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
------------------------------------
(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
Date of fiscal year end: 10/31
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Date of reporting period: 10/31/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
OCTOBER 31, 2008
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Limited Maturity U.S. Government Securities Fund
Franklin Real Return Fund
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN INVESTORS SECURITIES TRUST
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(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - 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)
Not part of the annual report
Contents
CEO'S MESSAGE ............................................................ 1
ANNUAL REPORT
Economic and Market Overview ............................................. 4
Franklin Balanced Fund ................................................... 6
Franklin Convertible Securities Fund ..................................... 18
Franklin Equity Income Fund .............................................. 27
Franklin Limited Maturity U.S. Government Securities Fund ................ 38
Franklin Real Return Fund ................................................ 47
Financial Highlights and Statements of Investments ....................... 56
Financial Statements ..................................................... 91
Notes to Financial Statements ............................................ 100
Report of Independent Registered Public Accounting Firm .................. 117
Tax Designation .......................................................... 118
Board Members and Officers ............................................... 119
Shareholder Information .................................................. 123
A Message from Gregory E. Johnson,
President and Chief Executive Officer of Franklin Resources, Inc.
October 31, 2008
Dear Shareholder:
The enclosed annual report for Franklin Investors Securities Trust covers the 12
months ended October 31, 2008, and I would like to add some comments on market
events during this time. Recent market volatility has been jarring to everyone,
including those of us who have worked in financial markets for many years. Bank
lending around the world seized up, and the fallout impacted venerable firms
alongside broader stock and bond indexes.
This environment is bound to provoke great concern, but it's equally important
to put the latest market developments in perspective. That's why I'd like to
offer a few thoughts on these events, our company's approach to investing and
the strong health of our organization.
A key point to recognize is that global financial turmoil is being addressed by
global action. Central banks around the world have coordinated their efforts to
cut interest rates and supply liquidity to frozen funding markets. A number of
governments have also intervened to rescue major financial institutions or find
an orderly way for them to be acquired. Here in the U.S., the Federal
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
Reserve and Treasury Department have moved rapidly to establish new programs for
easing money market pressures and handling troubled financial assets. The
outcome of all these efforts may take a while to be realized, but I believe the
latest actions here and abroad mark a significant turning point for global
capital markets.
It's also important to remember that as daunting as current market conditions
may be, we have navigated through other periods of market volatility. U.S. stock
markets recorded three bear markets during the 1960s as the nation grappled with
the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in
1973 led to a deep U.S. recession and a stock market plunge of 45.1% from
January 1973 through December 1974.(1) And the "Black Monday" stock market crash
of 1987 remains the largest single-day percentage decline in the history of the
Dow Jones Industrial Average.(2)
Advice applicable throughout these upheavals remains true today. The late Sir
John Templeton, writing 15 years ago, ended a list of his core investment
principles with these thoughts: "Do not be fearful or negative too often. . . .
For 100 years optimists have carried the day in U.S. stocks. Even in the dark
'70s, many professional money managers -- and many individual investors too --
made money in stocks . . . . In this century or the next it's still 'Buy low,
sell high.'"(3)
Sir John knew these simple concepts were difficult to execute in the face of
pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual
Series portfolio managers are contending with today's challenging environment.
They are using their expertise to sort through investment opportunities,
avoiding those firms that have become merely cheap and identifying those firms
best positioned to be eventual winners. This kind of rigorous, bottom-up,
security-by-security analysis is the fundamental investment discipline practiced
across our global platform.
These asset management strengths are also the core of our business. Unlike
financial firms that have dominated recent headlines, Franklin Templeton derives
its revenue primarily from investment management, not investment banking or
securities brokerage. Additionally, our assets under management are diversified
by investment objective, clientele and geographic region. Diversified
positioning helps our firm maintain healthy operating margins even
(1.) Source: Ned Davis Research, Inc.
(2.) Source: NYSE Euronext. 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.
(3.) Source: "16 Rules for Investment Success" by Sir John Templeton.
2 | Not part of the annual report
when volatile markets reduce assets under management. It is also important to
note that maintaining a strong balance sheet has been a pillar of our management
strategy. We have a substantial pool of cash and investments and low levels of
debt, and we are in the enviable position of not having to depend on credit to
meet our operating needs. In fact, our strong franchise, sound capitalization
and minimal leverage recently led Standard & Poor's to raise its credit ratings
on Franklin Resources, Inc. (BEN) to the highest level currently applied to a
publicly traded asset manager.(4)
Franklin Templeton's six-decade growth into a premier global asset manager has
given us the conviction that although conditions remain challenging, there are
ample reasons to be optimistic about eventual market stabilization and recovery.
Being able to take advantage of markets shaken by maximum pessimism has helped
our firm develop into an organization that stretches across 29 countries and
manages assets for more than 20 million shareholder accounts.
In the enclosed annual report for Franklin Investors Securities Trust, the
portfolio managers discuss market conditions, investment decisions and Fund
performance during the 12 months ended October 31, 2008. The report contains
additional performance data and financial information. Our website,
FRANKLINTEMPLETON.COM, offers more timely discussions, daily prices, portfolio
holdings and other information. We encourage you to discuss your concerns with
your financial advisor, who can review your overall portfolio, reassess your
goals and help you stay focused on the long term. As times like these
illustrate, all securities markets fluctuate, as do fund share prices.
We are grateful for the trust you have placed in Franklin Templeton and remain
focused on serving your investment needs.
Sincerely,
/s/ Gregory E. Johnson
Gregory E. Johnson
President and Chief Executive Officer
Franklin Resources, Inc.
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. 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.
(4.) Source: Standard & Poor's press release, 10/6/08.
Not part of the annual report | 3
Annual Report
Economic and Market Overview
The events that unfolded during the Funds' fiscal year brought extraordinary
volatility and uncertainty to financial markets. Credit market turmoil led to
significant losses and writedowns by financial institutions, reduced credit
availability and a general global repricing of risk. The credit contraction,
continued weakness in the housing market, and significant declines in consumer
confidence and consumer spending resulted in a weak and deteriorating economic
climate. Job losses mounted and the unemployment rate rose to 6.5% during the
reporting period.(1) These factors as well as upward inflationary pressures from
a weak U.S. dollar and high food, energy and commodity prices burdened the
overall economy for much of the reporting period. The economy contracted in the
fourth quarter of 2007, registering a -0.2% annualized growth rate before
staging a modest recovery in the first half of 2008. Gross domestic product
(GDP) grew at 0.9% and 2.8% annualized rates in the first and second quarters of
2008 largely due to rising exports and increased government spending. However,
as the financial turmoil intensified in the third quarter, GDP fell an estimated
annualized 0.5%.
Oil prices soared to a record high in July, rising above $145 per barrel, before
dramatically retreating to $68 by period-end. Many other commodities such as
agricultural products and precious and base metals followed similar trends.
Although inflation fell late in the review period, it rose 3.7% for the fiscal
year, largely due to higher food and energy costs.(1) Core inflation, which
excludes such costs, rose at a more moderate 2.2% annual rate; however, this
level was above the Federal Reserve Board's (Fed's) informal target range of
1.5%-2.0%.(1) The core personal consumption expenditures price index reported a
12-month increase of 2.1%.(2)
Amid a series of events that included massive government intervention, bank and
financial institution failures, and emergency funding, the Fed was focused
primarily on restoring liquidity and confidence to unsettled financial markets.
The Fed hoped to stimulate the sagging economy by cutting interest rates seven
times over the 12-month period, bringing the federal funds target rate to 1.00%.
It also implemented a series of unconventional measures aimed at easing strained
credit conditions that included a $700 billion bailout plan that would allow the
U.S. Treasury to purchase bad debt from troubled financial institutions.
(1.) Source: Bureau of Labor Statistics.
(2.) Source: Bureau of Economic Analysis.
4 | Annual Report
Volatility remained high throughout the reporting period but intensified in
September as stocks fluctuated wildly and Treasury prices soared. The blue chip
stocks of the Dow Jones Industrial Average had a total return of -31.24%, the
broader Standard & Poor's 500 Index (S&P 500) a -36.10% total return, and the
technology-heavy NASDAQ Composite Index a -39.34% total return.(3) Panicked
investors drove the yield on the three-month Treasury bill to a multi-decade
low, and LIBOR (London Interbank Offered Rate) rates, which banks charge one
another for loans, jumped to record highs. Fixed income spreads generally
widened relative to Treasury yields over the period due to heightened market
turbulence. Investors continued to seek the relative safety of short- and
intermediate-term U.S. Treasury securities as Treasury yields declined and the
yield curve steepened. Short-term, two- and five-year yields declined
significantly, with the two-year bill yielding 1.56% at the end of October, down
from 3.94% a year earlier. Over the same period, the 10-year U.S. Treasury note
yield declined from 4.48% to 4.01%.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2008. 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.
(3.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. 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.
Annual Report | 5
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.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Balanced Fund covers the fiscal year ended
October 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Balanced Fund - Class A had a
cumulative total return of -34.20%. The Fund performed better than its equity
benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -36.10% total
return for the same period.(1) However, it underperformed its fixed income
benchmark, the Barclays Capital (BC; formerly, Lehman Brothers) U.S. Aggregate
Index, which posted a +0.31% total return.(2) You can find the Fund's long-term
performance data in the Performance Summary beginning on page 10.
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
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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.
(2.) Source: (C) 2008 Morningstar. The BC 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 indexes are unmanaged and include reinvested 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.
6 | Annual Report
PORTFOLIO BREAKDOWN
Franklin Balanced Fund
Based on Total Net Assets as of 10/31/08
(BAR CHART)
Common Stocks 40.9%
Corporate Bonds 36.5%
Convertible Preferred Stocks 6.7%
Equity Linked Securities 2.5%
Convertible Bonds 2.4%
Mortgage-Backed Securities 1.3%
Asset-Backed Securities & Commercial Mortgage-Backed Securities 0.3%
Preferred Stocks 0.2%
Short-Term Investments & Other Net Assets 9.2%
DIVIDEND DISTRIBUTIONS*
Franklin Balanced Fund
11/1/07-10/31/08
DIVIDEND PER SHARE
-------------------------------------------------------
MONTH CLASS A CLASS C CLASS R ADVISOR CLASS
- ----- ----------- ----------- ----------- -------------
December** 12.56 cents 10.76 cents 11.93 cents 13.33 cents
March 8.50 cents 6.90 cents 8.06 cents 9.23 cents
April*** 3.00 cents 2.43 cents 2.83 cents 3.25 cents
May 3.00 cents 2.43 cents 2.83 cents 3.25 cents
June 3.00 cents 2.43 cents 2.83 cents 3.25 cents
July 3.00 cents 2.43 cents 2.83 cents 3.25 cents
August 3.00 cents 2.43 cents 2.83 cents 3.25 cents
September 3.00 cents 2.49 cents 2.84 cents 3.24 cents
October 3.00 cents 2.49 cents 2.84 cents 3.24 cents
----------- ----------- ----------- -----------
TOTAL 42.06 CENTS 34.79 CENTS 39.82 CENTS 45.29 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Includes an additional 4.06 cent per share distribution to meet excise tax
requirements.
*** Beginning April 2008, the Fund's dividend schedule changed from quarterly
to monthly.
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 nonconvertible 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
The S&P 500's decline accelerated in September and October 2008 as the global
financial system moved perilously close to a collapse and required substantial
global government intervention. Compounding the effects of the credit crisis,
the U.S. economic outlook deteriorated significantly, resulting in negative
gross domestic product growth expectations.
Annual Report | 7
TOP 5 EQUITIES
Franklin Balanced Fund
10/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Bank of America Corp. 2.7%
FINANCIALS
Johnson & Johnson 2.6%
HEALTH CARE
AT&T Inc. 2.3%
TELECOMMUNICATION SERVICES
Intel Corp. 2.0%
INFORMATION TECHNOLOGY
PG&E Corp. 1.9%
UTILITIES
TOP 5 BONDS
Franklin Balanced Fund
10/31/08
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
JPMorgan Chase & Co. 2.5%
FINANCIALS
Illinois Power Co. 2.1%
UTILITIES
Philip Morris International Inc. 1.8%
CONSUMER STAPLES
Rio Tinto Finance USA Ltd. 1.8%
MATERIALS
Target Corp. 1.8%
CONSUMER DISCRETIONARY
The Fund's negative performance was largely due to the severe U.S. equity market
decline; the credit crisis, which caused significant bond price declines; and
financial sector turmoil, which negatively impacted several holdings.
In the financials sector, the subprime mortgage crisis spread quickly and raised
concerns about other assets and fears regarding rising credit losses and
inadequate reserves. Waning investor confidence and increasing market panic
ultimately resulted in the failure of or forced government intervention in
several companies including Fannie Mae, Freddie Mac, Lehman Brothers Holdings,
American International Group, Washington Mutual and Wachovia. The Fund's equity
holdings in some of these companies -- including preferred stock, convertible
securities and common stock -- negatively impacted results.
Other stock positions that detracted from the Fund's absolute performance were
holdings in companies generally viewed as vulnerable to weakening economic
activity including 3M, Alcoa and Dow Chemical. On the other hand, stocks that
helped Fund performance included Genentech, Wal-Mart Stores and Anheuser-Busch
(all sold by period-end).
Among the Fund's fixed income holdings, our focus on corporate bonds hampered
results. Despite the rally in U.S. Treasury bonds -- with a decline in the
10-year yield from 4.48% at the beginning of the period to 4.01% at period-end
- -- corporate yield spreads to Treasuries widened substantially as credit markets
seized up, particularly in late September and October.
Although the BC U.S. Aggregate Index eked out a total return of +0.31%, it did
not reflect the difference between the government and corporate debt markets.(2)
As credit markets froze and the financial system neared collapse, investors
flocked to the safe haven of U.S. Treasuries, which rallied and delivered a
total return of +7.76% as measured by the BC U.S. Treasury Index.(3) In
contrast, investment-grade corporate bonds had a -13.82% return as measured by
the BC U.S. Corporate Investment Grade Index.(4)
(3.) Source: (C) 2008 Morningstar. The BC U.S. Treasury Index is the U.S.
Treasury component of the U.S. Government index and covers public
obligations of the U.S. Treasury with a remaining maturity of one year or
more.
(4.) Source: (C) 2008 Morningstar. The BC U.S. Corporate Investment Grade Index
is the corporate component of the BC U.S. Credit Index, which includes
publicly issued, SEC-registered bonds that meet specified maturity,
liquidity and quality requirements.
8 | Annual Report
Thank you for your continued participation in Franklin Balanced Fund. We look
forward to serving your future investment needs.
(PHOTO OF EDWARD D. PERKS)
/s/ Edward D. Perks
Edward D. Perks, CFA
(PHOTO OF ALAN E. MUSCHOTT)
/s/ Alan E. Muschott
Alan E. Muschott, CFA
(PHOTO OF SHAWN LYONS)
/s/ Shawn Lyons
Shawn Lyons, CFA
Portfolio Management Team
Franklin Balanced Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2008, 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.
Annual Report | 9
Performance Summary as of 10/31/08
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 and graphs do 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: FBLAX) CHANGE 10/31/08 10/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$4.36 $7.00 $11.36
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4206
Short-Term Capital Gain $0.2080
Long-Term Capital Gain $0.0346
TOTAL $0.6632
CLASS C (SYMBOL: N/A) CHANGE 10/31/08 10/31/07
- --------------------- ------ -------- --------
Net Asset Value (NAV) -$4.34 $6.96 $11.30
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.3479
Short-Term Capital Gain $0.2080
Long-Term Capital Gain $0.0346
TOTAL $0.5905
CLASS R (SYMBOL: N/A) CHANGE 10/31/08 10/31/07
- --------------------- ------ -------- --------
Net Asset Value (NAV) -$4.36 $7.00 $11.36
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.3982
Short-Term Capital Gain $0.2080
Long-Term Capital Gain $0.0346
TOTAL $0.6408
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 10/31/07
- --------------------------- ------ -------- --------
Net Asset Value (NAV) -$4.37 $7.01 $11.38
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4529
Short-Term Capital Gain $0.2080
Long-Term Capital Gain $0.0346
TOTAL $0.6955
10 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1)
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; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR INCEPTION (7/3/06)
- ------- -------- ------------------
Cumulative Total Return(2) -34.20% -22.47%
Average Annual Total Return(3) -37.97% -12.60%
Value of $10,000 Investment(4) $ 6,203 $ 7,308
Avg. Ann. Total Return (9/30/08)(5) -27.69% -6.62%
Distribution Rate(6) 4.85%
30-Day Standardized Yield(7) 5.89%
Total Annual Operating Expenses(8)
Without Waiver 1.64%
With Waiver 1.04%
CLASS C 1-YEAR INCEPTION (7/3/06)
- ------- -------- ------------------
Cumulative Total Return(2) -34.69% -23.67%
Average Annual Total Return(3) -35.31% -10.95%
Value of $10,000 Investment(4) $ 6,469 $ 7,633
Avg. Ann. Total Return (9/30/08)(5) -24.47% -4.78%
Distribution Rate(6) 4.29%
30-Day Standardized Yield(7) 5.53%
Total Annual Operating Expenses(8)
Without Waiver 2.31%
With Waiver 1.71%
CLASS R 1-YEAR INCEPTION (7/3/06)
- ------- -------- ------------------
Cumulative Total Return(2) -34.26% -22.66%
Average Annual Total Return(3) -34.26% -10.45%
Value of $10,000 Investment(4) $ 6,574 $ 7,734
Avg. Ann. Total Return (9/30/08)(5) -23.35% -4.29%
Distribution Rate(6) 4.86%
30-Day Standardized Yield(7) 6.05%
Total Annual Operating Expenses(8)
Without Waiver 1.81%
With Waiver 1.21%
Annual Report | 11
Performance Summary (CONTINUED)
PERFORMANCE(1) (CONTINUED)
ADVISOR CLASS 1-YEAR INCEPTION (7/3/06)
- ------------- ------- ------------------
Cumulative Total Return(2) -34.01% -21.86%
Average Annual Total Return(3) -34.01% -10.05%
Value of $10,000 Investment(4) $ 6,599 $ 7,814
Avg. Ann. Total Return (9/30/08)(5) -23.01% -3.82%
Distribution Rate(6) 5.55%
30-Day Standardized Yield(7) 6.58%
Total Annual Operating Expenses(8)
Without Waiver 1.31%
With Waiver 0.71%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSES CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES,
EXCLUSIVE OF ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED THE AMOUNT SHOWN
WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS, INCLUDING THOSE
RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS),
UNTIL 2/28/09.
12 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged indexes include reinvestment of
any income or distributions. They differ from the Fund in composition and do not
pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year -37.97%
Since Inception (7/3/06) -12.60%
CLASS A (7/3/06-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN BALANCED S&P 500 BARCLAYS CAPITAL
DATE FUND - CLASS A INDEX(9) U.S. AGGREGATE INDEX(9)
---- ----------------- ------------- -----------------------
7/3/2006 $ 9,425 $10,000 $10,000
7/31/2006 $ 9,566 $10,062 $10,135
8/31/2006 $ 9,755 $10,301 $10,290
9/30/2006 $ 9,867 $10,567 $10,381
10/31/2006 $10,104 $10,911 $10,449
11/30/2006 $10,275 $11,118 $10,571
12/31/2006 $10,335 $11,274 $10,509
1/31/2007 $10,421 $11,445 $10,505
2/28/2007 $10,507 $11,221 $10,667
3/31/2007 $10,551 $11,346 $10,667
4/30/2007 $10,898 $11,849 $10,725
5/31/2007 $11,101 $12,263 $10,644
6/30/2007 $10,974 $12,059 $10,612
7/31/2007 $10,780 $11,685 $10,701
8/31/2007 $10,945 $11,860 $10,832
9/30/2007 $11,174 $12,304 $10,914
10/31/2007 $11,106 $12,499 $11,012
11/30/2007 $10,881 $11,977 $11,210
12/31/2007 $10,764 $11,894 $11,241
1/31/2008 $10,572 $11,180 $11,430
2/29/2008 $10,420 $10,817 $11,446
3/31/2008 $10,255 $10,770 $11,485
4/30/2008 $10,674 $11,295 $11,461
5/31/2008 $10,746 $11,441 $11,377
6/30/2008 $10,180 $10,477 $11,368
7/31/2008 $ 9,923 $10,389 $11,359
8/31/2008 $ 9,985 $10,539 $11,467
9/30/2008 $ 8,575 $ 9,600 $11,313
10/31/2008 $ 7,308 $ 7,987 $11,046
Total Returns -26.92% -20.13% 10.46%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------- --------
1-Year -35.31%
Since Inception (7/3/06) -10.95%
CLASS C (7/3/06-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN BALANCED S&P 500 BARCLAYS CAPITAL
DATE FUND - CLASS C INDEX(9) U.S. AGGREGATE INDEX(9)
---- ----------------- ------------- -----------------------
7/3/2006 $10,000 $10,000 $10,000
7/31/2006 $10,150 $10,062 $10,135
8/31/2006 $10,340 $10,301 $10,290
9/30/2006 $10,449 $10,567 $10,381
10/31/2006 $10,690 $10,911 $10,449
11/30/2006 $10,871 $11,118 $10,571
12/31/2006 $10,929 $11,274 $10,509
1/31/2007 $11,021 $11,445 $10,505
2/28/2007 $11,102 $11,221 $10,667
3/31/2007 $11,131 $11,346 $10,667
4/30/2007 $11,499 $11,849 $10,725
5/31/2007 $11,703 $12,263 $10,644
6/30/2007 $11,566 $12,059 $10,612
7/31/2007 $11,361 $11,685 $10,701
8/31/2007 $11,515 $11,860 $10,832
9/30/2007 $11,749 $12,304 $10,914
10/31/2007 $11,687 $12,499 $11,012
11/30/2007 $11,429 $11,977 $11,210
12/31/2007 $11,307 $11,894 $11,241
1/31/2008 $11,093 $11,180 $11,430
2/29/2008 $10,933 $10,817 $11,446
3/31/2008 $10,752 $10,770 $11,485
4/30/2008 $11,188 $11,295 $11,461
5/31/2008 $11,257 $11,441 $11,377
6/30/2008 $10,666 $10,477 $11,368
7/31/2008 $10,379 $10,389 $11,359
8/31/2008 $10,437 $10,539 $11,467
9/30/2008 $ 8,960 $ 9,600 $11,313
10/31/2008 $ 7,633 $ 7,987 $11,046
Total Returns -23.67% -20.13% 10.46%
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/08
- ------- --------
1-Year -34.26%
Since Inception (7/3/06) -10.45%
CLASS R (7/3/06-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN BALANCED S&P 500 BARCLAYS CAPITAL
DATE FUND - CLASS R INDEX(9) U.S. AGGREGATE INDEX(9)
---- ----------------- ------------- -----------------------
7/3/2006 $10,000 $10,000 $10,000
7/31/2006 $10,150 $10,062 $10,135
8/31/2006 $10,350 $10,301 $10,290
9/30/2006 $10,469 $10,567 $10,381
10/31/2006 $10,710 $10,911 $10,449
11/30/2006 $10,891 $11,118 $10,571
12/31/2006 $10,960 $11,274 $10,509
1/31/2007 $11,052 $11,445 $10,505
2/28/2007 $11,143 $11,221 $10,667
3/31/2007 $11,178 $11,346 $10,667
4/30/2007 $11,546 $11,849 $10,725
5/31/2007 $11,760 $12,263 $10,644
6/30/2007 $11,631 $12,059 $10,612
7/31/2007 $11,425 $11,685 $10,701
8/31/2007 $11,590 $11,860 $10,832
9/30/2007 $11,825 $12,304 $10,914
10/31/2007 $11,763 $12,499 $11,012
11/30/2007 $11,514 $11,977 $11,210
12/31/2007 $11,394 $11,894 $11,241
1/31/2008 $11,191 $11,180 $11,430
2/29/2008 $11,020 $10,817 $11,446
3/31/2008 $10,851 $10,770 $11,485
4/30/2008 $11,293 $11,295 $11,461
5/31/2008 $11,366 $11,441 $11,377
6/30/2008 $10,767 $10,477 $11,368
7/31/2008 $10,493 $10,389 $11,359
8/31/2008 $10,556 $10,539 $11,467
9/30/2008 $ 9,064 $ 9,600 $11,313
10/31/2008 $ 7,734 $ 7,987 $11,046
Total Returns -22.66% -20.13% 10.46%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/08
- ------------ --------
1-Year -34.01%
Since Inception (7/3/06) -10.05%
ADVISOR CLASS (7/3/06-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN BALANCED S&P 500 BARCLAYS CAPITAL
DATE FUND - ADVISOR CLASS INDEX(9) U.S. AGGREGATE INDEX(9)
---- -------------------- ------- --------------------
7/3/2006 $10,000 $10,000 $10,000
7/31/2006 $10,160 $10,062 $10,135
8/31/2006 $10,360 $10,301 $10,290
9/30/2006 $10,479 $10,567 $10,381
10/31/2006 $10,730 $10,911 $10,449
11/30/2006 $10,922 $11,118 $10,571
12/31/2006 $10,984 $11,274 $10,509
1/31/2007 $11,086 $11,445 $10,505
2/28/2007 $11,178 $11,221 $10,667
3/31/2007 $11,220 $11,346 $10,667
4/30/2007 $11,589 $11,849 $10,725
5/31/2007 $11,814 $12,263 $10,644
6/30/2007 $11,688 $12,059 $10,612
7/31/2007 $11,482 $11,685 $10,701
8/31/2007 $11,657 $11,860 $10,832
9/30/2007 $11,902 $12,304 $10,914
10/31/2007 $11,840 $12,499 $11,012
11/30/2007 $11,590 $11,977 $11,210
12/31/2007 $11,485 $11,894 $11,241
1/31/2008 $11,280 $11,180 $11,430
2/29/2008 $11,118 $10,817 $11,446
3/31/2008 $10,940 $10,770 $11,485
4/30/2008 $11,401 $11,295 $11,461
5/31/2008 $11,468 $11,441 $11,377
6/30/2008 $10,879 $10,477 $11,368
7/31/2008 $10,597 $10,389 $11,359
8/31/2008 $10,666 $10,539 $11,467
9/30/2008 $ 9,163 $ 9,600 $11,313
10/31/2008 $ 7,814 $ 7,987 $11,046
Total Returns -21.86% -20.13% 10.46%
14 | Annual 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. 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 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 a higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1.) If the manager and administrator had not waived fees, the Fund's
distribution rate and total return would have been lower, and yield for the
period would have been 5.47%, 5.10%, 5.62% and 6.13% for Classes A, C, R
and Advisor, respectively.
(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.
(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 average annual total
return information through the latest calendar quarter.
(6.) Distribution rate is based on an annualization of the respective class's
October dividend and the maximum offering price (NAV for Classes C, R and
Advisor) per share on 10/31/08.
(7.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(8.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(9.) Source: (C) 2008 Morningstar. 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 BC
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.
Annual Report | 15
Your Fund's Expenses
FRANKLIN BALANCED FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
16 | Annual 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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 684.60 $4.28
Hypothetical (5% return before expenses) $1,000 $1,020.06 $5.13
CLASS C
Actual $1,000 $ 682.20 $6.98
Hypothetical (5% return before expenses) $1,000 $1,016.84 $8.36
CLASS R
Actual $1,000 $ 684.80 $5.08
Hypothetical (5% return before expenses) $1,000 $1,019.10 $6.09
ADVISOR CLASS
Actual $1,000 $ 685.40 $3.01
Hypothetical (5% return before expenses) $1,000 $1,021.57 $3.61
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 1.01%; C: 1.65%; R:
1.20%; and Advisor: 0.71%), multiplied by the average account value over
the period, multiplied by 184/366 to reflect the one-half year period.
Annual Report | 17
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 attempting 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 10/31/08
(PIE CHART)
Convertible Bonds ................................... 63.9%
Convertible Preferred Stocks ........................ 31.1%
Common Stocks ....................................... 1.3%
Short-Term Investments & Other Net Assets ........... 3.7%
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Convertible Securities Fund covers the fiscal
year ended October 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Convertible Securities Fund - Class A
had a -39.36% cumulative total return. The Fund underperformed its benchmark,
the Merrill Lynch (ML) All U.S. Convertibles Index, which had a -38.50% total
return for the same period.(1) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 21.
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The ML All U.S. Convertibles Index comprises 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 68.
18 | Annual 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 12 months under review, Fund performance suffered as volatile
financial markets revealed massive dislocations in the convertible securities
market due in part to distressed hedge funds. In the financials sector, asset
management holding company Affiliated Manager's Group was a major detractor from
Fund performance during the reporting period. Other financials sector holdings
that hurt performance included Lehman Brothers (sold by period-end), iStar
Financial, CIT Group, Legg Mason, Fannie Mae and Washington Mutual (sold by
period-end).
In the consumer discretionary sector, troubled automakers Ford Motor and General
Motors were negatively impacted by the credit crunch and weak demand. In the
same sector, a position in concert promoter Live Nation also detracted from
performance. Other individual holdings that performed poorly during the review
period included specialty chemicals manufacturer Celanese, offshore oil driller
Cal Dive International (Helix Energy Solutions Group in the SOI) and electronic
payment technologies company Verifone Holding.
The Fund also had some positive contributors to performance, several of which
were sold during the reporting period because we believed they were fully
valued. A position in oil, gas and consumable fuels company McMoRan Exploration
(sold by period-end) generated strong returns during the reporting period and
was a key contributor to Fund performance. Information storage and management
company EMC and drug maker MGI Pharmaceuticals (sold by period-end) also
performed well. Other holdings that had positive performance included health
technology company Celgene, oil field services company Schlumberger and packaged
food producer General Mills, all of which were sold by period-end.
TOP 10 HOLDINGS
Franklin Convertible Securities Fund
10/31/08
(BAR CHART)
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
Medtronic Inc. 3.6%
HEALTH CARE
Best Buy Co. Inc. 3.1%
CONSUMER DISCRETIONARY
PDL BioPharma 3.0%
HEALTH CARE
Microchip Technology Inc. 2.9%
INFORMATION TECHNOLOGY
Carnival Corp. 2.8%
CONSUMER DISCRETIONARY
Intel Corp. 2.8%
INFORMATION TECHNOLOGY
L-3 Communications Corp. 2.7%
INDUSTRIALS
General Motors Corp. 2.7%
CONSUMER DISCRETIONARY
Entergy Corp. 2.6%
UTILITIES
Avery Dennison Corp. 2.5%
INDUSTRIALS
Annual Report | 19
Thank you for your participation in Franklin Convertible Securities Fund. We
look forward to serving your future investment needs.
(PHOTO OF ALAN E. MUSCHOTT)
/s/ Alan E. Muschott
Alan E. Muschott, CFA
(PHOTO OF EDWARD D. PERKS)
/s/ Edward D. Perks
Edward D. Perks, CFA
(PHOTO OF MATT QUINLAN)
/s/ Matt Quinlan
Matt Quinlan, CFA
Portfolio Management Team
Franklin Convertible Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2008, 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.
20 | Annual Report
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.66 $9.48 $17.14
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.7526
Short-Term Capital Gain $0.1986
Long-Term Capital Gain $0.3800
TOTAL $1.3312
CLASS C (SYMBOL: FROTX) CHANGE 10/31/08 10/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$7.59 $9.39 $16.98
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.6372
Short-Term Capital Gain $0.1986
Long-Term Capital Gain $0.3800
TOTAL $1.2158
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 5/15/08
- --------------------------- ------ -------- --------
Net Asset Value (NAV) -$6.17 $9.48 $15.65
DISTRIBUTIONS (5/15/08-10/31/08)
Dividend Income $0.5316
Annual Report | 21
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; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ -------
Cumulative Total Return(1) -39.36% -2.95% +54.42%
Average Annual Total Return(2) -42.86% -1.77% +3.82%
Value of $10,000 Investment(3) $5,714 $9,146 $14,550
Avg. Ann. Total Return (9/30/08)(4) -29.16% +3.35% +6.23%
Distribution Rate(5) 7.48%
30-Day Standardized Yield(6) 5.53%
Total Annual Operating Expenses(7) 0.89%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------ -------
Cumulative Total Return(1) -39.80% -6.47% +43.54%
Average Annual Total Return(2) -40.36% -1.33% +3.68%
Value of $10,000 Investment(3) $5,964 $9,353 $14,354
Avg. Ann. Total Return (9/30/08)(4) -26.05% +3.81% +6.08%
Distribution Rate(5) 6.79%
30-Day Standardized Yield(6) 5.09%
Total Annual Operating Expenses(7) 1.64%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------ -------
Cumulative Total Return(1) -39.28% -2.82% +54.63%
Average Annual Total Return(2) -39.28% -0.57% +4.45%
Value of $10,000 Investment(3) $6,072 $9,718 $15,463
Avg. Ann. Total Return (9/30/08)(4) -24.72% +4.62% +6.88%
Distribution Rate(5) 5.61%
30-Day Standardized Yield(6) 6.13%
Total Annual Operating Expenses(7) 0.64%
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 (800) 342-5236.
22 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year -42.86%
5-Year -1.77%
10-Year +3.82%
CLASS A (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN CONVERTIBLE MERRILL LYNCH ALL U.S.
DATE SECURITIES FUND - CLASS A CONVERTIBLES INDEX(9)
- ---- ------------------------- ----------------------
11/1/1998 $ 9,423 $10,000
11/30/1998 $ 9,752 $10,478
12/31/1998 $ 9,950 $11,091
1/31/1999 $10,177 $11,638
2/28/1999 $ 9,704 $11,231
3/31/1999 $ 9,688 $11,696
4/30/1999 $10,108 $12,171
5/31/1999 $10,322 $12,109
6/30/1999 $10,688 $12,556
7/31/1999 $10,554 $12,475
8/31/1999 $10,646 $12,318
9/30/1999 $10,612 $12,399
10/31/1999 $10,765 $12,885
11/30/1999 $11,212 $13,632
12/31/1999 $12,054 $15,478
1/31/2000 $12,326 $15,474
2/29/2000 $13,096 $16,776
3/31/2000 $13,543 $16,752
4/30/2000 $13,331 $15,597
5/31/2000 $13,106 $14,922
6/30/2000 $13,634 $15,690
7/31/2000 $13,415 $15,224
8/31/2000 $14,517 $16,394
9/30/2000 $14,397 $15,859
10/31/2000 $14,049 $15,238
11/30/2000 $12,795 $13,417
12/31/2000 $13,906 $13,930
1/31/2001 $14,902 $14,797
2/28/2001 $14,019 $13,686
3/31/2001 $13,549 $13,093
4/30/2001 $14,493 $13,972
5/31/2001 $14,390 $13,885
6/30/2001 $14,116 $13,666
7/31/2001 $13,936 $13,469
8/31/2001 $13,504 $13,231
9/30/2001 $12,314 $12,442
10/31/2001 $12,763 $12,697
11/30/2001 $13,558 $13,037
12/31/2001 $14,019 $13,312
1/31/2002 $13,764 $13,101
2/28/2002 $13,419 $12,730
3/31/2002 $14,069 $13,187
4/30/2002 $13,962 $12,995
5/31/2002 $13,682 $12,881
6/30/2002 $12,663 $12,184
7/31/2002 $11,588 $11,454
8/31/2002 $11,724 $11,596
9/30/2002 $11,077 $11,187
10/31/2002 $11,264 $11,437
11/30/2002 $12,145 $12,261
12/31/2002 $11,839 $12,169
1/31/2003 $11,943 $12,365
2/28/2003 $11,901 $12,335
3/31/2003 $12,076 $12,543
4/30/2003 $12,889 $13,176
5/31/2003 $13,733 $13,789
6/30/2003 $13,960 $13,877
7/31/2003 $14,173 $13,916
8/31/2003 $14,312 $14,089
9/30/2003 $14,421 $14,263
10/31/2003 $14,993 $14,775
11/30/2003 $15,456 $15,016
12/31/2003 $16,035 $15,473
1/31/2004 $16,537 $15,942
2/29/2004 $16,701 $16,068
3/31/2004 $16,877 $16,129
4/30/2004 $16,811 $15,740
5/31/2004 $16,877 $15,780
6/30/2004 $17,145 $16,036
7/31/2004 $16,710 $15,604
8/31/2004 $16,721 $15,635
9/30/2004 $17,180 $15,903
10/31/2004 $17,101 $15,974
11/30/2004 $17,936 $16,555
12/31/2004 $18,604 $16,960
1/31/2005 $18,226 $16,589
2/28/2005 $18,272 $16,550
3/31/2005 $18,084 $16,168
4/30/2005 $17,612 $15,634
5/31/2005 $18,302 $16,037
6/30/2005 $18,837 $16,374
7/31/2005 $19,626 $16,949
8/31/2005 $19,603 $16,886
9/30/2005 $19,786 $17,054
10/31/2005 $19,282 $16,692
11/30/2005 $19,540 $16,996
12/31/2005 $19,894 $17,132
1/31/2006 $20,571 $17,838
2/28/2006 $20,633 $17,796
3/31/2006 $20,833 $18,043
4/30/2006 $20,895 $18,196
5/31/2006 $20,573 $17,912
6/30/2006 $20,536 $17,909
7/31/2006 $20,449 $17,950
8/31/2006 $20,761 $18,192
9/30/2006 $21,090 $18,408
10/31/2006 $21,682 $18,884
11/30/2006 $22,275 $19,257
12/31/2006 $22,311 $19,330
1/31/2007 $22,859 $19,749
2/28/2007 $22,817 $19,755
3/31/2007 $23,004 $19,814
4/30/2007 $23,568 $20,281
5/31/2007 $24,201 $20,740
6/30/2007 $23,887 $20,676
7/31/2007 $23,221 $20,181
8/31/2007 $23,193 $20,158
9/30/2007 $24,008 $20,882
10/31/2007 $23,994 $21,285
11/30/2007 $22,860 $20,465
12/31/2007 $22,422 $20,206
1/31/2008 $21,922 $19,820
2/29/2008 $21,686 $19,698
3/31/2008 $20,930 $19,072
4/30/2008 $22,509 $20,063
5/31/2008 $22,923 $20,340
6/30/2008 $21,470 $19,362
7/31/2008 $20,847 $18,756
8/31/2008 $20,981 $18,687
9/30/2008 $18,050 $15,961
10/31/2008 $14,550 $13,091
Total Returns 45.50% 30.91%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------- --------
1-Year -40.36%
5-Year -1.33%
10-Year +3.68%
CLASS C (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN CONVERTIBLE MERRILL LYNCH ALL U.S.
DATE SECURITIES FUND - CLASS C CONVERTIBLES INDEX(9)
- ---- ------------------------- ----------------------
11/1/1998 $10,000 $10,000
11/30/1998 $10,345 $10,478
12/31/1998 $10,549 $11,091
1/31/1999 $10,785 $11,638
2/28/1999 $10,275 $11,231
3/31/1999 $10,260 $11,696
4/30/1999 $10,691 $12,171
5/31/1999 $10,912 $12,109
6/30/1999 $11,294 $12,556
7/31/1999 $11,145 $12,475
8/31/1999 $11,228 $12,318
9/30/1999 $11,193 $12,399
10/31/1999 $11,348 $12,885
11/30/1999 $11,814 $13,632
12/31/1999 $12,688 $15,478
1/31/2000 $12,967 $15,474
2/29/2000 $13,782 $16,776
3/31/2000 $14,235 $16,752
4/30/2000 $14,001 $15,597
5/31/2000 $13,764 $14,922
6/30/2000 $14,304 $15,690
7/31/2000 $14,065 $15,224
8/31/2000 $15,208 $16,394
9/30/2000 $15,074 $15,859
10/31/2000 $14,700 $15,238
11/30/2000 $13,374 $13,417
12/31/2000 $14,540 $13,930
1/31/2001 $15,546 $14,797
2/28/2001 $14,639 $13,686
3/31/2001 $14,137 $13,093
4/30/2001 $15,116 $13,972
5/31/2001 $14,989 $13,885
6/30/2001 $14,703 $13,666
7/31/2001 $14,497 $13,469
8/31/2001 $14,047 $13,231
9/30/2001 $12,806 $12,442
10/31/2001 $13,257 $12,697
11/30/2001 $14,067 $13,037
12/31/2001 $14,540 $13,312
1/31/2002 $14,267 $13,101
2/28/2002 $13,910 $12,730
3/31/2002 $14,567 $13,187
4/30/2002 $14,447 $12,995
5/31/2002 $14,157 $12,881
6/30/2002 $13,089 $12,184
7/31/2002 $11,964 $11,454
8/31/2002 $12,107 $11,596
9/30/2002 $11,428 $11,187
10/31/2002 $11,619 $11,437
11/30/2002 $12,521 $12,261
12/31/2002 $12,188 $12,169
1/31/2003 $12,297 $12,365
2/28/2003 $12,243 $12,335
3/31/2003 $12,416 $12,543
4/30/2003 $13,234 $13,176
5/31/2003 $14,096 $13,789
6/30/2003 $14,328 $13,877
7/31/2003 $14,526 $13,916
8/31/2003 $14,659 $14,089
9/30/2003 $14,769 $14,263
10/31/2003 $15,347 $14,775
11/30/2003 $15,802 $15,016
12/31/2003 $16,394 $15,473
1/31/2004 $16,900 $15,942
2/29/2004 $17,057 $16,068
3/31/2004 $17,217 $16,129
4/30/2004 $17,149 $15,740
5/31/2004 $17,205 $15,780
6/30/2004 $17,461 $16,036
7/31/2004 $17,003 $15,604
8/31/2004 $17,003 $15,635
9/30/2004 $17,467 $15,903
10/31/2004 $17,374 $15,974
11/30/2004 $18,217 $16,555
12/31/2004 $18,869 $16,960
1/31/2005 $18,484 $16,589
2/28/2005 $18,507 $16,550
3/31/2005 $18,317 $16,168
4/30/2005 $17,824 $15,634
5/31/2005 $18,516 $16,037
6/30/2005 $19,038 $16,374
7/31/2005 $19,819 $16,949
8/31/2005 $19,795 $16,886
9/30/2005 $19,957 $17,054
10/31/2005 $19,445 $16,692
11/30/2005 $19,695 $16,996
12/31/2005 $20,031 $17,132
1/31/2006 $20,705 $17,838
2/28/2006 $20,743 $17,796
3/31/2006 $20,934 $18,043
4/30/2006 $20,984 $18,196
5/31/2006 $20,657 $17,912
6/30/2006 $20,607 $17,909
7/31/2006 $20,506 $17,950
8/31/2006 $20,797 $18,192
9/30/2006 $21,115 $18,408
10/31/2006 $21,688 $18,884
11/30/2006 $22,274 $19,257
12/31/2006 $22,294 $19,330
1/31/2007 $22,832 $19,749
2/28/2007 $22,777 $19,755
3/31/2007 $22,952 $19,814
4/30/2007 $23,506 $20,281
5/31/2007 $24,115 $20,740
6/30/2007 $23,797 $20,676
7/31/2007 $23,113 $20,181
8/31/2007 $23,072 $20,158
9/30/2007 $23,859 $20,882
10/31/2007 $23,845 $21,285
11/30/2007 $22,693 $20,465
12/31/2007 $22,251 $20,206
1/31/2008 $21,735 $19,820
2/29/2008 $21,499 $19,698
3/31/2008 $20,728 $19,072
4/30/2008 $22,278 $20,063
5/31/2008 $22,661 $20,340
6/30/2008 $21,230 $19,362
7/31/2008 $20,593 $18,756
8/31/2008 $20,711 $18,687
9/30/2008 $17,808 $15,961
10/31/2008 $14,354 $13,091
Total Returns 43.54% 30.91%
Annual Report | 23
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/08
- ---------------- --------
1-Year -39.28%
5-Year -0.57%
10-Year +4.45%
ADVISOR CLASS (11/1/98-10/31/08)(8)
(PERFORMANCE GRAPH)
FRANKLIN CONVERTIBLE SECURITIES MERRILL LYNCH ALL U.S.
DATE FUND - ADVISOR CLASS CONVERTIBLES INDEX(9)
- ---- ------------------------------- ----------------------
11/1/1998 $10,000 $10,000
11/30/1998 $10,349 $10,478
12/31/1998 $10,559 $11,091
1/31/1999 $10,801 $11,638
2/28/1999 $10,298 $11,231
3/31/1999 $10,281 $11,696
4/30/1999 $10,727 $12,171
5/31/1999 $10,955 $12,109
6/30/1999 $11,343 $12,556
7/31/1999 $11,200 $12,475
8/31/1999 $11,298 $12,318
9/30/1999 $11,262 $12,399
10/31/1999 $11,424 $12,885
11/30/1999 $11,899 $13,632
12/31/1999 $12,793 $15,478
1/31/2000 $13,082 $15,474
2/29/2000 $13,899 $16,776
3/31/2000 $14,373 $16,752
4/30/2000 $14,148 $15,597
5/31/2000 $13,909 $14,922
6/30/2000 $14,470 $15,690
7/31/2000 $14,237 $15,224
8/31/2000 $15,407 $16,394
9/30/2000 $15,280 $15,859
10/31/2000 $14,910 $15,238
11/30/2000 $13,579 $13,417
12/31/2000 $14,758 $13,930
1/31/2001 $15,815 $14,797
2/28/2001 $14,878 $13,686
3/31/2001 $14,379 $13,093
4/30/2001 $15,381 $13,972
5/31/2001 $15,272 $13,885
6/30/2001 $14,981 $13,666
7/31/2001 $14,790 $13,469
8/31/2001 $14,332 $13,231
9/30/2001 $13,068 $12,442
10/31/2001 $13,545 $12,697
11/30/2001 $14,389 $13,037
12/31/2001 $14,878 $13,312
1/31/2002 $14,608 $13,101
2/28/2002 $14,241 $12,730
3/31/2002 $14,931 $13,187
4/30/2002 $14,818 $12,995
5/31/2002 $14,520 $12,881
6/30/2002 $13,439 $12,184
7/31/2002 $12,298 $11,454
8/31/2002 $12,443 $11,596
9/30/2002 $11,756 $11,187
10/31/2002 $11,955 $11,437
11/30/2002 $12,890 $12,261
12/31/2002 $12,564 $12,169
1/31/2003 $12,675 $12,365
2/28/2003 $12,631 $12,335
3/31/2003 $12,816 $12,543
4/30/2003 $13,679 $13,176
5/31/2003 $14,575 $13,789
6/30/2003 $14,815 $13,877
7/31/2003 $15,042 $13,916
8/31/2003 $15,189 $14,089
9/30/2003 $15,305 $14,263
10/31/2003 $15,911 $14,775
11/30/2003 $16,404 $15,016
12/31/2003 $17,017 $15,473
1/31/2004 $17,551 $15,942
2/29/2004 $17,724 $16,068
3/31/2004 $17,911 $16,129
4/30/2004 $17,841 $15,740
5/31/2004 $17,911 $15,780
6/30/2004 $18,195 $16,036
7/31/2004 $17,734 $15,604
8/31/2004 $17,745 $15,635
9/30/2004 $18,233 $15,903
10/31/2004 $18,149 $15,974
11/30/2004 $19,035 $16,555
12/31/2004 $19,744 $16,960
1/31/2005 $19,343 $16,589
2/28/2005 $19,392 $16,550
3/31/2005 $19,192 $16,168
4/30/2005 $18,691 $15,634
5/31/2005 $19,424 $16,037
6/30/2005 $19,991 $16,374
7/31/2005 $20,829 $16,949
8/31/2005 $20,804 $16,886
9/30/2005 $20,998 $17,054
10/31/2005 $20,464 $16,692
11/30/2005 $20,737 $16,996
12/31/2005 $21,113 $17,132
1/31/2006 $21,832 $17,838
2/28/2006 $21,897 $17,796
3/31/2006 $22,110 $18,043
4/30/2006 $22,175 $18,196
5/31/2006 $21,833 $17,912
6/30/2006 $21,795 $17,909
7/31/2006 $21,702 $17,950
8/31/2006 $22,033 $18,192
9/30/2006 $22,382 $18,408
10/31/2006 $23,011 $18,884
11/30/2006 $23,640 $19,257
12/31/2006 $23,679 $19,330
1/31/2007 $24,259 $19,749
2/28/2007 $24,216 $19,755
3/31/2007 $24,414 $19,814
4/30/2007 $25,012 $20,281
5/31/2007 $25,684 $20,740
6/30/2007 $25,351 $20,676
7/31/2007 $24,644 $20,181
8/31/2007 $24,614 $20,158
9/30/2007 $25,480 $20,882
10/31/2007 $25,465 $21,285
11/30/2007 $24,261 $20,465
12/31/2007 $23,796 $20,206
1/31/2008 $23,265 $19,820
2/29/2008 $23,015 $19,698
3/31/2008 $22,213 $19,072
4/30/2008 $23,889 $20,063
5/31/2008 $24,327 $20,340
6/30/2008 $22,800 $19,362
7/31/2008 $22,138 $18,756
8/31/2008 $22,280 $18,687
9/30/2008 $19,182 $15,961
10/31/2008 $15,463 $13,091
Total Returns 54.63% 30.91%
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. BOND PRICES GENERALLY
MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. AS THE PRICES OF BONDS IN THE
FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. 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 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.
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.
(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 for Classes A and C and past two quarterly dividends
for Advisor Class and the maximum offering price (NAV for Classes C and
Advisor) per share on 10/31/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 5/15/08, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 5/15/08, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 5/14/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -36.93%.
(9.) Source: (C) 2008 Morningstar. The ML All U.S. Convertibles Index comprises
domestic securities of all quality grades that are convertible into U.S.
dollar-denominated common stock, ADRs or cash equivalents.
24 | Annual Report
Your Fund's Expenses
FRANKLIN CONVERTIBLE SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
Annual Report | 25
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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 646.40 $3.68
Hypothetical (5% return before expenses) $1,000 $1,020.66 $4.52
CLASS C
Actual $1,000 $ 644.30 $6.74
Hypothetical (5% return before expenses) $1,000 $1,016.94 $8.26
ADVISOR CLASS
Actual (5/15/08-10/31/08) $1,000 $ 630.70 $2.42
Hypothetical (5% return before expenses) $1,000 $1,021.92 $3.25
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.89%, C: 1.63%; and Advisor: 0.64%;),
multiplied by the average account value over the period, multiplied by
184/366 (Hypothetical for all share classes; Actual for Classes A and C) to
reflect the one-half year period. For Actual Advisor Class expenses, the
multiplier is 170/366) to reflect the number of days since inception.
26 | Annual Report
Franklin Equity Income Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Equity Income Fund seeks to
maximize total return by 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Equity Income Fund covers the fiscal year ended
October 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Equity Income Fund - Class A had a
- -38.01% cumulative total return. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a -36.10% total return.(1) The
Fund also underperformed its peers in the Lipper Equity Income Funds
Classification Average, which had a -33.80% total return for the same period.(2)
You can find the Fund's long-term performance data in the Performance Summary
beginning on page 31.
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
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. 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.
(2.) 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 12-month period ended
10/31/08, there were 286 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 76.
Annual Report | 27
PORTFOLIO BREAKDOWN
Franklin Equity Income Fund
Based on Total Net Assets as of 10/31/08
(BAR CHART)
Financials 15.3%
Industrials 14.5%
Health Care 11.0%
Information Technology 10.8%
Consumer Discretionary 10.6%
Energy 10.0%
Consumer Staple 7.1%
Utilities 6.2%
Materials 4.0%
Telecommunication Services 3.3%
Short-Term Investments & Other Net Assets 7.2%
DIVIDEND DISTRIBUTIONS*
Franklin Equity Income Fund
11/1/07-10/31/08
DIVIDEND PER SHARE
-----------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS**
- ----- ----------- ----------- ----------- ----------- ---------------
November 3.24 cents 1.83 cents 1.85 cents 2.75 cents --
December*** 10.24 cents 8.82 cents 8.81 cents 9.75 cents --
January 3.24 cents 1.82 cents 1.81 cents 2.75 cents --
February 3.50 cents 2.21 cents 2.20 cents 3.02 cents --
March 3.50 cents 2.21 cents 2.20 cents 3.02 cents --
April 3.50 cents 2.21 cents 2.20 cents 3.02 cents --
May 3.50 cents 2.21 cents 2.20 cents 3.02 cents --
June 3.50 cents 2.47 cents 2.48 cents 3.11 cents 3.87 cents
July 3.50 cents 2.47 cents 2.48 cents 3.11 cents 3.87 cents
August 3.50 cents 2.47 cents 2.48 cents 3.11 cents 3.87 cents
September 3.50 cents 2.59 cents 2.58 cents 3.18 cents 3.84 cents
October 3.50 cents 2.59 cents 2.58 cents 3.18 cents 3.84 cents
----------- ----------- ----------- ----------- -----------
TOTAL 48.22 CENTS 33.90 CENTS 33.87 CENTS 43.02 CENTS 19.29 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
** Effective 5/15/08, the Fund began offering Advisor Class shares. Please see
the prospectus for details.
*** Includes an additional 7.00 cent per share distribution to meet excise tax
requirements.
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.
28 | Annual Report
MANAGER'S DISCUSSION
During the 12 months under review, Fund performance was hurt by the challenging
economic and market environment. Among the Fund's major detractors from
performance during the review period were a preferred stock position in
investment bank Lehman Brothers (not held at period-end), which filed for
bankruptcy protection in October, and a convertible preferred stock position in
mortgage giant Fannie Mae. Several other financials sector companies also
detracted from the Fund's results such as equity positions in iStar Financial,
Citigroup and Bank of America.
In the materials sector, major aluminum producer Alcoa was a significant
detractor from performance as metals prices plummeted in the latter half of the
reporting period. In the consumer discretionary sector, shares of high-end
retailer Nordstrom also declined amid a pullback in consumer spending.
Other holdings that weighed notably on performance included integrated energy
company ConocoPhillips, heavy equipment manufacturer Caterpillar, Finnish cell
phone maker Nokia, industrial conglomerate General Electric and major
communications company AT&T.
The Fund also had some positive contributors to performance, including a
position in U.S. brewer Anheuser-Busch (sold by period-end), whose stock price
rose as the company agreed to be taken over by Belgium-based InBev. Among other
holdings that boosted performance was a position in insurance broker Marsh &
McLennan. Defense company Raytheon (sold by period-end) also had positive
returns during the reporting period.
TOP 10 HOLDINGS
Franklin Equity Income Fund
10/31/08
(BAR CHART)
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------- ----------
JPMorgan Chase & Co. 3.7%
FINANCIALS
Bank of America Corp. 3.5%
FINANCIALS
Roche Holding AG 3.4%
HEALTH CARE
AT&T Inc. 3.3%
TELECOMMUNICATION SERVICES
Chevron Corp. 3.0%
ENERGY
The Goldman Sachs Group Inc. into Comcast Corp. 2.7%
CONSUMER DISCRETIONARY
Microchip Technology Inc. 2.6%
INFORMATION TECHNOLOGY
Exxon Mobil Corp. 2.6%
ENERGY
The Coca-Cola Co. 2.6%
CONSUMER STAPLES
ConocoPhillips 2.6%
ENERGY
Annual Report | 29
Thank you for your continued participation in Franklin Equity Income Fund. We
look forward to serving your future investment needs.
(PHOTO OF ALAN E. MUSCHOTT)
/s/ Alan E. Muschott
Alan E. Muschott, CFA
(PHOTO OF EDWARD D. PERKS)
/s/ Edward D. Perks
Edward D. Perks, CFA
(PHOTO OF FRANK M. FELICELLI)
/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 OCTOBER 31, 2008, 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.
30 | Annual Report
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.53 $12.88 $22.41
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4822
Short-Term Capital Gain $0.1310
Long-Term Capital Gain $0.8335
TOTAL $1.4467
CLASS B (SYMBOL: FBEIX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.48 $12.82 $22.30
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.3390
Short-Term Capital Gain $0.1310
Long-Term Capital Gain $0.8335
TOTAL $1.3035
CLASS C (SYMBOL: FRETX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.48 $12.83 $22.31
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.3387
Short-Term Capital Gain $0.1310
Long-Term Capital Gain $0.8335
TOTAL $1.3032
CLASS R (SYMBOL: FREIX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$9.54 $12.89 $22.43
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4302
Short-Term Capital Gain $0.1310
Long-Term Capital Gain $0.8335
TOTAL $1.3947
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 5/15/08
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$6.71 $12.88 $19.59
DISTRIBUTIONS (5/15/08-10/31/08)
Dividend Income $0.1929
Annual Report | 31
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/ADVISOR: NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) -38.01% -7.45% +10.42%
Average Annual Total Return(2) -41.58% -2.70% +0.40%
Value of $10,000 Investment(3) $ 5,842 $8,722 $10,405
Avg. Ann. Total Return (9/30/08)(4) -30.77% +1.96% +2.61%
Distribution Rate(5) 3.07%
30-Day Standardized Yield(6) 3.93%
Total Annual Operating Expenses(7) 0.94%
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------- ------- ------- -----------------
Cumulative Total Return(1) -38.47% -10.81% +0.65%
Average Annual Total Return(2) -40.77% -2.58% +0.07%
Value of $10,000 Investment(3) $ 5,923 $ 8,775 $10,065
Avg. Ann. Total Return (9/30/08)(4) -29.81% +2.08% +1.90%
Distribution Rate(5) 2.42%
30-Day Standardized Yield(6) 3.42%
Total Annual Operating Expenses(7) 1.69%
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------- ------- ------- -------
Cumulative Total Return(1) -38.46% -10.80% +2.49%
Average Annual Total Return(2) -39.03% -2.26% +0.25%
Value of $10,000 Investment(3) $ 6,097 $ 8,920 $10,249
Avg. Ann. Total Return (9/30/08)(4) -27.75% +2.41% +2.46%
Distribution Rate(5) 2.41%
30-Day Standardized Yield(6) 3.40%
Total Annual Operating Expenses(7) 1.69%
CLASS R 1-YEAR 5-YEAR INCEPTION (8/1/02)
- ------- ------- ------- -----------------
Cumulative Total Return(1) -38.18% -8.65% +3.71%
Average Annual Total Return(2) -38.18% -1.79% +0.59%
Value of $10,000 Investment(3) $ 6,182 $9,135 $10,757
Avg. Ann. Total Return (9/30/08)(4) -26.78% +2.90% +3.53%
Distribution Rate(5) 2.96%
30-Day Standardized Yield(6) 3.91%
Total Annual Operating Expenses(7) 1.19%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR
- ---------------- ------- ------- -------
Cumulative Total Return(1) -37.94% -7.35% +10.55%
Average Annual Total Return(2) -37.94% -1.51% +1.01%
Value of $10,000 Investment(3) $ 6,206 $9,265 $11,055
Avg. Ann. Total Return (9/30/08)(4) -26.44% +3.21% +3.24%
Distribution Rate(5) 3.58%
30-Day Standardized Yield(6) 4.42%
Total Annual Operating Expenses(7) 0.69%
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 (800) 342-5236.
