UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04986
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FRANKLIN INVESTORS SECURITIES TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area Code: (650) 312-2000
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Date of fiscal year end: 10/31
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Date of reporting period: 4/30/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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APRIL 30, 2007
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Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Limited Maturity U.S.
Government Securities Fund
Franklin Real Return Fund
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SEMIANNUAL REPORT AND SHAREHOLDER LETTER
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise
of three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups
operates autonomously, relying on its own
research and staying true to the unique
investment disciplines that underlie its
success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and
value-style U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series
is dedicated to a unique style of value
investing, searching aggressively for
opportunity among what it believes are
undervalued stocks, as well as arbitrage
situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work
independently and adhere to different
investment approaches, Franklin, Templeton and
Mutual Series funds typically have distinct
portfolios. That's why our funds can be used to
build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as
well as the reliable, accurate and personal
service that has helped us become one of the
most trusted names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ....................................................... 1
SEMIANNUAL REPORT
Franklin Balanced Fund ................................................... 3
Franklin Convertible Securities Fund ..................................... 13
Franklin Equity Income Fund .............................................. 22
Franklin Limited Maturity U.S. Government Securities Fund ................ 32
Franklin Real Return Fund ................................................ 40
Financial Highlights and Statements of Investments ....................... 49
Financial Statements ..................................................... 83
Notes to Financial Statements ............................................ 92
Meeting of Shareholders .................................................. 108
Shareholder Information .................................................. 120
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Semiannual Report
Franklin Balanced Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Balanced Fund seeks income and
capital appreciation by investing in a combination of stocks, convertible
securities and fixed income securities. The Fund will normally invest at least
25% of its total assets in equity securities and at least 25% of its total
assets in fixed income securities, including money market securities.
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PORTFOLIO BREAKDOWN
Franklin Balanced Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Common Stocks ........................................................ 52.3%
Corporate Bonds ...................................................... 25.6%
Asset-Backed and Mortgage-Backed
Securities ........................................................... 4.7%
Convertible Preferred Stocks ......................................... 3.7%
Short-Term Investments &
Other Net Assets ..................................................... 13.7%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This semiannual report for Franklin Balanced Fund covers the period ended April
30, 2007.
PERFORMANCE SUMMARY
For the six months under review, Franklin Balanced Fund - Class A posted a
cumulative total return of +7.86%. The Fund underperformed its equity Common
Stocks benchmark, the Standard & Poor's 500 Index (S&P 500), which posted a
total return of +8.60% for the same period. 1 However, it outperformed its fixed
income benchmark, the Lehman Brothers (LB) U.S. Aggregate Index, which
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 53.
Semiannual Report | 3
posted a +2.64% total return. 2 You can find the Fund's long-term performance
data in the Performance Summary beginning on page 8.
ECONOMIC AND MARKET OVERVIEW
During the six months ended April 30, 2007, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product (GDP) grew an annualized 2.5%
in the fourth quarter of 2006 and slowed to an estimated annualized 0.6% in
2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand
and a healthy increase in exports, the U.S. entered 2007 with a record current
account deficit. Corporate profits and government spending generally remained
robust, but manufacturing activity indicated a downturn. The struggling housing
market grew more fragile with the abrupt unraveling of the subprime mortgage
market. This exacerbated already weak housing prices and an inventory glut in
most of the nation's residential real estate markets.
The unemployment rate increased slightly, from 4.4% to 4.5%, as overall job
growth slowed in the face of rising labor costs. 3 Jobs in vehicle manufacturing
and housing-related industries experienced declines stemming from reduced
consumer demand. Even though tight labor markets and the associated wage income
growth supported consumer spending, consumer confidence waned in March, and
large purchases, including those for vehicles and homes, dropped substantially.
Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to
tight supply and high demand, refinery maintenance issues, and ongoing
geopolitical tensions in the Middle East and Africa. Overall, the core Consumer
Price Index (CPI) rose 2.3% for the 12 months ended April 30, 2007, which was
higher than the 2.2% 10-year average. 4
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
2. Source: Standard & Poor's Micropal. The LB U.S. Aggregate Index represents
securities that are SEC-registered, taxable and dollar denominated. The
index covers the U.S. investment grade fixed-rate bond market, with index
components for government and corporate securities, mortgage pass-through
securities and asset-backed securities. All issues included must have at
least one year to final maturity and must be rated investment grade (Baa3
or better) by Moody's Investors Service. They must also be dollar
denominated and nonconvertible. Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
4 | Semiannual Report
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. However, markets
rebounded late in the period amid generally strong corporate earnings reports.
Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +9.41%, and the broader S&P 500 returned +8.60%, while
the technology-heavy NASDAQ Composite Index returned +7.12%. 5 Utilities,
materials and energy stocks performed particularly well.
INVESTMENT STRATEGY
We seek income by investing in a combination of corporate, agency and government
bonds issued in the U.S. and other countries, as well as dividend-paying common
stocks and convertible securities. We seek capital appreciation by investing in
equity securities and convertible securities of companies from a variety of
industries. We will generally invest in investment grade fixed income
securities, but may invest up to 10% of our total assets in non-convertible
bonds rated below investment grade. We apply a "bottom-up" approach to investing
in individual securities. We will assess the market price of a company's
securities relative to our evaluation of the company's long-term earnings, asset
value and cash flow potential. We also consider a company's price/earnings
ratio, profit margins and liquidation value. In determining an optimal mix of
equity and fixed income investments for the Fund, we assess changing economic,
market and industry conditions.
MANAGER'S DISCUSSION
During the reporting period, the Fund as a whole underperformed its equity
benchmark and outperformed its fixed income benchmark, which was consistent with
our expectations. We were pleased with the Fund's performance as the Fund's
equity and fixed income holdings outperformed their respective benchmarks, the
S&P 500 and the LB U.S. Aggregate Index. However, with the equity market
outpacing the fixed income market during the review period, the Fund benefited
from its proportionately larger equity allocation.
TOP 5 EQUITIES
Franklin Balanced Fund
4/30/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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3M Co. 2.6%
PRODUCER MANUFACTURING
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TXU Corp. 2.5%
UTILITIES
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Intel Corp. 2.5%
ELECTRONIC TECHNOLOGY
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Caterpillar Inc. 2.3%
PRODUCER MANUFACTURING
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General Electric Co. 2.1%
PRODUCER MANUFACTURING
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5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
Semiannual Report | 5
TOP 5 BONDS
Franklin Balanced Fund
4/30/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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U.S. Treasury Bill 7.7%
U.S. GOVERNMENT AND AGENCY SECURITIES
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FNMA 30 Year 3.3%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) FIXED RATE
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BNP Paribas (France) 1.5%
FINANCE
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Accredited Mortgage Loan Trust 1.4%
FINANCE
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MetLife Inc. 1.4%
FINANCE
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On a sector basis, the Fund's utility holdings contributed most to its equity
returns, primarily driven by solid operating performance and continued merger
and acquisition activity during the reporting period. Energy minerals was the
Fund's second-largest contributing sector to overall Fund performance, largely
due to robust commodity prices, stronger refining margins and healthy earnings
reports.
On a stock-specific basis, prescription benefit manager Caremark RX (sold during
the reporting period) was among the Fund's top contributors to overall
performance as its shareholders formally approved a merger with pharmacy chain
CVS. Caremark's stock price rose as a bidding war for the company erupted
between CVS and competing benefit manager Express Scripts. The Fund also
benefited from the strong performance of drug maker Schering-Plough, whose first
quarter 2007 earnings were substantially higher than analyst expectations due to
the strong sales of several of its key products such as rheumatoid-arthritis
drug Remicade and allergy medication Nasonex. In addition, electric utility
company TXU was a notable contributor to Fund returns as the company was
acquired by a group of private equity firms led by KKR (Kohlberg Kravis Roberts
& Co.) and TPG (Texas Pacific Group). The merger was among the largest
transactions of its kind, and the company's stock price rose following the
announcement of a privatization plan that included a significant premium to be
paid to existing shareholders.
The Fund had some detractors from performance during the review period. By
sector, retail trade dampened returns. For example, the Fund's investment in
clothing retailer The GAP was a key detractor from overall Fund performance as
the company's stock price was hurt by consumer spending concerns and
weaker-than-expected financial results. Other Fund holdings that weighed on
performance included homebuilder D.R. Horton and finance company Capital One
Financial. D.R. Horton's stock price was sluggish during the reporting period
mostly due to continued weakness in the housing market. Capital One Financial
lowered its guidance after its first quarter 2007 earnings were sharply below
estimates. The company cited mortgage losses and soft credit card sales as
reasons for its poor results.
In the fixed income market, we found credit-sensitive investments more
attractive given a favorable environment and better yields relative to higher
credit quality U.S. government and agency securities. Significant contributors
to Fund performance included EOP Operating (tendered during the reporting
period), Verizon New York and Telecom Italia, as well as new issues from
Freeport-McMoRan Copper and Gold and HCA. During the period, our holding in KB
Home was negatively affected as news in the subprime mortgage market pressured
homebuilders in general.
6 | Semiannual Report
Thank you for your continued participation in Franklin Balanced Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Edward D. Perks
Edward D. Perks, CFA
[PHOTO OMITTED] /s/ Alan E. Muschott, CFA
Alan E. Muschott
[PHOTO OMITTED] /s/ Shawn Lyons
Shawn Lyons, CFA
Portfolio Management Team
Franklin Balanced Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 7
Performance Summary as of 4/30/07
FRANKLIN BALANCED FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FBLAX) CHANGE 4/30/07 10/31/06
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Net Asset Value (NAV) +$0.66 $11.31 $10.65
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DISTRIBUTIONS (11/1/06-4/30/07)
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Dividend Income $0.1691
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CLASS C (SYMBOL: N/A) CHANGE 4/30/07 10/31/06
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Net Asset Value (NAV) +$0.64 $11.26 $10.62
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DISTRIBUTIONS (11/1/06-4/30/07)
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Dividend Income $0.1563
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CLASS R (SYMBOL: N/A) CHANGE 4/30/07 10/31//06
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Net Asset Value (NAV) +$0.66 $11.30 $10.64
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DISTRIBUTIONS (11/1/06-4/30/07)
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Dividend Income $0.1623
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ADVISOR CLASS (SYMBOL: N/A) CHANGE 4/30/07 10/31/06
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Net Asset Value (NAV) +$0.66 $11.32 $10.66
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DISTRIBUTIONS (11/1/06-4/30/07)
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Dividend Income $0.1838
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8 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE TOTAL RETURNS INCLUDE
MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS C: 1%
CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO
SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN
DAYS OF PURCHASE.
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CLASS A 6-MONTH INCEPTION (7/3/06)
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Cumulative Total Return 2 +7.86% +15.63%
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Aggregate Total Return 3 +1.66% +8.98%
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Value of $10,000 Investment 4 $10,166 $10,898
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Aggregate Total Return (3/31/07) 3, 5 +0.83% +5.51%
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30-Day Standardized Yield 6 2.15%
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Total Annual Operating Expenses 7
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Without Waiver 2.10%
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With Waiver 1.06%
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CLASS C 6-MONTH INCEPTION (7/3/06)
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Cumulative Total Return 2 +7.57% +14.99%
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Aggregate Total Return 3 +6.57% +13.99%
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Value of $10,000 Investment 4 $10,657 $11,399
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Aggregate Total Return (3/31/07) 3, 5 +5.53% +10.31%
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30-Day Standardized Yield 6 1.63%
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Total Annual Operating Expenses 7
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Without Waiver 2.73%
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With Waiver 1.71%
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CLASS R 6-MONTH INCEPTION (7/3/06)
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Cumulative Total Return 2 +7.80% +15.46%
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Aggregate Total Return 3 +7.80% +15.46%
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Value of $10,000 Investment 4 $10,780 $11,546
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Aggregate Total Return (3/31/07) 3, 5 +6.78% +11.78%
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30-Day Standardized Yield 6 2.14%
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Total Annual Operating Expenses 7
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Without Waiver 2.25%
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With Waiver 1.21%
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ADVISOR CLASS 6-MONTH INCEPTION (7/3/06)
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Cumulative Total Return 2 +8.00% +15.89%
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Aggregate Total Return 3 +8.00% +15.89%
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Value of $10,000 Investment 4 $10,800 $11,589
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Aggregate Total Return (3/31/07) 3, 5 +7.08% +12.20%
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30-Day Standardized Yield 6 2.63%
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Total Annual Operating Expenses 7
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Without Waiver 1.75%
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With Waiver 0.71%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER AND ADMINISTRATOR HAVE AGREED IN ADVANCE TO WAIVE OR LIMIT
THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND THROUGH MARCH 1, 2008. AFTER THIS DATE, THE FUND'S
MANAGER AND ADMINISTRATOR MAY END THIS ARRANGEMENT AT ANY TIME.
Semiannual Report | 9
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS WILL AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. AS PRICES OF
BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY
DECLINE. WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER
THE LONG TERM, THEY TEND TO FLUCTUATE DRAMATICALLY OVER THE SHORT TERM AS A
RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES
MARKET AS A WHOLE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS C: These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. The Fund's manager and administrator have agreed in advance to waive all
or a portion of their fees and to make certain payments to reduce
expenses. If the manager and administrator 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 1.32%, 0.75%, 1.26% and 1.74% for Classes
A, C, R and Advisor, respectively. After 3/1/08, the manager and
administrator may end this arrangement at any time upon notice to the
Fund's board.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Aggregate total return represents the change in value of an investment
over the periods indicated and includes any applicable maximum sales
charge. Because the Fund has existed for less than one year, average
annual total returns are not available.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized total return
information through the latest calendar quarter.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
10 | Semiannual Report
Your Fund's Expenses
FRANKLIN BALANCED FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 11
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,078.60 $5.46
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Hypothetical (5% return before expenses) $1,000 $1,019.54 $5.31
- ---------------------------------------------------------------------------------------------------------------------
CLASS C
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Actual $1,000 $1,075.70 $8.85
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.27 $8.60
- ---------------------------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,078.00 $6.29
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Hypothetical (5% return before expenses) $1,000 $1,018.74 $6.11
- ---------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,080.00 $3.66
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Hypothetical (5% return before expenses) $1,000 $1,021.27 $3.56
- ---------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, for each class (A: 1.06%; C: 1.72%; R: 1.22%; and Advisor:
0.71%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
12 | Semiannual Report
Franklin Convertible Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Convertible Securities Fund
seeks to maximize total return consistent with reasonable risk by seeking to
optimize capital appreciation and high current income under varying market
conditions and investing at least 80% of its net assets in convertible
securities.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Convertible Securities Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Convertible Bonds .................................................... 58.4%
Convertible Preferred Stocks ......................................... 34.3%
Common Stocks ........................................................ 2.1%
Short-Term Investments &
Other Net Assets ..................................................... 5.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Convertible Securities Fund's semiannual
report for the period ended April 30, 2007.
PERFORMANCE SUMMARY
For the six months under review, Franklin Convertible Securities Fund - Class A
posted a cumulative total return of +8.70%. The Fund outperformed its benchmark,
the Merrill Lynch (ML) All U.S. Convertibles Index, which returned +7.39% for
the same period. 1 The ML All U.S. Convertibles Index replaced the Goldman
Sachs/Bloomberg U.S. Convertible 100 Index, which was discontinued as of
December 31, 2006. You can find the Fund's long-term performance data in the
Performance Summary beginning on page 18.
1. Source: Standard & Poor's Micropal. The ML All U.S. Convertibles Index is
an unmanaged index of domestic securities of all quality grades that are
convertible into U.S. dollar-denominated common stock, ADRs or cash
equivalents. The index is unmanaged and includes reinvestment of any
income or distributions. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 60.
Semiannual Report | 13
ECONOMIC AND MARKET OVERVIEW
During the six months ended April 30, 2007, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product (GDP) grew an annualized 2.5%
in the fourth quarter of 2006 and slowed to an estimated annualized 0.6% in
2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand
and a healthy increase in exports, the U.S. entered 2007 with a record current
account deficit. Corporate profits and government spending generally remained
robust, but manufacturing activity indicated a downturn. The struggling housing
market grew more fragile with the abrupt unraveling of the subprime mortgage
market. This exacerbated already weak housing prices and an inventory glut in
most of the nation's residential real estate markets.
The unemployment rate increased slightly, from 4.4% to 4.5%, as overall job
growth slowed in the face of rising labor costs. 2 Jobs in vehicle manufacturing
and housing-related industries experienced declines stemming from reduced
consumer demand. Even though tight labor markets and the associated wage income
growth supported consumer spending, consumer confidence waned in March, and
large purchases, including those for vehicles and homes, dropped substantially.
Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to
tight supply and high demand, refinery maintenance issues, and ongoing
geopolitical tensions in the Middle East and Africa. Overall, the core Consumer
Price Index (CPI) rose 2.3% for the 12 months ended April 30, 2007, which was
higher than the 2.2% 10-year average. 3
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. However, markets
rebounded late in the period amid generally strong corporate earnings reports.
Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +9.41%, and the broader Standard & Poor's 500 Index
(S&P 500) returned +8.60%, while the technology-heavy NASDAQ Composite Index
returned +7.12%. 4 Utilities, materials and energy stocks performed particularly
well.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
14 | Semiannual Report
INVESTMENT STRATEGY
We follow a strategy of maintaining a balance in the portfolio between the
equity and debt characteristics of convertible securities with an emphasis on
the equity features. Convertible securities are attractive for two reasons: the
opportunity to participate in common stocks' potential growth with relatively
reduced volatility, and the potential for current income with potential downside
protection from bonds. Typically we sell securities whose equity sensitivity
becomes too high and no longer offers appropriate downside protection. Likewise,
as securities become too bond-like -- reducing their ability to appreciate with
increases in the underlying common stock -- we attempt to redeploy those assets
into more balanced convertible securities and maintain the potential for the
Fund's upside participation. Our experienced team of analysts searches for
investment opportunities among all economic sectors, and considers a company's
long-term earnings, asset value and cash flow potential, to create a broadly
diversified portfolio.
MANAGER'S DISCUSSION
During the six months under review, utilities, materials and telecommunications
services were among the Fund's best performing sectors. 5
In the utilities sector, independent power producers Calpine and NRG Energy
performed well as power prices rose. We held a position in Calpine for more than
a year after it filed bankruptcy in 2005 and subsequently sold our stake in the
company as we sought to take advantage of a rebound in Calpine convertibles.
Other utility holdings that performed well during the review period included
Entergy and Centerpoint Energy.
Materials sector holding, chemical maker Celanese, was among the Fund's top
performers as was Latin American wireless provider NII Holdings, which operates
under the Nextel brand name. Insurance provider Unum Group (formerly,
UnumProvident) also performed well and boosted Fund performance.
By contrast, the Fund's investments in the information technology, industrials
and consumer discretionary sectors generated the lowest total returns during
TOP 10 HOLDINGS
Franklin Convertible Securities Fund
4/30/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Schlumberger Ltd. (Netherlands) 2.4%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
Protein Design Labs Inc. 2.3%
HEALTH TECHNOLOGY
- --------------------------------------------------------------------------------
NII Holdings Inc. 2.2%
COMMUNICATIONS
- --------------------------------------------------------------------------------
Carnival Corp. 2.1%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
Entergy Corp. 1.9%
UTILITIES
- --------------------------------------------------------------------------------
E*TRADE Financial Corp. 1.8%
FINANCE
- --------------------------------------------------------------------------------
Juniper Networks Inc. 1.8%
ELECTRONIC TECHNOLOGY
- --------------------------------------------------------------------------------
WESCO International Inc. 1.8%
DISTRIBUTION SERVICES
- --------------------------------------------------------------------------------
Affiliated Managers Group Inc. 1.8%
FINANCE
- --------------------------------------------------------------------------------
The Walt Disney Co. 1.8%
CONSUMER SERVICES
- --------------------------------------------------------------------------------
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
5. Materials holdings are in the process industries industry in the SOI.
Telecommunications services holdings are in the communications industry in
the SOI.
Semiannual Report | 15
the reporting period. 6 Specifically, the Fund's investments in mobile telephone
company Motorola (securities issued by Liberty Media convertible into Motorola)
detracted from performance as the company reported disappointing results.
Additionally, airline JetBlue Airways was hurt by high fuel costs and strong
competition, and electronic retailer Best Buy also detracted from returns due to
mounting consumer spending concerns.
In addition, we prematurely attempted to identify the bottom of the housing
cycle, and a new investment in homebuilder D.R. Horton (securities issued by
Merrill Lynch convertible into D.R. Horton) hurt Fund performance. An existing
position in global biotechnology company Amgen was also among the Fund's most
significant detractors during the review period.
Thank you for your participation in Franklin Convertible Securities Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Alan E. Muschott
Alan E. Muschott, CFA
[PHOTO OMITTED] /s/ Mark L. Constant
Mark L. Constant
[PHOTO OMITTED] /s/ Edward D. Perks
Edward D. Perks, CFA
Portfolio Management Team
Franklin Convertible Securities Fund
6. Information technology holdings are in the electronic technology and
technology services industries in the SOI. Industrials holdings are in the
consumer services, distribution services, electronic technology, finance,
industrial services and transportation industries in the SOI. Consumer
discretionary holdings are in the commercial services, consumer durables,
consumer services and retail trade industries in the SOI.
16 | Semiannual Report
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
- --------------------------------------------------------------------------------
MARK CONSTANT has been portfolio manager for Franklin Convertible Securities
Fund since 2006. He is a vice president, research analyst and portfolio manager
for Franklin Global Advisers responsible for research in the capital markets
sector, including U.S.-based global securities and advisory firms, asset
managers, exchanges and trading services providers.
Prior to joining Franklin Templeton Investments in 2006, Mr. Constant worked as
a senior vice president and senior equity research analyst at Lehman Brothers
covering brokers and asset managers. During his seven years at Lehman Brothers,
he became a regular member of INSTITUTIONAL INVESTOR magazine's "All-America"
Equity Research Team, and ranked among the top sell-side analysts in his sector
in the annual Greenwich Associates survey each year. He is also a member of THE
WALL STREET JOURNAL's "All-Star Analysts Hall of Fame." Before joining Lehman
Brothers, Mr. Constant worked at Merrill Lynch for eight years, most recently as
vice president and senior equity research analyst covering asset managers and
mortgage finance.
Mr. Constant earned his bachelor's degree in economics from Stanford University.
He is a member of the CFA Institute, as well as the Security Analysts of San
Francisco.
- --------------------------------------------------------------------------------
Semiannual Report | 17
Performance Summary as of 4/30/07
FRANKLIN CONVERTIBLE SECURITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FISCX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.06 $17.13 $17.19
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2875
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2617
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.9438
- --------------------------------------------------------------------------------
TOTAL $1.4930
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FROTX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.07 $16.97 $17.04
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2261
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2617
- --------------------------------------------------------------------------------
Long-Term Capital Gain $0.9438
- --------------------------------------------------------------------------------
TOTAL $1.4316
- --------------------------------------------------------------------------------
18 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN
DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.70% +12.79% +68.80% +161.43%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.44% +6.30% +9.73% +9.44%
- -----------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,244 $10,630 $15,907 $24,642
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +4.05% +9.03% +9.20%
- -----------------------------------------------------------------------------------------------
Distribution Rate 5 3.12%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 2.29%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.88%
- -----------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.38% +12.02% +62.71% +142.80%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 2 +7.38% +11.02% +10.23% +9.28%
- -----------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,738 $11,102 $16,271 $24,280
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +8.65% +9.52% +9.03%
- -----------------------------------------------------------------------------------------------
Distribution Rate 5 2.63%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 1.69%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.63%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
ENDNOTES
THE FUND MAY INVEST IN HIGH-YIELDING, FIXED INCOME SECURITIES. HIGH YIELDS
REFLECT THE HIGHER CREDIT RISK ASSOCIATED WITH THESE LOWER-RATED SECURITIES AND,
IN SOME CASES, THE LOWER MARKET PRICES FOR THESE INSTRUMENTS. INTEREST RATE
MOVEMENTS MAY AFFECT THE FUND'S SHARE PRICE AND YIELD. THE FUND MAY ALSO INVEST
IN FOREIGN SECURITIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING POLITICAL
UNCERTAINTY AND CURRENCY VOLATILITY. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on the sum of the respective class's last four
quarterly dividends and the maximum offering price (NAV for Class C) per
share on 4/30/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 19
Your Fund's Expenses
FRANKLIN CONVERTIBLE SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
20 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,087.00 $4.45
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.53 $4.31
- --------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,083.80 $8.27
- --------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.86 $8.00
- --------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.86% and C: 1.60%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Semiannual Report | 21
Franklin Equity Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Equity Income Fund seeks to
maximize total return, emphasizing high, current income and long-term capital
appreciation, consistent with reasonable risk, by investing at least 80% of its
net assets in equity securities including securities convertible into common
stocks.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Equity Income Fund covers the period ended
April 30, 2007.
PERFORMANCE OVERVIEW
For the six months under review, Franklin Equity Income Fund - Class A posted a
cumulative total return of +8.86%. The Fund underperformed its narrow benchmark,
the Russell 1000(R) Value Index, which returned +9.79%. 1 The Fund performed
comparably to the +8.61% total return of its broad benchmark, the Standard &
Poor's 500 Index (S&P 500). 2 The Fund also underperformed its peers in the
Lipper Equity Income Funds Classification Average, which returned +9.49% for the
same period. 3 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 27.
ECONOMIC AND MARKET OVERVIEW
During the six months ended April 30, 2007, the U.S. economy advanced at a
moderate but slowing pace. Gross domestic product (GDP) grew an annualized 2.5%
in the fourth quarter of 2006 and slowed to an estimated annualized 0.6% in
2007's first quarter. Although GDP rose 3.3% in 2006 on strong domestic demand
and a healthy increase in exports, the U.S. entered 2007 with a record current
account deficit. Corporate profits and government spending generally
1. Source: Standard & Poor's Micropal. The Russell 1000 Value Index is market
capitalization weighted and measures performance of those Russell 1000
Index companies with lower price-to-book ratios and lower forecasted
growth values.
2. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
3. Source: Lipper Inc. The Lipper Equity Income Funds Classification Average
is calculated by averaging the total returns of all funds within the
Lipper Equity Income Funds classification in the Lipper Open-End
underlying funds universe. Lipper Equity Income Funds are defined as funds
that seek relatively high current income and growth of income through
investing 60% or more of their portfolios in equities. For the six-month
period ended April 30, 2007, there were 258 funds in this category. Lipper
calculations do not include sales charges or expense subsidization by a
fund's manager. The Fund's performance relative to the average may have
differed if these and other factors had been considered.
The indexes are unmanaged and include reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 68.
22 | Semiannual Report
remained robust, but manufacturing activity indicated a downturn. The struggling
housing market grew more fragile with the abrupt unraveling of the subprime
mortgage market. This exacerbated already weak housing prices and an inventory
glut in most of the nation's residential real estate markets.
The unemployment rate increased slightly, from 4.4% to 4.5%, as overall job
growth slowed in the face of rising labor costs. 4 Jobs in vehicle manufacturing
and housing-related industries experienced declines stemming from reduced
consumer demand. Even though tight labor markets and the associated wage income
growth supported consumer spending, consumer confidence waned in March, and
large purchases, including those for vehicles and homes, dropped substantially.
Gasoline prices rose in first quarter 2007 as oil hit a six-month high due to
tight supply and high demand, refinery maintenance issues, and ongoing
geopolitical tensions in the Middle East and Africa. Overall, the core Consumer
Price Index (CPI) rose 2.3% for the 12 months ended April 30, 2007, which was
higher than the 2.2% 10-year average. 5
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
U.S. investors entered 2007 cautious after more than four years of bull market
gains. The overall domestic equity market rose during the six months under
review, but was essentially flat during the first quarter of 2007 after global
stock market sell-offs in late February and mid-March. However, markets
rebounded late in the period amid generally strong corporate earnings reports.
Overall, the blue chip stocks of the Dow Jones Industrial Average posted a
six-month total return of +9.41%, and the broader S&P 500 returned +8.60%, while
the technology-heavy NASDAQ Composite Index returned +7.12%. 6 Utilities,
materials and energy stocks performed particularly well.
4. Source: Bureau of Labor Statistics.
5. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
6. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 2 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
Semiannual Report | 23
PORTFOLIO BREAKDOWN
Franklin Equity Income Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Finance* 28.2%
Producer Manufacturing 11.3%
Electronic Technology 8.5%
Energy Minerals 8.2%
Health Technology 6.1%
Communications 5.6%
Consumer Non-Durables 5.4%
Retail Trade 5.1%
Utilities 3.3%
Transportation 2.8%
Technology Services 2.4%
Other 10.4%
Short-Term Investments & Other Net Assets 2.7%
* Significant exposure to a single sector may result in greater volatility
for the Fund than a more broadly diversified portfolio. There are specific
risks to investing in the finance sector, which is sensitive to changes in
interest rates, subject to extensive government regulation, and recently
has undergone rapid change related to consolidations and changes to its
regulatory framework.
DIVIDEND DISTRIBUTIONS*
Franklin Equity Income Fund
11/1/06-4/30/07
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------
November 3.24 cents 1.92 cents 1.92 cents 2.79 cents
- --------------------------------------------------------------------------------
December** 9.23 cents 7.81 cents 7.85 cents 8.73 cents
- --------------------------------------------------------------------------------
January 3.24 cents 1.82 cents 1.86 cents 2.74 cents
- --------------------------------------------------------------------------------
February 3.24 cents 1.82 cents 1.86 cents 2.74 cents
- --------------------------------------------------------------------------------
March 3.24 cents 1.85 cents 1.86 cents 2.75 cents
- --------------------------------------------------------------------------------
April 3.24 cents 1.85 cents 1.86 cents 2.75 cents
- --------------------------------------------------------------------------------
TOTAL 25.43 CENTS 17.07 CENTS 17.21 CENTS 22.50 CENTS
- --------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 5.99 cent distribution to meet excise tax
requirements.
INVESTMENT STRATEGY
We emphasize dividends in selecting stocks for the Fund because we believe that
over time dividend income can contribute significantly to total return. We
target companies we believe are financially strong, but undervalued by the
market. To identify such companies, we use a current relative yield analysis
that focuses on a company's dividend yield (calculated by dividing a stock's
annual per share dividends by its per share market price). Our experienced team
of analysts searches for investment opportunities among all economic sectors,
and considers a company's long-term earnings, asset value and cash flow
potential, to create a broadly diversified portfolio.
MANAGER'S DISCUSSION
During the six months under review, the utilities sector provided the strongest
boost to Fund performance, fueled in part by the announced buyout of Texas-based
utility company TXU by a group of private equity firms led by KKR (Kohlberg
Kravis Roberts & Co.) and TPG (Texas Pacific Group). Although TXU was a new Fund
holding during the reporting period, we sold some of our position as we sought
to profit from the company's share price increase. Other utility holdings that
aided Fund performance during the review period included Public Service
Enterprise Group (PSEG) and Dominion Resources, which benefited from solid
operating performance. PSEG was among the Fund's top contributors to performance
and was sold at a profit during the reporting period.
24 | Semiannual Report
Likewise, the Fund benefited from merger and acquisition activity in the health
services sector. Prescription benefit manager Caremark RX was a notable
contributor to performance as a bidding war broke out for the company between
pharmacy chain CVS and competing prescription benefit manager Express Scripts.
We sought to take advantage of Caremark's strong stock price and realized a gain
as we exited our position during the review period.
Within the energy minerals sector, the Fund benefited from the positive
performance of several integrated oil company holdings such as Chevron, Exxon
Mobil and ConocoPhillips, whose share prices were bolstered by robust oil and
natural gas prices, stronger refining margins, and healthy earnings reports. The
electronic technology sector also aided Fund performance, with contributions
from several holdings such as mobile phone maker Nokia and semiconductor
manufacturer Microchip Technology. Other Fund holdings that performed well and
contributed to performance during the review period included industrial
conglomerate Honeywell International and consumer goods giant Unilever.
However, not all of the Fund's holdings performed well during the reporting
period. In particular, the consumer durables sector hurt Fund performance due to
our new position in homebuilder D.R. Horton. We prematurely attempted to
identify the bottom of the housing cycle, and the company's share price fell
sharply during the first several weeks following our initial purchase. We sought
to take advantage of this weakness by adding to our position as D.R. Horton's
stock price continued to fall. For similar reasons, in the retail trade sector,
our new position in home improvement chain Home Depot also detracted from
performance. Other retail trade sector holdings that performed poorly during the
review period included clothing retailer The GAP and consumer electronics
retailer Best Buy, primarily due to consumer spending concerns and weak
financial results. In addition, some of the Fund's finance sector holdings also
hindered performance as subprime lending concerns weighed on our positions in
Bank of America and mortgage lender Freddie Mac. We no longer held Freddie Mac
at period-end.
TOP 10 HOLDINGS
Franklin Equity Income Fund
4/30/07
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
AT&T Inc. 3.0%
COMMUNICATIONS
- -------------------------------------------------------------------------------
Citigroup Inc. 2.7%
FINANCE
- -------------------------------------------------------------------------------
Bank of America Corp. 2.6%
FINANCE
- -------------------------------------------------------------------------------
JP Morgan Chase & Co. 2.5%
FINANCE
- -------------------------------------------------------------------------------
Exxon Mobil Corp. 2.1%
ENERGY MINERALS
- -------------------------------------------------------------------------------
Caterpillar Inc. 2.1%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
Morgan Stanley 2.1%
FINANCE
- -------------------------------------------------------------------------------
Intel Corp. 2.1%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
General Electric Co. 2.0%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
Chevron Corp. 2.0%
ENERGY MINERALS
- -------------------------------------------------------------------------------
Semiannual Report | 25
Thank you for your continued participation in Franklin Equity Income Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Alan E. Muschott
Alan E. Muschott, CFA
[PHOTO OMITTED] /s/ Edward D. Perks
Edward D. Perks, CFA
[PHOTO OMITTED] /s/ Frank M. Felicelli
Frank M. Felicelli, CFA
Portfolio Management Team
Franklin Equity Income Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
26 | Semiannual Report
Performance Summary as of 4/30/07
FRANKLIN EQUITY INCOME FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FISEX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.24 $22.91 $22.67
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2543
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1683
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2605
- --------------------------------------------------------------------------------
TOTAL $1.6831
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBEIX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.23 $22.80 $22.57
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1707
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1683
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2605
- --------------------------------------------------------------------------------
TOTAL $1.5995
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FRETX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.23 $22.81 $22.58
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1721
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1683
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2605
- --------------------------------------------------------------------------------
TOTAL $1.6009
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FREIX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.24 $22.92 $22.68
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2250
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1683
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.2605
- --------------------------------------------------------------------------------
TOTAL $1.6538
- --------------------------------------------------------------------------------
Semiannual Report | 27
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE
ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.86% +15.73% +46.81% +129.18%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.62% +9.09% +6.71% +8.00%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,262 $10,909 $13,834 $21,597
- -------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +7.06% +5.14% +7.61%
- -------------------------------------------------------------------------------------------------------------
Distribution Rate 5 1.60%
- -------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 1.79%
- -------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 0.93%
- -------------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.45% +14.84% +41.45% +64.58%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +4.45% +10.84% +6.88% +6.16%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,445 $11,084 $13,945 $16,458
- -------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +8.69% +5.27% +5.67%
- -------------------------------------------------------------------------------------------------------------
Distribution Rate 5 0.97%
- -------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 1.17%
- -------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.67%
- -------------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.45% +14.84% +41.41% +112.57%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +7.45% +13.84% +7.18% +7.83%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,745 $11,384 $14,141 $21,257
- -------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +11.70% +5.59% +7.43%
- -------------------------------------------------------------------------------------------------------------
Distribution Rate 5 0.98%
- -------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 1.17%
- -------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.67%
- -------------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 3-YEAR INCEPTION (8/1/02)
- -------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +8.71% +15.37% +38.50% +70.26%
- -------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +8.71% +15.37% +11.47% +11.87%
- -------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $10,871 $11,537 $13,850 $17,026
- -------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +13.23% +9.35% +11.05%
- -------------------------------------------------------------------------------------------------------------
Distribution Rate 5 1.44%
- -------------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 1.67%
- -------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7 1.18%
- -------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
28 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE DRAMATICALLY OVER THE SHORT TERM AS A RESULT OF
FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A
WHOLE. THE FUND'S INVESTMENT IN FOREIGN SECURITIES ALSO INVOLVES SPECIAL RISKS,
INCLUDING CURRENCY FLUCTUATIONS AND ECONOMIC AS WELL AS POLITICAL UNCERTAINTY.
THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described in
the prospectus. These shares have higher annual fees and expenses
than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the respective class's
April dividend and the maximum offering price (NAV for Classes B, C and R)
per share on 4/30/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 29
Your Fund's Expenses
FRANKLIN EQUITY INCOME FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
30 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,088.60 $4.82
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.18 $4.66
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,084.50 $8.63
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.51 $8.35
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,084.50 $8.58
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.56 $8.30
- -----------------------------------------------------------------------------------------------------------
CLASS R
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,087.10 $6.11
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.94 $5.91
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.93%; B: 1.67%; C: 1.66%; and R: 1.18%), multiplied by the average
account value over the period, multiplied by 181/365 to reflect the
one-half year period.
Semiannual Report | 31
Franklin Limited Maturity U.S. Government
Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Limited Maturity U.S. Government
Securities Fund seeks to provide investors with as high a level of current
income as is consistent with prudent investing, while seeking to preserve
shareholders' capital, by investing at least 80% of its net assets in securities
with a dollar-weighted average maturity of less than 10 years and issued or
guaranteed by the U.S. government, its agencies or instrumentalities. 1 Some of
the Fund's investments may include securities issued by U.S.
government-sponsored entities such as Fannie Mae and Freddie Mac. 2
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Limited Maturity U.S. Government Securities Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
U.S. Government & Agency Bonds ....................................... 49.0%
Mortgage-Backed Securities ........................................... 47.4%
Short-Term Investments &
Other Net Assets ..................................................... 3.6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Limited Maturity U.S. Government Securities
Fund's semiannual report for the period ended April 30, 2007.
PERFORMANCE SUMMARY
For the six months under review, Franklin Limited Maturity U.S. Government
Securities Fund - Class A posted a +2.39% cumulative total return. The Fund
performed comparably to the +2.36% total return of its primary benchmark, the
Lehman Brothers (LB) U.S. Treasury: 1-5 Year Index, and the +2.34% total
1. In determining a security's maturity for the purposes of calculating the
Fund's average maturity, an estimate of the average time for its principal
to be paid may be used. This can be substantially shorter than its stated
final maturity.
2. Although U.S. government sponsored entities may be chartered or sponsored
by acts of Congress, their securities are neither insured nor guaranteed
by the U.S. government. Please refer to the Fund's prospectus for a
detailed discussion regarding various levels of credit support. The Fund's
yield and share price are not guaranteed and will vary with market
conditions.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 73.
32 | Semiannual Report
return of its secondary benchmark, the LB Government Bond: 1-3 Year Index. 3 You
can find the Fund's long-term performance data in the Performance Summary
beginning on page 36.
ECONOMIC AND MARKET OVERVIEW
For the six months ended April 30, 2007, a slowing housing market and moderating
profit growth dampened economic expansion. However, a tight labor market and
higher personal incomes helped support the consumer. Spending for durable goods,
as well as state and local government spending, contributed to growth in the
first quarter of 2007.
Oil prices were volatile and ended the period higher than where they started.
Headline, or overall, inflation and core inflation, which excludes food and
energy costs, experienced some upward pressure. April's headline Consumer Price
Index (CPI) reported a 12-month rise of 2.6%, while core CPI increased 2.3%. 4
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
The 10-year Treasury note yield rose slightly from 4.61% at the beginning of the
period to 4.63% on April 30, 2007. Typically, the intermediate portion of the
yield curve generally reflects market expectations of the future direction of
inflation. A relatively moderate inflation environment contributed to little
overall change in interest rates.
INVESTMENT STRATEGY
We currently maintain the portfolio's average dollar-weighted maturity between
two and five years. The Fund's average dollar-weighted maturity will vary with
market conditions and the outlook for interest rates. We invest primarily in
short- to intermediate-term securities guaranteed by the U.S. government, its
3. Source: Standard & Poor's Micropal. The LB U.S. Treasury: 1-5 Year Index
includes securities in the Treasury index (i.e., public obligations of the
U.S. Treasury) with a maturity from one up to (but not including) five
years. The LB Government Bond: 1-3 Year Index includes securities in the
Treasury index (i.e., public obligations of the U.S. Treasury) with a
maturity from one up to (but not including) three years. The indexes are
unmanaged and include reinvestment of any income or distributions. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
4. Source: Bureau of Labor Statistics.
Semiannual Report | 33
DIVIDEND DISTRIBUTIONS*
Franklin Limited Maturity U.S. Government Securities Fund
11/1/06-4/30/07
- -------------------------------------------------------------------------------
DIVIDEND PER SHARE
----------------------------------------------------------
MONTH CLASS A ADVISOR CLASS
- -------------------------------------------------------------------------------
November 3.25 cents 3.33 cents
- -------------------------------------------------------------------------------
December 3.25 cents 3.34 cents
- -------------------------------------------------------------------------------
January 3.25 cents 3.34 cents
- -------------------------------------------------------------------------------
February 3.25 cents 3.34 cents
- -------------------------------------------------------------------------------
March 3.25 cents 3.33 cents
- -------------------------------------------------------------------------------
April 3.25 cents 3.33 cents
- -------------------------------------------------------------------------------
TOTAL 19.50 CENTS 20.01 CENTS
- -------------------------------------------------------------------------------
* 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.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
agencies and instrumentalities. Some of the Fund's investments may include
securities issued by U.S. government-sponsored entities, such as Fannie Mae and
Freddie Mac. 2 Our portfolio emphasizes mortgage-backed bonds and agency
debentures, while also diversifying across components of the U.S. Treasury
sector. We analyze securities using proprietary and nonproprietary research to
help identify attractive investment opportunities.
MANAGER'S DISCUSSION
During the six months under review, the Fed left short-term interest rates
unchanged, and the general consensus was that it was more likely for rates to
decline than go up. Intermediate-term bond yields were relatively stable during
the review period, which led to essentially flat prices across a variety of
high-grade fixed income sectors. However, some of the more credit-sensitive
securities marginally outperformed their higher-quality counterparts. For
example, during the reporting period, the LB U.S. Aggregate Index, which
measures investment-grade bond performance, underperformed the LB U.S. Universal
Index, which is a broad measure of the debt market and includes some high yield
and non-dollar issues, as well as other components.
In this environment, we sought to reduce the Fund's exposure to interest rate
risk by investing in shorter-duration adjustable rate mortgage-backed securities
(MBS), which tend to have lower durations than fixed-rate MBS. As we compared
Treasuries at each part of the yield curve with agency debentures and mortgages,
we concluded that the best opportunities remained outside the Treasury sector.
Our analysis led us to believe that mortgage-related securities
34 | Semiannual Report
were attractive core holdings across a range of interest rate cycles due to
their ability to generate income and provide lower volatility when compared with
other comparable credit-quality assets.
Thank you for your continued participation in Franklin Limited Maturity U.S.
Government Securities Fund. We look forward to serving your future investment
needs.
[PHOTO OMITTED] /s/ Kent Burns
Kent Burns, CFA
[PHOTO OMITTED] /s/ Paul Varunok
Paul Varunok
Portfolio Management Team
Franklin Limited Maturity
U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 35
Performance Summary as of 4/30/07
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRGVX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $9.94 $9.90
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.1950
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FSUAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.04 $9.93 $9.89
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.2001
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.39% +5.15% +15.35% +54.03%
- --------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.07% +2.74% +2.43% +4.18%
- --------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +2.51% +2.60% +4.22%
- --------------------------------------------------------------------------------------------
Distribution Rate 4 3.83%
- --------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.96%
- --------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.85%
- --------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.45% +5.26% +15.94% +55.43%
- --------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.45% +5.26% +3.00% +4.51%
- --------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +5.02% +3.18% +4.54%
- --------------------------------------------------------------------------------------------
Distribution Rate 4 4.04%
- --------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.18%
- --------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.75%
- --------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
36 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS, UNSCHEDULED MORTGAGE PREPAYMENTS AND OTHER RISK FACTORS
WILL ADVERSELY AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND PRICES, AND THUS A
FUND'S SHARE PRICE, GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES.
THEREFORE, AS THE PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST
RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
4. Distribution rate is based on an annualization of the respective class's
April dividend and the maximum offering price (NAV for Advisor Class) per
share on 4/30/07.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 37
Your Fund's Expenses
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
38 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.90 $4.42
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.43 $4.41
- ------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,024.50 $3.92
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.93 $3.91
- ------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.88% and Advisor: 0.78%), multiplied by the average account value over
the period, multiplied by 181/365 to reflect the one-half year period.
Semiannual Report | 39
Franklin Real Return Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Real Return Fund seeks to
achieve total return that exceeds the rate of inflation over an economic cycle
by allocating assets among inflation-indexed securities, investment grade and
high yield fixed income securities, mortgage- and other asset-backed securities,
and equity securities with high correlation to broad measures of inflation.
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Real Return Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
U.S. Treasury Inflation Protected
Securities ........................................................... 66.4%
Foreign Government Debt Securities ................................... 11.5%
Real Estate Investment Trusts -
Common Stocks ........................................................ 5.1%
Natural Resources - Common Stocks* ................................... 5.1%
Corporate Bonds ...................................................... 1.3%
Short-Term Investments &
Other Net Assets ..................................................... 10.6%
* In the SOI, the natural resources sector comprises energy minerals,
industrial services, non-energy minerals and process industries.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Real Return Fund's semiannual report for
the period ended April 30, 2007.
PERFORMANCE SUMMARY
For the six months under review, Franklin Real Return Fund - Class A posted a
+4.18% cumulative total return. The Fund outperformed the Consumer Price Index
(CPI) for Urban Consumers (All Items) NSA (non-seasonally adjusted), which rose
2.42% for the same period and the Lehman Brothers (LB) U.S.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 78.
40 | Semiannual Report
TIPS Index's +2.08% total return for the same period. 1 The LB U.S. TIPS Index
was added as a benchmark for the Fund. You can find more of the Fund's
performance data in the Performance Summary beginning on page 44.
ECONOMIC AND MARKET OVERVIEW
For the six months ended April 30, 2007, a slowing housing market and moderating
profit growth dampened economic expansion. However, a tight labor market and
higher personal incomes helped support the consumer. Spending for durable goods,
as well as state and local government spending, contributed to growth in the
first quarter of 2007.
Oil prices were volatile and ended the period higher than where they started.
Headline, or overall, inflation and core inflation, which excludes food and
energy costs, experienced some upward pressure. April's headline Consumer Price
Index (CPI) reported a 12-month rise of 2.6%, while core CPI increased 2.3%. 2
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
The 10-year Treasury note yield rose slightly from 4.61% at the beginning of the
period to 4.63% on April 30, 2007. Typically, the intermediate portion of the
yield curve generally reflects market expectations of the future direction of
inflation. A relatively moderate inflation environment contributed to little
overall change in interest rates.
1. Source: Standard & Poor's Micropal. The CPI, calculated by the U.S. Bureau
of Labor Statistics, is a commonly used measure of the inflation rate. The
all urban consumers group represents about 87% of the total U.S.
population. It is based on the expenditures of almost all residents of
urban or metropolitan areas, including professionals, the self-employed,
the poor, the unemployed and retired persons as well as urban wage earners
and clerical workers. The figure quoted is non-seasonally adjusted (NSA).
The LB U.S. TIPS Index comprises U.S. Treasury Inflation Protected
Securities rated investment grade (Baa3 or better) with at least one year
to final maturity and at least $250 million par amount outstanding. The LB
U.S. TIPS Index includes reinvested interest. The indexes are unmanaged.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
2. Source: Bureau of Labor Statistics.
Semiannual Report | 41
DIVIDEND DISTRIBUTIONS*
Franklin Real Return Fund
11/1/06-4/30/07
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
--------------------------------------------------
MONTH CLASS A ADVISOR CLASS
- --------------------------------------------------------------------------------
November** -- --
- --------------------------------------------------------------------------------
December** -- --
- --------------------------------------------------------------------------------
January** -- --
- --------------------------------------------------------------------------------
February ** -- --
- --------------------------------------------------------------------------------
March 2.25 cents 3.25 cents
- --------------------------------------------------------------------------------
April 5.90 cents 6.12 cents
================================================================================
TOTAL 8.15 CENTS 9.37 CENTS
- --------------------------------------------------------------------------------
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** The Fund paid no dividends due to negative inflation adjustments for TIPS,
which are the Fund's primary investments.
INVESTMENT STRATEGY
We seek to allocate assets among investments to achieve the highest level of
real return (total return less the rate of inflation) consistent with an
acceptable level of risk. We will allocate the Fund's assets among securities in
various market sectors based on our assessment of changing economic, global
market, industry and issuer conditions. When making our investment decisions, we
will evaluate such criteria as country risk, business cycles, yield curves, and
values between and within markets.
MANAGER'S DISCUSSION
We invested the Fund's assets in the allowable sectors during the period under
review. At period-end, about two-thirds of the Fund's total net assets were
invested in Treasury Inflation Protected Securities (TIPS). We also allocated
some of the Fund's assets to natural resources, real estate investment trusts
(REITs), short-term non-dollar securities and high yield sectors. We employed a
non-dollar strategy to help hedge against dollar weakness versus certain
currencies. All of these strategies helped Fund performance during the reporting
period.
42 | Semiannual Report
Thank you for your continued participation in Franklin Real Return Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ T. Anthony Coffey
T. Anthony Coffey, CFA
[PHOTO OMITTED] /s/ Kent Burns
Kent Burns, CFA
Portfolio Management Team
Franklin Real Return Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 43
Performance Summary as of 4/30/07
FRANKLIN REAL RETURN FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FRRAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.34 $10.44 $10.10
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0815
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FARRX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.34 $10.45 $10.11
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.0937
- --------------------------------------------------------------------------------
44 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR INCEPTION (11/17/04)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +4.18% +6.50% +14.50%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -0.27% +1.97% +3.84%
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Return (3/31/07) 4 +2.07% +3.48%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 5 6.50%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 5.62%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ---------------------------------------------------------------------------------------------------
Without Waiver 1.12%
- ---------------------------------------------------------------------------------------------------
With Waiver 0.90%
- ---------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR INCEPTION (11/17/04)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +4.29% +6.74% +15.21%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +4.29% +6.74% +5.95%
- ---------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +6.89% +5.64%
- ---------------------------------------------------------------------------------------------------
Distribution Rate 5 7.03%
- ---------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 6.12%
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ---------------------------------------------------------------------------------------------------
Without Waiver 0.87%
- ---------------------------------------------------------------------------------------------------
With Waiver 0.65%
- ---------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER AND ADMINISTRATOR HAVE AGREED IN ADVANCE TO VOLUNTARILY WAIVE
OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN
EXPENSES OTHERWISE PAYABLE BY THE FUND. THE FUND'S MANAGER AND ADMINISTRATOR MAY
END THIS ARRANGEMENT AT ANY TIME.
Semiannual Report | 45
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS WILL AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET
CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE
SHORT TERM. THESE PRICE MOVEMENTS MAY RESULT FROM FACTORS AFFECTING INDIVIDUAL
COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. THE RISKS OF FOREIGN
SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. The Fund's manager and administrator have agreed in advance to waive all
or a portion of their fees and to make certain payments to reduce
expenses. If the manager and administrator 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 5.43% for Class A and 5.92% for Advisor
Class. The manager and administrator may end this arrangement at any time
upon notice to the Fund's board.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the respective class's
April dividend and the maximum offering price (NAV for Advisor Class) per
share on 4/30/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
46 | Semiannual Report
Your Fund's Expenses
FRANKLIN REAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 47
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,041.80 $4.56
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.33 $4.51
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,042.90 $3.29
- ----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- ----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, for each class (A: 0.90% and Advisor: 0.65%), multiplied by the
average account value over the period, multiplied by 181/365 to reflect
the one-half year period.
48 | Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN BALANCED FUND
--------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31,
CLASS A (UNAUDITED) 2006 f
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 10.65 $ 10.00
------------------------
Income from investment operations a:
Net investment income b ............................. 0.21 0.10
Net realized and unrealized gains (losses) .......... 0.62 0.62
------------------------
Total from investment operations ..................... 0.83 0.72
------------------------
Less distributions from net investment income ........ (0.17) (0.07)
------------------------
Redemption fees ...................................... -- d -- d
------------------------
Net asset value, end of period ....................... $ 11.31 $ 10.65
========================
Total return c ....................................... 7.86% 7.20%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .... 1.94% e 2.02% e
Expenses net of waiver and payments by affiliates .... 1.06% e 1.06% e
Net investment income ................................ 3.09% e 2.84% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $23,907 $17,258
Portfolio turnover rate .............................. 39.92% 13.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f For the period July 3, 2006 (commencement of operations) to October 31,
2006.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 49
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
--------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31,
CLASS C (UNAUDITED) 2006 f
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 10.62 $ 10.00
------------------------
Income from investment operations a:
Net investment income b ............................. 0.13 0.07
Net realized and unrealized gains (losses) .......... 0.67 0.62
------------------------
Total from investment operations ..................... 0.80 0.69
------------------------
Less distributions from net investment income ........ (0.16) (0.07)
------------------------
Redemption fees ...................................... -- d -- d
------------------------
Net asset value, end of period ....................... $ 11.26 $ 10.62
========================
Total return c ....................................... 7.57% 6.90%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .... 2.60% e 2.65% e
Expenses net of waiver and payments by affiliates .... 1.72% e 1.69% e
Net investment income ................................ 2.43% e 2.21% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 1,068 $ 242
Portfolio turnover rate .............................. 39.92% 13.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f For the period July 3, 2006 (commencement of operations) to October 31,
2006.
50 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
--------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31,
CLASS R (UNAUDITED) 2006 f
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 10.64 $ 10.00
------------------------
Income from investment operations a:
Net investment income b ............................. 0.20 0.09
Net realized and unrealized gains (losses) .......... 0.62 0.62
------------------------
Total from investment operations ..................... 0.82 0.71
------------------------
Less distributions from net investment income ........ (0.16) (0.07)
------------------------
Redemption fees ...................................... -- d -- d
------------------------
Net asset value, end of period ....................... $ 11.30 $ 10.64
========================
Total return c ....................................... 7.80% 7.10%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .... 2.10% e 2.17% e
Expenses net of waiver and payments by affiliates .... 1.22% e 1.21% e
Net investment income ................................ 2.93% e 2.69% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 15 $ 11
Portfolio turnover rate .............................. 39.92% 13.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f For the period July 3, 2006 (commencement of operations) to October 31,
2006.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 51
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
--------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31,
ADVISOR CLASS (UNAUDITED) 2006 f
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $ 10.66 $ 10.00
------------------------
Income from investment operations a:
Net investment income b ............................. 0.20 0.11
Net realized and unrealized gains (losses) .......... 0.64 0.62
------------------------
Total from investment operations ..................... 0.84 0.73
------------------------
Less distributions from net investment income ........ (0.18) (0.07)
------------------------
Redemption fees ...................................... -- d -- d
------------------------
Net asset value, end of period ....................... $ 11.32 $ 10.66
========================
Total return c ....................................... 8.00% 7.30%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .... 1.59% e 1.67% e
Expenses net of waiver and payments by affiliates .... 0.71% e 0.71% e
Net investment income ................................ 3.44% e 3.19% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) .................... $ 795 $ 239
Portfolio turnover rate .............................. 39.92% 13.10%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f For the period July 3, 2006 (commencement of operations) to October 31,
2006.
