N-CSR 1 fistarpt1209.txt FIST ARP PE 10/31/09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number_811-04986 FRANKLIN INVESTORS SECURITIES TRUST --------------------------------------------------- (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 --------------------------------------------------- (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 650 312-2000 ------------ Date of fiscal year end: 10/31 ----- Date of reporting period:10/31/09 -------- ITEM 1. REPORTS TO STOCKHOLDERS. OCTOBER 31, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Limited Maturity U.S. Government Securities Fund Franklin Real Return Fund SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com (GRAPHIC) FRANKLIN INVESTORS SECURITIES TRUST (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 SHAREHOLDER LETTER ............................................. 1 ANNUAL REPORT Economic and Market Overview ................................... 3 Franklin Balanced Fund ......................................... 5 Franklin Convertible Securities Fund .......................... 17 Franklin Equity Income Fund .................................... 27 Franklin Limited Maturity U.S. Government Securities Fund ...... 37 Franklin Real Return Fund ...................................... 46 Financial Highlights and Statements of Investments ............. 55 Financial Statements ........................................... 94 Notes to Financial Statements .................................. 103 Report of Independent Registered Public Accounting Firm ........ 124 Tax Designation ................................................ 125 Board Members and Officers ..................................... 126 Shareholder Information ........................................ 131
Shareholder Letter Dear Shareholder: During the 12-month period ended October 31, 2009, economic activity weakened before showing signs of stabilization. The slowdown began in 2008 with the U.S. subprime mortgage and credit crises and eventually spread worldwide. Despite coordinated efforts by many governments to address spreading liquidity and credit problems, deteriorating economic conditions and mounting uncertainty contributed to market woes through the period's first half. Later in the period, some indicators offered a better economic outlook, and markets rallied beginning in March 2009, erasing much of the earlier losses. At period-end, although some observers thought the worst of the economic crises was behind us, others believed significant challenges remained. We think it is important to put short-term market developments in perspective. Keep in mind we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us reason to be optimistic about future market stabilization and economic recovery. Franklin Investors Securities Trust's annual report goes into greater detail about prevailing conditions during the period under review. In addition, you will find performance data, financial information and discussions from the portfolio managers. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, franklintempleton.com provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds, keeping in mind the trust you have placed in us. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, /s/ Charles B. Johnson Charles B. Johnson Chairman Franklin Investors Securities Trust THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2009. 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. 2 | Not part of the annual report Annual Report Economic and Market Overview The 12-month period under review can be divided into two halves: the first marked by the bursting of the credit and commodities' bubbles, the onset of global recession and the precipitous decline of equity markets, and the second by a sharp market rebound amid renewed optimism. In the first half, restrictive credit and wealth deterioration stalled economic activity, marking arguably the worst global recession since World War II. Equity market volatility reached record levels in the face of plummeting consumer spending, manufacturing output and home prices in the U.S. The government responded by launching a massive stimulus package and a series of subsidy programs, and the Federal Reserve Board (Fed) lowered the federal funds target rate to a range of 0% to 0.25% in December 2008. Signs emerged of improving economic conditions in the second half. The real estate market stabilized at low levels across the country, with the government's tax credit for first-time homebuyers partly supporting home sales and prices. Industrial production picked up as exports and orders rose for big-ticket items. Consumer spending overall improved mainly due to the temporary boost from the month-long cash-for-clunkers program. In this environment, hopes ran high for a sustainable and broadening recovery, but the job market remained troubled as the unemployment rate climbed to 10.2% by period-end.(1) The Fed maintained its target rate range through period-end, but began to move away from crisis mode by allowing some of its government support measures to expire or shrink. Economic activity, as measured by U.S. gross domestic product (GDP), fell at annualized rates of 5.4% in 2008's fourth quarter and 6.1% in 2009's first quarter. The decline in GDP eased in 2009's second quarter at an annualized rate of -0.7%, and GDP grew at an annualized 2.8% rate in the third quarter. After a yearlong contraction, GDP returned to stronger-than-expected growth on improved consumer spending and homebuilding, yet much of the expansion was tied to federal government spending. Commodity prices fell through early 2009 before rebounding somewhat through period-end, which contributed to a significant decline in inflation. October's inflation rate was an annualized -0.2%, while core inflation, which excludes food and energy costs, was an annualized 1.7%.(1) (1.) Source: Bureau of Labor Statistics. Annual Report | 3 U.S. equity markets declined until March 2009 before beginning a rally fueled by low valuations, renewed optimism and aggregate corporate earnings that beat consensus expectations. Skepticism about the sustainability of positive trends led to market volatility near period-end. For the 12 months under review, the Dow Jones Industrial Average, Standard & Poor's 500 Index (S&P 500) and NASDAQ Composite Index had total returns of +7.71%, +9.80% and +20.07%, respectively.(2) Financials was the only sector to post negative results during the year under review, while the information technology, consumer discretionary and materials sectors had the strongest returns. Most Treasury prices rose during the period, and fixed income spreads were generally wide relative to Treasury yields due to heightened market turbulence and risk aversion. Spreads for high yield bonds hit record levels. The spread between two-year and 10-year Treasury yields rose to 251 basis points (100 basis points equal one percentage point) at the end of October 2009 from 245 basis points at the beginning of the reporting period. The two-year Treasury bill yield fell from 1.56% to 0.90% over the 12-month period, while the 10-year Treasury note yield fell from 4.01% to 3.41%. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2009. 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. (2.) Source: (C) 2009 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 common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Annual Report Franklin Balanced Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Balanced Fund seeks income and capital appreciation by investing in a combination of stocks, convertible securities and fixed income securities. The Fund will normally invest at least 25% of its total assets in equity securities and at least 25% of its total assets in fixed income securities, including money market securities. 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. We are pleased to bring you Franklin Balanced Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Balanced Fund - Class A delivered a +29.03% cumulative total return. The Fund outperformed its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which had a +9.80% total return for the same period.(1) It also outperformed its fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which posted a +13.79% total return.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. INVESTMENT STRATEGY We seek income by investing in a combination of corporate, agency and government bonds issued in the U.S. and other countries, as well as dividend-paying common stocks and convertible securities. We seek capital appreciation by investing in equity securities and convertible securities of companies from a variety of industries. We will generally invest in investment-grade fixed income securities, but may invest up to 10% of our total assets in nonconvertible bonds rated below investment grade. We apply a bottom-up approach to investing in (1.) Source: (C) 2009 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) 2009 Morningstar. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not 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 59. Annual Report | 5 PORTFOLIO BREAKDOWN Franklin Balanced Fund Based on Total Net Assets as of 10/31/09 (BAR CHART) Common Stocks 44.8% Corporate Bonds 35.2% Convertible Preferred Stocks 7.0% Equity-Linked Securities 5.1% Convertible Bonds 2.8% Mortgage-Backed Securities 0.5% Asset-Backed Securities & Commercial Mortgage-Backed Securities 0.1% Preferred Stocks 0.1% Short-Term Investments & Other Net Assets* 4.4%
* Includes options of -0.1%. DIVIDEND DISTRIBUTIONS* Franklin Balanced Fund 11/1/08-10/31/09
DIVIDEND PER SHARE ------------------------------------------------------- MONTH CLASS A CLASS C CLASS R ADVISOR CLASS ----- ----------- ----------- ----------- ------------- November 3.00 cents 2.49 cents 2.84 cents 3.24 cents December** 6.25 cents 5.98 cents 6.14 cents 6.40 cents January 3.00 cents 2.73 cents 2.89 cents 3.15 cents February 3.00 cents 2.73 cents 2.89 cents 3.15 cents March 3.00 cents 2.67 cents 2.89 cents 3.13 cents April 3.00 cents 2.67 cents 2.89 cents 3.13 cents May 3.00 cents 2.67 cents 2.89 cents 3.13 cents June 3.00 cents 2.56 cents 2.88 cents 3.14 cents July 3.00 cents 2.56 cents 2.88 cents 3.14 cents August 3.00 cents 2.56 cents 2.88 cents 3.14 cents September 3.00 cents 2.44 cents 2.85 cents 3.19 cents October 3.00 cents 2.44 cents 2.85 cents 3.19 cents ----------- ----------- ----------- ----------- TOTAL 39.25 CENTS 34.50 CENTS 37.77 CENTS 41.13 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** Includes an additional 3.25 cent per share distribution to meet excise tax requirements. 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 Both our stock and fixed income positions contributed to the Fund's outperformance of its two benchmark indexes during the year under review. As of October 31, 2009, the Fund held 57.0% of total net assets in equities, 38.6% in fixed income and 4.4% in short-term investments and other net assets. Within equities, the Fund's investments in the information technology, health care and financials sectors, where we had large weightings, benefited absolute performance. Our holdings in technology stalwarts International Business Machines, Microsoft, Intel and Cisco Systems boosted Fund returns as the 6 | Annual Report fundamental outlook improved for the demand for technology products and services. In health care, our investment in Schering-Plough convertible preferred stock appreciated due to the company's merger agreement with Merck & Co., which was successfully completed immediately after the reporting period ended. Hospital operator Tenet Healthcare's share price also rose significantly largely due to improved management execution and the potential for easing bad debt expenses as proposals were considered to extend more health care coverage to uninsured Americans. In financials, our investments in JPMorgan Chase common stock and Bank of America convertible preferred stock appreciated as the financials sector moved past the crisis from the fall of 2008, raised capital and began working through problem assets. Detractors within equities included Petroplus Holdings and ConocoPhilips in the energy sector and General Electric in the industrials sector. Within fixed income, the Fund's focus on corporate credit, which significantly outperformed other segments of the fixed income market, drove Fund returns. After peaking in December 2008, investment-grade yield spreads over Treasuries declined steadily throughout the year, driving yields down and bond prices up. In some instances, this allowed for substantial price gains in individual securities as overall long-term U.S. Treasury interest rates were flat to declining during the period. Fixed income holdings in the financials sector including Bank of America, JPMorgan Chase and The Goldman Sachs Group rallied substantially as efforts to stabilize the financial sector began to take hold. Similarly, American Express and Ford Motor Credit Co. appreciated as credit markets normalized and financial markets began to function after last year's disruption. Other strong performers included retailer Target and cigarette manufacturer Altria Group. Utility sector holdings Illinois Power and Sempra Energy contributed to absolute performance. Detractors on the fixed income side included noninvestment-grade holdings in electric utility Energy Future Holdings (parent company of Texas Competitive Electric Holdings) and media and publishing company R.H. Donnelley, both of which we sold by period-end. TOP 5 EQUITY HOLDINGS Franklin Balanced Fund 10/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- Verizon Communications Inc. 2.7% TELECOMMUNICATION SERVICES AT&T Inc. 2.3% TELECOMMUNICATION SERVICES ConocoPhillips 2.3% ENERGY Progress Energy Inc. 2.1% UTILITIES Merck & Co. Inc. 2.0% HEALTH CARE
TOP 5 BOND HOLDINGS Franklin Balanced Fund 10/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- JPMorgan Chase & Co. 1.3% FINANCIALS Forest City Enterprises Inc. 1.3% FINANCIALS HCA Inc. 1.2% HEALTH CARE Illinois Power Co. 1.1% UTILITIES Altria Group Inc. 1.1% CONSUMER STAPLES
Annual Report | 7 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, 2009, 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. 8 | Annual Report Performance Summary as of 10/31/09 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 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.55 $8.55 $7.00 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.3925
CLASS C (SYMBOL: FBMCX) CHANGE 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.53 $8.49 $6.96 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.3450
CLASS R (SYMBOL: N/A) CHANGE 10/31/09 10/31/08 --------------------- ------ -------- -------- Net Asset Value (NAV) +$1.56 $8.56 $7.00 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.3777
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/09 10/31/08 --------------------------- ------ -------- -------- Net Asset Value (NAV) +$1.55 $8.56 $7.01 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.4113
Annual Report | 9 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 3-YEAR INCEPTION (7/3/06) ------- ------- ------ ------------------ Cumulative Total Return(2) +29.03% -6.68% +0.04% Average Annual Total Return(3) +21.57% -4.19% -1.75% Value of $10,000 Investment(4) $12,157 $8,795 $9,429 Avg. Ann. Total Return (9/30/09)(5) +4.29% -3.22% -1.62% Distribution Rate(6) 3.97% 30-Day Standardized Yield(7) 3.55% Total Annual Operating Expenses(8) Without Waiver 1.38% With Waiver 1.03%
CLASS C 1-YEAR 3-YEAR INCEPTION (7/3/06) ------- ------- ------ ------------------ Cumulative Total Return(2) +28.08% -8.56% -2.24% Average Annual Total Return(3) +27.08% -2.94% -0.68% Value of $10,000 Investment(4) $12,708 $9,144 $9,776 Avg. Ann. Total Return (9/30/09)(5) +8.95% -1.94% -0.46% Distribution Rate(6) 3.45% 30-Day Standardized Yield(7) 3.06% Total Annual Operating Expenses(8) Without Waiver 2.04% With Waiver 1.69%
CLASS R 1-YEAR 3-YEAR INCEPTION (7/3/06) ------- ------- ------ ------------------ Cumulative Total Return(2) +28.73% -7.05% -0.45% Average Annual Total Return(3) +28.73% -2.41% -0.13% Value of $10,000 Investment(4) $12,873 $9,295 $9,955 Avg. Ann. Total Return (9/30/09)(5) +10.63% -1.43% +0.08% Distribution Rate(6) 4.00% 30-Day Standardized Yield(7) 3.52% Total Annual Operating Expenses(8) Without Waiver 1.58% With Waiver 1.23%
10 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1) (CONTINUED)
ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (7/3/06) ------------- ------- ------- ------------------ Cumulative Total Return(2) +29.32% -5.83% +1.05% Average Annual Total Return(3) +29.32% -1.98% +0.31% Value of $10,000 Investment(4) $12,932 $9,417 $10,105 Avg. Ann. Total Return (9/30/09)(5) +11.03% -0.98% +0.53% Distribution Rate(6) 4.47% 30-Day Standardized Yield(7) 4.04% Total Annual Operating Expenses(8) Without Waiver 1.08% With Waiver 0.73%
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 COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING THE RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.71% (OTHER THAN CERTAIN NONROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS), UNTIL 2/28/10. Annual Report | 11 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 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 10/31/09 ------- -------- 1-Year +21.57% 3-Year -4.19% Since Inception (7/3/06) -1.75%
CLASS A (7/3/06-10/31/09) (PERFORMANCE GRAPH)
BARCLAYS FRANKLIN CAPITAL U.S. BALANCED AGGREGATE DATE FUND - CLASS A S&P 500 INDEX BOND INDEX ---------- -------------- ------------- ------------ 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 $ 7,988 $11,046 11/30/2008 $ 6,942 $ 7,414 $11,405 12/31/2008 $ 7,231 $ 7,493 $11,831 1/31/2009 $ 7,040 $ 6,862 $11,726 2/28/2009 $ 6,571 $ 6,131 $11,682 3/31/2009 $ 6,978 $ 6,668 $11,844 4/30/2009 $ 7,677 $ 7,306 $11,901 5/31/2009 $ 8,131 $ 7,715 $11,987 6/30/2009 $ 8,294 $ 7,730 $12,055 7/31/2009 $ 8,817 $ 8,315 $12,250 8/31/2009 $ 9,167 $ 8,615 $12,377 9/30/2009 $ 9,485 $ 8,937 $12,507 10/31/2009 $ 9,429 $ 8,771 $12,569 Total Returns -5.71% -12.29% 25.69%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------- -------- 1-Year +27.08% 3-Year -2.94% Since Inception (7/3/06) -0.68%
CLASS C (7/3/06-10/31/09) (PERFORMANCE GRAPH)
BARCLAYS FRANKLIN CAPITAL U.S. BALANCED FUND - AGGREGATE DATE CLASS C S&P 500 INDEX BOND INDEX ---------- --------------- ------------- ------------ 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 $ 7,988 $11,046 11/30/2008 $ 7,243 $ 7,414 $11,405 12/31/2008 $ 7,543 $ 7,493 $11,831 1/31/2009 $ 7,351 $ 6,862 $11,726 2/28/2009 $ 6,856 $ 6,131 $11,682 3/31/2009 $ 7,268 $ 6,668 $11,844 4/30/2009 $ 7,985 $ 7,306 $11,901 5/31/2009 $ 8,457 $ 7,715 $11,987 6/30/2009 $ 8,622 $ 7,730 $12,055 7/31/2009 $ 9,165 $ 8,315 $12,250 8/31/2009 $ 9,514 $ 8,615 $12,377 9/30/2009 $ 9,852 $ 8,937 $12,507 10/31/2009 $ 9,776 $ 8,771 $12,569 Total Returns -2.24% -12.29% 25.69%
12 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/09 ------- -------- 1-Year +28.73% 3-Year -2.41% Since Inception (7/3/06) -0.13%
CLASS R (7/3/06-10/31/09) (PERFORMANCE GRAPH)
BARCLAYS FRANKLIN CAPITAL U.S. BALANCED FUND - AGGREGATE BOND DATE CLASS R S&P 500 INDEX INDEX ---------- --------------- ------------- --------------- 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 $ 7,988 $11,046 11/30/2008 $ 7,334 $ 7,414 $11,405 12/31/2008 $ 7,649 $ 7,493 $11,831 1/31/2009 $ 7,447 $ 6,862 $11,726 2/28/2009 $ 6,950 $ 6,131 $11,682 3/31/2009 $ 7,378 $ 6,668 $11,844 4/30/2009 $ 8,115 $ 7,306 $11,901 5/31/2009 $ 8,593 $ 7,715 $11,987 6/30/2009 $ 8,775 $ 7,730 $12,055 7/31/2009 $ 9,314 $ 8,315 $12,250 8/31/2009 $ 9,682 $ 8,615 $12,377 9/30/2009 $10,027 $ 8,937 $12,507 10/31/2009 $ 9,955 $ 8,771 $12,569 Total Returns -0.45% -12.29% 25.69%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/09 ------------- -------- 1-Year +29.32% 3-Year -1.98% Since Inception (7/3/06) +0.31%
ADVISOR CLASS (7/3/06-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN BARCLAYS BALANCED FUND - ADVISOR CAPITAL U.S.AGGREGATE DATE CLASS S&P 500 INDEX BOND INDEX ---------- ----------------------- ------------- --------------------- 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 $7,813 $7,988 $11,046 11/30/2008 $7,415 $7,414 $11,405 12/31/2008 $7,736 $7,493 $11,831 1/31/2009 $7,534 $6,862 $11,726 2/28/2009 $7,034 $6,131 $11,682 3/31/2009 $7,471 $6,668 $11,844 4/30/2009 $8,220 $7,306 $11,901 5/31/2009 $8,707 $7,715 $11,987 6/30/2009 $8,882 $7,730 $12,055 7/31/2009 $9,444 $8,315 $12,250 8/31/2009 $9,820 $8,615 $12,377 9/30/2009 $10,174 $8,937 $12,507 10/31/2009 $10,105 $8,771 $12,569 Total Returns -1.05% -12.29% 25.69%
Annual Report | 13 Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. 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 MORE DRAMATICALLY OVER THE SHORT TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS C: These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. (1.) 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 3.29%, 2.78%, 3.26% and 3.78% 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 10/31/09. (7.) The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (8.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (9.) Source: (C) 2009 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 is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. 14 | Annual Report 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 - 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 | 15 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. 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 PERIOD* VALUE 5/1/09 VALUE 10/31/09 ACTUAL 5/1/09-10/31/09 ----------------- -------------- ---------------------------- CLASS A Actual $1,000 $1,228.20 $5.62 Hypothetical (5% return before expenses) $1,000 $1,020.16 $5.09 CLASS C Actual $1,000 $1,224.20 $9.53 Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64 CLASS R Actual $1,000 $1,226.70 $6.79 Hypothetical (5% return before expenses) $1,000 $1,019.11 $6.16 ADVISOR CLASS Actual $1,000 $1,229.30 $3.99 Hypothetical (5% return before expenses) $1,000 $1,021.63 $3.62
* Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.00%; C: 1.70%; R: 1.21%; and Advisor: 0.71%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 16 | Annual Report Franklin Convertible Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Convertible Securities Fund seeks to maximize total return consistent with reasonable risk by seeking to optimize capital appreciation and high current income under varying market conditions and investing at least 80% of its net assets in convertible securities. PORTFOLIO BREAKDOWN Franklin Convertible Securities Fund Based on Total Net Assets as of 10/31/09 (PIE CHART) Convertible Bonds ............. 72.4% Convertible Preferred Stocks .. 26.0% Short-Term Investments & Other Net Assets ........... 1.6%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This annual report for Franklin Convertible Securities Fund covers the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Convertible Securities Fund - Class A delivered a +37.35% cumulative total return. The Fund's performance was comparable to that of its benchmark, the Merrill Lynch (ML) All U.S. Convertibles Index, which had a +37.27% total return for the same period.(1) We are replacing the benchmark with the ML All Total Return Alternatives U.S. Convertibles (1.) Source: (C) 2009 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, and an index is not 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. Annual Report | 17 Index, which had a +43.34% total return for the reporting period.(2) We believe the composition of the new index better reflects the Fund's holdings. You can find the Fund's long-term performance data in the Performance Summary beginning on page 21. 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 Every sector the Fund invested in rose in value, as did the majority of the portfolio's individual securities, supporting overall performance during the Fund's fiscal year. The Fund's large allocation in the health care sector was a major contributor, aided notably by holdings in the pharmaceuticals and biotechnology industries. For example, a position in Schering-Plough surged as the company's announced March 2009 acquisition by Merck & Co. neared successful completion. Generic pharmaceuticals maker Mylan also performed well, as did a position in biotechnology firm PDL Biopharma. (2.) Source: (C) 2009 Morningstar. The ML All Total Return Alternatives U.S. Convertibles Index consists of domestic securities of all quality grades that are convertible into U.S. dollar-denominated common stock, ADRs or cash equivalents and have a delta (measure of equity sensitivity) that indicates the security likely has a balance between the debt and equity characteristics of the security. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. 18 | Annual Report The information technology sector also supported the Fund's results. In general, information technology stocks benefited as market sentiment shifted on expectations of a long-awaited replacement cycle for technology products, which was essentially put on hold during the recession. Our strongest performers from this sector were semiconductor and semiconductor equipment industry holdings, led by Micron Technology, Intel and PMC-Sierra. Computers and peripherals manufacturers, namely data storage specialists EMC and NetApp, were other strong contributors. The Fund's financials holdings underwent a dramatic rally since mid-March to become one of our top-contributing sectors for the full fiscal year. Asset manager Affiliated Managers Group was a key contributor. CapitalSource, a middle-market lender with significant interests in health care leasing, and commercial bank Wells Fargo were also notable contributors. Many materials companies benefited as the global recession subsided and investors began to anticipate the need for more resources as economies return to positive industrial output. Our top-performing investments from this group included "building block" chemicals manufacturer Celanese, and the world's largest aluminum producer, Alcoa. Both companies benefited from increased demand, particularly from China and India, and we sold Alcoa during the period. Despite the Fund's strong results, there were some detractors from performance. On an industry level, our holdings in commercial services and supplies, automobiles, IT services, and leisure equipment and products hindered the Fund. Convertible preferred stocks of General Motors, which required government loans as it underwent bankruptcy reorganization, fell sharply in value despite an upswing in the company's auto sales. Management consulting and systems integration firm BearingPoint also suffered steep losses as it filed for Chapter 11 bankruptcy protection in February 2009 and began selling off its various operations. Another major detractor was Avery Dennison (sold by period-end), the global leader in the production of adhesives and, in particular, adhesive labels. TOP 10 HOLDINGS Franklin Convertible Securities Fund 10/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- WESCO International Inc. 3.0% INDUSTRIALS Mylan Inc. 2.7% HEALTH CARE Alliance Data Systems Corp. 2.6% INFORMATION TECHNOLOGY Intel Corp. 2.5% INFORMATION TECHNOLOGY Carnival Corp. 2.5% CONSUMER DISCRETIONARY Celanese Corp. 2.4% MATERIALS VeriFone Holdings Inc. 2.3% INFORMATION TECHNOLOGY Schering-Plough Corp. 2.3% HEALTH CARE Archer Daniels Midland Co. 2.2% CONSUMER STAPLES Microchip Technology Inc. 2.2% INFORMATION TECHNOLOGY
Annual Report | 19 Thank you for your continued 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, 2009, 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 10/31/09 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 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$2.80 $12.28 $9.48 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.5886
CLASS C (SYMBOL: FROTX) CHANGE 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$2.77 $12.16 $9.39 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.5132
ADVISOR CLASS (SYMBOL: FCSZX) CHANGE 10/31/09 10/31/08 ----------------------------- ------ -------- -------- Net Asset Value (NAV) +$2.81 $12.29 $9.48 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.6139
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) +37.35% +16.87% +85.65% Average Annual Total Return(2) +29.43% +1.96% +5.75% Value of $10,000 Investment(3) $12,943 $11,018 $17,494 Avg. Ann. Total Return (9/30/09)(4) +6.54% +2.28% +6.13% Distribution Rate(5) 4.52% 30-Day Standardized Yield(6) 3.09% Total Annual Operating Expenses(7) 0.91%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- -------- -------- -------- Cumulative Total Return(1) +36.36% +12.65% +72.48% Average Annual Total Return(2) +35.36% +2.41% +5.60% Value of $10,000 Investment(3) $13,536 $11,265 $17,248 Avg. Ann. Total Return (9/30/09)(4) +11.17% +2.72% +5.96% Distribution Rate(5) 4.22% 30-Day Standardized Yield(6) 2.50% Total Annual Operating Expenses(7) 1.65%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR ---------------- -------- -------- -------- Cumulative Total Return(1) +37.81% +17.41% +86.52% Average Annual Total Return(2) +37.81% +3.26% +6.43% Value of $10,000 Investment(3) $13,781 $11,741 $18,652 Avg. Ann. Total Return (9/30/09)(4) +13.35% +3.58% +6.80% Distribution Rate(5) 5.00% 30-Day Standardized Yield(6) 3.54% Total Annual Operating Expenses(7) 0.66%
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 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 10/31/09 ------- -------- 1-Year +29.43% 5-Year +1.96% 10-Year +5.75%
CLASS A (11/1/99-10/31/09) (PERFORMANCE GRAPH)
ML ALL TOTAL FRANKLIN MERRILL RETURN CONVERTIBLE LYNCH ALL U.S. ALTERNATIVES U.S. SECURITIES FUND CONVERTIBLES CONVERTIBLES DATE - CLASS A INDEX INDEX ---------- --------------- -------------- ----------------- 11/1/1999 $ 9,423 $10,000 $10,000 11/30/1999 $ 9,815 $10,580 $10,309 12/31/1999 $10,552 $12,013 $10,836 1/31/2000 $10,790 $12,010 $10,598 2/29/2000 $11,464 $13,020 $10,883 3/31/2000 $11,855 $13,002 $10,713 4/30/2000 $11,669 $12,105 $10,212 5/31/2000 $11,472 $11,581 $ 9,870 6/30/2000 $11,935 $12,177 $10,524 7/31/2000 $11,742 $11,815 $10,245 8/31/2000 $12,708 $12,723 $11,131 9/30/2000 $12,603 $12,308 $10,741 10/31/2000 $12,298 $11,826 $10,219 11/30/2000 $11,200 $10,413 $ 8,944 12/31/2000 $12,172 $10,811 $ 9,379 1/31/2001 $13,045 $11,484 $10,111 2/28/2001 $12,271 $10,621 $ 9,331 3/31/2001 $11,860 $10,162 $ 8,839 4/30/2001 $12,686 $10,843 $ 9,642 5/31/2001 $12,597 $10,776 $ 9,572 6/30/2001 $12,356 $10,606 $ 9,477 7/31/2001 $12,199 $10,453 $ 9,348 8/31/2001 $11,821 $10,269 $ 9,154 9/30/2001 $10,779 $ 9,656 $ 8,385 10/31/2001 $11,172 $ 9,854 $ 8,649 11/30/2001 $11,868 $10,118 $ 9,050 12/31/2001 $12,271 $10,331 $ 9,260 1/31/2002 $12,049 $10,167 $ 8,980 2/28/2002 $11,747 $ 9,879 $ 8,641 3/31/2002 $12,316 $10,234 $ 9,038 4/30/2002 $12,222 $10,085 $ 8,831 5/31/2002 $11,977 $ 9,997 $ 8,744 6/30/2002 $11,084 $ 9,455 $ 8,091 7/31/2002 $10,144 $ 8,889 $ 7,373 8/31/2002 $10,263 $ 8,999 $ 7,461 9/30/2002 $ 9,696 $ 8,682 $ 6,887 10/31/2002 $ 9,860 $ 8,876 $ 7,126 11/30/2002 $10,631 $ 9,516 $ 7,819 12/31/2002 $10,363 $ 9,444 $ 7,610 1/31/2003 $10,455 $ 9,596 $ 7,641 2/28/2003 $10,418 $ 9,573 $ 7,429 3/31/2003 $10,571 $ 9,735 $ 7,569 4/30/2003 $11,282 $10,226 $ 8,062 5/31/2003 $12,022 $10,702 $ 8,659 6/30/2003 $12,220 $10,770 $ 8,726 7/31/2003 $12,406 $10,800 $ 8,750 8/31/2003 $12,528 $10,934 $ 8,971 9/30/2003 $12,624 $11,069 $ 9,094 10/31/2003 $13,124 $11,467 $ 9,557 11/30/2003 $13,530 $11,654 $ 9,757 12/31/2003 $14,036 $12,008 $10,128 1/31/2004 $14,476 $12,373 $10,501 2/29/2004 $14,619 $12,471 $10,590 3/31/2004 $14,773 $12,517 $10,633 4/30/2004 $14,716 $12,215 $10,328 5/31/2004 $14,773 $12,247 $10,391 6/30/2004 $15,008 $12,445 $10,557 7/31/2004 $14,627 $12,110 $10,173 8/31/2004 $14,637 $12,135 $10,178 9/30/2004 $15,038 $12,343 $10,429 10/31/2004 $14,969 $12,397 $10,472 11/30/2004 $15,700 $12,848 $10,977 12/31/2004 $16,285 $13,163 $11,361 1/31/2005 $15,954 $12,875 $11,000 2/28/2005 $15,995 $12,844 $11,008 3/31/2005 $15,830 $12,548 $10,748 4/30/2005 $15,417 $12,134 $10,339 5/31/2005 $16,021 $12,446 $10,709 6/30/2005 $16,489 $12,708 $10,971 7/31/2005 $17,180 $13,154 $11,423 8/31/2005 $17,160 $13,105 $11,394 9/30/2005 $17,320 $13,235 $11,461 10/31/2005 $16,879 $12,955 $11,196 11/30/2005 $17,104 $13,190 $11,329 12/31/2005 $17,414 $13,296 $11,464 1/31/2006 $18,007 $13,844 $12,008 2/28/2006 $18,061 $13,812 $12,061 3/31/2006 $18,236 $14,003 $12,244 4/30/2006 $18,291 $14,122 $12,196 5/31/2006 $18,009 $13,901 $12,047 6/30/2006 $17,976 $13,899 $11,986 7/31/2006 $17,900 $13,931 $12,095 8/31/2006 $18,173 $14,118 $12,363 9/30/2006 $18,461 $14,287 $12,591 10/31/2006 $18,980 $14,656 $12,941 11/30/2006 $19,498 $14,945 $13,173 12/31/2006 $19,530 $15,002 $13,223 1/31/2007 $20,009 $15,327 $13,467 2/28/2007 $19,973 $15,332 $13,517 3/31/2007 $20,137 $15,378 $13,513 4/30/2007 $20,631 $15,740 $13,878 5/31/2007 $21,185 $16,096 $14,100 6/30/2007 $20,910 $16,047 $14,096 7/31/2007 $20,326 $15,662 $13,637 8/31/2007 $20,302 $15,644 $13,612 9/30/2007 $21,016 $16,206 $14,012 10/31/2007 $21,004 $16,520 $14,226 11/30/2007 $20,011 $15,883 $13,634 12/31/2007 $19,628 $15,682 $13,435 1/31/2008 $19,189 $15,382 $13,308 2/29/2008 $18,983 $15,287 $13,054 3/31/2008 $18,321 $14,802 $12,478 4/30/2008 $19,704 $15,570 $13,238 5/31/2008 $20,066 $15,786 $13,332 6/30/2008 $18,794 $15,027 $12,386 7/31/2008 $18,249 $14,557 $12,073 8/31/2008 $18,366 $14,503 $11,993 9/30/2008 $15,800 $12,388 $10,073 10/31/2008 $12,737 $10,160 $ 7,893 11/30/2008 $11,904 $ 9,567 $ 7,445 12/31/2008 $12,683 $10,079 $ 7,994 1/31/2009 $12,766 $10,091 $ 8,031 2/28/2009 $12,188 $ 9,832 $ 7,812 3/31/2009 $12,974 $10,362 $ 8,416 4/30/2009 $14,294 $11,328 $ 9,094 5/31/2009 $14,905 $11,962 $ 9,642 6/30/2009 $15,200 $12,197 $ 9,753 7/31/2009 $16,437 $13,071 $10,590 8/31/2009 $16,943 $13,542 $11,026 9/30/2009 $17,865 $14,183 $11,605 10/31/2009 $17,494 $13,946 $11,313 Total Returns 74.94% 39.46% 13.13%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------- -------- 1-Year +35.36% 5-Year +2.41% 10-Year +5.60%
CLASS C (11/1/99-10/31/09) (PERFORMANCE GRAPH)
ML ALL TOTAL FRANKLIN MERRILL LYNCH RETURN CONVERTIBLE ALL U.S. ALTERNATIVES U.S. SECURITIES FUND - CONVERTIBLES CONVERTIBLES DATE CLASS C INDEX INDEX ---------- ----------------- ------------- ----------------- 11/1/1999 $10,000 $10,000 $10,000 11/30/1999 $10,411 $10,580 $10,309 12/31/1999 $11,181 $12,013 $10,836 1/31/2000 $11,427 $12,010 $10,598 2/29/2000 $12,145 $13,020 $10,883 3/31/2000 $12,544 $13,002 $10,713 4/30/2000 $12,338 $12,105 $10,212 5/31/2000 $12,129 $11,581 $ 9,870 6/30/2000 $12,605 $12,177 $10,524 7/31/2000 $12,395 $11,815 $10,245 8/31/2000 $13,402 $12,723 $11,131 9/30/2000 $13,284 $12,308 $10,741 10/31/2000 $12,954 $11,826 $10,219 11/30/2000 $11,785 $10,413 $ 8,944 12/31/2000 $12,813 $10,811 $ 9,379 1/31/2001 $13,700 $11,484 $10,111 2/28/2001 $12,900 $10,621 $ 9,331 3/31/2001 $12,458 $10,162 $ 8,839 4/30/2001 $13,320 $10,843 $ 9,642 5/31/2001 $13,209 $10,776 $ 9,572 6/30/2001 $12,957 $10,606 $ 9,477 7/31/2001 $12,775 $10,453 $ 9,348 8/31/2001 $12,379 $10,269 $ 9,154 9/30/2001 $11,285 $ 9,656 $ 8,385 10/31/2001 $11,682 $ 9,854 $ 8,649 11/30/2001 $12,396 $10,118 $ 9,050 12/31/2001 $12,813 $10,331 $ 9,260 1/31/2002 $12,572 $10,167 $ 8,980 2/28/2002 $12,258 $ 9,879 $ 8,641 3/31/2002 $12,837 $10,234 $ 9,038 4/30/2002 $12,731 $10,085 $ 8,831 5/31/2002 $12,475 $ 9,997 $ 8,744 6/30/2002 $11,534 $ 9,455 $ 8,091 7/31/2002 $10,543 $ 8,889 $ 7,373 8/31/2002 $10,669 $ 8,999 $ 7,461 9/30/2002 $10,070 $ 8,682 $ 6,887 10/31/2002 $10,239 $ 8,876 $ 7,126 11/30/2002 $11,034 $ 9,516 $ 7,819 12/31/2002 $10,741 $ 9,444 $ 7,610 1/31/2003 $10,836 $ 9,596 $ 7,641 2/28/2003 $10,788 $ 9,573 $ 7,429 3/31/2003 $10,941 $ 9,735 $ 7,569 4/30/2003 $11,662 $10,226 $ 8,062 5/31/2003 $12,421 $10,702 $ 8,659 6/30/2003 $12,626 $10,770 $ 8,726 7/31/2003 $12,801 $10,800 $ 8,750 8/31/2003 $12,917 $10,934 $ 8,971 9/30/2003 $13,015 $11,069 $ 9,094 10/31/2003 $13,524 $11,467 $ 9,557 11/30/2003 $13,925 $11,654 $ 9,757 12/31/2003 $14,447 $12,008 $10,128 1/31/2004 $14,892 $12,373 $10,501 2/29/2004 $15,031 $12,471 $10,590 3/31/2004 $15,172 $12,517 $10,633 4/30/2004 $15,112 $12,215 $10,328 5/31/2004 $15,162 $12,247 $10,391 6/30/2004 $15,387 $12,445 $10,557 7/31/2004 $14,984 $12,110 $10,173 8/31/2004 $14,984 $12,135 $10,178 9/30/2004 $15,392 $12,343 $10,429 10/31/2004 $15,311 $12,397 $10,472 11/30/2004 $16,053 $12,848 $10,977 12/31/2004 $16,628 $13,163 $11,361 1/31/2005 $16,288 $12,875 $11,000 2/28/2005 $16,309 $12,844 $11,008 3/31/2005 $16,141 $12,548 $10,748 4/30/2005 $15,707 $12,134 $10,339 5/31/2005 $16,317 $12,446 $10,709 6/30/2005 $16,777 $12,708 $10,971 7/31/2005 $17,465 $13,154 $11,423 8/31/2005 $17,444 $13,105 $11,394 9/30/2005 $17,587 $13,235 $11,461 10/31/2005 $17,136 $12,955 $11,196 11/30/2005 $17,356 $13,190 $11,329 12/31/2005 $17,651 $13,296 $11,464 1/31/2006 $18,246 $13,844 $12,008 2/28/2006 $18,279 $13,812 $12,061 3/31/2006 $18,447 $14,003 $12,244 4/30/2006 $18,491 $14,122 $12,196 5/31/2006 $18,204 $13,901 $12,047 6/30/2006 $18,159 $13,899 $11,986 7/31/2006 $18,070 $13,931 $12,095 8/31/2006 $18,326 $14,118 $12,363 9/30/2006 $18,607 $14,287 $12,591 10/31/2006 $19,112 $14,656 $12,941 11/30/2006 $19,628 $14,945 $13,173 12/31/2006 $19,646 $15,002 $13,223 1/31/2007 $20,120 $15,327 $13,467 2/28/2007 $20,071 $15,332 $13,517 3/31/2007 $20,225 $15,378 $13,513 4/30/2007 $20,714 $15,740 $13,878 5/31/2007 $21,251 $16,096 $14,100 6/30/2007 $20,971 $16,047 $14,096 7/31/2007 $20,368 $15,662 $13,637 8/31/2007 $20,331 $15,644 $13,612 9/30/2007 $21,025 $16,206 $14,012 10/31/2007 $21,012 $16,520 $14,226 11/30/2007 $19,998 $15,883 $13,634 12/31/2007 $19,608 $15,682 $13,435 1/31/2008 $19,153 $15,382 $13,308 2/29/2008 $18,946 $15,287 $13,054 3/31/2008 $18,266 $14,802 $12,478 4/30/2008 $19,631 $15,570 $13,238 5/31/2008 $19,969 $15,786 $13,332 6/30/2008 $18,708 $15,027 $12,386 7/31/2008 $18,147 $14,557 $12,073 8/31/2008 $18,251 $14,503 $11,993 9/30/2008 $15,693 $12,388 $10,073 10/31/2008 $12,649 $10,160 $ 7,893 11/30/2008 $11,814 $ 9,567 $ 7,445 12/31/2008 $12,572 $10,079 $ 7,994 1/31/2009 $12,654 $10,091 $ 8,031 2/28/2009 $12,077 $ 9,832 $ 7,812 3/31/2009 $12,833 $10,362 $ 8,416 4/30/2009 $14,123 $11,328 $ 9,094 5/31/2009 $14,734 $11,962 $ 9,642 6/30/2009 $15,017 $12,197 $ 9,753 7/31/2009 $16,223 $13,071 $10,590 8/31/2009 $16,713 $13,542 $11,026 9/30/2009 $17,602 $14,183 $11,605 10/31/2009 $17,248 $13,946 $11,313 Total Returns 72.48% 39.46% 13.13%
Annual Report | 23 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/09 ---------------- --------- 1-Year +37.81% 5-Year +3.26% 10-Year +6.43%
ADVISOR CLASS (11/1/99-10/31/09)(8) (PERFORMANCE GRAPH)
ML ALL TOTAL RETURN FRANKLIN MERRILL ALTERNATIVES CONVERTIBLE LYNCH ALL U.S. U.S. SECURITIES FUND - CONVERTIBLES CONVERTIBLES DATE ADVISOR CLASS INDEX INDEX ---------- ----------------- -------------- ------------ 11/1/1999 $10,000 $10,000 $10,000 11/30/1999 $10,416 $10,580 $10,309 12/31/1999 $11,198 $12,013 $10,836 1/31/2000 $11,451 $12,010 $10,598 2/29/2000 $12,166 $13,020 $10,883 3/31/2000 $12,581 $13,002 $10,713 4/30/2000 $12,384 $12,105 $10,212 5/31/2000 $12,175 $11,581 $ 9,870 6/30/2000 $12,666 $12,177 $10,524 7/31/2000 $12,461 $11,815 $10,245 8/31/2000 $13,486 $12,723 $11,131 9/30/2000 $13,374 $12,308 $10,741 10/31/2000 $13,051 $11,826 $10,219 11/30/2000 $11,886 $10,413 $ 8,944 12/31/2000 $12,918 $10,811 $ 9,379 1/31/2001 $13,843 $11,484 $10,111 2/28/2001 $13,023 $10,621 $ 9,331 3/31/2001 $12,586 $10,162 $ 8,839 4/30/2001 $13,463 $10,843 $ 9,642 5/31/2001 $13,368 $10,776 $ 9,572 6/30/2001 $13,113 $10,606 $ 9,477 7/31/2001 $12,946 $10,453 $ 9,348 8/31/2001 $12,545 $10,269 $ 9,154 9/30/2001 $11,439 $ 9,656 $ 8,385 10/31/2001 $11,856 $ 9,854 $ 8,649 11/30/2001 $12,595 $10,118 $ 9,050 12/31/2001 $13,023 $10,331 $ 9,260 1/31/2002 $12,786 $10,167 $ 8,980 2/28/2002 $12,466 $ 9,879 $ 8,641 3/31/2002 $13,070 $10,234 $ 9,038 4/30/2002 $12,970 $10,085 $ 8,831 5/31/2002 $12,710 $ 9,997 $ 8,744 6/30/2002 $11,763 $ 9,455 $ 8,091 7/31/2002 $10,765 $ 8,889 $ 7,373 8/31/2002 $10,891 $ 8,999 $ 7,461 9/30/2002 $10,290 $ 8,682 $ 6,887 10/31/2002 $10,464 $ 8,876 $ 7,126 11/30/2002 $11,282 $ 9,516 $ 7,819 12/31/2002 $10,998 $ 9,444 $ 7,610 1/31/2003 $11,095 $ 9,596 $ 7,641 2/28/2003 $11,056 $ 9,573 $ 7,429 3/31/2003 $11,218 $ 9,735 $ 7,569 4/30/2003 $11,973 $10,226 $ 8,062 5/31/2003 $12,758 $10,702 $ 8,659 6/30/2003 $12,968 $10,770 $ 8,726 7/31/2003 $13,166 $10,800 $ 8,750 8/31/2003 $13,295 $10,934 $ 8,971 9/30/2003 $13,396 $11,069 $ 9,094 10/31/2003 $13,927 $11,467 $ 9,557 11/30/2003 $14,358 $11,654 $ 9,757 12/31/2003 $14,896 $12,008 $10,128 1/31/2004 $15,362 $12,373 $10,501 2/29/2004 $15,514 $12,471 $10,590 3/31/2004 $15,678 $12,517 $10,633 4/30/2004 $15,617 $12,215 $10,328 5/31/2004 $15,678 $12,247 $10,391 6/30/2004 $15,926 $12,445 $10,557 7/31/2004 $15,522 $12,110 $10,173 8/31/2004 $15,533 $12,135 $10,178 9/30/2004 $15,959 $12,343 $10,429 10/31/2004 $15,886 $12,397 $10,472 11/30/2004 $16,661 $12,848 $10,977 12/31/2004 $17,282 $13,163 $11,361 1/31/2005 $16,931 $12,875 $11,000 2/28/2005 $16,974 $12,844 $11,008 3/31/2005 $16,799 $12,548 $10,748 4/30/2005 $16,361 $12,134 $10,339 5/31/2005 $17,002 $12,446 $10,709 6/30/2005 $17,498 $12,708 $10,971 7/31/2005 $18,232 $13,154 $11,423 8/31/2005 $18,210 $13,105 $11,394 9/30/2005 $18,380 $13,235 $11,461 10/31/2005 $17,912 $12,955 $11,196 11/30/2005 $18,152 $13,190 $11,329 12/31/2005 $18,480 $13,296 $11,464 1/31/2006 $19,110 $13,844 $12,008 2/28/2006 $19,167 $13,812 $12,061 3/31/2006 $19,353 $14,003 $12,244 4/30/2006 $19,410 $14,122 $12,196 5/31/2006 $19,111 $13,901 $12,047 6/30/2006 $19,077 $13,899 $11,986 7/31/2006 $18,996 $13,931 $12,095 8/31/2006 $19,286 $14,118 $12,363 9/30/2006 $19,591 $14,287 $12,591 10/31/2006 $20,142 $14,656 $12,941 11/30/2006 $20,692 $14,945 $13,173 12/31/2006 $20,726 $15,002 $13,223 1/31/2007 $21,234 $15,327 $13,467 2/28/2007 $21,196 $15,332 $13,517 3/31/2007 $21,370 $15,378 $13,513 4/30/2007 $21,894 $15,740 $13,878 5/31/2007 $22,482 $16,096 $14,100 6/30/2007 $22,190 $16,047 $14,096 7/31/2007 $21,571 $15,662 $13,637 8/31/2007 $21,545 $15,644 $13,612 9/30/2007 $22,303 $16,206 $14,012 10/31/2007 $22,290 $16,520 $14,226 11/30/2007 $21,236 $15,883 $13,634 12/31/2007 $20,829 $15,682 $13,435 1/31/2008 $20,364 $15,382 $13,308 2/29/2008 $20,146 $15,287 $13,054 3/31/2008 $19,443 $14,802 $12,478 4/30/2008 $20,910 $15,570 $13,238 5/31/2008 $21,294 $15,786 $13,332 6/30/2008 $19,957 $15,027 $12,386 7/31/2008 $19,378 $14,557 $12,073 8/31/2008 $19,502 $14,503 $11,993 9/30/2008 $16,790 $12,388 $10,073 10/31/2008 $13,535 $10,160 $ 7,893 11/30/2008 $12,664 $ 9,567 $ 7,445 12/31/2008 $13,491 $10,079 $ 7,994 1/31/2009 $13,593 $10,091 $ 8,031 2/28/2009 $12,965 $ 9,832 $ 7,812 3/31/2009 $13,806 $10,362 $ 8,416 4/30/2009 $15,210 $11,328 $ 9,094 5/31/2009 $15,876 $11,962 $ 9,642 6/30/2009 $16,183 $12,197 $ 9,753 7/31/2009 $17,501 $13,071 $10,590 8/31/2009 $18,055 $13,542 $11,026 9/30/2009 $19,031 $14,183 $11,605 10/31/2009 $18,652 $13,946 $11,313 Total Returns 86.52% 39.46% 13.13%
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 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 and the maximum offering price (NAV for Classes C and Advisor) per share on 10/31/09. (6.) The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (7.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (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 and average annual total returns of Advisor Class shares were -13.08% and -9.14%. (9.) Source: (C) 2009 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. The ML All Total Return Alternatives U.S. Convertibles Index consists of domestic securities of all quality grades that are convertible into U.S. dollar-denominated common stock, ADRs or cash equivalents and have a delta (measure of equity sensitivity) that indicates the security likely has a balance between the debt and equity characteristics of the security. 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 - 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,223.90 $5.27 Hypothetical (5% return before expenses) $1,000 $1,020.47 $4.79 CLASS C Actual $1,000 $1,221.20 $9.46 Hypothetical (5% return before expenses) $1,000 $1,016.69 $8.59 ADVISOR CLASS Actual $1,000 $1,226.30 $3.87 Hypothetical (5% return before expenses) $1,000 $1,021.73 $3.52
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.94%, C: 1.69%; and Advisor: 0.69%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 26 | Annual Report Franklin Equity Income Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Equity Income Fund seeks to maximize total return, emphasizing high current income and long-term capital appreciation, consistent with reasonable risk, by investing at least 80% of its net assets in equity securities including securities convertible into common stocks. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT franklintempleton.com OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Franklin Equity Income Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Equity Income Fund - Class A delivered a +13.77% cumulative total return. The Fund outperformed its benchmark, the Standard & Poor's 500 Index (S&P 500), which had a +9.80% total return.(1) The Fund also outperformed its peers in the Lipper Equity Income Funds Classification Average, which returned +9.29% for the same period.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 30. INVESTMENT STRATEGY We emphasize dividends in selecting stocks for the Fund because we believe that over time dividend income can contribute significantly to total return. We target companies we believe are financially strong but undervalued by the market. To identify such companies, we use a current relative yield analysis that focuses on a company's dividend yield (calculated by dividing a stock's annual per share dividends by its per-share market price). Our experienced team of analysts searches for investment opportunities among all economic sectors, and considers a company's long-term earnings, asset value and cash flow potential, to create a broadly diversified portfolio. (1.) Source: (C) 2009 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 one-year period ended 10/31/09, there were 301 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, and an index is not 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 10/31/09 (BAR CHART) Information Technology 14.9% Health Care 14.3% Industrials 14.0% Financials 13.9% Energy 12.0% Consumer Staples 7.3% Utilities 7.1% Consumer Discretionary 6.7% Telecommunication Services 4.4% Materials 3.2% Short-Term Investments & Other Net Assets 2.2%
DIVIDEND DISTRIBUTIONS* Franklin Equity Income Fund 11/1/08-10/31/09
DIVIDEND PER SHARE --------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS ----- ----------- ----------- ----------- ----------- ------------- November 3.50 cents 2.59 cents 2.58 cents 3.18 cents 3.84 cents December ** 11.50 cents 10.76 cents 10.77 cents 11.27 cents 11.75 cents January 3.50 cents 2.76 cents 2.77 cents 3.27 cents 3.75 cents February 3.50 cents 2.76 cents 2.77 cents 3.27 cents 3.75 cents March 3.50 cents 2.91 cents 2.90 cents 3.31 cents 3.70 cents April 3.50 cents 2.91 cents 2.90 cents 3.31 cents 3.70 cents May 3.50 cents 2.91 cents 2.90 cents 3.31 cents 3.70 cents June 3.50 cents 2.85 cents 2.84 cents 3.28 cents 3.72 cents July 3.50 cents 2.85 cents 2.84 cents 3.28 cents 3.72 cents August 3.50 cents 2.85 cents 2.84 cents 3.28 cents 3.72 cents September 3.50 cents 2.64 cents 2.64 cents 3.20 cents 3.78 cents October 3.50 cents 2.64 cents 2.64 cents 3.20 cents 3.78 cents ----------- ----------- ----------- ----------- ----------- TOTAL 50.00 CENTS 41.43 CENTS 41.39 CENTS 47.16 CENTS 52.91 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** Includes an additional 8.00 cent per share distribution to meet excise tax requirements. MANAGER'S DISCUSSION Fund performance was aided generally by a broad-based rally across equity markets since March 2009. More specifically, the Fund's investments in the health care, information technology and energy sectors contributed to Fund returns. A large portion of the Fund's health care holdings were in the pharmaceuticals industry, where Schering-Plough and Mylan produced strong results. Schering-Plough's share price surged as the company agreed to be acquired by Merck. The Fund's investment in Mylan began to benefit from recent acquisitions as company management worked to integrate those acquisitions, extract synergies and improve operating margins. Information technology stocks benefited as market sentiment shifted on expectations of a long-awaited replacement cycle for technology products, which was essentially put on hold during the recession. The Fund's strongest performers within the sector included microchip manufacturers Intel and Microchip Technology, computer hardware maker International Business Machines and software giant Microsoft. The Fund's results within the energy sector were lifted by strong returns for Halliburton, one of the world's largest oilfield services companies, and Spectra Energy, which operates natural gas pipelines and storage facilities across the U.S. and Canada. The Fund also had several detractors from performance, including some holdings in the materials sector, where investments in Dow Chemical (sold by 28 | Annual Report period-end) and aluminum producer Alcoa (sold by period-end) depreciated significantly. The troubled financials sector also weighed on the Fund's results. Large banks Citigroup (sold by period-end) and Bank of America, insurers Marsh & McLennan and Aflac, and mortgage lender Fannie Mae suffered heavy stock price declines despite rebounding somewhat in the latter half of the reporting period. In other sectors, weak results stemmed from industrial conglomerate General Electric, automaker General Motors (sold by period-end), cruise line operator Carnival and upscale retailer Nordstrom (sold by period-end). 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, 2009, 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. TOP 10 HOLDINGS Franklin Equity Income Fund 10/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS --------------- ---------- JPMorgan Chase & Co. 3.7% FINANCIALS Wells Fargo & Co. 3.3% FINANCIALS Microsoft Corp. 3.2% INFORMATION TECHNOLOGY Chevron Corp. 2.8% ENERGY Schering-Plough Corp. 2.8% HEALTH CARE Johnson & Johnson 2.8% HEALTH CARE The Coca-Cola Co. 2.7% CONSUMER STAPLES International Business Machines Corp. 2.6% INFORMATION TECHNOLOGY Microchip Technology Inc. 2.6% INFORMATION TECHNOLOGY Intel Corp. 2.6% INFORMATION TECHNOLOGY
Annual Report | 29 Performance Summary as of 10/31/09 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 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.18 $14.06 $12.88 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.5000
CLASS B (SYMBOL: FBEIX) CHANGE 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.16 $13.98 $12.82 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.4143