32 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year -41.58%
5-Year -2.70%
10-Year +0.40%
CLASS A (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER
INCOME FUND - S&P 500 EQUITY INCOME
DATE CLASS A INDEX(9) FUNDS AVERAGE(9) CPI(9)
---- --------------- ------- ---------------- --------
11/1/1998 $ 9,423 $10,000 $10,000 $10,000
11/30/1998 $ 9,727 $10,606 $10,407 $10,000
12/31/1998 $ 9,729 $11,217 $10,732 $ 9,994
1/31/1999 $ 9,544 $11,686 $10,676 $10,018
2/28/1999 $ 9,378 $11,323 $10,463 $10,030
3/31/1999 $ 9,500 $11,776 $10,703 $10,061
4/30/1999 $10,252 $12,232 $11,430 $10,134
5/31/1999 $10,364 $11,943 $11,354 $10,134
6/30/1999 $10,487 $12,606 $11,690 $10,134
7/31/1999 $10,202 $12,213 $11,367 $10,165
8/31/1999 $ 9,958 $12,152 $11,074 $10,189
9/30/1999 $ 9,682 $11,819 $10,709 $10,238
10/31/1999 $ 9,885 $12,567 $11,123 $10,256
11/30/1999 $ 9,778 $12,823 $11,070 $10,262
12/31/1999 $ 9,806 $13,578 $11,221 $10,262
1/31/2000 $ 9,502 $12,896 $10,841 $10,293
2/29/2000 $ 8,996 $12,652 $10,254 $10,354
3/31/2000 $ 9,853 $13,889 $11,245 $10,439
4/30/2000 $ 9,956 $13,471 $11,197 $10,445
5/31/2000 $10,160 $13,195 $11,385 $10,457
6/30/2000 $ 9,936 $13,520 $11,120 $10,512
7/31/2000 $10,027 $13,309 $11,167 $10,537
8/31/2000 $10,735 $14,135 $11,815 $10,537
9/30/2000 $10,896 $13,389 $11,866 $10,591
10/31/2000 $11,273 $13,333 $12,087 $10,610
11/30/2000 $11,030 $12,281 $11,665 $10,616
12/31/2000 $11,630 $12,342 $12,279 $10,610
1/31/2001 $11,749 $12,779 $12,378 $10,677
2/28/2001 $11,510 $11,614 $12,035 $10,720
3/31/2001 $11,154 $10,878 $11,649 $10,744
4/30/2001 $11,691 $11,724 $12,292 $10,787
5/31/2001 $11,870 $11,802 $12,491 $10,835
6/30/2001 $11,677 $11,515 $12,181 $10,854
7/31/2001 $11,832 $11,402 $12,152 $10,823
8/31/2001 $11,525 $10,688 $11,769 $10,823
9/30/2001 $10,649 $ 9,825 $10,989 $10,872
10/31/2001 $10,573 $10,012 $11,019 $10,835
11/30/2001 $11,211 $10,780 $11,567 $10,817
12/31/2001 $11,475 $10,875 $11,808 $10,774
1/31/2002 $11,452 $10,716 $11,667 $10,799
2/28/2002 $11,599 $10,510 $11,722 $10,841
3/31/2002 $11,951 $10,905 $12,184 $10,902
4/30/2002 $11,589 $10,244 $11,800 $10,963
5/31/2002 $11,730 $10,168 $11,778 $10,963
6/30/2002 $11,020 $ 9,444 $11,062 $10,970
7/31/2002 $10,114 $ 8,708 $10,144 $10,982
8/31/2002 $10,176 $ 8,765 $10,239 $11,018
9/30/2002 $ 8,960 $ 7,812 $ 9,173 $11,037
10/31/2002 $ 9,470 $ 8,500 $ 9,703 $11,055
11/30/2002 $10,123 $ 9,000 $10,263 $11,055
12/31/2002 $ 9,742 $ 8,471 $ 9,895 $11,030
1/31/2003 $ 9,353 $ 8,249 $ 9,607 $11,079
2/28/2003 $ 8,995 $ 8,125 $ 9,354 $11,165
3/31/2003 $ 8,990 $ 8,204 $ 9,376 $11,232
4/30/2003 $ 9,669 $ 8,880 $10,100 $11,207
5/31/2003 $10,326 $ 9,348 $10,745 $11,189
6/30/2003 $10,495 $ 9,468 $10,872 $11,201
7/31/2003 $10,528 $ 9,634 $10,995 $11,213
8/31/2003 $10,667 $ 9,822 $11,175 $11,256
9/30/2003 $10,625 $ 9,718 $11,080 $11,293
10/31/2003 $11,243 $10,268 $11,636 $11,280
11/30/2003 $11,383 $10,359 $11,787 $11,250
12/31/2003 $12,166 $10,902 $12,484 $11,238
1/31/2004 $12,344 $11,102 $12,636 $11,293
2/29/2004 $12,536 $11,257 $12,879 $11,354
3/31/2004 $12,354 $11,087 $12,749 $11,427
4/30/2004 $12,190 $10,913 $12,517 $11,463
5/31/2004 $12,268 $11,062 $12,587 $11,530
6/30/2004 $12,557 $11,277 $12,871 $11,567
7/31/2004 $12,329 $10,904 $12,611 $11,549
8/31/2004 $12,497 $10,947 $12,751 $11,555
9/30/2004 $12,569 $11,065 $12,934 $11,579
10/31/2004 $12,596 $11,235 $13,076 $11,640
11/30/2004 $13,087 $11,690 $13,662 $11,646
12/31/2004 $13,440 $12,087 $14,077 $11,604
1/31/2005 $13,182 $11,793 $13,825 $11,628
2/28/2005 $13,651 $12,040 $14,262 $11,695
3/31/2005 $13,314 $11,827 $14,024 $11,787
4/30/2005 $13,153 $11,603 $13,789 $11,866
5/31/2005 $13,331 $11,972 $14,082 $11,854
6/30/2005 $13,411 $11,989 $14,221 $11,860
7/31/2005 $13,615 $12,435 $14,653 $11,915
8/31/2005 $13,570 $12,321 $14,555 $11,976
9/30/2005 $13,716 $12,421 $14,670 $12,122
10/31/2005 $13,469 $12,214 $14,375 $12,146
11/30/2005 $13,793 $12,676 $14,778 $12,049
12/31/2005 $13,871 $12,680 $14,853 $12,000
1/31/2006 $14,212 $13,016 $15,333 $12,091
2/28/2006 $14,234 $13,052 $15,391 $12,116
3/31/2006 $14,338 $13,214 $15,602 $12,183
4/30/2006 $14,702 $13,391 $15,958 $12,287
5/31/2006 $14,354 $13,006 $15,586 $12,348
6/30/2006 $14,439 $13,024 $15,639 $12,372
7/31/2006 $14,551 $13,104 $15,885 $12,409
8/31/2006 $14,848 $13,416 $16,175 $12,433
9/30/2006 $15,180 $13,762 $16,445 $12,372
10/31/2006 $15,629 $14,210 $16,947 $12,305
11/30/2006 $15,886 $14,480 $17,284 $12,287
12/31/2006 $16,140 $14,683 $17,601 $12,305
1/31/2007 $16,326 $14,905 $17,821 $12,342
2/28/2007 $16,150 $14,614 $17,642 $12,408
3/31/2007 $16,285 $14,777 $17,875 $12,521
4/30/2007 $17,014 $15,432 $18,578 $12,603
5/31/2007 $17,663 $15,970 $19,206 $12,680
6/30/2007 $17,284 $15,705 $18,896 $12,704
7/31/2007 $16,435 $15,218 $18,235 $12,701
8/31/2007 $16,647 $15,446 $18,483 $12,678
9/30/2007 $16,911 $16,024 $19,039 $12,713
10/31/2007 $16,785 $16,279 $19,211 $12,740
11/30/2007 $15,739 $15,598 $18,456 $12,816
12/31/2007 $15,567 $15,490 $18,277 $12,807
1/31/2008 $15,309 $14,561 $17,480 $12,871
2/29/2008 $14,599 $14,088 $16,959 $12,908
3/31/2008 $14,477 $14,027 $16,839 $13,020
4/30/2008 $15,199 $14,710 $17,514 $13,099
5/31/2008 $15,210 $14,901 $17,705 $13,209
6/30/2008 $13,750 $13,645 $16,191 $13,342
7/31/2008 $13,484 $13,530 $16,074 $13,412
8/31/2008 $13,688 $13,725 $16,264 $13,359
9/30/2008 $12,421 $12,502 $15,061 $13,340
10/31/2008 $10,405 $10,403 $12,725 $13,206
Total Returns 4.05% 4.03% 27.25% 32.06%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 10/31/08
- ------- --------
1-Year -40.77%
5-Year -2.58%
Since Inception (1/1/99) +0.07%
CLASS B (1/1/99-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER
INCOME FUND - S&P 500 EQUITY INCOME
DATE CLASS B INDEX(9) FUNDS AVERAGE(9) CPI(9)
---- --------------- ------- ---------------- --------
1/1/1999 $10,000 $10,000 $10,000 $10,000
1/31/1999 $ 9,805 $10,418 $ 9,948 $10,024
2/28/1999 $ 9,629 $10,094 $ 9,750 $10,037
3/31/1999 $ 9,748 $10,498 $ 9,973 $10,067
4/30/1999 $10,513 $10,905 $10,650 $10,140
5/31/1999 $10,617 $10,647 $10,580 $10,140
6/30/1999 $10,732 $11,238 $10,893 $10,140
7/31/1999 $10,435 $10,887 $10,592 $10,171
8/31/1999 $10,179 $10,834 $10,319 $10,195
9/30/1999 $ 9,885 $10,537 $ 9,979 $10,244
10/31/1999 $10,087 $11,203 $10,365 $10,262
11/30/1999 $ 9,966 $11,431 $10,315 $10,268
12/31/1999 $10,000 $12,104 $10,456 $10,268
1/31/2000 $ 9,677 $11,496 $10,102 $10,299
2/29/2000 $ 9,160 $11,279 $ 9,555 $10,360
3/31/2000 $10,023 $12,382 $10,479 $10,445
4/30/2000 $10,116 $12,010 $10,434 $10,451
5/31/2000 $10,317 $11,763 $10,609 $10,464
6/30/2000 $10,084 $12,053 $10,362 $10,519
7/31/2000 $10,171 $11,865 $10,405 $10,543
8/31/2000 $10,880 $12,602 $11,010 $10,543
9/30/2000 $11,043 $11,936 $11,057 $10,598
10/31/2000 $11,415 $11,886 $11,263 $10,616
11/30/2000 $11,162 $10,949 $10,870 $10,622
12/31/2000 $11,757 $11,002 $11,441 $10,616
1/31/2001 $11,876 $11,393 $11,534 $10,683
2/28/2001 $11,627 $10,354 $11,215 $10,726
3/31/2001 $11,258 $ 9,698 $10,855 $10,750
4/30/2001 $11,795 $10,452 $11,454 $10,793
5/31/2001 $11,969 $10,522 $11,639 $10,842
6/30/2001 $11,761 $10,266 $11,351 $10,860
7/31/2001 $11,911 $10,165 $11,323 $10,830
8/31/2001 $11,595 $ 9,528 $10,967 $10,830
9/30/2001 $10,709 $ 8,759 $10,240 $10,879
10/31/2001 $10,619 $ 8,926 $10,267 $10,842
11/30/2001 $11,255 $ 9,611 $10,779 $10,824
12/31/2001 $11,515 $ 9,695 $11,003 $10,781
1/31/2002 $11,486 $ 9,553 $10,872 $10,805
2/28/2002 $11,621 $ 9,369 $10,923 $10,848
3/31/2002 $11,975 $ 9,721 $11,353 $10,909
4/30/2002 $11,604 $ 9,132 $10,996 $10,970
5/31/2002 $11,738 $ 9,065 $10,975 $10,970
6/30/2002 $11,018 $ 8,419 $10,308 $10,976
7/31/2002 $10,108 $ 7,763 $ 9,452 $10,988
8/31/2002 $10,164 $ 7,814 $ 9,541 $11,025
9/30/2002 $ 8,945 $ 6,965 $ 8,548 $11,043
10/31/2002 $ 9,443 $ 7,578 $ 9,042 $11,062
11/30/2002 $10,096 $ 8,024 $ 9,563 $11,062
12/31/2002 $ 9,709 $ 7,552 $ 9,220 $11,037
1/31/2003 $ 9,309 $ 7,354 $ 8,952 $11,086
2/28/2003 $ 8,953 $ 7,244 $ 8,716 $11,171
3/31/2003 $ 8,936 $ 7,314 $ 8,736 $11,239
4/30/2003 $ 9,609 $ 7,917 $ 9,412 $11,214
5/31/2003 $10,252 $ 8,334 $10,012 $11,196
6/30/2003 $10,415 $ 8,440 $10,130 $11,208
7/31/2003 $10,442 $ 8,589 $10,246 $11,220
8/31/2003 $10,576 $ 8,756 $10,413 $11,263
9/30/2003 $10,527 $ 8,664 $10,324 $11,300
10/31/2003 $11,129 $ 9,154 $10,843 $11,287
11/30/2003 $11,261 $ 9,235 $10,984 $11,257
12/31/2003 $12,031 $ 9,719 $11,633 $11,245
1/31/2004 $12,202 $ 9,898 $11,775 $11,300
2/29/2004 $12,385 $10,035 $12,001 $11,361
3/31/2004 $12,196 $ 9,884 $11,879 $11,434
4/30/2004 $12,025 $ 9,728 $11,663 $11,470
5/31/2004 $12,095 $ 9,862 $11,729 $11,538
6/30/2004 $12,373 $10,053 $11,994 $11,574
7/31/2004 $12,139 $ 9,720 $11,751 $11,556
8/31/2004 $12,298 $ 9,759 $11,882 $11,562
9/30/2004 $12,362 $ 9,865 $12,052 $11,586
10/31/2004 $12,375 $10,016 $12,184 $11,647
11/30/2004 $12,852 $10,421 $12,730 $11,653
12/31/2004 $13,192 $10,775 $13,117 $11,611
1/31/2005 $12,930 $10,513 $12,882 $11,635
2/28/2005 $13,378 $10,734 $13,289 $11,702
3/31/2005 $13,044 $10,544 $13,067 $11,794
4/30/2005 $12,878 $10,344 $12,849 $11,873
5/31/2005 $13,051 $10,673 $13,122 $11,861
6/30/2005 $13,115 $10,688 $13,252 $11,867
7/31/2005 $13,307 $11,085 $13,654 $11,922
8/31/2005 $13,255 $10,984 $13,563 $11,983
9/30/2005 $13,390 $11,073 $13,670 $12,129
10/31/2005 $13,139 $10,889 $13,395 $12,154
11/30/2005 $13,448 $11,301 $13,770 $12,056
12/31/2005 $13,516 $11,304 $13,841 $12,007
1/31/2006 $13,841 $11,604 $14,288 $12,099
2/28/2006 $13,854 $11,635 $14,342 $12,123
3/31/2006 $13,947 $11,780 $14,538 $12,190
4/30/2006 $14,293 $11,938 $14,870 $12,294
5/31/2006 $13,939 $11,595 $14,523 $12,355
6/30/2006 $14,012 $11,611 $14,573 $12,379
7/31/2006 $14,119 $11,682 $14,802 $12,416
8/31/2006 $14,392 $11,960 $15,072 $12,441
9/30/2006 $14,707 $12,268 $15,324 $12,379
10/31/2006 $15,135 $12,668 $15,792 $12,312
11/30/2006 $15,369 $12,909 $16,106 $12,294
12/31/2006 $15,613 $13,090 $16,401 $12,312
1/31/2007 $15,794 $13,288 $16,606 $12,350
2/28/2007 $15,624 $13,028 $16,439 $12,416
3/31/2007 $15,755 $13,174 $16,656 $12,529
4/30/2007 $16,461 $13,757 $17,311 $12,610
5/31/2007 $17,088 $14,237 $17,896 $12,688
6/30/2007 $16,722 $14,001 $17,608 $12,712
7/31/2007 $15,901 $13,567 $16,992 $12,709
8/31/2007 $16,106 $13,770 $17,223 $12,686
9/30/2007 $16,361 $14,285 $17,741 $12,721
10/31/2007 $16,240 $14,512 $17,901 $12,748
11/30/2007 $15,226 $13,906 $17,197 $12,823
12/31/2007 $15,060 $13,809 $17,031 $12,815
1/31/2008 $14,810 $12,981 $16,288 $12,879
2/29/2008 $14,123 $12,559 $15,803 $12,916
3/31/2008 $14,004 $12,505 $15,691 $13,028
4/30/2008 $14,702 $13,114 $16,320 $13,107
5/31/2008 $14,712 $13,284 $16,498 $13,217
6/30/2008 $13,300 $12,164 $15,087 $13,351
7/31/2008 $13,042 $12,062 $14,978 $13,421
8/31/2008 $13,240 $12,236 $15,155 $13,367
9/30/2008 $12,015 $11,146 $14,034 $13,349
10/31/2008 $10,065 $ 9,274 $11,857 $13,214
Total Returns 0.65% -7.26% 18.57% 32.14%
Annual Report | 33
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------- --------
1-Year -39.03%
5-Year -2.26%
10-Year +0.25%
CLASS C (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER
INCOME FUND - S&P 500 EQUITY INCOME
DATE CLASS C INDEX(9) FUNDS AVERAGE(9) CPI(9)
---- --------------- ------- ---------------- --------
11/1/1998 $10,000 $10,000 $10,000 $10,000
11/30/1998 $10,317 $10,606 $10,407 $10,000
12/31/1998 $10,308 $11,217 $10,732 $ 9,994
1/31/1999 $10,111 $11,686 $10,676 $10,018
2/28/1999 $ 9,929 $11,323 $10,463 $10,030
3/31/1999 $10,052 $11,776 $10,703 $10,061
4/30/1999 $10,842 $12,232 $11,430 $10,134
5/31/1999 $10,950 $11,943 $11,354 $10,134
6/30/1999 $11,074 $12,606 $11,690 $10,134
7/31/1999 $10,766 $12,213 $11,367 $10,165
8/31/1999 $10,501 $12,152 $11,074 $10,189
9/30/1999 $10,203 $11,819 $10,709 $10,238
10/31/1999 $10,411 $12,567 $11,123 $10,256
11/30/1999 $10,291 $12,823 $11,070 $10,262
12/31/1999 $10,313 $13,578 $11,221 $10,262
1/31/2000 $ 9,984 $12,896 $10,841 $10,293
2/29/2000 $ 9,449 $12,652 $10,254 $10,354
3/31/2000 $10,345 $13,889 $11,245 $10,439
4/30/2000 $10,447 $13,471 $11,197 $10,445
5/31/2000 $10,654 $13,195 $11,385 $10,457
6/30/2000 $10,413 $13,520 $11,120 $10,512
7/31/2000 $10,503 $13,309 $11,167 $10,537
8/31/2000 $11,234 $14,135 $11,815 $10,537
9/30/2000 $11,402 $13,389 $11,866 $10,591
10/31/2000 $11,791 $13,333 $12,087 $10,610
11/30/2000 $11,529 $12,281 $11,665 $10,616
12/31/2000 $12,144 $12,342 $12,279 $10,610
1/31/2001 $12,260 $12,779 $12,378 $10,677
2/28/2001 $12,003 $11,614 $12,035 $10,720
3/31/2001 $11,628 $10,878 $11,649 $10,744
4/30/2001 $12,182 $11,724 $12,292 $10,787
5/31/2001 $12,355 $11,802 $12,491 $10,835
6/30/2001 $12,145 $11,515 $12,181 $10,854
7/31/2001 $12,300 $11,402 $12,152 $10,823
8/31/2001 $11,973 $10,688 $11,769 $10,823
9/30/2001 $11,052 $ 9,825 $10,989 $10,872
10/31/2001 $10,966 $10,012 $11,019 $10,835
11/30/2001 $11,622 $10,780 $11,567 $10,817
12/31/2001 $11,890 $10,875 $11,808 $10,774
1/31/2002 $11,861 $10,716 $11,667 $10,799
2/28/2002 $12,000 $10,510 $11,722 $10,841
3/31/2002 $12,359 $10,905 $12,184 $10,902
4/30/2002 $11,982 $10,244 $11,800 $10,963
5/31/2002 $12,115 $10,168 $11,778 $10,963
6/30/2002 $11,378 $ 9,444 $11,062 $10,970
7/31/2002 $10,438 $ 8,708 $10,144 $10,982
8/31/2002 $10,496 $ 8,765 $10,239 $11,018
9/30/2002 $ 9,238 $ 7,812 $ 9,173 $11,037
10/31/2002 $ 9,752 $ 8,500 $ 9,703 $11,055
11/30/2002 $10,426 $ 9,000 $10,263 $11,055
12/31/2002 $10,021 $ 8,471 $ 9,895 $11,030
1/31/2003 $ 9,615 $ 8,249 $ 9,607 $11,079
2/28/2003 $ 9,241 $ 8,125 $ 9,354 $11,165
3/31/2003 $ 9,230 $ 8,204 $ 9,376 $11,232
4/30/2003 $ 9,924 $ 8,880 $10,100 $11,207
5/31/2003 $10,588 $ 9,348 $10,745 $11,189
6/30/2003 $10,756 $ 9,468 $10,872 $11,201
7/31/2003 $10,777 $ 9,634 $10,995 $11,213
8/31/2003 $10,920 $ 9,822 $11,175 $11,256
9/30/2003 $10,869 $ 9,718 $11,080 $11,293
10/31/2003 $11,490 $10,268 $11,636 $11,280
11/30/2003 $11,627 $10,359 $11,787 $11,250
12/31/2003 $12,421 $10,902 $12,484 $11,238
1/31/2004 $12,591 $11,102 $12,636 $11,293
2/29/2004 $12,786 $11,257 $12,879 $11,354
3/31/2004 $12,591 $11,087 $12,749 $11,427
4/30/2004 $12,415 $10,913 $12,517 $11,463
5/31/2004 $12,487 $11,062 $12,587 $11,530
6/30/2004 $12,768 $11,277 $12,871 $11,567
7/31/2004 $12,533 $10,904 $12,611 $11,549
8/31/2004 $12,696 $10,947 $12,751 $11,555
9/30/2004 $12,762 $11,065 $12,934 $11,579
10/31/2004 $12,776 $11,235 $13,076 $11,640
11/30/2004 $13,267 $11,690 $13,662 $11,646
12/31/2004 $13,618 $12,087 $14,077 $11,604
1/31/2005 $13,348 $11,793 $13,825 $11,628
2/28/2005 $13,810 $12,040 $14,262 $11,695
3/31/2005 $13,466 $11,827 $14,024 $11,787
4/30/2005 $13,294 $11,603 $13,789 $11,866
5/31/2005 $13,472 $11,972 $14,082 $11,854
6/30/2005 $13,538 $11,989 $14,221 $11,860
7/31/2005 $13,737 $12,435 $14,653 $11,915
8/31/2005 $13,683 $12,321 $14,555 $11,976
9/30/2005 $13,822 $12,421 $14,670 $12,122
10/31/2005 $13,563 $12,214 $14,375 $12,146
11/30/2005 $13,882 $12,676 $14,778 $12,049
12/31/2005 $13,952 $12,680 $14,853 $12,000
1/31/2006 $14,287 $13,016 $15,333 $12,091
2/28/2006 $14,301 $13,052 $15,391 $12,116
3/31/2006 $14,397 $13,214 $15,602 $12,183
4/30/2006 $14,754 $13,391 $15,958 $12,287
5/31/2006 $14,389 $13,006 $15,586 $12,348
6/30/2006 $14,464 $13,024 $15,639 $12,372
7/31/2006 $14,575 $13,104 $15,885 $12,409
8/31/2006 $14,857 $13,416 $16,175 $12,433
9/30/2006 $15,181 $13,762 $16,445 $12,372
10/31/2006 $15,623 $14,210 $16,947 $12,305
11/30/2006 $15,865 $14,480 $17,284 $12,287
12/31/2006 $16,117 $14,683 $17,601 $12,305
1/31/2007 $16,286 $14,905 $17,821 $12,342
2/28/2007 $16,107 $14,614 $17,642 $12,408
3/31/2007 $16,225 $14,777 $17,875 $12,521
4/30/2007 $16,944 $15,432 $18,578 $12,603
5/31/2007 $17,582 $15,970 $19,206 $12,680
6/30/2007 $17,194 $15,705 $18,896 $12,704
7/31/2007 $16,336 $15,218 $18,235 $12,701
8/31/2007 $16,537 $15,446 $18,483 $12,678
9/30/2007 $16,790 $16,024 $19,039 $12,713
10/31/2007 $16,654 $16,279 $19,211 $12,740
11/30/2007 $15,608 $15,598 $18,456 $12,816
12/31/2007 $15,426 $15,490 $18,277 $12,807
1/31/2008 $15,157 $14,561 $17,480 $12,871
2/29/2008 $14,449 $14,088 $16,959 $12,908
3/31/2008 $14,317 $14,027 $16,839 $13,020
4/30/2008 $15,031 $14,710 $17,514 $13,099
5/31/2008 $15,032 $14,901 $17,705 $13,209
6/30/2008 $13,576 $13,645 $16,191 $13,342
7/31/2008 $13,303 $13,530 $16,074 $13,412
8/31/2008 $13,498 $13,725 $16,264 $13,359
9/30/2008 $12,245 $12,502 $15,061 $13,340
10/31/2008 $10,249 $10,403 $12,725 $13,206
Total Returns 2.49% 4.03% 27.25% 32.06%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/08
- ------- --------
1-Year -38.18%
5-Year -1.79%
Since Inception (8/1/02) +0.59%
CLASS R (8/1/02-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER
INCOME FUND - S&P 500 EQUITY INCOME
DATE CLASS R INDEX(9) FUNDS AVERAGE(9) CPI(9)
---- --------------- ------- ---------------- --------
8/1/2002 $10,000 $10,000 $10,000 $10,000
8/31/2002 $10,303 $10,066 $10,094 $10,033
9/30/2002 $ 9,070 $ 8,972 $ 9,043 $10,050
10/31/2002 $ 9,584 $ 9,761 $ 9,566 $10,067
11/30/2002 $10,248 $10,336 $10,118 $10,067
12/31/2002 $ 9,854 $ 9,728 $ 9,755 $10,044
1/31/2003 $ 9,460 $ 9,473 $ 9,471 $10,089
2/28/2003 $ 9,096 $ 9,331 $ 9,222 $10,167
3/31/2003 $ 9,090 $ 9,422 $ 9,243 $10,228
4/30/2003 $ 9,781 $10,198 $ 9,957 $10,205
5/31/2003 $10,436 $10,736 $10,593 $10,189
6/30/2003 $10,606 $10,873 $10,718 $10,200
7/31/2003 $10,637 $11,064 $10,840 $10,211
8/31/2003 $10,776 $11,280 $11,017 $10,250
9/30/2003 $10,731 $11,161 $10,923 $10,283
10/31/2003 $11,352 $11,792 $11,471 $10,272
11/30/2003 $11,492 $11,896 $11,620 $10,244
12/31/2003 $12,279 $12,520 $12,307 $10,233
1/31/2004 $12,456 $12,750 $12,457 $10,283
2/29/2004 $12,648 $12,927 $12,696 $10,339
3/31/2004 $12,468 $12,732 $12,568 $10,405
4/30/2004 $12,293 $12,532 $12,339 $10,439
5/31/2004 $12,369 $12,704 $12,409 $10,500
6/30/2004 $12,658 $12,950 $12,689 $10,533
7/31/2004 $12,425 $12,522 $12,433 $10,516
8/31/2004 $12,599 $12,572 $12,571 $10,522
9/30/2004 $12,662 $12,708 $12,750 $10,544
10/31/2004 $12,687 $12,902 $12,891 $10,600
11/30/2004 $13,178 $13,425 $13,468 $10,605
12/31/2004 $13,530 $13,881 $13,878 $10,566
1/31/2005 $13,268 $13,543 $13,629 $10,589
2/28/2005 $13,737 $13,827 $14,060 $10,650
3/31/2005 $13,396 $13,582 $13,825 $10,733
4/30/2005 $13,231 $13,325 $13,594 $10,805
5/31/2005 $13,413 $13,749 $13,882 $10,794
6/30/2005 $13,484 $13,768 $14,020 $10,800
7/31/2005 $13,687 $14,280 $14,446 $10,850
8/31/2005 $13,646 $14,150 $14,349 $10,905
9/30/2005 $13,789 $14,265 $14,463 $11,038
10/31/2005 $13,537 $14,027 $14,172 $11,061
11/30/2005 $13,853 $14,557 $14,569 $10,972
12/31/2005 $13,929 $14,563 $14,643 $10,927
1/31/2006 $14,275 $14,948 $15,116 $11,011
2/28/2006 $14,294 $14,989 $15,173 $11,033
3/31/2006 $14,396 $15,175 $15,381 $11,094
4/30/2006 $14,757 $15,379 $15,732 $11,188
5/31/2006 $14,399 $14,936 $15,365 $11,244
6/30/2006 $14,481 $14,957 $15,418 $11,266
7/31/2006 $14,596 $15,049 $15,660 $11,299
8/31/2006 $14,885 $15,407 $15,946 $11,321
9/30/2006 $15,213 $15,804 $16,213 $11,266
10/31/2006 $15,661 $16,319 $16,707 $11,205
11/30/2006 $15,915 $16,629 $17,040 $11,188
12/31/2006 $16,172 $16,863 $17,351 $11,205
1/31/2007 $16,348 $17,118 $17,568 $11,239
2/28/2007 $16,168 $16,783 $17,393 $11,299
3/31/2007 $16,300 $16,971 $17,622 $11,402
4/30/2007 $17,026 $17,722 $18,315 $11,476
5/31/2007 $17,678 $18,341 $18,934 $11,546
6/30/2007 $17,296 $18,036 $18,629 $11,569
7/31/2007 $16,436 $17,477 $17,977 $11,566
8/31/2007 $16,652 $17,739 $18,221 $11,545
9/30/2007 $16,911 $18,402 $18,770 $11,576
10/31/2007 $16,775 $18,695 $18,939 $11,601
11/30/2007 $15,733 $17,913 $18,195 $11,670
12/31/2007 $15,550 $17,789 $18,018 $11,662
1/31/2008 $15,281 $16,722 $17,232 $11,720
2/29/2008 $14,569 $16,179 $16,719 $11,754
3/31/2008 $14,443 $16,109 $16,600 $11,856
4/30/2008 $15,166 $16,893 $17,266 $11,928
5/31/2008 $15,174 $17,112 $17,454 $12,028
6/30/2008 $13,707 $15,670 $15,962 $12,150
7/31/2008 $13,439 $15,538 $15,847 $12,213
8/31/2008 $13,647 $15,763 $16,034 $12,165
9/30/2008 $12,383 $14,358 $14,847 $12,148
10/31/2008 $10,371 $11,947 $12,545 $12,025
Total Returns 3.71% 19.47% 25.45% 20.25%
34 | Annual Report
PERFORMANCE SUMMARY (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/08
- ---------------- --------
1-Year -37.94%
5-Year -1.51%
10-Year +1.01%
ADVISOR CLASS (11/1/98-10/31/08)(8)
(PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER
INCOME FUND - S&P 500 EQUITY INCOME
DATE ADVISOR CLASS INDEX(9) FUNDS AVERAGE(9) CPI(9)
---- --------------- ------- ---------------- --------
11/1/1998 $10,000 $10,000 $10,000 $10,000
11/30/1998 $10,322 $10,606 $10,407 $10,000
12/31/1998 $10,324 $11,217 $10,732 $ 9,994
1/31/1999 $10,128 $11,686 $10,676 $10,018
2/28/1999 $ 9,953 $11,323 $10,463 $10,030
3/31/1999 $10,082 $11,776 $10,703 $10,061
4/30/1999 $10,879 $12,232 $11,430 $10,134
5/31/1999 $10,999 $11,943 $11,354 $10,134
6/30/1999 $11,129 $12,606 $11,690 $10,134
7/31/1999 $10,827 $12,213 $11,367 $10,165
8/31/1999 $10,568 $12,152 $11,074 $10,189
9/30/1999 $10,275 $11,819 $10,709 $10,238
10/31/1999 $10,490 $12,567 $11,123 $10,256
11/30/1999 $10,377 $12,823 $11,070 $10,262
12/31/1999 $10,406 $13,578 $11,221 $10,262
1/31/2000 $10,083 $12,896 $10,841 $10,293
2/29/2000 $ 9,547 $12,652 $10,254 $10,354
3/31/2000 $10,457 $13,889 $11,245 $10,439
4/30/2000 $10,566 $13,471 $11,197 $10,445
5/31/2000 $10,782 $13,195 $11,385 $10,457
6/30/2000 $10,544 $13,520 $11,120 $10,512
7/31/2000 $10,641 $13,309 $11,167 $10,537
8/31/2000 $11,393 $14,135 $11,815 $10,537
9/30/2000 $11,563 $13,389 $11,866 $10,591
10/31/2000 $11,964 $13,333 $12,087 $10,610
11/30/2000 $11,706 $12,281 $11,665 $10,616
12/31/2000 $12,342 $12,342 $12,279 $10,610
1/31/2001 $12,468 $12,779 $12,378 $10,677
2/28/2001 $12,215 $11,614 $12,035 $10,720
3/31/2001 $11,837 $10,878 $11,649 $10,744
4/30/2001 $12,407 $11,724 $12,292 $10,787
5/31/2001 $12,597 $11,802 $12,491 $10,835
6/30/2001 $12,392 $11,515 $12,181 $10,854
7/31/2001 $12,557 $11,402 $12,152 $10,823
8/31/2001 $12,231 $10,688 $11,769 $10,823
9/30/2001 $11,301 $ 9,825 $10,989 $10,872
10/31/2001 $11,220 $10,012 $11,019 $10,835
11/30/2001 $11,897 $10,780 $11,567 $10,817
12/31/2001 $12,177 $10,875 $11,808 $10,774
1/31/2002 $12,154 $10,716 $11,667 $10,799
2/28/2002 $12,309 $10,510 $11,722 $10,841
3/31/2002 $12,683 $10,905 $12,184 $10,902
4/30/2002 $12,298 $10,244 $11,800 $10,963
5/31/2002 $12,448 $10,168 $11,778 $10,963
6/30/2002 $11,694 $ 9,444 $11,062 $10,970
7/31/2002 $10,733 $ 8,708 $10,144 $10,982
8/31/2002 $10,799 $ 8,765 $10,239 $11,018
9/30/2002 $ 9,508 $ 7,812 $ 9,173 $11,037
10/31/2002 $10,050 $ 8,500 $ 9,703 $11,055
11/30/2002 $10,743 $ 9,000 $10,263 $11,055
12/31/2002 $10,338 $ 8,471 $ 9,895 $11,030
1/31/2003 $ 9,925 $ 8,249 $ 9,607 $11,079
2/28/2003 $ 9,545 $ 8,125 $ 9,354 $11,165
3/31/2003 $ 9,540 $ 8,204 $ 9,376 $11,232
4/30/2003 $10,261 $ 8,880 $10,100 $11,207
5/31/2003 $10,958 $ 9,348 $10,745 $11,189
6/30/2003 $11,138 $ 9,468 $10,872 $11,201
7/31/2003 $11,172 $ 9,634 $10,995 $11,213
8/31/2003 $11,320 $ 9,822 $11,175 $11,256
9/30/2003 $11,275 $ 9,718 $11,080 $11,293
10/31/2003 $11,931 $10,268 $11,636 $11,280
11/30/2003 $12,080 $10,359 $11,787 $11,250
12/31/2003 $12,910 $10,902 $12,484 $11,238
1/31/2004 $13,100 $11,102 $12,636 $11,293
2/29/2004 $13,303 $11,257 $12,879 $11,354
3/31/2004 $13,110 $11,087 $12,749 $11,427
4/30/2004 $12,936 $10,913 $12,517 $11,463
5/31/2004 $13,019 $11,062 $12,587 $11,530
6/30/2004 $13,326 $11,277 $12,871 $11,567
7/31/2004 $13,083 $10,904 $12,611 $11,549
8/31/2004 $13,262 $10,947 $12,751 $11,555
9/30/2004 $13,338 $11,065 $12,934 $11,579
10/31/2004 $13,367 $11,235 $13,076 $11,640
11/30/2004 $13,888 $11,690 $13,662 $11,646
12/31/2004 $14,262 $12,087 $14,077 $11,604
1/31/2005 $13,989 $11,793 $13,825 $11,628
2/28/2005 $14,486 $12,040 $14,262 $11,695
3/31/2005 $14,129 $11,827 $14,024 $11,787
4/30/2005 $13,958 $11,603 $13,789 $11,866
5/31/2005 $14,147 $11,972 $14,082 $11,854
6/30/2005 $14,232 $11,989 $14,221 $11,860
7/31/2005 $14,448 $12,435 $14,653 $11,915
8/31/2005 $14,401 $12,321 $14,555 $11,976
9/30/2005 $14,556 $12,421 $14,670 $12,122
10/31/2005 $14,293 $12,214 $14,375 $12,146
11/30/2005 $14,637 $12,676 $14,778 $12,049
12/31/2005 $14,720 $12,680 $14,853 $12,000
1/31/2006 $15,082 $13,016 $15,333 $12,091
2/28/2006 $15,106 $13,052 $15,391 $12,116
3/31/2006 $15,216 $13,214 $15,602 $12,183
4/30/2006 $15,602 $13,391 $15,958 $12,287
5/31/2006 $15,233 $13,006 $15,586 $12,348
6/30/2006 $15,322 $13,024 $15,639 $12,372
7/31/2006 $15,441 $13,104 $15,885 $12,409
8/31/2006 $15,757 $13,416 $16,175 $12,433
9/30/2006 $16,109 $13,762 $16,445 $12,372
10/31/2006 $16,586 $14,210 $16,947 $12,305
11/30/2006 $16,858 $14,480 $17,284 $12,287
12/31/2006 $17,128 $14,683 $17,601 $12,305
1/31/2007 $17,326 $14,905 $17,821 $12,342
2/28/2007 $17,138 $14,614 $17,642 $12,408
3/31/2007 $17,282 $14,777 $17,875 $12,521
4/30/2007 $18,056 $15,432 $18,578 $12,603
5/31/2007 $18,744 $15,970 $19,206 $12,680
6/30/2007 $18,343 $15,705 $18,896 $12,704
7/31/2007 $17,442 $15,218 $18,235 $12,701
8/31/2007 $17,667 $15,446 $18,483 $12,678
9/30/2007 $17,946 $16,024 $19,039 $12,713
10/31/2007 $17,813 $16,279 $19,211 $12,740
11/30/2007 $16,702 $15,598 $18,456 $12,816
12/31/2007 $16,520 $15,490 $18,277 $12,807
1/31/2008 $16,246 $14,561 $17,480 $12,871
2/29/2008 $15,493 $14,088 $16,959 $12,908
3/31/2008 $15,363 $14,027 $16,839 $13,020
4/30/2008 $16,129 $14,710 $17,514 $13,099
5/31/2008 $16,149 $14,901 $17,705 $13,209
6/30/2008 $14,595 $13,645 $16,191 $13,342
7/31/2008 $14,315 $13,530 $16,074 $13,412
8/31/2008 $14,544 $13,725 $16,264 $13,359
9/30/2008 $13,202 $12,502 $15,061 $13,340
10/31/2008 $11,055 $10,403 $12,725 $13,206
Total Returns 10.55% 4.03% 27.25% 32.06%
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 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.) 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.
(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
October dividend and the maximum offering price (NAV for Classes B, C, R
and Advisor) per share on 10/31/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 5/15/08, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 5/15/08, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 5/14/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -33.43%.
(9.) Sources: (C) 2008 Morningstar; Lipper Inc. 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 Lipper Equity Income Funds Classification Average is
calculated by averaging the total return 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 12-month period ended
10/31/08, there were 286 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 Consumer Price Index (CPI),
calculated by the U.S. Bureau of Labor Statistics, is a commonly used
measure of the inflation rate.
Annual Report | 35
Your Fund's Expenses
FRANKLIN EQUITY INCOME FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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 | Annual 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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 684.60 $4.15
Hypothetical (5% return before expenses) $1,000 $1,020.21 $4.98
CLASS B
Actual $1,000 $ 681.70 $7.31
Hypothetical (5% return before expenses) $1,000 $1,016.44 $8.77
CLASS C
Actual $1,000 $ 681.90 $7.31
Hypothetical (5% return before expenses) $1,000 $1,016.44 $8.77
CLASS R
Actual $1,000 $ 683.80 $5.21
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.24
ADVISOR CLASS
Actual (5/15/08-10/31/08) $1,000 $ 665.70 $2.82
Hypothetical (5% return before expenses) $1,000 $1,021.47 $3.71
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.98%; B: 1.73%; C: 1.73%; R: 1.23%; and
Advisor: 0.73%) multiplied by the average account value over the period,
multiplied by 184/366 (Hypothetical for all share classes; Actual for
Classes A, B, C and R) to reflect the one-half year period. For Actual
Advisor Class expenses, the multiplier is 170/366 to reflect the number of
days since inception.
Annual Report | 37
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 10/31/08
(PIE CHART)
U.S. Government & Agency Bonds .............. 55.3%
Mortgage-Backed Securities .................. 37.5%
Short-Term Investments & Other Net Assets ... 7.2%
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Limited Maturity U.S. Government Securities Fund
covers the fiscal year ended October 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Limited Maturity U.S. Government
Securities Fund - Class A posted a +4.67% cumulative total return. The Fund
(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 81.
38 | Annual Report
underperformed the +8.21% total return of its primary benchmark, the Barclays
Capital (BC; formerly, Lehman Brothers) U.S. Treasury: 1-5 Year Index.(3) The
Fund also underperformed the +6.26% return of its secondary benchmark, the BC
U.S. Government: 1-3 Year Index.(4) We discontinued using the BC U.S.
Government: 1-3 Year Index as a secondary benchmark because we believe the index
no longer reflects the Fund's holdings. You can find the Fund's long-term
performance data in the Performance Summary beginning on page 42.
INVESTMENT STRATEGY
We currently maintain the portfolio's average dollar-weighted maturity between
one 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
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 year under review, fixed income returns were varied due to financial
market turmoil. The BC U.S. Treasury Index performed well during the reporting
period, increasing +7.76%.(5) Conversely, U.S. investment grade sectors as
measured by the BC group of indexes underperformed their comparable duration
Treasury equivalents but still produced positive returns. Higher quality agency
and mortgage-backed securities (MBS) also produced positive returns, gaining
(3.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC 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.
(4.) Source: (C) 2008 Morningstar. The BC U.S. Government: 1-3 Year Index is the
1-3 year component of the BC U.S. Government Index.
The indexes are unmanaged and include reinvestment of any income or
distributions. One cannot invest in an index, nor is an index representative of
the Fund's portfolio.
(5.) Source: (C) 2008 Morningstar. The BC U.S. Treasury Index is the U.S.
Treasury component of the U.S. Government index and covers public
obligations of the U.S. Treasury with a remaining maturity of one year or
more.
Annual Report | 39
DIVIDEND DISTRIBUTIONS*
Franklin Limited Maturity U.S. Government Securities Fund
11/1/07-10/31/08
DIVIDEND PER SHARE
---------------------------
MONTH CLASS A ADVISOR CLASS
- ----- ----------- -------------
November 3.25 cents 3.33 cents
December** 5.59 cents 5.68 cents
January 3.25 cents 3.34 cents
February 3.25 cents 3.34 cents
March 3.25 cents 3.34 cents
April 3.25 cents 3.34 cents
May 3.25 cents 3.34 cents
June 3.25 cents 3.33 cents
July 3.25 cents 3.33 cents
August 3.25 cents 3.33 cents
September 3.25 cents 3.33 cents
October 3.25 cents 3.33 cents
----------- -----------
TOTAL 41.34 CENTS 42.36 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.
** Includes an additional 2.34 cent per share distribution to meet excise tax
requirements.
4.72% and 4.62% for the same period.(6) The Fund, which is currently invested
only in U.S. Treasuries, agency debentures, agency mortgage pass-through
securities and cash investments, benefited from these trends.
In the recent environment, we favored high-quality agency debentures and
mortgage pass-through securities. We found agency pass-through securities
attractive during the review period because of their characteristically higher
yields than comparable-maturity U.S. government securities, collateral backing
and diverse structures and security types.
As risk and liquidity premiums increased, spreads on investment grade sectors
widened sharply as U.S. agency MBS and debentures underperformed comparable
duration U.S. Treasuries. Thus, our allocation to agency MBS and
(6.) Source: (C) 2008 Morningstar. The BC U.S. Agency Index is the U.S. Agency
component of the BC U.S. Government/Credit Index and includes publicly
issued debt of U.S. government agencies, quasi-federal corporations, and
corporate or foreign debt guaranteed by the U.S. government. The BC Fixed
Rate MBS Index is the MBS fixed rate component of the BC U.S. Aggregate
Index and covers the mortgage-backed pass-through securities of Ginnie Mae,
Fannie Mae and Freddie Mac. The MBS Index is formed by grouping the
universe of over 600,000 individual fixed rate MBS pools into approximately
3,500 generic aggregates.
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.
40 | Annual Report
debentures detracted from performance relative to the benchmark. Consistent with
our strategy, we continued to look for opportunities within government bond
markets that have lower interest rate risk. We emphasized agency debentures and
mortgage pass-throughs, as we believed they offered better return potential and
an income advantage over U.S. Treasuries.
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 OF KENT BURNS)
/s/ Kent Burns
Kent Burns, CFA
(PHOTO OF PAUL VARUNOK)
/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 OCTOBER 31, 2008, 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.
Annual Report | 41
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) +$0.05 $10.05 $10.00
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4134
ADVISOR CLASS (SYMBOL: FSUAX) CHANGE 10/31/08 10/31/07
- ----------------------------- ------ -------- --------
Net Asset Value (NAV) +$0.05 $10.04 $9.99
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.4236
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------- ------ ------ -------
Cumulative Total Return(1) +4.67% +16.31% +48.03%
Average Annual Total Return(2) +2.32% +2.60% +3.76%
Avg. Ann. Total Return (9/30/08)(3) +2.83% +2.50% +3.82%
Distribution Rate(4) 3.79%
30-Day Standardized Yield(5) 3.33%
Total Annual Operating Expenses(6) 0.90%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------- ------ ------ -------
Cumulative Total Return(1) +4.78% +16.91% +49.55%
Average Annual Total Return(2) +4.78% +3.17% +4.11%
Avg. Ann. Total Return (9/30/08)(3) +5.30% +3.07% +4.15%
Distribution Rate(4) 3.99%
30-Day Standardized Yield(5) 3.51%
Total Annual Operating Expenses(6) 0.80%
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 (800) 342-5236.
42 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged indexes include reinvestment of
any income or distributions. They differ from the Fund in composition and do not
pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year +2.32%
5-Year +2.60%
10-Year +3.76%
CLASS A (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT BARCLAYS CAPITAL BARCLAYS CAPITAL
SECURITIES FUND U.S. TREASURY: U.S. GOVERNMENT:
DATE - CLASS A 1-5 YEAR INDEX(7) CPI(7) 1-3 YEAR INDEX(7)
---- ---------------- ----------------- ------- -----------------
11/1/1998 $ 9,776 $10,000 $10,000 $10,000
11/30/1998 $ 9,752 $ 9,973 $10,000 $ 9,990
12/31/1998 $ 9,781 $10,007 $ 9,994 $10,028
1/31/1999 $ 9,820 $10,049 $10,018 $10,066
2/28/1999 $ 9,736 $ 9,958 $10,030 $10,021
3/31/1999 $ 9,794 $10,028 $10,061 $10,089
4/30/1999 $ 9,814 $10,057 $10,134 $10,120
5/31/1999 $ 9,767 $10,028 $10,134 $10,114
6/30/1999 $ 9,787 $10,052 $10,134 $10,143
7/31/1999 $ 9,778 $10,075 $10,165 $10,175
8/31/1999 $ 9,801 $10,103 $10,189 $10,203
9/30/1999 $ 9,891 $10,175 $10,238 $10,269
10/31/1999 $ 9,923 $10,192 $10,256 $10,297
11/30/1999 $ 9,936 $10,203 $10,262 $10,317
12/31/1999 $ 9,929 $10,197 $10,262 $10,326
1/31/2000 $ 9,887 $10,178 $10,293 $10,324
2/29/2000 $ 9,964 $10,251 $10,354 $10,394
3/31/2000 $10,031 $10,339 $10,439 $10,456
4/30/2000 $10,048 $10,349 $10,445 $10,483
5/31/2000 $10,045 $10,393 $10,457 $10,521
6/30/2000 $10,194 $10,522 $10,512 $10,635
7/31/2000 $10,252 $10,590 $10,537 $10,704
8/31/2000 $10,353 $10,682 $10,537 $10,785
9/30/2000 $10,455 $10,767 $10,591 $10,870
10/31/2000 $10,505 $10,830 $10,610 $10,928
11/30/2000 $10,618 $10,953 $10,616 $11,034
12/31/2000 $10,763 $11,110 $10,610 $11,170
1/31/2001 $10,887 $11,252 $10,677 $11,317
2/28/2001 $10,960 $11,339 $10,720 $11,391
3/31/2001 $11,032 $11,433 $10,744 $11,483
4/30/2001 $11,041 $11,433 $10,787 $11,516
5/31/2001 $11,083 $11,489 $10,835 $11,579
6/30/2001 $11,092 $11,527 $10,854 $11,621
7/31/2001 $11,250 $11,695 $10,823 $11,757
8/31/2001 $11,332 $11,783 $10,823 $11,831
9/30/2001 $11,502 $12,009 $10,872 $12,029
10/31/2001 $11,640 $12,153 $10,835 $12,149
11/30/2001 $11,526 $12,073 $10,817 $12,116
12/31/2001 $11,477 $12,049 $10,774 $12,123
1/31/2002 $11,550 $12,081 $10,799 $12,152
2/28/2002 $11,642 $12,158 $10,841 $12,213
3/31/2002 $11,533 $12,023 $10,902 $12,125
4/30/2002 $11,682 $12,200 $10,963 $12,272
5/31/2002 $11,742 $12,270 $10,963 $12,320
6/30/2002 $11,824 $12,397 $10,970 $12,431
7/31/2002 $11,959 $12,603 $10,982 $12,580
8/31/2002 $12,061 $12,688 $11,018 $12,632
9/30/2002 $12,163 $12,862 $11,037 $12,733
10/31/2002 $12,208 $12,874 $11,055 $12,765
11/30/2002 $12,149 $12,789 $11,055 $12,729
12/31/2002 $12,321 $12,968 $11,030 $12,851
1/31/2003 $12,315 $12,948 $11,079 $12,853
2/28/2003 $12,424 $13,044 $11,165 $12,912
3/31/2003 $12,417 $13,060 $11,232 $12,938
4/30/2003 $12,457 $13,086 $11,207 $12,964
5/31/2003 $12,544 $13,204 $11,189 $13,017
6/30/2003 $12,537 $13,208 $11,201 $13,037
7/31/2003 $12,313 $13,041 $11,213 $12,953
8/31/2003 $12,350 $13,047 $11,256 $12,959
9/30/2003 $12,515 $13,240 $11,293 $13,090
10/31/2003 $12,442 $13,152 $11,280 $13,037
11/30/2003 $12,452 $13,142 $11,250 $13,034
12/31/2003 $12,534 $13,235 $11,238 $13,110
1/31/2004 $12,581 $13,278 $11,293 $13,142
2/29/2004 $12,668 $13,375 $11,354 $13,210
3/31/2004 $12,719 $13,445 $11,427 $13,253
4/30/2004 $12,514 $13,224 $11,463 $13,119
5/31/2004 $12,468 $13,197 $11,530 $13,103
6/30/2004 $12,495 $13,209 $11,567 $13,104
7/31/2004 $12,548 $13,275 $11,549 $13,156
8/31/2004 $12,674 $13,420 $11,555 $13,253
9/30/2004 $12,666 $13,414 $11,579 $13,243
10/31/2004 $12,719 $13,471 $11,640 $13,288
11/30/2004 $12,652 $13,366 $11,646 $13,222
12/31/2004 $12,686 $13,412 $11,604 $13,250
1/31/2005 $12,693 $13,404 $11,628 $13,248
2/28/2005 $12,651 $13,342 $11,695 $13,221
3/31/2005 $12,608 $13,327 $11,787 $13,217
4/30/2005 $12,693 $13,440 $11,866 $13,294
5/31/2005 $12,766 $13,511 $11,854 $13,349
6/30/2005 $12,789 $13,542 $11,860 $13,375
7/31/2005 $12,712 $13,459 $11,915 $13,337
8/31/2005 $12,814 $13,578 $11,976 $13,422
9/30/2005 $12,750 $13,507 $12,122 $13,387
10/31/2005 $12,699 $13,478 $12,146 $13,384
11/30/2005 $12,737 $13,531 $12,049 $13,426
12/31/2005 $12,777 $13,592 $12,000 $13,479
1/31/2006 $12,803 $13,600 $12,091 $13,505
2/28/2006 $12,816 $13,598 $12,116 $13,519
3/31/2006 $12,790 $13,595 $12,183 $13,536
4/30/2006 $12,816 $13,629 $12,287 $13,580
5/31/2006 $12,816 $13,640 $12,348 $13,599
6/30/2006 $12,829 $13,662 $12,372 $13,625
7/31/2006 $12,934 $13,781 $12,409 $13,728
8/31/2006 $13,039 $13,901 $12,433 $13,827
9/30/2006 $13,106 $13,984 $12,372 $13,899
10/31/2006 $13,160 $14,040 $12,305 $13,957
11/30/2006 $13,257 $14,126 $12,287 $14,030
12/31/2006 $13,233 $14,102 $12,305 $14,035
1/31/2007 $13,250 $14,120 $12,342 $14,067
2/28/2007 $13,374 $14,264 $12,408 $14,177
3/31/2007 $13,418 $14,315 $12,521 $14,232
4/30/2007 $13,475 $14,371 $12,603 $14,283
5/31/2007 $13,424 $14,321 $12,680 $14,275
6/30/2007 $13,441 $14,372 $12,704 $14,336
7/31/2007 $13,540 $14,534 $12,701 $14,454
8/31/2007 $13,653 $14,714 $12,678 $14,588
9/30/2007 $13,767 $14,816 $12,713 $14,694
10/31/2007 $13,825 $14,885 $12,740 $14,756
11/30/2007 $14,050 $15,215 $12,816 $14,986
12/31/2007 $14,114 $15,253 $12,807 $15,032
1/31/2008 $14,354 $15,581 $12,871 $15,289
2/29/2008 $14,442 $15,776 $12,908 $15,433
3/31/2008 $14,501 $15,830 $13,020 $15,479
4/30/2008 $14,406 $15,627 $13,099 $15,365
5/31/2008 $14,311 $15,525 $13,209 $15,312
6/30/2008 $14,343 $15,583 $13,342 $15,350
7/31/2008 $14,375 $15,664 $13,412 $15,406
8/31/2008 $14,450 $15,771 $13,359 $15,472
9/30/2008 $14,482 $15,905 $13,340 $15,561
10/31/2008 $14,471 $16,106 $13,206 $15,679
Total Returns 44.71% 61.06% 32.06% 56.79%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/08
- ------------- --------
1-Year +4.78%
5-Year +3.17%
10-Year +4.11%
ADVISOR CLASS (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT BARCLAYS CAPITAL BARCLAYS CAPITAL
SECURITIES FUND U.S. TREASURY: U.S. GOVERNMENT:
DATE - ADVISOR CLASS 1-5 YEAR INDEX(7) CPI(7) 1-3 YEAR INDEX(7)
---- ---------------- ----------------- ------- -----------------
11/1/1998 $10,000 $10,000 $10,000 $10,000
11/30/1998 $ 9,977 $ 9,973 $10,000 $ 9,990
12/31/1998 $10,007 $10,007 $ 9,994 $10,028
1/31/1999 $10,048 $10,049 $10,018 $10,066
2/28/1999 $ 9,962 $ 9,958 $10,030 $10,021
3/31/1999 $10,023 $10,028 $10,061 $10,089
4/30/1999 $10,045 $10,057 $10,134 $10,120
5/31/1999 $ 9,997 $10,028 $10,134 $10,114
6/30/1999 $10,018 $10,052 $10,134 $10,143
7/31/1999 $10,010 $10,075 $10,165 $10,175
8/31/1999 $10,034 $10,103 $10,189 $10,203
9/30/1999 $10,128 $10,175 $10,238 $10,269
10/31/1999 $10,162 $10,192 $10,256 $10,297
11/30/1999 $10,176 $10,203 $10,262 $10,317
12/31/1999 $10,170 $10,197 $10,262 $10,326
1/31/2000 $10,127 $10,178 $10,293 $10,324
2/29/2000 $10,206 $10,251 $10,354 $10,394
3/31/2000 $10,266 $10,339 $10,439 $10,456
4/30/2000 $10,295 $10,349 $10,445 $10,483
5/31/2000 $10,292 $10,393 $10,457 $10,521
6/30/2000 $10,446 $10,522 $10,512 $10,635
7/31/2000 $10,507 $10,590 $10,537 $10,704
8/31/2000 $10,611 $10,682 $10,537 $10,785
9/30/2000 $10,705 $10,767 $10,591 $10,870
10/31/2000 $10,769 $10,830 $10,610 $10,928
11/30/2000 $10,875 $10,953 $10,616 $11,034
12/31/2000 $11,024 $11,110 $10,610 $11,170
1/31/2001 $11,164 $11,252 $10,677 $11,317
2/28/2001 $11,239 $11,339 $10,720 $11,391
3/31/2001 $11,314 $11,433 $10,744 $11,483
4/30/2001 $11,324 $11,433 $10,787 $11,516
5/31/2001 $11,367 $11,489 $10,835 $11,579
6/30/2001 $11,377 $11,527 $10,854 $11,621
7/31/2001 $11,540 $11,695 $10,823 $11,757
8/31/2001 $11,626 $11,783 $10,823 $11,831
9/30/2001 $11,801 $12,009 $10,872 $12,029
10/31/2001 $11,944 $12,153 $10,835 $12,149
11/30/2001 $11,828 $12,073 $10,817 $12,116
12/31/2001 $11,779 $12,049 $10,774 $12,123
1/31/2002 $11,855 $12,081 $10,799 $12,152
2/28/2002 $11,951 $12,158 $10,841 $12,213
3/31/2002 $11,839 $12,023 $10,902 $12,125
4/30/2002 $11,993 $12,200 $10,963 $12,272
5/31/2002 $12,066 $12,270 $10,963 $12,320
6/30/2002 $12,140 $12,397 $10,970 $12,431
7/31/2002 $12,280 $12,603 $10,982 $12,580
8/31/2002 $12,385 $12,688 $11,018 $12,632
9/30/2002 $12,503 $12,862 $11,037 $12,733
10/31/2002 $12,538 $12,874 $11,055 $12,765
11/30/2002 $12,479 $12,789 $11,055 $12,729
12/31/2002 $12,658 $12,968 $11,030 $12,851
1/31/2003 $12,652 $12,948 $11,079 $12,853
2/28/2003 $12,766 $13,044 $11,165 $12,912
3/31/2003 $12,759 $13,060 $11,232 $12,938
4/30/2003 $12,801 $13,086 $11,207 $12,964
5/31/2003 $12,892 $13,204 $11,189 $13,017
6/30/2003 $12,886 $13,208 $11,201 $13,037
7/31/2003 $12,668 $13,041 $11,213 $12,953
8/31/2003 $12,695 $13,047 $11,256 $12,959
9/30/2003 $12,866 $13,240 $11,293 $13,090
10/31/2003 $12,792 $13,152 $11,280 $13,037
11/30/2003 $12,803 $13,142 $11,250 $13,034
12/31/2003 $12,889 $13,235 $11,238 $13,110
1/31/2004 $12,938 $13,278 $11,293 $13,142
2/29/2004 $13,028 $13,375 $11,354 $13,210
3/31/2004 $13,082 $13,445 $11,427 $13,253
4/30/2004 $12,873 $13,224 $11,463 $13,119
5/31/2004 $12,826 $13,197 $11,530 $13,103
6/30/2004 $12,844 $13,209 $11,567 $13,104
7/31/2004 $12,899 $13,275 $11,549 $13,156
8/31/2004 $13,031 $13,420 $11,555 $13,253
9/30/2004 $13,023 $13,414 $11,579 $13,243
10/31/2004 $13,066 $13,471 $11,640 $13,288
11/30/2004 $13,011 $13,366 $11,646 $13,222
12/31/2004 $13,047 $13,412 $11,604 $13,250
1/31/2005 $13,055 $13,404 $11,628 $13,248
2/28/2005 $13,013 $13,342 $11,695 $13,221
3/31/2005 $12,970 $13,327 $11,787 $13,217
4/30/2005 $13,059 $13,440 $11,866 $13,294
5/31/2005 $13,123 $13,511 $11,854 $13,349
6/30/2005 $13,160 $13,542 $11,860 $13,375
7/31/2005 $13,081 $13,459 $11,915 $13,337
8/31/2005 $13,187 $13,578 $11,976 $13,422
9/30/2005 $13,109 $13,507 $12,122 $13,387
10/31/2005 $13,071 $13,478 $12,146 $13,384
11/30/2005 $13,112 $13,531 $12,049 $13,426
12/31/2005 $13,154 $13,592 $12,000 $13,479
1/31/2006 $13,182 $13,600 $12,091 $13,505
2/28/2006 $13,196 $13,598 $12,116 $13,519
3/31/2006 $13,171 $13,595 $12,183 $13,536
4/30/2006 $13,199 $13,629 $12,287 $13,580
5/31/2006 $13,200 $13,640 $12,348 $13,599
6/30/2006 $13,214 $13,662 $12,372 $13,625
7/31/2006 $13,324 $13,781 $12,409 $13,728
8/31/2006 $13,433 $13,901 $12,433 $13,827
9/30/2006 $13,503 $13,984 $12,372 $13,899
10/31/2006 $13,560 $14,040 $12,305 $13,957
11/30/2006 $13,661 $14,126 $12,287 $14,030
12/31/2006 $13,638 $14,102 $12,305 $14,035
1/31/2007 $13,656 $14,120 $12,342 $14,067
2/28/2007 $13,786 $14,264 $12,408 $14,177
3/31/2007 $13,832 $14,315 $12,521 $14,232
4/30/2007 $13,892 $14,371 $12,603 $14,283
5/31/2007 $13,841 $14,321 $12,680 $14,275
6/30/2007 $13,860 $14,372 $12,704 $14,336
7/31/2007 $13,963 $14,534 $12,701 $14,454
8/31/2007 $14,080 $14,714 $12,678 $14,588
9/30/2007 $14,199 $14,816 $12,713 $14,694
10/31/2007 $14,260 $14,885 $12,740 $14,756
11/30/2007 $14,493 $15,215 $12,816 $14,986
12/31/2007 $14,560 $15,253 $12,807 $15,032
1/31/2008 $14,810 $15,581 $12,871 $15,289
2/29/2008 $14,902 $15,776 $12,908 $15,433
3/31/2008 $14,979 $15,830 $13,020 $15,479
4/30/2008 $14,882 $15,627 $13,099 $15,365
5/31/2008 $14,770 $15,525 $13,209 $15,312
6/30/2008 $14,805 $15,583 $13,342 $15,350
7/31/2008 $14,839 $15,664 $13,412 $15,406
8/31/2008 $14,917 $15,771 $13,359 $15,472
9/30/2008 $14,952 $15,905 $13,340 $15,561
10/31/2008 $14,955 $16,106 $13,206 $15,679
Total Returns 49.55% 61.06% 32.06% 56.79%
Annual Report | 43
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 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.
(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
October dividend and the maximum offering price (NAV for Advisor Class) per
share on 10/31/08.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(7.) Source: (C) 2008 Morningstar. The BC U.S. Treasury Index: 1-5 Year
Component 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 BC U.S. Government Index: 1-3 Year Component is
the 1-3 year component of the BC U.S. Government Index and covers
securities issued by the U.S. government, including public obligations of
the U.S. Treasury with a remaining maturity of one year up to, but not
including, three years and publicly issued debt of U.S. government
agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government. The Consumer Price Index (CPI),
calculated by the U.S. Bureau of Labor Statistics, is a commonly used
measure of the inflation rate.
44 | Annual Report
Your Fund's Expenses
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
Annual Report | 45
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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,004.50 $4.33
Hypothetical (5% return before expenses) $1,000 $1,020.81 $4.37
ADVISOR CLASS
Actual $1,000 $1,004.00 $3.83
Hypothetical (5% return before expenses) $1,000 $1,021.32 $3.86
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.86% and Advisor: 0.76%), multiplied by the
average account value over the period, multiplied by 184/366 to reflect the
one-half year period.
46 | Annual Report
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.
The Fund will generally invest a substantial portion of its assets in
inflation-protected securities. Managers also have the flexibility to invest in
other sectors of the market to increase real return (total return less
inflation) potential and offer greater diversification.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Real Return Fund covers the fiscal year ended
October 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, Franklin Real Return Fund - Class A had a
cumulative total return of -4.93%. The Fund underperformed its benchmark, the
Barclays Capital (BC; formerly, Lehman Brothers) U.S. TIPS Index, which had a
- -4.11% total return.(1) The Fund also underperformed the Consumer Price Index
(CPI) for Urban Consumers (All Items) NSA (non-seasonally adjusted), which rose
3.66% for the same period.(2) You can find more of the Fund's performance data
in the Performance Summary beginning on page 50.
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.
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC 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 BC U.S. TIPS Index includes reinvested interest.
(2.) Source: (C) 2008 Morningstar. 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 indexes are unmanaged. 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 86.
Annual Report | 47
PORTFOLIO BREAKDOWN
Franklin Real Return Fund
Based on Total Net Assets as of 10/31/08
(BAR CHART)
U.S. Treasury Inflation Protected Securities 67.9%
Foreign Government Debt Securities 10.4%
Corporate Bonds 5.7%
Natural Resources - Common Stocks* 3.4%
Real Estate - Common Stocks 0.9%
Short-Term Investments & Other Net Assets 11.7%
* In the SOI, the natural resources sector comprises energy and materials.
DIVIDEND DISTRIBUTIONS*
Franklin Real Return Fund
11/1/07-10/31/08
DIVIDEND PER SHARE
---------------------------
MONTH CLASS A ADVISOR CLASS
- ----- ----------- -------------
November 7.78 cents 7.98 cents
December 6.42 cents 6.63 cents
January 4.19 cents 4.36 cents
February 1.04 cents 1.20 cents
March 3.97 cents 4.18 cents
April 3.96 cents 4.20 cents
May 6.70 cents 6.91 cents
June 4.69 cents 4.88 cents
July 6.28 cents 6.50 cents
August 7.40 cents 7.60 cents
September 6.28 cents 6.51 cents
October** -- --
----------- -----------
TOTAL 58.71 CENTS 60.95 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.
MANAGER'S DISCUSSION
We invested the Fund's assets in the allowable sectors during the year 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 U.S. dollar weakness versus certain
currencies. Sharply reduced inflation pressures later in the period due to
declining commodity prices and a weakening economy led to declines in most
sectors. A strengthening U.S. dollar also hurt our non-dollar holdings.
Conversely, our exposure to the high yield debt sector helped performance
relative to the benchmark index.
48 | Annual Report
Thank you for your continued participation in Franklin Real Return Fund. We look
forward to serving your future investment needs.
(PHOTO OF T. ANTHONY COFFEY)
/s/ T. Anthony Coffey
T. Anthony Coffey, CFA
(PHOTO OF KENT BURNS)
/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 OCTOBER 31, 2008, 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.
Annual Report | 49
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- ----------------------- ------ -------- --------
Net Asset Value (NAV) -$1.09 $9.55 $10.64
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.5871
Short-Term Capital Gain $0.0004
Long-Term Capital Gain $0.0327
TOTAL $0.6202
ADVISOR CLASS (SYMBOL: FARRX) CHANGE 10/31/08 10/31/07
- ----------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.08 $9.57 $10.65
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.6095
Short-Term Capital Gain $0.0004
Long-Term Capital Gain $0.0327
TOTAL $0.6426
50 | Annual 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.
CLASS A 1-YEAR 3-YEAR INCEPTION (11/17/04)
- ------- ------ ------ --------------------
Cumulative Total Return(2) -4.93% +9.76% +13.64%
Average Annual Total Return(3) -8.95% +1.68% +2.17%
Avg. Ann. Total Return (9/30/08)(4) -0.58% +3.74% +4.21%
Distribution Rate(5) 7.56%
30-Day Standardized Yield(6) 0.33%
Total Annual Operating Expenses(7)
Without Waiver 1.11%
With Waiver 0.90%
ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (11/17/04)
- ------------- ------ ------ --------------------
Cumulative Total Return(2) -4.63% +10.63% +14.84%
Average Annual Total Return(3) -4.63% +3.42% +3.56%
Avg. Ann. Total Return (9/30/08)(4) +4.12% +5.57% +5.66%
Distribution Rate(5) 8.16%
30-Day Standardized Yield(6) 0.60%
Total Annual Operating Expenses(7)
Without Waiver 0.86%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES DO
NOT EXCEED THE AMOUNT SHOWN WITH WAIVER (OTHER THAN CERTAIN NON-ROUTINE EXPENSES
OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION,
REORGANIZATIONS AND LIQUIDATIONS) UNTIL 2/28/09.
Annual Report | 51
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the period
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year -8.95%
3-Year +1.68%
Since Inception (11/17/04) +2.17%
CLASS A (11/17/04-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN REAL
RETURN FUND BARCLAYS CAPITAL
DATE - CLASS A U.S. TIPS INDEX(8) CPI(8)
---- ------------- ------------------ -------
11/17/2004 $ 9,579 $10,000 $10,000
11/30/2004 $ 9,598 $ 9,990 $10,002
12/31/2004 $ 9,678 $10,164 $ 9,966
1/31/2005 $ 9,605 $10,165 $ 9,987
2/28/2005 $ 9,706 $10,121 $10,044
3/31/2005 $ 9,614 $10,130 $10,123
4/30/2005 $ 9,699 $10,324 $10,191
5/31/2005 $ 9,739 $10,394 $10,180
6/30/2005 $ 9,799 $10,439 $10,186
7/31/2005 $ 9,850 $10,220 $10,233
8/31/2005 $10,000 $10,456 $10,285
9/30/2005 $10,058 $10,441 $10,411
10/31/2005 $ 9,917 $10,308 $10,432
11/30/2005 $ 9,973 $10,326 $10,348
12/31/2005 1$0,047 $10,452 $10,306
1/31/2006 $10,218 $10,451 $10,385
2/28/2006 $10,138 $10,446 $10,406
3/31/2006 $10,168 $10,217 $10,463
4/30/2006 $10,299 $10,209 $10,552
5/31/2006 $10,283 $10,239 $10,605
6/30/2006 $10,319 $10,268 $10,625
7/31/2006 $10,413 $10,434 $10,657
8/31/2006 $10,478 $10,615 $10,678
9/30/2006 $10,461 $10,633 $10,625
10/31/2006 $10,528 $10,615 $10,568
11/30/2006 $10,705 $10,746 $10,552
12/31/2006 $10,569 $10,495 $10,568
1/31/2007 $10,632 $10,509 $10,600
2/28/2007 $10,757 $10,733 $10,657
3/31/2007 $10,843 $10,759 $10,754
4/30/2007 $10,967 $10,835 $10,824
5/31/2007 $10,957 $10,694 $10,890
6/30/2007 $10,916 $10,678 $10,911
7/31/2007 $11,013 $10,921 $10,908
8/31/2007 $11,066 $11,015 $10,888
9/30/2007 $11,292 $11,162 $10,918
10/31/2007 $11,449 $11,287 $10,942
11/30/2007 $11,608 $11,735 $11,007
12/31/2007 $11,649 $11,717 $10,999
1/31/2008 $11,859 $12,180 $11,054
2/29/2008 $12,046 $12,330 $11,086
3/31/2008 $12,101 $12,323 $11,182
4/30/2008 $12,111 $12,063 $11,250
5/31/2008 $12,163 $12,103 $11,345
6/30/2008 $12,260 $12,289 $11,459
7/31/2008 $12,129 $12,226 $11,519
8/31/2008 $12,122 $12,326 $11,473
9/30/2008 $11,729 $11,854 $11,457
10/31/2008 $10,885 $10,824 $11,341
Total Returns 8.85% 8.24% 13.41%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/08
- ------------- --------
1-Year -4.63%
3-Year +3.42%
Since Inception (11/17/04) +3.56%
ADVISOR CLASS (11/17/04-10/31/08)
FRANKLIN REAL
RETURN FUND - BARCLAYS CAPITAL
DATE ADVISOR CLASS U.S. TIPS INDEX(8) CPI(8)
---- ------------- ------------------ -------
11/17/2004 $10,000 $10,000 $10,000
11/30/2004 $10,050 $ 9,990 $10,002
12/31/2004 $10,104 $10,164 $ 9,966
1/31/2005 $10,038 $10,165 $ 9,987
2/28/2005 $10,134 $10,121 $10,044
3/31/2005 $10,039 $10,130 $10,123
4/30/2005 $10,140 $10,324 $10,191
5/31/2005 $10,185 $10,394 $10,180
6/30/2005 $10,249 $10,439 $10,186
7/31/2005 $10,294 $10,220 $10,233
8/31/2005 $10,463 $10,456 $10,285
9/30/2005 $10,516 $10,441 $10,411
10/31/2005 $10,381 $10,308 $10,432
11/30/2005 $10,431 $10,326 $10,348
12/31/2005 $10,521 $10,452 $10,306
1/31/2006 $10,700 $10,451 $10,385
2/28/2006 $10,616 $10,446 $10,406
3/31/2006 $10,654 $10,217 $10,463
4/30/2006 $10,793 $10,209 $10,552
5/31/2006 $10,779 $10,239 $10,605
6/30/2006 $10,819 $10,268 $10,625
7/31/2006 $10,919 $10,434 $10,657
8/31/2006 $10,990 $10,615 $10,678
9/30/2006 $10,974 $10,633 $10,625
10/31/2006 $11,046 $10,615 $10,568
11/30/2006 $11,232 $10,746 $10,552
12/31/2006 $11,101 $10,495 $10,568
1/31/2007 $11,167 $10,509 $10,600
2/28/2007 $11,298 $10,733 $10,657
3/31/2007 $11,388 $10,759 $10,754
4/30/2007 $11,521 $10,835 $10,824
5/31/2007 $11,512 $10,694 $10,890
6/30/2007 $11,472 $10,678 $10,911
7/31/2007 $11,587 $10,921 $10,908
8/31/2007 $11,634 $11,015 $10,888
9/30/2007 $11,883 $11,162 $10,918
10/31/2007 $12,041 $11,287 $10,942
11/30/2007 $12,222 $11,735 $11,007
12/31/2007 $12,256 $11,717 $10,999
1/31/2008 $12,478 $12,180 $11,054
2/29/2008 $12,677 $12,330 $11,086
3/31/2008 $12,748 $12,323 $11,182
4/30/2008 $12,750 $12,063 $11,250
5/31/2008 $12,819 $12,103 $11,345
6/30/2008 $12,912 $12,289 $11,459
7/31/2008 $12,776 $12,226 $11,519
8/31/2008 $12,771 $12,326 $11,473
9/30/2008 $12,372 $11,854 $11,457
10/31/2008 $11,484 $10,824 $11,341
Total Returns 14.84% 8.24% 13.41%
52 | Annual 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. 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.) If the manager and administrator had not taken this action, the Fund's
distribution rate and total return would have been lower, and yields for
the period would have been 0.21% for Class A and 0.48% for Advisor Class.
(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.
(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
September dividend and the maximum offering price (NAV for Advisor Class)
per share on 10/31/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2008 Morningstar. The BC 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 Consumer Price Index (CPI), calculated by the
U.S. Bureau of Labor Statistics, is a commonly used measure of the
inflation rate.
Annual Report | 53
Your Fund's Expenses
FRANKLIN REAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
54 | Annual 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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 898.80 $4.30
Hypothetical (5% return before expenses) $1,000 $1,020.61 $4.57
ADVISOR CLASS
Actual $1,000 $ 900.70 $3.11
Hypothetical (5% return before expenses) $1,000 $1,021.87 $3.30
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 0.90% and Advisor:
0.65%), multiplied by the average account value over the period, multiplied
by 184/366 to reflect the one-half year period.
Annual Report | 55
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31,
---------------------------
CLASS A 2008 2007 2006(a)
- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 11.36 $ 10.65 $ 10.00
------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.39 0.36 0.10
Net realized and unrealized gains (losses) ............. (4.09) 0.68 0.62
------- ------- -------
Total from investment operations .......................... (3.70) 1.04 0.72
------- ------- -------
Less distributions from:
Net investment income .................................. (0.42) (0.33) (0.07)
Net realized gains ..................................... (0.24) -- --
------- ------- -------
Total distributions ....................................... (0.66) (0.33) (0.07)
------- ------- -------
Redemption fees(d, e) ..................................... -- -- --
------- ------- -------
Net asset value, end of year .............................. $ 7.00 $ 11.36 $ 10.65
======= ======= =======
Total return(f) ........................................... (34.20)% 9.91% 7.20%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 1.34% 1.58% 2.02%
Expenses net of waiver and payments by affiliates ......... 1.01% 1.04% 1.06%
Net investment income ..................................... 3.99% 3.26% 2.84%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $39,061 $35,180 $17,258
Portfolio turnover rate ................................... 51.48% 77.53% 13.10%
(a) For the period July 3, 2006 (commencement of operations) to October 31,
2006.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
56 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31,
---------------------------
CLASS C 2008 2007 2006(a)
- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 11.30 $ 10.62 $ 10.00
------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.33 0.30 0.07
Net realized and unrealized gains (losses) ............. (4.08) 0.68 0.62
------- ------- -------
Total from investment operations .......................... (3.75) 0.98 0.69
------- ------- -------
Less distributions from:
Net investment income .................................. (0.35) (0.30) (0.07)
Net realized gains ..................................... (0.24) -- --
------- ------- -------
Total distributions ....................................... (0.59) (0.30) (0.07)
------- ------- -------
Redemption fees(d, e) ..................................... -- -- --
------- ------- -------
Net asset value, end of year .............................. $ 6.96 $ 11.30 $ 10.62
======= ======= =======
Total return(f) ........................................... (34.69)% 9.33% 6.90%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 2.00% 2.25% 2.65%
Expenses net of waiver and payments by affiliates ......... 1.67% 1.71% 1.69%
Net investment income ..................................... 3.33% 2.59% 2.21%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 7,136 $ 6,542 $ 242
Portfolio turnover rate ................................... 51.48% 77.53% 13.10%
(a) For the period July 3, 2006 (commencement of operations) to October 31,
2006.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 57
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31,
---------------------------
CLASS R 2008 2007 2006(a)
- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 11.36 $ 10.64 $ 10.00
------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.37 0.34 0.09
Net realized and unrealized gains (losses) ............. (4.09) 0.69 0.62
------- ------- -------
Total from investment operations .......................... (3.72) 1.03 0.71
------- ------- -------
Less distributions from:
Net investment income .................................. (0.40) (0.31) (0.07)
Net realized gains ..................................... (0.24) -- --
------- ------- -------
Total distributions ....................................... (0.64) (0.31) (0.07)
------- ------- -------
Redemption fees(d, e) ..................................... -- -- --
------- ------- -------
Net asset value, end of year .............................. $ 7.00 $ 11.36 $ 10.64
======= ======= =======
Total return(f) ........................................... (34.26)% 9.83% 7.10%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 1.54% 1.75% 2.17%
Expenses net of waiver and payments by affiliates ......... 1.21% 1.21% 1.21%
Net investment income ..................................... 3.79% 3.09% 2.69%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 12 $ 15 $ 11
Portfolio turnover rate ................................... 51.48% 77.53% 13.10%
(a) For the period July 3, 2006 (commencement of operations) to October 31,
2006.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
58 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31,
---------------------------
ADVISOR CLASS 2008 2007 2006(a)
- ------------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 11.38 $ 10.66 $ 10.00
------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.42 0.40 0.11
Net realized and unrealized gains (losses) ............. (4.10) 0.69 0.62
------- ------- -------
Total from investment operations .......................... (3.68) 1.09 0.73
------- ------- -------
Less distributions from:
Net investment income .................................. (0.45) (0.37) (0.07)
Net realized gains ..................................... (0.24) -- --
------- ------- -------
Total distributions ....................................... (0.69) (0.37) (0.07)
------- ------- -------
Redemption fees(d, e) ..................................... -- -- --
------- ------- -------
Net asset value, end of year .............................. $ 7.01 $ 11.38 $ 10.66
======= ======= =======
Total return(f) ........................................... (34.01)% 10.34% 7.30%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 1.04% 1.25% 1.67%
Expenses net of waiver and payments by affiliates ......... 0.71% 0.71% 0.71%
Net investment income ..................................... 4.29% 3.59% 3.19%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 1,072 $ 1,180 $ 239
Portfolio turnover rate ................................... 51.48% 77.53% 13.10%
(a) For the period July 3, 2006 (commencement of operations) to October 31,
2006.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
Annual Report | 59
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE
---------------------- -------------- --------- -----------
COMMON STOCKS 40.9%
CONSUMER DISCRETIONARY 1.9%
Best Buy Co. Inc. ...................................................... United States 13,000 $ 348,530
CBS Corp., B ........................................................... United States 55,000 534,050
-----------
882,580
-----------
CONSUMER STAPLES 2.2%
Diageo PLC, ADR ........................................................ United Kingdom 12,600 783,593
The Procter & Gamble Co. ............................................... United States 4,000 258,160
-----------
1,041,753
-----------
ENERGY 3.9%
Chevron Corp. .......................................................... United States 3,600 268,560
ConocoPhillips ......................................................... United States 6,000 312,120
(a) Halliburton Co. ........................................................ United States 20,000 395,800
(b) Petroplus Holdings AG .................................................. Switzerland 25,000 662,038
Valero Energy Corp. .................................................... United States 10,000 205,800
-----------
1,844,318
-----------
FINANCIALS 1.4%
Duke Realty Corp. ...................................................... United States 20,000 282,200
iStar Financial Inc. ................................................... United States 30,000 32,400
Merrill Lynch & Co. Inc. ............................................... United States 20,000 371,800
-----------
686,400
-----------
HEALTH CARE 7.7%
(b) Genentech Inc. ......................................................... United States 8,000 663,520
Johnson & Johnson ...................................................... United States 20,000 1,226,800
Merck & Co. Inc. ....................................................... United States 20,000 619,000
Pfizer Inc. ............................................................ United States 30,000 531,300
Roche Holding AG ....................................................... Switzerland 4,000 610,023
-----------
3,650,643
-----------
INDUSTRIALS 7.6%
3M Co. ................................................................. United States 8,000 514,400
Avery Dennison Corp. ................................................... United States 15,000 525,300
The Boeing Co. ......................................................... United States 10,000 522,700
Caterpillar Inc. ....................................................... United States 8,000 305,360
General Electric Co. ................................................... United States 44,250 863,318
United Parcel Service Inc., B .......................................... United States 6,000 316,680
United Technologies Corp. .............................................. United States 10,000 549,600
-----------
3,597,358
-----------
INFORMATION TECHNOLOGY 7.5%
(b) Agilent Technologies Inc. .............................................. United States 15,000 332,850
(b) Cisco Systems Inc. ..................................................... United States 30,000 533,100
Intel Corp. ............................................................ United States 60,000 960,000
Maxim Integrated Products Inc. ......................................... United States 20,000 272,000
Microsoft Corp. ........................................................ United States 20,000 446,600
(b) NetApp Inc. ............................................................ United States 20,000 270,600
QUALCOMM Inc. .......................................................... United States 6,800 260,168
Texas Instruments Inc. ................................................. United States 25,000 489,000
-----------
3,564,318
-----------
60 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE
---------------------- -------------- --------- -----------
COMMON STOCKS (CONTINUED)
MATERIALS 3.0%
Alcoa Inc. ............................................................. United States 50,000 $ 575,500
The Dow Chemical Co. ................................................... United States 10,000 266,700
(a) Weyerhaeuser Co. ....................................................... United States 15,000 573,300
-----------
1,415,500
-----------
TELECOMMUNICATION SERVICES 2.3%
AT&T Inc. .............................................................. United States 40,000 1,070,800
-----------
UTILITIES 3.4%
Duke Energy Corp. ...................................................... United States 30,000 491,400
PG&E Corp. ............................................................. United States 25,000 916,750
Public Service Enterprise Group Inc. ................................... United States 6,400 180,160
-----------
1,588,310
-----------
TOTAL COMMON STOCKS (COST $27,912,794) ................................. 19,341,980
-----------
CONVERTIBLE PREFERRED STOCKS 6.7%
FINANCIALS 3.9%
American International Group Inc., 8.50%, cvt. pfd. .................... United States 10,000 44,500
Bank of America Corp., 7.25%, cvt. pfd., L ............................. United States 1,800 1,260,000
Citigroup Inc., 6.50%, cvt. pfd. ....................................... United States 16,050 516,970
-----------
1,821,470
-----------
HEALTH CARE 1.4%
Schering-Plough Corp., 6.00%, cvt. pfd. ................................ United States 5,000 668,341
-----------
MATERIALS 1.4%
Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. .................. United States 13,500 658,530
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $5,317,129) ................... 3,148,341
-----------
PREFERRED STOCKS 0.2%
FINANCIALS 0.2%
Fannie Mae, 7.625%, pfd., R ............................................ United States 20,000 25,000
Fannie Mae, 8.25%, pfd. ................................................ United States 25,000 52,500
Freddie Mac, 8.375%, pfd., Z ........................................... United States 30,200 46,810
-----------
TOTAL PREFERRED STOCKS (COST $1,880,000) ............................... 124,310
-----------
EQUITY LINKED SECURITIES 2.5%
CONSUMER DISCRETIONARY 1.0%
(c) The Goldman Sachs Group Inc. into Comcast Corp., 5.00%, 144A ........... United States 30,000 460,058
-----------
HEALTH CARE 1.5%
(c) Morgan Stanley into Genentech Inc., 5.26%, 144A ........................ United States 10,000 733,282
-----------
TOTAL EQUITY LINKED SECURITIES (COST $1,216,420) ....................... 1,193,340
-----------
PRINCIPAL
AMOUNT(d)
---------
CONVERTIBLE BONDS 2.4%
FINANCIALS 0.8%
Vornado Realty Trust, senior bond, cvt., 2.85%, 4/01/27 ................ United States 500,000 355,000
-----------
Annual Report | 61
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN BALANCED FUND COUNTRY AMOUNT(d) VALUE
---------------------- -------------- --------- -----------
CONVERTIBLE BONDS (CONTINUED)
HEALTH CARE 1.6%
(c) Mylan Inc., 144A, cvt., 3.75%, 9/15/15 ................................. United States 1,000,000 $ 768,750
-----------
TOTAL CONVERTIBLE BONDS (COST $1,239,445) .............................. 1,123,750
-----------
CORPORATE BONDS 36.5%
CONSUMER DISCRETIONARY 5.5%
Comcast Corp., senior note,
5.85%, 1/15/10 ...................................................... United States 200,000 196,170
6.30%, 11/15/17 ..................................................... United States 350,000 303,299
Dollar General Corp., senior note, 10.625%, 7/15/15 .................... United States 500,000 462,500
Ford Motor Credit Co. LLC, senior note, 9.75%, 9/15/10 ................. United States 900,000 612,493
R.H. Donnelley Corp., senior disc. note, A-2, 6.875%, 1/15/13 .......... United States 800,000 188,000
Target Corp., 6.00%, 1/15/18 ........................................... United States 1,000,000 828,845
-----------
2,591,307
-----------
CONSUMER STAPLES 2.8%
Bunge Ltd. Finance Corp., senior note, 5.10%, 7/15/15 .................. United States 300,000 216,965
CVS Caremark Corp., senior note, 5.75%, 6/01/17 ........................ United States 300,000 242,656
Philip Morris International Inc., 5.65%, 5/16/18 ....................... United States 1,000,000 857,562
-----------
1,317,183
-----------
ENERGY 3.7%
Chesapeake Energy Corp., senior note, 7.25%, 12/15/18 .................. United States 1,000,000 760,000
El Paso Natural Gas Co., senior note, 7.25%, 4/01/18 ................... United States 500,000 377,500
(c) LUKOIL International Finance BV, 144A, 6.356%, 6/07/17 ................. Russia 500,000 277,500
Valero Energy Corp., 6.125%, 6/15/17 ................................... United States 400,000 330,116
-----------
1,745,116
-----------
FINANCIALS 13.2%
American Express Co., senior note, 7.00%, 3/19/18 ...................... United States 700,000 540,413
American Express Credit Corp., C, 7.30%, 8/20/13 ....................... United States 500,000 441,932
(c,e) American International Group Inc., junior sub. deb., 144A, FRN, 8.175%,
5/15/58 ............................................................. United States 600,000 95,864
(f) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ........... United States 225,000 174,641
(c,f) BNP Paribas, 144A, 7.195%, Perpetual ................................... France 300,000 191,609
Compass Bank, 6.40%, 10/01/17 .......................................... United States 400,000 328,054
iStar Financial Inc., 8.625%, 6/01/13 .................................. United States 900,000 351,249
(f) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ............ United States 1,440,000 1,170,037
Lazard Group, senior note, 6.85%, 6/15/17 .............................. United States 300,000 215,903
(g) Lehman Brothers Holdings Inc., senior note, 6.875%, 5/02/18 ............ United States 1,000,000 135,000
(c,e) Liberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 ..... United States 500,000 262,824
(c) Metropolitan Life Global Funding I, senior secured note, 144A, 5.125%,
4/10/13 ............................................................. United States 900,000 805,603
(e) The Travelers Cos. Inc., junior sub. bond, FRN, 6.25%, 3/15/67 ......... United States 500,000 319,470
(f) Wachovia Capital Trust III, junior sub. bond, 5.80%, Perpetual ......... United States 500,000 267,624
(c,f,g) Washington Mutual Preferred Funding Trust IV, junior sub. bond, 144A,
9.75%, Perpetual .................................................... United States 500,000 3,125
(f) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ....................... United States 300,000 245,562
(f) Wells Fargo Capital XV, 9.75%, Perpetual ............................... United States 700,000 679,645
-----------
6,228,555
-----------
62 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN BALANCED FUND COUNTRY AMOUNT(d) VALUE
---------------------- -------------- --------- -----------
CORPORATE BONDS (CONTINUED)
HEALTH CARE 3.6%
(c) Bausch & Lomb Inc., senior note, 144A, 9.875%, 11/01/15 ................ United States 400,000 $ 316,000
Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ................. United States 400,000 281,633
Quest Diagnostics Inc., 6.95%, 7/01/37 ................................. United States 500,000 358,661
Schering-Plough Corp., senior note, 6.00%, 9/15/17 ..................... United States 400,000 352,380
(e) Tenet Healthcare Corp., senior note, FRN, 9.25%, 2/01/15 ............... United States 500,000 415,000
-----------
1,723,674
-----------
INFORMATION TECHNOLOGY 0.5%
First Data Corp., senior note, 9.875%, 9/24/15 ......................... United States 400,000 258,000
-----------
MATERIALS 1.8%
Rio Tinto Finance USA Ltd., 5.875%, 7/15/13 ............................ Australia 1,000,000 854,480
-----------
TELECOMMUNICATION SERVICES 2.0%
Embarq Corp., senior note, 7.082%, 6/01/16 ............................. United States 250,000 192,761
Telecom Italia Capital, senior note,
4.95%, 9/30/14 ...................................................... Italy 100,000 69,820
6.999%, 6/04/18 ..................................................... Italy 600,000 436,064
Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ................. United States 250,000 236,539
-----------
935,184
-----------
UTILITIES 3.4%
(c) Illinois Power Co., senior note, 144A, 9.75%, 11/15/18 ................. United States 1,000,000 1,003,670
(c) Texas Competitive Electric Holdings Co. LLC, senior note, 144A, 10.25%,
11/01/15 ............................................................ United States 800,000 614,000
-----------
1,617,670
-----------
TOTAL CORPORATE BONDS (COST $24,046,088) ............................... 17,271,169
-----------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED
SECURITIES (COST $139,727) 0.3%
FINANCIALS 0.3%
(e) Accredited Mortgage Loan Trust, 2005-3, A1, FRN, 3.447%, 9/25/35 ....... United States 139,640 128,883
-----------
MORTGAGE-BACKED SECURITIES 1.3%
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 1.3%
FNMA 30 Year, 6.00%, 8/01/36 ........................................... United States 361,392 361,486
FNMA 30 Year, 6.50%, 4/01/36 ........................................... United States 271,389 275,307
-----------
TOTAL MORTGAGE-BACKED SECURITIES (COST $625,854) ....................... 636,793
-----------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $62,377,457) ..................................................... 42,968,566
-----------
SHARES
---------
SHORT TERM INVESTMENTS (COST $3,585,681) 7.6%
MONEY MARKET FUNDS 7.6%
(h) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ... United States 3,585,681 3,585,681
-----------
TOTAL INVESTMENTS (COST $65,963,138) 98.4% ............................. 46,554,247
OPTIONS WRITTEN 0.0%(i) ................................................ (12,700)
OTHER ASSETS, LESS LIABILITIES 1.6% .................................... 739,321
-----------
NET ASSETS 100.0% ...................................................... $47,280,868
===========
Annual Report | 63
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
FRANKLIN BALANCED FUND COUNTRY CONTRACTS VALUE
---------------------- -------------- --------- -----------
(j) OPTIONS WRITTEN 0.0%(i)
PUT OPTIONS 0.0%(i)
ENERGY 0.0%(i)
Halliburton Co., Nov. 15 Puts, 11/22/08 ................................ United States 100 $ 3,700
-----------
MATERIALS 0.0%(i)
Weyerhaeuser Co., Nov. 30 Puts, 11/22/08 ............................... United States 100 9,000
-----------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $14,605) ...................... $ 12,700
-----------
See Selected Portfolio Abbreviations on page 90.