52 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 86.3%
COMMON STOCKS 52.3%
CONSUMER DURABLES 0.8%
D.R. Horton Inc. ..................... United States 10,000 $ 221,800
----------
CONSUMER NON-DURABLES 1.6%
Anheuser-Busch Cos. Inc. ............. United States 3,200 157,408
The Procter & Gamble Co. ............. United States 4,000 257,240
----------
414,648
----------
ELECTRONIC TECHNOLOGY 4.4%
a Cisco Systems Inc. ................... United States 10,000 267,400
Intel Corp. .......................... United States 30,000 645,000
QUALCOMM Inc. ........................ United States 5,000 219,000
----------
1,131,400
----------
ENERGY MINERALS 4.7%
Chesapeake Energy Corp. .............. United States 15,000 506,250
Chevron Corp. ........................ United States 3,600 280,044
ConocoPhillips ....................... United States 6,000 416,100
----------
1,202,394
----------
FINANCE 7.5%
Bank of America Corp. ................ United States 4,600 234,140
Capital One Financial Corp. .......... United States 7,000 519,820
Citigroup Inc. ....................... United States 6,000 321,720
Morgan Stanley ....................... United States 2,300 193,223
Wachovia Corp. ....................... United States 2,800 155,512
Washington Mutual Inc. ............... United States 12,000 503,760
----------
1,928,175
----------
HEALTH TECHNOLOGY 6.8%
a Genentech Inc. ....................... United States 3,000 239,970
Johnson & Johnson .................... United States 7,000 449,540
Mylan Laboratories Inc. .............. United States 11,900 260,967
Pfizer Inc. .......................... United States 16,000 423,360
Schering-Plough Corp. ................ United States 12,000 380,760
----------
1,754,597
----------
INDUSTRIAL SERVICES 5.4%
Baker Hughes Inc. .................... United States 4,000 321,560
Halliburton Co. ...................... United States 15,000 476,550
a Nabors Industries Ltd. ............... Bermuda 10,000 321,200
Rowan Cos. Inc. ...................... United States 7,500 274,800
----------
1,394,110
----------
NON-ENERGY MINERALS 0.3%
Freeport-McMoRan Copper & Gold Inc., B United States 1,100 73,876
----------
PROCESS INDUSTRIES 1.0%
The Dow Chemical Co. ................. United States 5,700 254,277
----------
Semiannual Report | 53
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
PRODUCER MANUFACTURING 8.3%
3M Co. ................................................................ United States 8,000 $ 662,160
Caterpillar Inc. ...................................................... United States 8,000 580,960
General Electric Co. .................................................. United States 15,000 552,900
United Technologies Corp. ............................................. United States 5,000 335,650
----------
2,131,670
----------
RETAIL TRADE 4.3%
Best Buy Co. Inc. ..................................................... United States 7,000 326,550
The Gap Inc. .......................................................... United States 13,000 233,350
Target Corp. .......................................................... United States 3,000 178,110
Wal-Mart Stores Inc. .................................................. United States 8,000 383,360
----------
1,121,370
----------
TRANSPORTATION 1.6%
United Parcel Service Inc., B ......................................... United States 6,000 422,580
----------
UTILITIES 5.6%
Ameren Corp. .......................................................... United States 6,000 315,420
FirstEnergy Corp. ..................................................... United States 2,800 191,632
Public Service Enterprise Group Inc. .................................. United States 3,200 276,640
TXU Corp. ............................................................. United States 10,000 655,800
----------
1,439,492
----------
TOTAL COMMON STOCKS (COST $12,239,454) ................................ 13,490,389
----------
CONVERTIBLE PREFERRED STOCKS 3.7%
ELECTRONIC TECHNOLOGY 1.6%
Citigroup Funding into Texas Instrument Inc., 7.50%, cvt. pfd. ........ United States 13,000 419,883
----------
ENERGY MINERALS 1.3%
b Goldman Sachs Group Inc. into Peabody Energy Corp., 10.00%, cvt. pfd.,
144A ................................................................. United States 7,500 323,888
----------
NON-ENERGY MINERALS 0.8%
b Morgan Stanley into Newmont Mining Corp., 8.50%, cvt. pfd., 144A ...... United States 5,000 209,225
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $850,933) .................... 952,996
----------
-----------
PRINCIPAL
AMOUNT c
-----------
CORPORATE BONDS 25.6%
COMMERCIAL SERVICES 0.4%
R.H. Donnelley Corp., senior discount note, 6.875%, 1/15/13 ........... United States $100,000 99,625
----------
COMMUNICATIONS 3.0%
Embarq Corp., senior note, 7.082%, 6/01/16 ............................ United States 250,000 258,716
Telecom Italia Capital, senior note,
4.95%, 9/30/14 ...................................................... Italy 100,000 95,412
7.20%, 7/18/36 ...................................................... Italy 150,000 160,920
Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ................ United States 250,000 264,372
----------
779,420
----------
54 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN BALANCED FUND COUNTRY AMOUNT c VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES 1.3%
Ford Motor Credit Co., senior note, 9.75%, 9/15/10 ................... United States $150,000 $ 158,839
KB Home, senior note, 6.25%, 6/15/15 ................................. United States 200,000 187,000
----------
345,839
----------
CONSUMER NON-DURABLES 0.8%
b Miller Brewing Co., 144A, 5.50%, 8/15/13 ............................. United States 200,000 201,039
----------
CONSUMER SERVICES 1.6%
Comcast Corp., senior note, 5.85%, 1/15/10 ........................... United States 200,000 203,777
MGM MIRAGE Inc., senior note, 5.875%, 2/27/14 ........................ United States 100,000 94,375
Time Warner Inc., 5.875%, 11/15/16 ................................... United States 100,000 100,868
----------
399,020
----------
ELECTRONIC TECHNOLOGY 0.8%
b Freescale Semiconductor Inc., senior note, 144A, 8.875%, 12/15/14 .... United States 200,000 201,250
----------
ENERGY MINERALS 0.8%
b Gaz Capital SA, 144A, 6.212%, 11/22/16 ............................... Luxembourg 200,000 203,100
----------
FINANCE 10.2%
b,d BNP Paribas, sub. note, 144A, 5.186%, Perpetual ...................... France 400,000 386,075
e Chubb Corp., FRN, 6.375%, 3/29/67 .................................... United States 300,000 304,173
e Fifth Third Capital Trust IV, junior sub. note, FRN, 6.50%, 4/15/67 .. United States 100,000 100,906
GMAC LLC, 6.875%, 8/28/12 ............................................ United States 100,000 100,040
International Lease Finance Corp., 4.75%, 2/15/08 .................... United States 200,000 198,974
JPMorgan Chase Capital II, 6.45%, 2/02/37 .......................... United States 300,000 304,703
Lincoln National Corp., 6.05%, 4/20/17 ............................... United States 300,000 297,231
e MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ................. United States 350,000 350,477
Morgan Stanley, sub. note, 4.75%, 4/01/14 ............................ United States 200,000 191,780
Residential Capital LLC, senior note, 6.00%, 2/22/11 ................. United States 300,000 296,826
d Wachovia Capital Trust III, 5.80%, Perpetual ......................... United States 100,000 101,577
----------
2,632,762
----------
HEALTH SERVICES 0.8%
b HCA Inc., senior secured note, 144A, 9.25%, 11/15/16 ................. United States 200,000 218,500
----------
HEALTH TECHNOLOGY 1.0%
Wyeth, 5.95%, 4/01/37 ................................................ United States 250,000 250,851
----------
INDUSTRIAL SERVICES 1.8%
Allied Waste North America Inc., senior secured note, 6.375%, 4/15/11 United States 150,000 151,125
Compagnie Generale de Geophysique-Veritas, senior note, 7.75%, 5/15/17 France 100,000 106,250
b Sabine Pass LNG LP, senior note, 144A, 7.50%, 11/30/16 ............... United States 200,000 205,500
----------
462,875
----------
NON-ENERGY MINERALS 0.4%
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 .... United States 100,000 109,625
----------
PROCESS INDUSTRIES 1.5%
Bunge Ltd. Finance Corp., senior note, 5.10%, 7/15/15 ................ United States 300,000 283,514
Lyondell Chemical Co., senior note, 8.00%, 9/15/14 ................... United States 100,000 105,250
----------
388,764
----------
Semiannual Report | 55
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN BALANCED FUND COUNTRY AMOUNT c VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
TECHNOLOGY SERVICES 0.4%
SunGard Data Systems Inc., senior sub. note, 10.25%, 8/15/15 ........ United States $ 100,000 $ 110,500
------------
UTILITIES 0.8%
National Grid PLC, senior note, 6.30%, 8/01/16 ...................... United Kingdom 200,000 210,343
------------
TOTAL CORPORATE BONDS (COST $6,435,183) ............................. 6,613,513
------------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $351,923) 1.4%
FINANCE 1.4%
e Accredited Mortgage Loan Trust, 2005-3, A1, FRN, 5.56%, 9/25/35 ..... United States 351,703 351,921
------------
MORTGAGE-BACKED SECURITIES 3.3%
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 3.3%
FNMA 30 Year, 6.00%, 8/01/36 ........................................ United States 458,519 462,089
FNMA 30 Year, 6.50%, 4/01/36 ........................................ United States 380,908 388,940
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $830,703) .................... 851,029
------------
TOTAL LONG TERM INVESTMENTS (COST $20,708,196) ...................... 22,259,848
------------
SHORT TERM INVESTMENTS 12.8%
-----------
SHARES
-----------
MONEY MARKET FUND 5.1%
f Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% . United States 1,316,106 1,316,106
------------
-----------
PRINCIPAL
AMOUNT c
-----------
U.S. GOVERNMENT AND AGENCY SECURITIES 7.7%
g U.S. Treasury Bill, 7/05/07 ......................................... United States $2,000,000 1,982,848
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,298,203) ...................... 3,298,954
------------
TOTAL INVESTMENTS (COST $24,006,399) 99.1% .......................... 25,558,802
OPTIONS WRITTEN (0.1)% .............................................. (21,605)
OTHER ASSETS, LESS LIABILITIES 1.0% ................................. 248,419
------------
NET ASSETS 100.0% ................................................... $ 25,785,616
============
-----------
CONTRACTS
-----------
OPTIONS WRITTEN 0.1%
ELECTRONIC TECHNOLOGY 0.0%h
Cisco Systems Inc., May 25 Puts, 5/19/07 ............................ United States 50 1,250
------------
HEALTH TECHNOLOGY 0.0%h
Amgen Inc., May 55 Puts, 5/19/07 .................................... United States 40 120
Genentech Inc.,
May 80 Puts, 5/19/07 ............................................... United States 30 3,300
May 90 Calls, 5/19/07 .............................................. United States 30 225
------------
3,645
------------
56 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------
FRANKLIN BALANCED FUND COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------
OPTIONS WRITTEN (CONTINUED)
INDUSTRIAL SERVICES 0.1%
Baker Hughes Inc., May 80 Calls, 5/19/07 ................. United States 40 $ 9,600
Rowan Cos. Inc., May 37.5 Calls, 5/19/07 ................. United States 75 5,250
---------
14,850
---------
NON-ENERGY MINERALS 0.0%h
Freeport McMoRan Copper & Gold Inc., May 75 Calls, 5/19/07 United States 11 110
---------
RETAIL TRADE 0.0%h
Target Corp., May 57.50 Puts, 5/18/07 .................... United States 50 1,750
---------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $14,609) ........ $ 21,605
---------
See Selected Portfolio Abbreviations on page 82.
a Non-income producing for the twelve months ended April 30,2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2007,
the aggregate value of these securities was $1,948,577 representing 7.56%
of net assets.
c The principal amount is stated in U.S. dollars unless otherwise indicated.
d Perpetual bond with no stated maturity date.
e The coupon rate shown represents the rate at period end.
f See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
g The security is traded on a discount basis with no stated coupon rate.
h Rounds to less than 0.1% of net assets.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CONVERTIBLE SECURITIES FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 17.19 $ 16.46 $ 15.16 $ 13.90 $ 10.87 $ 13.07
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.20 0.43 0.42 0.50 0.56 0.69
Net realized and unrealized gains (losses) ... 1.23 1.52 1.49 1.43 2.97 (2.14)
------------------------------------------------------------------------------
Total from investment operations .............. 1.43 1.95 1.91 1.93 3.53 (1.45)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.29) (0.60) (0.61) (0.67) (0.50) (0.75)
Net realized gains ........................... (1.20) (0.62) -- -- -- --
------------------------------------------------------------------------------
Total distributions ........................... (1.49) (1.22) (0.61) (0.67) (0.50) (0.75)
------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of period ................ $ 17.13 $ 17.19 $ 16.46 $ 15.16 $ 13.90 $ 10.87
==============================================================================
Total return c ................................ 8.70% 12.45% 12.76% 14.06% 33.10% (11.74)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.86% e 0.86% 0.88% 0.92% 0.98% 1.00%
Expenses net of payments by affiliates ........ 0.86% e,f 0.86% f 0.88% f 0.89% f 0.98% 1.00%
Net investment income ......................... 2.40% e 2.59% 2.63% 3.36% 4.49% 5.45%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $805,294 $718,018 $551,120 $380,960 $294,987 $168,040
Portfolio turnover rate ....................... 3.46% 31.37% 35.30% 28.37% 49.90% 91.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONVERTIBLE SECURITIES FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 17.04 $ 16.32 $ 15.05 $ 13.81 $ 10.82 $ 13.01
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.14 0.30 0.30 0.39 0.46 0.60
Net realized and unrealized gains (losses) ... 1.22 1.52 1.46 1.42 2.96 (2.13)
-------------------------------------------------------------------------------
Total from investment operations .............. 1.36 1.82 1.76 1.81 3.42 (1.53)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.23) (0.48) (0.49) (0.57) (0.43) (0.66)
Net realized gains ........................... (1.20) (0.62) -- -- -- --
-------------------------------------------------------------------------------
Total distributions ........................... (1.43) (1.10) (0.49) (0.57) (0.43) (0.66)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 16.97 $ 17.04 $ 16.32 $ 15.05 $ 13.81 $ 10.82
===============================================================================
Total return c ................................ 8.38% 11.53% 11.92% 13.21% 32.08% (12.35)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.60% e 1.61% 1.63% 1.67% 1.75% 1.72%
Expenses net of payments by affiliates ........ 1.60% e,f 1.61% f 1.63% f 1.64% f 1.75% 1.72%
Net investment income ......................... 1.66% e 1.84% 1.88% 2.61% 3.72% 4.73%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $299,401 $271,216 $219,970 $167,813 $106,719 $ 55,759
Portfolio turnover rate ....................... 3.46% 31.37% 35.30% 28.37% 49.90% 91.25%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 59
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.8%
COMMON STOCKS 2.1%
COMMERCIAL SERVICES 0.3%
a Interpublic Group of Cos. Inc. ....................................... 240,740 $ 3,052,583
------------
FINANCE 1.3%
Hartford Financial Services Group Inc. ............................... 65,055 6,583,566
The PMI Group Inc. ................................................... 156,060 7,564,229
------------
14,147,795
------------
INDUSTRIAL SERVICES 0.5%
The Williams Cos. Inc. ............................................... 186,146 5,491,307
------------
TOTAL COMMON STOCKS (COST $15,902,995) ............................... 22,691,685
------------
CONVERTIBLE PREFERRED STOCKS 34.3%
CONSUMER DURABLES 3.2%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. .................... 450,000 16,110,000
General Motors Corp., 6.25%, cvt. pfd. ............................... 235,000 5,402,650
a,b Merrill Lynch & Co. Inc. into D.R. Horton Inc., 4.00%, cvt. pfd., 144A 607,000 13,709,095
------------
35,221,745
------------
CONSUMER NON-DURABLES 1.3%
Lehman Brothers Holdings Inc. into General Mills, 6.25%, cvt. pfd. ... 500,000 14,250,000
------------
ELECTRONIC TECHNOLOGY 1.6%
b Morgan Stanley into Cisco Systems Inc., 2.75%, cvt. pfd., 144A ....... 500,000 12,702,500
Northrop Grumman Corp., 7.00%, cvt. pfd., B .......................... 40,000 5,550,800
------------
18,253,300
------------
ENERGY MINERALS 1.7%
b Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ...................... 170,000 19,107,660
------------
FINANCE 10.3%
Affiliated Managers Group Inc., 5.10%, cvt. pfd. ..................... 350,000 19,687,500
Conseco Inc., 5.50%, cvt. pfd. ....................................... 450,000 10,968,750
E*TRADE Financial Corp., 6.125%, cvt. pfd. ........................... 705,000 20,275,800
Fannie Mae, 5.375%, cvt. pfd. ........................................ 140 14,222,880
MetLife Inc., 6.375%, cvt. pfd. ...................................... 400,000 13,250,000
Unum Group, 8.25%, cvt. pfd. ......................................... 400,000 14,950,000
Washington Mutual Capital Trust I, 5.375%, cvt. pfd. ................. 20,000 1,105,800
b Washington Mutual Capital Trust I, 5.375%, cvt. pfd., 144A ........... 60,000 3,317,400
XL Capital Ltd., 6.50%, cvt. pfd. .................................... 620,000 15,896,242
------------
113,674,372
------------
HEALTH TECHNOLOGY 1.6%
Schering-Plough Corp., 6.00%, cvt. pfd. .............................. 250,000 18,032,500
------------
INDUSTRIAL SERVICES 3.0%
Allied Waste Industries Inc., 6.25%, cvt. pfd., D .................... 48,000 16,977,024
El Paso Corp., 4.99%, cvt. pfd. ...................................... 12,000 15,831,778
------------
32,808,802
------------
PROCESS INDUSTRIES 2.8%
Celanese Corp., 4.25%, cvt. pfd. ..................................... 375,000 16,406,250
Huntsman Corp., 5.00%, cvt. pfd. ..................................... 332,800 14,268,800
------------
30,675,050
------------
60 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUST 1.7%
Simon Property Group Inc., 6.00%, cvt. pfd. ................................ 200,000 $ 18,504,000
------------
RETAIL TRADE 1.5%
Retail Ventures into DSW Inc., 6.625%, cvt. pfd. ........................... 250,000 16,866,050
------------
UTILITIES 5.6%
CMS Energy Corp., 4.50%, cvt. pfd., B ...................................... 100,000 9,675,000
Entergy Corp., 7.625%, cvt. pfd. ........................................... 300,000 20,484,030
NRG Energy Inc., 4.00%, cvt. pfd. .......................................... 9,500 19,638,875
PNM Resources Inc., 6.75%, cvt. pfd. ....................................... 225,000 12,290,625
------------
62,088,530
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $315,391,125) ..................... 379,482,009
------------
------------
PRINCIPAL
AMOUNT
------------
CONVERTIBLE BONDS 58.4%
COMMERCIAL SERVICES 1.1%
b The Interpublic Group of Cos. Inc., cvt., senior note, 144A, 4.50%, 3/15/23 $ 3,000,000 3,566,250
b WPP Group PLC, cvt., sub. bond, 144A, 5.00%, 10/15/33 ...................... 6,000,000 8,583,360
------------
12,149,610
------------
COMMUNICATIONS 2.2%
b NII Holdings Inc., cvt., 144A, 2.75%, 8/15/25 .............................. 15,000,000 24,843,750
------------
CONSUMER DURABLES 0.4%
b K2 Inc., cvt., 144A, 5.00%, 6/15/10 ........................................ 4,000,000 4,815,000
------------
CONSUMER SERVICES 8.6%
Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 .......................... 18,000,000 22,860,000
Hilton Hotels Corp., cvt., senior note, 3.375%, 4/15/23 .................... 10,500,000 16,183,125
Liberty Media Corp. into Viacom, cvt., senior deb., B, 3.25%, 3/15/31 ...... 10,000,000 8,518,770
Six Flags Inc., cvt., 4.50%, 5/15/15 ....................................... 10,000,000 11,537,500
Tyco International Group SA, cvt., senior bond, 3.125%, 1/15/23 (Luxembourg) 11,000,000 16,752,230
The Walt Disney Co., cvt., senior note, 2.125%, 4/15/23 .................... 16,000,000 19,640,000
------------
95,491,625
------------
DISTRIBUTION SERVICES 1.8%
WESCO International Inc., cvt.,
senior deb, 1.75%, 11/15/26 ............................................. 5,000,000 4,962,500
b senior deb., 144A, 1.75%, 11/15/26 ...................................... 15,000,000 14,887,500
------------
19,850,000
------------
ELECTRONIC TECHNOLOGY 7.0%
Intel Corp., cvt.,
b junior sub. bond, 144A, 2.95%, 12/15/35 ................................. 19,000,000 17,421,461
sub. deb., 2.95%, 12/15/35 .............................................. 2,000,000 1,833,838
Juniper Networks Inc., cvt., senior note, zero cpn., 6/15/08 ............... 17,000,000 20,145,000
b L-3 Communications Corp., cvt., 144A, 3.00%, 8/01/35 ....................... 15,000,000 16,293,750
Liberty Media Corp. into Motorola, cvt., senior deb., 3.50%, 1/15/31 ....... 8,000,000 6,620,253
PMC-Sierra Inc.,
b cvt., 144A, 2.25%, 10/15/25 ............................................. 3,500,000 4,007,500
sub. note, cvt., 2.25%, 10/15/25 ........................................ 9,500,000 10,877,500
------------
77,199,302
------------
Semiannual Report | 61
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
FINANCE 4.9%
CapitalSource Inc., cvt., senior note,
3.50%, 7/15/34 ........................................................... $ 8,000,000 $ 9,396,352
b 144A, 3.50%, 7/15/34 ..................................................... 8,000,000 9,396,352
b GATX Corp., cvt., senior note, 144A, 5.00%, 8/15/23 ......................... 3,000,000 6,007,500
Leucadia National Corp., cvt., senior sub. note,
3.75%, 4/15/14 ........................................................... 3,600,000 5,373,000
b 144A, 3.75%, 4/15/14 ..................................................... 7,500,000 11,193,750
Providian Financial Corp., cvt., senior note, 4.00%, 5/15/08 ................ 9,000,000 12,858,750
------------
54,225,704
------------
HEALTH SERVICES 4.0%
Lifepoint Hospitals Inc., cvt., 3.25%, 8/15/25 .............................. 15,000,000 13,762,500
Omnicare Inc., cvt., 3.25%, 12/15/35 ........................................ 16,000,000 13,360,000
PacifiCare Health Systems Inc., cvt., sub. deb., 3.00%, 10/15/32 ............ 2,000,000 7,607,180
Sierra Health Services Inc., cvt., senior deb., 2.25%, 3/15/23 .............. 2,000,000 9,067,500
------------
43,797,180
------------
HEALTH TECHNOLOGY 14.7%
Affymetrix Inc., cvt., senior note, 0.75%, 12/15/33 ......................... 10,000,000 10,675,000
Alza Corp. into Johnson & Johnson, cvt., sub. deb., zero cpn., 7/28/20 ...... 15,000,000 13,312,500
American Medical Systems Holdings Ltd., cvt., senior sub. note, 3.25%, 7/1/36 15,000,000 16,800,000
b Amgen Inc., cvt., senior note, 144A, 0.375%, 2/01/13 ........................ 18,000,000 17,203,212
Biogen Idec Inc., cvt., sub. note, zero cpn., 2/16/19 ....................... 3,500,000 6,693,750
Biomarin Pharmaceutical Inc., cvt., senior note, 1.875%, 4/23/17 ............ 19,000,000 19,023,750
Celgene Corp., cvt., senior note, 1.75%, 6/01/08 ............................ 3,000,000 15,168,750
IVAX Corp., cvt., senior sub. note, 4.50%, 5/15/08 .......................... 5,000,000 5,068,750
Mannkind Corp., cvt., 3.75%, 12/15/13 ....................................... 1,500,000 1,477,500
b Medtronic Inc., cvt., senior note, 144A, 1.50%, 4/15/11 ..................... 17,000,000 18,062,500
b MGI Pharma Inc., cvt., senior sub. note, 144A, 1.682% to 3/02/11,
zero cpn. thereafter, 3/02/24 .............................................. 10,000,000 6,950,000
b NPS Pharmaceuticals Inc., cvt., senior note, 144A, 3.00%, 6/15/08 ........... 6,000,000 5,616,486
Protein Design Labs Inc., cvt., sub. note, 2.75%, 8/16/23 ................... 19,550,000 25,928,187
------------
161,980,385
------------
INDUSTRIAL SERVICES 3.7%
Helix Energy Solutions Group, cvt., senior note, 3.25%, 12/15/25 ............ 10,000,000 14,200,000
Schlumberger Ltd., cvt., senior deb., 1.50%, 6/01/23 (Netherland Antilles) .. 13,000,000 26,585,000
------------
40,785,000
------------
PROCESS INDUSTRIES 0.9%
Headwaters Inc., cvt., senior sub. note, 2.875%, 6/01/16 .................... 10,000,000 9,825,000
------------
RETAIL TRADE 2.9%
Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 .......................... 17,000,000 18,671,440
Lowe's Cos. Inc., cvt., senior note, zero cpn., 2/16/21 ..................... 13,000,000 13,085,111
------------
31,756,551
------------
TECHNOLOGY SERVICES 2.6%
b BearingPoint Inc., cvt., sub. note, 144A, 2.50%, 12/15/24 ................... 14,000,000 13,457,500
Yahoo! Inc., cvt., senior note, zero cpn., 4/01/08 .......................... 11,000,000 15,345,000
------------
28,802,500
------------
62 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
TRANSPORTATION 1.3%
JetBlue Airways Corp., cvt., senior note, 3.75%, 3/15/35 .................... $ 15,000,000 $ 14,325,000
--------------
UTILITIES 2.3%
Centerpoint Energy Inc., cvt., senior note, 3.75%, 5/15/23 .................. 10,000,000 16,762,500
CMS Energy Corp., cvt., senior note, 2.875%, 12/01/24 ....................... 6,000,000 8,391,300
--------------
25,153,800
--------------
TOTAL CONVERTIBLE BONDS (COST $563,640,307) ................................. 645,000,407
--------------
TOTAL LONG TERM INVESTMENTS (COST $894,934,427) ............................. 1,047,174,101
--------------
------------
SHARES
------------
SHORT TERM INVESTMENT (COST $51,162,545) 4.6%
MONEY MARKET FUND 4.6%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% ........ 51,162,545 51,162,545
--------------
TOTAL INVESTMENTS (COST $946,096,972) 99.4% ................................. 1,098,336,646
OTHER ASSETS, LESS LIABILITIES 0.6% ......................................... 6,358,720
--------------
NET ASSETS 100.0% ........................................................... $1,104,695,366
==============
See Selected Portfolio Abbreviations on page 82.
a Non-income producing for the twelve months ended April 30, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30,2007,
the aggregate value of these securities was $231,142,526, representing
20.92% of net assets.
c See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN EQUITY INCOME FUND
---------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.67 $ 20.47 $ 19.58 $ 17.84 $ 15.42 $ 17.76
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.21 0.48 0.50 0.41 0.40 0.42
Net realized and unrealized gains (losses) ... 1.71 2.70 0.85 1.72 2.45 (2.21)
---------------------------------------------------------------------
Total from investment operations .............. 1.92 3.18 1.35 2.13 2.85 (1.79)
---------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.25) (0.51) (0.46) (0.39) (0.43) (0.40)
Net realized gains ........................... (1.43) (0.47) -- -- -- (0.15)
---------------------------------------------------------------------
Total distributions ........................... (1.68) (0.98) (0.46) (0.39) (0.43) (0.55)
---------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
---------------------------------------------------------------------
Net asset value, end of period ................ $ 22.91 $ 22.67 $ 20.47 $ 19.58 $ 17.84 $ 15.42
=====================================================================
Total return c ................................ 8.86% 16.04% 6.92% 12.04% 18.72% (10.43)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.93% e,f 0.91% f 0.93% f 0.93% g 1.00% 1.00%
Net investment income ......................... 1.88% e 2.26% 2.43% 2.15% 2.46% 2.34%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $828,817 $735,432 $651,766 $615,941 $501,658 $404,219
Portfolio turnover rate ....................... 15.38% 29.34% 38.05% 36.42% 54.07% 77.27%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Benefit of payment by affiliate and expense reduction rounds to less than
0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.57 $ 20.38 $ 19.49 $ 17.76 $ 15.37 $ 17.70
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.13 0.32 0.35 0.27 0.27 0.28
Net realized and unrealized gains (losses) ... 1.70 2.70 0.85 1.71 2.44 (2.19)
-------------------------------------------------------------------------------
Total from investment operations .............. 1.83 3.02 1.20 1.98 2.71 (1.91)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.17) (0.36) (0.31) (0.25) (0.32) (0.27)
Net realized gains ........................... (1.43) (0.47) -- -- -- (0.15)
-------------------------------------------------------------------------------
Total distributions ........................... (1.60) (0.83) (0.31) (0.25) (0.32) (0.42)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 22.80 $ 22.57 $ 20.38 $ 19.49 $ 17.76 $ 15.37
===============================================================================
Total return c ................................ 8.45% 15.20% 6.17% 11.20% 17.85% (11.07)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.67% e,f 1.65% f 1.68% f 1.68% g 1.75% 1.75%
Net investment income ......................... 1.14% e 1.52% 1.68% 1.40% 1.71% 1.59%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $51,533 $51,979 $54,880 $55,442 $42,764 $21,341
Portfolio turnover rate ....................... 15.38% 29.34% 38.05% 36.42% 54.07% 77.27%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Benefit of payment by affiliate and expense reduction rounds to less than
0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.58 $ 20.39 $ 19.50 $ 17.77 $ 15.38 $ 17.70
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.13 0.32 0.34 0.27 0.27 0.28
Net realized and unrealized gains (losses) ... 1.70 2.70 0.86 1.71 2.43 (2.18)
-------------------------------------------------------------------------------
Total from investment operations .............. 1.83 3.02 1.20 1.98 2.70 (1.90)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.17) (0.36) (0.31) (0.25) (0.31) (0.27)
Net realized gains ........................... (1.43) (0.47) -- -- -- (0.15)
-------------------------------------------------------------------------------
Total distributions ........................... (1.60) (0.83) (0.31) (0.25) (0.31) (0.42)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 22.81 $ 22.58 $ 20.39 $ 19.50 $ 17.77 $ 15.38
===============================================================================
Total return c ................................ 8.45% 15.19% 6.16% 11.19% 17.82% (11.07)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.66% e,f 1.65% f 1.68% f 1.68% g 1.76% 1.73%
Net investment income ......................... 1.15% e 1.52% 1.68% 1.40% 1.70% 1.61%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $179,327 $172,366 $174,674 $172,773 $147,739 $96,701
Portfolio turnover rate ....................... 15.38% 29.34% 38.05% 36.42% 54.07% 77.27%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Benefit of payment by affiliate and expense reduction rounds to less than
0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 22.68 $ 20.48 $ 19.59 $ 17.85 $ 15.44 $ 16.20
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.18 0.43 0.45 0.37 0.34 0.06
Net realized and unrealized gains (losses) ... 1.71 2.70 0.85 1.72 2.46 (0.73)
-------------------------------------------------------------------------------
Total from investment operations .............. 1.89 3.13 1.30 2.09 2.80 (0.67)
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (0.22) (0.46) (0.41) (0.35) (0.39) (0.09)
Net realized gains ........................... (1.43) (0.47) -- -- -- --
-------------------------------------------------------------------------------
Total distributions ........................... (1.65) (0.93) (0.41) (0.35) (0.39) (0.09)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 22.92 $ 22.68 $ 20.48 $ 19.59 $ 17.85 $ 15.44
===============================================================================
Total return c ................................ 8.71% 15.69% 6.71% 11.75% 18.46% (4.17)%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.18% e,f 1.16% f 1.18% f 1.18% g 1.25% 1.25% e
Net investment income ......................... 1.63% e 2.01% 2.18% 1.90% 2.21% 2.09% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $17,297 $18,908 $20,612 $18,858 $14,685 $ 2,842
Portfolio turnover rate ....................... 15.38% 29.34% 38.05% 36.42% 54.07% 77.27%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share. e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Benefit of payment by affiliate and expense reduction rounds to less than
0.01%.
h For the period August 1, 2002 (effective date) to October 31, 2002.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.3%
COMMON STOCKS 93.4%
COMMERCIAL SERVICES 1.6%
R. R. Donnelley & Sons Co. ............................ United States 423,900 $17,040,780
-----------
COMMUNICATIONS 5.6%
Alltel Corp. .......................................... United States 165,400 10,368,926
America Movil SAB de CV, L, ADR ....................... Mexico 345,200 18,133,356
AT&T Inc. ............................................. United States 821,310 31,801,123
-----------
60,303,405
-----------
CONSUMER DURABLES 1.8%
D.R. Horton Inc. ...................................... United States 895,800 19,868,844
-----------
CONSUMER NON-DURABLES 5.4%
Anheuser-Busch Cos. Inc. .............................. United States 323,600 15,917,884
The Coca-Cola Co. ..................................... United States 329,800 17,212,262
Diageo PLC, ADR ....................................... United Kingdom 119,000 10,043,600
Unilever NV, N.Y. shs. ................................ Netherlands 488,700 14,905,350
-----------
58,079,096
-----------
CONSUMER SERVICES 1.8%
Carnival Corp. ........................................ United States 392,400 19,184,436
-----------
ELECTRONIC TECHNOLOGY 8.5%
Embraer-Empresa Brasileira de Aeronautica SA, ADR ..... Brazil 360,700 16,920,437
Intel Corp. ........................................... United States 1,037,800 22,312,700
Microchip Technology Inc. ............................. United States 505,900 20,408,006
Nokia Corp., ADR ...................................... Finland 623,500 15,743,375
Raytheon Co. .......................................... United States 299,100 16,013,814
-----------
91,398,332
-----------
ENERGY MINERALS 6.8%
Chevron Corp. ......................................... United States 278,720 21,681,629
ConocoPhillips ........................................ United States 279,300 19,369,455
Exxon Mobil Corp. ..................................... United States 290,834 23,086,403
Sunoco Inc. ........................................... United States 123,500 9,327,955
-----------
73,465,442
-----------
FINANCE 26.6%
AFLAC Inc. ............................................ United States 210,500 10,807,070
American International Group Inc. ..................... United States 114,200 7,983,722
Bank of America Corp. ................................. United States 553,706 28,183,635
Capital One Financial Corp. ........................... United States 171,124 12,707,668
CapitalSource Inc. .................................... United States 819,400 21,115,938
Citigroup Inc. ........................................ United States 533,400 28,600,908
Fannie Mae ............................................ United States 293,300 17,281,236
Fortress Investment Group, A .......................... United States 292,400 8,482,524
JPMorgan Chase & Co. .................................. United States 525,750 27,391,575
Marsh & McLennan Cos. Inc. ............................ United States 460,000 14,609,600
Merrill Lynch & Co. Inc. .............................. United States 121,300 10,944,899
Morgan Stanley ........................................ United States 272,100 22,859,121
OneBeacon Insurance Group Ltd. ........................ Bermuda 50,000 1,217,500
The Travelers Cos. Inc. ............................... United States 304,700 16,484,270
68 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
FINANCE (CONTINUED)
U.S. Bancorp .......................................... United States 520,000 $ 17,862,000
Wachovia Corp. ........................................ United States 358,900 19,933,306
Washington Mutual Inc. ................................ United States 492,900 20,691,942
------------
287,156,914
------------
HEALTH TECHNOLOGY 5.2%
Eli Lilly and Co. ..................................... United States 124,900 7,385,337
GlaxoSmithKline PLC, ADR .............................. United Kingdom 250,300 14,462,334
Mylan Laboratories Inc. ............................... United States 382,000 8,377,260
Pfizer Inc. ........................................... United States 802,700 21,239,442
Wyeth ................................................. United States 80,100 4,445,550
------------
55,909,923
------------
INDUSTRIAL SERVICES 1.1%
Waste Management Inc. ................................. United States 319,600 11,956,236
------------
NON-ENERGY MINERALS 1.6%
Alcoa Inc. ............................................ United States 479,000 16,999,710
------------
PROCESS INDUSTRIES 1.6%
The Dow Chemical Co. .................................. United States 379,300 16,920,573
------------
PRODUCER MANUFACTURING 11.3%
3M Co. ................................................ United States 213,100 17,638,287
Autoliv Inc. .......................................... Sweden 155,100 9,019,065
Caterpillar Inc. ...................................... United States 316,500 22,984,230
General Electric Co. .................................. United States 596,600 21,990,676
Honeywell International Inc. .......................... United States 345,300 18,708,354
Masco Corp. ........................................... United States 563,800 15,340,998
Pitney Bowes Inc. ..................................... United States 334,500 16,056,000
------------
121,737,610
------------
REAL ESTATE INVESTMENT TRUST 0.9%
iStar Financial Inc. .................................. United States 204,000 9,775,680
------------
RETAIL TRADE 5.1%
Best Buy Co. Inc. ..................................... United States 357,700 16,686,705
The Gap Inc. .......................................... United States 534,300 9,590,685
The Home Depot Inc. ................................... United States 518,100 19,620,447
Wal-Mart Stores Inc. .................................. United States 192,600 9,229,392
------------
55,127,229
------------
TECHNOLOGY SERVICES 2.4%
Microsoft Corp. ....................................... United States 541,900 16,224,486
Paychex Inc. .......................................... United States 250,100 9,278,710
------------
25,503,196
------------
TRANSPORTATION 2.8%
J.B. Hunt Transport Services Inc. ..................... United States 579,500 15,681,270
United Parcel Service Inc., B ......................... United States 201,600 14,198,688
------------
29,879,958
------------
Semiannual Report | 69
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
UTILITIES 3.3%
Dominion Resources Inc. ............................................. United States 171,500 $ 15,640,800
TXU Corp. ........................................................... United States 303,600 19,910,088
--------------
35,550,888
--------------
TOTAL COMMON STOCKS (COST $784,675,521) ............................. 1,005,858,252
--------------
CONVERTIBLE PREFERRED STOCKS 3.9%
ENERGY MINERALS 1.4%
Chesapeake Energy Corp., 5.00%, cvt. pfd. ........................... United States 105,600 15,285,600
--------------
FINANCE 1.6%
E*TRADE Financial Corp., 6.125%, cvt. pfd. .......................... United States 598,700 17,218,612
--------------
HEALTH TECHNOLOGY 0.9%
Schering-Plough Corp., 6.00%, cvt. pfd. ............................. United States 134,100 9,672,633
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $38,193,484) ............... 42,176,845
--------------
TOTAL LONG TERM INVESTMENTS (COST $822,869,005) ..................... 1,048,035,097
--------------
SHORT TERM INVESTMENT (COST $27,577,949) 2.6%
MONEY MARKET FUND 2.6%
a Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% United States 27,577,949 27,577,949
--------------
TOTAL INVESTMENTS (COST $850,446,954) 99.9% ......................... 1,075,613,046
OTHER ASSETS, LESS LIABILITIES 0.1% ................................. 1,361,633
--------------
NET ASSETS 100.0% ................................................... $1,076,974,679
==============
See Selected Portfolio Abbreviations on page 82.
a See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
70 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.90 $ 9.91 $ 10.26 $ 10.37 $ 10.57 $ 10.58
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.18 0.34 0.30 0.27 0.29 0.44
Net realized and unrealized gains (losses) ... 0.06 0.01 (0.32) (0.04) (0.09) 0.06
-------------------------------------------------------------------------------
Total from investment operations .............. 0.24 0.35 (0.02) 0.23 0.20 0.50
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.20) (0.36) (0.33) (0.34) (0.40) (0.51)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 9.94 $ 9.90 $ 9.91 $ 10.26 $ 10.37 $ 10.57
===============================================================================
Total return c ................................ 2.39% 3.63% (0.16)% 2.23% 1.92% 4.87%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.88% e 0.83% 0.81% f 0.79% 0.77% 0.80%
Net investment income ......................... 3.59% e 3.43% 2.96% 2.67% 2.80% 4.22%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $187,314 $211,245 $268,197 $309,544 $338,839 $295,623
Portfolio turnover rate ....................... 11.47% 45.79% 62.33% 86.82% 92.69% 112.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized
f Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.89 $ 9.90 $ 10.24 $ 10.36 $ 10.56 $ 10.57
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................... 0.18 0.35 0.31 0.28 0.29 0.44
Net realized and unrealized gains (losses) ... 0.06 0.01 (0.31) (0.05) (0.08) 0.07
-------------------------------------------------------------------------------
Total from investment operations .............. 0.24 0.36 -- 0.23 0.21 0.51
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.20) (0.37) (0.34) (0.35) (0.41) (0.52)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 9.93 $ 9.89 $ 9.90 $ 10.24 $ 10.36 $ 10.56
===============================================================================
Total return c ................................ 2.45% 3.74% 0.04% 2.24% 2.02% 4.97%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.78% e 0.73% 0.71% f 0.69% 0.67% 0.70%
Net investment income ......................... 3.69% e 3.53% 3.06% 2.77% 2.90% 4.32%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $22,010 $22,293 $26,725 $24,141 $16,753 $ 7,348
Portfolio turnover rate ....................... 11.47% 45.79% 62.33% 86.82% 92.69% 112.71%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
72 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.4%
MORTGAGE-BACKED SECURITIES 47.4%
a FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 4.7%
FHLMC, 4.226%, 12/01/34 ............................................... $1,160,731 $ 1,144,625
FHLMC, 4.439%, 9/01/33 ................................................ 282,201 280,183
FHLMC, 4.475%, 8/01/34 ................................................ 6,166,691 6,241,096
FHLMC, 5.481%, 12/01/33 ............................................... 2,241,197 2,276,755
-----------
9,942,659
-----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 1.5%
FHLMC Gold 15 Year, 5.00%, 10/01/17 ................................... 389,341 385,003
FHLMC Gold 15 Year, 7.00%, 8/01/07 - 9/01/13 .......................... 308,892 317,486
FHLMC Gold 30 Year, 8.50%, 12/01/22 - 7/01/31 ......................... 2,167,404 2,316,883
FHLMC Gold 30 Year, 9.50%, 3/01/21 .................................... 92,496 96,030
-----------
3,115,402
-----------
a FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 27.1%
FNMA, 3.491%, 5/01/34 ................................................. 3,927,863 3,934,293
FNMA, 3.501%, 4/01/34 ................................................. 1,168,282 1,143,542
FNMA, 3.841%, 1/01/35 ................................................. 459,627 460,606
FNMA, 3.93%, 3/01/33 .................................................. 280,075 275,241
FNMA, 3.983%, 8/01/34 ................................................. 3,812,287 3,861,307
FNMA, 4.019%, 12/01/34 ................................................ 3,001,876 3,015,818
FNMA, 4.165%, 6/01/33 ................................................. 581,965 579,549
FNMA, 4.179%, 11/01/34 ................................................ 1,202,975 1,210,004
FNMA, 4.219%, 4/01/33 ................................................. 2,835,855 2,835,196
FNMA, 4.246%, 4/01/33 ................................................. 893,573 894,478
FNMA, 4.247%, 6/01/34 ................................................. 2,112,981 2,077,087
FNMA, 4.288%, 12/01/33 ................................................ 575,242 571,759
FNMA, 4.32%, 9/01/33 .................................................. 4,712,774 4,582,282
FNMA, 4.35%, 1/01/33 .................................................. 606,039 609,059
FNMA, 4.361%, 2/01/34 ................................................. 3,146,993 3,127,693
FNMA, 4.402%, 4/01/35 ................................................. 327,394 324,563
FNMA, 4.403%, 2/01/35 ................................................. 4,355,443 4,364,692
FNMA, 4.485%, 8/01/34 ................................................. 4,873,548 4,829,748
FNMA, 4.50%, 12/01/32 ................................................. 188,464 189,230
FNMA, 4.611%, 7/01/34 ................................................. 3,069,464 3,048,190
FNMA, 4.656%, 1/01/33 ................................................. 60,108 60,685
FNMA, 4.778%, 3/01/35 ................................................. 4,361,185 4,383,543
FNMA, 4.84%, 9/01/32 .................................................. 103,835 104,748
FNMA, 4.842%, 10/01/33 ................................................ 415,868 416,791
FNMA, 4.861%, 3/01/33 ................................................. 2,899,477 2,939,709
FNMA, 4.903%, 11/01/32 ................................................ 4,899,852 4,888,287
FNMA, 5.53%, 3/01/34 .................................................. 243,742 245,815
FNMA, 5.642%, 8/01/33 - 9/01/34 ....................................... 1,661,449 1,676,151
-----------
56,650,066
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 10.5%
FNMA 15 Year, 4.50%, 12/01/18 - 2/01/19 ............................... 760,027 737,693
FNMA 15 Year, 5.00%, 2/01/18 - 5/01/18 ................................ 4,063,692 4,016,435
FNMA 15 Year, 5.50%, 3/01/16 - 11/01/17 ............................... 4,334,805 4,353,397
FNMA 15 Year, 5.50%, 2/01/21 .......................................... 6,171,105 6,179,771
Semiannual Report | 73
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE (CONTINUED)
FNMA 15 Year, 6.00%, 4/01/16 - 5/01/17 ................................. $ 3,980,795 $ 4,050,396
FNMA 15 Year, 6.50%, 12/01/08 - 10/01/16 ............................... 1,043,343 1,064,051
FNMA 15 Year, 7.00%, 7/01/12 - 7/01/14 ................................. 556,186 573,822
FNMA 15 Year, 7.50%, 12/01/14 - 1/01/15 ................................ 239,428 247,942
FNMA 30 Year, 9.00%, 1/01/17 - 12/01/20 ................................ 310,329 327,517
FNMA 30 Year, 9.50%, 7/01/16 - 6/01/22 ................................. 427,665 463,017
------------
22,014,041
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 3.6%
GNMA I SF 15 Year, 6.50%, 10/15/13 - 7/15/14 ........................... 875,973 897,949
GNMA I SF 15 Year, 7.50%, 10/15/14 - 12/15/14 .......................... 246,750 256,774
GNMA I SF 30 Year, 5.50%, 4/15/33 - 5/15/33 ............................ 1,128,745 1,124,225
GNMA I SF 30 Year, 6.00%, 3/15/33 ...................................... 269,441 273,715
GNMA I SF 30 Year, 7.50%, 5/15/07 - 11/15/16 ........................... 57,079 58,989
GNMA I SF 30 Year, 8.00%, 11/15/16 - 1/15/17 ........................... 153,714 161,924
GNMA I SF 30 Year, 8.50%, 7/15/08 - 1/15/17 ............................ 116,117 121,328
GNMA I SF 30 Year, 9.00%, 6/15/16 - 9/15/17 ............................ 663,173 710,919
GNMA II SF 30 Year, 5.00%, 9/20/33 ..................................... 2,933,289 2,846,074
GNMA II SF 30 Year, 7.50%, 10/20/29 - 10/20/31 ......................... 758,725 791,975
GNMA II SF 30 Year, 9.00%, 6/20/16 - 11/20/16 .......................... 124,875 133,358
GNMA II SF 30 Year, 9.50%, 6/20/16 ..................................... 75,259 80,865
------------
7,458,095
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $99,413,095) .................... 99,180,263
------------
U.S. GOVERNMENT AND AGENCY SECURITIES 49.0%
FHLB,
4.625%, 11/21/08 .................................................... 10,000,000 9,959,770
4.875%, 11/18/11 .................................................... 2,000,000 2,006,322
FHLMC,
4.125%, 7/12/10 ..................................................... 4,500,000 4,414,999
5.25%, 7/18/11 ...................................................... 16,000,000 16,266,160
5.75%, 1/15/12 ...................................................... 2,000,000 2,077,986
FNMA,
4.125%, 5/15/10 ..................................................... 17,000,000 16,691,331
4.125%, 4/15/14 ..................................................... 1,800,000 1,721,297
4.25%, 5/15/09 ...................................................... 7,000,000 6,928,166
4.50%, 2/15/11 ...................................................... 4,000,000 3,964,792
5.125%, 4/15/11 ..................................................... 9,000,000 9,103,743
5.375%, 11/15/11 .................................................... 1,300,000 1,331,174
7.25%, 1/15/10 ...................................................... 3,000,000 3,185,616
U.S. Treasury Note,
3.125%, 4/15/09 ..................................................... 7,000,000 6,808,599
4.00%, 11/15/12 ..................................................... 1,500,000 1,463,966
4.625%, 10/31/11 .................................................... 7,000,000 7,032,543
b Index Linked, 0.875%, 4/15/10 ....................................... 7,517,930 7,281,235
b Index Linked, 2.375%, 4/15/11 ....................................... 2,357,661 2,390,817
------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $102,346,914) ........ 102,628,516
------------
TOTAL LONG TERM INVESTMENTS (COST $201,760,009) ........................ 201,808,779
------------
74 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $8,179,411) 3.9%
MONEY MARKET FUND 3.9%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% .. 8,179,411 $ 8,179,411
------------
TOTAL INVESTMENTS (COST $209,939,420) 100.3% .......................... 209,988,190
OTHER ASSETS, LESS LIABILITIES (0.3)% ................................. (663,790)
------------
NET ASSETS 100.0% ..................................................... $209,324,400
============
See Selected Portfolio Abbreviations on page 82.
a The coupon rate shown represents the rate at period end.
b Principal amount of security is adjusted for inflation. See Note 1(h).
c See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN REAL RETURN FUND
------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 g
------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................. $10.10 $ 9.94 $10.00
-----------------------------------
Income from investment operations a:
Net investment income b .............................................. 0.06 0.38 0.31
Net realized and unrealized gains (losses) ........................... 0.36 0.22 0.04
-----------------------------------
Total from investment operations ...................................... 0.42 0.60 0.35
-----------------------------------
Less distributions from:
Net investment income ................................................ (0.08) (0.44) (0.40)
Tax return of capital ................................................ -- -- (0.01)
-----------------------------------
Total distributions ................................................... (0.08) (0.44) (0.41)
-----------------------------------
Redemption fees ....................................................... -- d -- d -- d
-----------------------------------
Net asset value, end of period ........................................ $10.44 $10.10 $ 9.94
===================================
Total return c ........................................................ 4.18% 6.16% 3.53%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates ..................... 1.11% e 1.12% 1.63% e
Expenses net of waiver and payments by affiliates and expense reduction 0.90% e,f 0.90% f 0.90% e,f
Net investment income ................................................. 1.12% e 3.75% 3.29% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................... $34,884 $31,452 $23,753
Portfolio turnover rate ............................................... 15.87% 3.53% 8.86%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period November 17, 2004 (commencement of operations) to October
31, 2005.
