SHAREHOLDER LETTER
Dear Shareholder:
This annual report for Franklin Investors Securities Trust covers the period
ended October 31, 2000.
RISING RATES WEIGH ON THE U.S. ECONOMY
After powering to an annualized 8.3% increase in the fourth quarter of 1999,
gross domestic product (GDP) growth eased to an annualized 2.4% in the third
quarter of 2000, as the Federal Reserve Board's (the Fed's) interest-rate
increases began to take hold. Economic indicators from new home and auto sales
to industrial production increasingly gave evidence that the slowdown was real.
Toward the end of the reporting period, the question most commonly asked was
whether the economy would slow too much, leading to a "hard landing" and
recession, or if the Fed had successfully engineered a "soft landing," which
would lead to slower growth with less of an inflation threat.
The wild cards in this scenario were the prices of oil and natural gas, both of
which rose approximately 50%, during the period. Oil at 10-year highs and
natural gas at all-time highs created some opposing forces on the U.S. economy.
On the one hand, sky-high energy prices caused inflation to warm up, as
evidenced by the 0.5% September increase in the Consumer Price Index, a commonly
used measure of inflation. On the other hand, these same energy prices exerted a
downward pressure on GDP growth as higher prices put a crimp on discretionary
spending, lessening future inflationary pressures and the possibility that the
Fed would raise rates again.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ................................................... 1
Fund Reports
Franklin Convertible Securities Fund ............................... 4
Franklin Equity Income Fund ........................................ 11
Franklin Global Government Income Fund ............................. 22
Franklin Short-Intermediate U.S. Government
Securities Fund .................................................... 32
Financial Highlights & Statements of Investments ..................... 40
Financial Statements ................................................. 62
Notes to Financial Statements ........................................ 67
Independent Auditors' Report ......................................... 74
Tax Designation ...................................................... 75
</TABLE>
<PAGE>
"In an about-face from recent history, bonds significantly outperformed equities
during the period..."
Despite these economic uncertainties, the U.S. consumer remained positive during
the period under review. With unemployment hovering near 3.9%, a 30-year low, at
the end of the period, consumer confidence stayed historically high. The tight
job market made many people more secure about their careers and confident that
the U.S. economy would continue its 10-year long expansion. This upbeat public
sentiment was somewhat surprising, however, given the equity markets'
less-than-stellar performances for the period and their negative returns since
the beginning of 2000.
BONDS SHINE; STOCKS LOSE THEIR LUSTER
In an about-face from recent history, bonds significantly outperformed equities
during the period, with a bulk of those gains occurring since May, when it
appeared that the Fed was prepared to stop raising rates. Although the full
fiscal year paints a picture of generally positive returns for the major U.S.
equity indexes as a result of strong November and December 1999 performances
when the Fed was increasing the money supply due to Y2K concerns, their
performances year-to-date perhaps tell a truer story. For the first 10 months of
2000, the Dow Jones(R) Industrial Average, Nasdaq(R) and Standard & Poor's
500(R) (S&P 500(R)) Indexes returned -3.58%, -16.70% and -1.81%, respectively,
with growth stocks performing poorly and value stocks holding up relatively
well.
For the same 10-month period, the 10-year Treasury note posted a return of
10.59% and investment-grade corporate bonds, as measured by the Lehman Brothers
Credit Index, returned 5.93%. Several factors played a role in bonds'
outperformance over equities. Slowing economic growth, a subdued inflation
threat, heightened Middle East hostility and anticipation that the Fed will
eventually cut short-term rates provided a favorable economic environment for
bonds. Furthermore, the equity markets' volatility and dismal performances
forced investors to look
2
<PAGE>
elsewhere for positive returns. However, high yield bonds suffered as investors
worried that companies that issue such lower-rated debt would have a more
difficult time paying the required interest and principal in a slower-growing
economy.
Recent market uncertainty reinforces the importance of investing for the long
term, so daily market fluctuations and short-term volatility have minimal impact
on overall investment goals. We encourage you to discuss your financial goals
with your investment representative, who can address concerns about 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/ C B JOHNSON
Charles B. Johnson
Chairman
Franklin Investors Securities Trust
3
<PAGE>
FUND CATEGORY
[PYRAMID GRAPH]
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.
--------------------------------------------------------------------------------
The 12 months under review could be characterized as a period of exciting growth
tempered by investor nervousness and confusion regarding the Federal Reserve
Board's (the Fed's) actions. The economy continued its robust growth with low
unemployment and little inflation, continuing one of the longest economic
expansions in U.S. history. Much of the economy's success can be attributed to
strong productivity gains garnered through the use of technology, enabling the
U.S. to grow with moderate inflation.
However, the Fed was concerned that inflationary pressures might be felt due to
an imbalance between aggregate supply and aggregate demand. This led the Fed to
raise the key federal funds target rate by 125 basis points (1.25%) over the
past year, to 6.5%. As a result, financial markets showed increased volatility
including significant market corrections in March/April and September/October
focused primarily on many of the leading growth sectors. There were initial
signs that the Fed was achieving its goal of slightly lower economic growth to
dampen inflationary pressures as gross domestic product (GDP) slowed to a 2.4%
annualized rate in the third calendar quarter of 2000, the lowest pace since the
second quarter of 1999. Despite the recent pullback, equity markets moved higher
during the period
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 42.
4
<PAGE>
led by the 14.32% gain in the Nasdaq Composite Index and the 6.09% increase in
the Standard & Poor's 500 Composite Index (S&P 500). Leading the advance were
energy, utilities and health care companies, because of the attractive growth
prospects facing these sectors and lower anticipated risk levels when compared
to Internet, technology and telecommunications companies.
For the 12-month period ended October 31, 2000, Franklin Convertible Securities
Fund - Class A outperformed its benchmark, the Goldman Sachs Convertible 100
Bond Index, with a cumulative total return of +30.51% versus the 19.24% increase
for the benchmark index, as shown in the Performance Summary beginning on page
8.(1) The Fund's strong performance relative to the index is mainly attributable
to a combination of our sector and individual security selection. Areas of
strength during the past year included energy, financials and select industries
in the technology sector including electronics manufacturing services (EMS) and
enterprise software.
Our overweight position relative to the benchmark index in oil and gas
exploration and production companies, including Devon Energy, Newfield
Exploration and EOG Resources, favorably impacted the Fund's performance. The
improving supply and demand balance in domestic natural gas markets during the
period led to higher gas pricing and improving profitability for these
companies. A combination of factors including reduced drilling over the past
several years and steadily rising demand due to strong electricity consumption
and a healthy economy drove natural gas prices to all-time highs, peaking in
early October. In addition, renewed emphasis on drilling activity should enable
these companies to deliver better-than-expected production growth going forward.
(1.) Source: Standard & Poor's Micropal. The Goldman Sachs Convertible 100 Bond
Index represents the 100 largest convertible bonds or convertible preferred
stocks, of at least $100 million issue size, with the greatest liquidity.
Monthly returns are calculated on an equal-dollar weighted basis. The index is
unmanaged and includes reinvested dividends. One cannot invest directly in an
index.
PORTFOLIO BREAKDOWN
[PIECHART]
Franklin Convertible Securities Fund
Based on Total Net Assets
10/31/00
Convertible Bonds
46.8%
Convertible
Preferred Stocks
44.0%
Common Stocks
2.5%
Short-Term
Investments &
Other Net Assets
6.7%
5
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Convertible Securities Fund
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
----------------------------------
MONTH CLASS A CLASS C
-------------------------------------------------------------------------------
<S> <C> <C>
November 5.00 cents 4.20 cents
December 6.00 cents* 5.11 cents*
January 5.00 cents 4.11 cents
February 5.00 cents 4.11 cents
March 5.00 cents 4.00 cents
April 5.00 cents 4.00 cents
May 5.00 cents 4.00 cents
June 5.00 cents 4.15 cents
July 5.00 cents 4.15 cents
August 6.25 cents 5.40 cents
September 6.25 cents 5.35 cents
October 6.25 cents 5.35 cents
-------------------------------------------------------------------------------
TOTAL 64.75 CENTS 53.93 CENTS
</TABLE>
*Includes an additional 1.0 cent distribution to meet excise tax requirements.
Other areas of strength included select investments in the technology sector
such as Solectron Corp. and Sanmina in the EMS industry and BEA Systems in the
enterprise software industry. Solectron and Sanmina benefited from increased
outsourcing of design, procurement, manufacturing and assembly services for a
wide range of computing and telecommunications products. In the enterprise
software industry, BEA Systems' flagship product, WebLogic, gained market share
in the fast-growing application server market. Their robust and flexible
e-commerce platform led to a sustainable competitive advantage over competitors
in this rapidly growing field.
In our opinion, the Fund's recent outperformance is also attributable to our
strategy of maintaining a balanced portfolio of convertible securities that will
offer the appropriate combination of upside participation, current income and
downside support. By
6
<PAGE>
reducing the portfolio's equity sensitivity, or delta, we were able to maintain
the appropriate amount of downside protection. Similarly when positions lost
delta, reducing their ability to appreciate with increases in the underlying
common stock, we sought to redeploy the assets in more balanced convertible
securities.
Looking forward, we remain optimistic about the prospects for U.S. financial
markets given continued low unemployment, modest GDP growth and strong
productivity gains. We believe the Fund is well positioned to take advantage of
the favorable outlook for the domestic, convertible securities market. Ongoing
increases in underlying common stock prices provide attractive upside
participation, while the fixed-income nature of convertible securities offers
current income and reduced volatility relative to the underlying equities,
providing some downside protection.
/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, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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 CONVERTIBLE
SECURITIES FUND
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +30.51%
Net Asset Value (NAV) $15.93 (10/31/00) $12.74 (10/31/99)
Change in NAV +$3.19
Distributions (11/1/99-10/31/00) Dividend Income $0.6475
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
One-Year Total Return +29.54%
Net Asset Value (NAV) $15.86 (10/31/00) $12.69 (10/31/99)
Change in NAV +$3.17
Distributions (11/1/99-10/31/00) Dividend Income $0.5393
</TABLE>
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, 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: 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.
8 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/15/87)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +35.67% +92.48% +347.31% +370.43%
Average Annual Total Return(2) +27.86% +12.65% +15.47% +11.70%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (10/2/95)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +34.67% +86.00% +86.00%
Average Annual Total Return(2) +32.30% +12.99% +12.99%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A C
--------------------------------------------------------------------------------
<S> <C> <C>
Distribution Rate(3) 4.44% 4.01%
30-Day Standardized Yield(4) 4.12% 3.61%
</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 dividend and the maximum offering price per share on 10/31/00.
(4.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 9
<PAGE>
FRANKLIN CONVERTIBLE
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(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 interest. One cannot invest directly in an index.
CLASS A (11/1/90 - 10/31/00)
[LINE GRAPH]
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
the Goldman Sachs Convertible 100 Bond Index from 11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Convertible Goldman Sachs Convertible 100
Securities Fund - Class A Bond Index
--------------------------------------------------------------------------------
<S> <C> <C>
11/01/1990 $9,421 $10,000
11/30/1990 $9,853 $10,560
12/31/1990 $10,298 $10,841
01/31/1991 $10,696 $11,432
02/28/1991 $11,358 $12,119
03/31/1991 $11,784 $12,389
04/30/1991 $12,059 $12,509
05/31/1991 $12,518 $12,967
06/30/1991 $12,102 $12,562
07/31/1991 $12,615 $12,904
08/31/1991 $13,068 $13,321
09/30/1991 $13,090 $13,285
10/31/1991 $13,218 $13,548
11/30/1991 $13,055 $13,193
12/31/1991 $13,761 $13,843
01/31/1992 $14,105 $14,512
02/29/1992 $14,329 $14,846
03/31/1992 $14,135 $14,674
04/30/1992 $14,186 $14,684
05/31/1992 $14,456 $14,731
06/30/1992 $14,218 $14,850
07/31/1992 $14,727 $15,370
08/31/1992 $14,542 $15,362
09/30/1992 $14,761 $15,676
10/31/1992 $14,940 $15,706
11/30/1992 $15,572 $16,068
12/31/1992 $15,996 $16,287
01/31/1993 $16,421 $16,657
02/28/1993 $16,360 $16,850
03/31/1993 $17,005 $17,418
04/30/1993 $16,972 $17,386
05/31/1993 $17,434 $17,821
06/30/1993 $17,621 $18,090
07/31/1993 $17,823 $18,045
08/31/1993 $18,470 $18,546
09/30/1993 $18,764 $18,569
10/31/1993 $19,162 $18,853
11/30/1993 $18,807 $18,785
12/31/1993 $19,281 $19,076
01/31/1994 $19,805 $19,545
02/28/1994 $19,733 $19,457
03/31/1994 $19,011 $18,876
04/30/1994 $18,723 $18,536
05/31/1994 $18,794 $18,591
06/30/1994 $18,772 $18,383
07/31/1994 $19,188 $18,771
08/31/1994 $19,654 $19,301
09/30/1994 $19,568 $19,038
10/31/1994 $19,578 $18,949
11/30/1994 $19,016 $18,283
12/31/1994 $18,966 $18,150
01/31/1995 $18,846 $18,509
02/28/1995 $19,240 $19,122
03/31/1995 $19,790 $19,686
04/30/1995 $20,325 $20,161
05/31/1995 $20,931 $20,739
06/30/1995 $21,539 $21,434
07/31/1995 $22,412 $22,092
08/31/1995 $22,623 $22,368
09/30/1995 $23,045 $22,630
10/31/1995 $22,549 $22,136
11/30/1995 $23,135 $23,020
12/31/1995 $23,554 $23,146
01/31/1996 $23,989 $23,806
02/29/1996 $24,367 $24,213
03/31/1996 $24,615 $24,547
04/30/1996 $25,208 $24,778
05/31/1996 $25,725 $25,221
06/30/1996 $25,320 $25,047
07/31/1996 $24,396 $24,213
08/31/1996 $25,267 $24,983
09/30/1996 $26,261 $25,800
10/31/1996 $26,318 $25,658
11/30/1996 $27,278 $26,523
12/31/1996 $27,400 $26,322
01/31/1997 $28,626 $26,793
02/28/1997 $28,329 $26,884
03/31/1997 $27,710 $26,677
04/30/1997 $27,775 $27,053
05/31/1997 $29,169 $28,319
06/30/1997 $30,116 $29,157
07/31/1997 $31,694 $30,889
08/31/1997 $31,933 $30,657
09/30/1997 $33,283 $32,196
10/31/1997 $32,232 $31,424
11/30/1997 $32,495 $31,317
12/31/1997 $32,955 $31,455
01/31/1998 $32,481 $31,326
02/28/1998 $33,269 $32,961
03/31/1998 $33,557 $34,177
04/30/1998 $33,966 $34,553
05/31/1998 $32,999 $33,620
06/30/1998 $32,322 $33,819
07/31/1998 $31,517 $33,068
08/31/1998 $28,068 $29,239
09/30/1998 $28,631 $29,803
10/31/1998 $29,030 $30,977
11/30/1998 $30,045 $32,359
12/31/1998 $30,654 $33,889
01/31/1999 $31,355 $34,964
02/28/1999 $29,897 $33,880
03/31/1999 $29,847 $34,479
04/30/1999 $31,141 $36,431
05/31/1999 $31,802 $36,781
06/30/1999 $32,929 $37,343
07/31/1999 $32,515 $37,224
08/31/1999 $32,800 $37,015
09/30/1999 $32,695 $36,171
10/31/1999 $33,166 $37,144
11/30/1999 $34,544 $38,329
12/31/1999 $37,139 $40,859
01/31/2000 $37,977 $41,182
02/29/2000 $40,349 $42,249
03/31/2000 $41,726 $43,372
04/30/2000 $41,071 $42,336
05/31/2000 $40,379 $41,582
06/30/2000 $42,006 $44,031
07/31/2000 $41,329 $43,499
08/31/2000 $44,726 $47,335
09/30/2000 $44,357 $46,019
10/31/2000 $43,285 $44,289
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +22.98%
5-Year +12.58%
10-Year +15.78%
Since Inception (4/15/87) +11.42%
</TABLE>
CLASS C (10/2/95 - 10/31/00)
[LINE CHART]
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
the Goldman Sachs Convertible 100 Bond Index from 10/2/95-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Convertible Goldman Sachs Convertible 100
Securities Fund - Class C Bond Index
-------------------------------------------------------------------------------
<S> <C> <C>
10/02/1995 $9,901 $10,000
10/31/1995 $9,708 $9,782
11/30/1995 $9,964 $10,172
12/31/1995 $10,125 $10,228
01/31/1996 $10,317 $10,520
02/29/1996 $10,468 $10,700
03/31/1996 $10,571 $10,847
04/30/1996 $10,822 $10,949
05/31/1996 $11,032 $11,145
06/30/1996 $10,854 $11,068
07/31/1996 $10,451 $10,700
08/31/1996 $10,812 $11,040
09/30/1996 $11,232 $11,401
10/31/1996 $11,245 $11,338
11/30/1996 $11,659 $11,720
12/31/1996 $11,697 $11,631
01/31/1997 $12,214 $11,840
02/28/1997 $12,079 $11,880
03/31/1997 $11,807 $11,788
04/30/1997 $11,827 $11,955
05/31/1997 $12,416 $12,514
06/30/1997 $12,803 $12,884
07/31/1997 $13,469 $13,650
08/31/1997 $13,564 $13,547
09/30/1997 $14,123 $14,227
10/31/1997 $13,667 $13,886
11/30/1997 $13,780 $13,839
12/31/1997 $13,957 $13,900
01/31/1998 $13,756 $13,843
02/28/1998 $14,071 $14,565
03/31/1998 $14,184 $15,103
04/30/1998 $14,348 $15,269
05/31/1998 $13,939 $14,857
06/30/1998 $13,643 $14,944
07/31/1998 $13,294 $14,613
08/31/1998 $11,826 $12,920
09/30/1998 $12,056 $13,170
10/31/1998 $12,217 $13,689
11/30/1998 $12,638 $14,299
12/31/1998 $12,888 $14,976
01/31/1999 $13,176 $15,450
02/28/1999 $12,554 $14,971
03/31/1999 $12,535 $15,236
04/30/1999 $13,061 $16,099
05/31/1999 $13,331 $16,253
06/30/1999 $13,798 $16,502
07/31/1999 $13,616 $16,449
08/31/1999 $13,717 $16,357
09/30/1999 $13,675 $15,984
10/31/1999 $13,864 $16,414
11/30/1999 $14,434 $16,938
12/31/1999 $15,501 $18,055
01/31/2000 $15,842 $18,198
02/29/2000 $16,837 $18,669
03/31/2000 $17,391 $19,166
04/30/2000 $17,106 $18,708
05/31/2000 $16,816 $18,375
06/30/2000 $17,476 $19,457
07/31/2000 $17,184 $19,222
08/31/2000 $18,580 $20,917
09/30/2000 $18,416 $20,336
10/31/2000 $17,959 $19,571
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C>
1-Year +27.23%
5-Year +12.86%
Since Inception (10/2/95) +12.20%
</TABLE>
*Source: Standard & Poor's Micropal. The Goldman Sachs Convertible 100 Bond
Index represents the 100 largest convertible bonds or convertible preferred
stocks, of at least $100 million issue size, with the greatest liquidity.
Monthly returns are calculated on an equal-dollar weighted basis.
10 Past performance does not guarantee future results.
<PAGE>
FRANKLIN EQUITY INCOME FUND
FUND CATEGORY
[PYRAMID CHART]
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
ECONOMIC OVERVIEW
The stock market switched gears during the 12 months ended October 31, 2000. In
the first part of the Fund's fiscal year, markets rebounded strongly, and growth
stocks outperformed their value counterparts. At its peak in March, the
technology-heavy Nasdaq Composite Index was up 70%, while most value indexes
were down approximately 10%. Toward the end of March, however, cracks surfaced
in "new economy" (technology-, Internet- and telecommunications-related) growth
stocks, whose valuations are often largely based on anticipated profits rather
than actual earnings. Investors began to question the valuations, growth rates
and even the long-term viability of many technology and Internet companies'
business models.
Many "old economy" (basic materials, industrial cyclicals, conventional
retailers) sectors also performed poorly. Investors acted upon concerns that the
Federal Reserve Board's (the Fed's) 125 basis points in interest rate hikes
during the period, coupled with a weakening euro and higher oil prices, would
cause a severe slowdown in the economy and corporate profits. Companies in
deeply cyclical sectors, which are especially vulnerable to a
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 48.
11
<PAGE>
TOP FIVE INVESTMENT SECTORS
Franklin Equity Income Fund
10/31/00
<TABLE>
<CAPTION>
% OF TOTAL
NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Finance 14.9%
Communications 10.9%
Electronic Technology 9.1%
Consumer Non-Durables 8.5%
Health Technology 8.3%
</TABLE>
slower economy, suffered the most. These included basic materials (papers,
chemicals and steel), capital goods and manufacturing companies. Sectors
dependent on consumer spending, such as retail, also fell. Bank stocks suffered
as well, amid worries about increasing credit problems of consumers and
corporations in a much slower economy.
Despite recent corrections, the overall valuation disparity between growth and
value issues widened to unprecedented proportions. On October 31, 2000, stocks
comprising the Russell 3000(R) Value Index were selling at approximately 27.5
times earnings, compared with 29.5 two years ago. Russell 3000 Growth Index
stocks, on the other hand, grew from a multiple of 48.6 times earnings two years
ago to approximately 60.9 at the end of the reporting period.(1)
PORTFOLIO NOTES
For the year ended October 31, 2000, Franklin Equity Income Fund - Class A
delivered a +14.05% cumulative total return, as shown in the Performance Summary
beginning on page 18, while the Russell 3000 Value Index, our benchmark,
increased 6.31%.(1) The Fund compared favorably with the Lipper Equity Income
Fund's total return of 6.06%.(2) The Fund's excellent performance can be
attributed largely to its overweight exposure to electric utilities, real estate
investment trusts (REITs), health technology, consumer non-durables and
insurance (finance) sectors. Many stocks in these sectors suited our highly
disciplined approach to value investing, which focuses on stocks that are
selling at
(1.) Source: Standard and Poor's Micropal. The Russell 3000 Value Index measures
the performance of those Russell 3000 Index companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 3000 Growth Index
measures the performance of those Russell 3000 Index companies with higher
price-to-book ratios and higher forecasted growth values. The indexes are
unmanaged and include reinvested dividends. One cannot invest directly in an
index.
(2.) Source: Lipper Analytical Services, Inc. Lipper Analytical Services 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
does not guarantee future results.
12
<PAGE>
attractive prices according to measurements such as relative dividend yield,
book value, revenues and normalized earnings. In addition, such stocks'
non-cyclical and defensive nature along with their emphasis on domestic
operations benefited the Fund during the reporting period's volatile market
environment. Our underweight allocations in technology and basic materials
stocks, which did not perform well during the period, also contributed to the
Fund's relative performance.
Our strategy of investing in high dividend-yielding stocks also contributed to
the Fund's history of less volatile returns. As of October 31, 2000, Franklin
Equity Income Fund placed in the top 8% of Lipper Equity Income Funds Objective
Average's universe of 113 funds in terms of lowest volatility over the past five
years, while its 2.60% distribution yield compared with 1.44% for Lipper's
average equity income fund category of 190 funds for the same period.(2)
As mentioned earlier, our overweight exposure in utilities and REITs proved
beneficial to the Fund's performance. Utilities stocks were among the stock
market's best performers during the period after underperforming the S&P 500
since 1993. The combination of extremely attractive dividend yields, industry
consolidation and earnings growth were largely responsible for their improved
relative performance. REITs were selling at historically low valuations. Many
were selling below our estimate of their net asset values and offered, on
average, yields greater than 7%. We continue to believe that both sectors offer
excellent total return potential and downside risk protection. As of October 31,
2000, utilities represented 7.1% of the Fund's total net assets, and REITs 5.9%.
The health technology and consumer non-durable sectors also generated superior
returns. Many health care industry leaders including Johnson & Johnson, Merck,
Abbott Laboratories, Bristol-Myers Squibb and American Home Products traded at
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.
13
<PAGE>
TOP 10 HOLDINGS
Franklin Equity Income Fund
10/31/00
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
SECTOR NET ASSETS
--------------------------------------------------------------------------------
<S> <C>
Verizon Communications 3.2%
Communications
SBC Communications Inc. 3.2%
Communications
Abbott Laboratories 2.2%
Health Technology
PerkinElmer Inc. 2.1%
Electronic Technology
Bristol-Myers Squibb Co. 2.0%
Health Technology
Fleet Boston Financial Corp. 1.8%
Finance
Conoco Inc., B 1.7%
Energy Minerals
Electronic Data Systems Corp. 1.7%
Technology Services
Emerson Electric Co. 1.6%
Producer Manufacturing
Lincoln National Corp. 1.6%
Finance
</TABLE>
substantial discounts, compared to their industry peers during the period,
providing us with what we believed to be exceptional investment opportunities.
We also initiated new positions in consumer non-durable names such as Procter &
Gamble, Kimberly-Clark and R.J. Reynolds. These stocks have attractive
valuations and high dividend yields, and we expect them to outperform in a
slowing economic environment. During the period, the Fund benefited from
Unilever's acquisition of Fund holding Bestfoods at a premium to its stock
price. As of October 31, 2000, health technology represented 8.3% of the Fund's
total net assets, and consumer non-durables 8.5%.
Believing telecommunications companies possessed exciting growth prospects and
their stocks traded at reasonable valuations, we maintained a significant
weighting in the sector. The Fund's two largest holdings -- Verizon
Communications and SBC Communications -- are telecommunications companies.
Demand for telecommunications services is accelerating in response to the
Internet's growth, yet most of these companies were selling for less than 25
times estimated earnings, compared with multiples in excess of 50 times earnings
for most technology companies, by the end of the year under review. In our
opinion, leaders in the field will benefit from their smaller competitors'
inability to raise more capital in this competitive market. As of October 31,
2000, communications represented 10.9% of the Fund's total net assets.
We took advantage of our decision last year to relax restrictive minimum
dividend yield requirements and increase the Fund's exposure to convertible
securities. This change gave us the latitude to invest in sectors such as
technology, where companies with higher growth rates choose to pay out little or
no dividends because they need to reinvest more capital back into their busi-
14
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Equity Income Fund
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-------------------------------------------------
MONTH CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
November 4.3 cents 3.17 cents 3.12 cents
December 4.3 cents 3.15 cents 2.96 cents
January 4.3 cents 3.15 cents 2.96 cents
February 4.3 cents 3.15 cents 2.96 cents
March 4.3 cents 3.27 cents 3.14 cents
April 4.3 cents 3.27 cents 3.14 cents
May 4.3 cents 3.27 cents 3.14 cents
June 4.3 cents 3.33 cents 3.27 cents
July 4.3 cents 3.33 cents 3.27 cents
August 4.3 cents 3.33 cents 3.27 cents
September 4.3 cents 3.26 cents 3.18 cents
October 4.3 cents 3.26 cents 3.18 cents
--------------------------------------------------------------------------------
TOTAL 51.6 CENTS 38.94 CENTS 37.59 CENTS
</TABLE>
nesses. In general, we were looking for entrenched industry leaders in rapidly
growing markets that still made sense from our valuation standpoint. With these
criteria in mind, we were able to uncover some attractive technology investments
that met our investment parameters. We also remained diligent in adding to or
selling existing technology positions depending on our assessment of their
intrinsic values and long-term growth rates. During the period, we purchased
stocks in LSI and Vitesse Semiconductor. We also trimmed our position and took a
profit in PerkinElmer, one of our best-performing stocks. As of October 31,
2000, convertible stocks and bonds grew from 9.0% to 10.9% of the Fund's total
net assets, while below market dividend-yielding stocks represented 6.2%.
15
<PAGE>
Unfortunately, we made our share of mistakes during the Fund's past fiscal year
as well. For example, our investment in AT&T did not meet our expectations.
AT&T's long distance business, which represented approximately half of corporate
profits, declined at a faster rate than we anticipated. Moreover, their foray
into cable has proven to be more costly and difficult than we ever imagined. In
response, we pared back our position in AT&T during the period. The basic
materials sector, which was a strong performer last year, also impaired the
Fund's performance this year. These notoriously cyclical stocks started to
decline as investors feared that the combination of the Fed tightening, a weak
euro and high oil prices would stunt earnings growth. We took a proactive role
in paring down our exposure to this group by reducing our holdings in several
chemical and paper companies.
Looking forward, we anticipate continued high levels of financial market
volatility. Within such an environment, we expect to find numerous exciting
investment opportunities, as many stocks of high-quality, dividend-paying
companies will still be selling at bargain prices. Such stocks offered at
depressed levels can provide substantial upside potential even in a slowing
16
<PAGE>
economy. In addition, if growth stocks continue to tumble and investors seek
safety and better value elsewhere, high yielding stocks can be excellent
performers in the years ahead. Thus, we believe the Fund's relative
dividend-yield discipline positions us well to take advantage of such future
market trends.
/s/ FRANK M. FELICELLI
Frank M. Felicelli
/s/ DEREK M. TANER
Derek M. Taner
Portfolio Management Team
Franklin Equity Income Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
--------------------------------------------------------------------------------
17
<PAGE>
FRANKLIN EQUITY
INCOME FUND
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
One-Year Total Return +14.05%
Net Asset Value (NAV) $19.82 (10/31/00) $19.20 (10/31/99)
Change in NAV +$0.62
Distributions (11/1/99-10/31/00) Dividend Income $0.5160
Short-Term Capital Gain $0.0608
Long-Term Capital Gain $1.2177
---------------------------------
Total $1.7945
CLASS B
One-Year Total Return +13.17%
Net Asset Value (NAV) $19.76 (10/31/00) $19.16 (10/31/99)
Change in NAV +$0.60
Distributions (11/1/99-10/31/00) Dividend Income $0.3894
Short-Term Capital Gain $0.0608
Long-Term Capital Gain $1.2177
---------------------------------
Total $1.6679
CLASS C
One-Year Total Return +13.26%
Net Asset Value (NAV) $19.77 (10/31/00) $19.14 (10/31/99)
Change in NAV +$0.63
Distributions (11/1/99-10/31/00) Dividend Income $0.3759
Short-Term Capital Gain $0.0608
Long-Term Capital Gain $1.2177
---------------------------------
Total $1.6544
</TABLE>
Franklin Equity Income Fund paid distributions derived from long-term
capital gains of $1.2177 per share in December 1999. The Fund hereby designates
such distributions as capital gain dividends per Internal Revenue Code
Section 852(b)(3).
CLASS A: Subject to the current, maximum 5.75% initial sales charge. Prior to
8/3/98, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, 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: 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.
18 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/15/88)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +12.53% +82.49% +291.81% +351.34%
Average Annual Total Return(2) +6.06% +11.45% +13.96% +12.23%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +11.71% +10.43%
Average Annual Total Return(2) +7.71% +3.65%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (10/2/95)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +11.75% +76.33% +76.33%
Average Annual Total Return(2) +9.64% +11.79% +11.79%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A B C
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution Rate(3) 2.45% 1.98% 1.91%
30-Day Standardized Yield(4) 2.49% 1.94% 1.92%
</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 dividend and the maximum offering price (net asset value for Class B)
per share on 10/31/00.
(4.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 19
<PAGE>
FRANKLIN EQUITY
INCOME 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(s), 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 inflation.