(a) A portion or all of the security is held in connection with written option
contracts open at year end.
(b) Non-income producing for the twelve months ended October 31, 2008.
(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 October 31, 2008,
the aggregate value of these securities was $5,532,285, representing 11.70%
of net assets.
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
(e) The coupon rate shown represents the rate at period end.
(f) Perpetual securities with no stated maturity date.
(g) See Note 9 regarding defaulted securities.
(h) 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.
(i) Rounds to less than 0.1% of net assets.
(j) See Note 1(e) regarding written options.
The accompanying notes are an integral part of these financial statements.
64 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN CONVERTIBLE SECURITIES FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 17.14 $ 17.19 $ 16.46 $ 15.16 $ 13.90
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................... 0.42 0.38 0.43 0.42 0.50
Net realized and unrealized gains (losses) .. (6.75) 1.36 1.52 1.49 1.43
-------- -------- -------- -------- --------
Total from investment operations ............... (6.33) 1.74 1.95 1.91 1.93
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.75) (0.58) (0.60) (0.61) (0.67)
Net realized gains .......................... (0.58) (1.21) (0.62) -- --
-------- -------- -------- -------- --------
Total distributions ............................ (1.33) (1.79) (1.22) (0.61) (0.67)
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 9.48 $ 17.14 $ 17.19 $ 16.46 $ 15.16
======== ======== ======== ======== ========
Total return(e) ................................ (39.36)% 10.66% 12.45% 12.76% 14.06%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 0.89% 0.87% 0.86% 0.88% 0.92%
Expenses net of payments by affiliates ......... 0.89%(f) 0.87%(f) 0.86%(f) 0.88%(f) 0.89%
Net investment income .......................... 2.92% 2.25% 2.59% 2.63% 3.36%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $396,201 $844,603 $718,018 $551,120 $380,960
Portfolio turnover rate ........................ 37.58% 17.59% 31.37% 35.30% 28.37%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 65
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONVERTIBLE SECURITIES FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 16.98 $ 17.04 $ 16.32 $ 15.05 $ 13.81
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) .................... 0.31 0.25 0.30 0.30 0.39
Net realized and unrealized gains (losses) .. (6.68) 1.36 1.52 1.46 1.42
-------- -------- -------- -------- --------
Total from investment operations ............... (6.37) 1.61 1.82 1.76 1.81
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ....................... (0.64) (0.46) (0.48) (0.49) (0.57)
Net realized gains .......................... (0.58) (1.21) (0.62) -- --
-------- -------- -------- -------- --------
Total distributions ............................ (1.22) (1.67) (1.10) (0.49) (0.57)
-------- -------- -------- -------- --------
Redemption fees(c, d) .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 9.39 $ 16.98 $ 17.04 $ 16.32 $ 15.05
======== ======== ======== ======== ========
Total return(e) ................................ (39.80)% 9.94% 11.53% 11.92% 13.21%
RATIOS TO AVERAGE NET ASSETS
Expenses ....................................... 1.63% 1.61% 1.61% 1.63% 1.67%
Expenses net of payments by affiliates ......... 1.63%(f) 1.61%(f) 1.61%(f) 1.63%(f) 1.64%
Net investment income .......................... 2.18% 1.51% 1.83% 1.88% 2.61%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $138,148 $306,353 $271,216 $219,970 $167,813
Portfolio turnover rate ........................ 37.58% 17.59% 31.37% 35.30% 28.37%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
66 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN CONVERTIBLE SECURITIES FUND
PERIOD ENDED
OCTOBER 31,
ADVISOR CLASS 2008(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 15.65
-------
Income from investment operations(b):
Net investment income(c) ...................... 0.24
Net realized and unrealized gains (losses) .... (5.88)
-------
Total from investment operations ................. (5.64)
-------
Less distributions from net investment income .... (0.53)
-------
Redemption fees(d, e) ............................ --
-------
Net asset value, end of period ................... $ 9.48
=======
Total return(f) .................................. (36.93)%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ...................................... 0.64%
Net investment income ............................ 3.17%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $ 318
Portfolio turnover rate .......................... 37.58%
(a) For the period May 15, 2008 (effective date) to October 31, 2008.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 67
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE
----------------------------------- ----------- ------------
COMMON STOCKS 1.3%
UTILITIES 1.3%
CenterPoint Energy Inc. ....................................................... 310,820 $ 3,580,646
PNM Resources Inc. ............................................................ 341,176 3,326,466
------------
TOTAL COMMON STOCKS (COST $14,042,517) ........................................ 6,907,112
------------
CONVERTIBLE PREFERRED STOCKS 31.1%
CONSUMER DISCRETIONARY 4.5%
Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ............................. 450,000 3,253,500
General Motors Corp., 6.25%, cvt. pfd. ........................................ 235,000 1,492,250
General Motors Corp., 1.50%, cvt. pfd., D ..................................... 776,200 12,807,300
Retail Ventures Inc. into DSW Inc., 6.625%, cvt. pfd. ......................... 250,000 6,343,750
------------
23,896,800
------------
CONSUMER STAPLES 2.1%
Archer Daniels Midland Co., 6.25%, cvt. pfd. .................................. 400,000 11,480,000
------------
ENERGY 3.2%
(a) Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ............................... 110,000 7,528,103
El Paso Corp., 4.99%, cvt. pfd. ............................................... 12,000 9,513,000
------------
17,041,103
------------
FINANCIALS 9.5%
Affiliated Managers Group Inc., 5.10%, cvt. pfd. .............................. 350,000 6,343,750
Bank of America Corp., 7.25%, cvt. pfd., L .................................... 4,000 2,800,000
CIT Group Inc., 8.75%, cvt. pfd., C ........................................... 30,000 641,100
CIT Group Inc., 7.75%, cvt. pfd., Z ........................................... 619,500 3,562,125
E*TRADE Financial Corp., 6.125%, cvt. pfd. .................................... 855,000 2,086,200
Fannie Mae, 5.375%, cvt. pfd. ................................................. 140 735,000
Legg Mason Inc., 7.00%, cvt. pfd. ............................................. 375,000 8,587,500
MetLife Inc., 6.375%, cvt. pfd. ............................................... 400,000 3,462,108
Simon Property Group Inc., 6.00%, cvt. pfd. ................................... 200,000 10,460,000
Wachovia Corp., 7.50%, cvt. pfd., L ........................................... 17,900 11,903,500
------------
50,581,283
------------
HEALTH CARE 2.2%
Schering-Plough Corp., 6.00%, cvt. pfd. ....................................... 88,000 11,762,799
------------
INDUSTRIALS 2.5%
Avery Dennison Corp., 7.875%, cvt. pfd. ....................................... 400,000 13,612,000
------------
MATERIALS 1.3%
Celanese Corp., 4.25%, cvt. pfd. .............................................. 375,000 7,160,175
------------
UTILITIES 5.8%
CMS Energy Corp., 4.50%, cvt. pfd., B ......................................... 100,000 5,381,250
Entergy Corp., 7.625%, cvt. pfd. .............................................. 300,000 14,119,500
NRG Energy Inc., 4.00%, cvt. pfd. ............................................. 9,500 11,307,375
------------
30,808,125
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $304,855,973) ........................ 166,342,285
------------
68 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT(b) VALUE
------------------------------------ ----------- ------------
CONVERTIBLE BONDS 63.9%
CONSUMER DISCRETIONARY 9.8%
Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 ............................ $21,000,000 $ 16,563,750
Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 ............................. 18,000,000 15,142,500
Liberty Media Corp., cvt., senior deb., B, 3.25%, 3/15/31 ..................... 10,000,000 3,862,500
Lions Gate Entertainment Corp., cvt., senior note, 3.625%, 3/15/25 (Canada) ... 10,000,000 7,274,850
(a) Live Nation Inc., cvt., senior note, 144A, 2.875%, 7/15/27 .................... 17,865,000 9,446,119
------------
52,289,719
------------
ENERGY 1.0%
Helix Energy Solutions Group, cvt., senior note, 3.25%, 12/15/25 .............. 10,000,000 5,462,500
------------
FINANCIALS 4.7%
CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 .................... 20,000,000 11,360,500
(c) iStar Financial Inc., cvt., senior note, FRN, 4.383%, 10/01/12 ................ 23,000,000 9,102,825
Leucadia National Corp., cvt., senior sub. note, 3.75%, 4/15/14 ............... 3,600,000 4,441,500
------------
24,904,825
------------
HEALTH CARE 20.4%
Alza Corp. into Johnson & Johnson, cvt., sub. deb., zero cpn., 7/28/20 ........ 15,000,000 12,862,500
American Medical Systems Holdings Ltd., cvt., senior sub. note, 3.25%,
7/01/36 .................................................................... 15,000,000 10,762,500
(a) Amgen Inc., cvt., senior note, 144A, 0.375%, 2/01/13 .......................... 15,000,000 13,336,800
Biomarin Pharmaceutical Inc., cvt., senior note, 1.875%, 4/23/17 .............. 3,300,000 3,295,875
Gilead Sciences Inc., cvt., senior note, 0.625%, 5/01/13 ...................... 10,000,000 12,462,500
Lifepoint Hospitals Inc., cvt., 3.25%, 8/15/25 ................................ 15,000,000 8,437,500
Medtronic Inc., cvt., senior note,
1.50%, 4/15/11 ......................................................... 4,000,000 3,682,084
(a) 144A, 1.50%, 4/15/11 ................................................... 17,000,000 15,648,857
(a) Mylan Inc., 144A, cvt., 3.75%, 9/15/15 ........................................ 16,000,000 12,300,000
PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ........................... 19,550,000 16,128,750
------------
108,917,366
------------
INDUSTRIALS 5.6%
(a) GATX Corp., cvt., senior note, 144A, 5.00%, 8/15/23 ........................... 3,000,000 3,480,000
(a) L-3 Communications Corp., cvt., 144A, 3.00%, 8/01/35 .......................... 15,000,000 14,400,000
WESCO International Inc., cvt., senior deb.,
1.75%, 11/15/26 ........................................................ 5,000,000 2,993,750
(a) 144A, 1.75%, 11/15/26 .................................................. 15,000,000 8,981,250
------------
29,855,000
------------
INFORMATION TECHNOLOGY 19.2%
(a) Alliance Data System Corp., senior note, 144A, cvt., 1.75%, 8/01/13 ........... 17,000,000 12,707,500
(a) BearingPoint Inc., cvt., sub. note, 144A, 2.50%, 12/15/24 ..................... 14,000,000 5,847,072
EMC Corp., senior note, cvt., 1.75%, 12/01/13 ................................. 10,000,000 9,087,500
Intel Corp., cvt.,
(a) junior sub. bond, 144A, 2.95%, 12/15/35 ................................ 19,000,000 13,341,781
sub. deb., 2.95%, 12/15/35 ............................................. 2,000,000 1,404,398
Liberty Media Corp. into Motorola Inc., cvt., senior deb., 3.50%, 1/15/31 ..... 8,000,000 2,216,806
(a) Microchip Technology Inc., cvt., junior sub. note, 144A, 2.125%, 12/15/37 ..... 20,000,000 15,704,800
Annual Report | 69
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT(b) VALUE
------------------------------------ ----------- ------------
CONVERTIBLE BONDS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Micron Technology Inc., cvt., senior sub. note, 1.875%, 6/01/14 ............... $20,000,000 $ 9,025,000
PMC-Sierra Inc., cvt.,
(a) 144A, 2.25%, 10/15/25 .................................................. 3,500,000 2,861,250
sub. note, 2.25%, 10/15/25 ............................................. 9,500,000 7,766,250
(a) VeriFone Holdings Inc., cvt., senior note, 144A, 1.375%, 6/15/12 .............. 21,000,000 13,387,500
(a) VeriSign Inc., cvt., junior sub. bond, 144A, 3.25%. 8/15/37 ................... 14,000,000 9,572,500
------------
102,922,357
------------
TELECOMMUNICATION SERVICES 2.3%
(a) NII Holdings Inc., cvt., 144A, 2.75%, 8/15/25 ................................. 15,000,000 12,187,499
------------
UTILITIES 0.9%
CMS Energy Corp., cvt., senior note, 2.875%, 12/01/24 ......................... 6,000,000 5,067,606
------------
TOTAL CONVERTIBLE BONDS (COST $488,069,359) ................................... 341,606,872
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $806,967,849) ........... 514,856,269
------------
SHARES
-----------
SHORT TERM INVESTMENTS (COST $14,651,385) 2.7%
MONEY MARKET FUNDS 2.7%
(d) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% .......... 14,651,385 14,651,385
------------
TOTAL INVESTMENTS (COST $821,619,234) 99.0% ................................... 529,507,654
OTHER ASSETS, LESS LIABILITIES 1.0% ........................................... 5,158,912
------------
NET ASSETS 100.0% ............................................................. $534,666,566
============
See Selected Portfolio Abbreviations on page 90.
(a) 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 October 31, 2008,
the aggregate value of these securities was $170,731,032, representing
31.93% of net assets.
(b) The principal amount is stated in U.S. dollars unless otherwise indicated.
(c) The coupon rate shown represents the rate at period end.
(d) 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.
The accompanying notes are an integral part of these financial statements.
70 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 22.41 $ 22.67 $ 20.47 $ 19.58 $ 17.84
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ..................... 0.48 0.46 0.48 0.50 0.41
Net realized and unrealized gains (losses) ... (8.57) 1.16 2.70 0.85 1.72
-------- -------- -------- -------- --------
Total from investment operations ................ (8.09) 1.62 3.18 1.35 2.13
-------- -------- -------- -------- --------
Less distributions from:
Net investment income ........................ (0.48) (0.45) (0.51) (0.46) (0.39)
Net realized gains ........................... (0.96) (1.43) (0.47) -- --
-------- -------- -------- -------- --------
Total distributions ............................. (1.44) (1.88) (0.98) (0.46) (0.39)
-------- -------- -------- -------- --------
Redemption fees(c, d) ........................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 12.88 $ 22.41 $ 22.67 $ 20.47 $ 19.58
======== ======== ======== ======== ========
Total return(e) ................................. (38.01)% 7.40% 16.04% 6.92% 12.04%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 0.95%(f) 0.92%(f) 0.91%(f) 0.93%(f) 0.93%(g)
Net investment income ........................... 2.66% 2.03% 2.26% 2.43% 2.15%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $465,027 $855,227 $735,432 $651,766 $615,941
Portfolio turnover rate ......................... 31.32% 27.66% 29.34% 38.05% 36.42%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of payments by affiliates and expense reduction rounds to less than
0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 71
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 22.30 $ 22.57 $ 20.38 $ 19.49 $ 17.76
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ..................... 0.34 0.29 0.32 0.35 0.27
Net realized and unrealized gains (losses) ... (8.52) 1.15 2.70 0.85 1.71
------- ------- ------- ------- -------
Total from investment operations ................ (8.18) 1.44 3.02 1.20 1.98
------- ------- ------- ------- -------
Less distributions from:
Net investment income ........................ (0.34) (0.28) (0.36) (0.31) (0.25)
Net realized gains ........................... (0.96) (1.43) (0.47) -- --
------- ------- ------- ------- -------
Total distributions ............................. (1.30) (1.71) (0.83) (0.31) (0.25)
------- ------- ------- ------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .................... $ 12.82 $ 22.30 $ 22.57 $ 20.38 $ 19.49
======= ======= ======= ======= =======
Total return(e) ................................. (38.47)% 6.59% 15.20% 6.17% 11.20%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.70%(f) 1.67%(f) 1.65%(f) 1.68%(f) 1.68%(g)
Net investment income ........................... 1.91% 1.28% 1.52% 1.68% 1.40%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $20,559 $46,627 $51,979 $54,880 $55,442
Portfolio turnover rate ......................... 31.32% 27.66% 29.34% 38.05% 36.42%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of payments by affiliates and expense reduction rounds to less than
0.01%.
The accompanying notes are an integral part of these financial statements.
72 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 22.31 $ 22.58 $ 20.39 $ 19.50 $ 17.77
------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ..................... 0.34 0.29 0.32 0.34 0.27
Net realized and unrealized gains (losses) ... (8.52) 1.15 2.70 0.86 1.71
------- -------- -------- -------- --------
Total from investment operations ................ (8.18) 1.44 3.02 1.20 1.98
------- -------- -------- -------- --------
Less distributions from:
Net investment income ........................ (0.34) (0.28) (0.36) (0.31) (0.25)
Net realized gains ........................... (0.96) (1.43) (0.47) -- --
------- -------- -------- -------- --------
Total distributions ............................. (1.30) (1.71) (0.83) (0.31) (0.25)
------- -------- -------- -------- --------
Redemption fees(c, d) ........................... -- -- -- -- --
------- -------- -------- -------- --------
Net asset value, end of year .................... $ 12.83 $ 22.31 $ 22.58 $ 20.39 $ 19.50
======= ======== ======== ======== ========
Total return(e) ................................. (38.46)% 6.60% 15.19% 6.16% 11.19%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.70%(f) 1.66%(f) 1.65%(f) 1.68%(f) 1.68%(g)
Net investment income ........................... 1.91% 1.29% 1.52% 1.68% 1.40%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $78,394 $166,481 $172,366 $174,674 $172,773
Portfolio turnover rate ......................... 31.32% 27.66% 29.34% 38.05% 36.42%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of payments by affiliates and expense reduction rounds to less than
0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 73
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ------- ------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 22.43 $ 22.68 $ 20.48 $ 19.59 $ 17.85
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ..................... 0.44 0.41 0.43 0.45 0.37
Net realized and unrealized gains (losses) ... (8.59) 1.16 2.70 0.85 1.72
------- ------- ------- ------- -------
Total from investment operations ................ (8.15) 1.57 3.13 1.30 2.09
------- ------- ------- ------- -------
Less distributions from:
Net investment income ........................ (0.43) (0.39) (0.46) (0.41) (0.35)
Net realized gains ........................... (0.96) (1.43) (0.47) -- --
------- ------- ------- ------- -------
Total distributions ............................. (1.39) (1.82) (0.93) (0.41) (0.35)
------- ------- ------- ------- -------
Redemption fees(c, d) ........................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .................... $ 12.89 $ 22.43 $ 22.68 $ 20.48 $ 19.59
======= ======= ======= ======= =======
Total return(e) ................................. (38.18)% 7.11% 15.69% 6.71% 11.75%
RATIOS TO AVERAGE NET ASSETS
Expenses ........................................ 1.20%(f) 1.17%(f) 1.16%(f) 1.18%(f) 1.18%(g)
Net investment income ........................... 2.41% 1.78% 2.01% 2.18% 1.90%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $ 4,690 $13,532 $18,908 $20,612 $18,858
Portfolio turnover rate ......................... 31.32% 27.66% 29.34% 38.05% 36.42%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Benefit of payments by affiliates and expense reduction rounds to less than
0.01%.
The accompanying notes are an integral part of these financial statements.
74 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN EQUITY INCOME FUND
PERIOD ENDED
OCTOBER 31,
ADVISOR CLASS 2008(a)
- ------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 19.59
-------
Income from investment operations(b):
Net investment income(c) ..................... 0.23
Net realized and unrealized gains (losses) ... (6.75)
-------
Total from investment operations ................ (6.52)
-------
Less distributions from net investment income ... (0.19)
-------
Redemption fees(d, e) ........................... --
-------
Net asset value, end of period .................. $ 12.88
=======
Total return(f) ................................. (33.43)%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses(h) ..................................... 0.70%
Net investment income ........................... 2.91%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 679
Portfolio turnover rate ......................... 31.32%
(a) For the period May 15, 2008 (effective date) to October 31, 2008.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 75
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE
--------------------------- -------------- ----------- ------------
COMMON STOCKS 74.9%
CONSUMER DISCRETIONARY 7.2%
Autoliv Inc. ........................................................... Sweden 155,100 $ 3,312,936
Best Buy Co. Inc. ...................................................... United States 298,700 8,008,147
Carnival Corp. ......................................................... United States 392,400 9,966,960
The Home Depot Inc. .................................................... United States 414,000 9,766,260
Nordstrom Inc. ......................................................... United States 542,700 9,817,443
------------
40,871,746
------------
CONSUMER STAPLES 7.1%
The Coca-Cola Co. ...................................................... United States 329,800 14,530,988
Diageo PLC, ADR ........................................................ United Kingdom 227,200 14,129,568
Unilever NV, N.Y. shs. ................................................. Netherlands 488,700 11,753,235
------------
40,413,791
------------
ENERGY 10.0%
Chesapeake Energy Corp. ................................................ United States 327,445 7,193,967
Chevron Corp. .......................................................... United States 226,520 16,898,392
ConocoPhillips ......................................................... United States 279,300 14,529,186
Exxon Mobil Corp. ...................................................... United States 198,534 14,715,340
Sunoco Inc. ............................................................ United States 123,500 3,766,750
------------
57,103,635
------------
FINANCIALS 9.1%
AFLAC Inc. ............................................................. United States 210,500 9,320,940
Bank of America Corp. .................................................. United States 553,706 13,383,074
Citigroup Inc. ......................................................... United States 533,400 7,280,910
iStar Financial Inc. ................................................... United States 534,400 577,152
JPMorgan Chase & Co. ................................................... United States 261,350 10,780,687
Marsh & McLennan Cos. Inc. ............................................. United States 365,900 10,728,188
------------
52,070,951
------------
HEALTH CARE 7.1%
Johnson & Johnson ...................................................... United States 150,500 9,231,670
Pfizer Inc. ............................................................ United States 684,500 12,122,495
Roche Holding AG ....................................................... Switzerland 125,300 19,108,979
------------
40,463,144
------------
INDUSTRIALS 14.5%
3M Co. ................................................................. United States 213,100 13,702,330
The Boeing Co. ......................................................... United States 189,300 9,894,711
Caterpillar Inc. ....................................................... United States 264,200 10,084,514
General Electric Co. ................................................... United States 596,600 11,639,666
J.B. Hunt Transport Services Inc. ...................................... United States 282,800 8,040,004
Pitney Bowes Inc. ...................................................... United States 334,500 8,288,910
United Parcel Service Inc., B .......................................... United States 201,600 10,640,448
Waste Management Inc. .................................................. United States 319,600 9,981,108
------------
82,271,691
------------
76 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE
--------------------------- -------------- ----------- ------------
COMMON STOCKS (CONTINUED)
INFORMATION TECHNOLOGY 8.2%
Intel Corp. ............................................................ United States 870,500 $ 13,928,000
Microsoft Corp. ........................................................ United States 541,900 12,100,627
Nokia Corp., ADR ....................................................... Finland 530,800 8,057,544
Paychex Inc. ........................................................... United States 443,900 12,668,906
------------
46,755,077
------------
MATERIALS 4.0%
Alcoa Inc. ............................................................. United States 479,000 5,513,290
The Dow Chemical Co. ................................................... United States 379,300 10,115,931
Weyerhaeuser Co. ....................................................... United States 185,000 7,070,700
------------
22,699,921
------------
TELECOMMUNICATION SERVICES 3.3%
AT&T Inc. .............................................................. United States 704,110 18,849,025
------------
UTILITIES 4.4%
Dominion Resources Inc. ................................................ United States 343,000 12,444,040
PG&E Corp. ............................................................. United States 340,000 12,467,800
------------
24,911,840
------------
TOTAL COMMON STOCKS (COST $549,285,167) ................................ 426,410,821
------------
CONVERTIBLE PREFERRED STOCKS 6.5%
CONSUMER DISCRETIONARY 0.7%
General Motors Corp., 6.25%, cvt. pfd. ................................. United States 680,000 4,318,000
------------
FINANCIALS 2.2%
Bank of America Corp., 7.25%, cvt. pfd., L ............................. United States 9,000 6,300,000
Wachovia Corp., 7.50%, cvt. pfd., L .................................... United States 9,500 6,317,500
------------
12,617,500
------------
HEALTH CARE 1.8%
Schering-Plough Corp., 6.00%, cvt. pfd. ................................ United States 76,000 10,158,781
------------
UTILITIES 1.8%
Entergy Corp., 7.625%, cvt. pfd. ....................................... United States 215,000 10,118,975
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $60,034,908) .................. 37,213,256
------------
PREFERRED STOCKS (COST $15,634,990) 0.2%
FINANCIALS 0.2%
Fannie Mae, 8.25%, pfd. ................................................ United States 625,000 1,312,500
------------
EQUITY LINKED SECURITIES (COST $18,418,000) 2.7%
CONSUMER DISCRETIONARY 2.7%
(a) The Goldman Sachs Group Inc. into Comcast Corp., 5.00%, 144A ........... United States 1,000,000 15,335,262
------------
PRINCIPAL
AMOUNT
-----------
CONVERTIBLE BONDS 4.7%
HEALTH CARE 2.1%
(a) Mylan Inc., 144A, cvt., 3.75%, 9/15/15 ................................. United States $15,000,000 11,531,250
------------
Annual Report | 77
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN EQUITY INCOME FUND COUNTRY AMOUNT VALUE
--------------------------- -------------- ----------- ------------
CONVERTIBLE BONDS (CONTINUED)
INFORMATION TECHNOLOGY 2.6%
Microchip Technology Inc., cvt., 2.125%, 12/15/37 ...................... United States $19,500,000 $ 14,917,500
------------
TOTAL CONVERTIBLE BONDS (COST $29,854,822) ............................. 26,448,750
------------
CORPORATE BONDS 3.8%
FINANCIALS 3.8%
American Express Credit Corp., C, 7.30%, 8/20/13 ....................... United States 12,500,000 11,048,287
(b) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ............ United States 13,000,000 10,562,838
------------
TOTAL CORPORATE BONDS (COST $24,165,428) ............................... 21,611,125
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $697,393,315) .................................................... 528,331,714
------------
SHARES
-----------
SHORT TERM INVESTMENTS 7.3%
MONEY MARKET FUNDS (COST $28,233,515) 5.0%
(c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ... United States 28,233,515 28,233,515
------------
PRINCIPAL
AMOUNT
-----------
REPURCHASE AGREEMENTS (COST $13,251,120) 2.3%
(d) Joint Repurchase Agreement, 0.159%, 11/03/08 (Maturity
Value $13,251,296) .................................................. $13,251,120 13,251,120
ABN AMRO Bank NV, New York Branch (Maturity Value $1,652,967)
Banc of America Securities LLC (Maturity Value $1,845,110)
Barclays Capital Inc. (Maturity Value $1,652,967)
BNP Paribas Securities Corp. (Maturity Value $1,845,110)
Credit Suisse Securities (USA) LLC (Maturity Value $1,652,967)
Deutsche Bank Securities Inc. (Maturity Value $1,988,225)
Dresdner Kleinwort Securities LLC (Maturity Value $768,840)
UBS Securities LLC (Maturity Value $1,845,110)
Collateralized by U.S. Government Agency Securities, 2.22% - 5.00%,
11/21/08 - 5/01/13; (e) U.S. Government Agency Discount Notes,
11/28/08 - 1/30/09; (e) U.S. Treasury Bills, 10/22/09; and U.S.
Treasury Notes, 3.50% - 4.75%, 2/28/09 - 11/15/09
------------
TOTAL INVESTMENTS (COST $738,877,950) 100.1% ................................. 569,816,349
OTHER ASSETS, LESS LIABILITIES (0.1)% ........................................ (466,872)
------------
NET ASSETS 100.0% ............................................................ $569,349,477
============
See Selected Portfolio Abbreviations on page 90.
(a) 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 October 31, 2008,
the aggregate value of these securities was $26,866,512, representing 4.72%
of net assets.
(b) Perpetual securities with no stated maturity date.
(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 joint repurchase agreement.
(e) The security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 10.00 $ 9.90 $ 9.91 $ 10.26 $ 10.37
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income(b) ............................... 0.37 0.38 0.34 0.30 0.27
Net realized and unrealized gains (losses) ............. 0.09 0.11 0.01 (0.32) (0.04)
-------- -------- -------- -------- --------
Total from investment operations .......................... 0.46 0.49 0.35 (0.02) 0.23
-------- -------- -------- -------- --------
Less distributions from net investment income ............. (0.41) (0.39) (0.36) (0.33) (0.34)
-------- -------- -------- -------- --------
Redemption fees(c, d) ..................................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year .............................. $ 10.05 $ 10.00 $ 9.90 $ 9.91 $ 10.26
======== ======== ======== ======== ========
Total return(e) ........................................... 4.67% 5.05% 3.63% (0.16)% 2.23%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................................. 0.86%(f) 0.88%(f) 0.83% 0.81%(f) 0.79%
Net investment income ..................................... 3.64% 3.79% 3.43% 2.96% 2.67%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $298,468 $189,122 $211,245 $268,197 $309,544
Portfolio turnover rate ................................... 61.57% 25.29% 45.79% 62.33% 86.82%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(f) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 79
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 9.99 $ 9.89 $ 9.90 $ 10.24 $ 10.36
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income(b) ............................... 0.38 0.39 0.35 0.31 0.28
Net realized and unrealized gains (losses) ............. 0.09 0.11 0.01 (0.31) (0.05)
------- ------- ------- ------- -------
Total from investment operations .......................... 0.47 0.50 0.36 -- 0.23
------- ------- ------- ------- -------
Less distributions from net investment income ............. (0.42) (0.40) (0.37) (0.34) (0.35)
------- ------- ------- ------- -------
Redemption fees (c, d) .................................... -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year .............................. $ 10.04 $ 9.99 $ 9.89 $ 9.90 $ 10.24
======= ======= ======= ======= =======
Total return .............................................. 4.78% 5.16% 3.74% 0.04% 2.24%
RATIOS TO AVERAGE NET ASSETS
Expenses .................................................. 0.76%(e) 0.78%(e) 0.73% 0.71%(e) 0.69%
Net investment income ..................................... 3.74% 3.89% 3.53% 3.06% 2.77%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $27,734 $22,143 $22,293 $26,725 $24,141
Portfolio turnover rate ................................... 61.57% 25.29% 45.79% 62.33% 86.82%
(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 repurchases 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) Amount rounds to less than $0.01 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
80 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
PRINCIPAL
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
--------------------------------------------------------- ----------- -----------
MORTGAGE-BACKED SECURITIES 37.5%
(a) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 1.1%
FHLMC, 4.225%, 12/01/34 ........................................................ $ 1,153,311 $ 1,149,989
FHLMC, 4.441%, 9/01/33 ......................................................... 273,919 275,089
FHLMC, 4.734%, 8/01/34 ......................................................... 1,234,498 1,232,820
FHLMC, 6.376%, 12/01/33 ........................................................ 977,347 995,754
-----------
3,653,652
-----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 11.7%
FHLMC Gold 15 Year, 5.00%, 10/01/17 - 7/01/23 .................................. 6,202,490 6,063,218
FHLMC Gold 15 Year, 5.00%, 6/01/23 ............................................. 6,684,499 6,531,397
FHLMC Gold 15 Year, 5.50%, 8/01/22 - 5/01/23 ................................... 38,206 46,035
FHLMC Gold 15 Year, 6.00%, 10/01/21 ............................................ 3,813,375 3,839,852
FHLMC Gold 15 Year, 6.00%, 10/01/23 ............................................ 19,933,990 20,066,418
FHLMC Gold 15 Year, 7.00%, 12/01/10 - 8/01/13 .................................. 143,113 150,362
FHLMC Gold 30 Year, 8.50%, 12/01/22 - 7/01/31 .................................. 1,495,253 1,605,985
FHLMC Gold 30 Year, 9.50%, 3/01/21 ............................................. 33,340 35,086
-----------
38,338,353
-----------
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 14.7%
FNMA, 3.432%, 4/01/34 .......................................................... 589,436 600,686
FNMA, 3.895%, 4/01/35 .......................................................... 130,272 132,176
FNMA, 3.93%, 3/01/33 ........................................................... 271,429 272,492
FNMA, 3.948%, 9/01/34 .......................................................... 645,408 642,653
FNMA, 4.104%, 8/01/33 .......................................................... 650,431 647,432
FNMA, 4.167%, 6/01/34 .......................................................... 1,230,469 1,235,451
FNMA, 4.177%, 8/01/34 .......................................................... 1,251,752 1,253,629
FNMA, 4.198%, 5/01/34 .......................................................... 1,176,796 1,184,526
FNMA, 4.286%, 12/01/33 ......................................................... 545,098 541,436
FNMA, 4.297%, 9/01/33 .......................................................... 3,717,055 3,643,927
FNMA, 4.398%, 2/01/34 .......................................................... 1,967,515 1,958,372
FNMA, 4.44%, 8/01/34 ........................................................... 3,995,209 4,086,110
FNMA, 4.446%, 1/01/35 .......................................................... 11,413,267 11,485,811
FNMA, 4.50%, 10/01/33 .......................................................... 404,706 406,634
FNMA, 4.514%, 6/01/33 .......................................................... 312,521 314,511
FNMA, 4.562%, 7/01/34 .......................................................... 1,993,339 2,037,187
FNMA, 4.699%, 4/01/33 .......................................................... 1,280,071 1,277,478
FNMA, 4.896%, 11/01/32 ......................................................... 3,886,730 3,989,250
FNMA, 4.956%, 3/01/33 .......................................................... 1,354,048 1,365,350
FNMA, 5.04%, 3/01/34 ........................................................... 145,945 146,339
FNMA, 5.249%, 11/01/34 ......................................................... 253,109 256,326
FNMA, 5.408%, 4/01/33 .......................................................... 462,654 466,887
FNMA, 5.718%, 2/01/35 .......................................................... 3,032,031 3,048,228
FNMA, 5.729%, 3/01/35 .......................................................... 2,931,027 2,944,031
FNMA, 5.763%, 1/01/35 .......................................................... 376,855 377,423
FNMA, 5.809%, 11/01/11 ......................................................... 2,458,309 2,512,227
FNMA, 5.988%, 12/01/34 ......................................................... 751,065 763,471
FNMA, 6.061%, 1/01/33 .......................................................... 210,295 210,379
FNMA, 6.174%, 1/01/33 .......................................................... 14,313 14,565
-----------
47,814,987
-----------
Annual Report | 81
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
--------------------------------------------------------- ------------ ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 8.3%
FNMA 15 Year, 4.50%, 12/01/18 - 2/01/19 ........................................ $ 582,366 $ 559,427
FNMA 15 Year, 5.00%, 2/01/18 - 5/01/18 ......................................... 2,994,163 2,951,986
FNMA 15 Year, 5.00%, 6/01/23 ................................................... 9,095,505 8,898,550
FNMA 15 Year, 5.50%, 3/01/16 - 11/01/17 ........................................ 2,855,985 2,869,712
FNMA 15 Year, 5.50%, 2/01/21 ................................................... 4,598,504 4,590,253
FNMA 15 Year, 6.00%, 4/01/16 - 5/01/17 ......................................... 2,780,327 2,813,514
FNMA 15 Year, 6.50%, 12/01/08 - 10/01/16 ....................................... 432,958 443,145
FNMA 15 Year, 7.00%, 7/01/12 - 7/01/14 ......................................... 303,790 319,182
FNMA 15 Year, 7.50%, 12/01/14 - 1/01/15 ........................................ 163,187 171,985
FNMA 30 Year, 6.50%, 8/01/38 ................................................... 2,816,114 2,856,332
FNMA 30 Year, 9.00%, 1/01/17 - 12/01/20 ........................................ 161,167 174,342
FNMA 30 Year, 9.50%, 7/01/16 - 6/01/22 ......................................... 278,945 307,721
------------
26,956,149
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.7%
GNMA I SF 15 Year, 6.50%, 10/15/13 - 7/15/14 ................................... 542,753 560,993
GNMA I SF 15 Year, 7.50%, 10/15/14 - 12/15/14 .................................. 183,011 193,536
GNMA I SF 30 Year, 5.50%, 4/15/33 - 5/15/33 .................................... 860,335 846,018
GNMA I SF 30 Year, 6.00%, 3/15/33 .............................................. 213,680 214,357
GNMA I SF 30 Year, 7.50%, 11/15/16 ............................................. 42,878 45,465
GNMA I SF 30 Year, 8.00%, 11/15/16 ............................................. 105,683 113,266
GNMA I SF 30 Year, 8.50%, 9/15/09 - 1/15/17 .................................... 51,609 55,600
GNMA I SF 30 Year, 9.00%, 6/15/16 - 9/15/17 .................................... 471,682 512,764
GNMA II SF 30 Year, 5.00%, 6/20/38 ............................................. 2,503,756 2,382,381
GNMA II SF 30 Year, 7.50%, 10/20/29 - 10/20/31 ................................. 547,700 575,109
GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/16 .................................. 72,368 78,356
GNMA II SF 30 Year, 9.50%, 6/20/16 ............................................. 66,680 72,655
------------
5,650,500
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $123,408,309) ........................... 122,413,641
------------
U.S. GOVERNMENT AND AGENCY SECURITIES 55.3%
FHLB,
4.625%, 11/21/08 ............................................................ 10,000,000 10,010,790
4.75%, 4/24/09 .............................................................. 2,000,000 2,021,262
4.875%, 11/18/11 ............................................................ 2,000,000 2,078,912
5.75%, 5/15/12 .............................................................. 2,000,000 2,102,214
FHLMC,
4.75%, 1/18/11 .............................................................. 11,000,000 11,406,329
3.875%, 6/29/11 ............................................................. 7,000,000 7,134,659
5.25%, 7/18/11 .............................................................. 16,000,000 16,837,072
5.50%, 9/15/11 .............................................................. 14,000,000 14,888,846
5.75%, 1/15/12 .............................................................. 2,000,000 2,130,308
5.50%, 8/20/12 .............................................................. 6,000,000 6,341,010
4.125%, 12/21/12 ............................................................ 4,000,000 4,006,356
4.50%, 1/15/13 .............................................................. 8,300,000 8,420,059
3.50%, 5/29/13 .............................................................. 4,200,000 4,088,204
3.75%, 6/28/13 .............................................................. 7,000,000 6,875,253
4.50%, 7/15/13 .............................................................. 3,500,000 3,547,233
4.50%, 1/15/14 .............................................................. 3,000,000 3,031,563
82 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
--------------------------------------------------------- ------------ ------------
U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED)
FHLMC, (continued)
4.50%, 1/15/15 .............................................................. $ 8,000,000 $ 7,982,928
senior note, 4.75%, 3/5/12 .................................................. 10,000,000 10,339,780
senior note, 4.375%, 7/17/15 ................................................ 4,000,000 3,932,712
FNMA,
2.875%, 10/12/10 ............................................................ 5,000,000 4,987,310
5.125%, 4/15/11 ............................................................. 9,000,000 9,365,328
6.00%, 5/15/11 .............................................................. 9,000,000 9,566,838
5.00%, 10/15/11 ............................................................. 3,000,000 3,131,619
5.375%, 11/15/11 ............................................................ 6,300,000 6,650,375
5.00%, 2/16/12 .............................................................. 6,000,000 6,242,484
4.75%, 11/19/12 ............................................................. 4,000,000 4,100,544
4.375%, 3/15/13 ............................................................. 4,000,000 4,044,264
4.625%, 10/15/13 ............................................................ 5,000,000 5,107,105
------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $178,602,798) ................ 180,371,357
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $302,011,107) ............ 302,784,998
------------
SHARES
------------
SHORT TERM INVESTMENTS 3.6%
MONEY MARKET FUNDS (COST $6,482,019) 2.0%
(b) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ........... 6,482,019 6,482,019
------------
PRINCIPAL
AMOUNT
------------
REPURCHASE AGREEMENTS (COST $5,306,405) 1.6%
(c) Joint Repurchase Agreement, 0.159%, 11/03/08 (Maturity Value $5,306,475) ....... $ 5,306,405 5,306,405
ABN AMRO Bank NV, New York Branch (Maturity Value $661,929)
Banc of America Securities LLC (Maturity Value $738,874)
Barclays Capital Inc. (Maturity Value $661,929)
BNP Paribas Securities Corp. (Maturity Value $738,874)
Credit Suisse Securities (USA) LLC (Maturity Value $661,929)
Deutsche Bank Securities Inc. (Maturity Value $796,184)
Dresdner Kleinwort Securities LLC (Maturity Value $307,882)
UBS Securities LLC (Maturity Value $738,874)
Collateralized by U.S. Government Agency Securities, 2.22% - 5.00%, 11/21/08
- 5/01/13; (d) U.S. Government Agency Discount Notes, 11/28/08 - 1/30/09;
(d) U.S. Treasury Bills, 10/22/09; and U.S. Treasury Notes, 3.50% - 4.75%,
2/28/09 - 11/15/09
------------
TOTAL INVESTMENTS (COST $313,799,531) 96.4% .................................... 314,573,422
OTHER ASSETS, LESS LIABILITIES 3.6% ............................................ 11,627,758
------------
NET ASSETS 100.0% .............................................................. $326,201,180
============
See Selected Portfolio Abbreviations on page 90.
(a) The coupon rate shown represents the rate at period end.
(b) 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.
(c) See Note 1(c) regarding joint repurchase agreement.
(d) The security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
Annual Report | 83
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN REAL RETURN FUND
YEAR ENDED OCTOBER 31,
---------------------------------------
CLASS A 2008 2007 2006 2005(a)
- ------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 10.64 $ 10.10 $ 9.94 $ 10.00
-------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.48 0.29 0.38 0.31
Net realized and unrealized gains (losses) ............. (0.95) 0.58 0.22 0.04
-------- ------- ------- -------
Total from investment operations .......................... (0.47) 0.87 0.60 0.35
-------- ------- ------- -------
Less distributions from:
Net investment income .................................. (0.59) (0.33) (0.44) (0.40)
Net realized gains ..................................... (0.03) -- -- --
Tax return of capital .................................. -- -- -- (0.01)
-------- ------- ------- -------
Total distributions ....................................... (0.62) (0.33) (0.44) (0.41)
-------- ------- ------- -------
Redemption fees(d, e) ..................................... -- -- -- --
-------- ------- ------- -------
Net asset value, end of year .............................. $ 9.55 $ 10.64 $ 10.10 $ 9.94
======== ======= ======== =======
Total return(f) ........................................... (4.93)% 8.75% 6.16% 3.53%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 1.08% 1.11% 1.12% 1.63%
Expenses net of waiver and payments by affiliates and
expense reduction(h) ................................... 0.90% 0.90% 0.90% 0.90%
Net investment income ..................................... 4.48% 2.80% 3.75% 3.29%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $285,467 $46,682 $31,452 $23,753
Portfolio turnover rate ................................... 28.06% 23.60% 3.53% 8.86%
(a) For the period November 17, 2004 (commencement of operations) to October
31, 2005.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
84 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL RETURN FUND
YEAR ENDED OCTOBER 31,
---------------------------------------
ADVISOR CLASS 2008 2007 2006 2005(a)
- ------------- -------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 10.65 $ 10.11 $ 9.95 $ 10.00
-------- ------- ------- -------
Income from investment operations(b):
Net investment income(c) ............................... 0.52 0.31 0.40 0.36
Net realized and unrealized gains (losses) ............. (0.96) 0.59 0.23 0.02
-------- ------- ------- -------
Total from investment operations .......................... (0.44) 0.90 0.63 0.38
-------- ------- ------- -------
Less distributions from:
Net investment income .................................. (0.61) (0.36) (0.47) (0.42)
Net realized gains ..................................... (0.03) -- -- --
Tax return of capital .................................. -- -- -- (0.01)
-------- ------- ------- -------
Total distributions ....................................... (0.64) (0.36) (0.47) (0.43)
-------- ------- ------- -------
Redemption fees(d, e) ..................................... -- -- -- --
-------- ------- ------- -------
Net asset value, end of year .............................. $ 9.57 $ 10.65 $ 10.11 $ 9.95
======== ======= ======== =======
Total return(f) ........................................... (4.63)% 9.01% 6.41% 3.81%
RATIOS TO AVERAGE NET ASSETS(g)
Expenses before waiver and payments by affiliates ......... 0.83% 0.86% 0.87% 1.38%
Expenses net of waiver and payments by affiliates and
expense reduction(h) ................................... 0.65% 0.65% 0.65% 0.65%
Net investment income ..................................... 4.73% 3.05% 4.00% 3.54%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 14,681 $20,068 $17,892 $ 496
Portfolio turnover rate ................................... 28.06% 23.60% 3.53% 8.86%
(a) For the period November 17, 2004 (commencement of operations) to October
31, 2005.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Based on average daily shares outstanding.
(d) Amount rounds to less than $0.01 per share.
(e) Effective September 1, 2008, the redemption fee was eliminated.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 85
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
COUNTRY/
FRANKLIN REAL RETURN FUND ORGANIZATION SHARES VALUE
------------------------- ------------- ----------- -----------
COMMON STOCKS 4.3%
ENERGY 2.7%
Devon Energy Corp. ....................................................... United States 10,300 $ 832,858
Exxon Mobil Corp. ........................................................ United States 10,300 763,436
Marathon Oil Corp. ....................................................... United States 17,300 503,430
(a) Nabors Industries Ltd. ................................................... Bermuda 9,800 140,924
Noble Corp. .............................................................. United States 9,800 315,658
Occidental Petroleum Corp. ............................................... United States 10,500 583,170
Peabody Energy Corp. ..................................................... United States 14,600 503,846
Schlumberger Ltd. ........................................................ United States 17,100 883,215
(a) Southwestern Energy Co. .................................................. United States 34,600 1,232,452
(a) Transocean Inc. .......................................................... United States 6,319 520,243
Valero Energy Corp. ...................................................... United States 9,300 191,394
(a) Weatherford International Ltd. ........................................... United States 21,600 364,608
XTO Energy Inc. .......................................................... United States 35,000 1,258,250
-----------
8,093,484
-----------
MATERIALS 0.7%
Alcoa Inc. ............................................................... United States 25,700 295,807
Barrick Gold Corp. ....................................................... Canada 47,900 1,088,288
Freeport-McMoRan Copper & Gold Inc., B ................................... United States 19,173 557,935
United States Steel Corp. ................................................ United States 6,100 224,968
-----------
2,166,998
-----------
REAL ESTATE 0.9%
AvalonBay Communities Inc. ............................................... United States 2,300 163,346
Boston Properties Inc. ................................................... United States 4,800 340,224
Kimco Realty Corp. ....................................................... United States 11,700 264,186
LaSalle Hotel Properties ................................................. United States 11,600 163,328
ProLogis ................................................................. United States 9,089 127,246
Public Storage ........................................................... United States 5,600 456,400
Regency Centers Corp. .................................................... United States 6,400 252,544
Simon Property Group Inc. ................................................ United States 4,800 321,744
UDR Inc. ................................................................. United States 9,100 179,816
Vornado Realty Trust ..................................................... United States 4,600 324,530
-----------
2,593,364
-----------
TOTAL COMMON STOCKS (COST $18,457,006) ................................... 12,853,846
-----------
PRINCIPAL
AMOUNT(b)
-----------
CORPORATE BONDS 5.7%
AUTOMOBILES & COMPONENTS 0.2%
Ford Motor Credit Co. LLC, senior note, 9.875%, 8/10/11 .................. United States 800,000 504,562
-----------
BANKS 1.5%
Oesterreichische Kontrollbank AG, senior bond, 2.75%, 6/14/11 ............ Austria 5,120,000 CHF 4,453,349
-----------
CAPITAL GOODS 0.1%
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 .................. United States 500,000 347,500
-----------
COMMERCIAL & PROFESSIONAL SERVICES 0.1%
(c) ARAMARK Corp., senior note, FRN, 6.301%, 2/01/15 ......................... United States 500,000 360,000
-----------
86 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN REAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
------------------------- -------------- --------- ----------
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES & APPAREL 0.1%
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ........................... United States 500,000 $ 375,000
----------
CONSUMER SERVICES 0.4%
MGM MIRAGE, senior note, 6.625%, 7/15/15 ................................. United States 800,000 472,000
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ................ United States 800,000 516,000
Station Casinos Inc., senior note, 7.75%, 8/15/16 ........................ United States 400,000 136,000
----------
1,124,000
----------
DIVERSIFIED FINANCIALS 0.2%
GMAC LLC, 6.875%, 9/15/11 ................................................ United States 800,000 468,966
----------
ENERGY 0.6%
Chesapeake Energy Corp., senior note,
6.625%, 1/15/16 ....................................................... United States 750,000 589,687
6.25%, 1/15/18 ........................................................ United States 50,000 35,750
(d) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ................ Switzerland 800,000 540,000
Tesoro Corp., senior note, 6.25%, 11/01/12 ............................... United States 800,000 616,000
----------
1,781,437
----------
FOOD, BEVERAGE & TOBACCO 0.2%
Reynolds American Inc., senior secured note, 7.25%, 6/01/13 .............. United States 400,000 350,471
Smithfield Foods Inc., senior note,
8.00%, 10/15/09 ....................................................... United States 50,000 45,000
7.75%, 7/01/17 ........................................................ United States 350,000 222,250
----------
617,721
----------
HEALTH CARE EQUIPMENT & SERVICES 0.3%
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ............................ United States 400,000 344,000
HCA Inc., senior secured note, 9.125%, 11/15/14 .......................... United States 800,000 690,000
----------
1,034,000
----------
MATERIALS 0.7%
Crown Americas Inc., senior note, 7.75%, 11/15/15 ........................ United States 500,000 438,750
Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 ......... United States 700,000 560,648
(d) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 ...... United Kingdom 500,000 187,500
Nalco Co., senior sub. note, 8.875%, 11/15/13 ............................ United States 600,000 519,000
Novelis Inc., senior note, 7.25%, 2/15/15 ................................ Canada 500,000 337,500
----------
2,043,398
----------
MEDIA 0.7%
(d) Charter Communications Operating LLC, senior note, 144A, 8.375%,
4/30/14 ............................................................... United States 700,000 511,000
Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ................ United States 350,000 132,125
(d) DIRECTV Holdings LLC, senior note, 144A, 7.625%, 5/15/16 ................. United States 600,000 507,000
Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ...................... United States 600,000 474,000
Liberty Media Corp., senior note, 5.70%, 5/15/13 ......................... United States 600,000 420,409
R.H. Donnelley Corp., senior note, A-3, 8.875%, 1/15/16 .................. United States 50,000 10,750
----------
2,055,284
----------
Annual Report | 87
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN REAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
------------------------- -------------- ----------- ------------
CORPORATE BONDS (CONTINUED)
SOFTWARE & SERVICES 0.2%
Sungard Data Systems Inc., 4.875%, 1/15/14 ............................... United States 600,000 $ 465,000
------------
TECHNOLOGY HARDWARE & EQUIPMENT 0.1%
(c,d) Sanmina-SCI Corp., senior note, 144A, FRN, 5.569%, 6/15/14 ............... United States 400,000 310,000
------------
TELECOMMUNICATION SERVICES 0.1%
(d) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ......... Italy 500,000 387,500
------------
UTILITIES 0.2%
NRG Energy Inc., senior note, 7.25%, 2/01/14 ............................. United States 700,000 614,250
------------
TOTAL CORPORATE BONDS (COST $21,164,546) ................................. 16,941,967
------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 10.4%
(c) European Investment Bank, senior note, FRN, 0.685%, 9/21/11 .............. Supranational(e) 233,000,000 JPY 2,365,702
Government of Malaysia,
4.305%, 2/27/09 .................................................... Malaysia 380,000 MYR 107,215
4.032%, 9/15/09 .................................................... Malaysia 70,000 MYR 19,760
3.869%, 4/13/10 .................................................... Malaysia 13,408,000 MYR 3,778,571
3.756%, 4/28/11 .................................................... Malaysia 8,560,000 MYR 2,401,186
3.833%, 9/28/11 .................................................... Malaysia 27,660,000 MYR 7,763,362
3.702%, 2/25/13 .................................................... Malaysia 1,840,000 MYR 511,075
3.461%, 7/31/13 .................................................... Malaysia 150,000 MYR 41,113
3.814%, 2/15/17 .................................................... Malaysia 6,100,000 MYR 1,642,731
Government of Singapore, 2.625%, 4/01/10 ................................. Singapore 5,845,000 SGD 4,018,452
Government of Sweden,
5.00%, 1/28/09 ..................................................... Sweden 33,400,000 SEK 4,320,034
4.00%, 12/01/09 .................................................... Sweden 1,920,000 SEK 250,755
(c) KfW Bankengruppe, FRN, 0.688%, 8/08/11 ................................... Germany 37,000,000 JPY 372,874
(f) Nota Do Tesouro Nacional, Index Linked, 6.00%,
5/15/15 ............................................................ Brazil 3,500(g) BRL 2,325,921
5/15/45 ............................................................ Brazil 1,680(g) BRL 1,015,188
Queensland Treasury Corp., 6.00%, 7/14/09 ................................ Australia 410,000 AUD 274,278
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $35,320,397) ........ 31,208,217
------------
U.S. GOVERNMENT AND AGENCY SECURITIES 67.9%
(h) U.S. Treasury Bond, Index Linked, 3.875%, 4/15/29 ........................ United States 399,860 430,100
(h) U.S. Treasury Note, Index Linked,
0.875%, 4/15/10 .................................................... United States 46,090,941 43,339,912
3.50%, 1/15/11 ..................................................... United States 629,475 615,067
2.375%, 4/15/11 .................................................... United States 58,287,220 55,281,814
2.00%, 4/15/12 ..................................................... United States 44,163,778 41,665,787
3.00%, 7/15/12 ..................................................... United States 9,749,247 9,511,619
2.00%, 1/15/14 ..................................................... United States 23,954,153 21,940,519
2.00%, 7/15/14 ..................................................... United States 1,162,430 1,060,445
1.625%, 1/15/15 .................................................... United States 10,901,486 9,543,063
2.00%, 1/15/16 ..................................................... United States 23,183,497 20,459,460
------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $225,281,996) .......... 203,847,786
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $300,223,945) ...... 264,851,816
------------
88 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN REAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
------------------------- ------------- ---------- ------------
SHORT TERM INVESTMENTS 8.3%
FOREIGN GOVERNMENT AND AGENCY SECURITIES 3.1%
(i) Egypt Treasury Bills,
12/16/08 - 3/17/09 ................................................. Egypt 8,550,000 EGP 1,490,834
7/14/09 ............................................................ Egypt 27,000,000 EGP 4,455,987
8/18/09 ............................................................ Egypt 21,600,000 EGP 3,526,910
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $9,917,636) ......... 9,473,731
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $310,141,581) ....... 274,325,547
------------
REPURCHASE AGREEMENTS (COST $15,551,056) 5.2%
(j) Joint Repurchase Agreement, 0.159%, 11/03/08 ............................. 15,551,056 15,551,056
(Maturity Value $15,551,261)
ABN AMRO Bank NV, New York Branch (Maturity Value $1,939,864)
Banc of America Securities LLC (Maturity Value $2,165,358)
Barclays Capital Inc. (Maturity Value $1,939,864)
BNP Paribas Securities Corp. (Maturity Value $2,165,358)
Credit Suisse Securities (USA) LLC (Maturity Value $1,939,864)
Deutsche Bank Securities Inc. (Maturity Value $2,333,311)
Dresdner Kleinwort Securities LLC (Maturity Value $902,284)
UBS Securities LLC (Maturity Value $2,165,358)
Collateralized by U.S. Government Agency Securities, 2.22% -
5.00%, 11/21/08 - 5/01/13; (l) U.S. Government Agency Discount
Notes, 11/28/08 - 1/30/09; (l) U.S. Treasury Bills,
10/22/09; and U.S. Treasury Notes, 3.50% - 4.75%, 2/28/09
- 11/15/09
------------
TOTAL INVESTMENTS (COST $325,692,637) 96.6% .............................. 289,876,603
NET UNREALIZED DEPRECIATION ON FORWARD EXCHANGE CONTRACTS 0.0%(k) ........ (15,788)
OTHER ASSETS, LESS LIABILITIES 3.4% ...................................... 10,287,005
------------
NET ASSETS 100.0% ........................................................ $300,147,820
============
See Currency and Selected Portfolio Abbreviations on page 90.
(a) Non-income producing for the twelve months ended October 31, 2008.
(b) The principal amount is stated in U.S. dollars unless otherwise indicated.
(c) The coupon rate shown represents the rate at period end.
(d) 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 October 31, 2008,
the aggregate value of these securities was $2,443,000, representing 0.81%
of net assets.
(e) A supranational organization is an entity formed by two or more central
governments through international treaties.
(f) Redemption price at maturity is adjusted for inflation. See Note 1(h).
(g) Principal amount is stated in 1,000 Brazilian Real Units.
(h) Principal amount of security is adjusted for inflation. See Note 1(h).
(i) The security is traded on a discount basis with no stated coupon rate.
(j) See Note 1(c) regarding joint repurchase agreement.
(k) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
Annual Report | 89
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BRL - Brazilian Real
CHF - Swiss Franc
EGP - Egyptian Pound
JPY - Japanese Yen
MYR - Malaysian Ringgit
SEK - Swedish Krona
SGD - Singapore Dollar
SELECTED PORTFOLIO ABBREVIATIONS:
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
SF - Single Family
The accompanying notes are an integral part of these financial statements.
90 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2008
FRANKLIN FRANKLIN CONVERTIBLE FRANKLIN EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
------------- -------------------- ---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................................... $ 62,377,457 $ 806,967,849 $ 697,393,315
Cost - Sweep Money Fund (Note 7) .................................. 3,585,681 14,651,385 28,233,515
Cost - Repurchase agreements ...................................... -- -- 13,251,120
------------ ------------- -------------
Total cost of investments ......................................... $ 65,963,138 $ 821,619,234 $ 738,877,950
============ ============= =============
Value - Unaffiliated issuers ...................................... $ 42,968,566 $ 514,856,269 $ 528,331,714
Value - Sweep Money Fund (Note 7) ................................. 3,585,681 14,651,385 28,233,515
Value - Repurchase agreements ..................................... -- -- 13,251,120
------------ ------------- -------------
Total value of investments ........................................ 46,554,247 529,507,654 569,816,349
Receivables:
Investment securities sold ........................................ 127,086 -- 3,935,164
Capital shares sold ............................................... 248,268 2,962,481 681,830
Dividends and interest ............................................ 556,607 5,011,773 1,861,184
Affiliates ........................................................ 4,200 -- --
------------ ------------- -------------
Total assets ................................................... 47,490,408 537,481,908 576,294,527
------------ ------------- -------------
Liabilities:
Payables:
Investment securities purchased ................................... -- -- 4,405,224
Capital shares redeemed ........................................... 86,116 2,199,103 1,849,321
Affiliates ........................................................ -- 459,046 477,202
Loss contingency (Note 12) ........................................... 96,432 -- --
Options written, at value (premiums received $14,605, $-- and $--) ... 12,700 -- --
Accrued expenses and other liabilities ............................... 14,292 157,193 213,303
------------ ------------- -------------
Total liabilities .............................................. 209,540 2,815,342 6,945,050
------------ ------------- -------------
Net assets, at value ........................................ $ 47,280,868 $ 534,666,566 $ 569,349,477
============ ============= =============
Net assets consist of:
Paid-in capital ...................................................... $ 70,580,161 $ 862,290,651 $ 782,105,384
Undistributed net investment income (distributions in excess of net
investment income) ................................................ 182,591 (32,947,401) 2,667,207
Net unrealized appreciation (depreciation) ........................... (19,503,846) (292,111,580) (169,074,998)
Accumulated net realized gain (loss) ................................. (3,978,038) (2,565,104) (46,348,116)
------------ ------------- -------------
Net assets, at value ........................................ $ 47,280,868 $ 534,666,566 $ 569,349,477
============ ============= =============
The accompanying notes are an integral part of these financial statements.
Annual Report | 91
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2008
FRANKLIN FRANKLIN CONVERTIBLE FRANKLIN EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
------------- -------------------- ---------------
CLASS A:
Net assets, at value ................................................. $39,061,396 $396,201,376 $465,026,785
----------- ------------ ------------
Shares outstanding ................................................... 5,582,242 41,790,686 36,104,735
----------- ------------ ------------
Net asset value per share(a) ......................................... $ 7.00 $ 9.48 $ 12.88
----------- ------------ ------------
Maximum offering price per share (net asset value
per share / 94.25%) ............................................... $ 7.43 $ 10.06 $ 13.67
----------- ------------ ------------
CLASS B:
Net assets, at value ................................................. -- -- $ 20,559,408
----------- ------------ ------------
Shares outstanding ................................................... -- -- 1,603,759
----------- ------------ ------------
Net asset value and maximum offering price per share(a) .............. -- -- $ 12.82
----------- ------------ ------------
CLASS C:
Net assets, at value ................................................. $ 7,136,060 $138,147,670 $ 78,394,277
----------- ------------ ------------
Shares outstanding ................................................... 1,025,575 14,716,809 6,112,011
----------- ------------ ------------
Net asset value and maximum offering price per share(a) .............. $ 6.96 $ 9.39 $ 12.83
----------- ------------ ------------
CLASS R:
Net assets, at value ................................................. $ 11,900 -- $ 4,689,873
----------- ------------ ------------
Shares outstanding ................................................... 1,699 -- 363,978
----------- ------------ ------------
Net asset value and maximum offering price per share ................. $ 7.00 -- $ 12.89
----------- ------------ ------------
ADVISOR CLASS:
Net assets, at value ................................................. $ 1,071,512 $ 317,520 $ 679,134
----------- ------------ ------------
Shares outstanding ................................................... 152,929 33,491 52,718
----------- ------------ ------------
Net asset value and maximum offering price per share ................. $ 7.01 $ 9.48 $ 12.88
----------- ------------ ------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charge, if applicable.
The accompanying notes are an integral part of these financial statements.
92 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2008
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
---------------- -------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ....................................... $302,011,107 $310,141,581
Cost - Sweep Money Fund (Note 7) .................................. 6,482,019 --
Cost - Repurchase agreements ...................................... 5,306,405 15,551,056
------------ ------------
Total cost of investments ......................................... $313,799,531 $325,692,637
------------ ------------
Value - Unaffiliated issuers ...................................... $302,784,998 $274,325,547
Value - Sweep Money Fund (Note 7) ................................. 6,482,019 --
Value - Repurchase agreements ..................................... 5,306,405 15,551,056
------------ ------------
Total value of investments ........................................ 314,573,422 289,876,603
Cash ................................................................. -- 9,593,166
Receivables:
Investment securities sold ........................................ 9,013,012 1,266,569
Capital shares sold ............................................... 1,747,859 1,386,588
Dividends and interest ............................................ 2,864,416 1,351,343
------------ ------------
Total assets .................................................. 328,198,709 303,474,269
------------ ------------
Liabilities:
Payables:
Capital shares redeemed ........................................... 1,546,506 3,147,959
Affiliates ........................................................ 189,961 126,679
Distributions to shareholders ..................................... 224,121 --
Unrealized depreciation on forward exchange contracts ............. -- 15,788
Accrued expenses and other liabilities ............................... 36,941 36,023
------------ ------------
Total liabilities .............................................. 1,997,529 3,326,449
------------ ------------
Net assets, at value ........................................ $326,201,180 $300,147,820
============ ============
Net assets consist of:
Paid-in capital ...................................................... $339,893,618 $339,701,158
Distributions in excess of net investment income ..................... (383,381) (1,615,214)
Net unrealized appreciation (depreciation) ........................... 773,891 (35,898,444)
Accumulated net realized gain (loss) ................................. (14,082,948) (2,039,680)
------------ ------------
Net assets, at value ........................................ $326,201,180 $300,147,820
============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 93
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2008
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
---------------- -------------
CLASS A:
Net assets, at value ................................................. $298,467,513 $285,467,299
------------ ------------
Shares outstanding ................................................... 29,698,755 29,896,770
------------ ------------
Net asset value per share(a) ......................................... $ 10.05 $ 9.55
------------ ------------
Maximum offering price per share (net asset value per share / 97.75%
and 95.75%, respectively) ......................................... $ 10.28 $ 9.97
------------ ------------
ADVISOR CLASS:
Net assets, at value ................................................. $ 27,733,667 $ 14,680,521
------------ ------------
Shares outstanding ................................................... 2,762,198 1,534,757
------------ ------------
Net asset value and maximum offering price per share ................. $ 10.04 $ 9.57
------------ ------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charge, if applicable.
The accompanying notes are an integral part of these financial statements.