CLASS C (SYMBOL: FRETX) CHANGE 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.17 $14.00 $12.83 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.4139
CLASS R (SYMBOL: FREIX) CHANGE 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.18 $14.07 $12.89 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.4716
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/09 10/31/08 --------------------------- ------ -------- -------- Net Asset Value (NAV) +$1.19 $14.07 $12.88 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.5291
30 | Annual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS 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) +13.77% -6.02% +19.76% Average Annual Total Return(2) +7.19% -2.39% +1.22% Value of $10,000 Investment(3) $10,719 $8,859 $11,288 Avg. Ann. Total Return (9/30/09)(4) -9.82% -2.27% +1.47% Distribution Rate(5) 2.82% 30-Day Standardized Yield(6) 2.47% Total Annual Operating Expenses(7) 0.97%
CLASS B 1-YEAR 5-YEAR 10-YEAR ------- ------- ------ ------- Cumulative Total Return(1) +12.87% -9.47% +12.79% Average Annual Total Return(2) +8.87% -2.28% +1.21% Value of $10,000 Investment(3) $10,887 $8,910 $11,279 Avg. Ann. Total Return (9/30/09)(4) -8.76% -2.17% +1.46% Distribution Rate(5) 2.27% 30-Day Standardized Yield(6) 1.86% Total Annual Operating Expenses(7) 1.72%
CLASS C 1-YEAR 5-YEAR 10-YEAR ------- ------- ------ ------- Cumulative Total Return(1) +12.94% -9.39% +11.19% Average Annual Total Return(2) +11.94% -1.95% +1.07% Value of $10,000 Investment(3) $11,194 $9,061 $11,119 Avg. Ann. Total Return (9/30/09)(4) -6.01% -1.86% +1.31% Distribution Rate(5) 2.26% 30-Day Standardized Yield(6) 1.86% Total Annual Operating Expenses(7) 1.72%
CLASS R 1-YEAR 5-YEAR INCEPTION (8/1/02) ------- ------- ------ ------------------ Cumulative Total Return(1) +13.49% -7.22% +17.71% Average Annual Total Return(2) +13.49% -1.49% +2.27% Value of $10,000 Investment(3) $11,349 $9,278 $11,771 Avg. Ann. Total Return (9/30/09)(4) -4.61% -1.38% +2.35% Distribution Rate(5) 2.73% 30-Day Standardized Yield(6) 2.37% Total Annual Operating Expenses(7) 1.22%
ADVISOR CLASS(8) 1-YEAR 5-YEAR 10-YEAR ---------------- ------- ------ ------- Cumulative Total Return(1) +14.12% -5.63% +20.26% Average Annual Total Return(2) +14.12% -1.15% +1.86% Value of $10,000 Investment(3) $11,412 $9,437 $12,026 Avg. Ann. Total Return (9/30/09)(4) -4.14% -1.05% +2.10% Distribution Rate(5) 3.22% 30-Day Standardized Yield(6) 2.87% Total Annual Operating Expenses(7) 0.72%
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 | 31 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 10/31/09 ------- -------- 1-Year +7.19% 5-Year -2.39% 10-Year +1.22%
CLASS A (11/1/99-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER EQUITY INCOME FUND - INCOME FUNDS DATE CLASS A S&P 500 INDEX AVERAGE CPI ------------- --------------- ------------- ------------- ------- 11/1/1999 $ 9,426 $10,000 $10,000 $10,000 11/30/1999 $ 9,324 $10,203 $ 9,950 $10,006 12/31/1999 $ 9,350 $10,804 $10,080 $10,006 1/31/2000 $ 9,060 $10,261 $ 9,736 $10,036 2/29/2000 $ 8,578 $10,067 $ 9,203 $10,095 3/31/2000 $ 9,396 $11,052 $10,093 $10,178 4/30/2000 $ 9,494 $10,719 $10,052 $10,184 5/31/2000 $ 9,688 $10,500 $10,223 $10,196 6/30/2000 $ 9,474 $10,758 $ 9,978 $10,250 7/31/2000 $ 9,561 $10,590 $10,026 $10,273 8/31/2000 $10,237 $11,248 $10,609 $10,273 9/30/2000 $10,389 $10,654 $10,665 $10,327 10/31/2000 $10,750 $10,609 $10,873 $10,345 11/30/2000 $10,518 $ 9,773 $10,500 $10,351 12/31/2000 $11,090 $ 9,821 $11,054 $10,345 1/31/2001 $11,203 $10,169 $11,148 $10,410 2/28/2001 $10,975 $ 9,242 $10,845 $10,452 3/31/2001 $10,636 $ 8,656 $10,503 $10,476 4/30/2001 $11,148 $ 9,329 $11,079 $10,517 5/31/2001 $11,318 $ 9,391 $11,261 $10,565 6/30/2001 $11,134 $ 9,163 $10,989 $10,583 7/31/2001 $11,282 $ 9,073 $10,966 $10,553 8/31/2001 $10,990 $ 8,505 $10,625 $10,553 9/30/2001 $10,154 $ 7,818 $ 9,919 $10,600 10/31/2001 $10,081 $ 7,967 $ 9,947 $10,565 11/30/2001 $10,690 $ 8,578 $10,443 $10,547 12/31/2001 $10,942 $ 8,653 $10,661 $10,505 1/31/2002 $10,920 $ 8,527 $10,534 $10,529 2/28/2002 $11,060 $ 8,363 $10,581 $10,571 3/31/2002 $11,396 $ 8,677 $10,998 $10,630 4/30/2002 $11,051 $ 8,151 $10,656 $10,690 5/31/2002 $11,185 $ 8,091 $10,638 $10,690 6/30/2002 $10,508 $ 7,515 $ 9,991 $10,696 7/31/2002 $ 9,644 $ 6,929 $ 9,163 $10,707 8/31/2002 $ 9,704 $ 6,974 $ 9,251 $10,743 9/30/2002 $ 8,544 $ 6,216 $ 8,291 $10,761 10/31/2002 $ 9,030 $ 6,764 $ 8,772 $10,779 11/30/2002 $ 9,652 $ 7,162 $ 9,279 $10,779 12/31/2002 $ 9,289 $ 6,741 $ 8,950 $10,755 1/31/2003 $ 8,918 $ 6,564 $ 8,691 $10,803 2/28/2003 $ 8,577 $ 6,466 $ 8,463 $10,886 3/31/2003 $ 8,572 $ 6,529 $ 8,482 $10,951 4/30/2003 $ 9,220 $ 7,066 $ 9,136 $10,927 5/31/2003 $ 9,846 $ 7,439 $ 9,724 $10,910 6/30/2003 $10,008 $ 7,534 $ 9,840 $10,922 7/31/2003 $10,039 $ 7,666 $ 9,952 $10,933 8/31/2003 $10,172 $ 7,816 $10,114 $10,975 9/30/2003 $10,131 $ 7,733 $10,029 $11,011 10/31/2003 $10,721 $ 8,170 $10,529 $10,999 11/30/2003 $10,854 $ 8,242 $10,667 $10,969 12/31/2003 $11,600 $ 8,674 $11,297 $10,957 1/31/2004 $11,771 $ 8,834 $11,436 $11,011 2/29/2004 $11,953 $ 8,956 $11,658 $11,070 3/31/2004 $11,780 $ 8,821 $11,542 $11,141 4/30/2004 $11,623 $ 8,683 $11,329 $11,177 5/31/2004 $11,698 $ 8,802 $11,392 $11,243 6/30/2004 $11,974 $ 8,973 $11,655 $11,278 7/31/2004 $11,756 $ 8,676 $11,417 $11,260 8/31/2004 $11,916 $ 8,711 $11,541 $11,266 9/30/2004 $11,985 $ 8,806 $11,710 $11,290 10/31/2004 $12,011 $ 8,940 $11,838 $11,350 11/30/2004 $12,479 $ 9,302 $12,377 $11,356 12/31/2004 $12,815 $ 9,618 $12,753 $11,314 1/31/2005 $12,569 $ 9,384 $12,525 $11,338 2/28/2005 $13,016 $ 9,581 $12,927 $11,403 3/31/2005 $12,695 $ 9,412 $12,708 $11,492 4/30/2005 $12,542 $ 9,233 $12,493 $11,570 5/31/2005 $12,712 $ 9,527 $12,763 $11,558 6/30/2005 $12,788 $ 9,541 $12,895 $11,564 7/31/2005 $12,982 $ 9,895 $13,291 $11,617 8/31/2005 $12,940 $ 9,805 $13,204 $11,677 9/30/2005 $13,079 $ 9,885 $13,314 $11,819 10/31/2005 $12,843 $ 9,720 $13,046 $11,843 11/30/2005 $13,152 $10,087 $13,408 $11,748 12/31/2005 $13,226 $10,091 $13,476 $11,700 1/31/2006 $13,552 $10,358 $13,919 $11,790 2/28/2006 $13,573 $10,386 $13,970 $11,813 3/31/2006 $13,672 $10,515 $14,161 $11,879 4/30/2006 $14,018 $10,657 $14,484 $11,980 5/31/2006 $13,687 $10,350 $14,152 $12,039 6/30/2006 $13,768 $10,364 $14,200 $12,063 7/31/2006 $13,875 $10,428 $14,423 $12,099 8/31/2006 $14,158 $10,676 $14,684 $12,122 9/30/2006 $14,474 $10,951 $14,922 $12,063 10/31/2006 $14,903 $11,308 $15,379 $11,998 11/30/2006 $15,148 $11,523 $15,680 $11,980 12/31/2006 $15,390 $11,685 $15,964 $11,998 1/31/2007 $15,567 $11,861 $16,165 $12,034 2/28/2007 $15,399 $11,629 $16,005 $12,099 3/31/2007 $15,528 $11,759 $16,224 $12,209 4/30/2007 $16,224 $12,280 $16,862 $12,288 5/31/2007 $16,842 $12,709 $17,432 $12,363 6/30/2007 $16,481 $12,498 $17,153 $12,387 7/31/2007 $15,672 $12,110 $16,566 $12,384 8/31/2007 $15,874 $12,292 $16,797 $12,361 9/30/2007 $16,125 $12,751 $17,314 $12,395 10/31/2007 $16,005 $12,954 $17,482 $12,422 11/30/2007 $15,007 $12,413 $16,807 $12,496 12/31/2007 $14,844 $12,327 $16,657 $12,487 1/31/2008 $14,598 $11,587 $15,928 $12,549 2/29/2008 $13,921 $11,211 $15,461 $12,586 3/31/2008 $13,804 $11,162 $15,359 $12,695 4/30/2008 $14,492 $11,706 $15,974 $12,772 5/31/2008 $14,503 $11,858 $16,154 $12,879 6/30/2008 $13,111 $10,858 $14,781 $13,009 7/31/2008 $12,857 $10,767 $14,669 $13,078 8/31/2008 $13,052 $10,923 $14,836 $13,025 9/30/2008 $11,844 $ 9,949 $13,741 $13,007 10/31/2008 $ 9,922 $ 8,278 $11,600 $12,876 11/30/2008 $ 9,464 $ 7,684 $10,837 $12,629 12/31/2008 $ 9,596 $ 7,766 $11,072 $12,499 1/31/2009 $ 8,709 $ 7,111 $10,089 $12,553 2/28/2009 $ 7,953 $ 6,354 $ 9,012 $12,616 3/31/2009 $ 8,696 $ 6,911 $ 9,699 $12,646 4/30/2009 $ 9,315 $ 7,572 $10,552 $12,678 5/31/2009 $ 9,881 $ 7,996 $11,214 $12,714 6/30/2009 $ 9,901 $ 8,012 $11,206 $12,824 7/31/2009 $10,598 $ 8,618 $12,038 $12,803 8/31/2009 $10,953 $ 8,929 $12,476 $12,832 9/30/2009 $11,333 $ 9,262 $12,877 $12,840 10/31/2009 $11,288 $ 9,090 $12,690 $12,852 Total Returns 12.88% -9.10% 26.90% 28.52%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 10/31/09 ------- -------- 1-Year +8.87% 5-Year -2.28% 10-Year +1.21%
CLASS B (11/1/99-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER EQUITY INCOME FUND - INCOME FUNDS DATE CLASS B S&P 500 INDEX AVERAGE CPI ------------- --------------- ------------- ------------- ------- 11/1/1999 $10,000 $10,000 $10,000 $10,000 11/30/1999 $ 9,881 $10,203 $ 9,950 $10,006 12/31/1999 $ 9,914 $10,804 $10,080 $10,006 1/31/2000 $ 9,594 $10,261 $ 9,736 $10,036 2/29/2000 $ 9,081 $10,067 $ 9,203 $10,095 3/31/2000 $ 9,936 $11,052 $10,093 $10,178 4/30/2000 $10,029 $10,719 $10,052 $10,184 5/31/2000 $10,229 $10,500 $10,223 $10,196 6/30/2000 $ 9,997 $10,758 $ 9,978 $10,250 7/31/2000 $10,084 $10,590 $10,026 $10,273 8/31/2000 $10,787 $11,248 $10,609 $10,273 9/30/2000 $10,948 $10,654 $10,665 $10,327 10/31/2000 $11,317 $10,609 $10,873 $10,345 11/30/2000 $11,066 $ 9,773 $10,500 $10,351 12/31/2000 $11,656 $ 9,821 $11,054 $10,345 1/31/2001 $11,774 $10,169 $11,148 $10,410 2/28/2001 $11,527 $ 9,242 $10,845 $10,452 3/31/2001 $11,162 $ 8,656 $10,503 $10,476 4/30/2001 $11,694 $ 9,329 $11,079 $10,517 5/31/2001 $11,866 $ 9,391 $11,261 $10,565 6/30/2001 $11,660 $ 9,163 $10,989 $10,583 7/31/2001 $11,809 $ 9,073 $10,966 $10,553 8/31/2001 $11,495 $ 8,505 $10,625 $10,553 9/30/2001 $10,617 $ 7,818 $ 9,919 $10,600 10/31/2001 $10,528 $ 7,967 $ 9,947 $10,565 11/30/2001 $11,159 $ 8,578 $10,443 $10,547 12/31/2001 $11,416 $ 8,653 $10,661 $10,505 1/31/2002 $11,387 $ 8,527 $10,534 $10,529 2/28/2002 $11,522 $ 8,363 $10,581 $10,571 3/31/2002 $11,872 $ 8,677 $10,998 $10,630 4/30/2002 $11,504 $ 8,151 $10,656 $10,690 5/31/2002 $11,637 $ 8,091 $10,638 $10,690 6/30/2002 $10,924 $ 7,515 $ 9,991 $10,696 7/31/2002 $10,022 $ 6,929 $ 9,163 $10,707 8/31/2002 $10,077 $ 6,974 $ 9,251 $10,743 9/30/2002 $ 8,868 $ 6,216 $ 8,291 $10,761 10/31/2002 $ 9,362 $ 6,764 $ 8,772 $10,779 11/30/2002 $10,009 $ 7,162 $ 9,279 $10,779 12/31/2002 $ 9,626 $ 6,741 $ 8,950 $10,755 1/31/2003 $ 9,229 $ 6,564 $ 8,691 $10,803 2/28/2003 $ 8,876 $ 6,466 $ 8,463 $10,886 3/31/2003 $ 8,859 $ 6,529 $ 8,482 $10,951 4/30/2003 $ 9,526 $ 7,066 $ 9,136 $10,927 5/31/2003 $10,164 $ 7,439 $ 9,724 $10,910 6/30/2003 $10,326 $ 7,534 $ 9,840 $10,922 7/31/2003 $10,353 $ 7,666 $ 9,952 $10,933 8/31/2003 $10,485 $ 7,816 $10,114 $10,975 9/30/2003 $10,436 $ 7,733 $10,029 $11,011 10/31/2003 $11,033 $ 8,170 $10,529 $10,999 11/30/2003 $11,164 $ 8,242 $10,667 $10,969 12/31/2003 $11,928 $ 8,674 $11,297 $10,957 1/31/2004 $12,097 $ 8,834 $11,436 $11,011 2/29/2004 $12,278 $ 8,956 $11,658 $11,070 3/31/2004 $12,091 $ 8,821 $11,542 $11,141 4/30/2004 $11,922 $ 8,683 $11,329 $11,177 5/31/2004 $11,991 $ 8,802 $11,392 $11,243 6/30/2004 $12,267 $ 8,973 $11,655 $11,278 7/31/2004 $12,035 $ 8,676 $11,417 $11,260 8/31/2004 $12,192 $ 8,711 $11,541 $11,266 9/30/2004 $12,256 $ 8,806 $11,710 $11,290 10/31/2004 $12,269 $ 8,940 $11,838 $11,350 11/30/2004 $12,741 $ 9,302 $12,377 $11,356 12/31/2004 $13,078 $ 9,618 $12,753 $11,314 1/31/2005 $12,819 $ 9,384 $12,525 $11,338 2/28/2005 $13,263 $ 9,581 $12,927 $11,403 3/31/2005 $12,932 $ 9,412 $12,708 $11,492 4/30/2005 $12,767 $ 9,233 $12,493 $11,570 5/31/2005 $12,938 $ 9,527 $12,763 $11,558 6/30/2005 $13,002 $ 9,541 $12,895 $11,564 7/31/2005 $13,193 $ 9,895 $13,291 $11,617 8/31/2005 $13,141 $ 9,805 $13,204 $11,677 9/30/2005 $13,275 $ 9,885 $13,314 $11,819 10/31/2005 $13,026 $ 9,720 $13,046 $11,843 11/30/2005 $13,332 $10,087 $13,408 $11,748 12/31/2005 $13,400 $10,091 $13,476 $11,700 1/31/2006 $13,722 $10,358 $13,919 $11,790 2/28/2006 $13,735 $10,386 $13,970 $11,813 3/31/2006 $13,827 $10,515 $14,161 $11,879 4/30/2006 $14,170 $10,657 $14,484 $11,980 5/31/2006 $13,819 $10,350 $14,152 $12,039 6/30/2006 $13,891 $10,364 $14,200 $12,063 7/31/2006 $13,997 $10,428 $14,423 $12,099 8/31/2006 $14,269 $10,676 $14,684 $12,122 9/30/2006 $14,580 $10,951 $14,922 $12,063 10/31/2006 $15,005 $11,308 $15,379 $11,998 11/30/2006 $15,237 $11,523 $15,680 $11,980 12/31/2006 $15,479 $11,685 $15,964 $11,998 1/31/2007 $15,641 $11,861 $16,165 $12,034 2/28/2007 $15,462 $11,629 $16,005 $12,099 3/31/2007 $15,582 $11,759 $16,224 $12,209 4/30/2007 $16,273 $12,280 $16,862 $12,288 5/31/2007 $16,879 $12,709 $17,432 $12,363 6/30/2007 $16,513 $12,498 $17,153 $12,387 7/31/2007 $15,689 $12,110 $16,566 $12,384 8/31/2007 $15,881 $12,292 $16,797 $12,361 9/30/2007 $16,124 $12,751 $17,314 $12,395 10/31/2007 $15,993 $12,954 $17,482 $12,422 11/30/2007 $14,995 $12,413 $16,807 $12,496 12/31/2007 $14,832 $12,327 $16,657 $12,487 1/31/2008 $14,585 $11,587 $15,928 $12,549 2/29/2008 $13,909 $11,211 $15,461 $12,586 3/31/2008 $13,792 $11,162 $15,359 $12,695 4/30/2008 $14,479 $11,706 $15,974 $12,772 5/31/2008 $14,489 $11,858 $16,154 $12,879 6/30/2008 $13,098 $10,858 $14,781 $13,009 7/31/2008 $12,844 $10,767 $14,669 $13,078 8/31/2008 $13,039 $10,923 $14,836 $13,025 9/30/2008 $11,833 $ 9,949 $13,741 $13,007 10/31/2008 $ 9,912 $ 8,278 $11,600 $12,876 11/30/2008 $ 9,455 $ 7,684 $10,837 $12,629 12/31/2008 $ 9,587 $ 7,766 $11,072 $12,499 1/31/2009 $ 8,701 $ 7,111 $10,089 $12,553 2/28/2009 $ 7,945 $ 6,354 $ 9,012 $12,616 3/31/2009 $ 8,688 $ 6,911 $ 9,699 $12,646 4/30/2009 $ 9,306 $ 7,572 $10,552 $12,678 5/31/2009 $ 9,872 $ 7,996 $11,214 $12,714 6/30/2009 $ 9,892 $ 8,012 $11,206 $12,824 7/31/2009 $10,588 $ 8,618 $12,038 $12,803 8/31/2009 $10,943 $ 8,929 $12,476 $12,832 9/30/2009 $11,322 $ 9,262 $12,877 $12,840 10/31/2009 $11,279 $ 9,090 $12,690 $12,852 Total Returns 12.79% -9.10% 26.90% 28.52%
32 | Annual Report Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------- -------- 1-Year +11.94% 5-Year -1.95% 10-Year +1.07%
CLASS C (11/1/99-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER EQUITY INCOME FUND - INCOME FUNDS DATE CLASS C S&P 500 INDEX AVERAGE CPI ------------- --------------- ------------- ------------- ------- 11/1/1999 $10,000 $10,000 $10,000 $10,000 11/30/1999 $ 9,885 $10,203 $ 9,950 $10,006 12/31/1999 $ 9,906 $10,804 $10,080 $10,006 1/31/2000 $ 9,590 $10,261 $ 9,736 $10,036 2/29/2000 $ 9,077 $10,067 $ 9,203 $10,095 3/31/2000 $ 9,937 $11,052 $10,093 $10,178 4/30/2000 $10,035 $10,719 $10,052 $10,184 5/31/2000 $10,234 $10,500 $10,223 $10,196 6/30/2000 $10,002 $10,758 $ 9,978 $10,250 7/31/2000 $10,088 $10,590 $10,026 $10,273 8/31/2000 $10,791 $11,248 $10,609 $10,273 9/30/2000 $10,952 $10,654 $10,665 $10,327 10/31/2000 $11,326 $10,609 $10,873 $10,345 11/30/2000 $11,075 $ 9,773 $10,500 $10,351 12/31/2000 $11,665 $ 9,821 $11,054 $10,345 1/31/2001 $11,777 $10,169 $11,148 $10,410 2/28/2001 $11,529 $ 9,242 $10,845 $10,452 3/31/2001 $11,170 $ 8,656 $10,503 $10,476 4/30/2001 $11,702 $ 9,329 $11,079 $10,517 5/31/2001 $11,867 $ 9,391 $11,261 $10,565 6/30/2001 $11,667 $ 9,163 $10,989 $10,583 7/31/2001 $11,815 $ 9,073 $10,966 $10,553 8/31/2001 $11,501 $ 8,505 $10,625 $10,553 9/30/2001 $10,616 $ 7,818 $ 9,919 $10,600 10/31/2001 $10,533 $ 7,967 $ 9,947 $10,565 11/30/2001 $11,164 $ 8,578 $10,443 $10,547 12/31/2001 $11,422 $ 8,653 $10,661 $10,505 1/31/2002 $11,393 $ 8,527 $10,534 $10,529 2/28/2002 $11,527 $ 8,363 $10,581 $10,571 3/31/2002 $11,871 $ 8,677 $10,998 $10,630 4/30/2002 $11,510 $ 8,151 $10,656 $10,690 5/31/2002 $11,637 $ 8,091 $10,638 $10,690 6/30/2002 $10,929 $ 7,515 $ 9,991 $10,696 7/31/2002 $10,027 $ 6,929 $ 9,163 $10,707 8/31/2002 $10,082 $ 6,974 $ 9,251 $10,743 9/30/2002 $ 8,873 $ 6,216 $ 8,291 $10,761 10/31/2002 $ 9,367 $ 6,764 $ 8,772 $10,779 11/30/2002 $10,015 $ 7,162 $ 9,279 $10,779 12/31/2002 $ 9,626 $ 6,741 $ 8,950 $10,755 1/31/2003 $ 9,236 $ 6,564 $ 8,691 $10,803 2/28/2003 $ 8,876 $ 6,466 $ 8,463 $10,886 3/31/2003 $ 8,866 $ 6,529 $ 8,482 $10,951 4/30/2003 $ 9,533 $ 7,066 $ 9,136 $10,927 5/31/2003 $10,170 $ 7,439 $ 9,724 $10,910 6/30/2003 $10,332 $ 7,534 $ 9,840 $10,922 7/31/2003 $10,352 $ 7,666 $ 9,952 $10,933 8/31/2003 $10,489 $ 7,816 $10,114 $10,975 9/30/2003 $10,441 $ 7,733 $10,029 $11,011 10/31/2003 $11,037 $ 8,170 $10,529 $10,999 11/30/2003 $11,168 $ 8,242 $10,667 $10,969 12/31/2003 $11,932 $ 8,674 $11,297 $10,957 1/31/2004 $12,094 $ 8,834 $11,436 $11,011 2/29/2004 $12,282 $ 8,956 $11,658 $11,070 3/31/2004 $12,095 $ 8,821 $11,542 $11,141 4/30/2004 $11,926 $ 8,683 $11,329 $11,177 5/31/2004 $11,995 $ 8,802 $11,392 $11,243 6/30/2004 $12,264 $ 8,973 $11,655 $11,278 7/31/2004 $12,039 $ 8,676 $11,417 $11,260 8/31/2004 $12,196 $ 8,711 $11,541 $11,266 9/30/2004 $12,259 $ 8,806 $11,710 $11,290 10/31/2004 $12,272 $ 8,940 $11,838 $11,350 11/30/2004 $12,744 $ 9,302 $12,377 $11,356 12/31/2004 $13,081 $ 9,618 $12,753 $11,314 1/31/2005 $12,822 $ 9,384 $12,525 $11,338 2/28/2005 $13,265 $ 9,581 $12,927 $11,403 3/31/2005 $12,935 $ 9,412 $12,708 $11,492 4/30/2005 $12,770 $ 9,233 $12,493 $11,570 5/31/2005 $12,941 $ 9,527 $12,763 $11,558 6/30/2005 $13,004 $ 9,541 $12,895 $11,564 7/31/2005 $13,195 $ 9,895 $13,291 $11,617 8/31/2005 $13,144 $ 9,805 $13,204 $11,677 9/30/2005 $13,277 $ 9,885 $13,314 $11,819 10/31/2005 $13,028 $ 9,720 $13,046 $11,843 11/30/2005 $13,334 $10,087 $13,408 $11,748 12/31/2005 $13,402 $10,091 $13,476 $11,700 1/31/2006 $13,724 $10,358 $13,919 $11,790 2/28/2006 $13,737 $10,386 $13,970 $11,813 3/31/2006 $13,829 $10,515 $14,161 $11,879 4/30/2006 $14,172 $10,657 $14,484 $11,980 5/31/2006 $13,821 $10,350 $14,152 $12,039 6/30/2006 $13,894 $10,364 $14,200 $12,063 7/31/2006 $14,000 $10,428 $14,423 $12,099 8/31/2006 $14,271 $10,676 $14,684 $12,122 9/30/2006 $14,583 $10,951 $14,922 $12,063 10/31/2006 $15,007 $11,308 $15,379 $11,998 11/30/2006 $15,239 $11,523 $15,680 $11,980 12/31/2006 $15,481 $11,685 $15,964 $11,998 1/31/2007 $15,644 $11,861 $16,165 $12,034 2/28/2007 $15,472 $11,629 $16,005 $12,099 3/31/2007 $15,585 $11,759 $16,224 $12,209 4/30/2007 $16,276 $12,280 $16,862 $12,288 5/31/2007 $16,889 $12,709 $17,432 $12,363 6/30/2007 $16,516 $12,498 $17,153 $12,387 7/31/2007 $15,692 $12,110 $16,566 $12,384 8/31/2007 $15,885 $12,292 $16,797 $12,361 9/30/2007 $16,128 $12,751 $17,314 $12,395 10/31/2007 $15,997 $12,954 $17,482 $12,422 11/30/2007 $14,993 $12,413 $16,807 $12,496 12/31/2007 $14,818 $12,327 $16,657 $12,487 1/31/2008 $14,560 $11,587 $15,928 $12,549 2/29/2008 $13,879 $11,211 $15,461 $12,586 3/31/2008 $13,752 $11,162 $15,359 $12,695 4/30/2008 $14,438 $11,706 $15,974 $12,772 5/31/2008 $14,439 $11,858 $16,154 $12,879 6/30/2008 $13,041 $10,858 $14,781 $13,009 7/31/2008 $12,779 $10,767 $14,669 $13,078 8/31/2008 $12,966 $10,923 $14,836 $13,025 9/30/2008 $11,762 $ 9,949 $13,741 $13,007 10/31/2008 $ 9,845 $ 8,278 $11,600 $12,876 11/30/2008 $ 9,383 $ 7,684 $10,837 $12,629 12/31/2008 $ 9,507 $ 7,766 $11,072 $12,499 1/31/2009 $ 8,628 $ 7,111 $10,089 $12,553 2/28/2009 $ 7,870 $ 6,354 $ 9,012 $12,616 3/31/2009 $ 8,604 $ 6,911 $ 9,699 $12,646 4/30/2009 $ 9,206 $ 7,572 $10,552 $12,678 5/31/2009 $ 9,755 $ 7,996 $11,214 $12,714 6/30/2009 $ 9,777 $ 8,012 $11,206 $12,824 7/31/2009 $10,455 $ 8,618 $12,038 $12,803 8/31/2009 $10,801 $ 8,929 $12,476 $12,832 9/30/2009 $11,163 $ 9,262 $12,877 $12,840 10/31/2009 $11,119 $ 9,090 $12,690 $12,852 Total Returns 11.19% -9.10% 26.90% 28.52%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/09 ------- -------- 1-Year +13.49% 5-Year -1.49% Since Inception (8/1/02) +2.27%
CLASS R (8/1/02-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER EQUITY INCOME FUND - INCOME FUNDS DATE CLASS R S&P 500 INDEX AVERAGE CPI ------------- --------------- ------------- ------------- ------- 8/1/2002 $10,000 $10,000 $10,000 $10,000 8/31/2002 $10,303 $10,066 $10,096 $10,033 9/30/2002 $ 9,070 $ 8,972 $ 9,048 $10,050 10/31/2002 $ 9,584 $ 9,761 $ 9,574 $10,067 11/30/2002 $10,248 $10,336 $10,126 $10,067 12/31/2002 $ 9,854 $ 9,729 $ 9,768 $10,044 1/31/2003 $ 9,460 $ 9,474 $ 9,484 $10,089 2/28/2003 $ 9,096 $ 9,332 $ 9,236 $10,167 3/31/2003 $ 9,090 $ 9,422 $ 9,257 $10,228 4/30/2003 $ 9,781 $10,198 $ 9,971 $10,205 5/31/2003 $10,436 $10,736 $10,612 $10,189 6/30/2003 $10,606 $10,873 $10,738 $10,200 7/31/2003 $10,637 $11,064 $10,861 $10,211 8/31/2003 $10,776 $11,280 $11,038 $10,250 9/30/2003 $10,731 $11,160 $10,945 $10,283 10/31/2003 $11,352 $11,792 $11,491 $10,272 11/30/2003 $11,492 $11,895 $11,642 $10,244 12/31/2003 $12,279 $12,519 $12,329 $10,233 1/31/2004 $12,456 $12,749 $12,480 $10,283 2/29/2004 $12,648 $12,926 $12,722 $10,339 3/31/2004 $12,468 $12,731 $12,596 $10,405 4/30/2004 $12,293 $12,531 $12,363 $10,439 5/31/2004 $12,369 $12,703 $12,433 $10,500 6/30/2004 $12,658 $12,950 $12,720 $10,533 7/31/2004 $12,425 $12,522 $12,460 $10,516 8/31/2004 $12,599 $12,572 $12,595 $10,522 9/30/2004 $12,662 $12,709 $12,780 $10,544 10/31/2004 $12,687 $12,903 $12,919 $10,600 11/30/2004 $13,178 $13,425 $13,507 $10,605 12/31/2004 $13,530 $13,882 $13,918 $10,566 1/31/2005 $13,268 $13,543 $13,669 $10,589 2/28/2005 $13,737 $13,828 $14,107 $10,650 3/31/2005 $13,396 $13,583 $13,869 $10,733 4/30/2005 $13,231 $13,326 $13,635 $10,805 5/31/2005 $13,413 $13,750 $13,929 $10,794 6/30/2005 $13,484 $13,769 $14,073 $10,800 7/31/2005 $13,687 $14,281 $14,505 $10,850 8/31/2005 $13,646 $14,151 $14,410 $10,905 9/30/2005 $13,789 $14,266 $14,530 $11,038 10/31/2005 $13,537 $14,028 $14,238 $11,061 11/30/2005 $13,853 $14,559 $14,632 $10,972 12/31/2005 $13,929 $14,564 $14,707 $10,927 1/31/2006 $14,275 $14,949 $15,191 $11,011 2/28/2006 $14,294 $14,990 $15,245 $11,033 3/31/2006 $14,396 $15,176 $15,454 $11,094 4/30/2006 $14,757 $15,380 $15,807 $11,188 5/31/2006 $14,399 $14,937 $15,445 $11,244 6/30/2006 $14,481 $14,958 $15,497 $11,266 7/31/2006 $14,596 $15,050 $15,740 $11,299 8/31/2006 $14,885 $15,408 $16,025 $11,321 9/30/2006 $15,213 $15,805 $16,285 $11,266 10/31/2006 $15,661 $16,320 $16,783 $11,205 11/30/2006 $15,915 $16,631 $17,112 $11,188 12/31/2006 $16,172 $16,864 $17,422 $11,205 1/31/2007 $16,348 $17,119 $17,642 $11,239 2/28/2007 $16,168 $16,784 $17,467 $11,299 3/31/2007 $16,300 $16,972 $17,706 $11,402 4/30/2007 $17,026 $17,724 $18,402 $11,476 5/31/2007 $17,678 $18,342 $19,024 $11,546 6/30/2007 $17,296 $18,037 $18,720 $11,569 7/31/2007 $16,436 $17,478 $18,079 $11,566 8/31/2007 $16,652 $17,740 $18,331 $11,545 9/30/2007 $16,911 $18,403 $18,895 $11,576 10/31/2007 $16,775 $18,696 $19,079 $11,601 11/30/2007 $15,733 $17,915 $18,342 $11,670 12/31/2007 $15,550 $17,790 $18,179 $11,662 1/31/2008 $15,281 $16,723 $17,383 $11,720 2/29/2008 $14,569 $16,180 $16,873 $11,754 3/31/2008 $14,443 $16,110 $16,762 $11,856 4/30/2008 $15,166 $16,895 $17,432 $11,928 5/31/2008 $15,174 $17,114 $17,629 $12,028 6/30/2008 $13,707 $15,671 $16,131 $12,150 7/31/2008 $13,439 $15,539 $16,008 $12,213 8/31/2008 $13,647 $15,764 $16,191 $12,165 9/30/2008 $12,383 $14,359 $14,996 $12,148 10/31/2008 $10,372 $11,948 $12,660 $12,025 11/30/2008 $ 9,891 $11,090 $11,827 $11,795 12/31/2008 $10,017 $11,208 $12,083 $11,673 1/31/2009 $ 9,098 $10,264 $11,010 $11,724 2/28/2009 $ 8,307 $ 9,171 $ 9,835 $11,782 3/31/2009 $ 9,082 $ 9,974 $10,585 $11,811 4/30/2009 $ 9,718 $10,929 $11,515 $11,840 5/31/2009 $10,306 $11,540 $12,238 $11,874 6/30/2009 $10,334 $11,563 $12,230 $11,976 7/31/2009 $11,050 $12,437 $13,137 $11,957 8/31/2009 $11,427 $12,886 $13,616 $11,984 9/30/2009 $11,812 $13,367 $14,053 $11,992 10/31/2009 $11,771 $13,119 $13,849 $12,003 Total Returns 17.71% 31.19% 38.49% 20.03%
Annual Report | 33 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/09 ---------------- -------- 1-Year +14.12% 5-Year -1.15% 10-Year +1.86%
ADVISOR CLASS (11/1/99-10/31/09)(8) (PERFORMANCE GRAPH)
FRANKLIN EQUITY LIPPER EQUITY INCOME FUND - INCOME FUNDS DATE ADVISOR CLASS S&P 500 INDEX AVERAGE CPI ------------- --------------- ------------- ------------- ------- 11/1/1999 $10,000 $10,000 $10,000 $10,000 11/30/1999 $ 9,892 $10,203 $ 9,950 $10,006 12/31/1999 $ 9,920 $10,804 $10,080 $10,006 1/31/2000 $ 9,612 $10,261 $ 9,736 $10,036 2/29/2000 $ 9,101 $10,067 $ 9,203 $10,095 3/31/2000 $ 9,968 $11,052 $10,093 $10,178 4/30/2000 $10,072 $10,719 $10,052 $10,184 5/31/2000 $10,278 $10,500 $10,223 $10,196 6/30/2000 $10,052 $10,758 $ 9,978 $10,250 7/31/2000 $10,144 $10,590 $10,026 $10,273 8/31/2000 $10,860 $11,248 $10,609 $10,273 9/30/2000 $11,023 $10,654 $10,665 $10,327 10/31/2000 $11,405 $10,609 $10,873 $10,345 11/30/2000 $11,159 $ 9,773 $10,500 $10,351 12/31/2000 $11,765 $ 9,821 $11,054 $10,345 1/31/2001 $11,886 $10,169 $11,148 $10,410 2/28/2001 $11,644 $ 9,242 $10,845 $10,452 3/31/2001 $11,284 $ 8,656 $10,503 $10,476 4/30/2001 $11,827 $ 9,329 $11,079 $10,517 5/31/2001 $12,008 $ 9,391 $11,261 $10,565 6/30/2001 $11,813 $ 9,163 $10,989 $10,583 7/31/2001 $11,970 $ 9,073 $10,966 $10,553 8/31/2001 $11,660 $ 8,505 $10,625 $10,553 9/30/2001 $10,773 $ 7,818 $ 9,919 $10,600 10/31/2001 $10,696 $ 7,967 $ 9,947 $10,565 11/30/2001 $11,341 $ 8,578 $10,443 $10,547 12/31/2001 $11,609 $ 8,653 $10,661 $10,505 1/31/2002 $11,586 $ 8,527 $10,534 $10,529 2/28/2002 $11,734 $ 8,363 $10,581 $10,571 3/31/2002 $12,090 $ 8,677 $10,998 $10,630 4/30/2002 $11,724 $ 8,151 $10,656 $10,690 5/31/2002 $11,866 $ 8,091 $10,638 $10,690 6/30/2002 $11,148 $ 7,515 $ 9,991 $10,696 7/31/2002 $10,232 $ 6,929 $ 9,163 $10,707 8/31/2002 $10,295 $ 6,974 $ 9,251 $10,743 9/30/2002 $ 9,064 $ 6,216 $ 8,291 $10,761 10/31/2002 $ 9,580 $ 6,764 $ 8,772 $10,779 11/30/2002 $10,241 $ 7,162 $ 9,279 $10,779 12/31/2002 $ 9,855 $ 6,741 $ 8,950 $10,755 1/31/2003 $ 9,461 $ 6,564 $ 8,691 $10,803 2/28/2003 $ 9,099 $ 6,466 $ 8,463 $10,886 3/31/2003 $ 9,094 $ 6,529 $ 8,482 $10,951 4/30/2003 $ 9,782 $ 7,066 $ 9,136 $10,927 5/31/2003 $10,446 $ 7,439 $ 9,724 $10,910 6/30/2003 $10,617 $ 7,534 $ 9,840 $10,922 7/31/2003 $10,650 $ 7,666 $ 9,952 $10,933 8/31/2003 $10,792 $ 7,816 $10,114 $10,975 9/30/2003 $10,748 $ 7,733 $10,029 $11,011 10/31/2003 $11,374 $ 8,170 $10,529 $10,999 11/30/2003 $11,516 $ 8,242 $10,667 $10,969 12/31/2003 $12,307 $ 8,674 $11,297 $10,957 1/31/2004 $12,488 $ 8,834 $11,436 $11,011 2/29/2004 $12,682 $ 8,956 $11,658 $11,070 3/31/2004 $12,498 $ 8,821 $11,542 $11,141 4/30/2004 $12,332 $ 8,683 $11,329 $11,177 5/31/2004 $12,411 $ 8,802 $11,392 $11,243 6/30/2004 $12,703 $ 8,973 $11,655 $11,278 7/31/2004 $12,472 $ 8,676 $11,417 $11,260 8/31/2004 $12,642 $ 8,711 $11,541 $11,266 9/30/2004 $12,715 $ 8,806 $11,710 $11,290 10/31/2004 $12,743 $ 8,940 $11,838 $11,350 11/30/2004 $13,239 $ 9,302 $12,377 $11,356 12/31/2004 $13,596 $ 9,618 $12,753 $11,314 1/31/2005 $13,335 $ 9,384 $12,525 $11,338 2/28/2005 $13,810 $ 9,581 $12,927 $11,403 3/31/2005 $13,469 $ 9,412 $12,708 $11,492 4/30/2005 $13,306 $ 9,233 $12,493 $11,570 5/31/2005 $13,486 $ 9,527 $12,763 $11,558 6/30/2005 $13,567 $ 9,541 $12,895 $11,564 7/31/2005 $13,773 $ 9,895 $13,291 $11,617 8/31/2005 $13,728 $ 9,805 $13,204 $11,677 9/30/2005 $13,876 $ 9,885 $13,314 $11,819 10/31/2005 $13,625 $ 9,720 $13,046 $11,843 11/30/2005 $13,953 $10,087 $13,408 $11,748 12/31/2005 $14,032 $10,091 $13,476 $11,700 1/31/2006 $14,377 $10,358 $13,919 $11,790 2/28/2006 $14,400 $10,386 $13,970 $11,813 3/31/2006 $14,505 $10,515 $14,161 $11,879 4/30/2006 $14,873 $10,657 $14,484 $11,980 5/31/2006 $14,521 $10,350 $14,152 $12,039 6/30/2006 $14,607 $10,364 $14,200 $12,063 7/31/2006 $14,720 $10,428 $14,423 $12,099 8/31/2006 $15,021 $10,676 $14,684 $12,122 9/30/2006 $15,356 $10,951 $14,922 $12,063 10/31/2006 $15,811 $11,308 $15,379 $11,998 11/30/2006 $16,071 $11,523 $15,680 $11,980 12/31/2006 $16,327 $11,685 $15,964 $11,998 1/31/2007 $16,516 $11,861 $16,165 $12,034 2/28/2007 $16,338 $11,629 $16,005 $12,099 3/31/2007 $16,475 $11,759 $16,224 $12,209 4/30/2007 $17,212 $12,280 $16,862 $12,288 5/31/2007 $17,868 $12,709 $17,432 $12,363 6/30/2007 $17,486 $12,498 $17,153 $12,387 7/31/2007 $16,627 $12,110 $16,566 $12,384 8/31/2007 $16,841 $12,292 $16,797 $12,361 9/30/2007 $17,108 $12,751 $17,314 $12,395 10/31/2007 $16,981 $12,954 $17,482 $12,422 11/30/2007 $15,922 $12,413 $16,807 $12,496 12/31/2007 $15,748 $12,327 $16,657 $12,487 1/31/2008 $15,487 $11,587 $15,928 $12,549 2/29/2008 $14,769 $11,211 $15,461 $12,586 3/31/2008 $14,646 $11,162 $15,359 $12,695 4/30/2008 $15,375 $11,706 $15,974 $12,772 5/31/2008 $15,395 $11,858 $16,154 $12,879 6/30/2008 $13,913 $10,858 $14,781 $13,009 7/31/2008 $13,646 $10,767 $14,669 $13,078 8/31/2008 $13,864 $10,923 $14,836 $13,025 9/30/2008 $12,585 $ 9,949 $13,741 $13,007 10/31/2008 $10,538 $ 8,278 $11,600 $12,876 11/30/2008 $10,056 $ 7,684 $10,837 $12,629 12/31/2008 $10,197 $ 7,766 $11,072 $12,499 1/31/2009 $ 9,265 $ 7,111 $10,089 $12,553 2/28/2009 $ 8,463 $ 6,354 $ 9,012 $12,616 3/31/2009 $ 9,247 $ 6,911 $ 9,699 $12,646 4/30/2009 $ 9,907 $ 7,572 $10,552 $12,678 5/31/2009 $10,511 $ 7,996 $11,214 $12,714 6/30/2009 $10,542 $ 8,012 $11,206 $12,824 7/31/2009 $11,285 $ 8,618 $12,038 $12,803 8/31/2009 $11,665 $ 8,929 $12,476 $12,832 9/30/2009 $12,063 $ 9,262 $12,877 $12,840 10/31/2009 $12,026 $ 9,090 $12,690 $12,852 Total Returns 20.26% -9.10% 26.90% 28.52%
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 10/31/09. (6.) The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (7.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (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 and average annual total returns of Advisor Class shares were -24.04% and -17.13%. (9.) Sources: (C) 2009 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 10/31/09, there were 301 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. 34 | Annual Report 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 - 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 | 35 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,211.70 $5.80 Hypothetical (5% return before expenses) $1,000 $1,019.96 $5.30 CLASS B Actual $1,000 $1,207.20 $9.96 Hypothetical (5% return before expenses) $1,000 $1,016.18 $9.10 CLASS C Actual $1,000 $1,207.90 $9.96 Hypothetical (5% return before expenses) $1,000 $1,016.18 $9.10 CLASS R Actual $1,000 $1,211.30 $7.19 Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.56 ADVISOR CLASS Actual $1,000 $1,213.90 $4.41 Hypothetical (5% return before expenses) $1,000 $1,021.22 $4.02
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.04%; B: 1.79%; C: 1.79%; R: 1.29%; and Advisor: 0.79%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 36 | Annual Report 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) 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 Limited Maturity U.S. Government Securities Fund Based on Total Net Assets as of 10/31/09 (PIE CHART) U.S. Government & Agency Securities ... 69.3% Mortgage-Backed Securities ............ 27.0% Short-Term Investments & Other Net Assets ................... 3.7%
We are pleased to bring you Franklin Limited Maturity U.S. Government Securities Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Limited Maturity U.S. Government Securities Fund - Class A posted a +7.79% 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. Annual Report | 37 DIVIDEND DISTRIBUTIONS* Franklin Limited Maturity U.S. Government Securities Fund 11/1/08-10/31/09
DIVIDEND PER SHARE --------------------------- MONTH CLASS A ADVISOR CLASS ----- ----------- ------------- November 3.25 cents 3.33 cents December 3.25 cents 3.33 cents January 3.25 cents 3.33 cents February 3.25 cents 3.33 cents March 2.79 cents 2.88 cents April 2.79 cents 2.88 cents May 2.79 cents 2.88 cents June 2.79 cents 2.87 cents July 2.79 cents 2.87 cents August 2.79 cents 2.87 cents September 2.39 cents 2.48 cents October 2.39 cents 2.48 cents ----------- ----------- TOTAL 34.52 CENTS 35.53 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. outperformed the +3.61% total return of its benchmark, the Barclays Capital (BC) U.S. Treasury Index: 1-5 Year Component.(3) You can find the Fund's long-term performance data in the Performance Summary beginning on page 41. 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 (FNMA) and Freddie Mac (FHLMC).(2) The Fund's portfolio emphasizes mortgage-backed bonds and agency debentures, while also diversifying across components of the (3.) Source: (C) 2009 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 Index: 1-5 Year Component includes securities in the Treasury index (i.e., public obligations of the U.S. Treasury) with a remaining maturity from one up to (but not including) five years. The index is unmanaged and includes reinvested interest. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. 38 | Annual Report U.S. Treasury sector. We analyze securities using proprietary and nonproprietary research to help identify attractive investment opportunities. MANAGER'S DISCUSSION Although economic activity contracted during the first half of the reporting period, the 12 months under review ended with a more constructive and optimistic tone. During the second half of the period, the economy gradually improved and financial systems stabilized. Also, U.S. gross domestic product moved back into positive territory, indicating the recession had ended. While a number of risks remained that raised concerns about continued growth momentum, economic and financial stability helped build a foundation for improved growth over the medium and longer terms. As measured by BC Indexes, most fixed income sectors posted positive returns during the period, including the U.S. TIPS Index (+17.15%), the FHLMC Index (+12.52%), the FNMA Index (+12.27%), the Ginnie Mae (GNMA) Index (+11.49%), the Hybrid Adjustable-Rate Mortgage (ARM) Index (+9.72%) and the U.S. Agency Index (+9.00%).(4) The Fund, which typically looks for attractive valuations within lower interest rate risk government bond markets, benefited from these trends. Following its investment strategy, the Fund invested only in U.S. Treasuries, agency debentures, agency mortgage pass-through securities, both fixed and adjustable rate, and cash investments. The Fund's non-Treasury sectors outperformed comparable nominal U.S. Treasuries. The Fund's relatively small position in Treasury Inflation Protected Securities also outperformed nominal Treasuries. During the period, although we continued to emphasize agency debentures and mortgage pass-throughs due to their return potential and income advantage over Treasuries, we reduced our exposure to these sectors as they became more fairly valued, in our view, and yields on agency ARMs declined due to heavy demand from investors looking for a better yielding cash substitute. We increased our allocation to Treasuries as we found opportunities, and kept the Fund nearly fully invested. (4.) Source: (C) 2009 Morningstar. The BC U.S. TIPS Index covers the universe of inflation-protected notes issued by the U.S. Treasury that have at least one year to final maturity. The BC FHLMC Index is the FHLMC component of the BC Fixed Rate MBS Index and includes the mortgage-backed pass-through securities of the FHLMC. The BC FNMA Index is the FNMA component of the BC Fixed Rate MBS Index and includes the mortgage-backed pass-through securities of the FNMA. The BC GNMA Index is the GNMA component of the BC Fixed Rate MBS Index and includes the mortgage-backed pass-through securities of the GNMA. The BC U.S. Hybrid ARM Index covers agency pass-through securities that pay a fixed interest rate for a period of time (usually 3, 5, 7, or 10 years) before switching to a floating coupon rate, thereby combining the features of both fixed and adjustable-rate mortgages. 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. Annual Report | 39 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, 2009, 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. 40 | Annual Report Performance Summary as of 10/31/09 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 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$0.43 $10.48 $10.05 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.3452
ADVISOR CLASS (SYMBOL: FSUAX) CHANGE 10/31/09 10/31/08 ----------------------------- ------ -------- -------- Net Asset Value (NAV) +$0.43 $10.47 $10.04 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.3553
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) +7.79% +22.64% +57.19% Average Annual Total Return(2) +5.38% +3.69% +4.39% Avg. Ann. Total Return (9/30/09)(3) +4.97% +3.70% +4.39% Distribution Rate(4) 2.68% 30-Day Standardized Yield(5) 1.46% Total Annual Operating Expenses(6) 0.88%
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR ------------- ------ ------ ------- Cumulative Total Return(1) +7.90% +23.39% +58.79% Average Annual Total Return(2) +7.90% +4.29% +4.73% Avg. Ann. Total Return (9/30/09)(3) +7.47% +4.29% +4.73% Distribution Rate(4) 2.84% 30-Day Standardized Yield(5) 1.58% Total Annual Operating Expenses(6) 0.78%
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 | 41 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
CLASS A 10/31/09 ------- -------- 1-Year +5.38% 5-Year +3.69% 10-Year +4.39%
CLASS A (11/1/99-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN LIMITED BARCLAYS MATURITY U.S. CAPITAL U.S. GOVERNMENT TREASURY: SECURITIES FUND - 1-5 YEAR DATE CLASS A INDEX CPI ------------- ----------------- ------------ ------- 11/1/1999 $ 9,778 $10,000 $10,000 11/30/1999 $ 9,790 $10,011 $10,006 12/31/1999 $ 9,783 $10,004 $10,006 1/31/2000 $ 9,741 $ 9,986 $10,036 2/29/2000 $ 9,817 $10,057 $10,095 3/31/2000 $ 9,883 $10,144 $10,178 4/30/2000 $ 9,900 $10,154 $10,184 5/31/2000 $ 9,897 $10,197 $10,196 6/30/2000 $10,044 $10,324 $10,250 7/31/2000 $10,102 $10,390 $10,273 8/31/2000 $10,201 $10,480 $10,273 9/30/2000 $10,301 $10,564 $10,327 10/31/2000 $10,350 $10,625 $10,345 11/30/2000 $10,462 $10,746 $10,351 12/31/2000 $10,604 $10,900 $10,345 1/31/2001 $10,727 $11,039 $10,410 2/28/2001 $10,798 $11,125 $10,452 3/31/2001 $10,870 $11,218 $10,476 4/30/2001 $10,879 $11,217 $10,517 5/31/2001 $10,920 $11,272 $10,565 6/30/2001 $10,929 $11,310 $10,583 7/31/2001 $11,084 $11,475 $10,553 8/31/2001 $11,165 $11,561 $10,553 9/30/2001 $11,333 $11,782 $10,600 10/31/2001 $11,469 $11,923 $10,565 11/30/2001 $11,356 $11,845 $10,547 12/31/2001 $11,308 $11,821 $10,505 1/31/2002 $11,381 $11,853 $10,529 2/28/2002 $11,471 $11,929 $10,571 3/31/2002 $11,364 $11,796 $10,630 4/30/2002 $11,510 $11,970 $10,690 5/31/2002 $11,569 $12,038 $10,690 6/30/2002 $11,650 $12,163 $10,696 7/31/2002 $11,783 $12,365 $10,707 8/31/2002 $11,883 $12,448 $10,743 9/30/2002 $11,984 $12,619 $10,761 10/31/2002 $12,028 $12,631 $10,779 11/30/2002 $11,970 $12,548 $10,779 12/31/2002 $12,140 $12,723 $10,755 1/31/2003 $12,133 $12,703 $10,803 2/28/2003 $12,242 $12,797 $10,886 3/31/2003 $12,235 $12,813 $10,951 4/30/2003 $12,274 $12,839 $10,927 5/31/2003 $12,360 $12,955 $10,910 6/30/2003 $12,353 $12,959 $10,922 7/31/2003 $12,132 $12,795 $10,933 8/31/2003 $12,168 $12,801 $10,975 9/30/2003 $12,331 $12,990 $11,011 10/31/2003 $12,259 $12,904 $10,999 11/30/2003 $12,269 $12,894 $10,969 12/31/2003 $12,350 $12,985 $10,957 1/31/2004 $12,396 $13,027 $11,011 2/29/2004 $12,482 $13,123 $11,070 3/31/2004 $12,532 $13,191 $11,141 4/30/2004 $12,330 $12,974 $11,177 5/31/2004 $12,285 $12,948 $11,243 6/30/2004 $12,311 $12,960 $11,278 7/31/2004 $12,363 $13,025 $11,260 8/31/2004 $12,488 $13,167 $11,266 9/30/2004 $12,480 $13,161 $11,290 10/31/2004 $12,532 $13,217 $11,350 11/30/2004 $12,466 $13,114 $11,356 12/31/2004 $12,499 $13,159 $11,314 1/31/2005 $12,506 $13,151 $11,338 2/28/2005 $12,465 $13,090 $11,403 3/31/2005 $12,423 $13,075 $11,492 4/30/2005 $12,507 $13,187 $11,570 5/31/2005 $12,579 $13,256 $11,558 6/30/2005 $12,601 $13,286 $11,564 7/31/2005 $12,525 $13,205 $11,617 8/31/2005 $12,625 $13,322 $11,677 9/30/2005 $12,562 $13,252 $11,819 10/31/2005 $12,512 $13,224 $11,843 11/30/2005 $12,550 $13,276 $11,748 12/31/2005 $12,589 $13,335 $11,700 1/31/2006 $12,615 $13,343 $11,790 2/28/2006 $12,627 $13,342 $11,813 3/31/2006 $12,602 $13,338 $11,879 4/30/2006 $12,627 $13,371 $11,980 5/31/2006 $12,627 $13,383 $12,039 6/30/2006 $12,640 $13,404 $12,063 7/31/2006 $12,744 $13,521 $12,099 8/31/2006 $12,848 $13,638 $12,122 9/30/2006 $12,913 $13,719 $12,063 10/31/2006 $12,967 $13,774 $11,998 11/30/2006 $13,062 $13,859 $11,980 12/31/2006 $13,039 $13,836 $11,998 1/31/2007 $13,055 $13,853 $12,034 2/28/2007 $13,177 $13,995 $12,099 3/31/2007 $13,221 $14,044 $12,209 4/30/2007 $13,277 $14,099 $12,288 5/31/2007 $13,227 $14,050 $12,363 6/30/2007 $13,244 $14,101 $12,387 7/31/2007 $13,341 $14,260 $12,384 8/31/2007 $13,453 $14,436 $12,361 9/30/2007 $13,564 $14,536 $12,395 10/31/2007 $13,622 $14,604 $12,422 11/30/2007 $13,843 $14,927 $12,496 12/31/2007 $13,906 $14,965 $12,487 1/31/2008 $14,143 $15,287 $12,549 2/29/2008 $14,229 $15,478 $12,586 3/31/2008 $14,288 $15,531 $12,695 4/30/2008 $14,194 $15,332 $12,772 5/31/2008 $14,100 $15,232 $12,879 6/30/2008 $14,132 $15,289 $13,009 7/31/2008 $14,163 $15,368 $13,078 8/31/2008 $14,237 $15,473 $13,025 9/30/2008 $14,269 $15,605 $13,007 10/31/2008 $14,258 $15,802 $12,876 11/30/2008 $14,560 $16,144 $12,629 12/31/2008 $14,905 $16,286 $12,499 1/31/2009 $14,851 $16,179 $12,553 2/28/2009 $14,926 $16,142 $12,616 3/31/2009 $15,067 $16,291 $12,646 4/30/2009 $15,107 $16,210 $12,678 5/31/2009 $15,119 $16,190 $12,714 6/30/2009 $15,116 $16,136 $12,824 7/31/2009 $15,156 $16,179 $12,803 8/31/2009 $15,241 $16,273 $12,832 9/30/2009 $15,319 $16,333 $12,840 10/31/2009 $15,369 $16,373 $12,852 Total Returns 53.69% 63.73% 28.52%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/09 ------------- -------- 1-Year +7.90% 5-Year +4.29% 10-Year +4.73%
ADVISOR CLASS (11/1/99-10/31/09) (PERFORMANCE GRAPH)
BARCLAYS FRANKLIN LIMITED CAPITAL U.S. MATURITY U.S. TREASURY: GOVERNMENT SECURITIES 1-5 YEAR DATE FUND - ADVISOR CLASS INDEX CPI ------------- --------------------- ------------ ------- 11/1/1999 $10,000 $10,000 $10,000 11/30/1999 $10,014 $10,011 $10,006 12/31/1999 $10,008 $10,004 $10,006 1/31/2000 $ 9,965 $ 9,986 $10,036 2/29/2000 $10,044 $10,057 $10,095 3/31/2000 $10,102 $10,144 $10,178 4/30/2000 $10,130 $10,154 $10,184 5/31/2000 $10,128 $10,197 $10,196 6/30/2000 $10,280 $10,324 $10,250 7/31/2000 $10,339 $10,390 $10,273 8/31/2000 $10,442 $10,480 $10,273 9/30/2000 $10,535 $10,564 $10,327 10/31/2000 $10,597 $10,625 $10,345 11/30/2000 $10,701 $10,746 $10,351 12/31/2000 $10,848 $10,900 $10,345 1/31/2001 $10,986 $11,039 $10,410 2/28/2001 $11,060 $11,125 $10,452 3/31/2001 $11,134 $11,218 $10,476 4/30/2001 $11,143 $11,217 $10,517 5/31/2001 $11,185 $11,272 $10,565 6/30/2001 $11,196 $11,310 $10,583 7/31/2001 $11,356 $11,475 $10,553 8/31/2001 $11,440 $11,561 $10,553 9/30/2001 $11,613 $11,782 $10,600 10/31/2001 $11,754 $11,923 $10,565 11/30/2001 $11,639 $11,845 $10,547 12/31/2001 $11,591 $11,821 $10,505 1/31/2002 $11,666 $11,853 $10,529 2/28/2002 $11,760 $11,929 $10,571 3/31/2002 $11,650 $11,796 $10,630 4/30/2002 $11,801 $11,970 $10,690 5/31/2002 $11,874 $12,038 $10,690 6/30/2002 $11,946 $12,163 $10,696 7/31/2002 $12,084 $12,365 $10,707 8/31/2002 $12,188 $12,448 $10,743 9/30/2002 $12,304 $12,619 $10,761 10/31/2002 $12,338 $12,631 $10,779 11/30/2002 $12,280 $12,548 $10,779 12/31/2002 $12,456 $12,723 $10,755 1/31/2003 $12,450 $12,703 $10,803 2/28/2003 $12,562 $12,797 $10,886 3/31/2003 $12,556 $12,813 $10,951 4/30/2003 $12,597 $12,839 $10,927 5/31/2003 $12,686 $12,955 $10,910 6/30/2003 $12,680 $12,959 $10,922 7/31/2003 $12,466 $12,795 $10,933 8/31/2003 $12,493 $12,801 $10,975 9/30/2003 $12,661 $12,990 $11,011 10/31/2003 $12,588 $12,904 $10,999 11/30/2003 $12,599 $12,894 $10,969 12/31/2003 $12,683 $12,985 $10,957 1/31/2004 $12,731 $13,027 $11,011 2/29/2004 $12,821 $13,123 $11,070 3/31/2004 $12,873 $13,191 $11,141 4/30/2004 $12,667 $12,974 $11,177 5/31/2004 $12,621 $12,948 $11,243 6/30/2004 $12,639 $12,960 $11,278 7/31/2004 $12,694 $13,025 $11,260 8/31/2004 $12,823 $13,167 $11,266 9/30/2004 $12,815 $13,161 $11,290 10/31/2004 $12,858 $13,217 $11,350 11/30/2004 $12,804 $13,114 $11,356 12/31/2004 $12,839 $13,159 $11,314 1/31/2005 $12,847 $13,151 $11,338 2/28/2005 $12,805 $13,090 $11,403 3/31/2005 $12,763 $13,075 $11,492 4/30/2005 $12,851 $13,187 $11,570 5/31/2005 $12,913 $13,256 $11,558 6/30/2005 $12,950 $13,286 $11,564 7/31/2005 $12,873 $13,205 $11,617 8/31/2005 $12,977 $13,322 $11,677 9/30/2005 $12,900 $13,252 $11,819 10/31/2005 $12,863 $13,224 $11,843 11/30/2005 $12,903 $13,276 $11,748 12/31/2005 $12,944 $13,335 $11,700 1/31/2006 $12,971 $13,343 $11,790 2/28/2006 $12,986 $13,342 $11,813 3/31/2006 $12,960 $13,338 $11,879 4/30/2006 $12,988 $13,371 $11,980 5/31/2006 $12,989 $13,383 $12,039 6/30/2006 $13,003 $13,404 $12,063 7/31/2006 $13,111 $13,521 $12,099 8/31/2006 $13,219 $13,638 $12,122 9/30/2006 $13,287 $13,719 $12,063 10/31/2006 $13,344 $13,774 $11,998 11/30/2006 $13,443 $13,859 $11,980 12/31/2006 $13,420 $13,836 $11,998 1/31/2007 $13,438 $13,853 $12,034 2/28/2007 $13,566 $13,995 $12,099 3/31/2007 $13,611 $14,044 $12,209 4/30/2007 $13,671 $14,099 $12,288 5/31/2007 $13,620 $14,050 $12,363 6/30/2007 $13,638 $14,101 $12,387 7/31/2007 $13,740 $14,260 $12,384 8/31/2007 $13,856 $14,436 $12,361 9/30/2007 $13,972 $14,536 $12,395 10/31/2007 $14,033 $14,604 $12,422 11/30/2007 $14,262 $14,927 $12,496 12/31/2007 $14,328 $14,965 $12,487 1/31/2008 $14,574 $15,287 $12,549 2/29/2008 $14,664 $15,478 $12,586 3/31/2008 $14,740 $15,531 $12,695 4/30/2008 $14,645 $15,332 $12,772 5/31/2008 $14,535 $15,232 $12,879 6/30/2008 $14,568 $15,289 $13,009 7/31/2008 $14,602 $15,368 $13,078 8/31/2008 $14,679 $15,473 $13,025 9/30/2008 $14,713 $15,605 $13,007 10/31/2008 $14,703 $15,802 $12,876 11/30/2008 $15,016 $16,144 $12,629 12/31/2008 $15,373 $16,286 $12,499 1/31/2009 $15,334 $16,179 $12,553 2/28/2009 $15,413 $16,142 $12,616 3/31/2009 $15,545 $16,291 $12,646 4/30/2009 $15,587 $16,210 $12,678 5/31/2009 $15,600 $16,190 $12,714 6/30/2009 $15,599 $16,136 $12,824 7/31/2009 $15,657 $16,179 $12,803 8/31/2009 $15,730 $16,273 $12,832 9/30/2009 $15,812 $16,333 $12,840 10/31/2009 $15,879 $16,373 $12,852 Total Returns 58.79% 63.73% 28.52%
42 | Annual Report Performance Summary (CONTINUED) ENDNOTES INTEREST RATE MOVEMENTS, UNSCHEDULED MORTGAGE PREPAYMENTS AND OTHER RISK FACTORS WILL AFFECT THE FUND'S SHARE PRICE AND YIELD. BOND PRICES, 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 10/31/09. (5.) The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Source: (C) 2009 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 Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. Annual Report | 43 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 - 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. 44 | 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,017.30 $4.22 Hypothetical (5% return before expenses) $1,000 $1,021.02 $4.23 ADVISOR CLASS Actual $1,000 $1,017.80 $3.71 Hypothetical (5% return before expenses) $1,000 $1,021.53 $3.72
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.83% and Advisor: 0.73%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. Annual Report | 45 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, 2009. PERFORMANCE OVERVIEW For the 12 months under review, Franklin Real Return Fund - Class A posted a +12.59% cumulative total return. The Fund underperformed its benchmark, the Barclays Capital (BC) U.S. TIPS Index, which had a +17.15% total return.(1) The Fund also outperformed the Consumer Price Index (CPI) for Urban Consumers (All Items) NSA (non-seasonally adjusted), which fell 0.2% for the same period.(2) You can find more of the Fund's performance data in the Performance Summary beginning on page 49. 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, (1.) Source: (C) 2009 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 covers the universe of inflation-protected notes issued by the U.S. Treasury that have at least one year to final maturity. The index is unmanaged and includes reinvested interest. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. (2.) Source: (C) 2009 Morningstar. The CPI, calculated by the U.S. Bureau of Labor Statistics, is a measure of the average change in prices of all goods and services purchased for consumption by urban householders. User fees and sales and excise taxes paid by the consumer are included. Income taxes and investment items are not included. CPI for urban consumers includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. This represents about 80% of the total U.S. population. Also known as Cost-of-Living Index. The index is unmanaged. One cannot invest directly in an index, and an index is not 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 88. 46 | Annual Report DIVIDEND DISTRIBUTIONS* Franklin Real Return Fund 11/1/08-10/31/09
DIVIDEND PER SHARE --------------------------------------- MONTH CLASS A CLASS C ADVISOR CLASS ----- ---------- ---------- ------------- November** -- -- -- December 1.11 cents 1.34 cents 1.34 cents January** -- -- -- February** -- -- -- March** -- -- -- April** -- -- -- May** -- -- -- June** -- -- -- July** -- -- -- August** -- -- -- September** -- -- -- October** -- -- -- ---------- ---------- ---------- TOTAL 1.11 CENTS 1.34 CENTS 1.34 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. industry and issuer conditions. When making our investment decisions, we will evaluate such criteria as country risk, business cycles, yield curves, and values between and within markets. MANAGER'S DISCUSSION During the year under review, we invested the Fund's assets in the allowable sectors. At period-end, 61.6% of the Fund's total net assets were invested in U.S. Treasury Inflation Protected Securities. For diversification, we also allocated some of the Fund's assets to natural resources, real estate investment trusts, short-term non-U.S. dollar securities and high yield sectors. We employed a non-U.S. dollar strategy to help hedge against dollar weakness versus certain currencies. The global financial crisis of late 2008 and early 2009 caused a downturn in commodity prices and also created expectations of broadly declining inflation. Annual Report | 47 PORTFOLIO BREAKDOWN Franklin Real Return Fund Based on Total Net Assets as of 10/31/09 (BAR CHART) U.S. Treasury Inflation Protected Securities 61.1% Foreign Government Debt Securities 12.7% Natural Resources - Common Stocks* 5.2% Corporate Bonds** 5.7% Real Estate - Common Stocks 0.6% Diversified Financials - Preferred Stocks*** 0.0% Short-Term Investments & Other Net Assets 14.2%
* In the SOI, the natural resources sector comprises energy and materials. ** Includes Senior Floating Rate Interests. *** Rounds to 0.0%. Inflation-sensitive assets, after performing poorly during this period, performed better through much of 2009. However, our TIPS holdings did lag the broader TIPS market due to their shorter maturities in a declining rate environment. A weakening U.S. dollar benefited our non-dollar holdings, and our exposure to the high yield debt sector helped the Fund's performance relative to the benchmark index. 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, 2009, 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. 48 | Annual Report Performance Summary as of 10/31/09 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 10/31/09 10/31/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.19 $10.74 $9.55 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.0111
CLASS C (SYMBOL: FRRCX) CHANGE 10/31/09 11/3/08 ----------------------- ------ -------- -------- Net Asset Value (NAV) +$1.12 $10.69 $9.57 DISTRIBUTIONS (11/3/08-10/31/09) Dividend Income $0.0134
ADVISOR CLASS (SYMBOL: FARRX) CHANGE 10/31/09 10/31/08 ----------------------------- ------ -------- -------- Net Asset Value (NAV) +$1.21 $10.78 $9.57 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.0134
Annual Report | 49 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 C: 1% CONTINGENT DEFERRED SALES CHARGE (CDSC) IN THE FIRST YEAR ONLY; ADVISOR CLASS: NO SALES CHARGES.