CLASS A (11/1/90 - 10/31/00)
[LINE CHART]
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 the Russell
3000 Value Index, the Lipper Equity Income Funds Average and CPI from
11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Equity Russell 3000 Lipper Equity CPI
Income Fund - Value Index Income Funds
Class A Average
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11/01/1990 $9,421 $10,000 $10,000 $10,000
11/30/1990 $10,025 $10,689 $10,606 $10,022
12/31/1990 $10,136 $10,964 $10,843 $10,022
01/31/1991 $10,506 $11,479 $11,276 $10,082
02/28/1991 $11,153 $12,266 $12,002 $10,097
03/31/1991 $11,298 $12,482 $12,245 $10,112
04/30/1991 $11,382 $12,575 $12,321 $10,128
05/31/1991 $11,850 $13,050 $12,831 $10,158
06/30/1991 $11,361 $12,497 $12,361 $10,187
07/31/1991 $11,822 $13,007 $12,846 $10,203
08/31/1991 $12,173 $13,254 $13,140 $10,232
09/30/1991 $12,199 $13,164 $13,129 $10,277
10/31/1991 $12,400 $13,377 $13,320 $10,293
11/30/1991 $12,137 $12,700 $12,851 $10,323
12/31/1991 $12,995 $13,749 $13,860 $10,330
01/31/1992 $12,927 $13,844 $13,851 $10,345
02/29/1992 $13,111 $14,205 $14,091 $10,383
03/31/1992 $12,947 $14,003 $13,923 $10,435
04/30/1992 $13,568 $14,550 $14,312 $10,450
05/31/1992 $13,701 $14,644 $14,429 $10,465
06/30/1992 $13,803 $14,527 $14,298 $10,502
07/31/1992 $14,454 $15,086 $14,797 $10,524
08/31/1992 $14,222 $14,638 $14,559 $10,554
09/30/1992 $14,141 $14,846 $14,682 $10,583
10/31/1992 $14,005 $14,886 $14,655 $10,621
11/30/1992 $14,394 $15,409 $15,040 $10,635
12/31/1992 $14,717 $15,799 $15,315 $10,628
01/31/1993 $15,057 $16,288 $15,531 $10,680
02/28/1993 $15,500 $16,819 $15,851 $10,717
03/31/1993 $15,911 $17,327 $16,322 $10,755
04/30/1993 $15,882 $17,090 $16,152 $10,785
05/31/1993 $16,114 $17,449 $16,391 $10,800
06/30/1993 $16,247 $17,815 $16,539 $10,815
07/31/1993 $16,414 $18,024 $16,638 $10,815
08/31/1993 $17,009 $18,680 $17,232 $10,846
09/30/1993 $17,120 $18,747 $17,215 $10,868
10/31/1993 $17,381 $18,775 $17,421 $10,913
11/30/1993 $17,201 $18,379 $17,188 $10,920
12/31/1993 $17,341 $18,746 $17,480 $10,920
01/31/1994 $17,746 $19,451 $17,990 $10,950
02/28/1994 $17,255 $18,844 $17,546 $10,987
03/31/1994 $16,528 $18,130 $16,853 $11,025
04/30/1994 $16,657 $18,462 $17,091 $11,040
05/31/1994 $16,866 $18,652 $17,280 $11,048
06/30/1994 $16,828 $18,203 $17,018 $11,085
07/31/1994 $17,273 $18,745 $17,486 $11,115
08/31/1994 $17,956 $19,304 $18,029 $11,160
09/30/1994 $17,608 $18,709 $17,687 $11,190
10/31/1994 $17,721 $18,906 $17,804 $11,198
11/30/1994 $17,219 $18,142 $17,175 $11,212
12/31/1994 $17,284 $18,385 $17,318 $11,212
01/31/1995 $17,774 $18,881 $17,704 $11,257
02/28/1995 $18,123 $19,623 $18,297 $11,302
03/31/1995 $18,383 $20,020 $18,721 $11,339
04/30/1995 $18,786 $20,648 $19,156 $11,377
05/31/1995 $19,178 $21,476 $19,773 $11,400
06/30/1995 $19,283 $21,811 $19,966 $11,422
07/31/1995 $19,533 $22,575 $20,442 $11,422
08/31/1995 $19,718 $22,929 $20,658 $11,452
09/30/1995 $20,406 $23,709 $21,346 $11,475
10/31/1995 $20,232 $23,403 $21,135 $11,513
11/30/1995 $20,915 $24,564 $22,082 $11,505
12/31/1995 $21,732 $25,195 $22,667 $11,497
01/31/1996 $22,245 $25,921 $23,229 $11,565
02/29/1996 $22,040 $26,136 $23,392 $11,602
03/31/1996 $22,210 $26,591 $23,703 $11,662
04/30/1996 $22,269 $26,750 $23,935 $11,707
05/31/1996 $22,439 $27,117 $24,296 $11,730
06/30/1996 $22,792 $27,106 $24,362 $11,737
07/31/1996 $21,966 $26,038 $23,519 $11,759
08/31/1996 $22,321 $26,821 $24,093 $11,781
09/30/1996 $22,861 $27,851 $24,972 $11,819
10/31/1996 $23,332 $28,849 $25,562 $11,857
11/30/1996 $24,402 $30,885 $27,003 $11,879
12/31/1996 $24,499 $30,632 $26,841 $11,879
01/31/1997 $25,144 $32,010 $27,783 $11,917
02/28/1997 $25,645 $32,465 $28,222 $11,954
03/31/1997 $25,205 $31,329 $27,364 $11,984
04/30/1997 $25,372 $32,557 $28,169 $11,999
05/31/1997 $26,707 $34,452 $29,792 $11,991
06/30/1997 $27,495 $35,957 $30,888 $12,006
07/31/1997 $28,808 $38,542 $32,843 $12,020
08/31/1997 $28,365 $37,359 $31,848 $12,043
09/30/1997 $29,820 $39,638 $33,463 $12,073
10/31/1997 $29,025 $38,532 $32,479 $12,103
11/30/1997 $30,309 $40,108 $33,554 $12,096
12/31/1997 $31,165 $41,299 $34,366 $12,081
01/31/1998 $30,948 $40,700 $34,304 $12,104
02/28/1998 $32,137 $43,411 $36,184 $12,127
03/31/1998 $33,836 $45,981 $37,848 $12,150
04/30/1998 $33,393 $46,280 $37,776 $12,172
05/31/1998 $32,886 $45,502 $37,225 $12,194
06/30/1998 $32,827 $46,008 $37,396 $12,209
07/31/1998 $31,900 $44,945 $36,304 $12,224
08/31/1998 $29,365 $38,226 $31,933 $12,238
09/30/1998 $30,912 $40,416 $33,699 $12,253
10/31/1998 $32,205 $43,386 $35,768 $12,282
11/30/1998 $33,244 $45,339 $37,252 $12,282
12/31/1998 $33,249 $46,871 $38,120 $12,275
01/31/1999 $32,617 $47,134 $37,850 $12,304
02/28/1999 $32,053 $46,271 $37,127 $12,319
03/31/1999 $32,469 $47,132 $37,866 $12,356
04/30/1999 $35,037 $51,529 $40,637 $12,446
05/31/1999 $35,421 $51,112 $40,239 $12,446
06/30/1999 $35,843 $52,625 $41,458 $12,446
07/31/1999 $34,868 $51,104 $40,356 $12,484
08/31/1999 $34,033 $49,213 $39,306 $12,514
09/30/1999 $33,091 $47,545 $37,884 $12,574
10/31/1999 $33,784 $50,012 $39,213 $12,596
11/30/1999 $33,418 $49,662 $38,931 $12,604
12/31/1999 $33,514 $49,985 $39,406 $12,604
01/31/2000 $32,474 $48,376 $37,845 $12,642
02/29/2000 $30,746 $45,221 $35,575 $12,716
03/31/2000 $33,676 $50,336 $39,022 $12,821
04/30/2000 $34,028 $49,807 $38,967 $12,828
05/31/2000 $34,723 $50,246 $39,501 $12,844
06/30/2000 $33,958 $48,206 $38,624 $12,910
07/31/2000 $34,270 $48,876 $38,802 $12,940
08/31/2000 $36,690 $51,559 $41,083 $12,940
09/30/2000 $37,238 $51,982 $40,931 $13,007
10/31/2000 $38,529 $53,162 $41,582 $13,030
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +7.50%
5-Year +12.41%
10-Year +14.44%
Since Inception (3/15/88) +12.45%
</TABLE>
CLASS B (1/1/99 - 10/31/00)
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 the Russell
3000 Value Index, the Lipper Equity Income Funds Average and CPI from
1/1/99-10/31/00.
[LINE CHART]
<TABLE>
<CAPTION>
Date Franklin Equity Russell 3000 Lipper Equity CPI
Income Fund - Value Index Income Funds
Class B Average
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
01/01/1999 $10,000 $10,000 $10,000 $10,000
01/31/1999 $9,805 $10,056 $9,929 $10,024
02/28/1999 $9,629 $9,872 $9,739 $10,036
03/31/1999 $9,748 $10,056 $9,933 $10,066
04/30/1999 $10,513 $10,994 $10,660 $10,140
05/31/1999 $10,617 $10,905 $10,556 $10,140
06/30/1999 $10,732 $11,228 $10,876 $10,140
07/31/1999 $10,435 $10,903 $10,586 $10,170
08/31/1999 $10,179 $10,500 $10,311 $10,194
09/30/1999 $ 9,885 $10,144 $9,938 $10,243
10/31/1999 $10,087 $10,670 $10,287 $10,262
11/30/1999 $9,966 $10,595 $10,213 $10,268
12/31/1999 $10,000 $10,664 $10,337 $10,268
01/31/2000 $9,677 $10,321 $9,928 $10,299
02/29/2000 $9,160 $9,648 $9,332 $10,360
03/31/2000 $10,023 $10,739 $10,236 $10,444
04/30/2000 $10,116 $10,626 $10,222 $10,451
05/31/2000 $10,317 $10,720 $10,362 $10,463
06/30/2000 $10,084 $10,285 $10,132 $10,518
07/31/2000 $10,171 $10,428 $10,179 $10,542
08/31/2000 $10,880 $11,000 $10,777 $10,542
09/30/2000 $11,043 $11,090 $10,737 $10,597
10/31/2000 $11,014 $11,342 $10,908 $10,615
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
<S> <C>
1-Year +9.17%
Since Inception (1/1/99) +5.41%
</TABLE>
20 Past performance does not guarantee future results.
<PAGE>
CLASS C (10/2/95-10/31/02)
[LINE CHART]
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 the Russell
3000 Value Index, the Lipper Equity Income Funds Average and CPI from
10/2/95-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Equity Russell 3000 Lipper Equity CPI
Income Fund - Value Index Income Funds
Class C Average
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/02/1995 $9,903 $10,000 $10,000 $10,000
10/31/1995 $9,843 $9,871 $9,901 $10,033
11/30/1995 $10,184 $10,361 $10,345 $10,026
12/31/1995 $10,548 $10,627 $10,619 $10,019
01/31/1996 $10,800 $10,933 $10,882 $10,078
02/29/1996 $10,697 $11,024 $10,958 $10,110
03/31/1996 $10,775 $11,215 $11,104 $10,163
04/30/1996 $10,800 $11,283 $11,213 $10,203
05/31/1996 $10,872 $11,437 $11,382 $10,222
06/30/1996 $11,040 $11,433 $11,413 $10,228
07/31/1996 $10,634 $10,982 $11,018 $10,247
08/31/1996 $10,794 $11,313 $11,287 $10,267
09/30/1996 $11,049 $11,747 $11,699 $10,300
10/31/1996 $11,266 $12,168 $11,975 $10,333
11/30/1996 $11,771 $13,027 $12,650 $10,352
12/31/1996 $11,815 $12,920 $12,574 $10,352
01/31/1997 $12,119 $13,501 $13,016 $10,386
02/28/1997 $12,352 $13,693 $13,221 $10,418
03/31/1997 $12,140 $13,214 $12,819 $10,444
04/30/1997 $12,208 $13,732 $13,196 $10,456
05/31/1997 $12,839 $14,531 $13,956 $10,450
06/30/1997 $13,206 $15,166 $14,470 $10,463
07/31/1997 $13,830 $16,257 $15,386 $10,475
08/31/1997 $13,602 $15,758 $14,920 $10,495
09/30/1997 $14,301 $16,719 $15,676 $10,521
10/31/1997 $13,903 $16,252 $15,215 $10,548
11/30/1997 $14,510 $16,917 $15,719 $10,541
12/31/1997 $14,912 $17,419 $16,099 $10,529
01/31/1998 $14,799 $17,167 $16,070 $10,549
02/28/1998 $15,359 $18,310 $16,951 $10,569
03/31/1998 $16,163 $19,394 $17,731 $10,589
04/30/1998 $15,933 $19,520 $17,697 $10,608
05/31/1998 $15,681 $19,192 $17,439 $10,627
06/30/1998 $15,650 $19,405 $17,519 $10,640
07/31/1998 $15,198 $18,957 $17,007 $10,652
08/31/1998 $13,979 $16,123 $14,960 $10,665
09/30/1998 $14,707 $17,047 $15,787 $10,678
10/31/1998 $15,316 $18,300 $16,756 $10,704
11/30/1998 $15,802 $19,123 $17,452 $10,704
12/31/1998 $15,787 $19,770 $17,858 $10,697
01/31/1999 $15,485 $19,880 $17,731 $10,723
02/28/1999 $15,207 $19,516 $17,393 $10,736
03/31/1999 $15,395 $19,879 $17,739 $10,768
04/30/1999 $16,606 $21,734 $19,037 $10,847
05/31/1999 $16,770 $21,558 $18,851 $10,847
06/30/1999 $16,960 $22,196 $19,422 $10,847
07/31/1999 $16,488 $21,555 $18,905 $10,879
08/31/1999 $16,083 $20,757 $18,414 $10,905
09/30/1999 $15,626 $20,054 $17,747 $10,958
10/31/1999 $15,944 $21,094 $18,370 $10,977
11/30/1999 $15,762 $20,947 $18,238 $10,984
12/31/1999 $15,795 $21,083 $18,460 $10,984
01/31/2000 $15,291 $20,404 $17,729 $11,017
02/29/2000 $14,472 $19,074 $16,666 $11,082
03/31/2000 $15,844 $21,231 $18,281 $11,173
04/30/2000 $16,000 $21,008 $18,255 $11,179
05/31/2000 $16,317 $21,193 $18,505 $11,193
06/30/2000 $15,947 $20,332 $18,094 $11,251
07/31/2000 $16,085 $20,615 $18,177 $11,277
08/31/2000 $17,206 $21,747 $19,246 $11,277
09/30/2000 $17,462 $21,925 $19,175 $11,335
10/31/2000 $18,059 $22,423 $19,480 $11,355
</TABLE>
AVERAGE ANNUAL TOTAL
RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C>
1-Year +11.16%
5-Year +12.68%
Since Inception (10/2/95) +12.33%
</TABLE>
*Source: Standard and Poor's Micropal. The Russell 3000 Value Index measures the
performance of those Russell 3000 Index companies with lower price-to-book
ratios and lower forecasted growth values. The stocks in this index are also
members of either the Russell 1000 Value or the Russell 2000 Value Indexes.
**Source: Lipper Analytical Services, Inc. The Lipper Equity Income Funds
Average comprised 190 funds as of 10/31/00. 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 does not guarantee future results. 21
<PAGE>
FUND CATEGORY
[PYRAMID CHART]
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
At the beginning of the year under review, investors continued to lose their
optimism that interest rates would head lower, mostly because of upward
revisions of global economic growth forecasts but also partly due to the
potential negative effect of higher oil prices on inflation. The improved
economic outlook was expected to result in higher commodity prices, capacity
utilization rates and employment rates, all of which would add to inflationary
pressures and tighter monetary policy stances by the world's central banks.
Thus, the positive trend in global growth led to the consensus view that the
industrial economies, except perhaps for Japan, had reached the bottom of their
respective interest-rate cycles. However, during the second half of the period,
inflation expectations improved as oil prices somewhat stabilized, albeit at
higher levels, and economic data began to indicate growth rates were converging
toward more sustainable levels going forward.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 55.
22
<PAGE>
During the 12 months ended October 31, 2000, the J.P. Morgan Global Government
Bond Index (JPM GGBI), a benchmark index for global government bonds, posted a
positive return of 5.20% in local currency terms.(1) However, a stronger U.S.
dollar during the period resulted in lower returns for the global index in
U.S.-dollar terms, and the JPM GGBI fell 4.65% by this measure. The J.P. Morgan
U.S. Government Bond Index, a benchmark index for U.S. Treasuries, posted a
positive 8.40% return for the period.(2)
The U.S. Treasury yield curve became inverted with shorter-term bonds offering
higher yields than longer-term bonds during the reporting period. Short-term
interest rates moved upward as the Federal Reserve Board increased the federal
funds target rate and long-term rates moved downward due to the U.S. Treasury's
30-year Treasury bond buyback program. The latter resulted in generally positive
returns for the U.S. bond market, as mentioned earlier.
European bonds rose 4.65% in local currency terms, as all European bond markets
offered positive returns. The U.K. index rose 6.29% despite the Bank of
England's interest-rate increases.(3) The Euroland (the 11 countries making up
the European Monetary Union or EMU) bond market also posted positive returns,
but principally due to interest payments obtained from holding such bonds, which
offset their price
(1.) Source: Standard and Poor's Micropal. The J.P. Morgan Global Government
Bond Index comprises 13 markets, including Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the U.S.
Each country's weight is determined by the total market capitalization in $US of
all the bonds in that country's traded index. The index includes only actively
traded, fixed-rate bonds with a remaining maturity of one year or longer. The
index is unhedged and expressed in terms of $US.
(2.) Source: Standard and Poor's Micropal. The J.P. Morgan U.S. Government Bond
Index includes only actively traded fixed-rate bonds with a remaining maturity
of one year or longer. As of October 31, 2000, the index included 103 issues
with a market value of US$1,570 billion.
(3.) Source: J.P. Morgan, Government Bond Index Monitor.
23
<PAGE>
declines. The Euroland benchmark yield curve flattened during the period, as
short-term rates increased due to the European Central Bank's raising its
reference interest rate and longer-term rates staying relatively unchanged. The
EMU bond index rose 4.20% in euro terms, also despite monetary policy
tightening, in this case by the European Central Bank, as German, Italian,
French and Spanish bonds increased in value during the year under review.(3)
Denmark performed in line with the Euroland countries, while Sweden outperformed
all Euroland bond markets, rising 7.75% as a result of the government's
commitment to buy back debt with the fiscal surpluses in excess of the annual
budget expectations.(3)
Elsewhere, the Japanese index climbed 1.73% for the 12-month period, despite a
25 basis point (0.25%) increase in short-term interest rates by the Bank of
Japan in August.(3) The dollar-bloc bond markets (Australia, Canada and New
Zealand) performed favorably as inflation concerns were less severe in these
countries, partly as a result of rising commodity prices, which supported their
currencies and helped contain inflation. Although they outperformed the global
bond markets in general, only New Zealand outperformed the U.S. in local
currency terms.
Emerging market bond prices rose during the 12-month period, mostly as a result
of higher commodity prices and continued strength in the U.S. equity market. The
former improved export revenues and, hence, the external debt repayment capacity
of the issuing countries. The latter reduced the level of risk aversion among
investors and thus increased their appetite for emerging market bonds. As a
result, the J.P. Morgan Emerging
24
<PAGE>
COUNTRY DISTRIBUTION
Franklin Global Government
Income Fund
Based on Total Net Assets
<TABLE>
<CAPTION>
COUNTRY 10/31/00 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C>
U.S. 18.9% 20.8%
Brazil 10.3% 8.0%
Germany 8.4% 12.2%
Canada 7.4% 6.4%
Venezuela 7.2% 5.3%
Italy 4.8% 7.6%
Mexico 4.4% 4.6%
U.K. 4.3% 4.0%
Australia 4.2% 4.1%
Netherlands 3.7% 0.0%
France 3.6% 0.0%
South Korea 3.6% 0.0%
Argentina 3.5% 5.5%
Sweden 3.3% 3.3%
Turkey 2.7% 3.9%
Spain 2.6% 7.1%
Denmark 2.2% 2.2%
New Zealand 2.1% 4.4%
Belgium 2.0% 0.0%
Panama 0.8% 0.6%
</TABLE>
Market Bond Global Index increased 18.18% during the period.(4) Bond prices of
all countries in the index rose, except for those of Ivory Coast, Columbia,
Nigeria and the Philippines. Russian bonds were the best performers, rising
114.75%, followed by those of Ecuador, Algeria and Croatia.(3) Prices of Russian
bonds recovered as a result of improved credit fundamentals and the successful
restructuring of defaulted bonds as the government reached an agreement with
bondholders through London Club negotiations. Ecuadorian bonds rebounded as well
upon the restructuring of its defaulted debt. Brazilian bonds performed strongly
as the economy continued to improve following the implementation of economic
measures designed to stabilize the country's fiscal accounts.
PORTFOLIO NOTES
During the period under review, Franklin Global Government Income Fund attempted
to maximize its return by allocating approximately 70%-75% of its assets to
intermediate- and long-term global investment-grade bonds and approximately
25%-30% of its assets to the highest quality and most liquid, below
investment-grade bonds available in the emerging markets. The Fund's managers
believed that this combination of bonds offered the opportunity for higher
returns at the cost of only modestly higher volatility. The Fund's allocation to
emerging markets added positively to its performance for the period, as emerging
market country bonds outperformed higher-quality industrial market bonds over
the 12 months.
(4.) Source: Standard and Poor's Micropal. The J.P. Morgan Emerging Market Bond
Global Index (EMBI) tracks total returns for external debt instruments in the
emerging markets. Included in the index are U.S. dollar and other external
currency denominated Brady bonds, loans, Eurobonds and local market instruments.
25
<PAGE>
DIVIDEND DISTRIBUTIONS
Franklin Global Government Income Fund
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-------------------------------------------
MONTH CLASS A CLASS C ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C> <C> <C>
November 5 cents 4.71 cents 5.08 cents
December 5 cents 4.67 cents 5.08 cents
January 5 cents 4.67 cents 5.11 cents
February 5 cents 4.67 cents 5.07 cents
March 5 cents 4.71 cents 5.08 cents
April 5 cents 4.71 cents 5.07 cents
May 5 cents 4.71 cents 5.07 cents
June 5 cents 4.67 cents 5.09 cents
July 5 cents 4.67 cents 5.08 cents
August 5 cents 4.67 cents 5.07 cents
September 5 cents 4.67 cents 5.08 cents
October 5 cents 4.67 cents 5.07 cents
--------------------------------------------------------------------------------
TOTAL 60 CENTS 56.20 CENTS 60.95 CENTS
</TABLE>
The Fund's overall allocation changed slightly during the period. On October 31,
2000, the Fund had 26.3% of total net assets in North America, down slightly
from 27.2% at the beginning of the period, principally due to a smaller U.S.
position, which declined from 20.8% on October 31, 1999, to 18.9% at end of the
period. While the overall European allocation fell to 34.9% at the end of the
period, from 36.4% on October 31, 1999, we made quite a few changes within
Europe during the period. We initiated new positions in Belgium, France, the
Netherlands, while decreasing holdings in Germany, Italy and Spain. Elsewhere,
the Fund also reduced the allocation to New Zealand and added to Brazil and
Venezuela. We initiated a position in South Korea, which stood at 3.6% of total
net assets at period-end.
26
<PAGE>
Looking forward, we believe that global inflation will likely be quite tame in
the period ahead and that global economic growth should continue to be slightly
higher than historical averages. This is an ideal environment for high-quality
bonds, which makes the management team positive for the Fund's outlook going
forward. We believe that the Fund's emerging market positions in particular will
continue to offer attractive return opportunities for the portfolio.
/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, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
--------------------------------------------------------------------------------
27
<PAGE>
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
One-Year Total Return -1.93%
Net Asset Value (NAV) $6.98 (10/31/00) $7.72 (10/31/99)
Change in NAV -$0.74
Distributions (11/1/99-10/31/00) Dividend Income $0.6000
CLASS C
One-Year Total Return -2.43%
Net Asset Value (NAV) $6.99 (10/31/00) $7.73 (10/31/99)
Change in NAV -$0.74
Distributions (11/1/99-10/31/00) Dividend Income $0.5620
ADVISOR CLASS
One-Year Total Return -1.94%
Net Asset Value (NAV) $6.98 (10/31/00) $7.73 (10/31/99)
Change in NAV -$0.75
Distributions (11/1/99-10/31/00) Dividend Income $0.6095
</TABLE>
CLASS A: Subject to the current, maximum 4.25% initial sales charge. Prior to
7/1/94, Fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective 5/1/94, the Fund implemented a Rule 12b-1
plan, which affects subsequent performance.*
CLASS C: 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.*
*Past expense reductions by the Fund's manager increased the Fund's total
return.
28 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/15/88)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +0.01% +26.17% +81.80% +116.65%
Average Annual Total Return(2) -4.19% +3.84% +5.70% +5.99%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 5-YEAR (5/1/95)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -0.49% +23.02% +30.68%
Average Annual Total Return(2) -2.42% +4.03% +4.87%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(3) 1-YEAR 5-YEAR 10-YEAR (3/15/88)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +0.15% +27.76% +84.08% +119.38%
Average Annual Total Return(2) +0.15% +5.02% +6.29% +6.46%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A C ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution Rate(4) 8.23% 7.94% 8.72%
30-Day Standardized Yield(5) 6.74% 6.43% 7.17%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or Rule 12b-1 plans. Performance quotations for this
class reflect the following methods of calculation: (a) For periods prior to
1/2/97, a restated figure is used based upon the Fund's Class A performance,
excluding the effect of Class A's maximum initial sales charge and including the
effect of the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an
actual Advisor Class figure is used reflecting a deduction of all charges and
fees applicable to that class. Since 1/2/97 (commencement of sales), the
cumulative and average annual total returns of Advisor Class shares were +9.57%
and +2.47%.
(4.) Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (net asset value for Advisor
Class) per share on 10/31/00.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
--------------------------------------------------------------------------------
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.
-------------------------------------------------------------------------------
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 29
<PAGE>
FRANKLIN GLOBAL
GOVERNMENT INCOME 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(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 interest. One cannot invest directly in an index.
CLASS A (11/1/90 - 10/31/00)
[LINE CHART]
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
the J.P. Morgan Global Government Bond Index from 11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Global JP Morgan Global
Government Income Government Bond Index
Fund - A
-------------------------------------------------------
<S> <C> <C>
11/01/90 $9,576 $10,000
11/30/90 $9,745 $10,176
12/31/90 $9,821 $10,289
01/31/91 $9,941 $10,523
02/28/91 $10,222 $10,532
03/31/91 $10,031 $10,202
04/30/91 $10,187 $10,229
05/31/91 $10,310 $10,335
06/30/91 $10,226 $10,197
07/31/91 $10,431 $10,412
08/31/91 $10,492 $10,628
09/30/91 $10,771 $11,016
10/31/91 $10,919 $11,125
11/30/91 $10,904 $11,306
12/31/91 $11,219 $11,817
01/31/92 $11,192 $11,645
02/29/92 $11,202 $11,612
03/31/92 $11,188 $11,504
04/30/92 $11,295 $11,600
05/31/92 $11,538 $11,930
06/30/92 $11,523 $12,255
07/31/92 $11,620 $12,526
08/31/92 $11,539 $12,859
09/30/92 $11,016 $12,847
10/31/92 $11,218 $12,525
11/30/92 $10,990 $12,304
12/31/92 $11,191 $12,419
01/31/93 $11,354 $12,630
02/28/93 $11,571 $12,834
03/31/93 $11,989 $13,031
04/30/93 $12,342 $13,269
05/31/93 $12,537 $13,358
06/30/93 $12,487 $13,364
07/31/93 $12,451 $13,370
08/31/93 $12,759 $13,765
09/30/93 $12,738 $13,911
10/31/93 $13,106 $13,904
11/30/93 $12,802 $13,803
12/31/93 $13,276 $13,944
01/31/94 $13,539 $14,075
02/28/94 $13,127 $13,920
03/31/94 $12,581 $13,856
04/30/94 $12,574 $13,843
05/31/94 $12,667 $13,730
06/30/94 $12,037 $13,893
07/31/94 $12,206 $14,024
08/31/94 $12,333 $13,987
09/30/94 $12,310 $14,056
10/31/94 $12,371 $14,267
11/30/94 $12,356 $14,087
12/31/94 $12,246 $14,119
01/31/95 $12,169 $14,405
02/28/95 $12,342 $14,776
03/31/95 $12,597 $15,528
04/30/95 $12,901 $15,775
05/31/95 $13,239 $16,215
06/30/95 $13,288 $16,317
07/31/95 $13,402 $16,394
08/31/95 $13,436 $15,938
09/30/95 $13,735 $16,297
10/31/95 $13,935 $16,457
11/30/95 $14,154 $16,641
12/31/95 $14,459 $16,847
01/31/96 $14,493 $16,674
02/29/96 $14,252 $16,577
03/31/96 $14,305 $16,552
04/30/96 $14,461 $16,491
05/31/96 $14,565 $16,508
06/30/96 $14,776 $16,651
07/31/96 $14,794 $16,958
08/31/96 $15,025 $17,029
09/30/96 $15,293 $17,122
10/31/96 $15,580 $17,461
11/30/96 $15,977 $17,711
12/31/96 $16,015 $17,587
01/31/97 $15,813 $17,147
02/28/97 $15,738 $17,029
03/31/97 $15,664 $16,900
04/30/97 $15,702 $16,805
05/31/97 $15,833 $17,202
06/30/97 $16,021 $17,398
07/31/97 $16,097 $17,333
08/31/97 $16,059 $17,313
09/30/97 $16,386 $17,697
10/31/97 $16,288 $18,072
11/30/97 $16,347 $17,855
12/31/97 $16,464 $17,836
01/31/98 $16,622 $18,014
02/28/98 $16,820 $18,147
03/31/98 $16,899 $18,011
04/30/98 $16,918 $18,289
05/31/98 $16,878 $18,367
06/30/98 $16,838 $18,419
07/31/98 $16,879 $18,468
08/31/98 $15,933 $18,978
09/30/98 $16,760 $19,969
10/31/98 $17,195 $20,416
11/30/98 $17,383 $20,185
12/31/98 $17,425 $20,565
01/31/99 $17,320 $20,396
02/28/99 $16,872 $19,715
03/31/99 $17,214 $19,764
04/30/99 $17,645 $19,758
05/31/99 $17,145 $19,411
06/30/99 $17,080 $19,086
07/31/99 $17,147 $19,506
08/31/99 $17,037 $19,557
09/30/99 $17,327 $19,839
10/31/99 $17,349 $19,815
11/30/99 $17,190 $19,579
12/31/99 $17,439 $19,522
01/31/00 $17,073 $19,138
02/29/00 $17,279 $19,042
03/31/00 $17,441 $19,596
04/30/00 $16,998 $19,000
05/31/00 $16,906 $19,139
06/30/00 $17,495 $19,604
07/31/00 $17,472 $19,296
08/31/00 $17,399 $19,157
09/30/00 $17,329 $19,119
10/31/00 $17,014 $18,892
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year -6.07%
5-Year +3.17%
10-Year +5.46%
Since Inception (3/15/88) +5.80%
</TABLE>
CLASS C (5/1/95 - 10/31/00)
[LINE CHART]
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
the J.P. Morgan Global Government Bond Index from 5/1/95-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Global JP Morgan Global
