Global Government Income Fund A, C & Advisor
Short-Intermediate U.S. Government Securities Fund A & Advisor
</TABLE>
95
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 1999, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
ADJUSTABLE
U.S. GOVERNMENT CONVERTIBLE
SECURITIES FUND BOND FUND SECURITIES FUND
-----------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
1999
Shares sold ................. 24,552,970 $ 228,668,326 619,183 $ 6,175,528 2,068,275 $ 25,777,173
Shares issued in reinvestment
of distributions ........... 902,518 8,389,289 19,877 195,826 475,259 5,808,595
Shares issued on merger
(Note 8) ................... 2,176,537 20,350,622 -- -- -- --
Shares redeemed ............. (29,098,204) (270,978,742) (228,647) (2,248,930) (6,878,148) (84,599,791)
------------------------------------------------------------------------------------------------
Net increase (decrease) ..... (1,466,179) $ (13,570,505) 410,413 $ 4,122,424 (4,334,614) $(53,014,023)
================================================================================================
1998*
Shares sold ................. 17,728,448 $ 167,216,987 428,859 $ 4,337,530 4,772,514 $ 64,822,630
Shares issued in reinvestment
of distributions ........... 1,090,772 10,268,136 545 5,651 1,402,784 18,865,612
Shares redeemed ............. (22,292,627) (210,197,212) (21,120) (218,454) (6,083,262) (80,421,677)
------------------------------------------------------------------------------------------------
Net increase (decrease) ..... (3,473,407) $ (32,712,089) 408,284 $ 4,124,727 92,036 $ 3,266,565
================================================================================================
CLASS C SHARES:
1999
Shares sold .................................................................................. 311,908 $ 3,811,987
Shares issued in reinvestment of distributions ............................................... 100,454 1,221,234
Shares redeemed .............................................................................. (1,667,505) (20,361,185)
-------------------------------
Net decrease ................................................................................. (1,255,143) $ (15,327,964)
===============================
1998
Shares sold .................................................................................. 1,925,827 $ 26,217,204
Shares issued in reinvestment of distributions ............................................... 267,020 3,567,903
Shares redeemed .............................................................................. (1,045,779) (13,300,627)
-------------------------------
Net increase ................................................................................. 1,147,068 $ 16,484,480
===============================
ADVISOR CLASS:
1999
Shares sold ..................................................... 749,605 $ 7,643,339
Shares issued in reinvestment of distributions .................. 178,319 1,787,167
Shares redeemed ................................................. (2,713,667) (26,631,028)
------------------------------
Net decrease .................................................... (1,785,743) $(17,200,522)
==============================
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 for the Bond
Fund.
96
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
GLOBAL GOVERNMENT U.S. GOVERNMENT
EQUITY INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
1999
Shares sold ................. 5,788,113 $ 113,372,968 3,229,144 $ 25,890,191 34,503,497 $ 352,227,000
Shares issued in reinvestment
of distributions ............ 1,647,926 31,685,607 527,266 4,191,903 649,862 6,640,659
Shares redeemed ............. (8,820,547) (171,908,293) (6,184,889) (49,468,124) (39,156,441) (399,743,235)
------------------------------------------------------------------------------------------------
Net decrease ................ (1,384,508) $ (26,849,718) (2,428,479) $(19,386,030) (4,003,082) $ (40,875,576)
================================================================================================
1998
Shares sold ................. 9,015,338 $ 180,490,789 2,683,291 $ 22,280,584 21,448,883 $ 221,708,093
Shares issued in reinvestment
of distributions ............ 1,236,040 24,317,467 556,177 4,608,867 627,776 6,477,086
Shares redeemed ............. (7,026,650) (140,169,863) (3,877,271) (32,218,838) (19,311,848) (199,491,183)
------------------------------------------------------------------------------------------------
Net increase (decrease) ..... 3,224,728 $ 64,638,393 (637,803) $ (5,329,387) 2,764,811 $ 28,693,996
================================================================================================
CLASS B SHARES:
1999**
Shares sold ................. 143,757 $ 2,846,656