CLASS A 1-YEAR 3-YEAR INCEPTION (11/17/04) ------- ------- ------ -------------------- Cumulative Total Return(2) +12.59% +16.41% +27.95% Average Annual Total Return(3) +7.85% +3.68% +4.19% Avg. Ann. Total Return (9/30/09)(4) -0.72% +3.63% +4.11% 30-Day Standardized Yield(5) 1.81% Total Annual Operating Expenses(6) Without Waiver 1.08% With Waiver 0.90%
CLASS C INCEPTION (11/3/08) ------- ------------------- Cumulative Total Return(2) +11.86% Aggregate Total Return(7) +10.86% Aggregate Total Return (9/30/09) +11.22% 30-Day Standardized Yield(5) 1.50% Total Annual Operating Expenses(6) Without Waiver 1.48% With Waiver 1.30%
ADVISOR CLASS 1-YEAR 3-YEAR INCEPTION (11/17/04) ------------- ------- ------ -------------------- Cumulative Total Return(2) +12.80% +17.27% +29.54% Average Annual Total Return(3) +12.80% +5.45% +5.36% Avg. Ann. Total Return (9/30/09)(4) +3.93% +5.42% +5.30% 30-Day Standardized Yield(5) 2.14% Total Annual Operating Expenses(6) Without Waiver 0.83% 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 COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING THE RULE 12B-1 FEES AND ACQUIRED FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.65% (OTHER THAN CERTAIN NONROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 2/28/10. 50 | Annual Report 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 10/31/09 ------- -------- 1-Year +7.85% 3-Year +3.68% Since Inception (11/17/04) +4.19%
CLASS A (11/17/04-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN REAL RETURN BARCLAYS CAPITAL U.S. DATE FUND - CLASS A TIPS INDEX CPI ------------- -------------------- --------------------- ------- 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 $10,131 $10,123 4/30/2005 $ 9,699 $10,324 $10,191 5/31/2005 $ 9,739 $10,395 $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 $10,047 $10,453 $10,306 1/31/2006 $10,218 $10,452 $10,385 2/28/2006 $10,138 $10,447 $10,406 3/31/2006 $10,168 $10,218 $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 $10,435 $10,657 8/31/2006 $10,478 $10,616 $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 $10,510 $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 $10,836 $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 $12,181 $11,054 2/29/2008 $12,046 $12,331 $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 $10,823 $11,341 11/30/2008 $10,771 $10,900 $11,124 12/31/2008 $11,126 $11,441 $11,009 1/31/2009 $11,229 $11,634 $11,057 2/28/2009 $11,069 $11,405 $11,112 3/31/2009 $11,366 $12,072 $11,139 4/30/2009 $11,480 $11,847 $11,167 5/31/2009 $11,776 $12,096 $11,199 6/30/2009 $11,742 $12,152 $11,295 7/31/2009 $11,890 $12,161 $11,277 8/31/2009 $11,959 $12,267 $11,303 9/30/2009 $12,164 $12,525 $11,310 10/31/2009 $12,256 $12,679 $11,321 Total Returns 22.56% 26.79% 13.21%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------- -------- 1-Year +10.85% Since Inception (11/3/08) +10.95%
CLASS C (11/3/08-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN REAL RETURN BARCLAYS CAPITAL U.S. DATE FUND - CLASS C TIPS INDEX CPI ------------- -------------------- --------------------- ------- 11/3/2008 $10,000 $10,000 $10,000 11/30/2008 $ 9,874 $10,071 $ 9,808 12/31/2008 $10,191 $10,571 $ 9,707 1/31/2009 $10,285 $10,749 $ 9,749 2/28/2009 $10,128 $10,538 $ 9,798 3/31/2009 $10,400 $11,154 $ 9,822 4/30/2009 $10,505 $10,946 $ 9,846 5/31/2009 $10,777 $11,176 $ 9,875 6/30/2009 $10,735 $11,227 $ 9,959 7/31/2009 $10,871 $11,235 $ 9,944 8/31/2009 $10,923 $11,334 $ 9,966 9/30/2009 $11,112 $11,572 $ 9,972 10/31/2009 $11,086 $11,715 $ 9,982 Total Returns 10.86% 17.15% -0.18%
Annual Report | 51 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/09 ------------- -------- 1-Year +12.80% 3-Year +5.45% Since Inception (11/17/04) +5.36%
ADVISOR CLASS (11/17/04-10/31/09) (PERFORMANCE GRAPH)
FRANKLIN REAL RETURN BARCLAYS CAPITAL U.S. DATE FUND - ADVISOR CLASS TIPS INDEX CPI ------------- -------------------- --------------------- ------- 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 $10,131 $10,123 4/30/2005 $10,140 $10,324 $10,191 5/31/2005 $10,185 $10,395 $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 $10,453 $10,306 1/31/2006 $10,700 $10,452 $10,385 2/28/2006 $10,616 $10,447 $10,406 3/31/2006 $10,654 $10,218 $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 $10,435 $10,657 8/31/2006 $10,990 $10,616 $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 $10,510 $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 $10,836 $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 $12,181 $11,054 2/29/2008 $12,677 $12,331 $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 $10,823 $11,341 11/30/2008 $11,364 $10,900 $11,124 12/31/2008 $11,728 $11,441 $11,009 1/31/2009 $11,848 $11,634 $11,057 2/28/2009 $11,680 $11,405 $11,112 3/31/2009 $11,993 $12,072 $11,139 4/30/2009 $12,125 $11,847 $11,167 5/31/2009 $12,437 $12,096 $11,199 6/30/2009 $12,401 $12,152 $11,295 7/31/2009 $12,569 $12,161 $11,277 8/31/2009 $12,629 $12,267 $11,303 9/30/2009 $12,858 $12,525 $11,310 10/31/2009 $12,954 $12,679 $11,321 Total Returns 29.54% 26.79% 13.21%
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 waived fees, the Fund's total return would have been lower, and yield for the period would have been 1.56%, 1.23% and 1.89% for Classes A, C 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.) The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. (6.) Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. (7.) Aggregate total return represents the change in value of an investment since inception. Since Class C shares have existed for less than one year, average annual total returns are not available. (8.) Source: (C) 2009 Morningstar. The BC U.S. TIPS Index covers the universe of inflation-protected notes issued by the U.S. Treasury that have at least one year to final maturity. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. 52 | Annual Report 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 - 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 | 53 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ----------------- -------------- ----------------------- CLASS A Actual $1,000 $1,067.60 $4.69 Hypothetical (5% return before expenses) $1,000 $1,020.67 $4.58 CLASS C Actual $1,000 $1,064.70 $6.77 Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.61 ADVISOR CLASS Actual $1,000 $1,068.40 $3.39 Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31
* Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 0.90%; C: 1.30%; and Advisor: 0.65%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 54 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31, ----------------------------------------- CLASS A 2009 2008 2007 2006(a) ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 7.00 $ 11.36 $ 10.65 $ 10.00 ------- ------- ------- ------- Income from investment operations(b): Net investment income(c) ........................ 0.35 0.39 0.36 0.10 Net realized and unrealized gains (losses) ...... 1.59 (4.09) 0.68 0.62 ------- ------- ------- ------- Total from investment operations ................... 1.94 (3.70) 1.04 0.72 ------- ------- ------- ------- Less distributions from: Net investment income ........................... (0.39) (0.42) (0.33) (0.07) Net realized gains .............................. -- (0.24) -- -- ------- ------- ------- ------- Total distributions ................................ (0.39) (0.66) (0.33) (0.07) ------- ------- ------- ------- Redemption fees(d) ................................. -- --(e) --(e) --(e) ------- ------- ------- ------- Net asset value, end of year ....................... $ 8.55 $ 7.00 $ 11.36 $ 10.65 ======= ======= ======= ======= Total return(f) .................................... 29.03% (34.20)% 9.91% 7.20% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates .. 1.26% 1.34% 1.58% 2.02% Expenses net of waiver and payments by affiliates .. 0.99% 1.01% 1.04% 1.06% Net investment income .............................. 4.69% 3.99% 3.26% 2.84% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $88,376 $39,061 $35,180 $17,258 Portfolio turnover rate ............................ 73.57% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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 | 55 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN BALANCED FUND
YEAR ENDED OCTOBER 31, ---------------------------------------- CLASS C 2009 2008 2007 2006(a) ------- ------- ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 6.96 $ 11.30 $10.62 $10.00 ------- ------- ------ ------ Income from investment operations(b): Net investment income(c) ........................ 0.29 0.33 0.30 0.07 Net realized and unrealized gains (losses) ...... 1.59 (4.08) 0.68 0.62 ------- ------- ------ ------ Total from investment operations ................... 1.88 (3.75) 0.98 0.69 ------- ------- ------ ------ Less distributions from: Net investment income ........................... (0.35) (0.35) (0.30) (0.07) Net realized gains .............................. -- (0.24) -- -- ------- ------- ------ ------ Total distributions ................................ (0.35) (0.59) (0.30) (0.07) ------- ------- ------ ------ Redemption fees(d) ................................. -- --(e) --(e) --(e) ------- ------- ------ ------ Net asset value, end of year ....................... $ 8.49 $ 6.96 $11.30 $10.62 ======= ======= ====== ====== Total return(f) .................................... 28.08% (34.69)% 9.33% 6.90% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates .. 1.96% 2.00% 2.25% 2.65% Expenses net of waiver and payments by affiliates .. 1.69% 1.67% 1.71% 1.69% Net investment income .............................. 3.99% 3.33% 2.59% 2.21% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $19,423 $ 7,136 $6,542 $ 242 Portfolio turnover rate ............................ 73.57% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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 R 2009 2008 2007 2006(a) ------- ------ ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 7.00 $ 11.36 $10.64 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c) ........................ 0.32 0.37 0.34 0.09 Net realized and unrealized gains (losses) ...... 1.62 (4.09) 0.69 0.62 ------ ------- ------ ------ Total from investment operations ................... 1.94 (3.72) 1.03 0.71 ------ ------- ------ ------ Less distributions from: Net investment income ........................... (0.38) (0.40) (0.31) (0.07) Net realized gains .............................. -- (0.24) -- -- ------ ------- ------ ------ Total distributions ................................ (0.38) (0.64) (0.31) (0.07) ------ ------- ------ ------ Redemption fees(d) ................................. -- --(e) --(e) --(e) ------ ------- ------ ------ Net asset value, end of year ....................... $ 8.56 $ 7.00 $11.36 $10.64 ====== ======= ====== ====== Total return(f) .................................... 28.73% (34.26)% 9.83% 7.10% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates .. 1.48% 1.54% 1.75% 2.17% Expenses net of waiver and payments by affiliates .. 1.21% 1.21% 1.21% 1.21% Net investment income .............................. 4.47% 3.79% 3.09% 2.69% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $ 175 $ 12 $ 15 $ 11 Portfolio turnover rate ............................ 73.57% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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, --------------------------------------- ADVISOR CLASS 2009 2008 2007 2006(a) ------------- ------ ------- ------ ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................. $ 7.01 $ 11.38 $10.66 $10.00 ------ ------- ------ ------ Income from investment operations(b): Net investment income(c) ........................ 0.37 0.42 0.40 0.11 Net realized and unrealized gains (losses) ...... 1.59 (4.10) 0.69 0.62 ------ ------- ------ ------ Total from investment operations ................... 1.96 (3.68) 1.09 0.73 ------ ------- ------ ------ Less distributions from: Net investment income ........................... (0.41) (0.45) (0.37) (0.07) Net realized gains .............................. -- (0.24) -- -- ------ ------- ------ ------ Total distributions ................................ (0.41) (0.69) (0.37) (0.07) ------ ------- ------ ------ Redemption fees(d) ................................. -- --(e) --(e) --(e) ------ ------- ------ ------ Net asset value, end of year ....................... $ 8.56 $ 7.01 $11.38 $10.66 ====== ======= ====== ====== Total return(f) .................................... 29.32% (34.01)% 10.34% 7.30% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates .. 0.98% 1.04% 1.25% 1.67% Expenses net of waiver and payments by affiliates .. 0.71% 0.71% 0.71% 0.71% Net investment income .............................. 4.97% 4.29% 3.59% 3.19% SUPPLEMENTAL DATA Net assets, end of year (000's) .................... $1,861 $ 1,072 $1,180 $ 239 Portfolio turnover rate ............................ 73.57% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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. 58 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------ -------------- COMMON STOCKS 44.8% CONSUMER DISCRETIONARY 2.1% CBS Corp., B ............................................................... United States 100,000 $ 1,177,000 Comcast Corp., A ........................................................... United States 75,000 1,087,500 -------------- 2,264,500 -------------- CONSUMER STAPLES 3.9% Colgate-Palmolive Co. ...................................................... United States 12,500 982,875 CVS Caremark Corp. ......................................................... United States 30,000 1,059,000 Diageo PLC, ADR ............................................................ United Kingdom 20,000 1,300,400 Philip Morris International Inc. ........................................... United States 20,000 947,200 -------------- 4,289,475 -------------- ENERGY 5.5% ConocoPhillips ............................................................. United States 50,000 2,509,000 Devon Energy Corp. ......................................................... United States 10,000 647,100 Diamond Offshore Drilling Inc. ............................................. United States 10,000 952,500 Halliburton Co. ............................................................ United States 30,000 876,300 Petroplus Holdings AG ...................................................... Switzerland 31,250 684,089 Valero Energy Corp. ........................................................ United States 20,000 362,000 -------------- 6,030,989 -------------- FINANCIALS 2.3% JPMorgan Chase & Co. ....................................................... United States 20,000 835,400 M&T Bank Corp. ............................................................. United States 20,000 1,257,000 Wells Fargo & Co. .......................................................... United States 16,000 440,320 -------------- 2,532,720 -------------- HEALTH CARE 4.4% Abbott Laboratories ........................................................ United States 20,000 1,011,400 Johnson & Johnson .......................................................... United States 20,000 1,181,000 Merck & Co. Inc. ........................................................... United States 70,000 2,165,100 (a) Tenet Healthcare Corp. ..................................................... United States 100,000 512,000 -------------- 4,869,500 -------------- INDUSTRIALS 4.2% General Dynamics Corp. ..................................................... United States 30,000 1,881,000 General Electric Co. ....................................................... United States 40,000 570,400 Pitney Bowes Inc. .......................................................... United States 50,000 1,225,000 (b) United Parcel Service Inc., B .............................................. United States 6,000 322,080 (b) United Technologies Corp. .................................................. United States 10,000 614,500 -------------- 4,612,980 -------------- INFORMATION TECHNOLOGY 9.2% (a) Agilent Technologies Inc. .................................................. United States 50,000 1,237,000 (a) Cisco Systems Inc. ......................................................... United States 30,000 685,500 Intel Corp. ................................................................ United States 60,000 1,146,600 International Business Machines Corp. ...................................... United States 5,000 603,050 (b) Lender Processing Services Inc. ............................................ United States 30,000 1,194,000 Maxim Integrated Products Inc. ............................................. United States 20,000 333,400 (b) Microsoft Corp. ............................................................ United States 70,000 1,941,100 QUALCOMM Inc. .............................................................. United States 11,800 488,638 (b) Texas Instruments Inc. ..................................................... United States 60,000 1,407,000 Xerox Corp. ................................................................ United States 140,000 1,052,800 -------------- 10,089,088 --------------
Annual Report | 59 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------ -------------- COMMON STOCKS (CONTINUED) MATERIALS 0.4% Celanese Corp., A .......................................................... United States 15,000 $ 411,750 -------------- TELECOMMUNICATION SERVICES 5.0% AT&T Inc. .................................................................. United States 100,000 2,567,000 Verizon Communications Inc. ................................................ United States 100,000 2,959,000 -------------- 5,526,000 -------------- UTILITIES 7.8% Duke Energy Corp. .......................................................... United States 40,000 632,800 PPL Corp. .................................................................. United States 65,000 1,913,600 Progress Energy Inc. ....................................................... United States 60,000 2,251,800 The Southern Co. ........................................................... United States 60,000 1,871,400 Xcel Energy Inc. ........................................................... United States 100,000 1,886,000 -------------- 8,555,600 -------------- TOTAL COMMON STOCKS (COST $49,170,141) ..................................... 49,182,602 -------------- CONVERTIBLE PREFERRED STOCKS 7.0% ENERGY 0.4% McMoRan Exploration Co., 8.00%, cvt. pfd. .................................. United States 350 462,560 -------------- FINANCIALS 1.4% Bank of America Corp., 7.25%, cvt. pfd., L ................................. United States 1,800 1,507,212 -------------- HEALTH CARE 2.4% Schering-Plough Corp., 6.00%, cvt. pfd. .................................... United States 5,000 1,207,500 Tenet Healthcare Corp., 7.00%, cvt. pfd. ................................... United States 1,600 1,486,263 -------------- 2,693,763 -------------- MATERIALS 1.3% Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. ...................... United States 13,500 1,444,500 -------------- UTILITIES 1.5% Great Plains Energy Inc., 12.00%, cvt. pfd. ................................ United States 26,300 1,635,334 -------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $7,123,162) ....................... 7,743,369 -------------- PREFERRED STOCKS 0.1% FINANCIALS 0.1% (a) Fannie Mae, 7.625%, pfd., R ................................................ United States 20,000 18,400 (a) Fannie Mae, 8.25%, pfd. .................................................... United States 25,000 28,750 (a) Freddie Mac, 8.375%, pfd., Z ............................................... United States 30,200 33,220 -------------- TOTAL PREFERRED STOCKS (COST $1,880,000) ................................... 80,370 -------------- (c) EQUITY-LINKED SECURITIES 5.1% ENERGY 3.3% Credit Suisse into Weatherford International Ltd., 11.00% .................. United States 75,000 1,400,640 (d) The Goldman Sachs Group Inc. into Devon Energy Corp., 10.55%, 144A ......... United States 20,000 1,154,180 (d) The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A ............. United States 25,000 1,053,840 -------------- 3,608,660 --------------
60 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN BALANCED FUND COUNTRY SHARES VALUE ---------------------- -------------- ------------ -------------- EQUITY-LINKED SECURITIES (CONTINUED) FINANCIALS 1.0% (d) JPMorgan Chase & Co. into Wells Fargo & Co., 10.00%, 144A .................. United States 38,000 $ 1,075,153 -------------- INFORMATION TECHNOLOGY 0.8% (d) The Goldman Sachs Group Inc. into Intel Corp., 10.00%, 144A ................ United States 50,000 899,900 -------------- TOTAL EQUITY-LINKED SECURITIES (COST $5,382,665) ........................... 5,583,713 --------------
PRINCIPAL AMOUNT(e) ------------ CONVERTIBLE BONDS 2.8% FINANCIALS 2.2% (d) Forest City Enterprises Inc., cvt., senior note, 144A, 5.00%, 10/15/16 ..... United States $ 1,500,000 1,378,125 (f) iStar Financial Inc., cvt., senior note, FRN, 0.79%, 10/01/12 .............. United States 1,000,000 525,000 Vornado Realty Trust, cvt., senior bond, 2.85%, 4/01/27 .................... United States 500,000 485,000 -------------- 2,388,125 -------------- INFORMATION TECHNOLOGY 0.6% (d) Sybase Inc., cvt., senior note, 144A, 3.50%, 8/15/29 ....................... United States 600,000 674,724 -------------- TOTAL CONVERTIBLE BONDS (COST $2,854,889) 3,062,849 -------------- CORPORATE BONDS 35.2% CONSUMER DISCRETIONARY 3.9% Comcast Corp., senior note, 6.30%, 11/15/17 ................................ United States 350,000 379,230 DISH DBS Corp., senior note, 7.875%, 9/01/19 ............................... United States 1,000,000 1,028,750 Ford Motor Credit Co. LLC, senior note, 9.75%, 9/15/10 ..................... United States 900,000 922,808 (d) News America Inc., senior note, 144A, 6.90%, 8/15/39 ....................... United States 300,000 319,105 Target Corp., 6.00%, 1/15/18 ............................................... United States 1,000,000 1,123,614 Yum! Brands Inc., senior note, 5.30%, 9/15/19 .............................. United States 500,000 506,649 -------------- 4,280,156 -------------- CONSUMER STAPLES 2.5% Altria Group Inc., senior note, 9.70%, 11/10/18 ............................ United States 1,000,000 1,232,333 (d) Anheuser-Busch InBev NV, senior note, 144A, 7.20%, 1/15/14 ................. United States 750,000 845,686 Bunge Ltd. Finance Corp., senior note, 5.10%, 7/15/15 ...................... United States 300,000 299,525 CVS Caremark Corp., senior note, 5.75%, 6/01/17 ............................ United States 300,000 323,161 -------------- 2,700,705 -------------- ENERGY 5.0% Anadarko Petroleum Corp., senior note, 6.95%, 6/15/19 ...................... United States 500,000 562,483 Chesapeake Energy Corp., senior note, 7.25%, 12/15/18 ...................... United States 1,000,000 972,500 El Paso Corp., senior note, 7.25%, 4/01/18 ................................. United States 500,000 501,577 (d) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ............................ United States 500,000 520,000 Plains All American Pipeline LP, senior note, 5.75%, 1/15/20 ............... United States 750,000 771,852 Valero Energy Corp., senior note, 10.50%, 3/15/39 .......................... United States 500,000 639,495 Weatherford International Ltd., senior note, 9.625%, 3/01/19 ............... United States 850,000 1,057,857 The Williams Cos. Inc., senior note, 8.75%, 1/15/20 ........................ United States 250,000 286,927 (d) Woodside Finance Ltd., senior note, 144A, 8.125%, 3/01/14 .................. Australia 100,000 113,379 -------------- 5,426,070 --------------
Annual Report | 61 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN BALANCED FUND COUNTRY AMOUNT(e) VALUE ---------------------- -------------- ------------ -------------- CORPORATE BONDS (CONTINUED) FINANCIALS 14.1% American Express Co., senior note, 7.00%, 3/19/18 .......................... United States $ 700,000 $ 774,394 (g) Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ............... United States 725,000 652,884 (d, g) BNP Paribas, 144A, 7.195%, Perpetual ....................................... France 300,000 277,500 Capital One Capital V, pfd., 10.25%, 8/15/39 ............................... United States 500,000 572,077 Capital One Financial Corp., senior note, 7.375%, 5/23/14 .................. United States 500,000 568,047 Citigroup Inc., senior note, 8.125%, 7/15/39 ............................... United States 500,000 587,363 (d) Commonwealth Bank of Australia, senior note, 144A, 3.75%, 10/15/14 ......... Australia 1,000,000 1,010,798 Compass Bank, 6.40%, 10/01/17 .............................................. United States 400,000 385,783 Duke Realty LP, senior note, 6.50%, 1/15/18 .......................................................... United States 585,000 556,675 7.375%, 2/15/15 ......................................................... United States 600,000 632,982 The Goldman Sachs Group Inc., senior note, 7.50%, 2/15/19 .................. United States 700,000 819,426 HCP Inc., senior note, 6.70%, 1/30/18 ...................................... United States 1,000,000 997,014 iStar Financial Inc., 8.625%, 6/01/13 ...................................... United States 900,000 567,000 (g) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ................ United States 1,440,000 1,452,583 Lazard Group, senior note, 6.85%, 6/15/17 .................................. United States 300,000 304,046 PNC Funding Corp., sub. note, 5.625%, 2/01/17 .............................. United States 700,000 691,204 (d) Pricoa Global Funding I, 144A, 5.45%, 6/11/14 .............................. United States 1,000,000 1,055,154 Royal Bank of Scotland Group PLC, senior note, 6.40%, 10/21/19 ............. United Kingdom 600,000 611,394 Simon Property Group LP, senior note, 10.35%, 4/01/19 ...................... United States 500,000 631,852 (f) The Travelers Cos. Inc., junior sub. bond, FRN, 6.25%, 3/15/67 ............. United States 500,000 451,982 (g) Wachovia Capital Trust III, junior sub. bond, 5.80%, Perpetual ............. United States 500,000 357,500 (g) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ........................... United States 300,000 280,500 (g) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ............................. United States 700,000 756,000 Willis North America Inc., senior note, 7.00%, 9/29/19 ..................... United States 500,000 508,007 -------------- 15,502,165 -------------- HEALTH CARE 2.4% (d) CareFusion Corp., senior note, 144A, 6.375%, 8/01/19 ....................... United States 750,000 809,752 Coventry Health Care Inc., senior note, 6.30%, 8/15/14 ..................... United States 400,000 393,575 HCA Inc., 6.375%, 1/15/15 ......................................................... United States 255,000 239,700 (d) senior secured note, 144A, 7.875%, 2/15/20 .............................. United States 1,000,000 1,032,500 (d) Talecris Biotherapeutics Holdings Corp., senior note, 144A, 7.75%, 11/15/16 ......................................................... United States 200,000 204,500 -------------- 2,680,027 -------------- INDUSTRIALS 0.3% Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 ........ United States 300,000 360,305 -------------- MATERIALS 1.4% (d) Anglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 ............. United Kingdom 500,000 584,381 ArcelorMittal, senior note, 9.00%, 2/15/15 ................................. Luxembourg 500,000 577,705 Weyerhaeuser Co., senior note, 7.375%, 10/01/19 ............................ United States 400,000 412,762 -------------- 1,574,848 --------------
62 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN BALANCED FUND COUNTRY AMOUNT(e) VALUE ---------------------- -------------- ------------ -------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES 1.3% (d) Cellco Partnership/Verizon Wireless, senior note, 144A, 8.50%, 11/15/18 .... United States $ 700,000 $ 873,214 Embarq Corp., senior note, 7.082%, 6/01/16 ................................. United States 250,000 273,390 Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ..................... United States 250,000 273,038 -------------- 1,419,642 -------------- UTILITIES 4.3% Ameren Corp., senior note, 8.875%, 5/15/14 ................................. United States 400,000 448,887 Arizona Public Service Co., senior note, 8.75%, 3/01/19 .................... United States 500,000 596,135 CMS Energy Corp., senior note, 8.75%, 6/15/19 .............................. United States 500,000 552,696 Dominion Resources Inc., senior note, 8.875%, 1/15/19 ...................... United States 500,000 631,951 Duke Energy Corp., senior note, 6.30%, 2/01/14 ............................. United States 300,000 331,952 Illinois Power Co., senior secured note, 9.75%, 11/15/18 ................... United States 1,000,000 1,252,683 Sempra Energy, senior note, 8.90%, 11/15/13 ................................ United States 750,000 889,525 -------------- 4,703,829 -------------- TOTAL CORPORATE BONDS (COST $35,385,720) ................................... 38,647,747 -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $103,730) 0.1% FINANCIALS 0.1% (f) Accredited Mortgage Loan Trust, 2005-3, A1, FRN, 0.484%, 9/25/35 ........... United States 103,666 81,426 -------------- MORTGAGE-BACKED SECURITIES 0.5% FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 0.5% FNMA 30 Year, 6.00%, 8/01/36 ............................................... United States 240,045 255,774 FNMA 30 Year, 6.50%, 4/01/36 ............................................... United States 246,170 264,829 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $481,735) ........................... 520,603 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $102,382,042) ........................................................ 104,902,679 -------------- SHORT TERM INVESTMENTS 2.4% U.S. GOVERNMENT AND AGENCY SECURITIES (COST $1,369,969) 1.2% (h) U.S. Treasury Bill, 11/27/09 ............................................... United States 1,370,000 1,369,996 -------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS (COST $103,752,011) ........................................................ 106,272,675 --------------
SHARES ------------ MONEY MARKET FUNDS (COST $1,319,490) 1.2% (i) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ................ United States 1,319,490 1,319,490 ------------- TOTAL INVESTMENTS (COST $105,071,501) 98.0% ................................ 107,592,165 OPTIONS WRITTEN (0.1)% ..................................................... (51,410) OTHER ASSETS, LESS LIABILITIES 2.1% ........................................ 2,295,140 ------------- NET ASSETS 100.0% .......................................................... $ 109,835,895 =============
Annual Report | 63 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN BALANCED FUND COUNTRY CONTRACTS VALUE ---------------------- -------------- ------------ ------------- (j) OPTIONS WRITTEN (0.0)%(k) CALL OPTIONS (0.0)%(k) INDUSTRIALS (0.0%)(k) United Parcel Service Inc., Nov. 60 Calls, 11/21/09 ........................ United States 60 $ (360) United Technologies Corp., Nov. 70 Calls, 11/21/09 ......................... United States 100 (500) ------------- (860) ------------- INFORMATION TECHNOLOGY (0.0)%(k) Lender Processing Services Inc., Nov. 45 Calls, 11/21/09 ................... United States 100 (1,250) Microsoft Corp., Nov. 30 Calls, 11/21/09 ................................... United States 100 (1,000) Texas Instruments Inc., Nov. 25 Calls, 11/21/09 ............................ United States 200 (6,000) ------------- (8,250) ------------- PUT OPTIONS (0.0)%(k) CONSUMER DISCRETIONARY (0.0)%(k) CBS Corp., Nov. 10 Puts, 11/21/09 .......................................... United States 100 (2,500) ------------- INFORMATION TECHNOLOGY (0.0)%(k) Analog Devices Inc., Nov. 25 Puts, 11/21/09 ................................ United States 200 (11,800) QUALCOMM Inc., Nov. 40 Puts, 11/21/09 ...................................... United States 200 (20,000) ------------- (31,800) ------------- MATERIALS (0.0)%(k) Celanese Corp., Nov. 25 Puts, 11/21/09 ..................................... United States 200 (8,000) ------------- TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $56,639) .......................... $ (51,410) =============
See Abbreviations on page 123. (a) Non-income producing. (b) A portion or all of the security is held in connection with written option contracts open at year end. (c) See Note 1(e) regarding equity-linked securities. (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, 2009, the aggregate value of these securities was $13,881,891, representing 12.64% of net assets. (e) The principal amount is stated in U.S. dollars unless otherwise indicated. (f) The coupon rate shown represents the rate at period end. (g) Perpetual security with no stated maturity date. (h) The security is traded on a discount basis with no stated coupon rate. (i) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (j) See Note 1(d) regarding written options. (k) Rounds to less than 0.1% of net assets. 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 2009 2008 2007 2006 2005 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................. $ 9.48 $ 17.14 $ 17.19 $ 16.46 $ 15.16 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................................... 0.35 0.42 0.38 0.43 0.42 Net realized and unrealized gains (losses) .................. 3.04 (6.75) 1.36 1.52 1.49 -------- -------- -------- -------- -------- Total from investment operations ............................... 3.39 (6.33) 1.74 1.95 1.91 -------- -------- -------- -------- -------- Less distributions from: Net investment income ....................................... (0.59) (0.75) (0.58) (0.60) (0.61) Net realized gains .......................................... -- (0.58) (1.21) (0.62) -- -------- -------- -------- -------- -------- Total distributions ............................................ (0.59) (1.33) (1.79) (1.22) (0.61) -------- -------- -------- -------- -------- Redemption fees(c) ............................................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ................................... $ 12.28 $ 9.48 $ 17.14 $ 17.19 $ 16.46 ======== ======== ======== ======== ======== Total return(e) ................................................ 37.35% (39.36)% 10.66% 12.45% 12.76% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................................... 0.96% 0.89% 0.87% 0.86% 0.88% Net investment income .......................................... 3.35% 2.92% 2.25% 2.59% 2.63% SUPPLEMENTAL DATA Net assets, end of year (000's) ................................ $542,741 $396,201 $844,603 $718,018 $551,120 Portfolio turnover rate ........................................ 47.18% 37.58% 17.59% 31.37% 35.30%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 2009 2008 2007 2006 2005 ------- -------- -------- -------- -------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .......................... $ 9.39 $ 16.98 $ 17.04 $ 16.32 $ 15.05 -------- -------- -------- -------- --------- Income from investment operations(a): Net investment income(b) ................................. 0.27 0.31 0.25 0.30 0.30 Net realized and unrealized gains (losses) ............... 3.01 (6.68) 1.36 1.52 1.46 -------- -------- -------- -------- --------- Total from investment operations ............................ 3.28 (6.37) 1.61 1.82 1.76 -------- -------- -------- -------- --------- Less distributions from: Net investment income .................................... (0.51) (0.64) (0.46) (0.48) (0.49) Net realized gains ....................................... -- (0.58) (1.21) (0.62) -- -------- -------- -------- -------- --------- Total distributions ......................................... (0.51) (1.22) (1.67) (1.10) (0.49) -------- -------- -------- -------- --------- Redemption fees(c) .......................................... -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- --------- Net asset value, end of year ................................ $ 12.16 $ 9.39 $ 16.98 $ 17.04 $ 16.32 ======== ======== ======== ======== ========= Total return(e) ............................................. 36.36% (39.80)% 9.94% 11.53% 11.92% RATIOS TO AVERAGE NET ASSETS Expenses(f) ................................................. 1.71% 1.63% 1.61% 1.61% 1.63% Net investment income ....................................... 2.60% 2.18% 1.51% 1.83% 1.88% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................. $192,297 $138,148 $306,353 $271,216 $ 219,970 Portfolio turnover rate ..................................... 47.18% 37.58% 17.59% 31.37% 35.30%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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
YEAR ENDED OCTOBER 31, ---------------------- ADVISOR CLASS 2009 2008(a) ------------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year................................ $ 9.48 $ 15.65 ------- ------- Income from investment operations(b): Net investment income(c)....................................... 0.39 0.24 Net realized and unrealized gains (losses)..................... 3.03 (5.88) ------- ------- Total from investment operations.................................. 3.42 (5.64) ------- ------- Less distributions from net investment income..................... (0.61) (0.53) ------- ------- Redemption fees(d) -- --(e) ------- ------- Net asset value, end of year...................................... $ 12.29 $ 9.48 ======= ======= Total return(f)................................................... 37.81% (36.93)% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h)....................................................... 0.71% 0.64% Net investment income............................................. 3.60% 3.17% SUPPLEMENTAL DATA Net assets, end of year (000's)................................... $32,003 $ 318 Portfolio turnover rate........................................... 47.18% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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, 2009
FRANKLIN CONVERTIBLE SECURITIES FUND SHARES VALUE ------------------------------------ ----------- ------------ CONVERTIBLE PREFERRED STOCKS 26.0% CONSUMER DISCRETIONARY 3.3% (a) Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. .............................. 450,000 $ 13,005,000 (a) General Motors Corp., 1.50%, cvt. pfd., D ...................................... 776,200 2,493,543 (a) General Motors Corp., 6.25%, cvt. pfd., C ...................................... 235,000 705,000 Retail Ventures Inc. into DSW Inc., 6.625%, cvt. pfd. .......................... 250,000 9,250,000 ------------ 25,453,543 ------------ CONSUMER STAPLES 2.2% Archer Daniels Midland Co., 6.25%, cvt. pfd. ................................... 400,000 17,100,000 ------------ ENERGY 3.5% Chesapeake Energy Corp., 5.00%, cvt. pfd. ...................................... 90,000 7,515,000 (b) Chesapeake Energy Corp., 5.00%, cvt. pfd., 144A ................................ 110,000 9,185,000 El Paso Corp., 4.99%, cvt. pfd. ................................................ 12,000 10,488,000 ------------ 27,188,000 ------------ FINANCIALS 4.8% Affiliated Managers Group Inc., 5.10%, cvt. pfd. ............................... 350,000 12,731,250 (a) Fannie Mae, 5.375%, cvt. pfd. .................................................. 140 490,000 Simon Property Group Inc., 6.00%, cvt. pfd. .................................... 200,000 11,800,000 Wells Fargo & Co., 7.50%, cvt. pfd., A ......................................... 12,900 11,545,500 ------------ 36,566,750 ------------ HEALTH CARE 4.1% Schering-Plough Corp., 6.00%, cvt. pfd. ........................................ 73,000 17,629,500 Tenet Healthcare Corp., 7.00%, cvt. pfd. ....................................... 15,000 13,933,717 ------------ 31,563,217 ------------ MATERIALS 4.5% Celanese Corp., 4.25%, cvt. pfd. ............................................... 514,700 18,207,513 Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. .......................... 150,000 16,050,000 ------------ 34,257,513 ------------ UTILITIES 3.6% Great Plains Energy Inc., 12.00%, cvt. pfd. .................................... 263,200 16,365,776 NRG Energy Inc., 4.00%, cvt. pfd. .............................................. 9,500 10,927,375 ------------ 27,293,151 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (COST $239,257,511) ......................... 199,422,174 ------------
PRINCIPAL AMOUNT(c) ----------- CONVERTIBLE BONDS 72.4% CONSUMER DISCRETIONARY 10.4% Best Buy Co. Inc., cvt., sub. deb., 2.25%, 1/15/22 ............................. $16,000,000 17,019,999 BorgWarner Inc., cvt., senior note, 3.50%, 4/15/12 ............................. 6,750,000 8,167,500 Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 .............................. 18,000,000 18,810,000 (b) Eastman Kodak Co., cvt., senior note, 144A, 7.00%, 4/01/17 ..................... 10,000,000 8,404,250 Liberty Media Corp., cvt., senior deb., B, 3.25%, 3/15/31 ...................... 10,000,000 5,647,580 Lions Gate Entertainment Corp., cvt., senior note, 3.625%, 3/15/25 (Canada) .... 10,000,000 9,025,000 (b) Live Nation Inc., cvt., senior note, 144A, 2.875%, 7/15/27 ..................... 17,865,000 12,840,469 ------------ 79,914,798 ------------
68 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT(c) VALUE ------------------------------------ ----------- ------------ CONVERTIBLE BONDS (CONTINUED) ENERGY 1.1% Helix Energy Solutions Group, cvt., senior note, 3.25%, 12/15/25 ............... $10,000,000 $ 8,712,500 ------------ FINANCIALS 3.4% CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 ..................... 11,500,000 9,737,625 (d) iStar Financial Inc., cvt., senior note, FRN, 0.79%, 10/01/12 .................. 23,000,000 12,075,000 Leucadia National Corp., cvt., senior sub. note, 3.75%, 4/15/14 ................ 3,600,000 4,176,000 ------------ 25,988,625 ------------ HEALTH CARE 20.2% ALZA Corp., cvt., sub. deb., zero cpn., 7/28/20 ................................ 15,000,000 12,956,250 American Medical Systems Holdings Ltd., cvt., senior sub. note, 3.25%, 7/01/36 .............................................................. 2,048,000 2,060,800 4.00%, 9/15/41 .............................................................. 12,952,000 13,664,360 (b) Amgen Inc., cvt., senior note, 144A, 0.375%, 2/01/13 ........................... 15,000,000 14,831,250 Biomarin Pharmaceutical Inc., cvt., senior note, 1.875%, 4/23/17 ............... 10,300,000 9,797,875 Cephalon Inc., cvt., senior sub. note, 2.50%, 5/01/14 .......................... 15,000,000 15,075,000 Gilead Sciences Inc., cvt., senior note, 0.625%, 5/01/13 ....................... 10,000,000 12,262,500 Lifepoint Hospitals Inc., cvt., 3.25%, 8/15/25 ................................. 15,000,000 13,500,000 (b) Medtronic Inc., cvt., senior note, 144A, 1.50%, 4/15/11 ........................ 17,000,000 16,830,000 (b) Mylan Inc., cvt., 144A, 3.75%, 9/15/15 ......................................... 14,500,000 20,426,875 Onyx Pharmaceuticals Inc., cvt., senior note, 4.00%, 8/15/16 ................... 11,500,000 11,715,625 PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ............................ 10,550,000 11,829,187 ------------ 154,949,722 ------------ INDUSTRIALS 8.7% AMR Corp., cvt., senior note, 6.25%, 10/15/14 .................................. 10,000,000 8,302,500 (b) GATX Corp., cvt., senior note, 144A, 5.00%, 8/15/23 ............................ 3,000,000 3,532,500 Ingersoll Rand Co., cvt., senior note, 4.50%, 4/15/12 .......................... 9,000,000 16,751,250 (b) L-3 Communications Corp., cvt., 144A, 3.00%, 8/01/35 ........................... 15,000,000 15,243,750 WESCO International Inc., cvt., senior deb., 6.00%, 9/15/29 .................... 19,200,000 23,088,000 ------------ 66,918,000 ------------ INFORMATION TECHNOLOGY 21.5% Alliance Data Systems Corp., cvt., senior note, 1.75%, 8/01/13 .............................................................. 17,000,000 16,150,000 (b) 144A, 4.75%, 5/15/14 ........................................................ 3,000,000 4,132,500 (b, e) BearingPoint Inc., cvt., sub. note, 144A, 2.50%, 12/15/24 ...................... 14,000,000 18,900 EMC Corp., cvt., senior note, 1.75%, 12/01/13 .................................. 10,000,000 12,050,000 Intel Corp., cvt., (b) junior sub. bond, 144A, 2.95%, 12/15/35 ..................................... 19,000,000 17,480,000 sub. deb., 2.95%, 12/15/35 .................................................. 2,000,000 1,840,000 Liberty Media Corp. into Motorola Inc., cvt., senior deb., 3.50%, 1/15/31 ...... 8,000,000 4,192,776 (b) Microchip Technology Inc., cvt., junior sub. note, 144A, 2.125%, 12/15/37 ...... 20,000,000 17,095,200 Micron Technology Inc., cvt., senior sub. note, 1.875%, 6/01/14 ................ 20,000,000 15,575,000 NetApp Inc., cvt., senior note, 1.75%, 6/01/13 ................................. 15,000,000 16,556,250 PMC-Sierra Inc., cvt., (b) 144A, 2.25%, 10/15/25 ....................................................... 3,500,000 4,143,125 sub. note, 2.25%, 10/15/25 .................................................. 9,500,000 11,245,625 (b) Sybase Inc., cvt., senior note, 144A, 3.50%, 8/15/29 ........................... 13,000,000 14,619,020 (b) VeriFone Holdings Inc., cvt., senior note, 144A, 1.375%, 6/15/12 ............... 21,000,000 17,902,500
Annual Report | 69 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN CONVERTIBLE SECURITIES FUND AMOUNT(c) VALUE ------------------------------------ ----------- ------------ CONVERTIBLE BONDS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) (b) VeriSign Inc., cvt., junior sub. bond, 144A, 3.25%, 8/15/37 .................... $14,000,000 $ 11,952,500 ------------ 164,953,396 ------------ MATERIALS 3.0% ArcelorMittal, cvt., senior note, 5.00%, 5/15/14 (Luxembourg) .................. 10,000,000 13,560,960 Newmont Mining Corp., cvt., senior note, 3.00%, 2/15/12 ........................ 7,500,000 9,065,625 ------------ 22,626,585 ------------ TELECOMMUNICATION SERVICES 1.9% (b) NII Holdings Inc., cvt., 144A, 2.75%, 8/15/25 .................................. 15,000,000 14,906,250 ------------ UTILITIES 2.2% CMS Energy Corp., cvt., senior note, 5.50%, 6/15/29 ............................ 15,000,000 16,912,500 ------------ TOTAL CONVERTIBLE BONDS (COST $583,737,748) .................................... 555,882,376 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $822,995,259) ............ 755,304,550 ------------
SHARES ----------- SHORT TERM INVESTMENTS (COST $15,879,258) 2.1% MONEY MARKET FUNDS 2.1% (f) Institutional Fiduciary Trust Money Market Portfolio, 0.00% .................... 15,879,258 15,879,258 ------------ TOTAL INVESTMENTS (COST $838,874,517) 100.5% ................................... 771,183,808 OTHER ASSETS, LESS LIABILITIES (0.5)% .......................................... (4,143,365) ------------ NET ASSETS 100.0% .............................................................. $767,040,443 ============
See Abbreviations on page 123. (a) Non-income producing. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2009, the aggregate value of these securities was $203,544,089, representing 26.54% of net assets. (c) The principal amount is stated in U.S. dollars unless otherwise indicated. (d) The coupon rate shown represents the rate at period end. (e) See Note 8 regarding defaulted securities. (f) See Note 7 regarding investments in the 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 2009 2008 2007 2006 2005 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 12.88 $ 22.41 $ 22.67 $ 20.47 $ 19.58 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................... 0.39 0.48 0.46 0.48 0.50 Net realized and unrealized gains (losses) .. 1.29 (8.57) 1.16 2.70 0.85 -------- -------- -------- -------- -------- Total from investment operations ............... 1.68 (8.09) 1.62 3.18 1.35 -------- -------- -------- -------- -------- Less distributions from: Net investment income ....................... (0.50) (0.48) (0.45) (0.51) (0.46) Net realized gains .......................... -- (0.96) (1.43) (0.47) -- -------- -------- -------- -------- -------- Total distributions ............................ (0.50) (1.44) (1.88) (0.98) (0.46) -------- -------- -------- -------- -------- Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 14.06 $ 12.88 $ 22.41 $ 22.67 $ 20.47 ======== ======== ======== ======== ======== Total return(e) ................................ 13.77% (38.01)% 7.40% 16.04% 6.92% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.04% 0.95% 0.92% 0.91% 0.93% Net investment income .......................... 3.19% 2.66% 2.03% 2.26% 2.43% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $540,127 $465,027 $855,227 $735,432 $651,766 Portfolio turnover rate ........................ 43.75% 31.32% 27.66% 29.34% 38.05%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 | 71 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31, -------------------------------------------------- CLASS B 2009 2008 2007 2006 2005 ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 12.82 $ 22.30 $ 22.57 $ 20.38 $ 19.49 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .................... 0.30 0.34 0.29 0.32 0.35 Net realized and unrealized gains (losses) .. 1.27 (8.52) 1.15 2.70 0.85 ------- ------- ------- ------- ------- Total from investment operations ............... 1.57 (8.18) 1.44 3.02 1.20 ------- ------- ------- ------- ------- Less distributions from: Net investment income ....................... (0.41) (0.34) (0.28) (0.36) (0.31) Net realized gains .......................... -- (0.96) (1.43) (0.47) -- ------- ------- ------- ------- ------- Total distributions ............................ (0.41) (1.30) (1.71) (0.83) (0.31) ------- ------- ------- ------- ------- Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year ................... $ 13.98 $ 12.82 $ 22.30 $ 22.57 $ 20.38 ======= ======= ======= ======= ======= Total return(e) ................................ 12.87% (38.47)% 6.59% 15.20% 6.17% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.79% 1.70% 1.67% 1.65% 1.68% Net investment income .......................... 2.44% 1.91% 1.28% 1.52% 1.68% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $16,737 $20,559 $46,627 $51,979 $54,880 Portfolio turnover rate ........................ 43.75% 31.32% 27.66% 29.34% 38.05%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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. 72 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31, ----------------------------------------------------- CLASS C 2009 2008 2007 2006 2005 ------- ------- ------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 12.83 $ 22.31 $ 22.58 $ 20.39 $ 19.50 ------- ------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .................... 0.30 0.34 0.29 0.32 0.34 Net realized and unrealized gains (losses) .. 1.28 (8.52) 1.15 2.70 0.86 ------- ------- -------- -------- -------- Total from investment operations ............... 1.58 (8.18) 1.44 3.02 1.20 ------- ------- -------- -------- -------- Less distributions from: Net investment income ....................... (0.41) (0.34) (0.28) (0.36) (0.31) Net realized gains .......................... -- (0.96) (1.43) (0.47) -- ------- ------- -------- -------- -------- Total distributions ............................ (0.41) (1.30) (1.71) (0.83) (0.31) ------- ------- -------- -------- -------- Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d) ------- ------- -------- -------- -------- Net asset value, end of year ................... $ 14.00 $ 12.83 $ 22.31 $ 22.58 $ 20.39 ======= ======= ======== ======== ======== Total return(e) ................................ 12.94% (38.46)% 6.60% 15.19% 6.16% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.79% 1.70% 1.66% 1.65% 1.68% Net investment income .......................... 2.44% 1.91% 1.29% 1.52% 1.68% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $86,152 $78,394 $166,481 $172,366 $174,674 Portfolio turnover rate ........................ 43.75% 31.32% 27.66% 29.34% 38.05%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 | 73 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31, ------------------------------------------------- CLASS R 2009 2008 2007 2006 2005 ------- ------ ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $12.89 $ 22.43 $ 22.68 $ 20.48 $ 19.59 ------ ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .................... 0.36 0.44 0.41 0.43 0.45 Net realized and unrealized gains (losses) .. 1.29 (8.59) 1.16 2.70 0.85 ------ ------- ------- ------- ------- Total from investment operations ............... 1.65 (8.15) 1.57 3.13 1.30 ------ ------- ------- ------- ------- Less distributions from: Net investment income ....................... (0.47) (0.43) (0.39) (0.46) (0.41) Net realized gains .......................... -- (0.96) (1.43) (0.47) -- ------ ------- ------- ------- ------- Total distributions ............................ (0.47) (1.39) (1.82) (0.93) (0.41) ------ ------- ------- ------- ------- Redemption fees(c) ............................. -- --(d) --(d) --(d) --(d) ------ ------- ------- ------- ------- Net asset value, end of year ................... $14.07 $ 12.89 $ 22.43 $ 22.68 $ 20.48 ====== ======= ======= ======= ======= Total return(e) ................................ 13.49% (38.18)% 7.11% 15.69% 6.71% RATIOS TO AVERAGE NET ASSETS Expenses(f) .................................... 1.29% 1.20% 1.17% 1.16% 1.18% Net investment income .......................... 2.94% 2.41% 1.78% 2.01% 2.18% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $4,218 $ 4,690 $13,532 $18,908 $20,612 Portfolio turnover rate ........................ 43.75% 31.32% 27.66% 29.34% 38.05%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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. 74 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN EQUITY INCOME FUND
YEAR ENDED OCTOBER 31, ---------------------- ADVISOR CLASS 2009 2008(a) ------------- --------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $12.88 $ 19.59 ------ ------- Income from investment operations(b): Net investment income(c) .................... 0.42 0.23 Net realized and unrealized gains (losses) .. 1.30 (6.75) ------ ------- Total from investment operations ............... 1.72 (6.52) ------ ------- Less distributions from net investment income .. (0.53) (0.19) ------ ------- Redemption fees(d) ............................. -- --(e) ------ ------- Net asset value, end of year ................... $14.07 $ 12.88 ====== ======= Total return(f) ................................ 14.12% (33.43)% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) .................................... 0.79% 0.70% Net investment income .......................... 3.44% 2.91% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $2,142 $ 679 Portfolio turnover rate ........................ 43.75% 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) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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, 2009
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE --------------------------- -------------- ----------- ------------ COMMON STOCKS 72.1% CONSUMER DISCRETIONARY 3.4% Best Buy Co. Inc. ................................................ United States 298,700 $ 11,404,366 The Home Depot Inc. .............................................. United States 414,000 10,387,260 ------------ 21,791,626 ------------ CONSUMER STAPLES 7.3% The Coca-Cola Co. ................................................ United States 329,800 17,581,638 Diageo PLC, ADR .................................................. United Kingdom 227,200 14,772,544 Unilever NV, N.Y. shs. ........................................... Netherlands 488,700 15,095,943 ------------ 47,450,125 ------------ ENERGY 10.7% Chevron Corp. .................................................... United States 240,500 18,407,870 ConocoPhillips ................................................... United States 279,300 14,015,274 Exxon Mobil Corp. ................................................ United States 144,734 10,373,086 Halliburton Co. .................................................. United States 450,000 13,144,500 Spectra Energy Corp. ............................................. United States 720,400 13,774,048 ------------ 69,714,778 ------------ FINANCIALS 6.5% Aflac Inc. ....................................................... United States 306,200 12,704,238 JPMorgan Chase & Co. ............................................. United States 261,350 10,916,589 Marsh & McLennan Cos. Inc. ....................................... United States 365,900 8,584,014 Wells Fargo & Co. ................................................ United States 374,400 10,303,488 ------------ 42,508,329 ------------ HEALTH CARE 8.3% Abbott Laboratories .............................................. United States 275,000 13,906,750 Johnson & Johnson ................................................ United States 307,000 18,128,350 Merck & Co. Inc. ................................................. United States 329,000 10,175,970 Pfizer Inc. ...................................................... United States 684,500 11,657,035 ------------ 53,868,105 ------------ INDUSTRIALS 14.0% 3M Co. ........................................................... United States 213,100 15,677,767 Caterpillar Inc. ................................................. United States 264,200 14,546,852 General Dynamics Corp. ........................................... United States 215,000 13,480,500 General Electric Co. ............................................. United States 596,600 8,507,516 J.B. Hunt Transport Services Inc. ................................ United States 282,800 8,500,968 Pitney Bowes Inc. ................................................ United States 334,500 8,195,250 Republic Services Inc. ........................................... United States 425,000 11,011,750 United Parcel Service Inc., B .................................... United States 201,600 10,821,888 ------------ 90,742,491 ------------ INFORMATION TECHNOLOGY 12.3% Intel Corp. ...................................................... United States 870,500 16,635,255 International Business Machines Corp. ............................ United States 139,900 16,873,339 Microsoft Corp. .................................................. United States 750,000 20,797,500 Nokia Corp., ADR ................................................. Finland 530,800 6,693,388 Paychex Inc. ..................................................... United States 443,900 12,611,199 Xerox Corp. ...................................................... United States 870,000 6,542,400 ------------ 80,153,081 ------------
76 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN EQUITY INCOME FUND COUNTRY SHARES VALUE --------------------------- -------------- ----------- ------------ COMMON STOCKS (CONTINUED) TELECOMMUNICATION SERVICES 4.4% AT&T Inc. ........................................................ United States 612,910 $ 15,733,400 Verizon Communications Inc. ...................................... United States 432,300 12,791,757 ------------ 28,525,157 ------------ UTILITIES 5.2% PG&E Corp. ....................................................... United States 261,000 10,672,290 Sempra Energy .................................................... United States 200,000 10,290,000 The Southern Co. ................................................. United States 404,000 12,600,760 ------------ 33,563,050 ------------ TOTAL COMMON STOCKS (COST $467,287,361) .......................... 468,316,742 ------------ CONVERTIBLE PREFERRED STOCKS 12.8% CONSUMER DISCRETIONARY 1.0% Autoliv Inc., 8.00%, cvt. pfd. ................................... Sweden 134,000 6,346,508 ------------ FINANCIALS 4.0% Bank of America Corp., 7.25%, cvt. pfd., L ....................... United States 18,000 15,072,120 Wells Fargo & Co., 7.50%, cvt. pfd., A ........................... United States 12,500 11,187,500 ------------ 26,259,620 ------------ HEALTH CARE 3.8% Schering-Plough Corp., 6.00%, cvt. pfd. .......................... United States 76,000 18,354,000 Tenet Healthcare Corp., 7.00%, cvt. pfd. ......................... United States 6,600 6,130,836 ------------ 24,484,836 ------------ MATERIALS 2.1% Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. ............ United States 128,000 13,696,000 ------------ UTILITIES 1.9% Great Plains Energy Inc., 12.00%, cvt. pfd. ...................... United States 200,000 12,436,000 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (COST $72,117,454) ............ 83,222,964 ------------ (a) EQUITY-LINKED SECURITIES 2.6% CONSUMER DISCRETIONARY 1.3% (b) Morgan Stanley into Comcast Corp., 10.00%, 144A .................. United States 600,000 8,741,280 ------------ ENERGY 1.3% Credit Suisse into Weatherford International Ltd., 11.00% ........ United States 450,000 8,403,840 ------------ TOTAL EQUITY-LINKED SECURITIES (COST $18,008,250) ................ 17,145,120 ------------ PREFERRED STOCKS (COST $15,634,990) 0.1% FINANCIALS 0.1% (c) Fannie Mae, 8.25%, pfd. .......................................... United States 625,000 718,750 ------------
PRINCIPAL AMOUNT(d) ----------- CONVERTIBLE BONDS 6.9% CONSUMER DISCRETIONARY 1.0% Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 ................ United States $ 6,344,000 6,629,480 ------------ HEALTH CARE 2.2% (b) Mylan Inc., cvt., 144A, 3.75%, 9/15/15 ........................... United States 10,000,000 14,087,500 ------------
Annual Report | 77 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN EQUITY INCOME FUND COUNTRY AMOUNT(d) VALUE --------------------------- -------------- ----------- ------------ CONVERTIBLE BONDS (CONTINUED) INFORMATION TECHNOLOGY 2.6% Microchip Technology Inc., cvt., 2.125%, 12/15/37................. United States $19,500,000 $ 16,672,500 ------------ MATERIALS 1.1% ArcelorMittal, cvt., senior note, 5.00%, 5/15/14.................. Luxembourg 5,250,000 7,119,504 ------------ TOTAL CONVERTIBLE BONDS (COST $35,797,315)........................ 44,508,984 ------------ CORPORATE BONDS 3.3% FINANCIALS 3.3% American Express Credit Corp., senior note, C, 7.30%, 8/20/13..... United States 7,500,000 8,429,010 (e) JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual....... United States 13,000,000 13,113,594 ------------ TOTAL CORPORATE BONDS (COST $19,263,558).......................... 21,542,604 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $628,108,928)............................................ 635,455,164 ------------
SHARES ----------- SHORT TERM INVESTMENTS (COST $4,248,348) 0.7% MONEY MARKET FUNDS 0.7% (f) Institutional Fiduciary Trust Money Market Portfolio, 0.00%....... United States 4,248,348 4,248,348 ------------ TOTAL INVESTMENTS (COST $632,357,276) 98.5%....................... 639,703,512 OTHER ASSETS, LESS LIABILITIES 1.5%............................... 9,672,405 ------------ NET ASSETS 100.0%................................................. $649,375,917 ============
See Abbreviations on page 123. (a) See Note 1(e) regarding equity-linked securities. (b) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2009, the aggregate value of these securities was $22,828,780, representing 3.52% of net assets. (c) Non-income producing. (d) The principal amount is stated in U.S. dollars unless otherwise indicated. (e) Perpetual security with no stated maturity date. (f) See Note 7 regarding investments in the 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. 78 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31, ----------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005 ------- -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 10.05 $ 10.00 $ 9.90 $ 9.91 $ 10.26 -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) .......................... 0.28 0.37 0.38 0.34 0.30 Net realized and unrealized gains (losses) ........ 0.50 0.09 0.11 0.01 (0.32) -------- -------- -------- -------- -------- Total from investment operations ..................... 0.78 0.46 0.49 0.35 (0.02) -------- -------- -------- -------- -------- Less distributions from net investment income ........ (0.35) (0.41) (0.39) (0.36) (0.33) -------- -------- -------- -------- -------- Redemption fees(c) ................................... -- --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- Net asset value, end of year ......................... $ 10.48 $ 10.05 $ 10.00 $ 9.90 $ 9.91 ======== ======== ======== ======== ======== Total return(e) ...................................... 7.79% 4.67% 5.05% 3.63% (0.16)% RATIOS TO AVERAGE NET ASSETS Expenses ............................................. 0.82%(f) 0.86%(f) 0.88%(f) 0.83% 0.81%(f) Net investment income ................................ 2.72% 3.64% 3.79% 3.43% 2.96% SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $357,691 $298,468 $189,122 $211,245 $268,197 Portfolio turnover rate .............................. 54.81% 61.57% 25.29% 45.79% 62.33%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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 2009 2008 2007 2006 2005 ------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................... $ 10.04 $ 9.99 $ 9.89 $ 9.90 $ 10.24 ------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) .......................... 0.29 0.38 0.39 0.35 0.31 Net realized and unrealized gains (losses) ........ 0.50 0.09 0.11 0.01 (0.31) ------- ------- ------- ------- ------- Total from investment operations ..................... 0.79 0.47 0.50 0.36 -- ------- ------- ------- ------- ------- Less distributions from net investment income ........ (0.36) (0.42) (0.40) (0.37) (0.34) ------- ------- ------- ------- ------- Redemption fees(c) ................................... -- --(d) --(d) --(d) --(d) ------- ------- ------- ------- ------- Net asset value, end of year ......................... $ 10.47 $ 10.04 $ 9.99 $ 9.89 $ 9.90 ======= ======= ======= ======= ======= Total return ......................................... 7.90% 4.78% 5.16% 3.74% 0.04% RATIOS TO AVERAGE NET ASSETS Expenses ............................................. 0.72%(e) 0.76%(e) 0.78%(e) 0.73% 0.71%(e) Net investment income ................................ 2.82% 3.74% 3.89% 3.53% 3.06% SUPPLEMENTAL DATA Net assets, end of year (000's) ...................... $55,156 $27,734 $22,143 $22,293 $26,725 Portfolio turnover rate .............................. 54.81% 61.57% 25.29% 45.79% 62.33%
(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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (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, 2009
PRINCIPAL FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE --------------------------------------------------------- ----------- ------------ MORTGAGE-BACKED SECURITIES 27.0% (a) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.6% FHLMC, 2.785%, 8/01/34 ......................................................... $ 827,685 $ 840,830 FHLMC, 4.176%, 12/01/34 ........................................................ 646,516 656,727 FHLMC, 4.367%, 12/01/33 ........................................................ 875,797 882,279 FHLMC, 4.443%, 9/01/33 ......................................................... 268,050 274,718 ------------ 2,654,554 ------------ FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 8.4% FHLMC Gold 15 Year, 5.00%, 6/01/23 ............................................. 4,790,886 5,065,370 FHLMC Gold 15 Year, 5.00%, 10/01/17 - 7/01/23 .................................. 4,987,117 5,275,883 FHLMC Gold 15 Year, 6.00%, 10/01/21 ............................................ 2,742,899 2,943,015 FHLMC Gold 15 Year, 6.00%, 10/01/23 ............................................ 14,002,009 15,011,841 FHLMC Gold 15 Year, 7.00%, 12/01/10 - 8/01/13 .................................. 81,928 86,022 FHLMC Gold 30 Year, 4.00%, 2/01/29 ............................................. 4,821,291 4,829,048 FHLMC Gold 30 Year, 8.50%, 12/01/22 - 7/01/31 .................................. 1,198,447 1,347,987 FHLMC Gold 30 Year, 9.50%, 3/01/21 ............................................. 23,919 24,970 ------------ 34,584,136 ------------ (a) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 9.7% FNMA, 2.625%, 8/01/34 .......................................................... 1,053,600 1,064,254 FNMA, 2.648%, 4/01/34 .......................................................... 265,417 268,730 FNMA, 2.693%, 8/01/34 .......................................................... 3,141,213 3,184,536 FNMA, 2.723%, 9/01/34 .......................................................... 581,590 580,306 FNMA, 2.75%, 10/01/33 .......................................................... 291,719 294,452 FNMA, 2.855%, 11/01/34 ......................................................... 95,054 96,829 FNMA, 2.895%, 4/01/35 .......................................................... 127,453 126,409 FNMA, 2.925%, 6/01/34 .......................................................... 951,371 945,495 FNMA, 2.957%, 3/01/33 .......................................................... 1,319,704 1,323,094 FNMA, 2.973%, 1/01/35 .......................................................... 9,756,723 9,858,232 FNMA, 3.213%, 7/01/34 .......................................................... 1,719,387 1,765,863 FNMA, 3.29%, 3/01/34 ........................................................... 142,880 144,236 FNMA, 3.309%, 6/01/33 .......................................................... 257,922 263,652 FNMA, 3.411%, 4/01/33 .......................................................... 401,199 417,564 FNMA, 3.757%, 5/01/34 .......................................................... 906,077 938,854 FNMA, 3.926%, 3/01/35 .......................................................... 2,630,803 2,705,222 FNMA, 3.975%, 4/01/33 .......................................................... 1,160,196 1,190,652 FNMA, 3.978%, 12/01/34 ......................................................... 608,607 630,459 FNMA, 4.07%, 11/01/32 .......................................................... 2,538,522 2,601,917 FNMA, 4.104%, 8/01/33 .......................................................... 586,779 589,440 FNMA, 4.128%, 2/01/35 .......................................................... 2,652,529 2,725,311 FNMA, 4.16%, 1/01/33 ........................................................... 10,621 10,823 FNMA, 4.301%, 9/01/33 .......................................................... 2,931,158 3,037,118 FNMA, 4.509%, 2/01/34 .......................................................... 1,454,147 1,499,077 FNMA, 4.58%, 1/01/33 ........................................................... 168,307 173,950 FNMA, 4.837%, 1/01/35 .......................................................... 258,846 267,381 FNMA, 5.80%, 12/01/33 .......................................................... 532,796 549,445 FNMA, 5.809%, 11/01/11 ......................................................... 2,409,804 2,570,487 ------------ 39,823,788 ------------
Annual Report | 81 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE --------------------------------------------------------- ----------- ------------ MORTGAGE-BACKED SECURITIES (CONTINUED) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 7.1% FNMA 15 Year, 4.50%, 12/01/18 - 2/01/19 ........................................ $ 447,439 $ 474,041 FNMA 15 Year, 5.00%, 2/01/18 - 5/01/18 ......................................... 2,337,618 2,495,861 FNMA 15 Year, 5.00%, 6/01/23 ................................................... 7,114,901 7,507,967 FNMA 15 Year, 5.50%, 3/01/16 - 2/01/21 ......................................... 5,583,113 5,975,275 FNMA 15 Year, 6.00%, 4/01/16 - 5/01/17 ......................................... 1,993,572 2,153,924 FNMA 15 Year, 6.50%, 5/01/11 - 10/01/16 ........................................ 259,171 276,491 FNMA 15 Year, 7.00%, 7/01/12 - 7/01/14 ......................................... 205,416 216,806 FNMA 15 Year, 7.50%, 12/01/14 - 1/01/15 ........................................ 104,585 113,866 FNMA 30 Year, 5.00%, 3/01/38 ................................................... 7,947,756 8,252,630 FNMA 30 Year, 6.50%, 8/01/38 ................................................... 1,396,699 1,501,614 FNMA 30 Year, 9.00%, 1/01/17 - 12/01/20 ........................................ 118,021 128,740 FNMA 30 Year, 9.50%, 7/01/16 - 6/01/22 ......................................... 239,967 265,159 ------------ 29,362,374 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 1.2% GNMA I SF 15 Year, 6.50%, 10/15/13 - 7/15/14 ................................... 377,098 405,465 GNMA I SF 15 Year, 7.50%, 10/15/14 - 12/15/14 .................................. 130,024 140,286 GNMA I SF 30 Year, 5.00%, 3/15/39 .............................................. 2,351,067 2,448,466 GNMA I SF 30 Year, 5.50%, 4/15/33 - 5/15/33 .................................... 726,094 771,691 GNMA I SF 30 Year, 6.00%, 3/15/33 .............................................. 174,206 186,841 GNMA I SF 30 Year, 7.50%, 11/15/16 ............................................. 38,652 41,816 GNMA I SF 30 Year, 8.00%, 11/15/16 ............................................. 57,799 63,450 GNMA I SF 30 Year, 8.50%, 1/15/17 .............................................. 23,947 25,993 GNMA I SF 30 Year, 9.00%, 6/15/16 - 9/15/17 .................................... 332,889 369,912 GNMA II SF 30 Year, 7.50%, 10/20/29 - 10/20/31 ................................. 437,974 496,025 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/16 .................................. 60,033 66,049 GNMA II SF 30 Year, 9.50%, 6/20/16 ............................................. 60,248 66,344 ------------ 5,082,338 ------------ TOTAL MORTGAGE-BACKED SECURITIES (COST $107,736,880) ........................... 111,507,190 ------------ U.S. GOVERNMENT AND AGENCY SECURITIES 69.3% FHLB, 5.75%, 5/15/12 ........................................................... 2,000,000 2,221,302 FHLMC, 2.125%, 3/23/12 ............................................................. 8,000,000 8,122,368 5.125%, 7/15/12 ............................................................. 14,000,000 15,382,864 5.50%, 8/20/12 .............................................................. 8,000,000 8,885,456 4.125%, 12/21/12 ............................................................ 4,000,000 4,305,200 4.50%, 1/15/13 .............................................................. 8,300,000 9,025,329 3.50%, 5/29/13 .............................................................. 4,200,000 4,437,531 3.75%, 6/28/13 .............................................................. 7,000,000 7,462,350 4.50%, 7/15/13 .............................................................. 3,500,000 3,817,660 4.50%, 1/15/14 .............................................................. 7,000,000 7,639,667 4.50%, 1/15/15 .............................................................. 4,000,000 4,342,008 senior note, 4.75%, 3/05/12 ................................................. 10,000,000 10,836,020 senior note, 2.50%, 4/23/14 ................................................. 3,000,000 3,019,689 senior note, 4.375%, 7/17/15 ................................................ 4,000,000 4,333,228 FNMA, 1.875%, 4/20/12 ............................................................. 1,500,000 1,521,090 4.75%, 11/19/12 ............................................................. 4,000,000 4,369,440 4.375%, 3/15/13 ............................................................. 4,000,000 4,328,840
82 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE --------------------------------------------------------- ----------- ------------ U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED) FNMA, (continued) 4.625%, 10/15/13 ............................................................ $ 5,000,000 $ 5,471,570 2.75%, 3/13/14 .............................................................. 20,000,000 20,309,040 3.00%, 9/16/14 .............................................................. 3,000,000 3,062,034 senior note, 4.625%, 10/15/14 ............................................... 6,000,000 6,565,656 senior note, 5.00%, 4/15/15 ................................................. 2,000,000 2,220,442 General Electric Capital Corp., senior note, FDIC Guaranteed, 3.00%, 12/09/11 .. 13,200,000 13,705,125 U.S. Treasury Note, 4.875%, 5/31/11 ............................................................. 18,000,000 19,207,278 1.125%, 6/30/11 ............................................................. 18,000,000 18,138,528 5.125%, 6/30/11 ............................................................. 18,000,000 19,324,692 4.875%, 7/31/11 ............................................................. 18,000,000 19,299,384 1.75%, 8/15/12 .............................................................. 12,000,000 12,142,512 2.25%, 5/31/14 .............................................................. 5,000,000 5,021,880 2.625%, 7/31/14 ............................................................. 4,000,000 4,072,188 2.375%, 8/31/14 ............................................................. 19,000,000 19,099,465 4.25%, 11/15/14 ............................................................. 3,500,000 3,821,839 4.00%, 2/15/15 .............................................................. 3,000,000 3,238,596 (b) Index Linked, 2.00%, 1/15/14 ................................................ 3,620,836 3,804,423 (b) Index Linked, 2.375%, 1/15/17 ............................................... 3,210,556 3,462,636 ------------ TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $278,245,316) ................ 286,017,330 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $385,982,196) ............ 397,524,520 ------------
SHARES ----------- SHORT TERM INVESTMENTS 3.0% MONEY MARKET FUNDS (COST $8,219,645) 2.0% (c) Institutional Fiduciary Trust Money Market Portfolio, 0.00%..................... 8,219,645 8,219,645 ------------
PRINCIPAL AMOUNT ----------- REPURCHASE AGREEMENTS (COST $4,148,996) 1.0% (d) Joint Repurchase Agreement, 0.049%, 11/02/09 (Maturity Value $4,149,013) ....... $ 4,148,996 4,148,996 Banc of America Securities LLC (Maturity Value $556,881) Barclays Capital Inc. (Maturity Value $556,881) BNP Paribas Securities Corp. (Maturity Value $668,196) Credit Suisse Securities (USA) LLC (Maturity Value $519,747) Deutsche Bank Securities Inc. (Maturity Value $547,919) HSBC Securities (USA) Inc. (Maturity Value $371,254) Morgan Stanley & Co. Inc. (Maturity Value $371,254) UBS Securities LLC (Maturity Value $556,881) Collateralized by U.S. Government Agency Securities, 2.55% - 5.00%, 11/18/11 - 6/18/24; (e) U.S. Government Agency Discount Notes, 11/06/09 - 4/12/10; (e)U.S. Treasury Bills, 4/01/10; and U.S. Treasury Notes, 2.125% - 3.875%, 1/31/10 - 3/31/13 ------------ TOTAL INVESTMENTS (COST $398,350,837) 99.3% .................................... 409,893,161 OTHER ASSETS, LESS LIABILITIES 0.7% ............................................ 2,953,473 ------------ NET ASSETS 100.0% .............................................................. $412,846,634 ============
Annual Report | 83 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND See Abbreviations on page 123. (a) The coupon rate shown represents the rate at period end. (b) Principal amount of security is adjusted for inflation. See Note 1(g). (c) See Note 7 regarding investments in the 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. 84 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN REAL RETURN FUND
YEAR ENDED OCTOBER 31, --------------------------------------------------------- CLASS A 2009 2008 2007 2006 2005(a) ------- -------- -------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 9.55 $ 10.64 $ 10.10 $ 9.94 $ 10.00 -------- -------- ------- ------- ------- Income from investment operations(b): Net investment income (loss) ........................ --(c) 0.48(d) 0.29(d) 0.38(d) 0.31(d) Net realized and unrealized gains (losses) .......... 1.20 (0.95) 0.58 0.22 0.04 -------- -------- ------- ------- ------- Total from investment operations ....................... 1.20 (0.47) 0.87 0.60 0.35 -------- -------- ------- ------- ------- Less distributions from: Net investment income ............................... (0.01) (0.59) (0.33) (0.44) (0.40) Net realized gains .................................. -- (0.03) -- -- -- Tax return of capital ............................... -- -- -- -- (0.01) -------- -------- ------- ------- ------- Total distributions .................................... (0.01) (0.62) (0.33) (0.44) (0.41) -------- -------- ------- ------- ------- Redemption fees(e) ..................................... -- --(c) --(c) --(c) --(c) -------- -------- ------- ------- ------- Net asset value, end of year ........................... $ 10.74 $ 9.55 $ 10.64 $ 10.10 $ 9.94 ======== ======== ======= ======= ======= Total return(f) ........................................ 12.59% (4.93)% 8.75% 6.16% 3.53% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates ...... 1.09% 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% 0.90% Net investment income .................................. 0.03% 4.48% 2.80% 3.75% 3.29% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $342,873 $285,467 $46,682 $31,452 $23,753 Portfolio turnover rate ................................ 10.73% 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 and may fluctuate between classes due to the timing of sales and repurchases of the Fund shares in relation to income earned, adjustments to interest income for the inflation-indexed bonds, and/or fluctuating market value of the investments of the Fund. (c) Amount rounds to less than $0.01 per share. (d) Based on average daily shares outstanding. (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. Annual Report | 85 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN REAL RETURN FUND
PERIOD ENDED OCTOBER 31, CLASS C 2009(a) ------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ................... $ 9.57 ------- Income from investment operations(b): Net investment income ............................... 0.10 Net realized and unrealized gains (losses) .......... 1.03 ------- Total from investment operations ....................... 1.13 ------- Less distributions from net investment income .......... (0.01) ------- Net asset value, end of period ......................... $ 10.69 ======= Total return(c) ........................................ 11.86% RATIOS TO AVERAGE NET ASSETS(d) Expenses before waiver and payments by affiliates ...... 1.49% Expenses net of waiver and payments by affiliates and expense reduction(e) ................................ 1.30% Net investment income (loss) ........................... (0.37)%(f) SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $24,151 Portfolio turnover rate ................................ 10.73%
(a) For the period November 3, 2008 (effective date) to October 31, 2009. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period and may fluctuate between classes due to the timing of sales and repurchases of the Fund shares in relation to income earned, adjustments to interest income for the inflation-indexed bonds, and/or fluctuating market value of the investments of the Fund. (c) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (d) Ratios are annualized for periods less than one year. (e) Benefit of expense reduction rounds to less than 0.01%. (f) Ratio is calculated based on the Fund level net investment income, as reflected on the Statement of Operations, and adjusted for class specific expenses. The amount may not correlate with the per share amount due to the timing of income earned and/or fluctuating market value of the investments of the Fund in relation to the timing of sales and repurchases of Fund shares. The accompanying notes are an integral part of these financial statements. 86 | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN REAL RETURN FUND
YEAR ENDED OCTOBER 31, ----------------------------------------------------- ADVISOR CLASS 2009 2008 2007 2006 2005(a) ------------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ..................... $ 9.57 $ 10.65 $ 10.11 $ 9.95 $10.00 ------- ------- ------- ------- ------ Income from investment operations(b): Net investment income ............................... 0.05 0.52(c) 0.31(c) 0.40(c) 0.36(c) Net realized and unrealized gains (losses) .......... 1.17 (0.96) 0.59 0.23 0.02 ------- ------- ------- ------- ------ Total from investment operations ....................... 1.22 (0.44) 0.90 0.63 0.38 ------- ------- ------- ------- ------ Less distributions from: Net investment income ............................... (0.01) (0.61) (0.36) (0.47) (0.42) Net realized gains .................................. -- (0.03) -- -- -- Tax return of capital ............................... -- -- -- -- (0.01) ------- ------- ------- ------- ------ Total distributions .................................... (0.01) (0.64) (0.36) (0.47) (0.43) ------- ------- ------- ------- ------ Redemption fees(d) ..................................... -- --(e) --(e) --(e) --(e) ------- ------- ------- ------- ------ Net asset value, end of year ........................... $ 10.78 $ 9.57 $ 10.65 $ 10.11 $ 9.95 ======= ======= ======= ======= ====== Total return(f) ........................................ 12.80% (4.63)% 9.01% 6.41% 3.81% RATIOS TO AVERAGE NET ASSETS(g) Expenses before waiver and payments by affiliates ...... 0.84% 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% 0.65% Net investment income .................................. 0.28% 4.73% 3.05% 4.00% 3.54% SUPPLEMENTAL DATA Net assets, end of year (000's) ........................ $24,256 $14,681 $20,068 $17,892 $ 496 Portfolio turnover rate ................................ 10.73% 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 and may fluctuate between classes due to the timing of sales and repurchases of the Fund shares in relation to income earned, adjustments to interest income for the inflation-indexed bonds, and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Amount rounds to less than $0.01 per share. (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 | 87 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009
FRANKLIN REAL RETURN FUND COUNTRY SHARES VALUE ------------------------- -------------- ------------- ------------ COMMON STOCKS 5.8% ENERGY 3.8% Devon Energy Corp. ............................................ United States 31,600 $ 2,044,836 Exxon Mobil Corp. ............................................. United States 6,800 487,356 Marathon Oil Corp. ............................................ United States 32,600 1,042,222 (a) Nabors Industries Ltd. ........................................ Bermuda 26,300 547,829 Occidental Petroleum Corp. .................................... United States 10,500 796,740 Peabody Energy Corp. .......................................... United States 27,300 1,080,807 Schlumberger Ltd. ............................................. United States 17,100 1,063,620 Smith International Inc. ...................................... United States 32,400 898,452 (a) Southwestern Energy Co. ....................................... United States 34,600 1,507,868 (a) Transocean Ltd. ............................................... United States 19,519 1,637,840 Valero Energy Corp. ........................................... United States 16,100 291,410 (a) Weatherford International Ltd. ................................ United States 60,300 1,057,059 XTO Energy Inc. ............................................... United States 59,300 2,464,508 ------------ 14,920,547 ------------ MATERIALS 1.4% Alcoa Inc. .................................................... United States 58,500 726,570 Barrick Gold Corp. ............................................ Canada 51,200 1,839,616 (a) Freeport-McMoRan Copper & Gold Inc., B ........................ United States 25,373 1,861,363 Nucor Corp. ................................................... United States 10,800 430,380 United States Steel Corp. ..................................... United States 12,100 417,329 ------------ 5,275,258 ------------ REAL ESTATE 0.6% AvalonBay Communities Inc. .................................... United States 2,372 163,146 Boston Properties Inc. ........................................ United States 4,800 291,696 Kimco Realty Corp. ............................................ United States 11,700 147,888 LaSalle Hotel Properties ...................................... United States 11,600 199,056 ProLogis ...................................................... United States 9,089 102,979 Public Storage ................................................ United States 5,600 412,160 Regency Centers Corp. ......................................... United States 6,400 214,720 Simon Property Group Inc. ..................................... United States 4,991 338,839 UDR Inc. ...................................................... United States 9,835 141,427 Vornado Realty Trust .......................................... United States 4,747 282,731 ------------ 2,294,642 ------------ TOTAL COMMON STOCKS (COST $24,252,488) ........................ 22,490,447 ------------ PREFERRED STOCKS (COST $37,985) 0.0%(b) DIVERSIFIED FINANCIALS 0.0%(b) (c) Preferred Blocker Inc., 7.00%, pfd., 144A ..................... United States 107 65,347 ------------
PRINCIPAL AMOUNT(d) ------------- (e) SENIOR FLOATING RATE INTERESTS (COST $396,966) 0.1% MATERIALS 0.1% Novelis Corp., U.S. Term Loan, 2.25% - 2.29%, 7/07/14 ......... United States 396,966 358,482 ------------
88 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN REAL RETURN FUND COUNTRY AMOUNT(d) VALUE ------------------------- -------------- ------------- ------------ CORPORATE BONDS 5.6% AUTOMOBILES & COMPONENTS 0.2% Ford Motor Credit Co. LLC, senior note, 9.875%, 8/10/11 ....... United States 800,000 $ 820,000 ------------ CAPITAL GOODS 0.4% Case New Holland Inc., senior note, 7.125%, 3/01/14 ........... United States 500,000 497,500 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ....... United States 500,000 497,500 (c) RSC Equipment Rental Inc., senior secured note, 144A, 10.00%, 7/15/17 .................................................... United States 500,000 545,000 ------------ 1,540,000 ------------ COMMERCIAL & PROFESSIONAL SERVICES 0.2% (e) ARAMARK Corp., senior note, FRN, 3.983%, 2/01/15 .............. United States 500,000 445,000 (c) Casella Waste Systems Inc., senior secured note, 144A, 11.00%, 7/15/14 .................................................... United States 200,000 212,500 ------------ 657,500 ------------ CONSUMER DURABLES & APPAREL 0.1% Jarden Corp., senior sub. note, 7.50%, 5/01/17 ................ United States 500,000 495,000 ------------ CONSUMER SERVICES 0.6% (c) Host Hotels & Resorts LP, senior note, 144A, 9.00%, 5/15/17 ... United States 500,000 537,500 MGM MIRAGE, senior note, 6.625%, 7/15/15 ...................... United States 800,000 610,000 Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 ..... United States 800,000 732,000 Starwood Hotels & Resorts Worldwide Inc., senior note, 6.75%, 5/15/18 .................................................... United States 500,000 483,750 ------------ 2,363,250 ------------ DIVERSIFIED FINANCIALS 0.1% (c) GMAC LLC, senior note, 144A, 6.875%, 9/15/11 .................. United States 506,000 490,820 ------------ ENERGY 0.7% Bill Barrett Corp., senior note, 9.875%, 7/17/16 .............. United States 100,000 106,500 Chesapeake Energy Corp., senior note, 6.625%, 1/15/16 ............................................ United States 750,000 724,688 6.25%, 1/15/18 ............................................. United States 50,000 46,000 El Paso Corp., senior note, 12.00%, 12/12/13 .................. United States 400,000 460,000 Mariner Energy Inc., senior note, 11.75%, 6/30/16 ............. United States 200,000 220,500 (c) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ..... Switzerland 500,000 469,743 Tesoro Corp., senior note, 6.25%, 11/01/12 .................... United States 800,000 790,000 ------------ 2,817,431 ------------ FOOD & STAPLES RETAILING 0.1% Rite Aid Corp., senior secured note, 9.75%, 6/12/16 ........... United States 500,000 542,500 ------------ FOOD, BEVERAGE & TOBACCO 0.3% (c) BAT International Finance PLC, 144A, 8.125%, 11/15/13 ......... United Kingdom 400,000 458,128 (c) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 .............. United States 500,000 557,500 ------------ 1,015,628 ------------ HEALTH CARE EQUIPMENT & SERVICES 0.5% DaVita Inc., senior sub. note, 7.25%, 3/15/15 ................. United States 500,000 496,250 (c) Fresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 .... Germany 200,000 221,000 HCA Inc., senior secured note, 9.125%, 11/15/14 ............... United States 800,000 830,000 (c) US Oncology Inc., senior secured note, 144A, 9.125%, 8/15/17 .. United States 400,000 424,000 ------------ 1,971,250 ------------
Annual Report | 89 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN REAL RETURN FUND COUNTRY AMOUNT(d) VALUE ------------------------- -------------- ------------- ------------ CORPORATE BONDS (CONTINUED) MATERIALS 0.5% Ball Corp., senior note, 7.375%, 9/01/19 ...................... United States 100,000 $ 102,750 Crown Americas Inc., senior note, 7.75%, 11/15/15 ............. United States 400,000 410,000 Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 .................................................... United States 500,000 536,836 Nalco Co., senior sub. note, 8.875%, 11/15/13 ................. United States 400,000 414,000 (c) NewPage Corp., senior secured note, 144A, 11.375%, 12/31/14 ... United States 200,000 200,500 (c) Solo Cup Co., senior secured note, 144A, 10.50%, 11/01/13 ..... United States 200,000 214,000 Solutia Inc., senior note, 8.75%, 11/01/17 .................... United States 200,000 207,000 ------------ 2,085,086 ------------ MEDIA 0.7% (c, f) Charter Communications Operating LLC, senior note, 144A, 8.375%, 4/30/14 ............................................ United States 700,000 715,750 (f, g) Dex Media Inc., senior note, B, 8.00%, 11/15/13 ............... United States 50,000 9,250 (f, g) Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ..... United States 350,000 70,875 Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ........... United States 600,000 592,500 Liberty Media Corp., senior note, 5.70%, 5/15/13 .............. United States 600,000 567,000 (c) Univision Communications Inc., senior secured note, 144A, 12.00%, 7/01/14 ............................................ United States 500,000 545,000 ------------ 2,500,375 ------------ REAL ESTATE 0.1% (c) FelCor Lodging Trust Inc., senior secured note, 144A, 10.00%, 10/01/14 ........................................... United States 400,000 397,000 ------------ SOFTWARE & SERVICES 0.1% SunGard Data Systems Inc., senior secured note, 4.875%, 1/15/14 .................................................... United States 600,000 543,000 ------------ TECHNOLOGY HARDWARE & EQUIPMENT 0.1% (c, e) Sanmina-SCI Corp., senior note, 144A, FRN, 3.049%, 6/15/14 .... United States 400,000 362,000 ------------ TELECOMMUNICATION SERVICES 0.1% (c) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ................................................... Italy 500,000 542,500 ------------ TRANSPORTATION 0.1% (c) Delta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 .................................................... United States 200,000 205,500 ------------ UTILITIES 0.7% Ameren Corp., senior note, 8.875%, 5/15/14 .................... United States 500,000 561,108 CMS Energy Corp., senior note, 8.75%, 6/15/19 ................. United States 300,000 331,618 Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ............ United States 500,000 468,750 (c) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ........ Netherlands 500,000 522,500 NRG Energy Inc., senior note, 7.25%, 2/01/14 .................. United States 700,000 696,500 ------------ 2,580,476 ------------ TOTAL CORPORATE BONDS (COST $20,881,118) ...................... 21,929,316 ------------ FOREIGN GOVERNMENT AND AGENCY SECURITIES 12.7% Government of Hungary, 3.50%, 7/18/16 ............................................. Hungary 60,000 EUR 80,603 4.375%, 7/04/17 ............................................ Hungary 150,000 EUR 209,410 5.75%, 6/11/18 ............................................. Hungary 435,000 EUR 661,091 senior note, 3.875%, 2/24/20 ............................... Hungary 180,000 EUR 230,495
90 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN REAL RETURN FUND COUNTRY AMOUNT(d) VALUE ------------------------- -------------- ------------- ------------ FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Government of Malaysia, 3.869%, 4/13/10 ............................................ Malaysia 7,000,000 MYR $ 2,068,078 3.756%, 4/28/11 ............................................ Malaysia 8,560,000 MYR 2,559,281 3.833%, 9/28/11 ............................................ Malaysia 33,960,000 MYR 10,189,433 3.702%, 2/25/13 ............................................ Malaysia 1,840,000 MYR 547,831 3.461%, 7/31/13 ............................................ Malaysia 150,000 MYR 44,050 3.814%, 2/15/17 ............................................ Malaysia 6,100,000 MYR 1,754,372 Government of Poland, 4.25%, 5/24/11 .......................... Poland 21,500,000 PLN 7,394,271 Government of Sweden, 5.25%, 3/15/11 .......................... Sweden 44,235,000 SEK 6,624,511 Korea Treasury Bond, 0400-1206, 4.00%, 6/10/12 .................................. South Korea 2,120,000,000 KRW 1,767,350 0550-1106, 5.50%, 6/10/11 .................................. South Korea 5,150,000,000 KRW 4,418,292 Nota Do Tesouro Nacional, 9.609%, 1/01/12 ............................................ Brazil 5,770(h) BRL 3,181,266 (i) Index Linked, 6.00%, 5/15/15 .................................. Brazil 4,600(h) BRL 4,680,488 (i) Index Linked, 6.00%, 5/15/45 .................................. Brazil 1,680(h) BRL 1,620,937 Queensland Treasury Corp., 11, 6.00%, 6/14/11 ................. Australia 2,010,000 AUD 1,838,885 ------------ TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $48,202,917) ......................................... 49,870,644 ------------ U.S. GOVERNMENT AND AGENCY SECURITIES 61.6% (j) U.S. Treasury Bond, Index Linked, 2.375%, 1/15/25 ............................................ United States 3,091,352 3,291,082 3.875%, 4/15/29 ............................................ United States 393,845 508,368 (j) U.S. Treasury Note, Index Linked, 0.875%, 4/15/10 ............................................ United States 45,397,644 45,564,344 3.50%, 1/15/11 ............................................. United States 620,007 647,907 2.375%, 4/15/11 ............................................ United States 57,410,467 59,433,268 2.00%, 4/15/12 ............................................. United States 43,499,470 45,477,347 3.00%, 7/15/12 ............................................. United States 9,602,599 10,320,547 2.00%, 1/15/14 ............................................. United States 23,593,837 24,790,115 2.00%, 7/15/14 ............................................. United States 1,144,945 1,208,365 1.625%, 1/15/15 ............................................ United States 24,865,806 25,726,386 2.00%, 1/15/16 ............................................. United States 22,834,773 24,030,036 ------------ TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $237,074,403) ........................................ 240,997,765 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $330,845,877) ........................................ 335,712,001 ------------ SHORT TERM INVESTMENTS 13.2% FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $6,498,402) 1.7% (k) Norway Treasury Bill, 3/17/10 ................................. Norway 38,710,000 NOK 6,711,501 ------------ TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $337,344,279) ........................................ 342,423,502 ------------
Annual Report | 91 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
PRINCIPAL FRANKLIN REAL RETURN FUND COUNTRY AMOUNT(d) VALUE ------------------------- -------------- ------------- ------------ SHORT TERM INVESTMENTS (CONTINUED) REPURCHASE AGREEMENTS (COST $45,041,016) 11.5% (l) Joint Repurchase Agreement, 0.049%, 11/02/09 (Maturity Value $45,041,202) .................................. United States 45,041,016 $ 45,041,016 Banc of America Securities LLC (Maturity Value $6,045,430) Barclays Capital Inc. (Maturity Value $6,045,430) BNP Paribas Securities Corp. (Maturity Value $7,253,886) Credit Suisse Securities (USA) LLC (Maturity Value $5,642,311) Deutsche Bank Securities Inc. (Maturity Value $5,948,141) HSBC Securities (USA) Inc. (Maturity Value $4,030,287) Morgan Stanley & Co. Inc. (Maturity Value $4,030,287) UBS Securities LLC (Maturity Value $6,045,430) Collateralized by U.S. Government Agency Securities, 2.55% - 5.00%, 11/18/11 - 6/18/24; (k)U.S. Government Agency Discount Notes, 11/06/09 - 4/12/10; (k)U.S. Treasury Bills, 4/01/10; and U.S. Treasury Notes, 2.125% - 3.875%, 1/31/10 - 3/31/13 ------------ TOTAL INVESTMENTS (COST $382,385,295) 99.0% ................... 387,464,518 OTHER ASSETS, LESS LIABILITIES 1.0% ........................... 3,815,077 ------------ NET ASSETS 100.0% ............................................. $391,279,595 ============
See Abbreviations on page 123. (a) Non-income producing. (b) Rounds to less than 0.1% of net assets. (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, 2009, the aggregate value of these securities was $7,686,288, representing 1.96% 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) See Note 10 regarding other considerations. (g) See Note 8 regarding defaulted securities. (h) Principal amount is stated in 1,000 Brazilian Real Units. (i) Redemption price at maturity is adjusted for inflation. See Note 1(g). (j) Principal amount of security is adjusted for inflation. See Note 1(g). (k) The security is traded on a discount basis with no stated coupon rate. (l) See Note 1(c) regarding joint repurchase agreement. 92 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN REAL RETURN FUND At October 31, 2009, the fund had the following forward exchange contracts outstanding. See Note 1(d).