Government Income Government Bond Index
Fund - C
-------------------------------------------------------------
<S> <C> <C>
05/01/95 $9,901 $10,000
05/31/95 $10,171 $10,279
06/30/95 $10,204 $10,344
07/31/95 $10,273 $10,392
08/31/95 $10,294 $10,103
09/30/95 $10,518 $10,331
10/31/95 $10,670 $10,432
11/30/95 $10,834 $10,549
12/31/95 $11,063 $10,680
01/31/96 $11,084 $10,570
02/29/96 $10,894 $10,508
03/31/96 $10,929 $10,493
04/30/96 $11,029 $10,454
05/31/96 $11,117 $10,464
06/30/96 $11,272 $10,555
07/31/96 $11,280 $10,749
08/31/96 $11,451 $10,795
09/30/96 $11,650 $10,854
10/31/96 $11,864 $11,069
11/30/96 $12,163 $11,227
12/31/96 $12,187 $11,149
01/31/97 $12,027 $10,870
02/28/97 $11,979 $10,795
03/31/97 $11,903 $10,713
04/30/97 $11,925 $10,653
05/31/97 $12,033 $10,904
06/30/97 $12,170 $11,029
07/31/97 $12,222 $10,988
08/31/97 $12,188 $10,975
09/30/97 $12,415 $11,218
10/31/97 $12,336 $11,456
11/30/97 $12,390 $11,319
12/31/97 $12,474 $11,306
01/31/98 $12,587 $11,419
02/28/98 $12,716 $11,504
03/31/98 $12,769 $11,417
04/30/98 $12,779 $11,593
05/31/98 $12,743 $11,643
06/30/98 $12,706 $11,676
07/31/98 $12,731 $11,707
08/31/98 $12,013 $12,030
09/30/98 $12,630 $12,658
10/31/98 $12,968 $12,942
11/30/98 $13,104 $12,796
12/31/98 $13,130 $13,036
01/31/99 $13,030 $12,929
02/28/99 $12,703 $12,497
03/31/99 $12,955 $12,529
04/30/99 $13,272 $12,525
05/31/99 $12,875 $12,305
06/30/99 $12,836 $12,099
07/31/99 $12,880 $12,365
08/31/99 $12,790 $12,397
09/30/99 $13,003 $12,576
10/31/99 $13,015 $12,561
11/30/99 $12,874 $12,411
12/31/99 $13,055 $12,375
01/31/00 $12,793 $12,132
02/29/00 $12,941 $12,071
03/31/00 $13,057 $12,422
04/30/00 $12,721 $12,044
05/31/00 $12,629 $12,132
06/30/00 $13,081 $12,427
07/31/00 $13,058 $12,232
08/31/00 $12,998 $12,144
09/30/00 $12,939 $12,120
10/31/00 $12,699 $11,976
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------------------
<S> <C>
1-Year -4.33%
5-Year +3.34%
Since Inception (5/1/95) +4.44%
</TABLE>
30 Past performance does not guarantee future results.
<PAGE>
ADVISOR CLASS (11/1/90 - 10/31/00)**
[LINE CHART]
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 the J.P. Morgan Global Government Bond Index from 11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Global JP Morgan Global
Government Income Fund Government Bond
- Advisor Index
------------------------------------------------------------
<S> <C> <C>
11/01/90 $10,000 $10,000
11/30/90 $10,176 $10,176
12/31/90 $10,256 $10,289
01/31/91 $10,381 $10,523
02/28/91 $10,674 $10,532
03/31/91 $10,475 $10,202
04/30/91 $10,637 $10,229
05/31/91 $10,767 $10,335
06/30/91 $10,678 $10,197
07/31/91 $10,892 $10,412
08/31/91 $10,956 $10,628
09/30/91 $11,247 $11,016
10/31/91 $11,402 $11,125
11/30/91 $11,386 $11,306
12/31/91 $11,715 $11,817
01/31/92 $11,687 $11,645
02/29/92 $11,698 $11,612
03/31/92 $11,683 $11,504
04/30/92 $11,795 $11,600
05/31/92 $12,048 $11,930
06/30/92 $12,033 $12,255
07/31/92 $12,134 $12,526
08/31/92 $12,050 $12,859
09/30/92 $11,504 $12,847
10/31/92 $11,714 $12,525
11/30/92 $11,477 $12,304
12/31/92 $11,686 $12,419
01/31/93 $11,856 $12,630
02/28/93 $12,082 $12,834
03/31/93 $12,519 $13,031
04/30/93 $12,888 $13,269
05/31/93 $13,091 $13,358
06/30/93 $13,040 $13,364
07/31/93 $13,002 $13,370
08/31/93 $13,324 $13,765
09/30/93 $13,301 $13,911
10/31/93 $13,686 $13,904
11/30/93 $13,368 $13,803
12/31/93 $13,863 $13,944
01/31/94 $14,138 $14,075
02/28/94 $13,708 $13,920
03/31/94 $13,138 $13,856
04/30/94 $13,130 $13,843
05/31/94 $13,227 $13,730
06/30/94 $12,569 $13,893
07/31/94 $12,746 $14,024
08/31/94 $12,879 $13,987
09/30/94 $12,854 $14,056
10/31/94 $12,918 $14,267
11/30/94 $12,902 $14,087
12/31/94 $12,788 $14,119
01/31/95 $12,707 $14,405
02/28/95 $12,888 $14,776
03/31/95 $13,154 $15,528
04/30/95 $13,471 $15,775
05/31/95 $13,825 $16,215
06/30/95 $13,876 $16,317
07/31/95 $13,994 $16,394
08/31/95 $14,030 $15,938
09/30/95 $14,342 $16,297
10/31/95 $14,551 $16,457
11/30/95 $14,780 $16,641
12/31/95 $15,099 $16,847
01/31/96 $15,134 $16,674
02/29/96 $14,883 $16,577
03/31/96 $14,938 $16,552
04/30/96 $15,101 $16,491
05/31/96 $15,210 $16,508
06/30/96 $15,430 $16,651
07/31/96 $15,448 $16,958
08/31/96 $15,689 $17,029
09/30/96 $15,969 $17,122
10/31/96 $16,269 $17,461
11/30/96 $16,684 $17,711
12/31/96 $16,723 $17,587
01/31/97 $16,628 $17,147
02/28/97 $16,569 $17,029
03/31/97 $16,473 $16,900
04/30/97 $16,534 $16,805
05/31/97 $16,673 $17,202
06/30/97 $16,873 $17,398
07/31/97 $16,954 $17,333
08/31/97 $16,915 $17,313
09/30/97 $17,240 $17,697
10/31/97 $17,140 $18,072
11/30/97 $17,224 $17,855
12/31/97 $17,350 $17,836
01/31/98 $17,518 $18,014
02/28/98 $17,707 $18,147
03/31/98 $17,814 $18,011
04/30/98 $17,837 $18,289
05/31/98 $17,774 $18,367
06/30/98 $17,756 $18,419
07/31/98 $17,801 $18,468
08/31/98 $16,808 $18,978
09/30/98 $17,658 $19,969
10/31/98 $18,140 $20,416
11/30/98 $18,318 $20,185
12/31/98 $18,364 $20,565
01/31/99 $18,254 $20,396
02/28/99 $17,804 $19,715
03/31/99 $18,168 $19,764
04/30/99 $18,624 $19,758
05/31/99 $18,076 $19,411
06/30/99 $18,031 $19,086
07/31/99 $18,103 $19,506
08/31/99 $17,965 $19,557
09/30/99 $18,296 $19,839
10/31/99 $18,324 $19,815
11/30/99 $18,133 $19,579
12/31/99 $18,398 $19,522
01/31/00 $18,015 $19,138
02/29/00 $18,258 $19,042
03/31/00 $18,432 $19,596
04/30/00 $17,965 $19,000
05/31/00 $17,845 $19,139
06/30/00 $18,495 $19,604
07/31/00 $18,472 $19,296
08/31/00 $18,398 $19,157
09/30/00 $18,327 $19,119
10/31/00 $17,967 $18,892
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
ADVISOR CLASS**
--------------------------------------------------------------------------------
<S> <C>
1-Year -1.94%
5-Year +4.31%
10-Year +6.03%
Since Inception (3/15/88) +6.25%
</TABLE>
*Source: Standard and Poor's Micropal. The index comprises 13 markets, including
Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands,
Spain, Sweden, the U.K. and the U.S. Each country's weight is determined by the
total market capitalization in $US of all the bonds in that country's traded
index. The J.P. Morgan Global Government Bond Index includes only actively
traded, fixed-rate bonds with a remaining maturity of one year or longer. The
index is unhedged and expressed in terms of $US.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
that class.
Past performance does not guarantee future results. 31
<PAGE>
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
FUND CATEGORY
[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.
--------------------------------------------------------------------------------
During the 12 months under review, the U.S. economy showed signs of moderating,
principally due to the Federal Reserve Board's (the Fed's) raising the federal
funds target rate to 6.5%. Third quarter 2000 gross domestic product (GDP)
registered an annualized 2.4% pace, much slower than the 8.3% growth rate
reported in the fourth quarter of 1999. Inflation remained relatively subdued,
although perking up a little, as increasing productivity offset higher energy
prices and other inflationary pressures.
In general, interest rates fell during the period, especially since May, when
investors felt the Fed was no longer raising short-term rates. The Treasury bond
yield curve became inverted in January, when short-term securities started to
offer higher rates than long-term bonds, suggesting that an economic
slowdown might be forthcoming. Toward the end of the period, it began to
dis-invert, as yields on 30-year Treasury bonds rose above those of 10-year
Treasury notes. However, on October 31, 2000, the 6-month Treasury bill had the
highest yield, 6.40%.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 60.
32
<PAGE>
Toward the end of the reporting period, investors reached for the yields offered
by non- Treasury securities, reflecting an increased likelihood that the Fed
would remain on hold, leading to strong performances for mortgages and agency
debentures. Fifteen-year Fannie Mae (FNMA or Federal National Mortgage
Association) and Ginnie Mae (GNMA or Government National Mortgage Association)
pass-throughs outperformed comparable Treasuries during the period. A
contributing factor to the overall strong performance of agency debentures and
mortgages was the decline in interest in the political debate surrounding
Government Sponsored Enterprises (GSEs), such as Fannie Mae and Freddie Mac
(FHLMC or Federal Home Loan Mortgage Corporation). Congress had been discussing
whether to alter the government's future relationship with these GSEs. However,
time has pretty well run out for Congress to make any changes in Fannie Mae and
Freddie Mac's GSE status this year, and we expect little news along these lines
in the near future, although at some point it will most likely be revisited.
Franklin Short-Intermediate U.S. Government Securities Fund continued to
emphasize shorter-term mortgage pass-throughs backed by government agencies
during the period. In our opinion, 15-year pass-throughs and 7-year balloon
pass-throughs provided strong yields, with relatively short average lives, to
help us control the portfolio's interest-rate sensitivity. Short- and
intermediate-term agency debentures provided the portfolio with diversification
and additional liquidity, while also offering higher yields than similar
Treasuries. We believe that, over time, this yield advantage will lead to
superior performance. In the fixed income universe, long-term total return is
highly dependent on income and yield accrual, as opposed to price appreciation.
PORTFOLIO BREAKDOWN
[PIE CHART]
Franklin Short-Intermediate U.S.
Government Securities Fund
Based on Total Net Assets
10/31/00
Mortgage-Backed Securities 57.0%
Agency Notes 40.9%
Short-Term Investments &
Other Net Assets 2.1%
33
<PAGE>
Looking forward, we are optimistic about the future of Franklin
Short-Intermediate U.S. Government Securities Fund. With the Fed holding rates
steady and possibly lowering them sometime in 2001, the environment is
supportive for mortgage-backed securities and agency bonds. We will continue to
favor an overweight position in agency mortgages. In our opinion, these bonds
offer much of the yield advantage of lower-rated securities, but they also
provide superior credit quality and liquidity.
/s/ ROGER A. BAYSTON
Roger A. Bayston
Portfolio Manager
Franklin Short-Intermediate
U.S. Government Securities Fund
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any industry, security or the Fund.
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.
--------------------------------------------------------------------------------
34
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Short-Intermediate U.S. Government Securities Fund
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
------------------------------------
MONTH CLASS A ADVISOR
-------------------------------------------------------------------------------
<S> <C> <C>
November 4.30 cents 4.40 cents
December 7.31 cents** 7.39 cents**
January 4.70 cents 4.76 cents
February 4.70 cents 4.77 cents
March 4.70 cents 4.79 cents
April 4.70 cents 4.79 cents
May 4.70 cents 4.78 cents
June 4.70 cents 4.77 cents
July 4.70 cents 4.77 cents
August 4.80 cents 4.88 cents
September 4.85 cents 4.94 cents
October 4.85 cents 4.94 cents
-------------------------------------------------------------------------------
TOTAL 59.01 CENTS 59.98 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 3.01 cent distribution to meet excise tax requirements.
35
<PAGE>
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS A
One-Year Total Return +5.86%
Net Asset Value (NAV) $10.09 (10/31/00) $10.11 (10/31/99)
Change in NAV -$0.02
Distributions (11/1/99-10/31/00) Dividend Income $0.5901
ADVISOR CLASS
One-Year Total Return +5.97%
Net Asset Value (NAV) $10.08 (10/31/00) $10.10 (10/31/99)
Change in NAV -$0.02
Distributions (11/1/99-10/31/00) Dividend Income $0.5998
</TABLE>
CLASS A: Subject to the maximum 2.25% initial sales charge. Effective 5/1/94,
the Fund implemented a Rule 12b-1 plan, which affects subsequent performance.*
ADVISOR CLASS: No initial sales charge or Rule 12b-1 fees and are available to a
limited class of investors.*
*Past expense reductions by the Fund's manager increased the Fund's total
return.
36 Past performance does not guarantee future results.
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/15/87)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.70% +28.72% +81.77% +134.04%
Average Annual Total Return(2) +3.35% +4.70% +5.92% +6.34%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(3) 1-YEAR 5-YEAR 10-YEAR (4/15/87)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.70% +29.01% +82.19% +134.58%
Average Annual Total Return(2) +5.70% +5.23% +6.18% +6.54%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C>
Distribution Rate(4) 5.64% 5.88%
30-Day Standardized Yield(5) 5.82% 6.05%
</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. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class. Since 1/2/97 (commencement of sales), the cumulative and average
annual total returns of Advisor Class shares were +21.10% and +5.24%.
4. Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (net asset value for
Advisor Class) per share on 10/31/00.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results. 37
<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 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 interest. One cannot invest directly in an index. The Consumer Price
Index (CPI) is a commonly used measure of inflation.
CLASS A (11/1/90-10/31/00)
[LINE GRAPH]
This graph compares the performance of 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 the Lehman Brothers Short U.S. Treasury 1-5 Year
Index and CPI from 11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Short-Intermediate Lehman Brothers Short U.S. CPI
U.S. Government Securities Treasury 1-5 Year Index
Fund - Class A
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/01/1990 $9,770 $10,000 $10,000
11/30/1990 $9,868 1.15% $10,115 0.22% $10,022
12/31/1990 $9,990 1.29% $10,245 0.00% $10,022
01/31/1991 $10,070 0.98% $10,346 0.60% $10,082
02/28/1991 $10,130 0.60% $10,408 0.15% $10,097
03/31/1991 $10,191 0.62% $10,472 0.15% $10,112
04/30/1991 $10,283 1.02% $10,579 0.15% $10,128
05/31/1991 $10,335 0.59% $10,642 0.30% $10,158
06/30/1991 $10,360 0.24% $10,667 0.29% $10,187
07/31/1991 $10,447 1.00% $10,774 0.15% $10,203
08/31/1991 $10,594 1.65% $10,952 0.29% $10,232
09/30/1991 $10,712 1.36% $11,101 0.44% $10,277
10/31/1991 $10,831 1.17% $11,231 0.15% $10,293
11/30/1991 $10,930 1.13% $11,357 0.29% $10,323
12/31/1991 $11,194 1.93% $11,577 0.07% $10,330
01/31/1992 $11,039 -0.51% $11,518 0.15% $10,345
02/29/1992 $11,065 0.26% $11,548 0.36% $10,383
03/31/1992 $11,012 -0.24% $11,520 0.51% $10,435
04/30/1992 $11,109 0.97% $11,632 0.14% $10,450
05/31/1992 $11,270 1.22% $11,773 0.14% $10,465
06/30/1992 $11,444 1.30% $11,927 0.36% $10,502
07/31/1992 $11,686 1.56% $12,113 0.21% $10,524
08/31/1992 $11,807 1.01% $12,235 0.28% $10,554
09/30/1992 $12,013 1.21% $12,383 0.28% $10,583
10/31/1992 $11,819 -1.00% $12,259 0.35% $10,621
11/30/1992 $11,748 -0.34% $12,217 0.14% $10,635
12/31/1992 $11,937 1.12% $12,354 -0.07% $10,628
01/31/1993 $12,159 1.58% $12,549 0.49% $10,680
02/28/1993 $12,371 1.17% $12,696 0.35% $10,717
03/31/1993 $12,422 0.34% $12,739 0.35% $10,755
04/30/1993 $12,496 0.76% $12,836 0.28% $10,785
05/31/1993 $12,454 -0.34% $12,793 0.14% $10,800
06/30/1993 $12,616 1.08% $12,931 0.14% $10,815
07/31/1993 $12,633 0.18% $12,954 0.00% $10,815
08/31/1993 $12,826 1.20% $13,110 0.28% $10,846
09/30/1993 $12,866 0.33% $13,153 0.21% $10,868
10/31/1993 $12,888 0.24% $13,184 0.41% $10,913
11/30/1993 $12,814 -0.22% $13,155 0.07% $10,920
12/31/1993 $12,862 0.40% $13,208 0.00% $10,920
01/31/1994 $12,993 0.83% $13,318 0.27% $10,950
02/28/1994 $12,796 -1.02% $13,182 0.34% $10,987
03/31/1994 $12,623 -0.98% $13,053 0.34% $11,025
04/30/1994 $12,522 -0.58% $12,977 0.14% $11,040
05/31/1994 $12,532 0.11% $12,991 0.07% $11,048
06/30/1994 $12,530 0.15% $13,011 0.34% $11,085
07/31/1994 $12,678 1.09% $13,152 0.27% $11,115
08/31/1994 $12,706 0.31% $13,193 0.40% $11,160
09/30/1994 $12,621 -0.54% $13,122 0.27% $11,190
10/31/1994 $12,638 0.13% $13,139 0.07% $11,198
11/30/1994 $12,568 -0.50% $13,073 0.13% $11,212
12/31/1994 $12,585 0.23% $13,103 0.00% $11,212
01/31/1995 $12,768 1.52% $13,303 0.40% $11,257
02/28/1995 $12,965 1.69% $13,527 0.40% $11,302
03/31/1995 $13,034 0.56% $13,603 0.33% $11,339
04/30/1995 $13,146 1.03% $13,743 0.33% $11,377
05/31/1995 $13,401 2.30% $14,059 0.20% $11,400
06/30/1995 $13,475 0.60% $14,144 0.20% $11,422
07/31/1995 $13,511 0.22% $14,175 0.00% $11,422
08/31/1995 $13,585 0.68% $14,271 0.26% $11,452
09/30/1995 $13,647 0.56% $14,351 0.20% $11,475
10/31/1995 $13,763 0.97% $14,490 0.33% $11,513
11/30/1995 $13,878 1.04% $14,641 -0.07% $11,505
12/31/1995 $13,981 0.87% $14,768 -0.07% $11,497
01/31/1996 $14,071 0.91% $14,903 0.59% $11,565
02/29/1996 $14,013 -0.69% $14,800 0.32% $11,602
03/31/1996 $13,982 -0.32% $14,753 0.52% $11,662
04/30/1996 $13,978 -0.09% $14,739 0.39% $11,707
05/31/1996 $13,989 0.07% $14,750 0.19% $11,730
06/30/1996 $14,096 0.85% $14,875 0.06% $11,737
07/31/1996 $14,134 0.35% $14,927 0.19% $11,759
08/31/1996 $14,173 0.26% $14,966 0.19% $11,781
09/30/1996 $14,296 1.08% $15,128 0.32% $11,819
10/31/1996 $14,447 1.37% $15,335 0.32% $11,857
11/30/1996 $14,570 0.93% $15,477 0.19% $11,879
12/31/1996 $14,539 -0.25% $15,439 0.00% $11,879
01/31/1997 $14,593 0.44% $15,507 0.32% $11,917
02/28/1997 $14,619 0.18% $15,535 0.31% $11,954
03/31/1997 $14,587 -0.31% $15,486 0.25% $11,984
04/30/1997 $14,700 0.96% $15,635 0.12% $11,999
05/31/1997 $14,798 0.72% $15,748 -0.06% $11,991
06/30/1997 $14,897 0.77% $15,869 0.12% $12,006
07/31/1997 $15,069 1.47% $16,102 0.12% $12,020
08/31/1997 $15,066 -0.13% $16,081 0.19% $12,043
09/30/1997 $15,181 0.91% $16,228 0.25% $12,073
10/31/1997 $15,296 0.95% $16,382 0.25% $12,103
11/30/1997 $15,308 0.20% $16,415 -0.06% $12,096
12/31/1997 $15,425 0.75% $16,538 -0.12% $12,081
01/31/1998 $15,587 1.18% $16,733 0.19% $12,104
02/28/1998 $15,584 -0.04% $16,726 0.19% $12,127
03/31/1998 $15,626 0.33% $16,781 0.19% $12,150
04/30/1998 $15,699 0.48% $16,862 0.18% $12,172
05/31/1998 $15,772 0.60% $16,963 0.18% $12,194
06/30/1998 $15,846 0.57% $17,060 0.12% $12,209
07/31/1998 $15,920 0.43% $17,133 0.12% $12,224
08/31/1998 $16,129 1.59% $17,405 0.12% $12,238
09/30/1998 $16,355 1.89% $17,734 0.12% $12,253
10/31/1998 $16,426 0.41% $17,807 0.24% $12,282
11/30/1998 $16,386 -0.27% $17,759 0.00% $12,282
12/31/1998 $16,435 0.34% $17,819 -0.06% $12,275
01/31/1999 $16,500 0.42% $17,894 0.24% $12,304
02/28/1999 $16,359 -0.90% $17,733 0.12% $12,319
03/31/1999 $16,456 0.70% $17,857 0.30% $12,356
04/30/1999 $16,490 0.29% $17,909 0.73% $12,446
05/31/1999 $16,411 -0.34% $17,848 0.00% $12,446
06/30/1999 $16,445 0.29% $17,900 0.00% $12,446
07/31/1999 $16,430 0.22% $17,939 0.30% $12,484
08/31/1999 $16,468 0.28% $17,990 0.24% $12,514
09/30/1999 $16,620 0.71% $18,117 0.48% $12,574
10/31/1999 $16,674 0.17% $18,148 0.18% $12,596
11/30/1999 $16,695 0.11% $18,168 0.06% $12,604
12/31/1999 $16,684 -0.06% $18,157 0.00% $12,604
01/31/2000 $16,612 -0.18% $18,125 0.30% $12,642
02/29/2000 $16,741 0.71% $18,253 0.59% $12,716
03/31/2000 $16,854 0.86% $18,410 0.82% $12,821
04/30/2000 $16,883 0.10% $18,429 0.06% $12,828
05/31/2000 $16,878 0.42% $18,506 0.12% $12,844
06/30/2000 $17,129 1.24% $18,735 0.52% $12,910
07/31/2000 $17,227 0.64% $18,855 0.23% $12,940
08/31/2000 $17,396 0.87% $19,019 0.00% $12,940
09/30/2000 $17,566 0.81% $19,173 0.52% $13,007
10/31/2000 $17,650 0.58% $19,285 0.17% $13,030
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +3.50%
5-Year +4.62%
10-Year +5.85%
Since Inception (4/15/87) +6.34%
</TABLE>
38 Past performance does not guarantee future results.
<PAGE>
ADVISOR CLASS (11/1/90-10/31/00)**
[LINE GRAPH]
This graph compares the performance of 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 the Lehman Brothers Short U.S. Treasury 1-5
Year Index and CPI from 11/1/90-10/31/00.
<TABLE>
<CAPTION>
Date Franklin Short-Intermediate Lehman Brothers Short U.S. CPI
U.S. Government Securities Treasury 1-5 Year Index
Fund - Advisor Class
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
11/01/1990 $10,000 $10,000 $10,000
11/30/1990 $10,100 1.15% $10,115 0.22% $10,022
12/31/1990 $10,225 1.29% $10,245 0.00% $10,022
01/31/1991 $10,306 0.98% $10,346 0.60% $10,082
02/28/1991 $10,368 0.60% $10,408 0.15% $10,097
03/31/1991 $10,431 0.62% $10,472 0.15% $10,112
04/30/1991 $10,525 1.02% $10,579 0.15% $10,128
05/31/1991 $10,578 0.59% $10,642 0.30% $10,158
06/30/1991 $10,604 0.24% $10,667 0.29% $10,187
07/31/1991 $10,692 1.00% $10,774 0.15% $10,203
08/31/1991 $10,843 1.65% $10,952 0.29% $10,232
09/30/1991 $10,964 1.36% $11,101 0.44% $10,277
10/31/1991 $11,086 1.17% $11,231 0.15% $10,293
11/30/1991 $11,187 1.13% $11,357 0.29% $10,323
12/31/1991 $11,457 1.93% $11,577 0.07% $10,330
01/31/1992 $11,299 -0.51% $11,518 0.15% $10,345
02/29/1992 $11,325 0.26% $11,548 0.36% $10,383
03/31/1992 $11,271 -0.24% $11,520 0.51% $10,435
04/30/1992 $11,370 0.97% $11,632 0.14% $10,450
05/31/1992 $11,535 1.22% $11,773 0.14% $10,465
06/30/1992 $11,713 1.30% $11,927 0.36% $10,502
07/31/1992 $11,960 1.56% $12,113 0.21% $10,524
08/31/1992 $12,084 1.01% $12,235 0.28% $10,554
09/30/1992 $12,295 1.21% $12,383 0.28% $10,583
10/31/1992 $12,097 -1.00% $12,259 0.35% $10,621
11/30/1992 $12,024 -0.34% $12,217 0.14% $10,635
12/31/1992 $12,218 1.12% $12,354 -0.07% $10,628
01/31/1993 $12,445 1.58% $12,549 0.49% $10,680
02/28/1993 $12,662 1.17% $12,696 0.35% $10,717
03/31/1993 $12,714 0.34% $12,739 0.35% $10,755
04/30/1993 $12,790 0.76% $12,836 0.28% $10,785
05/31/1993 $12,747 -0.34% $12,793 0.14% $10,800
06/30/1993 $12,913 1.08% $12,931 0.14% $10,815
07/31/1993 $12,930 0.18% $12,954 0.00% $10,815
08/31/1993 $13,128 1.20% $13,110 0.28% $10,846
09/30/1993 $13,169 0.33% $13,153 0.21% $10,868
10/31/1993 $13,191 0.24% $13,184 0.41% $10,913
11/30/1993 $13,115 -0.22% $13,155 0.07% $10,920
12/31/1993 $13,165 0.40% $13,208 0.00% $10,920
01/31/1994 $13,299 0.83% $13,318 0.27% $10,950
02/28/1994 $13,097 -1.02% $13,182 0.34% $10,987
03/31/1994 $12,919 -0.98% $13,053 0.34% $11,025
04/30/1994 $12,817 -0.58% $12,977 0.14% $11,040
05/31/1994 $12,827 0.11% $12,991 0.07% $11,048
06/30/1994 $12,824 0.15% $13,011 0.34% $11,085
07/31/1994 $12,976 1.09% $13,152 0.27% $11,115
08/31/1994 $13,004 0.31% $13,193 0.40% $11,160
09/30/1994 $12,917 -0.54% $13,122 0.27% $11,190
10/31/1994 $12,935 0.13% $13,139 0.07% $11,198
11/30/1994 $12,863 -0.50% $13,073 0.13% $11,212
12/31/1994 $12,881 0.23% $13,103 0.00% $11,212
01/31/1995 $13,069 1.52% $13,303 0.40% $11,257
02/28/1995 $13,270 1.69% $13,527 0.40% $11,302
03/31/1995 $13,341 0.56% $13,603 0.33% $11,339
04/30/1995 $13,455 1.03% $13,743 0.33% $11,377
05/31/1995 $13,716 2.30% $14,059 0.20% $11,400
06/30/1995 $13,792 0.60% $14,144 0.20% $11,422
07/31/1995 $13,828 0.22% $14,175 0.00% $11,422
08/31/1995 $13,905 0.68% $14,271 0.26% $11,452
09/30/1995 $13,968 0.56% $14,351 0.20% $11,475
10/31/1995 $14,086 0.97% $14,490 0.33% $11,513
11/30/1995 $14,204 1.04% $14,641 -0.07% $11,505
12/31/1995 $14,310 0.87% $14,768 -0.07% $11,497
01/31/1996 $14,402 0.91% $14,903 0.59% $11,565
02/29/1996 $14,342 -0.69% $14,800 0.32% $11,602
03/31/1996 $14,311 -0.32% $14,753 0.52% $11,662
04/30/1996 $14,306 -0.09% $14,739 0.39% $11,707
05/31/1996 $14,318 0.07% $14,750 0.19% $11,730
06/30/1996 $14,427 0.85% $14,875 0.06% $11,737
07/31/1996 $14,467 0.35% $14,927 0.19% $11,759
08/31/1996 $14,506 0.26% $14,966 0.19% $11,781
09/30/1996 $14,632 1.08% $15,128 0.32% $11,819
10/31/1996 $14,786 1.37% $15,335 0.32% $11,857
11/30/1996 $14,913 0.93% $15,477 0.19% $11,879
12/31/1996 $14,881 -0.25% $15,439 0.00% $11,879
01/31/1997 0.44% $14,946 0.44% $15,507 0.32% $11,917
02/28/1997 0.18% $14,973 0.18% $15,535 0.31% $11,954
03/31/1997 -0.21% $14,942 -0.31% $15,486 0.25% $11,984
04/30/1997 0.78% $15,058 0.96% $15,635 0.12% $11,999
05/31/1997 0.67% $15,159 0.72% $15,748 -0.06% $11,991
06/30/1997 0.67% $15,261 0.77% $15,869 0.12% $12,006
07/31/1997 1.16% $15,438 1.47% $16,102 0.12% $12,020
08/31/1997 -0.01% $15,436 -0.13% $16,081 0.19% $12,043
09/30/1997 0.77% $15,555 0.91% $16,228 0.25% $12,073
10/31/1997 0.77% $15,675 0.95% $16,382 0.25% $12,103
11/30/1997 0.18% $15,703 0.20% $16,415 -0.06% $12,096
12/31/1997 0.77% $15,824 0.75% $16,538 -0.12% $12,081
01/31/1998 1.06% $15,992 1.18% $16,733 0.19% $12,104
02/28/1998 -0.01% $15,990 -0.04% $16,726 0.19% $12,127
03/31/1998 0.18% $16,019 0.33% $16,781 0.19% $12,150
04/30/1998 0.37% $16,078 0.48% $16,862 0.18% $12,172
05/31/1998 0.57% $16,170 0.60% $16,963 0.18% $12,194
06/30/1998 0.47% $16,246 0.57% $17,060 0.12% $12,209
07/31/1998 0.48% $16,324 0.43% $17,133 0.12% $12,224
08/31/1998 1.23% $16,525 1.59% $17,405 0.12% $12,238
09/30/1998 1.51% $16,774 1.89% $17,734 0.12% $12,253
10/31/1998 0.34% $16,831 0.41% $17,807 0.24% $12,282
11/30/1998 -0.23% $16,793 -0.27% $17,759 0.00% $12,282
12/31/1998 0.30% $16,843 0.34% $17,819 -0.06% $12,275
01/31/1999 0.41% $16,912 0.42% $17,894 0.24% $12,304
02/28/1999 -0.85% $16,768 -0.90% $17,733 0.12% $12,319
03/31/1999 0.61% $16,871 0.70% $17,857 0.30% $12,356
04/30/1999 0.21% $16,906 0.29% $17,909 0.73% $12,446
05/31/1999 -0.47% $16,827 -0.34% $17,848 0.00% $12,446
06/30/1999 0.21% $16,862 0.29% $17,900 0.00% $12,446
07/31/1999 -0.08% $16,848 0.22% $17,939 0.30% $12,484
08/31/1999 0.24% $16,889 0.28% $17,990 0.24% $12,514
09/30/1999 0.94% $17,048 0.71% $18,117 0.48% $12,574
10/31/1999 0.34% $17,106 0.17% $18,148 0.18% $12,596
11/30/1999 0.14% $17,130 0.11% $18,168 0.06% $12,604
12/31/1999 -0.06% $17,119 -0.06% $18,157 0.00% $12,604
01/31/2000 -0.42% $17,047 -0.18% $18,125 0.30% $12,642
02/29/2000 0.78% $17,180 0.71% $18,253 0.59% $12,716
03/31/2000 0.58% $17,280 0.86% $18,410 0.82% $12,821
04/30/2000 0.28% $17,328 0.10% $18,429 0.06% $12,828
05/31/2000 -0.02% $17,325 0.42% $18,506 0.12% $12,844
06/30/2000 1.50% $17,585 1.24% $18,735 0.52% $12,910
07/31/2000 0.58% $17,687 0.64% $18,855 0.23% $12,940
08/31/2000 0.99% $17,862 0.87% $19,019 0.00% $12,940
09/30/2000 0.89% $18,021 0.81% $19,173 0.52% $13,007
10/31/2000 0.59% $18,126 0.58% $19,285 0.17% $13,030
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
ADVISOR CLASS**
--------------------------------------------------------------------------------
<S> <C>
1-Year +5.97%
5-Year +5.17%
10-Year +6.13%
Since Inception (4/15/87) +6.54%
</TABLE>
*Sources: Lehman Brothers; Standard and Poor's Micropal. The unmanaged Lehman
Brothers Short U.S. Treasury 1-5 Year Index includes fixed-rate debt issues
rated investment grade or higher by Moody's, S&P, or Fitch, in that order. All
issues have between one and five years to maturity and an outstanding par value
of at least $100 million for U.S. Government issues. All returns are
market-value weighted inclusive of accrued interest. The Treasury Index includes
all public obligations of the U.S. Treasury and excludes flower bonds and
foreign-targeted issues. Total return includes price appreciation/ depreciation
and income as a percentage of the original investment. The total return index is
rebalanced monthly by market capitalization.
**Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or Rule 12b-1 plans. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge and including the effect of the
Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, an actual Advisor
Class figure is used reflecting a deduction of all charges and fees applicable
to that class.
Past performance does not guarantee future results. 39
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.75 $ 11.75 $ 14.74 $ 13.45 $ 12.73
------------------------------------------------------------------------
Income from investment operations:
Net investment income(b) ................... .75 .61 .62 .64 .61
Net realized and unrealized gains (losses) . 3.08 1.03 (1.92) 2.15 1.39
------------------------------------------------------------------------
Total from investment operations ............ 3.83 1.64 (1.30) 2.79 2.00
------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.65) (.64) (.65) (.60) (.60)
Net realized gains ......................... -- -- (1.04) (.90) (.68)
------------------------------------------------------------------------
Total distributions ......................... (.65) (.64) (1.69) (1.50) (1.28)
------------------------------------------------------------------------
Net asset value, end of year ................ $ 15.93 $ 12.75 $ 11.75 $ 14.74 $ 13.45
========================================================================
Total return(a) ............................. 30.51% 14.25% (9.93%) 22.47% 16.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $159,130 $129,908 $170,569 $212,631 $130,951
Ratios to average net assets:
Expenses ................................... 1.05% 1.05% .98% 1.01% 1.02%
Net investment income ...................... 4.92% 4.92% 4.63% 4.81% 4.79%
Portfolio turnover rate ..................... 177.02% 147.75% 79.17% 141.49% 129.83%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
40
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CONVERTIBLE SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.70 $ 11.70 $ 14.68 $ 13.41 $ 12.71
-------------------------------------------------------------------
Income from investment operations:
Net investment income(b) ................... .64 .51 .51 .54 .51
Net realized and unrealized gains (losses) . 3.06 1.04 (1.91) 2.13 1.40
-------------------------------------------------------------------
Total from investment operations ............ 3.70 1.55 (1.40) 2.67 1.91
-------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.54) (.55) (.54) (.50) (.53)
Net realized gains ......................... -- -- (1.04) (.90) (.68)
-------------------------------------------------------------------
Total distributions ......................... (.54) (.55) (1.58) (1.40) (1.21)
-------------------------------------------------------------------
Net asset value, end of year ................ $ 15.86 $ 12.70 $ 11.70 $ 14.68 $ 13.41
===================================================================
Total return(a) ............................. 29.54% 13.48% (10.61%) 21.54% 15.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $35,525 $29,148 $41,533 $35,282 $10,861
Ratios to average net assets:
Expenses ................................... 1.77% 1.80% 1.73% 1.74% 1.79%
Net investment income ...................... 4.21% 4.16% 3.93% 4.04% 4.00%
Portfolio turnover rate ..................... 177.02% 147.75% 79.17% 141.49% 129.83%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
See notes to financial statements. 41
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 2.5%
ENERGY MINERALS .6%
Chesapeake Energy Corp. .......................................................... 213,000 $ 1,198,125
-----------
UTILITIES 1.9%
Enron Corp. ...................................................................... 44,532 3,654,407
-----------
TOTAL COMMON STOCKS (COST $2,563,169) ............................................ 4,852,532
-----------
CONVERTIBLE PREFERRED STOCKS 44.0%
COMMERCIAL SERVICES 1.5%
United Rentals Trust I, 6.50%, cvt. pfd. ......................................... 100,000 2,968,800
-----------
COMMUNICATIONS 7.7%
Broadwing Inc., 6.75% cvt. pfd., B ............................................... 60,000 2,917,500
McLeodUSA Inc., 6.75%, cvt. pfd., A .............................................. 5,000 2,599,375
MediaOne Group Inc., 6.25%, cvt. pfd. (exchangeable into Vodafone AirTouch common) 47,575 4,424,475
Williams Communications Group Inc., 6.75%, cvt. pfd., 144A ....................... 75,000 3,018,750
XO Communications Inc., 6.50%, cvt. pfd. ......................................... 12,500 1,945,313
-----------
14,905,413
-----------
CONSUMER SERVICES 5.1%
Cox Communications Inc., 7.00%, cvt. pfd. ........................................ 125,000 7,312,500
Seagram Co. Ltd., 7.50%, cvt. pfd. (Canada) ...................................... 50,000 2,625,000
-----------
9,937,500
-----------
ENERGY MINERALS 5.8%
Enron Corp., 7.00%, cvt. pfd. (exchangeable into EOG Resources Inc. common) ...... 100,000 3,418,750
Kerr-McGee Corp., 5.50%, cvt. pfd. (exchangeable into Devon Energy Corp. common) . 70,000 3,215,625
Newfield Financial Trust I, 6.50%, cvt. pfd. ..................................... 80,200 4,731,800
-----------
11,366,175
-----------
FINANCE 10.4%
Apartment Investment & Management Co., 8.00%, cvt. pfd., K ....................... 100,000 2,656,250
Bank United Corp., 8.00%, cvt. pfd. .............................................. 80,000 5,420,000
CNB Capital Trust I, 6.00%, cvt. pfd. ............................................ 100,000 3,525,000
IMC Global/Merrill Lynch, 6.25%, cvt. pfd., IGL .................................. 155,000 2,053,750
Metlife Capital Trust I, 8.00%, cvt. pfd. ........................................ 50,000 4,381,250
Sovereign Bancorp Inc., 7.50%, cvt. pfd. ......................................... 40,000 2,115,000
-----------
20,151,250
-----------
INDUSTRIAL SERVICES 3.8%
AES Trust III, 6.75%, cvt. pfd. .................................................. 13,800 1,228,200
Calpine Capital Trust III, cvt. pfd., 144A ....................................... 65,000 3,575,000
Weatherford International Inc., 5.00%, cvt. pfd. ................................. 60,000 2,617,500
-----------
7,420,700
-----------
RETAIL 2.3%
CVS Automatic Common Exchange Securities Trust, 6.00%, cvt. pfd. ................. 50,000 4,500,000
-----------
PROCESS INDUSTRIES 3.8%
Georgia-Pacific Corp., 7.50%, cvt. pfd. .......................................... 100,000 3,206,250
International Paper Co., 5.25%, cvt. pfd. ........................................ 100,000 4,100,000
-----------
7,306,250
-----------
</TABLE>
42
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
TRANSPORTATION 3.6%
Canadian National Railway Co., 5.25%, cvt. pfd. (Canada) ......................... 75,000 $ 3,562,500
Union Pacific Capital Trust, 6.25%, cvt. pfd. .................................... 75,000 3,393,750
----------
6,956,250
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $72,788,049) ........................... 85,512,338
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
---------
<S> <C> <C>
CONVERTIBLE BONDS 46.8%
COMMUNICATIONS 2.2%
Level 3 Communications Inc., cvt., 6.00%, 9/15/09 ................................ $ 2,000,000 1,867,500
Nextel Communications Inc, cvt., 144A, 5.25%, 1/15/10 ............................ 3,000,000 2,497,500
----------
4,365,000
----------
CONSUMER SERVICES 3.8%
Charter Communications Inc., cvt., 144A, 5.75%, 10/15/05 ......................... 5,000,000 5,431,250
Jacor Communications Inc, cvt., zero cpn., 6/12/11 ............................... 2,000,000 1,920,000
----------
7,351,250
----------
ELECTRONIC TECHNOLOGY 21.0%
Amkor Technology Inc., cvt., 5.75%, 5/01/03 ...................................... 2,250,000 3,782,813
ASM Lithography Holding NV, cvt., 144A, 4.25%, 11/30/04 (Netherlands) ............ 2,500,000 2,537,500
Conexant Systems Inc., cvt., 4.25%, 5/01/06 ...................................... 1,500,000 1,957,500
Cypress Semiconductor Corp., cvt., 4.00%, 2/01/05 ................................ 4,000,000 4,280,000
Efficient Networks Inc. cvt., 144A, 5.00%, 3/15/05 ............................... 3,500,000 2,314,375
Hewlett-Packard Co., cvt., zero cpn., 10/14/17 ................................... 3,500,000 2,480,625
Lam Research Corp., cvt., 5.00%, 9/01/02 ......................................... 2,000,000 2,052,500
LSI Logic Corp., cvt., 4.25%, 3/15/04 ............................................ 2,000,000 4,257,500
Sanmina Corp., cvt., 144A, 4.25%, 5/01/04 ........................................ 1,000,000 2,584,030
SCI Systems Inc., cvt., 3.00%, 3/15/07 ........................................... 6,250,000 6,507,813
Siebel Systems Inc., cvt., 5.50%, 9/15/06 ........................................ 250,000 1,171,250
Solectron Corp., cvt., zero cpn., 5/08/20 ........................................ 5,000,000 3,248,899
Vitesse Semiconductor Corp., cvt., 4.00%, 3/15/05 ................................ 1,000,000 878,749
Vitesse Semiconductor Corp., cvt., 144A, 4.00%, 3/15/05 .......................... 3,250,000 2,855,937
----------
40,909,491
----------
FINANCE 5.4%
Equity Office Properties Trust, cvt., 144A, 7.25%, 11/15/08 ...................... 3,750,000 3,754,688
JMH Finance Ltd., cvt., 144A, 4.75%, 9/06/07 ..................................... 3,500,000 3,565,625
Macerich Co., cvt. sub. deb., 144A, 7.25%, 12/15/02 .............................. 2,000,000 1,755,000
Providian Financial Corp., cvt., 3.25%, 8/15/05 .................................. 1,500,000 1,471,875
----------
10,547,188
----------
HEALTH SERVICES 1.0%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 ................................... 2,650,000 1,990,813
----------
</TABLE>
43
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT* VALUE
------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS (CONT.)
<S> <C> <C>
HEALTH TECHNOLOGY 3.4%
Inhale Therapeutic Systems Inc., cvt., 144A, 5.00%, 2/08/07 ..................... $ 1,000,000 $ 1,392,500
Roche Holdings Inc., cvt., 144A, zero cpn., 1/19/15 ............................. 2,500,000 2,256,250
Teva Pharmaceutical Industries Ltd., cvt., 144A 1.50%, 10/15/05 ................. 3,000,000 2,996,250
-----------
6,645,000
-----------
PRODUCER MANUFACTURING 2.0%
Tower Automotive Inc., cvt. sub. note, 5.00%, 8/01/04 ........................... 5,000,000 3,750,000
-----------
TECHNOLOGY SERVICES 8.0%
Affiliated Computer Services, cvt., sub. note, 4.00%, 3/15/05 ................... 8,000,000 11,260,000
BEA Systems Inc., cvt., 4.00%, 12/15/06 ......................................... 500,000 1,092,500
BEA Systems Inc., cvt., 144A, 4.00%, 12/15/06 ................................... 1,500,000 3,277,500
-----------
15,630,000
-----------
TOTAL CONVERTIBLE BONDS (COST $85,480,363) ...................................... 91,188,742
-----------
TOTAL LONG TERM INVESTMENTS (COST $160,831,581) 93.3% ........................... 181,553,612
-----------
(a)REPURCHASE AGREEMENT 2.7%
Joint Repurchase Agreement, 6.563%, 11/01/00 (Maturity Value $5,263,323)
(COST $5,262,364)............................................................. 5,262,364 5,262,364
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Deutsche Bank Govt. Securities
Dresdner Kleinwort Benson, North America LLC
Lehman Brothers Inc.
Nesbitt Burns Securities Inc.
Paribas Corporation
Societe Generale
UBS Warburg
Collateralized by U.S. Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $166,093,945) 96.0% ..................................... 186,815,976
-----------
OTHER ASSETS, LESS LIABILITIES 4.0% ............................................. 7,839,120
-----------
NET ASSETS 100.0% ............................................................... $194,655,096
============
</TABLE>
*The principal amount is stated in U.S. dollars unless otherwise indicated.
(a)Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 2000, all repurchase
agreements had been entered into on that date.
44 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.20 $ 19.93 $ 19.31 $ 16.41 $ 15.19
----------------------------------------------------------------------
Income from investment operations:
Net investment income(b) ................... .53 .58 .64 .64 .64
Net realized and unrealized gains .......... 1.89 .36 1.42 3.23 1.63
----------------------------------------------------------------------
Total from investment operations ............ 2.42 .94 2.06 3.87 2.27
----------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.52) (.60) (.65) (.64) (.65)
Net realized gains ......................... (1.28) (1.07) (.79) (.33) (.40)
Total distributions ......................... (1.80) (1.67) (1.44) (.97) (1.05)
----------------------------------------------------------------------
Net asset value, end of year ................ $ 19.82 $ 19.20 $ 19.93 $ 19.31 $ 16.41
======================================================================
Total return(a) ............................. 14.05% 4.90% 10.96% 24.40% 15.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $344,671 $385,968 $428,228 $352,555 $246,952
Ratios to average net assets:
Expenses ................................... 1.04% .94% .94% .97% .98%
Net investment income ...................... 2.94% 2.95% 3.20% 3.62% 4.11%
Portfolio turnover rate ..................... 69.75% 50.20% 30.65% 29.04% 24.15%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
45
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN EQUITY INCOME FUND (CONT.)
<TABLE>
<CAPTION>
CLASS B
----------------------------
YEAR ENDED OCTOBER 31,
----------------------------
2000 1999(d)
----------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.16 $ 19.37
----------------------------
Income from investment operations:
Net investment income(b) ................... .39 .33
Net realized and unrealized losses ......... 1.88 (.16)
----------------------------
Total from investment operations ............ 2.27 .17
----------------------------
Less distributions from:
Net investment income ...................... (.39) (.38)
Net realized gains ......................... (1.28) --
----------------------------
Total distributions ......................... (1.67) (.38)
----------------------------
Net asset value, end of year ................ $ 19.76 $ 19.16
============================
Total return(a) ............................. 13.17% .86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 4,509 $ 2,493
Ratios to average net assets:
Expenses ................................... 1.78% 1.69%(c)
Net investment income ...................... 2.18% 2.03%(c)
Portfolio turnover rate ..................... 69.75% 50.20%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding.
(c)Annualized.
(d)For the period January 1, 1999 (effective date) to October 31, 1999.
46
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN EQUITY INCOME FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 19.14 $ 19.88 $ 19.26 $ 16.38 $ 15.19
-------------------------------------------------------------
Income from investment operations:
Net investment income(b) ................... .40 .43 .50 .50 .52
Net realized and unrealized gains .......... 1.89 .36 1.41 3.22 1.63
-------------------------------------------------------------
Total from investment operations ............ 2.29 .79 1.91 3.72 2.15
-------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.38) (.46) (.50) (.51) (.56)
Net realized gains ......................... (1.28) (1.07) (.79) (.33) (.40)
-------------------------------------------------------------
Total distributions ......................... (1.66) (1.53) (1.29) (.84) (.96)
-------------------------------------------------------------
Net asset value, end of year ................ $ 19.77 $ 19.14 $ 19.88 $ 19.26 $ 16.38
=============================================================
Total return(a) ............................. 13.26% 4.11% 10.16% 23.40% 14.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 73,387 $82,353 $81,078 $45,277 $ 18,227
Ratios to average net assets:
Expenses ................................... 1.78% 1.69% 1.69% 1.72% 1.73%
Net investment income ...................... 2.20% 2.20% 2.45% 2.78% 3.33%
Portfolio turnover rate ..................... 69.75% 50.20% 30.65% 29.04% 24.15%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
See notes to financial statements. 47
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 82.1%
COMMERCIAL SERVICES 1.5%
The McGraw-Hill Cos. Inc. ........................................................ 99,000 $ 6,354,563
-----------
COMMUNICATIONS 9.9%
ALLTELL Corp. .................................................................... 75,000 4,832,813
AT&T Corp. ....................................................................... 184,250 4,272,297
SBC Communications Inc. .......................................................... 237,000 13,671,938
Sprint Corp. (FON Group) ......................................................... 225,000 5,737,500
Verizon Communications ........................................................... 236,950 13,698,672
-----------
42,213,220
-----------
CONSUMER DURABLES 1.8%
Ford Motor Co. ................................................................... 106,638 2,785,918
Mattel Inc. ...................................................................... 200,000 2,587,500
Maytag Corp. ..................................................................... 85,000 2,433,125
-----------
7,806,543
-----------
CONSUMER NON-DURABLES 8.5%
General Mills Inc. ............................................................... 126,600 5,285,550
Kimberly-Clark Corp. ............................................................. 90,000 5,940,000
PepsiCo Inc. ..................................................................... 80,000 3,875,000
Philip Morris Cos. Inc. .......................................................... 178,200 6,526,575
Procter & Gamble Co. ............................................................. 65,000 4,643,438
R.J. Reynolds Tobacco Holdings Inc. .............................................. 156,700 5,602,025
UST Inc. ......................................................................... 157,500 3,976,875
-----------
35,849,463
-----------
CONSUMER SERVICES 3.8%
Carnival Corp. ................................................................... 160,000 3,970,000
Gannett Co. Inc. ................................................................. 75,000 4,350,000
H & R Block Inc. ................................................................. 120,000 4,282,500
Harcourt General Inc. ............................................................ 61,500 3,447,075
-----------
16,049,575
-----------
ELECTRONIC TECHNOLOGY 6.2%
Diebold Inc. ..................................................................... 190,000 4,940,000
Motorola Inc. .................................................................... 214,200 5,341,613
PerkinElmer Inc. ................................................................. 73,000 8,723,500
Raytheon Co., B .................................................................. 137,800 4,711,038
Rockwell International Corp. ..................................................... 62,500 2,457,031
-----------
26,173,182
-----------
ENERGY MINERALS 6.0%
Chevron Corp. .................................................................... 43,900 3,605,288
Conoco Inc., B ................................................................... 264,131 7,181,062
Exxon Mobil Corp. ................................................................ 62,717 5,593,572
Petroleo Brasileiro SA (Petrobras), ADR .......................................... 140,100 4,071,656
Texaco Inc. ...................................................................... 80,000 4,725,000
-----------
25,176,578
-----------
</TABLE>
48
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
FINANCE 14.0%
Arthur J. Gallagher & Co. ........................................................ 101,800 $ 6,426,125
Bank of America Corp. ............................................................ 95,000 4,565,938
Fannie Mae ....................................................................... 76,500 5,890,500
Fleet Boston Financial Corp. ..................................................... 204,915 7,786,770
J.P. Morgan & Co. Inc. ........................................................... 22,500 3,723,750
KeyCorp .......................................................................... 140,000 3,456,250
Lincoln National Corp. ........................................................... 139,000 6,724,125
National City Corp. .............................................................. 96,400 2,060,550
St. Paul Cos. Inc. ............................................................... 84,300 4,320,375
SunTrust Banks Inc. .............................................................. 60,000 2,928,750
Washington Mutual Inc. ........................................................... 128,000 5,632,000
Wells Fargo & Co. ................................................................ 120,000 5,557,500
-----------
59,072,633
-----------
HEALTH TECHNOLOGY 8.3%
Abbott Laboratories .............................................................. 177,500 9,374,219
American Home Products Corp. ..................................................... 72,000 4,572,000
Baxter International Inc. ........................................................ 37,500 3,082,031
Bristol-Myers Squibb Co. ......................................................... 140,000 8,531,250
Glaxo Wellcome PLC, ADR (United Kingdom) ......................................... 53,200 3,095,575
Johnson & Johnson ................................................................ 48,000 4,053,500
Merck & Co., Inc. ................................................................ 25,000 2,248,438
-----------
34,957,013
-----------
NON-ENERGY MINERALS 1.0%
Weyerhaeuser Co. ................................................................. 90,000 4,224,375
-----------
PROCESS INDUSTRIES .6%
Dow Chemical Co. ................................................................. 79,500 2,434,688
-----------
PRODUCER MANUFACTURING 3.2%
Delphi Automotive Systems Corp. .................................................. 182,188 2,858,074
Emerson Electric Co. ............................................................. 92,000 6,756,250
Masco Corp. ...................................................................... 210,000 3,924,375
-----------
13,538,699
-----------
REAL ESTATE 5.6%
Arden Realty Inc. ................................................................ 155,000 3,720,000
Equity Office Properties Trust ................................................... 140,000 4,217,500
Equity Residential Properties Trust .............................................. 118,300 5,567,494
Glenborough Realty Trust Inc. .................................................... 144,000 2,313,000
MeriStar Hospitality Corp. ....................................................... 170,000 3,251,250
Simon Property Group Inc. ........................................................ 199,400 4,449,113
-----------
23,518,357
-----------
RETAIL TRADE 2.2%
Home Depot Inc. .................................................................. 55,000 2,365,000
Sears, Roebuck & Co. ............................................................. 120,000 3,567,600
Target Corp. ..................................................................... 120,000 3,315,000
-----------
9,247,600
-----------
</TABLE>
49
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
FRANKLIN EQUITY INCOME FUND SHARES VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES 2.8%
Automatic Data Processing Inc. ................................................... 76,000 $ 4,963,750
Electronic Data Systems Corp. .................................................... 150,000 7,040,625
------------
12,004,375
------------
UTILITIES 6.7%
Constellation Energy Group Inc. .................................................. 85,500 3,564,281
Duke Energy Corp. ................................................................ 50,000 4,321,875
Edison International ............................................................. 250,000 5,968,750
MCN Energy Group Inc. ............................................................ 180,000 4,432,500
National Fuel Gas Co. ............................................................ 84,600 4,536,675
TXU Corp. ........................................................................ 147,900 5,481,544
------------
28,305,625
------------
TOTAL COMMON STOCKS (COST $273,204,780) .......................................... 346,926,489
------------
CONVERTIBLE PREFERRED STOCKS 5.1%
COMMUNICATIONS 1.0%
MediaOne Group Inc., 7.00%, cvt. pfd. (exchangeable into Vodaphone AirTouch common) 98,400 4,077,450
------------
CONSUMER SERVICES .8%
Cox Communications Inc., 7.00%, cvt. pfd. ........................................ 62,500 3,656,250
------------
FINANCE .9%
Metlife Capital Trust I, 8.00%, cvt. pfd. ........................................ 45,000 3,943,125
------------
INDUSTRIAL SERVICES .6%
AES Trust III, 6.75%, cvt. pfd. .................................................. 26,800 2,385,200
------------
REAL ESTATE .3%
Glenborough Realty Trust Inc., 7.75%, cvt. pfd., A ............................... 71,200 1,174,793
------------
TRANSPORTATION 1.1%
Union Pacific Capital Trust, 6.25%, cvt. pfd. .................................... 100,800 4,561,200
------------
UTILITIES .4%
SEI Trust I, 6.25%, cvt. pfd., A ................................................. 31,200 1,883,700
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $19,390,903) ............................ 21,681,718
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
----------
<S> <C> <C>
CONVERTIBLE BONDS 5.8%
CONSUMER SERVICES .9%
Clear Channel Communications, 1.50%, 12/01/02 .................................... $ 4,000,000 3,805,000
------------
ELECTRONIC TECHNOLOGY 2.9%
Amkor Technology Inc., cvt., 5.00%, 3/15/07 ...................................... 3,200,000 2,304,000
LSI Logic Corp., cvt., 4.25%, 3/15/04 ............................................ 790,000 1,681,712
LSI Logic Corp., cvt., 4.00%, 2/15/05 ............................................ 1,875,000 1,579,088
SCI Systems Inc., cvt., 3.00%, 3/15/07 ........................................... 3,250,000 3,384,063
Vitesse Semiconductor Corp., cvt., 144A, 4.00%, 3/15/05 .......................... 3,750,000 3,295,313
------------
12,244,176
------------
</TABLE>
50
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN EQUITY INCOME FUND AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH SERVICES .9%
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 ............................................. $ 5,000,000 $ 3,756,250
------------
TECHNOLOGY SERVICES 1.1%
Affiliated Computer Services, cvt., sub. note, 4.00%, 3/15/05 .............................. 3,400,000 4,785,500
------------
TOTAL CONVERTIBLE BONDS (COST $24,515,837) ................................................. 24,590,926
------------
TOTAL LONG TERM INVESTMENTS (COST $317,111,520) 93.0% ...................................... 393,199,133
------------
(a)REPURCHASE AGREEMENT 6.6%
Joint Repurchase Agreement, 6.563%, 11/1/00, (Maturity Value $27,751,893) (COST $27,746,835) 27,746,835 27,746,835
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Deutsche Bank Govt. Securities
Dresdner Kleinwort Benson, North American LLC
Lehman Brothers Inc.
Nesbitt Burns Securities Inc.
Paribas Corporation
Societe Generale
UBS Warburg
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $344,858,355) 99.6% ................................................ 420,945,968
OTHER ASSETS, LESS LIABILITIES .4% ......................................................... 1,620,743
------------
NET ASSETS 100.0% .......................................................................... $422,566,711
============
</TABLE>
*The principal amount is stated in U.S. dollars unless otherwise indicated.
(a)Investment is through participation in a joint account with other funds
managed by the investment advisor. At October 31, 2000, all repurchase
agreements had been entered into on that date.
See notes to financial statements. 51
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 7.72 $ 8.25 $ 8.41 $ 8.65 $ 8.31
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(b).................... .56 .58 .60 .60 .61
Net realized and unrealized gains (losses) . (.70) (.51) (.15) (.22) .33
-------------------------------------------------------------------------
Total from investment operations ............ (.14) .07 .45 .38 .94
-------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.29) (.58) (.57) (.61) (.60)
In excess of net investment income ......... -- -- (.04) (.01) --
Tax return of capital ...................... (.31) -- -- -- --
Net realized gains ......................... -- (.02) -- -- --
-------------------------------------------------------------------------
Total distributions ......................... (.60) (.60) (.61) (.62) (.60)
-------------------------------------------------------------------------
Net asset value, end of year ................ $ 6.98 $ 7.72 $ 8.25 $ 8.41 $ 8.65
=========================================================================
Total return(a).............................. (1.93%) .90% 5.57% 4.31% 11.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 69,945 $ 85,004 $ 110,876 $ 118,348 $ 137,626
Ratios to average net assets:
Expenses ................................... 1.12% 1.06% .96% .90% .85%
Net investment income ...................... 7.62% 7.28% 7.17% 6.97% 7.68%
Portfolio turnover rate ..................... 138.13% 61.50% 49.93% 193.30% 139.71%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
52
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 7.73 $ 8.26 $ 8.41 $ 8.65 $ 8.31
---------------------------------------------------------------------
Income from investment operations:
Net investment income(b).................... .53 .54 .55 .55 .56
Net realized and unrealized gains (losses) . (.71) (.51) (.14) (.22) .33
---------------------------------------------------------------------
Total from investment operations ............ (.18) .03 .41 .33 .89
---------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.25) (.54) (.52) (.56) (.55)
In excess of net investment income ......... -- -- (.04) (.01) --
Tax return of capital ...................... (.31) -- -- -- --
Net realized gains ......................... -- (.02) -- -- --
---------------------------------------------------------------------
Total distributions ......................... (.56) (.56) (.56) (.57) (.55)
---------------------------------------------------------------------
Net asset value, end of year ................ $ 6.99 $ 7.73 $ 8.26 $ 8.41 $ 8.65
=====================================================================
Total return(a).............................. (2.43%) .36% 5.12% 3.74% 11.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 3,383 $ 4,744 $ 5,710 $ 4,473 $ 3,700
Ratios to average net assets:
Expenses ................................... 1.64% 1.59% 1.49% 1.46% 1.40%
Net investment income ...................... 7.11% 6.77% 6.64% 6.43% 7.17%
Portfolio turnover rate ..................... 138.13% 61.50% 49.93% 193.30% 139.71%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1998.
53
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2000 1999 1998 1997(d)
--------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 7.73 $ 8.26 $ 8.41 $ 8.71
--------------------------------------------------
Income from investment operations:
Net investment income(b).................... .59 .59 .62 .49
Net realized and unrealized losses ......... (.73) (.51) (.15) (.28)
--------------------------------------------------
Total from investment operations ............ (.14) .08 .47 .21
--------------------------------------------------
Less distributions from:
Net investment income ...................... (.30) (.59) (.58) (.49)
In excess of net investment income ......... -- -- (.04) (.02)
Tax return of capital ...................... (.31) -- -- --
Net realized gains ......................... -- (.02) -- --
--------------------------------------------------
Total distributions ......................... (.61) (.61) (.62) (.51)
--------------------------------------------------
Net asset value, end of year ................ $ 6.98 $ 7.73 $ 8.26 $ 8.41
==================================================
Total return(a).............................. (1.94%) 1.03% 5.81% 2.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 84 $ 694 $ 829 $ 741
Ratios to average net assets:
Expenses ................................... 1.00% .94% .85% .82%(c)
Net investment income ...................... 7.80% 7.43% 7.30% 7.08%(c)
Portfolio turnover rate ..................... 138.13% 61.50% 49.93% 193.30%
</TABLE>
(a)Total return is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1998.
(c)Annualized.
(d)For the period January 2, 1997 (effective date) to October 31, 1997.