94 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended October 31, 2008
FRANKLIN
FRANKLIN CONVERTIBLE FRANKLIN
BALANCED SECURITIES EQUITY
FUND FUND INCOME FUND
------------ ------------- -------------
Investment income:
Dividends:
Unaffiliated issuers ............................................. $ 1,194,091 $ 18,609,518 $ 29,527,353
Sweep Money Fund (Note 7) ........................................ 97,819 497,531 775,327
Interest ............................................................ 1,464,948 14,341,210 509,999
Income from securities loaned ....................................... -- -- 32,955
------------ ------------- -------------
Total investment income ....................................... 2,756,858 33,448,259 30,845,634
------------ ------------- -------------
Expenses:
Management fees (Note 3a) ........................................... 263,946 4,058,488 3,967,713
Administrative fees (Note 3b) ....................................... 110,164 -- --
Distribution fees: (Note 3c)
Class A .......................................................... 137,812 1,576,651 1,710,141
Class B .......................................................... -- -- 339,082
Class C .......................................................... 75,854 2,332,626 1,250,300
Class R .......................................................... 83 -- 41,084
Transfer agent fees (Note 3e) ....................................... 57,798 1,151,585 1,604,619
Custodian fees (Note 4) ............................................. 1,704 32,832 22,299
Reports to shareholders ............................................. 11,748 146,975 185,165
Registration and filing fees ........................................ 78,473 96,308 119,321
Professional fees ................................................... 32,209 42,007 38,913
Trustees' fees and expenses ......................................... 1,594 31,565 30,474
Other ............................................................... 14,717 36,568 33,222
------------ ------------- -------------
Total expenses ................................................ 786,102 9,505,605 9,342,333
Expense reductions (Note 4) ................................... -- (2,735) (5,346)
Expenses waived/paid by affiliates (Note 3f) .................. (180,777) -- --
------------ ------------- -------------
Net expenses ............................................... 605,325 9,502,870 9,336,987
------------ ------------- -------------
Net investment income ................................... 2,151,533 23,945,389 21,508,647
------------ ------------- -------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................... (4,522,035) 10,914,998 (45,864,623)
Written options (Note 1e) ........................................ 551,092 -- --
Foreign currency transactions .................................... 17,772 -- 5,423
Net increase from payments by affiliate (Note 10) ................ 47,078 -- --
------------ ------------- -------------
Net realized gain (loss) ................................ (3,906,093) 10,914,998 (45,859,200)
------------ ------------- -------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................... (20,845,307) (416,542,531) (354,318,290)
Translation of other assets and liabilities denominated in foreign
currencies .................................................... (1,420) -- (13,397)
------------ ------------- -------------
Net change in unrealized appreciation (depreciation) .... (20,846,727) (416,542,531) (354,331,687)
------------ ------------- -------------
Net realized and unrealized gain (loss) ................................ (24,752,820) (405,627,533) (400,190,887)
------------ ------------- -------------
Net increase (decrease) in net assets resulting from operations ........ $(22,601,287) $(381,682,144) $(378,682,240)
============ ============= =============
The accompanying notes are an integral part of these financial statements.
Annual Report | 95
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended October 31, 2008
FRANKLIN LIMITED
MATURITY U.S.
GOVERNMENT FRANKLIN REAL
SECURITIES FUND RETURN FUND
---------------- -------------
Investment income:
Dividends:
Unaffiliated issuers ............................................. $ -- $ 210,745
Sweep Money Fund (Note 7) ........................................ 132,724 --
Interest ............................................................ 10,963,808 10,795,431
----------- ------------
Total investment income ....................................... 11,096,532 11,006,176
----------- ------------
Expenses:
Management fees (Note 3a) ........................................... 1,353,998 866,346
Administrative fees (Note 3b) ....................................... -- 407,692
Distribution fees - Class A (Note 3c) ............................... 222,177 447,906
Transfer agent fees (Note 3e) ....................................... 372,510 187,202
Custodian fees (Note 4) ............................................. 4,423 19,872
Reports to shareholders ............................................. 31,230 22,432
Registration and filing fees ........................................ 57,560 136,584
Professional fees ................................................... 29,391 30,637
Trustees' fees and expenses ......................................... 7,189 4,038
Other ............................................................... 16,990 20,423
----------- ------------
Total expenses ................................................ 2,095,468 2,143,132
Expense reductions (Note 4) ................................... (28) (185)
Expenses waived/paid by affiliates (Note 3f) .................. -- (362,007)
----------- ------------
Net expenses ............................................... 2,095,440 1,780,940
----------- ------------
Net investment income ................................... 9,001,092 9,225,236
----------- ------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................... 1,409,071 (1,709,118)
Foreign currency transactions .................................... -- 444,600
----------- ------------
Net realized gain (loss) ................................ 1,409,071 (1,264,518)
----------- ------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................... (808,469) (38,837,322)
Translation of other assets and liabilities denominated in foreign
currencies .................................................... -- (188,284)
----------- ------------
Net change in unrealized appreciation (depreciation) .... (808,469) (39,025,606)
----------- ------------
Net realized and unrealized gain (loss) ................................ 600,602 (40,290,124)
----------- ------------
Net increase (decrease) in net assets resulting from operations ........ $ 9,601,694 $(31,064,888)
=========== ============
The accompanying notes are an integral part of these financial statements.
96 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN
FRANKLIN BALANCED FUND CONVERTIBLE SECURITIES FUND
-------------------------- -------------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
-------------------------- -------------------------------
2008 2007 2008 2007
------------ ----------- -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................. $ 2,151,533 $ 877,480 $ 23,945,389 $ 22,205,526
Net realized gain (loss) from investments,
written options, foreign currency transactions
and net increase from payments by affiliate ........ (3,906,093) 1,084,813 10,914,998 37,836,309
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies ...... (20,846,727) 329,158 (416,542,531) 44,502,885
------------ ----------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations .................... (22,601,287) 2,291,451 (381,682,144) 104,544,720
------------ ----------- -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ............................................ (1,920,199) (719,653) (32,900,894) (26,527,413)
Class C ............................................ (277,048) (53,488) (10,290,851) (7,845,592)
Class R ............................................ (659) (384) -- --
Advisor Class ...................................... (56,388) (22,527) (16,406) --
Net realized gains:
Class A ............................................ (886,464) -- (27,669,044) (50,626,878)
Class C ............................................ (154,165) -- (10,175,756) (19,206,544)
Class R ............................................ (327) -- -- --
Advisor Class ...................................... (25,060) -- -- --
------------ ----------- -------------- --------------
Total distributions to shareholders ...................... (3,320,310) (796,052) (81,052,951) (104,206,427)
------------ ----------- -------------- --------------
Capital share transactions: (Note 2)
Class A ............................................ 25,371,780 16,510,485 (109,381,103) 126,041,888
Class C ............................................ 4,409,838 6,263,137 (44,677,100) 35,323,179
Class R ............................................ 4,379 3,771 -- --
Advisor Class ...................................... 499,046 893,224 499,828 --
------------ ----------- -------------- --------------
Total capital share transactions ......................... 30,285,043 23,670,617 (153,558,375) 161,365,067
------------ ----------- -------------- --------------
Redemption fees .......................................... 817 759 4,226 18,999
------------ ----------- -------------- --------------
Net increase (decrease) in net assets ........... 4,364,263 25,166,775 (616,289,244) 161,722,359
Net assets:
Beginning of year ....................................... 42,916,605 17,749,830 1,150,955,810 989,233,451
------------ ----------- -------------- --------------
End of year ............................................. $ 47,280,868 $42,916,605 $ 534,666,566 $1,150,955,810
------------ ----------- -------------- --------------
Undistributed net investment income (distributions in excess
of net investment income) included in net assets:
End of year ........................................... $ 182,591 $ 215,846 $ (32,947,401) $ (24,948,395)
============ =========== ============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 97
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN LIMITED MATURITY
U.S. GOVERNMENT
FRANKLIN EQUITY INCOME FUND SECURITIES FUND
------------------------------- ---------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------- ---------------------------
2008 2007 2008 2007
-------------- -------------- ------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................... $ 21,508,647 $ 19,742,180 $ 9,001,092 $ 8,179,870
Net realized gain (loss) from investments
and foreign currency transactions ........... (45,859,200) 45,870,756 1,409,071 (515,289)
Net change in unrealized appreciation
(depreciation) on investments and translation
of other assets and liabilities denominated
in foreign currencies ...................... (354,331,687) 4,832,546 (808,469) 3,080,816
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations ............. (378,682,240) 70,445,482 9,601,694 10,745,397
-------------- -------------- ------------ ------------
Distributions to shareholders from:
Net investment income:
Class A ..................................... (18,304,971) (15,972,888) (8,996,967) (7,617,448)
Class B ..................................... (642,800) (630,546) -- --
Class C ..................................... (2,361,972) (2,189,372) -- --
Class R ..................................... (197,377) (293,600) -- --
Advisor Class ............................... (8,842) -- (1,028,555) (892,979)
Net realized gains:
Class A ..................................... (36,401,070) (46,881,447) -- --
Class B ..................................... (1,947,071) (3,228,819) -- --
Class C ..................................... (7,038,555) (10,790,372) -- --
Class R ..................................... (515,465) (1,172,131) -- --
-------------- -------------- ------------ ------------
Total distributions to shareholders ............... (67,418,123) (81,159,175) (10,025,522) (8,510,427)
-------------- -------------- ------------ ------------
Capital share transactions: (Note 2)
Class A ..................................... (31,388,609) 128,326,523 109,805,564 (24,153,550)
Class B ..................................... (8,454,274) (4,850,825) -- --
Class C ..................................... (23,079,473) (4,298,881) -- --
Class R ..................................... (4,459,712) (5,292,753) -- --
Advisor Class ............................... 964,294 -- 5,540,153 (374,585)
-------------- -------------- ------------ ------------
Total capital share transactions .................. (66,417,774) 113,884,064 115,345,717 (24,528,135)
-------------- -------------- ------------ ------------
Redemption fees ................................... 1,299 11,014 14,229 20,529
-------------- -------------- ------------ ------------
Net increase (decrease) in net assets ....... (512,516,838) 103,181,385 114,936,118 (22,272,636)
Net assets:
Beginning of year ................................. 1,081,866,315 978,684,930 211,265,062 233,537,698
-------------- -------------- ------------ ------------
End of year ....................................... $ 569,349,477 $1,081,866,315 $326,201,180 $211,265,062
============== ============== ============ ============
Undistributed net investment income (distributions in
excess of net investment income) included in net
assets:
End of year .................................... $ 2,667,207 $ 2,366,375 $ (383,381) $ 2,977
============== ============== ============ ============
The accompanying notes are an integral part of these financial statements.
98 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN REAL RETURN FUND
--------------------------
YEAR ENDED OCTOBER 31,
--------------------------
2008 2007
------------ -----------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................... $ 9,225,236 $ 1,579,097
Net realized gain (loss) from investments and foreign currency
transactions ........................................................... (1,264,518) 1,085,623
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign
currencies ............................................................. (39,025,606) 2,185,853
------------ -----------
Net increase (decrease) in net assets resulting from operations ..... (31,064,888) 4,850,573
------------ -----------
Distributions to shareholders from:
Net investment income:
Class A ................................................................ (10,236,128) (1,192,254)
Advisor Class .......................................................... (1,476,610) (614,695)
Net realized gains:
Class A ................................................................ (180,301) --
Advisor Class .......................................................... (62,307) --
------------ -----------
Total distributions to shareholders .......................................... (11,955,346) (1,806,949)
------------ -----------
Capital share transactions: (Note 2)
Class A ................................................................ 279,107,734 13,198,443
Advisor Class .......................................................... (2,697,978) 1,164,113
------------ -----------
Total capital share transactions ............................................. 276,409,756 14,362,556
------------ -----------
Redemption fees .............................................................. 8,054 104
------------ -----------
Net increase (decrease) in net assets ............................... 233,397,576 17,406,284
Net assets:
Beginning of year ............................................................ 66,750,244 49,343,960
------------ -----------
End of year .................................................................. $300,147,820 $66,750,244
============ ===========
Undistributed net investment income (distributions in excess of net investment
income) included in net assets:
End of year .................................................................. $ (1,615,214) $ 115,240
============ ===========
The accompanying notes are an integral part of these financial statements.
Annual Report | 99
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (Trust) is registered under the Investment
Company Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of nine separate funds. All funds included in this report (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. Effective May 15, 2008, the Franklin Equity Income Fund and the
Franklin Convertible Securities Fund began offering a new class of shares,
Advisor Class. 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 B,
CLASS A, CLASS C, CLASS A, CLASS C CLASS C, CLASS R
CLASS R & ADVISOR CLASS & ADVISOR CLASS & ADVISOR CLASS CLASS A & ADVISOR CLASS
- ----------------------- -------------------- ----------------- ----------------------------------
Franklin Balanced Fund Franklin Convertible Franklin Equity Franklin Limited Maturity
Securities Fund Income Fund U.S. Government 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.
100 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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
Statement 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.
Annual Report | 101
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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 year end had been entered into on October 31, 2008. The joint
repurchase agreement is valued at cost.
D. 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 at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Franklin Real Return Fund may also enter into forward exchange contracts to
hedge against fluctuations in foreign exchange rates. 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 Statement
of Assets and Liabilities. Realized and unrealized gains and losses on these
contracts are included in the Statement 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 Statement of Assets and Liabilities.
E. OPTIONS
The Franklin Balanced Fund may purchase or write options. Options are contracts
entitling the holder to purchase or sell securities or other financial
instruments at a specified price or, in the case of index options, to receive or
pay the difference between the index value and the strike price of the index
option. Options purchased are recorded as investments; options written (sold)
are recorded as liabilities. Upon closing of an option 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, the acquisition cost or sale proceeds
are adjusted by the amount of the premium. When an option expires, the premium
is
102 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS (CONTINUED)
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 Statement of Assets and Liabilities.
F. SECURITIES LENDING
The Franklin Equity Income Fund may loan securities to certain brokers through a
securities lending agent for which it receives initial cash collateral against
the loaned securities in an amount equal to at least 102% of the market value of
the loaned securities. Collateral is maintained over the life of the loan in an
amount not less than 100% of the market value of loaned securities, as
determined at the close of fund business each day; any additional collateral
required due to changes in security values is delivered to the fund on the next
business day. The fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the fund in the
case of default of any securities borrower. At October 31, 2008, the fund had no
securities on loan.
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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of October 31, 2008, and have
determined that no provision for income tax is required in the Funds' financial
statements.
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 of America. 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.
Annual Report | 103
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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 or
decreases 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. 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.
J. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
K. 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, on behalf of the Funds, 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.
104 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2008, there were an unlimited number of shares authorized
(without par value). Transactions in the Funds' shares were as follows:
FRANKLIN FRANKLIN CONVERTIBLE
BALANCED FUND SECURITIES FUND
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
CLASS A SHARES:
Year ended October 31, 2008
Shares sold ..................................... 3,734,984 $ 36,902,806 12,433,271 $ 171,368,524
Shares issued in reinvestment of distributions .. 170,071 1,673,518 3,291,047 46,928,316
Shares redeemed ................................. (1,418,333) (13,204,544) (23,201,851) (327,677,943)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 2,486,722 $ 25,371,780 (7,477,533) $(109,381,103)
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ..................................... 1,687,911 $ 18,910,449 14,399,024 $ 244,834,632
Shares issued in reinvestment of distributions .. 18,777 210,061 3,570,065 58,931,326
Shares redeemed ................................. (232,320) (2,610,025) (10,459,036) (177,724,070)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 1,474,368 $ 16,510,485 7,510,053 $ 126,041,888
========== ============ =========== =============
CLASS C SHARES:
Year ended October 31, 2008
Shares sold ..................................... 902,773 $ 8,513,852 2,252,359 $ 31,387,163
Shares issued in reinvestment of distributions .. 38,425 380,022 946,527 13,379,794
Shares redeemed ................................. (494,755) (4,484,036) (6,528,875) (89,444,057)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 446,443 $ 4,409,838 (3,329,989) $ (44,677,100)
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ..................................... 588,047 $ 6,611,187 3,729,693 $ 62,618,890
Shares issued in reinvestment of distributions .. 4,412 49,338 1,118,289 18,292,787
Shares redeemed ................................. (36,163) (397,388) (2,715,193) (45,588,498)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 556,296 $ 6,263,137 2,132,789 $ 35,323,179
========== ============ =========== =============
CLASS R SHARES:
Year ended October 31, 2008
Shares sold ..................................... 678 $ 7,048
Shares issued in reinvestment of distributions .. 35 345
Shares redeemed ................................. (360) (3,014)
---------- ------------
Net increase (decrease) ......................... 353 $ 4,379
========== ============
Year ended October 31, 2007
Shares sold ..................................... 340 $ 3,701
Shares issued in reinvestment of distributions .. 6 70
---------- ------------
Net increase (decrease) ......................... 346 $ 3,771
========== ============
Annual Report | 105
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN FRANKLIN CONVERTIBLE
BALANCED FUND SECURITIES FUND
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ----------- -------------
ADVISOR CLASS SHARES:
Year ended October 31, 2008(a)
Shares sold ..................................... 48,440 $ 488,922 38,866 $ 557,319
Shares issued in reinvestment of distributions .. 7,857 78,010 1,140 14,620
Shares redeemed ................................. (7,005) (67,886) (6,515) (72,111)
---------- ------------ ----------- -------------
Net increase (decrease) ......................... 49,292 $ 499,046 33,491 $ 499,828
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ..................................... 83,546 $ 918,347
Shares issued in reinvestment of distributions .. 2,002 22,404
Shares redeemed ................................. (4,326) (47,527)
---------- ------------
Net increase (decrease) ......................... 81,222 $ 893,224
========== ============
FRANKLIN LIMITED
FRANKLIN EQUITY MATURITY U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
CLASS A SHARES:
Year ended October 31, 2008
Shares sold ..................................... 6,933,562 $ 123,217,249 19,319,574 $196,194,455
Shares issued in reinvestment of distributions .. 2,700,596 50,720,976 715,124 7,254,840
Shares redeemed ................................. (11,692,512) (205,326,834) (9,238,717) (93,643,731)
----------- ------------- ---------- ------------
Net increase (decrease) ......................... (2,058,354) $ (31,388,609) 10,795,981 $109,805,564
=========== ============= ========== ============
Year ended October 31, 2007
Shares sold ..................................... 10,585,130 $ 239,170,803 4,454,202 $ 44,178,835
Shares issued in reinvestment of distributions .. 2,605,129 57,408,622 614,512 6,096,010
Shares redeemed ................................. (7,467,396) (168,252,902) (7,503,970) (74,428,395)
----------- ------------- ---------- ------------
Net increase (decrease) ......................... 5,722,863 $ 128,326,523 (2,435,256) $(24,153,550)
=========== ============= ========== ============
CLASS B SHARES:
Year ended October 31, 2008
Shares sold ..................................... 50,820 $ 886,688
Shares issued in reinvestment of distributions .. 120,078 2,267,538
Shares redeemed ................................. (658,119) (11,608,500)
----------- -------------
Net increase (decrease) ......................... (487,221) $ (8,454,274)
=========== =============
Year ended October 31, 2007
Shares sold ..................................... 105,074 $ 2,363,637
Shares issued in reinvestment of distributions .. 154,945 3,390,324
Shares redeemed ................................. (472,417) (10,604,786)
----------- -------------
Net increase (decrease) ......................... (212,398) $ (4,850,825)
=========== =============
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the
Franklin Convertible Securities Fund.
106 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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:
Year ended October 31, 2008
Shares sold ...................................... 826,985 $ 14,554,576
Shares issued in reinvestment of distributions ... 447,761 8,453,712
Shares redeemed .................................. (2,624,870) (46,087,761)
---------- ------------
Net increase (decrease) .......................... (1,350,124) $(23,079,473)
========== ============
Year ended October 31, 2007
Shares sold ...................................... 978,767 $ 21,854,647
Shares issued in reinvestment of distributions ... 534,361 11,699,188
Shares redeemed .................................. (1,685,264) (37,852,716)
---------- ------------
Net increase (decrease) .......................... (172,136) $ (4,298,881)
========== ============
CLASS R SHARES:
Year ended October 31, 2008
Shares sold ...................................... 100,536 $ 1,839,475
Shares issued in reinvestment of distributions ... 37,523 711,595
Shares redeemed .................................. (377,475) (7,010,782)
---------- ------------
Net increase (decrease) .......................... (239,416) $ (4,459,712)
========== ============
Year ended October 31, 2007
Shares sold ...................................... 189,919 $ 4,248,628
Shares issued in reinvestment of distributions ... 66,257 1,459,144
Shares redeemed .................................. (486,335) (11,000,525)
---------- ------------
Net increase (decrease) .......................... (230,159) $ (5,292,753)
========== ============
ADVISOR CLASS SHARES:
Year ended October 31, 2008(a)
Shares sold ...................................... 52,590 $ 961,953 970,571 $ 9,828,396
Shares issued in reinvestment of distributions ... 536 8,255 60,640 614,860
Shares redeemed .................................. (408) (5,914) (484,518) (4,903,103)
---------- ------------ -------- -----------
Net increase (decrease) .......................... 52,718 $ 964,294 546,693 $ 5,540,153
========== ============ ======== ===========
Year ended October 31, 2007
Shares sold ...................................... 244,139 $ 2,420,255
Shares issued in reinvestment of distributions ... 54,375 538,821
Shares redeemed .................................. (337,095) (3,333,661)
-------- -----------
Net increase (decrease) .......................... (38,581) $ (374,585)
======== ===========
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the
Franklin Equity Income Fund.
Annual Report | 107
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN REAL RETURN FUND
---------------------------
SHARES AMOUNT
----------- -------------
CLASS A SHARES:
Year ended October 31, 2008
Shares sold ...................................... 39,272,766 $ 423,063,502
Shares issued in reinvestment of distributions ... 818,966 8,768,320
Shares redeemed .................................. (14,582,863) (152,724,088)
----------- -------------
Net increase (decrease) .......................... 25,508,869 $ 279,107,734
=========== =============
Year ended October 31, 2007
Shares sold ...................................... 2,490,410 $ 25,763,946
Shares issued in reinvestment of distributions ... 95,318 986,170
Shares redeemed .................................. (1,311,467) (13,551,673)
----------- -------------
Net increase (decrease) .......................... 1,274,261 $ 13,198,443
=========== =============
ADVISOR CLASS SHARES:
Year ended October 31, 2008
Shares sold ...................................... 3,051,844 $ 33,176,053
Shares issued in reinvestment of distributions ... 58,400 626,973
Shares redeemed .................................. (3,459,670) (36,501,004)
----------- -------------
Net increase (decrease) .......................... (349,426) $ (2,697,978)
=========== =============
Year ended October 31, 2007
Shares sold ...................................... 441,613 $ 4,557,542
Shares issued in reinvestment of distributions ... 5,479 56,816
Shares redeemed .................................. (332,374) (3,450,245)
----------- -------------
Net increase (decrease) .......................... 114,718 $ 1,164,113
=========== =============
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
108 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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
Effective January 1, 2008, the Franklin Convertible Securities Fund and the
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 $7.5 billion
0.440% Over $7.5 billion, up to and including $10 billion
0.430% 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
Prior to January 1, 2008, the Franklin Convertible Securities Fund and the
Franklin Equity Income Fund paid fees 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
Annual Report | 109
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
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 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% In excess of $250 million
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 Fund 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, the Franklin Equity Income Fund and
the 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. 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.
110 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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% -- --
Distributors has agreed to limit the current rate to 0.30% per year for Class A
shares for the Franklin Balanced Fund for the period of August 1, 2007 through
January 31, 2009.
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 year:
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 ............ $65,954 $96,338 $467,527 $39,312 $388,902
Contingent deferred sales
charges retained .......... $ 3,455 $30,439 $ 49,605 $ 2,858 $ 8,755
E. TRANSFER AGENT FEES
For the year ended October 31, 2008, 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 .......... $32,389 $591,333 $875,720 $272,989 $112,512
Annual Report | 111
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
F. WAIVER AND EXPENSE REIMBURSEMENTS
For the Franklin Balanced Fund and the Franklin Real Return Fund, FT Services
and Advisers have agreed in advance to waive all or a portion of their
respective fees and to assume payment of other expenses through February 28,
2010. Total expenses waived or paid are not subject to reimbursement by the fund
subsequent to the funds' fiscal year end. After February 28, 2010, FT Services
and Advisers may discontinue this waiver at any time upon notice to the funds'
Board of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At October 31, 2008, Advisers owned 22.15% of the Franklin Balanced 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 year ended October 31, 2008, 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, 2008, the capital loss carryforwards were as
follows:
FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
------------- --------------- -----------
Capital loss carryforwards
expiring in:
2016 ...................... $3,978,038 $1,897,113 $46,281,261
---------- ---------- -----------
FRANKLIN
LIMITED MATURITY FRANKLIN
U.S. GOVERNMENT REAL
SECURITIES FUND RETURN FUND
---------------- -----------
Capital loss carryforwards
expiring in:
2011 ...................... $ 1,752,525 $ --
2012 ...................... 3,322,647 --
2013 ...................... 3,980,527 --
2014 ...................... 4,303,979 --
2015 ...................... 723,269 --
2016 ...................... -- 1,974,145
----------- ----------
$14,082,947 $1,974,145
=========== ==========
112 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
During the year ended October 31, 2008, the Franklin Limited Maturity U.S.
Government Securities Fund utilized $770,999 of capital loss carryforwards.
On October 31, 2008, the Franklin Limited Maturity U.S. Government Securities
Fund had expired capital loss carryforwards of $1,593,552, which were
reclassified to paid-in-capital.
The tax character of distributions paid during the years ended October 31, 2008
and 2007, was as follows:
FRANKLIN FRANKLIN CONVERTIBLE
BALANCED FUND SECURITIES FUND
--------------------- --------------------------
2008 2007 2008 2007
---------- -------- ----------- ------------
Distributions paid from:
Ordinary income ........... $3,168,274 $796,052 $56,198,229 $ 49,533,027
Long term capital gain .... 152,036 -- 24,854,722 54,673,400
---------- -------- ----------- ------------
$3,320,310 $796,052 $81,052,951 $104,206,427
========== ======== =========== ============
FRANKLIN
LIMITED MATURITY
FRANKLIN EQUITY U.S. GOVERNMENT
INCOME FUND SECURITIES FUND
------------------------- ------------------------
2008 2007 2008 2007
----------- ----------- ----------- ----------
Distributions paid from:
Ordinary income ........... $27,752,727 $26,398,031 $10,025,522 $8,510,427
Long term capital gain .... 39,665,396 54,761,144 -- --
----------- ----------- ----------- ----------
$67,418,123 $81,159,175 $10,025,522 $8,510,427
=========== =========== =========== ==========
FRANKLIN REAL
RETURN FUND
------------------------
2008 2007
----------- ----------
Distributions paid from:
Ordinary income ........... $11,715,670 $1,806,949
Long term capital gain .... 239,676 --
----------- ----------
$11,955,346 $1,806,949
=========== ==========
At October 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN
BALANCED CONVERTIBLE EQUITY
FUND SECURITIES FUND INCOME FUND
------------ --------------- -------------
Cost of investments ........................... $ 65,984,248 $ 859,131,838 $ 739,161,074
============ ============= =============
Unrealized appreciation ....................... $ 326,956 $ 4,887,077 $ 33,425,777
Unrealized depreciation ....................... (19,756,957) (334,511,261) (202,770,502)
------------ ------------- -------------
Net unrealized appreciation (depreciation) .... $(19,430,001) $(329,624,184) $(169,344,725)
============ ============= =============
Distributable earnings - undistributed ordinary
income ..................................... $ 217,604 $ 4,260,930 $ 3,456,942
============ ============= =============
Annual Report | 113
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
FRANKLIN FRANKLIN
LIMITED MATURITY REAL
U.S. GOVERNMENT RETURN
SECURITIES FUND FUND
---------------- ------------
Cost of investments ........................... $314,103,922 $327,733,625
============ ============
Unrealized appreciation ....................... $ 2,995,955 $ 630,230
Unrealized depreciation ....................... (2,526,455) (38,487,252)
------------ ------------
Net unrealized appreciation (depreciation) .... $ 469,500 $(37,857,022)
============ ============
Distributable earnings - undistributed ordinary
income ..................................... $ 145,130 $ 344,449
============ ============
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, partnership
distributions and recognition of partnership income 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, paydown losses, bond discounts and premiums and partnership
distributions and recognition of partnership income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended October 31, 2008, were 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
------------- --------------- ------------ ---------------- ------------
Purchases .......... $58,425,042 $322,909,441 $261,638,158 $238,933,274 $291,338,070
Sales .............. $24,728,423 $532,179,328 $375,304,727 $142,226,185 $ 50,619,093
Transactions in options written during the year ended October 31, 2008, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ---------
FRANKLIN BALANCED FUND
Options outstanding at October 31, 2007 .......... 920 $ 29,328
Options written .................................. 14,652 712,764
Options expired .................................. (12,923) (593,311)
Options exercised ................................ (1,905) (104,510)
Options closed ................................... (544) (29,666)
------- ---------
Options outstanding at October 31, 2008 .......... 200 $ 14,605
======= =========
114 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET
PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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. FORWARD EXCHANGE CONTRACTS
At October 31, 2008, the Franklin Real Return Fund had the following forward
exchange contracts outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE APPRECIATION DEPRECIATION
---------- ---------- ------------ ------------
CONTRACTS TO BUY
806,753 Chinese Yuan Renminbi ................................................ $ 116,633 10/23/09 $-- $ (1,607)
1,371,580 Chinese Yuan Renminbi ................................................ 197,232 10/26/09 -- (1,689)
820,480 Chinese Yuan Renminbi ................................................ 117,128 10/27/09 -- (157)
306,807,063 Japanese Yen ......................................................... 3,184,959 11/04/09 -- (12,335)
--- --------
Unrealized appreciation (depreciation) on forward exchange contracts .......... -- (15,788)
--- --------
Net unrealized appreciation (depreciation) on forward exchange contracts ... $(15,788)
========
9. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Balanced Fund and the Franklin Convertible Securities Fund have
15.36% and 62.31%, respectively, of their portfolios invested in high yield or
other securities rated below investment grade. These securities may be more
sensitive to economic conditions causing greater price volatility and are
potentially subject to a greater risk of loss due to default than higher rated
securities.
The Franklin Balanced Fund held defaulted securities and/or other securities for
which the income has been deemed uncollectible. At October 31, 2008, the
aggregate value of these securities was $138,125, representing 0.29% 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 securities have been identified on the accompanying
Statement of Investments.
10. VIOLATION OF INVESTMENT RESTRICTIONS
During the year ended October 31, 2008, the Franklin Balanced Fund inadvertently
breached one of its investment restrictions. For the year ended October 31,
2008, the fund incurred a loss of $47,078 on the investments. Advisers
reimbursed the fund for such losses incurred which is reflected in the Statement
of Operations.
Annual Report | 115
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (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 not have a material impact on its
financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Funds are currently evaluating the impact, if any,
of applying the various provisions of SFAS 161.
12. LOSS CONTINGENCY
At October 31, 2008, the Franklin Balanced Fund had two outstanding trades
related to put options written by the Fund with Lehman Brothers as the
counterparty. These trades have remained unsettled since the Lehman Brothers
bankruptcy on September 15, 2008. The Fund has recorded a loss contingency
related to the depreciation of the common stock underlying these put options and
its obligations to purchase the stock pursuant to the options contracts.
116 | Annual Report
Franklin Investors Securities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN INVESTORS SECURITIES TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Balanced Fund, Franklin
Convertible Securities Fund, Franklin Equity Income Fund, Franklin Limited
Maturity U.S. Government Securities Fund and Franklin Real Return Fund (the
"Funds") at October 31, 2008, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2008 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 17, 2008
Annual Report | 117
Franklin Investors Securities Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
long term capital gain dividends for the fiscal year ended October 31, 2008.
FRANKLIN FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY REAL RETURN
BALANCED FUND SECURITIES FUND INCOME FUND FUND
- ------------- --------------- ----------- -----------
$152,036 $24,854,722 $39,665,396 $239,676
Under Section 871(k)(2)(C) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as short term capital gain
dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended October 31, 2008.
FRANKLIN FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY REAL RETURN
BALANCED FUND SECURITIES FUND INCOME FUND FUND
- ------------- --------------- ----------- -----------
$926,730 $12,989,411 $6,642,283 $2,768
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following amounts as qualified dividends for
purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal
year ended October 31, 2008.
FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
- ------------- --------------- -----------
$826,985 $6,474,931 $26,023,885
Distributions, including qualified dividend income, paid during calendar year
2008 will be reported to shareholders on Form 1099-DIV in January 2009.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Under Section 871(k)(1)(C) of the Code, the Franklin Convertible Securities Fund
designates the maximum amount allowable but no less than $14,273,737 as interest
related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of
the Code for the fiscal year ended October 31, 2008.
Under Section 854(b)(2) of the Code, the Funds designate the following
percentage amounts of the ordinary income dividends as income qualifying for the
dividends received deduction for the fiscal year ended October 31, 2008.
FRANKLIN FRANKLIN
FRANKLIN CONVERTIBLE EQUITY
BALANCED FUND SECURITIES FUND INCOME FUND
- ------------- --------------- -----------
24.15% 11.52% 82.81%
118 | Annual Report
Franklin Investors Securities Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ----------- ----------------------- -----------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1986 143 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 120 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971-January 2008); member and Chairman of the Board, Sutter Community Hospitals; member,
Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 120 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global Communications
San Mateo, CA 94403-1906 (Holdings) Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless company); Chairman of the Board and
Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Groups (telephone
holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and allied
products), RTI International Metals, Inc.
(manufacture and distribution of
titanium), Canadian National Railway
(railroad) and White Mountains Insurance
Group, Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and
Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to
the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 119
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ----------- ----------------------- -----------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1986 120 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture
capital).
FRANK A. OLSON (1932) Trustee Since 2005 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and Sentient
San Mateo, CA 94403-1906 Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive
Officer (1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior
Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy
Attorney General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee 120 None
One Franklin Parkway Independent since 2007
San Mateo, CA 94403-1906 Trustee and Lead
Independent
Trustee
since
January
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial
Officer and Executive Vice President - Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior Vice
President - Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain &
Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ----------- ----------------------- -----------------------------------------
**CHARLES B. JOHNSON Trustee and Trustee 143 None
(1933) Chairman of since 1986
One Franklin Parkway the Board and
San Mateo, CA 94403-1906 Chairman of
the Board
since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide,
Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources,
Inc. and of 42 of the investment companies in Franklin Templeton Investments.
120 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ----------- ----------------------- -----------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or director, as the case may be, of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
EDWARD B. JAMIESON (1948) President President Not Applicable Not Applicable
One Franklin Parkway and Chief since 1993
San Mateo, CA 94403-1906 Executive and Chief
Officer - Executive
Investment Officer -
Management Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.
and of four of the investment companies in Franklin Templeton Investments.
KAREN L. SKIDMORE (1952) Vice Since 2006 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906 and
Secretary
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
Annual Report | 121
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------- -------------- ----------- ----------------------- -----------------------------------------
GALEN G. VETTER (1951) Senior Vice Since Not Applicable Not Applicable
500 East Broward Blvd. President February
Suite 2100 and Chief 2008
Fort Lauderdale, Executive
FL 33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.
(1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Trust's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
122 | Annual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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.
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 (800)
SEC-0330.
Annual Report | 123
This page intentionally left blank.
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment 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(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
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
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income 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
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
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(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond 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-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(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 four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN INVESTORS SECURITIES TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2008 12/08
OCTOBER 31, 2008
Franklin Adjustable U.S. Government Securities Fund
Franklin Floating Rate Daily Access Fund
Franklin Low Duration Total Return Fund
Franklin Total Return Fund
ANNUAL REPORT AND SHAREHOLDER LETTER
FIXED INCOME
FRANKLIN INVESTORS SECURITIES TRUST
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(GRAPHIC)
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
FRANKLIN - Templeton - 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)
Not part of the annual report
Contents
CEO'S MESSAGE ............................................................ 1
ANNUAL REPORT
Economic and Market Overview ............................................. 4
Franklin Adjustable U.S. Government Securities Fund ...................... 6
Franklin Floating Rate Daily Access Fund ................................. 16
Franklin Low Duration Total Return Fund .................................. 29
Franklin Total Return Fund ............................................... 38
Financial Highlights and Statements of Investments ....................... 51
Financial Statements ..................................................... 106
Notes to Financial Statements ............................................ 111
Report of Independent Registered Public Accounting Firm .................. 134
Tax Designation .......................................................... 135
Board Members and Officers ............................................... 136
Shareholder Information .................................................. 141
A Message from Gregory E. Johnson,
President and Chief Executive Officer of Franklin Resources, Inc.
October 31, 2008
Dear Shareholder:
The enclosed annual report for Franklin Investors Securities Trust covers the 12
months ended October 31, 2008, and I would like to add some comments on market
events during this time. Recent market volatility has been jarring to everyone,
including those of us who have worked in financial markets for many years. Bank
lending around the world seized up, and the fallout impacted venerable firms
alongside broader stock and bond indexes.
This environment is bound to provoke great concern, but it's equally important
to put the latest market developments in perspective. That's why I'd like to
offer a few thoughts on these events, our company's approach to investing and
the strong health of our organization.
A key point to recognize is that global financial turmoil is being addressed by
global action. Central banks around the world have coordinated their efforts to
cut interest rates and supply liquidity to frozen funding markets. A number of
governments have also intervened to rescue major financial institutions or find
an orderly way for them to be acquired. Here in the U.S., the Federal
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the annual report | 1
Reserve and Treasury Department have moved rapidly to establish new programs for
easing money market pressures and handling troubled financial assets. The
outcome of all these efforts may take a while to be realized, but I believe the
latest actions here and abroad mark a significant turning point for global
capital markets.
It's also important to remember that as daunting as current market conditions
may be, we have navigated through other periods of market volatility. U.S. stock
markets recorded three bear markets during the 1960s as the nation grappled with
the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in
1973 led to a deep U.S. recession and a stock market plunge of 45.1% from
January 1973 through December 1974.(1) And the "Black Monday" stock market crash
of 1987 remains the largest single-day percentage decline in the history of the
Dow Jones Industrial Average.(2)
Advice applicable throughout these upheavals remains true today. The late Sir
John Templeton, writing 15 years ago, ended a list of his core investment
principles with these thoughts: "Do not be fearful or negative too often. . . .
For 100 years optimists have carried the day in U.S. stocks. Even in the dark
'70s, many professional money managers -- and many individual investors too --
made money in stocks . . . . In this century or the next it's still 'Buy low,
sell high.'"(3)
Sir John knew these simple concepts were difficult to execute in the face of
pessimism. Nonetheless, that is precisely how our Franklin, Templeton and Mutual
Series portfolio managers are contending with today's challenging environment.
They are using their expertise to sort through investment opportunities,
avoiding those firms that have become merely cheap and identifying those firms
best positioned to be eventual winners. This kind of rigorous, bottom-up,
security-by-security analysis is the fundamental investment discipline practiced
across our global platform.
These asset management strengths are also the core of our business. Unlike
financial firms that have dominated recent headlines, Franklin Templeton derives
its revenue primarily from investment management, not investment banking or
securities brokerage. Additionally, our assets under management are diversified
by investment objective, clientele and geographic region. Diversified
positioning helps our firm maintain healthy operating margins
(1.) Source: Ned Davis Research, Inc.
(2.) Source: NYSE Euronext. 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.
(3.) Source: "16 Rules for Investment Success" by Sir John Templeton.
2 | Not part of the annual report
even when volatile markets reduce assets under management. It is also important
to note that maintaining a strong balance sheet has been a pillar of our
management strategy. We have a substantial pool of cash and investments and low
levels of debt, and we are in the enviable position of not having to depend on
credit to meet our operating needs. In fact, our strong franchise, sound
capitalization and minimal leverage recently led Standard & Poor's to raise its
credit ratings on Franklin Resources, Inc. (BEN) to the highest level currently
applied to a publicly traded asset manager.(4)
Franklin Templeton's six-decade growth into a premier global asset manager has
given us the conviction that although conditions remain challenging, there are
ample reasons to be optimistic about eventual market stabilization and recovery.
Being able to take advantage of markets shaken by maximum pessimism has helped
our firm develop into an organization that stretches across 29 countries and
manages assets for more than 20 million shareholder accounts.
In the enclosed annual report for Franklin Investors Securities Trust, the
portfolio managers discuss market conditions, investment decisions and Fund
performance during the 12 months ended October 31, 2008. The report contains
additional performance data and financial information. Our website,
FRANKLINTEMPLETON.COM, offers more timely discussions, daily prices, portfolio
holdings and other information. We encourage you to discuss your concerns with
your financial advisor, who can review your overall portfolio, reassess your
goals and help you stay focused on the long term. As times like these
illustrate, all securities markets fluctuate, as do fund share prices.
We are grateful for the trust you have placed in Franklin Templeton and remain
focused on serving your investment needs.
Sincerely,
/s/ Gregory E. Johnson
Gregory E. Johnson
President and Chief Executive Officer
Franklin Resources, Inc.
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2008. 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.
(4.) Source: Standard & Poor's press release, 10/6/08.
Not part of the annual report | 3
Annual Report
Economic and Market Overview
The events that unfolded during the Funds' fiscal year brought extraordinary
volatility and uncertainty to financial markets. Credit market turmoil led to
significant losses and writedowns by financial institutions, reduced credit
availability and a general global repricing of risk. The credit contraction,
continued weakness in the housing market, and significant declines in consumer
confidence and consumer spending resulted in a weak and deteriorating economic
climate. Job losses mounted and the unemployment rate rose to 6.5% during the
reporting period.(1) These factors as well as upward inflationary pressures from
a weak U.S. dollar and high food, energy and commodity prices burdened the
overall economy for much of the reporting period. The economy contracted in the
fourth quarter of 2007, registering a -0.2% annualized growth rate before
staging a modest recovery in the first half of 2008. Gross domestic product
(GDP) grew at 0.9% and 2.8% annualized rates in the first and second quarters of
2008 largely due to rising exports and increased government spending. However,
as the financial turmoil intensified in the third quarter, GDP fell an estimated
annualized 0.5%.
Oil prices soared to a record high in July, rising above $145 per barrel, before
dramatically retreating to $68 by period-end. Many other commodities such as
agricultural products and precious and base metals followed similar trends.
Although inflation fell late in the review period, it rose 3.7% for the fiscal
year, largely due to higher food and energy costs.(1) Core inflation, which
excludes such costs, rose at a more moderate 2.2% annual rate; however, this
level was above the Federal Reserve Board's (Fed's) informal target range of
1.5%-2.0%.(1) The core personal consumption expenditures price index reported a
12-month increase of 2.1%.(2)
(1.) Source: Bureau of Labor Statistics.
(2.) Source: Bureau of Economic Analysis.
4 | Annual Report
Amid a series of events that included massive government intervention, bank and
financial institution failures, and emergency funding, the Fed was focused
primarily on restoring liquidity and confidence to unsettled financial markets.
The Fed hoped to stimulate the sagging economy by cutting interest rates seven
times over the 12-month period, bringing the federal funds target rate to 1.00%.
It also implemented a series of unconventional measures aimed at easing strained
credit conditions that included a $700 billion bailout plan that would allow the
U.S. Treasury to purchase bad debt from troubled financial institutions.
Volatility remained high throughout the reporting period but intensified in
September as stocks fluctuated wildly and Treasury prices soared. Panicked
investors drove the yield on the three-month Treasury bill to a multi-decade
low, and LIBOR (London Interbank Offered Rate) rates, which banks charge one
another for loans, jumped to record highs. Fixed income spreads generally
widened relative to Treasury yields over the period due to heightened market
turbulence. Investors continued to seek the relative safety of short- and
intermediate-term U.S. Treasury securities as Treasury yields declined and the
yield curve steepened. Short-term, two- and five-year yields declined
significantly, with the two-year bill yielding 1.56% at the end of October, down
from 3.94% a year earlier. Over the same period, the 10-year U.S. Treasury note
yield declined from 4.48% to 4.01%.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2008. 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.
Annual Report | 5
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
agency 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)
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
PORTFOLIO BREAKDOWN
Franklin Adjustable U.S. Government Securities Fund Based on Total Net Assets as
of 10/31/08
(PIE CHART)
Fannie Mae (FNMA) .............................. 55.5%
Freddie Mac (FHLMC) ............................ 10.9%
Ginnie Mae (GNMA) .............................. 3.6%
Short-Term Investments & Other Net Assets ...... 30.0%
This annual report for Franklin Adjustable U.S. Government Securities Fund
covers the fiscal year ended October 31, 2008.
PERFORMANCE OVERVIEW
Franklin Adjustable U.S. Government Securities Fund - Class A posted a +4.06%
cumulative total return for the 12 months under review. The Fund
(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 54.
6 | Annual Report
DIVIDEND DISTRIBUTIONS*
Franklin Adjustable U.S. Government Securities Fund 11/1/07-10/31/08
DIVIDEND PER SHARE
-----------------------------------------------
MONTH CLASS A CLASS C ADVISOR CLASS**
- --------- ------------- ------------- ---------------
November 3.6679 cents 3.3487 cents --
December 3.6698 cents 3.3447 cents --
January 3.5282 cents 3.2430 cents --
February 3.3106 cents 3.0256 cents --
March 3.2449 cents 2.9418 cents --
April 3.1548 cents 2.8641 cents --
May 2.8484 cents 2.5679 cents 1.5455 cents
June 2.9902 cents 2.6848 cents 3.1781 cents
July 2.7922 cents 2.4885 cents 2.9825 cents
August 2.5009 cents 2.2190 cents 2.6794 cents
September 2.6797 cents 2.3615 cents 2.8759 cents
October 2.0136 cents 1.7114 cents 2.2041 cents
TOTAL 36.4012 CENTS 32.8010 CENTS 15.4655 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.
** Effective 5/15/08, the Fund began offering Advisor Class shares. Please see
the prospectus for details.
underperformed its benchmark, the Barclays Capital (BC; formerly, Lehman
Brothers) U.S. Government Index: 1-2 Year Component, which posted a +5.68% total
return for the same period.(3) You can find the Fund's long-term performance
data in the Performance Summary beginning on page 10.
(3.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC 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.
Annual Report | 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
The financial liquidity crisis affected the entire fixed income market including
the mortgage and mortgage-related asset-backed securities markets. Even agency
adjustable-rate mortgage-backed securities (MBS) were impacted by increased
volatility in the interest rate markets. As risk and liquidity premiums
increased, spreads on investment-grade sectors widened with U.S. agency MBS and
hybrid adjustable-rate MBS underperforming equivalent U.S. Treasury securities.
Consistent with our investment strategy, we continued to look for strong cash
flow fundamentals and attractive valuations to uncover opportunities across the
ARM universe. Although the Fund, which invests predominantly in Fannie Mae,
Freddie Mac and Ginnie Mae ARM securities, underperformed shorter-maturity U.S.
Treasury securities, many of its holdings were not as affected by the fixed
income market's increased volatility as were their hybrid adjustable-rate MBS
counterparts.
8 | Annual Report
Thank you for your continued participation in Franklin Adjustable U.S.
Government Securities Fund. We look forward to serving your future investment
needs.
(PHOTO OF T. ANTHONY COFFEY)
/s/ T. Anthony Coffey
T. Anthony Coffey, CFA
(PHOTO OF PAUL VARUNOK)
/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 OCTOBER 31, 2008, 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.
Annual Report | 9
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$0.01 $8.86 $8.87
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.364012
CLASS C (SYMBOL: FCSCX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$0.01 $8.86 $8.87
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.328010
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 5/15/08
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$0.01 $8.87 $8.88
DISTRIBUTIONS (5/15/08-10/31/08)
Dividend Income $0.154655
10 | Annual 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 C: 1% CONTINGENT DEFERRED SALES CHARGE IN FIRST YEAR ONLY; ADVISOR CLASS:
NO SALES CHARGES.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------ -------
Cumulative Total Return(1) +4.06% +17.65% +45.86%
Average Annual Total Return(2) +1.76% +2.84% +3.61%
Avg. Ann. Total Return (9/30/08)(3) +1.99% +2.77% +3.56%
Distribution Rate(4) 2.60%
30-Day Standardized Yield(5) 2.58%
Total Annual Operating Expenses(6) 0.93%
CLASS C 1-YEAR 5-YEAR INCEPTION (7/1/03)
- ------------------------------------- ------ ------ -----------------
Cumulative Total Return(1) +3.64% +15.34% +14.86%
Average Annual Total Return(2) +2.64% +2.90% +2.63%
Avg. Ann. Total Return (9/30/08)(3) +2.98% +2.83% +2.66%
Distribution Rate(4) 2.26%
30-Day Standardized Yield(5) 2.24%
Total Annual Operating Expenses(6) 1.33%
ADVISOR CLASS(7) 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------ ------ -------
Cumulative Total Return(1) +4.29% +17.91% +46.19%
Average Annual Total Return(2) +4.29% +3.35% +3.87%
Avg. Ann. Total Return (9/30/08)(3) +4.50% +3.28% +3.82%
Distribution Rate(4) 2.91%
30-Day Standardized Yield(5) 2.88%
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 (800) 342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year +1.76%
5-Year +2.84%
10-Year +3.61%
(PERFORMANCE GRAPH)
CLASS A (11/1/98-10/31/08)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. GOVERNMENT
DATE SECURITIES FUND - CLASS A 1-2 YEAR INDEX
- ---------- ----------------------------------- --------------------------------
11/1/1998 $ 9,770 $10,000
11/30/1998 $ 9,756 $ 9,996
12/31/1998 $ 9,806 $10,035
1/31/1999 $ 9,857 $10,072
2/28/1999 $ 9,918 $10,046
3/31/1999 $ 9,948 $10,112
4/30/1999 $ 9,989 $10,146
5/31/1999 $10,019 $10,150
6/30/1999 $10,027 $10,181
7/31/1999 $10,056 $10,218
8/31/1999 $10,096 $10,245
9/30/1999 $10,135 $10,306
10/31/1999 $10,185 $10,338
11/30/1999 $10,213 $10,361
12/31/1999 $10,237 $10,377
1/31/2000 $10,288 $10,386
2/29/2000 $10,320 $10,454
3/31/2000 $10,374 $10,510
4/30/2000 $10,421 $10,543
5/31/2000 $10,446 $10,584
6/30/2000 $10,516 $10,685
7/31/2000 $10,575 $10,751
8/31/2000 $10,624 $10,824
9/30/2000 $10,696 $10,901
10/31/2000 $10,739 $10,956
11/30/2000 $10,818 $11,051
12/31/2000 $10,922 $11,172
1/31/2001 $10,989 $11,314
2/28/2001 $11,057 $11,381
3/31/2001 $11,149 $11,470
4/30/2001 $11,193 $11,511
5/31/2001 $11,262 $11,579
6/30/2001 $11,331 $11,617
7/31/2001 $11,388 $11,736
8/31/2001 $11,409 $11,802
9/30/2001 $11,487 $11,974
10/31/2001 $11,599 $12,081
11/30/2001 $11,619 $12,069
12/31/2001 $11,626 $12,092
1/31/2002 $11,658 $12,110
2/28/2002 $11,678 $12,161
3/31/2002 $11,713 $12,093
4/30/2002 $11,799 $12,221
5/31/2002 $11,790 $12,263
6/30/2002 $11,844 $12,362
7/31/2002 $11,894 $12,488
8/31/2002 $11,878 $12,521
9/30/2002 $11,951 $12,605
10/31/2002 $11,999 $12,637
11/30/2002 $11,998 $12,612
12/31/2002 $12,024 $12,712
1/31/2003 $12,031 $12,718
2/28/2003 $12,068 $12,762
3/31/2003 $12,104 $12,787
4/30/2003 $12,125 $12,809
5/31/2003 $12,157 $12,844
6/30/2003 $12,151 $12,867
7/31/2003 $12,092 $12,820
8/31/2003 $12,082 $12,831
9/30/2003 $12,144 $12,925
10/31/2003 $12,120 $12,889
11/30/2003 $12,136 $12,889
12/31/2003 $12,171 $12,953
1/31/2004 $12,203 $12,977
2/29/2004 $12,234 $13,030
3/31/2004 $12,282 $13,059
4/30/2004 $12,232 $12,968
5/31/2004 $12,231 $12,959
6/30/2004 $12,237 $12,955
7/31/2004 $12,294 $12,998
8/31/2004 $12,324 $13,074
9/30/2004 $12,340 $13,064
10/31/2004 $12,354 $13,100
11/30/2004 $12,359 $13,049
12/31/2004 $12,389 $13,071
1/31/2005 $12,406 $13,074
2/28/2005 $12,452 $13,057
3/31/2005 $12,456 $13,059
4/30/2005 $12,488 $13,126
5/31/2005 $12,523 $13,172
6/30/2005 $12,543 $13,196
7/31/2005 $12,521 $13,176
8/31/2005 $12,587 $13,249
9/30/2005 $12,583 $13,228
10/31/2005 $12,579 $13,234
11/30/2005 $12,619 $13,275
12/31/2005 $12,645 $13,324
1/31/2006 $12,673 $13,353
2/28/2006 $12,717 $13,374
3/31/2006 $12,747 $13,398
4/30/2006 $12,759 $13,444
5/31/2006 $12,794 $13,470
6/30/2006 $12,826 $13,498
7/31/2006 $12,902 $13,589
8/31/2006 $12,965 $13,674
9/30/2006 $13,013 $13,741
10/31/2006 $13,051 $13,798
11/30/2006 $13,134 $13,863
12/31/2006 $13,169 $13,881
1/31/2007 $13,212 $13,918
2/28/2007 $13,268 $14,013
3/31/2007 $13,321 $14,066
4/30/2007 $13,393 $14,114
5/31/2007 $13,403 $14,124
6/30/2007 $13,458 $14,188
7/31/2007 $13,502 $14,290
8/31/2007 $13,558 $14,412
9/30/2007 $13,657 $14,510
10/31/2007 $13,702 $14,566
11/30/2007 $13,790 $14,760
12/31/2007 $13,831 $14,803
1/31/2008 $13,948 $15,030
2/29/2008 $14,000 $15,158
3/31/2008 $14,035 $15,194
4/30/2008 $14,054 $15,107
5/31/2008 $14,067 $15,078
6/30/2008 $14,114 $15,117
7/31/2008 $14,143 $15,170
8/31/2008 $14,199 $15,225
9/30/2008 $14,242 $15,294
10/31/2008 $14,251 $15,393
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------- --------
1-Year +2.64%
5-Year +2.90%
Since Inception
(7/1/03) +2.63%
(PERFORMANCE GRAPH)
CLASS C (7/1/03-10/31/08)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. GOVERNMENT
DATE SECURITIES FUND - CLASS C 1-2 YEAR INDEX
- ---------- ----------------------------------- --------------------------------
7/1/2003 $10,000 $10,000
7/31/2003 $ 9,946 $ 9,963
8/31/2003 $ 9,924 $ 9,972
9/30/2003 $ 9,981 $10,045
10/31/2003 $ 9,958 $10,017
11/30/2003 $ 9,958 $10,017
12/31/2003 $ 9,993 $10,067
1/31/2004 $10,005 $10,085
2/29/2004 $10,028 $10,127
3/31/2004 $10,063 $10,149
4/30/2004 $10,030 $10,078
5/31/2004 $10,015 $10,071
6/30/2004 $10,027 $10,068
7/31/2004 $10,059 $10,102
8/31/2004 $10,091 $10,160
9/30/2004 $10,101 $10,153
10/31/2004 $10,098 $10,181
11/30/2004 $10,110 $10,141
12/31/2004 $10,131 $10,159
1/31/2005 $10,141 $10,161
2/28/2005 $10,176 $10,148
3/31/2005 $10,176 $10,149
4/30/2005 $10,187 $10,201
5/31/2005 $10,212 $10,237
6/30/2005 $10,226 $10,256
7/31/2005 $10,205 $10,240
8/31/2005 $10,256 $10,296
9/30/2005 $10,249 $10,280
10/31/2005 $10,243 $10,285
11/30/2005 $10,272 $10,317
12/31/2005 $10,301 $10,355
1/31/2006 $10,321 $10,377
2/28/2006 $10,342 $10,394
3/31/2006 $10,363 $10,412
4/30/2006 $10,382 $10,449
5/31/2006 $10,406 $10,469
6/30/2006 $10,418 $10,490
7/31/2006 $10,476 $10,561
8/31/2006 $10,524 $10,627
9/30/2006 $10,559 $10,679
10/31/2006 $10,599 $10,723
11/30/2006 $10,650 $10,774
12/31/2006 $10,687 $10,788
1/31/2007 $10,706 $10,817
2/28/2007 $10,748 $10,890
3/31/2007 $10,799 $10,931
4/30/2007 $10,842 $10,969
5/31/2007 $10,859 $10,977
6/30/2007 $10,888 $11,027
7/31/2007 $10,932 $11,106
8/31/2007 $10,973 $11,201
9/30/2007 $11,037 $11,277
10/31/2007 $11,082 $11,320
11/30/2007 $11,149 $11,471
12/31/2007 $11,166 $11,504
1/31/2008 $11,257 $11,681
2/29/2008 $11,295 $11,780
3/31/2008 $11,333 $11,808
4/30/2008 $11,331 $11,741
5/31/2008 $11,351 $11,718
6/30/2008 $11,385 $11,748
7/31/2008 $11,404 $11,790
8/31/2008 $11,433 $11,832
9/30/2008 $11,476 $11,886
10/31/2008 $11,486 $11,963
12 | Annual Report
Performance Summary (CONTINUED)
(PERFORMANCE GRAPH)
ADVISOR CLASS (11/1/98-10/31/08)(7)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. GOVERNMENT
DATE SECURITIES FUND - ADVISOR CLASS 1-2 YEAR INDEX
- ---------- ----------------------------------- --------------------------------
11/1/1998 $10,000 $10,000
11/30/1998 $ 9,985 $ 9,996
12/31/1998 $10,037 $10,035
1/31/1999 $10,089 $10,072
2/28/1999 $10,152 $10,046
3/31/1999 $10,182 $10,112
4/30/1999 $10,224 $10,146
5/31/1999 $10,254 $10,150
6/30/1999 $10,263 $10,181
7/31/1999 $10,293 $10,218
8/31/1999 $10,333 $10,245
9/30/1999 $10,373 $10,306
10/31/1999 $10,424 $10,338
11/30/1999 $10,454 $10,361
12/31/1999 $10,477 $10,377
1/31/2000 $10,529 $10,386
2/29/2000 $10,562 $10,454
3/31/2000 $10,618 $10,510
4/30/2000 $10,666 $10,543
5/31/2000 $10,692 $10,584
6/30/2000 $10,763 $10,685
7/31/2000 $10,824 $10,751
8/31/2000 $10,874 $10,824
9/30/2000 $10,948 $10,901
10/31/2000 $10,991 $10,956
11/30/2000 $11,072 $11,051
12/31/2000 $11,179 $11,172
1/31/2001 $11,248 $11,314
2/28/2001 $11,317 $11,381
3/31/2001 $11,411 $11,470
4/30/2001 $11,456 $11,511
5/31/2001 $11,527 $11,579
6/30/2001 $11,597 $11,617
7/31/2001 $11,656 $11,736
8/31/2001 $11,678 $11,802
9/30/2001 $11,757 $11,974
10/31/2001 $11,872 $12,081
11/30/2001 $11,892 $12,069
12/31/2001 $11,899 $12,092
1/31/2002 $11,932 $12,110
2/28/2002 $11,953 $12,161
3/31/2002 $11,989 $12,093
4/30/2002 $12,076 $12,221
5/31/2002 $12,067 $12,263
6/30/2002 $12,122 $12,362
7/31/2002 $12,174 $12,488
8/31/2002 $12,157 $12,521
9/30/2002 $12,232 $12,605
10/31/2002 $12,281 $12,637
11/30/2002 $12,280 $12,612
12/31/2002 $12,306 $12,712
1/31/2003 $12,314 $12,718
2/28/2003 $12,351 $12,762
3/31/2003 $12,388 $12,787
4/30/2003 $12,410 $12,809
5/31/2003 $12,443 $12,844
6/30/2003 $12,437 $12,867
7/31/2003 $12,376 $12,820
8/31/2003 $12,366 $12,831
9/30/2003 $12,429 $12,925
10/31/2003 $12,404 $12,889
11/30/2003 $12,422 $12,889
12/31/2003 $12,457 $12,953
1/31/2004 $12,490 $12,977
2/29/2004 $12,522 $13,030
3/31/2004 $12,571 $13,059
4/30/2004 $12,520 $12,968
5/31/2004 $12,519 $12,959
6/30/2004 $12,525 $12,955
7/31/2004 $12,583 $12,998
8/31/2004 $12,614 $13,074
9/30/2004 $12,630 $13,064
10/31/2004 $12,645 $13,100
11/30/2004 $12,650 $13,049
12/31/2004 $12,681 $13,071
1/31/2005 $12,698 $13,074
2/28/2005 $12,744 $13,057
3/31/2005 $12,749 $13,059
4/30/2005 $12,782 $13,126
5/31/2005 $12,817 $13,172
6/30/2005 $12,838 $13,196
7/31/2005 $12,815 $13,176
8/31/2005 $12,883 $13,249
9/30/2005 $12,879 $13,228
10/31/2005 $12,875 $13,234
11/30/2005 $12,916 $13,275
12/31/2005 $12,942 $13,324
1/31/2006 $12,971 $13,353
2/28/2006 $13,016 $13,374
3/31/2006 $13,046 $13,398
4/30/2006 $13,059 $13,444
5/31/2006 $13,094 $13,470
6/30/2006 $13,128 $13,498
7/31/2006 $13,206 $13,589
8/31/2006 $13,270 $13,674
9/30/2006 $13,319 $13,741
10/31/2006 $13,358 $13,798
11/30/2006 $13,442 $13,863
12/31/2006 $13,479 $13,881
1/31/2007 $13,522 $13,918
2/28/2007 $13,579 $14,013
3/31/2007 $13,634 $14,066
4/30/2007 $13,707 $14,114
5/31/2007 $13,718 $14,124
6/30/2007 $13,775 $14,188
7/31/2007 $13,820 $14,290
8/31/2007 $13,877 $14,412
9/30/2007 $13,978 $14,510
10/31/2007 $14,024 $14,566
11/30/2007 $14,114 $14,760
12/31/2007 $14,156 $14,803
1/31/2008 $14,276 $15,030
2/29/2008 $14,329 $15,158
3/31/2008 $14,365 $15,194
4/30/2008 $14,384 $15,107
5/31/2008 $14,414 $15,078
6/30/2008 $14,465 $15,117
7/31/2008 $14,498 $15,170
8/31/2008 $14,558 $15,225
9/30/2008 $14,605 $15,294
10/31/2008 $14,619 $15,393
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(7) 10/31/08
- ---------------- --------
1-Year +4.29%
5-Year +3.35%
10-Year +3.87%
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.
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.
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 C and Advisor) per share on 10/31/08.
5. Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
6. Figures are as stated in the Fund's prospectus current as of the date of
this report.
7. Effective 5/15/08, the Fund began offering Advisor class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 5/15/08, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 5/14/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/08
(commencement of sales), the cumulative total return of Advisor Class
shares was +1.64%.
8. Source: (C) 2008 Morningstar. The BC 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.
Annual Report | 13
Your Fund's Expenses
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
14 | Annual 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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $1,014.50 $4.51
Hypothetical (5% return before expenses) $1,000 $1,020.66 $4.52
CLASS C
Actual $1,000 $1,013.60 $6.53
Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.55
ADVISOR CLASS
Actual (5/15/08-10/31/08) $1,000 $1,016.40 $3.23
Hypothetical (5% return before expenses) $1,000 $1,021.92 $3.25
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.89%; C: 1.29%; and Advisor: 0.65%;),
multiplied by the average account value over the period, multiplied by
184/366 (Hypothetical for all share classes; Actual for Classes A and C) to
reflect the one-half year period. For Actual Advisor Class expenses, the
multiplier is 170/366 to reflect the number of days since inception.
Annual Report | 15
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.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
PORTFOLIO BREAKDOWN
Franklin Floating Rate Daily Access Fund
Based on Total Net Assets as of 10/31/08
(PIE CHART)
Senior Floating Rate Interests ............. 86.3%
Short-Term Investments & Other Net Assets .. 13.7%
This annual report for Franklin Floating Rate Daily Access Fund covers the
fiscal year ended October 31, 2008.
PERFORMANCE OVERVIEW
Franklin Floating Rate Daily Access Fund - Class A had a -17.75% cumulative
total return for the 12 months under review. The Fund performed better than its
benchmark, the Credit Suisse (CS) Leveraged Loan Index, which had a -20.33%
total return for the same period.(1) You can find the Fund's long-term
performance data in the Performance Summary beginning on page 22.
1. Source: (C) 2008 Morningstar. All Rights Reserved. The information contained
herein: (1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate, complete
or timely. Neither Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information. The CS Leveraged
Loan Index is designed to mirror the investible 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 66.
16 | Annual Report
SYNDICATED BANK LOAN MARKET OVERVIEW
During the 12-month reporting period, the Federal Reserve Board aggressively cut
the federal funds target rate by a total of 350 basis points, from 4.50% to
1.00%, including a 50 basis-point inter-meeting cut on October 8 as part of a
global coordinated effort to restore confidence in financial markets, and
another 50 basis-point cut as part of its regular meeting later in the month.
Despite the significant reduction in the federal funds target rate during the
Fund's fiscal year, the three-month LIBOR declined only 186 basis points, from
4.89% to 3.03%, as banks became reluctant to lend to one another. The 10-year
Treasury bond yield fell from 4.48% to 4.01% over the same period.
The bank loan market experienced the worst one-year period in its history, with
a horrendous six-week period after Lehman Brothers went bankrupt in September
and credit markets froze. What began with the subprime mortgage market collapse
in July 2007 led to a repricing of risk in credit markets by September 2008,
which then became a major global liquidity and credit crisis. The loan asset
class experienced significantly increased volatility, with only a few pockets of
strength in a mostly weak market. From mid-September, yield spreads widened to
unprecedented levels and priced in significantly higher default rates going
forward, mostly due to a severe technical imbalance that resulted from
deleveraging by many accounts.
At the beginning of the period, average secondary loan prices were about 96
cents on the dollar, remained volatile throughout the year, and fell to 87 cents
in mid-September.(1) Since the Lehman Brothers bankruptcy, however, leveraged
investors such as hedge funds were faced with redemptions, and other leveraged
investment vehicles contended with market price triggers that forced them to
sell loans, causing severe technical pressure. Subsequently, some mutual funds
also sold loans to meet redemptions. As a result, loan prices plummeted to an
all-time low of 66 cents on the dollar on October 15, before edging up slightly
to end the period near 71 cents.(2, 3) During the last six weeks of the
reporting period, secondary loan prices fell 18%, which was far worse than the
volatile period in February when secondary loan prices fell to 86 cents, a
previous low.(2, 3)
As measured by the CS Leveraged Loan Index, the loan market experienced its
worst two monthly declines since the index's inception in 1992. In September,
the index had a -4.93% return, while October's return was -13.03%.(1) To put
this in historical perspective, the previous two worst monthly returns for the
CS Leveraged Loan Index were in September and October 2001 during the last
recession when the index had returns of -1.91% and -1.57%.(1)
(2.) Source: S&P Leveraged Commentary & Data.
(3.) Source: Standard & Poor's. The S&P/LSTA Leveraged Loan Index covers more
than 1,000 U.S. loan facilities and reflects the market-weighted
performance of institutional leveraged loans based upon real-time market
weightings, spreads and interest payments.
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.
Annual Report | 17
As a result of the record decline in secondary loan prices, the average
discounted loan spread, as measured by the Standard & Poor's (S&P)/Loan
Syndications and Trading Association (LSTA) Leveraged Loan Index, widened to
approximately LIBOR plus 1,700 basis points (based on a three-year discount
margin), far past any historical spreads in the past 10 years.(3) This suggested
that the market priced in significantly higher default rates of 25%-40%,
depending on recovery assumptions, and was in sharp contrast to the actual
historical average 3.6% default rate (by number of issuers) during the
period.(3) In the last economic downturn, the default rate peaked at 8% in
2000.(2, 3) Recently, loan defaults have generally been from smaller issuers, so
the default rate by principal amount was less than 2%.(2, 3)
Although defaults remained near historical averages, amendment activity
increased throughout the Fund's fiscal year, which often has been a precursor
for higher default rates. Through mid-September, there were 80 covenant-relief
amendments, which represented 7.1% of the overall market.(2) Issuers who sought
covenant relief paid considerably higher average yields and fees to compensate
lenders.
Thus far in 2008, overall new-issue volume was down significantly. For the 10
months through October, institutional new-issue volume was $67.8 billion, down
81% year-over-year.(2) Nevertheless, the market remained open to selective
issuers. Overall, transactions had better pricing and structure, more favorable
leverage ratios, higher equity contribution from sponsors for buyouts, and
tighter financial covenants, all of which created opportunities for investors.
As a result, secondary loan prices held up relatively well for many of the
transactions completed in 2008.
INVESTMENT STRATEGY
We use a detailed credit analysis process to select corporate loan and corporate
debt securities that meet our criteria. We conduct ongoing credit monitoring of
our investments. To help manage the credit risk associated with investing in
below-investment-grade securities, we diversify the Fund by investing in a large
number 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.
18 | Annual Report
MANAGER'S DISCUSSION
During the 12 months under review, the Fund performed better than the CS
Leveraged Loan Index mainly due to our individual loan selection and higher
credit quality focus, as BB-rated loans performed better than B-rated loans. Our
lack of exposure to second-lien loans supported the Fund's relative performance,
which was slightly offset by some of our industry weightings.
From an industry perspective, an underweighted position in wireless
communications had a negative impact on relative Fund performance, as a large
merger and acquisition transaction between Verizon and Alltel Communications
boosted industry valuations. An overweighted position in the broadcasting
industry also detracted from relative results. Unfavorable advertising trends
negatively affected broadcasting companies, especially those with a higher ratio
of national compared to local advertising revenues, as did competition from new
media.
The Fund's relative performance benefited from an underweighted position in the
retail industry. We avoided many of the highly leveraged retail loans structured
with few maintenance covenants, and such loans fell out of favor during the
period as consumer spending declined. In the cable and wireless video industry,
an overweighted position contributed to relative results, as many such companies
have a steady customer base and stable cash flow.
The Fund's credit selection process helped us avoid many problem issues.
Additionally, our credit monitoring process helped us sell a number of positions
early, before some of them either experienced credit deterioration or defaulted,
which helped relative performance. In fact, over the past four years, the Fund
has not held any loans that have defaulted.
We continued to position the Fund defensively, with a focus on higher credit
quality loans, and companies we believed had adequate liquidity to withstand
this tight credit market and weak economy, while holding on to some names that
have been beaten up and offer tremendous upside.
From the beginning of the reporting period through mid-September, we found what
we believed were attractive opportunities in the new-issue market, which
generally offered a better risk/reward profile. We also added to relatively
defensive industries such as health care and food. With the decline in loan
prices to all-time lows and discounted spreads at all-time wides, we believe
attractive long-term opportunities remain and have selectively added to
positions more recently in the secondary market.
TOP 10 HOLDINGS
Franklin Floating Rate Daily Access Fund 10/31/08
% OF TOTAL
COMPANY SECTOR/INDUSTRY NET ASSETS
- ----------------------------------------------- ----------
HCA Inc. 1.3%
HEALTH CARE FACILITIES
DaVita Inc. 1.3%
HEALTH CARE SERVICES
Community Health Systems Inc. 1.3%
HEALTH CARE FACILITIES
Idearc Inc. 1.3%
PUBLISHING
NRG Energy Inc. 1.2%
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS
Georgia-Pacific LLC 1.2%
PAPER PRODUCTS
Oshkosh Truck Corp. 1.1%
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS
CSC Holdings Inc. (Cablevision) 1.1%
CABLE & SATELLITE
Univision Communications Inc. 1.1%
BROADCASTING
Regal Cinemas Corp. 1.0%
MOVIES & ENTERTAINMENT
Annual Report | 19
DIVIDEND DISTRIBUTIONS*
Franklin Floating Rate Daily Access Fund 11/1/07-10/31/08
DIVIDEND PER SHARE
-------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C ADVISOR CLASS
- --------- ------------- ------------- ------------- -------------
November 4.7934 cents 4.1996 cents 4.4762 cents 5.0019 cents
December 5.1500 cents 4.5764 cents 4.8230 cents 5.3566 cents
January 5.0468 cents 4.4548 cents 4.7314 cents 5.2533 cents
February 4.2778 cents 3.7416 cents 3.9895 cents 4.4551 cents
March 4.1567 cents 3.5912 cents 3.8489 cents 4.3468 cents
April 3.3567 cents 2.7797 cents 3.0985 cents 3.5451 cents
May 3.1419 cents 2.5776 cents 2.8355 cents 3.3360 cents
June 3.2229 cents 2.6440 cents 2.9123 cents 3.4332 cents
July 3.3980 cents 2.7695 cents 3.1396 cents 3.5932 cents
August 3.1667 cents 2.6029 cents 2.8791 cents 3.3423 cents
September 3.6145 cents 3.0011 cents 3.3089 cents 3.8168 cents
October 4.3206 cents 3.8105 cents 4.0604 cents 4.4902 cents
------------- ------------- ------------- -------------
TOTAL 47.6460 CENTS 40.7489 CENTS 44.1033 CENTS 49.9705 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.