CONTRACT SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY AMOUNT DATE APPRECIATION DEPRECIATION -------- ------------ ---- ------------- ---------- ---------- ------------ ------------ Japanese Yen ....... DBAB Sell 306,807,063 $3,311,463 11/04/09 $ -- $ (97,969) Japanese Yen ....... DBAB Buy 306,807,063 3,184,959 11/04/09 224,473 -- Chinese Yuan ....... HSBC Buy 42,000,000 5,949,009 2/03/10 198,562 -- Chilean Peso ....... DBAB Buy 2,927,500,000 5,000,000 4/08/10 562,041 -- Indian Rupee ....... DBAB Buy 110,401,000 2,260,000 6/18/10 48,051 -- Chilean Peso ....... JPHQ Buy 870,254,700 1,590,000 8/18/10 64,966 -- Chilean Peso ....... JPHQ Buy 289,219,000 523,000 8/19/10 27,013 -- Chinese Yuan ....... HSBC Buy 806,753 122,536 10/25/10 -- (3,677) Chinese Yuan ....... HSBC Buy 1,371,580 207,746 10/26/10 -- (5,664) Chinese Yuan ....... HSBC Buy 820,480 124,024 10/27/10 -- (3,134) ---------- --------- Unrealized appreciation (depreciation) .......................................... 1,125,106 (110,444) ---------- --------- Net unrealized appreciation (depreciation) ................................... $1,014,662 ==========
The accompanying notes are an integral part of these financial statements. Annual Report | 93 Franklin Investors Securities Trust FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2009
FRANKLIN FRANKLIN CONVERTIBLE FRANKLIN EQUITY BALANCED FUND SECURITIES FUND INCOME FUND ------------- -------------------- --------------- Assets: Investments in securities: Cost - Unaffiliated issuers ................................... $ 103,752,011 $ 822,995,259 $ 628,108,928 Cost - Sweep Money Fund (Note 7) .............................. 1,319,490 15,879,258 4,248,348 ------------- ------------- ------------- Total cost of investments ..................................... $ 105,071,501 $ 838,874,517 $ 632,357,276 ============= ============= ============= Value - Unaffiliated issuers .................................. $ 106,272,675 $ 755,304,550 $ 635,455,164 Value - Sweep Money Fund (Note 7) ............................. 1,319,490 15,879,258 4,248,348 ------------- ------------- ------------- Total value of investments .................................... 107,592,165 771,183,808 639,703,512 Receivables: Investment securities sold .................................... 403,949 -- 7,347,450 Capital shares sold ........................................... 1,245,321 2,720,069 2,404,620 Dividends and interest ........................................ 1,022,852 4,628,876 2,759,834 Other assets ..................................................... 41 299 317 ------------- ------------- ------------- Total assets ............................................... 110,264,328 778,533,052 652,215,733 ------------- ------------- ------------- Liabilities: Payables: Capital shares redeemed ....................................... 194,514 10,714,318 2,127,094 Affiliates .................................................... 91,138 626,225 531,803 Loss contingency (Note 13) ....................................... 70,602 -- -- Options written, at value (premiums received $56,639, $--, and $--, respectively) ............................................ 51,410 -- -- Accrued expenses and other liabilities ........................... 20,769 152,066 180,919 ------------- ------------- ------------- Total liabilities .......................................... 428,433 11,492,609 2,839,816 ------------- ------------- ------------- Net assets, at value .................................... $ 109,835,895 $ 767,040,443 $ 649,375,917 ============= ============= ============= Net assets consist of: Paid-in capital .................................................. $ 116,335,629 $ 928,370,699 $ 808,568,526 Distributions in excess of net investment income ................. (86,142) (43,180,107) (1,842,524) Net unrealized appreciation (depreciation) ....................... 2,455,803 (67,690,709) 7,362,273 Accumulated net realized gain (loss) ............................. (8,869,395) (50,459,440) (164,712,358) ------------- ------------- ------------- Net assets, at value .................................... $ 109,835,895 $ 767,040,443 $ 649,375,917 ============= ============= =============
The accompanying notes are an integral part of these financial statements. 94 | Annual Report Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2009
FRANKLIN FRANKLIN CONVERTIBLE FRANKLIN EQUITY BALANCED FUND SECURITIES FUND INCOME FUND ------------- -------------------- --------------- CLASS A: Net assets, at value ............................................. $88,376,490 $542,740,546 $540,127,468 ----------- ------------ ------------ Shares outstanding ............................................... 10,341,538 44,181,099 38,410,674 ----------- ------------ ------------ Net asset value per share(a) ..................................... $ 8.55 $ 12.28 $ 14.06 ----------- ------------ ------------ Maximum offering price per share (net asset value per share / 94.25%) ....................................................... $ 9.07 $ 13.03 $ 14.92 ----------- ------------ ------------ CLASS B: Net assets, at value ............................................. -- -- $ 16,737,193 ----------- ------------ ------------ Shares outstanding ............................................... -- -- 1,196,912 ----------- ------------ ------------ Net asset value and maximum offering price per share(a) .......... -- -- $ 13.98 ----------- ------------ ------------ CLASS C: Net assets, at value ............................................. $19,423,321 $192,296,718 $ 86,151,585 ----------- ------------ ------------ Shares outstanding ............................................... 2,288,354 15,820,051 6,155,292 ----------- ------------ ------------ Net asset value and maximum offering price per share(a) .......... $ 8.49 $ 12.16 $ 14.00 ----------- ------------ ------------ CLASS R: Net assets, at value ............................................. $ 175,074 -- $ 4,217,926 ----------- ------------ ------------ Shares outstanding ............................................... 20,460 -- 299,875 ----------- ------------ ------------ Net asset value and maximum offering price per share ............. $ 8.56 -- $ 14.07 ----------- ------------ ------------ ADVISOR CLASS: Net assets, at value ............................................. $ 1,861,010 $ 32,003,179 $ 2,141,745 ----------- ------------ ------------ Shares outstanding ............................................... 217,474 2,603,823 152,221 ----------- ------------ ------------ Net asset value and maximum offering price per share ............. $ 8.56 $ 12.29 $ 14.07 ----------- ------------ ------------
(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 | 95 Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2009
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT FRANKLIN REAL SECURITIES FUND RETURN FUND ---------------- ------------- Assets: Investments in securities: Cost - Unaffiliated issuers .......................... $385,982,196 $337,344,279 Cost - Sweep Money Fund (Note 7) ..................... 8,219,645 -- Cost - Repurchase agreements ......................... 4,148,996 45,041,016 ------------ ------------ Total cost of investments ............................ $398,350,837 $382,385,295 ------------ ------------ Value - Unaffiliated issuers ......................... $397,524,520 $342,423,502 Value - Sweep Money Fund (Note 7) .................... 8,219,645 -- Value - Repurchase agreements ........................ 4,148,996 45,041,016 ------------ ------------ Total value of investments ........................... 409,893,161 387,464,518 Cash .................................................... -- 3,045 Receivables: Capital shares sold .................................. 1,930,175 2,314,101 Dividends and interest ............................... 3,084,180 2,047,621 Unrealized appreciation on forward exchange contracts ... -- 1,125,106 Other assets ............................................ 213 172 ------------ ------------ Total assets ...................................... 414,907,729 392,954,563 ------------ ------------ Liabilities: Payables: Capital shares redeemed .............................. 1,541,237 1,214,825 Affiliates ........................................... 240,900 223,289 Distributions to shareholders ........................ 211,488 -- Unrealized depreciation on forward exchange contracts ... -- 110,444 Accrued expenses and other liabilities .................. 67,470 126,410 ------------ ------------ Total liabilities ................................. 2,061,095 1,674,968 ------------ ------------ Net assets, at value ........................... $412,846,634 $391,279,595 ============ ============ Net assets consist of: Paid-in capital ......................................... $411,775,397 $392,137,560 Distributions in excess of net investment income ........ (1,379,765) (3,818,595) Net unrealized appreciation (depreciation) .............. 11,542,324 6,125,129 Accumulated net realized gain (loss) .................... (9,091,322) (3,164,499) ------------ ------------ Net assets, at value ........................... $412,846,634 $391,279,595 ============ ============
The accompanying notes are an integral part of these financial statements. 96 | Annual Report Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2009
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT FRANKLIN REAL SECURITIES FUND RETURN FUND ---------------- ------------- CLASS A: Net assets, at value .................................... $357,690,504 $342,873,015 ------------ ------------ Shares outstanding ...................................... 34,140,420 31,934,985 ------------ ------------ Net asset value per share ............................... $ 10.48 $ 10.74 ------------ ------------ Maximum offering price per share (net asset value per share / 97.75% and 95.75%, respectively) ............. $ 10.72 $ 11.22 ------------ ------------ CLASS C: Net assets, at value .................................... -- $ 24,150,625 ------------ ------------ Shares outstanding ...................................... -- 2,258,759 ------------ ------------ Net asset value and maximum offering price per share(a).. -- $ 10.69 ------------ ------------ ADVISOR CLASS: Net assets, at value .................................... $ 55,156,130 $ 24,255,955 ------------ ------------ Shares outstanding ...................................... 5,268,501 2,250,013 ------------ ------------ Net asset value and maximum offering price per share .... $ 10.47 $ 10.78 ------------ ------------
(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 | 97 Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended October 31, 2009
FRANKLIN FRANKLIN CONVERTIBLE FRANKLIN BALANCED SECURITIES EQUITY FUND FUND INCOME FUND ----------- ------------ ------------- Investment income: Dividends: Unaffiliated issuers ....................................... $ 1,607,662 $ 12,522,554 $ 19,207,103 Sweep Money Fund (Note 7) .................................. 15,360 46,511 54,245 Interest ...................................................... 2,610,886 13,953,896 4,503,218 ----------- ------------ ------------- Total investment income ................................. 4,233,908 26,522,961 23,764,566 ----------- ------------ ------------- Expenses: Management fees (Note 3a) ..................................... 356,593 3,002,026 2,727,919 Administrative fees (Note 3b) ................................. 148,873 -- -- Distribution fees: (Note 3c) Class A .................................................... 170,711 1,094,618 1,150,128 Class B .................................................... -- -- 174,023 Class C .................................................... 122,915 1,574,368 762,662 Class R .................................................... 274 -- 21,092 Transfer agent fees (Note 3e) ................................. 94,698 996,310 1,369,288 Custodian fees (Note 4) ....................................... 1,244 7,591 10,619 Reports to shareholders ....................................... 13,842 140,621 177,988 Registration and filing fees .................................. 56,472 75,641 77,650 Professional fees ............................................. 34,948 40,095 35,022 Trustees' fees and expenses ................................... 2,305 22,340 21,536 Other ......................................................... 22,399 81,030 33,261 ----------- ------------ ------------- Total expenses .......................................... 1,025,274 7,034,640 6,561,188 Expense reductions (Note 4) ............................. -- (1,068) (23) Expenses waived/paid by affiliates (Note 3f) ............ (202,876) -- -- ----------- ------------ ------------- Net expenses ......................................... 822,398 7,033,572 6,561,165 ----------- ------------ ------------- Net investment income ............................. 3,411,510 19,489,389 17,203,401 ----------- ------------ ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................ (5,331,574) (44,659,839) (118,040,821) Written options ............................................ 567,440 -- -- Foreign currency transactions .............................. (3,895) -- (77,085) ----------- ------------ ------------- Net realized gain (loss) .......................... (4,768,029) (44,659,839) (118,117,906) ----------- ------------ ------------- Net change in unrealized appreciation (depreciation) on: Investments ................................................ 21,958,709 224,420,871 176,407,837 Translation of other assets and liabilities denominated in foreign currencies ...................................... 940 -- 29,434 ----------- ------------ ------------- Net change in unrealized appreciation (depreciation) ................................. 21,959,649 224,420,871 176,437,271 ----------- ------------ ------------- Net realized and unrealized gain (loss) .......................... 17,191,620 179,761,032 58,319,365 ----------- ------------ ------------- Net increase (decrease) in net assets resulting from operations .. $20,603,130 $199,250,421 $ 75,522,766 =========== ============ =============
The accompanying notes are an integral part of these financial statements. 98 | Annual Report Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the year ended October 31, 2009
FRANKLIN LIMITED MATURITY U.S. GOVERNMENT FRANKLIN REAL SECURITIES FUND RETURN FUND --------------- ------------- Investment income: Dividends: Unaffiliated issuers ....................................... $ -- $ 231,595 Sweep Money Fund (Note 7) .................................. 14,896 -- Interest ...................................................... 13,993,093 5,710,280 Inflation principal adjustments ............................... (124,075) (2,858,348) ----------- ----------- Total investment income ................................. 13,883,914 3,083,527 ----------- ----------- Expenses: Management fees (Note 3a) ..................................... 2,009,422 1,407,204 Administrative fees (Note 3b) ................................. -- 662,214 Distribution fees: (Note 3c) Class A ....................................................... 349,870 764,590 Class C ....................................................... -- 50,360 Transfer agent fees (Note 3e) ................................. 621,035 447,451 Custodian fees (Note 4) ....................................... 5,624 55,160 Reports to shareholders ....................................... 58,717 72,562 Registration and filing fees .................................. 72,142 78,532 Professional fees ............................................. 38,588 40,449 Trustees' fees and expenses ................................... 13,333 11,941 Other ......................................................... 19,405 23,140 ----------- ----------- Total expenses .......................................... 3,188,136 3,613,603 Expense reductions (Note 4) ............................. (24) (591) Expenses waived/paid by affiliates (Note 3f) ............ -- (646,392) ----------- ----------- Net expenses ......................................... 3,188,112 2,966,620 ----------- ----------- Net investment income ............................. 10,695,802 116,907 ----------- ----------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ................................................ 6,262,556 (3,068,348) Foreign currency transactions .............................. -- (49,340) ----------- ----------- Net realized gain (loss) .......................... 6,262,556 (3,117,688) ----------- ----------- Net change in unrealized appreciation (depreciation) on: Investments ................................................ 10,768,433 40,898,709 Translation of other assets and liabilities denominated in foreign currencies ...................................... -- 1,124,864 ----------- ----------- Net change in unrealized appreciation (depreciation) ................................. 10,768,433 42,023,573 ----------- ----------- Net realized and unrealized gain (loss) .......................... 17,030,989 38,905,885 ----------- ----------- Net increase (decrease) in net assets resulting from operations .. $27,726,791 $39,022,792 =========== ===========
The accompanying notes are an integral part of these financial statements. Annual Report | 99 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, --------------------------- ----------------------------- 2009 2008 2009 2008 ------------ ------------ ------------ -------------- Increase (decrease) in net assets: Operations: Net investment income ........................... $ 3,411,510 $ 2,151,533 $ 19,489,389 $ 23,945,389 Net realized gain (loss) from investments, written options and foreign currency transactions, and net increase from payments by affiliates ....................... (4,768,029) (3,906,093) (44,659,839) 10,914,998 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ........................... 21,959,649 (20,846,727) 224,420,871 (416,542,531) ------------ ------------ ------------ -------------- Net increase (decrease) in net assets resulting from operations .............. 20,603,130 (22,601,287) 199,250,421 (381,682,144) ------------ ------------ ------------ -------------- Distributions to shareholders from: Net investment income: Class A ...................................... (3,159,541) (1,920,199) (24,773,314) (32,900,894) Class C ...................................... (575,245) (277,048) (7,791,341) (10,290,851) Class R ...................................... (2,675) (659) -- -- Advisor Class ................................ (70,588) (56,388) (850,548) (16,406) Net realized gains: Class A ...................................... -- (886,464) -- (27,669,044) Class C ...................................... -- (154,165) -- (10,175,756) Class R ...................................... -- (327) -- -- Advisor Class ................................ -- (25,060) -- -- ------------ ------------ ------------ -------------- Total distributions to shareholders ................ (3,808,049) (3,320,310) (33,415,203) (81,052,951) ------------ ------------ ------------ -------------- Capital share transactions: (Note 2) Class A ...................................... 35,441,027 25,371,780 26,928,762 (109,381,103) Class C ...................................... 9,663,374 4,409,838 11,366,862 (44,677,100) Class R ...................................... 145,105 4,379 -- -- Advisor Class ................................ 510,440 499,046 28,243,035 499,828 ------------ ------------ ------------ -------------- Total capital share transactions ................... 45,759,946 30,285,043 66,538,659 (153,558,375) ------------ ------------ ------------ -------------- Redemption fees .................................... -- 817 -- 4,226 ------------ ------------ ------------ -------------- Net increase (decrease) in net assets ..... 62,555,027 4,364,263 232,373,877 (616,289,244) Net assets: Beginning of year .................................. 47,280,868 42,916,605 534,666,566 1,150,955,810 ------------ ------------ ------------ -------------- End of year ........................................ $109,835,895 $ 47,280,868 $767,040,443 $ 534,666,566 ============ ============ ============ ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ........................................ $ (86,142) $ 182,591 $(43,180,107) $ (32,947,401) ============ ============ ============ ==============
The accompanying notes are an integral part of these financial statements. 100 | Annual Report 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, ------------------------------ --------------------------- 2009 2008 2009 2008 ------------- -------------- ------------ ------------ Increase (decrease) in net assets: Operations: Net investment income ........................... $ 17,203,401 $ 21,508,647 $ 10,695,802 $ 9,001,092 Net realized gain (loss) from investments and foreign currency transactions ................ (118,117,906) (45,859,200) 6,262,556 1,409,071 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ........................... 176,437,271 (354,331,687) 10,768,433 (808,469) ------------- -------------- ------------ ------------ Net increase (decrease) in net assets resulting from operations .............. 75,522,766 (378,682,240) 27,726,791 9,601,694 ------------- -------------- ------------ ------------ Distributions to shareholders from: Net investment income: Class A ...................................... (18,567,026) (18,304,971) (11,582,957) (8,996,967) Class B ...................................... (607,816) (642,800) -- -- Class C ...................................... (2,560,510) (2,361,972) -- -- Class R ...................................... (163,458) (197,377) -- -- Advisor Class ................................ (60,658) (8,842) (1,398,307) (1,028,555) Net realized gains: Class A ...................................... -- (36,401,070) -- -- Class B ...................................... -- (1,947,071) -- -- Class C ...................................... -- (7,038,555) -- -- Class R ...................................... -- (515,465) -- -- ------------- -------------- ------------ ------------ Total distributions to shareholders ................ (21,959,468) (67,418,123) (12,981,264) (10,025,522) ------------- -------------- ------------ ------------ Capital share transactions: (Note 2) Class A ...................................... 30,323,752 (31,388,609) 45,902,675 109,805,564 Class B ...................................... (4,934,336) (8,454,274) -- -- Class C ...................................... 647,234 (23,079,473) -- -- Class R ...................................... (839,999) (4,459,712) -- -- Advisor Class ................................ 1,266,491 964,294 25,997,252 5,540,153 ------------- -------------- ------------ ------------ Total capital share transactions ................... 26,463,142 (66,417,774) 71,899,927 115,345,717 ------------- -------------- ------------ ------------ Redemption fees .................................... -- 1,299 -- 14,229 ------------- -------------- ------------ ------------ Net increase (decrease) in net assets ..... 80,026,440 (512,516,838) 86,645,454 114,936,118 Net assets: Beginning of year .................................. 569,349,477 1,081,866,315 326,201,180 211,265,062 ------------- -------------- ------------ ------------ End of year ........................................ $ 649,375,917 $ 569,349,477 $412,846,634 $326,201,180 ============= ============== ============ ============ Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ........................................ $ (1,842,524) $ 2,667,207 $ (1,379,765) $ (383,381) ============= ============== ============ ============
The accompanying notes are an integral part of these financial statements. Annual Report | 101 Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN REAL RETURN FUND YEAR ENDED OCTOBER 31, --------------------------- 2009 2008 ------------ ------------ Increase (decrease) in net assets: Operations: Net investment income .................................................... $ 116,907 $ 9,225,236 Net realized gain (loss) from investments and foreign currency transactions ................................................. (3,117,688) (1,264,518) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ................................................. 42,023,573 (39,025,606) ------------ ------------ Net increase (decrease) in net assets resulting from operations ....... 39,022,792 (31,064,888) ------------ ------------ Distributions to shareholders from: Net investment income: Class A ............................................................... (326,766) (10,236,128) Class C ............................................................... (399) -- Advisor Class ......................................................... (19,887) (1,476,610) Net realized gains: Class A ............................................................... -- (180,301) Advisor Class ......................................................... -- (62,307) ------------ ------------ Total distributions to shareholders ......................................... (347,052) (11,955,346) ------------ ------------ Capital share transactions: (Note 2) Class A ............................................................... 21,713,620 279,107,734 Class C ............................................................... 23,252,923 -- Advisor Class ......................................................... 7,489,492 (2,697,978) ------------ ------------ Total capital share transactions ............................................ 52,456,035 276,409,756 ------------ ------------ Redemption fees ............................................................. -- 8,054 ------------ ------------ Net increase (decrease) in net assets .............................. 91,131,775 233,397,576 Net assets: Beginning of year ........................................................... 300,147,820 66,750,244 ------------ ------------ End of year ................................................................. $391,279,595 $300,147,820 ============ ============ Distributions in excess of net investment income included in net assets, end of year ................................................................. $ (3,818,595) $ (1,615,214) ============ ============
The accompanying notes are an integral part of these financial statements. 102 | 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, five of which are included in this report (Funds). 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 November 3, 2008, the Franklin Real Return Fund began offering a new class of shares, Class C. 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 Franklin Convertible Franklin Equity Franklin Limited Maturity Fund Securities Fund Income Fund U.S. Government Securities Fund Franklin Real Return Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Equity and other 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. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds 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 Funds' 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. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. Foreign equity 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 Annual Report | 103 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) that time, the foreign equity 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 security is determined. The Funds have 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 based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, 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 Funds' 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 Funds' 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 104 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. JOINT REPURCHASE AGREEMENT Certain funds may enter into a joint repurchase agreement whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Funds at year end had been entered into on October 30, 2009. The joint repurchase agreement is valued at cost which approximates market value. D. DERIVATIVE FINANCIAL INSTRUMENTS Certain funds may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Derivatives are marked to market daily based upon quotations from market makers or the Funds' independent pricing services and the Funds' net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations. Certain funds enter into forward exchange contracts generally in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral. Annual Report | 105 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Certain funds purchase or write option contracts generally in order to manage or gain exposure to equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of a particular security, currency or index, or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the security is adjusted by any premium paid or received. Upon expiration of an option, any premium paid or received is recorded as a realized loss or gain. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss. See Note 9 regarding other derivative information. E. EQUITY-LINKED SECURITIES The Franklin Balanced Fund and Franklin Equity Income Fund may invest in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Income received from equity linked securities is recorded as realized gains in the Statement of Operations and may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guarantee of a return of principal with equity linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the fund. F. 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, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. 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 106 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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. Realized and unrealized gains and losses and net investment income, not including 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. H. 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. I. 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. J. 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. Annual Report | 107 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. GUARANTEES AND INDEMNIFICATIONS (CONTINUED) 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, 2009, 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, 2009 Shares sold ........................ 8,467,809 $ 61,287,119 17,583,217 $ 181,565,209 Shares issued in reinvestment of distributions ................... 311,481 2,260,134 1,846,448 18,643,164 Shares redeemed .................... (4,019,994) (28,106,226) (17,039,252) (173,279,611) ---------- ------------ ----------- ------------- Net increase (decrease) ............ 4,759,296 $ 35,441,027 2,390,413 $ 26,928,762 ========== ============ =========== ============= 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) ========== ============ =========== ============= CLASS C SHARES: Year ended October 31, 2009 Shares sold ........................ 2,691,789 $ 19,419,328 5,260,858 $ 52,363,537 Shares issued in reinvestment of distributions ................... 58,829 420,240 537,461 5,357,000 Shares redeemed .................... (1,487,839) (10,176,194) (4,695,077) (46,353,675) ---------- ------------ ----------- ------------- Net increase (decrease) ............ 1,262,779 $ 9,663,374 1,103,242 $ 11,366,862 ========== ============ =========== ============= 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) ========== ============ =========== =============
108 | Annual Report 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 ----------- ------------ ----------- ------------- CLASS R SHARES: Year ended October 31, 2009 Shares sold ........................ 19,278 $ 148,614 Shares issued in reinvestment of distributions ................... 297 2,297 Shares redeemed .................... (814) (5,806) ---------- ------------ Net increase (decrease) ............ 18,761 $ 145,105 ========== ============ 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 ========== ============ ADVISOR CLASS SHARES: Year ended October 31, 2009 Shares sold ........................ 87,053 $ 704,641 3,528,088 $ 37,631,625 Shares issued in reinvestment of distributions ................... 7,666 54,704 56,438 555,049 Shares redeemed .................... (30,174) (248,905) (1,014,194) (9,943,639) ---------- ------------ ----------- ------------- Net increase (decrease) ............ 64,545 $ 510,440 2,570,332 $ 28,243,035 ========== ============ =========== ============= 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 ========== ============ =========== =============
FRANKLIN EQUITY FRANKLIN LIMITED MATURITY U.S. INCOME FUND GOVERNMENT SECURITIES FUND --------------------------- ------------------------------ SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ---------------- CLASS A SHARES: Year ended October 31, 2009 Shares sold ........................ 13,462,309 $ 165,022,874 21,695,160 $ 225,395,902 Shares issued in reinvestment of distributions ................... 1,421,743 17,183,064 895,516 9,326,291 Shares redeemed .................... (12,578,113) (151,882,186) (18,149,011) (188,819,518) ----------- ------------- ----------- ------------- Net increase (decrease) ............ 2,305,939 $ 30,323,752 4,441,665 $ 45,902,675 =========== ============= =========== ============= 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 =========== ============= =========== =============
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the Franklin Convertible Securities Fund. Annual Report | 109 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN EQUITY INCOME FUND --------------------------- SHARES AMOUNT ----------- ------------- CLASS B SHARES: Year ended October 31, 2009 Shares sold ........................ 191,147 $ 2,226,668 Shares issued in reinvestment of distributions ................... 43,858 522,954 Shares redeemed .................... (641,852) (7,683,958) ---------- ------------ Net increase (decrease) ............ (406,847) $ (4,934,336) ========== ============ 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) ========== ============ CLASS C SHARES: Year ended October 31, 2009 Shares sold ........................ 2,328,317 $ 28,070,055 Shares issued in reinvestment of distributions ................... 187,622 2,252,834 Shares redeemed .................... (2,472,658) (29,675,655) ---------- ------------ Net increase (decrease) ............ 43,281 $ 647,234 ========== ============ 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) ========== ============ CLASS R SHARES: Year ended October 31, 2009 Shares sold ........................ 57,455 $ 696,015 Shares issued in reinvestment of distributions ................... 13,581 163,252 Shares redeemed .................... (135,139) (1,699,266) ---------- ------------ Net increase (decrease) ............ (64,103) $ (839,999) ========== ============ 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) ========== ============
110 | 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 ------- ---------- ------------ --------------- ADVISOR CLASS SHARES: Year ended October 31, 2009 Shares sold ........................ 141,466 $1,771,572 4,176,435 $ 43,380,798 Shares issued in reinvestment of distributions ................... 4,525 54,765 62,522 650,799 Shares redeemed .................... (46,488) (559,846) (1,732,654) (18,034,345) ------- ---------- ---------- ------------ Net increase (decrease) ............ 99,503 $1,266,491 2,506,303 $ 25,997,252 ======= ========== ========== ============ 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 ======= ========== ========== ============
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the Franklin Equity Income Fund.
FRANKLIN REAL RETURN FUND --------------------------- SHARES AMOUNT ----------- ------------- CLASS A SHARES: Year ended October 31, 2009 Shares sold ..................................... 17,469,435 $ 176,345,404 Shares issued in reinvestment of distributions .. 28,335 276,272 Shares redeemed ................................. (15,459,555) (154,908,056) ----------- ------------- Net increase (decrease) ......................... 2,038,215 $ 21,713,620 =========== ============= 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 =========== ============= CLASS C SHARES: Year ended October 31, 2009(b) Shares sold ..................................... 2,467,232 $ 25,422,627 Shares issued in reinvestment of distributions .. 38 372 Shares redeemed ................................. (208,511) (2,170,076) ----------- ------------- Net increase (decrease) ......................... 2,258,759 $ 23,252,923 =========== =============
(b) For the period November 3, 2008 (effective date) to October 31, 2009. Annual Report | 111 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN REAL RETURN FUND -------------------------- SHARES AMOUNT ----------- ------------ ADVISOR CLASS SHARES: Year ended October 31, 2009 Shares sold ..................................... 1,486,014 $ 15,342,444 Shares issued in reinvestment of distributions .. 1,310 12,790 Shares redeemed ................................. (772,068) (7,865,742) ---------- ------------ Net increase (decrease) ......................... 715,256 $ 7,489,492 ========== ============ 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) ========== ============
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 (F T Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
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
112 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES (CONTINUED) 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
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 FT Services provides administrative services to the Funds. The Franklin Balanced Fund and the Franklin Real Return Fund each pay an administrative fee to FT Services of 0.20% per year of their respective average daily net assets. Under an agreement with Advisers, the administrative Annual Report | 113 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES (CONTINUED) fee for the Franklin Convertible Securities Fund, the Franklin Equity Income Fund and the Franklin Limited Maturity U.S. Government Securities Fund are paid by Advisers based on each fund's average daily net assets, and is not an additional expense of the funds. C. DISTRIBUTION FEES The Funds' 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. On December 1, 2008, the Funds' Board of Trustees approved a modification to the Class A distribution plan, for those funds that had a Class A compensation plan, changing the form of the plan from a compensation to a reimbursement distribution plan. Under the distribution plan, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. This change was effective February 1, 2009. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. Prior to February 1, 2009, under the Franklin Balanced Fund's and the Franklin Real Return Fund's Class A compensation distribution plan, the funds paid Distributors for costs incurred in connection with the servicing, sale and distribution of the funds' shares up to a certain percentage per year of its average daily net assets. 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 FRANKLIN LIMITED MATURITY REAL FRANKLIN CONVERTIBLE EQUITY U.S. GOVERNMENT RETURN BALANCED FUND SECURITIES FUND INCOME FUND SECURITIES FUND FUND ------------- --------------- ----------- ---------------- -------- Reimbursement Plans: Class A ......... 0.35% 0.25% 0.25% 0.10% 0.25% Compensation Plans: Class B ......... -- -- 1.00% -- -- Class C ......... 1.00% 1.00% 1.00% -- 0.65% Class R ......... 0.50% -- 0.50% -- --
Effective February 1, 2009, the Board of Trustees has set the current rate at 0.30% per year for Class A shares for the Franklin Balanced Fund until further notice and approval by the Board. 114 | 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 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 ............ $110,623 $199,201 $583,287 $101,786 $266,369 Contingent deferred sales charges retained .......... $ 1,000 $ 21,928 $ 8,292 $ 10,001 $ 16,605
E. TRANSFER AGENT FEES For the year ended October 31, 2009, 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 .......... $53,559 $547,530 $797,944 $421,760 $242,518
F. WAIVER AND EXPENSE REIMBURSEMENTS For the Franklin Balanced Fund and the Franklin Real Return Fund, FT Services and Advisers have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the fund so that the common expenses (i.e. a combination of management fees, administrative fees, and other expenses, but excluding distribution fees and acquired fund fees and expenses) for each class of the funds do not exceed 0.71% and 0.65%, respectively, (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until February 28, 2010. G. OTHER AFFILIATED TRANSACTIONS At October 31, 2009, Advisers owned 11.63% 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, 2009, the custodian fees were reduced as noted in the Statements of Operations. Annual Report | 115 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, 2009, the capital loss carryforwards were as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN LIMITED MATURITY FRANKLIN BALANCED CONVERTIBLE EQUITY U.S. GOVERNMENT REAL FUND SECURITIES FUND INCOME FUND SECURITIES FUND RETURN FUND ------------ ---------------- ------------ ---------------- ------------- Capital loss carryforwards expiring in: 2012 ........................ $ -- $ -- $ -- $ 83,547 $ -- 2013 ........................ -- -- -- 3,980,527 -- 2014 ........................ -- -- -- 4,303,979 -- 2015 ........................ -- -- -- 723,269 -- 2016 ........................ 3,920,213 1,589,567 45,458,589 -- 1,946,987 2017 ........................ 4,932,954 48,021,793 119,253,767 -- 1,217,512 ---------- ------------ ------------ ---------- ---------- $8,853,167 $ 49,611,360 $164,712,356 $9,091,322 $3,164,499 ========== ============ ============ ========== ==========
During the year ended October 31, 2009, the Franklin Limited Maturity U.S. Government Securities Fund utilized $4,991,625 of capital loss carryforwards. The tax character of distributions paid during the years ended October 31, 2009 and 2008, was as follows:
FRANKLIN FRANKLIN CONVERTIBLE BALANCED FUND SECURITIES FUND ------------------------------ ---------------------------- 2009 2008 2009 2008 -------------- ------------- ----------- ------------- Distributions paid from: Ordinary income ........... $3,808,049 $ 3,168,274 $33,415,203 $56,198,229 Long term capital gain .... -- 152,036 -- 24,854,722 ---------- ----------- ----------- ----------- $3,808,049 $ 3,320,310 $33,415,203 $81,052,951 ========== =========== =========== ===========
FRANKLIN EQUITY FRANKLIN LIMITED MATURITY U.S. INCOME FUND GOVERNMENT SECURITIES FUND ----------------------------- ---------------------------- 2009 2008 2009 2008 ------------- ------------- ------------ ------------- Distributions paid from: Ordinary income ........... $21,959,468 $27,752,727 $12,981,264 $10,025,522 Long term capital gain .... -- 39,665,396 -- -- ----------- ----------- ----------- ----------- $21,959,468 $67,418,123 $12,981,264 $10,025,522 =========== =========== =========== ===========
FRANKLIN REAL RETURN FUND ------------------------------ 2009 2008 ------------ ------------- Distributions paid from: Ordinary income ........... $347,052 $11,715,670 Long term capital gain .... -- 239,676 -------- ----------- $347,052 $11,955,346 ======== ===========
116 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At October 31, 2009, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN BALANCED CONVERTIBLE EQUITY FUND SECURITIES FUND INCOME FUND -------------- ---------------- --------------- Cost of investments ............ $105,133,794 $ 887,446,300 $634,184,923 ------------ ------------- ------------ Unrealized appreciation ........ $ 8,802,473 $ 55,800,789 $ 73,849,212 Unrealized depreciation ........ (6,344,102) (172,063,281) (68,330,623) ------------ ------------- ------------ Net unrealized appreciation (depreciation) .............. $ 2,458,371 $(116,262,492) $ 5,518,589 ------------ ------------- ------------ Distributable earnings -- undistributed ordinary income ............. $ -- $ 6,369,985 $ 145,127 ============ ============= ============
FRANKLIN LIMITED MATURITY FRANKLIN U.S. GOVERNMENT REAL SECURITIES FUND RETURN FUND ----------------- ------------- Cost of investments ............ $399,789,889 $385,879,489 ============ ============ Unrealized appreciation ........ $ 10,471,300 $ 6,307,311 Unrealized depreciation ........ (368,028) (4,722,282) ============ ============ Net unrealized appreciation (depreciation) .............. $ 10,103,272 $ 1,585,029 ============ ============ Distributable earnings -- undistributed ordinary income ...................... $ 270,773 $ -- ============ ============
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses, bond discounts and premiums, and 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, and bond discounts and premiums. Annual Report | 117 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the year ended October 31, 2009, 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 .................... $96,200,549 $341,801,368 $284,331,835 $285,106,472 $69,072,371 Sales ........................ $50,296,742 $281,910,993 $234,307,412 $205,056,232 $30,636,238
Transactions in options written during the year ended October 31, 2009, were as follows:
NUMBER OF PREMIUMS CONTRACTS RECEIVED ----------- --------- FRANKLIN BALANCED FUND Options outstanding at October 31, 2008 ........ 200 $ 14,605 Options written ............ 13,022 609,894 Options expired ............ (11,082) (523,810) Options exercised .......... (780) (40,150) Options closed ............. (100) (3,900) ------- --------- Options outstanding at October 31, 2009 ........ 1,260 $ 56,639 ======= =========
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the 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. CREDIT RISK AND DEFAULTED SECURITIES At October 31, 2009, the Franklin Balanced Fund, the Franklin Convertible Securities Fund, the Franklin Equity Income Fund, and the Franklin Real Return Fund have 7.66%, 67.65%, 13.31%, and 7.50%, 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 Convertible Securities Fund and the Franklin Real Return Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At October 31, 2009, the aggregate value of these securities was $18,900 and $80,125, respectively, representing less than 0.01% and 0.02%, respectively, of the funds' 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 Statements of Investments. 118 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. OTHER DERIVATIVE INFORMATION At October 31, 2009, the Franklin Balanced Fund and Franklin Real Return Fund have invested in derivative contracts which are reflected on the Statements of Assets and Liabilities as follows:
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------------- ------------------------------------- DERIVATIVE CONTRACTS NOT ACCOUNTED FOR AS STATEMENT OF ASSETS FAIR VALUE STATEMENT OF ASSETS FAIR VALUE HEDGING INSTRUMENTS AND LIABILITIES LOCATION AMOUNT AND LIABILITIES LOCATION AMOUNT ------------------------ ------------------------ ---------- ------------------------ ---------- FRANKLIN BALANCED FUND Equity contracts Investments, at value $ -- Options written, at value $ 51,410 FRANKLIN REAL RETURN FUND Foreign exchange contracts Unrealized appreciation Unrealized depreciation on forward exchange on forward exchange contracts $1,125,106 contracts $110,444
The effect of derivative contracts on the Franklin Balanced Fund's and Franklin Real Return Fund's Statements of Operations was as follows:
AVERAGE CHANGE IN AMOUNT DERIVATIVE CONTRACTS NOT UNREALIZED OUTSTANDING ACCOUNTED FOR AS STATEMENT OF OPERATIONS REALIZED APPRECIATION DURING THE HEDGING INSTRUMENTS LOCATION GAIN (LOSS)(a) (DEPRECIATION)(a) PERIOD(a, b) ------------------------ ------------------------------ -------------- ----------------- ------------ FRANKLIN BALANCED FUND Equity contracts Net realized gain (loss) from written options/Net change in unrealized appreciation (depreciation) on investments $416,730 $(38,234) $ 1,475 FRANKLIN REAL RETURN FUND Foreign exchange contracts Net realized gain (loss) from foreign currency transactions/ Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies $ 8,236 $793,425 $19,293,042
(a) For the six months ended October 31, 2009 (b) Represents the average number of option contracts or notional amount for other derivative contracts outstanding during the period. See Note 1(d) regarding derivative financial instruments. 10. OTHER CONSIDERATIONS From time to time, officers, directors or employees of the Franklin Real Return Fund's Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors' committees which, pursuant to the fund's policies and requirements of applicable securities laws, could prevent the fund from trading in the securities of such company for limited or extended periods of time. Annual Report | 119 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the year ended October 31, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period 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 ------------- --------------- ----------- ---------------- -------- Commitment fees ...... $138 $1,026 $1,054 $768 $593
12. FAIR VALUE MEASUREMENTS The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds' own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. 120 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE MEASUREMENTS (CONTINUED) The following is a summary of the inputs used as of October 31, 2009, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ----------- ------------ ------- ------------ FRANKLIN BALANCED FUND ASSETS: Investments in Securities: Equity Investments:(a) Energy ............................................ $ 6,030,989 $ 4,071,220 $-- $ 10,102,209 Financials. ....................................... 4,120,302 1,075,153 -- 5,195,455 Health Care ....................................... 4,869,500 2,693,763 -- 7,563,263 Information Technology ............................ 10,089,088 899,900 -- 10,988,988 Utilities ......................................... 8,555,600 1,635,334 -- 10,190,934 Other Equity Investments(b) ....................... 18,549,205 -- -- 18,549,205 Convertible Bonds .................................... -- 3,062,849 -- 3,062,849 Corporate Bonds. ..................................... -- 38,647,747 -- 38,647,747 Asset-Backed Securities and Commercial Mortgage-Backed Securities ............. -- 81,426 -- 81,426 Mortgage-Backed Securities ........................... -- 520,603 -- 520,603 Short Term Investments ............................... 2,689,486 -- -- 2,689,486 ----------- ------------ --- ------------ Total Investments in Securities ................ $54,904,170 $ 52,687,995 $-- $107,592,165 =========== ============ === ============ LIABILITIES: Options written ...................................... 51,410 -- -- 51,410 FRANKLIN CONVERTIBLE SECURITIES FUND ASSETS: Investments in Securities: Equity Investments:(a) Materials ......................................... $16,050,000 $ 18,207,513 $-- $ 34,257,513 Energy ............................................ -- 27,188,000 -- 27,188,000 Financials. ....................................... 23,345,500 13,221,250 -- 36,566,750 Consumer Discretionary ............................ 13,005,000 12,448,543 -- 25,453,543 Utilities ......................................... -- 27,293,151 -- 27,293,151 Health Care ....................................... -- 31,563,217 -- 31,563,217 Other Equity Investments(b) ....................... 17,100,000 -- -- 17,100,000 Convertible Bonds .................................... -- 555,882,376 -- 555,882,376 Short Term Investments ............................... 15,879,258 -- -- 15,879,258 ----------- ------------ --- ------------ Total Investments in Securities ................ $85,379,758 $685,804,050 $-- $771,183,808 =========== ============ === ============
Annual Report | 121 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------ ------------ ------- ------------ FRANKLIN EQUITY INCOME FUND ASSETS: Investments in Securities: Equity Investments:(a) Consumer Discretionary .......................... $ 21,791,626 $ 15,087,788 $-- $ 36,879,414 Energy .......................................... 69,714,778 8,403,840 -- 78,118,618 Health Care ..................................... 53,868,105 24,484,836 -- 78,352,941 Utilities. ...................................... 33,563,050 12,436,000 -- 45,999,050 Other Equity Investments(b) ..................... 330,053,553 -- -- 330,053,553 Convertible Bonds .................................. -- 44,508,984 -- 44,508,984 Corporate Bonds. ................................... -- 21,542,604 -- 21,542,604 Short Term Investments ............................. 4,248,348 -- -- 4,248,348 ------------ ------------ --- ------------ Total Investments in Securities .............. $513,239,460 $126,464,052 $-- $639,703,512 ============ ============ === ============ FRANKLIN LIMITED MATURITY U.S. GOVERNMENT SECURITIES FUND ASSETS: Investments in Securities: Corporate Bonds. ................................... $ -- $ 13,705,125 $-- $ 13,705,125 Mortgage-Backed Securities ......................... -- 111,507,190 -- 111,507,190 U.S. Government and Agency Securities .............. -- 272,312,205 -- 272,312,205 Short Term Investments ............................. 8,219,645 4,148,996 -- 12,368,641 ------------ ------------ --- ------------ Total Investments in Securities .............. $ 8,219,645 $401,673,516 $-- $409,893,161 ============ ============ === ============ FRANKLIN REAL RETURN FUND ASSETS: Investments in Securities: Equity Investments:(a) Diversified Financials. ......................... $ -- $ 65,347 $-- $ 65,347 Other Equity Investments(b) ..................... 22,490,447 -- -- 22,490,447 Corporate Bonds .................................... -- 21,929,316 -- 21,929,316 Foreign Government and Agency Securities ........... -- 49,870,644 -- 49,870,644 Senior Floating Rate Interests ..................... -- 358,482 -- 358,482 Short Term Investments ............................. -- 51,752,517 -- 51,752,517 U.S. Government and Agency Securities .............. -- 240,997,765 -- 240,997,765 ------------ ------------ --- ------------ Total Investments in Securities .............. $ 22,490,447 $364,974,071 $-- $387,464,518 ============ ============ === ============ Forward Exchange Contracts ............................ -- 1,125,106 -- 1,125,106 LIABILITIES: Forward Exchange Contracts ............................ -- 110,444 -- 110,444
(a) Includes common, preferred, and convertible preferred stock as well as other equity investments. (b) For detailed industry descriptions, see the accompanying Statements of Investments. 122 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. LOSS CONTINGENCY At October 31, 2009, 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. 14. SUBSEQUENT EVENTS The Funds have evaluated subsequent events through December 16, 2009, the issuance date of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS COUNTERPARTY DBAB - Deutsche Bank AG HSBC - HSBC Bank USA, N.A. JPHQ - JPMorgan Chase Bank, N.A. CURRENCY AUD - Australian Dollar BRL - Brazilian Real EUR - Euro KRW - South Korean Won MYR - Malaysian Ringgit NOK - Norwegian Krone PLN - Polish Zloty SEK - Swedish Krona SELECTED PORTFOLIO ADR - American Depository Receipt FDIC - Federal Deposit Insurance Corp. FHLB - Federal Home Loan Bank FNMA - Federal National Mortgage Association FRN - Floating Rate Note SF - Single Family Annual Report | 123 Franklin Investors Securities Trust REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE 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, 2009, 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 Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with 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, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California December 16, 2009 124 | Annual Report Franklin Investors Securities Trust TAX DESIGNATION (UNAUDITED) Under Section 854(b)(2) of the Internal Revenue Code (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, 2009:
FRANKLIN FRANKLIN FRANKLIN CONVERTIBLE EQUITY BALANCED FUND SECURITIES FUND INCOME FUND ------------- --------------- ------------ 39.49% 17.66% 77.91%
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, 2009:
FRANKLIN FRANKLIN FRANKLIN CONVERTIBLE EQUITY BALANCED FUND SECURITIES FUND INCOME FUND ------------- --------------- ----------- $1,573,622 $5,899,588 $18,901,462
Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. 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 $10,809,120 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, 2009. Annual Report | 125 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 LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- HARRIS J. ASHTON (1932) Trustee Since 1986 133 Bar-S Foods (meat packing One Franklin Parkway company). 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 110 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) (1971-2008); 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 110 ICO Global Communications One Franklin Parkway (Holdings) Limited (satellite San Mateo, CA 94403-1906 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 133 Hess Corporation (exploration One Franklin Parkway and refining of oil and gas), San Mateo, CA 94403-1906 H.J. Heinz 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).