76 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL RETURN FUND
------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
ADVISOR CLASS (UNAUDITED) 2006 2005 g
------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................................. $10.11 $ 9.95 $10.00
-----------------------------------
Income from investment operations a:
Net investment income b .............................................. 0.07 0.40 0.36
Net realized and unrealized gains (losses) ........................... 0.36 0.23 0.02
-----------------------------------
Total from investment operations ...................................... 0.43 0.63 0.38
-----------------------------------
Less distributions from:
Net investment income ................................................ (0.09) (0.47) (0.42)
Tax return of capital ................................................ -- -- (0.01)
-----------------------------------
Total distributions ................................................... (0.09) (0.47) (0.43)
-----------------------------------
Redemption fees ....................................................... -- d -- d -- d
-----------------------------------
Net asset value, end of period ........................................ $10.45 $10.11 $ 9.95
===================================
Total return c ........................................................ 4.29% 6.41% 3.81%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates ..................... 0.86% e 0.87% 1.38% e
Expenses net of waiver and payments by affiliates and expense reduction 0.65% e,f 0.65% f 0.65% e,f
Net investment income ................................................. 1.37% e 4.00% 3.54% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..................................... $17,385 $17,892 $ 496
Portfolio turnover rate ............................................... 15.87% 3.53% 8.86%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Basedon average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period November 17, 2004 (commencement of operations) to October
31, 2005.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
COUNTRY/
FRANKLIN REAL RETURN FUND ORGANIZATION SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 89.4%
COMMON STOCKS 10.2%
ENERGY MINERALS 2.0%
Chesapeake Energy Corp. .................................. United States 4,200 $ 141,750
ConocoPhillips ........................................... United States 1,700 117,895
Devon Energy Corp. ....................................... United States 2,500 182,175
Exxon Mobil Corp. ........................................ United States 1,500 119,070
a Newfield Exploration Co. ................................. United States 4,600 201,250
Occidental Petroleum Corp. ............................... United States 3,400 172,380
Peabody Energy Corp. ..................................... United States 2,800 134,344
-----------
1,068,864
-----------
INDUSTRIAL SERVICES 1.6%
ENSCO International Inc. ................................. United States 2,000 112,760
a Nabors Industries Ltd. ................................... Bermuda 3,100 99,572
Noble Corp. .............................................. United States 1,600 134,736
Schlumberger Ltd. ........................................ United States 3,300 243,639
a Weatherford International Ltd. ........................... Bermuda 4,450 233,580
-----------
824,287
-----------
NON-ENERGY MINERALS 1.2%
Alcoa Inc. ............................................... United States 3,800 134,862
Barrick Gold Corp. ....................................... Canada 3,600 101,196
Freeport-McMoRan Copper & Gold Inc., B ................... United States 3,573 239,963
United States Steel Corp. ................................ United States 1,500 152,310
-----------
628,331
-----------
PROCESS INDUSTRIES 0.3%
The Dow Chemical Co. ..................................... United States 3,400 151,674
-----------
REAL ESTATE INVESTMENT TRUSTS 5.1%
AvalonBay Communities Inc. ............................... United States 2,300 281,198
Boston Properties Inc. ................................... United States 2,700 317,412
Kimco Realty Corp. ....................................... United States 6,400 307,648
LaSalle Hotel Properties ................................. United States 5,400 250,722
ProLogis ................................................. United States 5,989 388,087
Public Storage Inc. ...................................... United States 3,000 279,960
Regency Centers Corp. .................................... United States 3,300 271,920
Simon Property Group Inc. ................................ United States 2,600 299,728
Vornado Realty Trust ..................................... United States 2,400 284,712
-----------
2,681,387
-----------
TOTAL COMMON STOCKS (COST $3,466,600) .................... 5,354,543
-----------
-----------
PRINCIPAL
AMOUNT b
-----------
CORPORATE BONDS 1.3%
COMMERCIAL SERVICES 0.2%
c,d ARAMARK Corp., senior note, B, 144A, FRN, 8.86%, 2/01/15 . United States 50,000 51,625
Dex Media West LLC, senior sub. note, 9.875%, 8/15/13 .... United States 50,000 54,687
-----------
106,312
-----------
78 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN REAL RETURN FUND ORGANIZATION AMOUNT b VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
COMMUNICATIONS 0.2%
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.25%, 1/15/13 Bermuda 50,000 $ 52,250
d Rogers Wireless Communications Inc., senior secured note,
FRN, 8.48%, 12/15/10 ........................................... Canada 50,000 51,125
-----------
103,375
-----------
CONSUMER DURABLES 0.1%
Ford Motor Credit Co., senior note, 9.875%, 8/10/11 ............. United States 50,000 53,289
-----------
CONSUMER NON-DURABLES 0.1%
Smithfield Foods Inc., senior note, 8.00%, 10/15/09 ............. United States 50,000 52,563
-----------
CONSUMER SERVICES 0.2%
CSC Holdings Inc., senior note, B, 7.625%, 4/01/11 .............. United States 50,000 51,812
MGM MIRAGE Inc., senior note, 6.625%, 7/15/15 ................... United States 50,000 48,750
-----------
100,562
-----------
ELECTRONIC TECHNOLOGY 0.1%
Solectron Global Finance Ltd., senior sub. note, 8.00%, 3/15/16 . United States 50,000 50,750
-----------
ENERGY MINERALS 0.1%
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 ............ United States 50,000 49,875
-----------
HEALTH SERVICES 0.1%
Fresenius Medical Care Capital Trust II, 7.875%, 2/01/08 ........ Germany 50,000 50,813
-----------
NON-ENERGY MINERALS 0.1%
Novelis Inc., senior note, 7.25%, 2/15/15 ....................... Canada 50,000 52,938
-----------
UTILITIES 0.1%
TXU Corp., senior note, P, 5.55%, 11/15/14 ...................... United States 50,000 45,112
-----------
TOTAL CORPORATE BONDS (COST $666,546) ........................... 665,589
-----------
U.S. GOVERNMENT SECURITIES 66.4%
e U.S. Treasury Bond, Index Linked,
3.50%, 1/15/11 ............................................... United States 584,510 617,229
2.00%, 7/15/14 ............................................... United States 1,079,400 1,070,631
3.875%, 4/15/29 .............................................. United States 371,298 470,504
e U.S. Treasury Note, Index Linked,
3.625%, 1/15/08 .............................................. United States 1,133,460 1,148,248
3.875%, 1/15/09 .............................................. United States 2,729,386 2,821,612
4.25%, 1/15/10 ............................................... United States 725,592 770,687
0.875%, 4/15/10 .............................................. United States 7,088,334 6,865,165
2.375%, 4/15/11 .............................................. United States 6,150,420 6,236,913
3.00%, 7/15/12 ............................................... United States 2,263,220 2,375,410
1.875%, 7/15/13 .............................................. United States 6,425,240 6,352,706
2.00%, 1/15/14 ............................................... United States 3,964,104 3,931,741
1.625%, 1/15/15 .............................................. United States 1,065,560 1,024,894
2.00%, 1/15/16 ............................................... United States 1,025,120 1,010,505
-----------
TOTAL U.S. GOVERNMENT SECURITIES (COST $34,757,805) ............. 34,696,245
-----------
Semiannual Report | 79
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
COUNTRY/ RINCIPAL
FRANKLIN REAL RETURN FUND ORGANIZATION AMOUNT b VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES 11.5%
d European Investment Bank, senior note, FRN, 0.508%, 9/21/11 .... Supranational f 175,000,000 JPY $ 1,465,489
Government of Malaysia,
6.45%, 7/01/08 ............................................ Malaysia 4,005,000 MYR 1,210,580
g 7.00%, 3/15/09 ............................................ Malaysia 30,000 MYR 9,333
Government of Singapore, 5.625%, 7/01/08 ....................... Singapore 330,000 SGD 225,530
Government of Sweden, 8.00%, 8/15/07 ........................... Sweden 8,145,000 SEK 1,230,588
Korea Treasury Note, 3.75%, 9/10/07 ............................ South Korea 625,000,000 KRW 668,287
h Nota Do Tesouro Nacional, Index Linked, 6.00%,
11/15/09 ................................................... Brazil 700 i BRL 549,834
5/15/15 .................................................... Brazil 800 i BRL 623,537
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $5,590,598) -----------
5,983,178
TOTAL LONG TERM INVESTMENTS (COST $44,481,549) ................. -----------
46,699,555
SHORT TERM INVESTMENTS 9.9% -----------
FOREIGN GOVERNMENT SECURITIES 6.2%
j Egypt Treasury Bill, 1/08/08 ................................... Egypt 100,000 EGP 16,731
Government of Canada, 4.50%, 9/01/07 ........................... Canada 740,000 CAD 667,600
Government of Malaysia, 3.546%, 1/11/08 ........................ Malaysia 2,400,000 MYR 702,186
Government of Singapore, 2.625%, 10/01/07 ...................... Singapore 50,000 SGD 32,964
g,j Malaysia Treasury Bill, 12/06/07 - 12/21/07 .................... Malaysia 1,090,000 MYR 311,486
j Norway Treasury Bill, 9/19/07 - 3/19/08 ........................ Norway 2,530,000 NOK 412,797
Queensland Treasury Corp., 07G, 8.00%, 9/14/07 ................. Australia 215,000 AUD 179,639
j Sweden Treasury Bill, 12/19/07 ................................. Sweden 1,925,000 SEK 280,933
j Thailand Treasury Bill, 12/06/07 ............................... Thailand 22,920,000 THB 645,634
-----------
TOTAL FOREIGN GOVERNMENT SECURITIES
(COST $3,114,131) ............................................ 3,249,970
-----------
TOTAL INVESTMENT BEFORE REPURCHASE AGREEMENT
(COST $47,595,680) ........................................... 49,949,525
-----------
80 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN REAL RETURN FUND COUNTRY AMOUNT b VALUE
- ------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENT (COST $1,932,465) 3.7%
k Joint Repurchase Agreement, 5.16%, 5/01/07
(Maturity Value $1,932,742) ........................................... United States 1,932,465 $ 1,932,465
ABN AMRO Bank, NV, New York Branch (Maturity Value $177,059)
Banc of America Securities LLC (Maturity Value $161,519)
Barclays Capital Inc. (Maturity Value $177,059)
Bear, Stearns & Co. Inc. (Maturity Value $124,276)
BNP Paribas Securities Corp. (Maturity Value $161,519)
Deutsche Bank Securities Inc. (Maturity Value $161,519)
Goldman, Sachs & Co. (Maturity Value $161,519)
Greenwich Capital Markets Inc. (Maturity Value $161,519)
Lehman Brothers Inc. (Maturity Value $146,656)
Merrill Lynch Government Securities Inc. (Maturity Value $161,519)
Morgan Stanley & Co. Inc. (Maturity Value $161,519)
UBS Securities LLC (Maturity Value $177,059)
Collateralized by U.S. Government Agency Securities, 3.00% - 6.375%,
5/15/07 - 4/02/12; jU.S. Government Agency Discount Notes,
7/06/07 - 9/27/07; jU.S. Treasury Bill, 8/02/07 and U.S. Treasury
Notes, 0.875% - 6.00%, 8/15/07 - 1/31/12 -----------
TOTAL SHORT TERM INVESTMENTS (COST $5,046,596) ......................... 5,182,435
-----------
TOTAL INVESTMENTS (COST $49,528,145) 99.3% ............................. 51,881,990
OTHER ASSETS, LESS LIABILITIES 0.7% .................................... 386,541
-----------
NET ASSETS 100.0% ...................................................... $52,268,531
===========
See Currency and Selected Portfolio Abbreviations on page 82.
a Non-income producing for the twelve months ended April 30, 2007.
b The principal amount is stated in U.S. dollars unless otherwise indicated.
c Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. This security has been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2007,
the value of this security was $51,625, representing 0.10% of net assets.
d The coupon rate shown represents the rate at period end.
e Principal amount of security is adjusted for inflation. See Note 1(h).
f A supranational organization is an entity formed by two or more central
governments through international treaties.
g See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
h Redemption price at maturity is adjusted for inflation. See Note 1(h).
i Principal amount is stated in 1,000 Real Units.
j The security is traded on a discount basis with no stated coupon rate.
k See Note 1(c) regarding joint repurchase agreement.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 81
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
CURRENCY ABBREVIATIONS: SELECTED PORTFOLIO ABBREVIATIONS:
AUD - Australian Dollar ADR - American Depository Receipt
BRL - Brazilian Real FHLB - Federal Home Loan Bank
CAD - Canadian Dollar FHLMC - Federal Home Loan Mortgage Corp.
EGP - Egyptian Pounds FNMA - Federal National Mortgage Association
JPY - Japanese Yen FRN - Floating Rate Note
KRW - South Korean Won GNMA - Government National Mortgage Association
MYR - Malaysian Ringgit SF - Single Family
NOK - Norwegian Krone
SEK - Swedish Krona
SGD - Singapore Dollar
THB - Thai Baht
82 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2007 (unaudited)
-------------------------------------------------------
FRANKLIN
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
-------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................. $ 22,690,293 $ 894,934,427 $ 822,869,005
Cost - Sweep Money Fund (Note 7) ............................. 1,316,106 51,162,545 27,577,949
------------------------------------------------------
Total cost of investments .................................... $ 24,006,399 $ 946,096,972 $ 850,446,954
======================================================
Value - Unaffiliated issuers ................................. $ 24,242,696 $ 1,047,174,101 $ 1,048,035,097
Value - Sweep Money Fund (Note 7) ............................ 1,316,106 51,162,545 27,577,949
------------------------------------------------------
Total value of investments ................................... 25,558,802 1,098,336,646 1,075,613,046
Receivables:
Investment securities sold ................................... 1,950 -- --
Capital shares sold .......................................... 145,256 5,017,126 3,121,045
Dividends and interest ....................................... 122,905 5,082,329 1,198,166
Affiliates ................................................... 15,299 -- --
Offering costs ................................................ 15,658 -- --
------------------------------------------------------
Total assets ........................................... 25,859,870 1,108,436,101 1,079,932,257
------------------------------------------------------
Liabilities:
Payables:
Capital shares redeemed ...................................... 26,873 2,596,041 1,690,626
Affiliates ................................................... -- 864,625 856,949
Professional fees ............................................ 15,149 15,165 15,297
Unaffiliated transfer agent fees ............................. 1,402 250,694 348,544
Options written, at value (premiums received $14,609) ......... 21,605 -- --
Accrued expenses and other liabilities ........................ 9,225 14,210 46,162
------------------------------------------------------
Total liabilities ...................................... 74,254 3,740,735 2,957,578
------------------------------------------------------
Net assets, at value ................................. $ 25,785,616 $ 1,104,695,366 $ 1,076,974,679
======================================================
Net assets consist of:
Paid-in capital ............................................... $ 23,379,878 $ 968,407,529 $ 818,327,516
Undistributed net investment income (distributions in excess of
net investment income) ....................................... 79,585 (17,435,104) 615,014
Net unrealized appreciation (depreciation) .................... 1,545,407 152,239,674 225,166,092
Accumulated net realized gain (loss) .......................... 780,746 1,483,267 32,866,057
------------------------------------------------------
Net assets, at value ................................. $ 25,785,616 $ 1,104,695,366 $ 1,076,974,679
======================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 83
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2007 (unaudited)
-------------------------------------------------------
FRANKLIN
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
-------------------------------------------------------
CLASS A:
Net assets, at value .......................................... $ 23,907,301 $ 805,294,410 $ 828,817,251
=======================================================
Shares outstanding ............................................ 2,114,162 47,001,063 36,181,249
=======================================================
Net asset value per sharea .................................... $ 11.31 $ 17.13 $ 22.91
=======================================================
Maximum offering price per share (net asset
value per share / 94.25%) .................................... $ 12.00 $ 18.18 $ 24.31
=======================================================
CLASS B:
Net assets, at value .......................................... -- -- $ 51,533,262
=======================================================
Shares outstanding ............................................ -- -- 2,260,593
=======================================================
Net asset value and maximum offering price per share a ........ -- -- $ 22.80
=======================================================
CLASS C:
Net assets, at value .......................................... $ 1,068,414 $ 299,400,956 $ 179,327,097
=======================================================
Shares outstanding ............................................ 94,911 17,644,207 7,861,976
=======================================================
Net asset value and maximum offering price per share a ........ $ 11.26 $ 16.97 $ 22.81
=======================================================
CLASS R:
Net assets, at value .......................................... $ 15,156 -- $ 17,297,069
=======================================================
Shares outstanding ............................................ 1,341 -- 754,565
=======================================================
Net asset value and maximum offering price per share a ........ $ 11.30 -- $ 22.92
=======================================================
ADVISOR CLASS:
Net assets, at value ........................................... $ 794,745 -- --
=======================================================
Shares outstanding ............................................. 70,177 -- --
=======================================================
Net asset value and maximum offering price per share a ......... $ 11.32 -- --
=======================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
84 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2007 (unaudited)
-------------------------------------
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
-------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................... $ 201,760,009 $ 47,595,680
Cost - Sweep Money Fund (Note 7) .............................. 8,179,411 --
Cost - Repurchase agreements .................................. -- 1,932,465
----------------------------------
Total cost of investments ..................................... $ 209,939,420 $ 49,528,145
==================================
Value - Unaffiliated issuers .................................. $ 201,808,779 $ 49,949,525
Value - Sweep Money Fund (Note 7) ............................. 8,179,411 --
Value - Repurchase agreements ................................. -- 1,932,465
----------------------------------
Total value of investments .................................... 209,988,190 51,881,990
Foreign currency, at value (cost $- and $199,062, respectively) -- 202,953
Receivables:
Investment securities sold .................................... 167,813 --
Capital shares sold ........................................... 101,934 314,682
Interest ...................................................... 1,703,024 324,434
----------------------------------
Total assets ............................................ 211,960,961 52,724,059
----------------------------------
Liabilities:
Payables:
Investment securities purchased ............................... -- 192,591
Capital shares redeemed ....................................... 2,264,827 69,685
Affiliates .................................................... 135,588 17,653
Distributions to shareholders ................................. 155,547 130,526
Professional fees ............................................. 13,942 15,254
Unaffiliated transfer agent fees .............................. 63,326 10,221
Accrued expenses and other liabilities ......................... 3,331 19,598
----------------------------------
Total liabilities ....................................... 2,636,561 455,528
----------------------------------
Net assets, at value .................................. $ 209,324,400 $ 52,268,531
==================================
Net assets consist of:
Paid-in capital ................................................ $ 225,645,764 $ 50,161,186
Distributions in excess of net investment income ............... (297,910) (621,034)
Net unrealized appreciation (depreciation) ..................... 48,770 2,363,331
Accumulated net realized gain (loss) ........................... (16,072,224) 365,048
----------------------------------
Net assets, at value .................................. $ 209,324,400 $ 52,268,531
==================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 85
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2007 (unaudited)
----------------------------------
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
----------------------------------
CLASS A:
Net assets, at value .......................................... $187,313,914 $34,883,520
================================
Shares outstanding ............................................ 18,850,070 3,342,282
================================
Net asset value per share a ................................... $ 9.94 $ 10.44
================================
Maximum offering price per share (net asset value per
share / 97.75% and 95.75%, respectively) ..................... $ 10.17 $ 10.90
================================
ADVISOR CLASS:
Net assets, at value .......................................... $ 22,010,486 $17,385,011
================================
Shares outstanding ............................................ 2,217,327 1,663,908
================================
Net asset value and maximum offering price per sharea ......... $ 9.93 $ 10.45
================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
86 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended April 30, 2007 (unaudited)
----------------------------------------------------
FRANKLIN
FRANKLIN CONVERTIBLE FRANKLIN EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
----------------------------------------------------
Investment income:
Dividends
Unaffiliated issuers ........................................ $ 156,380 $ 8,722,244 $ 13,664,515
Sweep Money Fund (Note 7) ................................... 44,546 1,272,418 559,533
Interest ..................................................... 234,406 6,945,168 --
--------------------------------------------------
Total investment income ............................... 435,332 16,939,830 14,224,048
--------------------------------------------------
Expenses:
Management fees (Note 3a) .................................... 49,100 2,396,239 2,385,915
Administrative fees (Note 3b) ................................ 20,947 -- --
Distribution fees: (Note 3c)
Class A ..................................................... 35,015 927,604 953,994
Class B ..................................................... -- -- 251,659
Class C ..................................................... 2,539 1,387,051 851,213
Class R ..................................................... 32 -- 44,774
Transfer agent fees (Note 3e) ................................ 5,401 698,922 951,957
Custodian fees (Note 4) ...................................... 272 10,295 9,239
Reports to shareholders ...................................... 5,891 63,925 95,059
Registration and filing fees ................................. 23,590 37,960 39,127
Professional fees ............................................ 15,626 16,816 17,779
Trustees' fees and expenses .................................. 459 9,733 7,672
Amortization of offering costs ............................... 44,986 -- --
Other ........................................................ 1,598 18,836 11,974
--------------------------------------------------
Total expenses ........................................ 205,456 5,567,381 5,620,362
Expense reductions (Note 4) ........................... -- (158) (32)
Expenses waived/paid by affiliates (Note 3f) .......... (93,510) -- --
--------------------------------------------------
Net expenses ....................................... 111,946 5,567,223 5,620,330
--------------------------------------------------
Net investment income ........................... 323,386 11,372,607 8,603,718
--------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................. 800,690 2,136,835 32,912,897
Foreign currency transactions ............................... (546) -- (1,103)
--------------------------------------------------
Net realized gain (loss) ........................... 800,144 2,136,835 32,911,794
--------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments ................................................. 531,684 72,441,513 44,741,949
--------------------------------------------------
Net realized and unrealized gain (loss) ....................... 1,331,828 74,578,348 77,653,743
--------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 1,655,214 $ 85,950,955 $ 86,257,461
==================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 87
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended April 30, 2007 (unaudited)
---------------------------------
FRANKLIN
LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
---------------------------------
Investment income:
Dividends (net of foreign taxes) a:
Unaffiliated issuers .................................................. $ -- $ 36,321
Sweep Money Fund (Note 7) ............................................. 71,831 --
Interest ............................................................... 4,885,267 472,356
---------------------------------
Total investment income ......................................... 4,957,098 508,677
---------------------------------
Expenses:
Management fees (Note 3a) .............................................. 608,770 107,301
Administrative fees (Note 3b) .......................................... -- 50,495
Distribution fees: (Note 3c)
Class A ............................................................... 99,321 41,035
Transfer agent fees (Note 3e) .......................................... 222,417 24,434
Custodian fees (Note 4) ................................................ 2,769 5,017
Reports to shareholders ................................................ 15,051 1,741
Registration and filing fees ........................................... 17,569 18,646
Professional fees ...................................................... 11,133 12,158
Trustees' fees and expenses ............................................ 2,522 456
Other .................................................................. 4,954 1,878
---------------------------------
Total expenses .................................................. 984,506 263,161
Expense reductions (Note 4) ..................................... -- (422)
Expenses waived/paid by affiliates (Note 3f) .................... -- (58,012)
---------------------------------
Net expenses ................................................. 984,506 204,727
---------------------------------
Net investment income ..................................... 3,972,592 303,950
---------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... (326,991) 365,675
Foreign currency transactions ......................................... -- 4,286
---------------------------------
Net realized gain (loss) ..................................... (326,991) 369,961
---------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 1,547,226 1,417,095
Translation of assets and liabilities denominated in foreign currencies -- 4,927
---------------------------------
Net change in unrealized appreciation (depreciation) ............... 1,547,226 1,422,022
---------------------------------
Net realized and unrealized gain (loss) ................................. 1,220,235 1,791,983
---------------------------------
Net increase (decrease) in net assets resulting from operations $ 5,192,827 $ 2,095,933
=================================
a Foreign taxes withheld on dividends ................................... $ -- $ 1,693
88 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------
FRANKLIN BALANCED FUND FRANKLIN CONVERTIBLE SECURITIES FUND
------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
APRIL 30, 2007 YEAR ENDED APRIL 30, 2007 YEAR ENDED
(UNAUDITED) OCTOBER 31, 2006 a (UNAUDITED) OCTOBER 31, 2006
------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 323,386 $ 154,415 $ 11,372,607 $ 21,374,703
Net realized gain (loss) from investments
and foreign currency transactions ..... 800,144 (19,286) 2,136,835 69,913,327
Net change in unrealized appreciation
(depreciation) on investments ......... 531,684 1,013,723 72,441,513 11,060,363
---------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........ 1,655,214 1,148,852 85,950,955 102,348,393
---------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (306,313) (107,069) (12,456,424) (23,140,732)
Class C ............................... (7,624) (1,076) (3,713,677) (7,186,294)
Class R ............................... (180) (68) -- --
Advisor Class ......................... (6,379) (1,141) -- --
Net realized gains:
Class A ............................... -- -- (50,626,878) (21,590,256)
Class C ............................... -- -- (19,206,544) (8,557,998)
---------------------------------------------------------------------
Total distributions to shareholders ...... (320,496) (109,354) (86,003,523) (60,475,280)
---------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... 5,387,333 16,239,165 87,113,841 136,363,886
Class C ............................... 790,100 233,326 28,385,016 39,905,865
Class R ............................... 3,719 10,000 -- --
Advisor Class ......................... 519,766 227,840 -- --
---------------------------------------------------------------------
Total capital share transactions ......... 6,700,918 16,710,331 115,498,857 176,269,751
---------------------------------------------------------------------
Redemption fees .......................... 150 1 15,626 (88)
---------------------------------------------------------------------
Net increase (decrease) in
net assets ....................... 8,035,786 17,749,830 115,461,915 218,142,776
Net assets:
Beginning of period ...................... 17,749,830 -- 989,233,451 771,090,675
---------------------------------------------------------------------
End of period ............................ $ 25,785,616 $ 17,749,830 $1,104,695,366 $989,233,451
=====================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period ........................... $ 79,585 $ 76,695 $(17,435,104) $(13,330,487)
=====================================================================
a For the period July 3, 2006 (commencement of operations) to October 31,
2006.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 89
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-----------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY
FRANKLIN EQUITY INCOME FUND U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
APRIL 30, 2007 YEAR ENDED APRIL 30, 2007 YEAR ENDED
(UNAUDITED) OCTOBER 31, 2006 (UNAUDITED) OCTOBER 31, 2006
-----------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 8,603,718 $ 19,049,430 $ 3,972,592 $ 8,871,709
Net realized gain (loss) from investments
and foreign currency transactions ..... 32,911,794 63,390,423 (326,991) (3,687,282)
Net change in unrealized appreciation
(depreciation) on investments ......... 44,741,949 54,011,482 1,547,226 3,776,779
---------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........ 86,257,461 136,451,335 5,192,827 8,961,206
---------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................... (8,669,953) (16,278,868) (3,945,222) (8,691,821)
Class B ............................... (389,887) (904,700) -- --
Class C ............................... (1,329,672) (2,940,496) -- --
Class R ............................... (182,071) (447,857) -- --
Advisor Class ......................... -- -- (450,832) (833,685)
Net realized gains:
Class A ............................... (46,881,439) (14,982,720) -- --
Class B ............................... (3,228,701) (1,242,475) -- --
Class C ............................... (10,790,372) (3,988,398) -- --
Class R ............................... (1,172,139) (471,352) -- --
---------------------------------------------------------------------------
Total distributions to shareholders ...... (72,644,234) (41,256,866) (4,396,054) (9,525,506)
---------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ............................... 82,615,998 13,164,326 (24,667,454) (56,401,378)
Class B ............................... (998,545) (8,195,831) -- --
Class C ............................... 4,845,786 (19,720,106) -- --
Class R ............................... (1,793,925) (3,698,975) -- --
Advisor Class ......................... -- -- (356,391) (4,425,688)
---------------------------------------------------------------------------
Total capital share transactions ......... 84,669,314 (18,450,586) (25,023,845) (60,827,066)
---------------------------------------------------------------------------
Redemption fees .......................... 7,208 9,042 13,774 6,716
---------------------------------------------------------------------------
Net increase (decrease) in
net assets ...................... 98,289,749 76,752,925 (24,213,298) (61,384,650)
Net assets:
Beginning of period ...................... 978,684,930 901,932,005 233,537,698 294,922,348
---------------------------------------------------------------------------
End of period ............................ $ 1,076,974,679 $ 978,684,930 $ 209,324,400 $ 233,537,698
===========================================================================
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period ........................... $ 615,014 $ 2,582,879 $ (297,910) $ 125,552
===========================================================================
90 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
FRANKLIN REAL RETURN FUND
-----------------------------------
SIX MONTHS ENDED
APRIL 30, 2007 YEAR ENDED
(UNAUDITED) OCTOBER 31, 2006
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................ $ 303,950 $ 1,539,243
Net realized gain (loss) from investments and foreign currency transactions .......... 369,961 508
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ........................... 1,422,022 830,808
-------------------------------
Net increase (decrease) in net assets resulting from operations ................ 2,095,933 2,370,559
-------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................................ (271,027) (1,259,154)
Advisor Class ...................................................................... (157,998) (572,904)
-------------------------------
Total distributions to shareholders ................................................... (429,025) (1,832,058)
-------------------------------
Capital share transactions: (Note 2)
Class A ............................................................................ 2,347,930 7,257,215
Advisor Class ...................................................................... (1,090,367) 17,299,813
-------------------------------
Total capital share transactions ...................................................... 1,257,563 24,557,028
-------------------------------
Redemption fees ....................................................................... 100 32
-------------------------------
Net increase (decrease) in net assets .......................................... 2,924,571 25,095,561
Net assets:
Beginning of period ................................................................... 49,343,960 24,248,399
===============================
End of period ......................................................................... $ 52,268,531 $ 49,343,960
===============================
Distributions in excess of net investment income included in net assets:
End of period ......................................................................... $ (621,034) $ (495,959)
===============================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 91
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is registered under the
Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end
investment company, consisting of nine separate funds. All funds included in
this report (the Funds) are diversified. The financial statements of the
remaining funds in the Trust are presented separately. The classes of shares
offered within each of the Funds are indicated below. Each class of shares
differ by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
- ------------------------------------------------------------------------------------------------------------------
CLASS A, CLASS C, CLASS A, CLASS B,
CLASS R & ADVISOR CLASS CLASS C & CLASS R CLASS A & CLASS C CLASS A & ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------
Franklin Balanced Franklin Equity Franklin Convertible Franklin Limited Maturity
Fund Income Fund Securities Fund U.S. Government Securities Fund
Securities Fund Franklin Real Return Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, government securities, mortgage pass-through
securities, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The Trust may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
92 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 on the
Statements of Operations.
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.
Semiannual Report | 93
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. JOINT REPURCHASE AGREEMENT
Certain funds may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account with other funds
managed by the investment manager or an affiliate of the investment manager and
is used to invest in one or more repurchase agreements. The value and face
amount of the joint repurchase agreement are allocated to the funds based on
their pro-rata interest. A repurchase agreement is accounted for as a loan by
the fund to the seller, collateralized by securities which are delivered to the
fund's custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. The joint repurchase agreement held by
the funds at period end had been entered into on April 30, 2007. The joint
repurchase agreement is valued at cost.
D. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The funds may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
funds will generally purchase these securities with the intention of holding the
securities, they may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
E. FOREIGN CURRENCY CONTRACTS
When the funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statements of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statements of Assets and Liabilities.
F. OPTIONS
The Franklin Balanced Fund may purchase or write options. Options are contracts
entitling the holder to purchase or sell a specified number of shares or units
of a particular security at a specified price. Options purchased are recorded as
investments; options written (sold) are recorded as liabilities. Upon closing of
an option, other than by exercise, which results in a cash settlement, the
difference between the premium (original option value) and the settlement
proceeds is realized as a gain or loss. When securities are acquired or
delivered upon exercise of an option,
94 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS (CONTINUED)
the acquisition cost or sale proceeds are adjusted by the amount of the premium.
When an option is closed, the difference between the premium and the cost to
close the position is realized as a gain or loss. When an option expires, the
premium is realized as a gain for options written or as a loss for options
purchased. The risks include the possibility there may be an illiquid options
market or the inability of the counterparties to fulfill their obligations under
the contract. Writing options involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statements of Assets and
Liabilities.
G. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
Foreign securities held by the funds may be subject to foreign taxation on
dividend income received. Foreign taxes, if any, are recorded based on the tax
regulations and rates that exist in the foreign markets in which the Funds
invest.
H. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recognized as soon as the funds are
notified of the ex-dividend date. Distributions to shareholders are recorded on
the ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. These differences may be permanent or temporary. Permanent
differences are reclassified among capital accounts to reflect their tax
character. These reclassifications have no impact on net assets or the results
of operations. Temporary differences are not reclassified, as they may reverse
in subsequent periods.
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 of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
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. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
Semiannual Report | 95
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Inflation-indexed bonds provide an inflation hedge through periodic increases in
the security's interest accruals and principal redemption value, by amounts
corresponding to the current rate of inflation. Any such adjustments, including
adjustments to principal redemption value, are recorded as interest income.
I. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
J. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
K. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and directors are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
96 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2007, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
-------------------------------------------------------------------
FRANKLIN FRANKLIN CONVERTIBLE
BALANCED FUND SECURITIES FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS A SHARES:
Six months ended April 30, 2007
Shares sold .................... 561,446 $ 6,138,799 7,097,082 $ 119,705,860
Shares issued in reinvestment of
distributions ................. 4,724 51,159 2,960,428 48,611,068
Shares redeemed ................ (73,160) (802,625) (4,814,613) (81,203,087)
-------------------------------------------------------------------
Net increase (decrease) ......... 493,010 $ 5,387,333 5,242,897 $ 87,113,841
===================================================================
Year ended October 31, 2006a
Shares sold .................... 1,621,499 $ 16,242,687 14,665,760 $ 243,063,926
Shares issued in reinvestment of
distributions ................. 528 5,423 2,042,486 33,203,460
Shares redeemed ................ (875) (8,945) (8,440,441) (139,903,500)
-------------------------------------------------------------------
Net increase (decrease) ......... 1,621,152 $ 16,239,165 8,267,805 $ 136,363,886
===================================================================
CLASS C SHARES:
Six months ended April 30, 2007
Shares sold .................... 91,416 $ 998,734 2,064,103 $ 34,332,438
Shares issued in reinvestment of
distributions ................. 695 7,505 962,222 15,672,752
Shares redeemed ................ (20,036) (216,139) (1,296,127) (21,620,174)
-------------------------------------------------------------------
Net increase (decrease) ......... 72,075 $ 790,100 1,730,198 $ 28,385,016
===================================================================
Year ended October 31, 2006a
Shares sold .................... 22,741 $ 232,346 4,412,676 $ 72,580,647
Shares issued in reinvestment of
distributions ................. 97 1,001 676,434 10,904,810
Shares redeemed ................ 2 (21) (2,650,782) (43,579,592)
-------------------------------------------------------------------
Net increase (decrease) ......... 22,836 $ 233,326 2,438,328 $ 39,905,865
===================================================================
CLASS R SHARES:
Six months ended April 30, 2007
Shares sold .................... 339 $ 3,701
Shares issued in reinvestment of
distributions ................. 2 18
----------------------------
Net increase (decrease) ......... 341 $ 3,719
============================
Year ended October 31, 2006a
Shares sold .................... 1,000 $ 10,000
----------------------------
Net increase (decrease) ......... 1,000 $ 10,000
============================
Semiannual Report | 97
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
--------------------------------
FRANKLIN
BALANCED FUND
--------------------------------
SHARES AMOUNT
--------------------------------
ADVISOR CLASS SHARES:
Six months ended April 30, 2007
Shares sold ................................. 51,152 $ 556,963
Shares issued in reinvestment of
distributions .............................. 577 6,256
Shares redeemed ............................. (3,967) (43,453)
--------------------------------
Net increase (decrease) ...................... 47,762 $ 519,766
================================
Year ended October 31, 2006 a
Shares sold ................................. 22,316 $ 226,824
Shares issued in reinvestment of
distributions .............................. 104 1,073
Shares redeemed ............................. 5 (57)
--------------------------------
Net increase (decrease) ...................... 22,415 $ 227,840
================================
a The Franklin Balanced Fund, for the period July 3, 2006 (commencement of
operations) to October 31, 2006.
-----------------------------------------------------------------------
FRANKLIN EQUITY FRANKLIN LIMITED MATURITY U.S.
INCOME FUND GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
CLASS A SHARES:
Six months ended April 30, 2007
Shares sold ................................. 5,125,726 $ 114,052,980 1,553,591 $ 15,410,059
Shares issued in reinvestment of
distributions .............................. 2,314,936 50,800,952 316,313 3,136,643
Shares redeemed ............................. (3,699,639) (82,237,934) (4,357,864) (43,214,156)
----------------------------------------------------------------------
Net increase (decrease) ...................... 3,741,023 $ 82,615,998 (2,487,960) $ (24,667,454)
======================================================================
Year ended October 31, 2006
Shares sold ................................. 9,072,798 $ 191,974,488 3,081,060 $ 30,372,148
Shares issued in reinvestment of
distributions .............................. 1,317,616 27,473,973 702,081 6,921,730
Shares redeemed ............................. (9,787,453) (206,284,135) (9,507,198) (93,695,256)
----------------------------------------------------------------------
Net increase (decrease) ...................... 602,961 $ 13,164,326 (5,724,057) $ (56,401,378)
======================================================================
CLASS B SHARES:
Six months ended April 30, 2007
Shares sold ................................. 52,711 $ 1,165,992
Shares issued in reinvestment of
distributions .............................. 145,926 3,185,694
Shares redeemed ............................. (241,422) (5,350,231)
--------------------------------
Net increase (decrease) ...................... (42,785) $ (998,545)
================================
Year ended October 31, 2006
Shares sold ................................. 114,749 $ 2,409,028
Shares issued in reinvestment of
distributions .............................. 90,620 1,877,082
Shares redeemed ............................. (594,565) (12,481,941)
--------------------------------
Net increase (decrease) ...................... (389,196) $ (8,195,831)
================================
98 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-------------------------------------------------------------------
FRANKLIN EQUITY FRANKLIN LIMITED MATURITY U.S.
INCOME FUND GOVERNMENT SECURITIES FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS C SHARES:
Six months ended April 30, 2007
Shares sold .................... 519,384 $ 11,441,400
Shares issued in reinvestment of
distributions ................. 501,422 10,951,657
Shares redeemed ................ (793,101) (17,547,271)
-----------------------------
Net increase (decrease) ......... 227,705 $ 4,845,786
=============================
Year ended October 31, 2006
Shares sold .................... 943,781 $ 19,838,896
Shares issued in reinvestment of
distributions ................. 296,892 6,153,300
Shares redeemed ................ (2,172,609) (45,712,302)
-----------------------------
Net increase (decrease) ......... (931,936) $(19,720,106)
=============================
CLASS R SHARES:
Six months ended April 30, 2007
Shares sold .................... 121,278 $ 2,665,663
Shares issued in reinvestment of
distributions ................. 61,434 1,349,044
Shares redeemed ................ (261,700) (5,808,632)
-----------------------------
Net increase (decrease) ......... (78,988) $ (1,793,925)
=============================
Year ended October 31, 2006
Shares sold .................... 192,890 $ 4,074,996
Shares issued in reinvestment of
distributions ................. 43,689 910,648
Shares redeemed ................ (409,295) (8,684,619)
-----------------------------
Net increase (decrease) ......... (172,716) $ (3,698,975)
=============================
ADVISOR CLASS SHARES:
Six months ended April 30, 2007
Shares sold .................... 200,983 $ 1,991,274
Shares issued in reinvestment of
distributions ................. 27,647 273,869
Shares redeemed ................ (265,389) (2,621,534)
---------------------------------
Net increase (decrease) ......... (36,759) $ (356,391)
=================================
Year ended October 31, 2006
Shares sold .................... 281,810 $ 2,777,912
Shares issued in reinvestment of
distributions ................. 53,884 530,718
Shares redeemed ................ (781,285) (7,734,318)
---------------------------------
Net increase (decrease) ......... (445,591) $ (4,425,688)
=================================
Semiannual Report | 99
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------
FRANKLIN REAL RETURN FUND
-----------------------------
SHARES AMOUNT
-----------------------------
CLASS A SHARES:
Six months ended April 30, 2007
Shares sold .................................. 825,795 $ 8,476,852
Shares issued in reinvestment of distributions 21,573 224,863
Shares redeemed .............................. (618,726) (6,353,785)
-----------------------------
Net increase (decrease) ....................... 228,642 $ 2,347,930
=============================
Year ended October 31, 2006
Shares sold .................................. 2,292,276 $ 23,059,764
Shares issued in reinvestment of distributions 88,061 885,141
Shares redeemed .............................. (1,655,854) (16,687,690)
-----------------------------
Net increase (decrease) ....................... 724,483 $ 7,257,215
=============================
ADVISOR CLASS SHARES:
Six months ended April 30, 2007
Shares sold .................................. 53,919 $ 555,072
Shares issued in reinvestment of distributions 710 7,402
Shares redeemed .............................. (160,186) (1,652,841)
-----------------------------
Net increase (decrease) ....................... (105,557) $ (1,090,367)
=============================
Year ended October 31, 2006
Shares sold .................................. 1,831,089 $ 18,422,808
Shares issued in reinvestment of distributions 2,306 23,278
Shares redeemed .............................. (113,742) (1,146,273)
-----------------------------
Net increase (decrease) ....................... 1,719,653 $ 17,299,813
=============================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ---------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ---------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
100 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Franklin Balanced Fund pays an investment management fee to Advisers based
on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.500% Up to and including $250 million
0.475% Over $250 million, up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.425% Over $1 billion, up to and including $2.5 billion
0.400% Over $2.5 billion, up to and including $5 billion
0.375% Over $5 billion, up to and including $10 billion
0.350% Over $10 billion, up to and including $15 billion
0.325% Over $15 billion, up to and including $20 billion
0.300% In excess of $20 billion
The Franklin Convertible Securities Fund and Franklin Equity Income Fund pay an
investment management fee to Advisers based on the month-end net assets of each
of the funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% Over $15 billion, up to and including $17.5 billion
0.380% Over $17.5 billion, up to and including $20 billion
0.360% Over $20 billion, up to and including $35 billion
0.355% Over $35 billion, up to and including $50 billion
0.350% In excess of $50 billion
The Franklin Limited Maturity U.S. Government Securities Fund pays an investment
management fee to Advisers based on the month-end net assets of the fund as
follows:
- --------------------------------------------------------------------------------
ANNUALIZED FRATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% In excess of $250 million
Semiannual Report | 101
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Real Return Fund pays an investment management fee to Advisers
based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.425% Up to and including $500 million
0.325% Over $500 million, up to and including $1 billion
0.280% Over $1 billion, up to and including $1.5 billion
0.235% Over $1.5 billion, up to and including $6.5 billion
0.215% Over $6.5 billion, up to and including $11.5 billion
0.200% Over $11.5 billion, up to and including $16.5 billion
0.190% Over $16.5 billion, up to and including $19 billion
0.180% Over $19 billion, up to and including $21.5 billion
0.170% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Balanced Fund and Franklin Real Return Funds' pay an administrative
fee to FT Services of 0.20% per year of the average daily net assets of each of
the funds.
Under an agreement with Advisers, FT Services provides administrative services
to the Franklin Convertible Securities Fund, Franklin Equity Income Fund and
Franklin Limited Maturity U.S. Government Securities Fund. The fee is paid by
Advisers based on average daily net assets, and is not an additional expense of
the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the funds' Class A reimbursement distribution plans, the
funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate for each class. Under the Class A reimbursement distribution plans,
costs exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
In addition, under the funds' compensation distribution plans, the funds pays
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
102 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
------------------------------------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN LIMITED MATURITY REAL
FRANKLIN CONVERTIBLE EQUITY U.S. GOVERNMENT RETURN
BALANCED FUND SECURITIES FUND INCOME FUND SECURITIES FUND FUND
------------------------------------------------------------------------------
Reimbursement Plans:
Class A ................. -- 0.25% 0.25% 0.10% --
Compensation Plans:
Class A ................. 0.35% -- -- -- 0.25%
Class B ................. -- -- 1.00% -- --
Class C ................. 1.00% 1.00% 1.00% -- --
Class R ................. 0.50% -- 0.50% -- --
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the period:
------------------------------------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN LIMITED MATURITY REAL
FRANKLIN CONVERTIBLE EQUITY U.S. GOVERNMENT RETURN
BALANCED FUND SECURITIES FUND INCOME FUND SECURITIES FUND FUND
------------------------------------------------------------------------------
Sales charges retained
net of commissions
paid to unaffiliated
broker/dealers ......... $2,796 $115,299 $526,896 $14,344 $85,085
Contingent deferred sales
charges retained ........ -- $ 13,938 $ 30,357 $ 7,613 $ 2,178
E. TRANSFER AGENT FEES
For the period ended April 30, 2007, the Funds paid transfer agent fees as noted
in the Statements of Operations of which the following amounts were retained by
Investor Services:
------------------------------------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN FRANKLIN LIMITED MATURITY REAL
FRANKLIN CONVERTIBLE EQUITY U.S. GOVERNMENT RETURN
BALANCED FUND SECURITIES FUND INCOME FUND SECURITIES FUND FUND
------------------------------------------------------------------------------
Transfer agent fees ..... $645 $297,066 $482,036 $137,625 $10,144
Semiannual Report | 103
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. EXPENSE WAIVER AND REIMBURSEMENTS
FT Services and Advisers have agreed in advance to waive a portion of their
respective fees and to assume payment of other expenses through February 29,
2008. Total expenses waived/paid are not subject to reimbursement by the fund
subsequent to the fund's fiscal year end. After February 29, 2008, FT Services
and Advisers may discontinue this waiver at any time upon notice to the fund's
Board of Trustees.
FT Services agreed in advance to voluntarily waive administrative fees for the
Franklin Real Return Fund. Additionally, Advisers agreed in advance to
voluntarily waive a portion of management fees for the fund. Total expenses
waived by Advisers and FT Services are not subject to reimbursement by the fund
subsequent to the fund's fiscal year end. FT Services and Advisers may
discontinue this waiver at any time upon notice to the Fund's Board of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At April 30, 2007, Advisers or its affiliates owned 68.51% and 31.46%,
respectively, of the Franklin Balanced Fund's and the Franklin Real Return
Fund's outstanding shares.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended April 30, 2007, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At October 31, 2006, the capital loss carryforwards were as
follows:
-----------------------------------------------------
FRANKLIN
FRANKLIN LIMITED MATURITY FRANKLIN
BALANCED U.S. GOVERNMENT REAL RETURN
FUND SECURITIES FUND FUND
-----------------------------------------------------
Capital loss carryovers expiring in:
2007 .............................. $ -- $ 21,004 $ --
2008 .............................. -- 2,364,551 --
2011 .............................. -- 1,752,525 --
2012 .............................. -- 3,322,647 --
2013 .............................. -- 3,980,527 --
2014 .............................. 19,398 4,303,979 4,913
----------------------------------------------------
$19,398 $15,745,233 $4,913
====================================================
104 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
At April 30, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
-----------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
-----------------------------------------------------
Investments at cost $ 24,007,322 $ 970,799,860 $ 850,513,808
=====================================================
Unrealized appreciation .................. $ 1,630,200 $ 217,866,518 $ 234,834,288
Unrealized depreciation .................. (78,720) (90,329,732) (9,735,050)
-----------------------------------------------------
Net unrealized appreciation (depreciation) $ 1,551,480 $ 127,536,786 $ 225,099,238
=====================================================
-----------------------------------
FRANKLIN
LIMITED MATURITY FRANKLIN
U.S. GOVERNMENT REAL RETURN
SECURITIES FUND FUND
-----------------------------------
Investments at cost ...................... $ 210,146,741 $ 49,956,619
=================================
Unrealized appreciation .................. $ 1,264,504 $ 2,653,540
Unrealized depreciation .................. (1,423,055) (728,169)
---------------------------------
Net unrealized appreciation (depreciation) $ (158,551) $ 1,925,371
=================================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, paydown losses, bond discounts and premiums and offering costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, paydown losses, bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended April 30, 2007, were as follows:
-----------------------------------------------------
FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
-----------------------------------------------------
Purchases ................................ $ 12,372,058 $ 86,848,245 $ 192,259,228
Sales .................................... $ 7,481,534 $ 33,814,014 $ 152,318,601
-------------------------------------------------------
FRANKLIN
LIMITED MATURITY FRANKLIN
U.S. GOVERNMENT REAL RETURN
SECURITIES FUND FUND
------------------------------------
Purchases ................................ $ 24,846,991 $ 8,317,762
Sales .................................... $ 48,097,304 $ 7,536,372
Semiannual Report | 105
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS (CONTINUED)
Transactions in options written during the period ended April 30, 2007, were as
follows:
- --------------------------------------------------------------------------------
NUMBER OF PREMIUMS
FRANKLIN BALANCED FUND CONTRACTS RECEIVED
- --------------------------------------------------------------------------------
Options outstanding at October 31, 2006 ....... 80 $ 9,160
Options written ............................... 2,263 96,658
Options expired ............................... (1,667) (66,840)
Options exercised ............................. (350) (24,369)
Options closed ................................ -- --
------------------------
Options outstanding at April 30, 2007 ......... 326 $ 14,609
========================
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
8. CREDIT RISK
The Franklin Convertible Securities Fund has 58.57% of its portfolio invested in
below investment grade 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.
9. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
106 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. REGULATORY AND LITIGATION MATTERS (CONTINUED)
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or their shareholders whole, as appropriate.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi annual reporting period in 2007. The Funds'
are currently evaluating the impact, if any, of applying the various provisions
of FIN 48.
In September 2006, issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
Semiannual Report | 107
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007
A Special Meeting of Shareholders of the Trust was held at the Trust's offices,
One Franklin Parkway, San Mateo, California on March 21, 2007 and reconvened on
April 11, 2007, May 11, 2007 and May 18, 2007. The purpose of the meeting was to
elect Trustees of the Trust and to vote on the following Proposals and
Sub-Proposals: to approve an Agreement and Plan of Reorganization that provides
for the reorganization of the Trust into a Delaware statutory trust; to approve
amendments to certain of Franklin Balanced Fund's, Franklin Convertible
Securities Fund's, Franklin Equity Income Fund's, Franklin Limited Maturity U.S.
Government Securities Fund's and Franklin Real Return Fund's (each, a "Fund")
fundamental investment restrictions (including several Sub-Proposals); to
approve the elimination of certain of the Funds' fundamental investment
restrictions; and to approve the reclassification of certain of the Fund's
investment policies as non-fundamental. At the meeting, the following persons
were elected by the shareholders to serve as Independent Trustees of the Trust:
Harris J. Ashton, Robert F. Carlson, Sam I. Ginn, Edith E. Holiday, Frank W. T.
LaHaye, Frank A. Olson, Larry D. Thompson and John I. Wilson. Charles B. Johnson
and Rupert H. Johnson Jr. were elected by the shareholders to serve as
Interested Trustees. Shareholders also approved the Agreement and Plan of
Reorganization that provides for the reorganization of the Trust into a Delaware
statutory trust, amendments to certain of the Funds' fundamental investment
restrictions (including several Sub-Proposals), the elimination of certain of
the Funds' fundamental investment restrictions and the reclassification of
certain of the Fund's investment policies as non-fundamental. No other business
was transacted at the meeting.
The results of the voting at the meeting are as follows:
Proposal 1. The election of Trustees:
- --------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
NAME FOR SHARES SHARES WITHHELD SHARES SHARES
- --------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton .... 292,445,977.426 61.632% 98.113% 5,625,569.981 1.185% 1.887%
Robert F. Carlson ... 292,546,627.073 61.653% 98.146% 5,524,920.334 1.164% 1.854%
Sam L. Ginn ......... 292,595,351.421 61.663% 98.163% 5,476,195.986 1.154% 1.837%
Edith E. Holiday .... 292,672,339.354 61.679% 98.189% 5,399,208.053 1.138% 1.811%
Frank W. T. LaHaye .. 292,242,986.408 61.589% 98.045% 5,828,560.999 1.228% 1.955%
Frank A. Olson ...... 292,468,150.457 61.636% 98.120% 5,603,396.950 1.181% 1.880%
Larry D. Thompson ... 292,820,553.135 61.711% 98.238% 5,250,994.272 1.106% 1.762%
John B. Wilson ...... 292,847,259.971 61.716% 98.247% 5,224,287.436 1.101% 1.753%
Charles B. Johnson .. 292,513,040.499 61.646% 98.135% 5,558,506.908 1.171% 1.865%
Rupert H. Johnson Jr. 292,608,652.731 61.666% 98.167% 5,462,894.676 1.151% 1.833%
108 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 2. To approve an Agreement and Plan of Reorganization that provides for
the reorganization of the Trust into a Delaware statutory trust:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN BALANCED FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For .......................... 1,662,345.646 89.591% 92.539%
Against ...................... 822.468 .045% .046%
Abstain ...................... 10,288.378 .554% .573%
Broker Non-votes ............. 122,908.000 6.624% 6.842%
- --------------------------------------------------------------------------------
TOTAL ........................ 1,796,364.492 96.814% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For .......................... 31,454,096.913 50.653% 75.741%
Against ...................... 691,552.496 1.114% 1.665%
Abstain ...................... 1,488,191.299 2.397% 3.584%
Broker Non-votes ............. 7,894,796.000 12.713% 19.010%
- --------------------------------------------------------------------------------
TOTAL ........................ 41,528,636.708 66.877% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For .......................... 23,320,522.660 50.816% 78.392%
Against ...................... 500,252.761 1.090% 1.681%
Abstain ...................... 1,763,429.816 3.842% 5.928%
Broker Non-votes ............. 4,164,582.000 9.075% 13.999%
- --------------------------------------------------------------------------------
TOTAL ........................ 29,748,787.237 64.823% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For .......................... 12,589,708.700 55.249% 77.139%
Against ...................... 281,890.747 1.238% 1.727%
Abstain ...................... 499,706.409 2.193% 3.062%
Broker Non-votes ............. 2,949,496.000 12.943% 18.072%
- --------------------------------------------------------------------------------
TOTAL ........................ 16,320,801.856 71.623% 100.000%
Semiannual Report | 109
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES
FUND FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 2. To approve an Agreement and Plan of Reorganization that provides for
the reorganization of the Trust into a Delaware statutory trust: (CONTINUED)
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN REAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................... 3,235,214.117 65.012% 78.168%
Against ....................... 22,131.032 .444% .535%
Abstain ....................... 151,272.960 3.040% 3.655%
Broker Non-votes .............. 730,162.000 14.673% 17.642%
- --------------------------------------------------------------------------------
TOTAL ......................... 4,138,780.109 83.169% 100.000%
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals):
(a) To amend the Fund's fundamental investment restriction regarding borrowing:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................... 17,985,234.623 39.190% 70.708%
Against ....................... 653,744.080 1.425% 2.570%
Abstain ....................... 1,230,166.122 2.680% 4.836%
Broker Non-votes .............. 5,566,815.000 12.130% 21.886%
- --------------------------------------------------------------------------------
TOTAL ......................... 25,435,959.825 55.425% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ......................... 12,296,391.730 53.962% 75.921%
Against ..................... 371,530.220 1.631% 2.293%
Abstain ..................... 567,918.231 2.492% 3.507%
Broker Non-votes ............ 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ....................... 16,196,399.181 71.077% 100.000%
110 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(b) To amend the Fund's fundamental investment restriction regarding
underwriting:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 18,102,262.664 39.445% 71.168%
Against .................... 544,080.632 1.186% 2.139%
Abstain .................... 1,222,801.529 2.664% 4.807%
Broker Non-votes ........... 5,566,815.000 12.130% 21.886%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,344,930.680 54.175% 76.220%
Against .................... 320,605.074 1.407% 1.980%
Abstain .................... 570,304.427 2.503% 3.521%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
(c) To amend the Fund's fundamental investment restriction regarding lending:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN BALANCED FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 1,667,372.665 89.862% 92.876%
Against .................... 532.014 .029% .030%
Abstain .................... 454.441 .025% .025%
Broker Non-votes ........... 126,901.000 6.839% 7.069%
- --------------------------------------------------------------------------------
TOTAL ...................... 1,795,260.120 96.755% 100.000%
Semiannual Report | 111
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(c) To amend the Fund's fundamental investment restriction regarding lending:
(CONTINUED)
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 26,647,921.975 42.914% 67.591%
Against .................... 2,185,655.084 3.519% 5.544%
Abstain .................... 1,477,073.141 2.379% 3.746%
Broker Non-votes ........... 9,114,442.000 14.678% 23.119%
- --------------------------------------------------------------------------------
TOTAL ...................... 39,425,092.200 63.490% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 17,991,043.559 39.203% 70.731%
Against .................... 668,359.609 1.456% 2.627%
Abstain .................... 1,209,741.657 2.636% 4.757%
Broker Non-votes ........... 5,566,815.000 12.130% 21.885%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,290,916.345 53.938% 75.887%
Against .................... 357,139.071 1.568% 2.205%
Abstain .................... 587,784.765 2.579% 3.629%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
Total ...................... 16,196,399.181 71.077% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN REAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 3,096,052.987 62.215% 75.220%
Against .................... 57,108.111 1.148% 1.387%
Abstain .................... 100,206.231 2.013% 2.435%
Broker Non-votes ........... 862,655.000 17.336% 20.958%
- --------------------------------------------------------------------------------
TOTAL ...................... 4,116,022.329 82.712% 100.000%
112 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(d) To amend the Fund's fundamental investment restriction regarding investments
in real estate:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN BALANCED FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 1,659,654.564 89.446% 92.446%
Against .................... 3,120.924 .169% .174%
Abstain .................... 5,583.632 .301% .311%
Broker Non-votes ........... 126,901.000 6.839% 7.069%
- --------------------------------------------------------------------------------
TOTAL ...................... 1,795,260.120 96.755% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 27,037,611.226 43.541% 68.580%
Against .................... 1,892,762.245 3.048% 4.801%
Abstain .................... 1,380,276.729 2.223% 3.501%
Broker Non-votes ........... 9,114,442.000 14.678% 23.118%
- --------------------------------------------------------------------------------
TOTAL ...................... 39,425,092.200 63.490% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 18,124,090.889 39.493% 71.254%
Against .................... 538,540.078 1.173% 2.117%
Abstain .................... 1,206,513.858 2.629% 4.744%
Broker Non-votes ........... 5,566,815.000 12.130% 21.885%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,320,762.445 54.069% 76.071%
Against .................... 347,669.434 1.526% 2.147%
Abstain .................... 567,408.302 2.490% 3.503%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
Semiannual Report | 113
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(d) To amend the Fund's fundamental investment restriction regarding investments
in real estate: (CONTINUED)
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN REAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 3,089,920.054 62.092% 75.071%
Against .................... 53,790.180 1.081% 1.306%
Abstain .................... 109,657.095 2.203% 2.665%
Broker Non-votes ........... 862,655.000 17.336% 20.958%
- --------------------------------------------------------------------------------
TOTAL ...................... 4,116,022.329 82.712% 100.000%
(e) To amend the Fund's fundamental investment restriction regarding investments
in commodities:
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 26,654,007.217 42.923% 67.607%
Against .................... 2,227,314.175 3.587% 5.649%
Abstain .................... 1,429,328.808 2.302% 3.626%
Broker Non-votes ........... 9,114,442.000 14.678% 23.118%
- --------------------------------------------------------------------------------
TOTAL ...................... 39,425,092.200 63.490% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 17,904,327.257 39.014% 70.390%
Against .................... 760,898.134 1.658% 2.991%
Abstain .................... 1,203,919.434 2.623% 4.734%
Broker Non-votes ........... 5,566,815.000 12.130% 21.885%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
114 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(e) To amend the Fund's fundamental investment restriction regarding investments
in commodities: (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,242,371.998 53.725% 75.587%
Against .................... 408,039.982 1.791% 2.519%
Abstain .................... 585,428.201 2.569% 3.615%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN REAL RETURN FUND SHARES VOTED SHARES SHARES
- ---------------------------. 3,091,129.350 62.116% 75.100%
Against .................... 61,333.459 1.233% 1.490%
Abstain .................... 100,904.520 2.027% 2.452%
Broker Non-votes ........... 862,655.000 17.336% 20.958%
- --------------------------------------------------------------------------------
TOTAL ...................... 4,116,022.329 82.712% 100.000%
(f) To amend the Fund's fundamental investment restriction regarding issuing
senior securities:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 18,067,845.153 39.370% 71.033%
Against .................... 568,171.661 1.238% 2.233%
Abstain .................... 1,233,128.011 2.687% 4.849%
Broker Non-votes ........... 5,566,815.000 12.130% 21.885%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
Semiannual Report | 115
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(f) To amend the Fund's fundamental investment restriction regarding issuing
senior securities: (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,252,051.486 53.768% 75.647%
Against .................... 398,251.746 1.747% 2.459%
Abstain .................... 585,536.949 2.570% 3.615%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration:
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 27,023,146.537 43.518% 68.543%
Against .................... 1,884,049.614 3.034% 4.779%
Abstain .................... 1,403,454.049 2.260% 3.560%
Broker Non-votes ........... 9,114,442.000 14.678% 23.118%
- --------------------------------------------------------------------------------
TOTAL ...................... 39,425,092.200 63.490% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 18,116,494.038 39.476% 71.224%
Against .................... 549,724.684 1.198% 2.161%
Abstain .................... 1,202,926.103 2.621% 4.729%
Broker Non-votes ........... 5,566,815.000 12.130% 21.886%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
116 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration: (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,294,910.153 53.956% 75.911%
Against .................... 337,531.313 1.481% 2.084%
Abstain .................... 603,398.715 2.648% 3.726%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
(h) To amend the Fund's fundamental investment restriction regarding
diversification of investments:
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN CONVERTIBLE OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 27,225,603.779 43.844% 69.057%
Against .................... 1,756,620.991 2.829% 4.455%
Abstain .................... 1,328,425.430 2.139% 3.370%
Broker Non-votes ........... 9,114,442.000 14.678% 23.118%
- --------------------------------------------------------------------------------
TOTAL ...................... 39,425,092.200 63.490% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 18,295,640.777 39.866% 71.928%
Against .................... 441,150.981 .962% 1.735%
Abstain .................... 1,132,353.067 2.467% 4.451%
Broker Non-votes ........... 5,566,815.000 12.130% 21.886%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
Semiannual Report | 117
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(h) To amend the Fund's fundamental investment restriction regarding
diversification of investments: (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,394,304.704 54.392% 76.525%
Against .................... 295,094.739 1.295% 1.822%
Abstain .................... 546,440.738 2.398% 3.374%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
Total ...................... 16,196,399.181 71.077% 100.000%
Proposal 4. To approve the elimination of certain of the Fund's fundamental
investment restrictions:
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN EQUITY INCOME FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 17,793,519.142 38.772% 69.954%
Against .................... 758,431.875 1.653% 2.982%
Abstain .................... 1,317,193.808 2.870% 5.178%
Broker Non-votes ........... 5,566,815.000 12.130% 21.886%
- --------------------------------------------------------------------------------
TOTAL ...................... 25,435,959.825 55.425% 100.000%
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,268,611.440 53.840% 75.749%
Against .................... 462,270.444 2.029% 2.854%
Abstain .................... 504,958.297 2.216% 3.118%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
118 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN BALANCED FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
FRANKLIN REAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007 AND MAY 18, 2007 (CONTINUED)
Proposal 5. To approve the reclassification of certain of the Fund's investment
policies as non-fundamental:
- --------------------------------------------------------------------------------
FRANKLIN LIMITED MATURITY % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ........................ 12,125,961.582 53.214% 74.868%
Against .................... 531,147.141 2.331% 3.280%
Abstain .................... 578,731.458 2.540% 3.573%
Broker Non-votes ........... 2,960,559.000 12.992% 18.279%
- --------------------------------------------------------------------------------
TOTAL ...................... 16,196,399.181 71.077% 100.000%
Semiannual Report | 119
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds comprising
Franklin Investors Securities Trust other than the recently formed Franklin
Balanced Fund, which did not require an agreement renewal ("Fund(s)"). In
reaching this decision, the Board took into account information furnished
throughout the year at regular Board meetings, as well as information prepared
specifically in connection with the annual renewal review process. Information
furnished and discussed throughout the year included investment performance
reports and related financial information for each Fund, as well as periodic
reports on shareholder services, legal, compliance, pricing, brokerage
commissions and execution and other services provided by the Investment Manager
("Manager") and its affiliates. Information furnished specifically in connection
with the renewal process included a report for each Fund prepared by Lipper,
Inc. ("Lipper"), an independent organization, as well as a Fund profitability
analysis report prepared by management. The Lipper reports compared each Fund's
investment performance and expenses with those of other mutual funds deemed
comparable to the Fund as selected by Lipper. The Fund profitability analysis
report discussed the profitability to Franklin Templeton Investments from its
overall U.S. fund operations, as well as on an individual fund-by-fund basis.