54 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
----------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 93.9%
ARGENTINA 3.5%
Republic of Argentina:
11.00%, 10/09/06 ....................................... $ 250,000 $ 222,125
11.75%, 4/07/09 ........................................ 2,045,000 1,789,375
11.375%, 3/15/10 ....................................... 121,000 102,548
9.75%, 9/19/27 ......................................... 600,000 448,500
----------
2,562,548
----------
AUSTRALIA 4.2%
Government of Australia, 10.00%, 10/15/07 ................. 2,438,000 AUD 1,534,819
Queensland Treasury Corp., 6.50%, 6/14/05 ................. 2,979,000 AUD 1,549,267
----------
3,084,086
----------
BELGIUM 2.0%
Kingdom of Belgium, 8.50%, 10/01/07 ....................... 1,488,000 EUR 1,473,496
----------
BRAZIL 10.3%
Government of Brazil:
FRN, 7.6875%, 4/15/09 .................................. 3,950,000 3,392,063
14.50%, 10/15/09 ....................................... 1,855,000 1,985,314
Series L, cvt., FRN, 7.6875%, 4/15/12 .................. 1,250,000 932,038
10.125%, 5/15/27 ....................................... 1,700,000 1,282,650
----------
7,592,065
----------
CANADA 7.4%
Government of Canada:
10.50%, 3/01/01 ........................................ 5,000,000 CAD 3,323,676
10.00%, 5/01/02 ........................................ 3,005,000 CAD 2,082,526
----------
5,406,202
----------
DENMARK 2.2%
Kingdom of Denmark:
9.00%, 11/15/00 ........................................ 3,385,000 DKK 386,569
8.00%, 3/15/067 ........................................ 9,357,000 DKK 1,186,321
----------
1,572,890
----------
FRANCE 3.6%
Government of France:
8.25%, 2/27/04 ......................................... 1,279,000 EUR 1,183,276
8.50%, 10/25/08 ........................................ 1,459,000 EUR 1,490,658
----------
2,673,934
----------
GERMANY 8.4%
Federal Republic of Germany:
Series 96, 6.00%, 1/05/06 .............................. 2,914,364 EUR 2,560,628
Series 97, 6.00%, 1/04/07 .............................. 4,080,109 EUR 3,601,480
----------
6,162,108
----------
</TABLE>
55
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ITALY 4.8%
Buoni Poliennali del Tesoro, 6.75%, 7/01/07 ....................................................... 825,000 EUR $ 749,758
Government of Italy, 10.50%, 4/01/05 .............................................................. 2,763,040 EUR 2,799,340
----------
3,549,098
----------
MEXICO 4.4%
United Mexican States:
9.875%, 1/15/07 ................................................................................ 675,000 700,313
8.625%, 3/12/08 ................................................................................ 565,000 550,875
11.375%, 9/15/16 ............................................................................... 1,760,000 1,998,920
----------
3,250,108
----------
NETHERLANDS 3.7%
Cellco Finance NV, 15.00%, 8/01/05 ................................................................ 1,300,000 1,329,250
Government of Netherlands, 7.75%, 3/01/05 ......................................................... 1,485,000 EUR 1,379,396
----------
2,708,646
----------
NEW ZEALAND 2.1%
Government of New Zealand, Series 1106, 8.00%, 11/15/06 ........................................... 3,623,000 NZD 1,534,050
----------
PANAMA .8%
Republic of Panama, 8.875%, 9/30/27 ............................................................... 650,000 550,875
----------
SOUTH KOREA 3.6%
Hanvit Bank, 144A, 12.75%, 3/01/10 ................................................................ 890,000 878,875
Republic of Korea, 8.875%, 4/15/08 ................................................................ 1,660,000 1,734,700
----------
2,613,575
----------
SPAIN 2.6%
Bonos y Oblig del Estado, 8.80%, 4/30/06 .......................................................... 1,932,855 EUR 1,896,321
----------
SWEDEN 3.3%
Kingdom of Sweden, 10.25%, 5/05/03 ................................................................ 21,500,000 SEK 2,412,461
----------
TURKEY 2.7%
Republic of Turkey:
Reg S, 10.00%, 9/19/07 ......................................................................... 262,000 242,219
12.375%, 6/15/09 ............................................................................... 1,744,000 1,757,080
----------
1,999,299
----------
UNITED KINGDOM 4.3%
United Kingdom:
8.00%, 12/07/00 ................................................................................ 1,000,000 GBP 1,454,885
8.50%, 7/16/07 ................................................................................. 1,005,000 GBP 1,700,100
----------
3,154,985
----------
UNITED STATES 12.8%
Fannie Mae, 5.25%, 1/15/09 ........................................................................ 3,609,000 3,288,286
U.S. Treasury Bond, 5.25%, 11/15/28 ............................................................... 3,364,000 3,059,238
U.S. Treasury Note:
6.125%, 8/31/02 ................................................................................ 235,000 235,632
7.25%, 8/15/04 ................................................................................. 2,714,000 2,840,795
----------
9,423,951
----------
</TABLE>
56
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AMOUNT* VALUE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
VENEZUELA 7.2%
Republic of Venezuela:
144A, 9.125%, 6/18/07 ............................................................. $ 1,220,000 $ 984,302
9.25%, 9/15/27 .................................................................... 6,530,000 4,317,963
-----------
5,302,265
-----------
TOTAL LONG TERM INVESTMENTS (COST $ 84,767,476) ............................... 68,922,963
-----------
SHORT TERM INVESTMENT (COST $470,875) .6%
U.S. Treasury Bill, 6.13%, 12/21/00 ............................................... 475,000 470,817
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $85,238,351) .................. 69,393,780
-----------
(a) REPURCHASE AGREEMENT 3.6%
Lehman Brothers Inc., 6.55%, 11/01/00 (Maturity Value $2,644,481) (COST $2,644,000)
Collateralized by U.S. Treasury Notes and Bonds ................................... 2,644,000 2,644,000
-----------
TOTAL INVESTMENTS (COST $87,882,351) 98.1% ........................................ 72,037,780
OTHER ASSETS, LESS LIABILITIES 1.9% ............................................... 1,374,726
-----------
TOTAL NET ASSETS 100.0% ........................................................... $73,412,506
===========
</TABLE>
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - European Unit
GBP - British Pound
NZD - New Zealand Dollar
SEK - Swedish Krona
PORTFOLIO ABBREVIATION:
FRN - Floating Rate Note
*The principal amount is stated in U.S. dollars unless otherwise indicated.
(a)At October 31, 2000, the repurchase agreement held by the Fund had been
entered into on that date.
See notes to financial statements. 57
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.11 $ 10.46 $ 10.29 $ 10.28 $ 10.35
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income(b).................... .57 .53 .54 .57 .58
Net realized and unrealized gains (losses) . -- (.38) .19 .02 (.08)
-------------------------------------------------------------------------------
Total from investment operations ............ .57 .15 .73 .59 .50
-------------------------------------------------------------------------------
Less distributions from net investment income (.59) (.50) (.56) (.58) (.57)
Net asset value, end of year ................ $ 10.09 $ 10.11 $ 10.46 $ 10.29 $ 10.28
===============================================================================
Total return(a).............................. 5.86% 1.51% 7.38% 5.88% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 141,646 $ 176,114 $ 224,132 $ 192,051 $ 196,042
Ratios to average net assets:
Expenses ................................... .85% .79% .78% .78% .74%
Net investment income ...................... 5.66% 5.18% 5.24% 5.51% 5.64%
Portfolio turnover rate ..................... 56.80% 64.26% 37.70% 40.56% 72.62%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
58
<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,
-------------------------------------------------------
2000 1999 1998 1997(d)
-------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.10 $ 10.45 $ 10.30 $ 10.24
-------------------------------------------------------
Income from investment operations:
Net investment income(b).................... .57 .54 .57 .47
Net realized and unrealized gains (losses) . .01 (.38) .16 .07
-------------------------------------------------------
Total from investment operations ............ .58 .16 .73 .54
-------------------------------------------------------
Less distributions from net investment income (.60) (.51) (.58) (.48)
-------------------------------------------------------
Net asset value, end of year ................ $ 10.08 $ 10.10 $ 10.45 $ 10.30
=======================================================
Total return(a).............................. 5.97% 1.62% 7.38% 5.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 1,483 $ 1,367 $ 3,644 $ 385
Ratios to average net assets:
Expenses ................................... .75% .69% .69% .70%(c)
Net investment income ...................... 5.76% 5.26% 5.28% 5.35%(c)
Portfolio turnover rate ..................... 56.80% 64.26% 37.70% 40.56%
</TABLE>
(a)Total return is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
(c)Annualized.
(d)For the period January 2, 1997 (effective date) to October 31, 1997.
See notes to financial statements. 59
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AGENCY BONDS 40.9%
FEDERAL HOME LOAN BANK (FHLB) 6.9%
6.00%, 8/15/02 ................................................................ $10,000,000 $ 9,926,400
----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 7.0%
6.52%, 1/02/02 ................................................................ 5,000,000 5,000,620
5.50%, 5/15/02 ................................................................ 5,000,000 4,930,925
----------
9,931,545
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 27.0%
5.60%, 2/02/01 ................................................................ 9,500,000 9,479,936
5.70%, 5/15/02 ................................................................ 10,000,000 9,887,870
5.75%, 4/15/03 ................................................................ 7,000,000 6,895,854
7.00%, 7/15/05 ................................................................ 3,000,000 3,057,456
7.125%, 3/15/07 ............................................................... 3,000,000 3,088,605
6.61%, 4/10/08 ................................................................ 3,000,000 2,916,429
6.19%, 2/19/09 ................................................................ 3,500,000 3,329,515
----------
38,655,665
----------
TOTAL AGENCY BONDS (COST $58,403,186) ......................................... 58,513,610
----------
MORTGAGE BACKED SECURITIES 57.0%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 5.1%
7.00%, 3/01/07 ................................................................ 301,795 302,256
7.00%, 4/01/07 ................................................................ 123,529 123,718
7.00%, 8/01/07 ................................................................ 236,477 236,838
7.00%, 12/01/10 ............................................................... 1,192,652 1,193,175
7.00%, 7/01/11 ................................................................ 327,258 326,728
7.00%, 10/01/11 ............................................................... 631,875 630,852
7.00%, 11/01/11 ............................................................... 101,167 101,003
7.00%, 4/01/12 ................................................................ 148,997 148,661
7.00%, 5/01/12 ................................................................ 460,418 459,379
7.00%, 8/01/12 ................................................................ 1,404,851 1,401,679
7.00%, 9/01/12 ................................................................ 119,529 119,259
7.00%, 10/01/12 ............................................................... 283,653 283,012
7.00%, 8/01/13 ................................................................ 352,465 351,498
7.00%, 9/01/13 ................................................................ 1,620,128 1,614,704
----------
7,292,762
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 42.3%
6.00%, 4/01/04 ................................................................ 10,657,595 10,449,031
6.50%, 9/01/05 ................................................................ 11,277,030 11,186,007
6.50%, 10/01/06 ............................................................... 9,920,132 9,840,061
6.50%, 12/01/08 ............................................................... 4,710,531 4,673,608
6.50%, 5/01/11 ................................................................ 6,964,050 6,860,356
6.50%, 2/01/12 ................................................................ 5,174,945 5,088,618
7.00%, 7/01/12 ................................................................ 624,956 623,349
7.00%, 8/01/12 ................................................................ 186,103 185,625
7.00%, 9/01/12 ................................................................ 231,027 230,433
7.00%, 10/01/12 ............................................................... 2,583,699 2,577,059
7.00%, 11/01/12 ............................................................... 2,608,470 2,601,766
</TABLE>
60
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE BACKED SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
7.00%, 12/01/12 .......................................................................... $ 398,836 $ 397,811
7.00%, 1/01/13 ........................................................................... 360,644 359,718
7.00%, 5/01/13 ........................................................................... 506,282 504,980
7.00%, 8/01/13 ........................................................................... 208,944 208,146
7.00%, 7/01/14 ........................................................................... 79,190 78,824
7.50%, 12/01/14 .......................................................................... 1,853,556 1,869,065
7.50%, 1/01/15 ........................................................................... 2,792,329 2,815,693
------------
60,550,150
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 9.6%
6.50%, 10/15/13 .......................................................................... 784,297 773,162
6.50%, 4/15/14 ........................................................................... 1,774,565 1,748,338
6.50%, 6/15/14 ........................................................................... 823,769 811,594
6.50%, 7/15/14 ........................................................................... 5,746,010 5,661,083
7.50%, 10/15/14 .......................................................................... 916,270 928,769
7.50%, 11/15/14 .......................................................................... 1,829,180 1,854,133
7.50%, 12/15/14 .......................................................................... 1,939,508 1,965,967
------------
13,743,046
------------
TOTAL MORTGAGE BACKED SECURITIES (COST $81,406,257) ...................................... 81,585,958
------------
TOTAL LONG TERM INVESTMENTS (COST $139,809,443) .......................................... 140,099,568
------------
(a)REPURCHASE AGREEMENT 1.7%
Joint Repurchase Agreement, 6.563%, 11/01/00 (Maturity Value $2,510,858) (COST $2,510,400) 2,510,400 2,510,400
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Deutsche Bank Govt. Securities
Dresdner Kleinwort Benson, North America LLC
Lehman Brothers Inc.
Nesbitt Burns Securities Inc.
Paribas Corporation
Societe Generale
UBS Warburg
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $142,319,843) 99.6% .............................................. 142,609,968
OTHER ASSETS, LESS LIABILITIES .4% ....................................................... 518,727
------------
NET ASSETS 100.0% ........................................................................ $143,128,695
------------
</TABLE>
(a)Investment is through participation in a joint account with other funds
managed by the investment adviser. At October 31, 2000, all repurchase
agreements had been entered into on that date.
See notes to financial statements. 61
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE FRANKLIN EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ...................................... $ 166,093,945 $ 344,858,355 $ 87,882,351 $ 142,319,843
=======================================================================
Value ..................................... 186,815,976 420,945,968 72,037,780 142,609,968
Receivables:
Investment securities sold ................ 7,200,704 1,214,001 -- --
Capital shares sold ....................... 3,527,348 1,450,544 47,632 25,844
Dividends and interest .................... 1,070,965 877,168 1,732,766 1,373,285
-----------------------------------------------------------------------
Total assets ............................ 198,614,993 424,487,681 73,818,178 144,009,097
-----------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........... 3,382,490 237,000 -- --
Capital shares redeemed ................... 339,268 1,160,248 259,780 748,219
Affiliates ................................ 207,549 419,148 46,381 83,409
Shareholders .............................. 7,566 63,216 -- 13,134
Funds advanced by custodian ............... -- -- 41,367 --
Other liabilities .......................... 23,024 41,358 58,144 35,640
-----------------------------------------------------------------------
Total liabilities ....................... 3,959,897 1,920,970 405,672 880,402
-----------------------------------------------------------------------
Net assets, at value .................... $ 194,655,096 $ 422,566,711 $ 73,412,506 $ 143,128,695
=======================================================================
Net assets consist of:
Undistributed net investment income ........ $ 1,419,983 $ 385,926 $ -- $ 177,762
Net unrealized appreciation (depreciation) . 20,722,031 76,087,613 (15,922,453) 290,125
Accumulated net realized gain (loss) ....... 8,241,611 8,488,200 (2,572,096) (8,039,628)
Capital shares ............................. 164,271,471 337,604,972 91,907,055 150,700,436
-----------------------------------------------------------------------
Net assets, at value .................... $ 194,655,096 $ 422,566,711 $ 73,412,506 $ 143,128,695
=======================================================================
</TABLE>
62 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE FRANKLIN EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets, at value ................................ $ 159,129,651 $344,671,076 $ 69,945,249 $141,645,735
========================================================================
Shares outstanding .................................. 9,990,288 17,387,229 10,020,878 14,037,068
========================================================================
Net asset value per share* .......................... $ 15.93 $ 19.82 $ 6.98 $ 10.09
========================================================================
Maximum offering price per share (net asset value per
share / 94.25%, 94.25%, 95.75%, 97.75%,
respectively) ..................................... $ 16.90 $ 21.03 $ 7.29 $ 10.32
========================================================================
CLASS B:
Net assets, at value ................................ -- $ 4,509,074 -- --
========================================================================
Shares outstanding .................................. -- 228,155 -- --
========================================================================
Net asset value and maximum offering price per
share* ............................................ -- $ 19.76 -- --
========================================================================
CLASS C:
Net assets, at value ................................ $ 35,525,445 $ 73,382,775 $ 3,382,775 --
========================================================================
Shares outstanding .................................. 2,239,940 3,712,936 484,130 --
========================================================================
Net asset value per share* .......................... $ 15.86 $ 19.77 $ 6.99 --
========================================================================
Maximum offering price per share (net asset value per
share / 99%) ...................................... $ 16.02 $ 19.97 $ 7.06 --
========================================================================
ADVISOR CLASS:
Net assets, at value ................................ -- -- $ 84,482 $ 1,482,960
========================================================================
Shares outstanding .................................. -- -- 12,099 147,149
========================================================================
Net asset value and maximum offering price per
share ............................................. -- -- $ 6.98 $ 10.08
========================================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 63
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE FRANKLIN EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:+
Dividends ............................................ $ 6,177,710 $ 14,036,605 $ -- $ --
Interest ............................................. 4,500,940 2,156,906 7,145,001 10,225,677
----------------------------------------------------------------------
Total investment income ........................... 10,678,650 16,193,511 7,145,001 10,225,677
----------------------------------------------------------------------
Expenses:
Management fees (Note 3) ............................. 1,022,168 2,070,294 507,924 905,933
Distribution fees (Note 3)
Class A ............................................. 365,008 839,964 100,158 150,556
Class B ............................................. -- 30,171 -- --
Class C ............................................. 318,378 676,466 25,742 --
Transfer agent fees (Note 3) ......................... 316,910 914,708 186,300 186,872
Custodian fees ....................................... 392 3,035 38,600 575
Reports to shareholders .............................. 31,494 111,681 26,400 28,066
Registration and filing fees ......................... 26,293 51,259 37,800 25,429
Professional fees (Note 3) ........................... 18,284 30,656 10,300 16,940
Trustees' fees and expenses .......................... 10,732 22,698 5,100 9,503
Other ................................................ 9,006 11,750 577 4,157
----------------------------------------------------------------------
Total expenses ..................................... 2,118,665 4,762,682 938,901 1,328,031
----------------------------------------------------------------------
Net investment income ............................ 8,559,985 11,430,829 6,206,100 8,897,646
----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ......................................... 12,144,775 9,149,345 (5,679,106) (2,364,551)
Foreign currency transactions ....................... -- -- 110,846 --
----------------------------------------------------------------------
Net realized gain (loss) .......................... 12,144,775 9,149,345 (5,568,260) (2,364,551)
Net unrealized appreciation (depreciation) on:
Investments ......................................... 24,938,138 29,128,699 (2,001,507) 2,139,300
Translation of assets and liabilities denominated in
foreign currencies ................................ -- -- (63,267) --
----------------------------------------------------------------------
Net unrealized appreciation (depreciation) ........ 24,938,138 29,128,699 (2,064,774) 2,139,300
----------------------------------------------------------------------
Net realized and unrealized gain (loss) ............... 37,082,913 38,278,044 (7,633,034) (225,251)
----------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... $ 45,642,898 $ 49,708,873 $ (1,426,934) $ 8,672,395
======================================================================
</TABLE>
+Net of foreign taxes and fees of $35,009 and $23,427 for the Franklin Equity
Income Fund and Franklin Global Government Income Fund, respectively.
64 See notes to financial statements.
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE SECURITIES FUND FRANKLIN EQUITY INCOME FUND
-------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................. $ 8,559,985 $ 8,709,026 $ 11,430,829 $ 14,528,303
Net realized gain from investments and foreign
currency transactions ................................. 12,144,775 4,749,408 9,149,345 30,161,732
Net unrealized appreciation (depreciation) on
investments and translation of assets and
liabilities denominated in foreign currencies ......... 24,938,138 11,188,287 29,128,699 (20,510,599)
-------------------------------------------------------------------
Net increase in net assets resulting
from operations ..................................... 45,642,898 24,646,721 49,708,873 24,179,436
Distributions to shareholders from:
Net investment income:
Class A .............................................. (6,243,372) (7,743,319) (9,602,977) (12,960,968)
Class B .............................................. -- -- (65,751) (24,744)
Class C .............................................. (1,171,254) (1,607,571) (1,418,498) (2,000,705)
Net realized gains:
Class A .............................................. -- -- (25,502,552) (23,373,432)
Class B .............................................. -- -- (173,233) --
Class C .............................................. -- -- (5,214,780) (4,503,651)
-------------------------------------------------------------------
Total distributions to shareholders ...................... (7,414,626) (9,350,890) (41,977,791) (42,863,500)
Capital share transactions: (Note 2)
Class A .............................................. (2,076,617) (53,014,023) (47,629,933) (26,849,718)
Class B .............................................. -- -- 1,786,312 2,574,198
Class C .............................................. (552,181) (15,327,964) (10,134,574) 4,467,283
-------------------------------------------------------------------
Total capital share transactions ......................... (2,628,798) (68,341,987) (55,978,195) (19,808,237)
Net increase (decrease) in net assets ................ 35,599,474 (53,046,156) (48,247,113) (38,492,301)
Net assets:
Beginning of year ........................................ 159,055,622 212,101,778 470,813,824 509,306,125
-------------------------------------------------------------------
End of year .............................................. $ 194,655,096 $ 159,055,622 $ 422,566,711 $ 470,813,824
===================================================================
Undistributed net investment income included in net assets:
End of year .............................................. $ 1,419,983 $ 274,624 $ 385,926 $ 42,323
===================================================================
</TABLE>
See notes to financial statements. 65
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ......................... $ 6,206,100 $ 7,815,767 $ 8,897,646 $ 10,454,640
Net realized gain (loss) from investments and
foreign currency transactions ................ (5,568,260) 2,292,674 (2,364,551) (21,004)
Net unrealized appreciation (depreciation) on
investments and translation of assets
and liabilities denominated in foreign
currencies ................................... (2,064,774) (9,301,008) 2,139,300 (7,765,879)
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................. (1,426,934) 807,433 8,672,395 2,667,757
Distributions to shareholders from:
Net investment income:
Class A ..................................... (3,037,241) (7,040,581) (9,213,924) (9,778,284)
Class C ..................................... (146,866) (358,541) -- --
Advisor Class ............................... (7,276) (56,550) (93,801) (99,886)
Tax return of capital:
Class A ..................................... (3,227,571) -- -- --
Class C ..................................... (156,069) -- -- --
Advisor Class ............................... (7,733) -- -- --
Net realized gains:
Class A ..................................... -- (221,141) -- --
Class C ..................................... -- (12,401) -- --
Advisor Class ............................... -- (1,793) -- --
-------------------------------------------------------------------
Total distributions to shareholders ............. (6,582,756) (7,691,007) (9,307,725) (9,878,170)
Capital share transactions: (Note 2)
Class A ..................................... (7,456,695) (19,386,030) (33,839,480) (40,875,576)
Class C ..................................... (968,014) (618,502) -- --
Advisor Class ............................... (595,804) (84,877) 122,593 (2,209,357)
-------------------------------------------------------------------
Total capital share transactions ................ (9,020,513) (20,089,409) (33,716,887) (43,084,933)
Net decrease in net assets .................. (17,030,203) (26,972,983) (34,352,217) (50,295,346)
Net assets:
Beginning of year ............................... 90,442,709 117,415,692 177,480,912 227,776,258
-------------------------------------------------------------------
End of year ..................................... $ 73,412,506 $ 90,442,709 $ 143,128,695 $ 177,480,912
===================================================================
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of year ................................... $ -- $ (764) $ 177,762 $ 587,841
===================================================================
</TABLE>
66 See notes to financial statements.
<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. All funds included in this report (the Funds) are
diversified except the Franklin Global Government Income Fund. The investment
objectives of the Funds included in this report are:
<TABLE>
<CAPTION>
GLOBAL INCOME GROWTH AND INCOME INCOME
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Global Government Income Fund Convertible Securities Fund Short-Intermediate U.S. Government Securities Fund
Equity Income Fund
</TABLE>
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.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, 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. FORWARD EXCHANGE CONTRACT:
The Global Government Income Fund may enter into forward exchange contracts to
hedge against foreign exchange risks. These contracts are valued daily and the
Fund's equity therein is included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses are included in the Statement of
Operations.
d. INCOME TAXES:
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
67
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets. Other expenses are
charged to each fund on a specific identification basis.
Distributions received by the Funds from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. Each
class of shares differs by its initial sales load, distribution fees, voting
rights on matters affecting a single class and its exchange privilege.
FUND CLASS
--------------------------------------------------------------------
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
68
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 2000, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES FUND EQUITY INCOME FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
2000
Shares sold ..................................... 10,080,650 $ 157,264,142 6,142,019 $ 110,209,796
Shares issued in reinvestment of distributions .. 317,324 4,788,259 1,738,950 30,426,262
Shares redeemed ................................. (10,592,868) (164,129,018) (10,594,274) (188,265,991)
------------------------------------------------------------------------
Net decrease .................................... (194,894) $ (2,076,617) (2,713,305) $ (47,629,933)
========================================================================
1999
Shares sold ..................................... 2,068,275 $ 25,777,173 5,788,113 $ 113,372,968
Shares issued in reinvestment of distributions .. 475,259 5,808,595 1,647,926 31,685,607
Shares redeemed ................................. (6,878,148) (84,599,791) (8,820,547)
------------------------------------------------------------------------
Net decrease .................................... (4,334,614) $ (53,014,023) (1,384,508) $ (26,849,718)
========================================================================
CLASS B SHARES:
2000
Shares sold ............................................................................... 149,977 $ 2,694,173
Shares issued in reinvestment of distributions ............................................ 12,578 219,914
Shares redeemed ........................................................................... (64,499) (1,127,775)
-----------------------------
Net increase .............................................................................. 98,056 $ 1,786,312
=============================
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:
2000
Shares sold ..................................... 501,333 $ 7,691,322 958,482 $ 17,287,634
Shares issued in reinvestment of distributions .. 60,362 908,242 345,903 6,026,937
Shares redeemed ................................. (616,352) (9,151,745) (1,893,621) (33,449,145)
------------------------------------------------------------------------
Net decrease .................................... (54,657) $ (552,181) (589,236) $ (10,134,574)
========================================================================
1999
Shares sold ..................................... 311,908 $ 3,811,987 1,374,494 $ 26,925,968
Shares issued in reinvestment of distributions .. 100,454 1,221,234 310,254 5,945,035
Shares redeemed ................................. (1,667,505) (1,460,904) (28,403,720)
------------------------------------------------------------------------
Net increase (decrease) ......................... (1,255,143) $ (15,327,964) 223,844 $ 4,467,283
========================================================================
</TABLE>
**For the period January 1, 1999 (effective date) to October 31, 1999.
69
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
SHORT-INTERMEDIATE
GLOBAL U.S. GOVERNMENT
GOVERNMENT INCOME FUND SECURITIES FUND
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
2000
Shares sold ...................................... 2,807,470 $ 20,750,963 26,702,261 $ 266,291,754
Shares issued in reinvestment of distributions ... 506,750 3,731,017 643,040 6,423,650
Shares redeemed .................................. (4,301,357) (31,938,675) (30,735,289) (306,554,884)
----------------------------------------------------------------
Net decrease ..................................... (987,137) $ (7,456,695) (3,389,988) $ (33,839,480)
================================================================
1999
Shares sold ...................................... 3,229,144 $ 25,890,191 34,503,497 $ 352,227,000
Shares issued in reinvestment of distributions ... 527,266 4,191,903 649,862 6,640,659
Shares redeemed .................................. (6,184,889) (49,468,124) (39,156,441) (399,743,235)
----------------------------------------------------------------
Net decrease ..................................... (2,428,479) $ (19,386,030) (4,003,082) $ (40,875,576)
================================================================
CLASS C SHARES:
2000
Shares sold ...................................... 118,514 $ 879,309
Shares issued in reinvestment of distributions ... 24,891 183,648
Shares redeemed .................................. (272,964) (2,030,971)
----------------------------
Net decrease ..................................... (129,559) $ (968,014)
============================
1999
Shares sold ...................................... 131,666 $ 1,059,002
Shares issued in reinvestment of distributions ... 29,752 236,792
Shares redeemed .................................. (239,250) (1,914,296)
----------------------------
Net decrease ..................................... (77,832) $ (618,502)
============================
ADVISOR CLASS:
2000
Shares sold ...................................... 4,521 $ 34,577 62,186 $ 625,861
Shares issued in reinvestment of distributions ... 1,953 14,697 8,177 81,588
Shares redeemed .................................. (84,260) (645,078) (58,653) (584,856)
----------------------------------------------------------------
Net increase (decrease) .......................... (77,786) $ (595,804) 11,710 $ 122,593
================================================================
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)
================================================================
</TABLE>
70
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
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
</TABLE>
The Funds pay an investment management fee to Advisers based on the month end
net assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE NET ASSETS
-------------------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% In excess of $250 million
</TABLE>
Under a subadvisory agreement, TICI provides subadvisory services to the Global
Government Income Fund, and receives from Advisers fees based on the average
monthly net assets of the fund.
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
The Funds reimburse Distributors up to the stated percentages of their average
daily 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>
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 paid net commissions on sales of the Funds' shares, and received
contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions paid .............................. $42,140 $198,572 $2,887 $254,604
Contingent deferred sales charges ................. $12,627 $ 37,584 $ 622 $ 17,043
</TABLE>
The Funds paid transfer agent fees of $1,604,790, of which $1,243,806 was paid
to Investor Services.
Included in professional fees are legal fees of $18,592 that were paid to a law
firm in which a partner was an officer of the Funds.
71
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 2000, the Global Government Income Fund and the Short-
Intermediate U.S. Government Securities Fund had tax basis capital losses, which
may be carried over to offset future capital gains. Such losses expire as
follows:
<TABLE>
<CAPTION>
GLOBAL SHORT-INTERMEDIATE
GOVERNMENT U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
-------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2002 ................................ $ -- $1,788,818
2003 ................................ -- 3,564,637
2004 ................................ -- 300,618
2005 ................................ -- --
2006 ................................ -- --
2007 ................................ -- 21,004
2008 ................................ 1,358,201 2,364,551
---------------------------
$1,358,201 $8,039,628
===========================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and foreign
currency transactions.
At October 31, 2000, the net unrealized appreciation/(depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ..................... $ 166,093,945 $ 345,531,213 $ 89,096,246 $ 142,319,843
===================================================================
Unrealized appreciation ................. $ 26,021,651 $ 86,408,541 $ 33,630 $ 946,683
Unrealized depreciation ................. (5,299,620) (10,993,786) (17,092,096) (656,558)
-------------------------------------------------------------------
Net unrealized appreciation (depreciation) $ 20,722,031 $ 75,414,755 $ (17,058,466) $ 290,125
===================================================================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 2000 were as follows:
<TABLE>
<CAPTION>
GLOBAL SHORT-INTERMEDIATE
CONVERTIBLE EQUITY GOVERNMENT U.S. GOVERNMENT
SECURITIES FUND INCOME FUND INCOME FUND SECURITIES FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ................... $296,960,692 $270,299,983 $105,051,941 $ 83,841,491
Sales ....................... $311,179,240 $369,950,568 $113,252,461 $118,926,082
</TABLE>
72
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
6. CREDIT RISK
The Convertible Securities Fund and the Equity Income Fund have 54.3% and 5.4%,
respectively, 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. For information as to specific securities, see
the accompanying Statement of Investments.
73
<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 of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds included in this
report constituting part of the Franklin Investors Securities Trust, (hereafter
referred to as the "Trust") at October 31, 2000, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 2000
74
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Equity Income Fund
hereby designates $1,997,373 as a capital gain dividend for the fiscal year
ended October 31, 2000.
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, 2000.