126 | Annual Report
NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- FRANK W.T. LAHAYE (1929) Trustee Since 1986 110 None One Franklin Parkway 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 133 Hess Corporation (exploration One Franklin Parkway and refining of oil and gas). San Mateo, CA 94403-1906 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 141 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 110 None One Franklin Parkway Independent 2007 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 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 LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- **CHARLES B. JOHNSON (1933) Trustee and Trustee since 1986 133 None One Franklin Parkway Chairman of and Chairman San Mateo, CA 94403-1906 the Board 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 41 of the investment companies in Franklin Templeton Investments.
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NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- **RUPERT H. JOHNSON, JR. (1940) Trustee and Trustee since 52 None One Franklin Parkway Vice President 1987 and Vice San Mateo, CA 94403-1906 President 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 43 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ MARK BOYADJIAN (1964) Vice President Since 2003 Not Applicable Not Applicable One Franklin Parkway 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 2004 San Mateo, CA 94403-1906 Officer and 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 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). ------------------------------------------------------------------------------------------------------------------------------------ LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 45 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). ------------------------------------------------------------------------------------------------------------------------------------ GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton Investments.
128 | Annual Report
NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway 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 45 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ STEVEN J. GRAY (1955) Vice President Since August Not Applicable Not Applicable One Franklin Parkway 2009 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer of 45 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. ------------------------------------------------------------------------------------------------------------------------------------ ROBERT C. ROSSELOT (1960) Vice President Since August Not Applicable Not Applicable 500 East Broward Blvd. 2009 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 45 of the investment companies in Franklin Templeton Investments. ------------------------------------------------------------------------------------------------------------------------------------ KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
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NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, YEAR OF BIRTH AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------- --------------- ------------------- ----------------------- -------------------------------- CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway 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 45 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).
* 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 2006. 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. 130 | 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 | 131 This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A 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. 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 Quest 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 Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global 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 Mutual International 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(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) 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(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM 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(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) (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.) An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. (4.) For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. (5.) The fund invests primarily in insured municipal securities. (6.) 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. (7.) The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. (8.) The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the annual report (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com 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 A2009 12/09 OCTOBER 31, 2009 ANNUAL REPORT AND SHAREHOLDER LETTER Franklin Adjustable U.S. Government Securities Fund Franklin Floating Rate Daily Access Fund Franklin Low Duration Total Return Fund Franklin Total Return Fund SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com (GRAPHIC) FIXED INCOME FRANKLIN INVESTORS SECURITIES TRUST (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) FRANKLIN - Templeton - Mutual Series Contents SHAREHOLDER LETTER................................................................. 1 ANNUAL REPORT...................................................................... 3 Economic and Market Overview....................................................... 5 Franklin Adjustable U.S. Government Securities Fund................................ 15 Franklin Floating Rate Daily Access Fund........................................... 29 Franklin Low Duration Total Return Fund............................................ 39 Franklin Total Return Fund......................................................... 51 Financial Highlights and Statements of Investments................................. 127 Financial Statements............................................................... 132 Notes to Financial Statements...................................................... 155 Report of Independent Registered Public Accounting Firm............................ 156 Tax Designation.................................................................... 157 Board Members and Officers......................................................... 162 Shareholder Information
Shareholder Letter Dear Shareholder: During the 12-month period ended October 31, 2009, economic activity weakened before showing signs of stabilization. The slowdown began in 2008 with the U.S. subprime mortgage and credit crises and eventually spread worldwide. Despite coordinated efforts by many governments to address spreading liquidity and credit problems, deteriorating economic conditions and mounting uncertainty contributed to market woes through the period's first half. Later in the period, some indicators offered a better economic outlook, and markets rallied beginning in March 2009, erasing much of the earlier losses. At period-end, although some observers thought the worst of the economic crises was behind us, others believed significant challenges remained. We think it is important to put short-term market developments in perspective. Keep in mind we have navigated through past periods of high market volatility by remaining committed to our long-term perspective and disciplined investment philosophy. During such times, we search for bargains we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us reason to be optimistic about future market stabilization and economic recovery. Franklin Investors Securities Trust's annual report goes into greater detail about prevailing conditions during the period under review. In addition, you will find performance data, financial information and discussions from the portfolio managers. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the annual report | 1 If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds, keeping in mind the trust you have placed in us. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate current market conditions. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, -s- Charles B. Johnson Charles B. Johnson Chairman Franklin Investors Securities Trust THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2009. 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. 2 | Not part of the annual report Annual Report Economic and Market Overview During the 12-month period ended October 31, 2009, economic activity showed signs of recovery as many of the forces that had hindered the economy dissipated. Early in the period, the U.S. financial system was in crisis and consumer confidence fell to an all-time low. The financial system, however, avoided collapse, and later in the period, government stress tests of banks were generally positive. Financial markets stabilized in response to federal stimulus packages and the Federal Reserve Board's (Fed's) interventions, and consumer confidence rebounded. In March, many investors reentered the stock market and started a rally that brought the major indexes off this cycle's lows. In the third quarter, a number of blue-chip companies reported better-than-expected profits resulting from cost-cutting measures. Economic activity as measured by gross domestic product (GDP) turned from contraction to expansion. In 2008's fourth quarter, GDP registered an annualized -5.4%, followed by annualized rates of -6.4%, -0.7% and 2.8% in each of the subsequent three quarters. These positive signs, however, were constrained by a rising unemployment rate, which reached 10.2% by period-end, a 26-year high.(1) Despite improving economic data, most industries eliminated jobs. Oil prices were volatile, falling from $68 per barrel at the beginning of the period to a $31 low in December. As economic conditions improved, oil prices rebounded to end the period at $77. Many other commodity prices followed similar trends; therefore, as prices fell in late 2008, inflation remained muted, and October 2009's inflation rate was an annualized -0.2%.(1) Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Fed's informal target range of 1.5% to 2.0%.(1) The core personal consumption expenditures price index reported a 12-month increase of 1.4%.(2) A slowing economy and decelerating inflation prompted policymakers to reduce interest rates and enact stimulus plans. During the period, the Fed lowered the federal funds target rate from 1.00% to a range of 0% to 0.25%. The government implemented the American Recovery and Reinvestment Act, which included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care 1. Source: Bureau of Labor Statistics. 2. Source: Bureau of Economic Analysis. Annual Report | 3 and education. The Fed and U.S. Treasury Department also launched programs designed to shore up beleaguered banks' capital, enable freer lending to businesses and consumers, help struggling home buyers avoid foreclosure, and boost auto sales. Near period-end, the Fed assessed which support programs it created or expanded could be phased out. Most Treasury prices rose during the period, and fixed income spreads were generally wide relative to Treasury yields due to heightened market turbulence and risk aversion. Spreads for high yield bonds hit record levels. The spread between two-year and 10-year Treasury yields rose to 251 basis points (100 basis points equal one percentage point) at the end of October from 245 basis points at the beginning of the reporting period. The two-year Treasury bill yield fell from 1.56% to 0.90% over the 12-month period, while the 10-year Treasury note yield fell from 4.01% to 3.41%. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31, 2009. 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 | Annual Report 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) PORTFOLIO BREAKDOWN Franklin Adjustable U.S. Government Securities Fund Based on Total Net Assets as of 10/31/09 [PIE CHART] Fannie Mae (FNMA)................................... 70.7% Freddie Mac (FHLMC)................................. 22.0% Ginnie Mae (GNMA)................................... 1.1% Short-Term Investments & Other Net Assets........... 6.2%
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. We are pleased to bring you Franklin Adjustable U.S. Government Securities Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW Franklin Adjustable U.S. Government Securities Fund - Class A posted a +4.10% cumulative total return for the 12 months under review. The Fund outperformed its benchmark, the Barclays Capital (BC) U.S. Government 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. Annual Report | 5 DIVIDEND DISTRIBUTIONS* Franklin Adjustable U.S. Government Securities Fund 11/1/08-10/31/09
DIVIDEND PER SHARE ------------------------------------------- MONTH CLASS A CLASS C ADVISOR CLASS ----------------------------------------------------------------- November 1.8193 cents 1.5481 cents 1.9917 cents December 2.4291 cents 2.1161 cents 2.6592 cents January 2.3777 cents 2.0845 cents 2.5754 cents February 2.4370 cents 2.1613 cents 2.5960 cents March 2.4128 cents 2.0989 cents 2.6117 cents April 2.2420 cents 1.9463 cents 2.4271 cents May 1.9729 cents 1.6860 cents 2.1519 cents June 2.2353 cents 1.9098 cents 2.4360 cents July 1.9374 cents 1.6321 cents 2.1294 cents August 2.0132 cents 1.7090 cents 2.2051 cents September 2.0609 cents 1.7506 cents 2.2505 cents October 1.9820 cents 1.6858 cents 2.1678 cents ----------------------------------------------------------------- TOTAL 25.9196 CENTS 22.3285 CENTS 28.2018 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. Index: 1-2 Year Component, which posted a +3.30% total return for the same period.(3) You can find the Fund's long-term performance data in the Performance Summary beginning on page 9. 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 have been through different interest rate cycles and have a lower sensitivity to shifts in interest rates. 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. 3. Source: (C) 2009 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 public obligations of the U.S. Treasury with at least one year up to, but not including, two years to final maturity and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. The index is unmanaged and includes reinvested interest. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. 6 | Annual Report MANAGER'S DISCUSSION Although economic activity contracted during the first half of the reporting period, the 12 months under review ended with a more constructive and optimistic tone. During the second half of the period, the economy gradually improved and financial systems stabilized. Also, U.S. gross domestic product moved back into positive territory, indicating the recession had ended. While a number of risks remained that raised concerns about continued growth momentum, economic and financial stability helped build a foundation for improved growth over the medium and longer terms. Interest rates remained historically low and Treasury yields decreased across all maturities during the period. Hybrid ARMs, mortgages that combine an initial fixed interest rate period with a subsequent adjustable rate period, delivered positive total returns, but underperformed their fixed-rate mortgage-backed counterparts. We maintained our investment strategy as we continued to look for strong cash flow fundamentals and attractive valuations to uncover opportunities across the ARM universe. The Fund invests predominantly in Fannie Mae, Freddie Mac and Ginnie Mae ARMs. Prepayment risk was heightened as the ARM market was priced at a premium due to the low Treasury and mortgage interest rates. However, refinancing activity was constrained during this cycle due to the associated cost of refinancing, reduced home equity, and declining home prices. To the extent we can buy ARMs that prepay slower than market expectations, we may add value for the Fund's shareholders. Annual Report | 7 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, 2009, 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. 8 | Annual Report Performance Summary as of 10/31/09 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 10/31/09 10/31/08 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $8.96 $8.86 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.259196
CLASS C (SYMBOL: FCSCX) CHANGE 10/31/09 10/31/08 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $8.96 $8.86 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.223285
ADVISOR CLASS (SYMBOL: FAGZX) CHANGE 10/31/09 10/31/08 -------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.10 $8.97 $8.87 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.282018
Annual Report | 9 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) +4.10% +20.14% +45.68% Average Annual Total Return(2) +1.80% +3.26% +3.60% Avg. Ann. Total Return (9/30/09)(3) +1.92% +3.29% +3.65% Distribution Rate(4) 2.63% 30-Day Standardized Yield(5) 2.25% Total Annual Operating Expenses(6) 0.94%
CLASS C 1-YEAR 5-YEAR INCEPTION (7/1/03) ----------------------------------------------------------------------------------------- Cumulative Total Return(1) +3.69% +17.93% +19.09% Average Annual Total Return(2) +2.69% +3.35% +2.80% Avg. Ann. Total Return (9/30/09)(3) +2.69% +3.33% +2.82% Distribution Rate(4) 2.29% 30-Day Standardized Yield(5) 1.91% Total Annual Operating Expenses(6) 1.34%
ADVISOR CLASS(7) 1-YEAR 5-YEAR 10-YEAR --------------------------------------------------------------------------------- Cumulative Total Return(1) +4.36% +20.72% +46.37% Average Annual Total Return(2) +4.36% +3.84% +3.88% Avg. Ann. Total Return (9/30/09)(3) +4.49% +3.86% +3.93% Distribution Rate(4) 2.94% 30-Day Standardized Yield(5) 2.55% Total Annual Operating Expenses(6) 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. 10 | 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. CLASS A (11/1/99-10/31/09)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. GOVERNMENT SECURITIES FUND - CLASS A 1-2 YEAR INDEX ----------------------------------- -------------------------------- 11/1/1999 $ 9,779 $10,000 11/30/1999 $ 9,807 $10,022 12/31/1999 $ 9,829 $10,038 1/31/2000 $ 9,878 $10,047 2/29/2000 $ 9,909 $10,112 3/31/2000 $ 9,961 $10,167 4/30/2000 $10,006 $10,198 5/31/2000 $10,030 $10,238 6/30/2000 $10,097 $10,336 7/31/2000 $10,154 $10,399 8/31/2000 $10,201 $10,471 9/30/2000 $10,270 $10,545 10/31/2000 $10,311 $10,598 11/30/2000 $10,387 $10,690 12/31/2000 $10,487 $10,807 1/31/2001 $10,552 $10,944 2/28/2001 $10,617 $11,009 3/31/2001 $10,704 $11,095 4/30/2001 $10,747 $11,135 5/31/2001 $10,813 $11,200 6/30/2001 $10,879 $11,238 7/31/2001 $10,935 $11,353 8/31/2001 $10,955 $11,417 9/30/2001 $11,029 $11,583 10/31/2001 $11,137 $11,686 11/30/2001 $11,156 $11,675 12/31/2001 $11,163 $11,697 1/31/2002 $11,194 $11,714 2/28/2002 $11,213 $11,763 3/31/2002 $11,247 $11,698 4/30/2002 $11,328 $11,822 5/31/2002 $11,320 $11,862 6/30/2002 $11,372 $11,958 7/31/2002 $11,420 $12,080 8/31/2002 $11,405 $12,112 9/30/2002 $11,475 $12,193 10/31/2002 $11,521 $12,224 11/30/2002 $11,520 $12,200 12/31/2002 $11,545 $12,297 1/31/2003 $11,552 $12,302 2/28/2003 $11,587 $12,345 3/31/2003 $11,621 $12,369 4/30/2003 $11,642 $12,390 5/31/2003 $11,673 $12,424 6/30/2003 $11,667 $12,447 7/31/2003 $11,610 $12,401 8/31/2003 $11,601 $12,412 9/30/2003 $11,660 $12,503 10/31/2003 $11,637 $12,468 11/30/2003 $11,653 $12,467 12/31/2003 $11,686 $12,529 1/31/2004 $11,717 $12,553 2/29/2004 $11,747 $12,604 3/31/2004 $11,793 $12,632 4/30/2004 $11,745 $12,544 5/31/2004 $11,744 $12,535 6/30/2004 $11,750 $12,532 7/31/2004 $11,804 $12,573 8/31/2004 $11,833 $12,647 9/30/2004 $11,848 $12,638 10/31/2004 $11,862 $12,672 11/30/2004 $11,867 $12,622 12/31/2004 $11,896 $12,645 1/31/2005 $11,912 $12,647 2/28/2005 $11,956 $12,630 3/31/2005 $11,960 $12,633 4/30/2005 $11,991 $12,697 5/31/2005 $12,024 $12,742 6/30/2005 $12,044 $12,765 7/31/2005 $12,022 $12,746 8/31/2005 $12,086 $12,816 9/30/2005 $12,081 $12,796 10/31/2005 $12,078 $12,802 11/30/2005 $12,116 $12,841 12/31/2005 $12,141 $12,888 1/31/2006 $12,168 $12,917 2/28/2006 $12,210 $12,937 3/31/2006 $12,239 $12,960 4/30/2006 $12,251 $13,005 5/31/2006 $12,284 $13,029 6/30/2006 $12,315 $13,056 7/31/2006 $12,388 $13,144 8/31/2006 $12,449 $13,227 9/30/2006 $12,495 $13,292 10/31/2006 $12,531 $13,347 11/30/2006 $12,610 $13,410 12/31/2006 $12,644 $13,427 1/31/2007 $12,685 $13,464 2/28/2007 $12,739 $13,555 3/31/2007 $12,790 $13,606 4/30/2007 $12,859 $13,653 5/31/2007 $12,869 $13,663 6/30/2007 $12,922 $13,725 7/31/2007 $12,964 $13,823 8/31/2007 $13,018 $13,941 9/30/2007 $13,113 $14,036 10/31/2007 $13,156 $14,090 11/30/2007 $13,240 $14,278 12/31/2007 $13,280 $14,319 1/31/2008 $13,393 $14,539 2/29/2008 $13,442 $14,662 3/31/2008 $13,476 $14,697 4/30/2008 $13,494 $14,613 5/31/2008 $13,507 $14,585 6/30/2008 $13,552 $14,623 7/31/2008 $13,579 $14,675 8/31/2008 $13,633 $14,728 9/30/2008 $13,674 $14,794 10/31/2008 $13,690 $14,891 11/30/2008 $13,703 $15,048 12/31/2008 $13,756 $15,172 1/31/2009 $13,870 $15,160 2/28/2009 $13,924 $15,153 3/31/2009 $13,993 $15,210 4/30/2009 $14,028 $15,227 5/31/2009 $14,090 $15,260 6/30/2009 $14,157 $15,253 7/31/2009 $14,187 $15,278 8/31/2009 $14,203 $15,327 9/30/2009 $14,252 $15,354 10/31/2009 $14,246 $15,382 Total Returns 42.46% 53.82%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/09 --------------------------------------------------------------------------- 1-Year +1.80% 5-Year +3.26% 10-Year +3.60%
CLASS C (7/1/03-10/31/09)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. SECURITIES FUND - CLASS C GOVERNMENT 1-2 YEAR INDEX ----------------------------------- ------------------------- 7/1/2003 $10,000 $10,000 7/31/2003 $9,946 $ 9,964 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 $10,016 12/31/2003 $9,993 $10,067 1/31/2004 $10,005 $10,085 2/29/2004 $10,028 $10,126 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 $10,101 8/31/2004 $10,091 $10,161 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 $10,286 11/30/2005 $10,272 $10,317 12/31/2005 $10,301 $10,355 1/31/2006 $10,321 $10,378 2/28/2006 $10,342 $10,394 3/31/2006 $10,363 $10,413 4/30/2006 $10,382 $10,449 5/31/2006 $10,406 $10,468 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 $10,680 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 $10,932 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 $11,200 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 $11,749 7/31/2008 $11,404 $11,790 8/31/2008 $11,433 $11,833 9/30/2008 $11,476 $11,886 10/31/2008 $11,486 $11,964 11/30/2008 $11,480 $12,090 12/31/2008 $11,533 $12,190 1/31/2009 $11,612 $12,180 2/28/2009 $11,667 $12,174 3/31/2009 $11,707 $12,220 4/30/2009 $11,746 $12,234 5/31/2009 $11,781 $12,260 6/30/2009 $11,833 $12,255 7/31/2009 $11,854 $12,275 8/31/2009 $11,864 $12,314 9/30/2009 $11,900 $12,336 10/31/2009 $11,909 $12,359 Total Returns 19.09% 23.59%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------------------------------------------------------------------------ 1-Year +2.69% 5-Year +3.35% Since Inception (7/1/03) +2.80%
Annual Report | 11 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
Advisor Class(7) 10/31/09 -------------------------------------------------------------------------- 1-Year +4.36% 5-Year +3.84% 10-Year +3.88%
ADVISOR CLASS (11/1/99-10/31/09)(7)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT BARCLAYS CAPITAL U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS 1-2 YEAR INDEX ------------------------------------- -------------------------------- 11/1/1999 $10,000 $10,000 11/30/1999 $10,028 $10,022 12/31/1999 $10,051 $10,038 1/31/2000 $10,101 $10,047 2/29/2000 $10,132 $10,112 3/31/2000 $10,186 $10,167 4/30/2000 $10,232 $10,198 5/31/2000 $10,256 $10,238 6/30/2000 $10,325 $10,336 7/31/2000 $10,383 $10,399 8/31/2000 $10,431 $10,471 9/30/2000 $10,502 $10,545 10/31/2000 $10,544 $10,598 11/30/2000 $10,622 $10,690 12/31/2000 $10,724 $10,807 1/31/2001 $10,790 $10,944 2/28/2001 $10,856 $11,009 3/31/2001 $10,946 $11,095 4/30/2001 $10,990 $11,135 5/31/2001 $11,057 $11,200 6/30/2001 $11,125 $11,238 7/31/2001 $11,181 $11,353 8/31/2001 $11,202 $11,417 9/30/2001 $11,278 $11,583 10/31/2001 $11,388 $11,686 11/30/2001 $11,408 $11,675 12/31/2001 $11,415 $11,697 1/31/2002 $11,447 $11,714 2/28/2002 $11,466 $11,763 3/31/2002 $11,501 $11,698 4/30/2002 $11,584 $11,822 5/31/2002 $11,576 $11,862 6/30/2002 $11,629 $11,958 7/31/2002 $11,678 $12,080 8/31/2002 $11,662 $12,112 9/30/2002 $11,734 $12,193 10/31/2002 $11,781 $12,224 11/30/2002 $11,780 $12,200 12/31/2002 $11,805 $12,297 1/31/2003 $11,813 $12,302 2/28/2003 $11,848 $12,345 3/31/2003 $11,884 $12,369 4/30/2003 $11,905 $12,390 5/31/2003 $11,936 $12,424 6/30/2003 $11,931 $12,447 7/31/2003 $11,872 $12,401 8/31/2003 $11,863 $12,412 9/30/2003 $11,923 $12,503 10/31/2003 $11,899 $12,468 11/30/2003 $11,916 $12,467 12/31/2003 $11,950 $12,529 1/31/2004 $11,981 $12,553 2/29/2004 $12,012 $12,604 3/31/2004 $12,059 $12,632 4/30/2004 $12,010 $12,544 5/31/2004 $12,009 $12,535 6/30/2004 $12,015 $12,532 7/31/2004 $12,071 $12,573 8/31/2004 $12,100 $12,647 9/30/2004 $12,116 $12,638 10/31/2004 $12,130 $12,672 11/30/2004 $12,135 $12,622 12/31/2004 $12,164 $12,645 1/31/2005 $12,181 $12,647 2/28/2005 $12,226 $12,630 3/31/2005 $12,230 $12,633 4/30/2005 $12,261 $12,697 5/31/2005 $12,295 $12,742 6/30/2005 $12,316 $12,765 7/31/2005 $12,293 $12,746 8/31/2005 $12,359 $12,816 9/30/2005 $12,354 $12,796 10/31/2005 $12,351 $12,802 11/30/2005 $12,390 $12,841 12/31/2005 $12,415 $12,888 1/31/2006 $12,443 $12,917 2/28/2006 $12,486 $12,937 3/31/2006 $12,515 $12,960 4/30/2006 $12,528 $13,005 5/31/2006 $12,561 $13,029 6/30/2006 $12,593 $13,056 7/31/2006 $12,668 $13,144 8/31/2006 $12,730 $13,227 9/30/2006 $12,777 $13,292 10/31/2006 $12,814 $13,347 11/30/2006 $12,895 $13,410 12/31/2006 $12,930 $13,427 1/31/2007 $12,972 $13,464 2/28/2007 $13,027 $13,555 3/31/2007 $13,079 $13,606 4/30/2007 $13,149 $13,653 5/31/2007 $13,160 $13,663 6/30/2007 $13,214 $13,725 7/31/2007 $13,257 $13,823 8/31/2007 $13,312 $13,941 9/30/2007 $13,409 $14,036 10/31/2007 $13,453 $14,090 11/30/2007 $13,539 $14,278 12/31/2007 $13,580 $14,319 1/31/2008 $13,695 $14,539 2/29/2008 $13,746 $14,662 3/31/2008 $13,781 $14,697 4/30/2008 $13,798 $14,613 5/31/2008 $13,827 $14,585 6/30/2008 $13,877 $14,623 7/31/2008 $13,907 $14,675 8/31/2008 $13,965 $14,728 9/30/2008 $14,010 $14,794 10/31/2008 $14,029 $14,891 11/30/2008 $14,029 $15,048 12/31/2008 $14,103 $15,172 1/31/2009 $14,224 $15,160 2/28/2009 $14,281 $15,153 3/31/2009 $14,339 $15,210 4/30/2009 $14,394 $15,227 5/31/2009 $14,460 $15,260 6/30/2009 $14,532 $15,253 7/31/2009 $14,550 $15,278 8/31/2009 $14,570 $15,327 9/30/2009 $14,639 $15,354 10/31/2009 $14,637 $15,382 Total Returns 46.37% 53.82%
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 10/31/09. 5. The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 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 and average annual total returns of Advisor Class shares were +6.07% and +4.11%. 8. Source: (C) 2009 Morningstar. The BC U.S. Government Index: 1-2 Year Component includes public obligations of the U.S. Treasury with at least one year up to, but not including, two years to final maturity and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. 12 | Annual Report 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 - 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 | 13 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 CLASS A Actual $ 1,000 $1,015.90 $4.37 Hypothetical (5% return before expenses) $ 1,000 $1,020.87 $4.38 CLASS C Actual $ 1,000 $1,013.90 $6.40 Hypothetical (5% return before expenses) $ 1,000 $1,018.85 $6.41 ADVISOR CLASS Actual $ 1,000 $1,017.20 $3.10 Hypothetical (5% return before expenses) $ 1,000 $1,022.13 $3.11
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.86%; C: 1.26%; and Advisor: 0.61%), multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 14 | Annual Report Franklin Floating Rate Daily Access Fund YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Floating Rate Daily Access Fund seeks to provide a high level of current income and, secondarily, preservation of capital by investing at least 80% of its net assets in income-producing floating interest rate corporate loans and corporate debt securities. PORTFOLIO BREAKDOWN Franklin Floating Rate Daily Access Fund Based on Total Net Assets as of 10/31/09 [PIE CHART] Senior Floating Rate Interests 91.6% Short-Term Investments & Other Net Assets 8.4%
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 Floating Rate Daily Access Fund covers the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW Franklin Floating Rate Daily Access Fund - Class A delivered a cumulative total return of +18.32% for the 12 months under review. The Fund underperformed its benchmark, the Credit Suisse Leveraged Loan Index (CS LLI), which had a +24.67% 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) 2009 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 LLI 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, and an index is not 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 70. Annual Report | 15 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. SYNDICATED BANK LOAN MARKET OVERVIEW During the 12-month reporting period, the Federal Reserve Board's low target interest rate and new programs to improve liquidity in the overall credit markets resulted in the three-month LIBOR rate declining 275 basis points (100 basis points equal one percentage point) from 3.03% to 0.28%. Benefiting from strong demand, the bank loan market rebounded to levels not reached since prior to Lehman Brothers' bankruptcy. The strong demand was the result of increased liquidity within the financial system and the opening up of the capital markets, which allowed companies to refinance their bank debt through the high yield bond and equity markets. This access to the capital markets also permitted the return of mergers and acquisition financings as well as a few leveraged buyouts and dividend deals later in the period. Issuers had many possible reasons to refinance their bank loans: 1) to deal with upcoming maturities, 2) to have more flexibility with regard to covenants or 3) to increase incremental liquidity on their balance sheets. Demand in the high yield bond market was particularly strong and led to significant high yield bond new issuance that replaced the senior bank debt of a number of issuers. In turn, these refinancings increased the cash balances of bank loan lenders and also created greater demand in the secondary market as there was little new issuance in the primary loan market during the period. Strong inflows into the high yield bond market also prompted a number of high yield accounts to increase their exposure to loans that offered attractive value relative to the bond market and added incremental demand in the secondary loan market. Investor demand for higher risk credits was particularly strong during the second half of the period, and drove an extreme rally for lower rated and distressed credits. Investors were more confident taking on this incremental risk, as corporate defaults increased at a slower pace toward the end of the period and longer term valuations remained fairly attractive. As liquidity improved, this activity led to historically high returns for lower rated and distressed loans. The overall strong demand for bank loans during the period drove secondary loan prices up from 71 cents on the dollar at the beginning of the period to approximately 90 cents on the dollar at the end of the period.(2) As a result, the average secondary spread to maturity tightened more than 324 basis points and at period-end was 521 basis points above LIBOR. 2. Source: Standard & Poor's. The S&P/Leveraged Commentary & Data (LCD) Flow Name Composite Index comprises the 15 most actively traded loan facilities, generally drawn from the S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index (LLI). 16 | Annual Report A number of issuers made amendment requests as they sought relief from covenants and entered into "amend and extend" transactions. "Amend and extend" transactions allowed issuers, prior to future comprehensive refinancings, to extend the maturity on a portion of their existing term loans in exchange for higher fees and spreads. During the period, these successful maturity extensions improved the risk/reward profile of extended term loans and benefited such credits' secondary loan prices. For the 12-month reporting period, the loan default rate was 10.7% by principal amount and 8.2% by number of loans.(3) Despite an improvement in capital market conditions, the loan default rate continued to rise as a number of companies had overleveraged and unsustainable capital structures. The defaults occurred in various industries, with more prevalence in the automotive, chemicals, gaming and hotel, media, printing and publishing, and oil and gas industries. Although defaults continued to increase, the pace was slower as liquidity improved. These conditions allowed some companies to avoid defaulting through refinancing or extending some of their maturities. 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. MANAGER'S DISCUSSION During the 12-month reporting period, the Fund's underperformance relative to the CS LLI was largely due to our focus on higher credit quality within the portfolio and our goal of avoiding defaults. Our conservative and selective investment process benefited the Fund's performance in prior periods such as calendar years 2007 and 2008, when the Fund sold a number of holdings early in the credit cycle before these companies defaulted and declined dramatically in price. 3. Source: S&P LCD. Annual Report | 17 DIVIDEND DISTRIBUTIONS* Franklin Floating Rate Daily Access Fund 11/1/08-10/31/09
DIVIDEND PER SHARE -------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C ADVISOR ------------------------------------------------------------------------------------ November 3.5691 cents 3.1395 cents 3.3427 cents 3.7123 cents December 3.8281 cents 3.3533 cents 3.5711 cents 3.9840 cents January 2.4515 cents 2.0089 cents 2.2187 cents 2.6037 cents February 1.9104 cents 1.4803 cents 1.6837 cents 2.0583 cents March 2.4754 cents 1.9817 cents 2.2160 cents 2.6350 cents April 2.0603 cents 1.5986 cents 1.8023 cents 2.2193 cents May 2.2329 cents 1.7560 cents 1.9860 cents 2.3889 cents June 2.0212 cents 1.4836 cents 1.7393 cents 2.2027 cents July 2.0621 cents 1.5358 cents 1.7686 cents 2.2405 cents August 2.1126 cents 1.5636 cents 1.8136 cents 2.2963 cents September 2.2917 cents 1.7570 cents 2.0078 cents 2.4719 cents October 2.3418 cents 1.8010 cents 2.0447 cents 2.5227 cents ------------------------------------------------------------------------------------ TOTAL 29.3571 CENTS 23.4593 CENTS 26.1945 CENTS 31.3356 CENTS
* Assumes shares were purchased or 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. However, during the past 12 months, higher credit quality loans (BB rated and above) significantly underperformed lower rated credits (B and lower) and distressed credits, as higher risk loans rallied strongly. For the one-year period, BB-rated loans returned 21.1% compared with 26.7% for B-rated loans.(1) Investors assumed more risk as liquidity returned to the credit markets and economic conditions stabilized, which led to historically high returns for lower rated and distressed loans, particularly in the second half of the period. However, although the loan default rate in the overall market continued to rise and reached an all-time high during the period, the Fund's default rate remained significantly lower. Although our overall investment strategy remained conservative during the period, the Fund sought to take advantage of a number of investment opportunities within the primary and secondary markets that had what we viewed as very attractive risk/reward profiles in the form of outsized coupons and/or yields and significant asset coverage. A number of new issues were priced at a premium to existing loans in the secondary market and offered very favorable deal structures, in our view. In general, institutional new issuance seemed to have some preference toward 18 | Annual Report companies in more stable industries. For example, the Fund participated in the financing for pharmaceutical company Warner Chilcott's acquisition of Proctor & Gamble's global branded drug unit. We invested in this loan due to the company's stronger and more diversified asset base following the merger and its attractive pricing. Within the casinos and gaming sector, we increased our exposure to a loan to the Venetian Macau, a subsidiary of Las Vegas Sands. In contrast to the broader market, which did not, in our view, adequately differentiate the credit risk between these two related borrowers, we favored the loan to the Venetian Macau over Las Vegas Sands due to features such as lower total leverage and a better risk/reward profile. Our strategy paid off, as the price of the Venetian Macau loan appreciated significantly versus the gaming sector and the broader market during the period. The Fund also benefited from its position in Conseco, a provider of supplemental health and life insurance and annuities. Conseco rebounded significantly from its poor March performance after lenders amended its loan agreement, a move that helped assuage investors' fears that the company's liquidity and debt covenant margins would cause a default under its previous loan agreement. The Fund took the opportunity to increase its position in the Conseco loan at lower prices, which subsequently rebounded and benefited Fund performance toward the end of the period. A number of the Fund's significant investments in the secondary market during the period sought to take advantage of our assessment that refinancings and/or bank loan paydowns would be more prevalent during the period. We targeted term loans with short, upcoming maturities and issuers that were likely to access the high yield bond or public equity markets for additional capital to repay debt. During the period, the Fund's performance was minimally impacted by its industry positioning relative to its benchmark. The Fund's performance was hurt by its overweighted position in the manufacturing sector and underweighted position in the wireless telecommunication services industry.(4) Some of the manufacturing companies we held were negatively impacted by a decline in demand for manufactured durable goods, despite their solid assets and strong product offerings. The Fund's underweighting in wireless telecommunication 4. The manufacturing sector comprises construction and farm machinery and heavy trucks, diversified support services, electrical components and equipment, electronic manufacturing services, industrial conglomerates, and industrial machinery in the SOI. TOP 10 HOLDINGS Franklin Floating Rate Daily Access Fund 10/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS -------------------------------------------------------------------------------- VML U.S. Finance LLC (Venetian Macau) 1.8% CASINOS & GAMING RBS Global Inc. (Rexnord) 1.6% INDUSTRIAL MACHINERY Conseco Inc. 1.6% LIFE & HEALTH INSURANCE Intelsat Corp. (Panamsat) 1.5% WIRELESS TELECOMMUNICATION SERVICES HCA Inc. 1.4% HEALTH CARE FACILITIES UPC Financing Partnership 1.4% CABLE & SATELLITE NRG Energy Inc. 1.3% INDEPENDENT POWER PRODUCERS & ENERGY TRADERS Community Health Systems Inc. 1.3% HEALTH CARE FACILITIES DaVita Inc. 1.2% HEALTH CARE SERVICES Iasis Healthcare LLC 1.2% HEALTH CARE FACILITIES
Annual Report | 19 services limited any benefits from January 2009's rally that was spurred by the merger of carriers Verizon and Alltel and by investor perception of the industry as fairly defensive in the economic downturn. In contrast, the Fund's performance did benefit from its underweighting in the utilities and energy sectors.(5) Many of the utilities sector issues were lower rated and single project deals. Although positive technical conditions such as repayments and inflows that increased demand supported the loan market for most of the period, near period-end we observed some signs of activity in the new-issue market. In our analysis, the prospect of more new issuance, barring an unexpected surge in loan defaults, could produce a more balanced supply/demand situation with loan prices potentially remaining range bound in the short term. Our long-term focus remains on minimizing defaults and concentrating on higher credit quality loans and companies we believe have adequate liquidity and appropriate balance sheets. However, as corporate earnings and the broader economy showed signs of stabilization, we shifted our positioning into industries that potentially can benefit more from an economic recovery. We also selectively added to a few stressed opportunities that our analysis showed can improve if the economy rebounds, and we intend to remain focused on their risk/reward profiles and longer term recovery values. 5. The utilities sector comprises independent power producers and energy traders in the SOI. The energy sector comprises oil and gas drilling in the SOI. 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, 2009, 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 10/31/09 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 10/31/09 10/31/08 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$1.07 $8.73 $7.66 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.293571
CLASS B (SYMBOL: FBFRX) CHANGE 10/31/09 10/31/08 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$1.06 $8.72 $7.66 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.234593
CLASS C (SYMBOL: FCFRX) CHANGE 10/31/09 10/31/08 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$1.06 $8.73 $7.67 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.261945
ADVISOR CLASS (SYMBOL: FDAAX) CHANGE 10/31/09 10/31/08 ----------------------------------------------------------------------------- Net Asset Value (NAV) +$1.07 $8.73 $7.66 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $0.313356
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) +18.32% +11.17% +29.73% Average Annual Total Return(2) +15.60% +1.68% +2.83% Avg. Ann. Total Return (9/30/09)(3) +0.77% +1.72% +2.83% Distribution Rate(4) 3.19% 30-Day Standardized Yield(5) 3.70% Total Annual Operating Expenses(6) 1.01%
CLASS B 1-YEAR 5-YEAR INCEPTION (5/1/01) ------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +17.31% +7.16% +22.56% Average Annual Total Return(2) +13.31% +1.06% +2.42% Avg. Ann. Total Return (9/30/09)(3) -1.66% +1.10% +2.41% Distribution Rate(4) 2.51% 30-Day Standardized Yield(5) 3.03% Total Annual Operating Expenses(6) 1.75%
CLASS C 1-YEAR 5-YEAR INCEPTION (5/1/01) ------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +17.69% +9.00% +25.53% Average Annual Total Return(2) +16.69% +1.74% +2.71% Avg. Ann. Total Return (9/30/09)(3) +1.66% +1.77% +2.71% Distribution Rate(4) 2.85% 30-Day Standardized Yield(5) 3.38% Total Annual Operating Expenses(6) 1.40%
ADVISOR CLASS 1-YEAR 5-YEAR INCEPTION (5/1/01) ------------------------------------------------------------------------------------------------------------- Cumulative Total Return(1) +18.74% +12.69% +32.65% Average Annual Total Return(2) +18.74% +2.42% +3.38% Avg. Ann. Total Return (9/30/09)(3) +3.43% +2.43% +3.38% Distribution Rate(4) 3.51% 30-Day Standardized Yield(5) 4.02% Total Annual Operating Expenses(6) 0.76%
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
CLASS A 10/31/09 ------------------------------------------------------------------------------ 1-Year +15.60% 5-Year +1.68% Since Inception (5/1/01) +2.83%
CLASS A (5/1/01-10/31/09)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED ACCESS FUND - CLASS A LOAN INDEX ---------------------------- ----------------------- 5/1/2001 $ 9,775 $10,000 5/31/2001 $ 9,896 $10,120 6/30/2001 $ 9,951 $10,132 7/31/2001 $10,022 $10,158 8/31/2001 $10,072 $10,239 9/30/2001 $10,025 $10,043 10/31/2001 $10,015 $ 9,886 11/30/2001 $10,107 $10,042 12/31/2001 $10,181 $10,146 1/31/2002 $10,261 $10,202 2/28/2002 $10,255 $10,163 3/31/2002 $10,333 $10,281 4/30/2002 $10,395 $10,391 5/31/2002 $10,443 $10,384 6/30/2002 $10,416 $10,227 7/31/2002 $10,279 $10,072 8/31/2002 $10,252 $10,043 9/30/2002 $10,259 $10,065 10/31/2002 $10,202 $ 9,930 11/30/2002 $10,271 $10,100 12/31/2002 $10,382 $10,259 1/31/2003 $10,440 $10,398 2/28/2003 $10,485 $10,452 3/31/2003 $10,533 $10,486 4/30/2003 $10,612 $10,634 5/31/2003 $10,692 $10,777 6/30/2003 $10,783 $10,929 7/31/2003 $10,830 $11,003 8/31/2003 $10,868 $11,027 9/30/2003 $10,922 $11,138 10/31/2003 $10,984 $11,238 11/30/2003 $11,023 $11,319 12/31/2003 $11,065 $11,389 1/31/2004 $11,115 $11,508 2/29/2004 $11,150 $11,544 3/31/2004 $11,188 $11,591 4/30/2004 $11,225 $11,644 5/31/2004 $11,225 $11,671 6/30/2004 $11,282 $11,745 7/31/2004 $11,316 $11,786 8/31/2004 $11,332 $11,804 9/30/2004 $11,358 $11,849 10/31/2004 $11,408 $11,908 11/30/2004 $11,439 $11,973 12/31/2004 $11,472 $12,028 1/31/2005 $11,508 $12,090 2/28/2005 $11,565 $12,160 3/31/2005 $11,603 $12,222 4/30/2005 $11,606 $12,232 5/31/2005 $11,614 $12,243 6/30/2005 $11,678 $12,325 7/31/2005 $11,743 $12,421 8/31/2005 $11,792 $12,507 9/30/2005 $11,838 $12,566 10/31/2005 $11,865 $12,606 11/30/2005 $11,903 $12,648 12/31/2005 $11,954 $12,712 1/31/2006 $12,048 $12,795 2/28/2006 $12,112 $12,884 3/31/2006 $12,159 $12,979 4/30/2006 $12,216 $13,041 5/31/2006 $12,234 $13,092 6/30/2006 $12,272 $13,146 7/31/2006 $12,327 $13,214 8/31/2006 $12,395 $13,303 9/30/2006 $12,447 $13,374 10/31/2006 $12,529 $13,466 11/30/2006 $12,608 $13,539 12/31/2006 $12,673 $13,644 1/31/2007 $12,761 $13,759 2/28/2007 $12,849 $13,860 3/31/2007 $12,902 $13,927 4/30/2007 $12,971 $14,004 5/31/2007 $13,054 $14,092 6/30/2007 $13,068 $14,136 7/31/2007 $12,803 $13,666 8/31/2007 $12,732 $13,701 9/30/2007 $12,929 $13,919 10/31/2007 $13,033 $14,026 11/30/2007 $12,910 $13,859 12/31/2007 $12,899 $13,900 1/31/2008 $12,631 $13,470 2/29/2008 $12,325 $13,149 3/31/2008 $12,422 $13,103 4/30/2008 $12,822 $13,536 5/31/2008 $12,946 $13,636 6/30/2008 $12,977 $13,657 7/31/2008 $12,900 $13,524 8/31/2008 $12,902 $13,516 9/30/2008 $12,273 $12,850 10/31/2008 $10,719 $11,175 11/30/2008 $10,153 $10,293 12/31/2008 $ 9,954 $ 9,904 1/31/2009 $10,625 $10,476 2/28/2009 $10,709 $10,512 3/31/2009 $10,687 $10,613 4/30/2009 $11,259 $11,464 5/31/2009 $11,563 $12,117 6/30/2009 $11,936 $12,587 7/31/2009 $12,296 $13,109 8/31/2009 $12,456 $13,402 9/30/2009 $12,648 $13,842 10/31/2009 $12,681 $13,932 Total Returns 26.81% 39.32%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 10/31/09 ------------------------------------------------------------------------------ 1-Year +13.31% 5-Year +1.06% Since Inception (5/1/01) +2.42%
CLASS B (5/1/01-10/31/09)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED ACCESS FUND - CLASS B LOAN INDEX ---------------------------- ----------------------- 5/1/2001 $10,000 $10,000 5/31/2001 $10,118 $10,120 6/30/2001 $10,168 $10,132 7/31/2001 $10,243 $10,158 8/31/2001 $10,288 $10,239 9/30/2001 $10,234 $10,043 10/31/2001 $10,208 $ 9,886 11/30/2001 $10,307 $10,042 12/31/2001 $10,365 $10,146 1/31/2002 $10,452 $10,202 2/28/2002 $10,430 $10,163 3/31/2002 $10,508 $10,281 4/30/2002 $10,569 $10,391 5/31/2002 $10,604 $10,384 6/30/2002 $10,583 $10,227 7/31/2002 $10,438 $10,072 8/31/2002 $10,406 $10,043 9/30/2002 $10,397 $10,065 10/31/2002 $10,334 $ 9,930 11/30/2002 $10,409 $10,100 12/31/2002 $10,505 $10,259 1/31/2003 $10,558 $10,398 2/28/2003 $10,598 $10,452 3/31/2003 $10,650 $10,486 4/30/2003 $10,724 $10,634 5/31/2003 $10,788 $10,777 6/30/2003 $10,874 $10,929 7/31/2003 $10,925 $11,003 8/31/2003 $10,948 $11,027 9/30/2003 $10,995 $11,138 10/31/2003 $11,050 $11,238 11/30/2003 $11,085 $11,319 12/31/2003 $11,120 $11,389 1/31/2004 $11,174 $11,508 2/29/2004 $11,192 $11,544 3/31/2004 $11,223 $11,591 4/30/2004 $11,253 $11,644 5/31/2004 $11,259 $11,671 6/30/2004 $11,297 $11,745 7/31/2004 $11,325 $11,786 8/31/2004 $11,334 $11,804 9/30/2004 $11,353 $11,849 10/31/2004 $11,398 $11,908 11/30/2004 $11,421 $11,973 12/31/2004 $11,447 $12,028 1/31/2005 $11,476 $12,090 2/28/2005 $11,526 $12,160 3/31/2005 $11,558 $12,222 4/30/2005 $11,553 $12,232 5/31/2005 $11,554 $12,243 6/30/2005 $11,611 $12,325 7/31/2005 $11,669 $12,421 8/31/2005 $11,710 $12,507 9/30/2005 $11,749 $12,566 10/31/2005 $11,768 $12,606 11/30/2005 $11,798 $12,648 12/31/2005 $11,842 $12,712 1/31/2006 $11,928 $12,795 2/28/2006 $11,996 $12,884 3/31/2006 $12,024 $12,979 4/30/2006 $12,073 $13,041 5/31/2006 $12,083 $13,092 6/30/2006 $12,125 $13,146 7/31/2006 $12,171 $13,214 8/31/2006 $12,231 $13,303 9/30/2006 $12,275 $13,374 10/31/2006 $12,348 $13,466 11/30/2006 $12,407 $13,539 12/31/2006 $12,477 $13,644 1/31/2007 $12,555 $13,759 2/28/2007 $12,622 $13,860 3/31/2007 $12,666 $13,927 4/30/2007 $12,726 $14,004 5/31/2007 $12,799 $14,092 6/30/2007 $12,818 $14,136 7/31/2007 $12,538 $13,666 8/31/2007 $12,473 $13,701 9/30/2007 $12,659 $13,919 10/31/2007 $12,740 $14,026 11/30/2007 $12,625 $13,859 12/31/2007 $12,594 $13,900 1/31/2008 $12,337 $13,470 2/29/2008 $12,018 $13,149 3/31/2008 $12,105 $13,103 4/30/2008 $12,487 $13,536 5/31/2008 $12,602 $13,636 6/30/2008 $12,623 $13,657 7/31/2008 $12,540 $13,524 8/31/2008 $12,535 $13,516 9/30/2008 $11,915 $12,850 10/31/2008 $10,411 $11,175 11/30/2008 $ 9,842 $10,293 12/31/2008 $ 9,656 $ 9,904 1/31/2009 $10,287 $10,476 2/28/2009 $10,376 $10,512 3/31/2009 $10,348 $10,613 4/30/2009 $10,881 $11,464 5/31/2009 $11,175 $12,117 6/30/2009 $11,536 $12,587 7/31/2009 $11,884 $13,109 8/31/2009 $12,039 $13,402 9/30/2009 $12,224 $13,842 10/31/2009 $12,256 $13,932 Total Returns 22.56% 39.32%
24 | Annual Report Performance Summary (CONTINUED) CLASS C (5/1/01-10/31/09)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED ACCESS FUND - CLASS C LOAN INDEX ---------------------------- ----------------------- 5/1/2001 $10,000 $10,000 5/31/2001 $10,120 $10,120 6/30/2001 $10,173 $10,132 7/31/2001 $10,252 $10,158 8/31/2001 $10,299 $10,239 9/30/2001 $10,238 $10,043 10/31/2001 $10,225 $9,886 11/30/2001 $10,326 $10,042 12/31/2001 $10,388 $10,146 1/31/2002 $10,476 $10,202 2/28/2002 $10,456 $10,163 3/31/2002 $10,545 $10,281 4/30/2002 $10,605 $10,391 5/31/2002 $10,641 $10,384 6/30/2002 $10,610 $10,227 7/31/2002 $10,468 $10,072 8/31/2002 $10,449 $10,043 9/30/2002 $10,443 $10,065 10/31/2002 $10,385 $9,930 11/30/2002 $10,452 $10,100 12/31/2002 $10,564 $10,259 1/31/2003 $10,621 $10,398 2/28/2003 $10,664 $10,452 3/31/2003 $10,709 $10,486 4/30/2003 $10,781 $10,634 5/31/2003 $10,858 $10,777 6/30/2003 $10,947 $10,929 7/31/2003 $10,991 $11,003 8/31/2003 $11,027 $11,027 9/30/2003 $11,077 $11,138 10/31/2003 $11,135 $11,238 11/30/2003 $11,171 $11,319 12/31/2003 $11,209 $11,389 1/31/2004 $11,255 $11,508 2/29/2004 $11,287 $11,544 3/31/2004 $11,321 $11,591 4/30/2004 $11,355 $11,644 5/31/2004 $11,352 $11,671 6/30/2004 $11,405 $11,745 7/31/2004 $11,436 $11,786 8/31/2004 $11,447 $11,804 9/30/2004 $11,470 $11,849 10/31/2004 $11,517 $11,908 11/30/2004 $11,544 $11,973 12/31/2004 $11,574 $12,028 1/31/2005 $11,607 $12,090 2/28/2005 $11,660 $12,160 3/31/2005 $11,694 $12,222 4/30/2005 $11,693 $12,232 5/31/2005 $11,697 $12,243 6/30/2005 $11,758 $12,325 7/31/2005 $11,820 $12,421 8/31/2005 $11,865 $12,507 9/30/2005 $11,908 $12,566 10/31/2005 $11,931 $12,606 11/30/2005 $11,965 $12,648 12/31/2005 $12,013 $12,712 1/31/2006 $12,104 $12,795 2/28/2006 $12,177 $12,884 3/31/2006 $12,208 $12,979 4/30/2006 $12,261 $13,041 5/31/2006 $12,275 $13,092 6/30/2006 $12,322 $13,146 7/31/2006 $12,372 $13,214 8/31/2006 $12,436 $13,303 9/30/2006 $12,484 $13,374 10/31/2006 $12,562 $13,466 11/30/2006 $12,625 $13,539 12/31/2006 $12,698 $13,644 1/31/2007 $12,782 $13,759 2/28/2007 $12,853 $13,860 3/31/2007 $12,902 $13,927 4/30/2007 $12,967 $14,004 5/31/2007 $13,045 $14,092 6/30/2007 $13,068 $14,136 7/31/2007 $12,786 $13,666 8/31/2007 $12,724 $13,701 9/30/2007 $12,916 $13,919 10/31/2007 $13,002 $14,026 11/30/2007 $12,889 $13,859 12/31/2007 $12,860 $13,900 1/31/2008 $12,602 $13,470 2/29/2008 $12,279 $13,149 3/31/2008 $12,372 $13,103 4/30/2008 $12,766 $13,536 5/31/2008 $12,887 $13,636 6/30/2008 $12,913 $13,657 7/31/2008 $12,832 $13,524 8/31/2008 $12,831 $13,516 9/30/2008 $12,201 $12,850 10/31/2008 $10,666 $11,175 11/30/2008 $10,087 $10,293 12/31/2008 $ 9,886 $9,904 1/31/2009 $10,549 $10,476 2/28/2009 $10,643 $10,512 3/31/2009 $10,603 $10,613 4/30/2009 $11,167 $11,464 5/31/2009 $11,465 $12,117 6/30/2009 $11,831 $12,587 7/31/2009 $12,184 $13,109 8/31/2009 $12,338 $13,402 9/30/2009 $12,525 $13,842 10/31/2009 $12,553 $13,932 Total Returns 25.53% 39.32%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 ------------------------------------------------------------------------ 1-Year +16.69% 5-Year +1.74% Since Inception (5/1/01) +2.71%
ADVISOR CLASS (5/1/01-10/31/09)
FRANKLIN FLOATING RATE DAILY CREDIT SUISSE LEVERAGED ACCESS FUND - ADVISOR CLASS LOAN INDEX ---------------------------- ----------------------- 5/1/2001 $10,000 $10,000 5/31/2001 $10,126 $10,120 6/30/2001 $10,184 $10,132 7/31/2001 $10,269 $10,158 8/31/2001 $10,322 $10,239 9/30/2001 $10,276 $10,043 10/31/2001 $10,258 $9,886 11/30/2001 $10,365 $10,042 12/31/2001 $10,432 $10,146 1/31/2002 $10,526 $10,202 2/28/2002 $10,511 $10,163 3/31/2002 $10,604 $10,281 4/30/2002 $10,670 $10,391 5/31/2002 $10,711 $10,384 6/30/2002 $10,695 $10,227 7/31/2002 $10,557 $10,072 8/31/2002 $10,532 $10,043 9/30/2002 $10,530 $10,065 10/31/2002 $10,485 $9,930 11/30/2002 $10,557 $10,100 12/31/2002 $10,663 $10,259 1/31/2003 $10,736 $10,398 2/28/2003 $10,773 $10,452 3/31/2003 $10,836 $10,486 4/30/2003 $10,919 $10,634 5/31/2003 $10,993 $10,777 6/30/2003 $11,100 $10,929 7/31/2003 $11,150 $11,003 8/31/2003 $11,193 $11,027 9/30/2003 $11,250 $11,138 10/31/2003 $11,316 $11,238 11/30/2003 $11,348 $11,319 12/31/2003 $11,405 $11,389 1/31/2004 $11,459 $11,508 2/29/2004 $11,498 $11,544 3/31/2004 $11,528 $11,591 4/30/2004 $11,569 $11,644 5/31/2004 $11,582 $11,671 6/30/2004 $11,643 $11,745 7/31/2004 $11,681 $11,786 8/31/2004 $11,688 $11,804 9/30/2004 $11,729 $11,849 10/31/2004 $11,772 $11,908 11/30/2004 $11,818 $11,973 12/31/2004 $11,854 $12,028 1/31/2005 $11,895 $12,090 2/28/2005 $11,955 $12,160 3/31/2005 $11,997 $12,222 4/30/2005 $12,002 $12,232 5/31/2005 $12,002 $12,243 6/30/2005 $12,071 $12,325 7/31/2005 $12,152 $12,421 8/31/2005 $12,206 $12,507 9/30/2005 $12,244 $12,566 10/31/2005 $12,286 $12,606 11/30/2005 $12,327 $12,648 12/31/2005 $12,383 $12,712 1/31/2006 $12,483 $12,795 2/28/2006 $12,552 $12,884 3/31/2006 $12,604 $12,979 4/30/2006 $12,665 $13,041 5/31/2006 $12,687 $13,092 6/30/2006 $12,729 $13,146 7/31/2006 $12,801 $13,214 8/31/2006 $12,861 $13,303 9/30/2006 $12,917 $13,374 10/31/2006 $13,018 $13,466 11/30/2006 $13,077 $13,539 12/31/2006 $13,161 $13,644 1/31/2007 $13,255 $13,759 2/28/2007 $13,349 $13,860 3/31/2007 $13,393 $13,927 4/30/2007 $13,468 $14,004 5/31/2007 $13,570 $14,092 6/30/2007 $13,587 $14,136 7/31/2007 $13,302 $13,666 8/31/2007 $13,231 $13,701 9/30/2007 $13,438 $13,919 10/31/2007 $13,549 $14,026 11/30/2007 $13,425 $13,859 12/31/2007 $13,416 $13,900 1/31/2008 $13,140 $13,470 2/29/2008 $12,824 $13,149 3/31/2008 $12,927 $13,103 4/30/2008 $13,346 $13,536 5/31/2008 $13,465 $13,636 6/30/2008 $13,514 $13,657 7/31/2008 $13,436 $13,524 8/31/2008 $13,427 $13,516 9/30/2008 $12,789 $12,850 10/31/2008 $11,172 $11,175 11/30/2008 $10,570 $10,293 12/31/2008 $10,379 $9,904 1/31/2009 $11,081 $10,476 2/28/2009 $11,185 $10,512 3/31/2009 $11,165 $10,613 4/30/2009 $11,749 $11,464 5/31/2009 $12,083 $12,117 6/30/2009 $12,476 $12,587 7/31/2009 $12,840 $13,109 8/31/2009 $13,025 $13,402 9/30/2009 $13,228 $13,842 10/31/2009 $13,265 $13,932 Total Returns 32.65% 39.32%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/09 ----------------------------------------------------- 1-Year +18.74% 5-Year +2.42% Since Inception (5/1/01) +3.38%
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 (CDS). THE FLOATING-RATE LOANS AND DEBT SECURITIES IN WHICH THE FUND INVESTS TEND TO BE RATED BELOW INVESTMENT GRADE. INVESTING IN HIGHER YIELDING, LOWER RATED, FLOATING-RATE LOANS AND DEBT SECURITIES INVOLVES GREATER RISK OF DEFAULT, WHICH COULD RESULT IN LOSS OF PRINCIPAL -- A RISK THAT MAY BE HEIGHTENED IN A SLOWING ECONOMY. 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 10/31/09. 5. The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 7. Source: (C) 2009 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 - 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ----------------------------------------------------------------------- CLASS A Actual $ 1,000 $ 1,126.40 $ 5.04 Hypothetical (5% return before expenses) $ 1,000 $ 1,020.47 $ 4.79 CLASS B Actual $ 1,000 $ 1,122.40 $ 9.04 Hypothetical (5% return before expenses) $ 1,000 $ 1,016.69 $ 8.59 CLASS C Actual $ 1,000 $ 1,124.20 $ 7.17 Hypothetical (5% return before expenses) $ 1,000 $ 1,018.45 $ 6.82 ADVISOR CLASS Actual $ 1,000 $ 1,129.10 $ 3.70 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.73 $ 3.52
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.94%; B: 1.69%; C: 1.34%; and Advisor: 0.69%), multiplied by the average account value over the period, multiplied by 184/365 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. We are pleased to bring you Franklin Low Duration Total Return Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW Franklin Low Duration Total Return Fund - Class A posted a +10.55% cumulative total return for the 12 months under review. The Fund outperformed the +6.31% total return of its new benchmark, the Barclays Capital (BC) U.S. Government/Credit Index: 1-3 Year Component.(1)The Fund outperformed its previous benchmark, the BC U.S. Aggregate Index: 1-3 Year Component, which had a +7.29% total return for the same period.(2)We replaced the BC U.S. Aggregate Index: 1-3 Year Component with the BC U.S. Government/Credit Index: 1-3 Year Component as the Fund's benchmark because we believe the new index better reflects the Fund's portfolio composition. You can find more of the Fund's performance data in the Performance Summary beginning on page 33. 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 1. Source: (C) 2009 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/Credit Index: 1-3 Year Component includes dollar-denominated investment grade corporate debt and nonnative currency agency and local authority debt, sovereign, supranational, and taxable municipal debt, public obligations of the U.S. Treasury with at least one year up to, but not including, three years to final maturity, and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. One cannot invest directly in an index, and an index is not representative of the Fund's portfolio. 2. Source: (C) 2009 Morningstar. The BC U.S. Aggregate Index: 1-3 Year Component is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year up to, but not including, three years to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. 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 83. Annual Report | 29 Portfolio Breakdown Franklin Low Duration Total Return Fund Based on Total Investments as of 10/31/09 Corporate Bonds........................................... 32.9% U.S. Government & Agency Securities....................... 27.4% Mortgage-Backed Securities................................ 13.8% Foreign Government & Agency Securities.................... 9.2% Asset-Backed & Commercial Mortgage-Backed Securities...... 5.2% Senior Floating Rate Interests............................ 2.8% Convertible Bonds......................................... 0.1% Preferred Stocks.......................................... 0.0%* Short-Term Investments.................................... 8.6%
* Rounds to less than 0.1% of total investments. DIVIDEND DISTRIBUTIONS* Franklin Low Duration Total Return Fund 11/1/08-10/31/09
DIVIDEND PER SHARE ------------------------------------------------ MONTH CLASS A ADVISOR CLASS --------------------------------------------------------------------------------------- November 2.3718 cents 2.5440 cents December** 13.4085 cents 13.6092 cents January 2.0572 cents 2.2251 cents February 1.8657 cents 2.0281 cents March 2.1210 cents 2.3343 cents April 1.6395 cents 1.7806 cents May 2.2528 cents 2.4549 cents June 2.4008 cents 2.5822 cents July 2.9376 cents 3.1386 cents August 1.8486 cents 2.0381 cents September 2.7490 cents 2.9623 cents October 2.5312 cents 2.7491 cents --------------------------------------------------------------------------------------- TOTAL 38.1837 CENTS 40.4465 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 10.74 cent per share distribution to meet excise tax requirements. 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. MANAGER'S DISCUSSION Although economic activity contracted during the first half of the reporting period, the 12 months under review ended with a more constructive and optimistic tone. During the second half of the period, the economy gradually improved and financial systems stabilized. Also, U.S. gross domestic product moved back into positive territory, indicating the recession had ended. While a number of risks remained that raised concerns about continued growth momentum, economic and financial stability helped build a foundation for improved growth over the medium and longer terms. 30 | Annual Report 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 duration than longer-term, fixed-rate securities generally provide. The Fund's performance greatly benefited from sector allocation. Our outperformance versus the benchmark was largely the result of exposure to high yield bonds and bank loans, commercial mortgage-backed securities, asset-backed securities, agency debentures and non-U.S. bonds and currencies. Each of these asset classes significantly outperformed U.S. Treasuries. The Fund increased its allocation to a number of fixed income sectors, such as U.S. Treasury securities, investment grade corporate bonds, high yield bonds and bank loans, as well as non-U.S. bonds and currencies. We continued to invest in higher quality commercial mortgage-backed and certain asset-backed sectors. We decreased the Fund's exposure to agency mortgages, which delivered strong performance and became more fairly valued in our view. Within the securitized sectors, we emphasized higher quality securities that were senior in the capital structure and benefited from strong levels of credit protection. Based on our assessment that valuations remained attractive on a longer-term basis and that an improved financing landscape would reduce estimated default rates, we continued to invest cash inflows in corporate credit positions that were below investment grade. Our research indicated that many of the best opportunities in global bond markets were outside of the U.S., and accordingly, we added diversified positions in international bonds and currencies. Annual Report | 31 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, 2009, 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. 32 | Annual Report Performance Summary as of 10/31/09 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 10/31/09 10/31/08 ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.61 $ 10.19 $ 9.58 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.381837
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/09 10/31/08 ---------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 0.61 $ 10.20 $ 9.59 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.404465
Annual Report | 33 Performance Summary (CONTINUED) PERFORMANCE(1) 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 3-YEAR INCEPTION (11/17/04) ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.55% +17.10% +22.73% Average Annual Total Return(3) +8.07% +4.59% +3.74% Average Annual Total Return (9/30/09)(4) +6.61% +4.70% +3.74% Distribution Rate(5) 2.92% 30-Day Standardized Yield(6) 1.95% Total Annual Operating Expenses(7) Without Waiver 1.55% With Waiver 0.94%
ADVISOR CLASS(8) 1-YEAR 3-YEAR INCEPTION (11/17/04) ----------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +10.80% +17.59% +23.24% Average Annual Total Return(3) +10.80% +5.55% +4.31% Average Annual Total Return (9/30/09)(4) +9.39% +5.59% +4.29% Distribution Rate(5) 3.23% 30-Day Standardized Yield(6) 2.24% Total Annual Operating Expenses(7) Without Waiver 1.30% With Waiver 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. 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 COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING THE RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.65% (OTHER THAN CERTAIN NONROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 2/28/10. 34 | Annual Report 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 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. CLASS A (11/17/04-10/31/09)
FRANKLIN LOW BARCLAYS CAPITAL DURATION TOTAL GOVERNMENT/CREDIT BARCLAYS CAPITAL U.S. RETURN FUND - CLASS A 1-3 YEAR INDEX AGGREGATE 1-3 YEAR INDEX --------------------- ----------------- ------------------------- 11/17/2004 $ 9,775 $10,000 $10,000 11/30/2004 $ 9,763 $ 9,979 $ 9,981 12/31/2004 $ 9,776 $10,003 $10,006 1/31/2005 $ 9,781 $10,001 $10,005 2/28/2005 $ 9,775 $ 9,983 $ 9,988 3/31/2005 $ 9,753 $ 9,975 $ 9,979 4/30/2005 $ 9,799 $10,033 $10,038 5/31/2005 $ 9,826 $10,076 $10,081 6/30/2005 $ 9,844 $10,099 $10,104 7/31/2005 $ 9,821 $10,072 $10,078 8/31/2005 $ 9,882 $10,137 $10,143 9/30/2005 $ 9,861 $10,112 $10,119 10/31/2005 $ 9,851 $10,108 $10,115 11/30/2005 $ 9,869 $10,141 $10,148 12/31/2005 $ 9,898 $10,181 $10,188 1/31/2006 $ 9,939 $10,200 $10,208 2/28/2006 $ 9,947 $10,212 $10,221 3/31/2006 $ 9,958 $10,225 $10,233 4/30/2006 $ 9,996 $10,259 $10,268 5/31/2006 $10,006 $10,273 $10,282 6/30/2006 $10,004 $10,293 $10,302 7/31/2006 $10,076 $10,373 $10,382 8/31/2006 $10,141 $10,450 $10,459 9/30/2006 $10,185 $10,506 $10,515 10/31/2006 $10,244 $10,551 $10,560 11/30/2006 $10,309 $10,608 $10,622 12/31/2006 $10,319 $10,613 $10,629 1/31/2007 $10,335 $10,638 $10,654 2/28/2007 $10,387 $10,724 $10,741 3/31/2007 $10,454 $10,766 $10,784 4/30/2007 $10,525 $10,806 $10,825 5/31/2007 $10,523 $10,797 $10,817 6/30/2007 $10,528 $10,843 $10,862 7/31/2007 $10,546 $10,927 $10,946 8/31/2007 $10,595 $11,016 $11,027 9/30/2007 $10,749 $11,098 $11,109 10/31/2007 $10,790 $11,148 $11,163 11/30/2007 $10,894 $11,306 $11,303 12/31/2007 $10,924 $11,339 $11,344 1/31/2008 $11,052 $11,536 $11,531 2/29/2008 $11,130 $11,639 $11,609 3/31/2008 $11,154 $11,648 $11,618 4/30/2008 $11,120 $11,581 $11,587 5/31/2008 $11,098 $11,552 $11,580 6/30/2008 $11,088 $11,573 $11,596 7/31/2008 $11,097 $11,607 $11,626 8/31/2008 $11,091 $11,661 $11,676 9/30/2008 $10,964 $11,591 $11,602 10/31/2008 $10,850 $11,616 $11,607 11/30/2008 $10,945 $11,755 $11,710 12/31/2008 $11,177 $11,902 $11,869 1/31/2009 $11,247 $11,935 $11,907 2/28/2009 $11,257 $11,914 $11,942 3/31/2009 $11,339 $11,970 $12,015 4/30/2009 $11,462 $12,038 $12,080 5/31/2009 $11,558 $12,120 $12,170 6/30/2009 $11,621 $12,141 $12,207 7/31/2009 $11,795 $12,199 $12,283 8/31/2009 $11,852 $12,263 $12,351 9/30/2009 $11,954 $12,310 $12,404 10/31/2009 $11,997 $12,350 $12,453 Total Returns 19.97% 23.50% 24.53%