In the health care industry, we invested in the loan that financed Fresenius
SE's acquisition of APP Pharmaceuticals, which makes injectable drugs for use in
hospitals and care facilities. We also invested in the loan to finance the
Invitrogen and Applied Biosystems merger, which would combine the industry's
leading consumables provider with the leading systems provider to create a
global leader in biotechnology reagents and systems. We invested in these loan
transactions based on the companies' stable cash flow generation and defensive
product offerings amid a slowing economy.
We also invested in the loan that funded the merger of The Wm. Wrigley Jr.
Company and Mars. Wrigley, well known for its chewing gum, is the world's
largest manufacturer and marketer of quality confectionery products. We invested
in this loan primarily due to Wrigley's strong market position, historical
operating performance and cash flow generation. Given Wrigley's brand strength,
diverse product offering and geographic footprint, combined with strong
ownership, we believed the company was well positioned to weather an economic
downturn.
20 | Annual Report
Thank you for your continued participation in Franklin Floating Rate Daily
Access Fund. We look forward to serving your future investment needs.
(PHOTO OF RICHARD S. HSU)
/s/ Richard S. Hsu
Richard S. Hsu, CFA
(PHOTO OF MADELINE LAM)
/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 OCTOBER 31, 2008, 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.
Annual Report | 21
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$2.15 $7.66 $9.81
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.476460
CLASS B (SYMBOL: FBFRX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$2.14 $7.66 $9.80
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.407489
CLASS C (SYMBOL: FCFRX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$2.14 $7.67 $9.81
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.441033
ADVISOR CLASS (SYMBOL: FDAAX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$2.15 $7.66 $9.81
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.499705
22 | Annual 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.
CLASS A 1-YEAR 5-YEAR INCEPTION (5/1/01)
- ------------------------------------- ------ ------ ------------------
Cumulative Total Return(1) -17.75% -2.41% +9.65%
Average Annual Total Return(2) -19.64% -0.94% +0.93%
Avg. Ann. Total Return (9/30/08)(3) -7.25% +1.89% +2.80%
Distribution Rate(4) 6.51%
30-Day Standardized Yield(5) 10.69%
Total Annual Operating Expenses(6) 0.95%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/01)
- ------------------------------------- ------ ------ ------------------
Cumulative Total Return(1) -18.28% -5.79% +4.10%
Average Annual Total Return(2) -21.41% -1.51% +0.54%
Avg. Ann. Total Return (9/30/08)(3) -9.48% +1.29% +2.39%
Distribution Rate(4) 5.88%
30-Day Standardized Yield(5) 10.13%
Total Annual Operating Expenses(6) 1.67%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/01)
- ------------------------------------- ------ ------ ------------------
Cumulative Total Return(1) -17.96% -4.20% +6.66%
Average Annual Total Return(2) -18.74% -0.86% +0.86%
Avg. Ann. Total Return (9/30/08)(3) -6.43% +1.95% +2.72%
Distribution Rate(4) 6.25%
30-Day Standardized Yield(5) 10.51%
Total Annual Operating Expenses(6) 1.35%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/01)
- ------------------------------------- ------ ------ ------------------
Cumulative Total Return(1) -17.54% -1.27% +11.71%
Average Annual Total Return(2) -17.54% -0.26% +1.49%
Avg. Ann. Total Return (9/30/08)(3) -4.83% +2.60% +3.37%
Distribution Rate(4) 6.92%
30-Day Standardized Yield(5) 11.20%
Total Annual Operating Expenses(6) 0.70%
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 (800) 342-5236.
Annual Report | 23
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
(PERFORMANCE GRAPH)
CLASS A 10/31/08
- ------------------------ --------
1-Year -19.64%
5-Year -0.94%
Since Inception (5/1/01) +0.93%
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED CS Leveraged Loan Index TR
DATE ACCESS FUND - CLASS A LOAN INDEX (%Total Return)
- ---------------- ----------------------------- ------------------------ --------------------------
5/1/2001 $ 9,775 $10,000
5/31/2001 $ 9,896 $10,120 1.19742900%
6/30/2001 $ 9,951 $10,132 0.11983100%
7/31/2001 $10,022 $10,158 0.25500400%
8/31/2001 $10,072 $10,239 0.80289700%
9/30/2001 $10,025 $10,043 -1.91334100%
10/31/2001 $10,015 $ 9,886 -1.56500700%
11/30/2001 $10,107 $10,042 1.57687800%
12/31/2001 $10,181 $10,146 1.03681500%
1/31/2002 $10,261 $10,202 0.54726200%
2/28/2002 $10,255 $10,163 -0.38028300%
3/31/2002 $10,333 $10,281 1.15863100%
4/30/2002 $10,395 $10,391 1.07062900%
5/31/2002 $10,443 $10,384 -0.06845600%
6/30/2002 $10,416 $10,227 -1.50513000%
7/31/2002 $10,279 $10,072 -1.51828800%
8/31/2002 $10,252 $10,043 -0.28868900%
9/30/2002 $10,259 $10,065 0.21502500%
10/31/2002 $10,202 $ 9,930 -1.34068400%
11/30/2002 $10,271 $10,100 1.71915300%
12/31/2002 $10,382 $10,259 1.57397800%
1/31/2003 $10,440 $10,398 1.35345000%
2/28/2003 $10,485 $10,452 0.52024300%
3/31/2003 $10,533 $10,486 0.32284100%
4/30/2003 $10,612 $10,634 1.41165800%
5/31/2003 $10,692 $10,777 1.34020900%
6/30/2003 $10,783 $10,929 1.41273200%
7/31/2003 $10,830 $11,003 0.68311400%
8/31/2003 $10,868 $11,027 0.21371500%
9/30/2003 $10,922 $11,138 1.00303600%
10/31/2003 $10,984 $11,238 0.89835700%
11/30/2003 $11,023 $11,319 0.72772000%
12/31/2003 $11,065 $11,389 0.61800900%
1/31/2004 $11,115 $11,508 1.04228500%
2/29/2004 $11,150 $11,544 0.30810800%
3/31/2004 $11,188 $11,591 0.41258300%
4/30/2004 $11,225 $11,644 0.45953200%
5/31/2004 $11,225 $11,671 0.22428300%
6/30/2004 $11,282 $11,745 0.64040800%
7/31/2004 $11,316 $11,786 0.34425100%
8/31/2004 $11,332 $11,804 0.15763100%
9/30/2004 $11,358 $11,849 0.37907300%
10/31/2004 $11,408 $11,908 0.49523500%
11/30/2004 $11,439 $11,973 0.54581800%
12/31/2004 $11,472 $12,028 0.45835400%
1/31/2005 $11,508 $12,090 0.51741500%
2/28/2005 $11,565 $12,160 0.58200900%
3/31/2005 $11,603 $12,222 0.51041900%
4/30/2005 $11,606 $12,232 0.08221300%
5/31/2005 $11,614 $12,243 0.08456600%
6/30/2005 $11,678 $12,325 0.66965400%
7/31/2005 $11,743 $12,421 0.78062700%
8/31/2005 $11,792 $12,507 0.69611200%
9/30/2005 $11,838 $12,566 0.47005600%
10/31/2005 $11,865 $12,606 0.32011600%
11/30/2005 $11,903 $12,648 0.33089100%
12/31/2005 $11,954 $12,712 0.50322200%
1/31/2006 $12,048 $12,795 0.65546900%
2/28/2006 $12,112 $12,884 0.69808500%
3/31/2006 $12,159 $12,979 0.73716300%
4/30/2006 $12,216 $13,041 0.47822700%
5/31/2006 $12,234 $13,092 0.38975100%
6/30/2006 $12,272 $13,146 0.40951000%
7/31/2006 $12,327 $13,214 0.51697600%
8/31/2006 $12,395 $13,303 0.67549900%
9/30/2006 $12,447 $13,375 0.54461900%
10/31/2006 $12,529 $13,467 0.68469500%
11/30/2006 $12,608 $13,540 0.54415800%
12/31/2006 $12,673 $13,645 0.77222500%
1/31/2007 $12,761 $13,760 0.84324300%
2/28/2007 $12,849 $13,861 0.73508800%
3/31/2007 $12,902 $13,928 0.48406100%
4/30/2007 $12,971 $14,005 0.55141100%
5/31/2007 $13,054 $14,093 0.63147800%
6/30/2007 $13,068 $14,138 0.31267900%
7/31/2007 $12,803 $13,668 -3.32462400%
8/31/2007 $12,732 $13,702 0.25138000%
9/30/2007 $12,929 $13,920 1.59446700%
10/31/2007 $13,033 $14,028 0.77153900%
11/30/2007 $12,910 $13,860 -1.19543300%
12/31/2007 $12,899 $13,902 0.30091300%
1/31/2008 $12,631 $13,471 -3.09509100%
2/29/2008 $12,325 $13,150 -2.38599900%
3/31/2008 $12,422 $13,104 -0.35219800%
4/30/2008 $12,822 $13,537 3.30541700%
5/31/2008 $12,946 $13,637 0.74155500%
6/30/2008 $12,977 $13,658 0.15224100%
7/31/2008 $12,900 $13,525 -0.97344500%
8/31/2008 $12,902 $13,517 -0.05782500%
9/30/2008 $12,273 $12,851 -4.92758300%
10/31/2008 $10,718 $11,176 -13.03377700%
AVERAGE ANNUAL TOTAL RETURN
(PERFORMANCE GRAPH)
CLASS B 10/31/08
- ------------------------ --------
1-Year -21.41%
5-Year -1.51%
Since Inception (5/1/01) +0.54%
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED CS Leveraged Loan Index TR
DATE ACCESS FUND - CLASS B LOAN INDEX (%Total Return)
- ---------------- ----------------------------- ------------------------ --------------------------
5/1/2001 $10,000 $10,000
5/31/2001 $10,118 $10,120 1.19742900%
6/30/2001 $10,168 $10,132 0.11983100%
7/31/2001 $10,243 $10,158 0.25500400%
8/31/2001 $10,288 $10,239 0.80289700%
9/30/2001 $10,234 $10,043 -1.91334100%
10/31/2001 $10,208 $ 9,886 -1.56500700%
11/30/2001 $10,307 $10,042 1.57687800%
12/31/2001 $10,365 $10,146 1.03681500%
1/31/2002 $10,452 $10,202 0.54726200%
2/28/2002 $10,430 $10,163 -0.38028300%
3/31/2002 $10,508 $10,281 1.15863100%
4/30/2002 $10,569 $10,391 1.07062900%
5/31/2002 $10,604 $10,384 -0.06845600%
6/30/2002 $10,583 $10,227 -1.50513000%
7/31/2002 $10,438 $10,072 -1.51828800%
8/31/2002 $10,406 $10,043 -0.28868900%
9/30/2002 $10,397 $10,065 0.21502500%
10/31/2002 $10,334 $ 9,930 -1.34068400%
11/30/2002 $10,409 $10,100 1.71915300%
12/31/2002 $10,505 $10,259 1.57397800%
1/31/2003 $10,558 $10,398 1.35345000%
2/28/2003 $10,598 $10,452 0.52024300%
3/31/2003 $10,650 $10,486 0.32284100%
4/30/2003 $10,724 $10,634 1.41165800%
5/31/2003 $10,788 $10,777 1.34020900%
6/30/2003 $10,874 $10,929 1.41273200%
7/31/2003 $10,925 $11,003 0.68311400%
8/31/2003 $10,948 $11,027 0.21371500%
9/30/2003 $10,995 $11,138 1.00303600%
10/31/2003 $11,050 $11,238 0.89835700%
11/30/2003 $11,085 $11,319 0.72772000%
12/31/2003 $11,120 $11,389 0.61800900%
1/31/2004 $11,174 $11,508 1.04228500%
2/29/2004 $11,192 $11,544 0.30810800%
3/31/2004 $11,223 $11,591 0.41258300%
4/30/2004 $11,253 $11,644 0.45953200%
5/31/2004 $11,259 $11,671 0.22428300%
6/30/2004 $11,297 $11,745 0.64040800%
7/31/2004 $11,325 $11,786 0.34425100%
8/31/2004 $11,334 $11,804 0.15763100%
9/30/2004 $11,353 $11,849 0.37907300%
10/31/2004 $11,398 $11,908 0.49523500%
11/30/2004 $11,421 $11,973 0.54581800%
12/31/2004 $11,447 $12,028 0.45835400%
1/31/2005 $11,476 $12,090 0.51741500%
2/28/2005 $11,526 $12,160 0.58200900%
3/31/2005 $11,558 $12,222 0.51041900%
4/30/2005 $11,553 $12,232 0.08221300%
5/31/2005 $11,554 $12,243 0.08456600%
6/30/2005 $11,611 $12,325 0.66965400%
7/31/2005 $11,669 $12,421 0.78062700%
8/31/2005 $11,710 $12,507 0.69611200%
9/30/2005 $11,749 $12,566 0.47005600%
10/31/2005 $11,768 $12,606 0.32011600%
11/30/2005 $11,798 $12,648 0.33089100%
12/31/2005 $11,842 $12,712 0.50322200%
1/31/2006 $11,928 $12,795 0.65546900%
2/28/2006 $11,996 $12,884 0.69808500%
3/31/2006 $12,024 $12,979 0.73716300%
4/30/2006 $12,073 $13,041 0.47822700%
5/31/2006 $12,083 $13,092 0.38975100%
6/30/2006 $12,125 $13,146 0.40951000%
7/31/2006 $12,171 $13,214 0.51697600%
8/31/2006 $12,231 $13,303 0.67549900%
9/30/2006 $12,275 $13,375 0.54461900%
10/31/2006 $12,348 $13,467 0.68469500%
11/30/2006 $12,407 $13,540 0.54415800%
12/31/2006 $12,477 $13,645 0.77222500%
1/31/2007 $12,555 $13,760 0.84324300%
2/28/2007 $12,622 $13,861 0.73508800%
3/31/2007 $12,666 $13,928 0.48406100%
4/30/2007 $12,726 $14,005 0.55141100%
5/31/2007 $12,799 $14,093 0.63147800%
6/30/2007 $12,818 $14,138 0.31267900%
7/31/2007 $12,538 $13,668 -3.32462400%
8/31/2007 $12,473 $13,702 0.25138000%
9/30/2007 $12,659 $13,920 1.59446700%
10/31/2007 $12,740 $14,028 0.77153900%
11/30/2007 $12,625 $13,860 -1.19543300%
12/31/2007 $12,594 $13,902 0.30091300%
1/31/2008 $12,337 $13,471 -3.09509100%
2/29/2008 $12,018 $13,150 -2.38599900%
3/31/2008 $12,105 $13,104 -0.35219800%
4/30/2008 $12,487 $13,537 3.30541700%
5/31/2008 $12,602 $13,637 0.74155500%
6/30/2008 $12,623 $13,658 0.15224100%
7/31/2008 $12,540 $13,525 -0.97344500%
8/31/2008 $12,535 $13,517 -0.05782500%
9/30/2008 $11,915 $12,851 -4.92758300%
10/31/2008 $10,410 $11,176 -13.03377700%
24 | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/01-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED CS Leveraged Loan Index TR
DATE ACCESS FUND - CLASS C LOAN INDEX (%Total Return)
- ---------------- ----------------------------- ------------------------ --------------------------
5/1/2001 $10,000 $10,000
5/31/2001 $10,120 $10,120 1.19742900%
6/30/2001 $10,173 $10,132 0.11983100%
7/31/2001 $10,252 $10,158 0.25500400%
8/31/2001 $10,299 $10,239 0.80289700%
9/30/2001 $10,238 $10,043 -1.91334100%
10/31/2001 $10,225 $ 9,886 -1.56500700%
11/30/2001 $10,326 $10,042 1.57687800%
12/31/2001 $10,388 $10,146 1.03681500%
1/31/2002 $10,476 $10,202 0.54726200%
2/28/2002 $10,456 $10,163 -0.38028300%
3/31/2002 $10,545 $10,281 1.15863100%
4/30/2002 $10,605 $10,391 1.07062900%
5/31/2002 $10,641 $10,384 -0.06845600%
6/30/2002 $10,610 $10,227 -1.50513000%
7/31/2002 $10,468 $10,072 -1.51828800%
8/31/2002 $10,449 $10,043 -0.28868900%
9/30/2002 $10,443 $10,065 0.21502500%
10/31/2002 $10,385 $ 9,930 -1.34068400%
11/30/2002 $10,452 $10,100 1.71915300%
12/31/2002 $10,564 $10,259 1.57397800%
1/31/2003 $10,621 $10,398 1.35345000%
2/28/2003 $10,664 $10,452 0.52024300%
3/31/2003 $10,709 $10,486 0.32284100%
4/30/2003 $10,781 $10,634 1.41165800%
5/31/2003 $10,858 $10,777 1.34020900%
6/30/2003 $10,947 $10,929 1.41273200%
7/31/2003 $10,991 $11,003 0.68311400%
8/31/2003 $11,027 $11,027 0.21371500%
9/30/2003 $11,077 $11,138 1.00303600%
10/31/2003 $11,135 $11,238 0.89835700%
11/30/2003 $11,171 $11,319 0.72772000%
12/31/2003 $11,209 $11,389 0.61800900%
1/31/2004 $11,255 $11,508 1.04228500%
2/29/2004 $11,287 $11,544 0.30810800%
3/31/2004 $11,321 $11,591 0.41258300%
4/30/2004 $11,355 $11,644 0.45953200%
5/31/2004 $11,352 $11,671 0.22428300%
6/30/2004 $11,405 $11,745 0.64040800%
7/31/2004 $11,436 $11,786 0.34425100%
8/31/2004 $11,447 $11,804 0.15763100%
9/30/2004 $11,470 $11,849 0.37907300%
10/31/2004 $11,517 $11,908 0.49523500%
11/30/2004 $11,544 $11,973 0.54581800%
12/31/2004 $11,574 $12,028 0.45835400%
1/31/2005 $11,607 $12,090 0.51741500%
2/28/2005 $11,660 $12,160 0.58200900%
3/31/2005 $11,694 $12,222 0.51041900%
4/30/2005 $11,693 $12,232 0.08221300%
5/31/2005 $11,697 $12,243 0.08456600%
6/30/2005 $11,758 $12,325 0.66965400%
7/31/2005 $11,820 $12,421 0.78062700%
8/31/2005 $11,865 $12,507 0.69611200%
9/30/2005 $11,908 $12,566 0.47005600%
10/31/2005 $11,931 $12,606 0.32011600%
11/30/2005 $11,965 $12,648 0.33089100%
12/31/2005 $12,013 $12,712 0.50322200%
1/31/2006 $12,104 $12,795 0.65546900%
2/28/2006 $12,177 $12,884 0.69808500%
3/31/2006 $12,208 $12,979 0.73716300%
4/30/2006 $12,261 $13,041 0.47822700%
5/31/2006 $12,275 $13,092 0.38975100%
6/30/2006 $12,322 $13,146 0.40951000%
7/31/2006 $12,372 $13,214 0.51697600%
8/31/2006 $12,436 $13,303 0.67549900%
9/30/2006 $12,484 $13,375 0.54461900%
10/31/2006 $12,562 $13,467 0.68469500%
11/30/2006 $12,625 $13,540 0.54415800%
12/31/2006 $12,698 $13,645 0.77222500%
1/31/2007 $12,782 $13,760 0.84324300%
2/28/2007 $12,853 $13,861 0.73508800%
3/31/2007 $12,902 $13,928 0.48406100%
4/30/2007 $12,967 $14,005 0.55141100%
5/31/2007 $13,045 $14,093 0.63147800%
6/30/2007 $13,068 $14,138 0.31267900%
7/31/2007 $12,786 $13,668 -3.32462400%
8/31/2007 $12,724 $13,702 0.25138000%
9/30/2007 $12,916 $13,920 1.59446700%
10/31/2007 $13,002 $14,028 0.77153900%
11/30/2007 $12,889 $13,860 -1.19543300%
12/31/2007 $12,860 $13,902 0.30091300%
1/31/2008 $12,602 $13,471 -3.09509100%
2/29/2008 $12,279 $13,150 -2.38599900%
3/31/2008 $12,372 $13,104 -0.35219800%
4/30/2008 $12,766 $13,537 3.30541700%
5/31/2008 $12,887 $13,637 0.74155500%
6/30/2008 $12,913 $13,658 0.15224100%
7/31/2008 $12,832 $13,525 -0.97344500%
8/31/2008 $12,831 $13,517 -0.05782500%
9/30/2008 $12,201 $12,851 -4.92758300%
10/31/2008 $10,666 $11,176 -13.03377700%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------------------------ --------
1-Year -18.74%
5-Year -0.86%
Since Inception (5/1/01) +0.86%
ADVISOR CLASS (5/1/01-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED CS Leveraged Loan Index TR
DATE ACCESS FUND - ADVISOR CLASS LOAN INDEX (%Total Return)
- ---------------- ----------------------------- ------------------------ --------------------------
5/1/2001 $10,000 $10,000
5/31/2001 $10,126 $10,120 1.19742900%
6/30/2001 $10,184 $10,132 0.11983100%
7/31/2001 $10,269 $10,158 0.25500400%
8/31/2001 $10,322 $10,239 0.80289700%
9/30/2001 $10,276 $10,043 -1.91334100%
10/31/2001 $10,258 $ 9,886 -1.56500700%
11/30/2001 $10,365 $10,042 1.57687800%
12/31/2001 $10,432 $10,146 1.03681500%
1/31/2002 $10,526 $10,202 0.54726200%
2/28/2002 $10,511 $10,163 -0.38028300%
3/31/2002 $10,604 $10,281 1.15863100%
4/30/2002 $10,670 $10,391 1.07062900%
5/31/2002 $10,711 $10,384 -0.06845600%
6/30/2002 $10,695 $10,227 -1.50513000%
7/31/2002 $10,557 $10,072 -1.51828800%
8/31/2002 $10,532 $10,043 -0.28868900%
9/30/2002 $10,530 $10,065 0.21502500%
10/31/2002 $10,485 $ 9,930 -1.34068400%
11/30/2002 $10,557 $10,100 1.71915300%
12/31/2002 $10,663 $10,259 1.57397800%
1/31/2003 $10,736 $10,398 1.35345000%
2/28/2003 $10,773 $10,452 0.52024300%
3/31/2003 $10,836 $10,486 0.32284100%
4/30/2003 $10,919 $10,634 1.41165800%
5/31/2003 $10,993 $10,777 1.34020900%
6/30/2003 $11,100 $10,929 1.41273200%
7/31/2003 $11,150 $11,003 0.68311400%
8/31/2003 $11,193 $11,027 0.21371500%
9/30/2003 $11,250 $11,138 1.00303600%
10/31/2003 $11,316 $11,238 0.89835700%
11/30/2003 $11,348 $11,319 0.72772000%
12/31/2003 $11,405 $11,389 0.61800900%
1/31/2004 $11,459 $11,508 1.04228500%
2/29/2004 $11,498 $11,544 0.30810800%
3/31/2004 $11,528 $11,591 0.41258300%
4/30/2004 $11,569 $11,644 0.45953200%
5/31/2004 $11,582 $11,671 0.22428300%
6/30/2004 $11,643 $11,745 0.64040800%
7/31/2004 $11,681 $11,786 0.34425100%
8/31/2004 $11,688 $11,804 0.15763100%
9/30/2004 $11,729 $11,849 0.37907300%
10/31/2004 $11,772 $11,908 0.49523500%
11/30/2004 $11,818 $11,973 0.54581800%
12/31/2004 $11,854 $12,028 0.45835400%
1/31/2005 $11,895 $12,090 0.51741500%
2/28/2005 $11,955 $12,160 0.58200900%
3/31/2005 $11,997 $12,222 0.51041900%
4/30/2005 $12,002 $12,232 0.08221300%
5/31/2005 $12,002 $12,243 0.08456600%
6/30/2005 $12,071 $12,325 0.66965400%
7/31/2005 $12,152 $12,421 0.78062700%
8/31/2005 $12,206 $12,507 0.69611200%
9/30/2005 $12,244 $12,566 0.47005600%
10/31/2005 $12,286 $12,606 0.32011600%
11/30/2005 $12,327 $12,648 0.33089100%
12/31/2005 $12,383 $12,712 0.50322200%
1/31/2006 $12,483 $12,795 0.65546900%
2/28/2006 $12,552 $12,884 0.69808500%
3/31/2006 $12,604 $12,979 0.73716300%
4/30/2006 $12,665 $13,041 0.47822700%
5/31/2006 $12,687 $13,092 0.38975100%
6/30/2006 $12,729 $13,146 0.40951000%
7/31/2006 $12,801 $13,214 0.51697600%
8/31/2006 $12,861 $13,303 0.67549900%
9/30/2006 $12,917 $13,375 0.54461900%
10/31/2006 $13,018 $13,467 0.68469500%
11/30/2006 $13,077 $13,540 0.54415800%
12/31/2006 $13,161 $13,645 0.77222500%
1/31/2007 $13,255 $13,760 0.84324300%
2/28/2007 $13,349 $13,861 0.73508800%
3/31/2007 $13,393 $13,928 0.48406100%
4/30/2007 $13,468 $14,005 0.55141100%
5/31/2007 $13,570 $14,093 0.63147800%
6/30/2007 $13,587 $14,138 0.31267900%
7/31/2007 $13,302 $13,668 -3.32462400%
8/31/2007 $13,231 $13,702 0.25138000%
9/30/2007 $13,438 $13,920 1.59446700%
10/31/2007 $13,549 $14,028 0.77153900%
11/30/2007 $13,425 $13,860 -1.19543300%
12/31/2007 $13,416 $13,902 0.30091300%
1/31/2008 $13,140 $13,471 -3.09509100%
2/29/2008 $12,824 $13,150 -2.38599900%
3/31/2008 $12,927 $13,104 -0.35219800%
4/30/2008 $13,346 $13,537 3.30541700%
5/31/2008 $13,465 $13,637 0.74155500%
6/30/2008 $13,514 $13,658 0.15224100%
7/31/2008 $13,436 $13,525 -0.97344500%
8/31/2008 $13,427 $13,517 -0.05782500%
9/30/2008 $12,789 $12,851 -4.92758300%
10/31/2008 $11,171 $11,176 -13.03377700%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/08
- ------------------------ --------
1-Year -17.54%
5-Year -0.26%
Since Inception (5/1/01) +1.49%
Annual Report | 25
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 CERTIFICATES OF DEPOSIT. 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. THE INTEREST
EARNED ON FLOATING-RATE LOANS VARIES WITH CHANGES IN PREVAILING INTEREST RATES.
THEREFORE, WHILE FLOATING-RATE LOANS OFFER HIGHER INTEREST INCOME WHEN INTEREST
RATES RISE, THEY WILL ALSO GENERATE LESS INCOME WHEN INTEREST RATES DECLINE. 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.
(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 10/31/08.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(6.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(7.) Source: (C) 2008 Morningstar. The CS Leveraged Loan Index is designed to
mirror the investible universe of the $US-denominated leveraged loan
market.
26 | Annual Report
Your Fund's Expenses
FRANKLIN FLOATING RATE DAILY ACCESS FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
Annual Report | 27
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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 836.00 $4.29
Hypothetical (5% return before expenses) $1,000 $1,020.46 $4.72
CLASS B
Actual $1,000 $ 833.70 $7.74
Hypothetical (5% return before expenses) $1,000 $1,016.69 $8.52
CLASS C
Actual $1,000 $ 835.50 $6.04
Hypothetical (5% return before expenses) $1,000 $1,018.55 $6.65
ADVISOR CLASS
Actual $1,000 $ 837.10 $3.09
Hypothetical (5% return before expenses) $1,000 $1,021.77 $3.40
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.93%; B: 1.68%; C: 1.31%; and Advisor:
0.67%), multiplied by the average account value over the period, multiplied
by 184/366 to reflect the one-half year period.
28 | Annual 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 capital preservation. 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.
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.
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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Low Duration Total Return Fund covers the fiscal
year ended October 31, 2008.
PERFORMANCE OVERVIEW
Franklin Low Duration Total Return Fund - Class A posted a +0.56% cumulative
total return for the 12 months under review. The Fund underperformed its
benchmark, the Barclays Capital (BC; formerly, Lehman Brothers) U.S. Aggregate
Index: 1-3 Year Component, which returned +3.98% for the same period.(1) You can
find more of the Fund's performance data in the Performance Summary beginning on
page 32.
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 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: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC U.S. Aggregate Index: 1-3 Year Component
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 a remaining maturity of one year up to, but not
including, three years 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 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 79.
Annual Report | 29
PORTFOLIO BREAKDOWN
Franklin Low Duration Total Return Fund Based on Total Investments as of
10/31/08
(PERFORMANCE GRAPH)
U.S. Government & Agency Securities 42.3%
Mortgage-Backed Securities 22.3%
Corporate Bonds 16.7%
Asset-Backed & Commercial Mortgage-Backed Securities 6.5%
Foreign Government & Agency Securities 3.1%
Convertible Bonds 0.2%
Convertible Preferred Stocks 0.0%*
Preferred Stocks 0.0%*
Short-Term Investments 8.9%
* Rounds to less than 0.1% of total investments.
DIVIDEND DISTRIBUTIONS*
Franklin Low Duration Total Return Fund Class A 11/1/07-10/31/08
DIVIDEND PER SHARE
-------------------------------
MONTH CLASS A ADVISOR CLASS**
- --------- ------------- ---------------
November 3.5422 cents --
December 3.7148 cents --
January 3.6491 cents --
February 3.0590 cents --
March 3.1479 cents --
April 2.9287 cents --
May 3.0786 cents 1.6559 cents
June 3.1204 cents 3.3312 cents
July 2.7514 cents 2.8134 cents
August 2.4739 cents 2.6801 cents
September 2.7345 cents 2.8989 cents
October 2.9417 cents 3.1520 cents
------------- -------------
TOTAL 37.1422 CENTS 16.5315 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.
** Effective 5/15/08, the Fund began offering Advisor Class shares. Please see
the prospectus for details.
MANAGER'S DISCUSSION
During the reporting period, we remained committed to our investment strategy as
we searched for new investments. We emphasized shorter-term and adjustable-rate
securities as we sought to maintain a lower interest rate risk profile
(duration) than longer-term, fixed-rate securities generally provide. We found
international and mortgage-related markets attractive and were overweighted in
these areas relative to the BC U.S. Aggregate Index: 1-3 Year Component.
During the fiscal year, the Fund's holdings in credit-related securities
detracted from performance as credit spreads widened in investment grade, high
yield and senior secured floating-rate sectors. In contrast, our non-U.S. dollar
positions generally helped performance relative to its benchmark. We also found
global fixed income markets attractive and held a diversified portfolio that
included international bond and currency exposure. As we believed global growth,
particularly in Asia, should outpace both U.S. and European growth rates, we
sought opportunities where we thought we could take advantage of Asian currency
strength and euro weakness.
30 | Annual Report
During the period, U.S. authorities seemed committed to stabilizing financial
markets by providing capital and liquidity. The SEC and other regulators took
steps to strengthen investor confidence and Congress approved a $700 billion
plan to address illiquid assets held by financial institutions. Central banks
around the world also took measures to provide additional liquidity to global
financial markets. At period-end, we believed these combined policy responses
were positive steps in the efforts to stabilize the financial market environment
and should help set the stage for a credit market recovery.
Thank you for your continued participation in Franklin Low Duration Total Return
Fund. We look forward to serving your future investment needs.
(PHOTO OF ROGER A. BAYSTON)
/s/ Roger A. Bayston
Roger A. Bayston, CFA
(PHOTO OF KENT BURNS)
/s/ Kent Burns
Kent Burns, CFA
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
Portfolio Management Team
Franklin Low Duration Total Return Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2008, 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.
Annual Report | 31
Performance Summary as of 10/31/08
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 of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do 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 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$0.31 $9.58 $9.89
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.371422
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/08 5/15/08
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$0.39 $9.59 $9.98
DISTRIBUTIONS (5/15/08-10/31/08)
Dividend Income $0.165315
32 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1)
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS
INCLUDE THE MAXIMUM SALES CHARGE. CLASS A: 2.25% MAXIMUM INITIAL SALES CHARGE;
ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 3-YEAR INCEPTION (11/17/04)
- ------------------------------------- ------ ------ --------------------
Cumulative Total Return(2) +0.56% +10.15% +11.01%
Average Annual Total Return(3) -1.73% +2.51% +2.09%
Avg. Ann. Total Return (9/30/08)(4) -0.32% +2.80% +2.41%
Distribution Rate(5) 3.53%
30-Day Standardized Yield(6) 3.57%
Total Annual Operating Expenses(7)
Without Waiver 1.44%
With Waiver 0.92%
ADVISOR CLASS(8) 1-YEAR 3-YEAR INCEPTION (11/17/04)
- ------------------------------------- ------ ------ --------------------
Cumulative Total Return(2) +0.76% +10.37% +11.24%
Average Annual Total Return(3) +0.76% +3.34% +2.73%
Avg. Ann. Total Return (9/30/08)(4) +1.97% +3.59% +3.01%
Distribution Rate(5) 3.87%
30-Day Standardized Yield(6) 3.90%
Total Annual Operating Expenses(7)
Without Waiver 1.19%
With Waiver 0.67%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES,
EXCLUDING ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED THE AMOUNT SHOWN WITH
WAIVER FOR EACH SHARE CLASS (OTHER THAN CERTAIN NON-ROUTINE EXPENSES OR COSTS,
INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND
LIQUIDATIONS) UNTIL 2/28/09.
Annual Report | 33
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- -------------------------- --------
1-Year -1.73%
3-Year +2.51%
Since Inception (11/17/04) +2.09%
CLASS A (11/17/04-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN LOW DURATION TOTAL BARCLAYS CAPITAL U.S.
DATE RETURN FUND - CLASS A AGGREGATE 1-3 YEAR INDEX
- ---------- --------------------------- ------------------------
11/17/2004 $ 9,775 $10,000
11/30/2004 $ 9,763 $ 9,981
12/31/2004 $ 9,776 $10,006
1/31/2005 $ 9,781 $10,005
2/28/2005 $ 9,775 $ 9,988
3/31/2005 $ 9,753 $ 9,979
4/30/2005 $ 9,799 $10,038
5/31/2005 $ 9,826 $10,081
6/30/2005 $ 9,844 $10,104
7/31/2005 $ 9,821 $10,078
8/31/2005 $ 9,882 $10,143
9/30/2005 $ 9,861 $10,119
10/31/2005 $ 9,851 $10,115
11/30/2005 $ 9,869 $10,148
12/31/2005 $ 9,898 $10,188
1/31/2006 $ 9,939 $10,208
2/28/2006 $ 9,947 $10,221
3/31/2006 $ 9,958 $10,233
4/30/2006 $ 9,996 $10,268
5/31/2006 $10,006 $10,282
6/30/2006 $10,004 $10,302
7/31/2006 $10,076 $10,382
8/31/2006 $10,141 $10,459
9/30/2006 $10,185 $10,515
10/31/2006 $10,244 $10,560
11/30/2006 $10,309 $10,622
12/31/2006 $10,319 $10,629
1/31/2007 $10,335 $10,654
2/28/2007 $10,387 $10,741
3/31/2007 $10,454 $10,784
4/30/2007 $10,525 $10,825
5/31/2007 $10,523 $10,817
6/30/2007 $10,528 $10,862
7/31/2007 $10,546 $10,946
8/31/2007 $10,595 $11,027
9/30/2007 $10,749 $11,109
10/31/2007 $10,790 $11,163
11/30/2007 $10,894 $11,303
12/31/2007 $10,924 $11,344
1/31/2008 $11,052 $11,531
2/29/2008 $11,130 $11,609
3/31/2008 $11,154 $11,618
4/30/2008 $11,120 $11,587
5/31/2008 $11,098 $11,580
6/30/2008 $11,088 $11,596
7/31/2008 $11,097 $11,626
8/31/2008 $11,091 $11,676
9/30/2008 $10,964 $11,602
10/31/2008 $10,852 $11,607
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/08
- -------------------------- --------
1-Year +0.76%
3-Year +3.34%
Since Inception (11/17/04) +2.73%
ADVISOR CLASS (11/17/04-10/31/08)(8)
(PERFORMANCE GRAPH)
FRANKLIN LOW DURATION TOTAL BARCLAYS CAPITAL U.S.
DATE RETURN FUND - ADVISOR CLASS AGGREGATE 1-3 YEAR INDEX
- ---------- --------------------------- ------------------------
11/17/2004 $10,000 $10,000
11/30/2004 $ 9,988 $ 9,981
12/31/2004 $10,001 $10,006
1/31/2005 $10,006 $10,005
2/28/2005 $10,000 $ 9,988
3/31/2005 $ 9,977 $ 9,979
4/30/2005 $10,024 $10,038
5/31/2005 $10,053 $10,081
6/30/2005 $10,071 $10,104
7/31/2005 $10,047 $10,078
8/31/2005 $10,110 $10,143
9/30/2005 $10,088 $10,119
10/31/2005 $10,077 $10,115
11/30/2005 $10,096 $10,148
12/31/2005 $10,126 $10,188
1/31/2006 $10,168 $10,208
2/28/2006 $10,176 $10,221
3/31/2006 $10,187 $10,233
4/30/2006 $10,226 $10,268
5/31/2006 $10,237 $10,282
6/30/2006 $10,234 $10,302
7/31/2006 $10,308 $10,382
8/31/2006 $10,374 $10,459
9/30/2006 $10,419 $10,515
10/31/2006 $10,480 $10,560
11/30/2006 $10,546 $10,622
12/31/2006 $10,557 $10,629
1/31/2007 $10,572 $10,654
2/28/2007 $10,626 $10,741
3/31/2007 $10,695 $10,784
4/30/2007 $10,767 $10,825
5/31/2007 $10,765 $10,817
6/30/2007 $10,770 $10,862
7/31/2007 $10,788 $10,946
8/31/2007 $10,838 $11,027
9/30/2007 $10,996 $11,109
10/31/2007 $11,038 $11,163
11/30/2007 $11,145 $11,303
12/31/2007 $11,175 $11,344
1/31/2008 $11,306 $11,531
2/29/2008 $11,386 $11,609
3/31/2008 $11,410 $11,618
4/30/2008 $11,375 $11,587
5/31/2008 $11,365 $11,580
6/30/2008 $11,346 $11,596
7/31/2008 $11,355 $11,626
8/31/2008 $11,352 $11,676
9/30/2008 $11,212 $11,602
10/31/2008 $11,124 $11,607
34 | Annual 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 FLUCTUATION
AND POLITICAL UNCERTAINTY. THE FUND'S USE OF FOREIGN CURRENCY TECHNIQUES
INVOLVES SPECIAL RISKS AS SUCH TECHNIQUES MAY NOT ACHIEVE THE ANTICIPATED
BENEFITS AND/OR MAY RESULT IN LOSSES TO THE FUND. 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.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
(1.) If the manager and administrator had not waived fees, the Fund's
distribution rate and total return would have been lower, and yield for the
period would have been 3.01% for Class A and 3.33% for Advisor Class.
(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.
(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 Advisor Class) per share on 10/31/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Effective 5/15/08, the Fund began offering Advisor class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 5/15/08, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 5/14/08, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 5/15/08
(commencement of sales), the cumulative total return of Advisor Class
shares was -2.28%.
(9.) Source: (C) 2008 Morningstar. The BC U.S. Aggregate Index: 1-3 Year
Component 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 a remaining maturity of one year up to, but not
including, three years 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.
Annual Report | 35
Your Fund's Expenses
FRANKLIN LOW DURATION TOTAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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% semiannual 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 | Annual 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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 975.80 $4.47
Hypothetical (5% return before expenses) $1,000 $1,020.61 $4.57
ADVISOR CLASS
Actual (5/15/08-10/31/08) $1,000 $ 977.20 $3.21
Hypothetical (5% return before expenses) $1,000 $1,021.87 $3.30
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized for each class (A: 0.90% and Advisor:
0.65%), multiplied by the average account value over the period, multiplied
by 184/366 (Hypothetical for all share classes; Actual for Class A) to
reflect the one-half year period. For Actual Advisor Class expenses, the
multiplier is 170/366 to reflect the number of days since inception.
Annual Report | 37
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 80% 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 (800) 342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
This annual report for Franklin Total Return Fund covers the fiscal year ended
October 31, 2008.
PERFORMANCE OVERVIEW
Franklin Total Return Fund - Class A had a -8.79% cumulative total return for
the 12 months under review. The Fund underperformed its benchmark, the Barclays
Capital (BC; formerly, Lehman Brothers) U.S. Aggregate Index, which returned
+0.31%.(1) You can find the Fund's long-term performance data in the Performance
Summary beginning on page 43.
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
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 20% of its total assets in
noninvestment-grade debt securities.
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. The BC 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 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 90.
38 | Annual Report
PORTFOLIO BREAKDOWN
Franklin Total Return Fund
Based on Total Investments
SECTOR 10/31/08 10/31/07
- ---------------------------------------------------- -------- --------
Mortgage-Backed Securities 45.4% 33.8%
Corporate Bonds 26.1% 20.5%
Asset-Backed & Commercial Mortgage-Backed Securities 19.6% 19.8%
Foreign Government & Agency Securities 3.7% 7.2%
Senior Floating Rate Interests 2.7% 3.7%
U.S. Government & Agency Securities 1.0% 3.5%
Convertible Bonds 0.4% 1.2%
Convertible Preferred Stocks 0.0%* 0.3%
Credit-Linked Structured Notes 0.0%* 0.1%
Short-Term Investments 1.1% 9.9%
* Rounds to less than 0.1% of total investments.
MANAGER'S DISCUSSION
As a result of financial market turmoil, bond market returns were varied and the
BC U.S. Aggregate Index, a proxy for broad-based U.S. fixed income performance,
gained just 0.31% for the fiscal year.(2) U.S. Treasuries were the strongest
performers during the reporting period as the BC U.S. Treasury Index rose
+7.76%, while higher-quality agency and mortgage-backed securities (MBS) also
fared relatively well, returning +4.72% and +4.61% as measured by the BC U.S.
Agency Index and the BC U.S. MBS Index.(3)
Investment grade sectors showed signs of significant stress and the BC U.S.
Credit Index, BC Asset-Backed Securities (ABS) Index and the BC Commercial MBS
(CMBS) Employee Retirement Income Security Act (ERISA)-Eligible
(2). Source: (C) 2008 Morningstar. See footnote 1 for a description of the BC
U.S. Aggregate Index.
(3.) Source: (C) 2008 Morningstar. The BC U.S. Treasury Index is the U.S.
Treasury component of the U.S. Government index and covers public
obligations of the U.S. Treasury with a remaining maturity of one year or
more. The BC U.S. Agency Index is the U.S. Agency component of the BC U.S.
Government/Credit Index and includes publicly issued debt of U.S.
government agencies, quasi-federal corporations and corporate or foreign
debt guaranteed by the U.S. government. The BC U.S. MBS Index covers the
universe of fixed-rate and hybrid adjustable-rate mortgage (ARM)
pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie
Mac (FHLMC).
Annual Report | 39
DIVIDEND DISTRIBUTIONS*
Franklin Total Return Fund 11/1/07-10/31/08
DIVIDEND PER SHARE (CENTS)
-----------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- --------- ------- ------- ------- ------- -------------
November 4.2564 3.9336 3.9259 4.0532 4.4674
December 3.9927 3.6576 3.6542 3.7822 4.2076
January 3.9957 3.6572 3.6566 3.7846 4.2129
February 3.6406 3.3286 3.3266 3.4440 3.8416
March 4.1637 3.8356 3.8267 3.9541 4.3782
April 3.6145 3.3029 3.3016 3.4197 3.8150
May 3.5943 3.2817 3.2784 3.3989 3.7955
June 4.4861 4.1607 4.1591 4.2805 4.7021
July 4.3071 3.9878 3.9831 4.1096 4.5199
August 3.9604 3.6544 3.6541 3.7675 4.1488
September 4.0863 3.7615 3.7589 3.8800 4.2954
October 3.8720 3.5819 3.5788 3.6908 4.0558
------- ------- ------- ------- -------
TOTAL 47.9698 44.1435 44.1040 45.5651 50.4402
* 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.
Index had returns of -11.36%, -12.98% and -15.24%, respectively.(4) Below
investment grade sectors fared even worse as higher volatility and credit and
liquidity concerns contributed to increased risk premiums. The BC U.S. Corporate
High Yield Index and the BC Emerging Market (U.S. Dollar) Index had returns of
- -25.81% and -24.31%.(5)
(4.) Source: (C) 2008 Morningstar. The BC U.S. Credit Index is the U.S. credit
component of the BC U.S. Government/Credit Index, and covers publicly
issued U.S. corporate and specified foreign debentures and secured notes
that meet the specified maturity, liquidity and quality requirements. To
qualify, bonds must be SEC registered. The index includes both corporate
and non-corporate sectors. The corporate sectors are industrial, utility
and finance, which include both U.S. and non-U.S. corporations. The
non-corporate sectors are sovereign, supranational, foreign agency and
foreign local government. The BC ABS Index is the ABS component of the BC
U.S. Aggregate Index and includes credit and charge, auto, home equity,
utility and manufactured housing loans. The BC CMBS ERISA-Eligible Index is
the CMBS component of the BC U.S. Aggregate Index and includes
investment-grade securities that are ERISA-eligible under the underwriter's
exemption.
(5.) Source: (C) 2008 Morningstar. The BC U.S. Corporate High Yield Index covers
the universe of U.S. dollar-denominated, noninvestment-grade, fixed-rate,
taxable corporate bond market. Securities are classified as high yield if
the middle rating of Moody's, Fitch and Standard & Poor's is Ba1/BB+/BB+ or
below. The BC Emerging Market (U.S. Dollar) Index includes
dollar-denominated debt of emerging markets in the following regions:
Americas, Europe, Middle East, Africa and Asia.
40 | Annual Report
Allocations to investment grade and below-investment grade spread sectors had a
negative impact on performance relative to the BC U.S. Aggregate Index during
the fiscal year, largely due to an ongoing flight to quality that partially
resulted from concerns of bank financing and asset liquidations. Similarly,
allocations to high quality CMBS and ABS also detracted from performance as
spreads widened significantly in those sectors.
The Fund's non-U.S. dollar positions generally helped performance relative to
the BC U.S. Aggregate Index. During the period, we continued to find value in
global fixed income markets and held a diversified portfolio that included
international bond and currency exposure. As we believed global growth,
particularly in Asia, should outpace U.S. and European growth rates, we sought
opportunities where we thought we could take advantage of Asian currency
strength and euro weakness.
During the period, U.S. authorities seemed committed to stabilizing financial
markets, by providing capital and liquidity. The SEC and other regulators took
steps to strengthen investor confidence and Congress approved a $700 billion
plan to address illiquid assets held by financial institutions. Central banks
around the world also took measures to provide additional liquidity to global
financial markets. At period-end, we believed these combined policy responses
were positive steps in the efforts to stabilize the financial market environment
and should help set the stage for a credit market recovery.
Annual Report | 41
Thank you for your continued participation in Franklin Total Return Fund. We
look forward to serving your future investment needs.
(PHOTO OF ROGER A. BAYSTON)
/s/ Roger A. Bayston
Roger A. Bayston, CFA
(PHOTO OF KENT BURNS)
/s/ Kent Burns
Kent Burns, CFA
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
(PHOTO OF DAVID YUEN)
/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 OCTOBER 31, 2008, 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.
42 | Annual Report
Performance Summary as of 10/31/08
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 and graphs do 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 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.32 $8.60 $9.92
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.479698
CLASS B (SYMBOL: FBTLX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.32 $8.60 $9.92
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.441435
CLASS C (SYMBOL: FCTLX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.31 $8.60 $9.91
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.441040
CLASS R (SYMBOL: FTRRX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.32 $8.60 $9.92
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.455651
ADVISOR CLASS (SYMBOL: FBDAX) CHANGE 10/31/08 10/31/07
- -------------------------------- ------ -------- --------
Net Asset Value (NAV) -$1.32 $8.61 $9.93
DISTRIBUTIONS (11/1/07-10/31/08)
Dividend Income $0.504402
Annual Report | 43
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.
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------ -------
Cumulative Total Return(2) -8.79% +8.78% +46.42%
Average Annual Total Return(3) -12.66% +0.81% +3.44%
Avg. Ann. Total Return (9/30/08)(4) -7.48% +1.80% +3.91%
Distribution Rate(5) 5.56%
30-Day Standardized Yield(6) 5.81%
Total Annual Operating Expenses(7)
Without Waiver 1.09%
With Waiver 0.85%
CLASS B 1-YEAR 5-YEAR INCEPTION (3/1/02)
- ------------------------------------- ------- ------ ------------------
Cumulative Total Return(2) -9.15% +6.65% +20.30%
Average Annual Total Return(3) -12.62% +0.97% +2.81%
Avg. Ann. Total Return (9/30/08)(4) -7.43% +1.95% +3.69%
Distribution Rate(5) 5.35%
30-Day Standardized Yield(6) 5.65%
Total Annual Operating Expenses(7)
Without Waiver 1.49%
With Waiver 1.25%
CLASS C 1-YEAR 5-YEAR INCEPTION (3/1/02)
- ------------------------------------- ------- ------ ------------------
Cumulative Total Return(2) -9.15% +6.72% +20.38%
Average Annual Total Return(3) -10.02% +1.31% +2.82%
Avg. Ann. Total Return (9/30/08)(4) -4.68% +2.28% +3.70%
Distribution Rate(5) 5.34%
30-Day Standardized Yield(6) 5.65%
Total Annual Operating Expenses(7)
Without Waiver 1.49%
With Waiver 1.25%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------- ------- ------ ------------------
Cumulative Total Return(2) -9.01% +7.44% +42.68%
Average Annual Total Return(3) -9.01% +1.45% +3.62%
Avg. Ann. Total Return (9/30/08)(4) -3.62% +2.43% +4.09%
Distribution Rate(5) 5.52%
30-Day Standardized Yield(6) 5.81%
Total Annual Operating Expenses(7)
Without Waiver 1.34%
With Waiver 1.10%
44 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE(1) (CONTINUED)
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- ------- ------ -------
Cumulative Total Return(2) -8.64% +10.16% +50.13%
Average Annual Total Return(3) -8.64% +1.95% +4.15%
Avg. Ann. Total Return (9/30/08)(4) -3.12% +2.97% +4.65%
Distribution Rate(5) 6.10%
30-Day Standardized Yield(6) 6.33%
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 (800) 342-5236.
THE INVESTMENT MANAGER AND ADMINISTRATOR HAVE CONTRACTUALLY AGREED TO WAIVE OR
LIMIT THEIR RESPECTIVE FEES AND TO ASSUME AS THEIR OWN EXPENSE CERTAIN EXPENSES
OTHERWISE PAYABLE BY THE FUND SO THAT TOTAL ANNUAL FUND OPERATING EXPENSES,
EXCLUDING ACQUIRED FUND FEES AND EXPENSES, DO NOT EXCEED THE AMOUNT SHOWN WITH
WAIVER FOR EACH SHARE CLASS (OTHER THAN NON-ROUTINE EXPENSES OR COSTS, INCLUDING
THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS)
UNTIL 2/28/09.
Annual Report | 45
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR A HYPOTHETICAL $10,000 INVESTMENT(1)
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/08
- ------- --------
1-Year -12.66%
5-Year +0.81%
10-Year +3.44%
CLASS A (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN TOTAL RETURN BARCLAYS CAPITAL U.S.
DATE FUND - CLASS A AGGREGATE INDEX CPI
- ---------- --------------------- --------------------- -------
11/1/1998 $ 9,575 $10,000 $10,000
11/30/1998 $ 9,616 $10,057 $10,000
12/31/1998 $ 9,637 $10,087 $ 9,994
1/31/1999 $ 9,707 $10,159 $10,018
2/28/1999 $ 9,523 $ 9,982 $10,030
3/31/1999 $ 9,558 $10,037 $10,061
4/30/1999 $ 9,584 $10,069 $10,134
5/31/1999 $ 9,457 $ 9,980 $10,134
6/30/1999 $ 9,426 $ 9,949 $10,134
7/31/1999 $ 9,386 $ 9,906 $10,165
8/31/1999 $ 9,393 $ 9,901 $10,189
9/30/1999 $ 9,474 $10,016 $10,238
10/31/1999 $ 9,505 $10,053 $10,256
11/30/1999 $ 9,567 $10,052 $10,262
12/31/1999 $ 9,549 $10,004 $10,262
1/31/2000 $ 9,463 $ 9,971 $10,293
2/29/2000 $ 9,574 $10,092 $10,354
3/31/2000 $ 9,655 $10,225 $10,439
4/30/2000 $ 9,613 $10,196 $10,445
5/31/2000 $ 9,593 $10,191 $10,457
6/30/2000 $ 9,844 $10,403 $10,512
7/31/2000 $ 9,939 $10,497 $10,537
8/31/2000 $10,088 $10,650 $10,537
9/30/2000 $10,174 $10,716 $10,591
10/31/2000 $10,229 $10,787 $10,610
11/30/2000 $10,348 $10,964 $10,616
12/31/2000 $10,566 $11,167 $10,610
1/31/2001 $10,770 $11,350 $10,677
2/28/2001 $10,832 $11,449 $10,720
3/31/2001 $10,871 $11,506 $10,744
4/30/2001 $10,769 $11,458 $10,787
5/31/2001 $10,817 $11,527 $10,835
6/30/2001 $10,863 $11,571 $10,854
7/31/2001 $11,106 $11,830 $10,823
8/31/2001 $11,211 $11,965 $10,823
9/30/2001 $11,255 $12,105 $10,872
10/31/2001 $11,443 $12,358 $10,835
11/30/2001 $11,327 $12,188 $10,817
12/31/2001 $11,278 $12,110 $10,774
1/31/2002 $11,356 $12,208 $10,799
2/28/2002 $11,443 $12,327 $10,841
3/31/2002 $11,268 $12,122 $10,902
4/30/2002 $11,474 $12,357 $10,963
5/31/2002 $11,577 $12,462 $10,963
6/30/2002 $11,567 $12,570 $10,970
7/31/2002 $11,564 $12,721 $10,982
8/31/2002 $11,774 $12,936 $11,018
9/30/2002 $11,916 $13,146 $11,037
10/31/2002 $11,837 $13,086 $11,055
11/30/2002 $11,949 $13,082 $11,055
12/31/2002 $12,202 $13,352 $11,030
1/31/2003 $12,269 $13,364 $11,079
2/28/2003 $12,430 $13,549 $11,165
3/31/2003 $12,431 $13,538 $11,232
4/30/2003 $12,620 $13,650 $11,207
5/31/2003 $12,845 $13,904 $11,189
6/30/2003 $12,887 $13,877 $11,201
7/31/2003 $12,501 $13,410 $11,213
8/31/2003 $12,604 $13,499 $11,256
9/30/2003 $12,947 $13,857 $11,293
10/31/2003 $12,888 $13,728 $11,280
11/30/2003 $12,978 $13,760 $11,250
12/31/2003 $13,166 $13,900 $11,238
1/31/2004 $13,296 $14,012 $11,293
2/29/2004 $13,412 $14,164 $11,354
3/31/2004 $13,495 $14,270 $11,427
4/30/2004 $13,167 $13,899 $11,463
5/31/2004 $13,082 $13,843 $11,530
6/30/2004 $13,163 $13,921 $11,567
7/31/2004 $13,284 $14,059 $11,549
8/31/2004 $13,537 $14,328 $11,555
9/30/2004 $13,601 $14,367 $11,579
10/31/2004 $13,742 $14,487 $11,640
11/30/2004 $13,728 $14,371 $11,646
12/31/2004 $13,859 $14,504 $11,604
1/31/2005 $13,923 $14,595 $11,628
2/28/2005 $13,902 $14,509 $11,695
3/31/2005 $13,775 $14,434 $11,787
4/30/2005 $13,906 $14,629 $11,866
5/31/2005 $14,041 $14,788 $11,854
6/30/2005 $14,118 $14,868 $11,860
7/31/2005 $14,013 $14,733 $11,915
8/31/2005 $14,177 $14,922 $11,976
9/30/2005 $14,031 $14,768 $12,122
10/31/2005 $13,916 $14,651 $12,146
11/30/2005 $13,981 $14,716 $12,049
12/31/2005 $14,109 $14,856 $12,000
1/31/2006 $14,165 $14,857 $12,091
2/28/2006 $14,216 $14,906 $12,116
3/31/2006 $14,058 $14,760 $12,183
4/30/2006 $14,067 $14,733 $12,287
5/31/2006 $14,040 $14,717 $12,348
6/30/2006 $14,037 $14,749 $12,372
7/31/2006 $14,254 $14,948 $12,409
8/31/2006 $14,444 $15,177 $12,433
9/30/2006 $14,572 $15,310 $12,372
10/31/2006 $14,690 $15,411 $12,305
11/30/2006 $14,877 $15,590 $12,287
12/31/2006 $14,795 $15,500 $12,305
1/31/2007 $14,794 $15,493 $12,342
2/28/2007 $14,979 $15,732 $12,408
3/31/2007 $15,008 $15,733 $12,521
4/30/2007 $15,145 $15,818 $12,603
5/31/2007 $15,071 $15,698 $12,680
6/30/2007 $14,964 $15,651 $12,704
7/31/2007 $14,966 $15,782 $12,701
8/31/2007 $15,059 $15,975 $12,678
9/30/2007 $15,301 $16,096 $12,713
10/31/2007 $15,370 $16,241 $12,740
11/30/2007 $15,482 $16,533 $12,816
12/31/2007 $15,513 $16,579 $12,807
1/31/2008 $15,638 $16,858 $12,871
2/29/2008 $15,570 $16,881 $12,908
3/31/2008 $15,557 $16,939 $13,020
4/30/2008 $15,693 $16,904 $13,099
5/31/2008 $15,607 $16,780 $13,209
6/30/2008 $15,408 $16,766 $13,342
7/31/2008 $15,300 $16,752 $13,412
8/31/2008 $15,316 $16,912 $13,359
9/30/2008 $14,784 $16,684 $13,340
10/31/2008 $14,019 $16,291 $13,206
AVERAGE ANNUAL TOTAL RETURN
CLASS B 10/31/08
- ------------------------ --------
1-Year -12.62%
5-Year +0.97%
Since Inception (3/1/02) +2.81%
CLASS B (3/1/02-10/31/08)
(PERFORMANCE GRAPH)
FRANKLIN TOTAL RETURN BARCLAYS CAPITAL U.S.
DATE FUND - CLASS B AGGREGATE INDEX CPI
- ---------- --------------------- --------------------- -------
3/1/2002 $10,000 $10,000 $10,000
3/31/2002 $ 9,916 $ 9,834 $10,056
4/30/2002 $10,102 $10,024 $10,112
5/31/2002 $10,189 $10,110 $10,112
6/30/2002 $10,177 $10,197 $10,118
7/31/2002 $10,171 $10,320 $10,129
8/31/2002 $10,353 $10,494 $10,163
9/30/2002 $10,474 $10,664 $10,180
10/31/2002 $10,401 $10,616 $10,197
11/30/2002 $10,497 $10,613 $10,197
12/31/2002 $10,715 $10,832 $10,174
1/31/2003 $10,770 $10,841 $10,219
2/28/2003 $10,908 $10,991 $10,298
3/31/2003 $10,905 $10,983 $10,360
4/30/2003 $11,068 $11,074 $10,337
5/31/2003 $11,261 $11,280 $10,321
6/30/2003 $11,294 $11,258 $10,332
7/31/2003 $10,952 $10,879 $10,343
8/31/2003 $11,039 $10,951 $10,382
9/30/2003 $11,335 $11,241 $10,416
10/31/2003 $11,279 $11,136 $10,405
11/30/2003 $11,355 $11,163 $10,377
12/31/2003 $11,515 $11,277 $10,366
1/31/2004 $11,614 $11,368 $10,416
2/29/2004 $11,723 $11,491 $10,472
3/31/2004 $11,791 $11,577 $10,540
4/30/2004 $11,501 $11,275 $10,574
5/31/2004 $11,423 $11,230 $10,636
6/30/2004 $11,490 $11,294 $10,669
7/31/2004 $11,592 $11,406 $10,652
8/31/2004 $11,809 $11,623 $10,658
9/30/2004 $11,861 $11,655 $10,681
10/31/2004 $11,980 $11,753 $10,737
11/30/2004 $11,964 $11,659 $10,742
12/31/2004 $12,062 $11,766 $10,703
1/31/2005 $12,126 $11,840 $10,726
2/28/2005 $12,104 $11,770 $10,787
3/31/2005 $11,989 $11,710 $10,872
4/30/2005 $12,100 $11,868 $10,945
5/31/2005 $12,213 $11,997 $10,934
6/30/2005 $12,276 $12,062 $10,939
7/31/2005 $12,181 $11,952 $10,990
8/31/2005 $12,319 $12,105 $11,046
9/30/2005 $12,188 $11,981 $11,181
10/31/2005 $12,084 $11,886 $11,204
11/30/2005 $12,137 $11,938 $11,114
12/31/2005 $12,243 $12,052 $11,069
1/31/2006 $12,287 $12,053 $11,153
2/28/2006 $12,329 $12,093 $11,175
3/31/2006 $12,187 $11,974 $11,237
4/30/2006 $12,191 $11,952 $11,333
5/31/2006 $12,163 $11,939 $11,389
6/30/2006 $12,157 $11,965 $11,412
7/31/2006 $12,328 $12,127 $11,445
8/31/2006 $12,501 $12,312 $11,468
9/30/2006 $12,595 $12,420 $11,412
10/31/2006 $12,693 $12,502 $11,350
11/30/2006 $12,863 $12,647 $11,333
12/31/2006 $12,788 $12,574 $11,350
1/31/2007 $12,783 $12,569 $11,384
2/28/2007 $12,939 $12,763 $11,445
3/31/2007 $12,960 $12,763 $11,550
4/30/2007 $13,060 $12,832 $11,625
5/31/2007 $13,005 $12,735 $11,696
6/30/2007 $12,908 $12,697 $11,718
7/31/2007 $12,906 $12,803 $11,715
8/31/2007 $12,968 $12,960 $11,694
9/30/2007 $13,186 $13,058 $11,726
10/31/2007 $13,241 $13,176 $11,751
11/30/2007 $13,333 $13,413 $11,821
12/31/2007 $13,356 $13,450 $11,813
1/31/2008 $13,459 $13,676 $11,872
2/29/2008 $13,396 $13,695 $11,906
3/31/2008 $13,380 $13,742 $12,009
4/30/2008 $13,493 $13,713 $12,082
5/31/2008 $13,401 $13,612 $12,184
6/30/2008 $13,239 $13,602 $12,307
7/31/2008 $13,142 $13,590 $12,371
8/31/2008 $13,151 $13,720 $12,322
9/30/2008 $12,690 $13,535 $12,305
10/31/2008 $12,030 $13,216 $12,181
46 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/02-10/31/08)
(PERFORMANCE GRAPH)
DATE FRANKLIN TOTAL RETURN FUND - CLASS C BARCLAYS CAPITAL U.S. AGGREGATE INDEX CPI
- ---------- ------------------------------------ ------------------------------------- -------
3/1/2002 $10,000 $10,000 $10,000
3/31/2002 $ 9,928 $ 9,834 $10,056
4/30/2002 $10,110 $10,024 $10,112
5/31/2002 $10,187 $10,110 $10,112
6/30/2002 $10,185 $10,197 $10,118
7/31/2002 $10,168 $10,320 $10,129
8/31/2002 $10,361 $10,494 $10,163
9/30/2002 $10,472 $10,664 $10,180
10/31/2002 $10,398 $10,616 $10,197
11/30/2002 $10,505 $10,613 $10,197
12/31/2002 $10,715 $10,832 $10,174
1/31/2003 $10,783 $10,841 $10,219
2/28/2003 $10,911 $10,991 $10,298
3/31/2003 $10,907 $10,983 $10,360
4/30/2003 $11,069 $11,074 $10,337
5/31/2003 $11,262 $11,280 $10,321
6/30/2003 $11,294 $11,258 $10,332
7/31/2003 $10,952 $10,879 $10,343
8/31/2003 $11,050 $10,951 $10,382
9/30/2003 $11,346 $11,241 $10,416
10/31/2003 $11,279 $11,136 $10,405
11/30/2003 $11,355 $11,163 $10,377
12/31/2003 $11,515 $11,277 $10,366
1/31/2004 $11,625 $11,368 $10,416
2/29/2004 $11,735 $11,491 $10,472
3/31/2004 $11,802 $11,577 $10,540
4/30/2004 $11,501 $11,275 $10,574
5/31/2004 $11,434 $11,230 $10,636
6/30/2004 $11,490 $11,294 $10,669
7/31/2004 $11,592 $11,406 $10,652
8/31/2004 $11,809 $11,623 $10,658
9/30/2004 $11,872 $11,655 $10,681
10/31/2004 $11,991 $11,753 $10,737
11/30/2004 $11,963 $11,659 $10,742
12/31/2004 $12,073 $11,766 $10,703
1/31/2005 $12,136 $11,840 $10,726
2/28/2005 $12,114 $11,770 $10,787
3/31/2005 $11,988 $11,710 $10,872
4/30/2005 $12,110 $11,868 $10,945
5/31/2005 $12,224 $11,997 $10,934
6/30/2005 $12,274 $12,062 $10,939
7/31/2005 $12,191 $11,952 $10,990
8/31/2005 $12,329 $12,105 $11,046
9/30/2005 $12,186 $11,981 $11,181
10/31/2005 $12,094 $11,886 $11,204
11/30/2005 $12,134 $11,938 $11,114
12/31/2005 $12,241 $12,052 $11,069
1/31/2006 $12,285 $12,053 $11,153
2/28/2006 $12,326 $12,093 $11,175
3/31/2006 $12,197 $11,974 $11,237
4/30/2006 $12,201 $11,952 $11,333
5/31/2006 $12,172 $11,939 $11,389
6/30/2006 $12,166 $11,965 $11,412
7/31/2006 $12,337 $12,127 $11,445
8/31/2006 $12,510 $12,312 $11,468
9/30/2006 $12,604 $12,420 $11,412
10/31/2006 $12,702 $12,502 $11,350
11/30/2006 $12,872 $12,647 $11,333
12/31/2006 $12,797 $12,574 $11,350
1/31/2007 $12,779 $12,569 $11,384
2/28/2007 $12,948 $12,763 $11,445
3/31/2007 $12,956 $12,763 $11,550
4/30/2007 $13,069 $12,832 $11,625
5/31/2007 $13,001 $12,735 $11,696
6/30/2007 $12,917 $12,697 $11,718
7/31/2007 $12,902 $12,803 $11,715
8/31/2007 $12,977 $12,960 $11,694
9/30/2007 $13,195 $13,058 $11,726
10/31/2007 $13,250 $13,176 $11,751
11/30/2007 $13,343 $13,413 $11,821
12/31/2007 $13,365 $13,450 $11,813
1/31/2008 $13,468 $13,676 $11,872
2/29/2008 $13,405 $13,695 $11,906
3/31/2008 $13,375 $13,742 $12,009
4/30/2008 $13,502 $13,713 $12,082
5/31/2008 $13,410 $13,612 $12,184
6/30/2008 $13,248 $13,602 $12,307
7/31/2008 $13,151 $13,590 $12,371
8/31/2008 $13,160 $13,720 $12,322
9/30/2008 $12,699 $13,535 $12,305
10/31/2008 $12,038 $13,216 $12,181
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/08
- ------------------------ --------
1-Year -10.02%
5-Year +1.31%
Since Inception (3/1/02) +2.82%
CLASS R (1/1/02-10/31/08)
(PERFORMANCE GRAPH)
DATE FRANKLIN TOTAL RETURN FUND - CLASS R BARCLAYS CAPITAL U.S. AGGREGATE INDEX CPI
- ---------- ------------------------------------ ------------------------------------- -------
1/2/2002 $10,000 $10,000 $10,000
1/31/2002 $10,116 $10,081 $10,023
2/28/2002 $10,181 $10,179 $10,062
3/31/2002 $10,024 $10,009 $10,119
4/30/2002 $10,206 $10,204 $10,175
5/31/2002 $10,296 $10,290 $10,175
6/30/2002 $10,285 $10,379 $10,181
7/31/2002 $10,280 $10,505 $10,192
8/31/2002 $10,465 $10,682 $10,226
9/30/2002 $10,589 $10,855 $10,243
10/31/2002 $10,517 $10,806 $10,260
11/30/2002 $10,614 $10,803 $10,260
12/31/2002 $10,824 $11,026 $10,238
1/31/2003 $10,892 $11,035 $10,283
2/28/2003 $11,033 $11,188 $10,362
3/31/2003 $11,032 $11,179 $10,424
4/30/2003 $11,197 $11,272 $10,402
5/31/2003 $11,394 $11,482 $10,385
6/30/2003 $11,429 $11,459 $10,396
7/31/2003 $11,084 $11,074 $10,407
8/31/2003 $11,173 $11,147 $10,447
9/30/2003 $11,475 $11,442 $10,481
10/31/2003 $11,420 $11,336 $10,470
11/30/2003 $11,498 $11,363 $10,441
12/31/2003 $11,661 $11,478 $10,430
1/31/2004 $11,763 $11,571 $10,481
2/29/2004 $11,875 $11,696 $10,538
3/31/2004 $11,946 $11,784 $10,606
4/30/2004 $11,641 $11,477 $10,640
5/31/2004 $11,575 $11,431 $10,702
6/30/2004 $11,645 $11,496 $10,736
7/31/2004 $11,750 $11,610 $10,719
8/31/2004 $11,971 $11,831 $10,724
9/30/2004 $12,025 $11,863 $10,747
10/31/2004 $12,147 $11,963 $10,804
11/30/2004 $12,120 $11,867 $10,809
12/31/2004 $12,234 $11,976 $10,770
1/31/2005 $12,299 $12,052 $10,792
2/28/2005 $12,279 $11,981 $10,855
3/31/2005 $12,164 $11,919 $10,939
4/30/2005 $12,277 $12,080 $11,013
5/31/2005 $12,393 $12,211 $11,002
6/30/2005 $12,459 $12,278 $11,007
7/31/2005 $12,363 $12,166 $11,058
8/31/2005 $12,506 $12,322 $11,115
9/30/2005 $12,373 $12,195 $11,251
10/31/2005 $12,270 $12,098 $11,273
11/30/2005 $12,325 $12,152 $11,183
12/31/2005 $12,435 $12,267 $11,138
1/31/2006 $12,482 $12,268 $11,222
2/28/2006 $12,525 $12,309 $11,245
3/31/2006 $12,382 $12,188 $11,307
4/30/2006 $12,388 $12,166 $11,404
5/31/2006 $12,361 $12,153 $11,460
6/30/2006 $12,356 $12,179 $11,483
7/31/2006 $12,532 $12,343 $11,517
8/31/2006 $12,709 $12,532 $11,539
9/30/2006 $12,819 $12,642 $11,483
10/31/2006 $12,908 $12,726 $11,420
11/30/2006 $13,082 $12,874 $11,404
12/31/2006 $13,007 $12,799 $11,420
1/31/2007 $13,004 $12,794 $11,455
2/28/2007 $13,164 $12,991 $11,517
3/31/2007 $13,187 $12,991 $11,622
4/30/2007 $13,304 $13,061 $11,697
5/31/2007 $13,236 $12,962 $11,768
6/30/2007 $13,140 $12,924 $11,791
7/31/2007 $13,139 $13,032 $11,788
8/31/2007 $13,217 $13,192 $11,767
9/30/2007 $13,427 $13,292 $11,799
10/31/2007 $13,485 $13,411 $11,824
11/30/2007 $13,580 $13,652 $11,895
12/31/2007 $13,604 $13,691 $11,887
1/31/2008 $13,712 $13,921 $11,946
2/29/2008 $13,649 $13,940 $11,980
3/31/2008 $13,635 $13,987 $12,084
4/30/2008 $13,751 $13,958 $12,157
5/31/2008 $13,660 $13,856 $12,260
6/30/2008 $13,496 $13,845 $12,383
7/31/2008 $13,399 $13,833 $12,448
8/31/2008 $13,410 $13,965 $12,399
9/30/2008 $12,942 $13,777 $12,382
10/31/2008 $12,271 $13,452 $12,257
AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/08
- ------------------------ --------
1-Year -9.01%
5-Year +1.45%
Since Inception (1/1/02) +3.62%
Annual Report | 47
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/08
- ------------- --------
1-Year -8.64%
5-Year +1.95%
10-Year +4.15%
ADVISOR CLASS (11/1/98-10/31/08)
(PERFORMANCE GRAPH)
DATE FRANKLIN TOTAL RETURN FUND - ADVISOR CLASS BARCLAYS CAPITAL U.S. AGGREGATE INDEX CPI
- ------------- ------------------------------------------ ------------------------------------- -------
11/1/1998 $10,000 $10,000 $10,000
11/30/1998 $10,045 $10,057 $10,000
12/31/1998 $10,078 $10,087 $ 9,994
1/31/1999 $10,144 $10,159 $10,018
2/28/1999 $9,954 $9,982 $10,030
3/31/1999 $9,995 $10,037 $10,061
4/30/1999 $10,024 $10,069 $10,134
5/31/1999 $9,893 $9,980 $10,134
6/30/1999 $9,863 $9,949 $10,134
7/31/1999 $9,823 $9,906 $10,165
8/31/1999 $9,833 $9,901 $10,189
9/30/1999 $9,919 $10,016 $10,238
10/31/1999 $9,954 $10,053 $10,256
11/30/1999 $10,020 $10,052 $10,262
12/31/1999 $10,004 $10,004 $10,262
1/31/2000 $9,916 $9,971 $10,293
2/29/2000 $10,034 $10,092 $10,354
3/31/2000 $10,120 $10,225 $10,439
4/30/2000 $10,079 $10,196 $10,445
5/31/2000 $10,060 $10,191 $10,457
6/30/2000 $10,325 $10,403 $10,512
7/31/2000 $10,427 $10,497 $10,537
8/31/2000 $10,585 $10,650 $10,537
9/30/2000 $10,677 $10,716 $10,591
10/31/2000 $10,737 $10,787 $10,610
11/30/2000 $10,853 $10,964 $10,616
12/31/2000 $11,084 $11,167 $10,610
1/31/2001 $11,311 $11,350 $10,677
2/28/2001 $11,378 $11,449 $10,720
3/31/2001 $11,409 $11,506 $10,744
4/30/2001 $11,316 $11,458 $10,787
5/31/2001 $11,369 $11,527 $10,835
6/30/2001 $11,432 $11,571 $10,854
7/31/2001 $11,677 $11,830 $10,823
8/31/2001 $11,790 $11,965 $10,823
9/30/2001 $11,851 $12,105 $10,872
10/31/2001 $12,051 $12,358 $10,835
11/30/2001 $11,919 $12,188 $10,817
12/31/2001 $11,870 $12,110 $10,774
1/31/2002 $11,967 $12,208 $10,799
2/28/2002 $12,048 $12,327 $10,841
3/31/2002 $11,867 $12,122 $10,902
4/30/2002 $12,088 $12,357 $10,963
5/31/2002 $12,199 $12,462 $10,963
6/30/2002 $12,203 $12,570 $10,970
7/31/2002 $12,190 $12,721 $10,982
8/31/2002 $12,427 $12,936 $11,018
9/30/2002 $12,566 $13,146 $11,037
10/31/2002 $12,486 $13,086 $11,055
11/30/2002 $12,620 $13,082 $11,055
12/31/2002 $12,876 $13,352 $11,030
1/31/2003 $12,963 $13,364 $11,079
2/28/2003 $13,122 $13,549 $11,165
3/31/2003 $13,126 $13,538 $11,232
4/30/2003 $13,328 $13,650 $11,207
5/31/2003 $13,568 $13,904 $11,189
6/30/2003 $13,616 $13,877 $11,201
7/31/2003 $13,211 $13,410 $11,213
8/31/2003 $13,323 $13,499 $11,256
9/30/2003 $13,687 $13,857 $11,293
10/31/2003 $13,628 $13,728 $11,280
11/30/2003 $13,726 $13,760 $11,250
12/31/2003 $13,928 $13,900 $11,238
1/31/2004 $14,068 $14,012 $11,293
2/29/2004 $14,207 $14,164 $11,354
3/31/2004 $14,298 $14,270 $11,427
4/30/2004 $13,941 $13,899 $11,463
5/31/2004 $13,867 $13,843 $11,530
6/30/2004 $13,943 $13,921 $11,567
7/31/2004 $14,074 $14,059 $11,549
8/31/2004 $14,345 $14,328 $11,555
9/30/2004 $14,429 $14,367 $11,579
10/31/2004 $14,581 $14,487 $11,640
11/30/2004 $14,555 $14,371 $11,646
12/31/2004 $14,698 $14,504 $11,604
1/31/2005 $14,783 $14,595 $11,628
2/28/2005 $14,764 $14,509 $11,695
3/31/2005 $14,618 $14,434 $11,787
4/30/2005 $14,774 $14,629 $11,866
5/31/2005 $14,921 $14,788 $11,854
6/30/2005 $14,991 $14,868 $11,860
7/31/2005 $14,882 $14,733 $11,915
8/31/2005 $15,075 $14,922 $11,976
9/30/2005 $14,908 $14,768 $12,122
10/31/2005 $14,789 $14,651 $12,146
11/30/2005 $14,861 $14,716 $12,049
12/31/2005 $15,000 $14,856 $12,000
1/31/2006 $15,063 $14,857 $12,091
2/28/2006 $15,121 $14,906 $12,116
3/31/2006 $14,971 $14,760 $12,183
4/30/2006 $14,984 $14,733 $12,287
5/31/2006 $14,958 $14,717 $12,348
6/30/2006 $14,958 $14,749 $12,372
7/31/2006 $15,177 $14,948 $12,409
8/31/2006 $15,397 $15,177 $12,433
9/30/2006 $15,521 $15,310 $12,372
10/31/2006 $15,651 $15,411 $12,305
11/30/2006 $15,853 $15,590 $12,287
12/31/2006 $15,768 $15,500 $12,305
1/31/2007 $15,771 $15,493 $12,342
2/28/2007 $15,972 $15,732 $12,408
3/31/2007 $16,006 $15,733 $12,521
4/30/2007 $16,155 $15,818 $12,603
5/31/2007 $16,079 $15,698 $12,680
6/30/2007 $15,985 $15,651 $12,704
7/31/2007 $15,975 $15,782 $12,701
8/31/2007 $16,077 $15,975 $12,678
9/30/2007 $16,355 $16,096 $12,713
10/31/2007 $16,432 $16,241 $12,740
11/30/2007 $16,556 $16,533 $12,816
12/31/2007 $16,576 $16,579 $12,807
1/31/2008 $16,730 $16,858 $12,871
2/29/2008 $16,660 $16,881 $12,908
3/31/2008 $16,633 $16,939 $13,020
4/30/2008 $16,799 $16,904 $13,099
5/31/2008 $16,694 $16,780 $13,209
6/30/2008 $16,501 $16,766 $13,342
7/31/2008 $16,373 $16,752 $13,412
8/31/2008 $16,393 $16,912 $13,359
9/30/2008 $15,845 $16,684 $13,340
10/31/2008 $15,013 $16,291 $13,206
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
(COMMONLY CALLED JUNK BONDS) INCLUDE HIGHER RISK OF DEFAULT AND LOSS OF
PRINCIPAL. INVESTMENT IN FOREIGN SECURITIES ALSO INVOLVES SPECIAL RISKS,
INCLUDING CURRENCY FLUCTUATIONS AND POLITICAL AND ECONOMIC UNCERTAINTY. THE
FUND'S USE OF FOREIGN CURRENCY TECHNIQUES INVOLVES SPECIAL RISKS AS SUCH
TECHNIQUES MAY NOT ACHIEVE THE ANTICIPATED BENEFITS AND/OR MAY RESULT IN LOSSES
TO THE 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: 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.) If the manager and administrator had not waived fees, the Fund's
distribution rate and total return would have been lower, and yield for the
period would have been 5.59%, 5.43%, 5.43%, 5.58% and 6.11% for Classes A,
B, C, R and Advisor, respectively.