Included with such profitability analysis report was information on a
fund-by-fund basis listing portfolio managers and other accounts they manage, as
well as information on management fees charged by the Manager and its affiliates
including management's explanation of differences where relevant and a
three-year expense analysis with an explanation for any increase in expense
ratios. Additional material accompanying such report was a memorandum prepared
by management describing project initiatives and capital investments relating to
the services provided to the Funds by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale and a
comparative analysis concerning transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin
120 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Templeton fund complex, the adherence to fair value pricing procedures
established by the Board, and the accuracy of net asset value calculations. The
Board also noted the extent of benefits provided Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of funds without a sales charge, the ability
to reinvest Fund dividends into other funds and the right to combine holdings in
other funds to obtain a reduced sales charge. Favorable consideration was given
to management's continuous efforts and expenditures in establishing back-up
systems and recovery procedures to function in the event of a natural disaster,
it being noted by the Board that such systems and procedures had functioned
smoothly during the Florida hurricanes and blackouts experienced in recent
years. Among other factors taken into account by the Board were the Manager's
best execution trading policies, including a favorable report by an independent
portfolio trading analytical firm.
Consideration was also given to the experience of each Fund's portfolio
management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of a portfolio manager's bonus compensation was the
relative investment performance of the funds he or she managed and that a
portion of such bonus was required to be invested in a pre-designated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, the high industry ranking given the
Franklin Templeton website, and the firsthand experience of individual Board
members who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the agreement
renewals. The Lipper reports prepared for each individual Fund showed the
investment performance of its Class A shares in comparison with its selected
performance universe during 2006 and during the previous 10 years ended December
31, 2006, unless otherwise noted. Performance on a total return basis was shown
by Lipper for all Funds with performance on an income return basis being shown
for those Funds having income return as an element of their investment
objective. The following summarizes the performance results for each Fund.
FRANKLIN CONVERTIBLE SECURITIES FUND - The Fund's investment performance was
shown in comparison with a performance universe consisting of all retail and
institutional convertible securities funds as selected by Lipper. Such
comparison showed the Fund's income return during 2006 and on an annualized
basis during each of the previous three-, five- and ten-year periods to be in
the highest quintile of its performance universe. The Lipper report showed that
the Fund's total return during 2006 was in the second-highest quintile of it
performance universe, and in each of the previous three-, five- and ten-year
periods on an annualized basis was in the highest quintile of such universe. The
Board was satisfied with this performance.
Semiannual Report | 121
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
FRANKLIN EQUITY INCOME FUND - The Fund's investment performance was shown in
comparison with a performance universe consisting of all retail and
institutional equity income funds as selected by Lipper. Such comparison showed
the Fund's income return during 2006 to be in the second-highest quintile, and
on an annualized basis during each of the previous three-, five- and ten-year
periods to be in the highest quintile of its performance universe. The Lipper
report showed that the Fund's total return during 2006 was in the second-lowest
quintile of such universe and on an annualized basis during the previous three-,
five- and ten-year periods was in the lowest, second-lowest and middle quintiles
of its performance universe, respectively. The Board found such performance
satisfactory, noting that the Fund had a total return in excess of 16% for 2006
as shown in such Lipper report.
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND - The Fund's
investment performance was shown in comparison to a performance universe
consisting of all retail and institutional short U.S. government funds as
selected by Lipper. The Lipper report showed the Fund's income return during
2006 to be in the second-lowest quintile of its performance universe and during
each of the previous three-, five- and ten-year periods on an annualized basis
to be in the highest or second-highest quintile of its performance universe. The
Lipper report showed the Fund's total return placed it in the second-lowest
quintile of its performance universe during 2006 and on an annualized basis in
the second-lowest quintile, second-highest quintile and middle quintile,
respectively, for the previous three-, five- and ten-year periods. The Board
found such performance acceptable, noting the Fund's conservative investment
policy and that its primary investment objective was to generate income.
FRANKLIN REAL RETURN FUND - The Fund has only been in operation for two full
calendar years and its investment performance was shown in comparison to a
performance universe consisting of all retail and institutional Treasury
inflation-protected securities ("TIPS") funds as selected by Lipper. The Lipper
report showed the Fund's income return during 2005 and 2006 to be in the middle
quintile of such performance universe, and its total return for such years to be
in the highest quintile of such universe. The Board was satisfied with such
performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as constituting its appropriate Lipper
expense group. Prior to making such comparison, the Board relied upon a survey
showing that the scope of services covered under the Fund's investment
management agreement was similar to those provided by fund managers to other
mutual fund groups. In reviewing comparative costs, emphasis was given to each
Fund's contractual investment management fee in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to the Fund, as well as
the actual total expenses of the Fund in comparison with those of its expense
group. The Lipper contractual investment management fee analysis includes within
such fee any separate administrative fees, and Lipper total expenses, for
comparative consistency, are shown by Lipper for fund Class A shares. The
results of such expense comparisons showed that the contractual investment
management fee rate and total expenses for
122 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
each of Franklin Convertible Securities Fund and Franklin Equity Income Fund
were in the least expensive quintile of their respective Lipper expense groups.
The contractual investment management fee rate for Franklin Limited Maturity
U.S. Government Securities Fund was in the second most expensive quintile, but
its total expenses were at the median of its Lipper expense group, while the
contractual investment management fee rate for Franklin Real Return Fund was in
the second most expensive quintile of its Lipper expense group and its total
expenses were above the median of its Lipper expense group. The Board was
satisfied with the management fees and total expenses of each of these Funds in
comparison to their Lipper expense groups as shown in the Lipper reports, noting
the small size of Franklin Real Return Fund and the fact its expenses were
subsidized through management fee waivers and reimbursements.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently subjective and various allocation methodologies may
each be reasonable while producing different results. In this respect, the Board
noted that, while being continuously refined and reflecting changes in the
Manager's own cost accounting, the cost allocation methodology was consistent
with that followed in profitability report presentations for the Funds made in
prior years and that the Funds' independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Funds' Board solely for
their purposes and use in reference to the profitability analysis. In reviewing
and discussing such analysis, management discussed with the Board its belief
that costs incurred in establishing the infrastructure necessary for the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, including its interest in a joint
venture entity that financed up-front commissions paid to brokers/dealers who
sold fund Class B shares prior to February 2005, when the offering of such
shares was discontinued, as well as potential benefits resulting from allocation
of fund brokerage and the use of "soft" commission dollars to pay for research.
Based upon its consideration of all these factors, the Board determined that the
level of profits realized by the Manager and its affiliates from providing
services to each Fund was not excessive in view of the nature, quality and
extent of services provided.
Semiannual Report | 123
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The management fee structure that includes
administrative expenses for Franklin Limited Maturity U.S. Government Securities
Fund provides an initial fee of 0.625% on the first $100 million of assets;
0.50% on the next $150 million of assets; and 0.45% on assets in excess of $250
million, which exceeded that Fund's size at year-end. In view of such structures
and the favorable fee and expense comparisons of the Fund within its Lipper
expense group, the Board believed that to the extent economies of scale may be
realized by the Manager of the Fund and its affiliates, that there was a sharing
of benefits with the Fund and its shareholders. The management fee structure,
which includes administrative expenses for each of Franklin Convertible
Securities Fund and Franklin Equity Income Fund, provides an initial fee of
0.625% on the first $100 million of assets; 0.50% on the next $150 million of
assets; and 0.45% on assets in excess of $250 million, with additional
breakpoints for assets in excess of $10 billion having been added in April 2006.
In considering such agreements, the Board took into account management's
position that the fee structure for these Funds reaches a relatively low rate
quickly as these Funds grow and that such low rate, in effect, reflects
anticipated economies of scale as assets increase as shown in the favorable
management fee and expense comparisons for these Funds within their Lipper
expense groups. The Board believed that to the extent economies of scale may be
realized by the Manager and its affiliates, the schedule of fees under the
investment management agreement for Franklin Convertible Securities Fund and
Franklin Equity Income Fund provides a sharing of benefits with each of these
Funds and their shareholders. The Board did not believe the small size of the
recently formed Franklin Real Return Fund, whose expenses were subsidized by
management, afforded any economies of scale.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
124 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Semiannual Report | 125
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust 9
1. The fund is open only to existing shareholders and select retirement
plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07
Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN INVESTORS
SECURITIES TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FIST1 S2007 06/07
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
APRIL 30, 2007
- --------------------------------------------------------------------------------
Franklin Adjustable
U.S. Government Securities Fund
Franklin Floating Rate
Daily Access Fund
Franklin Low Duration
Total Return Fund
Franklin Total Return Fund
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FRANKLIN FASTER VIA EMAIL?
INVESTORS SECURITIES TRUST
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups
operates autonomously, relying on its own
research and staying true to the unique
investment disciplines that underlie its
success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and
value-style U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series
is dedicated to a unique style of value
investing, searching aggressively for
opportunity among what it believes are
undervalued stocks, as well as arbitrage
situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work
independently and adhere to different
investment approaches, Franklin, Templeton and
Mutual Series funds typically have distinct
portfolios. That's why our funds can be used to
build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as
well as the reliable, accurate and personal
service that has helped us become one of the
most trusted names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
SHAREHOLDER LETTER ....................................................... 1
SEMIANNUAL REPORT
Economic and Market Overview ............................................. 3
Franklin Adjustable U.S. Government Securities Fund ...................... 4
Franklin Floating Rate Daily Access Fund ................................. 11
Franklin Low Duration Total Return Fund .................................. 21
Franklin Total Return Fund ............................................... 28
Financial Highlights and Statements of Investments ....................... 38
Financial Statements ..................................................... 92
Notes to Financial Statements ............................................ 97
Meeting of Shareholders .................................................. 117
Shareholder Information .................................................. 125
- --------------------------------------------------------------------------------
Semiannual Report
Economic and Market Overview
For the six months ended April 30, 2007, a slowing housing market and moderating
profit growth dampened economic expansion. However, a tight labor market and
higher personal incomes helped support the consumer. Spending for durable goods,
as well as state and local government spending, contributed to growth in the
first quarter of 2007.
Oil prices were volatile and ended the period higher than where they started.
Headline, or overall, inflation and core inflation, which excludes food and
energy costs, experienced some upward pressure. April's headline Consumer Price
Index (CPI) reported a 12-month rise of 2.6%, while core CPI increased 2.3%. 1
In its first meetings of 2007, the Federal Reserve Board (Fed) left short-term
rates at 5.25%. However, the Fed changed its stance in its March 21 statement
that communicates policy and appeared to drop its long-held tightening bias. The
Fed indicated that core inflation was somewhat elevated and remained a key
concern. Nevertheless, the markets continued to anticipate the Fed would lower
the federal funds target rate.
The 10-year Treasury note yield rose slightly from 4.61% at the beginning of the
period to 4.63% on April 30, 2007. Typically, the intermediate portion of the
yield curve generally reflects market expectations of the future direction of
inflation. A relatively moderate inflation environment contributed to little
overall change in interest rates.
1. Source: Bureau of Labor Statistics.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS APRIL 30, 2007.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
Semiannual Report | 3
Franklin Adjustable
U.S. Government Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Adjustable U.S. Government
Securities Fund seeks to provide a high level of current income while providing
lower volatility of principal than a fund that invests in fixed-rate securities
by investing at least 80% of its net assets in adjustable-rate U.S. government
mortgage securities, which are issued or guaranteed by the U.S. government, its
agencies or instrumentalities. 1 Some of the Fund's investments may include
securities issued by government-sponsored entities, such as Fannie Mae and
Freddie Mac. 2
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Adjustable U.S. Government Securities Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
FNMA .................................................................. 60.5%
FHLMC ................................................................. 21.2%
GNMA .................................................................. 10.4%
Short-Term Investments & Other Net Assets ............................. 7.9%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Adjustable U.S. Government Securities
Fund's semiannual report for the period ended April 30, 2007.
PERFORMANCE OVERVIEW
Franklin Adjustable U.S. Government Securities Fund - Class A posted a +2.61%
cumulative total return for the six months under review. The
1. Securities owned by the Fund, but not shares of the Fund, are guaranteed
by the U.S. government, its agencies or instrumentalities as to timely
payment of principal and interest.
2. Although U.S. government-sponsored entities may be chartered or sponsored
by acts of Congress, their securities are neither issued nor guaranteed by
the U.S. Treasury. Please see the Fund's prospectus for a detailed
discussion regarding various levels of credit support for government
agency or instrumentality securities. The Fund's yield and share price are
not guaranteed and will vary with market conditions.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 40.
4 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin Adjustable U.S. Government Securities Fund
11/1/06-4/30/07
- --------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
November 3.5876 cents 3.3051 cents
- --------------------------------------------------------------------------------
December 3.4020 cents 3.0833 cents
- --------------------------------------------------------------------------------
January 3.8946 cents 3.5790 cents
- --------------------------------------------------------------------------------
February 3.7483 cents 3.4762 cents
- --------------------------------------------------------------------------------
March 3.5429 cents 3.2229 cents
- --------------------------------------------------------------------------------
April 3.8043 cents 3.5079 cents
- --------------------------------------------------------------------------------
TOTAL 21.9797 CENTS 20.1744 CENTS
- --------------------------------------------------------------------------------
* 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.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
Fund - Class A outperformed its benchmark, the Lehman Brothers U.S. Government
Index: 1-2 Year Component, which posted a +2.30% total return for the same
period. 3 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 7.
INVESTMENT STRATEGY
We employ a conservative investment strategy as we strive to produce solid
performance in a variety of interest rate climates. We tend to invest in
seasoned adjustable-rate mortgage (ARM) securities, which tend to prepay at
slower rates than newer-production ARMs that have not been through previous
refinancing cycles. We choose securities using a value-oriented approach,
emphasizing the bonds' economic fundamentals in relation to comparable
securities as well as their historical prepayment performance.
MANAGER'S DISCUSSION
During the six months under review, we continued to invest primarily in agency
ARM securities. We decreased our positions in Freddie Mac and Ginnie Mae
mortgage-backed securities (MBS), and increased our positions in
3. Source: Standard & Poor's Micropal. The Lehman Brothers U.S. Government
Index: 1-2 Year Component includes fixed rate securities issued by the
U.S. government with remaining maturity of one year up to, but not
including, two years. Securities must have at least $250 million par
amount outstanding and be rated investment grade. All issues included must
be publicly issued, dollar denominated and nonconvertible. The index is
unmanaged and includes reinvested interest. One cannot invest directly in
an index, nor is an index representative of the Fund's portfolio.
Semiannual Report | 5
Fannie Mae MBS. However, this did not reflect any significant shift in our
outlook for the three major MBS issuers. Despite a deteriorating housing market,
we believe these issuers should be able to uphold their guarantees with regard
to payment of principal and interest.
We thought hybrid ARMs continued to be attractive in the investment-grade bond
universe. Consistent with our strategy, we focused on bonds that appeared
undervalued and closely matched the characteristics of the Fund's benchmark.
Normally, the Fund invests in ARMs that currently or soon will have higher
coupons. These bonds more closely match our benchmark's interest rate exposure.
Using a value-oriented approach, we assessed each bond's risk and return
fundamentals relative to comparable securities.
Thank you for your continued participation in Franklin Adjustable U.S.
Government Securities Fund. We look forward to serving your future investment
needs.
[PHOTO OMITTED] /s/T. Anthony Coffey
T. Anthony Coffey, CFA
[PHOTO OMITTED] /s/Paul Varunok
Paul Varunok
Portfolio Management Team
Franklin Adjustable U.S. Government Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
6 | Semiannual Report
Performance Summary as of 4/30/07
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FISAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $8.89 $8.88
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.219797
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCSCX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) $0.00 $8.88 $8.88
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.201744
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE;
CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.61% +4.96% +13.51% +48.15%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +0.35% +2.65% +2.09% +3.77%
- -----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +2.21% +2.13% +3.80%
- -----------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.93%
- -----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 4.11%
- -----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.91%
- -----------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 3-YEAR INCEPTION (7/1/03)
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +2.29% +4.43% +8.09% +8.42%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.29% +3.43% +2.63% +2.13%
- -----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.21% +2.38% +2.07%
- -----------------------------------------------------------------------------------------------------------
Distribution Rate 4 4.65%
- -----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 3.82%
- -----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.30%
- -----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 7
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS, UNSCHEDULED MORTGAGE PREPAYMENTS AND OTHER RISK FACTORS
WILL AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND PRICES GENERALLY MOVE IN THE
OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND
ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE
FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
4. Distribution rate is based on an annualization of the sum of the
respective class's past 30 days' daily distributions and the maximum
offering price (NAV for Class C) per share on 4/30/07.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
8 | Semiannual Report
Your Fund's Expenses
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 9
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,026.10 $4.62
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.23 $4.61
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.90 $6.67
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.20 $6.66
- ----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.92% and C: 1.33%), multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
10 | Semiannual Report
Franklin Floating Rate Daily Access Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Floating Rate Daily Access Fund
seeks to provide a high level of current income and, secondarily, preservation
of capital by investing at least 80% of its net assets in income-producing
floating interest rate corporate loans and corporate debt securities.
- --------------------------------------------------------------------------------
WHAT ARE SYNDICATED
BANK LOANS?
- --------------------------------------------------------------------------------
Syndicated bank loans are typically floating rate loans to corporate borrowers
made by a group, or syndicate, of banks and other lenders. A group of lenders
provides capital to companies for varied purposes, such as merger and
acquisition activity, leveraged buyouts or refinancings. Borrowing rates are
generally pegged to an index, such as LIBOR, the London InterBank Offered Rate.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Franklin Floating Rate Daily Access Fund
Based on Total Net Assets as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Senior Floating Rate Interests .................................. 94.5%
Short-Term Investments & Other Net Assets ....................... 5.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This semiannual report for Franklin Floating Rate Daily Access Fund covers the
period ended April 30, 2007.
PERFORMANCE OVERVIEW
Franklin Floating Rate Daily Access Fund - Class A posted a +3.53% cumulative
total return for the six months under review. The Fund underperformed its
benchmark, the Credit Suisse (CS) Leveraged Loan Index, which posted a +3.99%
total return for the same period. 1 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 16.
SYNDICATED BANK LOAN MARKET OVERVIEW
During the six-month period under review, the Federal Reserve Board kept
short-term interest rates steady, with the federal funds target rate remaining
at
1. Source: Credit Suisse (CS). The CS Leveraged Loan Index is designed to
mirror the investable universe of the $US-denominated leveraged loan
market. The index is unmanaged and includes reinvested interest. One
cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 50.
Semiannual Report | 11
5.25%. Similarly, the three-month LIBOR remained relatively flat at 5.36%. The
overall yield curve also remained relatively unchanged, with yield on the
10-year Treasury increasing marginally from 4.61% at the beginning of the period
to 4.63% on April 30, 2007.
The bank loan market continued to experience strong demand and record new-issue
volume throughout the period. Record merger and acquisition activity was the
primary driving factor of the new-issue volume, which was also helped by a large
number of sizable transactions. Many of these transactions were leveraged
buyouts (LBOs), where a company is taken private by equity sponsors, and this
LBO activity also reached record levels. Private equity sponsors remained
active, largely as a result of significant liquidity and cash on their balance
sheets, leading to the larger deals.
Many transactions included dividend recapitalizations or refinancings as
borrowers took advantage of strong demand. Issuers often took advantage of
favorable capital market conditions to fund dividend payments to their private
equity sponsors or public shareholders by issuing additional debt within their
capital structure. Many borrowers also repriced their loans, lowering the spread
over LIBOR and reducing their overall interest expense, adversely impacting the
income available to investors.
An interesting occurrence in the first part of 2007 was the growing prevalence
of deals that had fewer covenants in place. Such covenants (certain financial
ratios and restrictions that a company agrees to follow) exist to protect
investors, but with a borrower-friendly market over the past six months, deals
with fewer covenants became more common. It is unclear whether this trend will
become more permanent as the loan market continues to evolve or was a temporary
fad in the currently strong market.
For the period, much of the demand came from a proliferation of new
collateralized loan obligation (CLO) investment vehicles. However, the loan
market also experienced increasing demand from new and existing crossover
accounts, including hedge funds and traditional high yield bond investors, who
found the loan asset class to be attractive relative to high yield and other
fixed income asset classes. These crossover investors became a more meaningful
investor base in the first part of 2007.
In early 2007, the bank loan market reached new highs in terms of valuations,
and loan spreads tightened to historical lows despite weaker loan structures.
More recently, spread tightening abated, and valuations fell from their highs.
The strong demand and favorable outlook for the loan asset class came from an
attractive risk/reward profile versus other fixed income asset classes, as well
12 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin Floating Rate Daily Access Fund
11/1/06-4/30/07
- ---------------------------------------------------------------------------------------------
DIVIDEND PER SHARE
---------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
- ---------------------------------------------------------------------------------------------
November 5.3551 cents 4.7308 cents 5.0336 cents 5.5664 cents
- ---------------------------------------------------------------------------------------------
December 5.2026 cents 4.6952 cents 4.8642 cents 5.4065 cents
- ---------------------------------------------------------------------------------------------
January 6.0018 cents 5.3144 cents 5.6482 cents 6.2333 cents
- ---------------------------------------------------------------------------------------------
February 4.9270 cents 4.3480 cents 4.6298 cents 5.1234 cents
- ---------------------------------------------------------------------------------------------
March 5.1700 cents 4.5785 cents 4.8153 cents 5.3860 cents
- ---------------------------------------------------------------------------------------------
April 5.4036 cents 4.7677 cents 5.0760 cents 5.6339 cents
- ---------------------------------------------------------------------------------------------
TOTAL 32.0601 CENTS 28.4346 CENTS 30.0671 CENTS 33.3495 CENTS
- ---------------------------------------------------------------------------------------------
* 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.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
as its defensive characteristics if credit fundamentals deteriorate. Loans have
historically experienced lower volatility compared to many other fixed income
investments, largely due to their seniority in the capital structure, their
security with the borrower's assets pledged as collateral, and their floating
rate nature, which typically results in less interest rate sensitivity.
Lastly, loan market default rates declined to near historical lows, stemming in
large part from continued economic growth and favorable credit fundamentals, as
most companies continued to meet or beat their earnings guidance. Many companies
continued to maintain strong balance sheets with significant liquidity and
relatively few impending maturities.
INVESTMENT STRATEGY
We use credit analysis to select corporate loan and corporate debt securities
that meet our criteria. The Fund invests in a corporate loan or corporate debt
security only if the manager judges that the borrower can meet the scheduled
payments on the obligations. To help manage the credit risk associated with
investing in below-investment-grade securities, we diversify the Fund by
investing in hundreds of loans of companies that we have identified as having
attractive risk/reward profiles, favorable capital structures, strong asset
coverage and dominant market shares. This diversification potentially reduces
credit risk by spreading assets across many different industries. The Fund
offers investors the opportunity to buy and sell shares daily. To be able to
offer daily liquidity, the Fund is managed to hold up to 20% of its assets in
cash, depending on the market.
Semiannual Report | 13
TOP 10 HOLDINGS
Franklin Floating Rate Daily Access Fund
4/30/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
HCA Inc. 2.0%
HOSPITAL & NURSING MANAGEMENT
- --------------------------------------------------------------------------------
NRG Energy Inc. 1.4%
ELECTRIC UTILITIES
- --------------------------------------------------------------------------------
Oshkosh Truck Corp. 1.3%
TRUCKS, CONSTRUCTION & FARM MACHINERY
- --------------------------------------------------------------------------------
CSC Holdings Inc. (Cablevision) 1.3%
CABLE & SATELLITE TELEVISION
- --------------------------------------------------------------------------------
Hexion Specialty Chemicals Inc. 1.3%
CHEMICALS: SPECIALTY
- --------------------------------------------------------------------------------
IDEARC Inc. (Verizon Corp.) 1.3%
ADVERTISING & MARKETING SERVICES
- --------------------------------------------------------------------------------
Fresenius Medical Care Holdings Inc. 1.2%
MEDICAL & NURSING SERVICES
- --------------------------------------------------------------------------------
Regal Cinemas Corp. 1.1%
MOVIES & ENTERTAINMENT
- --------------------------------------------------------------------------------
Sungard Data Systems Inc. 1.1%
PACKAGED SOFTWARE
- --------------------------------------------------------------------------------
Affinia Group 1.1%
AUTOMOTIVE AFTERMARKET
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
The Fund remained focused on higher credit quality bank loans relative to our
benchmark, which detracted from performance during the period. These loans
offered less credit spread to the Fund, resulting in overall less yield and
return versus the benchmark. However, these loans typically would be more
defensive should the credit cycle turn and may result in less volatility for the
Fund's share price, as measured by net asset value.
We continued to remain selective in our process of evaluating available credits,
maintaining our focus on investing in higher credit quality loans that have
attractive risk/return profiles.
During the period, we invested in IDEARC, the second-largest yellow pages
directories publisher in the U.S., which was spun off from Verizon. IDEARC is
well diversified in terms of its revenue stream with directories in 316
incumbent markets and 42 independent markets, in 35 states across the country.
The company is the exclusive official publisher of Verizon print directories in
its incumbent markets. We invested significantly in the company due to its
stable free cash flow generation, strong revenue visibility, low capital
requirements and diverse customer base.
The Fund also invested in Oshkosh Truck, a leading supplier of vehicles for a
variety of necessary services. The company supplies vehicles for entities such
as fire departments and refuse collectors, and the company is also the sole
supplier for most of the military platforms it sells. We invested in the loan
that financed the acquisition of JLG Industries, as we liked the acquisition,
which broadened the company's product offerings into the non-residential
construction segment. In addition, the two companies are market leaders in their
respective sectors and have increased profitability in each of the past four
years.
The Fund also participated in the financing of Freeport-McMoRan Copper and
Gold's acquisition of Phelps Dodge. We found the loan attractive because
Freeport is one of the world's largest producers of copper, gold and molybdenum,
and the outlook for mining was favorable. Freeport operates the Grasberg mine,
located in Papua, Indonesia, which is the world's largest copper and gold mine
in terms of reserves. The acquisition of Phelps Dodge diversified Freeport's
revenues and also added mines (in operation or under development) in North and
South America and Africa. We found the loan attractive due to the significant
value of the copper, gold and molybdenum reserves.
With regard to industries, the Fund increased its exposure in several hospital
providers within the health care industry. We favored investments in hospital
operators primarily due to a strong demographic trend that involves an aging
population, increasing hospital expenditures and relatively stable government
14 | Semiannual Report
reimbursement. The most notable transaction within the hospital industry was our
involvement in the $33 billion LBO of HCA, the largest for-profit hospital
provider in the U.S., with additional operations in the U.K. and Switzerland. We
found the loan attractive due to the company's cash flow generation,
well-diversified base of hospitals and experienced management team. We also
invested significantly in Health Management Associates, a leading rural or
non-urban market hospital provider, since the company is the sole provider in
half of its markets and the preferred provider in its remaining markets, and has
stable cash flows.
Thank you for your continued participation in Franklin Floating Rate Daily
Access Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/Richard S. Hsu
Richard S. Hsu, CFA
[PHOTO OMITTED] /s/Madeline Lam
Madeline Lam
Portfolio Management Team
Franklin Floating Rate Daily Access Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 15
Performance Summary as of 4/30/07
FRANKLIN FLOATING RATE DAILY ACCESS FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FAFRX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.03 $10.09 $10.06
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.320601
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBFRX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $10.08 $10.06
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.284346
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCFRX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.02 $10.09 $10.07
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.300671
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FDAAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.01 $10.09 $10.08
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.333495
- --------------------------------------------------------------------------------
16 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY;
ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- -------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/01)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.53% +6.19% +24.77% +32.69%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +1.22% +3.83% +4.06% +4.43%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +3.75% +4.07% +4.40%
- -------------------------------------------------------------------------------------------------------
Distribution Rate 4 6.18%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 6.10%
- -------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.93%
- -------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/01)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.06% +5.41% +20.41% +27.26%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 -0.94% +1.43% +3.44% +3.96%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +1.36% +3.46% +3.94%
- -------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.58%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.48%
- -------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.66%
- -------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/01)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.22% +5.76% +22.26% +29.66%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +2.22% +4.76% +4.10% +4.43%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +4.69% +4.12% +4.40%
- -------------------------------------------------------------------------------------------------------
Distribution Rate 4 5.94%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 5.84%
- -------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 1.32%
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (5/1/01)
- -------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +3.45% +6.34% +26.21% +34.67%
- -------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +3.45% +6.34% +4.77% +5.09%
- -------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 3 +6.26% +4.78% +5.06%
- -------------------------------------------------------------------------------------------------------
Distribution Rate 4 6.59%
- -------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 5 6.49%
- -------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 6 0.68%
- -------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Semiannual Report | 17
Performance Summary (CONTINUED)
ENDNOTES
INVESTORS SHOULD BE AWARE THAT THE FUND'S SHARE PRICE AND YIELD WILL FLUCTUATE
WITH MARKET CONDITIONS. THE FUND SHOULD NOT BE CONSIDERED AN ALTERNATIVE TO
MONEY MARKET FUNDS OR CDS. THE FLOATING-RATE LOANS AND DEBT SECURITIES IN WHICH
THE FUND INVESTS TEND TO BE RATED BELOW INVESTMENT GRADE. INVESTING IN
HIGHER-YIELDING, LOWER-RATED FLOATING-RATE LOANS AND DEBT SECURITIES INVOLVES
GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT
MAY BE HEIGHTENED IN A SLOWING ECONOMY. IN ADDITION, THE FUND IS A
NONDIVERSIFIED FUND BECAUSE IT MAY INVEST A GREATER PORTION OF ITS ASSETS IN THE
LOANS OF ONE BORROWER THAN A DIVERSIFIED FUND. THE FUND'S PROSPECTUS ALSO
INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class
A shares.
CLASS C: These shares have higher annual fees and expenses than Class
A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
3. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
4. Distribution rate is based on an annualization of the sum of the
respective class's past 30 days' daily distributions and the maximum
offering price (NAV for Classes B, C and Advisor) per share on 4/30/07.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
18 | Semiannual Report
Your Fund's Expenses
FRANKLIN FLOATING RATE DAILY ACCESS FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Semiannual Report | 19
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,035.30 $4.54
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.33 $4.51
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.60 $8.21
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.71 $8.15
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.20 $6.55
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.51
- ---------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ---------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,034.50 $3.28
- ---------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.26
- ---------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.90%; B: 1.63%; C: 1.30%; and Advisor: 0.65%), multiplied by the average
account value over the period, multiplied by 181/365 to reflect the
one-half year period.
20 | Semiannual Report
Franklin Low Duration Total Return Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Low Duration Total Return Fund
seeks as high a level of current income as is consistent with prudent investing,
while seeking preservation of capital. The Fund invests primarily in
investment-grade debt securities, including government and corporate debt
securities and mortgage- and asset-backed securities, targeting an estimated
average portfolio duration of three years or less.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Low Duration Total Return Fund's
semi-annual report for the period ended April 30, 2007.
PERFORMANCE OVERVIEW
Franklin Low Duration Total Return Fund - Class A posted a +2.74% cumulative
total return for the six months under review. The Fund outperformed its
benchmark, the Lehman Brothers (LB) U.S. Government Index: 1-3 Year Component,
which posted a +2.34% total return for the same period. 1 You can find more of
the Fund's performance data in the Performance Summary beginning on page 24.
- --------------------------------------------------------------------------------
DURATION IS A MEASURE OF A BOND'S PRICE SENSITIVITY TO INTEREST RATE CHANGES. IN
GENERAL, A PORTFOLIO OF SECURITIES WITH A LOWER DURATION CAN BE EXPECTED TO BE
LESS SENSITIVE TO INTEREST RATE CHANGES THAN A PORTFOLIO WITH A HIGHER DURATION.
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
We seek to invest in a combination of fixed income securities, primarily from
across the investment-grade debt universe. We analyze securities using
proprietary and nonproprietary research to help us identify attractive
investment opportunities, across the entire fixed income opportunity set, on a
relative basis. When making investment decisions, we will evaluate business
cycles, yield curves, and values between and within markets. Through a low
duration portfolio, we seek to position the Fund to be less affected by interest
rate changes than a Fund with a higher duration.
1. Source: Standard & Poor's Micropal. The LB U.S. Government Index: 1-3 Year
Component includes fixed rate securities issued by the U.S. government
with remaining maturity of one year up to, but not including, three years.
Securities must have at least $250 million par amount outstanding and be
rated investment grade. All issues included must be publicly issued,
dollar denominated and nonconvertible. The index is unmanaged and includes
reinvested interest. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 66.
Semiannual Report | 21
PORTFOLIO BREAKDOWN
Franklin Low Duration Total Return Fund
Based on Total Investments as of 4/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A CHART IN THE PRINTED MATERIAL.]
U.S. Government & Agency Securities 48.0%
Mortgage-Backed Securities 20.6%
Corporate Bonds 11.9%
Foreign Government & Agency Securities 6.1%
Asset-Backed & Commercial Mortgage-Backed Securities 3.8%
Convertible Bonds 0.4%
Short-Term Investments 9.2%
MANAGER'S DISCUSSION
For the six-month reporting period, relatively stable intermediate-term yields
left prices largely unchanged across a variety of high-grade fixed income
sectors. (Bond yield and price typically move in opposite directions.) The Fund
focuses on less interest rate sensitive investments such as floating rate and
shorter-maturity securities. Although the bulk of the portfolio is investment
grade, we do have some exposure to more credit-sensitive sectors. During the
reporting period, some of the more credit-sensitive investments outperformed
higher quality assets by a small margin.
As we looked for new opportunities, our major investment sectors evolved but did
not change dramatically. We continued to find value in international markets and
remained overweighted in this arena. We looked to non-euro European and
non-Japan Asian debt as we believed these sectors are often overlooked. However,
we also searched through more traditional non-dollar sectors, such as Japan, as
many of these securities offered what we considered attractive fundamentals.
Although near-term corporate profit forecasts remained strong, profit growth may
weaken over the next few quarters should economic growth slow significantly.
Considering this possibility and the risks inherent in many parts of the credit
spectrum, we continued to seek more defensive areas for our allocations within
the corporate bond sector.
The Federal Reserve Board (Fed) left short-term interest rates unchanged for the
entire period under review. The market did not expect further increases and
actually expected the Fed's next move to be a decline, as indicated by the
Federal Funds Futures Contract Table. 2 Following our multi-sector strategy, we
compared Treasuries at each part of the yield curve with agency debentures,
agency mortgages and asset-backed securities. We continued to find the best
opportunities outside the Treasury sector. We continued to believe there was a
strong case for mortgage-related securities as a core holding across cycles due
to their income-generating characteristics and lower volatility than many
comparable credit-quality assets.
2. The federal funds futures contract is a key benchmark interest rate
barometer that reflects the forward overnight effective rate for excess
reserves that are traded among commercial banks in the U.S. federal funds
market.
22 | Semiannual Report
Thank you for your continued participation in Franklin Low Duration Total Return
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/Roger A. Bayston
Roger A. Bayston, CFA
[PHOTO OMITTED] /s/Kent Burns
Kent Burns, CFA
[PHOTO OMITTED] /s/Christopher J. Molumphy
Christopher J. Molumphy, CFA
Portfolio Management Team
Franklin Low Duration Total Return Fund
DIVIDEND DISTRIBUTIONS*
Franklin Low Duration Total Return Fund
Class A
11/1/06-4/30/07
- --------------------------------------------------------------------------------
MONTH DIVIDEND PER SHARE
- --------------------------------------------------------------------------------
November 3.1754 cents
- --------------------------------------------------------------------------------
December 2.9882 cents
- --------------------------------------------------------------------------------
January 3.4495 cents
- --------------------------------------------------------------------------------
February 2.9759 cents
- --------------------------------------------------------------------------------
March 3.3346 cents
- --------------------------------------------------------------------------------
April 3.6744 cents
- --------------------------------------------------------------------------------
TOTAL 19.5980 CENTS
- --------------------------------------------------------------------------------
* 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.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 23
Performance Summary as of 4/30/07
FRANKLIN LOW DURATION TOTAL RETURN FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. The performance table does not reflect any taxes that a shareholder
would pay on Fund dividends, capital gain distributions, if any, or any realized
gains on the sale of Fund shares. Total return reflects reinvestment of the
Fund's dividends and capital gain distributions, if any, and any unrealized
gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FLDAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $9.86 $9.79
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.195980
- --------------------------------------------------------------------------------
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES THE SALES CHARGE. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE.
THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR INCEPTION (11/17/04)
- -----------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.74% +5.29% +7.68%
- -----------------------------------------------------------------------------------------------
Average Annual Total Return 3 +0.38% +2.97% +2.12%
- -----------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +2.66% +1.90%
- -----------------------------------------------------------------------------------------------
Distribution Rate 5 4.25%
- -----------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 3.99%
- -----------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- -----------------------------------------------------------------------------------------------
Without Waiver 1.41%
- -----------------------------------------------------------------------------------------------
With Waiver 0.90%
- -----------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER AND ADMINISTRATOR HAVE AGREED IN ADVANCE TO VOLUNTARILY WAIVE
OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN
EXPENSES OTHERWISE PAYABLE BY THE FUND. THE FUND'S MANAGER AND ADMINISTRATOR MAY
END THIS ARRANGEMENT AT ANY TIME.
24 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS WILL AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND
PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS
PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE
PRICE MAY DECLINE. THE FUND'S INVESTMENTS IN DERIVATIVES, SUCH AS FINANCIAL
FUTURES AND OPTION CONTRACTS, MAY INVOLVE A SMALL INVESTMENT RELATIVE TO THE
AMOUNT OF RISK ASSUMED. SOME DERIVATIVES ARE PARTICULARLY SENSITIVE TO CHANGES
IN INTEREST RATES. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS
AND POLITICAL UNCERTAINTY. DURING PERIODS OF DECLINING INTEREST RATES, PRINCIPAL
PREPAYMENTS TEND TO INCREASE AS BORROWERS REFINANCE THEIR MORTGAGES AT LOWER
RATES; THEREFORE THE FUND MAY BE FORCED TO REINVEST RETURNED PRINCIPAL AT LOWER
INTEREST RATES, REDUCING ITS INCOME. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
1. The Fund's manager and administrator have agreed in advance to waive all
or a portion of their fees and to make certain payments to reduce
expenses. If the manager and administrator 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 3.62%. The manager and administrator may
end this arrangement at any time, upon notice to the Fund's board.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the sum of the past 30
days' daily distributions per share and the maximum offering price of
$10.09 per share on 4/30/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 25
Your Fund's Expenses
FRANKLIN LOW DURATION TOTAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
26 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ---------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.40 $4.52
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.33 $4.51
- ---------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, of 0.90%, multiplied by the average account value over the
period, multiplied by 181/365 to reflect the one-half year period.
Semiannual Report | 27
Franklin Total Return Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Total Return Fund seeks to
provide investors with high current income consistent with preservation of
capital. Capital appreciation over the long term is a secondary goal. The Fund
invests at least 85% of its assets in investment-grade debt securities. The Fund
focuses on government and corporate debt securities and mortgage- and
asset-backed securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Franklin Total Return Fund's semiannual report for
the period ended April 30, 2007.
PERFORMANCE OVERVIEW
Franklin Total Return Fund - Class A posted a +3.09% cumulative total return for
the six months under review. The Fund - Class A performed comparably to one of
its benchmarks, the Lehman Brothers (LB) U.S. Universal Index, which posted a
total return of +2.97% for the same period. 1 It outperformed its other
benchmark, the LB U.S. Aggregate Index, which returned +2.64%. 2 We are
discontinuing use of the LB U.S. Universal Index as a benchmark because the LB
U.S. Aggregate Index is a more widely accepted benchmark for this type of fund.
You can find the Fund's long-term performance data in the Performance Summary
beginning on page 32.
INVESTMENT STRATEGY
We seek to invest in a combination of fixed income securities, predominantly
from across the investment-grade debt universe. We analyze securities using
1. Source: Standard & Poor's Micropal. The LB U.S. Universal Index represents
the union of the U.S. Aggregate Index, the U.S. High-Yield Corporate
Index, the 144A Index, the Eurodollar Index, the Emerging Markets Index,
the non-ERISA portion of the CMBS Index, and the CMBS High-Yield Index.
Municipal debt, private placements and non-dollar-denominated issues are
excluded from the Universal Index. The only constituent of the index that
includes floating-rate debt is the Emerging Markets Index. It is designed
to capture the entire portfolio management choice set of fixed income
securities issued in U.S. dollars.
2. Source: Standard & Poor's Micropal. The LB U.S. Aggregate Index represents
securities that are SEC-registered, taxable and dollar denominated. The
index covers the U.S. investment grade fixed-rate bond market, with index
components for government and corporate securities, mortgage pass-through
securities and asset-backed securities. All issues included must have at
least one year to final maturity and must be rated investment grade (Baa3
or better) by Moody's Investors Service. They must also be dollar
denominated and nonconvertible. Total return includes price
appreciation/depreciation and income as a percentage of the original
investment. The index is rebalanced monthly by market capitalization.
The indexes are unmanaged and include reinvested interest. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 76.
28 | Semiannual Report
PORTFOLIO BREAKDOWN
Franklin Total Return Fund
Based on Total Investments
- ----------------------------------------------------------------------------------------
SECTOR 4/30/07 10/31/06
- ----------------------------------------------------------------------------------------
Mortgage-Backed Securities 31.0% 34.4%
- ----------------------------------------------------------------------------------------
Corporate Bonds 19.9% 19.2%
- ----------------------------------------------------------------------------------------
Asset-Backed & Commercial Mortgage-Backed Securities 19.1% 15.8%
- ----------------------------------------------------------------------------------------
U.S. Government & Agency Securities 7.5% 14.5%
- ----------------------------------------------------------------------------------------
Foreign Government & Agency Securities 6.5% 6.9%
- ----------------------------------------------------------------------------------------
Senior Floating Rate Interests 3.5% 3.0%
- ----------------------------------------------------------------------------------------
Convertible Bonds 0.5% 0.5%
- ----------------------------------------------------------------------------------------
Credit-Linked Structured Note 0.1% 0.2%
- ----------------------------------------------------------------------------------------
Convertible Preferred Stock 0.1% 0.1%
- ----------------------------------------------------------------------------------------
Short-Term Investments 11.8% 5.4%
- ----------------------------------------------------------------------------------------
proprietary and nonproprietary research to help us identify attractive
investment opportunities, across the entire fixed income opportunity set, on a
relative basis. The Fund may also invest up to 15% of its total assets in
non-investment-grade debt securities.
MANAGER'S DISCUSSION
For the six-month period under review, relatively stable intermediate-term
yields left prices largely unchanged across a variety of high-grade fixed income
sectors. (Bond yield and price typically move in opposite directions.) Some of
the more credit-sensitive investments outperformed higher quality assets by a
small margin. For example, the LB U.S. Aggregate Index, which measures
performance of investment-grade bonds, returned +2.64% for the six months ended
April 30, 2007. 2 The LB U.S. Universal Index, which includes the LB U.S.
Aggregate Index as well as some high yield, non-dollar and other components,
returned +2.97%. 1 Although the bulk of the portfolio is investment grade, we do
have some exposure to more credit-sensitive securities.
As we looked for new opportunities, our major investment sectors did not change
dramatically over the past six months. We continued to find value in
international markets and have invested in a diversified portfolio of fixed
income securities. We looked to peripheral (non-euro) European and non-Japan
Asian debt to benefit from a potential continued decline in the value of the
U.S. dollar. However, we also searched through more traditional non-dollar
sectors, such as Japan, as many of these securities offered what we considered
attractive fundamentals.
Semiannual Report | 29
DIVIDEND DISTRIBUTIONS*
Franklin Total Return Fund
11/1/06-4/30/07
- -------------------------------------------------------------------------------------------------------------
DIVIDEND PER SHARE (CENTS)
----------------------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
November 3.6352 3.3234 3.3022 3.4245 3.8461
- -------------------------------------------------------------------------------------------------------------
December** 5.4644 5.1460 5.1452 5.2704 5.6681
- -------------------------------------------------------------------------------------------------------------
January 3.9381 3.5755 3.5749 3.7134 4.1761
- -------------------------------------------------------------------------------------------------------------
February 3.3969 3.0822 3.0871 3.2073 3.5955
- -------------------------------------------------------------------------------------------------------------
March 3.9130 3.5813 3.5800 3.7069 4.1253
- -------------------------------------------------------------------------------------------------------------
April 4.0720 3.7174 3.7295 3.8602 4.2923
- -------------------------------------------------------------------------------------------------------------
TOTAL 24.4196 22.4258 22.4189 23.1827 25.7034
- -------------------------------------------------------------------------------------------------------------
* 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.
All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 2.03 cent per share distribution to meet excise tax
requirements.
The Federal Reserve Board (Fed) left short-term interest rates unchanged for the
entire period under review. The market did not expect further increases and
actually expected the Fed's next move to be a decline, as indicated by the
Federal Funds Futures Contract Table. 3 Our analysis led us to believe that the
U.S. economy should continue to expand in 2007, although headwinds such as a
lower housing market could dampen growth. We believe that corporate credit
default rates may remain subdued in the near term. However, risk premiums
(additional yield offered to investors to assume higher credit risk) remained
narrow for a broad range of fixed income asset classes. In this environment, we
sought more defensive areas for our allocations within the corporate bond and
bank loan sectors. Following our multi-sector strategy, we compared Treasuries
at each part of the yield curve with agency debentures, agency mortgages,
asset-backed securities and commercial mortgage-backed securities (CMBS). We
found some of the best investment opportunities in CMBS. We continued to believe
there was a strong case for mortgage-related securities as a core holding across
cycles due to their income-generating characteristics and lower volatility than
many comparable credit-quality assets.
3. The federal funds futures contract is a key benchmark interest rate
barometer that reflects the forward overnight effective rate for excess
reserves that are traded among commercial banks in the U.S. federal funds
market.
30 | Semiannual Report
Thank you for your continued participation in Franklin Total Return Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/Roger A. Bayston
Roger A. Bayston, CFA
[PHOTO OMITTED] /s/Kent Burns
Kent Burns, CFA
[PHOTO OMITTED] /s/Christopher J. Molumphy
Christopher J. Molumphy, CFA
[PHOTO OMITTED] /s/David Yuen
David Yuen, CFA, FRM
Portfolio Management Team
Franklin Total Return Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Semiannual Report | 31
Performance Summary as of 4/30/07
FRANKLIN TOTAL RETURN FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table does not reflect any taxes that a
shareholder would pay on Fund dividends, capital gain distributions, if any, or
any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: FKBAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.01 $9.95
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.244196
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FBTLX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.00 $9.94
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.224258
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: FCTLX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.00 $9.94
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.224189
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: FTRRX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.07 $10.01 $9.94
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.231827
- --------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FBDAX) CHANGE 4/30/07 10/31/06
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.06 $10.02 $9.96
- --------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/06-4/30/07)
- --------------------------------------------------------------------------------
Dividend Income $0.257034
- --------------------------------------------------------------------------------
32 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE;
CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER
SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS
R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A 2% FEE ON REDEMPTIONS
MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------
CLASS A 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/3/98)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.09% +7.66% +31.99% +64.58%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.27% +3.12% +4.79% +5.34%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +2.27% +4.99% +5.28%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 5 4.11%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.34%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ----------------------------------------------------------------------------------------------------------
Without Waiver 1.09%
- ----------------------------------------------------------------------------------------------------------
With Waiver 0.85%
- ----------------------------------------------------------------------------------------------------------
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (3/1/02)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.89% +7.12% +29.28% +30.60%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.11% +3.12% +4.94% +5.15%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +2.34% +5.17% +5.07%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 5 3.91%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.15%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ----------------------------------------------------------------------------------------------------------
Without Waiver 1.49%
- ----------------------------------------------------------------------------------------------------------
With Waiver 1.25%
- ----------------------------------------------------------------------------------------------------------
CLASS C 6-MONTH 1-YEAR 5-YEAR INCEPTION (3/1/02)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.89% +7.12% +29.27% +30.69%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +1.89% +6.12% +5.27% +5.32%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +5.22% +5.47% +5.23%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 5 3.90%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.13%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ----------------------------------------------------------------------------------------------------------
Without Waiver 1.49%
- ----------------------------------------------------------------------------------------------------------
With Waiver 1.25%
- ----------------------------------------------------------------------------------------------------------
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.07% +7.39% +30.36% +33.06%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.07% +7.39% +5.45% +5.51%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +6.50% +5.64% +5.42%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 5 4.04%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.28%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ----------------------------------------------------------------------------------------------------------
Without Waiver 1.34%
- ----------------------------------------------------------------------------------------------------------
With Waiver 1.10%
- ----------------------------------------------------------------------------------------------------------
Semiannual Report | 33
Performance Summary (CONTINUED)
PERFORMANCE 1 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR INCEPTION (8/3/98)
- ----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +3.22% +7.82% +33.64% +68.29%
- ----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.22% +7.82% +5.97% +6.13%
- ----------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (3/31/07) 4 +6.92% +6.17% +6.08%
- ----------------------------------------------------------------------------------------------------------
Distribution Rate 5 4.54%
- ----------------------------------------------------------------------------------------------------------
30-Day Standardized Yield 6 4.79%
- ----------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 7
- ----------------------------------------------------------------------------------------------------------
Without Waiver 0.84%
- ----------------------------------------------------------------------------------------------------------
With Waiver 0.60%
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND
PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
THE FUND'S MANAGER AND ADMINISTRATOR HAVE AGREED IN ADVANCE TO VOLUNTARILY WAIVE
OR LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN
EXPENSES OTHERWISE PAYABLE BY THE FUND. THE FUND'S MANAGER AND ADMINISTRATOR MAY
END THIS ARRANGEMENT AT ANY TIME.
34 | Semiannual Report
Performance Summary (CONTINUED)
ENDNOTES
INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS WILL AFFECT THE FUND'S SHARE
PRICE AND YIELD. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF
INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN
INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. INVESTING IN DERIVATIVE
SECURITIES SUCH AS FINANCIAL FUTURES AND OPTION CONTRACTS INVOLVES SPECIAL
RISKS. THE RISKS ASSOCIATED WITH HIGHER-YIELDING, LOWER-RATED SECURITIES INCLUDE
HIGHER RISK OF DEFAULT AND LOSS OF PRINCIPAL. INVESTMENTS IN FOREIGN SECURITIES
ALSO INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS, AND POLITICAL AND
ECONOMIC UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE
MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. The Fund's manager and administrator have agreed in advance to waive all
or a portion of their fees and to make certain payments to reduce
expenses. If the manager and administrator had not taken this action, the
Fund's distribution rate and total return would have been lower, and yield
for the period would have been 4.17%, 3.95%, 3.95%, 4.10% and 4.60% for
Classes A, B, C, R and Advisor, respectively. The manager and
administrator may end this agreement at any time, upon notice to the
Fund's board.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated. Six-month return has not been
annualized.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Distribution rate is based on an annualization of the sum of the
respective class's past 30 days' daily distributions and the maximum
offering price (NAV for Classes B, C, R and Advisor) per share on 4/30/07.
6. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 4/30/07.
7. Figures are as stated in the Fund's prospectus current as of the date of
this report.
Semiannual Report | 35
Your Fund's Expenses
FRANKLIN TOTAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
36 | Semiannual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 11/1/06 VALUE 4/30/07 PERIOD* 11/1/06-4/30/07
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.90 $4.28
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.58 $4.26
- ----------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.90 $6.29
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26
- ----------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.90 $6.29
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.60 $6.26
- ----------------------------------------------------------------------------------------------------------------
CLASS R
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.70 $5.54
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.34 $5.51
- ----------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ----------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,032.20 $3.02
- ----------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.82 $3.01
- ----------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, for each class (A: 0.85%; B: 1.25%; C: 1.25%; R: 1.10%; and
Advisor: 0.60%), multiplied by the average account value over the period,
multiplied by 181/365 to reflect the one-half year period.