AVERAGE ANNUAL TOTAL RETURN
CLASS A 10/31/09 --------------------------------------------------------------------------------------- 1-Year +8.07% 3-Year +4.59% Since Inception (11/17/04) +3.74%
ADVISOR CLASS (11/17/04-10/31/09)(8)
FRANKLIN LOW DURATION TOTAL BARCLAYS CAPITAL RETURN FUND - GOVERNMENT/CREDIT 1-3 BARCLAYS CAPITAL U.S. ADVISOR CLASS YEAR INDEX AGGREGATE 1-3 YEAR INDEX ---------------- --------------------- ------------------------ 11/17/2004 $10,000 $10,000 $10,000 11/30/2004 $ 9,988 $ 9,979 $ 9,981 12/31/2004 $10,001 $10,003 $10,006 1/31/2005 $10,006 $10,001 $10,005 2/28/2005 $10,000 $ 9,983 $ 9,988 3/31/2005 $ 9,977 $ 9,975 $ 9,979 4/30/2005 $10,024 $10,033 $10,038 5/31/2005 $10,053 $10,076 $10,081 6/30/2005 $10,071 $10,099 $10,104 7/31/2005 $10,047 $10,072 $10,078 8/31/2005 $10,110 $10,137 $10,143 9/30/2005 $10,088 $10,112 $10,119 10/31/2005 $10,077 $10,108 $10,115 11/30/2005 $10,096 $10,141 $10,148 12/31/2005 $10,126 $10,181 $10,188 1/31/2006 $10,168 $10,200 $10,208 2/28/2006 $10,176 $10,212 $10,221 3/31/2006 $10,187 $10,225 $10,233 4/30/2006 $10,226 $10,259 $10,268 5/31/2006 $10,237 $10,273 $10,282 6/30/2006 $10,234 $10,293 $10,302 7/31/2006 $10,308 $10,373 $10,382 8/31/2006 $10,374 $10,450 $10,459 9/30/2006 $10,419 $10,506 $10,515 10/31/2006 $10,480 $10,551 $10,560 11/30/2006 $10,546 $10,608 $10,622 12/31/2006 $10,557 $10,613 $10,629 1/31/2007 $10,572 $10,638 $10,654 2/28/2007 $10,626 $10,724 $10,741 3/31/2007 $10,695 $10,766 $10,784 4/30/2007 $10,767 $10,806 $10,825 5/31/2007 $10,765 $10,797 $10,817 6/30/2007 $10,770 $10,843 $10,862 7/31/2007 $10,788 $10,927 $10,946 8/31/2007 $10,838 $11,016 $11,027 9/30/2007 $10,996 $11,098 $11,109 10/31/2007 $11,038 $11,148 $11,163 11/30/2007 $11,145 $11,306 $11,303 12/31/2007 $11,175 $11,339 $11,344 1/31/2008 $11,306 $11,536 $11,531 2/29/2008 $11,386 $11,639 $11,609 3/31/2008 $11,410 $11,648 $11,618 4/30/2008 $11,375 $11,581 $11,587 5/31/2008 $11,365 $11,552 $11,580 6/30/2008 $11,346 $11,573 $11,596 7/31/2008 $11,355 $11,607 $11,626 8/31/2008 $11,352 $11,661 $11,676 9/30/2008 $11,212 $11,591 $11,602 10/31/2008 $11,121 $11,616 $11,607 11/30/2008 $11,209 $11,755 $11,710 12/31/2008 $11,448 $11,902 $11,869 1/31/2009 $11,534 $11,935 $11,907 2/28/2009 $11,534 $11,914 $11,942 3/31/2009 $11,633 $11,970 $12,015 4/30/2009 $11,749 $12,038 $12,080 5/31/2009 $11,861 $12,120 $12,170 6/30/2009 $11,916 $12,141 $12,207 7/31/2009 $12,097 $12,199 $12,283 8/31/2009 $12,169 $12,263 $12,351 9/30/2009 $12,265 $12,310 $12,404 10/31/2009 $12,324 $12,350 $12,453 Total Returns 23.24% 23.50% 24.53%
AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS(8) 10/31/09 ----------------------------------------------------------------------- 1-Year +10.80% 3-Year +5.55% Since Inception (11/17/04) +4.31%
Annual Report | 35 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 INVESTMENT IN DERIVATIVES, SUCH AS FINANCIAL FUTURES AND OPTION CONTRACTS, AND THE FUND'S USE OF FOREIGN CURRENCY TECHNIQUES INVOLVE SPECIAL RISKS AS SUCH MAY NOT ACHIEVE THE ANTICIPATED BENEFITS AND/OR MAY RESULT IN LOSSES TO THE FUND. SOME DERIVATIVES ARE PARTICULARLY SENSITIVE TO CHANGES IN INTEREST RATES. THE RISKS OF FOREIGN SECURITIES INCLUDE CURRENCY FLUCTUATIONS AND POLITICAL UNCERTAINTY. DURING PERIODS OF DECLINING INTEREST RATES, PRINCIPAL PREPAYMENTS TEND TO INCREASE AS BORROWERS REFINANCE THEIR MORTGAGES AT LOWER RATES; THEREFORE THE FUND MAY BE FORCED TO REINVEST RETURNED PRINCIPAL AT LOWER INTEREST RATES, REDUCING ITS INCOME. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 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 yields for the period would have been 1.79% and 2.08% for Class A and 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 10/31/09. 6. The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 7. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 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 and average annual total returns of Advisor Class shares were +8.28% and +5.58%. 9. Source: (C) 2009 Morningstar. The BC U.S. Government/Credit Index: 1-3 Year Component includes dollar-denominated investment-grade corporate debt and nonnative currency agency and local authority debt, sovereign, supranational, and taxable municipal debt, public obligations of the U.S. Treasury with at least one year up to, but not including, three years to final maturity, and 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. Aggregate Index: 1-3 Year Component is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year up to, but not including, three years to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. 36 | Annual Report 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 - 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 | 37 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ------------------- ----------------- ------------------------- CLASS A Actual $1,000 $1,046.50 $4.64 Hypothetical (5% return before expenses) $1,000 $1,020.67 $4.58 ADVISOR CLASS Actual $1,000 $1,048.80 $3.36 Hypothetical (5% return before expenses) $1,000 $1,021.93 $3.31
* 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 184/365 to reflect the one-half year period. 38 | Annual Report 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. We are pleased to bring you Franklin Total Return Fund's annual report for the fiscal year ended October 31, 2009. PERFORMANCE OVERVIEW Franklin Total Return Fund -- Class A posted a +20.25% cumulative total return for the 12 months under review. The Fund -- Class A outperformed its benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which returned +13.79%.(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. MANAGER'S DISCUSSION Although economic activity contracted during the first half of the reporting period, the 12 months under review ended with a more constructive and optimistic tone. During the second half of the period, the economy gradually improved and financial systems stabilized. Also, U.S. gross domestic product 1. Source: (C) 2009 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 is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's, Standard & Poor's or Fitch, respectively. The index is unmanaged and includes reinvested interest. One cannot invest directly in an index, and an index is not 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 103. Annual Report | 39 PORTFOLIO BREAKDOWN Franklin Total Return Fund Based on Total Investments
SECTOR 10/31/09 10/31/08 ----------------------------------------------------------------------------------------- Corporate Bonds 31.5% 26.1% Mortgage-Backed Securities 29.1% 45.4% Foreign Government & Agency Securities 11.5% 3.7% Asset-Backed & Commercial Mortgage-Backed Securities 11.1% 19.6% U.S. Government & Agency Securities 8.2% 1.0% Senior Floating Rate Interests 3.8% 2.7% Municipal Bonds 2.0% -- Convertible Bonds 0.3% 0.4% Preferred Stocks 0.0%* -- Convertible Preferred Stocks 0.0%* 0.0%* Short-Term Investments 2.5% 1.1%
* Rounds to less than 0.1% of total investments. moved back into positive territory, indicating the recession had ended. While a number of risks remained that raised concerns about continued growth momentum, economic and financial stability helped build a foundation for improved growth over the medium and longer terms. As measured by BC indexes, fixed income sectors made significant gains during the year under review. The Emerging Markets (U.S. Dollar) Index posted the best absolute 12-month performance (+48.41%), and other fixed income sectors posted positive returns as well, including the U.S. Corporate High Yield Index (+48.10%), the U.S. Corporate Investment Grade Index (+31.07%), the Asset-Backed Securities Index (+23.29%), the Commercial Mortgage-Backed Securities (CMBS) ERISA-Eligible Index (+21.99%), the U.S. Mortgage-Backed Securities (MBS) Index (+12.05%) and the U.S. Agency Index (+9.00%).(2) We continued to apply our disciplined process to choose what were, in our view, attractive investment opportunities across debt-related sectors. During 2. Source: (C) 2009 Morningstar. 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. 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+, respectively, or below. The BC U.S. Corporate Investment Grade Index is the U.S. Corporate component of the BC U.S. Credit Index and covers USD-denominated, investment-grade, fixed-rate, taxable securities sold by industrial, utility, and financial institution issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. The BC Asset-Backed Securities 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 the investment grade securities that are ERISA-eligible under the underwriter's exemption. The BC U.S. MBS Index is the MBS component of the BC U.S. Aggregate Index and covers agency mortgage-backed pass-through securities (both fixed rate and hybrid ARM) issued by Ginnie Mae, Fannie Mae and Freddie Mac. 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. 40 | Annual Report Dividend Distributions* Franklin Total Return Fund 11/1/08-10/31/09
DIVIDEND PER SHARE (CENTS) ------------------------------------------------------------------------------------------------ MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS --------------------------------------------------------------------------------------------------------------------------------- November 3.5772 3.3316 3.3303 3.4241 3.7352 December** 24.7974 24.4859 24.4844 24.5999 24.9991 January 3.5108 3.2221 3.2206 3.3309 3.6967 February 3.5602 3.2918 3.2905 3.3928 3.7328 March 3.7712 3.4761 3.4740 3.5867 3.9581 April 3.2701 3.0164 3.0071 3.1097 3.4383 May 3.3677 3.0783 3.0802 3.1897 3.5520 June 3.6935 3.3783 3.3698 3.4973 3.8978 July 3.3901 3.0977 3.0956 3.2075 3.5775 August 2.7337 2.4675 2.4639 2.5712 2.9094 September 3.2457 2.9450 2.9382 3.0589 3.4414 October 3.1223 2.8165 2.8134 2.9320 3.3182 --------------------------------------------------------------------------------------------------------------------------------- TOTAL 62.0399 58.6072 58.5680 59.9007 64.2565
* 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 20.70 cent per share distribution to meet excise tax requirements. the period, the Fund's performance benefited from sector allocation. The Fund's outperformance versus the benchmark was largely the result of exposure to high yield bonds and bank loans, investment grade corporate credit, CMBS and other securitized products as well as non-U.S. dollar bonds and currencies. Each of these asset classes significantly outperformed U.S. Treasuries. The Fund increased its allocation to a number of fixed income sectors, such as U.S. Treasury securities, high yield bonds and bank loans, as well as non-U.S. dollar bonds and currencies. We continued to favor higher quality CMBS and certain ABS sectors. We decreased the Fund's exposure to agency mortgage securities, which delivered strong performance and became more fairly valued in our view. Within the securitized sectors, we emphasized higher quality securities that were senior in the capital structure and benefited from strong levels of credit protection. Based on our assessment that valuations remained attractive on a longer term basis and that an improved financing landscape would reduce estimated default rates, we continued to invest cash inflows in corporate credit positions that were below investment grade. Our research indicated that many of the best opportunities in global bond markets were outside of the U.S., and accordingly, we added diversified positions in international bonds and currencies. Annual Report | 41 The Fund's underweighted allocation to U.S. government securities, relative to the benchmark, detracted from performance. 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, 2009, 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 10/31/09 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 10/31/09 10/31/08 ------------------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.05 $ 9.65 $ 8.60 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.620399
CLASS B (SYMBOL: FBTLX) CHANGE 10/31/09 10/31/08 ------------------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.05 $ 9.65 $ 8.60 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.586072
CLASS C (SYMBOL: FCTLX) CHANGE 10/31/09 10/31/08 ------------------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.05 $ 9.65 $ 8.60 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.585680
CLASS R (SYMBOL: FTRRX) CHANGE 10/31/09 10/31/08 ------------------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.05 $ 9.65 $ 8.60 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.599007
ADVISOR CLASS (SYMBOL: FBDAX) CHANGE 10/31/09 10/31/08 ------------------------------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$ 1.06 $ 9.67 $ 8.61 DISTRIBUTIONS (11/1/08-10/31/09) Dividend Income $ 0.642565
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) +20.25% +22.68% +77.36% Average Annual Total Return(3) +15.16% +3.28% +5.43% Avg. Ann. Total Return (9/30/09)(4) +8.20% +3.29% +5.37% Distribution Rate(5) 3.72% 30-Day Standardized Yield(6) 3.94% Total Annual Operating Expenses(7) Without Waiver 1.07% With Waiver 0.88%
CLASS B 1-YEAR 5-YEAR INCEPTION (3/1/02) -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +19.67% +20.17% +43.96% Average Annual Total Return(3) +15.67% +3.42% +4.87% Avg. Ann. Total Return (9/30/09)(4) +8.53% +3.45% +4.81% Distribution Rate(5) 3.51% 30-Day Standardized Yield(6) 3.72% Total Annual Operating Expenses(7) Without Waiver 1.47% With Waiver 1.28%
CLASS C 1-YEAR 5-YEAR INCEPTION (3/1/02) -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +19.67% +20.13% +44.05% Average Annual Total Return(3) +18.67% +3.74% +4.88% Avg. Ann. Total Return (9/30/09)(4) +11.41% +3.75% +4.80% Distribution Rate(5) 3.50% 30-Day Standardized Yield(6) 3.72% Total Annual Operating Expenses(7) Without Waiver 1.47% With Waiver 1.28%
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02) -------------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +19.97% +21.17% +47.21% Average Annual Total Return(3) +19.97% +3.92% +5.06% Avg. Ann. Total Return (9/30/09)(4) +12.69% +3.93% +5.00% Distribution Rate(5) 3.65% 30-Day Standardized Yield(6) 3.87% Total Annual Operating Expenses(7) Without Waiver 1.32% With Waiver 1.13%
44 | Annual Report Performance Summary (CONTINUED) PERFORMANCE(1)(CONTINUED)
ADVISOR CLASS 1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------------------------------------------------- Cumulative Total Return(2) +20.52% +24.08% +81.78% Average Annual Total Return(3) +20.52% +4.41% +6.16% Avg. Ann. Total Return (9/30/09)(4) +13.09% +4.43% +6.09% Distribution Rate(5) 4.12% 30-Day Standardized Yield(6) 4.37% Total Annual Operating Expenses(7) Without Waiver 0.82% With Waiver 0.63%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (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 COMMON EXPENSES (I.E., A COMBINATION OF INVESTMENT MANAGEMENT FEES, FUND ADMINISTRATION FEES, AND OTHER EXPENSES, BUT EXCLUDING THE RULE 12B-1 FEES AND ACQUIRED FUND FEES AND EXPENSES) FOR EACH CLASS OF THE FUND DO NOT EXCEED 0.60% (OTHER THAN CERTAIN NONROUTINE EXPENSES OR COSTS, INCLUDING THOSE RELATING TO LITIGATION, INDEMNIFICATION, REORGANIZATIONS AND LIQUIDATIONS) UNTIL 2/28/10. 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 10/31/09 -------------------------------------------------------------------- 1-Year +15.16% 5-Year +3.28% 10-Year +5.43%
CLASS A (11/1/99-10/31/09)
FRANKLIN TOTAL RETURN BARCLAYS CAPITAL U.S. FUND - CLASS A AGGREGATE INDEX CPI --------------------- --------------------- ------- 11/1/1999 $ 9,572 $10,000 $10,000 11/30/1999 $ 9,633 $ 9,999 $10,006 12/31/1999 $ 9,616 $ 9,951 $10,006 1/31/2000 $ 9,530 $ 9,918 $10,036 2/29/2000 $ 9,641 $10,038 $10,095 3/31/2000 $ 9,722 $10,171 $10,178 4/30/2000 $ 9,680 $10,142 $10,184 5/31/2000 $ 9,660 $10,137 $10,196 6/30/2000 $ 9,913 $10,348 $10,250 7/31/2000 $10,009 $10,442 $10,273 8/31/2000 $10,159 $10,593 $10,273 9/30/2000 $10,245 $10,660 $10,327 10/31/2000 $10,300 $10,730 $10,345 11/30/2000 $10,421 $10,906 $10,351 12/31/2000 $10,640 $11,108 $10,345 1/31/2001 $10,845 $11,290 $10,410 2/28/2001 $10,907 $11,388 $10,452 3/31/2001 $10,947 $11,445 $10,476 4/30/2001 $10,844 $11,398 $10,517 5/31/2001 $10,893 $11,466 $10,565 6/30/2001 $10,939 $11,510 $10,583 7/31/2001 $11,184 $11,767 $10,553 8/31/2001 $11,290 $11,902 $10,553 9/30/2001 $11,334 $12,041 $10,600 10/31/2001 $11,523 $12,293 $10,565 11/30/2001 $11,406 $12,123 $10,547 12/31/2001 $11,357 $12,046 $10,505 1/31/2002 $11,436 $12,144 $10,529 2/28/2002 $11,523 $12,261 $10,571 3/31/2002 $11,347 $12,057 $10,630 4/30/2002 $11,555 $12,291 $10,690 5/31/2002 $11,658 $12,396 $10,690 6/30/2002 $11,648 $12,503 $10,696 7/31/2002 $11,644 $12,654 $10,707 8/31/2002 $11,857 $12,868 $10,743 9/30/2002 $11,999 $13,076 $10,761 10/31/2002 $11,919 $13,016 $10,779 11/30/2002 $12,033 $13,013 $10,779 12/31/2002 $12,288 $13,282 $10,755 1/31/2003 $12,355 $13,293 $10,803 2/28/2003 $12,517 $13,477 $10,886 3/31/2003 $12,518 $13,467 $10,951 4/30/2003 $12,709 $13,578 $10,927 5/31/2003 $12,935 $13,831 $10,910 6/30/2003 $12,977 $13,803 $10,922 7/31/2003 $12,589 $13,339 $10,933 8/31/2003 $12,692 $13,428 $10,975 9/30/2003 $13,037 $13,783 $11,011 10/31/2003 $12,978 $13,655 $10,999 11/30/2003 $13,069 $13,688 $10,969 12/31/2003 $13,258 $13,827 $10,957 1/31/2004 $13,389 $13,938 $11,011 2/29/2004 $13,506 $14,089 $11,070 3/31/2004 $13,589 $14,195 $11,141 4/30/2004 $13,259 $13,825 $11,177 5/31/2004 $13,173 $13,770 $11,243 6/30/2004 $13,255 $13,848 $11,278 7/31/2004 $13,377 $13,985 $11,260 8/31/2004 $13,632 $14,252 $11,266 9/30/2004 $13,696 $14,290 $11,290 10/31/2004 $13,838 $14,410 $11,350 11/30/2004 $13,824 $14,295 $11,356 12/31/2004 $13,956 $14,427 $11,314 1/31/2005 $14,020 $14,517 $11,338 2/28/2005 $13,999 $14,432 $11,403 3/31/2005 $13,871 $14,358 $11,492 4/30/2005 $14,003 $14,552 $11,570 5/31/2005 $14,140 $14,709 $11,558 6/30/2005 $14,217 $14,790 $11,564 7/31/2005 $14,111 $14,655 $11,617 8/31/2005 $14,276 $14,843 $11,677 9/30/2005 $14,129 $14,690 $11,819 10/31/2005 $14,013 $14,574 $11,843 11/30/2005 $14,079 $14,638 $11,748 12/31/2005 $14,207 $14,777 $11,700 1/31/2006 $14,264 $14,778 $11,790 2/28/2006 $14,316 $14,827 $11,813 3/31/2006 $14,156 $14,682 $11,879 4/30/2006 $14,166 $14,655 $11,980 5/31/2006 $14,138 $14,639 $12,039 6/30/2006 $14,135 $14,671 $12,063 7/31/2006 $14,354 $14,869 $12,099 8/31/2006 $14,545 $15,096 $12,122 9/30/2006 $14,674 $15,229 $12,063 10/31/2006 $14,793 $15,330 $11,998 11/30/2006 $14,981 $15,508 $11,980 12/31/2006 $14,898 $15,418 $11,998 1/31/2007 $14,897 $15,411 $12,034 2/28/2007 $15,084 $15,649 $12,099 3/31/2007 $15,113 $15,649 $12,209 4/30/2007 $15,251 $15,734 $12,288 5/31/2007 $15,176 $15,615 $12,363 6/30/2007 $15,068 $15,568 $12,387 7/31/2007 $15,071 $15,698 $12,384 8/31/2007 $15,164 $15,891 $12,361 9/30/2007 $15,408 $16,011 $12,395 10/31/2007 $15,477 $16,155 $12,422 11/30/2007 $15,591 $16,446 $12,496 12/31/2007 $15,622 $16,492 $12,487 1/31/2008 $15,748 $16,769 $12,549 2/29/2008 $15,679 $16,792 $12,586 3/31/2008 $15,666 $16,849 $12,695 4/30/2008 $15,803 $16,814 $12,772 5/31/2008 $15,716 $16,691 $12,879 6/30/2008 $15,515 $16,677 $13,009 7/31/2008 $15,407 $16,664 $13,078 8/31/2008 $15,423 $16,822 $13,025 9/30/2008 $14,888 $16,596 $13,007 10/31/2008 $14,117 $16,205 $12,876 11/30/2008 $14,160 $16,732 $12,629 12/31/2008 $14,766 $17,356 $12,499 1/31/2009 $14,894 $17,203 $12,553 2/28/2009 $14,699 $17,138 $12,616 3/31/2009 $14,968 $17,376 $12,646 4/30/2009 $15,402 $17,459 $12,678 5/31/2009 $15,702 $17,586 $12,714 6/30/2009 $15,834 $17,686 $12,824 7/31/2009 $16,293 $17,971 $12,803 8/31/2009 $16,462 $18,157 $12,832 9/30/2009 $16,816 $18,348 $12,840 10/31/2009 $16,976 $18,439 $12,852 Total Returns 69.76% 84.39% 28.52%
AVERAGE ANNUAL TOTAL RETURN
CLASS B 10/31/09 ------------------------------------------------------- 1-Year +15.67% 5-Year +3.42% Since Inception (3/1/02) +4.87%
CLASS B (3/1/02-10/31/09)
FRANKLIN TOTAL RETURN BARCLAYS CAPITAL FUND - CLASS B U.S. 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 11/30/2008 $12,062 $13,646 $11,947 12/31/2008 $12,575 $14,155 $11,824 1/31/2009 $12,679 $14,030 $11,875 2/28/2009 $12,509 $13,977 $11,934 3/31/2009 $12,734 $14,172 $11,963 4/30/2009 $13,085 $14,239 $11,993 5/31/2009 $13,350 $14,343 $12,028 6/30/2009 $13,459 $14,424 $12,131 7/31/2009 $13,844 $14,657 $12,112 8/31/2009 $13,969 $14,809 $12,139 9/30/2009 $14,280 $14,964 $12,147 10/31/2009 $14,396 $15,038 $12,158 Total Returns 43.96% 50.38% 21.58%
46 | Annual Report Performance Summary (CONTINUED) CLASS C (3/1/02-10/31/09)
FRANKLIN TOTAL RETURN BARCLAYS CAPITAL U.S. FUND - CLASS C 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 11/30/2008 $12,056 $13,646 $11,947 12/31/2008 $12,583 $14,155 $11,824 1/31/2009 $12,687 $14,030 $11,875 2/28/2009 $12,503 $13,977 $11,934 3/31/2009 $12,743 $14,172 $11,963 4/30/2009 $13,094 $14,239 $11,993 5/31/2009 $13,359 $14,343 $12,028 6/30/2009 $13,467 $14,424 $12,131 7/31/2009 $13,853 $14,657 $12,112 8/31/2009 $13,978 $14,809 $12,139 9/30/2009 $14,274 $14,964 $12,147 10/31/2009 $14,405 $15,038 $12,158 Total Returns 44.05% 50.38% 21.58%
AVERAGE ANNUAL TOTAL RETURN
CLASS C 10/31/09 -------------------------------------------------------------------------- 1-Year +18.67% 5-Year +3.74% Since Inception (3/1/02) +4.88%
CLASS R (1/1/02-10/31/09)
BARCLAYS CAPITAL FRANKLIN TOTAL RETURN U.S. AGGREGATE FUND - CLASS R 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 $12,269 $13,452 $12,257 11/30/2008 $12,304 $13,890 $12,022 12/31/2008 $12,828 $14,408 $11,897 1/31/2009 $12,936 $14,281 $11,949 2/28/2009 $12,764 $14,227 $12,009 3/31/2009 $12,996 $14,425 $12,038 4/30/2009 $13,371 $14,494 $12,068 5/31/2009 $13,628 $14,599 $12,103 6/30/2009 $13,740 $14,682 $12,207 7/31/2009 $14,135 $14,919 $12,187 8/31/2009 $14,279 $15,073 $12,215 9/30/2009 $14,584 $15,232 $12,222 10/31/2009 $14,721 $15,307 $12,234 Total Returns 47.21% 53.07% 22.34%
AVERAGE ANNUAL TOTAL RETURN
CLASS R 10/31/09 --------------------------------------------------------- 1-Year +19.97% 5-Year +3.92% Since Inception (1/1/02) +5.06%
Annual Report | 47 Performance Summary (CONTINUED) AVERAGE ANNUAL TOTAL RETURN
ADVISOR CLASS 10/31/09 ---------------------------------------------------------------- 1-Year +20.52% 5-Year +4.41% 10-Year +6.16%
ADVISOR CLASS (11/1/99-10/31/09)
BARCLAYS CAPITAL FRANKLIN TOTAL RETURN U.S. AGGREGATE FUND - ADVISOR CLASS INDEX CPI --------------------- ---------------- ------- 11/1/1999 $10,000 $10,000 $10,000 11/30/1999 $10,067 $ 9,999 $10,006 12/31/1999 $10,051 $ 9,951 $10,006 1/31/2000 $ 9,962 $ 9,918 $10,036 2/29/2000 $10,081 $10,038 $10,095 3/31/2000 $10,168 $10,171 $10,178 4/30/2000 $10,126 $10,142 $10,184 5/31/2000 $10,107 $10,137 $10,196 6/30/2000 $10,373 $10,348 $10,250 7/31/2000 $10,476 $10,442 $10,273 8/31/2000 $10,635 $10,593 $10,273 9/30/2000 $10,727 $10,660 $10,327 10/31/2000 $10,787 $10,730 $10,345 11/30/2000 $10,904 $10,906 $10,351 12/31/2000 $11,136 $11,108 $10,345 1/31/2001 $11,364 $11,290 $10,410 2/28/2001 $11,431 $11,388 $10,452 3/31/2001 $11,462 $11,445 $10,476 4/30/2001 $11,368 $11,398 $10,517 5/31/2001 $11,422 $11,466 $10,565 6/30/2001 $11,485 $11,510 $10,583 7/31/2001 $11,732 $11,767 $10,553 8/31/2001 $11,845 $11,902 $10,553 9/30/2001 $11,906 $12,041 $10,600 10/31/2001 $12,107 $12,293 $10,565 11/30/2001 $11,974 $12,123 $10,547 12/31/2001 $11,926 $12,046 $10,505 1/31/2002 $12,023 $12,144 $10,529 2/28/2002 $12,104 $12,261 $10,571 3/31/2002 $11,922 $12,057 $10,630 4/30/2002 $12,145 $12,291 $10,690 5/31/2002 $12,256 $12,396 $10,690 6/30/2002 $12,260 $12,503 $10,696 7/31/2002 $12,247 $12,654 $10,707 8/31/2002 $12,485 $12,868 $10,743 9/30/2002 $12,625 $13,076 $10,761 10/31/2002 $12,544 $13,016 $10,779 11/30/2002 $12,679 $13,013 $10,779 12/31/2002 $12,936 $13,282 $10,755 1/31/2003 $13,023 $13,293 $10,803 2/28/2003 $13,183 $13,477 $10,886 3/31/2003 $13,187 $13,467 $10,951 4/30/2003 $13,390 $13,578 $10,927 5/31/2003 $13,631 $13,831 $10,910 6/30/2003 $13,679 $13,803 $10,922 7/31/2003 $13,273 $13,339 $10,933 8/31/2003 $13,385 $13,428 $10,975 9/30/2003 $13,751 $13,783 $11,011 10/31/2003 $13,692 $13,655 $10,999 11/30/2003 $13,790 $13,688 $10,969 12/31/2003 $13,992 $13,827 $10,957 1/31/2004 $14,134 $13,938 $11,011 2/29/2004 $14,274 $14,089 $11,070 3/31/2004 $14,365 $14,195 $11,141 4/30/2004 $14,006 $13,825 $11,177 5/31/2004 $13,932 $13,770 $11,243 6/30/2004 $14,008 $13,848 $11,278 7/31/2004 $14,139 $13,985 $11,260 8/31/2004 $14,412 $14,252 $11,266 9/30/2004 $14,497 $14,290 $11,290 10/31/2004 $14,649 $14,410 $11,350 11/30/2004 $14,623 $14,295 $11,356 12/31/2004 $14,766 $14,427 $11,314 1/31/2005 $14,852 $14,517 $11,338 2/28/2005 $14,832 $14,432 $11,403 3/31/2005 $14,686 $14,358 $11,492 4/30/2005 $14,843 $14,552 $11,570 5/31/2005 $14,991 $14,709 $11,558 6/30/2005 $15,061 $14,790 $11,564 7/31/2005 $14,952 $14,655 $11,617 8/31/2005 $15,145 $14,843 $11,677 9/30/2005 $14,977 $14,690 $11,819 10/31/2005 $14,858 $14,574 $11,843 11/30/2005 $14,931 $14,638 $11,748 12/31/2005 $15,070 $14,777 $11,700 1/31/2006 $15,133 $14,778 $11,790 2/28/2006 $15,191 $14,827 $11,813 3/31/2006 $15,040 $14,682 $11,879 4/30/2006 $15,053 $14,655 $11,980 5/31/2006 $15,028 $14,639 $12,039 6/30/2006 $15,028 $14,671 $12,063 7/31/2006 $15,248 $14,869 $12,099 8/31/2006 $15,469 $15,096 $12,122 9/30/2006 $15,593 $15,229 $12,063 10/31/2006 $15,724 $15,330 $11,998 11/30/2006 $15,926 $15,508 $11,980 12/31/2006 $15,842 $15,418 $11,998 1/31/2007 $15,845 $15,411 $12,034 2/28/2007 $16,046 $15,649 $12,099 3/31/2007 $16,080 $15,649 $12,209 4/30/2007 $16,230 $15,734 $12,288 5/31/2007 $16,154 $15,615 $12,363 6/30/2007 $16,060 $15,568 $12,387 7/31/2007 $16,050 $15,698 $12,384 8/31/2007 $16,152 $15,891 $12,361 9/30/2007 $16,431 $16,011 $12,395 10/31/2007 $16,509 $16,155 $12,422 11/30/2007 $16,633 $16,446 $12,496 12/31/2007 $16,653 $16,492 $12,487 1/31/2008 $16,808 $16,769 $12,549 2/29/2008 $16,738 $16,792 $12,586 3/31/2008 $16,710 $16,849 $12,695 4/30/2008 $16,877 $16,814 $12,772 5/31/2008 $16,771 $16,691 $12,879 6/30/2008 $16,578 $16,677 $13,009 7/31/2008 $16,449 $16,664 $13,078 8/31/2008 $16,469 $16,822 $13,025 9/30/2008 $15,919 $16,596 $13,007 10/31/2008 $15,083 $16,205 $12,876 11/30/2008 $15,131 $16,732 $12,629 12/31/2008 $15,782 $17,356 $12,499 1/31/2009 $15,921 $17,203 $12,553 2/28/2009 $15,717 $17,138 $12,616 3/31/2009 $16,008 $17,376 $12,646 4/30/2009 $16,474 $17,459 $12,678 5/31/2009 $16,797 $17,586 $12,714 6/30/2009 $16,962 $17,686 $12,824 7/31/2009 $17,455 $17,971 $12,803 8/31/2009 $17,621 $18,157 $12,832 9/30/2009 $18,003 $18,348 $12,840 10/31/2009 $18,178 $18,439 $12,852 Total Returns 81.78% 84.39% 28.52%
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. INVESTING IN DERIVATIVE SECURITIES, SUCH AS FINANCIAL FUTURES AND OPTION CONTRACTS, AND THE USE OF FOREIGN CURRENCY TECHNIQUES INVOLVE SPECIAL RISKS AS SUCH 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 yields for the period would have been 3.84%, 3.61%, 3.61%, 3.76% and 4.27% 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 10/31/09. 6. The 30-day standardized yield for the 30 days ended 10/31/09 reflects an estimated yield to maturity (assuming all portfolio securities are held to maturity). It should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate (which reflects the Fund's past dividends paid to shareholders) or the income reported in the Fund's financial statements. 7. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 8. Source: (C) 2009 Morningstar. The BC U.S. Aggregate Index is a market-capitalization weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB or higher) by Moody's, Standard & Poor's or Fitch, respectively. 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 - 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. 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 5/1/09 VALUE 10/31/09 PERIOD* 5/1/09-10/31/09 ---------------------------------------------------------------------------------------------------------------------- CLASS A Actual $1,000 $1,102.20 $4.50 Hypothetical (5% return before expenses) $1,000 $1,020.92 $4.33 CLASS B Actual $1,000 $1,100.20 $6.62 Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 CLASS C Actual $1,000 $1,100.20 $6.62 Hypothetical (5% return before expenses) $1,000 $1,018.90 $6.36 CLASS R Actual $1,000 $1,100.90 $5.82 Hypothetical (5% return before expenses) $1,000 $1,019.66 $5.60 ADVISOR CLASS Actual $1,000 $1,103.40 $3.18 Hypothetical (5% return before expenses) $1,000 $1,022.18 $3.06
* 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 184/365 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 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 8.86 $ 8.87 $ 8.88 $ 8.93 $ 9.06 ---------------------------------------------------------------------------- Income from investment operations(a): Net investment income ......................... 0.239 0.344 0.380 0.303 0.292 Net realized and unrealized gains (losses) .... 0.120 0.010 0.053 0.025 (0.129) ---------------------------------------------------------------------------- Total from investment operations ................. 0.359 0.354 0.433 0.328 0.163 ---------------------------------------------------------------------------- Less distributions from net investment income .... (0.259) (0.364) (0.443) (0.378) (0.293) ---------------------------------------------------------------------------- Redemption fees(b) ............................... -- --(c) --(c) --(c) --(c) ---------------------------------------------------------------------------- Net asset value, end of year ..................... $ 8.96 $ 8.86 $ 8.87 $ 8.88 $ 8.93 ============================================================================ Total return(d) .................................. 4.10% 4.06% 4.99% 3.75% 1.82% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 0.87%(f) 0.90%(f) 0.91%(f) 0.89%(f) 0.90% Net investment income ............................ 2.48% 3.64% 4.29% 3.50% 3.23% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $ 1,375,234 $586,696 $ 333,425 $372,703 $475,213 Portfolio turnover rate(g) ....................... 22.45% 23.83% 27.39% 15.91% 24.99%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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 shares of the U.S. Government Adjustable Rate Mortgage Portfolio's (Portfolio) allocated net assets. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Prior to October 27, 2005, represents the Portfolio's rate of turnover. Annual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31, CLASS C 2009 2008 2007 2006 2005 ------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .............. $ 8.86 $ 8.87 $ 8.88 $ 8.92 $ 9.05 ------------------------------------------------------------------------------ Income from investment operations(a): Net investment income ........................ 0.206 0.314 0.348 0.266 0.258 Net realized and unrealized gains (losses) ... 0.117 0.004 0.048 0.038 (0.129) ------------------------------------------------------------------------------ Total from investment operations ................ 0.323 0.318 0.396 0.304 0.129 ------------------------------------------------------------------------------ Less distributions from net investment income ... (0.223) (0.328) (0.406) (0.344) (0.259) ------------------------------------------------------------------------------ Redemption fees(b) .............................. -- --(c) --(c) --(c) --(c) ------------------------------------------------------------------------------ Net asset value, end of year .................... $ 8.96 $ 8.86 $ 8.87 $ 8.88 $ 8.92 ============================================================================== Total return(d) ................................. 3.69% 3.64% 4.56% 3.47% 1.43% RATIOS TO AVERAGE NET ASSETS Expenses(e) ..................................... 1.27%(f) 1.30%(f) 1.32%(f) 1.28%(f) 1.28% Net investment income ........................... 2.08% 3.24% 3.88% 3.11% 2.85% SUPPLEMENTAL DATA Net assets, end of year (000's) ................. $ 596,640 $132,254 $ 36,684 $ 35,967 $ 48,461 Portfolio turnover rate(g) ...................... 22.45% 23.83% 27.39% 15.91% 24.99%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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 shares of the U.S. Government Adjustable Rate Mortgage Portfolio's (Portfolio) allocated net assets. (f) Benefit of expense reduction rounds to less than 0.01%. (g) Prior to October 27, 2005, represents the Portfolio's rate of turnover. 52 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
YEAR ENDED OCTOBER 31, ADVISOR CLASS 2009 2008(a) ----------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year .................... $ 8.87 $ 8.88 ----------------------------- Income from investment operations(b): Net investment income .............................. 0.267 0.154 Net realized and unrealized gains (losses) ......... 0.115 (0.009) ----------------------------- Total from investment operations ...................... 0.382 0.145 ----------------------------- Less distributions from net investment income ......... (0.282) (0.155) ----------------------------- Redemption fees(c) .................................... -- --(d) ----------------------------- Net asset value, end of year .......................... $ 8.97 $ 8.87 ============================= Total return(e) ....................................... 4.36% 1.64% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................................... 0.62% 0.65% Net investment income ................................. 2.73% 3.89% SUPPLEMENTAL DATA Net assets, end of year (000's) ....................... $ 87,296 $ 4,124 Portfolio turnover rate ............................... 22.45% 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.001 per share. (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%. Annual Report | The accompanying notes are an integral part of these financial statements. | 53 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE -------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES 93.8% (a)FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 22.0% FHLMC, 2.764%, 3/01/32 ................................................. $ 718,694 $ 734,952 FHLMC, 2.828%, 4/01/34 ................................................. 4,030,429 4,155,155 FHLMC, 2.965%, 4/01/35 ................................................. 28,741,693 29,038,306 FHLMC, 3.007%, 7/01/18 ................................................. 174,751 176,282 FHLMC, 3.043%, 9/01/18 - 7/01/35 ....................................... 1,929,588 1,974,767 FHLMC, 3.051%, 1/01/35 ................................................. 253,568 259,885 FHLMC, 3.063%, 7/01/27 ................................................. 240,690 244,437 FHLMC, 3.086%, 5/01/33 ................................................. 67,322 67,907 FHLMC, 3.102%, 10/01/33 ................................................ 732,051 744,454 FHLMC, 3.175%, 10/01/18 ................................................ 23,236 23,550 FHLMC, 3.177%, 7/01/20 ................................................. 93,038 94,591 FHLMC, 3.23%, 9/01/31 .................................................. 95,883 96,566 FHLMC, 3.24%, 3/01/19 .................................................. 42,730 43,375 FHLMC, 3.25%, 9/01/31 .................................................. 179,649 181,047 FHLMC, 3.254%, 8/01/32 ................................................. 211,606 214,983 FHLMC, 3.257%, 10/01/29 ................................................ 127,394 129,499 FHLMC, 3.287%, 5/01/20 ................................................. 961,933 968,586 FHLMC, 3.305%, 8/01/30 ................................................. 149,317 152,152 FHLMC, 3.334%, 8/01/35 ................................................. 379,729 390,485 FHLMC, 3.347%, 10/01/24 ................................................ 895,281 908,461 FHLMC, 3.354%, 12/01/35 ................................................ 256,311 261,874 FHLMC, 3.362%, 3/01/34 ................................................. 9,323,204 9,419,969 FHLMC, 3.363%, 3/01/35 - 1/01/36 ....................................... 210,858 215,856 FHLMC, 3.365%, 4/01/30 ................................................. 303,355 306,823 FHLMC, 3.368%, 10/01/33 ................................................ 1,237,099 1,256,904 FHLMC, 3.378%, 10/01/36 ................................................ 198,764 203,483 FHLMC, 3.397%, 1/01/34 ................................................. 2,673,300 2,720,771 FHLMC, 3.398%, 7/01/29 ................................................. 71,245 72,647 FHLMC, 3.469%, 8/01/32 ................................................. 1,899,315 1,947,129 (b)FHLMC, 3.482%, 6/01/34 ................................................. 347,831 353,783 FHLMC, 3.483%, 9/01/34 ................................................. 1,621,914 1,665,935 FHLMC, 3.532%, 4/01/19 ................................................. 575,766 581,824 FHLMC, 3.533%, 8/01/31 ................................................. 98,125 100,902 FHLMC, 3.538%, 8/01/27 ................................................. 803,868 823,699 FHLMC, 3.541%, 10/01/31 ................................................ 1,859,429 1,901,153 FHLMC, 3.568%, 9/01/32 ................................................. 647,088 660,726 FHLMC, 3.585%, 12/01/28 ................................................ 318,899 325,283 FHLMC, 3.587%, 3/01/18 ................................................. 107,161 108,880 FHLMC, 3.591%, 8/01/36 ................................................. 3,149,793 3,244,149 FHLMC, 3.611%, 9/01/19 ................................................. 305,874 309,242 FHLMC, 3.625%, 11/01/29 ................................................ 2,489,176 2,523,232 FHLMC, 3.652%, 4/01/29 ................................................. 1,012,395 1,027,901 FHLMC, 3.676%, 1/01/23 ................................................. 2,814,838 2,856,316 FHLMC, 3.759%, 5/01/36 ................................................. 337,339 350,673 FHLMC, 3.77%, 5/01/25 .................................................. 232,906 238,659 FHLMC, 3.797%, 8/01/30 ................................................. 1,861,059 1,913,381
54 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE -------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE (CONTINUED) FHLMC, 3.801%, 1/01/34 ................................................. $ 1,973,308 $ 2,001,121 FHLMC, 3.821%, 6/01/35 ................................................. 1,589,864 1,641,814 FHLMC, 3.838%, 5/01/32 ................................................. 285,774 294,091 FHLMC, 3.841%, 6/01/35 ................................................. 5,684,126 5,840,990 FHLMC, 3.849%, 1/01/36 ................................................. 8,523,026 8,791,917 FHLMC, 3.875%, 11/01/16 ................................................ 306,696 309,946 FHLMC, 3.919%, 12/01/30 ................................................ 969,834 993,904 FHLMC, 3.93%, 4/01/18 .................................................. 653,707 668,895 FHLMC, 3.938%, 6/01/26 ................................................. 2,328,984 2,383,754 FHLMC, 3.955%, 2/01/19 ................................................. 129,833 131,107 FHLMC, 3.976%, 2/01/33 ................................................. 101,340 102,586 FHLMC, 3.98%, 5/01/34 .................................................. 884,240 910,974 FHLMC, 4.015%, 6/01/35 ................................................. 61,914 63,907 FHLMC, 4.031%, 2/01/32 ................................................. 183,147 187,403 FHLMC, 4.052%, 11/01/35 ................................................ 24,983,240 25,670,205 FHLMC, 4.096%, 3/01/32 ................................................. 241,917 245,096 FHLMC, 4.104%, 12/01/19 ................................................ 1,421,048 1,448,357 FHLMC, 4.116%, 5/01/32 ................................................. 373,038 378,522 FHLMC, 4.151%, 6/01/29 ................................................. 2,317,893 2,362,976 FHLMC, 4.214%, 12/01/32 ................................................ 128,514 130,836 FHLMC, 4.221%, 7/01/35 ................................................. 5,404,974 5,545,663 FHLMC, 4.343%, 4/01/25 ................................................. 1,021,189 1,022,734 FHLMC, 4.348%, 11/01/29 ................................................ 546,998 554,867 FHLMC, 4.362%, 6/01/35 - 11/01/35 ...................................... 290,614 300,341 FHLMC, 4.374%, 5/01/35 ................................................. 4,393,325 4,519,463 FHLMC, 4.401%, 12/01/16 ................................................ 208,951 211,535 FHLMC, 4.407%, 2/01/36 ................................................. 10,410,246 10,813,984 FHLMC, 4.419%, 11/01/31 ................................................ 1,497,402 1,533,161 FHLMC, 4.473%, 10/01/25 ................................................ 379,353 387,767 FHLMC, 4.483%, 11/01/25 ................................................ 3,145,071 3,153,867 FHLMC, 4.532%, 3/01/35 ................................................. 921,095 951,700 FHLMC, 4.579%, 1/01/37 ................................................. 43,707,738 45,507,696 (b)FHLMC, 4.607%, 7/01/33 ................................................. 576,530 585,483 FHLMC, 4.641%, 6/01/35 ................................................. 22,086,305 22,936,016 FHLMC, 4.761%, 9/01/35 ................................................. 1,926,693 1,980,977 FHLMC, 4.848%, 9/01/35 ................................................. 1,911,168 1,991,245 (b)FHLMC, 4.874%, 11/01/32 ................................................ 263,152 269,284 FHLMC, 4.894%, 11/01/34 ................................................ 3,291,514 3,430,132 FHLMC, 4.906%, 1/01/23 ................................................. 238,299 243,104 FHLMC, 4.919%, 2/01/35 ................................................. 1,145,642 1,182,708 FHLMC, 4.94%, 8/01/35 .................................................. 17,275,246 18,018,016 FHLMC, 4.964%, 12/01/34 ................................................ 1,122,231 1,157,205 (b)FHLMC, 4.987%, 10/01/35 ................................................ 9,007,334 9,329,189 FHLMC, 5.013%, 12/01/35 ................................................ 12,166,151 12,698,626 FHLMC, 5.053%, 1/01/36 ................................................. 11,875,565 12,354,173 FHLMC, 5.065%, 12/01/34 ................................................ 6,001,737 6,201,343 FHLMC, 5.169%, 2/01/36 ................................................. 26,243,546 27,348,324 FHLMC, 5.177%, 4/01/25 ................................................. 1,026,424 1,053,793
Annual Report | 55 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE (CONTINUED) FHLMC, 5.227%, 3/01/33 ................................................. $ 34,296 $ 34,925 FHLMC, 5.234%, 6/01/26 ................................................. 382,484 394,374 FHLMC, 5.29%, 9/01/35 .................................................. 40,627,482 42,337,096 FHLMC, 5.338%, 12/01/34 ................................................ 4,583,180 4,721,858 FHLMC, 5.342%, 3/01/37 ................................................. 5,491,613 5,690,983 FHLMC, 5.358%, 1/01/34 ................................................. 146,119 150,501 FHLMC, 5.397%, 3/01/36 ................................................. 8,778,927 9,149,680 FHLMC, 5.521%, 10/01/36 ................................................ 469,634 494,177 FHLMC, 5.578%, 6/01/36 ................................................. 2,147,332 2,246,073 FHLMC, 5.602%, 9/01/37 ................................................. 6,591,499 6,959,016 FHLMC, 5.707%, 6/01/36 ................................................. 11,415,662 12,024,798 FHLMC, 5.754%, 1/01/36 ................................................. 8,194,078 8,640,330 FHLMC, 5.785%, 2/01/37 ................................................. 4,594,806 4,852,971 FHLMC, 5.809%, 11/01/36 ................................................ 24,120,386 25,425,334 FHLMC, 5.906%, 12/01/31 ................................................ 285,930 292,988 FHLMC, 6.126%, 11/01/35 ................................................ 408,692 418,817 FHLMC, 6.214%, 9/01/36 ................................................. 3,073,752 3,259,107 FHLMC, 6.322%, 5/01/26 ................................................. 150,835 153,463 FHLMC, 6.635%, 12/01/21 ................................................ 34,685 35,257 FHLMC, 6.725%, 12/01/27 ................................................ 50,497 51,838 ----------- 453,165,017 ----------- (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 70.7% FNMA, 2.213%, 10/01/26 ................................................. 177,507 179,493 FNMA, 2.342%, 9/01/33 .................................................. 571,224 576,015 FNMA, 2.358%, 4/01/33 .................................................. 4,187,811 4,263,160 FNMA, 2.40%, 4/01/33 ................................................... 109,201 110,900 (b)FNMA, 2.42%, 5/01/34 ................................................... 262,578 264,163 FNMA, 2.423%, 10/01/34 ................................................. 731,233 731,486 FNMA, 2.444%, 3/01/32 .................................................. 992,856 998,748 FNMA, 2.451%, 10/01/33 ................................................. 64,642 65,682 FNMA, 2.456%, 3/01/32 .................................................. 1,142,652 1,145,461 FNMA, 2.492%, 5/01/34 .................................................. 1,491,112 1,511,510 FNMA, 2.50%, 10/01/34 .................................................. 118,834 120,537 FNMA, 2.504%, 10/01/33 ................................................. 294,523 295,761 FNMA, 2.51%, 3/01/34 ................................................... 79,104 78,869 FNMA, 2.511%, 3/01/35 .................................................. 3,706,047 3,753,093 FNMA, 2.526%, 9/01/34 .................................................. 464,577 473,285 FNMA, 2.533%, 6/01/33 .................................................. 68,021 68,220 FNMA, 2.55%, 9/01/16 ................................................... 17,662 17,084 FNMA, 2.556%, 11/01/34 ................................................. 193,006 195,995 FNMA, 2.60%, 10/01/33 .................................................. 23,633 23,939 (b)FNMA, 2.606%, 4/01/34 .................................................. 1,229,770 1,255,006 FNMA, 2.627%, 8/01/34 .................................................. 3,298,925 3,373,576 FNMA, 2.653%, 6/01/32 .................................................. 2,611,468 2,637,975 FNMA, 2.662%, 1/01/29 .................................................. 2,695,715 2,688,846 FNMA, 2.668%, 8/01/33 .................................................. 505,664 511,115 FNMA, 2.68%, 12/01/34 .................................................. 255,362 259,924
56 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 2.694%, 1/01/18 ............................................................ $ 5,547,601 $ 5,543,373 FNMA, 2.699%, 8/01/34 ............................................................ 689,950 707,514 FNMA, 2.713%, 1/01/19 ............................................................ 323,043 327,658 FNMA, 2.723%, 8/01/33 - 3/01/35 .................................................. 12,989,156 12,960,330 FNMA, 2.723%, 5/01/35 ............................................................ 22,216,972 22,464,655 FNMA, 2.735%, 6/01/20 ............................................................ 1,037,813 1,054,489 FNMA, 2.747%, 9/01/17 ............................................................ 305,705 308,897 FNMA, 2.754%, 10/01/34 ........................................................... 1,398,469 1,420,678 FNMA, 2.769%, 1/01/16 ............................................................ 496,884 498,700 FNMA, 2.784%, 5/01/35 ............................................................ 94,292 96,557 FNMA, 2.788%, 2/01/33 ............................................................ 194,075 197,748 FNMA, 2.791%, 4/01/35 ............................................................ 280,186 283,645 FNMA, 2.795%, 8/01/34 ............................................................ 114,982 117,430 FNMA, 2.797%, 8/01/34 ............................................................ 61,975 63,101 FNMA, 2.799%, 10/01/33 ........................................................... 24,040 24,565 FNMA, 2.803%, 9/01/32 ............................................................ 479,735 490,802 FNMA, 2.805%, 6/01/32 ............................................................ 461,003 467,277 FNMA, 2.806%, 8/01/34 ............................................................ 308,254 317,412 FNMA, 2.813%, 8/01/35 ............................................................ 51,175 51,679 FNMA, 2.816%, 9/01/32 ............................................................ 665,308 678,880 FNMA, 2.82%, 7/01/32 ............................................................. 118,678 119,055 FNMA, 2.849%, 3/01/33 ............................................................ 2,041,971 2,043,236 FNMA, 2.855%, 11/01/34 ........................................................... 94,128 95,886 FNMA, 2.863%, 8/01/35 ............................................................ 6,959,935 7,073,433 FNMA, 2.866%, 10/01/34 ........................................................... 68,310 69,557 FNMA, 2.867%, 10/01/34 ........................................................... 9,425,462 9,599,695 FNMA, 2.876%, 2/01/35 ............................................................ 2,308,359 2,347,940 FNMA, 2.901%, 6/01/33 ............................................................ 1,679,694 1,701,603 FNMA, 2.908%, 5/01/18 ............................................................ 4,027,816 4,100,389 FNMA, 2.913%, 9/01/18 ............................................................ 1,939,140 1,961,870 FNMA, 2.929%, 10/01/34 ........................................................... 197,113 201,070 FNMA, 2.938%, 1/01/35 ............................................................ 31,554 32,559 FNMA, 2.939%, 10/01/31 ........................................................... 215,995 222,381 FNMA, 2.94%, 7/01/24 ............................................................. 800,935 801,428 FNMA, 2.95%, 6/01/33 ............................................................. 486,903 501,859 FNMA, 2.952%, 8/01/34 ............................................................ 110,217 113,363 FNMA, 2.973%, 1/01/35 ............................................................ 18,815,258 19,011,013 FNMA, 2.979%, 3/01/20 ............................................................ 1,488,320 1,493,708 FNMA, 2.98%, 8/01/34 ............................................................. 170,835 173,320 FNMA, 2.989%, 4/01/18 ............................................................ 119,683 119,736 FNMA, 2.996%, 10/01/34 ........................................................... 833,737 846,902 FNMA, 3.00%, 10/01/32 ............................................................ 636,122 645,684 FNMA, 3.001%, 8/01/34 ............................................................ 77,514 79,128 FNMA, 3.009%, 12/01/20 ........................................................... 174,618 175,066 FNMA, 3.018%, 1/01/35 ............................................................ 542,507 550,269 FNMA, 3.02%, 2/01/34 ............................................................. 100,335 99,855 FNMA, 3.023%, 6/01/19 ............................................................ 236,835 240,811 (b)FNMA, 3.025%, 10/01/32 ........................................................... 472,421 475,885
Annual Report | 57 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 3.026%, 7/01/35 ..................................................... $ 75,712 $ 76,380 FNMA, 3.038%, 10/01/19 .................................................... 310,092 313,387 FNMA, 3.039%, 4/01/36 ..................................................... 566,868 572,233 FNMA, 3.041%, 9/01/32 ..................................................... 1,874,864 1,935,200 FNMA, 3.045%, 9/01/33 ..................................................... 288,375 294,690 FNMA, 3.046%, 3/01/35 ..................................................... 6,334 6,506 FNMA, 3.057%, 5/01/19 ..................................................... 177,421 177,061 FNMA, 3.065%, 3/01/22 ..................................................... 829 833 FNMA, 3.067%, 6/01/31 ..................................................... 293,802 300,721 FNMA, 3.07%, 5/01/31 - 10/01/34 ........................................... 245,920 251,686 FNMA, 3.075%, 6/01/32 ..................................................... 447,383 457,875 FNMA, 3.082%, 11/01/34 .................................................... 26,693,897 27,544,943 FNMA, 3.085%, 9/01/34 ..................................................... 10,949 11,222 FNMA, 3.114%, 10/01/34 .................................................... 182,910 186,004 FNMA, 3.121%, 10/01/35 .................................................... 78,632 80,390 FNMA, 3.122%, 9/01/15 - 11/01/32 .......................................... 1,242,981 1,268,190 FNMA, 3.123%, 8/01/33 ..................................................... 30,738 31,450 FNMA, 3.125%, 3/01/19 ..................................................... 225,381 227,042 FNMA, 3.127%, 9/01/34 ..................................................... 96,791 99,390 FNMA, 3.128%, 10/01/32 .................................................... 128,321 130,638 FNMA, 3.135%, 8/01/29 ..................................................... 157,966 159,001 FNMA, 3.142%, 9/01/31 - 9/01/34 ........................................... 185,418 189,679 FNMA, 3.15%, 9/01/34 ...................................................... 23,727 24,214 FNMA, 3.153%, 11/01/33 .................................................... 34,548,136 35,474,742 FNMA, 3.153%, 4/01/35 ..................................................... 627,882 636,340 FNMA, 3.154%, 1/01/35 ..................................................... 8,638,264 8,770,750 FNMA, 3.155%, 6/01/31 - 11/01/31 .......................................... 580,244 594,502 FNMA, 3.18%, 8/01/31 ...................................................... 187,651 188,742 FNMA, 3.182%, 11/01/36 .................................................... 483,012 490,466 FNMA, 3.186%, 12/01/19 .................................................... 224,901 227,228 FNMA, 3.19%, 7/01/34 ...................................................... 22,375 22,988 FNMA, 3.198%, 9/01/34 ..................................................... 114,776 117,982 FNMA, 3.20%, 4/01/32 ...................................................... 518,275 525,825 FNMA, 3.205%, 3/01/21 ..................................................... 49,652 50,236 FNMA, 3.212%, 3/01/20 ..................................................... 105,183 107,354 FNMA, 3.215%, 5/01/31 ..................................................... 110,602 112,709 FNMA, 3.218%, 5/01/19 ..................................................... 650,339 652,212 FNMA, 3.223%, 12/01/17 .................................................... 66,638 67,098 FNMA, 3.225%, 3/01/18 ..................................................... 59,448 59,774 FNMA, 3.228%, 1/01/31 ..................................................... 279,489 282,134 FNMA, 3.231%, 5/01/29 ..................................................... 155,209 157,875 FNMA, 3.236%, 9/01/32 - 7/01/33 ........................................... 859,229 871,172 FNMA, 3.245%, 10/01/34 .................................................... 141,144 144,671 FNMA, 3.25%, 1/01/19 - 10/01/30 ........................................... 1,516,341 1,522,685 FNMA, 3.252%, 9/01/35 ..................................................... 65,879 65,965 FNMA, 3.253%, 3/01/35 ..................................................... 16,966 17,255 FNMA, 3.257%, 9/01/34 ..................................................... 38,293 39,446 FNMA, 3.258%, 8/01/33 ..................................................... 850,824 874,805
58 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 3.263%, 6/01/27 ............................................................ $ 368,925 $ 377,417 FNMA, 3.267%, 10/01/34 ........................................................... 25,336,865 25,977,284 FNMA, 3.277%, 8/01/34 ............................................................ 18,732 19,232 FNMA, 3.278%, 9/01/32 ............................................................ 404,649 413,414 FNMA, 3.28%, 4/01/33 ............................................................. 5,417 5,483 FNMA, 3.285%, 7/01/35 ............................................................ 1,308,766 1,339,349 FNMA, 3.286%, 8/01/33 ............................................................ 153,032 157,440 FNMA, 3.289%, 4/01/27 ............................................................ 2,071,081 2,080,936 FNMA, 3.298%, 4/01/22 ............................................................ 832,763 838,892 FNMA, 3.306%, 1/01/34 ............................................................ 21,903 22,229 FNMA, 3.313%, 6/01/35 ............................................................ 118,220 120,303 FNMA, 3.318%, 1/01/32 ............................................................ 1,620,161 1,643,956 FNMA, 3.319%, 7/01/34 ............................................................ 484,795 498,041 FNMA, 3.32%, 10/01/18 ............................................................ 13,166 13,595 FNMA, 3.321%, 5/01/29 ............................................................ 139,068 140,700 FNMA, 3.333%, 1/01/29 ............................................................ 444,747 448,656 FNMA, 3.335%, 9/01/34 ............................................................ 2,146,421 2,205,098 FNMA, 3.336%, 5/01/32 ............................................................ 620,268 633,458 FNMA, 3.34%, 11/01/20 - 5/01/32 .................................................. 755,635 769,213 FNMA, 3.341%, 9/01/39 ............................................................ 578,791 589,925 FNMA, 3.345%, 3/01/28 ............................................................ 90,030 91,277 FNMA, 3.348%, 9/01/29 ............................................................ 82,705 83,992 FNMA, 3.355%, 6/01/19 ............................................................ 84,082 84,736 FNMA, 3.357%, 12/01/20 ........................................................... 165,555 166,136 FNMA, 3.358%, 7/01/33 - 7/01/34 .................................................. 2,967,203 3,036,310 FNMA, 3.365%, 10/01/24 - 9/01/35 ................................................. 5,289,828 5,367,202 FNMA, 3.367%, 2/01/33 ............................................................ 356,265 365,817 FNMA, 3.379%, 3/01/19 ............................................................ 97,754 99,040 FNMA, 3.38%, 9/01/22 - 7/01/35 ................................................... 809,039 819,893 FNMA, 3.384%, 5/01/25 - 9/01/34 .................................................. 800,237 812,470 FNMA, 3.39%, 7/01/35 ............................................................. 2,118,991 2,172,025 FNMA, 3.395%, 4/01/34 - 5/01/34 .................................................. 4,383,827 4,480,011 FNMA, 3.398%, 5/01/27 ............................................................ 1,058,626 1,077,508 FNMA, 3.406%, 11/01/30 ........................................................... 3,424,137 3,473,209 FNMA, 3.426%, 4/01/34 ............................................................ 5,087,008 5,064,196 FNMA, 3.432%, 9/01/34 ............................................................ 189,929 195,293 FNMA, 3.435%, 5/01/35 ............................................................ 11,116,252 11,365,390 FNMA, 3.437%, 9/01/34 ............................................................ 48,492 49,619 FNMA, 3.439%, 1/01/29 ............................................................ 330,391 332,340 FNMA, 3.445%, 9/01/19 ............................................................ 212,878 218,121 FNMA, 3.446%, 1/01/31 ............................................................ 698,308 704,533 FNMA, 3.448%, 3/01/32 ............................................................ 889,605 909,250 FNMA, 3.455%, 2/01/31 ............................................................ 128,537 131,482 FNMA, 3.458%, 12/01/27 - 5/01/36 ................................................. 2,043,180 2,048,671 FNMA, 3.459%, 7/01/35 ............................................................ 75,351 77,331 FNMA, 3.471%, 11/01/17 ........................................................... 269,005 272,323 FNMA, 3.482%, 3/01/19 - 2/01/25 .................................................. 2,477,523 2,488,204 FNMA, 3.486%, 3/01/19 ............................................................ 113,317 113,223
Annual Report | 59 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 3.518%, 7/01/34 ............................................................ $ 14,379,517 $14,756,548 FNMA, 3.52%, 12/01/32 ............................................................ 567,473 570,333 FNMA, 3.53%, 6/01/35 ............................................................. 74,295 76,285 FNMA, 3.538%, 8/01/30 ............................................................ 41,729 42,017 FNMA, 3.547%, 8/01/26 ............................................................ 106,894 106,917 FNMA, 3.55%, 8/01/16 - 8/01/34 ................................................... 199,524 203,520 FNMA, 3.56%, 7/01/26 ............................................................. 626,056 637,719 FNMA, 3.566%, 10/01/33 ........................................................... 477,076 490,961 FNMA, 3.57%, 6/01/32 ............................................................. 70,373 72,242 FNMA, 3.576%, 1/01/36 ............................................................ 37,691,149 38,688,237 FNMA, 3.58%, 4/01/19 ............................................................. 530,072 529,790 FNMA, 3.59%, 6/01/32 ............................................................. 527,899 540,293 FNMA, 3.591%, 9/01/35 ............................................................ 11,992,405 12,284,675 FNMA, 3.594%, 9/01/35 ............................................................ 1,294,904 1,331,744 FNMA, 3.597%, 3/01/34 ............................................................ 858,014 878,593 FNMA, 3.598%, 9/01/25 ............................................................ 203,796 205,442 FNMA, 3.604%, 4/01/30 ............................................................ 477,922 486,942 FNMA, 3.606%, 2/01/29 ............................................................ 229,896 234,127 FNMA, 3.611%, 5/01/33 ............................................................ 737,577 758,512 FNMA, 3.616%, 1/01/32 ............................................................ 802,093 822,254 FNMA, 3.617%, 5/01/36 ............................................................ 2,311,919 2,303,007 FNMA, 3.622%, 4/01/32 ............................................................ 404,693 416,150 FNMA, 3.635%, 6/01/33 ............................................................ 106,091 109,023 FNMA, 3.642%, 4/01/34 ............................................................ 146,647 150,466 FNMA, 3.645%, 11/01/31 ........................................................... 291,281 292,426 FNMA, 3.665%, 2/01/32 ............................................................ 540,484 548,602 FNMA, 3.672%, 5/01/32 ............................................................ 395,454 407,608 FNMA, 3.688%, 6/01/35 ............................................................ 209,349 215,867 FNMA, 3.693%, 4/01/34 ............................................................ 2,384,879 2,447,742 FNMA, 3.701%, 10/01/35 ........................................................... 114,576 118,090 FNMA, 3.704%, 3/01/35 ............................................................ 45,657,418 46,972,398 FNMA, 3.72%, 5/01/19 ............................................................. 232,363 235,798 FNMA, 3.721%, 5/01/28 ............................................................ 1,437,026 1,484,107 (b)FNMA, 3.726%, 4/01/33 ............................................................ 658,118 677,716 FNMA, 3.729%, 2/01/16 ............................................................ 207,537 208,791 FNMA, 3.741%, 6/01/19 ............................................................ 261,424 264,068 FNMA, 3.742%, 4/01/35 ............................................................ 1,130,241 1,167,974 FNMA, 3.746%, 11/01/36 ........................................................... 209,750 217,733 FNMA, 3.748%, 4/01/19 ............................................................ 176,961 181,789 FNMA, 3.75%, 8/01/28 ............................................................. 1,073,209 1,077,925 FNMA, 3.754%, 10/01/22 ........................................................... 434,620 435,463 FNMA, 3.76%, 2/01/32 ............................................................. 130,607 133,768 FNMA, 3.763%, 2/01/36 ............................................................ 1,392,381 1,437,509 FNMA, 3.767%, 11/01/31 ........................................................... 105,246 106,946 FNMA, 3.78%, 6/01/20 ............................................................. 300,244 309,394 FNMA, 3.796%, 6/01/35 ............................................................ 2,854,779 2,950,778 FNMA, 3.801%, 5/01/35 ............................................................ 27,853 28,712