Shares issued in reinvestment
of distributions ............ 1,143 22,443
Shares redeemed ............. (14,801) (294,901)
------------------------------
Net increase ................ 130,099 $ 2,574,198
==============================
CLASS C SHARES:
1999
Shares sold ................. 1,374,494 $ 26,925,968 131,666 $ 1,059,002
Shares issued in reinvestment
of distributions ............ 310,254 5,945,035 29,752 236,792
Shares redeemed ............. (1,460,904) (28,403,720) (239,250) (1,914,296)
--------------------------------------------------------------
Net increase (decrease) ..... 223,844 $ 4,467,283 (77,832) $ (618,502)
==============================================================
1998
Shares sold ................. 2,664,562 $ 53,316,585 405,491 $ 3,372,424
Shares issued in reinvestment
of distributions ............ 166,092 3,261,574 27,768 229,929
Shares redeemed ............. (1,103,002) (22,193,573) (273,562) (2,267,065)
--------------------------------------------------------------
Net increase ................ 1,727,652 $ 34,384,586 159,697 $ 1,335,288
==============================================================
</TABLE>
**For the period January 1, 1999 (effective date) to October 31, 1999.
97
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
GLOBAL GOVERNMENT U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS:
1999
Shares sold .................................. 18,974 $ 153,011 109,306 $ 1,121,253
Shares issued in reinvestment of distributions 7,067 56,218 6,126 62,526
Shares redeemed .............................. (36,633) (294,106) (328,548) (3,393,136)
--------------------------------------------------------
Net decrease ................................. (10,592) $ (84,877) (213,116) $(2,209,357)
========================================================
1998
Shares sold .................................. 30,190 $ 249,021 312,657 $ 3,216,468
Shares issued in reinvestment of distributions 6,299 52,063 10,199 105,389
Shares redeemed .............................. (24,127) (201,201) (11,650) (120,368)
--------------------------------------------------------
Net increase ................................. 12,362 $ 99,883 311,206 $ 3,201,489
========================================================
</TABLE>
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. (FT Services) 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 U.S. Government Adjustable Rate Mortgage Portfolio The fund in which the Franklin Adjustable U.S. Government
Securities Fund invests.
</TABLE>
All funds, except the Adjustable U.S. Government Securities Fund and the Bond
Fund, pay an investment management fee to Advisers based on the net assets of
the Funds, as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE MONTH END NET ASSETS
--------------------------------------------------------------------
<S> <C>
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million
</TABLE>
The Bond Fund pays an investment management fee to Advisers of 0.425% 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.
98
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Adjustable U.S. Government Securities Fund pays an administrative fee to
Advisers based on the net assets of the Funds, as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
------------------------------------------------------------------
<S> <C>
0.10% First $5 billion
0.09% Over $5 billion, up to and including $10 billion
0.08% 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 average daily net assets, and is not
an additional expense of the Funds.
Under a subadvisory agreement, TICI provides subadvisory fees to the Bond Fund
and the Global Government Income Fund, and receives from Advisers fees based on
the month end net assets of the funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Franklin Bond Fund as noted in the Statement of Operations.
The Funds reimburse Distributors up to the stated percentages of their daily
average net assets for costs incurred in marketing the Funds' shares as follows:
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjustable U.S. Government Securities Fund .25% -- --
Bond Fund .25% -- --
Convertible Securities Fund .25% -- 1.00%
Equity Income Fund .25% 1.00% 1.00%
Global Government Income Fund .15% -- .65%
Short-Intermediate U.S. Government Securities Fund .10% -- --
</TABLE>
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
U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net commissions received (paid) $(170,722) $1,199 $(10,934) $(273,995) $(9,654) $(497,486)
Contingent deferred sales charges $ 77,580 $ -- $ 37,204 $ 72,920 $ 4,376 $ 22,687
</TABLE>
The Trust paid shareholder servicing fees of $1,722,243, of which $1,559,791 was
paid to Investor Services.