Semiannual Report | 37
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 8.88 $ 8.93 $ 9.06 $ 9.16 $ 9.38 $ 9.46
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.186 0.303 0.292 0.277 0.313 0.390i
Net realized and unrealized gains (losses) ... 0.044 0.025 (0.129) (0.102) (0.220) (0.070)
--------------------------------------------------------------------------------
Total from investment operations .............. 0.230 0.328 0.163 0.175 0.093 0.320
--------------------------------------------------------------------------------
Less distributions from net investment income . (0.220) (0.378) (0.293) (0.275) (0.313) (0.400)
--------------------------------------------------------------------------------
Redemption fees ............................... -- f -- f -- f -- f -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 8.89 $ 8.88 $ 8.93 $ 9.06 $ 9.16 $ 9.38
================================================================================
Total return b ................................ 2.61% 3.75% 1.82% 1.94% 1.00% 3.45%
RATIOS TO AVERAGE NET ASSETS
Expenses c .................................... 0.92% g,h 0.89% h 0.90% 0.89% 0.88% 0.88%
Net investment income ......................... 4.23% g 3.50% 3.23% 3.01% 3.30% 4.14%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $326,640 $372,703 $475,213 $577,073 $651,701 $575,665
Portfolio turnover rated ...................... 16.94% 15.91% 24.99% 49.67% 130.32% 85.05%
Portfolio turnover rate excluding mortgage
dollar rolls d,e ............................. 16.94% 15.91% 24.99% 45.38% 96.52% 85.05%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or the contingent deferred
sales charge, if applicable, and is not annualized for periods less than
one year.
c Prior to October 27, 2005, the expense ratio includes the fund's share of
the U.S. Government Adjustable Rate Mortgage Portfolio's (the Portfolio)
allocated net expenses.
d Prior to October 27, 2005, represents the Portfolio's rate of turnover.
e See Note 1(i) regarding mortgage dollar rolls.
f Amount rounds to less than $0.001 per share.
g Annualized.
h Benefit of expense reduction rounds to less than 0.01%. iBased on average
daily shares outstanding.
38 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
-----------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS C (UNAUDITED) 2006 2005 2004 2003 i
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 8.88 $ 8.92 $ 9.05 $ 9.16 $ 9.28
-----------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.167 0.266 0.258 0.232 0.081
Net realized and unrealized gains (losses) ... 0.035 0.038 (0.129) (0.104) (0.120)
-----------------------------------------------------------------
Total from investment operations .............. 0.202 0.304 0.129 0.128 (0.039)
-----------------------------------------------------------------
Less distributions from net investment income . (0.202) (0.344) (0.259) (0.238) (0.081)
-----------------------------------------------------------------
Redemption fees ............................... -- f -- f -- f -- --
-----------------------------------------------------------------
Net asset value, end of period ................ $ 8.88 $ 8.88 $ 8.92 $ 9.05 $ 9.16
=================================================================
Total return b ................................ 2.29% 3.47% 1.43% 1.41% (0.42)%
RATIOS TO AVERAGE NET ASSETS
Expenses c .................................... 1.33% g,h 1.28% h 1.28% 1.29% 1.26% g
Net investment income ......................... 3.82% g 3.11% 2.85% 2.61% 2.92% g
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 32,679 $ 35,967 $ 48,461 $ 49,423 $ 12,868
Portfolio turnover rated d .................... 16.94% 15.91% 24.99% 49.67% 130.32%
Portfolio turnover rate excluding mortgage
dollar rolls d,e ............................ 16.94% 15.91% 24.99% 45.38% 96.52%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investment of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c Prior to October 27, 2005, the expense ratio includes the fund's share of
the Portfolio allocated net expenses.
d Prior to October 27, 2005, represents the Portfolio's rate of turnover.
e See Note 1(i) regarding mortgage dollar rolls.
f Amount rounds to less than $0.001 per share.
g Annualized.
h Benefit of expense reduction rounds to less than 0.01%
i For the period July 1, 2003 (effective date) to October 31, 2003.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 39
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- --------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 92.1%
MORTGAGE-BACKED SECURITIES 92.1%
a FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 21.2%
FHLMC, 5.692%, 8/01/32 ....................................... $ 668,735 $ 684,985
FHLMC, 5.772%, 1/01/23 ....................................... 526,668 529,072
FHLMC, 5.789%, 6/01/26 ....................................... 437,769 445,290
FHLMC, 5.797%, 2/01/37 ....................................... 6,962,560 7,031,197
FHLMC, 5.863%, 11/01/35 ...................................... 572,763 586,882
FHLMC, 5.865%, 3/01/32 ....................................... 1,493,982 1,502,687
FHLMC, 5.911%, 9/01/32 ....................................... 1,360,770 1,394,315
FHLMC, 5.954%, 12/01/19 ...................................... 2,082,138 2,133,611
FHLMC, 6.017%, 11/01/25 ...................................... 5,032,661 5,064,299
FHLMC, 6.07%, 6/01/29 ........................................ 3,413,494 3,513,377
FHLMC, 6.241%, 9/01/36 ....................................... 4,955,078 5,029,484
FHLMC, 6.331%, 4/01/25 ....................................... 1,644,530 1,672,688
FHLMC, 6.504%, 5/01/26 ....................................... 225,757 227,453
FHLMC, 6.725%, 12/01/27 ...................................... 54,218 55,552
FHLMC, 6.74%, 3/01/19 ........................................ 51,452 52,132
FHLMC, 6.75%, 11/01/16 ....................................... 532,055 540,820
FHLMC, 6.783%, 10/01/29 ...................................... 152,106 152,846
FHLMC, 6.797%, 7/01/18 ....................................... 213,287 215,655
FHLMC, 6.881%, 7/01/27 ....................................... 459,761 464,349
FHLMC, 6.886%, 12/01/21 ...................................... 73,937 74,947
FHLMC, 6.94%, 5/01/20 ........................................ 1,787,330 1,799,940
FHLMC, 6.971%, 12/01/16 ...................................... 333,310 336,489
FHLMC, 6.982%, 2/01/33 ....................................... 357,126 361,603
FHLMC, 6.998%, 4/01/29 ....................................... 1,617,840 1,627,670
FHLMC, 7.022%, 4/01/19 ....................................... 1,005,122 1,017,452
FHLMC, 7.025%, 5/01/32 ....................................... 1,276,842 1,277,734
FHLMC, 7.042%, 9/01/19 ....................................... 508,881 514,626
FHLMC, 7.094%, 9/01/18 ....................................... 1,076,512 1,086,227
FHLMC, 7.113%, 10/01/24 ...................................... 1,253,115 1,269,434
FHLMC, 7.129%, 8/01/32 ....................................... 3,424,038 3,478,469
FHLMC, 7.157%, 8/01/27 ....................................... 1,824,884 1,882,277
FHLMC, 7.175%, 3/01/18 ....................................... 235,124 238,669
FHLMC, 7.18%, 5/01/25 ........................................ 374,082 381,245
FHLMC, 7.181%, 4/01/25 ....................................... 1,600,709 1,618,167
FHLMC, 7.205%, 8/01/30 ....................................... 3,636,661 3,706,173
FHLMC, 7.214%, 4/01/18 ....................................... 876,593 891,422
FHLMC, 7.215%, 7/01/29 ....................................... 179,357 183,739
FHLMC, 7.217%, 11/01/29 ...................................... 3,940,459 4,028,697
FHLMC, 7.244%, 4/01/30 ....................................... 345,733 348,387
FHLMC, 7.253%, 10/01/18 ...................................... 199,369 202,476
FHLMC, 7.255%, 8/01/30 ....................................... 237,737 241,095
FHLMC, 7.264%, 3/01/32 ....................................... 455,406 461,960
FHLMC, 7.283%, 8/01/31 ....................................... 64,051 64,684
FHLMC, 7.29%, 1/01/23 ........................................ 4,607,130 4,722,388
FHLMC, 7.299%, 11/01/31 ...................................... 3,696,328 3,752,422
FHLMC, 7.302%, 7/01/20 ....................................... 108,503 110,287
FHLMC, 7.305%, 9/01/31 ....................................... 341,310 344,221
40 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
a FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE (CONTINUED)
FHLMC, 7.356%, 10/01/25 ............................................ $ 576,365 $ 583,964
FHLMC, 7.415%, 9/01/31 ............................................. 356,014 360,178
FHLMC, 7.424%, 12/01/30 ............................................ 1,737,765 1,780,984
FHLMC, 7.44%, 5/01/32 .............................................. 513,277 525,869
FHLMC, 7.452%, 6/01/26 ............................................. 3,949,733 3,990,744
FHLMC, 7.464%, 8/01/31 ............................................. 92,257 93,093
FHLMC, 7.705%, 2/01/19 ............................................. 152,690 153,169
FHLMC, 7.71%, 12/01/28 ............................................. 341,917 350,576
FHLMC, 7.739%, 11/01/29 ............................................ 962,251 976,961
-----------
76,135,132
-----------
a FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 60.5%
FNMA, 4.179%, 11/01/34 ............................................. 1,191,259 1,198,219
FNMA, 4.573%, 8/01/22 .............................................. 77,172 78,740
FNMA, 4.625%, 9/01/32 .............................................. 2,145,784 2,171,057
FNMA, 4.737%, 9/01/32 .............................................. 4,113,842 4,156,563
FNMA, 4.78%, 2/01/33 ............................................... 2,115,145 2,156,957
FNMA, 4.892%, 12/01/32 ............................................. 3,493,619 3,555,039
FNMA, 4.934%, 4/01/35 .............................................. 1,021,292 1,026,601
FNMA, 4.973%, 12/01/17 ............................................. 212,990 216,541
FNMA, 5.017%, 9/01/32 .............................................. 1,856,101 1,872,276
FNMA, 5.302%, 11/01/17 ............................................. 2,109,795 2,129,811
FNMA, 5.348%, 8/01/32 .............................................. 584,097 594,626
FNMA, 5.457%, 1/01/26 .............................................. 748,404 774,530
FNMA, 5.466%, 3/01/20 .............................................. 100,827 104,443
FNMA, 5.468%, 10/01/28 ............................................. 124,027 124,205
FNMA, 5.50%, 1/01/17 ............................................... 716,822 719,791
FNMA, 5.542%, 1/01/32 .............................................. 2,020,985 2,041,357
FNMA, 5.551%, 5/01/32 .............................................. 2,330,892 2,359,086
FNMA, 5.572%, 4/01/22 .............................................. 1,230,830 1,242,952
FNMA, 5.584%, 5/01/19 .............................................. 916,730 921,761
FNMA, 5.597%, 3/01/19 - 6/01/29 .................................... 3,981,264 4,025,154
FNMA, 5.626%, 1/01/18 .............................................. 8,452,670 8,502,077
FNMA, 5.626%, 6/01/20 .............................................. 1,644,167 1,659,176
FNMA, 5.626%, 1/01/29 .............................................. 4,316,237 4,366,720
FNMA, 5.63%, 7/01/32 ............................................... 482,767 487,951
FNMA, 5.637%, 5/01/18 .............................................. 5,293,114 5,326,849
FNMA, 5.641%, 5/01/21 .............................................. 407,348 411,676
FNMA, 5.642%, 9/01/18 - 8/01/26 .................................... 2,524,264 2,542,842
FNMA, 5.642%, 8/01/33 .............................................. 8,583,407 8,686,348
FNMA, 5.642%, 9/01/34 .............................................. 4,547,852 4,573,780
FNMA, 5.642%, 3/01/35 .............................................. 5,350,608 5,415,625
FNMA, 5.646%, 3/01/33 .............................................. 2,886,001 2,920,517
FNMA, 5.648%, 5/01/36 .............................................. 3,531,410 3,574,572
FNMA, 5.649%, 5/01/36 .............................................. 2,124,671 2,150,622
FNMA, 5.771%, 6/01/32 .............................................. 419,040 428,221
FNMA, 5.802%, 9/01/32 .............................................. 652,851 661,246
Semiannual Report | 41
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
a FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 5.804%, 10/01/14 ................................................. $ 118,770 $ 118,686
FNMA, 5.828%, 5/01/21 .................................................. 833,087 843,823
FNMA, 5.86%, 7/01/24 ................................................... 1,140,813 1,153,175
FNMA, 5.878%, 5/01/36 .................................................. 8,690,062 8,844,422
FNMA, 5.924%, 4/01/19 .................................................. 1,158,466 1,167,319
FNMA, 5.957%, 1/01/19 .................................................. 900,488 907,459
FNMA, 5.999%, 12/01/24 ................................................. 548,685 562,948
FNMA, 6.095%, 6/01/32 .................................................. 1,623,619 1,654,784
FNMA, 6.145%, 1/01/19 .................................................. 1,807,073 1,825,173
FNMA, 6.171%, 8/01/36 .................................................. 23,471,728 23,889,716
FNMA, 6.184%, 7/01/17 .................................................. 960,951 966,028
FNMA, 6.218%, 9/01/36 .................................................. 5,992,847 6,075,324
FNMA, 6.238%, 4/01/34 .................................................. 6,633,010 6,722,614
FNMA, 6.263%, 10/01/17 ................................................. 266,720 269,212
FNMA, 6.288%, 3/01/26 .................................................. 895,577 911,883
FNMA, 6.31%, 8/01/21 ................................................... 2,370,340 2,399,106
FNMA, 6.322%, 10/01/22 ................................................. 652,005 659,782
FNMA, 6.328%, 2/01/30 .................................................. 389,048 392,302
FNMA, 6.368%, 7/01/33 .................................................. 1,514,757 1,545,092
FNMA, 6.424%, 6/01/17 .................................................. 8,217 8,270
FNMA, 6.441%, 11/01/18 ................................................. 111,847 113,904
FNMA, 6.466%, 6/01/19 .................................................. 262,417 265,030
FNMA, 6.52%, 11/01/31 .................................................. 393,440 393,349
FNMA, 6.616%, 1/01/16 .................................................. 803,677 804,383
FNMA, 6.641%, 3/01/20 .................................................. 2,721,414 2,773,342
FNMA, 6.658%, 1/01/19 .................................................. 503,847 506,486
FNMA, 6.70%, 1/01/25 ................................................... 3,281,348 3,321,792
FNMA, 6.735%, 10/01/32 ................................................. 1,231,215 1,244,817
FNMA, 6.776%, 1/01/35 .................................................. 1,221,442 1,235,438
FNMA, 6.788%, 5/01/19 .................................................. 403,773 406,166
FNMA, 6.803%, 7/01/24 .................................................. 509,537 509,042
FNMA, 6.875%, 12/01/20 ................................................. 209,976 213,595
FNMA, 6.912%, 1/01/19 .................................................. 408,354 412,464
FNMA, 6.928%, 4/01/27 .................................................. 3,456,981 3,477,706
FNMA, 6.938%, 6/01/31 .................................................. 686,334 696,988
FNMA, 6.939%, 2/01/31 .................................................. 225,117 234,834
FNMA, 6.956%, 12/01/17 ................................................. 130,548 131,014
FNMA, 6.975%, 3/01/18 .................................................. 145,684 145,965
FNMA, 6.979%, 7/01/31 .................................................. 86,442 87,817
FNMA, 6.985%, 4/01/32 .................................................. 1,520,123 1,548,532
FNMA, 6.989%, 2/01/20 .................................................. 511,453 521,450
FNMA, 6.997%, 10/01/31 ................................................. 648,309 665,020
FNMA, 7.00%, 8/01/16 - 6/01/19 ......................................... 154,768 155,690
FNMA, 7.03%, 6/01/31 ................................................... 610,407 617,180
FNMA, 7.055%, 3/01/19 .................................................. 335,854 337,638
FNMA, 7.056%, 12/01/20 ................................................. 466,099 468,863
FNMA, 7.06%, 4/01/18 ................................................... 175,513 178,374
42 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
a FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 7.061%, 4/01/32 .................................................. $1,264,314 $1,280,465
FNMA, 7.063%, 6/01/32 .................................................. 383,020 386,745
FNMA, 7.064%, 5/01/32 .................................................. 1,101,955 1,120,895
FNMA, 7.074%, 3/01/22 .................................................. 21,316 21,484
FNMA, 7.09%, 5/01/31 - 3/01/32 ......................................... 405,174 410,610
FNMA, 7.095%, 11/01/27 ................................................. 119,416 120,373
FNMA, 7.10%, 6/01/19 ................................................... 206,938 209,637
FNMA, 7.101%, 6/01/19 .................................................. 420,113 424,218
FNMA, 7.101%, 10/01/24 ................................................. 7,131,027 7,289,465
FNMA, 7.102%, 10/01/19 ................................................. 541,697 544,808
FNMA, 7.123%, 2/01/32 .................................................. 152,304 155,306
FNMA, 7.125%, 8/01/29 .................................................. 408,535 413,446
FNMA, 7.127%, 3/01/20 .................................................. 236,792 237,552
FNMA, 7.128%, 10/01/32 ................................................. 136,260 137,173
FNMA, 7.135%, 8/01/29 .................................................. 252,851 250,741
FNMA, 7.142%, 9/01/31 .................................................. 293,647 297,508
FNMA, 7.149%, 11/01/20 ................................................. 245,939 248,207
FNMA, 7.154%, 3/01/32 .................................................. 3,125,544 3,168,959
FNMA, 7.16%, 9/01/22 ................................................... 1,164,618 1,175,292
FNMA, 7.172%, 2/01/29 .................................................. 358,517 366,415
FNMA, 7.18%, 8/01/31 ................................................... 196,985 197,079
FNMA, 7.182%, 3/01/32 .................................................. 417,966 423,228
FNMA, 7.194%, 4/01/19 .................................................. 713,306 722,948
FNMA, 7.194%, 12/01/19 ................................................. 303,717 308,042
FNMA, 7.195%, 2/01/25 .................................................. 42,884 43,327
FNMA, 7.195%, 2/01/32 .................................................. 771,227 783,979
FNMA, 7.20%, 3/01/19 ................................................... 186,658 188,940
FNMA, 7.201%, 6/01/32 .................................................. 562,222 568,410
FNMA, 7.209%, 5/01/27 .................................................. 2,052,293 2,074,356
FNMA, 7.216%, 11/01/36 ................................................. 904,560 917,401
FNMA, 7.23%, 6/01/27 ................................................... 750,362 756,548
FNMA, 7.233%, 1/01/31 .................................................. 811,818 827,334
FNMA, 7.25%, 2/01/19 - 2/01/32 ......................................... 410,076 415,398
FNMA, 7.25%, 4/01/31 ................................................... 1,718,183 1,744,020
FNMA, 7.252%, 3/01/21 .................................................. 130,714 132,072
FNMA, 7.252%, 10/01/30 ................................................. 540,844 545,324
FNMA, 7.259%, 1/01/29 .................................................. 594,924 613,520
FNMA, 7.27%, 11/01/31 .................................................. 261,095 264,180
FNMA, 7.277%, 11/01/30 ................................................. 5,411,493 5,466,730
FNMA, 7.278%, 1/01/31 .................................................. 729,685 733,730
FNMA, 7.279%, 9/01/39 .................................................. 859,684 870,610
FNMA, 7.28%, 12/01/27 .................................................. 1,081,527 1,088,327
FNMA, 7.282%, 12/01/32 ................................................. 1,161,371 1,186,177
FNMA, 7.302%, 5/01/25 .................................................. 1,173,242 1,183,868
FNMA, 7.309%, 12/01/18 ................................................. 233,714 235,485
FNMA, 7.336%, 5/01/29 .................................................. 243,224 246,950
FNMA, 7.34%, 5/01/32 ................................................... 704,527 707,664
Semiannual Report | 43
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
a FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 7.358%, 8/01/28 ................................................................. $ 1,809,718 $ 1,831,818
FNMA, 7.371%, 11/01/17 ................................................................ 1,061,128 1,072,804
FNMA, 7.391%, 11/01/26 ................................................................ 90,303 90,641
FNMA, 7.395%, 9/01/30 ................................................................. 288,820 291,458
FNMA, 7.405%, 11/01/31 ................................................................ 82,391 83,244
FNMA, 7.43%, 6/01/19 .................................................................. 585,753 591,294
FNMA, 7.465%, 4/01/30 ................................................................. 697,781 709,132
FNMA, 7.516%, 7/01/26 ................................................................. 1,017,308 1,029,601
FNMA, 7.598%, 9/01/29 ................................................................. 201,852 203,612
FNMA, 7.617%, 5/01/19 ................................................................. 398,278 403,045
FNMA, 7.635%, 3/01/25 ................................................................. 230,200 228,322
FNMA, 7.669%, 9/01/25 ................................................................. 723,077 734,019
FNMA, 7.677%, 1/01/29 ................................................................. 580,962 589,353
FNMA, 7.724%, 6/01/28 ................................................................. 2,442,380 2,474,845
------------
217,400,062
------------
a GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 10.4%
GNMA, 5.375%, 4/20/22 - 6/20/31 ....................................................... 5,390,557 5,450,489
GNMA, 5.50%, 7/20/29 - 9/20/31 ........................................................ 6,147,020 6,227,356
GNMA, 5.75%, 7/20/21 - 9/20/27 ........................................................ 3,985,744 4,032,621
GNMA, 6.125%, 10/20/23 - 10/20/26 ..................................................... 9,675,333 9,790,987
GNMA, 6.375%, 1/20/23 - 2/20/28 ....................................................... 11,754,418 11,887,767
GNMA, 6.75%, 7/20/25 .................................................................. 40,377 40,541
------------
37,429,761
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $334,460,912) .................................. 330,964,955
------------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $97,550) 0.0% b
FINANCE 0.0% b
a Travelers Mortgage Services Inc., 1998-5A, A, FRN, 8.055%, 12/25/18 ................... 95,902 95,903
------------
TOTAL LONG TERM INVESTMENTS (COST $334,558,462) ....................................... 331,060,858
------------
------------ ------------
SHARES VALUE
------------ ------------
SHORT TERM INVESTMENTS 6.9%
MONEY MARKET FUND (COST $17,946,959) 5.0%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% .................. 17,946,959 17,946,959
------------
44 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENT (COST $6,938,763) 1.9%
d Joint Repurchase Agreement, 5.16%, 5/01/07 (Maturity Value $6,939,757) .................... $ 6,938,763 $ 6,938,763
ABN AMRO Bank, NV, New York Branch (Maturity Value $635,752)
Banc of America Securities LLC (Maturity Value $579,955)
Barclays Capital Inc. (Maturity Value $635,752)
Bear, Stearns & Co. Inc. (Maturity Value $446,226)
BNP Paribas Securities Corp. (Maturity Value $579,955)
Deutsche Bank Securities Inc. (Maturity Value $579,955)
Goldman, Sachs & Co. (Maturity Value $579,955)
Greenwich Capital Markets Inc. (Maturity Value $579,955)
Lehman Brothers Inc. (Maturity Value $526,590)
Merrill Lynch Government Securities Inc. (Maturity Value $579,955)
Morgan Stanley & Co. Inc. (Maturity Value $579,955)
UBS Securities LLC (Maturity Value $635,752)
Collateralized by U.S. Government Agency Securities, 3.00% - 6.375%, 5/15/07 - 4/02/12;
e U.S. Government Agency Discount Notes, 7/06/07 - 9/27/07;
e U.S. Treasury Bill, 8/02/07 and U.S. Treasury Notes, 0.875% - 6.00%, 8/15/07 - 1/31/12
------------
TOTAL SHORT TERM INVESTMENTS (COST $24,885,722) ........................................... 24,885,722
------------
TOTAL INVESTMENTS (COST $359,444,184) 99.0% ............................................... 355,946,580
OTHER ASSETS, LESS LIABILITIES 1.0% ....................................................... 3,373,093
------------
NET ASSETS 100.0% ......................................................................... $359,319,673
============
See Selected Portfolio Abbreviations on page 91.
a The coupon rate shown represents the rate at period end.
b Rounds to less than 0.1% of net assets.
c See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
d See Note 1(c) regarding repurchase agreements.
e The security is traded on a discount basis with no stated coupon rate.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 45
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLOATING RATE DAILY ACCESS FUND
---------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
---------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.06 $ 10.11 $ 10.13 $ 10.03 $ 9.69 $ 9.95
---------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.321 0.599 0.416 0.281 0.388 0.437
Net realized and unrealized gains (losses) ... 0.030 (0.048) (0.018) 0.102 0.341 (0.248)
---------------------------------------------------------------------------------
Total from investment operations .............. 0.351 0.551 0.398 0.383 0.729 0.189
---------------------------------------------------------------------------------
Less distributions from net investment income . (0.321) (0.601) (0.418) (0.283) (0.389) (0.449)
---------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- c -- --
---------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.09 $ 10.06 $ 10.11 $ 10.13 $ 10.03 $ 9.69
=================================================================================
Total return b ................................ 3.53% 5.59% 4.00% 3.87% 7.65% 1.87%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.89% d,e 0.87% e 0.89% e 0.94% e 1.05% 1.12%
Net investment income ......................... 6.41% d 5.94% 4.26% 2.71% 3.83% 4.33%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $1,669,711 $1,742,514 $1,890,591 $615,002 $127,660 $ 49,389
Portfolio turnover rate ....................... 37.84% 74.56% 77.13% 50.52% 85.54% 76.17%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c Amount rounds to less than $0.001 per share.
d Annualized.
e Benefit of expense reduction rounds to less than 0.01%.
46 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.06 $ 10.10 $ 10.12 $ 10.02 $ 9.68 $ 9.95
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.283 0.524 0.339 0.207 0.328 0.379
Net realized and unrealized gains (losses) ... 0.021 (0.037) (0.015) 0.105 0.333 (0.251)
--------------------------------------------------------------------------------
Total from investment operations .............. 0.304 0.487 0.324 0.312 0.661 0.128
--------------------------------------------------------------------------------
Less distributions from net investment income . (0.284) (0.527) (0.344) (0.212) (0.321) (0.398)
--------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- c -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.08 $ 10.06 $ 10.10 $ 10.12 $ 10.02 $ 9.68
================================================================================
Total return b ................................ 3.06% 4.93% 3.25% 3.14% 6.92% 1.24%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.62% d,e 1.60% e 1.62% e 1.68% e 1.74% 1.72%
Net investment income ......................... 5.68% d 5.21% 3.53% 1.97% 3.14% 3.73%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 57,688 $ 60,972 $ 65,687 $ 69,331 $ 28,637 $ 17,162
Portfolio turnover rate ....................... 37.84% 74.56% 77.13% 50.52% 85.54% 76.17%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c Amount rounds to less than $0.001 per share.
d Annualized.
e Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 47
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.07 $ 10.11 $ 10.13 $ 10.03 $ 9.69 $ 9.95
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.301 0.561 0.373 0.239 0.351 0.405
Net realized and unrealized gains (losses) ... 0.020 (0.039) (0.015) 0.102 0.337 (0.245)
--------------------------------------------------------------------------------
Total from investment operations .............. 0.321 0.522 0.358 0.341 0.688 0.160
--------------------------------------------------------------------------------
Less distributions from net investment income . (0.301) (0.562) (0.378) (0.241) (0.348) (0.420)
--------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- c -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.09 $ 10.07 $ 10.11 $ 10.13 $ 10.03 $ 9.69
================================================================================
Total return b ................................ 3.22% 5.29% 3.59% 3.44% 7.21% 1.57%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 1.29% d,e 1.26% e 1.29% e 1.34% e 1.46% 1.42%
Net investment income ......................... 6.01% d 5.55% 3.86% 2.31% 3.42% 4.03%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $416,541 $380,599 $331,218 $270,104 $ 95,802 $ 54,585
Portfolio turnover rate ....................... 37.84% 74.56% 77.13% 50.52% 85.54% 76.17%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c Amount rounds to less than $0.001 per share.
d Annualized.
e Benefit of expense reduction rounds to less than 0.01%.
48 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.08 $ 10.12 $ 10.13 $ 10.04 $ 9.70 $ 9.95
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.333 0.630 0.438 0.307 0.411 0.464
Net realized and unrealized gains (losses) ... 0.011 (0.043) (0.004) 0.092 0.343 (0.241)
--------------------------------------------------------------------------------
Total from investment operations .............. 0.344 0.587 0.434 0.399 0.754 0.223
--------------------------------------------------------------------------------
Less distributions from net investment income . (0.334) (0.627) (0.444) (0.309) (0.414) (0.473)
--------------------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- c -- --
--------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.09 $ 10.08 $ 10.12 $ 10.13 $ 10.04 $ 9.70
================================================================================
Total return b ................................ 3.45% 5.96% 4.37% 4.03% 7.92% 2.21%
RATIOS TO AVERAGE NET ASSETS
Expenses ...................................... 0.64% d,e 0.62% e 0.64% e 0.69% e 0.80% 0.87%
Net investment income ......................... 6.66% d 6.19% 4.51% 2.96% 4.08% 4.58%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 73,532 $ 94,185 $ 38,822 $ 37,810 $ 7,602 $ 5,874
Portfolio turnover rate ....................... 37.84% 74.56% 77.13% 50.52% 85.54% 76.17%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return is not annualized for periods less than one year.
c Amount rounds to less than $0.001 per share.
d Annualized.
e Benefit of expense reduction rounds to less than 0.01%.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 49
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.5%
b,c SENIOR FLOATING RATE INTERESTS 94.5%
ADVERTISING/MARKETING SERVICES 2.9%
Dex Media East LLC, Term Loan B, 6.84% - 6.86%, 5/08/09 ............ United States $ 4,327,737 $ 4,325,703
Dex Media West LLC,
Term Loan B1, 6.84% - 6.86%, 3/09/10 ............................ United States 1,619,895 1,611,877
Term Loan B2, 6.84% - 6.86%, 3/09/10 ............................ United States 9,159,783 9,114,442
IDEARC Inc. (Verizon Corp.), Term Loan B, 7.35%, 11/17/14 .......... United States 27,930,000 28,104,842
R.H. Donnelley Inc.,
Term Loan A-4, 6.57%, 12/31/09 .................................. United States 475,031 471,772
Term Loan D-1, 6.85%, 6/30/11 ................................... United States 1,727,904 1,727,679
Term Loan D-2, 6.83% - 6.86%, 6/30/11 ........................... United States 14,481,453 14,494,921
Valassis, Term Loan B, 7.10%, 3/02/14 .............................. United States 3,933,333 3,943,324
-----------
63,794,560
-----------
AEROSPACE & DEFENSE 2.6%
BE Aerospace Inc., Term Loan B, 7.12% - 7.14%, 8/24/12 ............. United States 2,650,000 2,658,904
CACI International Inc., Term Loan B, 6.84% - 6.86%, 5/03/11 ....... United States 5,735,210 5,741,117
DRS Technologies Inc., Term Loan, 6.85% - 6.86%, 1/31/13 ........... United States 4,570,597 4,587,142
Dyncorp International, Term Loan B, 7.625%, 2/11/11 ................ United States 7,840,000 7,891,430
GenCorp Inc.,
L/C, 8.32%, 12/06/10 ............................................ United States 1,864,078 1,866,594
Term Loan B, 8.36%, 12/06/10 .................................... United States 1,708,922 1,711,229
Hawker Beechcraft Inc.,
Synthetic L/C, 5.25%, 3/26/14 ................................... United States 390,071 392,123
Term Loan B, 7.32%, 3/26/14 ..................................... United States 4,609,929 4,634,177
ILC Industries Inc., Term Loan B, 7.85%, 2/24/12 ................... United States 2,863,847 2,864,477
K&F Acquisition Inc., Term Loan C, 7.32%, 11/18/12 ................. United States 2,926,991 2,933,284
SI International Inc., Term Loan, 7.33% - 7.40%, 2/09/11 ........... United States 1,612,293 1,618,243
Spirit Aerosystems Inc. (Onex Wind Finance LP), Term Loan B, 7.105%,
12/31/11 .......................................................... United States 2,352,127 2,365,464
TransDigm Inc., Term Loan B, 7.348%, 6/23/13 ....................... United States 9,100,000 9,170,252
Vought Aircraft Industries Inc.,
L/C Term Loan, 7.82%, 12/22/10 .................................. United States 1,000,000 1,007,370
Term Loan B, 7.83%, 12/22/11 .................................... United States 8,511,360 8,595,453
-----------
58,037,259
-----------
AIRLINES 0.2%
United Air Lines Inc., Term Loan, 7.375%, 2/01/14 .................. United States 2,051,066 2,050,738
US Airways Group Inc., Term Loan B, 7.85%, 3/23/14 ................. United States 3,200,000 3,218,176
-----------
5,268,914
-----------
APPAREL/FOOTWEAR 0.6%
Hanesbrands Inc., Term Loan B, 7.105%, 9/05/13 ..................... United States 2,593,393 2,611,132
Warnaco Inc., Term Loan, 6.83% - 8.75%, 1/31/13 .................... United States 4,035,105 4,044,023
The William Carter Co., Term Loan B, 6.82% - 6.855%, 7/14/12 ....... United States 7,089,616 7,097,769
-----------
13,752,924
-----------
APPAREL/FOOTWEAR RETAIL 0.2%
Easton Bell Sports Inc., Term Loan B, 7.07%, 3/16/12 ............... United States 4,495,519 4,507,837
-----------
50 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
AUTO PARTS: ORIGINAL EQUIPMENT MANUFACTURER 2.5%
Accuride Corp., Term Loan B, 7.375%, 1/31/12 ....................... United States $ 2,769,318 $ 2,788,933
Cooper Standard Automotive Inc.,
Term Loan B, 7.875%, 12/23/11 ................................... Canada 3,110,734 3,109,086
Term Loan C, 7.875%, 12/23/11 ................................... United States 7,972,838 7,968,612
Term Loan D, 7.875%, 12/23/11 ................................... United States 1,678,750 1,675,879
Dayco Products LLC (Mark IV), Term Loan B, 7.82% - 7.87%, 6/21/11 .. United States 8,895,100 8,906,130
Key Safety Systems Inc., Term Loan B, 7.57%, 3/08/14 ............... United States 5,100,000 5,134,374
Tenneco Inc., L/C, 6.82%, 3/16/14 .................................. United States 6,463,122 6,494,016
TRW Automotive Inc.,
Term Loan B, 6.938%, 6/30/12 .................................... United States 10,019,375 10,018,073
Term Loan B2, 6.875%, 6/30/12 ................................... United States 2,271,250 2,270,955
Term Loan E, 6.875%, 10/31/10 ................................... United States 6,341,451 6,356,512
-----------
54,722,570
-----------
AUTOMOTIVE AFTERMARKET 0.6%
Affinia Group Inc., Term Loan B, 8.355%, 11/30/11 .................. United States 9,339,369 9,413,795
United Components Inc., Term Loan D, 7.61%, 6/29/12 ................ United States 3,457,028 3,460,865
-----------
12,874,660
-----------
BEVERAGES: ALCOHOLIC 0.5%
Constellation Brands Inc., Term Loan B, 6.875%, 6/05/13 ............ United States 7,416,667 7,467,323
Southern Wine & Spirits of America Inc., Term Loan B, 6.85%, 5/31/12 United States 4,215,348 4,234,570
-----------
11,701,893
-----------
BROADCASTING 3.2%
Alliance Atlantis Communications Inc., Term Loan C, 6.82%, 12/16/11 United States 5,978,000 5,953,968
Cumulus Media Inc., Term Loan B, 7.32% - 7.324%, 6/07/13 ........... United States 4,468,689 4,489,960
Entravision Communications Corp., Term Loan B, 6.85%, 3/29/13 ...... United States 18,124,000 18,208,095
d Gray Television Inc., Term Loan B, 6.85% - 6.86%, 12/31/14 ......... United States 7,462,703 7,483,822
LBI Media Inc., Term Loan B, 6.82% - 6.86%, 3/31/12 ................ United States 990,000 976,536
Mission Broadcasting Inc., Term Loan B, 7.10%, 10/01/12 ............ United States 6,948,135 6,926,039
Nexstar Broadcasting Inc., Term Loan B, 7.10%, 10/01/12 ............ United States 6,582,714 6,561,781
NextMedia Inc.,
Delay Draw, 7.32%, 11/15/12 ..................................... United States 1,067,337 1,068,938
Term Loan B, 7.32%, 11/15/12 .................................... United States 2,401,507 2,400,355
Spanish Broadcasting System Inc., Term Loan B, 7.10%, 6/11/12 ...... United States 4,606,000 4,611,481
Univision Communications Inc., Term Loan B, 7.605%, 9/29/14 ........ United States 12,402,685 12,388,298
-----------
71,069,273
-----------
BUILDING PRODUCTS 1.4%
Goodman Global Holdings Inc., Term Loan C, 7.125%, 12/15/11 ........ United States 4,497,191 4,477,494
Headwaters Inc., Term Loan B, 7.36%, 4/30/11 ....................... United States 4,229,203 4,226,369
NCI Building Systems Inc., Term Loan B, 6.82%, 6/18/10 ............. United States 4,609,764 4,623,316
Nortek Inc., Term Loan, 7.36% - 9.25%, 8/27/11 ..................... United States 17,822,337 17,898,082
-----------
31,225,261
-----------
Semiannual Report | 51
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
CABLE/SATELLITE TELEVISION 7.1%
e Bresnan Communications LLC, Term Loan B, 9.25%, 9/29/13 ............ United States $ 3,400,000 $ 3,413,430
e Charter Communications Operating LLC,
New First Lien Term Loan, 9.25%, 3/06/14 ........................ United States 3,400,000 3,390,820
Refinance First Lien Term Loan, 9.25%, 3/06/14 .................. United States 14,191,120 14,152,804
CSC Holdings Inc. (Cablevision), Incremental Term Loan, 7.07% -
7.11%, 3/29/13 .................................................... United States 28,304,050 28,369,150
DIRECTV Holdings LLC, Term Loan B, 6.82%, 4/13/13 .................. United States 9,932,242 9,965,415
Insight Midwest Holdings, Term Loan B, 7.35%, 4/02/14 .............. United States 18,400,000 18,496,416
Intelsat Corp. (Panamsat), Term Loan B2, 7.349%, 1/03/14 ........... United States 7,760,923 7,779,549
Intelsat Subsidiary Holding Co. Ltd., Term Loan B, 7.349%, 6/30/13 . United States 10,793,022 10,807,053
LodgeNet Entertainment Corp., Term Loan B, 7.34%, 4/14/14 .......... United States 2,700,000 2,714,310
MCC Iowa,
Term Loan D-1, 7.10% - 7.11%, 1/31/15 ........................... United States 9,280,904 9,323,410
Term Loan D-2 (Delayed Draw), 7.10%, 1/31/15 .................... United States 2,514,947 2,526,465
Mediacom Broadband (MCC Iowa), Term Loan A, 6.84% - 6.85%,
3/31/10 ........................................................... United States 3,525,000 3,489,116
Mediacom LLC, Term Loan C, 7.09% - 7.11%, 1/31/15 .................. United States 6,608,437 6,638,704
e RCN Corp., Term Loan B, 9.50%, 4/19/14 ............................. United States 4,000,000 4,027,720
e UPC Financing Partnership, Term Loan N, 9.00%, 12/31/14 ............ Netherlands 23,700,000 23,724,411
Virgin Media Dover LLC (NTL Dover LLC), Tranche B4, 7.356%,
9/03/12 ........................................................... United States 8,954,098 8,989,736
------------
157,808,509
------------
CASINOS/GAMING 2.9%
Ameristar Casinos Inc., Term Loan B, 6.82%, 11/10/12 ............... United States 2,399,588 2,401,700
Boyd Gaming Corp., Term Loan B, 6.82%, 6/30/11 ..................... United States 1,425,550 1,421,801
CCM Merger Inc. (MotorCity Casino), Term Loan B, 7.33% - 7.36%,
7/13/12 ........................................................... United States 5,188,731 5,190,080
Greektown Holdings LLC,
e Delayed Draw Term Loan, 9.75%, 12/03/12 ......................... United States 1,000,000 1,002,130
Term Loan B, 7.86%, 12/03/12 .................................... United States 5,601,678 5,613,610
e Term Loan B Add-On, 9.75%, 12/03/12 ............................. United States 1,000,000 1,002,130
Green Valley Ranch Gaming LLC, Term Loan B, 7.36%, 2/16/14 ......... United States 5,698,182 5,733,396
Herbst Gaming Inc.,
Delayed Draw Term Loan, 7.225%, 12/02/11 ........................ United States 900,000 903,411
Term Loan B, 7.225% - 7.245%, 12/02/11 .......................... United States 1,795,500 1,802,305
Isle of Capri Black Hawk LLC, Term Loan, 7.34% - 7.36%, 10/24/11 ... United States 6,485,304 6,494,838
Penn National Gaming Inc.,
Term Loan A, 6.86% - 6.90%, 10/03/11 ............................ United States 2,534,884 2,536,278
Term Loan B, 7.10% - 7.15%, 10/03/12 ............................ United States 6,385,107 6,422,396
Seminole Tribe of Florida,
d Term B-1 Delay Draw Loan, 6.875%, 3/05/14 ....................... United States 210,526 211,296
Term B-2 Delay Draw Loan, 6.875%, 3/05/14 ....................... United States 2,842,105 2,852,507
Term B-3 Delay Draw Loan, 6.875%, 3/05/14 ....................... United States 2,815,789 2,826,095
Venetian Casino Resorts,
Delay Draw, 7.09%, 6/15/11 ...................................... United States 1,709,402 1,711,026
Term Loan B, 7.09%, 6/15/11 ..................................... United States 8,290,598 8,298,474
52 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
CASINOS/GAMING (CONTINUED)
VML US Finance LLC (Venetian Macau),
d Delay Draw, 7.60%, 5/26/12 ...................................... Macau $ 617,428 $ 621,393
New Project Term Loans, 7.60%, 5/25/13 .......................... Macau 900,000 906,867
Term Loan B, 7.60%, 5/26/13 ..................................... Macau 5,433,333 5,473,975
------------
63,425,708
------------
CHEMICALS: MAJOR DIVERSIFIED 3.3%
Basell BV,
Term Loan B4, 7.57%, 8/01/13 .................................... Netherlands 183,333 184,597
Term Loan C4, 8.32%, 8/01/14 .................................... Netherlands 183,333 184,719
Basell USA Inc.,
Term Loan B2, 7.57%, 8/01/13 .................................... United States 916,667 923,899
Term Loan C2, 8.32%, 8/01/14 .................................... United States 916,667 923,597
Celanese U.S. Holdings LLC, Dollar Term Loan, 7.099%, 4/02/14 ...... United States 14,600,000 14,682,782
e Huntsman International, Term Loan B, 7.07%, 4/19/14 ................ United States 17,949,416 18,017,624
Ineos U.S. Finance LLC,
Term Loan B2, 7.58%, 12/16/13 ................................... United States 3,564,000 3,589,732
Term Loan C2, 8.08%, 12/23/14 ................................... United States 3,564,000 3,589,946
Invista Canada Co., Term Loan B2, 6.85%, 4/29/11 ................... Canada 3,978,281 3,986,476
Invista SARL, Term Loan B1, 6.85%, 4/29/11 ......................... Luxembourg 7,505,097 7,520,558
Lyondell Chemical Co., Term Loan, 6.86%, 8/16/13 ................... United States 18,407,500 18,432,534
------------
72,036,464
------------
CHEMICALS: SPECIALTY 3.1%
Brenntag Holding GmbH & Co. KG,
Acquisition Facility, 7.887%, 12/23/13 .......................... Germany 824,727 827,944
Term Loan B2, 7.887%, 12/23/13 .................................. United States 3,375,273 3,386,850
Compass Minerals Group Inc., Term Loan, 6.82% - 6.85%, 12/22/12 .... United States 5,680,170 5,689,883
Hexion Specialty Chemicals BV, Term Loan C-2, 7.875%, 5/03/13 ...... Netherlands 5,000,749 5,041,005
Hexion Specialty Chemicals Inc., Term Loan C-1, 7.875%, 5/03/13 .... United States 23,020,688 23,206,005
ISP Chemco Inc., Term Loan, 7.125%, 2/16/13 ........................ United States 5,049,000 5,052,989
JohnsonDiversey Inc.,
Delay Draw, 7.86%, 12/16/10 ..................................... United States 483,233 483,479
Term Loan B, 7.86%, 12/16/11 .................................... United States 4,194,858 4,202,325
Nalco Co., Term Loan B, 7.07% - 7.14%, 11/04/10 .................... United States 9,941,281 10,010,074
Rockwood Specialties Group Inc., Term Loan E, 7.355%, 7/30/12 ...... United States 5,874,580 5,893,849
Vertellus Specialties Inc., First Lien Term Loan, 8.60%, 7/10/13 ... United States 4,466,250 4,463,257
------------
68,257,660
------------
COAL 0.3%
Alpha Natural Resources LLC, Term Loan B, 7.10%, 10/26/12 .......... United States 5,628,750 5,641,302
------------
COMMERCIAL PRINTING/FORMS 0.1%
Cenveo Corp.,
Delayed Draw Term Loan, 7.10%, 6/21/13 .......................... United States 85,090 85,246
Term Loan C, 7.10%, 6/21/13 ..................................... United States 2,552,690 2,557,387
------------
2,642,633
------------
Semiannual Report | 53
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
CONSUMER SUNDRIES 0.7%
Central Garden & Pet Co., Term Loan B, 6.82%, 9/30/12 .............. United States $ 5,809,735 $ 5,824,898
Chattem Inc., Term Loan B, 7.11%, 1/02/13 .......................... United States 1,261,333 1,266,404
Nutro Products Inc., Term Loan B, 7.32% - 7.35%, 4/26/13 ........... United States 5,899,872 5,894,091
Weight Watchers International Inc., Term Loan B, 6.875%, 1/26/14 ... United States 2,992,500 3,000,071
------------
15,985,464
------------
CONTAINERS/PACKAGING 1.7%
Altivity Packaging LLC (Bluegrass Container Co.),
Delayed Draw First Lien Term Loan, 7.57% - 7.60%, 6/30/13 ....... United States 2,080,039 2,101,069
First Lien Term Loan, 7.57% - 7.60%, 6/30/13 .................... United States 6,951,711 7,021,992
Berry Plastics Holding Corp., Term Loan C, 7.32%, 4/03/15 .......... United States 1,972,090 1,977,789
BWAY Corp., Term Loan B, 7.125%, 7/17/13 ........................... United States 2,408,684 2,408,323
Graham Packaging Co., New Term Loan, 7.625%, 10/07/11 .............. United States 17,962,834 18,061,809
Graphic Packaging International Corp., Term Loan C, 7.82% - 7.85%,
8/08/10 ........................................................... United States 2,031,596 2,032,409
Smurfit-Stone Container Canada Inc.,
Term Loan C, 7.375%, 11/01/11 ................................... Canada 1,455,692 1,467,265
Term Loan C-1, 7.375%, 11/01/11 ................................. Canada 458,325 465,273
Smurfit-Stone Container Enterprises,
L/C Term Loan, 5.22%, 11/01/10 .................................. United States 608,628 612,517
Term Loan B, 7.375%, 11/01/11 ................................... United States 2,393,819 2,412,850
------------
38,561,296
------------
DATA PROCESSING SERVICES 0.3%
InfoUSA Inc.,
2007 Term Loan, 7.32%, 2/10/12 .................................. United States 2,992,500 2,997,976
Term Loan B, 7.35%, 2/10/12 ..................................... United States 4,643,681 4,652,179
------------
7,650,155
------------
DEPARTMENT STORES 0.2%
Neiman Marcus Group Inc., Term Loan, 7.346%, 4/06/13 ............... United States 4,039,831 4,089,279
------------
DRUG STORE CHAINS 0.1%
The Jean Coutu Group (PJC) Inc., Term Loan B, 7.875%, 7/30/11 ...... Canada 2,737,876 2,739,354
------------
ELECTRIC UTILITIES 3.0%
Ashmore Energy International,
Synthetic Revolver, 8.25%, 3/30/12 .............................. United States 928,177 928,548
Term Loan, 8.35%, 3/30/14 ....................................... United States 7,071,823 7,082,007
Astoria Generating Co. Acquisitions LLC, Term Loan B, 7.34%, 2/23/13 United States 2,410,360 2,417,880
e Broadway General Funding LLC (LS Power), First Lien Term Loan,
9.25%, 5/01/14 .................................................... United States 5,300,000 5,300,000
Dynegy Inc.,
Synthetic L/C, 6.82%, 4/02/13 ................................... United States 6,382,979 6,388,660
Term Loan B, 6.82%, 4/02/13 ..................................... United States 1,117,021 1,118,015
d Infrastrux Group Inc., Term Loan, 8.57%, 11/03/12 .................. United States 1,770,195 1,768,637
Longview Power LLC,
Synthetic L/C, 7.475%, 2/28/14 .................................. United States 440,000 442,719
Term Loan B, 7.625%, 2/28/14 .................................... United States 1,320,000 1,328,158
54 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
LSP General Finance Co. LLC,
Delay Draw, 7.10%, 5/04/13 ...................................... United States $ 193,793 $ 193,967
Term Loan, 7.10%, 5/04/13 ....................................... United States 4,355,556 4,359,475
Midwest Generation LLC, Term Loan, 6.82% - 6.86%, 4/27/11 .......... United States 2,649,513 2,658,283
NRG Energy Inc.,
Credit Link, 7.35%, 2/01/13 ..................................... United States 9,626,473 9,696,458
Term Loan B, 7.35%, 2/01/13 ..................................... United States 21,600,061 21,756,877
TPF Generation Holdings LLC,
Synthetic L/C, 5.25%, 12/15/13 .................................. United States 316,140 318,568
Synthetic Revolver, 5.25%, 12/15/11 ............................. United States 99,103 99,864
Term Loan, 7.35%, 12/15/13 ...................................... United States 1,680,545 1,693,452
------------
67,551,568
------------
ELECTRICAL PRODUCTS 0.2%
EnerSys Capital Inc., Term Loan D, 7.07% - 7.15%, 3/17/11 .......... United States 4,825,208 4,843,930
------------
ELECTRONIC COMPONENTS 1.4%
Freescale Semiconductor Inc., Term Loan B, 7.11%, 12/02/13 ......... United States 16,463,750 16,479,226
Marvell Technology Group Ltd., Term Loan, 7.35%, 11/09/09 .......... Bermuda 10,540,375 10,554,394
Sanmina-SCI Corp., Term Loan, 8.375%, 1/31/08 ...................... United States 4,100,000 4,104,838
------------
31,138,458
------------
ELECTRONICS/APPLIANCES 1.2%
DEI Sales Inc., Term Loan B, 7.82% - 7.85, 9/22/13 ................. United States 5,756,500 5,761,508
Eastman Kodak Co.,
Term Loan B1, 7.57% - 9.50%, 10/18/12 ........................... United States 4,375,930 4,379,168
Term Loan B2 (Delayed Draw), 7.57%, 10/18/12 .................... United States 6,872,025 6,877,797
Jarden Corp.,
Term Loan B1, 7.10%, 1/24/12 .................................... United States 614,659 618,974
Term Loan B2, 7.10%, 1/24/12 .................................... United States 9,816,472 9,883,912
------------
27,521,359
------------
ENVIRONMENTAL SERVICES 1.6%
Allied Waste North America Inc.,
Credit Link, 5.32%, 3/28/14 ..................................... United States 5,414,078 5,449,756
Term Loan B, 7.06% - 7.15%, 1/15/12 ............................. United States 12,208,914 12,289,371
e Casella Waste Systems Inc., Term Loan B, 7.36%, 4/28/10 ............ United States 4,100,000 4,103,239
EnviroSolutions Inc., Term Loan B, 8.87% - 8.885%, 7/07/12 ......... United States 5,661,764 5,707,114
IESI Corp., Term Loan B, 7.109% - 7.11%, 1/20/12 ................... United States 3,800,000 3,796,428
Safety-Kleen Systems Inc.,
Synthetic L/C, 7.875%, 8/02/13 .................................. United States 528,814 529,490
Term Loan B, 7.875%, 8/02/13 .................................... United States 2,016,983 2,019,565