60 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 3.803%, 3/01/35 ............................................................ $ 7,999,151 $ 8,220,989 FNMA, 3.811%, 4/01/32 ............................................................ 78,862 81,379 FNMA, 3.812%, 7/01/34 ............................................................ 15,392,971 15,879,274 FNMA, 3.827%, 11/01/33 ........................................................... 436,096 437,431 FNMA, 3.835%, 6/01/19 ............................................................ 186,066 185,742 FNMA, 3.838%, 8/01/35 ............................................................ 3,740,113 3,874,331 FNMA, 3.84%, 12/01/33 ............................................................ 82,673 84,076 FNMA, 3.856%, 9/01/29 ............................................................ 242,031 247,104 FNMA, 3.862%, 12/01/34 ........................................................... 3,448,472 3,553,901 FNMA, 3.863%, 1/01/35 ............................................................ 143,620 142,188 FNMA, 3.869%, 1/01/25 ............................................................ 1,265,640 1,268,845 FNMA, 3.87%, 5/01/35 ............................................................. 22,599 23,296 FNMA, 3.873%, 6/01/33 ............................................................ 55,107 56,884 FNMA, 3.89%, 6/01/28 ............................................................. 1,679,028 1,714,570 FNMA, 3.901%, 8/01/21 ............................................................ 1,527,844 1,535,381 FNMA, 3.922%, 12/01/34 ........................................................... 4,571,120 4,629,920 FNMA, 3.926%, 5/01/36 ............................................................ 97,114 101,323 FNMA, 3.938%, 4/01/19 - 1/01/35 .................................................. 824,414 831,055 FNMA, 3.947%, 1/01/35 ............................................................ 184,389 186,197 FNMA, 3.983%, 4/01/35 ............................................................ 7,294,169 7,493,783 FNMA, 4.001%, 12/01/34 ........................................................... 5,901,377 6,119,889 FNMA, 4.005%, 3/01/35 ............................................................ 21,437 21,983 FNMA, 4.013%, 6/01/19 ............................................................ 171,796 173,450 FNMA, 4.022%, 2/01/34 ............................................................ 304,941 312,647 FNMA, 4.023%, 2/01/32 ............................................................ 1,365,148 1,396,519 FNMA, 4.035%, 5/01/35 ............................................................ 168,600 171,831 FNMA, 4.04%, 12/01/18 ............................................................ 141,812 142,982 FNMA, 4.043%, 7/01/34 ............................................................ 237,646 245,835 FNMA, 4.06%, 7/01/36 ............................................................. 861,037 895,109 FNMA, 4.08%, 1/01/37 ............................................................. 35,365,184 36,671,866 FNMA, 4.091%, 2/01/19 ............................................................ 193,364 195,537 FNMA, 4.105%, 1/01/19 ............................................................ 257,642 260,031 FNMA, 4.11%, 4/01/31 - 1/01/35 ................................................... 3,416,549 3,492,431 FNMA, 4.114%, 2/01/35 ............................................................ 137,171 141,545 FNMA, 4.117%, 9/01/33 ............................................................ 2,420,294 2,500,385 FNMA, 4.125%, 10/01/28 - 2/01/33 ................................................. 222,556 224,649 FNMA, 4.139%, 11/01/34 ........................................................... 9,326,593 9,631,833 FNMA, 4.162%, 12/01/19 ........................................................... 454,162 460,689 FNMA, 4.181%, 3/01/33 ............................................................ 64,175 66,324 FNMA, 4.185%, 2/01/34 ............................................................ 4,028,806 4,154,115 FNMA, 4.22%, 11/01/27 ............................................................ 37,446 38,066 FNMA, 4.237%, 8/01/33 ............................................................ 7,602,903 7,810,064 FNMA, 4.25%, 8/01/35 ............................................................. 436,571 452,893 FNMA, 4.251%, 12/01/34 ........................................................... 6,424,743 6,647,333 FNMA, 4.254%, 12/01/32 ........................................................... 1,102,011 1,121,166 FNMA, 4.291%, 6/01/36 ............................................................ 207,010 216,510 FNMA, 4.295%, 8/01/36 ............................................................ 27,677,902 28,768,444 FNMA, 4.299%, 4/01/38 ............................................................ 2,744,524 2,848,421
Annual Report | 61 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 4.316%, 1/01/34 ............................................................ $ 498,616 $ 498,282 FNMA, 4.326%, 1/01/35 ............................................................ 6,028,428 6,072,910 FNMA, 4.328%, 1/01/37 ............................................................ 1,775,090 1,843,993 FNMA, 4.33%, 5/01/28 - 1/01/37 ................................................... 961,188 985,769 FNMA, 4.336%, 5/01/35 ............................................................ 3,107,859 3,210,985 FNMA, 4.345%, 12/01/33 ........................................................... 426,353 429,889 FNMA, 4.358%, 12/01/36 ........................................................... 52,836,260 55,416,173 FNMA, 4.363%, 2/01/34 ............................................................ 2,265,522 2,336,014 FNMA, 4.374%, 2/01/35 ............................................................ 18,484 19,104 FNMA, 4.378%, 4/01/33 ............................................................ 96,034 97,942 FNMA, 4.408%, 8/01/33 ............................................................ 3,736,809 3,891,789 FNMA, 4.41%, 5/01/34 ............................................................. 148,945 154,633 FNMA, 4.415%, 5/01/35 ............................................................ 7,527,172 7,779,343 FNMA, 4.42%, 7/01/35 ............................................................. 11,027,133 11,320,984 FNMA, 4.432%, 4/01/34 ............................................................ 1,148,025 1,192,943 FNMA, 4.462%, 1/01/35 ............................................................ 6,882,285 7,088,924 FNMA, 4.472%, 3/01/33 ............................................................ 1,200,219 1,238,136 FNMA, 4.487%, 1/01/35 ............................................................ 6,055,823 6,237,112 FNMA, 4.498%, 2/01/18 ............................................................ 116,626 117,658 FNMA, 4.52%, 3/01/32 ............................................................. 160,986 164,085 (b)FNMA, 4.528%, 3/01/33 - 3/01/34 .................................................. 1,183,868 1,226,263 FNMA, 4.53%, 12/01/34 ............................................................ 1,543,320 1,586,731 FNMA, 4.543%, 1/01/35 ............................................................ 6,782,646 7,007,551 FNMA, 4.545%, 2/01/35 ............................................................ 4,751 4,908 FNMA, 4.564%, 12/01/35 - 2/01/36 ................................................. 3,631,515 3,787,168 FNMA, 4.59%, 5/01/36 ............................................................. 19,638,902 20,150,632 FNMA, 4.597%, 3/01/35 ............................................................ 306,558 315,284 (b)FNMA, 4.606%, 5/01/33 ............................................................ 636,976 661,320 FNMA, 4.634%, 3/01/35 ............................................................ 22,684,141 23,412,572 (b)FNMA, 4.638%, 5/01/34 ............................................................ 1,000,588 1,032,314 FNMA, 4.646%, 8/01/35 ............................................................ 10,679,405 11,128,702 FNMA, 4.65%, 11/01/17 ............................................................ 1,313,777 1,320,636 FNMA, 4.654%, 2/01/34 ............................................................ 34,785 35,858 FNMA, 4.657%, 11/01/33 ........................................................... 3,638,920 3,763,277 FNMA, 4.682%, 1/01/34 ............................................................ 387,526 399,428 FNMA, 4.71%, 5/01/35 ............................................................. 2,412,388 2,497,606 FNMA, 4.712%, 10/01/14 ........................................................... 43,862 44,335 FNMA, 4.719%, 2/01/34 ............................................................ 3,683,072 3,799,874 FNMA, 4.73%, 5/01/38 ............................................................. 34,599,106 36,061,947 FNMA, 4.73%, 1/01/45 ............................................................. 118,792 122,626 FNMA, 4.737%, 1/01/36 ............................................................ 15,585,569 16,228,855 (b)FNMA, 4.754%, 2/01/33 ............................................................ 373,990 385,634 FNMA, 4.772%, 3/01/35 ............................................................ 20,817,836 21,400,606 FNMA, 4.775%, 2/01/35 ............................................................ 6,161,832 6,356,965 FNMA, 4.78%, 7/01/35 ............................................................. 23,472,911 24,452,936 FNMA, 4.795%, 6/01/35 ............................................................ 19,959,408 20,770,444 FNMA, 4.843%, 9/01/35 ............................................................ 8,468,189 8,808,915 FNMA, 4.844%, 7/01/35 ............................................................ 26,227,558 27,345,843
62 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 4.848%, 9/01/35 ............................................................ $ 12,490,504 $12,897,853 FNMA, 4.858%, 1/01/38 ............................................................ 29,980,452 31,127,642 FNMA, 4.863%, 1/01/34 ............................................................ 177,804 185,012 FNMA, 4.867%, 10/01/34 ........................................................... 13,003,254 13,517,687 FNMA, 4.869%, 12/01/35 ........................................................... 3,742,001 3,893,802 FNMA, 4.891%, 7/01/35 ............................................................ 5,583,272 5,812,075 FNMA, 4.897%, 6/01/35 ............................................................ 2,167,646 2,255,457 FNMA, 4.902%, 1/01/36 ............................................................ 7,870,582 8,176,098 FNMA, 4.906%, 6/01/35 ............................................................ 1,348,929 1,402,189 FNMA, 4.919%, 7/01/35 ............................................................ 5,616,893 5,843,472 FNMA, 4.936%, 5/01/35 ............................................................ 5,704,579 5,896,991 FNMA, 4.947%, 12/01/33 ........................................................... 3,053,660 3,156,820 FNMA, 4.948%, 12/01/35 ........................................................... 2,520,443 2,625,120 FNMA, 4.951%, 1/01/34 ............................................................ 41,730 43,128 FNMA, 4.957%, 11/01/35 ........................................................... 24,369,970 25,356,352 FNMA, 4.972%, 6/01/35 ............................................................ 1,070,957 1,101,913 FNMA, 4.982%, 5/01/21 ............................................................ 593,355 608,489 FNMA, 4.987%, 5/01/25 ............................................................ 532,863 547,924 FNMA, 4.996%, 7/01/35 ............................................................ 2,132,081 2,222,842 FNMA, 5.00%, 1/01/17 - 6/01/35 ................................................... 3,269,294 3,383,962 FNMA, 5.017%, 11/01/35 ........................................................... 24,891,058 25,967,151 FNMA, 5.032%, 1/01/36 ............................................................ 11,505,872 11,940,730 FNMA, 5.054%, 2/01/35 ............................................................ 14,684,586 15,232,714 FNMA, 5.058%, 2/01/30 ............................................................ 201,830 205,862 (b)FNMA, 5.062%, 10/01/34 ........................................................... 134,879 138,926 FNMA, 5.069%, 1/01/34 ............................................................ 26,379 27,289 FNMA, 5.099%, 6/01/29 ............................................................ 544,842 560,852 FNMA, 5.11%, 1/01/36 ............................................................. 46,517,553 48,531,992 FNMA, 5.118%, 7/01/17 ............................................................ 660,105 681,177 FNMA, 5.138%, 5/01/37 ............................................................ 2,179,609 2,264,486 FNMA, 5.141%, 3/01/36 ............................................................ 218,486 227,106 FNMA, 5.153%, 9/01/35 ............................................................ 5,056,342 5,294,825 FNMA, 5.168%, 10/01/35 ........................................................... 6,054,921 6,172,716 FNMA, 5.174%, 1/01/36 ............................................................ 2,156,518 2,244,552 FNMA, 5.205%, 5/01/36 ............................................................ 8,201,509 8,550,858 FNMA, 5.242%, 6/01/32 ............................................................ 349,218 350,503 FNMA, 5.248%, 11/01/18 ........................................................... 48,901 49,501 FNMA, 5.25%, 5/01/35 ............................................................. 1,287,039 1,335,192 FNMA, 5.285%, 3/01/36 ............................................................ 5,145,181 5,364,471 FNMA, 5.294%, 12/01/24 ........................................................... 451,715 468,115 FNMA, 5.307%, 1/01/19 ............................................................ 724,855 718,245 FNMA, 5.308%, 3/01/36 ............................................................ 645,430 674,659 FNMA, 5.333%, 1/01/36 ............................................................ 186,113 191,618 FNMA, 5.392%, 10/01/37 ........................................................... 6,401,600 6,713,277 FNMA, 5.417%, 1/01/34 - 9/01/37 .................................................. 13,161,676 13,825,974 FNMA, 5.425%, 8/01/36 ............................................................ 16,339,861 17,153,491 FNMA, 5.453%, 9/01/37 ............................................................ 14,654,063 15,291,415 FNMA, 5.455%, 8/01/37 ............................................................ 19,504,652 20,295,852
Annual Report | 63 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) (a)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE (CONTINUED) FNMA, 5.489%, 6/01/36 ............................................................ $ 5,174,753 $ 5,416,031 (b)FNMA, 5.517%, 4/01/36 ............................................................ 2,952,876 3,102,502 FNMA, 5.588%, 6/01/17 ............................................................ 3,145 3,127 FNMA, 5.612%, 8/01/36 ............................................................ 17,637,395 18,566,841 FNMA, 5.621%, 11/01/26 ........................................................... 68,027 67,520 FNMA, 5.658%, 4/01/36 ............................................................ 719,985 757,541 FNMA, 5.683%, 6/01/36 ............................................................ 11,805,181 12,433,218 FNMA, 5.766%, 4/01/36 ............................................................ 16,373,579 17,237,446 (b)FNMA, 5.778%, 9/01/36 ............................................................ 869,624 915,514 FNMA, 5.782%, 12/01/33 ........................................................... 247,249 255,552 (b)FNMA, 5.817%, 7/01/46 ............................................................ 55,215,803 58,318,960 FNMA, 5.83%, 3/01/26 ............................................................. 564,506 580,806 FNMA, 5.853%, 6/01/36 ............................................................ 6,595,087 6,971,852 FNMA, 5.875%, 5/01/36 ............................................................ 5,618,098 5,978,457 FNMA, 5.899%, 6/01/35 ............................................................ 218,282 230,674 FNMA, 6.145%, 3/01/20 ............................................................ 82,487 83,420 FNMA, 6.171%, 8/01/36 ............................................................ 18,171,382 19,275,231 FNMA, 6.189%, 5/01/21 ............................................................ 272,551 279,906 FNMA, 6.332%, 9/01/36 ............................................................ 4,218,226 4,483,397 FNMA, 6.48%, 8/01/22 ............................................................. 58,142 59,909 FNMA, 6.493%, 1/01/26 ............................................................ 513,275 523,598 FNMA, 6.711%, 7/01/24 ............................................................ 197,097 205,002 FNMA, 6.836%, 10/01/17 ........................................................... 179,169 185,238 FNMA, 6.898%, 12/01/17 ........................................................... 116,526 117,849 FNMA, 6.989%, 2/01/20 ............................................................ 448,230 456,607 FNMA, 7.634%, 3/01/25 ............................................................ 112,156 116,158 -------------- 1,455,083,696 -------------- (a)GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 1.1% GNMA, 3.625%, 7/20/21 - 9/20/31 .................................................. 5,922,759 6,111,797 GNMA, 4.125%, 10/20/23 - 10/20/26 ................................................ 7,004,881 7,115,736 GNMA, 4.375%, 4/20/22 - 6/20/31 ................................................. 9,823,671 10,047,067 -------------- 23,274,600 -------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $1,918,883,862) ........................... 1,931,523,313 -------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $51,441) 0.0%(c) FINANCE 0.0%(c) (a)Travelers Mortgage Services Inc., 1998-5A, A, FRN, 4.600%, 12/25/18 .............. 50,572 44,503 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,918,935,303) ............ 1,931,567,816 --------------
SHARES ------------------ SHORT TERM INVESTMENTS 8.1% MONEY MARKET FUNDS (COST $101,980,417) 4.9% (d)Institutional Fiduciary Trust Money Market Portfolio, 0.00% ....................... 101,980,417 101,980,417 --------------
64 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE ----------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS (CONTINUED) REPURCHASE AGREEMENTS (COST $65,525,525) 3.2% (e)Joint Repurchase Agreement, 0.049%, 11/02/09 (Maturity Value $ 65,525,795) ................. $ 65,525,525 $ 65,525,525 Banc of America Securities LLC (Maturity Value $8,794,872) Barclays Capital Inc. (Maturity Value $8,794,872) BNP Paribas Securities Corp. (Maturity Value $10,552,931) Credit Suisse Securities (USA) LLC (Maturity Value $8,208,416) Deutsche Bank Securities Inc. (Maturity Value $8,653,336) HSBC Securities (USA) Inc. (Maturity Value $5,863,248) Morgan Stanley & Co. Inc. (Maturity Value $5,863,248) UBS Securities LLC (Maturity Value $8,794,872) Collateralized by U.S. Government Agency Securities, 2.55% - 5.00%, 11/18/11 - 6/18/24; (f)U.S. Government Agency Discount Notes, 11/06/09 - 4/12/10; (f)U.S. Treasury Bills, 4/01/10; and U.S. Treasury Notes, 2.125% - 3.875%, 1/31/10 - 3/31/13 --------------- TOTAL INVESTMENTS (COST $2,086,441,245) 101.9% .............................................. 2,099,073,758 OTHER ASSETS, LESS LIABILITIES (1.9)% ....................................................... (39,903,395) --------------- NET ASSETS 100.0% ........................................................................... $ 2,059,170,363 ===============
See Abbreviations on page 154. (a) The coupon rate shown represents the rate at period end. (b) A portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(d). (c) Rounds to less than 0.1% of net assets. (d) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (e) See Note 1(c) regarding joint repurchase agreement. (f) The security is traded on a discount basis with no stated coupon rate. Annual Report | The accompanying notes are an integral part of these financial statements. | 65 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31, CLASS A 2009 2008 2007 2006 2005 ----------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 7.66 $ 9.81 $ 10.06 $ 10.11 $ 10.13 ----------------------------------------------------------------------------- Income from investment operations(a): Net investment income ......................... 0.292 0.478 0.645 0.599 0.416 Net realized and unrealized gains (losses) .... 1.072 (2.152) (0.249) (0.048) (0.018) ----------------------------------------------------------------------------- Total from investment operations ................. 1.364 (1.674) 0.396 0.551 0.398 ----------------------------------------------------------------------------- Less distributions from net investment income .... (0.294) (0.476) (0.646) (0.601) (0.418) ----------------------------------------------------------------------------- Redemption fees(b) ............................... -- --(c) --(c) --(c) --(c) ----------------------------------------------------------------------------- Net asset value, end of year ..................... $ 8.73 $ 7.66 $ 9.81 $ 10.06 $ 10.11 ============================================================================= Total return(d) .................................. 18.32% (17.75)% 4.02% 5.59% 4.00% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 0.96% 0.93% 0.89% 0.87% 0.89% Net investment income ............................ 3.66% 5.23% 6.44% 5.94% 4.26% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $ 955,944 $ 796,384 $ 1,375,871 $ 1,742,514 $ 1,890,591 Portfolio turnover rate .......................... 51.46% 31.59% 69.25% 74.56% 77.13%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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%. 66 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31, CLASS B 2009 2008 2007 2006 2005 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 7.66 $ 9.80 $ 10.06 $ 10.10 $ 10.12 -------------------------------------------------------------------------- Income from investment operations(a): Net investment income ......................... 0.228 0.400 0.567 0.524 0.339 Net realized and unrealized gains (losses) .... 1.067 (2.133) (0.254) (0.037) (0.015) -------------------------------------------------------------------------- Total from investment operations ................. 1.295 (1.733) 0.313 0.487 0.324 -------------------------------------------------------------------------- Less distributions from net investment income .... (0.235) (0.407) (0.573) (0.527) (0.344) -------------------------------------------------------------------------- Redemption fees(b) ............................... -- --(c) --(c) --(c) --(c) -------------------------------------------------------------------------- Net asset value, end of year ..................... $ 8.72 $ 7.66 $ 9.80 $ 10.06 $ 10.10 ========================================================================== Total return(d) .................................. 17.31% (18.28)% 3.17% 4.93% 3.25% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 1.71% 1.67% 1.61% 1.60% 1.62% Net investment income ............................ 2.91% 4.49% 5.72% 5.21% 3.53% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $ 14,747 $ 17,481 $ 39,548 $ 60,972 $ 65,687 Portfolio turnover rate .......................... 51.46% 31.59% 69.25% 74.56% 77.13%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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%. Annual Report | The accompanying notes are an integral part of these financial statements. | 67 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31, CLASS C 2009 2008 2007 2006 2005 -------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............... $ 7.67 $ 9.81 $ 10.07 $ 10.11 $ 10.13 -------------------------------------------------------------------------- Income from investment operations(a): Net investment income ......................... 0.260 0.441 0.605 0.561 0.373 Net realized and unrealized gains (losses) .... 1.062 (2.140) (0.259) (0.039) (0.015) -------------------------------------------------------------------------- Total from investment operations ................. 1.322 (1.699) 0.346 0.522 0.358 -------------------------------------------------------------------------- Less distributions from net investment income .... (0.262) (0.441) (0.606) (0.562) (0.378) -------------------------------------------------------------------------- Redemption fees(b) ............................... -- --(c) --(c) --(c) --(c) -------------------------------------------------------------------------- Net asset value, end of year ..................... $ 8.73 $ 7.67 $ 9.81 $ 10.07 $ 10.11 ========================================================================== Total return(d) .................................. 17.69% (17.96)% 3.50% 5.29% 3.59% RATIOS TO AVERAGE NET ASSETS Expenses(e) ...................................... 1.36% 1.32% 1.29% 1.26% 1.29% Net investment income ............................ 3.26% 4.84% 6.04% 5.55% 3.86% SUPPLEMENTAL DATA Net assets, end of year (000's) .................. $ 209,897 $ 188,240 $ 382,911 $ 380,599 $ 331,218 Portfolio turnover rate .......................... 51.46% 31.59% 69.25% 74.56% 77.13%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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%. 68 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN FLOATING RATE DAILY ACCESS FUND
YEAR ENDED OCTOBER 31, ADVISOR CLASS 2009 2008 2007 2006 2005 ---------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............. $ 7.66 $ 9.81 $ 10.08 $ 10.12 $ 10.13 ---------------------------------------------------------------------------- Income from investment operations(a): Net investment income ....................... 0.312 0.500 0.671 0.630 0.438 Net realized and unrealized gains (losses) .. 1.071 (2.150) (0.269) (0.043) (0.004) ---------------------------------------------------------------------------- Total from investment operations ............... 1.383 (1.650) 0.402 0.587 0.434 ---------------------------------------------------------------------------- Less distributions from net investment income .. (0.313) (0.500) (0.672) (0.627) (0.444) ---------------------------------------------------------------------------- Redemption fees(b) ............................. -- --(c) --(c) --(c) --(c) ---------------------------------------------------------------------------- Net asset value, end of year ................... $ 8.73 $ 7.66 $ 9.81 $ 10.08 $ 10.12 ============================================================================ Total return ................................... 18.74% (17.54)% 4.08% 5.96% 4.37% RATIOS TO AVERAGE NET ASSETS Expenses(d) .................................... 0.71% 0.68% 0.64% 0.62% 0.64% Net investment income .......................... 3.91% 5.48% 6.69% 6.19% 4.51% SUPPLEMENTAL DATA Net assets, end of year (000's) ................ $ 186,816 $ 91,831 $ 85,416 $ 94,185 $ 38,822 Portfolio turnover rate ........................ 51.46% 31.59% 69.25% 74.56% 77.13%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (d) Benefit of expense reduction rounds to less than 0.01%. Annual Report | The accompanying notes are an integral part of these financial statements. | 69 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ---------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS 91.6% AEROSPACE & DEFENSE 3.1% BE Aerospace Inc., Term Loan B, 5.75%, 7/28/14 ........................... United States $ 8,931,003 $ 8,957,796 Hawker Beechcraft Inc., Synthetic L/C, 2.283%, 3/26/14 .................................. United States 405,588 322,442 Term Loan B, 2.243% - 2.283%, 3/26/14 ........................... United States 6,854,435 5,449,276 ILC Industries Inc., June 2006 Term Loan, 2.243%, 2/24/12 ................ United States 3,133,526 2,997,741 L-1 Identity Solutions Operating Co., Tranche B-1 Term Loan, 6.75%, 8/05/13 ........................... United States 871,039 876,846 Tranche B-2 Term Loan, 7.25%, 8/05/13 ........................... United States 3,433,582 3,456,474 Spirit Aerosystems Inc. (Onex Wind Finance LP), Term B-1 Loan, 2.034%, 12/31/11 ...................................................... United States 10,734,663 10,399,204 TransDigm Inc., Term Loan B, 2.289%, 6/23/13 ............................. United States 10,115,000 9,726,655 ----------- 42,186,434 ----------- AIRLINES 0.4% Delta Air Lines Inc., Term Loan, 8.75%, 9/27/13 .......................... United States 5,650,000 5,676,838 ----------- APPAREL, ACCESSORIES & LUXURY GOODS 0.6% (d)Hanesbrands Inc., Term Loan B, 5.032%, 9/05/13 ........................... United States 6,173,921 6,210,304 The William Carter Co., Term Loan B, 1.743% - 1.781%, 7/14/12 ............ United States 2,436,401 2,381,582 ----------- 8,591,886 ----------- APPLICATION SOFTWARE 0.1% CCC Information Services Group Inc., Term Loan B, 2.50%, 2/10/13 ......... United States 1,403,455 1,363,106 ----------- AUTO PARTS & EQUIPMENT 3.6% Cooper-Standard Automotive Canada Ltd., Canadian Revolver, 6.75%, 12/23/10 .............................. Canada 281,752 258,507 DIP Term Loan B, 12.50%, 8/02/10 ................................ Canada 624,541 642,659 Term Loan A, 6.75%, 12/23/10 .................................... Canada 240,800 220,934 (e)Term Loan B, 4.75%, 12/23/11 .................................... Canada 734,249 673,673 Cooper-Standard Automotive Inc., DIP Term Loan A, 12.50%, 8/02/10 ................................ United States 1,562,918 1,608,258 Multi-Curr Revolver, 4.50%, 12/23/10 ............................ United States 305,794 280,566 Revolver, 6.75%, 12/23/10 ....................................... United States 672,797 617,292 (e)Term Loan C, 4.75%, 12/23/11 .................................... United States 1,834,120 1,682,805 (e)Term Loan D, 4.75%, 12/23/11 .................................... United States 2,038,815 1,870,613 Term Loan E, 6.75%, 12/23/11 .................................... United States 1,011,826 928,351 Dayco Products LLC (Mark IV), (e)Replacement Term Loan, 6.75%, 6/23/11 ........................... United States 7,860,231 3,602,603 U.S. Term Facility (DIP TL), 8.50%, 5/04/10 ..................... United States 2,800,000 3,290,000 U.S. Term Loan, 8.75%, 11/13/12 ................................. United States 3,525,000 3,512,627 Federal-Mogul Corp., Term Loan B, 2.188%, 12/27/14 ................................... United States 7,919,088 6,102,647 Term Loan C, 2.188%, 12/27/15 ................................... United States 585,728 451,377 Key Safety Systems Inc., Term Loan B, 2.494% - 2.533%, 3/10/14 ........... United States 14,585,254 10,063,825 Mark IV Industries Corp., Canadian Term Loan, 8.75%, 11/13/12 ............ Canada 1,175,000 1,170,876 Tenneco Inc., Tranche B-1 Credit Linked, 5.746%, 3/16/14 ................. United States 8,663,122 8,186,650 United Components Inc., Term Loan D, 2.72%, 6/29/12 ...................... United States 3,670,918 3,404,777 ----------- 48,569,040 -----------
70 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ---------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) BROADCASTING 5.5% Bresnan Communications LLC, Add-On Term Loan, 2.25% - 2.29%, 9/29/13 ........................... United States $ 2,313,518 $ 2,228,688 Initial Term Loan B, 2.25% - 2.48%, 9/29/13 ........................ United States 1,253,700 1,207,731 Citadel Broadcasting Corp., Term Loan B, 2.04%, 6/12/14 ................ United States 6,582,075 4,533,404 Discovery Communications Inc., Term Loan B, 2.283%, 5/14/14 ....................................... United States 12,385,785 12,048,272 Term Loan C, 5.25%, 5/14/14 ........................................ United States 3,283,500 3,336,857 Entravision Communications Corp., Term Loan B, 5.54%, 3/29/13 .......... United States 11,331,427 10,675,145 Gray Television Inc., Term Loan B, 3.75% - 3.79%, 12/31/14 ............. United States 13,662,558 11,775,417 LBI Media Inc., Term Loan B, 1.743%, 3/31/12 ........................... United States 965,000 805,775 Mediacom LLC, Tranche D, 5.50%, 3/31/17 ................................ United States 1,800,000 1,809,000 Mission Broadcasting Inc., Term Loan B, 5.00%, 10/01/12 ................ United States 4,924,629 4,419,855 Nexstar Broadcasting Inc., Term Loan B, 5.00% - 6.25%, 10/01/12 ........ United States 4,656,583 4,179,283 Sinclair Television Group Inc., Tranche B Term Loan, 6.75%, 10/29/15 ... United States 5,100,000 5,112,750 Univision Communications Inc., Initial Term Loan, 2.533%, 9/29/14 ...... United States 16,600,000 13,422,279 ---------- 75,554,456 ---------- BUILDING PRODUCTS 0.5% Goodman Global Holdings Co. Inc., Term Loan B, 6.25%, 2/13/14 .......... United States 6,125,000 6,144,906 ---------- CABLE & SATELLITE 4.2% CSC Holdings Inc. (Cablevision), Incremental Term Loan, 2.049% - 2.194%, 3/29/13 .................... United States 2,601,142 2,481,237 Incremental Term Loan B-2, 2.049% - 2.194%, 3/29/16 ................ United States 7,560,825 7,332,072 DIRECTV Holdings LLC, Term Loan B, 1.743%, 4/13/13 ....................................... United States 1,242,935 1,219,963 Term Loan C, 5.25%, 4/13/13 ........................................ United States 7,345,757 7,357,209 Insight Midwest Holdings, Term Loan B, 2.29%, 4/02/14 .................. United States 9,825,000 9,363,579 MCC Iowa, Term Loan E, 6.50%, 1/03/16 ........................................ United States 1,280,780 1,289,186 Tranche D-1 Term Loan, 1.98%, 1/31/15 .............................. United States 600,473 552,435 Tranche D-2 Term Loan, 1.98%, 1/31/15 .............................. United States 967,183 889,808 UPC Financing Partnership, Term Loan N, 1.996%, 12/31/14 ...................................... Netherlands 7,598,462 7,126,726 Term Loan T, 3.746%, 12/31/16 ...................................... Netherlands 12,140,074 11,684,821 (d)Virgin Media Dover LLC, Tranche B10, 3.783%, 9/03/12 ................... United States 8,596,283 8,468,371 ---------- 57,765,407 ---------- CASINOS & GAMING 3.9% Ameristar Casinos Inc., Term Loan B, 3.534%, 11/10/12 .................. United States 4,528,023 4,501,611 CCM Merger Inc. (MotorCity Casino), Term Loan B, 8.50%, 7/13/12 ........ United States 3,695,616 3,523,541 Green Valley Ranch Gaming LLC, Term Loan B, 2.283% - 2.288%, 2/16/14 ............................................................... United States 2,929,037 2,068,632 Harrah's Operating Co. Inc., Term Loan B-4, 9.50%, 10/31/16 ............ United States 8,500,000 8,327,637 Penn National Gaming Inc., Term Loan B, 1.99% - 2.21%, 10/03/12 ........ United States 11,051,096 10,710,933 VML U.S. Finance LLC (Venetian Macau), Delayed Draw, 5.79%, 5/25/12 ....................................... Macau 7,513,283 6,983,597 New Project Term Loans, 5.79%, 5/25/13 ............................. Macau 7,970,071 7,408,181 Term Loan B, 5.79%, 5/25/13 ........................................ Macau 10,385,673 9,653,483 ---------- 53,177,615 ----------
Annual Report | 71 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ------------------------------------------------------------------------------------------------------------------------------------ (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) COMMERCIAL PRINTING 0.2% Cenveo Corp., Delayed Draw Term Loan, 4.792%, 6/21/13 ................................ United States $ 23,630 $ 23,010 Term Loan C, 4.792%, 6/21/13 ........................................... United States 2,387,877 2,325,195 ----------- 2,348,205 ----------- COMMUNICATIONS EQUIPMENT 0.5% Brocade Communications Systems Inc., Term Loan, 7.00%, 10/07/13 ......... United States 3,226,468 3,247,644 CommScope Inc., Term Loan B, 2.743% - 2.783%, 12/26/14 .................. United States 3,593,161 3,483,570 ----------- 6,731,214 ----------- CONSTRUCTION & ENGINEERING 0.5% URS Corp., Term Loan B, 2.533% - 2.537%, 5/15/13 ........................ United States 6,931,391 6,864,967 ----------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS 1.7% Bucyrus International Inc., Tranche B Dollar Term Loan, 1.75% - 1.98%, 5/04/14 ................................................................ United States 6,778,839 6,575,474 Manitowoc Co. Inc., Term Loan B, 7.50%, 11/06/14 ........................ United States 10,818,250 10,669,499 Oshkosh Truck Corp., Term Loan B, 6.29% - 6.33%, 12/06/13 ............... United States 6,338,536 6,342,923 ----------- 23,587,896 ----------- DATA PROCESSING & OUTSOURCED SERVICES 3.6% Affiliated Computer Services Inc., Additional Term Loan, 2.243% - 2.244%, 3/20/13 ....................... United States 6,984,873 6,911,608 Term Loan B, 2.244%, 3/20/13 ......................................... United States 2,303,142 2,278,985 Emdeon Business Services LLC, First Lien Term Loan, 2.29%, 11/16/13 ..... United States 10,624,734 10,146,621 Fidelity National Information Services Inc., Tranche C Term Loan, 4.473%, 1/18/12 ........................................................ United States 3,348,314 3,344,128 First Data Corp., Term Loan B-2, 3.033% - 3.036%, 9/24/14 ............................. United States 2,654,503 2,282,689 Term Loan B-3, 3.033% - 3.036%, 9/24/14 ............................. United States 2,830,938 2,430,406 Lender Processing Services Inc., Term Loan B, 2.743%, 7/02/14 ........... United States 1,569,345 1,560,518 Metavante Corp., Term Loan B, 3.733%, 11/01/14 .......................... United States 8,165,243 8,158,441 SunGard Data Systems Inc., (d)Incremental Term Loan, 6.75%, 2/28/14 ............................... United States 4,767,710 4,827,307 Tranche A U.S. Term Loan, 1.994%, 2/28/14 ........................... United States 61,283 57,702 Tranche B U.S. Term Loan, 3.879% - 4.089%, 2/28/16 .................. United States 7,503,295 7,300,976 ----------- 49,299,381 ----------- DISTILLERS & VINTNERS 0.3% Constellation Brands Inc., Term Loan B, 1.75%, 6/05/13 .................. United States 3,770,905 3,635,782 ----------- DIVERSIFIED CHEMICALS 1.8% Ashland Inc., Term Loan B, 7.65%, 5/13/14 ............................... United States 4,412,656 4,491,717 (d)Celanese U.S. Holdings LLC, Dollar Term Loan, 2.037%, 4/02/14 ........... United States 9,984,853 9,365,343 Huntsman International LLC, Term Loan B, 1.994%, 4/21/14 ................ United States 11,864,559 10,864,306 ----------- 24,721,366 ----------- DIVERSIFIED REAL ESTATE ACTIVITIES 0.5% CB Richard Ellis Services Inc., Term Loan B, 6.00%, 12/20/13 ............ United States 6,315,102 6,180,906 -----------
72 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ----------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) DIVERSIFIED SUPPORT SERVICES 4.0% ARAMARK Corp., Synthetic L/C, 2.14%, 1/26/14 .................................... United States $ 1,077,053 $ 990,439 Term Loan B, 2.118% - 2.158%, 1/26/14 ............................ United States 16,349,513 15,034,735 JohnsonDiversey Inc., Delay Draw, Term Loan, 2.483%, 12/16/10 .......................... United States 2,201,175 2,192,234 Term Loan B, 2.483%, 12/16/11 .................................... United States 12,799,967 12,747,973 Language Line LLC, Term Loan B, 5.75%, 11/04/15 ..................... United States 6,200,000 6,203,875 Language Lines Inc., Term Loan B, 5.50%, 6/11/11 .................... United States 5,372,258 5,372,258 West Corp., Term Loan B-2, 2.619%, 10/24/13 .................................. United States 3,583,650 3,298,750 Term Loan B-3, 7.25%, 10/24/13 ................................... United States 3,977,203 3,999,559 Term Loan B-4, 4.119%, 7/15/16 ................................... United States 5,205,414 4,904,801 ----------- 54,744,624 ----------- DRUG RETAIL 0.6% Rite Aid Corp., Tranche 3 Term Loan, 6.00%, 6/04/14 .............................. United States 2,292,560 2,155,006 Tranche 4 Term Loan, 9.50%, 6/10/15 .............................. United States 5,520,000 5,722,402 ----------- 7,877,408 ----------- EDUCATION SERVICES 1.9% Bright Horizons Family Solution Inc., Term Loan B, 7.50%, 5/21/15 ... United States 6,120,025 6,123,850 Education Management LLC, Term Loan C, 2.063%, 6/01/13 .............. United States 11,250,769 10,573,968 Laureate Education Inc., Closing Date Term Loan, 3.532%, 8/18/14 .......................... United States 5,698,269 5,193,972 Delayed Draw Term Loan, 3.532%, 8/18/14 .......................... United States 852,834 777,358 Term Loan B, 7.00%, 8/18/14 ...................................... United States 3,200,000 2,916,800 ----------- 25,585,948 ----------- ELECTRICAL COMPONENTS & EQUIPMENT 0.8% Baldor Electric Co., Term Loan B, 5.25%, 1/31/14 .................... United States 11,477,918 11,469,677 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS 0.7% Itron Inc., Dollar Term Loan, 4.00%, 4/18/14 ........................ United States 8,930,869 8,902,906 ----------- ELECTRONIC MANUFACTURING SERVICES 0.5% FCI USA, Term Loan B1, 3.406%, 11/01/13 ................................... United States 1,987,205 1,813,325 Term Loan B5B, 3.406%, 11/03/14 .................................. United States 1,987,205 1,821,605 Flextronics International USA Inc., Term Loan A, 2.494% - 2.54%, 10/01/14 ............................ United States 2,956,416 2,743,001 Term Loan A-1, 2.534%, 10/01/14 .................................. United States 849,545 788,219 ----------- 7,166,150 ----------- ENVIRONMENTAL & FACILITIES SERVICES 1.6% Casella Waste Systems Inc., Term Loan B, 7.00%, 4/09/14 ............. United States 5,310,290 5,356,755 (d)Duratek Inc. (EnergySolutions), Term Loan B, 4.05%, 6/07/13 ......... United States 2,980,332 2,969,156
Annual Report | 73 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ----------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) ENVIRONMENTAL & FACILITIES SERVICES (CONTINUED) EnergySolutions LLC, Synthetic A Deposit, 4.00%, 6/07/13 ................................. United States $ 1,982,452 $ 1,977,496 (d)Synthetic L/C, 4.00%, 6/07/13 ....................................... United States 442,693 441,586 (d)Term Loan B, 4.05%, 6/07/13 ......................................... United States 6,211,935 6,188,640 (f)EnviroSolutions Inc., Initial Term Loan, PIK, 11.00%, 7/07/12 ........... United States 6,226,935 4,685,769 ----------- 21,619,402 ----------- FOOD DISTRIBUTORS 0.4% JRD Holdings Inc., Term Loan, 2.504%, 7/02/14 ........................... United States 5,274,656 5,076,857 ----------- FOOD RETAIL 0.3% Pantry Inc., Delayed Draw Term Loan, 1.75%, 5/14/14 ................................ United States 783,291 742,658 Term Loan B, 1.75%, 5/14/14 ........................................... United States 2,719,193 2,578,135 ----------- 3,320,793 ----------- GENERAL MERCHANDISE STORES 1.1% Dollar General Corp., Tranche B-1 Term Loan, 2.993% - 3.031%, 7/07/14 ................................................................ United States 15,618,625 14,965,642 ----------- HEALTH CARE EQUIPMENT 1.1% DJO Finance LLC, Term Loan B, 3.243% - 3.283%, 5/20/14 .................. United States 11,489,515 11,101,743 Fresenius SE, Term Loan B1, 6.75%, 9/10/14 .......................................... Germany 2,128,567 2,152,070 Term Loan B2, 6.75%, 9/10/14 .......................................... Germany 1,146,683 1,159,345 ----------- 14,413,158 ----------- HEALTH CARE FACILITIES 6.9% Community Health Systems Inc., Delayed Draw Term Loan, 2.493%, 7/25/14 ............................... United States 913,243 852,798 Term Loan, 2.493% - 2.622%, 7/25/14 ................................... United States 17,832,819 16,652,519 HCA Inc., Term Loan B-1, 2.533%, 11/18/13 ............................... United States 20,285,552 18,931,776 Health Management Associates Inc., Term Loan B, 2.033%, 2/28/14 ......... United States 2,536,990 2,330,542 HealthSouth Corp., Term Loan B, 2.54% - 2.55%, 3/10/13 ................................... United States 5,823,650 5,561,586 Term Loan B-2, 4.04% - 4.05%, 9/10/15 ................................. United States 4,793,116 4,637,339 Iasis Healthcare LLC, Delayed Draw Term Loan, 2.243%, 3/14/14 ............................... United States 4,087,883 3,855,749 Initial Term Loan, 2.243%, 3/14/14 .................................... United States 11,812,431 11,141,650 Synthetic L/C, 2.293%, 3/14/14 ........................................ United States 1,103,901 1,041,215 LifePoint Hospitals Inc., Term Loan B, 2.015%, 4/15/12 .................. United States 7,144,373 6,938,972 Psychiatric Solutions Inc., Term Loan, 1.994% - 2.034%, 7/01/12 ......... United States 7,530,558 7,210,509 Vanguard Health Holding Co. II LLC, Replacement Term Loan, 2.493%, 9/23/11 ................................................................ United States 16,144,498 15,781,246 ----------- 94,935,901 ----------- HEALTH CARE SERVICES 2.2% AMR Holdco/EmCare Holdco, Term Loan B, 2.244% - 2.246%, 2/10/12 ................................................................ United States 2,084,896 2,006,712 DaVita Inc., Term Loan B-1, 1.75% - 1.79%, 10/05/12 ..................... United States 17,274,532 16,617,133
74 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ------------------------------------------------------------------------------------------------------------------------------------ (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) HEALTH CARE SERVICES (CONTINUED) Fresenius Medical Care Holdings Inc., Term Loan B, 1.658% - 1.667%, 3/31/13 ................................................................ Germany $ 3,285,606 $ 3,163,766 Team Finance LLC, Term Loan B, 2.285% - 2.407%, 11/23/12 .................. United States 5,448,607 5,181,288 VICAR Operating Inc., Incremental Term Loan, 1.75%, 5/16/11 ............... United States 3,277,845 3,253,556 ----------- 30,222,455 ----------- HEALTH CARE SUPPLIES 0.6% Bausch and Lomb Inc., Delayed Draw Term Loan, 3.504% - 3.533%, 4/28/15 .................... United States 1,665,272 1,591,144 Parent Term Loan, 3.533%, 4/28/15 ................................... United States 6,857,432 6,552,180 ----------- 8,143,324 ----------- HOUSEHOLD PRODUCTS 0.3% Prestige Brands Inc., Term Loan B, 2.493%, 4/06/11 ........................ United States 4,537,541 4,458,135 ----------- HOUSEWARES & SPECIALTIES 1.6% Jarden Corp., Term Loan B1, 2.033%, 1/24/12 ....................................... United States 2,761,470 2,671,032 Term Loan B2, 2.033%, 1/24/12 ....................................... United States 3,877,933 3,742,205 Term Loan B4, 3.533%, 1/26/15 ....................................... United States 7,559,159 7,527,033 Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 2.322%, 10/04/11 ............................................................... United States 8,343,692 8,274,164 ----------- 22,214,434 ----------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.4% Dynegy Holdings Inc., Term L/C Facility, 4.00%, 4/02/13 ................................... United States 6,605,521 6,362,398 Term Loan B, 4.00%, 4/02/13 ......................................... United States 660,688 636,371 NRG Energy Inc., Credit Link, 2.033%, 2/01/13 ........................................ United States 6,658,609 6,281,286 Term Loan, 1.993% - 2.033%, 2/01/13 ................................. United States 12,382,428 11,680,753 Texas Competitive Electric Holdings Co. LLC, Term Loan B-2, 3.744% - 3.783%, 10/10/14 ............................ United States 5,419,697 4,212,969 Term Loan B-3, 3.744% - 3.783%, 10/10/14 ............................ United States 3,920,000 3,018,400 ----------- 32,192,177 ----------- INDUSTRIAL CONGLOMERATES 0.9% Sensus Metering Systems Inc., Term Loan B-3, 7.00%, 6/17/13 ............... United States 7,825,173 7,854,517 TriMas Co. LLC, Term Loan B, 2.496% - 2.50%, 8/02/13 ................................ United States 4,411,793 4,064,364 Tranche B-1 L/C, 2.595%, 8/02/11 .................................... United States 1,049,594 966,939 ----------- 12,885,820 ----------- INDUSTRIAL MACHINERY 2.5% Amsted Industries Inc., Delayed Draw, 2.29% - 2.48%, 4/05/13 .............. United States 3,976,627 3,648,555 CI Acquisition Inc. (Chart Industries), Term Loan B, 2.25%, 10/17/12 ...... United States 1,735,586 1,709,552 Husky Injection Molding Systems Ltd. (Ontario Inc.), Term Loan, 3.533%, 12/14/12 ....................................................... Canada 3,192,750 3,172,795 Mueller Water Products Inc., Term Loan B, 5.781% - 5.783%, 5/24/14 ................................................................ United States 3,058,959 2,995,232
Annual Report | 75 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ---------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) INDUSTRIAL MACHINERY (CONTINUED) RBS Global Inc. (Rexnord), Incremental Tranche B-2, 2.50%, 7/22/13 ....................... United States $ 8,751,080 $ 8,393,747 Tranche B-1 Term Loan B, 2.75% - 2.813%, 7/22/13 .............. United States 14,170,744 13,651,146 ----------- 33,571,027 ----------- INTEGRATED TELECOMMUNICATION SERVICES 1.8% GCI Holdings Inc., Add-On Term Loan, 4.50%, 8/31/12 ............ United States 6,056,930 5,935,792 Intelsat Subsidiary Holding Co. Ltd., Term Loan B, 2.746%, 6/30/13 ....................................................... United States 2,983,742 2,871,851 Wind Telecomunicazioni SpA, Term Loan B-2, 3.926%, 5/26/13 ................................ Italy 4,850,000 4,658,799 Term Loan C-2, 4.926%, 5/26/14 ................................ Italy 4,850,000 4,658,022 Windstream Corp., Tranche B-2 Term Loan, 3.00% - 3.04%, 12/17/15 ..................................................... United States 6,970,732 6,780,256 ----------- 24,904,720 ----------- INTERNET RETAIL 0.2% Ticketmaster, Term Loan B, 3.55%, 7/25/14 ...................... United States 3,000,000 2,955,000 ----------- IT CONSULTING & OTHER SERVICES 0.6% Acxiom Corp., Term Loan B, 1.993% - 2.92%, 9/14/12 ............. United States 5,167,222 5,141,386 (d)CACI International Inc., Term B-2 Loan, 1.76% - 1.80%, 5/03/11 ....................................................... United States 2,744,137 2,702,975 ----------- 7,844,361 ----------- LEISURE FACILITIES 1.0% 24 Hour Fitness Worldwide Inc., Term Loan B, 2.75% - 2.79%, 6/08/12 ....................................................... United States 6,074,152 5,689,458 Universal City Development Partners Ltd., Term Loan, 6.50%, 11/06/14 ...................................................... United States 7,650,000 7,678,687 ----------- 13,368,145 ----------- LEISURE PRODUCTS 0.1% PlayPower Inc., Term Loan B, 5.28% - 5.37%, 6/30/12 ............ United States 1,138,022 1,075,431 ----------- LIFE & HEALTH INSURANCE 1.6% (d)Conseco Inc., Term Loan, 6.50%, 10/10/13 ....................... United States 23,484,443 21,272,983 ----------- LIFE SCIENCES TOOLS & SERVICES 0.1% Life Technologies Corp., Term Loan B, 5.25%, 11/21/15 .......... United States 1,741,117 1,753,449 ----------- METAL & GLASS CONTAINERS 1.2% Anchor Glass Container Corp., Term Loan, 6.75%, 6/20/14 ........ United States 4,995,164 5,009,735 Crown Americas LLC, Additional Term B Dollar Loan, 1.995%, 11/15/12 ............... United States 2,496,955 2,449,096 Term B Dollar Loan, 1.995%, 11/15/12 .......................... United States 4,833,045 4,740,410 Owens-Brockway Glass Container Inc., Term Loan B, 1.744%, 6/14/13 ....................................................... United States 4,600,000 4,494,582 ----------- 16,693,823 ----------- MOVIES & ENTERTAINMENT 2.1% Cinemark USA Inc., Term Loan, 2.00% - 2.21%, 10/05/13 .......... United States 2,928,467 2,785,180 (e)Metro-Goldwyn-Mayer Inc., Term Loan B, 20.50%, 4/08/12 ......... United States 10,971,576 6,314,142
76 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ------------------------------------------------------------------------------------------------------------------------------------ (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) MOVIES & ENTERTAINMENT (CONTINUED) Regal Cinemas Corp., Term Loan, 4.033%, 10/27/13 .................... United States $ 13,255,975 $13,167,598 Zuffa LLC, Incremental Term Loan, 7.50%, 6/19/15 ......................... United States 4,900,000 4,875,500 Initial Term Loan, 2.313%, 6/19/15 ............................ United States 1,973,323 1,780,924 ----------- 28,923,344 ----------- OIL & GAS DRILLING 0.5% Dresser Inc., Term Loan B, 2.679%, 5/04/14 .......................... United States 7,794,806 7,309,252 ----------- PACKAGED FOODS & MEATS 1.7% B&G Foods Inc., Term Loan C, 2.35%, 2/23/13 ......................... United States 3,056,185 3,006,522 Dean Foods Co., Term Loan B, 1.625% - 1.665%, 4/02/14 ............... United States 7,309,060 6,847,676 Del Monte Foods Co., Term Loan B, 1.743% - 1.781%, 2/08/12 .......... United States 5,699,538 5,598,907 Michael Foods Inc., Term Loan B, 6.50%, 5/01/14 ..................... United States 5,240,705 5,310,580 Wm. Wrigley Jr. Co., Term Loan B, 6.50%, 10/06/14 ................... United States 2,983,750 3,026,471 ----------- 23,790,156 ----------- PAPER PACKAGING 0.7% (d)Graham Packaging Co. LP, Term Loan C, 6.75%, 4/05/14 ................ United States 7,540,476 7,559,327 Rock-Tenn Co., Term Loan B, 5.75%, 3/05/14 .......................... United States 2,368,972 2,371,934 ----------- 9,931,261 ----------- PAPER PRODUCTS 1.6% Domtar Corp., Term Loan, 1.62%, 3/07/14 ............................. United States 7,947,328 7,589,698 Georgia-Pacific LLC, Additional Term Loan, 2.283% - 2.464%, 12/20/12 ............... United States 2,333,942 2,252,896 Term Loan B, 2.283% - 2.464%, 12/20/12 ........................ United States 5,566,784 5,373,477 Term Loan C, 3.533% - 3.714%, 12/23/14 ........................ United States 4,351,051 4,330,384 Graphic Packaging International Inc., 2008 Incremental Term Loan, 2.995% - 3.04%, 5/16/14 .......................................... United States 2,955,000 2,844,188 ----------- 22,390,643 ----------- PERSONAL PRODUCTS 0.4% Chattem Inc., Term Loan B, 1.994% - 2.043%, 1/02/13 ................. United States 2,194,579 2,161,661 Herbalife International Inc., Term Loan B, 1.74%, 7/21/13 ........... United States 2,987,746 2,838,359 ----------- 5,000,020 ----------- PHARMACEUTICALS 1.2% Mylan Inc., Term Loan B, 3.50% - 3.563%, 10/02/14 ................... United States 6,743,408 6,574,823 (d)Warner Chilcott Co. LLC, Delayed Draw Term Loan, 5.75%, 4/30/15 ........................ United States 1,198,305 1,202,143 Term Loan A, 5.50%, 10/30/14 .................................. United States 3,423,729 3,434,695 Term Loan B2, 5.75%, 4/30/15 .................................. United States 1,711,864 1,717,347 (d)Warner Chilcott Corp., Term Loan B1, 5.75%, 4/30/15.................. United States 3,766,102 3,778,165 ----------- 16,707,173 ----------- PROPERTY & CASUALTY INSURANCE 0.0%(g) Affirmative Insurance Holdings Inc., Term Loan, 9.25%, 1/31/14 ...... United States 1,104,851 552,426 -----------
Annual Report | 77 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ----------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) PUBLISHING 3.8% Dex Media East LLC, Term Loan B, 2.25%, 10/24/14 ......................... United States $ 1,348,343 $ 1,071,933 Dex Media West LLC, Term Loan B, 7.00%, 10/24/14 ......................... United States 17,379,808 15,352,158 Newsday LLC, Floating Rate Term Loan, 6.534%, 8/01/13 .................... United States 5,000,000 4,987,500 (d)R.H. Donnelley Inc., Term Loan D-1, 3.75%, 6/30/11 ........................................... United States 1,384,220 1,212,345 Term Loan D-2, 6.75%, 6/30/11 ........................................... United States 12,741,327 11,003,028 (d,e)Tribune Co., Initial Tranche B Advances, 5.25%, 5/16/14 .............................. United States 19,920,771 9,437,465 Term Loan X, 5.00%, 2/20/49 ............................................. United States 9,606,743 4,475,138 Tribune Receivables LLC, Term Loan (DIP), 9.00%, 4/10/10 ................. United States 1,932,500 1,942,162 Wenner Media LLC, Term Loan B, 1.993%, 10/02/13 .......................... United States 2,421,947 2,203,972 ----------- 51,685,701 ----------- RAILROADS 0.4% Kansas City Southern Railway Co., Term Loan B, 2.00% - 2.24%, 4/26/13 .... United States 6,263,344 5,950,176 ----------- RESEARCH & CONSULTING SERVICES 1.0% Alix Partners LLP, Term Loan C, 2.25% - 2.30%, 10/12/13 .................. United States 5,936,582 5,810,430 Nielsen Finance LLC (VNU Inc.), Class A Term Loan, 2.244%, 8/09/13 ...................................... United States 7,133,662 6,658,083 Class B Term Loan, 3.994%, 5/02/16 ...................................... United States 1,610,471 1,515,281 ----------- 13,983,794 ----------- SECURITY & ALARM SERVICES 0.1% Protection One Inc., Term Loan C, 2.49%, 3/31/12 ......................... United States 1,530,476 1,464,474 ----------- SEMICONDUCTORS 0.4% Fairchild Semiconductor Corp., Incremental Term Loan, 2.75%, 6/26/13 ................................... United States 4,875,750 4,629,929 Initial Term Loan, 1.75%, 6/26/13 ....................................... United States 1,390,669 1,309,836 ----------- 5,939,765 ----------- SPECIALIZED CONSUMER SERVICES 1.1% Affinion Group Inc., Term Loan B, 2.743%, 10/17/12 ....................... United States 11,123,022 10,697,566 Brickman Group Holdings Inc., Term Loan B, 2.283%, 1/23/14 ............... United States 4,283,003 4,043,870 ----------- 14,741,436 ----------- SPECIALTY CHEMICALS 5.1% Brenntag Holding GmbH & Co. KG, Acquisition Facility, 2.245% - 2.985%, 1/20/14 .......................... Germany 805,978 767,694 Term Loan B2, 2.245%, 1/20/14 ........................................... United States 1,833,996 1,746,881 Cognis GmbH, Term Loan C, 2.299%, 9/15/13 ................................ Germany 5,500,000 5,020,713 Compass Minerals Group Inc., Term Loan, 1.75% - 1.79%, 12/22/12 .......... United States 6,504,168 6,439,127 Hexion Specialty Chemicals BV, Term Loan C-2, 2.563%, 5/03/13 .......................................... Netherlands 3,033,739 2,411,822 Term Loan C-5, 2.563%, 5/03/13 .......................................... Netherlands 1,173,000 932,535
78 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY PRINCIPAL AMOUNT(a) VALUE ---------------------------------------------------------------------------------------------------------------------------------- (b,c)SENIOR FLOATING RATE INTERESTS (CONTINUED) SPECIALTY CHEMICALS (CONTINUED) Hexion Specialty Chemicals Inc., Term Loan C-1, 2.563%, 5/03/13 ..... United States $ 13,965,658 $ 11,102,698 Nalco Co., Term Loan, 6.50%, 5/13/16 ...................................... United States 8,234,665 8,389,065 Term Loan B, 2.063%, 11/04/10 .................................. United States 421,865 422,030 Oxbow Carbon LLC, Delayed Draw Term Loan, 2.283%, 5/08/14 ........................ United States 838,376 797,505 Term Loan B, 2.243% - 3.75%, 5/08/14 ........................... United States 8,789,231 8,360,756 Polypore Inc., U.S. Term Loan, 2.46%, 7/03/14 ....................... United States 5,423,648 5,077,891 Rockwood Specialties Group Inc., Term Loan H, 6.00%, 5/15/14 ........ United States 8,146,553 8,261,623 Univar Inc., Opco Tranche B Term Loan, 3.243%, 10/10/14 ............. United States 11,347,776 10,361,938 -------------- 70,092,278 -------------- SYSTEMS SOFTWARE 0.4% Audatex North America Inc., Domestic Term Loan C, 2.063%, 5/16/14 ... United States 3,854,448 3,702,679 Rovi Corp., Term Loan B, 6.00%, 5/02/13 ............................. United States 1,544,940 1,552,665 -------------- 5,255,344 -------------- TRADING COMPANIES & DISTRIBUTORS 0.6% Ashtead Group PLC, Term Loan, 2.063%, 8/31/11 ....................... United Kingdom 2,891,854 2,787,024 Interline Brands, Delayed Draw Term Loan, 2.035%, 6/23/13 ........................ United States 1,549,186 1,429,124 Term Loan B, 1.994%, 6/23/13 ................................... United States 485,618 447,983 RSC Holdings III, Second Lien Term Loan, 3.79% - 3.91%, 11/30/13 .... United States 4,000,000 3,630,000 -------------- 8,294,131 -------------- TRUCKING 0.2% Hertz Corp., Credit Link, 0.292%, 12/21/12 .................................. United States 377,149 352,844 Term Loan B, 2.00% - 2.04%, 12/21/12 ........................... United States 2,054,474 1,922,075 -------------- 2,274,919 -------------- WIRELESS TELECOMMUNICATION SERVICES 2.3% Intelsat Corp. (Panamsat), Tranche B-2-A, 2.746%, 1/03/14 ................................. United States 7,091,480 6,715,851 Tranche B-2-B, 2.746%, 1/03/14 ................................. United States 7,089,315 6,713,801 Tranche B-2-C, 2.746%, 1/03/14 ................................. United States 7,089,315 6,713,801 (d)NTELOS Inc., Term Loan B, 5.75%, 8/07/15 ............................ United States 11,784,700 11,868,171 -------------- 32,011,624 -------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $1,270,253,084) .......................................... 1,252,331,072 --------------
Annual Report | 79 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN FLOATING RATE DAILY ACCESS FUND COUNTRY SHARES VALUE ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (COST $150,406) 0.0%(g) STEEL 0.0%(g) (h,i)Copperweld Holding Co., B, Escrow Account, ..................... United States 1,741 $ 181,360 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,270,403,490) 1,252,512,432 --------------- SHORT TERM INVESTMENTS (COST $155,407,971) 11.4% MONEY MARKET FUNDS 11.4% (j)Institutional Fiduciary Trust Money Market Portfolio, 0.00% .... United States 155,407,971 155,407,971 --------------- TOTAL INVESTMENTS (COST $1,425,811,461) 103.0% ................. 1,407,920,403 OTHER ASSETS, LESS LIABILITIES (3.0)% .......................... (40,516,813) --------------- NET ASSETS 100.0% .............................................. $ 1,367,403,590 ===============
See Abbreviations on page 154. (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(g) 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) See Note 8 regarding defaulted securities. (f) Income may be received in additional securities and/or cash. (g) Rounds to less than 0.1% of net assets. (h) Security has been deemed illiquid because it may not be able to be sold within seven days. At October 31, 2009, the value of this security was $181,360, representing 0.01% of net assets. (i) Non-income producing. (j) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. 80 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN LOW DURATION TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, CLASS A 2009 2008 2007 2006 2005(a) ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 9.58 $ 9.89 $ 9.79 $ 9.77 $ 10.00 ---------------------------------------------------------------- Income from investment operations(b): Net investment income ....................................... 0.347 0.334 0.398 0.346 0.263 Net realized and unrealized gains (losses) .................. 0.645 (0.273) 0.113 0.036 (0.186) ---------------------------------------------------------------- Total from investment operations ............................. 0.992 0.061 0.511 0.382 0.077 ---------------------------------------------------------------- Less distributions from net investment income ................ (0.382) (0.371) (0.411) (0.362) (0.307) ---------------------------------------------------------------- Redemption fees(c) ........................................... -- --(d) --(d) --(d) --(d) ---------------------------------------------------------------- Net asset value, end of year ................................. $ 10.19 $ 9.58 $ 9.89 $ 9.79 $ 9.77 ================================================================ Total return(e) .............................................. 10.55% 0.56% 5.33% 3.99% 0.78% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ............ 1.12% 1.48% 1.40% 1.37% 1.97% Expenses net of waiver and payments by affiliates(g) ......... 0.90% 0.90% 0.90% 0.90% 0.90% Net investment income ........................................ 3.04% 3.36% 3.97% 3.52% 2.68% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 152,673 $ 35,181 $ 16,744 $ 11,722 $ 10,311 Portfolio turnover rate ...................................... 53.06% 115.61% 82.95% 86.38% 79.69% Portfolio turnover rate excluding mortgage dollar rolls(h).... 53.06% 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. Annual Report | The accompanying notes are an integral part of these financial statements. | 81 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, ADVISOR CLASS 2009 2008(a) --------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................ $ 9.59 $ 9.98 --------------------- Income from investment operations(b): Net investment income ............................................ 0.011 0.132 Net realized and unrealized gains (losses) ....................... 1.003 (0.357) --------------------- Total from investment operations .................................. 1.014 (0.225) --------------------- Less distributions from net investment income ..................... (0.404) (0.165) --------------------- Redemption fees(c) ................................................ -- --(d) --------------------- Net asset value, end of year ...................................... $ 10.20 $ 9.59 ===================== Total return(e) ................................................... 10.80% (2.28)% RATIOS TO AVERAGE NET ASSETS(f) Expenses before waiver and payments by affiliates ................. 0.87% 1.23% Expenses net of waiver and payments by affiliates(g) .............. 0.65% 0.65% Net investment income ............................................. 3.29% 3.61% SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $ 1,893 $ 75 Portfolio turnover rate ........................................... 53.06% 115.61% Portfolio turnover rate excluding mortgage dollar rolls(h) ........ 53.06% 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) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. 82 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY SHARES VALUE ------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS (COST $104,200) 0.0%(a) BANKS 0.0%(a) (b)Freddie Mac, 8.375%, pfd., Z.......................................... United States 4,000 $ 4,400 ---------- PRINCIPAL AMOUNT(c) CORPORATE BONDS 33.3% AUTOMOBILES & COMPONENTS 0.2 % Ford Motor Credit Co. LLC, senior note, 9.75%, 9/15/10 ...................................................... United States 200,000 205,067 7.50%, 8/01/12 ...................................................... United States 100,000 97,445 ---------- 302,512 ---------- BANKS 4.2% Barclays Bank PLC, senior note, 5.20%, 7/10/14 ....................... United Kingdom 400,000 426,973 BB&T Corp., senior note, 5.70%, 4/30/14 .............................. United States 500,000 541,560 (d)Commonwealth Bank of Australia, senior note, 144A, 3.75%, 10/15/14 ... Australia 1,000,000 1,010,798 PNC Funding Corp., senior note, 5.40%, 6/10/14 ....................... United States 750,000 812,650 (d)Royal Bank of Scotland PLC, senior note, 144A, 4.875%, 8/25/14 ....... United Kingdom 750,000 763,939 (e)Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ..................... United States 100,000 93,500 (e)Wells Fargo Capital XV, pfd., 9.75%, Perpetual ....................... United States 150,000 162,000 Western Corporate Federal Credit Union, senior note, 1.75%, 11/02/12 . United States 2,000,000 2,001,404 Westpac Banking Corp., senior note, 4.20%, 2/27/15 ................... Australia 750,000 765,364 ---------- 6,578,188 ---------- CAPITAL GOODS 1.7% Case New Holland Inc., senior note, 7.125%, 3/01/14 .................. United States 200,000 199,000 Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 .. United States 300,000 360,305 John Deere Capital Corp., 5.25%, 10/01/12 ..................................................... United States 250,000 271,868 (f)senior note, FRN, 1.052%, 6/10/11 ................................ United States 300,000 302,393 Masco Corp., senior note, 7.125%, 8/15/13 ............................ United States 500,000 522,262 Northrop Grumman Corp., senior note, 3.70%, 8/01/14 .................. United States 750,000 762,801 RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 .............. United States 200,000 198,500 ---------- 2,617,129 ---------- COMMERCIAL & PROFESSIONAL SERVICES 0.1% (d)Casella Waste Systems Inc., senior secured note, 144A, 11.00%, 7/15/14 ............................................................. United States 100,000 106,250 ---------- CONSUMER DURABLES & APPAREL 1.8% D.R. Horton Inc., senior note, 5.375%, 6/15/12 ....................... United States 1,000,000 1,001,250 Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ................. United States 200,000 202,250 The Ryland Group Inc., senior note, 5.375%, 5/15/12 ..................................................... United States 1,000,000 1,005,000 6.875%, 6/15/13 ..................................................... United States 500,000 517,500 ---------- 2,726,000 ---------- CONSUMER SERVICES 0.5% Yum! Brands Inc., senior note, 4.25%, 9/15/15 ........................ United States 750,000 761,957 ----------