Advisers and/or investment companies managed by Advisers owned 72.8% of the net
assets of the Bond Fund.
99
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 1999, 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 SHORT-INTERMEDIATE
U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT
SECURITIES FUND BOND FUND SECURITIES FUND SECURITIES FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in:
2000 $ 1,925,614 $ -- $ -- $ --
2001 7,701,615 -- -- --
2002 42,220,363 -- -- 1,788,818
2003 18,463,010 -- -- 3,564,637
2004 8,807,294 -- 300,618
2005 4,580,551 -- -- --
2006 2,585,375 3,900,664 --
2007 1,456,300 1,794,250 -- 21,004
-------------------------------------------------------------------------
$87,740,122 $1,794,250 $3,900,664 $5,675,077
=========================================================================
</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 gain (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency, mortgage dollar roll, and financial futures transactions.
At October 31, 1999, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments at cost .......... $304,208,436 $26,601,937 $163,281,880 $429,400,452 $100,930,821 $177,240,135
===============================================================================================
Unrealized appreciation ...... $ 2,683 $ 50,622 $ 14,792,313 $ 76,857,629 $ -- $ 559,451
Unrealized depreciation ...... (22,315,679) (532,577) (19,010,920) (30,464,625) (14,609,294) (2,408,626)
-----------------------------------------------------------------------------------------------
Net unrealized
appreciation (depreciation) . $(22,312,996) $ (481,955) $ (4,218,607) $ 46,393,004 $(14,609,294) $ (1,849,175)
===============================================================================================
</TABLE>
100
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1999 were as follows:
<TABLE>
<CAPTION>
ADJUSTABLE GLOBAL SHORT-INTERMEDIATE
U.S. GOVERNMENT CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND BOND FUND SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases ...... $187,225,221 $33,500,498 $249,063,425 $242,891,890 $60,357,389 $128,119,035
Sales .......... $202,860,241 $40,996,983 $290,465,437 $267,417,865 $77,710,802 $168,669,916
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Global Government Income Fund and the Bond Fund have been parties to
financial instruments with off-balance-sheet risk, primarily forward exchange
contracts, in order to minimize the impact on the Funds from adverse changes in
the relationship between the U.S. dollar and foreign currencies, and financial
futures contracts to minimize the impact of changes in interest rates.
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.
As of October 31, 1999, all forward exchange contracts in the Global Government
Income Fund were offset.
A financial futures contract is an agreement between 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 future
contracts, interest rates, and the underlying hedged assets.
As of October 31, 1999, the Bond Fund had the following futures contracts
outstanding:
<TABLE>
<CAPTION>
NUMBER OF DELIVERY CONTRACT UNREALIZED
CONTRACTS TO BUY CONTRACTS DATES FACE VALUE GAIN/(LOSS)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note (CBT) Dec99 9 12/1/99-12/31/99 $1,800,000 $4,781
</TABLE>
7. CREDIT RISK
The Convertible Securities Fund has 66.4% 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.
101
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
7. CREDIT RISK (CONT.)
The Convertible Securities Fund has investments in excess of 10% of its total
net assets in the Electronic Technology Industry. Such concentration may subject
the Fund more significantly to economic changes occurring within that industry.
The Global Government Income Fund has investments in excess of 10% of its total
assets in the nation of Germany. Such concentration may subject the Fund more
significantly to economic changes occurring within that nation.
8. MERGER WITH FRANKLIN ADJUSTABLE RATE SECURITIES FUND
On May 6, 1999, the Adjustable U.S. Government Securities Fund acquired the net
assets of the Franklin Adjustable Rate Securities Fund (Adjustable Rate
Securities Fund) pursuant to a plan of reorganization approved by Adjustable
Rate Securities Fund's shareholders. The merger was accomplished by a tax-free
exchange of 2,176,537 shares of the Adjustable U.S. Government Securities Fund
(valued at $9.35) for the net assets of the Adjustable Rate Securities Fund
which aggregated $20,350,622, including $146,285 of unrealized appreciation. The
merger was accounted for as a pooling-of-interests without restatement for
financial reporting purposes. The combined net assets of the Fund immediately
after the merger were $294,168,164.