Synatech Inc. (Synagro), Term Loan, 7.32%, 3/31/14 ................. United States 2,475,000 2,482,747
------------
36,377,710
------------
FINANCE/RENTAL/LEASING 1.5%
Ashtead Holdings LLC, Term Loan, 7.125%, 8/31/11 ................... United States 3,800,000 3,786,928
Avis Budget Car Rental LLC, Term Loan, 6.61%, 4/19/12 .............. United States 9,051,429 9,043,554
Baker Tanks Inc., Term Loan, 9.50%, 11/23/12 ....................... United States 1,415,937 1,416,447
Semiannual Report | 55
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
FINANCE/RENTAL/LEASING (CONTINUED)
Hertz Corp.,
Credit Link, 5.35%, 12/21/12 .................................... United States $ 1,535,410 $ 1,545,652
Term Loan B, 7.07% - 7.09%, 12/21/12 ............................ United States 8,576,596 8,633,802
RSC Holdings III, ABL Term Loan, 7.10% - 9.00%, 11/30/12 ........... United States 8,457,500 8,453,017
------------
32,879,400
------------
FINANCIAL CONGLOMERATES 0.5%
Nasdaq Stock Market Inc.,
Incremental Term Loan B, 7.07%, 4/18/12 ......................... United States 995,000 995,786
Term Loan B, 7.07%, 4/18/12 ..................................... United States 6,556,210 6,561,324
Term Loan C (Delayed Draw), 7.07%, 4/18/12 ...................... United States 3,800,482 3,803,447
------------
11,360,557
------------
FOOD DISTRIBUTORS 0.2%
OSI Group LLC,
German Term Loan, 7.35%, 9/02/11 ................................ Germany 1,193,293 1,193,985
Netherlands Term Loan, 7.35%, 9/02/11 ........................... Netherlands 1,491,616 1,492,481
U.S. Term Loan, 7.35%, 9/02/11 .................................. United States 2,684,908 2,686,465
------------
5,372,931
------------
FOOD: MAJOR DIVERSIFIED 0.6%
Del Monte Foods Co., Term Loan B, 6.82% - 6.855%, 2/08/12 .......... United States 7,503,426 7,514,456
Pinnacle Foods Finance LLC, Term Loan B, 8.099%, 4/02/14 ........... United States 6,493,030 6,540,170
------------
14,054,626
------------
FOOD: MEAT/FISH/DAIRY 1.0%
Advance Food Co., Term Loan B, 7.10%, 3/16/14 ...................... United States 1,400,000 1,405,880
Bumble Bee Foods LLC, Term Loan B, 7.106% - 7.11%, 5/02/12 ......... United States 2,000,000 1,997,440
Dean Foods Co., Term Loan B, 6.875%, 4/02/14 ....................... United States 15,700,000 15,716,014
Michael Foods Inc., Term Loan B1, 7.36%, 11/21/10 .................. United States 2,420,313 2,432,124
------------
21,551,458
------------
FOOD: SPECIALTY/CANDY 0.4%
CBRL Group (Cracker Barrel), Term Loan B1, 6.86%, 4/27/13 .......... United States 5,212,110 5,214,508
Herbalife International Inc., Term Loan B, 6.82%, 7/21/13 .......... United States 3,064,750 3,065,332
------------
8,279,840
------------
HOME FURNISHINGS 0.6%
Knoll Inc., Term Loan, 7.10%, 10/03/12 ............................. United States 3,417,860 3,409,999
National Bedding Co. LLC, Term Loan, 7.35% - 7.36%, 2/19/13 ........ United States 4,575,033 4,580,706
Simmons Bedding Company, Term Loan D, 7.375% - 9.25%, 12/19/11 ..... United States 5,107,391 5,134,307
------------
13,125,012
------------
HOMEBUILDING 1.1%
Building Material Corp. of America, Term Loan B, 8.188%, 2/22/14 ... United States 5,985,000 5,931,494
CONTECH Construction Products Inc., Term Loan B, 7.32%, 1/31/13 .... United States 5,538,894 5,532,857
Lanoga Corp. (Pro-Build Holdings), Term Loan B, 7.10%, 6/29/13 ..... United States 2,868,579 2,867,030
Stile Acquisition Corp. (Masonite), Canadian Term Loan, 7.35% -
7.355%, 4/05/13 ................................................... Canada 5,505,301 5,378,679
56 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
HOMEBUILDING (CONTINUED)
Stile U.S. Acquisition Corp. (Masonite), U.S. Term Loan, 7.35% -
7.355%, 4/05/13 ...................................................... United States $ 5,514,680 $ 5,387,842
------------
25,097,902
------------
HOSPITAL/NURSING MANAGEMENT 5.0%
HCA Inc., Term Loan B-1, 7.60%, 11/18/13 .............................. United States 43,092,000 43,553,084
Health Management Associates Inc., Term Loan B, 7.10%, 2/28/14 ........ United States 19,600,000 19,680,948
e Iasis Healthcare LLC,
Delayed Draw Term Loan, 9.25%, 3/15/14 ............................. United States 2,933,227 2,946,984
Initial Term Loan, 9.25%, 3/15/14 .................................. United States 8,584,579 8,624,840
Synthetic L/C, 9.25%, 3/15/14 ...................................... United States 782,194 785,863
LifePoint Hospitals Inc., Term Loan B, 6.985%, 4/15/12 ................ United States 19,065,959 19,037,551
United Surgical Partners International Inc., Term Loan B, 9.25%,
4/19/14 .............................................................. United States 3,941,935 3,963,104
Vanguard Health Holding Co. II LLC, Term Loan C, 7.60%, 9/23/11 ....... United States 11,248,536 11,335,239
------------
109,927,613
------------
HOTEL/RESORTS/CRUISELINES 0.2%
e Oceania Cruises Inc., Term Loan B, 9.50%, 4/26/13 ..................... United States 3,300,000 3,304,653
------------
HOUSEHOLD/PERSONAL CARE 0.7%
Acco Brands Corp., Term Loan B, 7.10% - 7.11%, 8/17/12 ................ United States 3,493,640 3,480,993
American Safety Razor Co., Term Loan B, 7.83% - 7.86%, 7/31/13 ........ United States 739,413 742,518
Levlad LLC and Arbonne Int'l LLC (Natural Products Group), Term Loan B,
7.59% - 7.605%, 3/06/14 .............................................. United States 3,407,080 3,421,491
Prestige Brands Inc., Term Loan B, 7.61% - 9.50%, 4/06/11 ............. United States 2,916,068 2,926,916
Spectrum Brands Inc.,
Dollar Term B Loan, 9.32% - 9.36%, 4/01/13 ......................... United States 4,686,856 4,758,799
Dollar Term B II Loan, 9.32%, 4/01/13 .............................. United States 834,043 836,987
L/C Commitment, 5.17%, 4/01/13 ..................................... United States 231,679 235,235
------------
16,402,939
------------
INDUSTRIAL CONGLOMERATES 1.2%
Amsted Industries Inc.,
Delay Draw, 7.34% - 7.36%, 4/05/13 ................................. United States 900,000 900,783
Term Loan B, 7.35%, 4/05/13 ........................................ United States 2,064,094 2,075,715
Day International Group Inc., Term Loan B, 7.82%, 12/05/12 ............ United States 1,648,892 1,657,565
FCI USA,
Term Loan B1, 7.742%, 11/01/13 ..................................... United States 2,650,000 2,652,385
Term Loan C1, 8.617%, 11/03/14 ..................................... United States 2,650,000 2,651,060
e GPS CCMP Merger Corp. (Generac), Term Loan B, 7.85%, 11/09/13 ......... United States 9,581,333 9,590,819
PlayPower Inc., Term Loan B, 8.10%, 6/30/12 ........................... United States 1,259,055 1,264,142
TriMas Co. LLC,
Term Loan B, 8.09% - 8.125%, 8/02/13 ............................... United States 4,758,258 4,780,384
Tranche B-1 L/C, 8.07%, 8/02/13 .................................... United States 1,103,578 1,107,672
------------
26,680,525
------------
INDUSTRIAL MACHINERY 2.2%
CI Acquisition Inc. (Chart Industries), Term Loan B, 7.375%, 10/17/12 . United States 2,603,379 2,595,179
Colfax Corp., Term Loan B, 7.625%, 12/19/11 ........................... United States 5,407,616 5,409,130
Semiannual Report | 57
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
INDUSTRIAL MACHINERY (CONTINUED)
Dresser Inc., Term Loan B, 10.00%, 10/31/13 ......................... United States $ 9,665,924 $ 9,675,493
Flowserve Corp., Term Loan B, 6.875%, 8/10/12 ....................... United States 5,582,198 5,583,761
Mueller Group, Term Loan B, 7.32% - 7.36%, 10/03/12 ................. United States 7,370,696 7,379,541
RBS Global Inc. (Rexnord Corp.),
Incremental Tranche B-2, 7.58%, 7/21/13 ........................... United States 1,871,158 1,871,757
Term Loan, 7.84% - 7.858%, 7/19/13 ................................ United States 5,803,279 5,807,863
Sensus Metering Systems Inc.,
Term Loan B1, 7.35% - 7.387%, 12/17/10 ............................ United States 8,437,630 8,431,133
Term Loan B2, 7.35% - 7.387%, 12/17/10 ............................ Luxembourg 914,077 913,373
------------
47,667,230
------------
INDUSTRIAL SPECIALTIES 0.1%
Babcock and Wilcox Co., Synthetic L/C, 5.25%, 2/22/12 ............... United States 1,800,000 1,811,016
------------
INFORMATION TECHNOLOGY SERVICES 0.2%
Cellnet Group Inc., Term Loan, 7.34%, 7/22/11 ....................... United States 999,707 1,001,716
Verifone Inc., Term Loan B, 7.09% - 7.11%, 10/31/13 ................. United States 3,491,250 3,497,849
------------
4,499,565
------------
INSURANCE BROKERS/SERVICES 0.4%
Alliant Resources Group Inc.,
First Lien Term Loan, 8.375%, 11/30/11 ............................ United States 2,666,250 2,668,943
Term Loan C, 8.375%, 11/30/11 ..................................... United States 997,500 998,508
Arrowhead General Insurance Agency Inc., First Lien Term Loan,
8.35% - 8.36%, 8/08/12 ............................................. United States 2,288,500 2,293,809
HMSC Holdings Corp. (Swett & Crawford), First Lien Term Loan, 7.607%,
2/04/15 ............................................................ United States 2,282,750 2,289,849
------------
8,251,109
------------
INVESTMENT BANKS/BROKERS 1.2%
BNY ConvergEx Group LLC, First Lien Term Loan, 8.35%, 10/02/13 ...... United States 8,450,000 8,468,928
LPL Holdings Inc., Term Loan C, 7.85%, 6/28/13 ...................... United States 3,217,561 3,238,636
TD Ameritrade Holding Corp., Term Loan B, 6.82%, 12/31/12 ........... United States 15,613,250 15,669,302
------------
27,376,866
------------
LIFE/HEALTH INSURANCE 0.3%
Conseco Inc., Term Loan, 7.32%, 10/10/13 ............................ United States 7,562,000 7,588,164
------------
MAJOR TELECOMMUNICATIONS 1.3%
Alaska Communications Systems Holdings Inc.,
2005 Incremental Loan, 7.10%, 2/01/12 ............................. United States 1,728,567 1,738,592
2006 Incremental Loan, 7.10%, 2/01/12 ............................. United States 500,000 502,920
Term Loan, 7.10%, 2/01/12 ......................................... United States 8,357,133 8,405,605
Consolidated Communications Inc., Term Loan D, 7.10% - 7.11%,
10/14/11 ........................................................... United States 6,214,286 6,218,511
Wind Telecomunicazioni SpA,
Term Loan B, 8.59%, 9/30/13 ....................................... Italy 5,850,000 5,885,451
Term Loan C, 8.09%, 9/30/14 ....................................... Italy 5,850,000 5,904,698
f Winstar Communications Inc., DIP, 11.25%, 2/20/49 ................... United States 837,576 1,102,809
------------
29,758,586
------------
58 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
MARINE SHIPPING 0.2%
Horizon Lines LLC, Term Loan C, 7.60%, 7/07/11 ..................... United States $ 3,323,949 $ 3,329,201
------------
MEDICAL DISTRIBUTORS 0.2%
VWR International Inc., Term Loan B, 7.61%, 4/07/11 ................ United States 3,418,722 3,419,576
------------
MEDICAL SPECIALTIES 0.6%
Advanced Medical Optics Inc., Term Loan B, 7.085% - 7.10%,
4/02/14 ........................................................... United States 2,000,000 2,009,600
DJ Orthopedics LLC, Term Loan B, 6.875%, 4/07/13 ................... United States 4,955,500 4,971,952
e ONEX Carestream Finance LP, Term Loan, 9.25%, 4/30/13 .............. United States 5,800,000 5,816,704
------------
12,798,256
------------
MEDICAL/NURSING SERVICES 2.9%
AMR Holdco/EmCare Holdco, Term Loan B, 7.32% - 7.386%, 2/10/12 ..... United States 4,356,564 4,367,586
DaVita Inc., Term Loan B-1, 6.82% - 6.86%, 10/05/12 ................ United States 18,274,532 18,347,082
Fresenius Medical Care Holdings Inc., Term Loan B, 6.725% - 6.735%,
3/31/13 ........................................................... United States 26,037,000 26,016,170
HealthSouth Corp., Term Loan B, 7.82% - 7.85%, 3/10/13 ............. United States 10,123,500 10,205,754
U.S. Oncology Inc., Term Loan B, 7.60% - 7.625, 8/20/11 ............ United States 5,803,230 5,823,309
------------
64,759,901
------------
METAL FABRICATION 0.1%
Baldor Electric Co., Term Loan B, 7.125%, 1/31/14 .................. United States 1,134,000 1,137,436
------------
MISCELLANEOUS COMMERCIAL SERVICES 6.8%
Acosta Inc., Term Loan B, 7.57%, 7/28/13 ........................... United States 5,528,225 5,573,335
Acxiom Corp., Term Loan B, 7.07% - 7.105%, 9/14/12 ................. United States 5,561,167 5,580,186
Affiliated Computer Services Inc.,
Additional Term Loan, 7.32%, 3/20/13 ............................ United States 11,006,800 11,026,392
Term Loan B, 7.32%, 3/20/13 ..................................... United States 2,765,000 2,769,922
Alix Partners LLP, Term Loan, 7.610%, 10/12/13 ..................... United States 5,386,500 5,388,655
Alliance Laundry Systems LLC, Term Loan, 7.57%, 1/27/12 ............ United States 1,607,967 1,611,456
e American Reprographics Co. LLC, Term Loan B, 9.00%, 6/30/09 ........ United States 4,827,647 4,832,716
ARAMARK Corp.,
Synthetic L/C, 7.35%, 1/26/14 ................................... United States 566,236 569,555
Term Loan B, 7.35%, 1/26/14 ..................................... United States 7,893,664 7,939,921
Audatex North America Inc., Term Loan B, 7.57%, 4/13/13 ............ United States 2,133,875 2,142,795
Brickman Group Holdings Inc., Term Loan B, 7.34% - 7.399%,
1/23/14 ........................................................... United States 3,800,000 3,809,348
CCC Information Services Group Inc., Term Loan B, 7.85%, 2/10/13 ... United States 3,156,000 3,191,190
e Clarke American Corp., Term Loan B, 9.75%, 3/31/14 ................. United States 6,500,000 6,506,045
Coinmach Corp., Term Loan B-1, 7.875%, 12/19/12 .................... United States 3,084,364 3,107,528
Corporate Express NV,
Term Loan D-1, 7.093% - 7.108%, 12/23/10 ........................ United States 10,936,581 10,945,549
Term Loan D-1 Anton, 7.093%, 12/23/10 ........................... United States 1,296,750 1,297,865
Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien Term
Loan, 7.35%, 10/26/12 ............................................. United States 11,743,494 11,758,643
Duratek Inc. (EnergySolutions), Term Loan B, 7.63%, 6/07/13 ........ United States 2,171,584 2,179,423
Emdeon Business Services LLC, First Lien Term Loan, 7.60%,
11/16/13 .......................................................... United States 6,688,423 6,698,188
Semiannual Report | 59
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
MISCELLANEOUS COMMERCIAL SERVICES (CONTINUED)
EnergySolutions LLC,
Synthetic L/C, 7.57%, 6/07/13 ................................... United States $ 228,832 $ 230,340
Synthetic L/C (Add-On), 7.57%, 6/07/13 .......................... United States 1,830,189 1,841,481
Term Loan B, 7.63%, 6/07/13 ..................................... United States 4,685,742 4,716,621
Geo Group Inc., Term Loan B, 6.82% - 6.855%, 1/24/14 ............... United States 809,199 811,246
Language Lines Inc., Term Loan B, 8.60%, 6/11/11 ................... United States 4,212,039 4,259,087
NEP II Inc., Term Loan B, 7.60%, 2/18/14 ........................... United States 1,906,236 1,919,980
Nielsen Finance LLC (VNU Inc.), Term Loan B, 7.61%, 8/09/13 ........ United States 19,900,000 20,090,443
TDS Investor Corp. (Travelport),
Synthetic L/C, 7.85%, 8/23/13 ................................... United States 1,070,664 1,073,630
Term Loan B, 7.85%, 8/23/13 ..................................... United States 10,874,690 10,904,812
Workflow Management Inc., Term Loan B, 9.355%, 11/30/11 ............ United States 3,812,835 3,810,623
Worldspan LP, Term Loan B, 8.59% - 8.61%, 12/07/13 ................. United States 4,887,750 4,906,470
------------
151,493,445
------------
MOVIES/ENTERTAINMENT 2.9%
24 Hour Fitness Worldwide Inc., Term Loan B, 7.85%, 6/08/12 ........ United States 3,960,000 3,954,733
Carmike Cinemas Inc., Delay Draw, 8.59%, 5/19/12 ................... United States 3,316,026 3,346,666
Cinemark USA Inc., Term Loan, 7.04% - 7.15%, 10/05/13 .............. United States 5,970,000 5,978,597
Cinram International, Term Loan B, 7.36%, 5/05/11 .................. Canada 6,248,765 6,222,896
National CineMedia LLC, Term Loan, 7.09%, 2/13/15 .................. United States 7,400,000 7,420,794
Regal Cinemas Corp., Term Loan, 7.10%, 10/27/13 .................... United States 25,324,438 25,454,605
WMG Acquisition Corp. (Warner Music), Term Loan B, 7.35% - 7.36%,
2/28/11 ........................................................... United States 11,298,724 11,360,642
------------
63,738,933
------------
OIL & GAS PIPELINES 0.1%
El Paso Corp., Deposit Loan, 5.156%, 7/31/11 ....................... United States 3,113,879 3,138,167
------------
OIL & GAS PRODUCTION 0.6%
Helix Energy Solutions Group, Term Loan B, 7.32% - 7.349%, 7/01/13 . United States 10,619,269 10,682,879
W&T Offshore Inc., Term Loan B, 7.60%, 5/26/10 ..................... United States 2,100,000 2,104,389
------------
12,787,268
------------
OIL REFINING/MARKETING 1.3%
Citgo Petroleum Corp., Term Loan B, 6.695%, 11/15/12 ............... United States 7,331,450 7,356,377
Coffeyville Resources LLC,
Synthetic L/C, 5.249%, 12/28/13 ................................. United States 794,595 799,648
Term Loan D, 8.349%, 12/28/13 ................................... United States 4,095,142 4,127,575
Niska Gas Storage Canada ULC (C/R Gas),
Asset Sale Term Loan, 7.07%, 5/13/11 ............................ Canada 1,125,250 1,124,080
Canadian Term Loan, 7.09%, 5/12/13 .............................. Canada 6,106,102 6,097,188
Niska Gas Storage U.S. LLC (C/R Gas),
Delay Draw, 7.07%, 5/12/13 ...................................... United States 717,095 715,016
U.S. Term Loan, 7.07% - 7.09%, 5/12/13 .......................... United States 1,058,615 1,056,053
e Western Refining Inc.,
Delayed Draw Term Loan, 9.00%, 3/06/14 .......................... United States 1,610,714 1,611,375
Term Loan B, 8.95%, 3/06/14 ..................................... United States 6,589,286 6,591,987
------------
29,479,299
------------
60 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
OTHER CONSUMER SERVICES 2.2%
Affinion Group, Term Loan B, 7.82% - 7.86%, 10/17/12 ............... United States $14,430,233 $ 14,563,712
Education Management LLC, Term Loan B, 7.375%, 6/01/13 ............. United States 5,152,294 5,183,826
Euronet Worldwide Inc., Term Loam B, 7.32%, 3/31/14 ................ United States 3,000,000 3,012,480
FTD Inc., Term Loan B, 7.36%, 7/28/13 .............................. United States 4,256,776 4,266,610
Protection One Inc., Term Loan C, 7.57% - 7.61%, 3/31/12 ........... United States 1,570,125 1,571,224
e Realogy Corp.,
Synthetic L/C, 10.25%, 10/10/13 ................................. United States 2,420,000 2,425,663
Term Loan B, 10.25%, 10/10/13 ................................... United States 8,580,000 8,600,077
Sabre Inc., Term Loan B, 7.605%, 3/30/14 ........................... United States 6,700,000 6,721,976
VICAR Operating Inc. (Veterinary Centers), Term Loan B, 6.875%,
5/16/11 ........................................................... United States 1,736,795 1,742,075
------------
48,087,643
------------
OTHER CONSUMER SPECIALTIES 1.0%
Tupperware Corp., Term Loan B, 6.84%, 12/05/12 ..................... United States 15,545,082 15,565,912
Visant Holding Corp. (Jostens IH Corp.), Term Loan C, 7.33%,
12/21/11 .......................................................... United States 5,951,194 5,970,476
Waterpik Technologies Inc., First Lien Term Loan, 7.57%, 6/28/13 ... United States 1,624,164 1,618,674
------------
23,155,062
------------
OTHER METALS/MINERALS 1.1%
Freeport-McMoRan Copper & Gold Inc., Term Loan B, 7.07%, 3/19/14 ... United States 18,012,480 18,098,039
Thompson Creek Metals Co., First Lien Term Loan, 10.07% - 10.11%,
10/26/12 .......................................................... United States 6,689,338 6,759,108
------------
24,857,147
------------
OTHER PHARMACEUTICALS 0.2%
Stiefel Laboratories Inc.,
Delayed Draw Term Loan, 7.605%, 12/28/13 ........................ United States 1,815,674 1,822,900
Initial Term Loan, 7.605%, 12/28/13 ............................. United States 2,373,826 2,383,274
------------
4,206,174
------------
OTHER TRANSPORTATION 0.2%
Laidlaw International Inc., Term Loan B, 7.09%, 7/31/13 ............ United States 3,057,755 3,070,414
Laidlaw Transit Inc., Term Loan B, 7.09%, 7/31/13 .................. Canada 1,019,252 1,023,471
------------
4,093,885
------------
PACKAGED SOFTWARE 1.5%
Infor Global Solutions,
Delayed Draw First Lien Term Loan, 9.10%, 7/28/12 ............... United States 1,795,489 1,797,248
First Lien Term Loan, 9.10%, 7/28/12 ............................ United States 3,441,353 3,447,548
Nuance Communications Inc.,
Term Loan, 7.32%, 3/31/13 ....................................... United States 1,082,267 1,082,170
Term Loan B-1, 7.32%, 3/31/13 ................................... United States 1,700,000 1,699,847
SunGard Data Systems Inc., Term Loan B, 7.36%, 2/28/14 ............. United States 25,236,750 25,353,848
------------
33,380,661
------------
Semiannual Report | 61
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
PERSONNEL SERVICES 0.5%
Allied Security Holdings LLC, Term Loan D, 8.35%, 6/30/10 .......... United States $ 1,955,129 $ 1,962,265
Town Sports International LLC, Term Loan, 7.125%, 2/27/14 .......... United States 1,800,000 1,805,976
U.S. Investigations Services Inc.,
Term Loan B, 7.85%, 10/14/12 .................................... United States 4,225,901 4,234,902
Term Loan C, 7.85%, 10/14/12 .................................... United States 2,172,500 2,177,128
------------
10,180,271
------------
PROPERTY-CASUALTY INSURANCE 0.2%
Affirmative Insurance Holdings Inc., Term Loan, 8.82% - 8.855%,
1/31/14 ........................................................... United States 3,790,500 3,801,000
------------
PUBLISHING: BOOKS/MAGAZINES 0.2%
Readers Digest Association Inc., Term Loan B, 7.33% - 7.348%,
3/02/14 ........................................................... United States 2,100,000 2,104,158
Wenner Media LLC, Term Loan B, 7.10%, 10/02/13 ..................... United States 2,674,000 2,677,851
------------
4,782,009
------------
PUBLISHING: NEWSPAPERS 0.6%
Gatehouse Media Operating Inc.,
Delayed Draw Term Loan, 7.10% - 7.11%, 8/28/14 .................. United States 2,065,217 2,053,301
Term Loan, 7.11%, 8/28/14 ....................................... United States 5,534,783 5,502,847
MediaNews Group Inc.,
Term Loan B, 6.59%, 12/30/10 .................................... United States 1,803,870 1,782,927
Term Loan C, 7.09%, 8/02/13 ..................................... United States 4,168,500 4,157,662
------------
13,496,737
------------
PULP & PAPER 1.9%
Boise Cascade LLC, Term Loan D, 6.82%, 10/28/11 .................... United States 1,977,032 1,980,709
Domtar Corp., Term Loan, 6.735%, 3/07/12 ........................... United States 6,000,000 6,007,440
Georgia-Pacific Corp.,
Additional Term Loan, 7.09%, 12/20/12 ........................... United States 4,571,875 4,598,666
Term Loan B, 7.09% - 7.10%, 12/20/12 ............................ United States 18,999,052 19,100,697
NewPage Corp., Term Loan, 7.625%, 5/02/11 .......................... United States 5,562,312 5,608,813
Verso Paper Holdings LLC, Term Loan B, 7.125%, 8/01/13 ............. United States 5,534,412 5,547,363
------------
42,843,688
------------
RAILROADS 0.3%
Helm Financial Corp., Term Loan B, 7.82% - 7.86%, 7/08/11 .......... United States 3,084,661 3,090,645
Kansas City Southern Railway Co., Term Loan B, 7.07% - 7.08%,
4/26/13 ........................................................... United States 2,853,208 2,851,810
------------
5,942,455
------------
REAL ESTATE DEVELOPMENT 0.2%
Standard Pacific Corp., Term Loan B, 6.86%, 5/05/13 ................ United States 3,500,000 3,462,865
SunCal Master I LLC, Term Loan B, 8.57%, 1/19/10 ................... United States 1,175,316 1,167,277
------------
4,630,142
------------
62 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS 1.1%
Capital Automotive REIT, Term Loan B, 7.07%, 12/15/10 .............. United States $ 1,806,876 $ 1,827,203
CB Richard Ellis Services Inc., Term Loan B, 6.82%, 12/20/13 ....... United States 9,576,000 9,574,947
General Growth Properties Inc., Term Loan A-1, 6.57%, 2/24/10 ...... United States 3,800,658 3,794,425
Macerich Co., Term Loan B, 6.875%, 4/26/10 ......................... United States 7,200,000 7,191,936
e Maguire Properties Holdings III LLC, Term Loan B, 9.25%, 4/15/12 ... United States 2,000,000 2,008,120
------------
24,396,631
------------
RECREATIONAL PRODUCTS 0.4%
Fender Musical Instruments, Term Loan B, 8.11%, 3/30/12 ............ United States 1,353,779 1,359,600
e Mega Bloks Inc., Term Loan B, 7.125% - 7.713%, 7/26/12 ............. Canada 6,622,402 6,647,766
------------
8,007,366
------------
RESTAURANTS 0.3%
Arby's Restaurant Holdings LLC, Term Loan B, 7.59% - 7.61%,
7/25/12 ........................................................... United States 7,066,899 7,095,874
------------
SEMICONDUCTORS 0.6%
Advanced Micro Devices Inc., Term Loan B, 7.34%, 12/31/13 .......... United States 7,606,237 7,616,809
Fairchild Semiconductor Corp., Term Loan, 6.85%, 6/26/13 ........... United States 4,993,672 5,017,942
------------
12,634,751
------------
SPECIALTY STORES 0.8%
Michaels Stores Inc., Term Loan B, 8.125%, 10/31/13 ................ United States 9,547,854 9,557,402
Pantry Inc., Term Loan, 7.07%, 1/02/12 ............................. United States 3,405,620 3,407,834
Sally Holdings LLC, Term Loan B, 7.86%, 11/16/13 ................... United States 4,246,500 4,282,893
------------
17,248,129
------------
SPECIALTY TELECOMMUNICATIONS 2.5%
d Fairpoint Communications Inc., Revolver, 9.25%, 2/08/11 ............ United States 989,850 980,090
Iowa Telecommunications Services Inc., Term Loan B, 7.08% - 7.10%,
11/23/11 .......................................................... United States 14,750,000 14,833,780
Kentucky Data Link Inc., Term Loan B, 7.57%, 2/26/12 ............... United States 1,995,000 2,009,364
NTELOS Inc., Term Loan B-1, 7.57%, 8/24/11 ......................... United States 8,220,766 8,258,335
e West Corp., Term Loan B-2, 7.695% - 7.763%, 10/24/13 ............... United States 12,832,125 12,841,493
Windstream Corp., Tranche B-1, 6.86%, 7/17/13 ...................... United States 16,415,560 16,503,875
------------
55,426,937
------------
TOBACCO 0.6%
Reynolds American Inc., Term Loan B, 7.104% - 7.125%, 5/31/12 ...... United States 14,192,750 14,260,166
------------
TRUCKS/CONSTRUCTION/FARM MACHINERY 1.3%
Oshkosh Truck Corp.,
Term Loan A, 7.10%, 12/06/11 .................................... United States 2,437,500 2,441,912
Term Loan B, 7.10%, 12/06/13 .................................... United States 26,633,250 26,699,300
------------
29,141,212
------------
Semiannual Report | 63
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT a VALUE
- ---------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
b,c SENIOR FLOATING RATE INTERESTS (CONTINUED)
WHOLESALE DISTRIBUTORS 0.2%
Interline Brands,
Delayed Draw Term Loan, 7.07%, 6/23/13 .......................... United States $ 2,248,772 $ 2,240,767
Term Loan B, 7.07%, 6/23/13 ..................................... United States 1,555,535 1,549,997
--------------
3,790,764
--------------
WIRELESS COMMUNICATIONS 0.3%
e American Cellular Corp., Term Loan B, 7.32%, 3/15/14 ............... United States 5,800,000 5,836,482
--------------
TOTAL SENIOR FLOATING RATE INTERESTS (COST $2,089,590,330) .......... 2,095,592,660
--------------
------------
SHARES/
WARRANTS
------------
COMMON STOCKS AND WARRANTS 0.0% g
COMMERCIAL PRINTING/FORMS 0.0% g
h,i Vertis Holdings Inc., wts., 6/30/11 ................................ United States 39,812 --
--------------
STEEL 0.0% g
h,i Copperweld Holding Co., B, Escrow .................................. United States 1,741 150,405
--------------
TOTAL COMMON STOCKS AND WARRANTS (COST $150,406) .................... 150,405
--------------
TOTAL LONG TERM INVESTMENTS (COST $2,089,740,736) ................... 2,095,743,065
--------------
SHORT TERM INVESTMENT (COST $159,678,949) 7.2%
MONEY MARKET FUND 7.2%
j Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% United States 159,678,949 159,678,949
--------------
TOTAL INVESTMENTS (COST $2,249,419,685) 101.7% ...................... 2,255,422,014
OTHER ASSETS, LESS LIABILITIES (1.7)% ............................... (37,949,686)
--------------
NET ASSETS 100.0% ................................................... $2,217,472,328
==============
See Currency and Selected Portfolio Abbreviations on page 91.
a The principal amount is stated in U.S. dollars unless otherwise indicated.
b The coupon rate shown represents the rate at period end.
c See Note 1(j) regarding senior floating rate interests.
d See Note 12 regarding unfunded loan commitments.
e See Note 1(d) regarding securities purchased on a when-issued or delayed
delivery basis.
f See Note 11 regarding defaulted securities.
g Rounds to less than 0.1% of net assets.
h Security has been deemed illiquid because it may not be able to be sold
within seven days. At April 30, 2007, aggregate value of these securities
was $150,405, representing less than 0.01% of net assets.
i Non-income producing for the twelve months ended April 30, 2007.
j See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
64 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LOW DURATION TOTAL RETURN FUND
--------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31,
(UNAUDITED) 2006 2005 f
--------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 9.79 $ 9.77 $ 10.00
--------------------------------------------
Income from investment operations a:
Net investment income .......................... 0.189 0.346 0.263
Net realized and unrealized gains (losses) ..... 0.077 0.036 (0.186)
-------------------------------------------
Total from investment operations ................ 0.266 0.382 0.077
-------------------------------------------
Less distributions from net investment income ... (0.196) (0.362) (0.307)
-------------------------------------------
Redemption fees ................................. -- c -- c -- c
-------------------------------------------
Net asset value, end of period .................. $ 9.86 $ 9.79 $ 9.77
===========================================
Total return b .................................. 2.74% 3.99% 0.78%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates 1.44% d 1.37% 1.97% d
Expenses net of waiver and payments by affiliates 0.90% d,e 0.90% e 0.90% d,e
Net investment income ........................... 3.84% d 3.52% 2.68% d
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 13,261 $ 11,722 $ 10,311
Portfolio turnover rate ......................... 17.36% 86.38% 79.69%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c Amount rounds to less than $0.001 per share.
d Annualized
e Benefit of expense reduction rounds to less than 0.01%.
f For the period November 17, 2004 (commencement of operations) to October
31, 2005.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 89.4%
CORPORATE BONDS 11.7%
COMMUNICATIONS 0.7%
b AT&T Inc., FRN, 5.57%, 11/14/08 ...................................... United States 100,000 $ 100,341
----------
CONSUMER DURABLES 2.7%
Ford Motor Credit Co.,
5.625%, 10/01/08 .................................................. United States 50,000 49,231
7.875%, 6/15/10 ................................................... United States 150,000 150,900
senior note, 9.75%, 9/15/10 ....................................... United States 150,000 158,839
----------
358,970
----------
CONSUMER SERVICES 0.7%
b Cox Communications Inc., FRN, 5.905%, 12/14/07 ....................... United States 100,000 100,288
----------
FINANCE 5.1%
b General Electric Capital Corp., FRN, 5.46%, 10/21/10 ................. United States 18,000 18,040
GMAC LLC,
7.75%, 1/19/10 .................................................... United States 150,000 153,942
6.875%, 9/15/11 ................................................... United States 200,000 200,859
HSBC Finance Corp., 4.125%, 3/11/08 .................................. United States 100,000 99,007
b,c Landsbanki Islands HF, 144A, FRN, 6.06%, 8/25/09 ..................... Iceland 100,000 101,146
b Wells Fargo & Co., FRN, 5.38%, 3/10/08 ............................... United States 100,000 100,084
----------
673,078
----------
PROCESS INDUSTRIES 0.6%
Bunge Ltd. Finance Corp., 4.375%, 12/15/08 ........................... United States 75,000 73,884
----------
UTILITIES 1.9%
CenterPoint Energy Inc., senior note, B, 5.875%, 6/01/08 ............. United States 100,000 100,409
PSEG Funding Trust, 5.381%, 11/16/07 ................................. United States 50,000 49,949
Public Service Electric and Gas Co., 4.00%, 11/01/08 ................. United States 100,000 98,332
----------
248,690
----------
TOTAL CORPORATE BONDS (COST $1,562,836) .............................. 1,555,251
----------
CONVERTIBLE BONDS 0.3%
HEALTH TECHNOLOGY 0.2%
Protein Design Labs Inc., cvt., sub. note, 2.75%, 8/16/23 ............ United States 20,000 26,525
----------
PROCESS INDUSTRIES 0.1%
Headwaters Inc., cvt., senior sub. note, 2.875%, 6/01/16 ............. United States 20,000 19,650
----------
TOTAL CONVERTIBLE BONDS (COST $42,503) ............................... 46,175
----------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 3.8%
FINANCE 3.8%
b Chase Funding Mortgage Loan Asset-Backed Certificates,
2003-6, 1A3, FRN, 3.34%, 5/25/26 .................................. United States 42,755 42,293
2004-2, 2A2, FRN, 5.57%, 2/25/35 .................................. United States 75,916 76,044
66 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
FINANCE (CONTINUED)
b Countrywide Asset-Backed Certificates,
2001-BC3, A, FRN, 5.80%, 12/25/31 ........................................ United States 4,197 $ 4,200
2002-3, 1A1, FRN, 6.06%, 5/25/32 ......................................... United States 1,795 1,797
FNMA, G93-33, K, 7.00%, 9/25/23 ............................................. United States 19,563 20,485
b Ownit Mortgage Loan Asset-Backed Certificates, 2006-6, A2B, FRN, 5.43%,
9/25/37 ................................................................... United States 193,940 193,862
Popular ABS Mortgage Pass-Through Trust, 2004-4, AF3, 3.856%,
9/25/34 ................................................................... United States 55,307 55,026
Residential Funding Mortgage Securities II, 2003-HS3, AI2, 3.15%,
7/25/18 ................................................................... United States 20,959 20,775
Structured Asset Securities Corp., 2004-4XS, 1A4, 4.13%, 2/25/34 ............ United States 14,513 14,382
c Susquehanna Auto Lease Trust, 2005-1, A3, 144A, 4.43%, 6/16/08 .............. United States 73,939 73,681
----------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $502,383) ................................................. 502,545
----------
MORTGAGE-BACKED SECURITIES 20.3%
b FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 2.0%
FHLMC, 4.226%, 12/01/34 ..................................................... United States 130,846 129,030
FHLMC, 4.317%, 10/01/33 ..................................................... United States 134,950 134,185
----------
263,215
----------
b FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 17.1%
FNMA, 3.501%,4/01/34 ........................................................ United States 56,877 55,672
FNMA, 3.841%,1/01/35 ........................................................ United States 44,181 44,275
FNMA, 3.983%,8/01/34 ........................................................ United States 58,862 59,619
FNMA, 4.019%,12/01/34 ....................................................... United States 35,815 35,981
FNMA, 4.179%,11/01/34 ....................................................... United States 145,346 146,196
FNMA, 4.219%,4/01/33 ........................................................ United States 238,455 238,400
FNMA, 4.246%,4/01/33 ........................................................ United States 39,714 39,755
FNMA, 4.247%,6/01/34 ........................................................ United States 78,175 76,847
FNMA, 4.288%,12/01/33 ....................................................... United States 135,414 134,594
FNMA, 4.35%, 1/01/33 ........................................................ United States 46,785 47,018
FNMA, 4.361%,2/01/34 ........................................................ United States 80,923 80,426
FNMA, 4.402%,4/01/35 ........................................................ United States 57,490 56,993
FNMA, 4.403%,2/01/35 ........................................................ United States 159,101 159,439
FNMA, 4.445%,5/01/33 ........................................................ United States 42,730 42,919
FNMA, 4.485%,8/01/34 ........................................................ United States 151,960 150,595
FNMA, 4.50%, 12/01/32 ....................................................... United States 27,899 28,013
FNMA, 4.611%,7/01/34 ........................................................ United States 75,829 75,303
FNMA, 4.778%,3/01/35 ........................................................ United States 329,724 331,414
FNMA, 4.861%,3/01/33 ........................................................ United States 121,142 122,823
FNMA, 5.302%,11/01/32 ....................................................... United States 128,423 129,404
FNMA, 5.53%, 3/01/34 ........................................................ United States 44,310 44,687
FNMA, 5.642%,8/01/33 ........................................................ United States 166,224 168,217
----------
2,268,590
----------
Semiannual Report | 67
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- -----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.4%
FNMA 30 Year, 9.00%, 12/01/20 ........................................ United States 51,394 $ 52,747
----------
b GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 0.8%
GNMA, 5.375%, 4/20/26 ................................................ United States 37,620 38,057
GNMA, 5.75%, 8/20/26 - 9/20/26 ....................................... United States 63,125 63,880
----------
101,937
----------
TOTAL MORTGAGE-BACKED SECURITIES (COST $2,684,594) ................... 2,686,489
----------
U.S. GOVERNMENT AND AGENCY SECURITIES 47.3%
FHLB, 4.625%, 11/21/08 ............................................... United States 250,000 248,994
FHLMC,
3.875%, 6/15/08 .................................................... United States 150,000 148,131
4.125%, 7/12/10 .................................................... United States 400,000 392,444
4.25%, 7/15/09 ..................................................... United States 250,000 247,076
4.375%, 11/16/07 ................................................... United States 300,000 298,597
4.75%, 1/18/11 ..................................................... United States 400,000 399,608
4.875%, 2/17/09 .................................................... United States 300,000 300,054
4.875%, 2/09/10 .................................................... United States 200,000 200,454
5.125%, 4/18/08 .................................................... United States 300,000 300,099
5.25%, 5/21/09 ..................................................... United States 500,000 504,131
FNMA,
4.125%, 5/15/10 .................................................... United States 300,000 294,553
7.125%, 6/15/10 .................................................... United States 200,000 213,499
7.25%, 1/15/10 ..................................................... United States 500,000 530,936
U.S. Treasury Note,
3.625%, 1/15/10 .................................................... United States 1,000,000 977,071
6.50%, 2/15/10 ..................................................... United States 800,000 840,719
d Index Linked, 0.875%, 4/15/10 ...................................... United States 386,636 374,464
----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $6,237,874) ........ 6,270,830
----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 6.0%
European Investment Bank,
2.125%, 9/20/07 ................................................... Supranational e 1,000,000 JPY 8,420
b senior note, FRN, 0.508%, 9/21/11 ................................. Supranational e 9,000,000 JPY 75,368
b,f Government of Argentina, FRN, 5.475%, 8/03/12 ........................ Argentina 30,000 21,501
Government of Indonesia,
11.50%, 9/15/19 .................................................... Indonesia 165,000,000 IDR 20,209
13.15%, 3/15/10 .................................................... Indonesia 150,000,000 IDR 18,559
14.00%, 6/15/09 .................................................... Indonesia 475,000,000 IDR 58,460
68 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Malaysia,
6.45%, 7/01/08 .................................................... Malaysia 250,000 MYR $ 75,567
8.60%, 12/01/07 ................................................... Malaysia 40,000 MYR 12,037
Government of Poland, 5.75%,
6/24/08 ........................................................... Poland 135,000 PLN 49,273
9/23/22 ........................................................... Poland 50,000 PLN 18,753
Government of Singapore,
2.625%, 10/01/07 .................................................. Singapore 25,000 SGD 16,482
5.625%, 7/01/08 ................................................... Singapore 20,000 SGD 13,669
Government of Sweden,
6.50%, 5/05/08 .................................................... Sweden 375,000 SEK 57,457
8.00%, 8/15/07 .................................................... Sweden 660,000 SEK 99,716
KfW Bankengruppe,
b FRN, 0.325%, 8/08/11 .............................................. Germany 3,000,000 JPY 25,133
senior note, 8.25%, 9/20/07 ....................................... Germany 800,000 ISK 12,200
Korea Treasury Note, 3.75%, 9/10/07 .................................. South Korea 95,000,000 KRW 101,580
Nota Do Tesouro Nacional, 9.762%, 1/01/10 ............................ Brazil 230 g BRL 110,931
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $730,432) ....... 795,315
------------
TOTAL LONG TERM INVESTMENTS (COST $11,760,622) ....................... 11,856,605
------------
SHORT TERM INVESTMENTS 9.1%
FOREIGN GOVERNMENT SECURITIES 1.8%
h Egypt Treasury Bill, 9/18/07 ......................................... Egypt 150,000 EGP 25,693
Government of Malaysia,
3.135%, 12/17/07 .................................................. Malaysia 90,000 MYR 26,255
3.546%, 1/11/08 ................................................... Malaysia 10,000 MYR 2,926
3.569%, 2/14/08 ................................................... Malaysia 130,000 MYR 38,046
7.60%, 3/15/08 .................................................... Malaysia 35,000 MYR 10,593
Government of Poland, 8.50%, 5/12/07 ................................. Poland 65,000 PLN 23,453
h Malaysia Treasury Bill, 12/13/07 - 2/28/08 ........................... Malaysia 170,000 MYR 48,409
h Norway Treasury Bill, 9/19/07 - 3/19/08 .............................. Norway 395,000 NOK 64,177
------------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $231,137) .................. 239,552
------------
U.S. GOVERNMENT AND AGENCY SECURITIES (COST $49,832) 0.4%
h,i U.S. Treasury Bill, 5/24/07 .......................................... United States 50,000 49,851
------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $12,041,591) .................................................. 12,146,008
------------
Semiannual Report | 69
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- -----------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MONEY MARKET FUND (COST $910,906) 6.9%
j Franklin Institutional Fiduciary Trust Money Market Portfolio, 5.01% . United States 910,906 $ 910,906
------------
TOTAL INVESTMENTS (COST $12,952,497) 98.5% ........................... 13,056,914
NET UNREALIZED GAIN ON CREDIT DEFAULT SWAPS 0.0% k ................... 5,455
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (0.0)% k ........... (361)
OTHER ASSETS, LESS LIABILITIES 1.5% .................................. 199,199
------------
NET ASSETS 100.0% .................................................... $ 13,261,207
============
See Currency and Selected Portfolio Abbreviations on page 91.
a The principal amount is stated in U.S. dollars unless otherwise indicated.
b The coupon rate shown represents the rate at period end.
c Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2007,
the aggregate value of these securities was $174,827, representing 1.32%
of net assets.
d Principal amount of security is adjusted for inflation. See Note 1(l).
e A supranational organization is an entity formed by two or more central
governments through international treaties.
f The principal amount is stated in original face, and scheduled paydowns
are reflected in the market price on ex-date.
g Principal amount is stated in 1,000 Real units.
h The security is traded on a discount basis with no stated coupon rate.
i On deposit with broker for initial margin on futures contracts (Note 9).
j See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
k Rounds to less than 0.1% of net assets.
70 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN TOTAL RETURN FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS A (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.95 $ 9.91 $ 10.22 $ 10.06 $ 9.72 $ 9.94
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.225 0.439 0.410 0.415 0.403 0.488 g
Net realized and unrealized gains (losses) ... 0.079 0.096 (0.280) 0.226 0.458 (0.161)
-------------------------------------------------------------------------------
Total from investment operations .............. 0.304 0.535 0.130 0.641 0.861 0.327
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.244) (0.495) (0.440) (0.481) (0.521) (0.547)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.01 $ 9.95 $ 9.91 $ 10.22 $ 10.06 $ 9.72
===============================================================================
Total return b ................................ 3.09% 5.56% 1.27% 6.63% 8.88% 3.44%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments
by affiliates ................................ 1.05% e 1.03% 1.04% 1.04% 1.02% 0.97%
Expenses net of waiver and payments
by affiliates ................................ 0.85% e,f 0.85% f 0.85% f 0.80% 0.68% 0.68%
Net investment income ......................... 4.52% e 4.39% 3.88% 3.90% 3.88% 5.02%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $503,799 $406,242 $291,473 $208,943 $149,231 $ 95,514
Portfolio turnover rate ....................... 126.71% 251.50% 58.81% 100.05% 195.15% 135.63%
Portfolio turnover rate excluding mortgage
dollar rolls c ............................... 44.07% 89.19% 51.26% 45.85% 110.73% 95.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c See Note 1(i) regarding mortgage dollar rolls.
d Amount rounds to less than $0.001 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Based on average daily shares outstanding.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS B (UNAUDITED) 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.72 $ 9.71
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.203 0.392 0.356 0.366 0.392 0.295 h
Net realized and unrealized gains (losses) ... 0.081 0.094 (0.266) 0.245 0.418 0.087
-------------------------------------------------------------------------------
Total from investment operations .............. 0.284 0.486 0.090 0.611 0.810 0.382
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.224) (0.456) (0.400) (0.441) (0.480) (0.372)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.00 $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.72
===============================================================================
Total return b ................................ 2.89% 5.04% 0.87% 6.21% 8.44% 4.01%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments
by affiliates ................................ 1.45% e 1.43% 1.44% 1.44% 1.42% 1.36% e
Expenses net of waiver and payments
by affiliates ................................ 1.25% e,f 1.25% f 1.25% f 1.20% 1.08% 1.07% e
Net investment income ......................... 4.12% e 3.99% 3.48% 3.50% 3.48% 4.63% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 20,963 $ 21,028 $ 21,366 $ 19,387 $ 13,797 $ 4,084
Portfolio turnover rate ....................... 126.71% 251.50% 58.81% 100.05% 195.15% 135.63%
Portfolio turnover rate excluding mortgage
dollar rolls c ............................... 44.07% 89.19% 51.26% 45.85% 110.73% 95.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c See Note 1(i) regarding mortgage dollar rolls.
d Amount rounds to less than $0.001 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period March 1, 2002 (effective date) to October 31, 2002.
h Based on average daily shares outstanding.
72 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS C (UNAUDITED) 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.71 $ 9.71
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.203 0.395 0.364 0.363 0.392 0.292 h
Net realized and unrealized gains (losses) ... 0.081 0.089 (0.275) 0.247 0.430 0.087
-------------------------------------------------------------------------------
Total from investment operations .............. 0.284 0.484 0.089 0.610 0.822 0.379
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.224) (0.454) (0.399) (0.440) (0.482) (0.379)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.00 $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.71
===============================================================================
Total return b ................................ 2.89% 5.03% 0.86% 6.31% 8.47% 3.98%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments
by affiliates ................................ 1.45% e 1.43% 1.44% 1.44% 1.42% 1.36% e
Expenses net of waiver and payments
by affiliates ................................ 1.25% e,f 1.25% f 1.25% f 1.20% 1.08% 1.07% e
Net investment income ......................... 4.12% e 3.99% 3.48% 3.50% 3.48% 4.63% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 60,487 $ 46,110 $ 34,751 $ 22,202 $ 15,807 $ 4,466
Portfolio turnover rate ....................... 126.71% 251.50% 58.81% 100.05% 195.15% 135.63%
Portfolio turnover rate excluding mortgage
dollar rolls c ............................... 44.07% 89.19% 51.26% 45.85% 110.73% 95.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c See Note 1(i) regarding mortgage dollar rolls.
d Amount rounds to less than $0.001 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period March 1, 2002 (effective date) to October 31, 2002.
h Based on average daily shares outstanding.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 73
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
CLASS R (UNAUDITED) 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.72 $ 9.66
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.211 0.407 0.389 0.376 0.398 0.385 h
Net realized and unrealized gains (losses) ... 0.091 0.093 (0.284) 0.250 0.428 0.104
-------------------------------------------------------------------------------
Total from investment operations .............. 0.302 0.500 0.105 0.626 0.826 0.489
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.232) (0.470) (0.415) (0.456) (0.496) (0.429)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.01 $ 9.94 $ 9.91 $ 10.22 $ 10.05 $ 9.72
===============================================================================
Total return b ................................ 3.07% 5.20% 1.01% 6.37% 8.61% 5.16%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments
by affiliates ................................ 1.30% e 1.28% 1.29% 1.29% 1.27% 1.22% e
Expenses net of waiver and payments
by affiliates ................................ 1.10% e,f 1.10% f 1.10% f 1.05% 0.93% 0.93% e
Net investment income ......................... 4.27% e 4.14% 3.63% 3.65% 3.63% 4.78% e
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $ 41,257 $ 30,219 $ 21,647 $ 9,083 $ 7,302 $ 1,869
Portfolio turnover rate ....................... 126.71% 251.50% 58.81% 100.05% 195.15% 135.63%
Portfolio turnover rate excluding mortgage
dollar rolls c ............................... 44.07% 89.19% 51.26% 45.85% 110.73% 95.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
c See Note 1(i) regarding mortgage dollar rolls.
d Amount rounds to less than $0.001 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 2, 2002 (effective date) to October 31, 2002.
h Based on average daily shares outstanding.