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES FUND EQUITY INCOME FUND
------------------------------------------------------
<S> <C>
66.38% 89.59%
</TABLE>
75
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $ 9.31 $ 9.37 $ 9.48 $ 9.37 $ 9.33
----------------------------------------------------------------------
Income from investment operations:
Net investment income(b)............................ .555 .496 .553 .593 .589
Net realized and unrealized gains (losses).......... (.010) (.060) (.110) .110 .040
----------------------------------------------------------------------
Total from investment operations..................... .545 .436 .443 .703 .629
Less distributions from net investment income........ (.555) (.496) (.553) (.593) (.589)
----------------------------------------------------------------------
Net asset value, end of year......................... $ 9.30 $ 9.31 $ 9.37 $ 9.48 $ 9.37
======================================================================
Total Return(a)...................................... 6.03% 4.77% 4.80% 7.74% 6.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)...................... $ 232,949 $ 281,974 $ 302,434 $ 342,541 $ 406,431
Ratios to average net assets:
Expenses............................................ .43% .43% .26% .25% .25%
Expenses excluding waiver and payments by affiliate. .43% .43% .43% .43% .42%
Net investment income............................... 5.96% 5.32% 5.88% 6.31% 6.31%
Portfolio turnover rate.............................. 12.68% 23.23% 38.92% 20.84% 24.63%
</TABLE>
(a)Total return is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
76 See notes to financial statements.
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 94.0%
U.S. GOVERNMENT AGENCY SECURITIES 92.9%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 13.9%
Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.00%, 11/01/16 .................................... $ 2,419,995 $ 2,444,528
Cap 12.012%, Margin 2.297% + 5CMT, Resets Annually, 7.925%, 5/01/26 .................................. 3,240,909 3,330,551
Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 8.319%, 7/01/18 .................................... 1,409,398 1,434,345
Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 8.002%, 4/01/18 .................................... 3,389,115 3,459,808
Cap 12.993%, Margin 1.743% + 6 Month TB, Resets Semi-Annually, 7.935%, 10/01/29 ...................... 625,125 626,988
Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.774%, 9/01/19 .................................... 2,718,528 2,753,298
Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.196%, 12/01/16 .................................. 1,521,089 1,544,027
Cap 13.175%, Margin 2.233% + CMT, Resets Annually, 8.055%, 5/01/25 ................................... 2,472,203 2,540,759
Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.976%, 10/01/18 .................................. 730,899 744,878
Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.557%, 3/01/19 ................................... 1,172,429 1,191,729
Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.678%, 3/01/18 ................................... 2,459,441 2,499,284
Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.779%, 4/01/19 ..................................... 4,167,341 4,223,082
Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 8.226%, 7/01/20 .................................... 2,463,746 2,524,317
Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 8.430%, 11/01/19 .................................. 1,217,500 1,248,061
Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.943%, 12/01/21 ............................ 753,545 768,316
Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.391%, 2/01/19 .................................... 935,474 973,382
-----------
32,307,353
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 70.4%
Cap 11.06%, Margin 1.98% + CMT, Resets Annually, 7.891%, 3/01/22 ..................................... 376,035 383,205
Cap 11.884%, Margin 2.211% + CMT, Resets Annually, 7.970%, 2/01/25 ................................... 1,963,063 2,011,317
Cap 11.93%, Margin 2.00% + CMT, Resets Semi-Annually, 8.207%, 6/01/32 ................................ 5,770,881 5,901,269
Cap 11.94%, Margin 2.352% + CMT, Resets Annually, 6.958%, 9/01/29 .................................... 5,663,506 5,604,283
Cap 11.966%, Margin 1.25% + COFI, Resets Monthly, 6.259%, 4/01/22 .................................... 4,403,264 4,318,536
Cap 12.233%, Margin 1.70% + COFI, Resets Monthly, 6.686%, 1/01/19 .................................... 4,754,028 4,707,668
Cap 12.435%, Margin 2.146% + CMT, Resets Annually, 6.480%, 8/01/29 ................................... 9,857,012 9,621,187
Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 7.740%, 11/01/18 ...................... 981,080 1,007,371
Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.616%, 11/01/17 ................................... 9,210,354 9,196,858
Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.757%, 3/01/19 ..................................... 1,566,543 1,593,360
Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%, 10/01/28 ..................................... 437,165 434,339
Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 7.706%, 1/01/19 ......................... 4,217,226 4,239,072
Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.867%, 1/01/19 .................................... 2,186,484 2,163,778
Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 9/01/18 .................................... 8,294,860 8,199,757
Cap 12.763%, Margin 1.25% + COFI, Resets Monthly, 6.686%, 6/01/20 .................................... 5,343,723 5,296,865
Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.250%, 1/01/19 .................................... 310,522 308,487
Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 8.056%, 11/01/20 ................................... 1,640,886 1,686,825
Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.545%, 5/01/19 .................................... 2,268,173 2,287,712
Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.888%, 6/01/17 ........................ 1,404,268 1,453,934
Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.266%, 10/01/17 ............................. 1,504,856 1,557,954
Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 7.414%, 7/01/17 ........................ 5,316,217 5,432,733
Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 2/01/19 .................................... 2,937,577 2,879,561
Cap 12.953%, Margin 2.125% + 6 Month TB, Resets Semi-Annually, 8.088%, 4/01/18 ....................... 393,576 401,266
Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 8.033%, 12/01/19 .................................. 1,504,038 1,539,169
Cap 12.994%, Margin 1.923% + CMT, Resets Annually, 7.759%, 12/01/17 .................................. 565,991 573,536
Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 7.411%, 11/01/17 ............................. 2,219,869 2,263,675
Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.742%, 6/01/19 ..................................... 2,130,332 2,173,455
</TABLE>
77
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
U.S. GOVERNMENT AGENCY SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.926%, 2/01/20 .............................. $ 6,899,033 $ 6,827,523
Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.930%, 12/01/20 ................. 2,430,614 2,477,859
Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.765%, 4/01/19 ............................ 2,953,855 3,022,723
Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.792%, 6/01/19 ............................ 1,998,959 2,034,534
Cap 13.128%, Margin 2.02% + COFI, Resets Annually, 6.893%, 6/01/19 ............................ 2,571,271 2,559,348
Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 8.321%, 11/01/26 ............... 980,483 1,010,473
Cap 13.248%, Margin 2.142% + 3CMT, Resets Every 3 Years, 7.574%, 1/01/26 ...................... 4,559,869 4,653,906
Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 8.023%, 6/01/19 ............................. 1,463,981 1,494,747
Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.853%, 10/01/19 ............................ 3,401,476 3,460,913
Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.326%, 4/01/03 .............................. 2,231,650 2,228,846
Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 8.031%, 9/01/22 ............................ 5,541,558 5,677,507
Cap 13.54%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 8/01/26 .............................. 643,928 635,261
Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 8.099%, 3/01/21 ............................ 1,837,681 1,885,898
Cap 13.791%, Margin 2.143% + CMT, Resets Monthly, 8.101%, 12/01/20 ............................ 3,477,172 3,573,815
Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.963%, 3/01/19 ............................. 951,534 974,916
Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.831%, 7/01/24 .................. 3,256,737 3,225,019
Cap 13.847%, Margin 2.134% + 3CMT, Resets Every 3 Years, 8.236%, 3/01/22 ...................... 417,221 429,501
Cap 13.86%, Margin 1.842% + CMT, Resets Monthly 7.715%, 8/01/16 ............................... 115,732 117,199
Cap 13.875%, Margin 1.975% + CMT, Resets Annually, 7.770%, 3/01/18 ............................ 768,265 781,091
Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.751%, 2/01/19 ............................. 1,562,559 1,602,520
Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.549%, 12/01/18 ............................ 1,274,851 1,305,845
Cap 13.932%, Margin 1.992% + 3CMT, Resets Every 3 Years, 7.395%, 6/01/26 ...................... 3,239,912 3,300,277
Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.922%, 1/01/19 ............................ 2,601,676 2,652,753
Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 7.877%, 5/01/21 ....................... 3,946,546 4,061,685
Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 8.068%, 3/01/20 ............................. 1,540,570 1,584,798
Cap 14.561%, Margin 2.199% + 3CMT, Resets Every 3 Years, 7.794%, 12/01/24 ..................... 3,831,306 3,931,677
Cap 14.68%, Margin 2.125% + 3CMT, Resets Every 3 Years, 7.786%, 8/01/22 ....................... 1,027,490 1,055,516
Cap 14.725%, Margin 2.42% + CMT, Resets Annually, 8.332%, 6/01/19 ............................. 2,989,953 3,102,826
Cap 14.804%, Margin 2.186% + 3CMT, Resets Every 3 Years, 7.425%, 12/01/17 ..................... 1,453,985 1,482,600
Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.802%, 1/01/16 ............................. 3,813,334 3,843,393
Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.901%, 5/01/19 ............................ 1,701,379 1,782,767
-----------
164,014,908
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 8.6%
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 6.750%, 9/20/22 .............................. 3,711,264 3,753,733
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.125%, 10/20/24 ............................. 4,404,847 4,444,159
Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 7.750%, 7/20/25 .............................. 1,350,041 1,402,734
Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.375%, 1/20/23 .............................. 10,314,937 10,413,689
-----------
20,014,315
-----------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $219,255,746) ................................... 216,336,576
-----------
MISCELLANEOUS MORTGAGE BACKED SECURITIES 1.1%
Countrywide Mortgage Backed Securities, Inc., Series 1994-I, A8, 6.25%, 7/25/09 ............... 262,050 259,955
Home Owners Federal Savings & Loan, Cap 13.00%, Margin 1.75%, Resets Monthly, 7.543%, 1/25/18 . 409,952 409,695
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 7.634%, 1/25/25 ............. 509,830 507,691
</TABLE>
78
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MISCELLANEOUS MORTGAGE BACKED SECURITIES (CONT.)
Salomon Brothers Mortgage Securities VII, Cap 14.00%, Margin 0.96% + NACR, Resets Annually,
8.197%, 10/25/16 ............................................................................. $ 416,318 $ 415,698
Sears Mortgage Securities, Cap 13.66%, Margin 2.42% +COFI, Resets Monthly, 6.180%, 7/25/21 ... 169,614 167,732
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25%+CMT, Resets Annually, 7.701%,
12/25/18 ..................................................................................... 363,527 363,618
Western Federal Savings and Loan Association, Cap 12.25%, Margin 0.75% + 1 Month LIBOR,
Resets Monthly, 7.370%, 6/25/20 .............................................................. 187,272 186,569
Western Federal Savings And Loan Association, Cap 12.75%, Margin 0.75% + 1 Month LIBOR,
Resets Monthly, 7.370%, 7/25/20 .............................................................. 201,288 200,533
------------
TOTAL MISCELLANEOUS MORTGAGE BACKED SECURITIES (COST $2,529,175) ............................. 2,511,491
------------
TOTAL LONG TERM INVESTMENTS (COST $221,784,921) .............................................. 218,848,067
------------
(a)REPURCHASE AGREEMENT 5.5%
Joint Repurchase Agreement, 6.563%, 11/01/00, (Maturity Value $12,906,833) (COST $12,904,480). 12,904,480 12,904,480
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Deutsche Bank Govt. Securities
Dresdner Kleinwort Benson, North America LLC
Lehman Brothers Inc.
Nesbitt Burns Securities Inc.
Paribas Corporation
Societe Generale
UBS Warburg
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $234,689,401) 99.5% .................................................................. 231,752,547
OTHER ASSETS, LESS LIABILITIES .5% ........................................................................... 1,196,473
------------
NET ASSETS 100.0% ............................................................................................ $232,949,020
============
</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
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, 2000, all repurchase
agreements had been entered into on that date.
See notes to financial statements. 79
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<S> <C>
Assets:
Investments in securities:
Cost .......................................................................................... $234,689,401
============
Value ......................................................................................... 231,752,547
Receivables:
Investment securities sold .................................................................... 623,619
Interest ...................................................................................... 1,552,950
------------
Total assets .............................................................................. 233,929,116
------------
Liabilities:
Payables:
Capital shares redeemed ....................................................................... 865,773
Affiliates .................................................................................... 79,750
Other liabilities .............................................................................. 34,573
------------
Total liabilities ......................................................................... 980,096
------------
Net assets, at value ..................................................................... $232,949,020
============
Net assets consist of:
Net unrealized depreciation ................................................................... (2,936,854)
Accumulated net realized loss ................................................................. (92,731,427)
Capital shares ................................................................................ 328,617,301
------------
Net assets, at value .......................................................................... $232,949,020
============
Shares outstanding ............................................................................ 25,049,290
============
Net asset value and maximum offering price per share (net asset value/shares outstanding) ..... $9.30
============
</TABLE>
80 See notes to financial statements.
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
Investment income:
Interest ............................................................................... $16,163,151
-----------
Expenses:
Management fees (Note 3) ............................................................... 1,014,088
Custodian fees ......................................................................... 2,517
Reports to shareholders ................................................................ 1,311
Professional fees (Note 3) ............................................................. 44,070
Trustees' fees and expenses ............................................................ 13,804
Other .................................................................................. 15,575
-----------
Total expenses .................................................................... 1,091,365
-----------
Net investment income ............................................................ 15,071,786
-----------
Realized and unrealized losses:
Net realized loss from investments ..................................................... (210,331)
Net unrealized depreciation on investments ............................................. (250,160)
-----------
Net realized and unrealized loss ........................................................ (460,491)
-----------
Net increase in net assets resulting from operations .................................... $14,611,295
===========
</TABLE>
See notes to financial statements. 81
<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, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................... $ 15,071,786 $ 15,297,092
Net realized loss from investments ......................................... (210,331) (140,123)
Net unrealized depreciation on investments ................................. (250,160) (1,785,775)
-------------------------------
Net increase in net assets resulting from operations ................... 14,611,295 13,371,194
Distributions to shareholders from net investment income .................... (15,071,786) (15,297,092)
Capital share transactions (Note 2) ......................................... (48,564,430) (18,533,904)
-------------------------------
Net decrease in net assets ............................................. (49,024,921) (20,459,802)
Net assets (there is no undistributed net investment income at beginning or
end of year):
Beginning of year ........................................................... 281,973,941 302,433,743
-------------------------------
End of year ................................................................. $ 232,949,020 $ 281,973,941
===============================
</TABLE>
82 See notes to financial statements.
<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 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.
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.
83
<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, 2000, there was 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>
2000
Shares sold................................................................ 8,344,642 $ 77,468,342
Shares issued in reinvestment of distributions............................. 1,623,370 15,071,636
Shares redeemed............................................................ (15,197,502) (141,104,408)
---------------------------
Net decrease...................................................... (5,229,490) $(48,564,430)
===========================
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)
===========================
</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 of .400% of the
first $5 billion of the portfolio's month end net assets. Fees are further
reduced on net assets over $5 billion.
At October 31, 2000, all shares of the Portfolio were owned by the Franklin
Adjustable U.S. Government Securities Fund.
Included in professional fees are legal fees of $1,770 that were paid to a law
firm in which a partner was an officer of the Portfolio.
84
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 2000, 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>
2001......................... $17,182,002
2002......................... 67,102,060
2003......................... 7,677,608
2004......................... 419,303
2007......................... 140,123
2008......................... 210,331
-----------
$92,731,427
===========
</TABLE>
At October 31, 2000, the Portfolio had expired capital loss carryovers of
$44,474,794, which were reclassified to paid-in capital.
At October 31, 2000, the net unrealized depreciation based on the cost of
investments for income tax purposes of $234,689,401 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation........ $ 242,547
Unrealized depreciation........ (3,179,401)
-----------
Net unrealized depreciation.... $(2,936,854)
===========
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 2000 aggregated $30,418,006 and $78,546,522, respectively.
85
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS 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, 2000, 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 accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 2000
86
<PAGE>
This page intentionally left blank.
<PAGE>
This page intentionally left blank.
SHAREHOLDER LETTER
Dear Shareholder:
This annual report for Franklin Investors Securities Trust covers the period
ended October 31, 2000.
RISING RATES WEIGH ON THE U.S. ECONOMY
After powering to an annualized 8.3% increase in the fourth quarter of 1999,
gross domestic product (GDP) growth eased to an annualized 2.4% in the third
quarter of 2000, as the Federal Reserve Board's (the Fed's) interest-rate
increases began to take hold. Economic indicators from new home and auto sales
to industrial production increasingly gave evidence that the slowdown was real.
Toward the end of the reporting period, the question most commonly asked was
whether the economy would slow too much, leading to a "hard landing" and
recession, or if the Fed had successfully engineered a "soft landing," which
would lead to slower growth with less of an inflation threat.
The wild cards in this scenario were the prices of oil and natural gas, both of
which rose approximately 50%, during the period. Oil at 10-year highs and
natural gas at all-time highs created some opposing forces on the U.S. economy.
On the one hand, sky-high energy prices caused inflation to warm up, as
evidenced by the 0.5% September increase in the Consumer Price Index, a commonly
used measure of inflation. On the other hand, these same energy prices exerted a
downward pressure on GDP growth as higher prices
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ................................................. 1
Fund Reports
Franklin Adjustable U.S. Government Securities Fund ............... 4
Franklin Bond Fund ................................................ 10
Financial Highlights & Statements of Investments ................... 20
Financial Statements ............................................... 28
Notes to Financial Statements ...................................... 31
Independent Auditors' Report ....................................... 37
</TABLE>
[FUND CATEGORY PYRAMID GRAPHIC]
<PAGE>
"In an about-face from recent history, bonds significantly outperformed equities
during the period. ..."
put a crimp on discretionary spending, lessening future inflationary pressures
and the possibility that the Fed would raise rates again.
Despite these economic uncertainties, the U.S. consumer remained positive during
the period under review. With unemployment hovering near 3.9%, a 30-year low, at
the end of the period, consumer confidence stayed historically high. The tight
job market made many people more secure about their careers and confident that
the U.S. economy would continue its 10-year long expansion. This upbeat public
sentiment was somewhat surprising, however, given the equity markets'
less-than-stellar performances for the period and their negative returns since
the beginning of 2000.
BONDS SHINE; STOCKS LOSE THEIR LUSTER
In an about-face from recent history, bonds significantly outperformed equities
during the period, with a bulk of those gains occurring since May, when it
appeared that the Fed was prepared to stop raising rates. Although the full
fiscal year paints a picture of generally positive returns for the major U.S.
equity indexes as a result of strong November and December 1999 performances
when the Fed was increasing the money supply due to Y2K concerns, their
performances year-to-date perhaps tell a truer story. For the first 10 months of
2000, the Dow Jones(R) Industrial Average, Nasdaq(R) and Standard & Poor's
500(R) (S&P 500(R)) Indexes returned -3.58%, -16.70% and -1.81%, respectively,
with growth stocks performing poorly and value stocks holding up relatively
well.
For the same 10-month period, the 10-year Treasury note posted a return of
10.59% and investment-grade corporate bonds, as measured by the Lehman Brothers
Credit Index, returned
2
<PAGE>
5.93%. Several factors played a role in bonds' outperformance over equities.
Slowing economic growth, a subdued inflation threat, heightened Middle East
hostility and anticipation that the Fed will eventually cut short-term rates
provided a favorable economic environment for bonds. Furthermore, the equity
markets' volatility and dismal performances forced investors to look elsewhere
for positive returns. However, high yield bonds suffered as investors worried
that companies that issue such lower-rated debt would have a more difficult time
paying the required interest and principal in a slower-growing economy.
Recent market uncertainty reinforces the importance of investing for the long
term, so daily market fluctuations and short-term volatility have minimal impact
on overall investment goals. We encourage you to discuss your financial goals
with your investment representative, who can address concerns about 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>
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
During the year under review, different forces influenced short-term and
long-term interest rates. Short-term rates primarily responded to actual and
expected monetary-policy activity by the Federal Reserve Board (the Fed) based
on assessing changing economic conditions. Through May 2000, the Fed had raised
the federal funds target rate four times during the reporting period, by a total
of 1.25%, in response to exceptionally strong economic growth and potential
inflationary concerns. The 2-year Treasury note yield rose as high as 6.91% on
May 18, after beginning the reporting period at 5.79%. However, as market
expectations faded for future Fed rate hikes, intermediate-term rates fell, and
the 2-year Treasury yield finished the period at 5.91%. Long-term interest
rates, on the other hand, responded primarily to supply and demand influences.
Specifically, long-term rates declined due to expectations of reduced, future
long-term Treasury bond supply. The 30-year Treasury bond yield
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.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investment
(SOI). The SOI begins on page 21.
4
<PAGE>
fell from 6.16% on October 31, 1999, to 5.79% on October 31, 2000. Unless the
Treasury alters its plans to reduce the long-term Treasury bond supply, we
believe downward pressure on long-term rates will continue.
By the end of the reporting period, concerns about a slowing domestic economy
appeared unfounded. The third quarter 2000 gross domestic product growth was an
annualized 2.4%, slower than the second quarter's annualized 5.6%, but early
signs point to a re-acceleration in the fourth quarter. Despite stock market
weakness during the Fund's fiscal year, the consumer sector held up relatively
well. Additionally, consumer confidence remained fairly strong throughout the
reporting period, which we believe bodes well for the important holiday shopping
season.
Continuing economic strength raised the Fed's concerns that inflation pressures
may grow despite productivity increases, with higher energy prices and tight
labor markets being primary sources of such pressure. During the period, oil
supply shortages and political instability in some of the world's oil-producing
regions pushed crude oil prices to nearly $35 per barrel, up from less than $20
a year earlier. Regarding labor, the unemployment rate dipped to 3.9%, a 30-year
low. As a result of such forces, the Consumer Price Index, a commonly used
measure of inflation, began to creep up, rising 3.5% on an annual basis through
September. The core rate, which excludes food and energy, grew at a 2.6% rate
for the same period. While these rates are not alarming by themselves, the trend
higher is a source for concern, and, if it persists, we believe further Fed
tightenings may be forthcoming.
5
<PAGE>
PORTFOLIO BREAKDOWN
FRANKLIN ADJUSTABLE
U.S. Government Securities Fund
Based on Total Net Assets
10/31/00
[PORTFOLIO BREAKDOWN PIE CHART]
<TABLE>
<S> <C>
FNMA 70.4%
FHLMC 13.9%
GNMA 8.6%
Other 7.1%
</TABLE>
PORTFOLIO NOTES
We continued to employ 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 select securities using a value-oriented approach,
emphasizing the bond's fundamental cost to comparable securities, as well as its
historical prepayment performance.
During the reporting period, we made no major changes to the portfolio. On
October 31, 2000, Federal National Mortgage Association (FNMA or Fannie Mae)
securities continued to represent the Fund's largest weighting, at 70.4% of
total net assets. Net outflows during the period prompted us to liquidate some
of our faster-prepaying ARM securities. However, we were able to selectively add
several seasoned, conventional ARMs to our core holdings.
The Fund's distribution rate tends to track movements in short-term interest
rates; however, it does so with a lag due to the nature of the coupon resets on
the Fund's securities. Because short-term rates increased early in the period,
the Fund's distribution rate increased from 4.54% at the beginning of the period
to 5.87% at the end, as shown in the Performance Summary on page 8. Further
rises in the distribution rate will be constrained
6
<PAGE>
by short-term rate declines later in the reporting period. Going forward, we
will continue to maintain our conservative strategy, which we believe allows the
Fund to produce consistent performance in a variety of interest-rate
environments.
/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
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
--------------------------------------------------------------------------------
<S> <C>
November 3.60 cents
December 4.10 cents*
January 3.60 cents
February 3.90 cents
March 3.90 cents
April 4.20 cents
May 4.20 cents
June 4.20 cents
July 4.20 cents
August 4.30 cents
September 4.30 cents
October 4.65 cents
--------------------------------------------------------------------------------
TOTAL 49.15 CENTS
</TABLE>
*Includes an additional 0.5 cent distribution to meet excise tax requirements.
This discussion reflects our views, opinions and portfolio holdings as of
October 31, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any industry, security or the Fund.
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
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include the sales charge. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of the Fund's operating
expenses. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
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.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +5.44%
Net Asset Value (NAV) $9.30 (10/31/00) $9.30 (10/31/99)
Change in NAV --
Distributions (11/1/99-10/31/00) Dividend Income $0.4915
</TABLE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (10/20/87)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.54% +30.88% +61.55% +104.25%
Average Annual Total Return(2) +3.21% +5.04% +4.67% +5.49%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A
--------------------------------------------------------------------------------
<S> <C>
Distribution Rate(3) 5.87%
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 the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum sales charge.
3. Distribution rate is based on an annualization of October's 4.65 cent per
share dividend and the maximum offering price of $9.51 per share on 10/31/00.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee 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 applicable, maximum sales charge, 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
interest. One cannot invest directly in an index.
CLASS A (11/1/90-10/31/00)
<TABLE>
<CAPTION>
Franklin Adjustble U.S. Lehman Brothers Short U.S. Payden & Rygel
Government Securities Fund Government 1-2 Year Index 6-Month CD Index
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/01/1990 $9,775 $10,000 $10,000
11/30/1990 $9,843 0.89% $10,089 0.56% $10,056
12/31/1990 $9,933 1.11% $10,201 0.97% $10,154
01/31/1991 $10,019 0.92% $10,295 0.84% $10,239
02/28/1991 $10,105 0.66% $10,363 0.60% $10,300
03/31/1991 $10,189 0.69% $10,434 0.70% $10,372
04/30/1991 $10,253 0.86% $10,524 0.66% $10,441
05/31/1991 $10,315 0.56% $10,583 0.48% $10,491
06/30/1991 $10,354 0.45% $10,631 0.36% $10,529
07/31/1991 $10,464 0.78% $10,713 0.61% $10,593
08/31/1991 $10,541 1.25% $10,847 0.72% $10,669
09/30/1991 $10,637 0.90% $10,945 0.54% $10,727
10/31/1991 $10,701 0.98% $11,052 0.60% $10,791
11/30/1991 $10,732 1.00% $11,163 0.58% $10,854
12/31/1991 $10,793 1.30% $11,308 0.61% $10,920
01/31/1992 $10,817 0.01% $11,309 0.41% $10,965
02/29/1992 $10,873 0.29% $11,342 0.29% $10,997
03/31/1992 $10,916 0.10% $11,353 0.29% $11,028
04/30/1992 $10,947 0.86% $11,451 0.49% $11,082
05/31/1992 $11,019 0.84% $11,547 0.37% $11,123
06/30/1992 $11,091 0.86% $11,646 0.35% $11,162
07/31/1992 $11,100 1.03% $11,766 0.55% $11,224
08/31/1992 $11,147 0.71% $11,850 0.30% $11,257
09/30/1992 $11,193 0.82% $11,947 0.41% $11,304
10/31/1992 $11,160 -0.46% $11,892 0.17% $11,323
11/30/1992 $11,183 -0.10% $11,880 0.10% $11,334
12/31/1992 $11,226 0.86% $11,982 0.47% $11,387
01/31/1993 $11,267 0.91% $12,091 0.38% $11,431
02/28/1993 $11,318 0.70% $12,176 0.27% $11,462
03/31/1993 $11,333 0.27% $12,209 0.27% $11,493
04/30/1993 $11,392 0.55% $12,276 0.30% $11,527
05/31/1993 $11,393 -0.22% $12,249 0.17% $11,547
06/30/1993 $11,454 0.62% $12,325 0.27% $11,578
07/31/1993 $11,493 0.24% $12,355 0.29% $11,611
08/31/1993 $11,530 0.67% $12,437 0.32% $11,649
09/30/1993 $11,516 0.32% $12,477 0.28% $11,681
10/31/1993 $11,491 0.22% $12,505 0.25% $11,710
11/30/1993 $11,406 0.12% $12,520 0.24% $11,738
12/31/1993 $11,377 0.37% $12,566 0.30% $11,774
01/31/1994 $11,418 0.58% $12,639 0.33% $11,812
02/28/1994 $11,350 -0.41% $12,587 -0.01% $11,811
03/31/1994 $11,268 -0.25% $12,555 0.23% $11,838
04/30/1994 $11,195 -0.25% $12,524 0.15% $11,856
05/31/1994 $11,247 0.18% $12,547 0.26% $11,887
06/30/1994 $11,278 0.28% $12,582 0.31% $11,924
07/31/1994 $11,325 0.80% $12,682 0.44% $11,976
08/31/1994 $11,325 0.34% $12,726 0.39% $12,023
09/30/1994 $11,313 -0.08% $12,715 0.25% $12,053
10/31/1994 $11,183 0.28% $12,751 0.39% $12,100
11/30/1994 $11,178 -0.32% $12,710 0.22% $12,127
12/31/1994 $11,154 0.24% $12,741 0.39% $12,174
01/31/1995 $11,244 1.22% $12,896 0.70% $12,259
02/28/1995 $11,372 1.19% $13,050 0.61% $12,334
03/31/1995 $11,439 0.57% $13,124 0.49% $12,395
04/30/1995 $11,545 0.81% $13,230 0.58% $12,466
05/31/1995 $11,789 1.39% $13,414 0.66% $12,549
06/30/1995 $11,747 0.53% $13,485 0.50% $12,611
07/31/1995 $11,820 0.47% $13,549 0.55% $12,681
08/31/1995 $11,920 0.55% $13,623 0.48% $12,742
09/30/1995 $11,981 0.45% $13,684 0.45% $12,799
10/31/1995 $12,030 0.74% $13,786 0.53% $12,867
11/30/1995 $12,143 0.74% $13,888 0.53% $12,935
12/31/1995 $12,177 0.70% $13,985 0.56% $13,007
01/31/1996 $12,263 0.79% $14,095 0.54% $13,078
02/29/1996 $12,271 -0.22% $14,064 0.39% $13,129
03/31/1996 $12,345 0.06% $14,073 0.35% $13,175
04/30/1996 $12,355 0.19% $14,100 0.43% $13,231
05/31/1996 $12,406 0.30% $14,142 0.42% $13,287
06/30/1996 $12,523 0.67% $14,237 0.39% $13,339
07/31/1996 $12,561 0.40% $14,294 0.43% $13,396
08/31/1996 $12,599 0.41% $14,352 0.53% $13,467
09/30/1996 $12,688 0.80% $14,467 0.49% $13,533
10/31/1996 $12,817 1.00% $14,612 0.52% $13,603
11/30/1996 $12,877 0.64% $14,705 0.48% $13,669
12/31/1996 $12,938 0.16% $14,729 0.45% $13,730
01/31/1997 $13,027 0.47% $14,798 0.44% $13,791
02/28/1997 $13,101 0.29% $14,841 0.40% $13,846
03/31/1997 $13,136 0.04% $14,847 0.34% $13,893
04/30/1997 $13,243 0.75% $14,958 0.47% $13,958
05/31/1997 $13,322 0.67% $15,058 0.52% $14,031
06/30/1997 $13,416 0.63% $15,153 0.50% $14,101
07/31/1997 $13,553 0.91% $15,291 0.54% $14,177
08/31/1997 $13,561 0.20% $15,322 0.45% $14,241
09/30/1997 $13,656 0.68% $15,426 0.46% $14,306
10/31/1997 $13,737 0.66% $15,528 0.49% $14,376
11/30/1997 $13,744 0.27% $15,570 0.42% $14,437
12/31/1997 $13,839 0.63% $15,668 0.52% $14,512
01/31/1998 $13,949 0.85% $15,801 0.57% $14,595
02/28/1998 $13,956 0.16% $15,826 0.39% $14,652
03/31/1998 $13,993 0.41% $15,891 0.45% $14,717
04/30/1998 $14,060 0.47% $15,966 0.44% $14,782
05/31/1998 $14,098 0.51% $16,047 0.49% $14,855
06/30/1998 $14,165 0.50% $16,127 0.45% $14,921
07/31/1998 $14,201 0.47% $16,203 0.49% $14,995
08/31/1998 $14,289 1.03% $16,370 0.53% $15,074
09/30/1998 $14,375 1.14% $16,557 0.61% $15,166
10/31/1998 $14,323 0.52% $16,643 0.51% $15,243
11/30/1998 $14,302 -0.03% $16,638 0.34% $15,295
12/31/1998 $14,375 0.38% $16,701 0.47% $15,367
01/31/1999 $14,450 0.37% $16,763 0.45% $15,436
02/28/1999 $14,540 -0.25% $16,721 0.31% $15,484
03/31/1999 $14,583 0.66% $16,831 0.45% $15,554
04/30/1999 $14,643 0.33% $16,887 0.42% $15,619
05/31/1999 $14,687 0.06% $16,897 0.33% $15,671
06/30/1999 $14,699 0.30% $16,948 0.22% $15,705
07/31/1999 $14,742 0.36% $17,009 0.45% $15,776
08/31/1999 $14,799 0.26% $17,053 0.41% $15,840
09/30/1999 $14,857 0.59% $17,154 0.46% $15,913
10/31/1999 $14,931 0.31% $17,207 0.44% $15,983
11/30/1999 $14,972 0.22% $17,245 0.52% $16,066
12/31/1999 $15,006 0.16% $17,272 0.48% $16,144
01/31/2000 $15,081 0.09% $17,288 0.45% $16,216
02/29/2000 $15,128 0.64% $17,398 0.45% $16,289
03/31/2000 $15,208 0.54% $17,492 0.45% $16,363
04/30/2000 $15,277 0.31% $17,547 0.44% $16,435
05/31/2000 $15,313 0.39% $17,615 0.42% $16,504
06/30/2000 $15,416 0.96% $17,784 0.62% $16,606
07/31/2000 $15,503 0.61% $17,893 0.63% $16,710
08/31/2000 $15,574 0.69% $18,016 0.62% $16,814
09/30/2000 $15,680 0.71% $18,144 0.57% $16,910
10/31/2000 0.39% $15,742 0.50% $18,235 0.56% $17,005
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +3.11%
5-Year +5.06%
10-Year +4.64%
Since Inception (10/20/87) +5.48%
</TABLE>
*Source: Standard & Poor's Micropal (Lehman Brothers; Payden & Rygel). The
unmanaged Lehman Brothers Short U.S. Government 1-2 Year Index includes fixed
rate debt issues rated investment grade or higher by Moody's, S&P or Fitch, in
that order. All issues have between one and two years to maturity and an
outstanding par value of at least $100 million for U.S. Government issues. All
returns are market value-weighted inclusive of accrued interest. The index
includes issues of the U.S. government or any agency thereof. The
non-convertible, publicly issued, domestic debt is guaranteed by the U.S.
government. Total return includes price appreciation/depreciation and income as
a percentage of the original investment. The index is rebalanced monthly by
market capitalization. The Payden & Rygel 6-Month CD Index is a total return
index based on a constant maturity instrument. Payden & Rygel includes both
accrued interest and change in market price in its monthly total return
calculations. End of month yield levels are obtained from the Federal Reserve
H15 publication and used to calculate change in price. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
Past performance does not guarantee future results.