(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.
(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 10/31/08.
(6.) Yield, calculated as required by the SEC, is based on the earnings of the
Fund's portfolio for the 30 days ended 10/31/08.
(7.) Figures are as stated in the Fund's prospectus current as of the date of
this report.
(8.) Source: (C) 2008 Morningstar. The BC 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
Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor
Statistics, is a commonly used measure of the inflation rate.
48 | Annual Report
Your Fund's Expenses
FRANKLIN TOTAL RETURN FUND
As a Fund shareholder, you can incur two types of costs:
- - Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
- - 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.
Annual Report | 49
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
VALUE 5/1/08 VALUE 10/31/08 PERIOD* 5/1/08-10/31/08
----------------- -------------- -----------------------
CLASS A
Actual $1,000 $ 893.30 $4.05
Hypothetical (5% return before expenses) $1,000 $1,020.86 $4.32
CLASS B
Actual $1,000 $ 891.60 $5.94
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.34
CLASS C
Actual $1,000 $ 891.60 $5.94
Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.34
CLASS R
Actual $1,000 $ 892.20 $5.23
Hypothetical (5% return before expenses) $1,000 $1,019.61 $5.58
ADVISOR CLASS
Actual $1,000 $ 893.70 $2.86
Hypothetical (5% return before expenses) $1,000 $1,022.12 $3.05
* Expenses are calculated using the most recent six-month expense ratio, net
of expense waivers, annualized 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 184/366 to reflect the one-half year
period.
50 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 8.87 $ 8.88 $ 8.93 $ 9.06 $ 9.16
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income ............................................. 0.344 0.380 0.303 0.292 0.277
Net realized and unrealized gains (losses) ........................ 0.010 0.053 0.025 (0.129) (0.102)
-------- -------- -------- -------- --------
Total from investment operations ..................................... 0.354 0.433 0.328 0.163 0.175
-------- -------- -------- -------- --------
Less distributions from net investment income ........................ (0.364) (0.443) (0.378) (0.293) (0.275)
-------- -------- -------- -------- --------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ......................................... $ 8.86 $ 8.87 $ 8.88 $ 8.93 $ 9.06
======== ======= ======== ======== ========
Total return(d) ...................................................... 4.06% 4.99% 3.75% 1.82% 1.94%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .......................................................... 0.90%(f) 0.91%(f) 0.89%(f) 0.90% 0.89%
Net investment income ................................................ 3.64% 4.29% 3.50% 3.23% 3.01%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $586,696 $333,425 $372,703 $475,213 $577,073
Portfolio turnover rate(g) ........................................... 23.83% 27.39% 15.91% 24.99% 49.67%
Portfolio turnover rate excluding mortgage dollar rolls(g,h) ......... 23.83% 27.39% 15.91% 24.99% 45.38%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Prior to October 27, 2005, the expense ratio includes the Fund's share of
the U.S. Government Adjustable Rate Mortgage Portfolio's (Portfolio)
allocated net expenses.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Prior to October 27, 2005, represents the Portfolio's rate of turnover.
(h) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 51
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31,
------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 8.87 $ 8.88 $ 8.92 $ 9.05 $ 9.16
-------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.314 0.348 0.266 0.258 0.232
Net realized and unrealized gains (losses) ........................ 0.004 0.048 0.038 (0.129) (0.104)
-------- ------- ------- ------- -------
Total from investment operations ..................................... 0.318 0.396 0.304 0.129 0.128
-------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.328) (0.406) (0.344) (0.259) (0.238)
-------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 8.86 $ 8.87 $ 8.88 $ 8.92 $ 9.05
======== ======= ======= ======= =======
Total return(d) ...................................................... 3.64% 4.56% 3.47% 1.43% 1.41%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .......................................................... 1.30%(f) 1.32%(f) 1.28%(f) 1.28% 1.29%
Net investment income ................................................ 3.24% 3.88% 3.11% 2.85% 2.61%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $132,254 $36,684 $35,967 $48,461 $49,423
Portfolio turnover rate(g) ........................................... 23.83% 27.39% 15.91% 24.99% 49.67%
Portfolio turnover rate excluding mortgage dollar rolls(g,h) ......... 23.83% 27.39% 15.91% 24.99% 45.38%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Prior to October 27, 2005, the expense ratio includes the Fund's share of
the U.S. Government Adjustable Rate Mortgage Portfolio's (Portfolio)
allocated net expenses.
(f) Benefit of expense reduction rounds to less than 0.01%.
(g) Prior to October 27, 2005, represents the Portfolio's rate of turnover.
(h) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
52 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
PERIOD ENDED
OCTOBER 31,
ADVISOR CLASS 2008(a)
- ------------------------------------------------------------ ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ....................... $ 8.88
-------
Income from investment operations(b):
Net investment income ................................... 0.154
Net realized and unrealized gains (losses) .............. (0.009)
-------
Total from investment operations ........................... 0.145
-------
Less distributions from net investment income .............. (0.155)
-------
Redemption fees(c,d) ....................................... --
-------
Net asset value, end of period ............................. $ 8.87
=======
Total return(e) ............................................ 1.64%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses(g) ................................................ 0.65%
Net investment income ...................................... 3.89%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .......................... $ 4,124
Portfolio turnover rate .................................... 23.83%
(a) For the period May 15, 2008 (effective date) to October 31, 2008.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Amount rounds to less than $0.001 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 53
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ---------- ----------
MORTGAGE-BACKED SECURITIES 70.0%
(a) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 10.9%
FHLMC, 4.195%, 1/01/34 ................................................... $3,364,434 $3,442,990
FHLMC, 4.275%, 6/01/35 ................................................... 73,345 73,663
FHLMC, 4.378%, 6/01/35 ................................................... 1,787,321 1,804,282
FHLMC, 4.72%, 4/01/35 .................................................... 218,431 218,904
FHLMC, 4.915%, 10/01/33 .................................................. 919,290 935,607
FHLMC, 4.97%, 11/01/35 ................................................... 251,458 250,662
FHLMC, 5.008%, 7/01/18 ................................................... 191,804 195,275
FHLMC, 5.021%, 9/01/18 ................................................... 708,661 724,210
FHLMC, 5.035%, 7/01/27 ................................................... 369,944 378,387
FHLMC, 5.121%, 1/01/36 ................................................... 231,452 232,317
FHLMC, 5.175%, 10/01/18 .................................................. 29,250 29,818
FHLMC, 5.177%, 7/01/20 ................................................... 100,022 102,095
FHLMC, 5.222%, 12/01/35 .................................................. 305,974 306,961
FHLMC, 5.23%, 9/01/31 .................................................... 99,497 100,150
FHLMC, 5.24%, 3/01/19 .................................................... 46,617 47,820
FHLMC, 5.25%, 9/01/31 .................................................... 294,490 299,548
FHLMC, 5.274%, 10/01/29 .................................................. 140,814 142,644
FHLMC, 5.283%, 8/01/31 ................................................... 101,704 101,561
FHLMC, 5.305%, 8/01/30 ................................................... 159,923 165,617
FHLMC, 5.334%, 9/01/34 ................................................... 2,136,819 2,204,123
FHLMC, 5.339%, 5/01/20 ................................................... 1,200,009 1,210,780
FHLMC, 5.361%, 4/01/30 ................................................... 325,530 334,881
FHLMC, 5.364%, 3/01/35 ................................................... 38,623 39,030
FHLMC, 5.398%, 7/01/29 ................................................... 77,229 79,062
FHLMC, 5.413%, 8/01/32 ................................................... 348,850 356,668
FHLMC, 5.434%, 10/01/24 .................................................. 1,027,715 1,047,424
FHLMC, 5.478%, 9/01/32 ................................................... 927,329 949,923
FHLMC, 5.50%, 8/01/32 .................................................... 2,100,731 2,117,614
FHLMC, 5.501%, 3/01/37 ................................................... 6,356,671 6,368,915
FHLMC, 5.502%, 12/01/19 .................................................. 1,647,916 1,678,212
FHLMC, 5.507%, 8/01/27 ................................................... 943,223 951,197
FHLMC, 5.518%, 3/01/18 ................................................... 155,528 157,468
FHLMC, 5.54%, 4/01/19 - 6/01/29 .......................................... 3,441,768 3,498,335
FHLMC, 5.569%, 4/01/25 ................................................... 1,144,932 1,143,606
FHLMC, 5.584%, 9/01/19 ................................................... 350,439 357,629
FHLMC, 5.585%, 12/01/28 .................................................. 330,922 341,408
FHLMC, 5.611%, 11/01/29 .................................................. 2,843,910 2,905,015
FHLMC, 5.645%, 4/01/29 ................................................... 1,225,984 1,250,190
FHLMC, 5.708%, 1/01/23 ................................................... 3,369,256 3,438,763
FHLMC, 5.737%, 10/01/31 .................................................. 2,399,552 2,424,713
FHLMC, 5.756%, 5/01/25 ................................................... 289,085 296,901
FHLMC, 5.764%, 8/01/30 ................................................... 2,192,882 2,247,435
FHLMC, 5.778%, 2/01/37 ................................................... 5,852,296 5,932,071
FHLMC, 5.843%, 5/01/32 ................................................... 294,729 297,863
FHLMC, 5.855%, 1/01/23 ................................................... 382,267 391,490
FHLMC, 5.869%, 3/01/32 ................................................... 1,024,505 1,043,295
FHLMC, 5.875%, 11/01/16 .................................................. 365,344 372,729
54 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ----------- -----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE (CONTINUED)
FHLMC, 5.902%, 11/01/25 .................................................. $ 3,627,401 $ 3,645,212
FHLMC, 5.916%, 12/01/30 .................................................. 1,064,192 1,094,920
FHLMC, 5.927%, 6/01/35 ................................................... 84,865 86,185
FHLMC, 5.928%, 4/01/18 ................................................... 715,864 729,910
FHLMC, 5.931%, 6/01/26 ................................................... 2,745,770 2,813,434
FHLMC, 5.94%, 2/01/33 .................................................... 147,973 151,911
FHLMC, 5.955%, 2/01/19 ................................................... 140,140 140,690
FHLMC, 6.184%, 5/01/32 - 12/01/34 ........................................ 7,343,916 7,395,877
FHLMC, 6.185%, 4/01/25 ................................................... 1,276,739 1,315,585
FHLMC, 6.188%, 3/01/32 ................................................... 277,421 282,177
FHLMC, 6.222%, 9/01/36 ................................................... 3,449,363 3,540,232
FHLMC, 6.228%, 12/01/32 .................................................. 146,224 148,109
FHLMC, 6.292%, 11/01/29 .................................................. 660,779 684,409
FHLMC, 6.328%, 11/01/35 .................................................. 446,477 464,670
FHLMC, 6.394%, 6/01/26 ................................................... 406,013 413,782
FHLMC, 6.402%, 12/01/16 .................................................. 238,271 242,649
FHLMC, 6.42%, 11/01/31 ................................................... 1,550,396 1,580,658
FHLMC, 6.422%, 10/01/25 .................................................. 446,563 455,319
FHLMC, 6.44%, 3/01/33 .................................................... 61,079 62,025
FHLMC, 6.462%, 5/01/26 ................................................... 176,261 180,618
FHLMC, 6.725%, 12/01/27 .................................................. 52,020 54,019
FHLMC, 6.762%, 12/01/21 .................................................. 39,248 41,506
-----------
78,513,148
-----------
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 55.5%
FNMA, 3.23%, 9/01/16 ..................................................... 22,913 22,347
FNMA, 3.62%, 8/01/16 ..................................................... 75,526 74,124
FNMA, 3.792%, 6/01/33 .................................................... 1,721,924 1,727,676
FNMA, 3.805%, 1/01/34 .................................................... 31,206 30,919
FNMA, 3.943%, 1/01/29 .................................................... 3,314,341 3,294,986
FNMA, 3.947%, 5/01/18 .................................................... 4,615,588 4,603,620
FNMA, 3.948%, 9/01/18 - 3/01/35 .......................................... 16,763,852 16,699,278
FNMA, 3.958%, 6/01/20 .................................................... 1,212,502 1,212,433
FNMA, 3.963%, 1/01/18 .................................................... 6,411,478 6,386,407
FNMA, 3.974%, 8/01/26 .................................................... 119,336 118,516
FNMA, 4.079%, 3/01/33 .................................................... 2,263,135 2,252,776
FNMA, 4.082%, 6/01/35 .................................................... 80,845 81,128
FNMA, 4.164%, 7/01/24 .................................................... 850,644 847,946
FNMA, 4.238%, 1/01/35 .................................................... 36,901 37,763
FNMA, 4.25%, 1/01/34 - 2/01/34 ........................................... 94,395 93,451
FNMA, 4.266%, 11/01/34 ................................................... 275,214 273,430
FNMA, 4.267%, 7/01/35 .................................................... 78,279 78,484
FNMA, 4.268%, 5/01/36 .................................................... 1,634,780 1,628,566
FNMA, 4.27%, 1/01/34 ..................................................... 39,446 39,263
FNMA, 4.284%, 12/01/33 - 1/01/34 ......................................... 260,632 258,721
FNMA, 4.297%, 5/01/33 .................................................... 12,251 12,275
FNMA, 4.329%, 7/01/35 .................................................... 125,384 125,756
Annual Report | 55
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ----------- -----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 4.34%, 2/01/34 ..................................................... $ 4,970,474 $ 4,948,337
FNMA, 4.342%, 9/01/32 - 9/01/33 .......................................... 1,075,274 1,084,272
FNMA, 4.359%, 5/01/35 .................................................... 3,847,885 3,850,103
FNMA, 4.361%, 6/01/35 .................................................... 139,147 139,910
FNMA, 4.363%, 5/01/36 .................................................... 2,756,923 2,746,672
FNMA, 4.397%, 1/01/35 .................................................... 668,476 671,340
FNMA, 4.406%, 8/01/35 .................................................... 57,633 57,612
FNMA, 4.407%, 8/01/34 .................................................... 933,591 934,500
FNMA, 4.42%, 10/01/34 .................................................... 200,935 201,107
FNMA, 4.423%, 6/01/35 .................................................... 251,190 252,314
FNMA, 4.426%, 5/01/35 .................................................... 35,288 35,439
FNMA, 4.446%, 1/01/35 .................................................... 22,009,806 22,149,701
FNMA, 4.469%, 1/01/19 .................................................... 1,443,758 1,434,767
FNMA, 4.474%, 4/01/35 .................................................... 11,773,556 11,836,474
FNMA, 4.486%, 10/01/33 ................................................... 419,972 420,710
FNMA, 4.499%, 7/01/35 .................................................... 93,070 93,964
FNMA, 4.50%, 3/01/34 ..................................................... 1,214,460 1,219,729
FNMA, 4.501%, 5/01/35 .................................................... 116,315 116,948
FNMA, 4.51%, 3/01/34 ..................................................... 80,703 81,404
FNMA, 4.522%, 8/01/35 .................................................... 8,942,757 8,916,489
FNMA, 4.533%, 6/01/33 .................................................... 203,122 205,478
FNMA, 4.538%, 2/01/33 .................................................... 220,380 222,149
FNMA, 4.542%, 3/01/35 .................................................... 4,433,056 4,453,398
FNMA, 4.548%, 10/01/33 ................................................... 32,657 33,103
FNMA, 4.553%, 2/01/35 .................................................... 36,987 37,458
FNMA, 4.557%, 4/01/35 .................................................... 378,681 377,309
FNMA, 4.561%, 8/01/34 .................................................... 4,163,227 4,242,169
FNMA, 4.563%, 5/01/19 - 4/01/34 .......................................... 3,549,589 3,540,801
FNMA, 4.579%, 6/01/33 .................................................... 70,764 70,898
FNMA, 4.581%, 1/01/35 .................................................... 2,851,855 2,879,447
FNMA, 4.585%, 2/01/35 .................................................... 166,951 167,063
FNMA, 4.591%, 8/01/34 .................................................... 78,092 79,111
FNMA, 4.60%, 10/01/33 .................................................... 30,039 30,459
FNMA, 4.626%, 10/01/34 ................................................... 30,257,522 30,283,448
FNMA, 4.627%, 4/01/22 .................................................... 956,827 952,386
FNMA, 4.64%, 4/01/33 ..................................................... 5,933 5,929
FNMA, 4.658%, 4/01/34 - 10/01/35 ......................................... 5,630,262 5,618,225
FNMA, 4.665%, 10/01/33 ................................................... 84,848 86,113
FNMA, 4.67%, 4/01/33 ..................................................... 115,547 117,268
FNMA, 4.675%, 10/01/34 ................................................... 82,697 82,842
FNMA, 4.687%, 9/01/34 .................................................... 251,575 252,743
FNMA, 4.694%, 10/01/34 ................................................... 243,650 244,287
FNMA, 4.70%, 9/01/32 ..................................................... 997,322 997,658
FNMA, 4.708%, 1/01/19 .................................................... 370,971 371,012
FNMA, 4.721%, 8/01/33 - 7/01/34 .......................................... 211,648 211,644
FNMA, 4.74%, 8/01/33 ..................................................... 1,238,783 1,238,019
FNMA, 4.743%, 10/01/34 ................................................... 943,398 955,299
56 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ----------- -----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 4.761%, 11/01/32 - 9/01/35 ......................................... $ 3,780,084 $ 3,777,984
FNMA, 4.766%, 1/01/16 .................................................... 615,709 622,570
FNMA, 4.777%, 4/01/35 .................................................... 1,280,505 1,279,698
FNMA, 4.78%, 2/01/34 ..................................................... 5,924,914 5,944,078
FNMA, 4.782%, 10/01/28 ................................................... 112,817 111,772
FNMA, 4.783%, 7/01/33 .................................................... 4,002,276 3,999,527
FNMA, 4.787%, 6/01/35 .................................................... 22,741,837 22,742,981
FNMA, 4.788%, 9/01/34 .................................................... 131,178 132,123
FNMA, 4.793%, 3/01/19 .................................................... 2,242,192 2,228,855
FNMA, 4.797%, 9/01/34 .................................................... 77,586 78,166
FNMA, 4.814%, 10/01/31 ................................................... 220,915 221,550
FNMA, 4.82%, 7/01/32 ..................................................... 122,195 123,806
FNMA, 4.821%, 8/01/34 .................................................... 156,420 160,044
FNMA, 4.829%, 8/01/34 .................................................... 65,622 65,885
FNMA, 4.834%, 9/01/34 .................................................... 11,999 12,094
FNMA, 4.84%, 12/01/33 .................................................... 84,361 84,877
FNMA, 4.843%, 8/01/33 .................................................... 44,732 46,307
FNMA, 4.845%, 8/01/34 .................................................... 106,177 106,602
FNMA, 4.846%, 10/01/34 ................................................... 221,255 224,318
FNMA, 4.848%, 9/01/35 .................................................... 13,350,088 13,341,886
FNMA, 4.857%, 9/01/34 .................................................... 65,543 65,618
FNMA, 4.861%, 9/01/34 .................................................... 161,806 162,611
FNMA, 4.867%, 5/01/32 .................................................... 404,871 404,133
FNMA, 4.874%, 4/01/33 .................................................... 161,389 162,125
FNMA, 4.886%, 8/01/34 .................................................... 22,905 22,997
FNMA, 4.893%, 4/01/19 - 9/01/32 .......................................... 1,207,862 1,204,334
FNMA, 4.909%, 4/01/35 .................................................... 708,561 708,380
FNMA, 4.917%, 7/01/34 .................................................... 159,430 159,506
FNMA, 4.923%, 8/01/34 .................................................... 148,647 152,246
FNMA, 4.929%, 8/01/34 .................................................... 372,611 380,994
FNMA, 4.939%, 5/01/35 .................................................... 7,047,895 7,030,706
FNMA, 4.942%, 8/01/21 .................................................... 1,764,058 1,744,073
FNMA, 4.944%, 9/01/34 .................................................... 49,505 49,660
FNMA, 4.967%, 10/01/32 ................................................... 774,832 790,175
FNMA, 4.973%, 7/01/34 .................................................... 100,719 101,124
FNMA, 4.98%, 8/01/34 ..................................................... 174,078 176,849
FNMA, 4.987%, 4/01/32 .................................................... 490,421 489,535
FNMA, 4.99%, 4/01/18 ..................................................... 134,828 134,091
FNMA, 4.995%, 3/01/20 .................................................... 1,925,936 1,937,397
FNMA, 4.997%, 6/01/32 .................................................... 538,754 551,680
FNMA, 5.002%, 9/01/34 .................................................... 532,733 544,893
FNMA, 5.008%, 12/01/20 ................................................... 190,572 191,101
FNMA, 5.02%, 2/01/34 ..................................................... 102,656 104,294
FNMA, 5.025%, 6/01/19 .................................................... 263,731 268,443
FNMA, 5.033%, 1/01/38 .................................................... 38,269,198 38,545,190
FNMA, 5.034%, 5/01/19 .................................................... 247,608 250,745
FNMA, 5.041%, 10/01/19 ................................................... 350,221 354,295
Annual Report | 57
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ----------- -----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 5.048%, 6/01/31 .................................................... $ 425,233 $ 434,090
FNMA, 5.049%, 7/01/31 .................................................... 22,128 22,620
FNMA, 5.054%, 12/01/34 ................................................... 8,237,619 8,525,281
FNMA, 5.055%, 12/01/35 ................................................... 4,322,454 4,333,019
FNMA, 5.065%, 3/01/22 .................................................... 1,189 1,195
FNMA, 5.069%, 1/01/25 .................................................... 1,800,617 1,800,975
FNMA, 5.072%, 5/01/35 .................................................... 280,948 286,367
FNMA, 5.076%, 7/01/33 .................................................... 634,343 648,865
FNMA, 5.092%, 9/01/34 .................................................... 29,173 29,305
FNMA, 5.093%, 10/01/33 - 9/01/34 ......................................... 770,029 781,715
FNMA, 5.095%, 3/01/19 .................................................... 266,383 270,568
FNMA, 5.107%, 3/01/18 .................................................... 129,036 130,182
FNMA, 5.117%, 7/01/34 .................................................... 763,849 765,454
FNMA, 5.119%, 12/01/17 ................................................... 93,907 94,786
FNMA, 5.121%, 3/01/35 .................................................... 9,032 9,354
FNMA, 5.128%, 6/01/19 - 10/01/32 ......................................... 371,543 369,608
FNMA, 5.135%, 8/01/29 .................................................... 162,308 162,686
FNMA, 5.142%, 9/01/31 .................................................... 144,094 146,472
FNMA, 5.15%, 5/01/35 ..................................................... 26,646 26,642
FNMA, 5.151%, 2/01/36 .................................................... 1,616,795 1,618,596
FNMA, 5.155%, 6/01/31 - 11/01/31 ......................................... 598,001 610,669
FNMA, 5.161%, 10/01/18 ................................................... 19,567 19,706
FNMA, 5.18%, 8/01/31 - 3/01/36 ........................................... 466,600 474,585
FNMA, 5.183%, 11/01/36 ................................................... 536,455 540,176
FNMA, 5.185%, 12/01/19 ................................................... 250,646 251,755
FNMA, 5.199%, 4/01/32 .................................................... 535,288 548,576
FNMA, 5.204%, 3/01/21 .................................................... 53,681 54,337
FNMA, 5.21%, 9/01/15 ..................................................... 426,429 434,631
FNMA, 5.215%, 5/01/31 .................................................... 114,639 116,451
FNMA, 5.228%, 1/01/31 .................................................... 295,861 301,130
FNMA, 5.229%, 3/01/20 .................................................... 116,186 116,417
FNMA, 5.24%, 10/01/22 .................................................... 471,932 472,466
FNMA, 5.245%, 12/01/20 ................................................... 263,137 266,156
FNMA, 5.246%, 6/01/32 .................................................... 364,092 381,775
FNMA, 5.249%, 11/01/34 ................................................... 250,643 253,829
FNMA, 5.25%, 10/01/30 .................................................... 258,314 260,204
FNMA, 5.262%, 9/01/32 .................................................... 536,313 540,322
FNMA, 5.265%, 6/01/27 .................................................... 396,578 396,800
FNMA, 5.271%, 2/01/16 .................................................... 286,063 289,237
FNMA, 5.28%, 3/01/35 ..................................................... 22,117 22,536
FNMA, 5.288%, 5/01/36 .................................................... 119,562 120,924
FNMA, 5.299%, 4/01/27 .................................................... 2,496,469 2,594,324
FNMA, 5.307%, 3/01/36 .................................................... 750,262 759,534
FNMA, 5.31%, 8/01/32 - 12/01/34 .......................................... 347,190 353,014
FNMA, 5.311%, 1/01/34 .................................................... 641,888 657,462
FNMA, 5.321%, 5/01/29 .................................................... 143,520 144,623
FNMA, 5.328%, 5/01/29 .................................................... 216,325 215,902
58 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ---------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 5.334%, 1/01/29 - 10/01/35 ......................................... $ 658,661 $ 668,946
FNMA, 5.336%, 5/01/32 .................................................... 636,014 654,908
FNMA, 5.338%, 11/01/20 ................................................... 155,438 157,479
FNMA, 5.34%, 3/01/32 - 5/01/32 ........................................... 631,800 635,718
FNMA, 5.341%, 9/01/22 .................................................... 854,191 860,153
FNMA, 5.345%, 3/01/28 - 9/01/39 .......................................... 718,017 726,299
FNMA, 5.347%, 6/01/19 .................................................... 94,272 94,899
FNMA, 5.348%, 9/01/29 - 2/01/36 .......................................... 574,500 583,710
FNMA, 5.354%, 3/01/19 .................................................... 136,293 137,079
FNMA, 5.36%, 8/01/35 ..................................................... 4,597,897 4,624,280
FNMA, 5.381%, 10/01/24 ................................................... 5,277,062 5,464,296
FNMA, 5.386%, 11/01/17 ................................................... 1,567,461 1,566,376
FNMA, 5.393%, 1/01/32 .................................................... 1,095,327 1,119,676
FNMA, 5.397%, 1/01/19 .................................................... 788,711 782,139
FNMA, 5.402%, 2/01/31 .................................................... 146,036 146,629
FNMA, 5.426%, 5/01/21 .................................................... 656,269 676,897
FNMA, 5.432%, 3/01/32 .................................................... 1,060,538 1,071,402
FNMA, 5.439%, 1/01/29 - 12/01/32 ......................................... 1,090,723 1,116,528
FNMA, 5.444%, 5/01/27 .................................................... 1,254,458 1,281,856
FNMA, 5.449%, 1/01/31 .................................................... 724,128 737,094
FNMA, 5.464%, 12/01/27 ................................................... 676,640 678,841
FNMA, 5.469%, 5/01/25 .................................................... 889,947 907,170
FNMA, 5.489%, 11/01/30 ................................................... 4,186,130 4,364,240
FNMA, 5.491%, 10/01/37 ................................................... 8,314,464 8,404,943
FNMA, 5.505%, 2/01/25 .................................................... 715,931 737,464
FNMA, 5.518%, 11/01/17 ................................................... 352,687 355,433
FNMA, 5.519%, 11/01/36 ................................................... 267,965 267,806
FNMA, 5.539%, 7/01/26 .................................................... 731,946 737,909
FNMA, 5.546%, 7/01/34 .................................................... 322,580 324,661
FNMA, 5.598%, 9/01/25 .................................................... 355,826 357,193
FNMA, 5.601%, 4/01/30 .................................................... 497,466 503,026
FNMA, 5.606%, 2/01/29 .................................................... 238,837 241,273
FNMA, 5.61%, 1/01/37 ..................................................... 2,116,139 2,128,371
FNMA, 5.638%, 1/01/19 .................................................... 301,809 303,898
FNMA, 5.645%, 11/01/31 ................................................... 300,123 298,458
FNMA, 5.647%, 11/01/31 ................................................... 158,060 158,995
FNMA, 5.661%, 10/01/14 ................................................... 68,581 69,416
FNMA, 5.676%, 12/01/19 ................................................... 553,569 557,921
FNMA, 5.684%, 2/01/32 .................................................... 610,032 609,737
FNMA, 5.688%, 11/01/27 ................................................... 74,004 74,329
FNMA, 5.72%, 5/01/19 ..................................................... 250,410 252,495
FNMA, 5.722%, 5/01/36 .................................................... 7,770,176 7,967,053
FNMA, 5.739%, 6/01/19 .................................................... 290,940 289,324
FNMA, 5.788%, 2/01/18 - 12/01/24 ......................................... 658,872 680,690
FNMA, 5.791%, 8/01/28 .................................................... 1,253,421 1,262,850
FNMA, 5.796%, 6/01/29 .................................................... 674,436 702,150
FNMA, 5.823%, 6/01/35 .................................................... 280,385 284,584
FNMA, 5.827%, 11/01/33 ................................................... 445,105 453,009
Annual Report | 59
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ----------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 5.837%, 11/01/26 ................................................... $ 78,928 80,607
FNMA, 5.861%, 9/01/29 .................................................... 267,283 $ 272,950
FNMA, 5.875%, 1/01/17 .................................................... 550,608 555,995
FNMA, 5.886%, 6/01/28 .................................................... 1,906,900 1,996,561
FNMA, 5.892%, 2/01/35 .................................................... 7,720 7,734
FNMA, 5.918%, 3/01/35 .................................................... 29,370 29,491
FNMA, 5.935%, 1/01/35 .................................................... 318,925 321,864
FNMA, 5.944%, 4/01/19 .................................................... 564,473 568,350
FNMA, 5.947%, 1/01/35 .................................................... 187,938 190,065
FNMA, 5.975%, 5/01/25 .................................................... 599,810 620,463
FNMA, 6.012%, 6/01/19 .................................................... 187,368 191,304
FNMA, 6.02%, 7/01/17 ..................................................... 773,171 772,422
FNMA, 6.04%, 12/01/18 .................................................... 153,689 156,885
FNMA, 6.047%, 2/01/30 .................................................... 216,030 223,113
FNMA, 6.052%, 3/01/33 .................................................... 88,778 89,189
FNMA, 6.068%, 4/01/31 .................................................... 1,124,816 1,140,349
FNMA, 6.074%, 2/01/19 .................................................... 257,408 260,507
FNMA, 6.123%, 3/01/20 .................................................... 90,103 92,673
FNMA, 6.125%, 2/01/33 .................................................... 121,257 123,367
FNMA, 6.142%, 3/01/33 .................................................... 1,444,692 1,451,640
FNMA, 6.161%, 8/01/36 .................................................... 20,640,337 21,012,082
FNMA, 6.197%, 5/01/21 .................................................... 301,438 308,823
FNMA, 6.217%, 2/01/35 .................................................... 23,016 23,281
FNMA, 6.243%, 6/01/36 - 9/01/36 .......................................... 5,495,109 5,587,085
FNMA, 6.26%, 12/01/32 .................................................... 1,218,496 1,230,306
FNMA, 6.322%, 11/01/18 ................................................... 93,492 96,654
FNMA, 6.326%, 5/01/28 .................................................... 448,696 461,775
FNMA, 6.345%, 12/01/33 ................................................... 602,379 615,077
FNMA, 6.352%, 1/01/37 .................................................... 784,536 796,064
FNMA, 6.48%, 8/01/22 ..................................................... 62,413 65,143
FNMA, 6.52%, 3/01/32 ..................................................... 164,643 168,074
FNMA, 6.603%, 6/01/17 .................................................... 3,688 3,763
FNMA, 6.662%, 7/01/24 .................................................... 252,898 261,994
FNMA, 6.669%, 3/01/26 .................................................... 709,210 744,123
FNMA, 6.727%, 1/01/26 .................................................... 566,720 585,369
FNMA, 6.835%, 10/01/17 ................................................... 196,428 202,537
FNMA, 6.942%, 12/01/17 ................................................... 135,591 139,379
FNMA, 6.989%, 2/01/20 .................................................... 475,110 478,431
FNMA, 7.687%, 3/01/25 .................................................... 134,072 138,765
------------
401,638,869
------------
(a) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 3.6%
GNMA, 4.625%, 7/20/21 - 9/20/31 .......................................... 6,778,831 6,820,280
GNMA, 5.125%, 10/20/23 - 10/20/26 ........................................ 7,758,793 7,803,658
GNMA, 5.375%, 4/20/22 - 6/20/31 .......................................... 11,389,109 11,443,278
------------
26,067,216
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $508,702,578) ........................... 506,219,233
------------
60 | Annual Report
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
-------------------------------------------------------------------------- ------------ ------------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $56,371) 0.0%(b)
FINANCE 0.0%(b)
(a) Travelers Mortgage Services Inc., 1998-5A, A, FRN, 5.023%, 12/25/18 ...... $ 55,418 $ 43,226
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $508,758,949) ...... 506,262,459
------------
SHARES
------------
SHORT TERM INVESTMENTS 28.2%
MONEY MARKET FUNDS (COST $35,724,785) 4.9%
(c) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ..... 35,724,785 35,724,785
------------
PRINCIPAL
AMOUNT
------------
REPURCHASE AGREEMENTS (COST $168,129,385) 23.3%
(d) Joint Repurchase Agreement, 0.159%, 11/03/08 (Maturity Value
$168,131,607) ......................................................... $168,129,385 168,129,385
ABN AMRO Bank NV, New York Branch (Maturity Value $20,972,737)
Banc of America Securities LLC (Maturity Value $23,410,645)
Barclays Capital Inc. (Maturity Value $20,972,737)
BNP Paribas Securities Corp. (Maturity Value $23,410,645)
Credit Suisse Securities (USA) LLC (Maturity Value $20,972,737)
Deutsche Bank Securities Inc. (Maturity Value $25,226,465)
Dresdner Kleinwort Securities LLC (Maturity Value $9,754,996)
UBS Securities LLC (Maturity Value $23,410,645)
Collateralized by U.S. Government Agency Securities, 2.22% - 5.00%,
11/21/08 - 4/01/13;
(e) U.S. Government Agency Discount Notes, 11/28/08 - 1/30/09;
(e) U.S. Treasury Bills, 10/22/09; and U.S. Treasury Notes,
3.50% - 475%, 2/28/09 - 11/15/09
------------
TOTAL SHORT TERM INVESTMENTS (COST $203,854,170) ......................... 203,854,170
------------
TOTAL INVESTMENTS (COST $712,613,119) 98.2% .............................. 710,116,629
OTHER ASSETS, LESS LIABILITIES 1.8% ...................................... 12,956,725
------------
NET ASSETS 100.0% ........................................................ $723,073,354
============
See Selected Portfolio Abbreviations on page 105.
(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 joint repurchase agreement.
(e) The security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
Annual Report | 61
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- ---------- ---------- ---------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.81 $ 10.06 $ 10.11 $ 10.13 $ 10.03
-------- ---------- ---------- ---------- --------
Income from investment operations(a):
Net investment income ............................................. 0.478 0.645 0.599 0.416 0.281
Net realized and unrealized gains (losses) ........................ (2.152) (0.249) (0.048) (0.018) 0.102
-------- ---------- ---------- ---------- --------
Total from investment operations ..................................... (1.674) 0.396 0.551 0.398 0.383
-------- ---------- ---------- ---------- --------
Less distributions from net investment income ........................ (0.476) (0.646) (0.601) (0.418) (0.283)
-------- ---------- ---------- ---------- --------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- ---------- ---------- ---------- --------
Net asset value, end of year ......................................... $ 7.66 $ 9.81 $ 10.06 $ 10.11 $ 10.13
======== ========== ========== ========== ========
Total return(d) ...................................................... (17.75)% 4.02% 5.59% 4.00% 3.87%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .......................................................... 0.93% 0.89% 0.87% 0.89% 0.94%
Net investment income ................................................ 5.23% 6.44% 5.94% 4.26% 2.71%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $796,384 $1,375,871 $1,742,514 $1,890,591 $615,002
Portfolio turnover rate .............................................. 31.59% 69.25% 74.56% 77.13% 50.52%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
62 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31,
--------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.80 $ 10.06 $ 10.10 $ 10.12 $ 10.02
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.400 0.567 0.524 0.339 0.207
Net realized and unrealized gains (losses) ........................ (2.133) (0.254) (0.037) (0.015) 0.105
------- ------- ------- ------- -------
Total from investment operations ..................................... (1.733) 0.313 0.487 0.324 0.312
------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.407) (0.573) (0.527) (0.344) (0.212)
------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 7.66 $ 9.80 $ 10.06 $ 10.10 $ 10.12
======= ======= ======= ======= =======
Total return(d) ...................................................... (18.28)% 3.17% 4.93% 3.25% 3.14%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .......................................................... 1.67% 1.61% 1.60% 1.62% 1.68%
Net investment income ................................................ 4.49% 5.72% 5.21% 3.53% 1.97%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $17,481 $39,548 $60,972 $65,687 $69,331
Portfolio turnover rate .............................................. 31.59% 69.25% 74.56% 77.13% 50.52%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 63
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31,
-------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.81 $ 10.07 $ 10.11 $ 10.13 $ 10.03
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income ............................................. 0.441 0.605 0.561 0.373 0.239
Net realized and unrealized gains (losses) ........................ (2.140) (0.259) (0.039) (0.015) 0.102
-------- -------- -------- -------- --------
Total from investment operations ..................................... (1.699) 0.346 0.522 0.358 0.341
-------- -------- -------- -------- --------
Less distributions from net investment income ........................ (0.441) (0.606) (0.562) (0.378) (0.241)
-------- -------- -------- -------- --------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ......................................... $ 7.67 $ 9.81 $ 10.07 $ 10.11 $ 10.13
======== ======== ======== ======== ========
Total return(d) ...................................................... (17.96)% 3.50% 5.29% 3.59% 3.44%
RATIOS TO AVERAGE NET ASSETS
Expenses(e) .......................................................... 1.32% 1.29% 1.26% 1.29% 1.34%
Net investment income ................................................ 4.84% 6.04% 5.55% 3.86% 2.31%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $188,240 $382,911 $380,599 $331,218 $270,104
Portfolio turnover rate .............................................. 31.59% 69.25% 74.56% 77.13% 50.52%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
64 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31,
--------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.81 $ 10.08 $ 10.12 $ 10.13 $ 10.04
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.500 0.671 0.630 0.438 0.307
Net realized and unrealized gains (losses) ........................ (2.150) (0.269) (0.043) (0.004) 0.092
------- ------- ------- ------- -------
Total from investment operations ..................................... (1.650) 0.402 0.587 0.434 0.399
------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.500) (0.672) (0.627) (0.444) (0.309)
------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 7.66 $ 9.81 $ 10.08 $ 10.12 $ 10.13
======= ======= ======= ======= =======
Total return ......................................................... (17.54)% 4.08% 5.96% 4.37% 4.03%
RATIOS TO AVERAGE NET ASSETS
Expenses(d) .......................................................... 0.68% 0.64% 0.62% 0.64% 0.69%
Net investment income ................................................ 5.48% 6.69% 6.19% 4.51% 2.96%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $91,831 $85,416 $94,185 $38,822 $37,810
Portfolio turnover rate .............................................. 31.59% 69.25% 74.56% 77.13% 50.52%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Annual Report | 65
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS 86.3%
AEROSPACE & DEFENSE 2.6%
BE Aerospace Inc., Term Loan B, 5.87% - 6.52%, 7/28/14 ................... United States $ 4,887,750 $ 4,496,730
Hawker Beechcraft Inc.,
Synthetic L/C, 5.762%, 3/26/14 ........................................ United States 405,588 263,342
Term Loan B, 5.762%, 3/26/14 .......................................... United States 6,924,737 4,496,135
ILC Industries Inc., June 2006 Term Loan, 5.118%, 2/24/12................. United States 2,359,688 2,277,099
L-1 Identity Solutions Operating Co., Term Loan B, 7.50%, 8/05/13 ........ United States 1,800,000 1,606,500
Spirit Aerosystems Inc. (Onex Wind Finance LP), Term B-1 Loan, 6.50%,
12/31/11 .............................................................. United States 6,020,714 5,132,658
TransDigm Inc., Term Loan B, 5.21%, 6/23/13 .............................. United States 10,715,000 8,210,369
Vought Aircraft Industries Inc., L/C Term Loan, 5.164%, 12/22/10 ......... United States 2,500,000 1,875,000
-----------
28,357,833
-----------
APPAREL, ACCESSORIES & LUXURY GOODS 0.4%
The William Carter Co., Term Loan B, 4.618% - 4.92%, 7/14/12 ............. United States 4,981,378 4,196,811
-----------
APPLICATION SOFTWARE 0.8%
CCC Information Services Group Inc., Term Loan B, 6.02%, 2/10/13.......... United States 1,417,999 1,141,489
Dealer Computer Services Inc. (Reynolds & Reynolds), First Lien Term Loan,
5.171%, 10/26/12 ...................................................... United States 4,987,562 3,241,916
SunGard Data Systems Inc.,
Incremental Term Loan, 6.75%, 2/28/14 .............................. United States 2,700,000 2,233,197
New U.S. Term Loan, 4.553%, 2/28/14 ................................ United States 1,802,902 1,389,522
-----------
8,006,124
-----------
ASSET MANAGEMENT & CUSTODY BANKS 0.2%
Nuveen Investments Inc., Term Loan B, 6.118% - 6.769%, 11/13/14 .......... United States 4,274,261 2,464,825
-----------
AUTO PARTS & EQUIPMENT 3.8%
Affinia Group Inc., Term Loan B, 6.42%, 11/30/11 ......................... United States 6,339,369 4,532,649
Cooper Standard Automotive Inc.,
Term Loan B, 6.313%, 12/23/11 ...................................... Canada 2,562,588 1,787,405
Term Loan C, 6.313%, 12/23/11 ...................................... United States 6,628,478 4,623,363
Dayco Products LLC (Mark IV), Replacement Term Loan, 7.65% - 8.48%,
6/23/11 ............................................................... United States 7,956,921 2,705,353
Federal-Mogul Corp.,
Term Loan B, 4.938% - 6.528%, 12/27/14 ............................. United States 16,442,221 10,009,202
Term Loan C, 4.938% - 6.238%, 12/27/15 ............................. United States 591,690 360,191
Key Safety Systems Inc., Term Loan B, 5.469% - 6.753%, 3/10/14 ........... United States 13,500,736 8,032,938
Tenneco Inc., Synthetic L/C, 5.503%, 3/16/14 ............................. United States 6,463,122 5,041,235
TRW Automotive Inc., Tranche B-1 Term Loan, 4.625% - 5.813%,
2/09/14 ............................................................... United States 2,824,468 2,226,622
United Components Inc., Term Loan D, 4.81%, 6/29/12 ...................... United States 3,377,245 2,570,928
-----------
41,889,886
-----------
BROADCASTING 4.3%
Citadel Broadcasting Corp., Term Loan B, 4.625% - 5.395%, 6/12/14......... United States 14,882,075 8,110,731
Discovery Communications Inc., Term Loan B, 5.762%, 5/14/14 .............. United States 8,097,500 6,712,828
Entravision Communications Corp., Term Loan B, 6.38%, 3/29/13 ............ United States 14,512,667 9,965,369
Gray Television Inc., Term Loan B, 4.25% - 5.65%, 12/31/14 ............... United States 7,366,287 4,198,783
LBI Media Inc., Term Loan B, 4.618%, 3/31/12 ............................. United States 975,000 614,250
66 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
BROADCASTING (CONTINUED)
Mission Broadcasting Inc., Term Loan B, 5.512%, 10/01/12 ................. United States $ 3,851,340 $ 2,676,681
Nexstar Broadcasting Inc., Term Loan B, 5.512%, 10/01/12 ................. United States 3,644,586 2,532,988
Univision Communications Inc., Initial Term Loan, 5.25%, 9/29/14 ......... United States 21,500,000 11,685,250
-----------
46,496,880
-----------
BUILDING PRODUCTS 0.7%
Goodman Global Holdings, Inc., Term Loan B, 7.708%, 2/13/14 .............. United States 3,825,000 3,126,937
NCI Building Systems Inc., Term Loan B, 4.72% - 6.25%, 6/18/10 .......... United States 5,176,516 4,400,039
-----------
7,526,976
-----------
CABLE & SATELLITE 5.6%
Charter Communications Operating LLC,
Incremental Term Loan, 8.77%, 3/06/14 .............................. United States 4,482,488 3,763,420
Term Loan, 5.47% - 5.50%, 3/06/14 .................................. United States 8,217,687 6,187,663
CSC Holdings Inc. (Cablevision), Incremental Term Loan, 4.569%,
3/29/13 ............................................................... United States 13,666,737 11,880,303
DIRECTV Holdings LLC,
Term Loan B, 4.618%, 4/13/13 ....................................... United States 2,490,487 2,215,841
Term Loan C, 5.25% - 5.368%, 4/13/13 ............................... United States 8,920,125 8,173,064
Insight Midwest Holdings, Term Loan B, 5.93%, 4/02/14..................... United States 9,487,500 7,510,941
MCC Iowa,
Term Loan E, 6.50%, 1/03/16 ........................................ United States 2,493,750 2,061,501
Tranche D-1 Term Loan, 3.89%, 1/31/15 .............................. United States 6,148,955 4,473,365
Tranche D-2 Term Loan, 3.89%, 1/31/15 .............................. United States 977,128 710,861
Mediacom LLC, Term Loan C, 3.64%, 1/31/15 ................................ United States 2,724,176 1,981,838
UPC Financing Partnership, Term Loan N, 5.47%, 12/31/14 .................. Netherlands 13,500,000 9,686,250
Virgin Media Dover LLC (NTL Dover LLC), Tranche B4, 5.834%,
9/03/12 ............................................................... United States 3,953,108 2,737,527
-----------
61,382,574
-----------
CASINOS & GAMING 2.1%
Ameristar Casinos Inc., Term Loan B, 5.769%, 11/10/12 .................... United States 4,575,068 2,630,664
Green Valley Ranch Gaming LLC, Term Loan B, 5.00%, 2/16/14................ United States 2,834,246 1,417,123
Las Vegas Sands LLC,
Delayed Draw I Term Loan, 5.52%, 5/23/14 ........................... United States 1,789,280 1,029,283
Term Loan B, 5.52%, 5/23/14 ........................................ United States 6,915,255 3,978,000
Penn National Gaming Inc.,
Term Loan A, 4.72%, 10/03/11 ....................................... United States 2,027,907 1,708,512
Term Loan B, 4.55% - 5.29%, 10/03/12 ............................... United States 2,533,497 2,118,285
VML U.S. Finance LLC (Venetian Macau),
Delayed Draw, 6.02%, 5/25/12 ....................................... Macau 4,785,438 3,074,644
New Project Term Loans, 6.02%, 5/25/13.............................. Macau 6,032,721 3,876,023
Term Loan B, 6.02%, 5/25/13 ........................................ Macau 4,431,841 2,847,458
-----------
22,679,992
-----------
COAL & CONSUMABLE FUELS 0.2%
Alpha Natural Resources LLC, Term Loan B, 5.563%, 10/26/12 ............... United States 2,664,489 2,467,983
-----------
Annual Report | 67
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
COMMERCIAL PRINTING 0.2%
Cenveo Corp.,
Delayed Draw Term Loan, 4.954%, 6/21/13............................. United States $ 24,480 $ 18,482
Term Loan C, 4.954%, 6/21/13........................................ United States 2,473,758 1,867,688
-----------
1,886,170
-----------
COMMODITY CHEMICALS 0.7%
Lyondell Chemical Co.,
Tranche B-1, 8.044%, 12/20/14....................................... United States 3,482,500 2,094,236
Tranche B-2, 8.044%, 12/20/14....................................... United States 8,759,741 5,270,447
-----------
7,364,683
-----------
COMMUNICATIONS EQUIPMENT 0.4%
CommScope Inc., Term Loan B, 5.50% - 6.262%, 12/26/14..................... United States 5,723,010 4,406,717
-----------
CONSTRUCTION & ENGINEERING 0.3%
CONTECH Construction Products Inc., Term Loan B, 5.00%, 1/31/13........... United States 5,289,135 3,530,498
-----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS 1.1%
Oshkosh Truck Corp.,
Term Loan A, 4.62% - 6.09%, 12/06/11................................ United States 1,937,500 1,627,500
Term Loan B, 4.32% - 6.09%, 12/06/13................................ United States 15,376,937 10,725,413
-----------
12,352,913
-----------
CONSTRUCTION MATERIALS 0.3%
Headwaters Inc., Term Loan B, 8.27%, 4/30/11.............................. United States 3,222,250 2,932,247
-----------
DATA PROCESSING & OUTSOURCED SERVICES 2.7%
Affiliated Computer Services Inc.,
Additional Term Loan, 5.00% - 6.513%, 3/20/13....................... United States 5,409,895 4,581,505
Term Loan B, 5.259%, 3/20/13........................................ United States 2,327,071 1,970,739
Emdeon Business Services LLC, First Lien Term Loan, 4.81% - 5.762%,
11/16/13............................................................... United States 3,778,411 2,852,700
First Data Corp.,
Term Loan B-2, 5.948% - 6.512%, 9/24/14............................. United States 671,437 497,103
Term Loan B-3, 5.948% - 6.512%, 9/24/14............................. United States 2,859,825 2,109,121
infoGROUP Inc.,
2006 Term Loan, 5.77%, 2/10/12...................................... United States 4,573,851 4,024,989
2007 Term Loan, 5.77%, 2/10/12...................................... United States 2,947,500 2,593,800
Lender Processing Services Inc., Term Loan B, 5.618%, 7/02/14............. United States 4,887,750 4,496,730
Metavante Corp., Term Loan B, 4.551%, 11/01/14............................ United States 8,259,734 6,772,982
-----------
29,899,669
-----------
DISTILLERS & VINTNERS 0.5%
Constellation Brands Inc., Term Loan B, 4.313% - 5.25%, 6/05/13........... United States 6,640,904 5,799,169
-----------
DIVERSIFIED CHEMICALS 2.7%
Celanese U.S. Holdings LLC, Dollar Term Loan, 5.553%, 4/02/14............. United States 10,908,493 8,867,045
Huntsman International LLC, Term Loan B, 4.969%, 4/19/14.................. United States 11,086,647 9,641,425
Ineos U.S. Finance LLC,
Term Loan B2, 5.727% - 5.952%, 12/16/13............................. United States 5,639,848 3,139,517
Term Loan C2, 6.227% - 6.452%, 12/23/14............................. United States 5,639,848 3,087,817
68 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
DIVERSIFIED CHEMICALS (CONTINUED)
Invista Canada Co., Term Loan B2, 4.921%, 4/29/11......................... Canada $ 1,411,970 $ 1,171,935
Invista SARL, Term Loan B1, 4.921%, 4/29/11............................... Luxembourg 4,892,941 4,061,141
-----------
29,968,880
-----------
DIVERSIFIED REAL ESTATE ACTIVITIES 0.3%
CB Richard Ellis Services Inc., Term Loan B, 4.50% - 5.251%,
12/20/13............................................................... United States 6,323,369 3,825,638
-----------
DIVERSIFIED SUPPORT SERVICES 2.0%
ARAMARK Corp.,
Synthetic L/C, 2.427%, 1/26/14...................................... United States 814,219 683,741
Term Loan B, 5.637%, 1/26/14........................................ United States 12,748,724 10,705,741
Language Lines Inc., Term Loan B, 7.02%, 6/11/11.......................... United States 3,771,853 3,187,216
West Corp.,
Term Loan B-2, 5.594% - 5.75%, 10/24/13............................. United States 10,341,669 6,696,231
Term Loan B-3, 8.00%, 10/24/13...................................... United States 995,000 736,300
-----------
22,009,229
-----------
EDUCATION SERVICES 1.1%
Bright Horizons Family Solution Inc., Term Loan B, 7.00% - 7.50%,
5/21/15................................................................ United States 6,182,000 4,924,995
Education Management LLC, Term Loan C, 5.563%, 6/01/13.................... United States 7,800,780 5,499,550
Laureate Education Inc.,
Closing Date Term Loan, 7.001%, 8/17/14............................. United States 1,756,948 1,256,218
Delayed Draw Term Loan, 3.25% - 7.00%, 8/17/14...................... United States 262,918 187,986
-----------
11,868,749
-----------
ELECTRICAL COMPONENTS & EQUIPMENT 0.3%
Baldor Electric Co., Term Loan B, 4.875% - 5.25%, 1/31/14................. United States 4,656,510 3,793,114
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.9%
(d) Brocade Communications Systems Inc., Term Loan, 7.00%, 10/07/13........... United States 3,800,000 3,529,250
Sensus Metering Systems Inc., Term Loan B1, 4.81% - 6.00%,
12/17/10............................................................... United States 6,747,701 6,241,623
-----------
9,770,873
-----------
ELECTRONIC MANUFACTURING SERVICES 0.7%
FCI USA,
Term Loan B1, 6.47%, 11/01/13.......................................... United States 2,641,850 2,139,898
Term Loan C1, 6.47%, 11/03/14.......................................... United States 2,641,850 2,156,859
Flextronics International USA Inc.,
Term Loan A, 6.133% - 7.069%, 10/01/14................................. United States 2,986,583 2,292,203
Term Loan A-1, 7.069%, 10/01/14........................................ United States 858,214 658,679
-----------
7,247,639
-----------
ENVIRONMENTAL & FACILITIES SERVICES 2.1%
Allied Waste North America Inc.,
Credit Link, 4.135%, 3/28/14........................................ United States 4,597,363 4,398,146
Term Loan B, 4.06% - 5.55%, 3/28/14................................. United States 6,433,190 6,154,421
Duratek Inc. (EnergySolutions), Term Loan B, 5.47%, 6/07/13............... United States 2,017,937 1,442,825
Annual Report | 69
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
ENVIRONMENTAL & FACILITIES SERVICES (CONTINUED)
EnergySolutions LLC,
Synthetic L/C, 3.76%, 6/07/13 ...................................... United States $ 269,683 $ 192,824
Synthetic L/C (Add-On), 3.76%, 6/07/13 ............................. United States 1,830,189 1,308,585
Term Loan B, 5.47%, 6/07/13 ........................................ United States 4,206,005 3,007,293
(e) EnviroSolutions Inc., Initial Term Loan, PIK, 12.042%, 7/07/12............ United States 6,154,569 4,569,767
Safety-Kleen Systems Inc.,
Synthetic L/C, 3.75%, 8/02/13 ...................................... United States 528,814 471,178
Term Loan B, 5.50%, 8/02/13 ........................................ United States 1,986,576 1,770,059
-----------
23,315,098
-----------
FOOD DISTRIBUTORS 0.5%
Wm. Wrigley Jr. Co., Term Loan B, 7.75%, 8/15/14 ......................... United States 5,700,000 5,416,425
-----------
FOOD RETAIL 0.2%
Pantry Inc.,
Delayed Draw Term Loan, 4.87%, 5/14/14 ............................. United States 753,020 534,645
Term Loan B, 4.87%, 5/14/14 ........................................ United States 2,615,706 1,857,151
-----------
2,391,796
-----------
GENERAL MERCHANDISE STORES 0.1%
Dollar General Corp., Tranche B-1 Term Loan, 5.75% - 6.17%, 7/07/14 ...... United States 1,100,000 887,700
-----------
HEALTH CARE EQUIPMENT 0.9%
DJO Finance LLC, Term Loan B, 6.723% - 6.762%, 5/20/14 ................... United States 8,684,375 6,643,547
Fresenius SE (APP), Term Loan B2, 6.75%, 8/20/14 ......................... United States 1,155,348 1,080,251
Fresenius SE (New Finco1), Term Loan B1, 7.50%, 8/20/14 .................. United States 2,144,652 2,005,249
-----------
9,729,047
-----------
HEALTH CARE FACILITIES 6.0%
Community Health Systems Inc., Term Loan, 5.06% - 5.973%, 7/25/14 ........ United States 17,599,945 14,148,156
HCA Inc., Term Loan B-1, 6.012%, 11/18/13 ................................ United States 17,795,698 14,730,389
Health Management Associates Inc., Term Loan B, 5.512%, 2/28/14 .......... United States 3,902,467 2,751,239
HealthSouth Corp., Term Loan B, 5.50%, 3/10/13............................ United States 7,640,411 6,348,968
Iasis Healthcare LLC,
Delayed Draw Term Loan, 5.118%, 3/14/14 ............................ United States 2,925,894 2,369,975
Initial Term Loan, 5.118%, 3/14/14.................................. United States 8,455,810 6,849,206
Synthetic L/C, 4.54%, 3/14/14 ...................................... United States 782,194 633,577
LifePoint Hospitals Inc., Term Loan B, 4.435%, 4/15/12 ................... United States 1,956,042 1,649,188
Psychiatric Solutions Inc., Second Additional Term Loan, 4.75% - 4.868%,
7/01/12 ............................................................... United States 7,566,921 6,214,334
Vanguard Health Holding Co. II LLC, Replacement Term Loan, 5.368% -
6.012%, 9/23/11 ....................................................... United States 11,080,859 9,460,283
-----------
65,155,315
-----------
70 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
HEALTH CARE SERVICES 2.3%
AMR Holdco/EmCare Holdco, Term Loan B, 4.817% - 5.259%, 2/10/12 .......... United States $ 2,315,457 $ 2,060,757
DaVita Inc., Term Loan B-1, 4.20% - 6.32%, 10/05/12 ...................... United States 16,774,532 14,617,814
Fresenius Medical Care Holdings Inc., Term Loan B, 4.185% - 6.125%,
3/31/13 ............................................................... United States 6,600,041 5,623,235
U.S. Oncology Inc., Term Loan B, 6.178% - 6.512%, 8/20/11 ................ United States 2,575,385 2,156,885
VICAR Operating Inc., Incremental Term Loan, 4.625%, 5/16/11 ............. United States 1,477,500 1,374,075
-----------
25,832,766
-----------
HEALTH CARE SUPPLIES 0.8%
Bausch and Lomb Inc.,
(f) Delayed Draw Term Loan, 7.012%, 4/28/15 ........................ United States 1,454,990 1,180,967
Parent Term Loan, 7.012%, 4/28/15 .............................. United States 9,627,181 7,814,065
-----------
8,995,032
-----------
HOME FURNISHINGS 0.4%
(f) Sealy Mattress Co., Revolver, 5.86%, 4/06/10 ............................. United States 1,193,500 1,062,215
Simmons Bedding Company, Term Loan D, 4.875% - 6.50%, 12/19/11 ........... United States 4,074,053 2,892,578
-----------
3,954,793
-----------
HOUSEHOLD PRODUCTS 0.2%
Prestige Brands Inc., Term Loan B, 5.421% - 6.012%, 4/06/11 .............. United States 2,240,751 1,803,804
-----------
HOUSEWARES & SPECIALTIES 1.1%
Jarden Corp.,
Term Loan B1, 5.512%, 1/24/12 ...................................... United States 605,229 495,532
Term Loan B2, 5.512%, 1/24/12 ...................................... United States 8,330,725 6,820,781
Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 5.171%, 12/21/11 ... United States 6,011,589 5,012,162
-----------
12,328,475
-----------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.6%
Dynegy Holdings Inc.,
Term L/C Facility, 4.62%, 4/02/13 .................................. United States 9,211,240 6,823,990
Term Loan B, 4.62%, 4/02/13 ........................................ United States 879,873 651,839
NRG Energy Inc.,
Credit Link, 2.701%, 2/01/13 ....................................... United States 5,160,706 4,494,113
Term Loan, 5.262%, 2/01/13 ......................................... United States 10,501,104 9,144,707
Texas Competitive Electric Holdings Co. LLC,
Term Loan B-2, 6.303% - 7.64%, 10/10/14 ............................ United States 4,747,519 3,724,163
Term Loan B-3, 6.303% - 7.64%, 10/10/14 ............................ United States 3,960,000 3,091,770
-----------
27,930,582
-----------
INDUSTRIAL CONGLOMERATES 0.6%
TriMas Co. LLC,
Term Loan B, 5.49% - 5.766%, 8/02/13 ..................................... United States 6,857,763 5,211,900
Tranche B-1 L/C, 4.868%, 8/02/11 ......................................... United States 1,614,858 1,227,292
-----------
6,439,192
-----------
Annual Report | 71
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
INDUSTRIAL MACHINERY 2.0%
Bucyrus International Inc., Tranche B Dollar Term Loan, 4.291% - 5.383%,
5/04/14 ............................................................... United States $ 5,476,913 $ 4,463,684
CI Acquisition Inc. (Chart Industries), Term Loan B, 5.25%, 10/17/12 ..... United States 1,735,586 1,449,215
Husky Injection Molding Systems Ltd. (Ontario Inc.), Term Loan, 6.762%,
12/14/12 .............................................................. Canada 3,275,250 2,898,596
Mueller Water Products Inc., Term Loan B, 4.868% - 5.512%, 5/24/14 ....... United States 6,477,462 4,987,645
RBS Global Inc. (Rexnord Corp.),
Incremental Tranche B-2, 5.762%, 7/22/13 ........................... United States 1,861,684 1,480,039
Term Loan, 6.00% - 7.003%, 7/22/13 ................................. United States 8,606,557 6,885,246
-----------
22,164,425
-----------
INTEGRATED TELECOMMUNICATION SERVICES 2.7%
GCI Holdings Inc., Add-On Term Loan, 7.37%, 8/31/12 ...................... United States 6,118,891 5,812,946
NTELOS Inc., Term Loan B-1, 5.37%, 8/24/11 ............................... United States 5,908,538 5,086,265
Wind Telecomunicazioni SpA,
Term Loan B-2, 5.885%, 12/12/14 .................................... Italy 4,850,000 3,748,356
Term Loan C-2, 6.635%, 12/12/15 .................................... Italy 4,850,000 3,787,995
Windstream Corp., Tranche B-1, 6.05%, 7/17/13 ............................ United States 11,811,202 10,324,467
(g) Winstar Communications Inc., DIP, 2/20/49 ................................ United States 837,576 1,298,243
-----------
30,058,272
-----------
IT CONSULTING & OTHER SERVICES 0.6%
Acxiom Corp., Term Loan B, 4.834% - 5.291%, 9/14/12 ...................... United States 6,497,750 4,743,358
CACI International Inc., Term B-2 Loan, 4.32% - 5.60%, 5/03/11 ........... United States 2,075,527 1,779,764
-----------
6,523,122
-----------
LEISURE FACILITIES 0.4%
24 Hour Fitness Worldwide Inc., Term Loan B, 5.62% - 6.71%, 6/08/12 ...... United States 6,137,096 4,572,137
-----------
LEISURE PRODUCTS 0.1%
PlayPower Inc., Term Loan B, 6.51%, 6/30/12 .............................. United States 1,259,055 1,126,854
-----------
LIFE & HEALTH INSURANCE 1.0%
Conseco Inc.,
Revolver, 0.50% - 5.00%, 6/22/09 ................................... United States 4,000,000 2,920,000
Term Loan, 5.00%, 10/10/13 ......................................... United States 11,554,094 7,654,587
-----------
10,574,587
-----------
LIFE SCIENCES TOOLS & SERVICES 0.3%
(d) Applied Biosystems Inc., Term Loan B, 7.00%, 10/31/15 .................... United States 3,400,000 3,174,750
-----------
METAL & GLASS CONTAINERS 0.3%
Anchor Glass Container Corp., Term Loan, 7.50% - 7.851%, 6/20/14 ......... United States 4,409,615 3,737,149
-----------
MOVIES & ENTERTAINMENT 1.7%
Cinemark USA Inc., Term Loan, 4.56% - 4.93%, 10/05/13 .................... United States 4,872,581 3,735,647
Regal Cinemas Corp., Term Loan, 5.262%, 10/27/13 ......................... United States 15,092,951 11,411,947
Zuffa LLC, Term Loan B, 5.813%, 6/19/15 .................................. United States 5,735,201 3,584,501
-----------
18,732,095
-----------
72 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
OFFICE SERVICES & SUPPLIES 0.1%
Acco Brands Corp., Term Loan B, 4.561% - 6.30%, 8/17/12 .................. United States $ 1,941,251 $ 1,358,876
-----------
OIL & GAS DRILLING 0.5%
Dresser Inc., Term Loan B, 5.057% - 5.368%, 5/04/14 ...................... United States 7,794,806 5,673,161
-----------
OIL & GAS EQUIPMENT & SERVICES 0.4%
Helix Energy Solutions Group, Term Loan B, 5.00% - 6.75%, 7/01/13 ........ United States 5,384,266 4,415,098
-----------
OIL & GAS EXPLORATION & PRODUCTION 0.2%
ATP Oil and Gas Corp.,
Tranche B-1, 8.50%, 7/15/14 ........................................ United States 1,656,757 1,259,135
Tranche B-2, 8.50% - 8.97%, 1/15/11 ................................ United States 949,091 721,309
-----------
1,980,444
-----------
OIL & GAS REFINING & MARKETING 0.4%
Alon Refining Krotz Springs Inc., Term Loan, 10.75%, 7/03/14 ............. United States 1,800,000 1,575,000
Citgo Petroleum Corp., Term Loan B, 3.391%, 11/15/12 ..................... United States 4,185,715 3,128,822
-----------
4,703,822
-----------
PACKAGED FOODS & MEATS 1.3%
Bumble Bee Foods LLC, Term Loan B, 5.051% - 6.885%, 5/02/12 .............. United States 2,000,000 1,870,000
Dean Foods Co., Term Loan B, 4.62% - 5.27%, 4/02/14 ...................... United States 13,859,955 10,442,617
Del Monte Foods Co., Term Loan B, 4.50% - 5.041%, 2/08/12 ................ United States 1,733,429 1,543,371
-----------
13,855,988
-----------
PAPER PACKAGING 1.1%
Domtar Corp., Term Loan, 5.38%, 3/07/14 .................................. United States 5,800,284 4,692,430
Graham Packaging Co. LP, New Term Loan, 5.063% - 6.313%, 10/07/11 ........ United States 1,911,303 1,565,357
Graphic Packaging International Inc., 2008 Incremental Term Loan,
5.884% - 7.50%, 5/16/14 ............................................... United States 2,956,359 2,518,448
Rock-Tenn Co., Term Loan B, 5.75% - 5.87%, 3/05/14 ....................... United States 3,582,000 3,205,890
-----------
11,982,125
-----------
PAPER PRODUCTS 1.7%
Georgia-Pacific LLC,
Additional Term Loan, 4.868% - 6.044%, 12/20/12 .................... United States 4,330,145 3,607,253
Term Loan B, 4.551% - 4.868%, 12/20/12 ............................. United States 11,529,444 9,604,673
NewPage Corp., Term Loan, 7.00%, 12/22/14 ................................ United States 3,197,486 2,610,521
Verso Paper Holdings LLC, Term Loan B, 5.512%, 8/01/13 ................... United States 2,963,751 2,482,141
-----------
18,304,588
-----------
PERSONAL PRODUCTS 0.9%
Chattem Inc., Term Loan B, 6.433% - 6.569%, 1/02/13 ...................... United States 2,257,582 1,930,232
FTD Group Inc., Term Loan B, 7.759% - 8.035%, 8/04/14 .................... United States 6,200,000 5,518,000
Herbalife International Inc., Term Loan B, 5.27%, 7/21/13 ................ United States 3,018,548 2,739,332
-----------
10,187,564
-----------
PHARMACEUTICALS 0.3%
Mylan Inc., Term Loan B, 6.625% - 7.063%, 10/02/14 ....................... United States 3,870,750 3,341,978
-----------
Annual Report | 73
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
PROPERTY & CASUALTY INSURANCE 0.1%
Affirmative Insurance Holdings Inc., Term Loan, 6.31% - 6.92%,
1/31/14 ............................................................... United States $ 1,161,388 $ 842,007
-----------
PUBLISHING 4.2%
Canwest Mediaworks LP, Credit D, 4.81%, 7/10/14 .......................... Canada 9,509,849 6,799,542
Dex Media East LLC, Term Loan B, 4.82% - 5.77%, 10/24/14 ................. United States 200,000 110,000
Dex Media West LLC, Term Loan B, 7.00% - 7.77%, 10/24/14 ................. United States 8,500,000 4,734,500
(d) Idearc Inc., Term Loan B, 5.12% - 5.77%, 11/17/14 United States 31,946,090 13,790,073
Newsday LLC, Floating Rate Term Loan, 9.008%, 8/1/13 ..................... United States 5,000,000 4,200,000
R.H. Donnelley Inc.,
Term Loan D-1, 6.75% - 6.87%, 6/30/11 .............................. United States 1,071,403 700,430
Term Loan D-2, 6.75% - 7.52%, 6/30/11 .............................. United States 7,979,953 5,068,930
Tribune Co.,
Term Loan B, 6.00%, 5/16/14 ........................................ United States 15,970,771 7,170,876
Term Loan X, 7.084%, 5/18/09 ....................................... United States 1,506,743 1,185,806
Wenner Media LLC, Term Loan B, 5.512%, 10/02/13 .......................... United States 2,450,886 1,985,218
-----------
45,745,375
-----------
RAILROADS 0.2%
Kansas City Southern Railway Co., Term Loan B, 4.75% - 5.52%,
4/26/13 ............................................................... United States 2,810,086 2,430,724
-----------
RESEARCH & CONSULTING SERVICES 0.9%
Nielsen Finance LLC (VNU Inc.), Dollar Term Loan, 4.803%, 8/09/13 ........ United States 12,808,324 9,337,268
-----------
RESTAURANTS 0.7%
Arby's Restaurant Holdings LLC, Term Loan B, 5.25% - 6.012%,
7/25/12 ............................................................... United States 5,598,763 4,199,072
OSI Restaurant Partners LLC (Outback),
Pre-Funded Revolving Credit, 2.639%, 6/14/13 ....................... United States 524,698 275,904
Term Loan B, 5.25%, 6/14/14 ........................................ United States 6,559,644 3,449,277
-----------
7,924,253
-----------
RETAIL REIT'S 0.6%
Macerich Co., Term Loan B, 4.625%, 4/25/10 ............................... United States 7,140,000 6,247,500
-----------
SEMICONDUCTORS 0.9%
Fairchild Semiconductor Corp.,
Incremental Term Loan 6.262%, 6/26/13 .............................. United States 4,925,250 3,669,311
Initial Term Loan, 5.262%, 6/26/13 ................................. United States 3,918,201 2,840,696
Marvell Technology Group Ltd., Term Loan, 5.50%, 11/08/09 ................ Bermuda 3,981,375 3,483,703
-----------
9,993,710
-----------
SPECIALIZED CONSUMER SERVICES 1.7%
Affinion Group Inc., Term Loan B, 5.311% - 5.618%, 10/17/12 .............. United States 6,095,901 4,861,481
Brickman Group Holdings Inc., Term Loan B, 5.118%, 1/23/14 ............... United States 2,750,557 2,111,712
Protection One Inc., Term Loan C, 5.37% - 5.51%, 3/31/12 ................. United States 1,546,335 1,252,532
74 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
SPECIALIZED CONSUMER SERVICES (CONTINUED)
TDS Investor Corp. (Travelport),
Delayed Draw Term Loan, 5.368%, 8/23/13 ............................ United States $ 7,110,694 $ 4,418,792
Synthetic L/C, 6.012%, 8/23/13 ..................................... United States 189,598 117,822
Term Loan B, 6.012%, 8/23/13 ....................................... United States 717,027 445,582
Ticketmaster, Term Loan B, 3.25% - 6.64%, 7/25/14 ........................ United States 6,000,000 4,980,000
-----------
18,187,921
-----------
SPECIALTY CHEMICALS 3.6%
Brenntag Holding GmbH & Co. KG,
Acquisition Facility, 5.071%, 1/20/14 .............................. Germany 824,727 573,186
Term Loan B2, 5.071%, 1/20/14 ...................................... United States 1,875,273 1,349,428
Cognis GmbH, Term Loan C, 4.819%, 9/15/13 ................................ Germany 5,500,000 3,470,500
Hexion Specialty Chemicals BV,
Term Loan C-2, 6.063%, 5/03/13 ....................................... Netherlands 3,065,095 2,132,794
Term Loan C-5, 6.063%, 5/03/13 ....................................... Netherlands 1,185,000 824,562
Hexion Specialty Chemicals Inc., Term Loan C-1, 6.188%, 5/03/13 .......... United States 14,110,006 9,818,208
Nalco Co., Term Loan B, 4.92% - 5.313%, 11/04/10 ......................... United States 3,241,281 2,907,892
Oxbow Carbon LLC,
Delayed Draw Term Loan, 5.762%, 5/08/14 ............................ United States 538,386 390,330
Term Loan B, 5.00% - 5.762%, 5/08/14 ............................... United States 6,013,781 4,359,991
Polypore Inc., Incremental Term Loan, 5.39%, 7/03/14 ..................... United States 3,066,919 2,392,197
PQ Corp., Term Loan, 6.72% - 7.02%, 7/30/14 .............................. United States 7,281,750 5,033,510
Rockwood Specialties Group Inc., Term Loan E, 4.618%, 7/30/12 ............ United States 4,300,048 3,601,290
Vertellus Specialties Inc., Term Loan, 8.00% - 8.125%, 12/10/12 .......... United States 3,101,563 2,589,805
-----------
39,443,693
-----------
SYSTEMS SOFTWARE 0.6%
Audatex North America Inc., Domestic Term Loan C, 4.569%, 5/16/14 ........ United States 3,894,179 3,076,401
Macrovision Solutions Corp., Term Loan B, 7.25% - 7.48%, 5/02/13 ......... United States 4,089,750 3,721,673
-----------
6,798,074
-----------
TRADING COMPANIES & DISTRIBUTORS 1.5%
Ashtead Group PLC, Term Loan, 4.563%, 8/31/11 ............................ United Kingdom 2,165,600 1,862,416
Bakercorp., Term Loan C, 5.368% - 6.838%, 5/08/14 ........................ United States 10,604,172 6,335,993
Interline Brands,
Delayed Draw Term Loan, 4.75%, 6/23/13 ............................. United States 2,214,786 1,705,385
Term Loan B, 4.75%, 6/23/13 ........................................ United States 1,533,749 1,180,986
RSC Holdings III, ABL Term Loan, 5.52% - 5.96%, 11/27/12 ................. United States 6,746,689 5,532,285
-----------
16,617,065
-----------
TRUCKING 0.4%
Avis Budget Car Rental LLC, Term Loan, 4.67%, 4/19/12 .................... United States 1,620,748 958,943
Hertz Corp.,
Credit Link, 3.204%, 12/21/12 ...................................... United States 686,017 497,852
Term Loan B, 4.719% - 5.00%, 12/21/12 .............................. United States 3,774,767 2,739,401
-----------
4,196,196
-----------
Annual Report | 75
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
PRINCIPAL
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY AMOUNT(a) VALUE
-------------------------------------------------------------------------- ------------- ------------ --------------
(b,c) SENIOR FLOATING RATE INTERESTS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES 2.2%
Alltel Communications Inc., Term Loan B-3, 5.50%, 5/18/15 ................ United States $ 9,405,000 $ 9,002,353
Intelsat Corp. (Panamsat),
Tranche B-2-A, 6.65%, 1/03/14 ...................................... United States 4,524,969 3,755,725
Tranche B-2-B, 6.65%, 1/03/14 ...................................... United States 4,523,602 3,754,590
Tranche B-2-C, 6.65%, 1/03/14 ...................................... United States 4,523,602 3,754,589
Intelsat Subsidiary Holding Co. Ltd., Term Loan B, 6.65%, 6/30/13 ........ United States 3,014,502 2,498,268
--------------
22,765,525
--------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $1,229,157,005) ................................................. 943,302,443
--------------
SHARES
------------
COMMON STOCKS (COST $156,558) 0.0%(h)
STEEL 0.0%(h)
(i,j) Copperweld Holding Co., B, Escrow Account ................................ United States 1,741 181,361
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $1,229,313,563) ................................................. 943,483,804
--------------
SHORT TERM INVESTMENTS (COST $120,707,743) 11.0%
MONEY MARKET FUNDS 11.0%
(k) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ..... United States 120,707,743 120,707,743
--------------
TOTAL INVESTMENTS (COST $1,350,021,306) 97.3% ............................ 1,064,191,547
OTHER ASSETS, LESS LIABILITIES 2.7% ...................................... 29,744,333
--------------
NET ASSETS 100.0% ........................................................ $1,093,935,880
==============
See Selected Portfolio Abbreviations on page 105.