74 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
-------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30,
2007 YEAR ENDED OCTOBER 31,
ADVISOR CLASS (UNAUDITED) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 9.96 $ 9.92 $ 10.24 $ 10.07 $ 9.73 $ 9.96
-------------------------------------------------------------------------------
Income from investment operations a:
Net investment income ........................ 0.239 0.470 0.436 0.426 0.417 0.513 g
Net realized and unrealized gains (losses) ... 0.078 0.090 (0.289) 0.251 0.470 (0.170)
-------------------------------------------------------------------------------
Total from investment operations .............. 0.317 0.560 0.147 0.677 0.887 0.343
-------------------------------------------------------------------------------
Less distributions from net investment income . (0.257) (0.520) (0.467) (0.507) (0.547) (0.573)
-------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d -- --
-------------------------------------------------------------------------------
Net asset value, end of period ................ $ 10.02 $ 9.96 $ 9.92 $ 10.24 $ 10.07 $ 9.73
===============================================================================
Total return b ................................ 3.22% 5.82% 1.43% 7.00% 9.15% 3.61%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments
by affiliates ................................ 0.80% e 0.78% 0.79% 0.79% 0.77% 0.72%
Expenses net of waiver and payments
by affiliates and expense reduction .......... 0.60% e,f 0.60% f 0.60% f 0.55% 0.43% 0.43%
Net investment income ......................... 4.77% e 4.64% 4.13% 4.15% 4.13% 5.27%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $244,778 $222,992 $178,792 $146,053 $133,432 $134,285
Portfolio turnover rate ....................... 126.71% 251.50% 58.81% 100.05% 195.15% 135.63%
Portfolio turnover rate excluding mortgage
dollar rolls c ............................... 44.07% 89.19% 51.26% 45.85% 110.73% 95.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Total return is not annualized for periods less than one year.
c See Note 1(i) regarding mortgage dollar rolls.
d Amount rounds to less than $0.001 per share.
e Annualized.
f Benefit of expense reduction rounds to less than 0.01%.
g Based on average daily shares outstanding.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 75
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
COUNTRY/
FRANKLIN TOTAL RETURN FUND ORGANIZATION SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 110.4%
CONVERTIBLE PREFERRED STOCK (COST $668,075) 0.1%
ENERGY MINERALS 0.1%
Chesapeake Energy Corp., 6.25%, cvt. pfd. ............................ United States 2,500 $ 709,613
-----------
-----------
PRINCIPAL
AMOUNT a
-----------
CORPORATE BONDS 24.8%
COMMERCIAL SERVICES 0.2%
b ARAMARK Corp., senior note, B, 144A, 8.50%, 2/01/15 .................. United States 800,000 841,001
Dex Media West LLC, senior sub. note, 9.875%, 8/15/13 ................ United States 100,000 109,375
R.H. Donnelley Corp., senior note, 8.875%, 1/15/16 ................... United States 700,000 763,000
b Rental Service Corp., senior note, 144A, 9.50%, 12/01/14 ............. United States 200,000 213,500
-----------
1,926,876
-----------
COMMUNICATIONS 1.8%
c AT&T Inc., FRN, 5.57%, 11/14/08 ...................................... United States 1,000,000 1,003,413
Dobson Cellular Systems Inc., senior secured note, 9.875%,
11/01/12 ........................................................... United States 700,000 768,250
Embarq Corp., senior note, 7.082%, 6/01/16 ........................... United States 2,500,000 2,587,160
Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08,
10.375% thereafter, 11/15/12 ....................................... United Kingdom 200,000 191,000
Intelsat Intermediate, senior note, zero cpn. to 2/01/10, 9.25%
thereafter, 2/01/15 ................................................ Bermuda 200,000 169,000
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.25%, 1/15/13 .... Bermuda 700,000 731,500
Telecom Italia Capital, senior note,
4.95%, 9/30/14 ................................................... Italy 1,500,000 1,431,180
7.20%, 7/18/36 ................................................... Italy 1,500,000 1,609,200
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 ............................................... United States 4,700,000 4,970,189
B, 7.375%, 4/01/32 ............................................... United States 1,000,000 1,071,125
Verizon Virginia Inc., A, 4.625%, 3/15/13 ............................ United States 1,000,000 953,434
-----------
15,485,451
-----------
CONSUMER DURABLES 4.2%
Beazer Homes USA Inc., senior note, 8.125%, 6/15/16 .................. United States 200,000 199,000
Ford Motor Credit Co.,
6.625%, 6/16/08 .................................................. United States 500,000 499,847
5.625%, 10/01/08 ................................................. United States 500,000 492,310
7.875%, 6/15/10 .................................................. United States 9,850,000 9,909,061
7.375%, 2/01/11 .................................................. United States 10,000,000 9,898,600
senior note, 9.75%, 9/15/10 ...................................... United States 11,923,000 12,625,610
senior note, 9.875%, 8/10/11 ..................................... United States 1,500,000 1,598,678
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ....................... United States 600,000 617,250
KB Home, senior note,
6.25%, 6/15/15 ................................................... United States 100,000 93,500
7.25%, 6/15/18 ................................................... United States 700,000 668,500
-----------
36,602,356
-----------
CONSUMER NON-DURABLES 0.5%
b Miller Brewing Co., 144A, 5.50%, 8/15/13 ............................. United States 1,000,000 1,005,194
Reynolds American Inc., senior secured note, 7.625%, 6/01/16 ......... United States 700,000 769,363
76 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
CONSUMER NON-DURABLES (CONTINUED)
b SABMiller PLC, 144A, 6.50%, 7/01/16 .................................. South Africa 2,200,000 $ 2,331,285
Smithfield Foods Inc., senior note,
7.00%, 8/01/11 .................................................... United States 100,000 102,500
7.75%, 5/15/13 .................................................... United States 100,000 104,500
-----------
4,312,842
-----------
CONSUMER SERVICES 1.4%
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ............ United States 200,000 206,000
CCH I LLC, senior secured note, 11.00%, 10/01/15 ..................... United States 200,000 213,500
CCH II LLC, senior note, 10.25%, 9/15/10 ............................. United States 600,000 642,000
Comcast Corp., senior note, 6.50%, 11/15/35 .......................... United States 1,000,000 1,021,086
b Cox Enterprises Inc., 144A, 4.375%, 5/01/08 .......................... United States 500,000 494,532
Harrah's Operating Co. Inc., senior note, 6.50%, 6/01/16 ............. United States 2,000,000 1,787,946
MGM MIRAGE Inc., senior note, 6.625%, 7/15/15 ........................ United States 800,000 780,000
News America Inc., senior deb., 7.25%, 5/18/18 ....................... United States 2,000,000 2,242,656
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ............ United States 200,000 208,123
Station Casinos Inc.,
senior note, 7.75%, 8/15/16 ....................................... United States 600,000 627,000
senior sub. note, 6.875%, 3/01/16 ................................. United States 100,000 94,500
Time Warner Inc., 5.875%, 11/15/16 ................................... United States 1,600,000 1,613,896
Viacom Inc., senior note, 6.25%, 4/30/16 ............................. United States 2,000,000 2,032,262
-----------
11,963,501
-----------
ELECTRONIC TECHNOLOGY 0.6%
Cisco Systems Inc., senior note, 5.50%, 2/22/16 ...................... United States 2,000,000 2,014,388
b Freescale Semiconductor Inc., senior note, 144A, 8.875%,
12/15/14 ............................................................ United States 1,000,000 1,006,250
L-3 Communications Corp., senior sub. note,
6.125%, 1/15/14 ................................................... United States 200,000 198,000
6.375%, 10/15/15 .................................................. United States 500,000 500,000
b NXP BV/NXP Funding LLC, senior secured bond, 144A, 7.875%,
10/15/14 ............................................................ Netherlands 800,000 836,000
Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 .................. United States 200,000 190,000
Solectron Global Finance Ltd., senior sub. note, 8.00%, 3/15/16 ...... United States 200,000 203,000
-----------
4,947,638
-----------
ENERGY MINERALS 1.3%
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ................................................... United States 100,000 106,500
6.625%, 1/15/16 ................................................... United States 1,100,000 1,122,000
6.25%, 1/15/18 .................................................... United States 300,000 299,250
b Gaz Capital SA, 144A, 6.212%, 11/22/16 ............................... Luxembourg 5,000,000 5,077,500
Hess Corp., 7.125%, 3/15/33 .......................................... United States 500,000 550,555
Marathon Oil Corp., 5.375%, 6/01/07 .................................. United States 1,000,000 999,913
b Petroleum Export Cayman, senior note, 144A, 5.265%, 6/15/11 .......... Egypt 859,812 842,109
b,d Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ............ Switzerland 300,000 303,000
Semiannual Report | 77
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
ENERGY MINERALS (CONTINUED)
b Ras Laffan Liquefied Natural Gas Co. Ltd., 144A, 3.437%,
9/15/09 ............................................................. Qatar 384,000 $ 377,957
XTO Energy Inc., 6.10%, 4/01/36 ...................................... United States 2,000,000 1,974,450
-----------
11,653,234
-----------
FINANCE 9.1%
Bear Stearns Cos. Inc., B, 4.55%, 6/23/10 ............................ United States 1,000,000 984,201
b,e BNP Paribas, sub. note, 144A, 5.186%, Perpetual ...................... France 4,000,000 3,860,748
Charles Schwab Corp., senior note, 8.05%, 3/01/10 .................... United States 750,000 805,940
c Chubb Corp., FRN, 6.375%, 3/29/67 .................................... United States 3,300,000 3,345,903
CIT Group Inc., senior note, 5.50%, 11/30/07 ......................... United States 1,000,000 1,000,313
Citigroup Inc., sub. note, 5.00%, 9/15/14 ............................ United States 1,000,000 979,974
CNA Financial Corp., senior note, 6.45%, 1/15/08 ..................... United States 500,000 502,994
c Fifth Third Capital Trust IV, junior sub. note, FRN, 6.50%, 4/15/67 .. United States 3,000,000 3,027,183
General Electric Capital Corp.,
c FRN, 5.46%, 10/21/10 .............................................. United States 1,500,000 1,503,314
senior note, 5.00%, 1/08/16 ....................................... United States 2,000,000 1,960,148
b,e Glitnir Banki HF, 144A, 7.451%, Perpetual ............................ Iceland 1,800,000 1,946,785
GMAC LLC,
7.75%, 1/19/10 .................................................... United States 8,850,000 9,082,560
6.875%, 9/15/11 ................................................... United States 14,800,000 14,863,566
6.875%, 8/28/12 ................................................... United States 1,500,000 1,500,597
The Goldman Sachs Group Inc., 5.125%, 1/15/15 ........................ United States 1,000,000 979,216
b,c ICICI Bank Ltd., sub. note, 144A, FRN, 6.375%, 4/30/22 ............... India 2,000,000 2,002,910
JPMorgan Chase Capital XXII, 6.45%, 2/02/37 .......................... United States 4,000,000 4,062,712
b Kaupthing Bank, 144A, 7.125%, 5/19/16 ................................ Iceland 2,000,000 2,169,016
b Landsbanki Islands HF, 144A, 6.10%, 8/25/11 .......................... Iceland 2,450,000 2,523,387
Lazard Group LLC, 7.125%, 5/15/15 .................................... United States 500,000 530,362
Lincoln National Corp., 6.05%, 4/20/17 ............................... United States 3,800,000 3,764,926
c MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ................. United States 4,000,000 4,005,456
Morgan Stanley, sub. note, 4.75%, 4/01/14 ............................ United States 1,500,000 1,438,350
b Nationwide Mutual Insurance Co., 144A, 8.25%, 12/01/31 ............... United States 1,200,000 1,472,162
Residential Capital LLC, senior note, 6.00%, 2/22/11 ................. United States 3,000,000 2,968,257
b Standard Chartered Bank, 144A, 8.00%, 5/30/31 ........................ United Kingdom 1,000,000 1,230,028
UBS Paine Webber Group Inc., senior note, 6.55%, 4/15/08 ............. United States 150,000 150,861
e USB Capital IX, 6.189%, Perpetual .................................... United States 2,000,000 2,055,376
e Wachovia Capital Trust III, 5.80%, Perpetual ......................... United States 2,000,000 2,031,542
b WEA Finance/WCI Finance, senior note, 144A, 5.70%, 10/01/16 .......... Australia 3,000,000 3,040,155
-----------
79,788,942
-----------
HEALTH SERVICES 0.3%
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ........................ United States 800,000 822,000
b HCA Inc., senior secured note, 144A, 9.125%, 11/15/14 ................ United States 800,000 866,000
Tenet Healthcare Corp., senior note,
6.375%, 12/01/11 .................................................. United States 200,000 189,000
9.875%, 7/01/14 ................................................... United States 600,000 618,000
78 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
HEALTH SERVICES (CONTINUED)
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%,
10/01/14 ............................................................ United States 200,000 $ 208,250
-----------
2,703,250
-----------
HEALTH TECHNOLOGY 0.2%
Wyeth, 5.95%, 4/01/37 ................................................ United States 2,000,000 2,006,810
-----------
INDUSTRIAL SERVICES 0.3%
Compagnie Generale de Geophysique-Veritas, senior note, 7.75%,
5/15/17 ............................................................. France 400,000 425,000
Markwest Energy Partners LP, senior note, 6.875%, 11/01/14 ........... United States 700,000 691,250
Waste Management Inc., senior note, 6.50%, 11/15/08 .................. United States 500,000 508,645
The Williams Cos. Inc.,
8.75%, 3/15/32 .................................................... United States 400,000 467,500
senior note, 7.625%, 7/15/19 ...................................... United States 200,000 219,000
senior note, 7.875%, 9/01/21 ...................................... United States 400,000 445,000
-----------
2,756,395
-----------
NON-ENERGY MINERALS 0.3%
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%,
4/01/17 ............................................................. United States 800,000 877,000
Novelis Inc., senior note, 7.25%, 2/15/15 ............................ Canada 700,000 741,125
Weyerhaeuser Co., 6.75%, 3/15/12 ..................................... United States 1,000,000 1,054,340
-----------
2,672,465
-----------
PROCESS INDUSTRIES 1.0%
Bunge Ltd. Finance Corp., senior note,
5.875%, 5/15/13 ................................................... United States 2,000,000 2,002,706
5.10%, 7/15/15 .................................................... United States 680,000 642,631
b Huntsman International LLC, senior note, 144A, 7.875%, 11/15/14 ...... United States 800,000 840,000
JSG Funding PLC, senior sub. note, 7.75%, 4/01/15 .................... Ireland 100,000 103,000
Lyondell Chemical Co., senior note, 8.00%, 9/15/14 ................... United States 1,000,000 1,052,500
Nalco Co., senior sub. note, 8.875%, 11/15/13 ........................ United States 700,000 752,500
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ............................................................ United States 700,000 707,875
RPM International Inc., 6.25%, 12/15/13 .............................. United States 1,000,000 1,030,086
b RPM U.K. G.P., 144A, 6.70%, 11/01/15 ................................. United States 1,000,000 1,030,967
b Yara International ASA, 144A, 5.25%, 12/15/14 ........................ Norway 1,000,000 969,143
-----------
9,131,408
-----------
PRODUCER MANUFACTURING 0.8%
Cleveland Electric Illuminating Co., senior note, 5.65%, 12/15/13 .... United States 1,000,000 1,007,882
Commercial Vehicle Group Inc., senior note, 8.00%, 7/01/13 ........... United States 500,000 512,500
Cooper Industries Ltd., 5.25%, 7/01/07 ............................... United States 1,000,000 998,948
Hubbell Inc., 6.375%, 5/15/12 ........................................ United States 1,000,000 1,056,178
b Hutchison Whampoa International Ltd., senior note, 144A,
6.25%, 1/24/14 .................................................... Hong Kong 1,000,000 1,046,442
7.45%, 11/24/33 ................................................... Hong Kong 1,000,000 1,166,236
Semiannual Report | 79
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Nortek Inc., senior sub. note, 8.50%, 9/01/14 ........................ United States 100,000 $ 99,250
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 .............. United States 800,000 860,000
-----------
6,747,436
-----------
REAL ESTATE DEVELOPMENT 0.2%
Colonial Realty LP, 5.50%, 10/01/15 .................................. United States 2,000,000 1,971,204
-----------
REAL ESTATE INVESTMENT TRUSTS 0.3%
Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 .............. United States 500,000 514,375
Host Marriott LP, senior note, K, 7.125%, 11/01/13 ................... United States 200,000 207,000
iStar Financial Inc., senior note, 6.00%, 12/15/10 ................... United States 1,500,000 1,534,406
-----------
2,255,781
-----------
RETAIL TRADE 0.2%
b Michaels Stores Inc., senior note, 144A, 10.00%, 11/01/14 ............ United States 700,000 767,375
Office Depot Inc., senior note, 6.25%, 8/15/13 ....................... United States 1,000,000 1,024,377
-----------
1,791,752
-----------
TECHNOLOGY SERVICES 0.1%
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ...................................... United States 100,000 107,750
senior sub. note, 10.25%, 8/15/15 ................................. United States 600,000 663,000
-----------
770,750
-----------
TRANSPORTATION 0.3%
CSX Corp., senior deb., 7.45%, 5/01/07 ............................... United States 1,000,000 1,000,000
Union Pacific Corp., 3.625%, 6/01/10 ................................. United States 1,500,000 1,430,338
-----------
2,430,338
-----------
UTILITIES 1.7%
CenterPoint Energy Inc., senior note, 6.85%, 6/01/15 ................. United States 1,000,000 1,063,254
Consumers Energy Co., first mortgage, H, 4.80%, 2/17/09 .............. United States 1,000,000 991,932
Dominion Resources Inc., senior note, 5.15%, 7/15/15 ................. United States 1,500,000 1,473,834
DPL Inc., senior note, 6.875%, 9/01/11 ............................... United States 500,000 530,229
Dynegy Inc., senior note, 8.375%, 5/01/16 ............................ United States 100,000 105,875
East Coast Power LLC, senior secured note, 6.737%, 3/31/08 ........... United States 15,511 15,628
MidAmerican Energy Holdings Co., senior note, 3.50%, 5/15/08 ......... United States 1,000,000 982,370
National Grid PLC, senior note, 6.30%, 8/01/16 ....................... United Kingdom 2,000,000 2,103,428
Northeast Generation Co., senior note, 8.812%, 10/15/26 .............. United States 400,000 411,723
NRG Energy Inc., senior note,
7.25%, 2/01/14 .................................................... United States 500,000 518,750
7.375%, 2/01/16 ................................................... United States 200,000 208,250
7.375%, 1/15/17 ................................................... United States 300,000 311,625
Pacific Gas and Electric Co., 6.05%, 3/01/34 ......................... United States 1,000,000 1,025,577
PSEG Funding Trust, 5.381%, 11/16/07 ................................. United States 2,000,000 1,997,940
Texas New Mexico Power Co., senior note, 6.125%, 6/01/08 ............. United States 1,000,000 1,004,219
80 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
UTILITIES (CONTINUED)
TXU Corp., senior note,
P, 5.55%, 11/15/14 ................................................ United States 500,000 $ 451,124
R, 6.55%, 11/15/34 ................................................ United States 1,000,000 864,795
Westar Energy Inc., first mortgage, 6.00%, 7/01/14 ................... United States 500,000 515,335
-----------
14,575,888
-----------
TOTAL CORPORATE BONDS (COST $213,903,025) ............................ 216,494,317
-----------
CONVERTIBLE BONDS 0.7%
CONSUMER SERVICES 0.2%
Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 .................... United States 890,000 1,130,300
-----------
ELECTRONIC TECHNOLOGY 0.1%
Intel Corp., cvt., sub. deb., 2.95%, 12/15/35 ........................ United States 1,206,000 1,105,804
-----------
HEALTH TECHNOLOGY 0.2%
Protein Design Labs Inc., cvt., sub. note, 2.75%, 8/16/23 ............ United States 1,500,000 1,989,375
-----------
PROCESS INDUSTRIES 0.2%
Headwaters Inc., cvt., senior sub. note, 2.875%, 6/01/16 ............. United States 1,700,000 1,670,250
-----------
TOTAL CONVERTIBLE BONDS (COST $5,369,005) ............................ 5,895,729
-----------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES 23.9%
FINANCE 23.9%
c Ace Securities Corp., 2005-HE5, A2A, FRN, 5.44%, 8/25/35 ............. United States 149,722 149,825
c AFC Home Equity Loan Trust, 1997-4, 2A2, FRN, 5.96%,
12/22/27 ............................................................ United States 302,560 302,862
c Amortizing Residential Collateral Trust, 2002-BC1, M1, FRN,
6.17%, 1/25/32 ...................................................... United States 673,220 675,936
c Bear Stearns Asset-Backed Securities Inc., 2001-2, 2A, FRN,
5.64%, 10/25/34 ..................................................... United States 2,872,691 2,875,555
c Bear Stearns Commercial Mortgage Securities Inc., 2005-PW10, A4,
FRN, 5.405%, 12/11/40 ............................................... United States 4,000,000 4,021,901
Chase Funding Mortgage Loan Asset-Backed Certificates,
2003-1, 1A4, 4.119%, 2/25/29 ...................................... United States 46,295 46,150
c 2004-2, 2A2, FRN, 5.57%, 2/25/35 .................................. United States 3,871,696 3,878,222
Citigroup/Deutsche Bank Commercial Mortgage Trust,
c 2005-CD1, A4, FRN, 5.226%, 7/15/44 ................................ United States 8,750,000 8,748,739
c 2006-CD3, A5, FRN, 5.617%, 10/15/48 ............................... United States 13,500,000 13,726,599
2007-CD4, C, 5.476%, 12/11/49 ..................................... United States 14,200,000 14,026,730
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ...................................... United States 874,199 870,195
c 2004-9, AF4, FRN, 4.649%, 10/25/32 ................................ United States 1,886,221 1,872,678
FHLMC,
2643, OG, 5.00%, 7/15/32 .......................................... United States 3,182,750 3,048,987
c 2942, TF, FRN, 5.67%, 3/15/35 ..................................... United States 4,730,550 4,740,018
Semiannual Report | 81
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
FINANCE (CONTINUED)
c First Franklin Mortgage Loan Asset-Backed Certificates,
2004-FF11, 1A2, FRN, 5.67%, 1/25/35 ............................... United States 2,579,353 $ 2,582,153
2005-FF8, A2B, FRN, 5.50%, 9/25/35 ................................ United States 17,200,000 17,214,756
2005-FF10, A2, FRN, 5.42%, 11/25/35 ............................... United States 1,847,149 1,848,526
FNMA, G93-33, K, 7.00%, 9/25/23 ...................................... United States 1,369,390 1,433,961
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%,
1/10/38 ............................................................. United States 1,578,354 1,549,419
c GMAC Mortgage Corp. Loan Trust, 2004-HE2, A2, FRN, 2.88%,
10/25/33 ............................................................ United States 102,317 100,423
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 ..................................... United States 11,680,000 11,724,963
c,d 2006-GG7, A4, FRN, 5.945%, 7/10/38 ................................ United States 19,500,000 20,357,056
2007-GG9, C, 5.554%, 3/10/39 ...................................... United States 6,438,000 6,412,191
c GS Mortgage Securities Corp. II, 2006-GG6, A4, FRN, 5.553%,
4/10/38 ............................................................. United States 7,300,000 7,400,562
c Home Equity Asset Trust, 2005-6, 2A1, FRN, 5.44%, 12/25/35 ........... United States 266,050 266,250
JPMorgan Chase Commercial Mortgage Securities Corp.,
c 2004-CB9, A4, FRN, 5.377%, 6/12/41 ................................ United States 11,324,540 11,503,265
2004-LN2, A2, 5.115%, 7/15/41 ..................................... United States 697,106 689,426
b Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 ............. United States 98,414 98,053
b Legacy Benefits Insurance Settlements LLC, 2004-1, A, 144A,
5.35%, 2/10/39 ...................................................... United States 2,308,216 2,215,537
c Master Asset-Backed Securities Trust, 2006-AB1, A1, FRN, 5.46%,
2/25/36 ............................................................. United States 878,335 878,938
c Morgan Stanley ABS Capital I, 2006-WMC, 2A, FRN, 5.36%,
7/25/36 ............................................................. United States 2,300,225 2,301,505
c Morgan Stanley Capital I, 2004-IQ7, A4, FRN, 5.431%, 6/15/38 ......... United States 6,900,000 6,977,316
c Ownit Mortgage Loan Asset-Backed Certificates,
2005-2, A2B, FRN, 5.52%, 3/25/36 .................................. United States 5,201,890 5,206,301
2006-6, A2B, FRN, 5.43%, 9/25/37 .................................. United States 18,230,360 18,223,035
Residential Asset Securities Corp.,
2001-KS2, AI5, 7.014%, 6/25/31 .................................... United States 11,559 11,547
2004-KS1, AI4, 4.213%, 4/25/32 .................................... United States 1,296,242 1,279,735
c 2005-AHL2, A2, FRN, 5.58%, 10/25/35 ................................ United States 4,900,000 4,907,371
c Securitized Asset-Backed Receivables LLC,
2004-0P1, M1, FRN, 5.83%, 2/25/34 ................................. United States 946,143 948,194
2006-FR1, A2A, FRN, 5.39%, 11/25/35 ............................... United States 3,769,258 3,772,196
c Securitized Asset-Backed Receivables LLC Trust, 2006-FR2, A2,
FRN, 5.47%, 3/25/36 ................................................. United States 7,200,000 7,202,319
c Structured Asset Investment Loan Trust,
2005-5, A7, FRN, 5.53%, 6/25/35 ................................... United States 5,451,380 5,455,985
2005-HE2, A1, FRN, 5.44%, 7/25/35 ................................. United States 532,645 532,986
Structured Asset Securities Corp.,
c 2002-1A, 2A1, FRN, 6.713%, 2/25/32 ................................ United States 90,293 90,504
2004-4XS, 1A4, 4.13%, 2/25/34 ..................................... United States 798,211 791,033
82 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
FINANCE (CONTINUED)
b Susquehanna Auto Lease Trust, 2005-1, A3, 144A, 4.43%,
6/16/08 ............................................................. United States 5,397,525 $ 5,378,686
-----------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $209,709,722) ...................................... 208,338,589
-----------
MORTGAGE-BACKED SECURITIES 38.8%
c FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 1.7%
FHLMC, 4.701%, 9/01/32 ............................................... United States 3,285,307 3,315,690
FHLMC, 5.642%, 11/01/27 .............................................. United States 8,141,992 8,296,462
FHLMC, 5.98%, 10/01/36 ............................................... United States 168,163 170,191
FHLMC, 7.083%, 4/01/32 ............................................... United States 2,229,736 2,257,511
FHLMC, 7.254%, 4/01/30 ............................................... United States 736,569 749,746
FHLMC, 7.275%, 3/01/25 ............................................... United States 149,378 150,182
-----------
14,939,782
-----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.5%
d FHLMC Gold 15 Year, 4.50%, 5/15/18 ................................... United States 4,620,000 4,472,738
d FHLMC Gold 15 Year, 5.00%, 10/01/17 - 9/01/18 ........................ United States 3,189,570 3,146,344
FHLMC Gold 15 Year, 6.00%, 2/01/17 ................................... United States 102,158 103,975
FHLMC Gold 30 Year, 5.00%, 8/01/33 - 5/01/34 ......................... United States 2,950,684 2,858,805
d FHLMC Gold 30 Year, 5.00%, 5/15/37 ................................... United States 9,320,000 9,005,450
d FHLMC Gold 30 Year, 5.50%, 5/01/33 - 1/01/35 ......................... United States 5,040,015 4,984,059
d FHLMC Gold 30 Year, 6.00%, 5/01/31 ................................... United States 4,000,000 4,032,500
FHLMC Gold 30 Year, 6.00%, 5/01/33 - 8/01/34 ......................... United States 3,351,931 3,391,692
d FHLMC Gold 30 Year, 6.50%, 4/01/28 - 5/15/36 ......................... United States 5,132,581 5,251,187
FHLMC Gold 30 Year, 7.00%, 4/01/26 - 7/01/32 ......................... United States 732,758 763,260
FHLMC Gold 30 Year, 7.50%, 3/01/32 ................................... United States 96,560 101,087
FHLMC Gold 30 Year, 8.50%, 8/01/30 ................................... United States 14,058 15,108
FHLMC Gold 30 Year, 9.00%, 1/01/22 ................................... United States 205,183 217,256
FHLMC Gold 30 Year, 10.00%, 10/01/30 ................................. United States 349,818 391,001
FHLMC Gold PC 15 Year, 8.50%, 5/01/12 ................................ United States 11,915 12,063
-----------
38,746,525
-----------
c FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 4.5%
FNMA, 4.019%, 12/01/34 ............................................... United States 3,202,001 3,216,872
FNMA, 4.361%, 2/01/34 ................................................ United States 3,596,563 3,574,506
FNMA, 4.618%, 12/01/34 ............................................... United States 1,801,153 1,796,805
FNMA, 4.934%, 4/01/35 ................................................ United States 7,757,326 7,797,647
FNMA, 5.617%, 6/01/17 ................................................ United States 128,465 129,103
FNMA, 5.642%, 8/01/33 - 9/01/34 ...................................... United States 16,492,657 16,638,976
FNMA, 6.037%, 12/01/27 ............................................... United States 541,156 544,424
FNMA, 6.044%, 3/01/33 ................................................ United States 625,555 635,338
FNMA, 6.054%, 6/01/33 ................................................ United States 536,135 544,520
FNMA, 6.337%, 12/01/24 ............................................... United States 65,711 67,232
FNMA, 6.575%, 9/01/19 ................................................ United States 47,577 48,180
FNMA, 6.64%, 1/01/17 ................................................. United States 744,291 746,273
FNMA, 6.735%, 10/01/32 ............................................... United States 1,718,581 1,737,567
Semiannual Report | 83
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES (CONTINUED)
c FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 6.75%, 6/01/15 ................................................. United States 131,597 $ 132,066
FNMA, 7.106%, 11/01/31 ............................................... United States 644,540 653,915
FNMA, 7.148%, 12/01/22 ............................................... United States 247,710 249,014
FNMA, 7.302%, 5/01/25 ................................................ United States 203,116 204,956
FNMA, 7.302%, 6/01/32 ................................................ United States 274,085 277,224
------------
38,994,618
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 27.9%
d FNMA 15 Year, 4.50%, 3/01/19 - 6/01/19 ............................... United States 4,513,654 4,372,294
d FNMA 15 Year, 5.00%, 5/01/18 ......................................... United States 13,025,000 12,837,766
FNMA 15 Year, 5.00%, 6/01/18 - 7/01/18 ............................... United States 1,884,399 1,863,161
FNMA 15 Year, 5.50%, 1/01/14 - 2/01/18 ............................... United States 1,081,872 1,086,365
FNMA 15 Year, 6.00%, 8/01/16 - 6/01/17 ............................... United States 568,930 578,871
FNMA 15 Year, 6.50%, 4/01/16 - 9/01/16 ............................... United States 61,373 62,923
d FNMA 30 Year, 5.00%, 5/15/37 ......................................... United States 50,650,000 48,924,760
FNMA 30 Year, 5.50%, 6/01/33 - 12/01/35 .............................. United States 46,971,265 46,516,032
d FNMA 30 Year, 5.50%, 5/15/37 ......................................... United States 47,750,000 47,212,812
FNMA 30 Year, 6.00%, 9/01/32 - 11/01/35 .............................. United States 8,022,228 8,105,880
d FNMA 30 Year, 6.00%, 5/15/37 ......................................... United States 54,750,000 55,160,625
FNMA 30 Year, 6.50%, 5/01/28 - 8/01/32 ............................... United States 2,545,591 2,625,113
d FNMA 30 Year, 6.50%, 5/15/37 ......................................... United States 12,350,000 12,608,584
FNMA 30 Year, 7.50%, 1/01/30 ......................................... United States 91,837 96,293
FNMA 30 Year, 8.00%, 12/01/30 ........................................ United States 6,513 6,890
FNMA 30 Year, 8.50%, 5/01/32 ......................................... United States 291,669 314,204
FNMA 30 Year, 9.00%, 11/01/26 - 5/01/27 .............................. United States 980,245 1,066,798
------------
243,439,371
------------
c GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 0.0% f
GNMA, 6.125%, 10/20/26 ............................................... United States 131,115 132,747
GNMA, 6.375%, 1/20/23 ................................................ United States 64,165 64,903
------------
197,650
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.2%
GNMA I SF 15 Year, 7.00%, 2/15/09 .................................... United States 26,884 27,282
GNMA I SF 30 Year, 6.50%, 10/15/31 - 4/15/32 ......................... United States 164,818 170,159
GNMA I SF 30 Year, 7.00%, 10/15/27 - 4/15/28 ......................... United States 69,124 72,550
GNMA I SF 30 Year, 7.50%, 6/15/07 - 5/15/26 .......................... United States 473,062 494,642
GNMA I SF 30 Year, 8.00%, 8/15/16 - 7/15/17 .......................... United States 220,691 232,663
GNMA I SF 30 Year, 9.00%, 9/15/25 - 3/15/31 .......................... United States 8,999 9,776
GNMA II SF 30 Year, 6.00%, 5/20/31 ................................... United States 53,073 53,925
GNMA II SF 30 Year, 6.50%, 3/20/28 - 4/20/31 ......................... United States 39,105 40,349
GNMA II SF 30 Year, 7.50%, 8/20/30 - 1/20/33 ......................... United States 281,792 293,989
GNMA II SF 30 Year, 8.00%, 1/20/27 - 7/20/27 ......................... United States 245,392 260,506
------------
1,655,841
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $337,361,464) ................. 337,973,787
------------
84 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT AND AGENCY SECURITIES 9.3%
FHLMC,
4.625%, 2/21/08 ...................................................... United States 7,000,000 $ 6,970,201
6.75%, 3/15/31 ....................................................... United States 6,500,000 7,844,070
FNMA,
4.25%, 9/15/07 ....................................................... United States 2,500,000 2,491,665
6.25%, 5/15/29 ....................................................... United States 4,000,000 4,543,932
6.625%, 10/15/07 ..................................................... United States 5,000,000 5,031,195
6.625%, 11/15/30 ..................................................... United States 7,000,000 8,313,536
7.125%, 1/15/30 ...................................................... United States 4,000,000 5,004,948
7.25%, 5/15/30 ....................................................... United States 1,500,000 1,906,611
g U.S. Treasury Bond, Index Linked, 2.00%, 7/15/14 ....................... United States 8,095,500 8,029,732
U.S. Treasury Note,
3.00%, 2/15/08 ....................................................... United States 10,000,000 9,848,050
4.50%, 3/31/12 ....................................................... United States 5,000,000 4,997,465
g Index Linked, 0.875%, 4/15/10 ........................................ United States 3,221,970 3,120,529
g Index Linked, 1.875%, 7/15/15 ........................................ United States 3,138,090 3,071,776
g Index Linked, 2.375%, 4/15/11 ........................................ United States 3,075,210 3,118,457
g Index Linked, 3.00%, 7/15/12 ......................................... United States 6,789,660 7,126,230
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $81,016,258) ..................................................... 81,418,397
-----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 8.2%
Bank of Thailand Bond,
5.00%, 1/12/08 ....................................................... Thailand 7,801,000 THB 226,685
5.375%, 4/7/08 ....................................................... Thailand 1,500,000 THB 43,876
5.50%, 8/10/08 ....................................................... Thailand 6,120,000 THB 180,323
European Investment Bank,
2.125%, 9/20/07 ...................................................... Supranational h 110,000,000 JPY 926,220
c senior note, FRN, 0.508%, 9/21/11 .................................... Supranational h 550,000,000 JPY 4,605,822
c,i Government of Argentina, FRN, 5.475%, 8/03/12 .......................... Argentina 2,225,000 1,594,685
Government of Indonesia,
11.00%, 9/15/25 ...................................................... Indonesia 21,230,000,000 IDR 2,483,802
11.50%, 9/15/19 ...................................................... Indonesia 12,200,000,000 IDR 1,494,263
12.00%, 9/15/26 ...................................................... Indonesia 1,158,000,000 IDR 144,782
12.80%, 6/15/21 ...................................................... Indonesia 9,705,000,000 IDR 1,282,468
12.90%, 6/15/22 ...................................................... Indonesia 21,000,000,000 IDR 2,798,109
13.15%, 3/15/10 ...................................................... Indonesia 9,320,000,000 IDR 1,153,155
14.25%, 6/15/13 ...................................................... Indonesia 7,995,000,000 IDR 1,090,867
14.275%, 12/15/13 .................................................... Indonesia 12,430,000,000 IDR 1,711,724
j Government of Iraq, Reg S, 5.80%, 1/15/28 .............................. Iraq 3,200,000 2,064,000
Government of Malaysia,
3.135%, 12/17/07 ..................................................... Malaysia 5,930,000 MYR 1,729,922
4.305%, 2/27/09 ...................................................... Malaysia 9,300,000 MYR 2,759,020
6.45%, 7/01/08 ....................................................... Malaysia 3,640,000 MYR 1,100,252
d 7.00%, 3/15/09 ....................................................... Malaysia 170,000 MYR 52,888
8.60%, 12/01/07 ...................................................... Malaysia 4,790,000 MYR 1,441,453
Semiannual Report | 85
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
Government of Peru,
7.84%, 8/12/20 ................................................... Peru 1,100,000 PEN $ 410,355
Series 7, 8.60%, 8/12/17 ......................................... Peru 3,200,000 PEN 1,233,235
Government of Poland,
5.75%, 6/24/08 ................................................... Poland 565,000 PLN 206,218
5.75%, 9/23/22 ................................................... Poland 1,800,000 PLN 675,095
6.00%, 5/24/09 ................................................... Poland 11,700,000 PLN 4,318,482
8.50%, 5/12/07 ................................................... Poland 6,100,000 PLN 2,200,993
Government of Singapore,
1.50%, 4/01/08 ................................................... Singapore 180,000 SGD 117,719
2.625%, 10/01/07 ................................................. Singapore 3,020,000 SGD 1,991,057
5.625%, 7/01/08 .................................................. Singapore 1,830,000 SGD 1,250,669
Government of Slovakia,
4.80%, 4/14/09 ................................................... Slovak Republic 2,600,000 SKK 107,024
4.90%, 2/11/14 ................................................... Slovak Republic 2,000,000 SKK 84,329
5.30%, 5/12/19 ................................................... Slovak Republic 1,900,000 SKK 83,697
Government of Sweden,
5.50%, 10/08/12 .................................................. Sweden 2,880,000 SEK 457,863
6.50%, 5/05/08 ................................................... Sweden 20,825,000 SEK 3,190,792
8.00%, 8/15/07 ................................................... Sweden 32,310,000 SEK 4,881,558
Government of Thailand,
4.125%, 2/12/08 .................................................. Thailand 19,000,000 THB 548,962
8.50%, 12/08/08 .................................................. Thailand 15,000,000 THB 464,661
c Government of Vietnam, FRN, 6.25%, 3/12/16 ......................... Vietnam 211,304 212,611
Korea Treasury Note,
3.75%, 9/10/07 ................................................... South Korea 2,890,000,000 KRW 3,090,158
4.25%, 9/10/08 ................................................... South Korea 1,000,000,000 KRW 1,062,785
4.50%, 9/09/08 ................................................... South Korea 3,300,000,000 KRW 3,518,220
4.75%, 3/12/08 ................................................... South Korea 1,100,000,000 KRW 1,177,836
KfW Bankengruppe,
c FRN, 0.325%, 8/08/11 ............................................. Germany 265,000,000 JPY 2,220,045
senior note, 8.25%, 9/20/07 ...................................... Germany 51,000,000 ISK 777,755
Nota Do Tesouro Nacional,
9.762%, 1/01/12 .................................................. Brazil 2,500 k BRL 1,198,618
9.762%, 1/01/14 .................................................. Brazil 1,900 k BRL 906,408
10.00%, 1/01/17 .................................................. Brazil 10,975 k BRL 5,173,827
b Peru Enhanced Pass-Through Finance Ltd., senior secured bond,
A-1, 144A, zero cpn., 5/31/18 ...................................... Peru 1,350,000 924,750
-----------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $64,626,156) ................................................ 71,370,038
-----------
c,l SENIOR FLOATING RATE INTERESTS 4.4%
COMMERCIAL SERVICES 0.4%
Affiliated Computer Services Inc., Term Loan B, 7.32%, 3/20/13 ..... United States 987,500 989,258
Corporate Express NV, Term Loan D-1 Anton, 7.093%, 12/23/10 ........ United States 997,500 998,358
IDEARC Inc. (Verizon Corp.), Term Loan B, 7.35%, 11/17/14 .......... United States 997,500 1,003,744
Workflow Management Inc., Term Loan B, 9.355%, 11/30/11 ............ United States 486,331 486,049
-----------
3,477,409
-----------
86 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
c,l SENIOR FLOATING RATE INTERESTS (CONTINUED)
COMMUNICATIONS 0.1%
Alaska Communications Systems Holdings Inc., 2006 Incremental
Loan, 7.10%, 2/01/12 ................................................ United States 1,000,000 $ 1,005,840
-----------
CONSUMER DURABLES 0.3%
Jarden Corp.,
Term Loan B1, 7.10%, 1/24/12 ...................................... United States 165,606 166,768
Term Loan B2, 7.10%, 1/24/12 ...................................... United States 771,971 777,275
Propex Fabrics Inc., Term Loan B, 8.36%, 7/31/12 ..................... United States 5,044 5,038
Tupperware Corp., Term Loan B, 6.84%, 12/05/12 ....................... United States 1,105,424 1,106,905
-----------
2,055,986
-----------
CONSUMER NON-DURABLES 0.8%
Acco Brands Corp., Term Loan B, 7.10% - 7.11%, 8/17/12 ............... United States 800,000 797,104
B&G Foods Inc., Term Loan C, 7.36%, 2/23/13 .......................... United States 1,250,000 1,263,963
Central Garden & Pet Co., Term Loan B, 6.82%, 9/30/12 ................ United States 1,068,591 1,071,380
Dean Foods Co., Term Loan B, 6.875%, 4/02/14 ......................... United States 500,000 500,510
Michael Foods Inc., Term Loan B1, 7.36%, 11/21/10 .................... United States 1,042,031 1,047,116
Southern Wine & Spirits of America Inc., Term Loan B, 6.85%,
5/31/12 ............................................................. United States 1,187,260 1,192,674
Warnaco Inc., Term Loan, 6.83% - 8.75%, 1/31/13 ...................... United States 1,160,648 1,163,213
-----------
7,035,960
-----------
CONSUMER SERVICES 0.6%
Cinemark USA Inc., Term Loan, 7.04% - 7.15%, 10/05/13 ................ United States 895,500 896,789
Cinram International, Term Loan B, 7.36%, 5/05/11 .................... Canada 240,909 239,912
CSC Holdings Inc. (Cablevision), Incremental Term Loan, 7.07% -
7.11%, 3/29/13 ...................................................... United States 990,000 992,277
Entravision Communications Corp., Term Loan B, 6.85%, 3/29/13 ........ United States 600,000 602,784
Gatehouse Media Operating Inc.,
Delayed Draw Term Loan, 7.10% - 7.11%, 8/28/14 .................... United States 108,696 108,068
Term Loan B, 7.11%, 8/28/14 ....................................... United States 291,304 289,624
MCC Iowa,
Term Loan D-1, 7.10% - 7.11%, 1/31/15 ............................. United States 937,721 942,016
Term Loan D-2 (Delayed Draw), 7.10%, 1/31/15 ...................... United States 88,279 88,683
Regal Cinemas Corp., Term Loan, 7.10%, 10/27/13 ...................... United States 1,097,243 1,102,883
-----------
5,263,036
-----------
ELECTRONIC TECHNOLOGY 0.1%
DRS Technologies Inc., Term Loan, 6.85% - 6.86%, 1/31/13 ............. United States 977,147 980,684
-----------
ENERGY MINERALS 0.1%
Alpha Natural Resources LLC, Term Loan B, 7.10%, 10/26/12 ............ United States 987,500 989,702
-----------
FINANCE 0.2%
Ameritrade Holding Corp., Term Loan B, 6.82%, 12/31/12 ............... United States 1,138,409 1,142,496
Avis Budget Car Rental LLC, Term Loan, 6.61%, 4/19/12 ................ United States 914,286 913,490
-----------
2,055,986
-----------
Semiannual Report | 87
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
c,l SENIOR FLOATING RATE INTERESTS (CONTINUED)
HEALTH SERVICES 0.3%
Fresenius Medical Care Holdings Inc., Term Loan B, 6.725% -
6.735%, 3/31/13 ..................................................... United States 990,000 $ 989,208
HCA Inc., Term Loan B-1, 7.60%, 11/18/13 ............................. United States 698,250 705,721
Health Management Associates Inc., Term Loan B, 7.10%,
2/28/14 ............................................................. United States 1,200,000 1,204,956
-----------
2,899,885
-----------
HEALTH TECHNOLOGY 0.1%
DJ Orthopedics LLC, Term Loan B, 6.875%, 4/07/13 ..................... United States 1,100,000 1,103,652
-----------
INDUSTRIAL SERVICES 0.1%
Allied Waste North America Inc.,
Credit Link, 5.32%, 3/28/14 ....................................... United States 276,841 278,666
Term Loan B, 7.06% - 7.15%, 1/15/12 ............................... United States 624,287 628,401
-----------
907,067
-----------
NON-ENERGY MINERALS 0.1%
Freeport-McMoRan Copper & Gold Inc., Term Loan B, 7.07%,
3/19/14 ............................................................. United States 569,360 572,065
-----------
PROCESS INDUSTRIES 0.3%
Berry Plastics Holding Corp., Term Loan C, 7.32%, 4/03/15 ............ United States 99,500 99,788
Georgia-Pacific Corp.,
Additional Term Loan, 7.09%, 12/20/12 ............................. United States 498,750 501,673
Term Loan B, 7.09% - 7.10%, 12/20/12 .............................. United States 691,250 694,948
d Huntsman International, Term Loan B, 7.07%, 4/19/14 .................. United States 738,836 741,644
Ineos U.S. Finance LLC,
Term Loan B2, 7.58%, 12/16/13 ..................................... United States 247,500 249,287
Term Loan C2, 8.08%, 12/23/14 ..................................... United States 247,500 249,302
Nalco Co., Term Loan B, 7.07% - 7.14%, 11/04/10 ...................... United States 204,891 206,309
-----------
2,742,951
-----------
PRODUCER MANUFACTURING 0.2%
NCI Building Systems Inc., Term Loan B, 6.82%, 6/18/10 ............... United States 976,997 979,870
Sensus Metering Systems Inc.,
Term Loan B1, 7.35% - 7.387%, 12/17/10 ............................ United States 192,391 192,243
Term Loan B2, 7.35% - 7.387%, 12/17/10 ............................ Luxembourg 20,842 20,826
TriMas Co. LLC,
Term Loan B, 8.09% - 8.125%, 8/02/13 .............................. United States 207,565 208,530
Tranche B-1 L/C, 8.07%, 8/02/13 ................................... United States 48,140 48,319
-----------
1,449,788
-----------
REAL ESTATE INVESTMENT TRUSTS 0.3%
Capital Automotive REIT, Term Loan B, 7.07%, 12/15/10 ................ United States 590,723 597,369
CB Richard Ellis Services Inc., Term Loan B, 6.82%, 12/20/13 ......... United States 997,500 997,390
General Growth Properties Inc., Term Loan A-1, 6.57%, 2/24/10 ........ United States 503,655 502,829
-----------
2,097,588
-----------
88 | Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT a VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
c,l SENIOR FLOATING RATE INTERESTS (CONTINUED)
RETAIL TRADE 0.1%
Easton Bell Sports Inc., Term Loan B, 7.07%, 3/16/12 ................. United States 1,093,489 $ 1,096,485
-----------
TECHNOLOGY SERVICES 0.1%
Nuance Communications Inc.,
Term Loan, 7.32%, 3/31/13 ......................................... United States 289,519 289,493
Term Loan B-1, 7.32%, 3/31/13 ..................................... United States 600,000 599,946
-----------
889,439
-----------
UTILITIES 0.2%
Covanta Energy Corp.,
Synthetic L/C, 5.26%, 2/09/14 ..................................... United States 329,897 330,913
Term Loan B, 6.875%, 2/09/14 ...................................... United States 670,103 672,167
NRG Energy Inc.,
Credit Link, 7.35%, 2/01/13 ....................................... United States 98,401 99,117
Term Loan B, 7.35%, 2/01/13 ....................................... United States 378,992 381,743
-----------
1,483,940
-----------
TOTAL SENIOR FLOATING RATE INTERESTS (COST $38,059,317) .............. 38,107,463
-----------
CREDIT - LINKED STRUCTURED NOTE (COST $1,404,289) 0.2%
FINANCE CONGLOMERATES 0.2%
b,c Credit Suisse First Boston International, 144A, FRN, 7.65%,
3/20/09 ............................................................. United States 1,400,000 1,429,750
-----------
TOTAL LONG TERM INVESTMENTS (COST $952,117,311) ...................... 961,737,683
-----------
SHORT TERM INVESTMENTS 14.8%
FOREIGN GOVERNMENT SECURITIES 2.2%
Bank of Thailand Bond, 5.25%, 11/10/07 ............................... Thailand 988,000 THB 28,673
m Canada Treasury Bill, 5/17/07 ........................................ Canada 1,995,000 CAD 1,794,013
m Egypt Treasury Bill, 6/26/07 - 1/08/08 ............................... Egypt 12,725,000 EGP 2,175,052
Government of Malaysia, 3.546%, 1/11/08 .............................. Malaysia 1,530,000 MYR 447,643
Government of Malaysia, 3.569%, 2/14/08 .............................. Malaysia 5,925,000 MYR 1,734,041
d,m Malaysia Treasury Bill, 12/06/07 - 2/28/08 ........................... Malaysia 15,300,000 MYR 4,365,247
m Norway Treasury Bill, 9/19/07 - 3/19/08 .............................. Norway 29,155,000 NOK 4,738,229
m Sweden Treasury Bill, 12/19/07 ....................................... Sweden 10,085,000 SEK 1,471,798
m Thailand Treasury Bill, 9/06/07 - 1/10/08 ............................ Thailand 92,097,000 THB 2,602,988
-----------
TOTAL FOREIGN GOVERNMENT SECURITIES (COST $18,786,669) ............... 19,357,684
-----------
U.S. GOVERNMENT AND AGENCY SECURITIES (COST $797,311) 0.1%
m,n U.S. Treasury Bill, 5/24/07 .......................................... United States 800,000 797,608
-----------
Semiannual Report | 89
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY/
FRANKLIN TOTAL RETURN FUND ORGANIZATION SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
MONEY MARKET FUND (COST $109,049,009) 12.5%
o Franklin Institutional Fiduciary Trust Money Market Portfolio,
5.01% ............................................................. United States 109,049,009 $ 109,049,009
---------------
TOTAL SHORT TERM INVESTMENTS (COST $128,632,989) ..................... 129,204,301
---------------
TOTAL INVESTMENTS (COST $1,080,750,300) 125.2% ....................... 1,090,941,984
NET UNREALIZED GAIN ON CREDIT DEFAULT SWAPS 0.0% f ................... 402,083
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.0% f ............. 26,122
OTHER ASSETS, LESS LIABILITIES (25.2)% ............................... (220,087,293)
---------------
NET ASSETS 100.0% .................................................... $ 871,282,896
===============
See Currency and Selected Portfolio Abbreviations on page 91.
a The principal amount is stated in U.S. dollars unless otherwise indicated.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At April 30, 2007,
the aggregate value of these securities was $48,306,457, representing
5.54% of net assets.
c The coupon rate shown represents the rate at period end.
d See Note 1(d) regarding securities purchased on a when-issued, delayed
delivery, or to-be-announced basis.
e Perpetual bond with no stated maturity date.
f Rounds to less than 0.1% of net assets.
g Principal amount of security is adjusted for inflation. See Note 1(l).
h A supranational organization is an entity formed by two or more central
governments through international treaties.
i The principal amount is stated in original face, and scheduled paydowns
are reflected in the market price on ex-date.
j Security was purchased pursuant to Regulation S under the Securities Act
of 1933, which exempts from registration securities offered and sold
outside of the United States. Such a security cannot be sold in the United
States without either an effective registration statement filed pursuant
to the Securities Act of 1933, or pursuant to an exemption from
registration. This security has been deemed liquid under guidelines
approved by the Trust's Board of Trustees. At April 30, 2007, the value of
this security was $2,064,000, representing 0.24% of net assets.
k Principal amount is stated in 1,000 Real units.
l See Note 1(j) regarding senior floating rate interests.
m The security is traded on a discount basis with no stated coupon rate.
n On deposit with broker for initial margin on futures contracts (Note 9).
o See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
90 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2007 (UNAUDITED) (CONTINUED)
CURRENCY ABBREVIATIONS: SELECTED PORTFOLIO ABBREVIATIONS:
BRL - Brazilian Real DIP - Debtor-In-Possession
CAD - Canadian Dollar FHLB - Federal Home Loan Bank
EGP - Egyptian Pounds FHLMC - Federal Home Loan Mortgage Corp.
IDR - Indonesian Rupiah FNMA - Federal National Mortgage Association
ISK - Iceland Krona FRN - Floating Rate Note
JPY - Japanese Yen GNMA - Government National Mortgage Association
KRW - South Korean Won L/C - Letter of Credit
MYR - Malaysian Ringgit PC - Participation Certificate
NOK - Norwegian Krone REIT - Real Estate Investment Trust
PEN - Peruvian Nuevo Sol SF - Single Family
PLN - Polish Zloty
SEK - Swedish Krona
SGD - Singapore Dollar
SKK - Slovak Koruna
THB - Thai Baht
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 91
Franklin Investors Securities Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 2007 (unaudited)
------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
------------------------------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................... $ 334,558,462 $ 2,089,740,736 $ 12,041,591 $ 971,701,291
Cost - Sweep Money Fund (Note 7) ..................... 17,946,959 159,678,949 910,906 109,049,009
Cost - Repurchase agreements ......................... 6,938,763 -- -- --
------------------------------------------------------------------------
Total cost of investments ............................ $ 359,444,184 $ 2,249,419,685 $ 12,952,497 $ 1,080,750,300
------------------------------------------------------------------------
Value - Unaffiliated issuers ......................... $ 331,060,858 $ 2,095,743,065 $ 12,146,008 $ 981,892,975
Value - Sweep Money Fund (Note 7) .................... 17,946,959 159,678,949 910,906 109,049,009
Value - Repurchase agreements ........................ 6,938,763 -- -- --
------------------------------------------------------------------------
Total value of investments ........................... 355,946,580 2,255,422,014 13,056,914 1,090,941,984
Cash .................................................. -- 29,549,971 -- --
Foreign currency, at value (cost $--, $--, $--, and
$219,078, respectively) .............................. -- -- -- 222,910
Receivables:
Investment securities sold ........................... 1,433,263 62,758,978 116,483 7,816,226
Capital shares sold .................................. 1,690,523 8,001,594 79,204 5,463,916
Interest ............................................. 2,160,397 13,990,613 147,780 7,737,228
Variation margin ..................................... -- -- -- 118,813
Other ................................................ -- -- 497 11,450
Swap premiums paid .................................... -- -- -- 17,588
Unrealized gain on forward exchange contracts (Note 10) -- -- 994 90,288
Unrealized gain on swap agreements (Note 8) ........... -- -- 7,230 620,298
------------------------------------------------------------------------
Total assets ................................... 361,230,763 2,369,723,170 13,409,102 1,113,040,701
------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ...................... -- 138,146,255 34,863 234,941,280
Capital shares redeemed .............................. 1,086,500 7,949,524 3,445 1,956,757
Affiliates ........................................... 240,417 1,499,585 4,764 444,766
Accrued swap premium ................................. -- -- 852 212,405
Swap premiums received ............................... -- -- 14,243 1,718,076
Distributions to shareholders ........................ 426,062 3,593,644 23,004 1,118,198
Professional fees .................................... 14,121 78,133 13,098 14,204
Unaffiliated transfer agent fees ..................... 104,958 103,973 4,496 245,617
Funds advanced by custodian ........................... -- -- -- 749,777
Foreign funds advanced by custodian ................... -- -- 40,416 --
Unrealized loss on forward exchange contracts (Note 10) -- -- 1,355 64,166
Unrealized loss on swap agreements (Note 8) ........... -- -- 1,775 218,215
Unrealized loss on unfunded loan commitments (Note 12) . -- 46,523 -- --
Accrued expenses and other liabilities ................ 39,032 833,205 5,584 74,344
------------------------------------------------------------------------
Total liabilities .............................. 1,911,090 152,250,842 147,895 241,757,805
------------------------------------------------------------------------
Net assets, at value .......................... $ 359,319,673 $ 2,217,472,328 $ 13,261,207 $ 871,282,896
========================================================================
Net assets consist of:
Paid-in capital ....................................... $ 378,659,831 $ 2,585,622,423 $ 13,307,263 $ 866,623,538
Distributions in excess of net investment income ...... (1,406,648) (328,567) (32,451) (1,715,206)
Net unrealized appreciation (depreciation) ............ (3,497,604) 5,955,806 114,244 10,709,289
Accumulated net realized gain (loss) .................. (14,435,906) (373,777,334) (127,849) (4,334,725)
------------------------------------------------------------------------
Net assets, at value .......................... $ 359,319,673 $ 2,217,472,328 $ 13,261,207 $ 871,282,896
========================================================================
92 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2007 (unaudited)
---------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
---------------------------------------------------------------------
CLASS A:
Net assets, at value ................................. $ 326,640,371 $ 1,669,710,767 $ 13,261,207 $ 503,798,521
=====================================================================
Shares outstanding ................................... 36,759,070 165,522,257 1,345,171 50,349,750
=====================================================================
Net asset value per share a .......................... $ 8.89 $ 10.09 $ 9.86 $ 10.01
=====================================================================
Maximum offering price per share (net asset value per
share / 97.75%, 97.75%, 97.75% and 95.75%,
respectively) ....................................... $ 9.09 $ 10.32 $ 10.09 $ 10.45
=====================================================================
CLASS B:
Net assets, at value ................................. -- $ 57,688,147 -- $ 20,962,866
=====================================================================
Shares outstanding ................................... -- 5,722,791 -- 2,095,332
=====================================================================
Net asset value and maximum offering price per share a -- $ 10.08 -- $ 10.00
=====================================================================
CLASS C:
Net assets, at value ................................. $ 32,679,302 $ 416,541,329 -- $ 60,486,983
=====================================================================
Shares outstanding ................................... 3,679,548 41,278,642 -- 6,048,183
=====================================================================
Net asset value and maximum offering price per share a $ 8.88 $ 10.09 -- $ 10.00
=====================================================================
CLASS R:
Net assets, at value ................................. -- -- -- $ 41,256,869
=====================================================================
Shares outstanding ................................... -- -- -- 4,123,471
=====================================================================
Net asset value and maximum offering price per share a -- -- -- $ 10.01
=====================================================================
ADVISOR CLASS:
Net assets, at value .................................. -- $ 73,532,085 -- $ 244,777,657
=====================================================================
Shares outstanding .................................... -- 7,284,590 -- 24,430,085
=====================================================================
Net asset value and maximum offering price per share a -- $ 10.09 -- $ 10.02
=====================================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 93
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended April 30, 2007
-------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
-------------------------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers .................................... $ -- $ -- $ -- $ 19,531
Sweep Money Fund (Note 7) ............................... 309,957 4,033,389 17,116 1,446,730
Interest ................................................. 9,263,311 75,790,025 274,433 19,521,096
-------------------------------------------------------------------
Total investment income ........................... 9,573,268 79,823,414 291,549 20,987,357
-------------------------------------------------------------------
Expenses:
Management fees (Note 3a) ................................ 721,204 3,318,194 24,959 1,419,352
Administrative fees (Note 3b) ............................ 185,589 2,183,764 12,295 781,477
Distribution fees: (Note 3c)
Class A ................................................. 421,604 2,099,266 15,378 556,028
Class B ................................................. -- 285,475 -- 67,157
Class C ................................................. 110,634 1,271,417 -- 168,785
Class R ................................................. -- -- -- 85,266
Transfer agent fees (Note 3e) ............................ 282,912 1,253,799 7,808 771,432
Custodian fees (Note 4) .................................. 3,619 20,283 4,196 54,202
Reports to shareholders .................................. 27,075 158,965 833 35,723
Registration and filing fees ............................. 32,088 88,270 11,147 85,876
Professional fees ........................................ 12,477 73,973 10,452 16,215
Trustees' fees and expenses .............................. 5,842 20,881 142 7,458
Other .................................................... 3,755 42,105 2,898 23,859
-------------------------------------------------------------------
Total expenses .................................... 1,806,799 10,816,392 90,108 4,072,830
Expense reductions (Note 4) ....................... (6) (10,575) (11) (1,830)
Expenses waived/paid by affiliates (Note 3f) ...... -- -- (34,759) (849,332)
-------------------------------------------------------------------
Net expenses ................................... 1,806,793 10,805,817 55,338 3,221,668
-------------------------------------------------------------------
Net investment income ......................... 7,766,475 69,017,597 236,211 17,765,689
-------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................. 107,794 875,349 22,847 3,407,908
Foreign currency transactions ........................... -- -- (2,674) (68,725)
Financial futures contracts ............................. -- -- -- 118,294
Swap agreements ......................................... -- -- (169) (428,971)
-------------------------------------------------------------------
Net realized gain (loss) ....................... 107,794 875,349 20,004 3,028,506
-------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................. 1,461,818 4,079,911 72,642 3,533,734
Translation of assets and liabilities denominated in
foreign currencies .................................... -- -- 4,997 118,972
-------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) .................. 1,461,818 4,079,911 77,639 3,652,706
-------------------------------------------------------------------
Net realized and unrealized gain (loss) ................... 1,569,612 4,955,260 97,643 6,681,212
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations .............................................. $ 9,336,087 $ 73,972,857 $ 333,854 $ 24,446,901
===================================================================
94 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------
FRANKLIN ADJUSTABLE FRANKLIN FLOATING RATE
U.S. GOVERNMENT SECURITIES FUND DAILY ACCESS FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31, APRIL 30, 2007 OCTOBER 31,
(UNAUDITED) 2006 (UNAUDITED) 2006
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 7,766,475 $ 16,188,822 $ 69,017,597 $ 135,282,231
Net realized gain (loss) from investments .. 107,794 (497,000) 875,349 1,505,541
Net change in unrealized appreciation
(depreciation) on investments ............ 1,461,818 1,281,173 4,079,911 (11,804,713)
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......... 9,336,087 16,972,995 73,972,857 124,983,059
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (8,406,393) (18,018,583) (53,925,509) (108,018,973)
Class B .................................. -- -- (1,674,881) (3,443,982)
Class C .................................. (769,534) (1,640,973) (11,750,576) (19,601,654)
Advisor Class ............................ -- -- (1,770,429) (4,629,148)
-------------------------------------------------------------------------
Total distributions to shareholders ......... (9,175,927) (19,659,556) (69,121,395) (135,693,757)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................. (46,210,384) (100,079,739) (76,573,012) (139,955,746)
Class B .................................. -- -- (3,416,463) (4,402,296)
Class C .................................. (3,301,058) (12,245,463) 35,077,195 50,980,725
Advisor Class ............................ -- -- (20,758,985) 56,002,366
-------------------------------------------------------------------------
Total capital share transactions ............ (49,511,442) (112,325,202) (65,671,265) (37,374,951)
-------------------------------------------------------------------------
Redemption fees ............................. 845 7,259 23,027 36,615
-------------------------------------------------------------------------
Net increase (decrease) in net assets (49,350,437) (115,004,504) (60,796,776) (48,049,034)
Net assets:
Beginning of period ......................... 408,670,110 523,674,614 2,278,269,104 2,326,318,138
-------------------------------------------------------------------------
End of period ............................... $ 359,319,673 $ 408,670,110 $ 2,217,472,328 $ 2,278,269,104
-------------------------------------------------------------------------
Undistributed net investment income
(distributions in excess of net investment
income) included in net assets:
End of period .............................. $ (1,406,648) $ 2,804 $ (328,567) $ (224,769)
=========================================================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 95
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------------------------------------------
FRANKLIN LOW DURATION FRANKLIN
TOTAL RETURN FUND TOTAL RETURN FUND
-------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2007 OCTOBER 31, APRIL 30, 2007 OCTOBER 31,
(UNAUDITED) 2006 (UNAUDITED) 2006
-------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................... $ 236,211 $ 372,023 $ 17,765,689 $ 27,650,817
Net realized gain (loss) from investments,
swap agreements, financial futures contracts
and foreign currency transactions ........ 20,004 (93,224) 3,028,506 (4,009,431)
Net change in unrealized appreciation
(depreciation) on investments and
translation of assets and liabilities
denominated in foreign currencies ........ 77,639 144,538 3,652,706 11,198,704
-------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .......... 333,854 423,337 24,446,901 34,840,090
-------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................. (247,947) (394,176) (10,954,369) (17,392,729)
Class B .................................. -- -- (472,760) (983,675)
Class C .................................. -- -- (1,173,118) (1,791,510)
Class R .................................. -- -- (798,096) (1,263,525)
Advisor Class ............................ -- -- (5,974,285) (10,025,400)
-------------------------------------------------------------------------
Total distributions to shareholders ......... (247,947) (394,176) (19,372,628) (31,456,839)
-------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A .................................. 1,447,969 1,382,277 94,661,438 112,725,310
Class B .................................. -- -- (193,913) (403,599)
Class C .................................. -- -- 14,039,148 11,130,931
Class R .................................. -- -- 10,811,380 8,436,557
Advisor Class ............................ -- -- 20,297,742 43,281,057
-------------------------------------------------------------------------
Total capital share transactions ............ 1,447,969 1,382,277 139,615,795 175,170,256
-------------------------------------------------------------------------
Redemption fees ............................. 5,275 (41) 2,668 7,345
-------------------------------------------------------------------------
Net increase (decrease) in net assets 1,539,151 1,411,397 144,692,736 178,560,852
Net assets:
Beginning of period ......................... 11,722,056 10,310,659 726,590,160 548,029,308
-------------------------------------------------------------------------
End of period ............................... $ 13,261,207 $ 11,722,056 $ 871,282,896 $ 726,590,160
-------------------------------------------------------------------------
Distributions in excess of net investment
income included in net assets:
End of period .............................. $ (32,451) $ (36,420) $ (1,715,206) (108,267)
=========================================================================
96 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is registered under the
Investment Company Act of 1940, as amended, (the 1940 Act) as an open-end
investment company, consisting of nine separate funds. All funds included in
this report (the Funds) are diversified, except The Franklin Floating Rate Daily
Access Fund. The financial statements of the remaining funds in the Trust are
presented separately. The classes of shares offered within each of the Funds are
indicated below. Each class of shares differs by its initial sales load,
contingent deferred sales charges, distribution fees, voting rights on matters
affecting a single class and its exchange privilege.