9
<PAGE>
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.
--------------------------------------------------------------------------------
In general, interest rates fell during the year under review, especially since
May, when investors felt the Fed was no longer raising short-term rates. The
Treasury bond yield curve inverted in February, when short-term securities
started to offer higher rates than long-term bonds, suggesting that an economic
slowdown was forthcoming. Toward the end of the period, it began to dis-invert,
as yields on 10-year Treasury notes fell below those of 30-year Treasury bonds.
Long-term interest rates responded primarily to supply and demand influences.
Specifically, long-term rates declined due to expectations of reduced future,
long-term Treasury bond supply. During the reporting period, the 30-year
Treasury bond yield fell from 6.16% on October 31, 1999, to 5.79% on October 31,
2000, while the 10-year note fell from 6.02% to 5.75%.
The Fund's performance benefited from tightening swap spreads -- the difference
between yields on the Treasury curve and the LIBOR (London InterBank Offered
Rate) curve -- later in the period. Because of the dwindling supply of Treasury
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 24.
10
<PAGE>
securities, investors found a new pricing benchmark in swaps. Movements in swap
markets can affect the performance of most non-Treasury asset classes. When swap
spreads tighten, non-Treasury bonds tend to perform well. We believe the ideal
portfolio in such an environment is one heavily invested in securities offering
yield advantages. In the fixed-income universe, long-term total return is almost
completely dependent on income, as opposed to price appreciation. During the
reporting period, we attempted to add value by investing in suitable
alternatives to our core sectors as they became more attractive.
Mortgage rates rose early in the reporting period, a positive event for
mortgage-backed pass-through securities, the Fund's largest asset-class
weighting. As a result, such securities experienced slowing prepayments and
decreased prepayment risk, as higher mortgage rates reduced the incentive for
homeowners to refinance their mortgages. In addition, tightening swap spreads
and a flattening yield curve also benefited mortgage-backed securities.
Following the Fed's May interest-rate increase, mortgage rates steadily declined
and prepayments due to refinancing increased. Fortunately, the decrease in rates
was gradual and homeowner refinancing was moderate and predictable. In addition,
seasonal factors peaked in August and prepayments, due to summer homeowner
relocations, dropped off. According to the Federal Home Loan Mortgage
Corporation, the conforming 30-year fixed mortgage rate declined slightly, from
7.96% on October 31, 1999, to 7.68% on October 31, 2000, peaking at 8.64% on May
19, 2000.
PORTFOLIO BREAKDOWN
Franklin Bond Fund
Based on Total Investments
10/31/00
<TABLE>
<CAPTION>
SECTOR 10/31/00 10/31/99
--------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-Backed Securities 30.6% 47.6%
Corporate Bonds 19.0% 33.5%
Asset-Backed Securities 12.8% 8.3%
U.S. Treasury Securities 7.3% 0.1%
U.S. Agency Bonds 2.4% 2.3%
International Bonds 2.2% 3.7%
Short-Term Investments 25.7% 4.5%
</TABLE>
11
<PAGE>
For much of the period, investors focused their attention on the value of the
"full faith and credit" guarantee of Ginnie Mae (GNMA or Government National
Mortgage Association) securities, as Ginnie Mae is considering making changes to
their securitization programs. However, it has moved cautiously and has
demonstrated high regard for investor interests, which has moderated the impact
on Ginnie Mae prices. During this time, we closely monitored the yield spreads
between Ginnie Maes and Fannie Maes (FNMA or Federal National Mortgage
Association), swapping from one to the other when warranted. For the year under
review, the Fund's exposure to mortgage-backed securities fell from 47.6% of
total investments at the beginning of the period to 30.6% at the end.
Our corporate bond holdings also decreased during the period to end at 19.0% of
total investments, down from 33.5% on October 31, 1999. Late in the period, the
market appeared spooked by the sheer volume of expected issuance, primarily from
telecommunications companies, many of which are expected to come to market by
the end of 2000. As a result of this added debt burden, several companies
experienced downgrades by independent credit rating agencies. By October 2000,
the corporate bond market faced additional pressure after a deluge of earnings
warnings; however, with corporate bond spreads at attractive levels, we were
looking to add select positions to the Fund. Going forward, we intend to
aggressively
12
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Bond Fund
11/1/99 - 10/31/00
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
----------------------------------------
MONTH CLASS A ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C> <C>
November 5.20 cents 5.41 cents
December 14.26 cents** 14.47 cents**
January 5.50 cents 5.69 cents
February 5.90 cents 6.08 cents
March 5.90 cents 6.09 cents
April 5.90 cents 6.10 cents
May 6.10 cents 6.31 cents
June 6.10 cents 6.30 cents
July 6.10 cents 6.28 cents
August 6.10 cents 6.28 cents
September 6.10 cents 6.29 cents
October 6.10 cents 6.32 cents
--------------------------------------------------------------------------------
TOTAL 79.26 CENTS 81.62 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 8.76 cent distribution to meet excise tax requirements.
pursue relative value opportunities as the corporate bond market outlook
improves due to the economy's slowing.
During the 12 months under review, we significantly boosted our exposure to U.S.
Treasury securities. By October 31, 2000, U.S. Treasuries represented 7.3% of
the Fund's total investments,
13
<PAGE>
up from less than 1%. We focused the exposure at the 30-year part of the curve
because we believed the perceived reduction in this Treasury supply would
support long-term bond prices. During the year under review, the price on the
30-year Treasury bond increased 14.80%.
The Fund's exposure to international bonds remained fairly constant, falling
slightly, from 3.7% of total investments at the beginning of the period to 2.2%
at the end. Emerging market bond prices generally rose, partly as a result of
rising oil prices, which increased export revenue and many emerging countries'
debt repayment capacity. Other positive influences included the strong U.S.
economy, Mexico's upgrade to investment-grade status by Moody's, and a reduction
in the level of risk aversion among international investors. The portfolio's
international bonds are primarily U.S. dollar-denominated sovereign Eurobonds
with fixed coupons issued by countries with what we believe have relatively
strong repayment capacity, with an emphasis on Latin American issuers.
14
<PAGE>
Looking ahead, we believe Franklin Bond Fund is well-positioned, regardless of
the short-term direction of interest rates. In seeking income-producing
securities, we are committed to maintaining the Fund's sector diversification,
as well as to employing a value-oriented investment approach that seeks to add
to our holdings as relative value opportunities arise.
/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, 2000, the end of the reporting period. The information provided is
not a complete analysis of every aspect of any country, industry, security or
the Fund. 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.
15
<PAGE>
FRANKLIN BOND FUND
PERFORMANCE SUMMARY AS OF 10/31/00
One-year total return represents the change in value of an investment for the
period indicated and does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return +7.61%
Net Asset Value (NAV) $9.51 (10/31/00) $9.61 (10/31/99)
Change in NAV -$0.10
Distributions (11/1/99-10/31/00) Dividend Income $0.7926
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C> <C>
One-Year Total Return +7.87%
Net Asset Value (NAV) $9.52 (10/31/00) $9.62 (10/31/99)
Change in NAV -$0.10
Distributions (11/1/99-10/31/00) Dividend Income $0.8162
</TABLE>
CLASS A: 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 (see Additional Performance). 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 6.42% and 6.97% 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 Trustees.
Past performance does not guarantee future results.
16
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 9/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (8/3/98)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +7.39% +10.56%
Average Annual Total Return(2) +2.80% +2.68%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS 1-YEAR (8/3/98)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +7.65% +11.23%
Average Annual Total Return(2) +7.65% +5.03%
</TABLE>
AS OF 10/31/00
<TABLE>
<CAPTION>
SHARE CLASS A ADVISOR
--------------------------------------------------------------------------------
<S> <C> <C>
Distribution Rate(3) 7.37% 7.97%
30-Day Standardized Yield(4) 7.01% 7.59%
</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 for
Advisor Class) per share on 10/31/00.
4. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/00.
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.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton Investments at 1-800/342-5236.
Past performance does not guarantee future results.
17
<PAGE>
FRANKLIN BOND 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 applicable, maximum sales charge(s), Fund expenses,
account fees and reinvested distributions. Going forward, we will replace the
Salomon Smith Barney Broad Investment Grade Index with the Lehman Brothers U.S.
Universal Index because we believe it is a more relevant comparison to the
Fund's portfolio than the Salomon Smith Barney Broad Investment Grade Index. The
unmanaged indexes differ from the Fund in composition, do not pay management
fees or expenses and include reinvested interest. One cannot invest directly in
an index. The Consumer Price Index (CPI) is a commonly used measure of
inflation.
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
<S> <C>
1-Year +3.00%
Since Inception (8/3/98) +2.82%
</TABLE>
CLASS A (8/3/98-10/31/00)
<TABLE>
<CAPTION>
Franklin Bond Fund - Lehman Brothers U.S. Salomon Smith Barney CPI
Class A Universal Index Broad Investment Grade
Index
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
08/03/1998 $9,579 $10,000 $10,000 $10,000
08/31/1998 $9,761 -0.01% $9,999 1.53% $10,153 0.12% $10,012
09/30/1998 $10,038 2.37% $10,236 2.36% $10,393 0.12% $10,024
10/31/1998 $9,966 -0.41% $10,194 -0.45% $10,346 0.24% $10,048
11/30/1998 $10,010 1.00% $10,296 0.55% $10,403 0.00% $10,048
12/31/1998 $10,031 0.23% $10,320 0.31% $10,435 -0.06% $10,042
01/31/1999 $10,104 0.67% $10,389 0.74% $10,512 0.24% $10,066
02/28/1999 $9,912 -1.58% $10,225 -1.75% $10,328 0.12% $10,078
03/31/1999 $9,949 0.76% $10,302 0.57% $10,387 0.30% $10,108
04/30/1999 $9,976 0.59% $10,363 0.33% $10,421 0.73% $10,182
05/31/1999 $9,844 -1.01% $10,258 -0.92% $10,326 0.00% $10,182
06/30/1999 $9,812 -0.18% $10,240 -0.34% $10,290 0.00% $10,182
07/31/1999 $9,770 -0.41% $10,198 -0.40% $10,249 0.30% $10,213
08/31/1999 $9,778 -0.11% $10,187 -0.07% $10,242 0.24% $10,237
09/30/1999 $9,861 1.08% $10,297 1.20% $10,365 0.48% $10,286
10/31/1999 $9,894 0.42% $10,340 0.30% $10,396 0.18% $10,305
11/30/1999 $9,958 0.16% $10,357 -0.01% $10,395 0.06% $10,311
12/31/1999 $9,940 -0.19% $10,337 -0.46% $10,347 0.00% $10,311
01/31/2000 $9,850 -0.34% $10,302 -0.28% $10,318 0.30% $10,342
02/29/2000 $9,966 1.27% $10,433 1.17% $10,439 0.59% $10,403
03/31/2000 $10,050 1.17% $10,555 1.30% $10,575 0.82% $10,488
04/30/2000 $10,006 -0.31% $10,522 -0.30% $10,543 0.06% $10,495
05/31/2000 $9,985 -0.18% $10,503 -0.09% $10,533 0.12% $10,507
06/30/2000 $10,247 2.15% $10,729 2.09% $10,754 0.52% $10,562
07/31/2000 $10,346 0.97% $10,833 0.91% $10,851 0.23% $10,586
08/31/2000 $10,501 1.46% $10,991 1.43% $11,007 0.00% $10,586
09/30/2000 $10,590 0.51% $11,047 0.68% $11,081 0.52% $10,641
10/31/2000 0.54% $10,647 0.40% $11,091 0.64% $11,152 0.17% $10,659
</TABLE>
Past performance does not guarantee future results.
18
<PAGE>
ADVISOR CLASS (8/3/98 - 10/31/00)
<TABLE>
<CAPTION>
Franklin Bond Fund Lehman Brothers U.S. Salomon Smith Barney Broad CPI
Advisor Class Universal Index Investment Grade Index
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
08/03/1998 $10,000 $10,000 $10,000 $10,000
08/31/1998 $10,200 -0.01% $9,999 1.53% $10,153 0.12% $10,012
09/30/1998 $10,480 2.37% $10,236 2.36% $10,393 0.12% $10,024
10/31/1998 $10,417 -0.41% $10,194 -0.45% $10,346 0.24% $10,048
11/30/1998 $10,464 1.00% $10,296 0.55% $10,403 0.00% $10,048
12/31/1998 $10,499 0.23% $10,320 0.31% $10,435 -0.06% $10,042
01/31/1999 $10,567 0.67% $10,389 0.74% $10,512 0.24% $10,066
02/28/1999 $10,369 -1.58% $10,225 -1.75% $10,328 0.12% $10,078
03/31/1999 $10,411 0.76% $10,302 0.57% $10,387 0.30% $10,108
04/30/1999 $10,442 0.59% $10,363 0.33% $10,421 0.73% $10,182
05/31/1999 $10,306 -1.01% $10,258 -0.92% $10,326 0.00% $10,182
06/30/1999 $10,274 -0.18% $10,240 -0.34% $10,290 0.00% $10,182
07/31/1999 $10,232 -0.41% $10,198 -0.40% $10,249 0.30% $10,213
08/31/1999 $10,243 -0.11% $10,187 -0.07% $10,242 0.24% $10,237
09/30/1999 $10,332 1.08% $10,297 1.20% $10,365 0.48% $10,286
10/31/1999 $10,369 0.42% $10,340 0.30% $10,396 0.18% $10,305
11/30/1999 $10,438 0.16% $10,357 -0.01% $10,395 0.06% $10,311
12/31/1999 $10,421 -0.19% $10,337 -0.46% $10,347 0.00% $10,311
01/31/2000 $10,330 -0.34% $10,302 -0.28% $10,318 0.30% $10,342
02/29/2000 $10,452 1.27% $10,433 1.17% $10,439 0.59% $10,403
03/31/2000 $10,543 1.17% $10,555 1.30% $10,575 0.82% $10,488
04/30/2000 $10,499 -0.31% $10,522 -0.30% $10,543 0.06% $10,495
05/31/2000 $10,480 -0.18% $10,503 -0.09% $10,533 0.12% $10,507
06/30/2000 $10,756 2.15% $10,729 2.09% $10,754 0.52% $10,562
07/31/2000 $10,862 0.97% $10,833 0.91% $10,851 0.23% $10,586
08/31/2000 $11,027 1.46% $10,991 1.43% $11,007 0.00% $10,586
09/30/2000 $11,123 0.51% $11,047 0.68% $11,081 0.52% $10,641
10/31/2000 0.56% $11,185 0.40% $11,091 0.64% $11,152 0.17% $10,659
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
10/31/00
<TABLE>
<CAPTION>
ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C>
1-Year +7.87%
Since Inception (8/3/98) +5.10%
</TABLE>
*Source: Standard & Poor's Micropal (Lehman Brothers; Salomon Smith Barney). The
Lehman Brothers U.S. Universal Index is designed to capture the entire portfolio
management choice set of fixed income securities issued in U.S. dollars,
including those found in the Lehman Brothers U.S. Aggregate Index, as well as
high yield corporate bonds and dollar-denominated Eurobonds and emerging market
debt. The Salomon Smith Barney Broad Investment Grade Index is representative of
the entire universe of taxable, fixed-income investments. It includes issues of
the U.S. Government and any agency thereof, corporate issues of investment grade
quality (Baa/BBB or better), mortgage-backed securities, and Yankee bonds. The
total return index excludes flower bonds and CMOs. All issues have at least 1
year remaining term to maturity and $25 million face value outstanding. About
half are Treasury/Agency and half is divided between Corporate and Mortgage. The
BIG Index provides a reliable and fair benchmark for investment-grade bond
managers. It is compatible with active, structured, and passive portfolios. All
new entries are priced at the offer price.
Past performance does not guarantee future results.
19
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 9.30 $ 9.36 $ 9.48 $ 9.37 $ 9.34
------------------------------------------------------------------
Income from investment operations:
Net investment income(b) .................................. .50 .45 .51 .55 .56
Net realized and unrealized gains (losses) ................ (.01) (.06) (.12) .10 .03
------------------------------------------------------------------
Total from investment operations ........................... .49 .39 .39 .65 .59
------------------------------------------------------------------
Less distributions from net investment income .............. (.49) (.45) (.51) (.54) (.56)
------------------------------------------------------------------
Net asset value, end of year ............................... $ 9.30 $ 9.30 $ 9.36 $ 9.48 $ 9.37
==================================================================
Total return(a) ............................................ 5.44% 4.24% 4.26% 7.18% 6.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $232,413 $282,685 $298,298 $334,990 $397,078
Ratios to average net assets:
Expenses(c) ............................................... 1.00% .96% .76% .75% .69%
Expenses excluding waiver and payments by affiliate(c) .... 1.00% .96% .93% .93% .86%
Net investment income ..................................... 5.38% 4.80% 5.38% 5.81% 5.87%
Portfolio turnover rate(d) ................................. 12.68% 23.23% 38.92% 20.84% 24.63%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding effective year ended October 31, 1999.
(c)Includes the Fund's share of the Portfolio's allocated expenses.
(d)Represents the Portfolio's rate of turnover.
See notes to financial statements.
20
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND SHARES VALUE
----------------------------------------------------------------------------------------------
MUTUAL FUNDS 100.2%
<S> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio (Note 1).... 25,049,290 $232,958,393
------------
TOTAL INVESTMENTS (COST $252,106,283) 100.2%................... 232,958,393
OTHER ASSETS, LESS LIABILITIES (.2%)........................... (545,810)
------------
NET ASSETS 100.0%.............................................. $232,412,583
============
</TABLE>
See notes to financial statements.
21
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights
FRANKLIN BOND FUND
<TABLE>
<CAPTION>
CLASS A
-------
YEAR ENDED OCTOBER 31,
----------------------
2000 1999 1998(f)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year..................... $ 9.61 $ 10.37 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income(b).............................. .67 .63 .12
Net realized and unrealized gains (losses)............ .02 (.71) .30
---------- ---------- ----------
Total from investment operations....................... .69 (.08) .42
---------- ---------- ----------
Less distributions from:
Net investment income................................. (.79) (.63) (.05)
Net realized gains.................................... -- (.05) --
---------- ---------- ----------
Total distributions.................................... (.79) (.68) (.05)
---------- ---------- ----------
Net asset value, end of year........................... $ 9.51 $ 9.61 $ 10.37
========== ========== ==========
Total return(a)........................................ 7.61% (.73%) 4.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................ $ 20,611 $ 7,870 $ 4,232
Ratios to average net assets:
Expenses.............................................. .50% .50% .50%(e)
Expenses excluding waiver and payments by affiliate... 1.17% 1.18% 1.29%(e)
Net investment income................................. 7.14% 6.32% 5.21%(e)
Portfolio turnover rate(g)............................. 39.64% 96.38% 23.19%
</TABLE>
(a)Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b)Based on average shares outstanding.
(e)Annualized.
(f)For the period August 3, 1998 (effective date) to October 31, 1998.
(g)The portfolio turnover rate excludes mortgage dollar roll transactions.
22
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN BOND FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------
YEAR ENDED OCTOBER 31,
----------------------
2000 1999 1998(f)
---- ---- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year..................... $ 9.62 $ 10.38 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income(b).............................. .71 .66 .12
Net realized and unrealized gains (losses)............ .01 (.71) .31
---------- ---------- ----------
Total from investment operations....................... .72 (.05) .43
---------- ---------- ----------
Less distributions from:
Net investment income................................. (.82) (.66) (.05)
Net realized gains.................................... -- (.05) --
---------- ---------- ----------
Total distributions.................................... (.82) (.71) (.05)
---------- ---------- ----------
Net asset value, end of year........................... $ 9.52 $ 9.62 $ 10.38
========== ========== ==========
Total return(a)........................................ 7.87% (.46%) 4.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)........................ $ 13,173 $ 12,099 $ 31,588
Ratios to average net assets:
Expenses.............................................. .25% .25% .25%(e)
Expenses excluding waiver and payments by affiliate... .92% .93% 1.04%(e)
Net investment income................................. 7.53% 6.57% 5.46%(e)
Portfolio turnover rate(g)............................. 39.64% 96.38% 23.19%
</TABLE>
(a)Total return is not annualized for periods less than one year.
(b)Based on average shares outstanding.
(e)Annualized.
(f)For the period August 3, 1998 (effective date) to October 31, 1998.
(g)The portfolio turnover rate excludes mortgage dollar roll transactions.
See notes to financial statements.
23
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
------------------ ------- -----
<S> <C> <C>
LONG TERM INVESTMENTS 99.1%
CORPORATE BONDS 21.9%
COMMERCIAL SERVICES .6%
Grand Metropolitan Investment, 7.125%, 9/15/04.................................. $ 200,000 $ 201,129
----------
CONSUMER NON-DURABLES 1.4%
Pepsi Bottling Group Inc., 7.00%, 3/01/29....................................... 500,000 462,353
----------
CONSUMER SERVICES 1.7%
Horseshoe Gaming Holding Corp., senior sub. note, 8.625%, 5/15/09............... 300,000 294,000
Host Marroitt LP, 144A, 9.25%, 10/01/07......................................... 300,000 295,500
----------
589,500
----------
ELECTRONIC TECHNOLOGY 2.5%
L-3 Communications Holdings Inc., senior sub. note, 10.375%, 5/01/07............ 300,000 307,875
Lockheed Martin Corp, 8.50%, 12/01/29........................................... 500,000 538,195
----------
846,070
----------
FINANCE 8.0%
Capital One Bank, senior note, 6.62%, 8/04/03................................... 1,000,000 976,175
First Chicago NBD Corp., sub. note, 7.625%, 1/15/03............................. 291,000 294,482
Lehman Brothers Holdings, 7.75%, 1/15/05........................................ 1,000,000 1,003,376
Paine Webber Group Inc., senior note, 6.55%, 4/15/08............................ 150,000 143,550
Societe Generale-New York, sub. note, 7.40%, 6/01/06............................ 300,000 299,906
----------
2,717,489
----------
HEALTH SERVICES 1.1%
HCA-The Healthcare Co., 8.75%, 9/01/10.......................................... 350,000 356,220
----------
INDUSTRIAL SERVICES .9%
Calpine Corp., senior note, 8.625%, 8/15/10..................................... 300,000 300,326
----------
PROCESS INDUSTRIES .9%
Lyondell Chemical Co., 9.875%, 5/01/07.......................................... 300,000 295,500
----------
TRANSPORTATION .3%
Gearbulk Holding Ltd., senior note, 11.25%, 12/01/04 (Bermuda).................. 100,000 100,000
----------
UTILITIES 4.5%
CMS Energy Corp., senior note, 7.50%, 1/15/09................................... 300,000 261,867
Duquesne Light Co., 6.625%, 6/15/04............................................. 300,000 292,900
McLeodUSA Inc., 8.125%, 2/15/09................................................. 300,000 258,000
Nextel Communications Inc., senior note, 9.375%, 11/15/09....................... 300,000 290,250
Sprint Capital Corp., 6.875%, 11/15/28.......................................... 500,000 411,465
----------
1,514,482
----------
TOTAL CORPORATE BONDS (COST $7,527,300)......................................... 7,383,069
----------
ASSET BACKED SECURITIES 17.3%
Aames Mortgage Trust, 6.59%, 6/15/24............................................ 422,891 420,548
Advanta Mortgage Loan Trust, 7.05%, 5/25/21..................................... 18,743 18,669
Banc One Home Equity Trust, 6.06%, 1/25/12...................................... 53,653 53,156
Centex Home Equity, 5.91%, 4/25/19.............................................. 132,829 131,749
Champion Home Equity Loan Trust, 7.72%, 5/25/29................................. 850,000 835,393
Countrywide Asset-backed Certificates, 6.78%, 11/25/27.......................... 500,000 472,643
Delta Funding Home Equity Loan Trust, 6.28%, 5/25/30............................ 29,007 28,856
</TABLE>
24
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
------------------ ------- -----
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ASSET BACKED SECURITIES (CONT.)
First Plus Home Loan Trust, 6.27%, 5/10/13........................................ $ 119,578 $ 119,116
Green Tree Financial Corp., 5.75%, 10/15/18....................................... 39,602 39,456
Green Tree Financial Corp., 7.00%, 10/15/27....................................... 100,665 100,728
Green Tree Financial Corp., 7.68%, 7/01/30........................................ 1,000,000 918,645
Green Tree Financial Corp., 6.80%, 12/01/30....................................... 400,000 364,882
Green Tree Financial Corp., 8.37%, 2/01/31........................................ 500,000 463,611
Green Tree Home Improvement Loan Trust, 7.16%, 3/15/28............................ 92,190 92,351
Merrill Lynch Mortgage Investors Inc., 8.55%, 1/15/12............................. 819,353 817,669
Money Store Home Equity Trust, 6.04%, 8/15/17..................................... 126,485 125,947
Residential Asset Securities Corp., 6.90%, 8/25/27................................ 50,986 50,720
Saxon Asset Security Trust, 6.365%, 10/25/13...................................... 91,968 91,472
Saxon Asset Security Trust, 7.00%, 3/25/27........................................ 552,000 541,007
Saxon Asset Security Trust, 6.93%, 1/25/30........................................ 150,000 141,763
----------
TOTAL ASSET BACKED SECURITIES (COST $5,929,254)................................... 5,828,381
----------
COMMERCIAL MORTGAGE BACKED SECURITIES 3.9%
Bear Stearns Commercial Mortgage Securities, 1998-C1 CL A1, 6.34%, 10/16/07....... 362,279 354,185
Morgan Stanley Capital I, 7.12%, 1/15/08.......................................... 1,000,000 963,840
----------
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (COST $1,306,454)..................... 1,318,025
----------
MORTGAGE BACKED SECURITIES 49.8%
15-YEAR MORTGAGE BACKED SECURITIES 3.1%...........................................
FNMA, 5.50%, 1/01/14.............................................................. 436,581 412,573
FNMA, 8.00%, 6/01/15.............................................................. 314,658 318,120
GNMA, SF, 7.00%, 2/15/09.......................................................... 328,971 331,432
----------
1,062,125
----------
30-YEAR MORTGAGE BACKED SECURITIES 35.1%
(a)FHLMC, 7.50%, 11/01/28.......................................................... 1,508,336 1,507,865
(a)FNMA, 6.50%, 11/01/28 .......................................................... 2,699,974 2,596,195
(a)FNMA, 6.00%, 11/01/29 .......................................................... 1,700,000 1,594,813
FNMA, 7.00%, 10/01/30 ............................................................. 1,499,899 1,470,952
(a)FNMA, 8.00%, 11/01/30 .......................................................... 1,000,000 1,012,813
GNMA II, 6.00%, 3/20/28............................................................ 432,618 406,811
GNMA II, 6.50%, 3/20/28............................................................ 343,612 330,495
GNMA II, 6.50%, 6/20/30............................................................ 439,075 422,046
GNMA, SF, 7.00%, 10/15/27.......................................................... 446,636 441,310
(a)GNMA, SF, 7.00%, 11/01/29....................................................... 700,000 690,156
GNMA, SF, 7.50%, 2/15/30........................................................... 428,147 429,960
GNMA, SF, 8.00%, 2/15/30........................................................... 937,549 953,421
----------
11,856,837
----------
ADJUSTABLE RATE MORTGAGE SECURITIES 11.6%
FNMA, ARM, 8.006%, 9/01/19........................................................ 219,980 223,488
FNMA, ARM, 7.925%, 12/01/24....................................................... 408,944 417,863
FNMA, ARM, 8.745%, 6/01/30........................................................ 672,164 707,189
GNMA, ARM, 7.375%, 1/20/23........................................................ 600,184 605,930
GNMA, ARM, 7.125%, 10/20/26....................................................... 76,910 77,580
Prudential Home Mortgage Securities, 8.671%, 7/25/18.............................. 1,168,280 1,164,994
</TABLE>
25
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
------------------ ------- -----
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MORTGAGE BACKED SECURITIES (CONT.)
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
Saxon Mortgage Securities Corp., 9.652%, 5/25/24 ............................ $ 67,193 $ 70,301
Structured Asset Securities Corp., 8.533%, 11/15/26 ......................... 626,740 639,913
----------
3,907,258
----------
TOTAL MORTGAGE BACKED SECURITIES (COST $16,753,237) ......................... 16,826,220
----------
OTHER GOVERNMENT AND AGENCY SECURITIES 2.8%
FNMA, 5.75%, 4/15/03 ........................................................ 500,000 492,561
FNMA, 6.50%, 4/29/09 ........................................................ 500,000 477,786
----------
TOTAL OTHER GOVERNMENT AND AGENCY SECURITIES (COST $952,063) ................ 970,347
----------
FOREIGN GOVERNMENT SECURITIES 2.7%
Republic of Brazil, 12.25%, 3/06/30 (Brazil) ................................ 250,000 218,438
Republic of Brazil, 11.00%, 8/17/40 (Brazil) ................................ 275,000 211,406
Republic of Turkey, Reg S, 10.00%, 9/19/07 (Turkey) ......................... 231,000 213,560
United Mexican States, 9.875%, 2/01/10 (Mexico) ............................. 250,000 260,250
----------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $951,217) ......................... 903,654
----------
ZERO COUPON BOND .7%
Charter Communications Holdings LLC, senior disc. note, zero cpn. to 4/01/04,
9.92% thereafter, 4/01/11 (COST $291,392) ................................. 400,000 236,000
----------
TOTAL LONG TERM INVESTMENTS (COST $33,710,917) .............................. 33,465,696
----------
SHORT TERM INVESTMENTS 23.8%
COMMERCIAL MORTGAGE BACKED SECURITIES .4%
Criimi Mae CMBS Corp., 5.697%, 10/20/01 ..................................... 137,825 135,463
----------
ELECTRONIC TECHNOLOGY .2%
Raytheon Co., 5.95%, 3/15/01 ................................................ 70,000 69,652
----------
ENERGY MINERALS .1%
BP America Inc., debenture, 8.50%, 4/15/01 .................................. 37,000 37,171
----------
FINANCE 3.2%
Associates Corp. NA, 6.70%, 5/29/01 ......................................... 10,000 9,975
Bankers Trust Corp., 9.00%, 8/01/01 ......................................... 35,000 35,529
Bankers Trust Corp., sub. debenture, 9.40%, 3/01/01 ......................... 35,000 35,265
Bear Stearns Co., Inc., senior note, 5.75%, 2/15/01 ......................... 45,000 44,851
Chrysler Financial Co., LLC, 5.875%, 2/07/01 ................................ 213,000 212,152
Chrysler Financial Co., LLC, 6.34%, 3/26/01 ................................. 11,000 10,958
Dillard Investment, debenture, 9.25%, 2/01/01 ............................... 50,000 50,010
FleetBoston Finl. Corp., sub. note, 9.90%, 6/15/01 .......................... 55,000 55,937
Ford Motor Credit Co., 5.90%, 2/23/01 ....................................... 10,000 9,952
Ford Motor Credit Co., 6.57%, 3/27/01 ....................................... 70,000 69,986
Ford Motor Credit Co., 6.84%, 7/10/01 ....................................... 25,000 25,034
Ford Motor Credit Co., 6.03%, 8/13/01 ....................................... 20,000 19,907
General Electric Capital Corp., debenture, 8.375%, 3/01/01 .................. 25,000 25,097
International Lease Finance Corp., debenture, 8.875%, 4/15/01 ............... 45,000 45,431
Lehman Brothers Holdings, medium term note, 6.00%, 2/26/01 .................. 268,000 266,727
Merrill Lynch & Co., 6.02%, 5/11/01 ......................................... 19,000 18,893
Morgan Stanley Dean Witter, senior note, 5.25%, 2/08/01 .................... 25,000 24,877
</TABLE>
26
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BOND FUND AMOUNT* VALUE
------------------ ------- -----
<S> <C> <C>
SHORT TERM INVESTMENTS (CONT.)
FINANCE (CONT.)