(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) A portion or all of the security purchased on a when-issued or delayed
delivery basis. See Note 1(d).
(e) Income may be received in additional securities and/or cash.
(f) See Note 11 regarding unfunded loan commitments.
(g) See Note 10 regarding defaulted securities.
(h) Rounds to less than 0.1% of net assets.
(i) Non-income producing for the twelve months ended October 31, 2008.
(j) Security has been deemed illiquid because it may not be able to be sold
within seven days. At October 31, 2008, the aggregate value of this
security was $181,361, representing 0.01% of net assets.
(k) 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.
The accompanying notes are an integral part of these financial statements.
76 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LOW DURATION TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
----------------------------------
CLASS A 2008 2007 2006 2005(a)
- ---------------------------------------------------------------------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.89 $ 9.79 $ 9.77 $ 10.00
------- ------- ------- -------
Income from investment operations(b):
Net investment income ............................................. 0.334 0.398 0.346 0.263
Net realized and unrealized gains (losses) ........................ (0.273) 0.113 0.036 (0.186)
------- ------- ------- -------
Total from investment operations ..................................... 0.061 0.511 0.382 0.077
------- ------- ------- -------
Less distributions from net investment income ........................ (0.371) (0.411) (0.362) (0.307)
------- ------- ------- -------
Redemption fees(c,d) ................................................. -- -- -- --
------- ------- ------- -------
Net asset value, end of year ......................................... $ 9.58 $ 9.89 $ 9.79 $ 9.77
======= ======= ======= =======
Total return(e) ...................................................... 0.56% 5.33% 3.99% 0.78%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates .................... 1.48% 1.40% 1.37% 1.97%
Expenses net of waiver and payments by affiliatesg ................... 0.90% 0.90% 0.90% 0.90%
Net investment income ................................................ 3.36% 3.97% 3.52% 2.68%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $35,181 $16,744 $11,722 $10,311
Portfolio turnover rate .............................................. 115.61% 82.95% 86.38% 79.69%
Portfolio turnover rate excluding mortgage dollar rolls(h) ........... 108.45% 49.38% 86.38% 79.69%
(a) For the period November 17, 2004 (commencement of operations) to October
31, 2005.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Amount rounds to less than $0.001 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 77
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND
PERIOD ENDED
OCTOBER 31,
ADVISOR CLASS 2008(a)
- ---------------------------------------------------------------------- ------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period.................................. $ 9.98
--------
Income from investment operations(b):
Net investment income (loss)....................................... 0.132
Net realized and unrealized gains (losses)......................... (0.357)
--------
Total from investment operations...................................... (0.225)
--------
Less distributions from net investment income......................... (0.165)
--------
Redemption fees(c,d).................................................. --
--------
Net asset value, end of period........................................ $ 9.59
========
Total return(e)....................................................... (2.28)%
RATIOS TO AVERAGE NET ASSETS(f)
Expenses before waiver and payments by affiliates..................... 1.23%
Expenses net of waiver and payments by affiliates(g).................. 0.65%
Net investment income................................................. 3.61%
SUPPLEMENTAL DATA
Net assets, end of period (000's)..................................... $ 75
Portfolio turnover rate............................................... 115.61%
Portfolio turnover rate excluding mortgage dollar rollsh.............. 108.45%
(a) For the period May 15, 2008 (effective date) to October 31, 2008.
(b) 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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(c) Amount rounds to less than $0.001 per share.
(d) Effective September 1, 2008, the redemption fee was eliminated.
(e) Total return is not annualized for periods less than one year.
(f) Ratios are annualized for periods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
(h) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
78 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
COUNTRY/
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION SHARES VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
CONVERTIBLE PREFERRED STOCKS (COST $20,000) 0.0%(a)
DIVERSIFIED FINANCIALS 0.0%(a)
CIT Group Inc., 7.75%, cvt. pfd., Z ...................................... United States 800 $ 4,600
----------
PREFERRED STOCKS (COST $104,200) 0.0%(a)
BANKS 0.0%(a)
Freddie Mac, 8.375%, pfd., Z ............................................. United States 4,000 6,200
----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT(b)
-----------
CORPORATE BONDS 16.3%
AUTOMOBILES & COMPONENTS 0.2%
Ford Motor Credit Co. LLC,
7.875%, 6/15/10 ....................................................... United States 50,000 33,611
senior note, 5.80%, 1/12/09 ........................................... United States 50,000 46,361
----------
79,972
----------
BANKS 0.2%
(c) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ......................... United States 100,000 81,854
----------
CAPITAL GOODS 0.8%
(d) John Deere Capital Corp., senior note, FRN, 3.567%, 6/10/11 .............. United States 300,000 282,790
----------
DIVERSIFIED FINANCIALS 4.2%
(d) Bear Stearns & Co. Inc., FRN, 4.903%, 7/19/10 ............................ United States 300,000 289,340
(d) Caterpillar Financial Services Corp., senior note, FRN, 4.226%, 6/24/11... United States 300,000 254,116
Deutsche Bank AG, 4.875%, 5/20/13......................................... Germany 200,000 187,892
(d) General Electric Capital Corp., FRN, 4.519%, 10/21/10 .................... United States 18,000 16,411
GMAC LLC, 6.875%, 9/15/11 ................................................ United States 50,000 29,310
(d,e) Lehman Brothers Holdings Inc., senior note, FRN, 3.005%, 7/18/11 ......... United States 200,000 27,000
(d) Merrill Lynch & Co. Inc., senior note, C, FRN, 3.310%, 3/23/10............ United States 300,000 263,769
Morgan Stanley Dean Witter & Co., 5.30%, 3/01/13 ......................... United States 200,000 165,629
Textron Financial Corp., 5.125%, 11/01/10 ................................ United States 250,000 230,949
----------
1,464,416
----------
ENERGY 0.6%
Valero Energy Corp., senior note, 6.875%, 4/15/12 ........................ United States 200,000 192,854
----------
FOOD, BEVERAGE & TOBACCO 0.2%
Bunge Ltd. Finance Corp., senior note, 4.375%, 12/15/08................... United States 75,000 74,762
----------
MATERIALS 0.5%
Rio Tinto Finance USA Ltd., 5.875%, 7/15/13 .............................. Australia 200,000 170,896
----------
MEDIA 3.4%
Comcast Corp., senior note, 5.50%, 3/15/11................................ United States 100,000 95,563
The Interpublic Group of Cos. Inc., senior note,
5.40%, 11/15/09.................................................... United States 200,000 184,000
7.25%, 8/15/11..................................................... United States 500,000 417,500
(d) FRN, 4.804%, 11/15/10..................................................... United States 500,000 407,500
Viacom Inc., senior note, 5.75%, 4/30/11.................................. United States 100,000 89,530
----------
1,194,093
----------
Annual Report | 79
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------------------------------------------------------- ------------- --------- ----------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES 5.1%
AT&T Inc.,
4.95%, 1/15/13..................................................... United States 100,000 $ 92,707
(d) FRN, 3.014%, 11/14/08.............................................. United States 100,000 99,993
Royal KPN NV, senior note, 8.00%, 10/01/10 ............................... Netherlands 200,000 191,713
Sprint Capital Corp., senior note, 8.375%, 3/15/12 ....................... United States 1,000,000 805,550
(d) Telecom Italia Capital, senior note, FRN, 5.113%, 7/18/11 ................ Italy 300,000 240,138
Telefonica Europe BV, 7.75%, 9/15/10 ..................................... Netherlands 200,000 191,920
Verizon New England Inc., senior note, 6.50%, 9/15/11..................... United States 200,000 187,682
----------
1,809,703
----------
UTILITIES 1.1%
Public Service Electric and Gas Co., 4.00%, 11/01/08 ..................... United States 100,000 100,000
(d) Southern Co., senior note, 2008A, FRN, 3.511%, 8/20/10 ................... United States 300,000 299,846
----------
399,846
----------
TOTAL CORPORATE BONDS (COST $6,565,378)................................... 5,751,186
----------
CONVERTIBLE BONDS 0.2%
DIVERSIFIED FINANCIALS 0.1%
Merrill Lynch & Co. Inc., cvt., senior note, zero cpn., 3/13/32........... United States 31,000 31,747
----------
MATERIALS 0.0%(a)
Headwaters Inc., cvt., senior sub. note, 2.875%, 6/01/16 ................. United States 20,000 15,500
----------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.1%
PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ...................... United States 30,000 24,750
----------
TOTAL CONVERTIBLE BONDS (COST $91,000).................................... 71,997
----------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 6.3%
BANKS 0.7%
(d) Countrywide Asset-Backed Certificates,
2001-BC3, A, FRN, 3.687%, 12/25/31 ................................. United States 2,944 2,465
2002-3, 1A1, FRN, 3.947%, 5/25/32 .................................. United States 1,795 1,421
(d) FHLMC, 2996, FK, FRN, 4.838%, 6/15/35 .................................... United States 197,656 191,264
FNMA, G93-33, K, 7.00%, 9/25/23........................................... United States 15,327 16,180
(d,f) GS Mortgage Securities Corp. II, 2007-E0P, A1, 144A, FRN, 4.135%,
3/06/20................................................................ United States 37,863 31,992
----------
243,322
----------
DIVERSIFIED FINANCIALS 5.1%
(d) ACE Securities Corp., 2005-HE7, A2B, FRN, 3.387%, 11/25/35 ............... United States 49,801 49,607
(d) Bank of America Credit Card Trust, 2007-A13, A13, FRN, 4.808%,
4/15/12................................................................ United States 400,000 383,054
(d) Capital One Auto Finance Trust, 2006-C, A4, FRN, 4.59%, 5/15/13 .......... United States 100,000 77,685
80 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------------------------------------------------------- ------------- --------- ----------
ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES
(CONTINUED)
DIVERSIFIED FINANCIALS (CONTINUED)
Chase Funding Mortgage Loan Asset-Backed Certificates,
2003-6, 1A3, 3.34%, 5/25/26........................................ United States 2,522 $ 2,513
(d) 2004-2, 2A2, FRN, 3.457%, 2/25/35 ................................. United States 47,375 39,933
(d) Chase Issuance Trust,
2005-A9, A9, FRN, 4.608%, 11/15/11 ................................. United States 400,000 385,173
2007-A9, A9, FRN, 4.618%, 6/16/14 .................................. United States 500,000 416,037
(d) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 4.628%,
11/15/12 .............................................................. United States 500,000 463,978
Structured Asset Securities Corp., 2004-4XS, 1A4, 4.13%, 2/25/34.......... United States 3,306 3,309
----------
1,821,289
----------
REAL ESTATE 0.5%
(d) Ownit Mortgage Loan Asset-Backed Certificates, 2006-6, A2B, FRN, 3.317%,
9/25/37 ............................................................... United States 193,940 175,278
----------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES
(COST $2,420,052) ..................................................... 2,239,889
----------
MORTGAGE-BACKED SECURITIES 21.8%
(d) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.6%
FHLMC, 4.225%, 12/01/34 .................................................. United States 130,009 129,635
FHLMC, 4.314%, 10/01/33 .................................................. United States 80,517 80,177
----------
209,812
----------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 10.2%
FHLMC Gold 15 Year, 5.00%, 10/01/23....................................... United States 2,992,540 2,923,999
FHLMC Gold 15 Year, 6.00%, 6/01/23........................................ United States 672,339 676,806
----------
3,600,805
----------
(d) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 10.8%
FNMA, 3.432%, 4/01/34 .................................................... United States 28,696 29,244
FNMA, 3.895%, 4/01/35 .................................................... United States 22,876 23,210
FNMA, 4.104%, 8/01/33 .................................................... United States 130,086 129,486
FNMA, 4.167%, 6/01/34 .................................................... United States 45,524 45,708
FNMA, 4.177%, 8/01/34 .................................................... United States 19,327 19,356
FNMA, 4.286%, 12/01/33 ................................................... United States 128,318 127,456
FNMA, 4.398%, 2/01/34 .................................................... United States 50,593 50,358
FNMA, 4.44%, 8/01/34 ..................................................... United States 124,573 127,408
FNMA, 4.446%, 1/01/35 .................................................... United States 1,549,691 1,559,541
FNMA, 4.562%, 7/01/34 .................................................... United States 49,244 50,327
FNMA, 4.699%, 4/01/33 .................................................... United States 107,636 107,418
FNMA, 4.859%, 5/01/33 .................................................... United States 25,658 26,265
FNMA, 4.956%, 3/01/33 .................................................... United States 56,573 57,045
FNMA, 5.04%, 3/01/34 ..................................................... United States 26,531 26,603
FNMA, 5.044%, 9/01/35 .................................................... United States 876,944 884,316
Annual Report | 81
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------------------------------------------------------- ---------------- ----------------- ----------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(d) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED)
FNMA, 5.249%, 11/01/34 ................................................... United States 30,581 $ 30,970
FNMA, 5.321%, 11/01/32 ................................................... United States 78,205 78,016
FNMA, 5.408%, 4/01/33 .................................................... United States 20,562 20,750
FNMA, 5.718%, 2/01/35 .................................................... United States 110,758 111,350
FNMA, 5.729%, 3/01/35 .................................................... United States 221,598 222,581
FNMA, 5.763%, 1/01/35 .................................................... United States 36,225 36,279
FNMA, 5.988%, 12/01/34 ................................................... United States 8,961 9,109
FNMA, 6.061%, 1/01/33 .................................................... United States 16,234 16,241
----------
3,789,037
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.0%(a)
FNMA 30 Year, 9.00%, 12/01/20 ............................................ United States 5,374 5,406
----------
(d) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 0.2%
GNMA, 4.625%, 8/20/26 - 9/20/26 .......................................... United States 46,994 47,281
GNMA, 5.375%, 4/20/26 .................................................... United States 30,947 31,074
----------
78,355
----------
TOTAL MORTGAGE-BACKED SECURITIES (COST $7,686,636) ....................... 7,683,415
----------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 3.1%
(d) European Investment Bank, senior note, FRN, 0.685%, 9/21/11 .............. Supranational(g) 6,000,000 JPY 60,919
(d,h) Government of Argentina, senior bond, FRN, 3.127%, 8/03/12 ............... Argentina 30,000 5,432
Government of Indonesia,
FR02, 14.00%, 6/15/09 .............................................. Indonesia 475,000,000 IDR 43,534
FR10, 13.15%, 3/15/10 .............................................. Indonesia 150,000,000 IDR 13,417
FR36, 11.50%, 9/15/19 .............................................. Indonesia 165,000,000 IDR 10,842
Government of Malaysia,
7.00%, 3/15/09 ..................................................... Malaysia 231,000 MYR 65,823
3.869%, 4/13/10 .................................................... Malaysia 19,000 MYR 5,355
3.756%, 4/28/11 .................................................... Malaysia 60,000 MYR 16,831
3.833%, 9/28/11 .................................................... Malaysia 275,000 MYR 77,185
Government of Norway,
5.50%, 5/15/09 ..................................................... Norway 235,000 NOK 35,034
6.00%, 5/16/11 ..................................................... Norway 655,000 NOK 102,378
Government of Singapore,
4.375%, 1/15/09 .................................................... Singapore 4,000 SGD 2,714
2.625%, 4/01/10 .................................................... Singapore 19,000 SGD 13,063
Government of Sweden,
5.00%, 1/28/09 ..................................................... Sweden 1,000,000 SEK 129,342
4.00%, 12/01/09 .................................................... Sweden 810,000 SEK 105,788
KfW Bankengruppe, senior note, 6.50%, 11/15/11 ........................... Germany 282,000 NZD 166,214
Korea Treasury Note, 4.75%, 6/10/09 ...................................... South Korea 100,000,000 KRW 77,643
Nota Do Tesouro Nacional, 9.762%, 1/01/10 ................................ Brazil 340(i) BRL 148,343
----------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $1,271,480) ..................................................... 1,079,857
----------
82 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN LOW DURATION TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------------------------------------------------------- ------------- ----------- -----------
U.S. GOVERNMENT AND AGENCY SECURITIES 41.3%
FHLB,
4.625%, 11/21/08 ...................................................... United States 250,000 $ 250,270
4.875%, 5/14/10 ....................................................... United States 500,000 512,088
3.50%, 7/16/10 ........................................................ United States 1,000,000 1,004,429
5.75%, 5/15/12 ........................................................ United States 600,000 630,664
FHLMC,
4.25%, 7/15/09 ........................................................ United States 250,000 252,668
4.875%, 2/09/10 ....................................................... United States 200,000 204,534
2.875%, 4/30/10 ....................................................... United States 500,000 497,764
2.375%, 5/28/10 ....................................................... United States 700,000 692,805
2.875%, 6/28/10 ....................................................... United States 1,000,000 997,474
4.125%, 7/12/10 ....................................................... United States 400,000 407,207
5.125%, 8/23/10 ....................................................... United States 600,000 622,253
3.50%, 5/29/13 ........................................................ United States 1,200,000 1,168,058
FNMA,
7.25%, 1/15/10 ........................................................ United States 500,000 524,190
7.125%, 6/15/10 ....................................................... United States 200,000 212,585
3.00%, 7/12/10 ........................................................ United States 1,000,000 998,656
4.25%, 8/15/10 ........................................................ United States 750,000 765,419
4.375%, 9/13/10 ....................................................... United States 300,000 307,172
2.875%, 10/12/10 ...................................................... United States 3,600,000 3,590,863
6.625%, 11/15/10 ...................................................... United States 800,000 856,706
5.00%, 10/15/11 ....................................................... United States 50,000 52,194
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $14,491,048) .................................................... 14,547,999
-----------
SHORT TERM INVESTMENTS 8.7%
U.S. GOVERNMENT AND AGENCY SECURITIES 3.0%
FHLB, 1, 4.20%, 2/17/09 .................................................. United States 1,000,000 1,000,057
(j,k) U.S. Treasury Bill, 11/28/08 ............................................. United States 50,000 49,996
-----------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,049,970) 1,050,053
-----------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS
(COST $33,699,764) .................................................... 32,435,196
-----------
SHARES
-----------
MONEY MARKET FUNDS (COST $2,012,983) 5.7%
(l) Franklin Institutional Fiduciary Trust Money Market Portfolio, 1.56% ..... United States 2,012,983 2,012,983
-----------
TOTAL INVESTMENTS (COST $35,712,747) 97.7% ............................... 34,448,179
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE CONTRACTS 0.8% ........... 267,431
OTHER ASSETS, LESS LIABILITIES 1.5% ...................................... 540,551
-----------
NET ASSETS 100.0% ........................................................ $35,256,161
===========
Annual Report | 83
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND
See Currency and Selected Portfolio Abbreviations on page 105.
(a) Rounds to less than 0.1% of net assets.
(b) The principal amount is stated in U.S. dollars unless otherwise indicated.
(c) Perpetual securities with no stated maturity date.
(d) The coupon rate shown represents the rate at period end.
(e) See Note 10 regarding defaulted securities.
(f) 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 October 31, 2008,
the value of this security was $31,992, representing 0.09% of net assets.
(g) A supranational organization is an entity formed by two or more central
governments through international treaties.
(h) The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
(i) Principal amount is stated in 1,000 Brazilian Real units.
(j) The security is traded on a discount basis with no stated coupon rate.
(k) Security has been segregated as collateral for open future contracts. At
October 31, 2008, the value of security pledged amounted to $49,996.
(l) 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.
The accompanying notes are an integral part of these financial statements.
84 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
- ------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 9.92 $ 9.95 $ 9.91 $ 10.22 $ 10.06
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income ................................. 0.449 0.469 0.439 0.410 0.415
Net realized and unrealized gains (losses) ............ (1.289) (0.010) 0.096 (0.280) 0.226
-------- -------- -------- -------- --------
Total from investment operations ......................... (0.840) 0.459 0.535 0.130 0.641
-------- -------- -------- -------- --------
Less distributions from net investment income ............ (0.480) (0.489) (0.495) (0.440) (0.481)
-------- -------- -------- -------- --------
Redemption fees(b,c) ..................................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ............................. $ 8.60 $ 9.92 $ 9.95 $ 9.91 $ 10.22
======== ======== ======== ======== ========
Total return(d) .......................................... (8.79)% 4.62% 5.56% 1.27% 6.63%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates ........ 1.01% 1.03% 1.03% 1.04% 1.04%
Expenses net of waiver and payments by affiliates ........ 0.85%(e) 0.85%(e) 0.85%(e) 0.85%(e) 0.80%
Net investment income .................................... 4.68% 4.69% 4.39% 3.88% 3.90%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $780,551 $683,736 $406,242 $291,473 $208,943
Portfolio turnover rate .................................. 300.07% 313.08% 251.50% 58.81% 100.05%
Portfolio turnover rate excluding mortgage dollar
rolls(f) .............................................. 68.00% 92.51% 89.19% 51.26% 45.85%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 85
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.92 $ 9.94 $ 9.91 $ 10.22 $ 10.05
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.412 0.422 0.392 0.356 0.366
Net realized and unrealized gains (losses) ........................ (1.291) 0.007 0.094 (0.266) 0.245
------- ------- ------- ------- -------
Total from investment operations ..................................... (0.879) 0.429 0.486 0.090 0.611
------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.441) (0.449) (0.456) (0.400) (0.441)
------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 8.60 $ 9.92 $ 9.94 $ 9.91 $ 10.22
======= ======= ======= ======= =======
Total return(d) ...................................................... (9.15)% 4.31% 5.04% 0.87% 6.21%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .................... 1.41% 1.43% 1.43% 1.44% 1.44%
Expenses net of waiver and payments by affiliates .................... 1.25%(e) 1.25%(e) 1.25%(e) 1.25%(e) 1.20%
Net investment income ................................................ 4.28% 4.29% 3.99% 3.48% 3.50%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $19,176 $20,422 $21,028 $21,366 $19,387
Portfolio turnover rate .............................................. 300.07% 313.08% 251.50% 58.81% 100.05%
Portfolio turnover rate excluding mortgage dollar rolls(f) ........... 68.00% 92.51% 89.19% 51.26% 45.85%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
86 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
CLASS C 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.91 $ 9.94 $ 9.91 $ 10.22 $ 10.05
-------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.406 0.424 0.395 0.364 0.363
Net realized and unrealized gains (losses) ........................ (1.275) (0.005) 0.089 (0.275) 0.247
-------- ------- ------- ------- -------
Total from investment operations ..................................... (0.869) 0.419 0.484 0.089 0.610
-------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.441) (0.449) (0.454) (0.399) (0.440)
-------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 8.60 $ 9.91 $ 9.94 $ 9.91 $ 10.22
======== ======= ======= ======= =======
Total return(d) ...................................................... (9.15)% 4.31% 5.03% 0.86% 6.31%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .................... 1.41% 1.43% 1.43% 1.44% 1.44%
Expenses net of waiver and payments by affiliates .................... 1.25%(e) 1.25%(e) 1.25%(e) 1.25%(e) 1.20%
Net investment income ................................................ 4.28% 4.29% 3.99% 3.48% 3.50%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $103,564 $84,457 $46,110 $34,751 $22,202
Portfolio turnover rate .............................................. 300.07% 313.08% 251.50% 58.81% 100.05%
Portfolio turnover rate excluding mortgage dollar rolls(f) ........... 68.00% 92.51% 89.19% 51.26% 45.85%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 87
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.92 $ 9.94 $ 9.91 $ 10.22 $ 10.05
------- ------- ------- ------- -------
Income from investment operations(a):
Net investment income ............................................. 0.422 0.439 0.407 0.389 0.376
Net realized and unrealized gains (losses) ........................ (1.286) 0.005 0.093 (0.284) 0.250
------- ------- ------- ------- -------
Total from investment operations ..................................... (0.864) 0.444 0.500 0.105 0.626
------- ------- ------- ------- -------
Less distributions from net investment income ........................ (0.456) (0.464) (0.470) (0.415) (0.456)
------- ------- ------- ------- -------
Redemption fees(b,c) ................................................. -- -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ......................................... $ 8.60 $ 9.92 $ 9.94 $ 9.91 $ 10.22
======= ======= ======= ======= =======
Total return(d) ...................................................... (9.01)% 4.47% 5.20% 1.01% 6.37%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .................... 1.26% 1.28% 1.28% 1.29% 1.29%
Expenses net of waiver and payments by affiliates .................... 1.10%(e) 1.10%(e) 1.10%(e) 1.10%(e) 1.05%
Net investment income ................................................ 4.43% 4.44% 4.14% 3.63% 3.65%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $68,775 $57,935 $30,219 $21,647 $ 9,083
Portfolio turnover rate .............................................. 300.07% 313.08% 251.50% 58.81% 100.05%
Portfolio turnover rate excluding mortgage dollar rolls(f) ........... 68.00% 92.51% 89.19% 51.26% 45.85%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
88 | Annual Report
Franklin Investors Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
ADVISOR CLASS 2008 2007 2006 2005 2004
- ---------------------------------------------------------------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 9.93 $ 9.96 $ 9.92 $ 10.24 $ 10.07
-------- -------- -------- -------- --------
Income from investment operations(a):
Net investment income ............................................. 0.479 0.497 0.470 0.436 0.426
Net realized and unrealized gains (losses) ........................ (1.295) (0.012) 0.090 (0.289) 0.251
-------- -------- -------- -------- --------
Total from investment operations ..................................... (0.816) 0.485 0.560 0.147 0.677
-------- -------- -------- -------- --------
Less distributions from net investment income ........................ (0.504) (0.515) (0.520) (0.467) (0.507)
-------- -------- -------- -------- --------
Redemption fees(b,c) ................................................. -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year ......................................... $ 8.61 $ 9.93 $ 9.96 $ 9.92 $ 10.24
======== ======== ======== ======== ========
Total return ......................................................... (8.64)% 4.99% 5.82% 1.43% 7.00%
RATIOS TO AVERAGE NET ASSETS
Expenses before waiver and payments by affiliates .................... 0.76% 0.78% 0.78% 0.79% 0.79%
Expenses net of waiver and payments by affiliates .................... 0.60%(d) 0.60%(d) 0.60%(d) 0.60%(d) 0.55%
Net investment income ................................................ 4.93% 4.94% 4.64% 4.13% 4.15%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $345,256 $280,776 $222,992 $178,792 $146,053
Portfolio turnover rate .............................................. 300.07% 313.08% 251.50% 58.81% 100.05%
Portfolio turnover rate excluding mortgage dollar rolls(e) ........... 68.00% 92.51% 89.19% 51.26% 45.85%
(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 repurchases of the Fund shares in relation to income earned
and/or fluctuating market value of the investments of the Fund.
(b) Amount rounds to less than $0.001 per share.
(c) Effective September 1, 2008, the redemption fee was eliminated.
(d) Benefit of expense reduction rounds to less than 0.01%.
(e) See Note 1(i) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
Annual Report | 89
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
COUNTRY/
FRANKLIN TOTAL RETURN FUND ORGANIZATION SHARES VALUE
-------------------------- ---------------- -------------- --------------
CONVERTIBLE PREFERRED STOCKS 0.1%
AUTOMOBILES & COMPONENTS 0.0%(a)
General Motors Corp., 6.25%, cvt. pfd ....................... United States 43,500 $ 276,225
--------------
DIVERSIFIED FINANCIALS 0.1%
CIT Group Inc., 7.75%, cvt. pfd., Z ......................... United States 57,500 330,625
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,438,391) ........ 606,850
--------------
PRINCIPAL
AMOUNT(b) VALUE
-------------- --------------
CORPORATE BONDS 29.4%
AUTOMOBILES & COMPONENTS 0.2%
Ford Motor Credit Co. LLC,
7.875%, 6/15/10 .......................................... United States 1,950,000 1,310,850
senior note, 9.875%, 8/10/11 ............................. United States 1,500,000 946,053
--------------
2,256,903
--------------
BANKS 2.1%
(c, d) BNP Paribas, 144A, 7.195%, Perpetual ........................ France 3,500,000 2,235,443
Citigroup Capital XXI, pfd., junior sub. bond, 8.30%,
12/21/77 ................................................. United States 4,000,000 2,746,280
Compass Bank, 6.40%, 10/01/17 ............................... United States 3,700,000 3,034,496
(e) Fifth Third Capital Trust IV, junior sub. note, FRN, 6.50%,
4/15/67 .................................................. United States 3,000,000 1,331,250
HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 ................ United Kingdom 3,000,000 2,366,832
(d) ICICI Bank Ltd.,
144A, 6.625%, 10/03/12 ................................... India 1,825,000 1,232,240
(e) sub. bond, 144A, FRN, 6.375%, 4/30/22 .................... India 2,400,000 1,097,856
(d) Standard Chartered Bank, 144A, 8.00%, 5/30/31 ............... United Kingdom 1,000,000 672,542
Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 ........ Sweden 410,000 NZD 249,516
UBS AG Stamford, senior note, 5.875%, 12/20/17 .............. United States 4,000,000 3,200,164
(c) Wachovia Capital Trust III, junior sub. bond, 5.80%,
Perpetual ................................................ United States 4,000,000 2,140,992
(c) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ............ United States 2,000,000 1,637,082
(c) Wells Fargo Capital XV, 9.75%, Perpetual .................... United States 5,500,000 5,340,065
--------------
27,284,758
--------------
CAPITAL GOODS 0.1%
Hubbell Inc., 6.375%, 5/15/12 ............................... United States 1,000,000 1,036,377
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ..... United States 1,250,000 868,750
--------------
1,905,127
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.1%
ARAMARK Corp., senior note, 8.50%, 2/01/15 .................. United States 800,000 688,000
Waste Management Inc., senior note, 6.50%, 11/15/08 ......... United States 500,000 500,425
--------------
1,188,425
--------------
CONSUMER DURABLES & APPAREL 0.9%
Centex Corp., senior note, 7.875%, 2/01/11 .................. United States 10,000,000 8,400,000
Jarden Corp., senior sub. note, 7.50%, 5/01/17 .............. United States 1,350,000 1,012,500
KB Home, senior note,
6.25%, 6/15/15 ........................................... United States 100,000 67,000
7.25%, 6/15/18 ........................................... United States 700,000 465,500
90 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
CORPORATE BONDS (CONTINUED)
CONSUMER DURABLES & APPAREL (CONTINUED)
Pulte Homes Inc., senior note, 7.875%, 8/01/11 .............. United States 3,000,000 $ 2,557,500
--------------
12,502,500
--------------
CONSUMER SERVICES 0.1%
Host Hotels & Resorts LP, senior note,
6.875%, 11/01/14 ......................................... United States 950,000 712,500
K, 7.125%, 11/01/13 ...................................... United States 250,000 197,500
MGM MIRAGE, senior note,
6.625%, 7/15/15 .......................................... United States 900,000 531,000
7.50%, 6/01/16 ........................................... United States 200,000 119,000
Station Casinos Inc., senior note, 7.75%, 8/15/16 ........... United States 800,000 272,000
--------------
1,832,000
--------------
DIVERSIFIED FINANCIALS 6.8%
American Express Co., senior note, 7.00%, 3/19/18 ........... United States 4,300,000 3,319,682
(c) Bank of America Corp., pfd., sub. bond, M, 8.125%,
Perpetual ................................................ United States 10,000,000 7,761,800
Bear Stearns & Co. Inc., B, 4.55%, 6/23/10 .................. United States 1,000,000 978,220
Capmark Financial Group Inc., senior note, 6.30%, 5/10/17 ... United States 1,200,000 266,490
Charles Schwab Corp., senior note, 8.05%, 3/01/10 ........... United States 750,000 769,175
Deutsche Bank AG, 4.875%, 5/20/13 ........................... Germany 6,100,000 5,730,694
General Electric Capital Corp.,
(e) FRN, 4.519%, 10/21/10 ....................................... United States 1,500,000 1,367,565
senior note, 5.00%, 1/08/16 .............................. United States 2,000,000 1,610,082
senior note, A, 8.50%, 4/06/18 ........................... United States 245,000,000 MXN 14,602,451
GMAC LLC, 6.875%,
9/15/11 .................................................. United States 400,000 234,483
8/28/12 .................................................. United States 3,050,000 1,671,113
The Goldman Sachs Group Inc.,
5.125%, 1/15/15 .......................................... United States 1,000,000 830,837
senior note, 5.70%, 9/01/12 .............................. United States 5,000,000 4,495,515
sub. note, 6.75%, 10/01/37 ............................... United States 2,700,000 1,759,339
(c) JPMorgan Chase & Co., junior sub. note, 1, 7.90%,
Perpetual ................................................ United States 4,500,000 3,656,367
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 ...... United States 4,000,000 2,792,980
Lazard Group, senior note, 6.85%, 6/15/17 ................... United States 4,850,000 3,490,438
(f) Lehman Brothers Holdings Inc., senior note, 6.875%, ......... United States 6,000,000 810,000
5/02/18
Merrill Lynch & Co. Inc., 6.875%, 4/25/18 ................... United States 7,100,000 6,320,867
Morgan Stanley, senior note, 6.00%, 4/28/15 ................. United States 1,500,000 1,220,963
(e) NiSource Finance Corp., senior note, FRN, 3.381%, 11/23/09... United States 8,310,000 7,564,701
Textron Financial Corp., 5.125%, 11/01/10 ................... United States 16,750,000 15,473,549
(d) WEA Finance/WCI Finance, senior note, 144A, 5.70%,
10/01/16 ................................................. Australia 3,000,000 2,232,210
--------------
88,959,521
--------------
ENERGY 2.3%
Baker Hughes Inc., senior note, 7.50%, 11/15/18 ............. United States 7,200,000 7,102,419
Canadian Natural Resources Ltd., 5.90%, 2/01/18 ............. Canada 5,000,000 4,186,800
Chesapeake Energy Corp., senior note,
6.625%, 1/15/16 .......................................... United States 2,050,000 1,611,813
6.25%, 1/15/18 ........................................... United States 450,000 321,750
Annual Report | 91
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ........................................... France 200,000 $ 135,000
7.75%, 5/15/17 ........................................... France 400,000 270,000
(d) Gaz Capital SA, 144A, 6.212%, 11/22/16 ...................... Luxembourg 2,800,000 1,750,000
Hess Corp., 7.125%, 3/15/33 ................................. United States 500,000 387,756
(d) KazMunaiGaz Finance Sub BV, 144A, 8.375%, 7/02/13 ........... Kazakhstan 3,500,000 2,362,500
(d) LUKOIL International Finance BV, 144A, 6.656%, 6/07/22 ...... Russia 2,000,000 1,005,000
(d) Petroleum Export Cayman, senior note, 144A, 5.265%,
6/15/11 .................................................. Egypt 651,888 651,610
(d) Petroplus Finance Ltd., senior note, 144A, 6.75%,
5/01/14 .................................................. Switzerland 1,100,000 742,500
Valero Energy Corp., 6.125%, 6/15/17 ........................ United States 4,400,000 3,631,276
Weatherford International Ltd., 7.00%, 3/15/38 .............. United States 3,400,000 2,497,803
The Williams Cos. Inc., senior note,
7.625%, 7/15/19 .......................................... United States 200,000 165,280
7.875%, 9/01/21 .......................................... United States 400,000 330,613
8.75%, 3/15/32 ........................................... United States 400,000 326,707
XTO Energy Inc., senior note, 5.90%, 8/01/12 ................ United States 3,600,000 3,346,535
--------------
30,825,362
--------------
FOOD & STAPLES RETAILING 0.5%
CVS Caremark Corp., senior note, 5.75%, 6/01/17 ............. United States 1,200,000 970,625
The Kroger Co., 6.15%, 1/15/20 .............................. United States 2,500,000 2,057,855
(d) Tesco PLC, 144A, 6.15%, 11/15/37 ............................ United Kingdom 4,900,000 3,252,977
--------------
6,281,457
--------------
FOOD, BEVERAGE & TOBACCO 1.9%
Bunge Ltd. Finance Corp., senior note,
5.875%, 5/15/13 .......................................... United States 2,000,000 1,685,912
5.10%, 7/15/15 ........................................... United States 680,000 491,787
(d) Cargill Inc., 144A, 6.00%, 11/27/17 ......................... United States 6,000,000 4,837,944
Kellogg Co., 4.25%, 3/06/13 ................................. United States 6,500,000 6,015,848
(d) Miller Brewing Co., 144A, 5.50%, 8/15/13 .................... United States 1,000,000 958,391
Philip Morris International Inc., 5.65%, 5/16/18 ............ United States 10,000,000 8,575,620
Reynolds American Inc., senior secured note, 7.625%,
6/01/16 .................................................. United States 1,000,000 822,291
(d) SABMiller PLC, 144A, 6.50%, 7/01/16 ......................... South Africa 2,200,000 2,004,708
--------------
25,392,501
--------------
HEALTH CARE EQUIPMENT & SERVICES 1.0%
Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ...... United States 4,750,000 3,344,390
DaVita Inc., senior sub. note, 7.25%, 3/15/15 ............... United States 800,000 688,000
Medco Health Solutions Inc., 7.125%, 3/15/18 ................ United States 4,500,000 3,776,143
Quest Diagnostics Inc., 6.95%, 7/01/37 ...................... United States 4,000,000 2,869,292
Tenet Healthcare Corp., senior note, 9.875%, 7/01/14 ........ United States 1,600,000 1,316,000
UnitedHealth Group Inc. 6.50%, 6/15/37 ...................... United States 2,300,000 1,555,646
--------------
13,549,471
--------------
INSURANCE 0.7%
(d, e) American International Group Inc., junior sub. deb.,
144A, FRN, 8.175%, 5/15/58 ............................... United States 3,000,000 479,319
(e) Genworth Financial Inc., junior sub. note, FRN, 6.15%,
11/15/66 ................................................. United States 3,300,000 772,887
92 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
CORPORATE BONDS (CONTINUED)
INSURANCE (CONTINUED)
(e) Lincoln National Corp., junior sub. deb., FRN, 6.05%,
4/20/67 .................................................. United States 3,800,000 $ 1,750,295
(d) Metropolitan Life Global Funding I, senior secured note,
144A, 5.125%, 4/10/13 .................................... United States 3,500,000 3,132,899
(e) MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 ........ United States 4,000,000 1,991,440
(d) Nationwide Mutual Insurance Co., 144A, 8.25%, 12/01/31 ...... United States 1,200,000 672,276
--------------
8,799,116
--------------
MATERIALS 2.3%
Crown European Holdings SA, senior secured note, 6.25%,
9/01/11 .................................................. France 10,000,000 EUR 10,771,638
Freeport-McMoRan Copper & Gold Inc., senior note,
8.25%, 4/01/15 ........................................... United States 1,000,000 800,926
8.375%, 4/01/17 .......................................... United States 900,000 707,477
Huntsman International LLC, senior sub. note, 7.875%,
11/15/14 ................................................. United States 800,000 716,000
(d) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%,
2/15/16 .................................................. United Kingdom 1,100,000 412,500
Novelis Inc., senior note, 7.25%, 2/15/15 ................... Canada 700,000 472,500
Owens-Brockway Glass Container Inc., senior note, 6.75%,
12/01/14 ................................................. United States 700,000 609,000
Rio Tinto Finance USA Ltd., 5.875%, 7/15/13 ................. Australia 8,500,000 7,263,080
RPM International Inc.,
6.25%, 12/15/13 .......................................... United States 1,000,000 1,010,468
6.50%, 2/15/18 ........................................... United States 5,000,000 4,253,300
(d) RPM U.K. G.P., 144A, 6.70%, 11/01/15 ........................ United States 1,000,000 909,253
Weyerhaeuser Co., 6.75%, 3/15/12 ............................ United States 1,000,000 861,764
(d) Yara International ASA, 144A, 5.25%, 12/15/14 ............... Norway 1,000,000 839,806
--------------
29,627,712
--------------
MEDIA 5.1%
(d) British Sky Broadcasting Group PLC, senior note, 144A, 6.10%,
2/15/18 .................................................. United Kingdom 5,000,000 4,227,930
CCH I LLC, senior secured note, 11.00%, 10/01/15 ............ United States 250,000 113,750
CCH II LLC, senior note, 10.25%, 9/15/10 .................... United States 625,000 437,500
Comcast Corp., senior note,
5.50%, 3/15/11 ........................................... United States 7,000,000 6,689,403
6.30%, 11/15/17 .......................................... United States 5,000,000 4,332,840
Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ... United States 100,000 37,750
The Interpublic Group of Cos. Inc., senior note,
5.40%, 11/15/09 .......................................... United States 9,800,000 9,016,000
7.25%, 8/15/11 ........................................... United States 9,500,000 7,932,500
(e) FRN, 4.804%, 11/15/10 ....................................... United States 8,500,000 6,927,500
News America Inc., senior deb., 7.25%, 5/18/18 .............. United States 2,000,000 1,729,112
R.H. Donnelley Corp.,
senior disc. note, A-1, 6.875%, 1/15/13 .................. United States 100,000 23,500
senior disc. note, A-2, 6.875%, 1/15/13 .................. United States 400,000 94,000
senior note, A-3, 8.875%, 1/15/16 ........................ United States 800,000 172,000
Time Warner Cable Inc., senior note, 6.75%, 7/01/18 ......... United States 8,500,000 7,310,850
Annual Report | 93
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
Viacom Inc., senior note,
5.75%, 4/30/11 ........................................... United States 16,000,000 $ 14,324,896
6.25%, 4/30/16 ........................................... United States 2,000,000 1,616,564
6.125%, 10/05/17 ......................................... United States 2,500,000 1,944,115
--------------
66,930,210
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.6%
Abbott Laboratories, 6.15%, 11/30/37 ........................ United States 1,600,000 1,374,943
Amgen Inc., senior note, 5.85%, 6/01/17 ..................... United States 4,200,000 3,736,782
Schering-Plough Corp., senior note, 6.00%, 9/15/17 .......... United States 3,700,000 3,259,511
--------------
8,371,236
--------------
REAL ESTATE 0.5%
Colonial Realty LP, 5.50%, 10/01/15 ......................... United States 2,000,000 1,622,928
ERP Operating LP, 5.75%, 6/15/17 ............................ United States 2,000,000 1,365,826
HCP Inc., senior note, 6.70%, 1/30/18 ....................... United States 5,000,000 3,531,120
--------------
6,519,874
--------------
RETAILING 0.5%
Target Corp.,
6.00%, 1/15/18 ........................................... United States 5,000,000 4,144,225
6.50%, 10/15/37 .......................................... United States 2,800,000 2,016,420
--------------
6,160,645
--------------
SOFTWARE & SERVICES 0.3%
Fiserv Inc., senior note, 6.125%, 11/20/12 .................. United States 2,500,000 2,204,133
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ............................. United States 1,200,000 1,002,000
senior sub. note, 10.25%, 8/15/15 ........................ United States 650,000 458,250
--------------
3,664,383
--------------
TELECOMMUNICATION SERVICES 1.8%
AT&T Inc.,
4.95%, 1/15/13 ........................................... United States 5,000,000 4,635,335
(e) FRN, 3.014%, 11/14/08 .................................... United States 1,000,000 999,931
Embarq Corp., senior note, 7.082%, 6/01/16 .................. United States 2,500,000 1,927,610
(d) Hutchison Whampoa International Ltd., senior note, 144A,
6.25%, 1/24/14 ........................................... Hong Kong 1,000,000 825,359
7.45%, 11/24/33 .......................................... Hong Kong 1,000,000 625,920
Sprint Capital Corp., senior note, 8.375%, 3/15/12 .......... United States 4,256,000 3,428,421
Telecom Italia Capital, senior note,
4.95%, 9/30/14 ........................................... Italy 1,500,000 1,047,300
6.999%, 6/04/18 .......................................... Italy 6,000,000 4,360,644
Verizon New York Inc., senior deb.,
A, 6.875%, 4/01/12 ....................................... United States 4,700,000 4,446,928
B, 7.375%, 4/01/32 ....................................... United States 1,000,000 782,142
Verizon Virginia Inc., A, 4.625%, 3/15/13 ................... United States 1,000,000 840,670
--------------
23,920,260
--------------
94 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
CORPORATE BONDS (CONTINUED)
TRANSPORTATION 0.1%
Union Pacific Corp., 3.625%, 6/01/10 ........................ United States 1,500,000 $ 1,472,616
--------------
UTILITIES 1.5%
CenterPoint Energy Inc., senior note,
6.85%, 6/01/15 ........................................... United States 1,000,000 832,147
6.125%, 11/01/17 ......................................... United States 1,400,000 1,076,849
6.50%, 5/01/18 ........................................... United States 7,000,000 5,311,523
Consumers Energy Co., first mortgage, H, 4.80%, 2/17/09 ..... United States 1,000,000 993,839
Dominion Resources Inc., 6.40%, 6/15/18 ..................... United States 3,400,000 2,889,157
DPL Inc., senior note, 6.875%, 9/01/11 ...................... United States 500,000 477,115
(d) E.ON International Finance BV, 144A, 5.80%, 4/30/18 ......... Germany 6,000,000 5,137,134
Northeast Generation Co., senior secured note, B-1, 8.812%,
10/15/26 ................................................. United States 388,949 388,629
NRG Energy Inc., senior note,
7.25%, 2/01/14 ........................................... United States 600,000 526,500
7.375%, 2/01/16 .......................................... United States 225,000 194,625
7.375%, 1/15/17 .......................................... United States 300,000 260,250
(d) Ras Laffan Liquefied Natural Gas Co. Ltd., 144A, 3.437%,
9/15/09 .................................................. Qatar 158,400 156,441
(d) Texas Competitive Electric Holdings Co. LLC, senior note,
144A, 10.25%, 11/01/15 ................................... United States 2,450,000 1,880,375
--------------
20,124,584
--------------
TOTAL CORPORATE BONDS (COST $490,703,597) 387,568,661
--------------
CONVERTIBLE BONDS 0.5%
DIVERSIFIED FINANCIALS 0.2%
Merrill Lynch & Co. Inc., cvt., senior note, zero cpn.,
3/13/32 .................................................. United States 2,100,000 2,150,568
--------------
MATERIALS 0.1%
Headwaters Inc., cvt., senior sub. note, 2.875%, 6/01/16 .... United States 1,700,000 1,317,500
--------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.1%
PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ......... United States 1,900,000 1,567,500
--------------
SOFTWARE & SERVICES 0.1%
(d) VeriFone Holdings Inc., cvt., senior note, 144A, 1.375%,
6/15/12 .................................................. United States 2,100,000 1,338,750
--------------
TOTAL CONVERTIBLE BONDS (COST $8,431,198) ................... 6,374,318
--------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES 22.1%
BANKS 9.5%
Bear Stearns Commercial Mortgage Securities Inc., 2005-PW10,
A4, 5.405%, 12/11/40 ..................................... United States 4,000,000 3,275,344
Citigroup/Deutsche Bank Commercial Mortgage Trust,
(e) 2005-CD1, A4, FRN, 5.40%, 7/15/44 ........................ United States 15,350,000 12,523,985
(e) 2005-CD1, E, FRN, 5.40%, 7/15/44 ......................... United States 4,500,000 2,627,644
2006-CD3, A5, 5.617%, 10/15/48 ........................... United States 13,500,000 10,487,488
2007-CD4, B, 5.447%, 12/11/49 ............................ United States 4,100,000 2,104,366
2007-CD4, C, 5.476%, 12/11/49 ............................ United States 14,200,000 6,543,644
Annual Report | 95
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (CONTINUED)
BANKS (CONTINUED)
Countrywide Asset-Backed Certificates,
2004-7, AF4, 4.774%, 8/25/32 ............................. United States 284,936 $ 281,791
(e) 2004-9, AF4, FRN, 4.649%, 10/25/32 ....................... United States 633,290 628,646
FHLMC,
2643, OG, 5.00%, 7/15/32 ................................. United States 3,182,750 2,915,135
(e) 2942, TF, FRN, 2.838%, 3/15/35 ........................... United States 3,946,107 3,752,294
FNMA,
(e) 2005-122, FN, FRN, 3.609%, 1/25/36 ....................... United States 4,872,464 4,381,715
G93-33, K, 7.00%, 9/25/23 ................................ United States 1,072,921 1,132,587
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%,
1/10/38 .................................................. United States 1,578,354 1,385,664
Greenwich Capital Commercial Funding Corp.,
2004-GG1, A7, 5.317%, 6/10/36 ............................ United States 11,680,000 10,061,612
2005-GG5, A5, 5.224%, 4/10/37 ............................ United States 9,250,000 7,476,844
(e) 2006-GG7, A4, FRN, 6.112%, 7/10/38 ....................... United States 21,200,000 16,966,648
2007-GG9, C, 5.554%, 3/10/39 ............................. United States 6,438,000 3,292,393
(e) GS Mortgage Securities Corp. II,
2006-GG6, A4, FRN, 5.553%, 4/10/38 ....................... United States 8,807,000 7,026,648
(d) 2007-EOP, A1, 144A, FRN, 4.135%, 3/06/20 ................. United States 2,271,784 1,919,517
2007-GG10, C, FRN, 5.993%, 8/10/45 ....................... United States 4,610,000 2,379,405
(e) HSI Asset Securitization Corp. Trust, 2006-OPT4, 2A2, FRN,
3.317%, 3/25/36 .......................................... United States 2,404,736 2,368,717
LB-UBS Commercial Mortgage Trust, 2005-C5, A4, 4.954%,
9/15/30 .................................................. United States 10,545,000 8,473,605
(e) Morgan Stanley ABS Capital I Inc. Trust,
2006-NC3, A2B, FRN, 3.327%, 3/25/36 ...................... United States 4,132,211 4,052,924
2006-WMC, 2A, FRN, 3.299%, 7/25/36 ....................... United States 349,288 347,129
Morgan Stanley Capital I Trust,
(e) 2004-IQ7, A4, FRN, 5.431%, 6/15/38 ....................... United States 6,900,000 5,927,923
(d) 2007-IQ13, B, 144A, 5.517%, 3/15/44 ...................... United States 5,138,000 2,585,159
--------------
124,918,827
--------------
DIVERSIFIED FINANCIALS 11.4%
(e) Accredited Mortgage Loan Trust, 2005-4, A2B, FRN, 3.357%,
12/25/35 ................................................. United States 681,674 679,040
(e) ACE Securities Corp., 2005-HE7, A2B, FRN, 3.387%, 11/25/35 .. United States 936,251 932,621
(e) AFC Home Equity Loan Trust, 1997-4, 2A2, FRN, 3.487%,
12/22/27 ................................................. United States 202,491 130,745
(e) American Express Credit Account Master Trust, 2002-5, A, FRN,
2.658%, 2/15/12 .......................................... United States 21,300,000 20,686,042
(e) Amortizing Residential Collateral Trust, 2002-BC1, M1, FRN,
4.057%, 1/25/32 .......................................... United States 411,552 269,056
(e) Asset-Backed Securities Corp. Home Equity Loan Trust,
2005-HE4, A1, FRN, 3.367%, 5/25/35 ....................... United States 221,394 210,566
(e) Bank of America Credit Card Trust, 2007-A13, A13, FRN,
2.708%, 4/15/12 .......................................... United States 25,000,000 23,940,855
96 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (CONTINUED)
DIVERSIFIED FINANCIALS (CONTINUED)
(e) Capital One Auto Finance Trust, 2006-C, A4, FRN, 4.59%,
5/15/13 .................................................. United States 5,250,000 $ 4,078,495
(e) Chase Funding Mortgage Loan Asset-Backed Certificates,
2004-2, 2A2, FRN, 3.457%, 2/25/35 ........................ United States 2,416,130 2,036,569
(e) Chase Issuance Trust,
2005-A3, A, FRN, 2.508%, 10/17/11 ........................ United States 23,000,000 22,716,585
2007-A9, A9, FRN, 2.518%, 6/16/14 ........................ United States 16,450,000 13,687,607
(e) First Franklin Mortgage Loan Asset-Backed Certificates,
2004-FF11, 1A2, FRN, 3.557%, 1/25/35 ..................... United States 760,092 599,740
(e) Ford Credit Auto Owner Trust, 2007-B, A2B, FRN, 2.818%,
6/15/10 .................................................. United States 11,895,690 11,739,684
JPMorgan Chase Commercial Mortgage Securities Corp.,
(e) 2004-CB9, A4, FRN, 5.377%, 6/12/41 ....................... United States 11,324,540 9,635,655
2004-LN2, A2, 5.115%, 7/15/41 ............................ United States 697,106 579,892
(e) 2005-LDP5, A4, FRN, 5.179%, 12/15/44 ..................... United States 32,000,000 25,742,429
(d) Keystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 .... United States 23,755 23,589
(d) Legacy Benefits Insurance Settlements LLC, 2004-1, A, 144A,
5.35%, 2/10/39 ........................................... United States 2,133,021 1,996,207
(e) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 4.628%
11/15/12 ................................................. United States 1,850,000 1,716,720
Residential Asset Securities Corp.,
2001-KS2, AI5, 7.014%, 6/25/31 ........................... United States 8,866 7,959
2004-KS1, AI4, 4.213%, 4/25/32 ........................... United States 723,190 689,736
(e) 2005-AHL2, A2, FRN, 3.467%, 10/25/35 ..................... United States 1,790,056 1,649,281
(e) Securitized Asset-Backed Receivables LLC Trust, 2006-FR2,
A2, FRN, 3.357%, 3/25/36 ................................. United States 6,082,702 5,720,392
Structured Asset Securities Corp.,
(e) 2002-1A, 2A1, FRN, 5.263%, 2/25/32 ....................... United States 66,804 56,317
2004-4XS, 1A4, 4.13%, 2/25/34 ............................ United States 181,839 181,983
--------------
149,707,765
--------------
REAL ESTATE 1.2%
(e) Master Asset-Backed Securities Trust, 2006-AB1, A1, FRN,
3.347%, 2/25/36 .......................................... United States 152,036 150,403
(e) Ownit Mortgage Loan Asset-Backed Certificates, 2006-6, A2B,
FRN, 3.317%, 9/25/37 ..................................... United States 18,230,360 16,476,111
--------------
16,626,514
--------------
TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL
MORTGAGE-BACKED SECURITIES (COST $ 343,737,935) .......... 291,253,106
--------------
MORTGAGE-BACKED SECURITIES 51.2%
(e) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE
0.6%
FHLMC, 3.948%, 11/01/27 ..................................... United States 6,088,636 6,165,700
FHLMC, 5.136%, 9/01/32 ...................................... United States 417,917 417,437
FHLMC, 5.408%, 4/01/32 ...................................... United States 981,348 996,524
FHLMC, 5.472%, 4/01/30 ...................................... United States 502,590 516,852
Annual Report | 97
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(e) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE
(CONTINUED)
FHLMC, 5.961%, 10/01/36 ..................................... United States 141,289 $ 143,103
FHLMC, 7.275%, 3/01/25 ...................................... United States 142,110 149,225
--------------
8,388,841
--------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 24.7%
FHLMC Gold 15 Year, 5.00%, 10/01/17 - 9/01/18 ............... United States 675,461 665,614
FHLMC Gold 15 Year, 5.00%, 7/01/23 .......................... United States 14,846,163 14,506,125
FHLMC Gold 15 Year, 5.50%, 11/01/22 ......................... United States 4,092,307 4,077,702
FHLMC Gold 15 Year, 6.00%, 2/01/17 - 9/01/22 ................ United States 7,695,120 7,747,648
FHLMC Gold 30 Year, 5.00%, 8/01/33 - 5/01/34 ................ United States 2,575,190 2,442,949
(g) FHLMC Gold 30 Year, 5.00%, 11/15/37 ......................... United States 39,300,000 37,193,756
FHLMC Gold 30 Year, 5.00%, 1/01/38 .......................... United States 25,000,001 23,671,615
FHLMC Gold 30 Year, 5.00%, 8/01/38 .......................... United States 15,000,000 14,202,969
(h) FHLMC Gold 30 Year, 5.50%, 1/01/35 - 12/01/37 ............... United States 20,101,029 19,617,495
FHLMC Gold 30 Year, 5.50%, 11/01/37 ......................... United States 24,027,326 23,448,918
FHLMC Gold 30 Year, 5.50%, 9/01/38 .......................... United States 20,000,000 19,518,542
FHLMC Gold 30 Year, 6.00%, 5/01/33 - 8/01/34 ................ United States 2,875,792 2,878,780
FHLMC Gold 30 Year, 6.00%, 10/01/37 ......................... United States 19,847,977 19,827,509
FHLMC Gold 30 Year, 6.00%, 1/01/38 .......................... United States 24,844,232 24,818,611
FHLMC Gold 30 Year, 6.00%, 4/01/38 .......................... United States 44,046,760 44,001,336
FHLMC Gold 30 Year, 6.00%, 7/01/38 .......................... United States 14,978,643 14,963,197
FHLMC Gold 30 Year, 6.50%, 4/01/28 - 1/01/35 ................ United States 905,892 923,951
(g) FHLMC Gold 30 Year, 6.50%, 11/01/31 ......................... United States 49,000,000 49,666,106
FHLMC Gold 30 Year, 7.00%, 4/01/26 - 7/01/32 ................ United States 556,722 572,510
FHLMC Gold 30 Year, 7.50%, 3/01/32 .......................... United States 81,587 86,256
FHLMC Gold 30 Year, 8.50%, 8/01/30 .......................... United States 9,542 10,251
FHLMC Gold 30 Year, 9.00%, 1/01/22 .......................... United States 114,890 123,073
FHLMC Gold 30 Year, 10.00%, 10/01/30 ........................ United States 238,907 284,900
--------------
325,249,813
--------------
(e) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE
RATE 2.0%
FNMA, 3.445%, 1/01/17 ....................................... United States 561,977 557,761
FNMA, 3.948%, 9/01/34 ....................................... United States 6,359,550 6,332,404
FNMA, 4.104%, 8/01/33 ....................................... United States 6,504,133 6,474,144
FNMA, 4.342%, 12/01/27 ...................................... United States 468,365 464,826
FNMA, 4.354%, 3/01/33 ....................................... United States 510,589 508,390
FNMA, 4.361%, 6/01/33 ....................................... United States 445,101 443,188
FNMA, 4.398%, 2/01/34 ....................................... United States 2,248,589 2,238,139
FNMA, 4.617%, 12/01/34 ...................................... United States 1,212,508 1,243,457
FNMA, 4.75%, 6/01/15 ........................................ United States 95,110 96,218
FNMA, 4.909%, 4/01/35 ....................................... United States 5,381,946 5,380,571
FNMA, 4.967%, 10/01/32 ...................................... United States 1,081,543 1,102,960
FNMA, 5.061%, 12/01/22 ...................................... United States 177,560 179,515
FNMA, 5.186%, 11/01/31 ...................................... United States 424,944 432,885
FNMA, 5.469%, 5/01/25 ....................................... United States 154,071 157,053
FNMA, 5.475%, 6/01/32 ....................................... United States 56,085 57,284
FNMA, 5.711%, 12/01/24 ...................................... United States 47,786 49,533
98 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
(e) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE
(CONTINUED)
FNMA, 5.985%, 9/01/19 ....................................... United States 10,205 $ 10,508
FNMA, 5.988%, 12/01/34 ...................................... United States 801,136 814,369
FNMA, 6.35%, 6/01/17 ........................................ United States 83,654 83,533
--------------
26,626,738
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 20.7%
FNMA 15 Year, 4.50%, 3/01/19 - 6/01/19 ...................... United States 1,572,833 1,506,089
FNMA 15 Year, 5.00%, 6/01/18 - 7/01/18 ...................... United States 1,398,749 1,379,994
FNMA 15 Year, 5.50%, 1/01/14 - 2/01/18 ...................... United States 777,308 780,893
FNMA 15 Year, 6.00%, 8/01/16 - 9/01/22 ...................... United States 2,531,082 2,552,539
FNMA 15 Year, 6.50%, 4/01/16 - 9/01/16 ...................... United States 38,781 39,772
(g) FNMA 30 Year, 5.00%, 11/15/35 ............................... United States 18,575,000 17,596,915
FNMA 30 Year, 5.00%, 8/01/36 - 10/01/38 ..................... United States 30,163,165 28,591,293
FNMA 30 Year, 5.50%, 6/01/33 - 8/01/37 ...................... United States 69,077,796 67,563,522
FNMA 30 Year, 6.00%, 9/01/32 - 6/01/38 ...................... United States 16,144,718 16,158,431
(g) FNMA 30 Year, 6.00%, 11/01/32 ............................... United States 36,750,000 36,732,764
FNMA 30 Year, 6.00%, 8/01/37 ................................ United States 30,000,001 30,006,126
FNMA 30 Year, 6.50%, 5/01/28 - 8/01/32 ...................... United States 1,995,262 2,038,706
(g) FNMA 30 Year, 6.50%, 11/01/28 ............................... United States 65,850,000 66,745,165
FNMA 30 Year, 7.50%, 1/01/30 ................................ United States 68,099 71,621
FNMA 30 Year, 8.50%, 5/01/32 ................................ United States 224,179 241,390
FNMA 30 Year, 9.00%, 11/01/26 - 5/01/27 ..................... United States 798,590 873,620
--------------
272,878,840
--------------
(e) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE
RATE 0.0%(a)
GNMA, 5.125%, 10/20/26 ...................................... United States 95,564 96,084
GNMA, 5.375%, 1/20/23 ....................................... United States 45,821 46,135
--------------
142,219
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE
3.2%
GNMA I SF 15 Year, 7.00%, 2/15/09 ........................... United States 2,191 2,236
(g) GNMA I SF 30 Year, 6.00%, 11/01/28 .......................... United States 30,000,000 30,004,680
GNMA I SF 30 Year, 6.50%, 10/15/31 - 8/15/38 ................ United States 10,119,421 10,240,556
GNMA I SF 30 Year, 7.00%, 10/15/27 - 4/15/28 ................ United States 55,266 56,796
GNMA I SF 30 Year, 7.50%, 2/15/17 - 5/15/26 ................. United States 396,505 420,139
GNMA I SF 30 Year, 8.00%, 8/15/16 - 5/15/17 ................. United States 160,610 172,197
GNMA I SF 30 Year, 9.00%, 9/15/25 - 3/15/31 ................. United States 4,338 4,715
GNMA II SF 30 Year, 6.00%, 5/20/31 .......................... United States 39,528 39,705
GNMA II SF 30 Year, 6.50%, 3/20/28 - 4/20/31 ................ United States 28,901 29,301
GNMA II SF 30 Year, 7.50%, 8/20/30 - 1/20/33 ................ United States 217,795 228,442
GNMA II SF 30 Year, 8.00%, 5/20/27 - 7/20/27 ................ United States 218,676 233,133
--------------
41,431,900
--------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $681,584,867) 674,718,351
--------------
Annual Report | 99
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 4.2%
European Investment Bank, senior note,
4.50%, 5/15/13 ........................................... Supranational(i) 2,700,000 NOK $ 402,526
1612/37, 6.50%, 9/10/14 .................................. Supranational(i) 1,395,000 NZD 823,016
(e) FRN, 0.685%, 9/21/11 ..................................... Supranational(i) 342,000,000 JPY 3,472,403
(e, j) Government of Argentina, senior bond, FRN, 3.127%,
8/03/12 ................................................. Argentina 2,225,000 402,873
(k) Government of Ghana, Reg S, 8.50%, 10/04/17 ................. Ghana 300,000 192,750
Government of Indonesia,
FR19, 14.25%, 6/15/13 .................................... Indonesia 7,995,000,000 IDR 682,142
FR34, 12.80%, 6/15/21 .................................... Indonesia 9,705,000,000 IDR 676,679
FR35, 12.90%, 6/15/22 .................................... Indonesia 21,000,000,000 IDR 1,464,221
FR36, 11.50%, 9/15/19 .................................... Indonesia 12,200,000,000 IDR 801,674
FR40, 11.00%, 9/15/25 .................................... Indonesia 21,230,000,000 IDR 1,256,270
(k) Government of Iraq, Reg S, 5.80%, 1/15/28 ................... Iraq 260,000 124,800
Government of Mexico, 10.00%, 12/05/24 ...................... Mexico 400,000(l) MXN 3,426,726
Government of Norway,
6.00%, 5/16/11 ........................................... Norway 3,600,000 NOK 562,687
6.50%, 5/15/13 ........................................... Norway 35,500,000 NOK 5,854,610
Government of Peru,
7.84%, 8/12/20 ........................................... Peru 1,100,000 PEN 316,793
Series 7, 8.60%, 8/12/17 ................................. Peru 3,200,000 PEN 967,529
Government of Russia,
(d) 144A, 7.50%, 3/31/30 ..................................... Russia 2,300,060 2,012,286
(k) senior bond, Reg S, 7.50%, 3/31/30 ....................... Russia 6,977,600 6,105,435
Government of Singapore,
4.375%, 1/15/09 .......................................... Singapore 553,000 SGD 375,227
2.375%, 10/01/09 ......................................... Singapore 170,000 SGD 115,893
2.625%, 4/01/10 .......................................... Singapore 1,771,000 SGD 1,217,567
(e) Government of Vietnam, FRN, 3.938%, 3/12/16 ................. Vietnam 176,087 152,315
KfW Bankengruppe,
(e) FRN, 0.688%, 8/08/11 ..................................... Germany 49,000,000 JPY 493,806
senior note, 6.50%, 11/15/11 ............................. Germany 1,099,000 NZD 647,763
Korea Treasury Bond, 0525-2703, 5.25%, 3/10/27 .............. South Korea 2,001,000,000 KRW 1,511,736
Korea Treasury Note,
0525-1209, 5.25%, 9/10/12 ................................ South Korea 1,800,000,000 KRW 1,408,092
0550-1709, 5.50%, 9/10/17 ................................ South Korea 5,190,000,000 KRW 3,990,308
New South Wales Treasury Corp., senior note, 5.50%,
3/01/17 .................................................. Australia 5,095,000 AUD 3,321,579
Nota Do Tesouro Nacional, 9.762%, 1/01/14 ................... Brazil 21,900(m) BRL 7,617,397
Province of Ontario, 6.25%, 6/16/15 ......................... Canada 305,000 NZD 171,496
(d) Peru Enhanced Pass-Through Finance Ltd., senior secured
bond, A-1, 144A, zero cpn., 5/31/18 ...................... Peru 1,328,940 651,181
Queensland Treasury Corp.,
13, 6.00%, 8/14/13 ....................................... Australia 865,000 AUD 585,481
17, 6.00%, 9/14/17 ....................................... Australia 1,730,000 AUD 1,166,105
(d) 144A, 7.125%, 9/18/17 .................................... Australia 3,320,000 NZD 2,056,991
--------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $65,895,308) ....................................... 55,028,357
--------------
100 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $15,102,021) 1.1%
U.S. Treasury Bond, 4.50%, 5/15/38 .......................... United States 14,000,000 $ 14,254,856
--------------
(e, n) SENIOR FLOATING RATE INTERESTS 3.0%
AUTOMOBILES & COMPONENTS 0.0%(a)
(g) Dayco Products LLC (Mark IV), Replacement Term Loan, 7.65% -
8.48%, 6/23/11 ........................................... United States 200,000 68,000
--------------
CAPITAL GOODS 0.0%(a)
Oshkosh Truck Corp., Term Loan B, 4.32% - 4.62%, 12/06/13 ... United States 901,266 628,633
--------------
COMMERCIAL & PROFESSIONAL SERVICES 0.3%
Affinion Group Inc., Term Loan B, 5.311% - 5.618%,
10/17/12 ................................................. United States 500,000 398,750
Allied Waste North America Inc.,
Credit Link, 4.40%, 3/28/14 .............................. United States 271,191 259,440
Term Loan B, 4.06%, 3/28/14 .............................. United States 379,485 363,041
ARAMARK Corp.,
Synthetic L/C, 2.427%, 1/26/14 ........................... United States 50,120 42,088
Term Loan B, 5.637%, 1/26/14 ............................. United States 788,925 662,500
(g, o) EnviroSolutions Inc., Initial Term Loan, PIK, 12.042%, ...... United States 951,153 706,231
7/07/12
Nielsen Finance LLC (VNU Inc.), Dollar Term Loan, 4.803%,
8/09/13 .................................................. United States 2,701,058 1,969,071
--------------
4,401,121
--------------
CONSUMER DURABLES & APPAREL 0.2%
Jarden Corp.,
Term Loan B1, 5.512%, 1/24/12 ............................ United States 719,755 589,299
Term Loan B2, 5.512%, 1/24/12 ............................ United States 873,987 715,577
Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 5.171%,
12/21/11 ................................................. United States 812,195 677,168
--------------
1,982,044
--------------
CONSUMER SERVICES 0.3%
Education Management LLC, Term Loan C, 5.563%, 6/01/13 ...... United States 2,851,159 2,010,067
(g) Kuilima Resort Co. (Turtle Bay), First Lien Term Loan, 8.75%,
9/30/10 .................................................. United States 1,300,000 633,750
Penn National Gaming Inc., Term Loan B, 4.55% - 5.25%,
10/03/12 ................................................. United States 497,436 415,912
VML U.S. Finance LLC (Venetian Macau),
Delayed Draw, 6.02%, 5/25/12 ............................. Macau 394,018 253,156
(g) New Project Term Loans, 6.02%, 5/25/13 ................... Macau 480,000 308,400
Term Loan B, 6.02%, 5/25/13 .............................. Macau 805,982 517,843
--------------
4,139,128
--------------
DIVERSIFIED FINANCIALS 0.2%
Nuveen Investments Inc., Term Loan B, 6.118%, 11/13/14 ...... United States 2,189,000 1,262,324
TD Ameritrade Holding Corp., Term Loan B, 5.00%, 12/31/12 ... United States 983,088 822,107
--------------
2,084,431
--------------
Annual Report | 101
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
(e, n) SENIOR FLOATING RATE INTERESTS (CONTINUED)
ENERGY 0.1%
Alpha Natural Resources LLC, Term Loan B, 5.563%, 10/26/12 .. United States 932,500 $ 863,728
--------------
FOOD, BEVERAGE & TOBACCO 0.0%(a)
Dean Foods Co., Term Loan B, 4.62%, 4/02/14 ................. United States 492,500 371,068
--------------
HEALTH CARE EQUIPMENT & SERVICES 0.5%
(g) Carestream Health Inc., Term Loan, 5.42%, 4/30/13 ........... United States 170,033 111,938
Community Health Systems Inc., Term Loan, 5.06% - 5.25%,
7/25/14 .................................................. United States 2,001,340 1,608,827
DaVita Inc., Term Loan B-1, 4.20%, 10/05/12 ................. United States 815,000 710,215
Fresenius Medical Care Holdings Inc., Term Loan B, 4.185% -
6.125%, 3/31/13 .......................................... United States 1,098,968 936,321
HCA Inc.,
Term Loan A-1, 5.262%, 11/19/12 .......................... United States 2,828,095 2,396,103
Term Loan B-1, 6.012%, 11/18/13 .......................... United States 1,210,558 1,002,040
--------------
6,765,444
--------------
MATERIALS 0.3%
Celanese U.S. Holdings LLC, Dollar Term Loan, 5.553%,
4/02/14 .................................................. United States 1,381,977 1,123,350
Georgia-Pacific LLC,
Additional Term Loan, 4.868%, 12/20/12 ................... United States 472,380 393,518
Term Loan B, 4.551% - 4.868%, 12/20/12 ................... United States 1,275,213 1,062,324
(g) Huntsman International LLC, Term Loan B, 4.969%, 4/19/14 .... United States 128,572 111,811
(g) Lyondell Chemical Co., Tranche B-1, 8.044%, 12/20/14 ........ United States 400,000 240,544
Nalco Co., Term Loan B, 4.92% - 5.313%, 11/04/10 ............ United States 204,891 183,817
Rockwood Specialties Group Inc., Term Loan E, 4.618%,
7/30/12 .................................................. United States 994,845 833,183
--------------
3,948,547
--------------
MEDIA 0.6%
CSC Holdings Inc. (Cablevision), Incremental Term Loan,
4.569%, 3/29/13 .......................................... United States 1,322,328 1,149,481
(g) Idearc Inc., Term Loan B, 5.12%, 11/17/14 ................... United States 1,681,739 725,951
MCC Iowa,
Tranche D-1 Term Loan, 3.89%, 1/31/15 .................... United States 923,620 671,934
Tranche D-2 Term Loan, 3.89%, 1/31/15 .................... United States 86,951 63,257
(g) Metro-Goldwyn-Mayer Inc., Term Loan B, 7.012%, 4/08/12 ...... United States 998,210 504,720
Regal Cinemas Corp., Term Loan, 5.262%, 10/27/13 ............ United States 1,578,164 1,193,267
Tribune Co.,
(g) Incremental Term Loan, 6.00%, 5/14/14 ....................... United States 1,333,473 493,385
Term Loan B, 6.00%, 5/16/14 .............................. United States 685,000 307,565
Univision Communications Inc., Initial Term Loan, 5.25%,
9/29/14 .................................................. United States 2,790,000 1,516,365
UPC Financing Partnership, Term Loan N, 5.47%, 12/31/14 ..... Netherlands 1,730,000 1,241,275
--------------
7,867,200
--------------
REAL ESTATE 0.0%(a)
Capital Automotive REIT, Term Loan B, 5.47%, 12/15/10 ....... United States 940,723 599,241
--------------
102 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
COUNTRY/ PRINCIPAL
FRANKLIN TOTAL RETURN FUND ORGANIZATION AMOUNT(b) VALUE
-------------------------- ---------------- -------------- --------------
(e, n) SENIOR FLOATING RATE INTERESTS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.0%(a)
Fairchild Semiconductor Corp., Initial Term Loan, 5.262%,
6/26/13 .................................................. United States 496,193 $359,740
--------------
SOFTWARE & SERVICES 0.3%
First Data Corp., Term Loan B-2, 5.948% - 6.025%, 9/24/14 ... United States 2,575,470 1,906,767
SunGard Data Systems Inc., New U.S. Term Loan, 4.553%,
2/28/14 .................................................. United States 2,435,459 1,877,043
--------------
3,783,810
--------------
TELECOMMUNICATION SERVICES 0.1%
Alltel Communications Inc., Term Loan B-3, 5.50%, 5/18/15 ... United States 727,005 695,880
(g) Hawaiian Telecom Communications Inc., Term Loan C, 6.262%,
6/01/14 .................................................. United States 799,506 435,731
--------------
1,131,611
--------------
UTILITIES 0.1%
NRG Energy Inc.,
Credit Link, 2.701%, 2/01/13 ............................. United States 364,438 317,365
Term Loan, 5.262%, 2/01/13 ............................... United States 741,800 645,984
Texas Competitive Electric Holdings Co. LLC, Term Loan B-2,
6.303% - 7.64%, 10/10/14 ................................. United States 184,300 144,573
--------------
1,107,922
--------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $50,963,873) ...................................... 40,101,668
--------------
CREDIT LINKED NOTE (COST $1,000,624) 0.1%
BANKS 0.1%
(d, e, p) Credit Suisse First Boston International, 144A, FRN,
5.103%, 3/20/09 .......................................... United States 1,000,000 995,000
--------------
SHORT TERM INVESTMENTS 1.2%
FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST
$1,481,926) 0.1%
(q) Egypt Treasury Bills, 1/13/09 - 8/18/09 ..................... Egypt 8,375,000 EGP 1,424,141
--------------
U.S. GOVERNMENT AND AGENCY SECURITY (COST $5,995,301) 0.4%
(h, q) U.S. Treasury Bill, 11/28/08 ................................ United States 6,000,000 5,999,573
--------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $1,667,335,041) .................................... 1,478,324,881
--------------
SHARES
--------------
MONEY MARKET FUNDS (COST $8,786,161) 0.7%
(r) Franklin Institutional Fiduciary Trust Money Market
Portfolio, 1.56% ......................................... United States 8,786,161 8,786,161
--------------
Annual Report | 103
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008 (CONTINUED)
FRANKLIN TOTAL RETURN FUND VALUE
-------------------------- --------------
TOTAL INVESTMENTS (COST $1,676,121,202) 112.9% $1,487,111,042
NET UNREALIZED APPRECIATION ON FORWARD EXCHANGE
CONTRACTS 1.8% 23,762,554
OTHER ASSETS, LESS LIABILITIES (14.7)% (193,551,324)
--------------
NET ASSETS 100.0% $1,317,322,272
==============
See Currency and Selected Portfolio Abbreviations on page 105.