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS A, CLASS B, CLASS C & ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
Franklin Low Duration Total Return Fund Franklin Floating Rate Daily Access Fund
- -------------------------------------------------------------------------------------------------------------
CLASS A & CLASS C CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
Franklin Adjustable U.S. Government Securities Fund Franklin Total Return Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities, government securities, mortgage pass-through
securities, other mortgage-backed securities, collateralized mortgage
obligations and asset-backed securities generally trade in the over-the-counter
market rather than on a securities exchange. The Trust may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Trust may utilize independent pricing services, quotations from
loan dealers and other financial institutions, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Trust's pricing services use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis to determine
current value.
Semiannual Report | 97
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Trust's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 on the
Statements of Operations.
98 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION (CONTINUED)
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. JOINT REPURCHASE AGREEMENT
Certain funds may enter into a joint repurchase agreement whereby their
uninvested cash balance is deposited into a joint cash account with other funds
managed by the investment manager or an affiliate of the investment manager and
is used to invest in one or more repurchase agreements. The value and face
amount of the joint repurchase agreement are allocated to the funds based on
their pro-rata interest. A repurchase agreement is accounted for as a loan by
the fund to the seller, collateralized by securities which are delivered to the
fund's custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. The joint repurchase agreement held by
the funds at period end had been entered into on April 30, 2007. The joint
repurchase agreement is valued at cost.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS
The funds may purchase securities on a when-issued, delayed delivery, or
to-be-announced (TBA) basis, with payment and delivery scheduled for a future
date. These transactions are subject to market fluctuations and are subject to
the risk that the value at delivery may be more or less than the trade date
purchase price. Although the funds will generally purchase these securities with
the intention of holding the securities, they may sell the securities before the
settlement date. Sufficient assets have been segregated for these securities.
E. FUTURES CONTRACTS
The Franklin Total Return Fund may purchase financial futures contracts to gain
exposure to market changes. A financial futures contract is an agreement between
two parties to buy or sell a security for a set price on a future date. 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 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 on these contracts are
included in the Statements of Operations.
Semiannual Report | 99
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. FUTURES CONTRACTS (CONTINUED)
The risks of these contracts include the possibility there may be an illiquid
secondary market and/or a change in the value of the contract may not correlate
with the changes in the value of the underlying securities.
F. FOREIGN CURRENCY CONTRACTS
When the funds purchase or sell foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statements of Operations.
The Franklin Low Duration Total Return Fund and the Franklin Total Return Fund
may also enter into forward exchange contracts to hedge against fluctuations in
foreign exchange rates or to gain exposure to certain foreign currencies. These
contracts are valued daily by the fund and the unrealized gains or losses on the
contracts, as measured by the difference between the contractual forward foreign
exchange rates and the forward rates at the reporting date, are included in the
Statements of Assets and Liabilities. Realized and unrealized gains and losses
on these contracts are included in the Statements of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statements of Assets and Liabilities.
G. CREDIT DEFAULT SWAPS
The Franklin Low Duration Total Return Fund and the Franklin Total Return Fund
may purchase or sell credit default swap contracts to manage or gain exposure to
credit risk. Credit default swaps are agreements between two parties whereby the
buyer receives credit protection and the seller guarantees the credit worthiness
of a referenced debt obligation. The buyer pays the seller a periodic stream of
payments over the term of the contract provided that no event of default has
occurred. Such periodic payments are accrued daily and recorded as realized gain
or loss upon receipt or payment thereof in the Statements of Operations. In
return, the buyer would be entitled to receive the par (or other agreed-upon)
value of a referenced debt obligation from the counterparty to the contract in
the event of a default by a third party, such as a U.S. or foreign issuer, on
the debt obligation.
100 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. CREDIT DEFAULT SWAPS (CONTINUED)
Credit default swaps are marked to market daily based upon quotations from the
market makers and the change in value, if any, is recorded as an unrealized gain
or loss in the Statements of Operations. Any payment received or paid to
initiate a contract is recorded as a liability or asset in the Statements of
Assets and Liabilities and amortized over the life of the contract as a realized
gain or loss. When the swap contract is terminated early, the fund records a
realized gain or loss for any payments received or paid.
The risks of credit default swaps include unfavorable changes in interest rates,
an illiquid secondary market and the possible inability of the counterparty to
fulfill its obligations under the agreement, which may be in excess of the
amount reflected in the Statements of Assets and Liabilities.
H. CREDIT LINKED NOTES
The Franklin Total Return Fund may purchase credit linked notes. Credit linked
notes are intended to replicate the economic effects that would apply had the
fund directly purchased the underlying reference asset or basket of assets. The
risks of credit linked notes include the potential default of the underlying
reference asset, the potential inability of the fund to dispose of the credit
linked note in the normal course of business, and the possible inability of the
counterparties to fulfill their obligations under the contracts.
I. MORTGAGE DOLLAR ROLLS
The Franklin Adjustable U.S. Government Securities Fund and the Franklin Total
Return Fund may enter into mortgage dollar rolls, typically on a TBA basis.
Dollar rolls are agreements between the funds and a financial institution to
simultaneously sell and repurchase mortgage-backed securities at a future date.
Gains or losses are realized at the time of the sale and the difference between
the repurchase price and sale price is recorded as an unrealized gain to the
funds. The risks of mortgage dollar roll transactions include the potential
inability of the counterparty to fulfill its obligations.
J. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the funds invest are generally readily
marketable, but may be subject to some restrictions on resale.
Semiannual Report | 101
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. INCOME TAXES
No provision has been made for U.S. income taxes because it is each fund's
policy to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
L. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Facility fees are recognized as income over the expected term of the
loan. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with accounting
principles generally accepted in the United States. These differences may be
permanent or temporary. Permanent differences are reclassified among capital
accounts to reflect their tax character. These reclassifications have no impact
on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
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 of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
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. Differences in per share
distributions, by class, are generally due to differences in class specific
expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases in
the security's interest accruals and principal redemption value, by amounts
corresponding to the current rate of inflation. Any such adjustments, including
adjustments to principal redemption value, are recorded as interest income.
M. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
102 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the funds and accounted for as an addition to paid-in
capital.
O. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2007, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
-------------------------------------------------------------
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT FRANKLIN FLOATING RATE
SECURITIES FUND DAILY ACCESS FUND
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
CLASS A SHARES:
Six months ended April 30, 2007
Shares sold .................... 3,226,565 $ 28,649,249 21,046,692 $ 212,242,084
Shares issued in reinvestment of
distributions ................. 677,983 6,025,044 3,692,856 37,234,819
Shares redeemed ................ (9,102,832) (80,884,677) (32,345,934) (326,049,915)
-------------------------------------------------------------
Net increase (decrease) ........ (5,198,284) $ (46,210,384) (7,606,386) $ (76,573,012)
=============================================================
Year ended October 31, 2006
Shares sold .................... 7,377,947 $ 65,604,588 54,725,812 $ 552,722,965
Shares issued in reinvestment of
distributions ................. 1,470,103 13,073,964 7,357,358 74,246,788
Shares redeemed ................ (20,107,643) (178,758,291) (75,947,165) (766,925,499)
-------------------------------------------------------------
Net increase (decrease) ........ (11,259,593) $(100,079,739) (13,863,995) $(139,955,746)
=============================================================
Semiannual Report | 103
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------------------------------
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT FRANKLIN FLOATING RATE
SECURITIES FUND DAILY ACCESS FUND
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
CLASS B SHARES:
Six months ended April 30, 2007
Shares sold .................... 314,474 $ 3,169,908
Shares issued in reinvestment of
distributions ................. 112,568 1,134,278
Shares redeemed ................ (766,288) (7,720,649)
-----------------------------
Net increase (decrease) ........ (339,246) $ (3,416,463)
=============================
Year ended October 31, 2006
Shares sold .................... 1,766,366 $ 17,836,278
Shares issued in reinvestment of
distributions ................. 223,881 2,258,068
Shares redeemed ................ (2,429,685) (24,496,642)
-----------------------------
Net increase (decrease) ........ (439,438) $ (4,402,296)
=============================
CLASS C SHARES:
Six months ended April 30, 2007
Shares sold .................... 418,874 $ 3,718,095 9,177,920 $ 92,560,568
Shares issued in reinvestment of
distributions ................. 65,724 583,613 841,412 8,487,068
Shares redeemed ................ (856,253) (7,602,766) (6,542,201) (65,970,441)
----------------------------------------------------------
Net increase (decrease) ........ (371,655) $ (3,301,058) 3,477,131 $ 35,077,195
===========================================================
Year ended October 31, 2006
Shares sold .................... 1,018,449 $ 9,056,076 17,324,325 $ 174,966,405
Shares issued in reinvestment of
distributions ................. 136,025 1,208,933 1,389,217 14,024,507
Shares redeemed ................ (2,533,121) (22,510,472) (13,660,912) (138,010,187)
-----------------------------------------------------------
Net increase (decrease) ........ (1,378,647) $(12,245,463) 5,052,630 $ 50,980,725
===========================================================
ADVISOR CLASS SHARES:
Six months ended April 30, 2007
Shares sold .................... 3,557,348 $ 35,899,557
Shares issued in reinvestment of
distributions ................. 107,565 1,085,155
Shares redeemed ................ (5,727,876) (57,743,697)
-----------------------------
Net increase (decrease) ........ (2,062,963) $ (20,758,985)
=============================
Year ended October 31, 2006
Shares sold .................... 9,526,397 $ 96,508,595
Shares issued in reinvestment of
distributions ................. 347,922 3,510,016
Shares redeemed ................ (4,363,229) (44,016,245)
-----------------------------
Net increase (decrease) ........ 5,511,090 $ 56,002,366
=============================
104 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
--------------------------------------------------------
FRANKLIN LOW DURATION
TOTAL RETURN FUND FRANKLIN TOTAL RETURN FUND
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
CLASS A SHARES:
Six months ended April 30, 2007
Shares sold .................... 395,872 $ 3,883,927 14,547,615 $ 144,932,939
Shares issued in reinvestment of
distributions ................. 12,780 125,464 768,109 7,654,320
Shares redeemed ................ (261,253) (2,561,422) (5,813,050) (57,925,821)
--------------------------------------------------------
Net increase (decrease) ........ 147,399 $ 1,447,969 9,502,674 $ 94,661,438
========================================================
Year ended October 31, 2006
Shares sold .................... 489,444 $ 4,766,287 20,615,536 $ 202,745,466
Shares issued in reinvestment of
distributions ................. 17,609 171,686 1,203,711 11,851,828
Shares redeemed ................ (364,981) (3,555,696) (10,381,230) (101,871,984)
--------------------------------------------------------
Net increase (decrease) ........ 142,072 $ 1,382,277 11,438,017 $ 112,725,310
========================================================
CLASS B SHARES:
Six months ended April 30, 2007
Shares sold .................... 186,436 $ 1,856,590
Shares issued in reinvestment of
distributions ................. 35,720 355,871
Shares redeemed ................ (241,485) (2,406,374)
---------------------------
Net increase (decrease) ........ (19,329) $ (193,913)
===========================
Year ended October 31, 2006
Shares sold .................... 462,867 $ 4,551,684
Shares issued in reinvestment of
distributions ................. 74,768 736,308
Shares redeemed ................ (579,037) (5,691,591)
---------------------------
Net increase (decrease) ........ (41,402) $ (403,599)
===========================
CLASS C SHARES:
Six months ended April 30, 2007
Shares sold .................... 2,207,186 $ 21,987,030
Shares issued in reinvestment of
distributions ................. 89,331 889,706
Shares redeemed ................ (886,958) (8,837,588)
---------------------------
Net increase (decrease) ........ 1,409,559 $ 14,039,148
===========================
Year ended October 31, 2006
Shares sold .................... 2,403,512 $ 23,631,789
Shares issued in reinvestment of
distributions ................. 141,295 1,390,990
Shares redeemed ................ (1,414,514) (13,891,848)
---------------------------
Net increase (decrease) ........ 1,130,293 $ 11,130,931
===========================
Semiannual Report | 105
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
--------------------------
FRANKLIN TOTAL RETURN FUND
--------------------------
SHARES AMOUNT
--------------------------
CLASS R SHARES:
Six months ended April 30, 2007
Shares sold .................................. 1,573,902 $ 15,679,679
Shares issued in reinvestment of distributions 70,014 697,734
Shares redeemed .............................. (559,283) (5,566,033)
--------------------------
Net increase (decrease) ...................... 1,084,633 $ 10,811,380
==========================
Year ended October 31, 2006
Shares sold .................................. 1,591,047 $ 15,660,425
Shares issued in reinvestment of distributions 117,352 1,155,375
Shares redeemed .............................. (853,879) (8,379,243)
--------------------------
Net increase (decrease) ...................... 854,520 $ 8,436,557
==========================
ADVISOR CLASS SHARES:
Six months ended April 30, 2007
Shares sold .................................. 2,529,879 $ 25,209,216
Shares issued in reinvestment of distributions 363,885 3,629,273
Shares redeemed .............................. (854,922) (8,540,747)
--------------------------
Net increase (decrease) ...................... 2,038,842 $ 20,297,742
==========================
Year ended October 31, 2006
Shares sold .................................. 5,675,564 $ 56,096,696
Shares issued in reinvestment of distributions 522,742 5,157,807
Shares redeemed .............................. (1,822,549) (17,973,446)
--------------------------
Net increase (decrease) ...................... 4,375,757 $ 43,281,057
==========================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Franklin Adjustable U.S. Government Securities Fund pays an investment
management fee to Advisers based on the average daily net assets of the fund as
follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.40% Up to and including $5 billion
0.35% Over $5 billion, up to and including $10 billion
0.33% Over $10 billion, up to and including $15 billion
0.30% In excess of $15 billion
106 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Floating Rate Daily Access Fund pays an investment management fee
to Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.450% Up to and including $500 million
0.350% Over $500 million, up to and including $1 billion
0.300% Over $1 billion, up to and including $1.5 billion
0.250% Over $1.5 billion, up to and including $6.5 billion
0.225% Over $6.5 billion, up to and including $11.5 billion
0.200% Over $11.5 billion, up to and including $16.5 billion
0.190% Over $16.5 billion, up to and including $19 billion
0.180% Over $19 billion, up to and including $21.5 billion
0.170% In excess of $21.5 billion
The Franklin Low Duration Total Return Fund and the Franklin Total Return Fund
pay an investment management fee to Advisers based on the average daily net
assets of the funds as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.425% Up to and including $500 million
0.325% Over $500 million, up to and including $1 billion
0.280% Over $1 billion, up to and including $1.5 billion
0.235% Over $1.5 billion, up to and including $6.5 billion
0.215% Over $6.5 billion, up to and including $11.5 billion
0.200% Over $11.5 billion, up to and including $16.5 billion
0.190% Over $16.5 billion, up to and including $19 billion
0.180% Over $19 billion, up to and including $21.5 billion
0.170% In excess of $21.5 billion
B. ADMINISTRATIVE FEES
The Franklin Floating Rate Daily Access Fund, the Franklin Low Duration Total
Return Fund and the Franklin Total Return Fund pay an administrative fee to FT
Services of 0.20% per year of the average daily net assets of each of the funds.
The Franklin Adjustable U.S. Government Securities Fund pays an administrative
fee to Advisers based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.10% Up to and including $5 billion
0.09% Over $5 billion, up to and including $10 billion
0.08% In excess of $10 billion
Semiannual Report | 107
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the funds' Class A reimbursement distribution plans, the
funds reimburse Distributors for costs incurred in connection with the
servicing, sale and distribution of each fund's shares up to the maximum annual
plan rate for each class. Under the Class A reimbursement distribution plans,
costs exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
In addition, under the funds' compensation distribution plans, the funds pay
Distributors for costs incurred in connection with the servicing, sale and
distribution of each fund's shares up to the maximum annual plan rate for each
class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
-------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING LOW DURATION FRANKLIN
U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN
SECURITIES FUND ACCESS FUND FUND FUND
-------------------------------------------------------------------
Reimbursement Plans:
Class A ................ 0.25% 0.25% --% 0.25%
Compensation Plans:
Class A ................ -- -- 0.25% --
Class B ................ -- 1.00% -- 0.65%
Class C ................ 0.65% 0.65% -- 0.65%
Class R ................ -- -- -- 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the period:
--------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING LOW DURATION FRANKLIN
U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN
SECURITIES FUND ACCESS FUND FUND FUND
--------------------------------------------------------------
Sales charges retained net of
commissions paid to unaffiliated
broker/dealers ..................... $8,616 $453,834 $4,043 $307,636
Contingent deferred sales charges
retained ........................... $3,433 $116,439 $ -- $ 16,964
108 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
E. TRANSFER AGENT FEES
For the period ended April 30, 2007, the Funds paid transfer agent fees as noted
in the Statements of Operations of which the following amounts were retained by
Investor Services:
-----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING LOW DURATION FRANKLIN
U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN
SECURITIES FUND ACCESS FUND FUND FUND
-----------------------------------------------------------
Transfer agent fees ........... $143,801 $600,754 $2,875 $421,066
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
FT Services agreed in advance to voluntarily waive administrative fees for the
Franklin Low Duration Total Return Fund and the Franklin Total Return Fund.
Additionally, Advisers agreed in advance to voluntarily waive a portion of
management fees. Total expenses waived by Advisers and FT Services are not
subject to reimbursement by the funds subsequent to the fund's fiscal year end.
FT Services and Advisers may discontinue this waiver at any time upon notice to
the fund's Board of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At April 30, 2007, Advisers or the investment companies managed by Advisers
owned 37.17% and 10.76%, respectively, of the Franklin Low Duration Total Return
Fund's and the Franklin Total Return Fund's outstanding shares.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the period ended April 30, 2007, the
custodian fees were reduced as noted in the Statements of Operations.
Semiannual Report | 109
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At October 31, 2006, the capital loss carryforwards were as
follows:
---------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING LOW DURATION FRANKLIN
U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN
SECURITIES FUND ACCESS FUND FUND FUND
---------------------------------------------------------------------
Capital loss carryforwards expiring in:
2007 .................................. $ 1,456,300 $ -- $ -- $ --
2008 .................................. 3,438,157 -- -- --
2009 .................................. 1,279,054 -- -- 1,361,562
2010 .................................. -- 192,104,885 -- 550,214
2011 .................................. 585,362 108,452,146 -- --
2012 .................................. 1,039,516 74,147,691 -- --
2013 .................................. 2,782,773 -- 38,924 466,273
2014 .................................. 3,962,538 -- 108,726 5,783,491
---------------------------------------------------------------------
$ 14,543,700 $ 374,704,722 $ 147,650 $ 8,161,540
=====================================================================
At April 30, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING LOW DURATION FRANKLIN
U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN
SECURITIES FUND ACCESS FUND FUND FUND
------------------------------------------------------------------------
Cost of investments ................... $ 359,444,184 $ 2,249,683,181 $ 12,982,053 $ 1,082,955,110
========================================================================
Unrealized appreciation ............... $ 381,391 $ 7,483,349 $ 109,096 $ 13,689,693
Unrealized depreciation ............... (3,878,995) (1,744,516) (34,235) (5,702,819)
------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) ....................... $ (3,497,604) $ 5,738,833 $ 74,861 $ 7,986,874
========================================================================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, mortgage dollar rolls, paydown losses, credit default swaps, bond
discounts and premiums and inflation related adjustments on foreign securities.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, mortgage dollar rolls, financial futures transactions, paydown
losses, credit default swaps, bond discounts and premiums, and inflation related
adjustments on foreign securities.
110 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended April 30, 2007, were as follows:
---------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
---------------------------------------------------------------------
Purchases ............................. $ 60,372,585 $ 793,777,769 $ 2,880,555 $ 1,252,298,850
Sales ................................. $ 111,643,690 $ 780,237,706 $ 1,967,138 $ 1,075,548,095
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Funds are reduced on assets invested in
the Sweep Money Fund, in an amount not to exceed the management and
administrative fees paid by the Sweep Money Fund.
8. CREDIT DEFAULT SWAPS
At April 30, 2007, the Franklin Low Duration Total Return Fund and the Franklin
Total Return Fund had the following credit default swap contracts outstanding:
FRANKLIN LOW DURATION TOTAL RETURN FUND
- --------------------------------------------------------------------------------------------------------------------
PERIODIC
NOTIONAL PAYMENT EXPIRATION UNREALIZED UNREALIZED
AMOUNT RATE DATE GAIN LOSS
- --------------------------------------------------------------------------------------------------------------------
CONTRACTS TO BUY PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
Anadarko Petroleum Corp., 6.125%, 3/15/12
(Citigroup) ..................................... $ 180,000 0.33% 3/20/12 $ -- $ (435)
Dow Jones CDX North America High Yield
Swap Series 7 (Credit Suisse International) ..... 100,000 3.25% 12/20/11 -- (41)
Ford Motor Credit Co., 7.00%, 10/01/13
(Merrill Lynch) ................................. 150,000 2.75% 9/20/10 -- (1,299)
GMAC LLC, 6.875%, 8/28/12
(Merrill Lynch) ................................. 150,000 0.93% 3/20/10 2,030 --
IAC/InteractiveCorp., 7.00%, 1/15/13
(Merrill Lynch) ................................. 200,000 0.68% 3/20/12 200 --
CONTRACTS TO SELL PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
ABX.HE.A.06-1 (JPMorgan Chase) ................... $ 500,000 0.54% 7/25/45 5,000 --
-----------------------
Unrealized gain (loss) on credit default swaps .. 7,230 (1,775)
-----------------------
Net unrealized gain (loss) on credit default swaps $ 5,455 $ --
=======================
Semiannual Report | 111
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CREDIT DEFAULT SWAPS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
- --------------------------------------------------------------------------------------------------------------------------------
PERIODIC
NOTIONAL PAYMENT EXPIRATION UNREALIZED UNREALIZED
AMOUNT RATE DATE GAIN LOSS
- --------------------------------------------------------------------------------------------------------------------------------
CONTRACTS TO BUY PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
Anadarko Petroleum Corp., 6.125%, 3/15/12
(Citigroup) .......................................... $ 10,480,000 0.33% 3/20/12 $ -- $ (25,317)
Dow Jones CDX North America High Yield
Swap Series 7 (Credit Suisse
International) ....................................... 7,000,000 3.25% 12/20/11 -- (12,357)
Dow Jones CDX North America High Yield
Swap Series 7 (Goldman Sachs) ........................ 2,000,000 3.25% 12/20/11 -- (3,530)
Dow Jones CDX North America High Yield
Swap Series 7 (Merrill Lynch) ........................ 9,000,000 3.25% 12/20/11 -- (15,886)
Dow Jones CDX North America Investment
Grade Swap Series 7 (Credit Suisse
International) ....................................... 12,000,000 0.40% 12/20/11 -- (4,890)
First Energy Corp., 6.45%, 11/15/11
(Citigroup) .......................................... 4,500,000 0.46% 3/20/11 -- (53,609)
Ford Motor Credit Co., 7.375%, 2/01/11
(Goldman Sachs) ...................................... 10,000,000 2.08% 2/01/11 157,151 --
Ford Motor Credit Co., 7.00%, 10/01/13
(Merrill Lynch) ...................................... 11,850,000 2.75% 9/20/10 -- (102,626)
GMAC LLC, 7.75%, 1/19/10
(Merrill Lynch) ...................................... 8,850,000 0.845% 3/20/10 119,734 --
IAC/InteractiveCorp., 7.00%, 1/15/13
(Merrill Lynch) ...................................... 8,400,000 0.68% 3/20/12 8,413 --
CONTRACTS TO SELL PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
ABX.HE.A.06-1 (JPMorgan Chase) ......................... $ 33,500,000 0.54% 7/25/45 335,000 --
---------------------------
Unrealized gain (loss) on credit default swaps ....... 620,298 (218,215)
---------------------------
Net unrealized gain (loss) on credit default swaps . $ 402,083 $ --
===========================
9. FINANCIAL FUTURES CONTRACTS
At April 30, 2007, the Franklin Total Return Fund had the following financial
futures contracts outstanding:
FRANKLIN TOTAL RETURN FUND
- --------------------------------------------------------------------------------------
NUMBER OF DELIVERY CONTRACT UNREALIZED
CONTRACTS TO BUY CONTRACTS DATES FACE VALUE GAIN (LOSS)
- --------------------------------------------------------------------------------------
U.S. Treasury 20 Year Bond .. 111 6/29/07 $11,100,000 $ (44,227)
U.S. Treasury 2 Year Note .. 95 6/29/07 19,000,000 44,531
U.S. Treasury 5 Year Note .. 14 6/29/07 1,400,000 7,766
112 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. FORWARD EXCHANGE CONTRACTS
At April 30, 2007, the Franklin Low Duration Total Return Fund and the Franklin
Total Return Fund had the following forward exchange contracts outstanding:
FRANKLIN LOW DURATION TOTAL RETURN FUND
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN LOSS
- -------------------------------------------------------------------------------------------------------------------------
5,777,000 Japanese Yen ............................ 50,000 7/13/07 $ -- $ (1,160)
3,953,250 Japanese Yen ............................ 34,426 1/22/08 -- (195)
600,000 Iceland Krona ........................... 8,024 10/09/07 994 --
----------------------------
Unrealized gain (loss) on forward exchange contracts ..................... 994 (1,355)
============================
Net unrealized gain (loss) on forward exchange contracts ............... $ -- $ (361)
============================
FRANKLIN TOTAL RETURN FUND
- -------------------------------------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN LOSS
- -------------------------------------------------------------------------------------------------------------------------
265,742,000 Japanese Yen ........................... 2,300,000 7/13/07 $ -- $ (53,355)
218,558,250 Japanese Yen ........................... 1,903,287 1/22/08 -- (10,811)
54,500,000 Iceland Krona .......................... 728,804 10/09/07 90,288
----------------------------
Unrealized gain (loss) on forward exchange contracts ..................... 90,288 (64,166)
============================
Net unrealized gain (loss) on forward exchange contracts .............. $ 26,122 $ --
============================
a In U.S. dollars unless otherwise indicated.
11. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Floating Rate Daily Access Fund has 89.47% of its portfolio
invested in below investment grade and comparable quality unrated high yield
securities, which tend to be more sensitive to economic conditions than higher
rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
The Franklin Floating Rate Daily Access Fund held defaulted securities and/or
other securities for which the income has been deemed uncollectible. At April
30, 2007, the value of this security was $1,102,809, representing 0.05%, of the
Fund's net assets. The fund discontinues accruing income on securities for which
income has been deemed uncollectible and provides an estimate for losses on
interest receivable. The security has been identified on the accompanying
Statement of Investments.
Semiannual Report | 113
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. UNFUNDED LOAN COMMITMENTS
The Franklin Floating Rate Daily Access Fund may enter into certain credit
agreements, all or a portion of which may be unfunded. The fund is obligated to
fund these loan commitments at the borrowers' discretion. Funded portions of
credit agreements are presented on the Statements of Investments.
At April 30, 2007, unfunded commitments were as follows:
- --------------------------------------------------------------------------------
UNFUNDED
BORROWER COMMITMENT
- --------------------------------------------------------------------------------
Advance Food Company, Delayed Draw Term Loan ................... $ 400,000
CBRL Group (Cracker Barrel), Term Loan B2 (Delayed Draw) ....... 817,862
Conseco Inc., Revolver ......................................... 4,000,000
Fairpoint Communications Inc., Revolver ........................ 120,909
Gray Television, Term Loan B ................................... 4,010,150
Infrastrux, Term Loan .......................................... 337,297
Longview Power LLC, Delayed Draw Term Loan ..................... 1,540,000
Sealy Mattress Co., Revolver ................................... 1,750,000
Seminole Tribe of Florida, Term B-1 Delay Draw Loan ............ 631,579
United Surgical Partners, Delayed Draw Term Loan ............... 758,065
Univision Communications, Delayed Draw Term Loan ............... 797,315
Valassis Communications, Delayed Draw Term Loan ................ 1,066,667
VML US Finance LLC, Delayed Draw ............................... 4,349,238
WMG Acquisition Group, Revolver A .............................. 6,520,000
-----------
$27,099,082
===========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
13. FUND LITIGATION
On July 6, 2003, Adelphia Communications Corp. (Adelphia) and related parties,
along with its official Committee of Unsecured Creditors, filed an advisory
proceeding in the Adelphia bankruptcy case in the U.S. Bankruptcy Court (SDNY)
against more than 400 banks, financial services companies, insurance companies,
investment banks, mutual funds and other parties that had arranged for the sale
of, or purchased the bank debt of, Adelphia or its related parties. Named
defendants included Franklin CLOs I-III, Franklin Floating Rate Daily Access
Fund, Franklin Floating Rate Master Series, and Franklin Floating Rate Trust.
The Complaint alleges that the purchasers of this bank debt knew, or should have
known, that the loan proceeds would not benefit Adelphia, but instead would be
used to enrich Adelphia insiders. It seeks avoidance of the loans and recovery
of fraudulent transfers. The reference of this adversary proceeding to the
Bankruptcy Court has been withdrawn, and the matter is now pending in U.S.
District Court (SYNY) before Judge Lawrence McKenna.
114 | Semiannual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. FUND LITIGATION (CONTINUED)
The Franklin defendants have not yet been required to respond to the complaint
or to discovery, and other pending motions to dismiss have not been ruled upon.
Thus, it is not possible to predict the lawsuit's outcome at this preliminary
stage of the proceedings. However, management of the funds does not expect that
the result will have a material adverse effect on the financial condition of the
funds.
14. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
Semiannual Report | 115
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Funds'
are currently evaluating the impact, if any, of applying the various provisions
of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
116 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007
A Special Meeting of Shareholders of the Trust was held at the Trust's offices,
One Franklin Parkway, San Mateo, California on March 21, 2007 and reconvened on
April 11, 2007, May 11, 2007, May 18, 2007 and May 20, 2007. The purpose of the
meeting was to elect Trustees of the Trust and to vote on the following
Proposals and Sub-Proposals: to approve an Agreement and Plan of Reorganization
that provides for the reorganization of the Trust into a Delaware statutory
trust; and to approve amendments to certain of Franklin Adjustable U.S.
Government Securities Fund's, Franklin Floating Rate Daily Access Fund's,
Franklin Low Duration Total Return Fund's and Franklin Total Return Fund's
(each, a "Fund") fundamental investment restrictions (including several
Sub-Proposals). At the meeting, the following persons were elected by the
shareholders to serve as Independent Trustees of the Trust: Harris J. Ashton,
Robert F. Carlson, Sam L. Ginn, Edith E. Holiday, Frank W. T. LaHaye, Frank A.
Olson, Larry D. Thompson and John B. Wilson. Charles B. Johnson and Rupert H.
Johnson Jr. were elected by the shareholders to serve as Interested Trustees.
Shareholders also approved the Agreement and Plan of Reorganization that
provides for the reorganization of the Trust into a Delaware statutory trust and
amendments to certain of the Funds' fundamental investment restrictions
(including several Sub-Proposals). No other business was transacted at the
meeting.
The results of the voting at the meeting are as follows: Proposal 1. The
election of Trustees:
- -------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
NAME FOR SHARES SHARES WITHHELD SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton .......... 292,445,977.426 61.632% 98.113% 5,625,569.981 1.185% 1.887%
Robert F. Carlson ......... 292,546,627.073 61.653% 98.146% 5,524,920.334 1.164% 1.854%
Sam L. Ginn ............... 292,595,351.421 61.663% 98.163% 5,476,195.986 1.154% 1.837%
Edith E. Holiday .......... 292,672,339.354 61.679% 98.189% 5,399,208.053 1.138% 1.811%
Frank W. T. LaHaye ........ 292,242,986.408 61.589% 98.045% 5,828,560.999 1.228% 1.955%
Frank A. Olson ............ 292,468,150.457 61.636% 98.120% 5,603,396.950 1.181% 1.880%
Larry D. Thompson ......... 292,820,553.135 61.711% 98.238% 5,250,994.272 1.106% 1.762%
John B. Wilson ............ 292,847,259.971 61.716% 98.247% 5,224,287.436 1.101% 1.753%
Charles B. Johnson ........ 292,513,040.499 61.646% 98.135% 5,558,506.908 1.171% 1.865%
Rupert H. Johnson Jr. ..... 292,608,652.731 61.666% 98.167% 5,462,894.676 1.151% 1.833%
Semiannual Report | 117
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 2. To approve an Agreement and Plan of Reorganization that provides for
the reorganization of the Trust into a Delaware statutory trust:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,783,699.577 52.087% 73.758%
Against ......................... 562,521.750 1.345% 1.905%
Abstain ......................... 1,298,960.636 3.106% 4.398%
Broker Non-votes ................ 5,888,855.000 14.081% 19.939%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,534,036.963 70.619% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 109,848,438.982 50.593% 70.854%
Against ......................... 3,377,043.165 1.555% 2.178%
Abstain ......................... 9,473,515.092 4.364% 6.111%
Broker Non-votes ................ 32,336,503.000 14.893% 20.857%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN LOW DURATION OUTSTANDING VOTED
TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 794,541.269 64.415% 76.767%
Against ......................... 16,538.567 1.341% 1.598%
Abstain ......................... 10,542.917 .854% 1.019%
Broker Non-votes ................ 213,375.000 17.298% 20.616%
- --------------------------------------------------------------------------------
TOTAL ........................... 1,034,997.753 83.908% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 48,159,896.421 62.772% 86.530%
Against ......................... 393,869.569 .513% .708%
Abstain ......................... 1,255,755.960 1.637% 2.256%
Broker Non-votes ................ 5,847,265.000 7.621% 10.506%
- --------------------------------------------------------------------------------
TOTAL ........................... 55,656,786.950 72.543% 100.000%
118 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals):
(a) To amend the Fund's fundamental investment restriction regarding borrowing:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,429,546.503 51.241% 72.713%
Against ......................... 790,529.591 1.890% 2.682%
Abstain ......................... 1,359,959.907 3.252% 4.615%
Broker Non-votes ................ 5,891,545.000 14.087% 19.990%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 107,869,335.595 49.681% 69.577%
Against ......................... 5,274,909.372 2.430% 3.403%
Abstain ......................... 9,554,752.272 4.401% 6.162%
Broker Non-votes ................ 32,336,503.000 14.893% 20.858%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND ...... SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 48,159,896.421 62.772% 86.530%
Against ......................... 393,869.569 .513% .708%
Abstain ......................... 1,255,755.960 1.637% 2.256%
Broker Non-votes ................ 5,847,265.000 7.621% 10.506%
- --------------------------------------------------------------------------------
TOTAL ........................... 55,656,786.950 72.543% 100.000%
(b) To amend the Fund's fundamental investment restriction regarding
underwriting:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,464,976.837 51.325% 72.833%
Against ......................... 712,260.559 1.703% 2.417%
Abstain ......................... 1,402,798.605 3.355% 4.760%
Broker Non-votes ................ 5,891,545.000 14.087% 19.990%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
Semiannual Report | 119
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(c) To amend the Fund's fundamental investment restriction regarding lending:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,526,472.569 51.472% 73.041%
Against ......................... 757,870.705 1.813% 2.572%
Abstain ......................... 1,295,692.727 3.098% 4.396%
Broker Non-votes ................ 5,891,545.000 14.087% 19.991%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 108,378,383.623 49.916% 69.906%
Against ......................... 4,854,792.610 2.236% 3.131%
Abstain ......................... 9,465,821.006 4.360% 6.106%
Broker Non-votes ................ 32,336,503.000 14.893% 20.857%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN LOW DURATION OUTSTANDING VOTED
TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 725,828.561 58.843% 74.273%
Against ......................... 9,934.524 .806% 1.017%
Abstain ......................... 21,978.856 1.781% 2.249%
Broker Non-votes ................ 219,502.000 17.796% 22.461%
- --------------------------------------------------------------------------------
TOTAL ........................... 977,243.941 79.226% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 45,761,331.657 59.646% 84.891%
Against ......................... 566,572.684 .738% 1.051%
Abstain ......................... 1,024,961.091 1.336% 1.901%
Broker Non-votes ................ 6,553,410.000 8.542% 12.157%
- --------------------------------------------------------------------------------
TOTAL ........................... 53,906,275.432 70.262% 100.000%
120 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(d) To amend the Fund's fundamental investment restriction regarding investments
in real estate:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,541,678.770 51.509% 73.093%
Against ......................... 724,421.565 1.732% 2.458%
Abstain ......................... 1,313,935.666 3.142% 4.458%
Broker Non-votes ................ 5,891,545.000 14.087% 19.991%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 108,287,925.121 49.874% 69.847%
Against ......................... 5,091,085.818 2.345% 3.284%
Abstain ......................... 9,319,986.300 4.293% 6.011%
Broker Non-votes ................ 32,336,503.000 14.893% 20.858%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN LOW DURATION OUTSTANDING VOTED
TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 722,475.242 58.571% 73.930%
Against ......................... 25,689.388 2.083% 2.629%
Abstain ......................... 9,577.311 .776% .980%
Broker Non-votes ................ 219,502.000 17.796% 22.461%
- --------------------------------------------------------------------------------
TOTAL ........................... 977,243.941 79.226% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 45,962,268.900 59.907% 85.263%
Against ......................... 451,365.115 .589% .838%
Abstain ......................... 939,231.417 1.224% 1.742%
Broker Non-votes ................ 6,553,410.000 8.542% 12.157%
- --------------------------------------------------------------------------------
TOTAL ........................... 53,906,275.432 70.262% 100.000%
Semiannual Report | 121
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(e) To amend the Fund's fundamental investment restriction regarding investments
in commodities:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,350,922.452 51.053% 72.446%
Against ......................... 833,197.121 1.992% 2.827%
Abstain ......................... 1,395,916.428 3.338% 4.737%
Broker Non-votes ................ 5,891,545.000 14.087% 19.990%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 108,066,812.850 49.772% 69.705%
Against ......................... 5,186,769.236 2.389% 3.345%
Abstain ......................... 9,445,415.153 4.351% 6.093%
Broker Non-votes ................ 32,336,503.000 14.893% 20.857%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN LOW DURATION OUTSTANDING VOTED
TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 722,035.339 58.536% 73.885%
Against ......................... 25,777.784 2.090% 2.638%
Abstain ......................... 9,928.818 .804% 1.016%
Broker Non-votes ................ 219,502.000 17.796% 22.461%
- --------------------------------------------------------------------------------
TOTAL ........................... 977,243.941 79.226% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 45,670,163.365 59.527% 84.721%
Against ......................... 639,383.380 .833% 1.187%
Abstain ......................... 1,043,318.687 1.360% 1.935%
Broker Non-votes ................ 6,553,410.000 8.542% 12.157%
- --------------------------------------------------------------------------------
TOTAL ........................... 53,906,275.432 70.262% 100.000%
122 | Semiannual Report
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(f) To amend the Fund's fundamental investment restriction regarding issuing
senior securities:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,421,017.073 51.220% 72.684%
Against ......................... 727,734.629 1.740% 2.469%
Abstain ......................... 1,431,284.299 3.423% 4.857%
Broker Non-votes ................ 5,891,545.000 14.087% 19.990%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 108,817,833.538 50.118% 70.189%
Against ......................... 4,433,878.967 2.042% 2.860%
Abstain ......................... 9,447,284.734 4.352% 6.094%
Broker Non-votes ................ 32,336,503.000 14.893% 20.857%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 45,801,110.028 59.697% 84.964%
Against ......................... 506,704.106 .661% .940%
Abstain ......................... 1,045,051.298 1.362% 1.939%
Broker Non-votes ................ 6,553,410.000 8.542% 12.157%
- --------------------------------------------------------------------------------
TOTAL .......................... 53,906,275.432 70.262% 100.000%
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,443,963.453 51.275% 72.761%
Against ......................... 728,294.265 1.741% 2.472%
Abstain ......................... 1,407,778.283 3.367% 4.776%
Broker Non-votes ................ 5,891,545.000 14.087% 19.991%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
Semiannual Report | 123
Franklin Investors Securities Trust
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN FLOATING RATE DAILY ACCESS FUND
FRANKLIN LOW DURATION TOTAL RETURN FUND
FRANKLIN TOTAL RETURN FUND
MEETING OF SHAREHOLDERS, MARCH 21, 2007 AND RECONVENED ON APRIL 11, 2007, MAY
11, 2007, MAY 18, 2007 AND MAY 20, 2007 (CONTINUED)
Proposal 3. To approve amendments to certain of the Funds' fundamental
investment restrictions (includes several Sub-Proposals): (CONTINUED)
(g) To amend the Fund's fundamental investment restriction regarding industry
concentration: (CONTINUED)
- --------------------------------------------------------------------------------
% OF % OF
FRANKLIN FLOATING RATE OUTSTANDING VOTED
DAILY ACCESS FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 108,187,558.380 49.828% 69.782%
Against ......................... 4,823,812.099 2.222% 3.112%
Abstain ......................... 9,687,626.760 4.462% 6.248%
Broker Non-votes ................ 32,336,503.000 14.893% 20.858%
- --------------------------------------------------------------------------------
TOTAL ........................... 155,035,500.239 71.405% 100.000%
(h) To amend the Fund's fundamental investment restriction regarding
diversification of investments:
- --------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE % OF % OF
U.S. GOVERNMENT OUTSTANDING VOTED
SECURITIES FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 21,645,298.042 51.756% 73.445%
Against ......................... 601,087.207 1.438% 2.039%
Abstain ......................... 1,333,650.752 3.189% 4.526%
Broker Non-votes ................ 5,891,545.000 14.087% 19.990%
- --------------------------------------------------------------------------------
TOTAL ........................... 29,471,581.001 70.470% 100.000%
- --------------------------------------------------------------------------------
% OF % OF
OUTSTANDING VOTED
FRANKLIN TOTAL RETURN FUND SHARES VOTED SHARES SHARES
- --------------------------------------------------------------------------------
For ............................. 45,992,529.388 59.947% 85.319%
Against ......................... 382,805.067 .499% .711%
Abstain ......................... 977,530.977 1.274% 1.813%
Broker Non-votes ................ 6,553,410.000 8.542% 12.157%
- --------------------------------------------------------------------------------
TOTAL ........................... 53,906,275.432 70.262% 100.000%
124 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Trustees ("Board"), including
a majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for each of the separate funds comprising
Franklin Investors Securities Trust ("Fund(s)"). In reaching this decision, the
Board took into account information furnished throughout the year at regular
Board meetings, as well as information prepared specifically in connection with
the annual renewal review process. Information furnished and discussed
throughout the year included investment performance reports and related
financial information for each Fund, as well as periodic reports on shareholder
services, legal, compliance, pricing, brokerage commissions and execution and
other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report for each Fund prepared by Lipper, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper reports compared each Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager and its affiliates including management's
explanation of differences where relevant and a three-year expense analysis with
an explanation for any increase in expense ratios. Additional material
accompanying such report was a memorandum prepared by management describing
project initiatives and capital investments relating to the services provided to
the Funds by the Franklin Templeton Investments organization, as well as a
memorandum relating to economies of scale and a comparative analysis concerning
transfer agent fees charged each Fund.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. While the investment
management agreements for all Funds were considered at the same Board meeting,
the Board dealt with each Fund separately. In approving continuance of the
investment management agreement for each Fund, the Board, including a majority
of independent Trustees, determined that the existing management fee structure
was fair and reasonable and that continuance of the investment management
agreement was in the best interests of each Fund and its shareholders. While
attention was given to all information furnished, the following discusses some
primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Funds and their shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
each Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin
Semiannual Report | 125
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Templeton fund complex, the adherence to fair value pricing procedures
established by the Board, and the accuracy of net asset value calculations. The
Board also noted the extent of benefits provided Fund shareholders from being
part of the Franklin Templeton family of funds, including the right to exchange
investments between the same class of funds without a sales charge, the ability
to reinvest Fund dividends into other funds and the right to combine holdings in
other funds to obtain a reduced sales charge. Favorable consideration was given
to management's continuous efforts and expenditures in establishing back-up
systems and recovery procedures to function in the event of a natural disaster,
it being noted by the Board that such systems and procedures had functioned
smoothly during the Florida hurricanes and blackouts experienced in recent
years. Consideration was also given to the experience of each Fund's portfolio
management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of a portfolio manager's bonus compensation was the
relative investment performance of the funds he or she managed and that a
portion of such bonus was required to be invested in a pre-designated list of
funds within such person's fund management area so as to be aligned with the
interests of Fund shareholders. The Board also took into account the quality of
transfer agent and shareholder services provided Fund shareholders by an
affiliate of the Manager, noting continuing expenditures by management to
increase and improve the scope of such services, periodic favorable reports on
such service conducted by third parties, the high industry ranking given the
Franklin Templeton website, and the firsthand experience of individual Board
members who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of each Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the agreement
renewals. The Lipper reports prepared for each individual Fund showed the
investment performance of its Class A shares in comparison with its selected
performance universe during 2006 and during the previous 10 years ended December
31, 2006, unless otherwise noted. Performance on a total return basis was shown
by Lipper for all Funds with performance on an income return basis being shown
for those Funds having income return as an element of their investment
objective. The following summarizes the performance results for each Fund.
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND - The Fund's investment
performance was shown in comparison with a performance universe consisting of
all retail and institutional adjustable rate mortgage funds as selected by
Lipper. Such comparison showed that the Fund's income return during 2006 and for
the previous three- and five-year periods on an annualized basis was in the
highest quintile of its performance universe and was in the second-highest
quintile of such universe for the previous ten-year period. The Lipper report
also showed that the Fund's total return during 2006 and during each of the
previous three-, five- and ten-year periods on an annualized basis was at or
above the median for its performance universe. The Board found such performance
satisfactory.
126 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND - The Fund's investment performance was
shown in comparison with a performance universe consisting of all retail and
institutional loan participation funds as selected by Lipper. This Fund has been
in existence for only five full years, and the Lipper report showed its income
return during 2006 and on an annualized basis during its five-year period of
existence to be in the second-highest quintile of its performance universe. The
Lipper report showed that the Fund's total return during 2006 and on an
annualized basis for the five-year period of its existence was in the middle
quintile of its performance universe. The Board was satisfied with such
performance.
FRANKLIN LOW DURATION TOTAL RETURN FUND - This Fund has only been in operation
for two full calendar years and its investment performance was shown in
comparison to a performance universe consisting of all retail and institutional
short investment-grade debt funds as selected by Lipper. The Lipper report
showed the Fund's income and total return during 2006 were in the second-lowest
and second-highest quintiles of such performance universe, respectively, and in
each case was in the middle quintile of such universe on an annualized basis
during its two full years of operation. The Board found such performance
acceptable, noting the Fund's small size and short period of operation.
FRANKLIN TOTAL RETURN FUND - The Fund's investment performance was shown in
comparison to a performance universe consisting of all retail and institutional
intermediate investment-grade debt funds as selected by Lipper. This Fund has
been in existence less than ten years and the Fund's total return during 2006
and in each of the previous three- and five-year periods on an annualized basis
was in the highest quintile of its performance universe. Its income return was
in the highest quintile of such universe during 2006 as well as during the
previous three- and five-year periods. The Board was satisfied with this
performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of each Fund compared with those of a
group of other funds selected by Lipper as constituting its appropriate Lipper
expense group. Prior to making such comparison, the Board relied upon a survey
showing that the scope of services covered under the Fund's investment
management agreement was similar to those provided by fund managers to other
mutual fund groups. In reviewing comparative costs, emphasis was given to each
Fund's contractual investment management fee in comparison with the contractual
investment management fee that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to the Fund, as well as
the actual total expenses of the Fund in comparison with those of its expense
group. The Lipper contractual investment management fee analysis includes within
such fee any separate administrative fees, and Lipper total expenses, for
comparative consistency, are shown by Lipper for fund Class A shares. The
results of such expense comparisons showed that the contractual investment
management fee rate and total expenses for Franklin Floating Rate Daily Access
Fund were in the least expensive quintile of its Lipper expense group. The
contractual investment management fee rate for each of Franklin Adjustable U.S.
Semiannual Report | 127
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
Government Securities Fund and Franklin Total Return Fund was in the second
least expensive quintile of their Lipper expense groups, and total expenses in
each case were below the median of their respective Lipper expense groups. The
contractual investment management fee rate for Franklin Low Duration Total
Return Fund was in the most expensive quintile of its Lipper expense group and
its total expenses were above the median of its Lipper expense group. The Board
was satisfied with the management fees and total expenses of each of these Funds
in comparison to their Lipper expense groups as shown in the Lipper reports,
noting the small size of Franklin Low Duration Total Return Fund and the fact
its expenses were subsidized through management fee waivers and reimbursements.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
each Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. Specific attention was given to the methodology
followed in allocating costs to each Fund, it being recognized that allocation
methodologies are inherently subjective and various allocation methodologies may
each be reasonable while producing different results. In this respect, the Board
noted that, while being continuously refined and reflecting changes in the
Manager's own cost accounting, the cost allocation methodology was consistent
with that followed in profitability report presentations for the Funds made in
prior years and that the Funds' independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Funds' Board solely for
their purposes and use in reference to the profitability analysis. In reviewing
and discussing such analysis, management discussed with the Board its belief
that costs incurred in establishing the infrastructure necessary for the type of
mutual fund operations conducted by the Manager and its affiliates may not be
fully reflected in the expenses allocated to each Fund in determining its
profitability, as well as the fact that the level of profits, to a certain
extent, reflected operational cost savings and efficiencies initiated by
management. The Board also took into account management's expenditures in
improving shareholder services provided the Funds, as well as the need to meet
additional regulatory and compliance requirements resulting from the
Sarbanes-Oxley Act and recent SEC requirements. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, including its interest in a joint
venture entity that financed up-front commissions paid to brokers/dealers who
sold fund Class B shares prior to February 2005, when the offering of such
shares was discontinued, as well as potential benefits resulting from allocation
of fund brokerage and the use of "soft" commission dollars to pay for research.
Based upon its consideration
128 | Semiannual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
of all these factors, the Board determined that the level of profits realized by
the Manager and its affiliates from providing services to each Fund was not
excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Funds grow larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with each Fund and its shareholders through
management fee breakpoints so that as a Fund grows in size, its effective
management fee rate declines. The fee structure including a separate
administrative fee for each of Franklin Floating Rate Daily Access Fund and
Franklin Total Return Fund provides for breakpoints in stages going to the $21.5
billion asset level, which far exceeded the present size of these Funds. In view
of such structures and the favorable fee and expense comparisons of these Funds
within their respective Lipper expense groups, the Board believed that to the
extent economies of scale may be realized by the Manager of these Funds and its
affiliates, that there was a sharing of benefits with each of these Funds and
their shareholders. The fee structure, including a separate administrative fee,
for Franklin Adjustable U.S. Government Securities Fund provides a management
fee of 0.50% on the first $5 billion of assets, with breakpoints continuing at
stages thereafter. In discussing such fee, management expressed the view that
this initial rate anticipated economies of scale. In support of this position,
management pointed to the favorable management fee and expense comparison of
this Fund, which had assets of approximately $370 million at year-end, with
those of its Lipper expense group. While intending to monitor future growth of
this Fund, the Board believed that to the extent economies of scale may be
realized by the Manager and its affiliates, there was a sharing of benefits with
this Fund and its shareholders. The Board did not believe the small size of the
recently formed Franklin Low Duration Total Return Fund, whose expenses were
subsidized by management, afforded any economies of scale.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
Semiannual Report | 129
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
130 | Semiannual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is open only to existing shareholders and select retirement
plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07
Not part of the semiannual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN INVESTORS
SECURITIES TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FIST2 S2007 06/07
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN INVESTORS SECURITIES TRUST
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 27, 2007
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date June 27, 2007