Morgan Stanley Dean Witter, senior note, 6.09%, 3/09/01 ....................... $ 15,000 $ 14,922
Republic NY Corp., debenture, 8.875%, 2/01/01 ................................. 25,000 25,104
Salomon Inc., Smith Barney Hld., senior note, 9.25%, 5/01/01 .................. 35,000 35,346
Travelers Property Casualty, 6.75%, 4/15/01 ................................... 22,000 21,961
Wells Fargo Co., 5.625%, 2/05/01 .............................................. 15,000 14,947
------------
1,072,861
------------
HEALTH TECHNOLOGY 1.1%
Bausch & Lomb Inc., note, 6.15%, 8/01/01 ...................................... 400,000 388,402
------------
INDUSTRIAL SERVICES 2.3%
Waste Management Inc., 7.125%, 6/15/01 ........................................ 285,000 281,998
Waste Management Inc., 6.125%, 7/15/01 ........................................ 500,000 491,843
------------
773,841
------------
MISCELLANEOUS .3%
CBS Corp., 8.875%, 6/01/01 .................................................... 95,000 95,772
PNC Funding Corp., sub. note, 9.875%, 3/01/01 ................................. 15,000 15,110
------------
110,882
------------
MONEY FUND 9.5%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio .............. 3,204,763 3,204,763
------------
RETAIL TRADE 4.5%
Dillards Inc., 6.17%, 8/01/01 ................................................. 1,000,000 969,949
Sears Roebuck Acceptance, 6.18%, 12/01/00 ..................................... 10,000 9,993
Sears Roebuck Acceptance, 7.13%, 6/26/01 ...................................... 445,000 443,455
Target Corp., 10.00%, 12/01/00 ................................................ 40,000 40,103
Target Corp., 9.40%, 2/15/01 .................................................. 42,000 42,234
------------
1,505,734
------------
UTILITIES .3%
GTE California Inc., debenture, 5.625%, 2/01/01 ............................... 15,000 14,932
Virginia Electric Power, 6.30%, 6/21/01 ....................................... 90,000 89,610
------------
104,542
------------
U.S. GOVERNMENT AND AGENCY SECURITIES 1.9%
Tennessee Valley Authority, 5.28%, 9/14/01 .................................... 600,000 592,418
(c)U.S. Treasury Bill, 12/07/00 ............................................... 50,000 49,690
------------
642,108
------------
TOTAL SHORT TERM INVESTMENTS (COST $8,057,012) ................................ 8,045,419
------------
TOTAL INVESTMENTS (COST $41,767,929) 122.9% ................................... 41,511,115
OTHER ASSETS, LESS LIABILITIES (22.9%) ........................................ (7,727,284)
------------
NET ASSETS 100.0% ............................................................. $ 33,783,831
============
</TABLE>
* The principal amount is stated in U.S. dollars unless otherwise indicated.
(a) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(b) See Note 3 regarding investments in the Sweep Money Fund.
(c) On deposit with broker for initial margin on futures contracts (Note 1(b)).
See notes to financial statements.
27
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
--------------- ---------
<S> <C> <C>
Assets:
Investments in securities:
Cost................................................... $ 252,106,283 $ 41,767,929
============= =============
Value.................................................. 232,958,393 41,511,115
Receivables:
Capital shares sold.................................... 1,067,659 209,954
Dividends and interest................................. -- 416,390
Affiliates............................................. -- 9,946
------------- -------------
Total assets....................................... 234,026,052 42,147,405
------------- -------------
Liabilities:
Payables:
Investment securities purchased........................ -- 8,230,108
Capital shares redeemed................................ 1,444,276 114,425
Affiliates............................................. 88,210 --
Shareholders........................................... 46,032 237
Variation margin (Note 1).............................. -- 14,500
Other liabilities....................................... 34,951 4,304
------------- -------------
Total liabilities.................................. 1,613,469 8,363,574
------------- -------------
Net assets, at value.............................. $ 232,412,583 $ 33,783,831
============= =============
Net assets consist of:
Undistributed net investment income..................... $ 933,441 $ 15,203
Net unrealized depreciation............................. (19,147,890) (254,907)
Accumulated net realized loss........................... (89,352,230) (1,938,302)
Capital shares.......................................... 339,979,262 35,961,837
------------- -------------
Net assets, at value.............................. $ 232,412,583 $ 33,783,831
============= =============
CLASS A:
Net assets, at value.................................... $ 232,412,583 $ 20,611,186
============= =============
Shares outstanding...................................... 24,985,063 2,167,844
============= =============
Net asset value per share*.............................. $ 9.30 $ 9.51
============= =============
Maximum offering price per share (net asset value per
share/97.75%, 95.75%, respectively).................. $ 9.51 $ 9.93
============= =============
ADVISOR CLASS:
Net assets, at value.................................... -- $ 13,172,645
============= =============
Shares outstanding...................................... -- 1,384,242
============= =============
Net asset value and maximum offering price per share.... -- $ 9.52
============= =============
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
28
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
--------------- ---------
<S> <C> <C>
Investment income:
Dividends (Note 3)......................................................... $ 15,071,636 $ 82,825
Interest................................................................... -- 1,916,227
------------ ------------
Total investment income............................................... 15,071,636 1,999,052
------------ ------------
Expenses:
Management fees (Note 3)................................................... -- 110,170
Administrative fees (Note 3)............................................... 254,081 52,036
Distribution fees - Class A (Note 3)....................................... 633,809 32,662
Transfer agent fees (Note 3)............................................... 421,964 16,235
Custodian fees............................................................. -- 1,560
Reports to shareholders.................................................... 60,085 4,322
Registration and filing fees............................................... 34,996 22,951
Professional fees (Note 3)................................................. 25,610 20,704
Trustees' fees and expenses................................................ 15,904 1,572
Other...................................................................... 6,934 8,968
------------ ------------
Total expenses........................................................ 1,453,383 271,180
Expenses waived/paid by affiliate (Note 3)............................ -- (173,566)
------------ ------------
Net expenses......................................................... 1,453,383 97,614
------------ ------------
Net investment income............................................... 13,618,253 1,901,438
------------ ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................................... (2,737,933) (243,279)
Financial futures contracts............................................... -- 57,496
------------ ------------
Net realized loss........................................................ (2,737,933) (185,783)
Net unrealized appreciation on investments and financial futures contracts. 2,365,317 345,619
------------ ------------
Net realized and unrealized gain (loss)..................................... (372,616) 159,836
------------ ------------
Net increase in net assets resulting from operations........................ $ 13,245,637 $ 2,061,274
============ ============
</TABLE>
See notes to financial statements.
29
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN BOND FUND
------------------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 13,618,253 $ 13,753,864 $ 1,901,438 $ 2,191,713
Net realized loss from investments and
financial futures contracts ............... (2,737,933) (2,239,106) (185,783) (1,669,242)
Net unrealized appreciation (depreciation)
on investments and financial futures
contracts ................................. 2,365,317 168,036 345,619 (906,443)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ........... 13,245,637 11,682,794 2,061,274 (383,972)
Distributions to shareholders from:
Net investment income:
Class A ................................... (13,416,415) (13,725,049) (1,059,660) (403,205)
Advisor Class ............................. -- -- (1,111,986) (1,804,997)
Net realized gains:
Class A ................................... -- -- -- (23,840)
Advisor Class ............................. -- -- -- (158,045)
------------- ------------- ------------- -------------
Total distributions to shareholders ......... (13,416,415) (13,725,049) (2,171,646) (2,390,087)
Capital share transactions: (Note 2)
Class A ................................... (50,101,470) (13,570,505) 12,718,009 4,122,424
Advisor Class ............................. -- -- 1,207,765 (17,200,522)
------------- ------------- ------------- -------------
Total capital share transactions ............ (50,101,470) (13,570,505) 13,925,774 (13,078,098)
Net increase (decrease) in net assets .. (50,272,248) (15,612,760) 13,815,402 (15,852,157)
Net assets:
Beginning of year ........................... 282,684,831 298,297,591 19,968,429 35,820,586
------------- ------------- ------------- -------------
End of year ................................. $ 232,412,583 $ 282,684,831 $ 33,783,831 $ 19,968,429
============= ============= ============= =============
Undistributed net investment income included
in net assets:
End of year ................................ $ 933,441 $ 731,603 $ 15,203 $ 206,188
============= ============= ============= =============
</TABLE>
See notes to financial statements.
30
<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. All Funds included in this report (the Funds) are
diversified. The Funds' investment objective is to provide high level current
income.
The Franklin 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 Franklin Adjustable U.S. Government Securities Fund holds portfolio shares
that are valued at their proportionate interest in the net asset values of the
Portfolio. At October 31, 2000 the Franklin Adjustable U.S. Government
Securities Fund owns 100% of the Portfolio.
b. FUTURES CONTRACTS
The Franklin 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.
c. MORTGAGE DOLLAR ROLLS
The Franklin Bond Fund enters into dollar roll transactions in which it agrees
to sell and repurchase mortgage backed securities. If the securities are
substantially similar, the difference between the sale and repurchase price is
treated as interest income and realized gains and losses are deferred.
31
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. INCOME TAXES
No provision has been made for income taxes because each fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. For the Franklin Bond Fund,
dividends from net investment income are normally declared daily and distributed
monthly to shareholders.
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.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
f. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below. 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>
Franklin Adjustable U.S. Government Securities Fund A
Franklin Bond Fund A & Advisor
</TABLE>
32
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At October 31, 2000 there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN BOND FUND
------------------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS A SHARES:
2000
Shares sold ....................................... 15,193,146 $141,054,087 1,746,021 $16,477,834
Shares issued in reinvestment of distributions .... 888,957 8,235,523 61,770 581,748
Shares redeemed ................................... (21,485,637) (199,391,080) (458,644) (4,341,573)
----------- ------------- ---------- ------------
Net increase (decrease) ........................... (5,403,534) $(50,101,470) 1,349,147 $12,718,009
========== ============= ========== ============
1999
Shares sold ....................................... 24,552,970 $228,668,326 619,183 $6,175,528
Shares issued in reinvestment of distributions .... 902,518 8,389,289 19,877 195,826
Shares issued on merger(a) ........................ 2,176,537 20,350,622 -- --
Shares redeemed ................................... (29,098,204) (270,978,742) (228,647) (2,248,930)
----------- ------------- ---------- ------------
Net increase (decrease) ........................... (1,466,179) $(13,570,505) 410,413 $4,122,424
=========== ============= ========== ============
ADVISOR CLASS
2000
Shares sold ....................................... 189,824 $1,804,702
Shares issued in reinvestment of distributions .... 96,283 907,693
Shares redeemed ................................... (159,264) (1,504,630)
---------- ------------
Net increase ...................................... 126,843 $1,207,765
========== ============
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)
========== ============
</TABLE>
(a)During the year ended October 31, 1999, the Adjustable U.S. Government
Securities Fund acquired the net assets of the Franklin Adjustable Rate
Securities Fund pursuant to a plan of reorganization approved by the fund's
shareholders. The merger was accomplished by a tax free exchange.
33
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
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>
The Franklin Bond Fund may invest in the Franklin Institutional Fiduciary Trust
Money Market Portfolio (the Sweep Money Fund) which is managed by Advisers.
The Franklin Bond Fund pays an investment management fee to Advisers of .425% of
the first $500 million of the fund's average daily net assets. Fees are further
reduced on net assets over $500 million.
Management fees were reduced for the Franklin Bond Fund on assets invested in
the Franklin Institutional Fiduciary Trust Money Market Portfolio.
Under a subadvisory agreement, TICI provides subadvisory services to the
Franklin Bond Fund and receives from Advisers fees based on the month-end net
assets of the fund.
The Franklin Bond Fund pays an administrative fee to FT Services of .20% per
year of the fund's average daily net assets.
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 Franklin Adjustable U.S. Government Securities Fund pays an administrative
fee to Advisers of .10% of the first $5 billion of the fund's average daily net
assets. Fees are further reduced on net assets over $5 billion.
The Funds reimburse Distributors up to .25% per year of their average daily net
assets of Class A for costs incurred in marketing the Funds' shares.
Distributors paid net commissions on sales of the Funds' shares, and received
contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
-----------------------------
<S> <C> <C>
Net Commissions paid ................ $77,208 $36,892
Contingent deferred sales charges ... $33,372 $ --
</TABLE>
The Funds paid transfer agent fees of $438,199 of which $303,955 was paid to
Investor Services.
34
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
At October 31, 2000, Advisers or investment companies managed by Advisers owned
45.6% of the net assets of the Franklin Bond Fund.
Included in professional fees are legal fees of $5,886 that were paid to a law
firm in which a partner was an officer of the Funds.
4. INCOME TAXES
At October 31, 2000, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
--------------- ---------
<S> <C> <C>
Capital loss carryovers expiring in:
2001 ................................ $ 7,701,615 $ --
2002 ................................ 42,220,363 --
2003 ................................ 18,463,010 --
2004 ................................ 8,807,294 --
2005 ................................ 4,580,551 --
2006 ................................ 2,585,375 --
2007 ................................ 1,456,300 1,794,250
2008 ................................ 3,438,157 142,145
----------- -----------
$89,252,665 $ 1,936,395
=========== ===========
</TABLE>
On October 31,2000, the Franklin Adjustable U.S. Government Securities Fund had
expired capital loss carryovers of $1,925,614, which were reclassified to
paid-in capital.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of mortgage dollar roll transactions.
Net realized capital gain and losses differ for financial statement and tax
purposes primarily due to differing treatments of wash sales and financial
futures transactions.
At October 31, 2000, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
--------------- ---------
<S> <C> <C>
Investments at cost .......... $ 252,205,848 $ 41,767,929
============= =============
Unrealized appreciation ...... $ -- $ 221,156
Unrealized depreciation ...... (19,247,455) (477,970)
------------- -------------
Net unrealized depreciation .. $ (19,247,455) $ (256,814)
============= =============
</TABLE>
35
<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, 2000 were as follows:
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND BOND FUND
----------------- ------------
<S> <C> <C>
Purchases ..... $ 92,539,978 $ 22,603,961
Sales ......... $141,104,408 $ 11,164,736
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Franklin Bond Fund has been a party to financial instruments with
off-balance-sheet risk, primarily futures contracts, in order to minimize the
impact on the fund from adverse changes in interest rates. This instrument
involves market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. The contract amount indicates the extent of the fund's
involvement in such contracts.
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 futures
contracts, interest rates, and the underlying hedged assets.
As of October 31, 2000, the Franklin Bond Fund had the following futures
contracts outstanding:
<TABLE>
<CAPTION>
NUMBER OF DELIVERY CONTRACT UNREALIZED
CONTRACTS TO BUY CONTRACTS DATES FACE VALUE GAIN
---------------- --------- ----- ---------- ----
<S> <C> <C> <C> <C>
U.S. Treasury Bond (CBT) Dec00 ...... 29 12/1/00-12/29/00 $2,900,000 $1,907
</TABLE>
7. CREDIT RISK
The Franklin Bond Fund has 7.2% of its portfolio invested in lower rated and
comparable quality unrated high yield securities, which tend to be more
sensitive to economic conditions than higher rated securities. The risk of loss
due to default by the issuer may be significantly greater for the holders of
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
36
<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 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 each of the funds included in this
report constituting part of the Franklin Investors Securities Trust (hereafter
referred to as the "Trust") at October 31, 2000, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 2000
37
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
Financial Highlights
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 9.31 $ 9.37 $ 9.48 $ 9.37 $ 9.33
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(b) ............................. .555 .496 .553 .593 .589
Net realized and unrealized gains (losses) ........... (.010) (.060) (.110) .110 .040
-------- -------- -------- -------- --------
Total from investment operations ...................... .545 .436 .443 .703 .629
Less distributions from net investment income ......... (.555) (.496) (.553) (.593) (.589)
-------- -------- -------- -------- --------
Net asset value, end of year .......................... $ 9.30 $ 9.31 $ 9.37 $ 9.48 $ 9.37
======== ======== ======== ======== ========
Total Return(a) ....................................... 6.03% 4.77% 4.80% 7.74% 6.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ....................... $232,949 $281,974 $302,434 $342,541 $406,431
Ratios to average net assets:
Expenses ............................................. .43% .43% .26% .25% .25%
Expenses excluding waiver and payments by affiliate .. .43% .43% .43% .43% .42%
Net investment income ................................ 5.96% 5.32% 5.88% 6.31% 6.31%
Portfolio turnover rate ............................... 12.68% 23.23% 38.92% 20.84% 24.63%
</TABLE>
(a) Total return is not annualized for periods less than one year.
(b) Based on average shares outstanding effective year ended October
31, 1999.
See notes to financial statements.
38
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
-------------------------------------------------- ------ -----
<S> <C> <C>
LONG TERM INVESTMENTS 94.0%
U.S. GOVERNMENT AGENCY SECURITIES 92.9%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 13.9%
Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.00%, 11/01/16 ......................... $ 2,419,995 $ 2,444,528
Cap 12.012%, Margin 2.297% + 5CMT, Resets Annually, 7.925%, 5/01/26 ....................... 3,240,909 3,330,551
Cap 12.744%, Margin 2.00% + CMT, Resets Annually, 8.319%, 7/01/18 ......................... 1,409,398 1,434,345
Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 8.002%, 4/01/18 ......................... 3,389,115 3,459,808
Cap 12.993%, Margin 1.743% + 6 Month TB, Resets Semi-Annually, 7.935%, 10/01/29 ........... 625,125 626,988
Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 7.774%, 9/01/19 ......................... 2,718,528 2,753,298
Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 7.196%, 12/01/16 ....................... 1,521,089 1,544,027
Cap 13.175%, Margin 2.233% + CMT, Resets Annually, 8.055%, 5/01/25 ........................ 2,472,203 2,540,759
Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.976%, 10/01/18 ....................... 730,899 744,878
Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 7.557%, 3/01/19 ........................ 1,172,429 1,191,729
Cap 13.366%, Margin 2.102% + CMT, Resets Annually, 7.678%, 3/01/18 ........................ 2,459,441 2,499,284
Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 7.779%, 4/01/19 .......................... 4,167,341 4,223,082
Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 8.226%, 7/01/20 ......................... 2,463,746 2,524,317
Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 8.430%, 11/01/19 ....................... 1,217,500 1,248,061
Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.943%, 12/01/21 ................. 753,545 768,316
Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 8.391%, 2/01/19 ......................... 935,474 973,382
----------
32,307,353
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 70.4%
Cap 11.06%, Margin 1.98% + CMT, Resets Annually, 7.891%, 3/01/22 .......................... 376,035 383,205
Cap 11.884%, Margin 2.211% + CMT, Resets Annually, 7.970%, 2/01/25 ........................ 1,963,063 2,011,317
Cap 11.93%, Margin 2.00% + CMT, Resets Semi-Annually, 8.207%, 6/01/32 ..................... 5,770,881 5,901,269
Cap 11.94%, Margin 2.352% + CMT, Resets Annually, 6.958%, 9/01/29 ......................... 5,663,506 5,604,283
Cap 11.966%, Margin 1.25% + COFI, Resets Monthly, 6.259%, 4/01/22 ......................... 4,403,264 4,318,536
Cap 12.233%, Margin 1.70% + COFI, Resets Monthly, 6.686%, 1/01/19 ......................... 4,754,028 4,707,668
Cap 12.435%, Margin 2.146% + CMT, Resets Annually, 6.480%, 8/01/29 ........................ 9,857,012 9,621,187
Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 7.740%, 11/01/18 ........... 981,080 1,007,371
Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.616%, 11/01/17......................... 9,210,354 9,196,858
Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 7.757%, 3/01/19 .......................... 1,566,543 1,593,360
Cap 12.65%, Margin 1.75% + NCI, Resets Monthly, 6.625%, 10/01/28 .......................... 437,165 434,339
Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Semi-Annually, 7.706%, 1/01/19 .............. 4,217,226 4,239,072
Cap 12.662%, Margin 1.25% + COFI, Resets Monthly, 6.867%, 1/01/19 ......................... 2,186,484 2,163,778
Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 9/01/18 ......................... 8,294,860 8,199,757
Cap 12.763%, Margin 1.25% + COFI, Resets Monthly, 6.686%, 6/01/20 ......................... 5,343,723 5,296,865
Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.250%, 1/01/19 ......................... 310,522 308,487
Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 8.056%, 11/01/20 ........................ 1,640,886 1,686,825
Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 7.545%, 5/01/19 ......................... 2,268,173 2,287,712
Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.888%, 6/01/17 ............. 1,404,268 1,453,934
Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 8.266%, 10/01/17 .................. 1,504,856 1,557,954
Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 7.414%, 7/01/17 ............. 5,316,217 5,432,733
Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 2/01/19 ......................... 2,937,577 2,879,561
Cap 12.953%, Margin 2.125% + 6 Month TB, Resets Semi-Annually, 8.088%, 4/01/18 ............ 393,576 401,266
Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 8.033%, 12/01/19 ....................... 1,504,038 1,539,169
Cap 12.994%, Margin 1.923% + CMT, Resets Annually, 7.759%, 12/01/17 ....................... 565,991 573,536
Cap 13.005%, Margin 1.97% + 3CMT, Resets Every 3 Years, 7.411%, 11/01/17 .................. 2,219,869 2,263,675
Cap 13.01%, Margin 2.10% + CMT, Resets Annually, 7.742%, 6/01/19 .......................... 2,130,332 2,173,455
</TABLE>
39
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
-------------------------------------------------- ------ -----
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
U.S. GOVERNMENT AGENCY SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.926%, 2/01/20 ................................ $ 6,899,033 $ 6,827,523
Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.930%, 12/01/20 ................... 2,430,614 2,477,859
Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 7.765%, 4/01/19 .............................. 2,953,855 3,022,723
Cap 13.083%, Margin 2.005% + CMT, Resets Annually, 7.792%, 6/01/19 .............................. 1,998,959 2,034,534
Cap 13.128%, Margin 2.02% + COFI, Resets Annually, 6.893%, 6/01/19 .............................. 2,571,271 2,559,348
Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 8.321%, 11/01/26 ................. 980,483 1,010,473
Cap 13.248%, Margin 2.142% + 3CMT, Resets Every 3 Years, 7.574%, 1/01/26 ........................ 4,559,869 4,653,906
Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 8.023%, 6/01/19 ............................... 1,463,981 1,494,747
Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.853%, 10/01/19 .............................. 3,401,476 3,460,913
Cap 13.32%, Margin 1.25% + COFI, Resets Monthly, 7.326%, 4/01/03 ................................ 2,231,650 2,228,846
Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 8.031%, 9/01/22 .............................. 5,541,558 5,677,507
Cap 13.54%, Margin 1.25% + COFI, Resets Monthly, 6.607%, 8/01/26 ................................ 643,928 635,261
Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 8.099%, 3/01/21 .............................. 1,837,681 1,885,898
Cap 13.791%, Margin 2.143% + CMT, Resets Monthly, 8.101%, 12/01/20 .............................. 3,477,172 3,573,815
Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 7.963%, 3/01/19 ............................... 951,534 974,916
Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.831%, 7/01/24 .................... 3,256,737 3,225,019
Cap 13.847%, Margin 2.134% + 3CMT, Resets Every 3 Years, 8.236%, 3/01/22 ........................ 417,221 429,501
Cap 13.86%, Margin 1.842% + CMT, Resets Monthly 7.715%, 8/01/16 ................................. 115,732 117,199
Cap 13.875%, Margin 1.975% + CMT, Resets Annually, 7.770%, 3/01/18 .............................. 768,265 781,091
Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 7.751%, 2/01/19 ............................... 1,562,559 1,602,520
Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 7.549%, 12/01/18 .............................. 1,274,851 1,305,845
Cap 13.932%, Margin 1.992% + 3CMT, Resets Every 3 Years, 7.395%, 6/01/26 ........................ 3,239,912 3,300,277
Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 7.922%, 1/01/19 .............................. 2,601,676 2,652,753
Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 7.877%, 5/01/21 ......................... 3,946,546 4,061,685
Cap 14.42%, Margin 2.099% + CMT, Resets Annually, 8.068%, 3/01/20 ............................... 1,540,570 1,584,798
Cap 14.561%, Margin 2.199% + 3CMT, Resets Every 3 Years, 7.794%, 12/01/24 ....................... 3,831,306 3,931,677
Cap 14.68%, Margin 2.125% + 3CMT, Resets Every 3 Years, 7.786%, 8/01/22 ......................... 1,027,490 1,055,516
Cap 14.725%, Margin 2.42% + CMT, Resets Annually, 8.332%, 6/01/19 ............................... 2,989,953 3,102,826
Cap 14.804%, Margin 2.186% + 3CMT, Resets Every 3 Years, 7.425%, 12/01/17 ....................... 1,453,985 1,482,600
Cap 14.887%, Margin 1.72% + CMT, Resets Annually, 7.802%, 1/01/16 ............................... 3,813,334 3,843,393
Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 8.901%, 5/01/19 .............................. 1,701,379 1,782,767
------------
164,014,908
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 8.6%
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 6.750%, 9/20/22 ................................ 3,711,264 3,753,733
Cap 10.50%, Margin 1.50% + CMT, Resets Annually, 7.125%, 10/20/24 ............................... 4,404,847 4,444,159
Cap 11.00%, Margin 2.50% + CMT, Resets Annually, 7.750%, 7/20/25 ................................ 1,350,041 1,402,734
Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.375%, 1/20/23 ................................ 10,314,937 10,413,689
------------
20,014,315
------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $219,255,746) ..................................... 216,336,576
------------
MISCELLANEOUS MORTGAGE BACKED SECURITIES 1.1%
Countrywide Mortgage Backed Securities, Inc., Series 1994-I, A8, 6.25%, 7/25/09 ................. 262,050 259,955
Home Owners Federal Savings & Loan, Cap 13.00%, Margin 1.75%, Resets Monthly, 7.543%, 1/25/18 ... 409,952 409,695
RTC, Cap 12.39%, Margin 1.61% + 6 Month DR, Resets Semi-Annually, 7.634%, 1/25/25 ............... 509,830 507,691
</TABLE>
40
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS, OCTOBER 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO AMOUNT VALUE
-------------------------------------------------- ------ -----
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
MISCELLANEOUS MORTGAGE BACKED SECURITIES (CONT.)
Salomon Brothers Mortgage Securities VII, Cap 14.00%, Margin 0.96% + NACR,
Resets Annually, 8.197%, 10/25/16 ........................................... $ 416,318 $ 415,698
Sears Mortgage Securities, Cap 13.66%, Margin 2.42% +COFI, Resets Monthly,
6.180%, 7/25/21 ............................................................. 169,614 167,732
Travelers Mortgage Services, Inc., Cap 13.95%, Margin 2.25%+CMT,
Resets Annually, 7.701%, 12/25/18 ........................................... 363,527 363,618
Western Federal Savings and Loan Association, Cap 12.25%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 7.370%, 6/25/20 ................................ 187,272 186,569
Western Federal Savings And Loan Association, Cap 12.75%, Margin 0.75% + 1
Month LIBOR, Resets Monthly, 7.370%, 7/25/20 ................................ 201,288 200,533
------------
TOTAL MISCELLANEOUS MORTGAGE BACKED SECURITIES (COST $2,529,175) .............. 2,511,491
------------
TOTAL LONG TERM INVESTMENTS (COST $221,784,921) ............................... 218,848,067
------------
(a) REPURCHASE AGREEMENT 5.5%
Joint Repurchase Agreement, 6.563%, 11/01/00, (Maturity Value $12,906,833)
(COST $12,904,480) .......................................................... 12,904,480 12,904,480
Barclays Capital Inc. ........................................................
Bear, Stearns & Co. Inc. .....................................................
Deutsche Bank Govt. Securities ...............................................
Dresdner Kleinwort Benson, North America LLC .................................
Lehman Brothers Inc. .........................................................
Nesbitt Burns Securities Inc. ................................................
Paribas Corporation ..........................................................
Societe Generale .............................................................
UBS Warburg ..................................................................
Collateralized by U.S. Treasury Bills and Notes .............................
------------
TOTAL INVESTMENTS (COST $234,689,401) 99.5% ................................... 231,752,547
OTHER ASSETS, LESS LIABILITIES .5% ........................................... 1,196,473
------------
NET ASSETS 100.0% ............................................................. $232,949,020
============
</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
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, 2000, all repurchase
agreements had been entered into on that date.
See notes to financial statements.
41
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities:
Cost.............................................................. $ 234,689,401
=============
Value............................................................. 231,752,547
Receivables:
Investment securities sold........................................ 623,619
Interest.......................................................... 1,552,950
-------------
Total assets.................................................. 233,929,116
-------------
Liabilities:
Payables:
Capital shares redeemed........................................... 865,773
Affiliates........................................................ 79,750
Other liabilities.................................................. 34,573
-------------
Total liabilities............................................. 980,096
-------------
Net assets, at value......................................... $232,949,020
=============
Net assets consist of:
Net unrealized depreciation........................................ (2,936,854)
Accumulated net realized loss...................................... (92,731,427)
Capital shares..................................................... 328,617,301
-------------
Net assets, at value............................................... $ 232,949,020
=============
Shares outstanding................................................. 25,049,290
=============
Net asset value and maximum offering price per share (net
asset value divided by shares outstanding)....................... $ 9.30
=============
</TABLE>
See notes to financial statements.
42
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
<TABLE>
<S> <C>
Investment income:
Interest................................................. $ 16,163,151
------------
Expenses:
Management fees (Note 3)................................. 1,014,088
Custodian fees........................................... 2,517
Reports to shareholders.................................. 1,311
Professional fees (Note 3)............................... 44,070
Trustees' fees and expenses.............................. 13,804
Other.................................................... 15,575
------------
Total expenses...................................... 1,091,365
------------
Net investment income.............................. 15,071,786
------------
Realized and unrealized losses:
Net realized loss from investments....................... (210,331)
Net unrealized depreciation on investments............... (250,160)
------------
Net realized and unrealized loss.......................... (460,491)
------------
Net increase in net assets resulting from operations...... $ 14,611,295
============
</TABLE>
See notes to financial statements.
43
<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, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income............................................................. $ 15,071,786 $ 15,297,092
Net realized loss from investments................................................ (210,331) (140,123)
Net unrealized depreciation on investments........................................ (250,160) (1,785,775)
------------- -------------
Net increase in net assets resulting from operations.......................... 14,611,295 13,371,194
Distributions to shareholders from net investment income........................... (15,071,786) (15,297,092)
Capital share transactions (Note 2)................................................ (48,564,430) (18,533,904)
------------- -------------
Net decrease in net assets.................................................... (49,024,921) (20,459,802)
Net assets (there is no undistributed net investment income at beginning or end of
year):
Beginning of year.................................................................. 281,973,941 302,433,743
------------- -------------
End of year........................................................................ $ 232,949,020 $ 281,973,941
============= =============
</TABLE>
See notes to financial statements.
44
<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 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.
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.
45
<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, 2000, there was 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>
2000
Shares sold ....................................... 8,344,642 $ 77,468,342
Shares issued in reinvestment of distributions .... 1,623,370 15,071,636
Shares redeemed ................................... (15,197,502) (141,104,408)
----------- ------------
Net decrease ................................... (5,229,490) $ (48,564,430)
=========== ============
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)
=========== ============
</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 of .400% of the
first $5 billion of the portfolio's month end net assets. Fees are further
reduced on net assets over $5 billion.
At October 31, 2000, all shares of the Portfolio were owned by the Franklin
Adjustable U.S. Government Securities Fund.
Included in professional fees are legal fees of $1,770 that were paid to a law
firm in which a partner was an officer of the Portfolio.
46
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Notes to Financial Statements (continued)
4. INCOME TAXES
At October 31, 2000, 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>
2001 .................... $17,182,002
2002 .................... 67,102,060
2003 .................... 7,677,608
2004 .................... 419,303
2007 .................... 140,123
2008 .................... 210,331
-----------
$92,731,427
===========
</TABLE>
At October 31, 2000, the Portfolio had expired capital loss carryovers of
$44,474,794, which were reclassified to paid-in capital.
At October 31, 2000, the net unrealized depreciation based on the cost of
investments for income tax purposes of $234,689,401 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation ....... $ 242,547
Unrealized depreciation ....... (3,179,401)
----------
Net unrealized depreciation ... $(2,936,854)
===========
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 2000 aggregated $30,418,006 and $78,546,522, respectively.
47
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS 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, 2000, 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 accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 6, 2000
48