102
<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, cash flows, 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, 1999, 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 cash flows and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereinafter 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 audits 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 1999
103
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Funds hereby
designate the following amounts as capital gain dividends for the fiscal year
ended October 31, 1999.
<TABLE>
<CAPTION>
EQUITY GLOBAL GOVERNMENT
INCOME FUND INCOME FUND
-------------------------------------
<S> <C>
$29,331,279 $249,053
</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, 1999.
<TABLE>
<CAPTION>
CONVERTIBLE EQUITY
SECURITIES FUND INCOME FUND
-----------------------------------
<S> <C>
53.23% 79.06%
</TABLE>
104
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
1999(2) 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 9.37 $ 9.48 $ 9.37 $ 9.33 $ 9.19
----------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .496 .553 .593 .589 .572
Net realized and unrealized gain (loss) ........... (.060) (.110) .110 .040 .140
----------------------------------------------------------------------
Total from investment operations ................... .436 .443 .703 .629 .712
Less distributions from net investment income ...... (.496) (.553) (.593) (.589) (.572)
-----------------------------------------------------------------------
Net asset value, end of year ....................... $ 9.31 $ 9.37 $ 9.48 $ 9.37 $ 9.33
======================================================================
Total Return(1)..................................... 4.77% 4.80% 7.74% 6.95% 7.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 281,974 $ 302,434 $ 342,541 $ 406,431 $ 522,802
Ratios to average net assets:
Expenses .......................................... .43% .26% .25% .25% .18%
Expenses excluding waiver and payments by affiliate .43% .43% .43% .42% .43%
Net investment income ............................. 5.32% 5.88% 6.31% 6.31% 6.17%
Portfolio turnover rate ............................ 23.23% 38.92% 20.84% 24.63% 20.16%
</TABLE>
(1) Total return is not annualized for periods less than one year.
(2) Based on average shares outstanding.
See notes to financial statements.
105
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 95.3%
U.S. GOVERNMENT AND AGENCY SECURITIES 93.9%
DIVERSIFIED FINANCIAL SERVICES 0.4%
PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 7.3105%, 7/25/22 ....... $ 186,560 $ 185,891
PHMS, Cap 13.00%, Margin 2.53% + CMT, Resets Annually, 7.2448%, 8/25/21 ....... 33,034 32,807
PHMS, Cap 13.40%, Margin 2.50% + CMT, Resets Annually, 7.1867%, 7/25/18 ....... 837,065 832,095
-----------
1,050,793
-----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 13.8%
Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 6.50%, 11/01/16 ............. 2,771,952 2,818,313
Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 6.976%, 7/01/18 ............. 2,028,122 2,059,136
Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 7.019%, 4/01/18 ............. 4,271,643 4,388,559
Cap 12.993, Margin 1.743% + 6 Month TB, Resets Semi-Annually, 6.348%, 10/01/29 637,508 647,230
Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 6.938%, 9/01/19 ............. 3,378,176 3,451,548
Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 6.669%, 12/01/16 ........... 1,706,393 1,749,362
Cap 13.175%, Margin 2.233% + CMT, Resets Annually, 7.046%, 5/01/25 ............ 3,067,345 3,157,355
Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.501%, 10/01/18 ........... 870,204 889,351
Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.64%, 3/01/19 ............. 1,502,130 1,537,682
Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 6.518%, 3/01/18 ............ 2,642,038 2,724,901
Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 6.829%, 4/01/19 .............. 5,333,722 5,485,240
Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 7.189%, 7/01/20 ............. 3,490,668 3,578,296
Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.319%, 11/01/19 ........... 1,658,175 1,698,428
Cap 13.948%, Margin 2.133% + CMT, Resets Annually, 6.988%, 1/01/19 ............ 2,275,017 2,333,768
Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.886%, 12/01/21 ..... 869,816 879,325
Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 7.12%, 2/01/19 .............. 1,316,323 1,370,035
-----------
38,768,529
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 70.9%
Cap 11.06%, Margin 1.98% + CMT, Resets Annually, 6.793%, 3/01/22 .............. 549,444 560,411
Cap 11.884%, Margin 2.211% + CMT, Resets Annually, 7.40%, 2/01/25 ............. 2,945,127 3,008,416
Cap 11.94%, Margin 2.352% + CMT, Resets Annually, 6.943%, 9/01/29 ............. 6,078,397 6,101,738
Cap 11.966%, Margin 1.25% + COFI, Resets Monthly, 5.803%, 4/01/22 ............. 5,471,860 5,389,991
Cap 12.097%, Margin 2.135% + CMT, Resets Annually, 6.99%, 11/01/23 ............ 7,020,461 7,203,071
Cap 12.233%, Margin 1.70% + COFI, Resets Monthly, 6.232%, 1/01/19 ............. 5,958,591 5,864,545
Cap 12.435%, Margin 2.146% + CMT, Resets Annually, 6.493%, 8/01/29 ............ 10,593,568 10,508,392
Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 6.983%, 11/01/18 1,166,102 1,187,763
Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.769%, 11/01/17 ............ 11,173,727 11,267,474
Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 6.848%, 3/01/19 .............. 1,717,508 1,760,630
Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.963%, 10/01/28 .............. 533,465 524,642
Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 6.258%, 1/01/19 .. 5,296,861 5,418,938
Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.867%, 1/01/19 ............. 2,240,880 2,228,869
Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 5.754%, 9/01/18 ............. 8,515,005 8,341,639
Cap 12.763%, Margin 1.25% + COFI, Resets Monthly, 5.748%, 6/01/20 ............. 5,921,969 5,815,669
Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.555%, 1/01/19 ............. 1,705,306 1,715,862
Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 6.831%, 11/01/20 ............ 2,195,615 2,262,312
Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 6.503%, 5/01/19 ............. 2,812,807 2,847,543
Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.227%, 6/01/17 . 1,678,277 1,763,958
Cap 12.85%, Margin 1.97% + CMT, Resets Annually, 6.789%, 12/01/17 ............. 653,964 669,394
Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.262%, 10/01/17 ...... 1,944,973 1,967,156
Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 6.60%, 7/01/17 .. 5,990,746 6,180,522
Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 5.754%, 2/01/19 ............. 3,023,136 2,960,617
</TABLE>
106
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
U.S. GOVERNMENT AND AGENCY SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
Cap 12.953%, Margin 2.125% + 6 Month TB, Resets Semi-Annually, 6.602%, 4/01/18 $ 477,508 $ 492,973
Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 6.793%, 12/01/19 ........... 1,623,058 1,666,925
Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 7.424%, 11/01/17 ...... 2,705,419 2,729,212
Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 6.7616%, 6/01/19 ............. 2,703,900 2,778,782
Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.886%, 2/01/20 .............. 7,315,211 7,276,001
Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 6.493%, 12/01/20 . 3,118,203 3,187,525
Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 6.679%, 4/01/19 ............ 3,907,158 4,067,167
Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 6.823%, 6/01/19 ............ 2,679,864 2,752,219