(a) Rounds to less than 0.1% of net assets.
(b) The principal amount is stated in U.S. dollars unless otherwise indicated.
(c) Perpetual securities with no stated maturity date.
(d) 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 October 31, 2008,
the aggregate value of these securities was $57,913,813, representing 4.40%
of net assets.
(e) The coupon rate shown represents the rate at period end.
(f) See Note 10 regarding defaulted securities.
(g) A portion or all of the security purchased on a delayed delivery, or
to-be-announced basis. See Note 1(d).
(h) Security or a portion of the security has been segregated as collateral for
open swap contracts and open future contracts. At October 31, 2008, the
value of securities pledged amounted to $4,087,862.
(i) A supranational organization is an entity formed by two or more central
governments through international treaties.
(j) The principal amount is stated in original face, and scheduled paydowns are
reflected in the market price on ex-date.
(k) 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.
These securities have been deemed liquid under guidelines approved by the
Trust's Board of Trustees. At October 31, 2008, the aggregate value of
these securities was $ 6,422,985, representing 0.49% of net assets.
(l) Principal amount is stated in 100 Mexican Peso Units.
(m) Principal amount is stated in 1,000 Brazilian Real Units.
(n) See Note 1(j) regarding senior floating rate interests.
(o) Income may be received in additional securities and/or cash.
(p) See Note 1(h) regarding credit linked notes.
(q) The security is traded on a discount basis with no stated coupon rate.
(r) 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.
The accompanying notes are an integral part of these financial statements.
104 | Annual Report
Franklin Investors Securities Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2008
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BRL - Brazilian Real
EGP - Egyptian Pound
EUR - Euro
IDR - Indonesian Rupiah
JPY - Japanese Yen
KRW - South Korean Won
MXN - Mexican Peso
MYR - Malaysian Ringgit
NOK - Norwegian Krone
NZD - New Zealand Dollar
PEN - Peruvian Nuevo Sol
SEK - Swedish Krona
SGD - Singapore Dollar
SELECTED PORTFOLIO ABBREVIATIONS:
DIP - Debtor-In-Possession
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
L/C - Letter of Credit
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of these financial statements.
Annual Report | 105
Franklin Investors Securities Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2008
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 ...................... $508,758,949 $1,229,313,563 $33,699,764 $1,667,335,041
Cost - Sweep Money Fund (Note 7) ................. 35,724,785 120,707,743 2,012,983 8,786,161
Cost - Repurchase agreements ..................... 168,129,385 -- -- --
------------ -------------- ----------- --------------
Total cost of investments ........................ $712,613,119 $1,350,021,306 $35,712,747 $1,676,121,202
------------ -------------- ----------- --------------
Value - Unaffiliated issuers ..................... $506,262,459 $ 943,483,804 $32,435,196 $1,478,324,881
Value - Sweep Money Fund (Note 7) ................ 35,724,785 120,707,743 2,012,983 8,786,161
Value - Repurchase agreements .................... 168,129,385 -- -- --
------------ -------------- ----------- --------------
Total value of investments ....................... 710,116,629 1,064,191,547 34,448,179 1,487,111,042
Cash ................................................ -- 4,636,487 -- 15,090,155
Foreign currency, at value (cost $--, $--, $138,717
and $9,719,144) .................................. -- -- 137,509 9,720,837
Receivables:
Investment securities sold ....................... 872,603 43,585,150 2,944,176 19,114,050
Capital shares sold .............................. 12,854,113 1,627,012 303,215 3,926,251
Interest ......................................... 2,388,610 6,143,400 315,293 12,752,792
Affiliates ....................................... -- -- 12,439 --
Swaps ............................................... -- -- 11,284 279,272
Unrealized appreciation on forward exchange contracts
(Note 9) ......................................... -- -- 272,798 24,262,105
Unrealized appreciation on swap contracts (Note 8) .. -- -- 223,420 8,261,120
------------ -------------- ----------- --------------
Total assets .................................. 726,231,955 1,120,183,596 38,668,313 1,580,517,624
------------ -------------- ----------- --------------
Liabilities:
Payables:
Investment securities purchased .................. -- 15,508,348 2,938,938 242,676,630
Capital shares redeemed .......................... 2,343,597 4,858,735 223,170 9,657,118
Affiliates ....................................... 470,053 922,485 -- 533,917
Distributions to shareholders .................... 284,557 1,742,405 31,616 1,401,878
Variation margin ................................. -- -- 3,875 134,843
Swaps (premium received $--, $--, $43,958, $--) ..... -- -- 49,805 322,992
Collateral due to brokers for swaps ................. -- -- -- 3,960,000
Unrealized depreciation on forward exchange contracts
(Note 9) ......................................... -- -- 5,367 499,551
Unrealized depreciation on swap contracts (Note 8) .. -- -- 146,488 3,533,061
Unrealized depreciation on unfunded loan commitments
(Note 11) ........................................ -- 2,455,568 -- 16,752
Accrued expenses and other liabilities .............. 60,394 760,175 12,893 458,610
------------ -------------- ----------- --------------
Total liabilities ............................. 3,158,601 26,247,716 3,412,152 263,195,352
------------ -------------- ----------- --------------
Net assets, at value ....................... $723,073,354 $1,093,935,880 $35,256,161 $1,317,322,272
============ ============== =========== ==============
The accompanying notes are an integral part of these financial statements.
106 | Annual Report
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2008
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
--------------- -------------- ------------ --------------
Net assets consist of:
Paid-in capital ..................................... $739,204,490 $1,866,542,946 $36,468,816 $1,515,863,557
Undistributed net investment income (distributions in
excess of net investment income) .................... (931) 295,732 97,664 5,558,472
Net unrealized appreciation (depreciation) .......... (2,496,490) (288,285,327) (890,250) (159,824,652)
Accumulated net realized gain (loss) ................ (13,633,715) (484,617,471) (420,069) (44,275,105)
------------ -------------- ----------- --------------
Net assets, at value ............................. $723,073,354 $1,093,935,880 $35,256,161 $1,317,322,272
------------ -------------- ----------- --------------
CLASS A:
Net assets, at value ................................ $586,695,687 $ 796,384,289 $35,181,301 $ 780,550,753
------------ -------------- ----------- --------------
Shares outstanding .................................. 66,201,996 103,928,926 3,671,511 90,736,130
------------ -------------- ----------- --------------
Net asset value per share (a) ....................... $ 8.86 $ 7.66 $ 9.58 $ 8.60
------------ -------------- ----------- --------------
Maximum offering price per share (net asset value per
share / 97.75%, 97.75%, 97.75% and 95.75%,
respectively) .................................... $ 9.06 $ 7.84 $ 9.80 $ 8.98
------------ -------------- ----------- --------------
CLASS B:
Net assets, at value ................................ -- $ 17,480,724 -- $ 19,175,719
------------ -------------- ----------- --------------
Shares outstanding .................................. -- 2,282,881 -- 2,229,634
------------ -------------- ----------- --------------
Net asset value and maximum offering price per
share (a) ........................................ -- $ 7.66 -- $ 8.60
------------ -------------- ----------- --------------
CLASS C:
Net assets, at value ................................ $132,254,036 $ 188,239,688 -- $ 103,564,303
------------ -------------- ----------- --------------
Shares outstanding .................................. 14,932,551 24,558,327 -- 12,045,197
------------ -------------- ----------- --------------
Net asset value and maximum offering price per
share (a) ........................................ $ 8.86 $ 7.67 -- $ 8.60
------------ -------------- ----------- --------------
CLASS R:
Net assets, at value ................................ -- -- -- $ 68,775,417
------------ -------------- ----------- --------------
Shares outstanding .................................. -- -- -- 7,994,991
------------ -------------- ----------- --------------
Net asset value and maximum offering price per
share ........................................... -- -- -- $ 8.60
------------ -------------- ----------- --------------
ADVISOR CLASS:
Net assets, at value ................................ $ 4,123,631 $ 91,831,179 $ 74,860 $ 345,256,080
------------ -------------- ----------- --------------
Shares outstanding .................................. 464,845 11,985,407 7,809 40,078,667
------------ -------------- ----------- --------------
Net asset value and maximum offering price per
share ............................................ $ 8.87 $ 7.66 $ 9.59 $ 8.61
------------ -------------- ----------- --------------
(a) Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Annual Report | 107
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended October 31, 2008
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 ............................. $ -- $ -- $ 4,536 $ 835,773
Sweep Money Fund (Note 7) ........................ 610,685 4,576,117 64,519 3,401,965
Interest ............................................ 20,134,087 88,075,640 1,044,838 69,076,947
----------- ------------- ----------- -------------
Total investment income ....................... 20,744,772 92,651,757 1,113,893 73,314,685
----------- ------------- ----------- -------------
Expenses:
Management fees (Note 3a) ........................... 1,742,904 4,928,802 101,945 4,256,413
Administrative fees (Note 3b) ....................... 455,381 3,008,796 52,248 2,652,494
Distribution fees: (Note 3c)
Class A .......................................... 983,542 2,736,869 63,644 2,029,109
Class B .......................................... -- 282,476 -- 138,821
Class C .......................................... 405,218 1,811,270 -- 705,009
Class R .......................................... -- -- -- 353,787
Transfer agent fees (Note 3e) ....................... 502,601 1,628,792 19,392 2,512,743
Custodian fees (Note 4) ............................. 6,848 21,555 -- 155,555
Reports to shareholders ............................. 65,635 157,756 5,330 196,837
Registration and filing fees ........................ 134,392 154,693 63,597 136,063
Professional fees ................................... 34,645 209,071 47,826 87,211
Trustees' fees and expenses ......................... 12,768 52,427 647 38,876
Other ............................................... 21,519 123,882 30,159 107,466
----------- ------------- ----------- -------------
Total expenses ................................ 4,365,453 15,116,389 384,788 13,370,384
Expense reductions (Note 4) ................... (2,962) (26,581) (177) (5,599)
Expenses waived/paid by affiliates (Note 3f) .. -- -- (150,816) (2,179,837)
----------- ------------- ----------- -------------
Net expenses ............................... 4,362,491 15,089,808 233,795 11,184,948
----------- ------------- ----------- -------------
Net investment income ................... 16,382,281 77,561,949 880,098 62,129,737
----------- ------------- ----------- -------------
Relized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................... 5,333 (91,576,104) (63,811) (25,308,456)
Foreign currency transactions .................... -- -- 40,841 1,516,346
Financial futures contracts ...................... -- -- 16,688 2,130,723
Swap contracts ................................... -- -- (87,305) (4,580,356)
----------- ------------- ----------- -------------
Net realized gain (loss) ................ 5,333 (91,576,104) (93,587) (26,241,743)
----------- ------------- ----------- -------------
Net change in unrealized appreciation (depreciation)
on:
Investments ...................................... 282,195 (248,029,157) (1,103,803) (190,157,233)
Translation of other assets and liabilities
denominated in foreign currencies ............. -- -- 27,067 22,876,889
----------- ------------- ----------- -------------
Net change in unrealized appreciation
(depreciation) ....................... 282,195 (248,029,157) (1,076,736) (167,280,344)
----------- ------------- ----------- -------------
Net realized and unrealized gain (loss) ................ 287,528 (339,605,261) (1,170,323) (193,522,087)
----------- ------------- ----------- -------------
Net increase (decrease) in net assets resulting from
operations .......................................... $16,669,809 $(262,043,312) $ (290,225) $(131,392,350)
=========== ============= =========== =============
The accompanying notes are an integral part of these financial statements.
108 | Annual 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
------------------------------- -------------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
--------------------------- -------------------------------
2008 2007 2008 2007
------------ ------------ -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................... $ 16,382,281 $ 15,754,025 $ 77,561,949 $ 137,196,885
Net realized gain (loss) from investments ..... 5,333 107,794 (91,576,104) (17,709,569)
Net change in unrealized appreciation
(depreciation) on investments ................. 282,195 2,180,737 (248,029,157) (42,132,065)
------------ ------------ -------------- --------------
Net increase (decrease) in net assets
resulting from operations ............ 16,669,809 18,042,556 (262,043,312) 77,355,251
------------ ------------ -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A .................................... (15,724,528) (16,788,834) (57,170,201) (105,199,853)
Class B .................................... -- -- (1,293,184) (3,131,867)
Class C .................................... (2,143,383) (1,568,974) (13,858,643) (24,353,482)
Advisor Class .............................. (11,921) -- (5,141,861) (4,768,357)
------------ ------------ -------------- --------------
Total distributions to shareholders .............. (17,879,832) (18,357,808) (77,463,889) (137,453,559)
------------ ------------ -------------- --------------
Capital share transactions: (Note 2)
Class A .................................... 254,207,122 (38,995,215) (332,371,457) (322,747,971)
Class B .................................... -- -- (16,146,106) (19,987,582)
Class C .................................... 95,822,320 745,399 (132,930,220) 14,082,357
Advisor Class .............................. 4,127,226 -- 31,134,948 (5,821,192)
------------ ------------ -------------- --------------
Total capital share transactions ................. 354,156,668 (38,249,816) (450,312,835) (334,474,388)
------------ ------------ -------------- --------------
Redemption fees .................................. 18,455 3,212 10,393 49,115
------------ ------------ -------------- --------------
Net increase (decrease) in net assets ... 352,965,100 (38,561,856) (789,809,643) (394,523,581)
Net assets:
Beginning of year ................................ 370,108,254 408,670,110 1,883,745,523 2,278,269,104
------------ ------------ -------------- --------------
End of year ...................................... $723,073,354 $370,108,254 $1,093,935,880 $1,883,745,523
------------ ------------ -------------- --------------
Undistributed net investment income (distributions
in excess of net investment income) included in
net assets:
End of year ................................... $ (931) $ (1,158) $ 295,732 $ (1,969)
============ ============ ============== ==============
The accompanying notes are an integral part of these financial statements.
Annual Report | 109
Franklin Investors Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN LOW DURATION FRANKLIN
TOTAL RETURN FUND TOTAL RETURN FUND
------------------------- -------------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------- -------------------------------
2008 2007 2008 2007
----------- ----------- -------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income .............................. $ 880,098 $ 533,425 $ 62,129,737 $ 41,784,488
Net realized gain (loss) from investments, financial
futures, foreign currency transactions, and swap
contracts ....................................... (93,587) 41,616 (26,241,743) 998,868
Net change in unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities denominated in foreign currencies ... (1,076,736) 149,881 (167,280,344) 399,109
----------- ----------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations .................... (290,225) 724,922 (131,392,350) 43,182,465
----------- ----------- -------------- --------------
Distributions to shareholders from:
Net investment income:
Class A ......................................... (927,764) (563,718) (40,221,963) (25,471,366)
Class B ......................................... -- -- (976,601) (938,074)
Class C ......................................... -- -- (4,949,577) (2,817,538)
Class R ......................................... -- -- (3,334,074) (1,971,779)
Advisor Class ................................... (23,907) -- (16,507,475) (12,728,081)
----------- ----------- -------------- --------------
Total distributions to shareholders ................... (951,671) (563,718) (65,989,690) (43,926,838)
----------- ----------- -------------- --------------
Capital share transactions: (Note 2)
Class A ......................................... 19,665,308 4,855,283 215,568,068 277,578,606
Class B ......................................... -- -- 1,718,251 (551,588)
Class C ......................................... -- -- 35,032,011 38,343,835
Class R ......................................... -- -- 21,223,255 27,774,892
Advisor Class ................................... 86,659 -- 113,820,897 58,316,715
----------- ----------- -------------- --------------
Total capital share transactions ...................... 19,751,967 4,855,283 387,362,482 401,462,460
----------- ----------- -------------- --------------
Redemption fees ....................................... 2,021 5,526 17,114 16,469
----------- ----------- -------------- --------------
Net increase (decrease) in net assets ........ 18,512,092 5,022,013 189,997,556 400,734,556
Net assets:
Beginning of year ..................................... 16,744,069 11,722,056 1,127,324,716 726,590,160
----------- ----------- -------------- --------------
End of year ........................................... $35,256,161 $16,744,069 $1,317,322,272 $1,127,324,716
----------- ----------- -------------- --------------
Undistributed net investment income included in
net assets:
----------- ----------- -------------- --------------
End of year ........................................ $ 97,664 $ 7,497 $ 5,558,472 $ 2,108,164
=========== =========== ============== ==============
The accompanying notes are an integral part of these financial statements.
110 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (Trust) is registered under the Investment
Company Act of 1940, as amended, (1940 Act) as an open-end investment company,
consisting of nine separate funds. All funds included in this report (Funds) are
diversified. The financial statements of the remaining funds in the Trust are
presented separately. Effective May 15, 2008, the Franklin Adjustable U.S.
Government Securities Fund and the Franklin Low Duration Total Return Fund began
offering a new class of shares, Advisor Class. 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 & ADVISOR CLASS CLASS A, CLASS C & ADVISOR CLASS
- ----------------------- ---------------------------------------------------
Franklin Low Duration Total Return Fund Franklin Adjustable U.S. Government Securities Fund
CLASS A, CLASS B, CLASS C & ADVISOR CLASS CLASS A, CLASS B, CLASS C, CLASS R & ADVISOR CLASS
- ----------------------------------------- --------------------------------------------------
Franklin Floating Rate Daily Access 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.
Annual Report | 111
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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. 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
Statement of Operations.
112 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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
The 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 Franklin Adjustable U.S. Government Securities Fund at year end had been
entered into on October 31, 2008. The joint repurchase agreement is valued at
cost.
D. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY AND 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 Low Duration Total Return Fund and 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 appreciation or depreciation 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 Statement of
Operations.
Annual Report | 113
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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 Statement 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
Statement of Assets and Liabilities. Realized and unrealized gains and losses on
these contracts are included in the Statement 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 Statement 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 there of in the Statement 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.
114 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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
appreciation or depreciation in the Statement of Operations. Any payment
received or paid to initiate a contract is recorded as a liability or asset in
the Statement 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 Statement of Assets and Liabilities. Cash and/or
securities are segregated in accounts maintained by the fund's custodian.
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
counterpar-ties to fulfill their obligations under the contracts.
I. MORTGAGE DOLLAR ROLLS
The Funds may enter into mortgage dollar rolls, typically on a TBA basis.
Mortgage dollar rolls are agreements between a fund and a financial institution
to simultaneously sell and repurchase mortgage-backed securities at a future
date. Gains or losses are realized on the initial sale, and the difference
between the repurchase price and the sale price is recorded as an unrealized
gain or loss to the fund upon entering into the mortgage dollar roll. In
addition, the fund may earn interest on the cash proceeds that are received from
the initial sale. During the period between the sale and repurchase, the fund is
not entitled to principal and interest paid on the mortgage backed securities.
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.
Annual Report | 115
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. SENIOR FLOATING RATE INTERESTS (CONTINUED)
Senior secured corporate loans in which the Franklin Floating Rate Daily Access
Fund and the Franklin Total Return Fund invest are generally readily marketable,
but may be subject to some restrictions on resale.
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.
The Funds have reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of October 31, 2008, and have
determined that no provision for income tax is required in the Funds' financial
statements.
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 of America. 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.
Net investment income, other than class specific expenses, is allocated daily to
each class of shares based upon the relative value of the settled shares of each
class. Realized and unrealized gains and losses 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 or
decreases 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.
116 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
N. REDEMPTION FEES
A short term trading redemption fee was imposed, with some exceptions, on any
fund shares that were redeemed or exchanged within seven calendar days following
their purchase date. The redemption fee was 2% of the amount redeemed. Such fees
were retained by the funds and accounted for as an addition to paid-in capital.
Effective September 1, 2008, the redemption fee was eliminated.
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, on behalf of the Funds, 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 October 31, 2008, there were an unlimited number of shares authorized
(without 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:
Year ended October 31, 2008
Shares sold ........................ 45,330,017 $ 402,602,305 26,731,178 $ 249,321,027
Shares issued in reinvestment of
distributions ...................... 1,368,917 12,161,490 4,323,393 39,679,394
Shares redeemed ....................... (18,074,814) (160,556,673) (67,410,649) (621,371,878)
----------- ------------- ----------- -------------
Net increase (decrease) .................. 28,624,120 $ 254,207,122 (36,356,078) $(332,371,457)
=========== ============= =========== =============
Year ended October 31, 2007
Shares sold ........................ 11,740,658 $ 104,080,368 45,449,542 $ 455,318,857
Shares issued in reinvestment of
distributions ................... 1,374,465 12,197,091 7,259,151 72,450,526
Shares redeemed .................... (17,494,601) (155,272,674) (85,552,332) (850,517,354)
----------- ------------- ----------- -------------
Net increase (decrease) ............... (4,379,478) $ (38,995,215) (32,843,639) $(322,747,971)
=========== ============= =========== =============
Annual Report | 117
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (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:
Year ended October 31, 2008
Shares sold ........................... 279,595 $ 2,609,595
Shares issued in reinvestment of
distributions ...................... 103,242 950,053
Shares redeemed ....................... (2,135,194) (19,705,754)
----------- -------------
Net increase (decrease) ............... (1,752,357) $ (16,146,106)
========== =============
Year ended October 31, 2007
Shares sold ........................... 671,070 $ 6,725,075
Shares issued in reinvestment of
distributions ...................... 216,354 2,159,084
Shares redeemed ....................... (2,914,223) (28,871,741)
----------- -------------
Net increase (decrease) ............... (2,026,799) $ (19,987,582)
=========== =============
CLASS C SHARES:
Year ended October 31, 2008
Shares sold ........................... 14,050,831 $124,708,844 5,548,177 $ 51,926,100
Shares issued in reinvestment of
distributions ...................... 188,688 1,675,135 1,075,167 9,896,217
Shares redeemed ....................... (3,443,603) (30,561,659) (21,092,906) (194,752,537)
---------- ------------ ----------- -------------
Net increase (decrease) ............... 10,795,916 $ 95,822,320 (14,469,562) $(132,930,220)
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ........................... 1,542,997 $ 13,673,247 18,843,591 $ 189,046,271
Shares issued in reinvestment of
distributions ...................... 134,527 1,193,107 1,755,971 17,522,348
Shares redeemed ....................... (1,592,092) (14,120,955) (19,373,184) (192,486,262)
---------- ------------ ----------- -------------
Net increase (decrease) ............... 85,432 $ 745,399 1,226,378 $ 14,082,357
========== ============ =========== =============
ADVISOR CLASS SHARES:
Year ended October 31, 2008(a)
Shares sold ........................... 465,349 $ 4,131,712 6,787,882 $ 63,704,976
Shares issued in reinvestment of
distributions ...................... 1,187 10,533 496,771 4,522,141
Shares redeemed ....................... (1,691) (15,019) (4,009,188) (37,092,169)
---------- ------------ ----------- -------------
Net increase (decrease) ............... 464,845 $ 4,127,226 3,275,465 $ 31,134,948
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ........................... 9,108,020 $ 91,476,645
Shares issued in reinvestment of
distributions ...................... 341,688 3,395,371
Shares redeemed ....................... (10,087,319) (100,693,208)
----------- -------------
Net increase (decrease) ............... (637,611) $ (5,821,192)
=========== =============
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the
Franklin Adjustable U.S. Government Securities Fund.
118 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN LOW DURATION
TOTAL RETURN FUND FRANKLIN TOTAL RETURN FUND
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- -------------
CLASS A SHARES:
Year ended October 31, 2008
Shares sold ........................... 3,498,413 $ 34,600,717 44,337,225 $ 430,078,325
Shares issued in reinvestment of
distributions ...................... 61,187 604,096 3,169,808 30,365,396
Shares redeemed ....................... (1,580,515) (15,539,505) (25,706,207) (244,875,653)
---------- ------------ ----------- -------------
Net increase (decrease) ............... 1,979,085 $ 19,665,308 21,800,826 $ 215,568,068
========== ============ =========== =============
Year ended October 31, 2007
Shares sold ........................... 1,019,652 $ 10,002,143 38,001,519 $ 375,757,973
Shares issued in reinvestment of
distributions ...................... 30,631 300,867 1,817,051 17,989,816
Shares redeemed ....................... (555,629) (5,447,727) (11,730,342) (116,169,183)
---------- ------------ ----------- -------------
Net increase (decrease) ............... 494,654 $ 4,855,283 28,088,228 $ 277,578,606
========== ============ =========== =============
CLASS B SHARES:
Year ended October 31, 2008
Shares sold ........................... 963,738 $ 9,287,696
Shares issued in reinvestment of
distributions ...................... 76,219 731,940
Shares redeemed ....................... (869,648) (8,301,385)
----------- -------------
Net increase (decrease) ............... 170,309 $ 1,718,251
=========== =============
Year ended October 31, 2007
Shares sold ........................... 500,987 $ 4,950,179
Shares issued in reinvestment of
distributions ...................... 71,528 708,571
Shares redeemed ....................... (627,851) (6,210,338)
----------- -------------
Net increase (decrease) ............... (55,336) $ (551,588)
=========== =============
CLASS C SHARES:
Year ended October 31, 2008
Shares sold ........................... 7,570,823 $ 73,400,411
Shares issued in reinvestment of
distributions ...................... 379,146 3,629,812
Shares redeemed ....................... (4,424,080) (41,998,212)
----------- -------------
Net increase (decrease) ............... 3,525,889 $ 35,032,011
=========== =============
Year ended October 31, 2007
Shares sold ........................... 5,398,553 $ 53,386,701
Shares issued in reinvestment of
distributions ...................... 208,906 2,067,241
Shares redeemed ....................... (1,726,775) (17,110,107)
----------- -------------
Net increase (decrease) ............... 3,880,684 $ 38,343,835
=========== =============
Annual Report | 119
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN LOW DURATION FRANKLIN
TOTAL RETURN FUND TOTAL RETURN FUND
--------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------
CLASS R SHARES:
Year ended October 31, 2008
Shares sold..................................... 4,646,052 $ 45,076,063
Shares issued in reinvestment of distributions.. 291,877 2,796,395
Shares redeemed................................. (2,784,227) (26,649,203)
---------- ------------
Net increase (decrease)......................... 2,153,702 $ 21,223,255
========== ============
Year ended October 31, 2007
Shares sold..................................... 3,862,765 $ 38,274,993
Shares issued in reinvestment of distributions.. 173,026 1,712,580
Shares redeemed................................. (1,233,340) (12,212,681)
---------- ------------
Net increase (decrease)......................... 2,802,451 $ 27,774,892
========== ============
ADVISOR CLASS SHARES:
Year ended October 31, 2008 (a)
Shares sold..................................... 561,358 $ 5,551,066 16,159,792 $153,681,720
Shares issued in reinvestment of distributions.. 2,328 22,960 1,213,934 11,603,054
Shares redeemed................................. (555,877) (5,487,367) (5,564,488) (51,463,877)
-------- ----------- ---------- ------------
Net increase (decrease)......................... 7,809 $ 86,659 11,809,238 $113,820,897
======== =========== ========== ============
Year ended October 31, 2007
Shares sold..................................... 6,859,193 $ 68,063,219
Shares issued in reinvestment of distributions.. 792,896 7,862,513
Shares redeemed................................. (1,773,903) (17,609,017)
---------- ------------
Net increase (decrease)......................... 5,878,186 $ 58,316,715
========== ============
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the
Franklin Low Duration Total Return Fund.
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 Institutional, LLC (FT Institutional) Investment manager
Franklin Advisers, Inc. (Advisers) Administrative 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
120 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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
- ------------------- ----------
0.400% Up to and including $5 billion
0.350% Over $5 billion, up to and including $10 billion
0.330% Over $10 billion, up to and including 15 billion
0.300% In excess of $15 billion
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 each 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
Under a subadvisory agreement, FT Institutional, an affiliate of Advisers,
provides subadvisory services to the Franklin Total Return Fund and receives
from Advisers fees based on the average daily net assets of the fund.
Annual Report | 121
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Franklin Adjustable U.S. Government Securities Fund pays an administrative
fee to Advisers based on the fund's average daily net assets as follows:
ANNUALIZED FEE RATE NET ASSETS
- ------------------- ----------
0.100% Up to and including $5 billion
0.090% Over $5 billion, up to and including $10 billion
0.080% In excess of $10 billion
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.
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%
Compensation Plans:
Class A ......... -- 0.25% 0.25% --
Class B ......... -- 1.00% -- 0.65%
Class C ......... 0.65% 0.65% -- 0.65%
Class R ......... -- -- -- 0.50%
122 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 year:
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 .. $58,717 $ 45,740 $18,359 $702,297
Contingent deferred sales charges
retained ............................. $55,180 $267,189 $ 1,998 $ 73,697
E. TRANSFER AGENT FEES
For the year ended October 31, 2008, 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 ..................... $319,699 $991,829 $13,316 $1,267,106
F. WAIVER AND EXPENSE REIMBURSEMENTS
Advisers and FT Services have agreed in advance to waive all or a portion of
their respective fees and to assume payment of other expenses through February
28, 2009 for the Franklin Low Duration Total Return Fund and the Franklin Total
Return. Total expenses waived or paid are not subject to reimbursement by the
fund subsequent to the fund's fiscal year end. After February 28, 2009, Advisers
and FT Services may discontinue this waiver at any time upon notice to the
fund's Board of Trustees.
G. OTHER AFFILIATED TRANSACTIONS
At October 31, 2008, Advisers or the investment companies managed by Advisers
owned 8.01% and 21.50%, 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 year ended October 31, 2008, the
custodian fees were reduced as noted in the Statements of Operations.
Annual Report | 123
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At October 31, 2008, 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:
2009 ................................. $ 1,279,055 $ -- $ -- $ 1,361,562
2010 ................................. -- 192,099,191 -- 550,214
2011 ................................. 585,362 108,452,146 -- --
2012 ................................. 1,039,514 74,147,691 -- --
2013 ................................. 2,782,773 -- 38,924 466,273
2014 ................................. 3,962,538 -- 108,726 5,783,491
2015 ................................. 2,492,027 17,905,138 18,880 1,438,217
2016 ................................. 1,492,445 91,389,184 215,718 35,203,346
----------- ------------ -------- -----------
$13,633,714 $483,993,350 $382,248 $44,803,103
=========== ============ ======== ===========
On October 31, 2008, the Franklin Adjustable U.S. Government Securities Fund had
expired capital loss carryforwards of $3,438,157, which were reclassified to
paid-in capital.
The tax character of distributions paid during the years ended October 31, 2008
and 2007, was as follows:
FRANKLIN ADJUSTABLE U.S.
GOVERNMENT FRANKLIN FLOATING RATE
SECURITIES FUND DAILY ACCESS FUND
------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- ------------
Distributions paid from:
Ordinary income ..... $17,879,832 $18,357,808 $77,463,889 $137,453,559
=========== =========== =========== ============
FRANKLIN LOW DURATION
TOTAL RETURN FUND FRANKLIN TOTAL RETURN FUND
------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- ------------
Distributions paid from:
Ordinary income ..... $951,671 $563,718 $65,989,690 $43,926,838
======== ======== =========== ===========
124 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At October 31, 2008, the cost of investments, net unrealized appreciation
(depreciation) and undistributed ordinary income 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 ....... $712,613,119 $1,350,568,152 $35,774,408 $1,677,865,210
------------ -------------- ----------- --------------
Unrealized appreciation ... $ 1,343,417 $ 530,316 $ 138,479 $ 2,465,927
Unrealized depreciation ... (3,839,907) (286,906,921) (1,464,708) (193,220,095)
------------ -------------- ----------- --------------
Net unrealized appreciation
(depreciation) ......... $ (2,496,490) $ (286,376,605) $(1,326,229) $ (190,754,168)
------------ -------------- ----------- --------------
Distributable earnings -
Ordinary income ........ $ 283,628 $ 1,960,062 $ 488,033 $ 34,005,984
------------ -------------- ----------- --------------
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.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended October 31, 2008, 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
--------------- -------------- ------------ --------------
Purchases ................. $282,318,493 $424,156,043 $45,892,899 $4,840,601,328
Sales ..................... $ 89,027,251 $827,720,534 $27,445,362 $4,491,731,518
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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.
Annual Report | 125
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT DEFAULT SWAPS
At October 31, 2008, the Franklin Low Duration Total Return Fund and the
Franklin Total Return Fund had the following credit default swap contracts
outstanding:
PERIODIC
NOTIONAL PAYMENT EXPIRATION UNREALIZED UNREALIZED
AMOUNT (a) RATE DATE APPRECIATION DEPRECIATION
----------- -------- ---------- ------------ ------------
FRANKLIN LOW DURATION TOTAL RETURN FUND
CONTRACTS TO BUY PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
Aetna Inc. (Merrill Lynch) ....................... $ 100,000 0.62% 3/20/13 $ 3,236 $ --
Comcast Corp. (Merrill Lynch) .................... 100,000 0.33% 3/20/11 2,874 --
Cox Communications Inc. (JPMorgan Chase) ......... 200,000 0.98% 6/20/13 66 --
Interpublic Group of Cos. Inc. (Citigroup) ....... 200,000 4.89% 12/20/09 8,212 --
Interpublic Group of Cos. Inc. (Citigroup) ....... 500,000 5.15% 9/20/11 42,670 --
Interpublic Group of Cos. Inc. (Merrill Lynch) ... 500,000 2.74% 12/20/10 55,282 --
Sprint Capital Corp. (Merrill Lynch) ............. 1,000,000 3.15% 3/20/12 82,067 --
Textron Financial Corp. (Merrill Lynch) .......... 250,000 0.27% 12/20/10 24,993 --
Viacom Inc. (Merrill Lynch) ...................... 100,000 0.45% 6/20/11 4,020 --
CONTRACTS TO SELL PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
CDX.NA.IG.11 (Credit Suisse) ..................... 2,000,000 1.50% 12/20/13 -- (31,501)
LCDX.NA.10 (JPMorgan Chase) ...................... 1,000,000 3.25% 6/20/13 -- (94,610)
Time Warner Cable Inc. (JPMorgan Chase) .......... 200,000 1.83% 6/20/13 -- (5,547)
UnitedHealth Group Inc. (Merrill Lynch) .......... 200,000 0.88% 3/20/13 -- (14,830)
---------- -----------
Unrealized appreciation (depreciation) on
credit default swaps ....................... 223,420 (146,488)
---------- -----------
Net unrealized appreciation
(depreciation) on credit default swaps .. $ 76,932
==========
FRANKLIN TOTAL RETURN FUND
CONTRACTS TO BUY PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
Aetna Inc. (JP Morgan Chase) ..................... $ 2,850,000 0.58% 3/20/13 $ 96,701 $ --
Aetna Inc. (Merrill Lynch) ....................... 5,000,000 0.62% 3/20/13 161,779 --
Capital One Financial Corp. (Goldman Sachs) ...... 8,400,000 1.95% 3/20/18 428,694 --
Centex Corp. (Merrill Lynch) ..................... 10,000,000 4.30% 3/20/11 400,507 --
Comcast Corp. (Merrill Lynch) .................... 7,000,000 0.33% 3/20/11 201,174 --
Cox Communications Inc. (Goldman Sachs) .......... 10,000,000 0.98% 6/20/13 3,310 --
126 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT DEFAULT SWAPS (CONTINUED)
PERIODIC
NOTIONAL PAYMENT EXPIRATION UNREALIZED UNREALIZED
AMOUNT (a) RATE DATE APPRECIATION DEPRECIATION
----------- -------- ---------- ------------ ------------
FRANKLIN TOTAL RETURN FUND(CONTINUED)
CONTRACTS TO BUY PROTECTION (CONTINUED)
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
(CONTINUED)
Crown European Holdings SA (Citigroup) ........... $10,000,000 EUR 2.00% 9/20/11 $ 27,450 $ --
Goldman Sachs Group Inc. (Credit Suisse) ......... 5,000,000 4.00% 9/20/12 -- (108,722)
Interpublic Group of Cos. Inc. (Citigroup) ....... 9,800,000 4.89% 12/20/09 402,386 --
Interpublic Group of Cos. Inc. (Citigroup) ....... 9,500,000 5.15% 9/20/11 810,726 --
Interpublic Group of Cos. Inc. (Merrill Lynch) ... 8,500,000 2.74% 12/20/10 939,803 --
iStar Financial Inc. (Credit Suisse) ............. 3,600,000 2.92% 3/20/18 1,959,737 --
NiSource Finance Corp. (Citigroup) ............... 8,110,000 1.50% 11/23/09 51,814 --
Pulte Homes Inc. (Merrill Lynch) ................. 3,000,000 2.96% 9/20/11 85,345 --
Sprint Capital Corp. (Merrill Lynch) ............. 4,256,000 3.15% 3/20/12 349,277 --
Textron Financial Corp. (Merrill Lynch) .......... 16,750,000 0.27% 12/20/10 1,674,528 --
Viacom Inc. (Merrill Lynch) ...................... 10,000,000 0.35% 6/20/11 426,666 --
Viacom Inc. (Merrill Lynch) ...................... 6,000,000 0.45% 6/20/11 241,223 --
CONTRACTS TO SELL PROTECTION
REFERENCED DEBT OBLIGATION (SWAP COUNTERPARTY)
Capital One Financial Corp. (Goldman Sachs) ...... 14,030,000 2.60% 3/20/13 -- (413,559)
iStar Financial Inc. (Credit Suisse) ............. 3,600,000 4.00% 3/20/13 -- (1,777,376)
Time Warner Cable Inc. (Goldman Sachs) ........... 10,000,000 1.83% 6/20/13 -- (277,338)
UnitedHealth Group Inc. (JPMorgan Chase) ......... 2,850,000 0.85% 3/20/13 -- (214,556)
UnitedHealth Group Inc. (Merrill Lynch) .......... 10,000,000 0.88% 3/20/13 -- (741,510)
---------- -----------
Unrealized appreciation (depreciation) on
credit default swaps ....................... 8,261,120 (3,533,061)
---------- -----------
Net unrealized appreciation
(depreciation) on credit default swaps .. $4,728,059
==========
(a) In U.S. dollars unless otherwise indicated.
CURRENCY ABBREVIATION
EUR - Euro
Annual Report | 127
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. FINANCIAL FUTURES AND FORWARD EXCHANGE CONTRACTS
At October 31, 2008, the Franklin Low Duration Total Return Fund and the
Franklin Total Return Fund had the following financial futures contracts
outstanding:
UNREALIZED
NUMBER OF DELIVERY CONTRACT APPRECIATION
CONTRACTS DATE FACE VALUE (DEPRECIATION)
--------- -------- ------------ --------------
FRANKLIN LOW DURATION TOTAL RETURN FUND
CONTRACTS TO BUY
U.S. Treasury 2 Year Note ............. 20 12/31/08 $ 4,000,000 $ 35,653
CONTRACTS TO SELL
U.S. Treasury 5 Year Note ............. 8 12/31/08 $ 800,000 $ 2,097
FRANKLIN TOTAL RETURN FUND
CONTRACTS TO BUY
U.S. Treasury 2 Year Note ............. 515 12/31/08 $103,000,000 $1,240,869
U.S. Treasury 10 Year Note ............ 250 12/19/08 25,000,000 (477,188)
CONTRACTS TO SELL
U.S. Treasury Bond .................... 80 12/19/08 $ 8,000,000 $ 250,318
U.S. Treasury 5 Year Note ............. 170 12/31/08 17,000,000 (198,316)
At October 31, 2008, the Franklin Low Duration Total Return Fund and the
Franklin Total Return Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT (a) DATE APPRECIATION DEPRECIATION
-------------- ---------- ------------ ------------
FRANKLIN LOW DURATION TOTAL RETURN FUND
CONTRACTS TO BUY
92,387 Swiss Franc .......... 85,000 11/28/08 $ -- $ (5,278)
3,953,250 Japanese Yen ......... 37,884 1/22/09 2,411 --
5,777,000 Japanese Yen ......... 57,753 4/14/09 1,362 --
458,108 Malaysian Ringgit .... 75,000 GBP 5/26/09 9,966 --
517,900 Singapore Dollar ..... 250,000 EUR 5/26/09 34,423 --
260,000 U S Dollar ........... 170,469 EUR 6/18/09 43,433 --
2,956,500 Japanese Yen ......... 18,346 EUR 6/24/09 7,057 --
24,000 Chinese Yuan ......... 2,500 EUR 9/18/09 247 --
149,700 Chinese Yuan ......... 15,642 EUR 9/23/09 1,473 --
67,000 Chinese Yuan ......... 6,904 EUR 9/24/09 782 --
2,800,000 Japanese Yen ......... 27,309 9/28/09 1,590 --
90,000 Malaysian Ringgit .... 18,399 EUR 9/30/09 2,185 --
58,724 Chinese Yuan ......... 6,231 EUR 10/15/09 449 --
19,095 Chinese Yuan ......... 2,761 10/23/09 -- (38)
37,968 Chinese Yuan ......... 5,460 10/26/09 -- (47)
18,971 Chinese Yuan ......... 2,708 10/27/09 -- (4)
CONTRACTS TO SELL
50,000,000 South Korean Won ..... 60,950 CHF 12/18/08 13,473 --
100,000 Euro ................. 15,588,600 JPY 2/27/09 32,008 --
100,000 Euro ................. 149,115 2/27/09 21,963 --
128 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. FINANCIAL FUTURES AND FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT (a) DATE GAIN LOSS
-------------- ---------- ----------- ----------
FRANKLIN LOW DURATION TOTAL RETURN FUND
(CONTINUED)
CONTRACTS TO SELL (CONTINUED)
165,000 Euro ................. 255,767 4/17/09 $ 46,117 $ --
165,000 Euro ................. 25,532,100 JPY 4/17/09 51,654 --
289,180 New Zealand Dollar ... 1,947,713,448 IDR 8/04/09 2,205 --
----------- ---------
Unrealized appreciation
(depreciation) on forward
exchange contracts .............. 272,798 (5,367)
----------- ---------
Net unrealized appreciation
(depreciation) on forward
exchange contracts .......... $ 267,431
===========
FRANKLIN TOTAL RETURN FUND
CONTRACTS TO BUY
6,298,586 Swiss Franc .......... 5,795,000 11/28/08 $ -- $(359,846)
218,558,250 Japanese Yen ......... 2,094,433 1/22/09 133,305 --
265,742,000 Japanese Yen ......... 2,656,623 4/14/09 62,672 --
21,531,053 Malaysian Ringgit .... 3,525,000 GBP 5/26/09 468,403 --
27,448,700 Singapore Dollar ..... 13,250,000 EUR 5/26/09 1,824,394 --
14,020,000 U S Dollar ........... 9,192,237 EUR 6/18/09 2,342,042 --
215,824,500 Japanese Yen ......... 1,339,277 EUR 6/24/09 515,155 --
1,016,000 Chinese Yuan ......... 105,833 EUR 9/18/09 10,445 --
6,329,900 Chinese Yuan ......... 661,411 EUR 9/23/09 62,288 --
2,824,000 Chinese Yuan ......... 290,999 EUR 9/24/09 32,961 --
36,349,888 Russian Ruble ........ 1,729,247 AUD 9/24/09 4,954 --
85,000,000 Japanese Yen ......... 829,026 9/28/09 48,282 --
55,943,933 Russian Ruble ........ 2,689,034 AUD 9/28/09 -- (10,756)
12,560,000 Malaysian Ringgit .... 2,567,720 EUR 9/30/09 304,874 --
13,930,596,086 Viet Nam Dong ........ 1,131,226 AUD 10/07/09 -- (10,629)
4,599,206 Chinese Yuan ......... 993,714 AUD 10/13/09 8,782 --
2,487,166 Chinese Yuan ......... 263,918 EUR 10/15/09 19,021 --
4,732,477 Chinese Yuan ......... 1,004,920 AUD 10/19/09 20,622 --
3,007,421 Chinese Yuan ......... 434,787 10/23/09 -- (5,989)
5,097,153 Chinese Yuan ......... 732,967 10/26/09 -- (6,277)
3,049,528 Chinese Yuan ......... 435,336 10/27/09 -- (583)
CONTRACTS TO SELL
3,300,000,000 South Korean Won ..... 4,022,722 CHF 12/18/08 889,185 --
8,400,000 Euro ................. 1,309,442,400 JPY 2/27/09 2,688,688 --
8,400,000 Euro ................. 12,525,660 2/27/09 1,844,857 --
9,727,500 Euro ................. 14,931,226 4/06/09 2,569,426 --
243,647,600 Mexican Peso ......... 22,069,529 4/07/09 3,846,111 --
8,638,000 Euro ................. 1,336,644,120 JPY 4/17/09 2,704,187 --
8,638,000 Euro ................. 13,389,764 4/17/09 2,414,296 --
5,201,175,000 South Korean Won ..... 5,250,000 4/27/09 1,132,468 --
50,419,174 Mexican Peso ......... 196,307,052 INR 5/15/09 192,612 --
3,276,627 New Zealand Dollar ... 22,069,065,564 IDR 8/04/09 24,984 --
1,213,924 New Zealand Dollar ... 20,369,637 RUB 8/12/09 -- (52,065)
Annual Report | 129
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. FINANCIAL FUTURES AND FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT (a) DATE GAIN LOSS
-------------- ---------- ----------- ----------
FRANKLIN TOTAL RETURN FUND (CONTINUED)
CONTRACTS TO SELL (CONTINUED)
1,139,367 New Zealand Dollar ... 13,807,414,869 VND 8/14/09 $ 97,091 $ --
1,205,982 New Zealand Dollar ... 20,183,315 RUB 8/14/09 -- (53,406)
----------- ---------
Unrealized appreciation
(depreciation) on forward
exchange contracts .............. 24,262,105 (499,551)
----------- ---------
Net unrealized appreciation
(depreciation) on forward
exchange contracts ........... $23,762,554
===========
(a) In U.S. dollars unless otherwise indicated.
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound Sterling
IDR - Indonesian Rupiah
INR - Indian Rupee
JPY - Japanese Yen
RUB - Russian Ruble
VND - Viet Nam Dong
10. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin Floating Rate Daily Access Fund has 78.79% of its portfolio
invested in senior secured floating rate notes, or other securities rated below
investment grade. These securities may be more sensitive to economic conditions
causing greater price volatility and are potentially subject to a greater risk
of loss due to default than higher rated securities.
The funds held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At October 31, 2008, the value of these
securities for the Franklin Floating Rate Daily Access Fund, the Franklin Low
Duration Total Return Fund, and the Franklin Total Return Fund was $1,298,243,
$27,000, and $810,000, respectively, representing 0.12%, 0.08%, and 0.06%,
respectively, of each fund's net assets. The funds discontinue accruing income
on securities for which income has been deemed uncollectible and provide an
estimate for losses on interest receivable. The securities have been identified
on the accompanying Statement of Investments.
11. UNFUNDED LOAN COMMITMENTS
The Franklin Floating Rate Daily Access Fund and the Franklin Total Return Fund
may enter into certain credit agreements, all or a portion of which may be
unfunded. The funds are obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statements of Investments.
130 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. UNFUNDED LOAN COMMITMENTS (CONTINUED)
At October 31, 2008, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENT
- -------- -----------
FRANKLIN FLOATING RATE DAILY ACCESS FUND
Bausch and Lomb Inc., Delayed Draw Term Loan ............ $ 969,993
Community Health Systems Inc., Delayed Draw Term Loan ... 903,685
Manitowoc Co Inc., Term Loan B .......................... 10,900,000
Sealy Mattress Co., Revolver ............................ 556,500
-----------
$13,330,178
===========
FRANKLIN TOTAL RETURN FUND
Community Health Systems Inc., Delayed Draw Term Loan ... $ 102,087
===========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized appreciation or depreciation is included in the
Statement of Assets and Liabilities and Statement of Operations.
12. CREDIT FACILITY
Effective June 30, 2008, the Franklin Floating Rate Daily Access Fund entered
into a committed, senior, secured 364 day line of credit, up to a maximum amount
of $100 million (Committed Credit Facility) with a bank, for temporary liquidity
purposes. The Committed Credit Facility replaced an existing senior, secured,
uncommitted, advised line of credit (Advised Line) that the fund and another
investment company had entered into with that bank. Interest on outstanding
draws under the terms of the Committed Credit Facility will be charged at the
Federal Funds Rate plus 0.60%. Fees and other expenses are charged over the term
of the Committed Credit Facility. The fund must segregate securities as
collateral for any outstanding loan advances at a ratio of 5:1. During the year
ended October 31, 2008, the fund did not utilize the Committed Credit Facility
or the Advised Line to the Credit Facility Note.
13. FUND LITIGATION
On July 6, 2003, Adelphia Communications Corp. ("Adelphia") and related parties,
along with its Official Committee of Unsecured Creditors, (collectively
"Plaintiffs") filed an adversary proceeding in the then-pending Adelphia
bankruptcy case in the U.S. Bankruptcy Court for the Southern District of New
York 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 Floating Rate Daily Access Fund (individually
and as successor to the Franklin Floating Rate Trust's interests in the credit
facilities at issue), Franklin Floating Rate Trust, and Franklin Floating Rate
Master Series (collectively the "Franklin Defendants"), and Franklin CLOs I-III,
Annual Report | 131
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. FUND LITIGATION (CONTINUED)
among other defendants. In addition, Advisers was originally named as a
defendant, but later dismissed from the lawsuit. The complaint alleged 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 and sought avoidance of the loans and recovery of fraudulent transfers
(the "Complaint"). The agent bank and investment bank defendants moved to
dismiss the Complaint, which the Bankruptcy Court granted in part and denied in
part, with leave to amend the Complaint. The reference to the bankruptcy was
withdrawn and the matter is now before the United States District Court for the
Southern District of New York.
On October 22, 2007, Plaintiffs filed an amended complaint, largely duplicating
the allegations in the original Complaint, and adding hundreds of additional
syndicate lender defendants (the "Amended Complaint"). The Franklin Defendants,
among others, moved to dismiss the Amended Complaint on December 20, 2007. On
June 17, 2008, the court granted the motions and dismissed all of the claims
against certain defendants, including the Franklin Defendants, while leaving
other claims against other defendants outstanding. On July 17, 2008, defendants,
including the Franklin Defendants, filed a motion asking the court to enter
final judgment with respect to the dismissed claims. Plaintiffs then agreed to
the entry of a final judgment and the parties filed a stipulation to that effect
with the court. On December 8, 2008, the court accepted the parties' stipulation
and entered final judgment with respect to the dismissed claims. Plaintiffs have
30 days to appeal that judgment.
14. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, Financial Accounting Standards Board (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 not have a material impact on its
financial statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Funds are currently evaluating the impact, if any,
of applying the various provisions of SFAS 161.
132 | Annual Report
Franklin Investors Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4 which amended
FASB Statement 133, "Accounting for Derivative Instruments and Hedging
Activities", to require sellers of credit derivatives to provide additional
disclosure over credit-indexed derivative instruments including credit default
swaps, credit spread options and credit index products and hybrid instruments
that have embedded credit derivatives. This FSP also amends FASB Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, to require additional
disclosures about the status of the risk of payment or performance risk of a
guarantee. The FSP is effective for reporting periods (annual or interim) ending
after November 15, 2008. The funds are currently reviewing the expanded
disclosure requirements and believe the adoption of FSP FAS 133-1 and FIN 45-4
will not have a material impact on the financial statements.
Annual Report | 133
Franklin Investors Securities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN INVESTORS SECURITIES TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Adjustable U.S. Government
Securities Fund, Franklin Floating Rate Daily Access Fund, Franklin Low Duration
Total Return Fund and Franklin Total Return Fund (separate portfolios of
Franklin Investors Securities Trust, hereafter referred to as the "Funds") at
October 31, 2008, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2008 by correspondence with the custodian, brokers, and agent banks, provide
a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 17, 2008
134 | Annual Report
Franklin Investors Securities Trust
TAX DESIGNATION (UNAUDITED)
Under Section 871(k)(1)(C) of the Internal Revenue Code (Code), the Funds
designate the maximum amount allowable but no less than the following amounts as
interest related dividends for purposes of the tax imposed under Section
871(a)(1)(A) of the Code for the fiscal year ended October 31, 2008.
FRANKLIN FRANKLIN FRANKLIN
ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN
U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN
SECURITIES FUND FUND FUND FUND
- --------------- ------------- ------------ ------------
$17,856,057 $71,436,508 $927,814 $54,250,359
Under Section 854(b)(2) of the Code, Franklin Total Return Fund designates 1.18%
of the ordinary income dividends as income qualifying for the dividends received
deduction for the fiscal year ended October 31, 2008.
Annual Report | 135
Franklin Investors Securities Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Generally, each board member
serves until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1986 143 Bar-S Foods (meat packing company).
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank
holding company) (until 2002); and President, Chief Executive Officer and
Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2007 120 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of
Administration, California Public Employees Retirement Systems (CALPERS)
(1971-January 2008); member and Chairman of the Board, Sutter Community
Hospitals; member, Corporate Board, Blue Shield of California; and Chief
Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 120 Chevron Corporation (global energy
One Franklin Parkway company) and ICO Global Communications
San Mateo, CA 94403-1906 (Holdings) Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC
(wireless company); Chairman of the Board and Chief Executive Officer, AirTouch
Communications (cellular communications) (1993-1998) and Pacific Telesis Groups
(telephone holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 1998 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J. Heinz
San Mateo, CA 94403-1906 Company (processed foods and
allied products), RTI International
Metals, Inc. (manufacture and
distribution of titanium), Canadian
National Railway (railroad) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to
the President of the United States and Secretary of the Cabinet (1990-1993);
General Counsel to the United States Treasury Department (1989-1990); and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
136 | Annual Report
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1986 120 Center for Creative Land Recycling
One Franklin Parkway (brownfield redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman,
Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2005 143 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas) and Sentient
San Mateo, CA 94403-1906 Jet (private jet service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of
the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY,
Chairman of the Board, President and Chief Executive Officer, UAL Corporation
(airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary,
PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines
(aviation) (2003-2005) and Providian Financial Corp. (credit card provider)
(1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting
Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 120 None
One Franklin Parkway Independent 2007 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
January 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private
equity investing); serves on private and non-profit boards; and FORMERLY, Chief
Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000);
Chief Financial Officer and Executive Vice President - Finance and Strategy,
Staples, Inc. (office supplies) (1992-1996); Senior Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President
and Partner, Bain & Company (consulting firm) (1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
**CHARLES B. JOHNSON Trustee and Trustee since 1986 143 None
(1933) Chairman of and Chairman
One Franklin Parkway the Board of the Board
San Mateo, CA 94403-1906 since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 42 of the investment companies in Franklin
Templeton Investments.
Annual Report | 137
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
**RUPERT H. JOHNSON, JR. Trustee and Trustee since 54 None
(1940) Vice 1987 and Vice
One Franklin Parkway President President
San Mateo, CA 94403-1906 since 1986
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior
Vice President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 44 of the investment companies in Franklin Templeton
Investments.
MARK BOYADJIAN (1964) Vice Since 2003 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of two of the
investment companies in Franklin Templeton Investments.
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance
Compliance since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director of
Compliance, Franklin Resources, Inc. (1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Treasurer Not Applicable Not Applicable
One Franklin Parkway Chief since 2004,
San Mateo,CA 94403-1906 Financial Chief Financial
Officer and Officer and Chief
Chief Accounting Officer
Accounting since February
Officer 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Director
and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004);
Assistant Treasurer of most of the investment companies in Franklin Templeton
Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President 2008
Suite 2100 Fort
Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton
Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
138 | Annual Report
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and/or
director as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
EDWARD B. JAMIESON (1948) President President since Not Applicable Not Applicable
One Franklin Parkway and Chief 1993 and Chief
San Mateo, CA 94403-1906 Executive Executive Officer -
Officer - Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Templeton Institutional, LLC; officer
and/or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of four of the investment companies in Franklin
Templeton Investments.
KAREN L. SKIDMORE (1952) Vice Since 2006 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906 and
Secretary
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of
30 of the investment companies in Franklin Templeton Investments.
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer
of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Partner,
Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
Annual Report | 139
NUMBER OF
PORTFOLIOS IN FUND
NAME, YEAR OF BIRTH AND LENGTH OF COMPLEX OVERSEEN
ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------- -------------- ------------------ ------------------ -------------------------------------
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Fort Chief
Lauderdale, FL Executive
33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments; and formerly, Managing Director,
RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Trust under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Trust's
investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED THAT THERE IS
AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED
JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT
MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS
BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER OF
STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2007. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD BELIEVES THAT MR. WILSON HAS ACQUIRED AN UNDERSTANDING OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL
APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES,
ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT
PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY
COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL
CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT
COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT BOARD MEMBER AS THAT TERM IS
DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION RULES AND
RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL (800) DIAL BEN/(800) 342-5236 TO REQUEST THE SAI.
140 | Annual Report
Franklin Investors Securities Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust's investment manager 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 (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.
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 (800)
SEC-0330.
Annual Report | 141
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(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
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment 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(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
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
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income 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
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
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(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond 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-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
1. The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
2. 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.
3. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
4. Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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 four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN INVESTORS SECURITIES TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
(800) DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
(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 A2008 12/08
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.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $361,186 for the fiscal year ended October 31, 2008 and $275,259 for the
fiscal year ended October 31, 2007.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $4,000 for the fiscal year ended
October 31, 2008 and $46,000 for the fiscal year ended October 31, 2007. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $4,164 for the fiscal year ended October 31,
2008 and $0 for the fiscal year ended October 31, 2007. The services for which
these fees were paid include review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $279,913 for the fiscal year ended October
31, 2008 and $0 for the fiscal year ended October 31, 2007. The services for
which these fees were paid include review of materials provided to the fund
Board in connection with the investment management contract renewal process.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $288,077 for the fiscal year ended October 31, 2008 and $46,000
for the fiscal year ended October 31, 2007.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
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 Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jennifer J. Bolt, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting 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/Jennifer J. Bolt
------------------
Jennifer J. Bolt
Chief Executive Officer - Finance and Administration
Date December 26, 2008
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/Jennifer J. Bolt
------------------
Jennifer J. Bolt
Chief Executive Officer - Finance and Administration
Date December 26, 2008
By /s/LAURA F. FERGERSON
-------------------
Laura F. Fergerson
Chief Financial Officer and Chief Accounting Officer
Date December 26, 2008