Cap 13.1282%, Margin 2.02% + COFI, Resets Annually, 6.621%, 4/01/03 ........... 3,053,397 3,034,852
Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 6.681%, 4/01/19 ............ 3,248,068 3,342,381
Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 7.123%, 11/01/26 1,470,164 1,535,947
Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 6.608%, 6/01/19 ............. 1,662,306 1,702,721
Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.019%, 10/01/19 ............ 3,848,795 3,954,421
Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.295%, 4/01/03 .............. 2,896,984 2,905,878
Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 6.831%, 9/01/22 ............ 6,686,833 6,873,593
Cap 13.457%, Margin 1.903% + CMT, Resets Annually, 6.758%, 6/01/18 ............ 3,500,231 3,591,415
Cap 13.54%, Margin 1.25% + COFI, Resets Monthly, 5.75%, 8/01/26 ............... 739,989 725,822
Cap 13.563%, Margin 2.111% + CMT, Resets Annually, 6.873%, 8/01/20 ............ 2,219,220 2,279,342
Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 6.835%, 3/01/21 ............ 2,466,749 2,540,003
Cap 13.791%, Margin 2.143% + CMT, Resets Monthly, 6.889%, 5/01/19 ............. 4,046,185 4,169,035
Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 6.664%, 3/01/19 ............. 1,176,494 1,212,142
Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.796%, 7/01/24 .. 3,675,511 3,740,103
Cap 13.85%, Margin 2.13% + 3CMT, Resets Every 3 Years, 8.201%, 3/01/22 ........ 481,376 491,963
Cap 13.86%, Margin 1.842% + CMT, Resets Monthly 6.70%, 8/01/16 ................ 185,544 190,844
Cap 13.875%, Margin 1.975% + CMT, Resets Annually, 6.475%, 3/01/18 ............ 1,092,616 1,113,155
Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 6.683%, 2/01/19 ............. 2,161,184 2,230,855
Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 6.793%, 12/01/18 ............ 1,520,617 1,570,085
Cap 13.932%, Margin 1.992% + 3CMT, Resets Every 3 Years, 7.396%, 6/01/26 ...... 4,048,239 4,124,977
Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 6.858%, 1/01/19 ............ 3,145,861 3,235,287
Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.144%, 5/01/21 ....... 4,850,831 4,896,312
Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 6.788%, 3/01/20 ............. 2,041,557 2,103,561
Cap 14.561%, Margin 2.199% + 3CMT, Resets Every 3 Years, 7.801%, 12/01/24 ..... 4,373,748 4,452,803
Cap 14.68%, Margin 2.125% + 3CMT, Resets Every 3 Years, 7.844%, 2/01/22 ....... 1,161,649 1,182,559
Cap 14.725%, Margin 2.42% + CMT, Resets Annually, 7.062%, 6/01/19 ............. 3,851,241 4,000,065
Cap 14.804%, Margin 2.186% + 3CMT, Resets Every 3 Years, 7.449%, 12/01/17 ..... 2,032,666 2,050,591
Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 6.499%, 1/01/16 ............. 4,442,778 4,496,600
Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 7.525%, 5/01/19 ............ 1,739,353 1,790,652
-----------
200,038,320
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 8.8%
Cap 10.00%, Margin 1.50% + CMT, Resets Annually, 6.375%, 1/20/24 .............. 3,673,805 3,731,550
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 6.625%, 6/20/22 .............. 4,469,537 4,550,907
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 6.625%, 8/20/22 .............. 6,605,212 6,727,467
Cap 11.00%, Margin 1.50% + CMT, Resets Annually, 6.125%, 11/20/23 ............. 2,346,504 2,385,452
Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 7.625%, 7/20/25 .............. 1,722,483 1,786,218
Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 6.375%, 1/20/23 .............. 3,377,787 3,435,354
Cap 12.00%, Margin 1.50% + CMT, Resets Annually, 6.375%, 3/20/17 .............. 2,169,491 2,206,222
-----------
24,823,170
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $267,332,547) ............... 264,680,812
-----------
</TABLE>
107
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long Term Investments (cont.)
MISCELLANEOUS MORTGAGE BACKED SECURITIES 1.4%
Countrywide Mortgage Backed Securities Inc., Series 1994-I, A8, 6.25%, 7/25/09 .. $ 294,027 $ 290,959
Home Owners Federal Savings & Loan, Cap 13.00%, Margin 1.75%, Reset Monthly,
6.4464%, 1/25/18 ............................................................... 517,610 517,448
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 6.155%, 1/25/25 677,950 673,655
Ryland Mortgage Securities Corp., Cap 12.41%, Margin 1.80% + CMT, Resets
Annually, 6.6425%, 3/25/20 ..................................................... 386,399 386,819
Ryland Mortgage Securities Corp., Cap 14.82%, Margin 2.29% + 6 Month TB,
Resets Semi-Annually, 6.8856%, 8/25/23 ....................................... 357,124 356,154
Salomon Brothers Mortgage Securities VII, Cap 14.00%, Margin 0.96% + NACR,
Resets Annually, 7.3485%, 10/25/16 ............................................ 577,453 576,551
Sears Mortgage Securities, Cap 10.78%, Margin 1.10% + COFI, Resets Monthly,
5.63%, 7/25/21 ................................................................. 251,167 246,615
Travelers Mortgage Services Inc., Cap 13.95%, Margin 2.25% + CMT, Resets
Annually, 7.3813%, 12/25/18 .................................................... 392,488 394,668
Western Federal Savings and Loan Association, Cap 12.25%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 5.689%, 6/25/20 ................................... 248,241 244,052
Western Federal Savings and Loan Association, Cap 12.75%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 5.689%, 7/25/20 .................................. 252,544 248,285
------------
TOTAL MISCELLANEOUS MORTGAGE BACKED SECURITIES (COST $3,970,165) ................ 3,935,206
------------
TOTAL LONG TERM INVESTMENTS (COST $271,302,712) ................................. 268,616,018
------------
(a)REPURCHASE AGREEMENT 3.8%
Joint Repurchase Agreement, 5.199%, 11/01/99, (Maturity Value $10,643,747)
(COST $10,639,138) ............................................................ 10,639,138 10,639,138
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC World Markets Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Goldman, Sachs & Co.
Paine Webber Inc.
Paribas Corporation
Warburg Dillon Read LLC
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $281,941,850) 99.1% ..................................... 279,255,156
------------
OTHER ASSETS, LESS LIABILITIES .9% .............................................. 2,718,785
------------
NET ASSETS 100.0% ............................................................... $281,973,941
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - Eleventh District Cost of Funds Index
DR - Discount Rate
LIBOR - London Interbank Offered Rate
NACR - National Average Contract Rate
NCI - National Median Cost of Funds Index
PHMS - Prudential Home Mortgage Securities
RTC - Resolution Trust Corp.
TB - Treasury Bill Rate
(a) Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 1999, all repurchase
agreements had been entered into on October 29, 1999.
See notes to financial statements.
108
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
<TABLE>
<S> <C>
Assets:
Investments in securities:
Cost ............................................. $ 281,941,850
=============
Value ............................................ 279,255,156
Receivables:
Investment securities sold ....................... 773,501
Capital shares sold .............................. 385,113
Interest ......................................... 1,718,620
-------------
Total assets ................................... 282,132,390
-------------
Liabilities:
Payables to affiliates ............................ 94,980
Other liabilities ................................. 63,469
-------------
Total liabilities .............................. 158,449
-------------
Net assets, at value ......................... $ 281,973,941
=============
Net assets consist of:
Net unrealized depreciation ....................... $ (2,686,694)
Accumulated net realized loss ..................... (136,995,890)
Capital shares .................................... 421,656,525
-------------
Net assets, at value ............................... $ 281,973,941
=============
Shares outstanding ................................. 30,278,780
=============
Net asset value and maximum offering price per share $ 9.31
=============
</TABLE>
See notes to financial statements.
109
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<S> <C>
Investment income:
Interest .......................................... $ 16,537,166
------------
Expenses:
Management fees (Note 3) .......................... 1,150,240
Custodian fees .................................... 2,842
Professional fees ................................. 57,900
Trustees' fees and expenses ....................... 13,878
Other ............................................. 15,214
------------
Total expenses ................................. 1,240,074
------------
Net investment income ........................ 15,297,092
------------
Realized and unrealized losses:
Net realized loss from investments ................ (140,123)
Net unrealized depreciation on investments ........ (1,785,775)
------------
Net realized and unrealized loss ................... (1,925,898)
------------
Net increase in net assets resulting from operations $ 13,371,194
============
</TABLE>
See notes to financial statements.
110
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................... $ 15,297,092 $ 18,709,641
Net realized gain (loss) from investments .................................. (140,123) 271,114
Net unrealized depreciation on investments ................................. (1,785,775) (3,967,154)
----------------------------------
Net increase in net assets resulting from operations ..................... 13,371,194 15,013,601
Distributions to shareholders from net investment income .................... (15,297,092) (18,709,641)
Capital share transactions (Note 2) ......................................... (18,533,904) (36,411,307)
----------------------------------
Net decrease in net assets (20,459,802) (40,107,347)
Net assets (there is no undistributed net investment income at
beginning or end of year):
Beginning of year ........................................................... 302,433,743 342,541,090
----------------------------------
End of year ................................................................. $ 281,973,941 $ 302,433,743
==================================
</TABLE>
See notes to financial statements.
111
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
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 a diversified, open-end investment company,
consisting of one portfolio, the U.S. Government Adjustable Rate Mortgage
Portfolio (the Portfolio). The shares of the Trust are issued in private
placements and are exempt from registration under the Securities Act of 1933.
The investment objective of the Portfolio is to seek current income.
The Trust previously consisted of two separate portfolios, the U.S. Government
Adjustable Rate Mortgage Portfolio and the Adjustable Rate Securities Portfolio
(Securities Portfolio). On May 6, 1999, all of the shares of the Securities
Portfolio were redeemed and the portfolio was liquidated.
The following summarizes the Portfolio's 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 the Portfolio's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially 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.
Prior to the liquidation of the Securities Portfolio, common expenses incurred
by the Trust were allocated based on net assets. Other expenses were charged to
the Portfolios 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.
112
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 1999, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Portfolio's shares were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------------------------------
<S> <C> <C>
Year ended October 31, 1999
Shares sold 18,450,025 $ 172,044,493
Shares issued in reinvestment of distributions 1,641,140 15,300,133
Shares redeemed (22,090,242) (205,878,530)
---------------------------------
Net decrease (1,999,077) $ (18,533,904)
=================================
Year ended October 31, 1998
Shares sold 11,366,772 $ 107,271,915
Shares issued in reinvestment of distributions 1,982,722 18,703,706
Shares redeemed (17,212,608) (162,386,928)
---------------------------------
Net decrease (3,863,114) $ (36,411,307)
=================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), the Portfolio's investment manager (a
wholly-owned subsidiary of Franklin Resources, Inc.) and trustees of Franklin
Investors Securities Trust.
The Portfolio pays an investment management fee to Advisers based on the net
assets of the Portfolio as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE MONTH END NET ASSETS
------------------------------------------------------------------
<S> <C>
.400% First $5 billion
.350% Over $5 billion, up to and including $10 billion
.330% Over $10 billion, up to and including $15 billion
</TABLE>
Fees are further reduced on net assets over $15 billion.
At October 31, 1999, all shares of the Portfolio were owned by the Franklin
Adjustable U.S. Government Securities Fund.
113
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 1999, the Portfolio had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
Capital loss carryovers
Expiring in:
<S> <C>
2000 ................... $ 44,474,794
2001 ................... 17,182,002
2002 ................... 67,102,060
2003 ................... 7,677,608
2004 ................... 419,303
2007 ................... 140,123
------------
$136,995,890
============
</TABLE>
At October 31, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $281,941,850 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 520,936
Unrealized depreciation (3,207,629)
------------
Net unrealized depreciation $ (2,686,694)
============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1999 aggregated $62,362,656 and $95,491,685, respectively.
114
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
ADJUSTABLE RATE SECURITIES PORTFOLIOS
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the U.S. Government Adjustable Rate
Mortgage Portfolio (the "Portfolio") at October 31, 1999, the results of its
operations for the year then ended, the changes in its 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 Portfolio'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 audits 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 1999
115
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