Annual Report | 83 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ------------------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) DIVERSIFIED FINANCIALS 5.1% American Express Credit Corp., senior note, 5.125%, 8/25/14 ............... United States 750,000 $ 790,969 Bank of America Corp., senior note, L, 7.375%, 5/15/14 .................... United States 500,000 560,375 (f)Bear Stearns Cos. LLC, FRN, 0.684%, 7/19/10 ............................... United States 300,000 300,839 Capital One Financial Corp., senior note, 7.375%, 5/23/14 ................. United States 400,000 454,438 (f)Caterpillar Financial Services Corp., senior note, FRN, 1.033%, 6/24/11.... United States 300,000 302,348 Citigroup Inc., senior note, 5.50%, 10/15/14 .............................. United States 1,000,000 1,026,660 Deutsche Bank AG, 4.875%, 5/20/13 ......................................... Germany 200,000 214,054 General Electric Capital Corp., (f)FRN, 0.383%, 10/21/10 ................................................. United States 18,000 17,820 5.90%, 5/13/14 ........................................................... United States 500,000 547,771 (d)GMAC LLC, senior note, 144A, 6.875%, 9/15/11 .............................. United States 231,000 224,070 The Goldman Sachs Group Inc., senior note, 3.625%, 8/01/12 ................ United States 750,000 773,234 JPMorgan Chase & Co., senior note, 4.65%, 6/01/14 ......................... United States 750,000 791,967 (f,g)Lehman Brothers Holdings Inc., senior note, FRN, 3.005%, 7/18/11 .......... United States 200,000 32,500 (f)Merrill Lynch & Co. Inc., senior note, C, FRN, 0.389%, 3/23/10 ............ United States 300,000 300,031 Morgan Stanley Dean Witter & Co., 5.30%, 3/01/13 .......................... United States 200,000 211,673 Morgan Stanley, senior note, 6.00%, 5/13/14 ............................... United States 500,000 537,264 (d)Pricoa Global Funding I, 144A, 5.45%, 6/11/14 ............................. United States 500,000 527,577 Textron Financial Corp., 5.125%, 11/01/10 ................................. United States 250,000 250,262 ----------- 7,863,852 ----------- ENERGY 2.3% Anadarko Petroleum Corp., senior note, 5.75%, 6/15/14 ..................... United States 500,000 538,362 Berry Petroleum Co., senior note, 10.25%, 6/01/14 ......................... United States 200,000 215,000 BP Capital Markets PLC, senior note, 3.625%, 5/08/14 ...................... United Kingdom 600,000 620,721 ConocoPhillips, 4.75%, 2/01/14 ........................................................... United States 100,000 107,474 4.60%, 1/15/15 ........................................................... United States 500,000 536,984 El Paso Corp., senior note, 12.00%, 12/12/13 .............................. United States 200,000 230,000 (d)Gazprom, secured note, 144A, 7.51%, 7/31/13 ............................... Russia 100,000 106,137 Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 ..................... United States 300,000 304,500 Petrohawk Energy Corp., senior note, 10.50%, 8/01/14 ...................... United States 200,000 219,000 (d)Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ................. Switzerland 200,000 187,897 Valero Energy Corp., senior note, 6.875%, 4/15/12 ......................... United States 500,000 545,086 ----------- 3,611,161 ----------- FOOD & STAPLES RETAILING 0.3% Wal-Mart Stores Inc., 3.20%, 5/15/14 ...................................... United States 500,000 512,902 ----------- FOOD, BEVERAGE & TOBACCO 1.2% Altria Group Inc., 7.75%, 2/06/14 ......................................... United States 100,000 114,216 (d)Anheuser-Busch InBev NV, senior note, 144A, 7.20%, 1/15/14 ................ United States 100,000 112,758 Bunge Ltd. Finance Co., senior note, 7.80%, 10/15/12 ...................... United States 500,000 552,828 (d)Cargill Inc., 144A, 5.20%, 1/22/13 ........................................ United States 500,000 531,809 ConAgra Foods Inc., 5.875%, 4/15/14 ...................................... United States 300,000 328,261 (d)JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 .......................... United States 200,000 223,000 ----------- 1,862,872 -----------
84 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ------------------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) HEALTH CARE EQUIPMENT & SERVICES 1.1% (d)CareFusion Corp., senior note, 144A, 5.125%, 8/01/14 ....................... United States 750,000 $ 788,870 Express Scripts Inc., senior note, 5.25%, 6/15/12 .......................... United States 500,000 532,961 Fresenius Medical Care Capital Trust IV, 7.875%, 6/15/11 ................... Germany 200,000 204,500 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ..... United States 200,000 209,000 ----------- 1,735,331 ----------- INSURANCE 1.1% Berkshire Hathaway Finance Corp., senior note, 4.00%, 4/15/12 .............. United States 400,000 421,324 Marsh & McLennan Cos. Inc., senior note, 5.15%, 9/15/10 .................... United States 500,000 510,217 (d)Metropolitan Life Global Funding I, 144A, 2.875%, 9/17/12 ..................................................... United States 500,000 502,103 senior secured note, 144A, 5.125%, 4/10/13 ................................ United States 250,000 264,814 ----------- 1,698,458 ----------- MATERIALS 1.3% (d)Anglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 ............ United Kingdom 400,000 467,505 The Dow Chemical Co., senior note, 4.85%, 8/15/12 .......................... United States 750,000 781,336 (d)NewPage Corp., senior secured note, 144A, 11.375%, 12/31/14 ................ United States 100,000 100,250 Novelis Inc., senior note, 7.25%, 2/15/15 .................................. Canada 200,000 180,500 Rio Tinto Finance USA Ltd., 5.875%, 7/15/13 ................................ Australia 200,000 215,679 Solo Cup Co., (d)senior secured note, 144A, 10.50%, 11/01/13 ............................ United States 100,000 107,000 senior sub. note, 8.50%, 2/15/14 ....................................... United States 100,000 97,750 Teck Resources Ltd., senior note, 9.75%, 5/15/14 ........................... Canada 100,000 112,750 ----------- 2,062,770 ----------- MEDIA 1.6% (g,h)CCH II LLC, senior note, 10.25%, 9/15/10 ................................... United States 50,000 60,750 Clear Channel Communications Inc., senior note, 6.25%, 3/15/11 ............. United States 1,000,000 665,000 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 .......................... United States 700,000 717,500 Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 ........................ United States 200,000 197,500 LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ..................... United States 200,000 188,500 Reed Elsevier PLC, senior note, 7.75%, 1/15/14 ............................. United Kingdom 50,000 57,832 (d)Univision Communications Inc., senior secured note, 144A, 12.00%, 7/01/14 ................................................................... United States 200,000 218,000 Viacom Inc., 4.375%, 9/15/14 ............................................... United States 350,000 359,316 ----------- 2,464,398 ----------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 1.3% Merck & Co Inc., senior note, 1.875%, 6/30/11 .............................. United States 700,000 709,214 Pfizer Inc., senior note, 4.45%, 3/15/12 ................................... United States 250,000 265,250 (d)Roche Holdings Inc., senior note, 144A, 4.50%, 3/01/12 ..................... Switzerland 250,000 264,536 Watson Pharmaceuticals Inc., senior note, 5.00%, 8/15/14 ................... United States 750,000 770,311 ----------- 2,009,311 ----------- REAL ESTATE 2.4% (d)Dexus Finance Property Ltd., 144A, 7.125%, 10/15/14 ........................ Australia 750,000 751,319 Duke Realty LP, senior note, 5.625%, 8/15/11 ........................................................... United States 250,000 254,545 7.375%, 2/15/15 ........................................................... United States 400,000 421,988
Annual Report | 85 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ----------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) REAL ESTATE (CONTINUED) (d)FelCor Lodging Trust Inc., senior secured note, 144A, 10.00%, 10/01/14 ..... United States 200,000 $ 198,500 HCP Inc., senior note, F, 4.875%, 9/15/10 .................................. United States 750,000 755,568 Simon Property Group LP, senior note, 5.00%, 3/01/12 ....................... United States 500,000 516,928 (d)WEA Finance/WT Finance Australia, 144A, 5.75%, 9/02/15 ..................... United States 750,000 754,721 ----------- 3,653,569 ----------- RETAILING 1.3% Macy's Retail Holdings Inc., senior deb., 7.45%, 9/15/11 ............................................... United States 900,000 927,000 senior note, 5.35%, 3/15/12 ............................................... United States 1,000,000 986,250 Michaels Stores Inc., senior note, 10.00%, 11/01/14 ........................ United States 100,000 100,500 ----------- 2,013,750 ----------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ................ United States 100,000 81,750 ----------- SOFTWARE & SERVICES 0.5% Oracle Corp., senior note, 3.75%, 7/08/14 .................................. United States 500,000 520,341 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 .................... United States 200,000 204,500 ----------- 724,841 ----------- TECHNOLOGY HARDWARE & EQUIPMENT 0.3% Hewlett-Packard Co., senior note, 2.95%, 8/15/12 ........................... United States 500,000 513,409 ----------- TELECOMMUNICATION SERVICES 1.6% AT&T Inc., 4.95%, 1/15/13 ................................................. United States 100,000 106,781 (d)Cellco Partnership/Verizon Wireless, senior note, 144A, 5.25%, 2/01/12 ..... United States 200,000 213,845 (d)Digicel SA, senior note, 144A, 12.00%, 4/01/14 ............................. Jamaica 200,000 227,000 Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 ....................... United Kingdom 200,000 207,500 MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ....................... United States 100,000 101,250 Millicom International Cellular SA, senior note, 10.00%, 12/01/13 .......... Luxembourg 200,000 207,750 (f)Telecom Italia Capital SA, senior note, FRN, 0.894%, 7/18/11 ............... Italy 300,000 296,926 Telefonica Europe BV, 7.75%, 9/15/10 ...................................... Netherlands 200,000 210,665 Telefonica SA, senior note, 4.949%, 1/15/15 ................................ Spain 500,000 529,983 Verizon New England Inc., senior note, 6.50%, 9/15/11 ...................... United States 200,000 215,912 Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 ..................... United States 200,000 218,431 ----------- 2,536,043 ----------- TRANSPORTATION 0.1% (d)Delta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 ............ United States 100,000 102,750 ----------- UTILITIES 3.2% Ameren Corp., senior note, 8.875%, 5/15/14 ................................. United States 500,000 561,108 (d)Cenovus Energy Inc., senior note, 144A, 4.50%, 9/15/14 ..................... Canada 700,000 719,352 Duke Energy Corp., senior note, 6.30%, 2/01/14 ............................. United States 750,000 829,881 Midamerican Energy Holdings Co., senior note, 3.15%, 7/15/12 ............... United States 700,000 714,814 NRG Energy Inc., senior note, 7.25%, 2/01/14 ............................... United States 200,000 199,000 PG&E Corp., senior note, 5.75%, 4/01/14 .................................... United States 500,000 546,212 (f)Southern Co., senior note, 2008A, FRN, 1.125%, 8/20/10 ..................... United States 300,000 301,637 Teco Finance Inc., senior note, 7.20%, 5/01/11 ............................. United States 1,000,000 1,051,051 ----------- 4,923,055 ----------- TOTAL CORPORATE BONDS (COST $49,001,685) ................................... 51,462,258 -----------
86 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ------------------------------------------------------------------------------------------------------------------------------------ CONVERTIBLE BONDS 0.1% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.1% Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ............................. United States 86,000 $ 85,140 PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ....................... United States 30,000 33,638 ----------- TOTAL CONVERTIBLE BONDS (COST $ 98,348) ................................... 118,778 ----------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 5.2% BANKS 2.1% (f)Countrywide Asset-Backed Certificates, 2001-BC3, A, FRN, 0.724%, 12/25/31 ....................................... United States 2,558 1,048 2002-3, 1A1, FRN, 0.984%, 5/25/32 ........................................ United States 1,795 1,311 (f)FHLMC, 2996, FK, FRN, 0.495%, 6/15/35 ..................................... United States 155,955 156,027 FNMA, G93-33, K, 7.00%, 9/25/23 ........................................... United States 12,949 14,372 Greenwich Capital Commercial Funding Corp., 2004-GG1, A7, 5.317%, 6/10/36 .................................................................. United States 1,000,000 1,023,405 (d,f)Wachovia Bank Commercial Mortgage Trust, 2007-WHL8, A1, 144A, FRN, 0.325%, 6/15/20 .......................................................... United States 2,341,418 2,007,530 ----------- 3,203,693 ----------- DIVERSIFIED FINANCIALS 3.0% (f)Advanta Business Card Master Trust, 2005-A2, A2, FRN, 0.3761%, 5/20/13 ....................................... United States 213,653 207,831 2007-A4, A4, FRN, 0.275%, 4/22/13 ........................................ United States 427,305 415,662 (f)Bank of America Credit Card Trust, 2007-A13, A13, FRN, 0.465%, 4/15/12 .................................................................. United States 1,500,000 1,499,820 (f)Capital One Auto Finance Trust, 2006-C, A4, FRN, 0.275%, 5/15/13 .......... United States 98,430 96,887 (f) Chase Funding Mortgage Loan Asset-Backed Certificates, 2004-2, 2A2, FRN, 0.744%, 2/25/35 ...................................................... United States 36,007 26,206 (f) Chase Issuance Trust, 2007-A9, A9, FRN, 0.275%, 6/16/14 .................. United States 500,000 493,420 (f) MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 0.285%, 11/15/12 ................................................................. United States 2,000,000 1,993,559 ----------- 4,733,385 ----------- REAL ESTATE 0.1% (f)Ownit Mortgage Loan Asset-Backed Certificates, 2006-6, A2B, FRN, 0.354%, 9/25/37 .......................................................... United States 162,836 129,029 ----------- TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $ 7,877,170) ............................. 8,066,107 ----------- MORTGAGE-BACKED SECURITIES 14.0% (f)FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 1.8% FHLMC, 3.758%, 11/01/35 ................................................... United States 875,540 906,294 FHLMC, 4.176%, 12/01/34 ................................................... United States 72,880 74,031 FHLMC, 4.641%, 6/01/35 .................................................... United States 1,687,088 1,751,994 FHLMC, 5.098%, 10/01/33 ................................................... United States 55,514 57,297 ----------- 2,789,616 ----------- FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 4.2% FHLMC Gold 15 Year, 5.00%, 10/01/23 ....................................... United States 2,317,315 2,450,080 FHLMC Gold 15 Year, 6.00%, 6/01/23 ........................................ United States 499,564 535,593 FHLMC Gold 30 Year, 5.00%, 1/01/39 ........................................ United States 3,422,699 3,552,923 ----------- 6,538,596 -----------
Annual Report | 87 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES (CONTINUED) (f)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 6.2% FNMA, 2.625%, 8/01/34 ...................................................... United States 16,268 $ 16,432 FNMA, 2.648%, 4/01/34 ...................................................... United States 12,922 13,083 FNMA, 2.693%, 8/01/34 ...................................................... United States 97,945 99,296 FNMA, 2.855%, 11/01/34 ..................................................... United States 11,485 11,699 FNMA, 2.895%, 4/01/35 ...................................................... United States 22,381 22,197 FNMA, 2.925%, 6/01/34 ...................................................... United States 35,198 34,981 FNMA, 2.957%, 3/01/33 ...................................................... United States 55,138 55,280 FNMA, 2.982%, 1/01/35 ...................................................... United States 1,324,766 1,338,549 FNMA, 3.153%, 11/01/33 ..................................................... United States 1,603,755 1,646,769 FNMA, 3.213%, 7/01/34 ...................................................... United States 42,476 43,624 FNMA, 3.29%, 3/01/34 ....................................................... United States 25,974 26,221 FNMA, 3.335%, 9/01/34 ...................................................... United States 688,465 707,285 FNMA, 3.395%, 5/01/34 ...................................................... United States 896,911 916,785 FNMA, 3.411%, 4/01/33 ...................................................... United States 17,831 18,558 FNMA, 3.432%, 5/01/33 ...................................................... United States 24,948 25,711 FNMA, 3.704%, 3/01/35 ...................................................... United States 1,805,128 1,857,117 FNMA, 3.926%, 3/01/35 ...................................................... United States 198,900 204,526 FNMA, 3.975%, 4/01/33 ...................................................... United States 97,556 100,117 FNMA, 3.978%, 12/01/34 ..................................................... United States 7,261 7,522 FNMA, 4.104%, 8/01/33 ...................................................... United States 117,356 117,888 FNMA, 4.114%, 11/01/36 ..................................................... United States 263,814 273,093 FNMA, 4.128%, 2/01/35 ...................................................... United States 96,895 99,554 FNMA, 4.509%, 2/01/34 ...................................................... United States 37,392 38,548 FNMA, 4.543%, 1/01/35 ...................................................... United States 801,022 827,583 FNMA, 4.58%, 1/01/33 ....................................................... United States 12,993 13,429 FNMA, 4.837%, 1/01/35 ...................................................... United States 24,881 25,702 FNMA, 5.032%, 9/01/35 ...................................................... United States 758,450 796,549 FNMA, 5.321%, 11/01/32 ..................................................... United States 76,692 78,722 FNMA, 5.80%, 12/01/33 ...................................................... United States 125,422 129,341 ----------- 9,546,161 ----------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 1.7% FNMA 15 Year, 4.50%, 1/01/24 ............................................... United States 1,780,619 1,853,245 FNMA 30 Year, 5.00%, 3/01/38 ............................................... United States 796,060 826,596 FNMA 30 Year, 9.00%, 12/01/20 .............................................. United States 292 314 ----------- 2,680,155 ----------- (f)GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 0.1% GNMA, 3.625%, 8/20/26 - 9/20/26 ............................................ United States 40,763 42,031 GNMA, 4.375%, 4/20/26 ...................................................... United States 27,020 27,626 ----------- 69,657 ----------- TOTAL MORTGAGE-BACKED SECURITIES (COST $ 21,109,326) ....................... 21,624,185 ----------- FOREIGN GOVERNMENT AND AGENCY SECURITIES 9.3% (f,i)Government of Argentina, senior bond, FRN, 0.943%, 8/03/12 ................. Argentina 30,000 9,480 Government of Indonesia, FR10, 13.15%, 3/15/10 ..................................................... Indonesia 150,000,000 IDR 16,076 FR36, 11.50%, 9/15/19 ..................................................... Indonesia 165,000,000 IDR 18,746 Government of Israel, 2680, 7.00%, 4/29/11 ................................. Israel 730,000 ILS 208,557
88 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ------------------------------------------------------------------------------------------------------------------------------ FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Government of Korea, senior note, 5.75%, 4/16/14 .................. South Korea 210,000 $ 228,003 (d)Government of Lithuania, 144A, 6.75%, 1/15/15 ..................... Lithuania 250,000 249,925 Government of Malaysia, 3.869%, 4/13/10 .................................................. Malaysia 19,000 MYR 5,613 3.756%, 4/28/11 .................................................. Malaysia 5,310,000 MYR 1,587,591 3.833%, 9/28/11 .................................................. Malaysia 2,065,000 MYR 619,587 Government of Mexico, MI10, 8.00%, 12/19/13 ....................... Mexico 38,350 MXN 298,773 Government of Norway, 6.00%, 5/16/11 .............................. Norway 655,000 NOK 120,471 Government of Poland, 4.75%, 4/25/12 ................................................... Poland 760,000 PLN 261,375 5.00%, 10/24/13 .................................................. Poland 370,000 PLN 125,716 5.75%, 4/25/14 ................................................... Poland 4,595,000 PLN 1,591,588 Government of Sri Lanka, A, 8.50%, 1/15/13 ................................................... Sri Lanka 3,400,000 LKR 28,322 13.50%, 2/01/13 .................................................. Sri Lanka 3,900,000 LKR 37,069 11.25%, 7/15/14 .................................................. Sri Lanka 11,700,000 LKR 105,651 11.00%, 8/01/15 .................................................. Sri Lanka 13,400,000 LKR 120,463 Government of Sweden, 5.25%, 3/15/11 ................................................... Sweden 6,870,000 SEK 1,028,832 5.50%, 10/08/12 .................................................. Sweden 13,460,000 SEK 2,087,174 Government of Venezuela, 10.75%, 9/19/13 .................................................. Venezuela 35,000 33,513 (k) senior bond, Reg S, 5.375%, 8/07/10 .......................... Venezuela 20,000 19,430 KfWBankengruppe, senior note, 6.50%, 11/15/11 ..................... Germany 282,000 NZD 209,315 Korea Treasury Bond, 0400-1206, 4.00%, 6/10/12 ........................................ South Korea 4,550,000,000 KRW 3,793,134 0475-1112, 4.75%, 12/10/11 ....................................... South Korea 95,000,000 KRW 80,435 Nota Do Tesouro Nacional, 9.609%, 1/01/13 .................................................. Brazil 700(l) BRL 373,961 (m) Index Linked, 6.00%, 5/15/17 ................................. Brazil 150(l) BRL 151,576 (d,f)Societe Financement de l'Economie Francaise, senior bond, 144A, FRN, 0.484%, 7/16/12 .................................................. France 1,000,000 1,001,260 ----------- TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $ 14,453,879) ............................................... 14,411,636 ----------- U.S. GOVERNMENT AND AGENCY SECURITIES 27.6% Bank of America Corp., FDIC Guaranteed, 2.375%, 6/22/12 ........... United States 1,500,000 1,535,584 FHLB, 4.875%, 5/14/10 .................................................. United States 500,000 512,228 3.50%, 7/16/10 ................................................... United States 1,000,000 1,022,532 2.25% 4/13/12 .................................................... United States 3,500,000 3,584,063 5.75%, 5/15/12 ................................................... United States 600,000 666,391 FHLMC, 4.875%, 2/09/10 .................................................. United States 200,000 202,492 2.875%, 4/30/10 .................................................. United States 500,000 506,545 2.375%, 5/28/10 .................................................. United States 700,000 708,294 2.875%, 6/28/10 .................................................. United States 1,000,000 1,016,838 4.125%, 7/12/10 .................................................. United States 400,000 410,604 5.125%, 8/23/10 .................................................. United States 600,000 622,714 5.125%, 7/15/12 .................................................. United States 1,000,000 1,098,776
Annual Report | 89 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE -------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND AGENCY SECURITIES (CONTINUED) FHLMC, (continued) 5.50%, 8/20/12 ........................................... United States 1,200,000 $ 1,332,818 3.50%, 5/29/13 ........................................... United States 500,000 528,278 4.50%, 1/15/14 ........................................... United States 2,000,000 2,182,762 senior note, 2.50%, 4/23/14 .............................. United States 3,000,000 3,019,689 FNMA, 7.25%, 1/15/10 ........................................... United States 500,000 507,293 7.125%, 6/15/10 .......................................... United States 200,000 208,466 3.00%, 7/12/10 ........................................... United States 1,000,000 1,018,387 4.25%, 8/15/10 ........................................... United States 750,000 772,759 4.375%, 9/13/10 .......................................... United States 300,000 310,292 2.875%, 10/12/10 ......................................... United States 3,600,000 3,682,418 6.625%, 11/15/10 ......................................... United States 800,000 850,264 5.00%, 10/15/11 .......................................... United States 50,000 53,995 U.S. Treasury Note, 5.125%, 6/30/11 .......................................... United States 3,000,000 3,220,782 4.875%, 7/31/11 .......................................... United States 3,000,000 3,216,564 4.50%, 11/30/11 .......................................... United States 4,000,000 4,294,688 1.25%, 10/15/12 .......................................... United States 4,000,000 3,997,188 1.75%, 2/28/14 ........................................... United States 1,000,000 993,047 (n)Index Linked, 3.00%, 7/15/12 ........................... United States 600,119 644,988 ----------- TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $42,027,415) ........................................ 42,721,739 ----------- (f,o)SENIOR FLOATING RATE INTERESTS 2.8% CAPITAL GOODS 0.2% RBS Global Inc. (Rexnord), Incremental Tranche B-2, 2.50%, 7/22/13 .................. United States 9,078 8,708 Tranche B-1 Term Loan B, 2.75% - 2.813%, 7/22/13 ......... United States 259,428 249,915 TransDigm Inc., Term Loan B, 2.289%, 6/23/13 .............. United States 25,463 24,485 ----------- 283,108 ----------- COMMERCIAL & PROFESSIONAL SERVICES 0.1% ARAMARK Corp., Synthetic L/C, 2.14%, 1/26/14 ............................ United States 5,392 4,958 Term Loan B, 2.118% - 2.158%, 1/26/14 .................... United States 82,179 75,571 Duratek Inc. (EnergySolutions), Term Loan B, 4.05%, 6/07/13 United States 11,438 11,395 EnergySolutions LLC, Synthetic L/C, 4.00%, 6/07/13 ............................ United States 1,699 1,695 Synthetic L/C (Add-On), 4.00%, 6/07/13 ................... United States 457 456 Term Loan B, 4.05%, 6/07/13 .............................. United States 23,840 23,750 JohnsonDiversey Inc., Delay Draw, Term Loan, 2.483%, 12/16/10 .................. United States 2,253 2,243 Term Loan B, 2.483%, 12/16/11 ............................ United States 9,760 9,721 ----------- 129,789 ----------- CONSUMER DURABLES & APPAREL 0.1% Jarden Corp., Term Loan B1, 2.033%, 1/24/12 ............................ United States 3,759 3,636 Term Loan B2, 2.033%, 1/24/12 ............................ United States 11,279 10,884 Term Loan B4, 3.533%, 1/26/15 ............................ United States 117,123 116,625 ----------- 131,145 -----------
90 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE --------------------------------------------------------------------------------------------------------------------------------- (f,o)SENIOR FLOATING RATE INTERESTS (CONTINUED) CONSUMER SERVICES 0.1% Education Management LLC, Term Loan C, 2.063%, 6/01/13 .................. United States 48,647 $ 45,721 Penn National Gaming Inc., Term Loan B, 1.99% - 2.21%, 10/03/12 ......... United States 86,309 83,652 ---------- 129,373 ---------- FOOD & STAPLES RETAILING 0.1% (p)SUPERVALU Inc., Term Loan B, 1.504% - 1.531%, 6/02/12 .................. United States 138,314 132,445 ---------- FOOD, BEVERAGE & TOBACCO 0.3% Constellation Brands Inc., Term Loan B, 1.75%, 6/05/13 .................. United States 7,637 7,363 Dean Foods Co., Term Loan B, 1.625% - 1.665%, 4/02/14 ................... United States 32,956 30,876 (p)Wm. Wrigley Jr. Co., Term Loan B, 6.50%, 10/06/14 ....................... United States 415,659 421,610 ---------- 459,849 ---------- HEALTH CARE EQUIPMENT & SERVICES 0.8% (p)Community Health Systems Inc., Delayed Draw Term Loan, 2.493%, 7/25/14 ................................ United States 22,614 21,117 Term Loan, 2.493% - 2.622%, 7/25/14 .................................... United States 443,272 413,933 DaVita Inc., Term Loan B-1, 1.75% - 1.79%, 10/05/12 .................... United States 15,598 15,004 DJO Finance LLC, Term Loan B, 3.243% - 3.283%, 5/20/14 ................. United States 229,129 221,396 Fresenius Medical Care Holdings Inc., Term Loan B, 1.658% - 1.667%, 3/31/13 ................................................................ Germany 12,976 12,495 HCA Inc., Term Loan B-1, 2.533%, 11/18/13 ............................... United States 464,366 433,376 LifePoint Hospitals Inc., Term Loan B, 2.015%, 4/15/12 .................. United States 83,812 81,403 ---------- 1,198,724 ---------- MATERIALS 0.4% (p)Ashland Inc., Term Loan B, 7.65%, 5/13/14 .............................. United States 45,591 46,408 Celanese U.S. Holdings LLC, Dollar Term Loan, 2.037%, 4/02/14 ........... United States 61,932 58,090 Georgia-Pacific LLC, Term Loan C, 3.533% - 3.714%, 12/23/14 ............. United States 116,030 115,479 (p)Nalco Co., Term Loan, 6.50%, 5/13/16 .................................... United States 56,824 57,889 (p)Rockwood Specialties Group Inc., Term Loan H, 6.00%, 5/15/14 ............ United States 422,291 428,256 ---------- 706,122 ---------- MEDIA 0.2% Cinemark USA Inc., Term Loan, 2.00% - 2.21%, 10/05/13 ................... United States 14,825 14,099 (p)CSC Holdings Inc. (Cablevision), Incremental Term Loan B-2, 2.049% - 2.194%, 3/29/16 ............................................... United States 223,170 216,418 DIRECTV Holdings LLC, Term Loan B, 1.743%, 4/13/13 ...................... United States 9,655 9,477 Discovery Communications Inc., Term Loan B, 2.283%, 5/14/14 ............. United States 9,409 9,153 Regal Cinemas Corp., Term Loan, 4.033%, 10/27/13 ........................ United States 19,630 19,499 (p)UPC Financing Partnership, Term Loan T, 3.746%, 12/31/16 ................ Netherlands 57,989 55,814 ---------- 324,460 ---------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Mylan Inc., Term Loan B, 3.50% - 3.563%, 10/02/14 ....................... United States 261,759 255,215 ---------- RETAILING 0.0%(a) Dollar General Corp., Tranche B-1 Term Loan, 2.993% - 3.031%, 7/07/14 ... United States 5,752 5,512 ---------- SOFTWARE & SERVICES 0.0%(a) SunGard Data Systems Inc., Tranche A U.S. Term Loan, 1.994%, 2/28/14 .... United States 27,310 25,714 ----------
Annual Report | 91 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN LOW DURATION TOTAL RETURN FUND COUNTRY PRINCIPAL AMOUNT(c) VALUE ----------------------------------------------------------------------------------------------------------------------------- (f,o)SENIOR FLOATING RATE INTERESTS (CONTINUED) TELECOMMUNICATION SERVICES 0.2% Intelsat Corp. (Panamsat), Tranche B-2-A, 2.746%, 1/03/14 .................................... United States 96,944 $ 91,809 Tranche B-2-B, 2.746%, 1/03/14 .................................... United States 96,914 91,780 Tranche B-2-C, 2.746%, 1/03/14 .................................... United States 96,914 91,781 Incremental Term Loan B-2-A, 2.746%, 1/03/14 ...................... United States 1,158 1,096 Incremental Term Loan B-2-B, 2.746%, 1/03/14 ...................... United States 1,157 1,096 Incremental Term Loan B-2-C, 2.746%, 1/03/14 ...................... United States 1,157 1,096 (p)NTELOS Inc., Term Loan B, 5.75%, 8/07/15 ........................... United States 14,918 15,024 Windstream Corp., Tranche B-2 Term Loan, 3.00% - 3.04%, 12/17/15 ... United States 10,632 10,341 ------------ 304,023 ------------ UTILITIES 0.1% NRG Energy Inc., Credit Link, 2.033%, 2/01/13 ...................................... United States 89,911 84,816 Term Loan, 1.993% - 2.033%, 2/01/13 ............................... United States 167,409 157,923 ------------ 242,739 ------------ TOTAL SENIOR FLOATING RATE INTERESTS (COST $4,311,967) ............. 4,328,218 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $138,983,990) ............................................... 142,737,321 ------------ SHORT TERM INVESTMENTS 8.7% FOREIGN GOVERNMENT AND AGENCY SECURITIES 0.1% (q)Israel Treasury Bill, 10/06/10 ..................................... Israel 205,000 ILS 53,865 (q)Norway Treasury Bill, 3/17/10 ...................................... Norway 235,000 NOK 40,744 ------------ TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $90,588) .................................................... 94,609 ------------ U.S. GOVERNMENT AND AGENCY SECURITIES (COST $199,978) 0.1% (q,r)U.S. Treasury Bill, 11/27/09 ................................... United States 200,000 199,999 ------------ TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS (COST $139,274,556) ................................................ 143,031,929 ------------ SHARES MONEY MARKET FUNDS (COST $13,125,350) 8.5% (s)Institutional Fiduciary Trust Money Market Portfolio, 0.00% United States 13,125,350 13,125,350 ------------ TOTAL INVESTMENTS (COST $152,399,906) 101.0% 156,157,279 OTHER ASSETS, LESS LIABILITIES (1.0)% (1,591,163) ------------ NET ASSETS 100.0% $154,566,116 ============
(a) Rounds to less than 0.1% of net assets. (b) Non-income producing. (c) The principal amount is stated in U.S. dollars unless otherwise indicated. (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, 2009, the aggregate value of these securities was $12,733,515, representing 8.24% of net assets. 92 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND (e) Perpetual security with no stated maturity date. (f) The coupon rate shown represents the rate at period end. (g) See Note 8 regarding defaulted securities. (h) See Note 11 regarding other considerations. (i) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (j) Principal amount is stated in 100 Mexican Peso Units. (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. This security has been deemed liquid under guidelines approved by the Trust's Board of Trustees. At October 31, 2009, the value of this security was $19,430, representing 0.01% of net assets. (l) Principal amount is stated in 1,000 Brazilian Real Units. (m) Redemption price at maturity is adjusted for inflation. See Note 1(i). (n) Principal amount of security is adjusted for inflation. See Note 1(i). (o) See Note 1(g) regarding senior floating rate interests. (p) A portion or all of the security purchased on delayed delivery basis. See Note 1(d). (q) The security is traded on a discount basis with no stated coupon rate. (r) Security or a portion of the security has been segregated as collateral for open futures contracts. At October 31, 2009, the value of securities pledged amounted to $199,999. (s) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. At October 31, 2009, the fund had the following financial futures contracts outstanding. See Note 1(e). FINANCIAL FUTURES CONTRACTS
NUMBER OF UNREALIZED UNREALIZED DESCRIPTION TYPE CONTRACTS NOTIONAL AMOUNT DELIVERY DATE APPRECIATION DEPRECIATION -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury 2 Year Note .................. Long 129 $25,800,000 12/31/09 $ 193,131 $ -- U.S. Treasury 5 Year Note .................. Short 59 5,900,000 12/31/09 -- (71,390) U.S. Treasury 10 Year Note ................. Short 58 5,800,000 12/21/09 -- (120,733) --------------------------- Unrealized appreciation (depreciation) .... 193,131 (192,123) --------------------------- Net unrealized appreciation (depreciation) $ 1,008 ===========
At October 31, 2009, the fund had the following forward exchange contracts outstanding. See Note 1(e). FORWARD EXCHANGE CONTRACTS
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION -------------------------------------------------------------------------------------------------------------------------------- New Zealand Dollar .................. CITI Buy 48,458 35,922 11/30/09 $ -- $ (1,269) New Zealand Dollar .................. CITI Sell 48,458 29,784 11/30/09 -- (4,868) New Zealand Dollar .................. DBAB Buy 85,140 63,381 11/30/09 -- (2,498) New Zealand Dollar .................. DBAB Sell 85,140 52,391 11/30/09 -- (8,493) New Zealand Dollar .................. UBSW Buy 85,656 63,407 11/30/09 -- (2,154) New Zealand Dollar .................. UBSW Sell 85,656 52,563 11/30/09 -- (8,690) Mexican Peso ........................ CITI Sell 121,000 8,932 12/01/09 -- (192) New Zealand Dollar .................. BZWS Buy 142,001 105,280 12/02/09 -- (3,750) New Zealand Dollar .................. BZWS Sell 142,001 87,757 12/02/09 -- (13,773) New Zealand Dollar .................. DBAB Buy 36,724 27,335 12/02/09 -- (1,077) New Zealand Dollar .................. DBAB Sell 36,724 22,338 12/02/09 -- (3,919)
Annual Report | 93 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------------------------------------------- New Zealand Dollar .............. FBCO Buy 12,119 8,983 12/02/09 $ -- $ (318) New Zealand Dollar .............. FBCO Sell 12,119 7,495 12/02/09 -- (1,170) Euro ............................ UBSW Sell 373,000 516,411 1/11/10 -- (32,204) Euro ............................ BZWS Sell 227,000 317,652 1/13/10 -- (16,220) Philippine Peso ................. JPHQ Buy 5,831,000 125,058 1/13/10 -- (3,222) Euro ............................ DBAB Sell 47,000 65,653 1/15/10 -- (3,474) Euro ............................ CITI Sell 532,000 759,600 1/27/10 -- (22,827) Mexican Peso .................... CITI Sell 122,000 8,950 1/29/10 -- (173) New Zealand Dollar .............. UBSW Buy 57,321 42,246 1/29/10 -- (1,438) New Zealand Dollar .............. UBSW Sell 57,321 37,310 1/29/10 -- (3,497) Singapore Dollar ................ JPHQ Buy 647,494 465,522 2/08/10 -- (3,903) Singapore Dollar ................ JPHQ Sell 647,494 430,000 2/08/10 -- (31,618) Malaysian Ringgit ............... DBAB Buy 462,000 126,489 2/17/10 8,306 -- Singapore Dollar ................ UBSW Buy 1,253,000 902,868 3/23/10 -- (9,718) Singapore Dollar ................ UBSW Sell 1,253,000 824,966 3/23/10 -- (68,183) Indian Rupee .................... DBAB Buy 1,355,000 26,187 4/09/10 2,307 -- Indian Rupee .................... DBAB Buy 2,905,000 56,103 4/12/10 4,968 -- Indian Rupee .................... JPHQ Buy 1,951,000 37,397 4/13/10 3,614 -- Indian Rupee .................... JPHQ Buy 1,915,000 37,395 4/15/10 2,852 -- Indian Rupee .................... DBAB Buy 673,000 13,119 4/19/10 1,020 -- Indian Rupee .................... JPHQ Buy 957,000 18,757 4/19/10 1,348 -- Chilean Peso .................... CITI Buy 37,334,000 63,693 4/26/10 7,280 -- Indian Rupee .................... DBAB Buy 1,361,000 26,263 4/26/10 2,312 -- Chilean Peso .................... CITI Buy 29,628,000 50,452 4/27/10 5,873 -- Chilean Peso .................... JPHQ Buy 29,522,000 50,452 4/27/10 5,672 -- Indian Rupee .................... JPHQ Buy 194,000 3,749 4/27/10 324 -- Chilean Peso .................... CITI Buy 47,586,000 80,723 4/28/10 9,745 -- Chilean Peso .................... UBSW Buy 5,958,000 10,090 4/28/10 1,237 -- Indian Rupee .................... JPHQ Buy 963,000 18,754 4/28/10 1,462 -- Indian Rupee .................... JPHQ Buy 964,000 18,755 4/30/10 1,478 -- Indian Rupee .................... DBAB Buy 1,843,000 37,552 6/01/10 1,031 -- Indian Rupee .................... HSBC Buy 55,000 1,134 6/02/10 17 -- Indian Rupee .................... HSBC Buy 270,000 5,625 6/03/10 26 -- Indian Rupee .................... HSBC Buy 1,805,000 37,557 6/04/10 221 -- Indian Rupee .................... DBAB Buy 903,000 18,789 6/07/10 106 -- Indian Rupee .................... DBAB Buy 455,000 9,440 6/08/10 80 -- Indian Rupee .................... HSBC Buy 362,000 7,503 6/08/10 71 -- Indian Rupee .................... DBAB Buy 368,000 7,564 6/10/10 134 -- Indian Rupee .................... BZWS Buy 550,000 11,340 6/11/10 165 -- Indian Rupee .................... HSBC Buy 368,000 7,549 6/11/10 149 -- Indian Rupee .................... DBAB Buy 920,000 18,887 6/16/10 349 -- Indian Rupee .................... DBAB Buy 838,000 16,998 6/21/10 517 -- Indonesian Rupiah ............... JPHQ Buy 5,835,300,000 530,000 6/30/10 51,901 -- New Zealand Dollar .............. DBAB Buy 1,348,065 986,379 7/06/10 -- (38,576)
94 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------------------------------------------- New Zealand Dollar .............. DBAB Sell 1,348,065 848,000 7/06/10 $ -- $ (99,803) New Zealand Dollar .............. DBAB Buy 142,170 103,784 7/30/10 -- (4,036) New Zealand Dollar .............. DBAB Sell 142,170 91,486 7/30/10 -- (8,262) New Zealand Dollar .............. BZWS Buy 55,442 40,284 8/03/10 -- (1,402) New Zealand Dollar .............. BZWS Sell 55,442 35,594 8/03/10 -- (3,289) New Zealand Dollar .............. DBAB Buy 141,629 103,347 8/03/10 -- (4,020) New Zealand Dollar .............. DBAB Sell 141,629 90,975 8/03/10 -- (8,351) New Zealand Dollar .............. BZWS Buy 27,935 20,296 8/04/10 -- (706) New Zealand Dollar .............. BZWS Sell 27,935 17,934 8/04/10 -- (1,655) New Zealand Dollar .............. DBAB Buy 56,112 40,945 8/04/10 -- (1,597) New Zealand Dollar .............. DBAB Sell 56,112 35,850 8/04/10 -- (3,498) New Zealand Dollar .............. CITI Buy 140,649 102,139 8/05/10 -- (3,520) New Zealand Dollar .............. CITI Sell 140,649 91,847 8/05/10 -- (6,772) New Zealand Dollar .............. DBAB Buy 41,724 30,442 8/05/10 -- (1,186) New Zealand Dollar .............. DBAB Sell 41,724 27,196 8/05/10 -- (2,060) New Zealand Dollar .............. HSBC Buy 289,000 210,739 8/05/10 -- (8,101) New Zealand Dollar .............. HSBC Sell 289,000 186,925 8/05/10 -- (15,713) New Zealand Dollar .............. CITI Buy 55,081 39,994 8/06/10 -- (1,377) New Zealand Dollar .............. CITI Sell 55,081 35,996 8/06/10 -- (2,621) New Zealand Dollar .............. FBCO Buy 27,490 19,971 8/06/10 -- (698) New Zealand Dollar .............. FBCO Sell 27,490 17,903 8/06/10 -- (1,370) New Zealand Dollar .............. CITI Sell 54,349 35,733 8/09/10 -- (2,360) New Zealand Dollar .............. DBAB Sell 54,595 35,912 8/09/10 -- (2,352) New Zealand Dollar .............. FBCO Sell 53,729 35,405 8/09/10 -- (2,253) New Zealand Dollar .............. FBCO Sell 53,824 35,746 8/11/10 -- (1,970) New Zealand Dollar .............. DBAB Sell 50,534 33,009 8/12/10 -- (2,398) Israeli Shekel .................. CITI Buy 150,000 39,584 8/17/10 409 -- Israeli Shekel .................. CITI Buy 150,000 39,518 8/19/10 475 -- Israeli Shekel .................. DBAB Buy 15,000 3,952 8/19/10 48 -- Israeli Shekel .................. CITI Buy 57,600 15,070 8/20/10 287 -- Israeli Shekel .................. CITI Buy 98,200 25,753 8/23/10 429 -- New Zealand Dollar .............. FBCO Sell 49,380 32,560 8/24/10 -- (1,995) New Zealand Dollar .............. DBAB Sell 49,000 32,757 8/27/10 -- (1,522) Euro ............................ BZWS Sell 2,400 3,534 9/20/10 10 -- Euro ............................ UBSW Sell 15,642 22,935 9/23/10 -- (31) Euro ............................ JPHQ Sell 6,904 10,222 9/24/10 86 -- Malaysian Ringgit ............... JPHQ Buy 90,000 17,654 EUR 9/28/10 182 -- Euro ............................ DBAB Sell 1,355,000 1,982,27 10/04/10 -- (6,961) Philippine Peso ................. DBAB Buy 2,962,000 61,39 10/04/10 -- (566) Philippine Peso ................. HSBC Buy 2,376,000 49,11 10/04/10 -- (323) Philippine Peso ................. DBAB Buy 3,542,000 73,68 10/05/10 -- (952) Philippine Peso ................. HSBC Buy 3,543,000 73,68 10/05/10 -- (934) Indian Rupee .................... DBAB Buy 37,626,250 775,00 10/06/10 4,839 -- Philippine Peso ................. JPHQ Buy 936,000 19,65 10/06/10 -- (436)
Annual Report | 95 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------------------------------------------- Philippine Peso ................. DBAB Buy 2,908,000 61,41 10/07/10 $ -- $ (1,704) Philippine Peso ................. CITI Buy 1,164,000 24,56 10/08/10 -- (667) Philippine Peso ................. DBAB Buy 2,327,000 49,13 10/08/10 -- (1,354) Philippine Peso ................. HSBC Buy 2,331,000 49,12 10/08/10 -- (1,263) Philippine Peso ................. JPHQ Buy 1,160,000 24,54 10/08/10 -- (728) Philippine Peso ................. DBAB Buy 693,000 14,74 10/12/10 -- (517) Philippine Peso ................. HSBC Buy 1,155,000 24,55 10/13/10 -- (852) Philippine Peso ................. JPHQ Buy 2,582,000 55,17 10/13/10 -- (2,175) Chinese Yuan .................... HSBC Buy 58,724 5,963 EUR 10/15/10 -- (105) Chinese Yuan .................... HSBC Buy 19,095 2,900 10/25/10 -- (87) Chinese Yuan .................... HSBC Buy 37,968 5,751 10/26/10 -- (157) Chinese Yuan .................... HSBC Buy 18,971 2,868 10/27/10 -- (72) Japanese Yen .................... DBAB Sell 59,567,300 650,000 10/28/10 -- (15,282) Euro ............................ DBAB Sell 1,051,000 1,554,009 10/29/10 11,390 -- --------------------------- Unrealized appreciation (depreciation) ............................................................ 132,720 (517,277) --------------------------- Net unrealized appreciation (depreciation) ....................................................... $ (384,557) ============
(a) In U.S. dollars unless otherwise indicated. At October 31, 2009, the fund had the following credit default swap contracts outstanding. See Note 1(e). CREDIT DEFAULT SWAP CONTRACTS
PERIODIC PAYMENT EXPIRATION UNREALIZED UNREALIZED DESCRIPTION COUNTERPARTY(a) NOTIONAL AMOUNT(b) RATE DATE APPRECIATION DEPRECIATION RATING(c) ----------------------------------------------------------------------------------------------------------------------------------- CONTRACTS TO BUY PROTECTION SINGLE NAME Aetna Inc. ....................... MLCO $ 100,000 0.62% 3/20/13 $ 897 $ -- Clear Channel Communications Inc. ............................ CITI 1,000,000 5.00% 3/20/11 11,376 -- Dish Network Corp. ............... FBCO 500,000 1.00% 12/20/11 -- (3,275) D.R. Horton Inc. ................. FBCO 1,000,000 1.00% 6/20/12 -- (25,847) Macy's Retail Holdings Inc. ...... FBCO 400,000 5.00% 9/20/11 -- (12,141) Macy's Retail Holdings Inc. ...... MSCO 500,000 5.00% 9/20/11 4,444 -- Macy's Retail Holdings Inc. ...... FBCO 1,000,000 5.00% 3/20/12 -- (36,641) Marsh & McLennan Cos. Inc. ....... FBCO 500,000 0.65% 9/20/10 -- (846) Masco Corp. ...................... FBCO 500,000 5.00% 9/20/13 5,984 -- Ryland Group Inc. ................ FBCO 1,000,000 5.00% 6/20/12 2,534 -- Ryland Group Inc. ................ FBCO 500,000 5.00% 6/20/13 3,106 -- Teco Finance Inc. ................ FBCO 1,000,000 2.80% 6/20/11 -- (28,696) Textron Financial Corp. .......... MLCO 250,000 0.27% 12/20/10 5,781 --
96 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN LOW DURATION TOTAL RETURN FUND CREDIT DEFAULT SWAP CONTRACTS (CONTINUED)
PERIODIC PAYMENT EXPIRATION UNREALIZED UNREALIZED DESCRIPTION COUNTERPARTY(a) NOTIONAL AMOUNT(b) RATE DATE APPRECIATION DEPRECIATION RATING(c) ---------------------------------------------------------------------------------------------------------------------------------- CONTRACTS TO SELL PROTECTION(d) SINGLE NAME .................... UnitedHealth Group Inc. ........ MLCO $ 200,000 0.88% 3/20/13 $ -- $ (6,408) A- TRADED INDEX ................... CDX.NA.HY.13 ................... FBCO 1,000,000 5.00% 12/20/14 2,739 -- Non Investment Grade CDX.NA.IG.13 ................... FBCO 2,000,000 1.00% 12/20/14 -- (7,818) Investment Grade LCDX.NA.13 ..................... FBCO 4,000,000 5.00% 12/20/14 30,369 -- Non Investment Grade -------------------------- Unrealized appreciation (depreciation) ................................................ 67,230 (121,672) -------------------------- Net unrealized appreciation (depreciation) ........................................... $ (54,442) ============
(a) Positions are generally not collateralized if the unrealized appreciation (depreciation) is under $250,000. Collateral requirements may be net of current positions at the individual counterparty for the fund. The table below summarizes the cash and/or securities held as collateral for each applicable counterparty at year end:
COUNTERPARTY COLLATERAL POSTED (RECEIVED) ---------------------------------------------------------------------------------- CITI $ (284,849) MLCO (20,000) --------------------------- Total collateral for credit default swaps $ (304,849) ===========================
(b) In U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts. (c) Based on Standard and Poor's (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings are based on mapping into equivalent ratings from external vendors. (d) The fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps, and failure to pay or bankruptcy for traded index swaps. See Abbreviations on page 154. Annual Report | The accompanying notes are an integral part of these financial statements. | 97 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, CLASS A 2009 2008 2007 2006 2005 ----------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ....................... $ 8.60 $ 9.92 $ 9.95 $ 9.91 $ 10.22 ----------------------------------------------------------------- Income from investment operations(a): Net investment income ................................... 0.480 0.449 0.469 0.439 0.410 Net realized and unrealized gains (losses) .............. 1.190 (1.289) (0.010) 0.096 (0.280) ----------------------------------------------------------------- Total from investment operations ......................... 1.670 (0.840) 0.459 0.535 0.130 ----------------------------------------------------------------- Less distributions from net investment income ............ (0.620) (0.480) (0.489) (0.495) (0.440) ----------------------------------------------------------------- Redemption fees(b) ....................................... -- --(c) --(c) --(c) --(c) ----------------------------------------------------------------- Net asset value, end of year ............................. $ 9.65 $ 8.60 $ 9.92 $ 9.95 $ 9.91 ================================================================= Total return(d) .......................................... 20.25% (8.79)% 4.62% 5.56% 1.27% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ........ 1.01% 1.01% 1.03% 1.03% 1.04% Expenses net of waiver and payments by affiliates(e) ..... 0.85% 0.85% 0.85% 0.85% 0.85% Net investment income .................................... 4.75% 4.68% 4.69% 4.39% 3.88% SUPPLEMENTAL DATA Net assets, end of year (000's) .......................... $ 1,244,157 $ 780,551 $ 683,736 $ 406,242 $291,473 Portfolio turnover rate .................................. 187.73% 300.07% 313.08% 251.50% 58.81% Portfolio turnover rate excluding mortgage dollar rolls(f) ................................................ 59.67% 68.00% 92.51% 89.19% 51.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. 98 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, CLASS B 2009 2008 2007 2006 2005 --------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year........................... $ 8.60 $ 9.92 $ 9.94 $ 9.91 $ 10.22 --------------------------------------------------------------- Income from investment operations(a): Net investment income...................................... 0.406 0.412 0.422 0.392 0.356 --------------------------------------------------------------- Net realized and unrealized gains (losses)................. 1.230 (1.291) 0.007 0.094 (0.266) --------------------------------------------------------------- Total from investment operations............................. 1.636 (0.879) 0.429 0.486 0.090 --------------------------------------------------------------- Less distributions from net investment income................ (0.586) (0.441) (0.449) (0.456) (0.400) --------------------------------------------------------------- Redemption fees(b) .......................................... -- --(c) --(c) --(c) --(c) --------------------------------------------------------------- Net asset value, end of year................................. $ 9.65 $ 8.60 $ 9.92 $ 9.94 $ 9.91 =============================================================== Total return(d).............................................. 19.67% (9.15)% 4.31% 5.04% 0.87% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates............ 1.41% 1.41% 1.43% 1.43% 1.44% Expenses net of waiver and payments by affiliates(e)......... 1.25% 1.25% 1.25% 1.25% 1.25% Net investment income........................................ 4.35% 4.28% 4.29% 3.99% 3.48% SUPPLEMENTAL DATA Net assets, end of year (000's).............................. $ 22,492 $ 19,176 $ 20,422 $ 21,028 $ 21,366 Portfolio turnover rate...................................... 187.73% 300.07% 313.08% 251.50% 58.81% Portfolio turnover rate excluding mortgage dollar rolls(f)... 59.67% 68.00% 92.51% 89.19% 51.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. Annual Report | The accompanying notes are an integral part of these financial statements. | 99 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, CLASS C 2009 2008 2007 2006 2005 ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 8.60 $ 9.91 $ 9.94 $ 9.91 $ 10.22 ---------------------------------------------------------------- Income from investment operations(a): Net investment income ....................................... 0.473 0.406 0.424 0.395 0.364 Net realized and unrealized gains (losses) .................. 1.163 (1.275) (0.005) 0.089 (0.275) ---------------------------------------------------------------- Total from investment operations ............................. 1.636 (0.869) 0.419 0.484 0.089 ---------------------------------------------------------------- Less distributions from net investment income ................ (0.586) (0.441) (0.449) (0.454) (0.399) ---------------------------------------------------------------- Redemption fees(b) ........................................... -- --(c) --(c) --(c) --(c) ---------------------------------------------------------------- Net asset value, end of year ................................. $ 9.65 $ 8.60 $ 9.91 $ 9.94 $ 9.91 ================================================================ Total return(d) .............................................. 19.67% (9.15)% 4.31% 5.03% 0.86% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ............ 1.41% 1.41% 1.43% 1.43% 1.44% Expenses net of waiver and payments by affiliates(e) ........ 1.25% 1.25% 1.25% 1.25% 1.25% Net investment income ........................................ 4.35% 4.28% 4.29% 3.99% 3.48% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 237,596 $ 103,564 $ 84,457 $ 46,110 $ 34,751 Portfolio turnover rate ...................................... 187.73% 300.07% 313.08% 251.50% 58.81% Portfolio turnover rate excluding mortgage dollar rolls(f) ... 59.67% 68.00% 92.51% 89.19% 51.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. 100 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, CLASS R 2009 2008 2007 2006 2005 ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ........................... $ 8.60 $ 9.92 $ 9.94 $ 9.91 $ 10.22 --------------------------------------------------------------- Income from investment operations(a): Net investment income ....................................... 0.425 0.422 0.439 0.407 0.389 Net realized and unrealized gains (losses) .................. 1.224 (1.286) 0.005 0.093 (0.284) --------------------------------------------------------------- Total from investment operations ............................. 1.649 (0.864) 0.444 0.500 0.105 --------------------------------------------------------------- Less distributions from net investment income ................ (0.599) (0.456) (0.464) (0.470) (0.415) --------------------------------------------------------------- Redemption fees(b) .......................................... -- --(c) --(c) --(c) --(c) --------------------------------------------------------------- Net asset value, end of year ................................. $ 9.65 $ 8.60 $ 9.92 $ 9.94 $ 9.91 =============================================================== Total return(d) .............................................. 19.97% (9.01)% 4.47% 5.20% 1.01% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ............ 1.26% 1.26% 1.28% 1.28% 1.29% Expenses net of waiver and payments by affiliates(e) ......... 1.10% 1.10% 1.10% 1.10% 1.10% Net investment income ........................................ 4.50% 4.43% 4.44% 4.14% 3.63% SUPPLEMENTAL DATA Net assets, end of year (000's) .............................. $ 85,024 $ 68,775 $ 57,935 $ 30,219 $ 21,647 Portfolio turnover rate ...................................... 187.73% 300.07% 313.08% 251.50% 58.81% Portfolio turnover rate excluding mortgage dollar rolls(f) ... 59.67% 68.00% 92.51% 89.19% 51.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (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(f) regarding mortgage dollar rolls. Annual Report | The accompanying notes are an integral part of these financial statements. | 101 Franklin Investors Securities Trust FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN TOTAL RETURN FUND
YEAR ENDED OCTOBER 31, ADVISOR CLASS 2009 2008 2007 2006 2005 ---------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................ $ 8.61 $ 9.93 $ 9.96 $ 9.92 $ 10.24 ---------------------------------------------------------------- Income from investment operations(a): Net investment income ....................................... 0.517 0.479 0.497 0.470 0.436 Net realized and unrealized gains (losses) .................. 1.186 (1.295) (0.012) 0.090 (0.289) ---------------------------------------------------------------- Total from investment operations .............................. 1.703 (0.816) 0.485 0.560 0.147 ---------------------------------------------------------------- Less distributions from net investment income ................. (0.643) (0.504) (0.515) (0.520) (0.467) ---------------------------------------------------------------- Redemption fees(b) ............................................ -- --(c) --(c) --(c) --(c) ---------------------------------------------------------------- Net asset value, end of year .................................. $ 9.67 $ 8.61 $ 9.93 $ 9.96 $ 9.92 ================================================================ Total return .................................................. 20.52% (8.64)% 4.99% 5.82% 1.43% RATIOS TO AVERAGE NET ASSETS Expenses before waiver and payments by affiliates ............. 0.76% 0.76% 0.78% 0.78% 0.79% Expenses net of waiver and payments by affiliates(d) .......... 0.60% 0.60% 0.60% 0.60% 0.60% Net investment income ......................................... 5.00% 4.93% 4.94% 4.64% 4.13% SUPPLEMENTAL DATA Net assets, end of year (000's) ............................... $ 668,955 $ 345,256 $ 280,776 $ 222,992 $ 178,792 Portfolio turnover rate ....................................... 187.73% 300.07% 313.08% 251.50% 58.81% Portfolio turnover rate excluding mortgage dollar rolls(e) .... 59.67% 68.00% 92.51% 89.19% 51.26%
(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) Effective September 1, 2008, the redemption fee was eliminated. (c) Amount rounds to less than $0.001 per share. (d) Benefit of expense reduction rounds to less than 0.01%. (e) See Note 1(f) regarding mortgage dollar rolls. 102 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION SHARES VALUE ------------------------------------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS (COST $1,000,891) 0.0%(a) AUTOMOBILES & COMPONENTS 0.0%(a) (b)General Motors Corp., 6.25%, cvt. pfd., C ....................... United States 43,500 $ 130,500 ----------- PREFERRED STOCKS (COST $164,010) 0.0%(a) DIVERSIFIED FINANCIALS 0.0%(a) (c)Preferred Blocker Inc., 7.00%, pfd., 144A ....................... United States 462 282,152 ----------- PRINCIPAL AMOUNT(d) CORPORATE BONDS 34.4% AUTOMOBILES & COMPONENTS 0.7% Ford Motor Credit Co. LLC, senior note, 9.875%, 8/10/11 ................................................ United States 2,000,000 2,050,000 7.50%, 8/01/12 ................................................. United States 2,500,000 2,436,112 The Goodyear Tire & Rubber Co., senior note, 7.857%, 8/15/11 .... United States 10,000,000 10,225,000 ----------- 14,711,112 ----------- BANKS 2.8% Barclays Bank PLC, senior note, 5.20%, 7/10/14 .................. United Kingdom 3,200,000 3,415,786 BB&T Corp., senior note, 6.85%, 4/30/19 ......................... United States 6,800,000 7,656,480 (c,e) BNP Paribas, 144A, 7.195%, Perpetual ......................... France 3,500,000 3,237,500 (c)Commonwealth Bank of Australia, senior note, 144A, 5.00%, 10/15/19 ....................................................... Australia 10,000,000 10,001,699 Compass Bank, 6.40%, 10/01/17 ................................... United States 3,700,000 3,568,491 Countrywide Financial Corp., 4.00%, 3/22/11 ..................... United States 1,300,000 1,325,748 (f)Fifth Third Capital Trust IV, junior sub. note, FRN, 6.50%, 4/15/67 ........................................................ United States 3,000,000 2,145,000 (f)First Tennessee Bank, senior note, FRN, 0.433%, 12/17/09 ........ United States 200,000 199,804 HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 .................... United Kingdom 3,000,000 3,299,747 (g)HSBK (Europe) BV, Reg S, 7.25%, 5/03/17 ......................... Kazakhstan 3,850,000 3,221,155 Royal Bank of Scotland Group PLC, senior note, 6.40%, 10/21/19 .. United Kingdom 7,000,000 7,132,930 Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 ............ Sweden 410,000 NZD 307,606 UBS AG Stamford, senior note, 5.875%, 12/20/17 .................. United States 4,000,000 4,112,256 (e)Wachovia Capital Trust III, junior sub. bond, 5.80%, Perpetual ...................................................... United States 4,000,000 2,860,000 (e)Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ................ United States 2,000,000 1,870,000 (e)Wells Fargo Capital XV, pfd., 9.75%, Perpetual .................. United States 5,500,000 5,940,000 Wells Fargo Financial Inc., senior note, 5.50%, 8/01/12 ......... United States 850,000 913,068 Willis North America Inc., senior note, 7.00%, 9/29/19 .......... United States 2,600,000 2,641,636 ----------- 63,848,906 ----------- CAPITAL GOODS 1.2% Case New Holland Inc., senior note, 7.125%, 3/01/14 ............. United States 1,500,000 1,492,500 Hubbell Inc., 6.375%, 5/15/12 . ................................ United States 1,000,000 1,060,737 Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 ........................................................ United States 3,900,000 4,683,962 Masco Corp., senior note, 7.125%, 8/15/13 ....................... United States 15,000,000 15,667,875 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ......... United States 2,000,000 1,990,000 RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ......... United States 1,500,000 1,488,750 ----------- 26,383,824 -----------
Annual Report | 103 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE -------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) CONSUMER DURABLES & APPAREL 1.8% Centex Corp., senior note, 7.50%, 1/15/12 .................................................. United States 3,750,000 $ 3,937,500 5.45%, 8/15/12 .................................................. United States 5,000,000 5,075,000 D.R. Horton Inc., senior note, 5.375%, 6/15/12 ................... United States 4,000,000 4,005,000 Jarden Corp., senior sub. note, 7.50%, 5/01/17 ................... United States 1,500,000 1,485,000 Meritage Homes Corp., senior note, 6.25%, 3/15/15 ................ United States 5,000,000 4,637,500 The Ryland Group Inc., senior note, 5.375%, 5/15/12 ................................................. United States 7,000,000 7,035,000 6.875%, 6/15/13 ................................................. United States 10,000,000 10,350,000 Standard Pacific Corp., senior note, 7.75%, 3/15/13 .............. United States 4,000,000 3,660,000 ----------- 40,185,000 ----------- CONSUMER SERVICES 0.7% (c)Harrah's Operating Co. Inc., senior secured note, 144A, 11.25%, 6/01/17 ......................................................... United States 500,000 512,500 (c)Harrah's Operating Escrow, senior secured note, 144A, 11.25%, 6/01/17 ......................................................... United States 2,000,000 2,055,000 MGM MIRAGE, senior note, 6.625%, 7/15/15 ......................... United States 3,000,000 2,287,500 (c)New York City IDA, 144A, 11.00%, 3/01/29 ........................ United States 700,000 749,497 Pinnacle Entertainment Inc., senior sub. note, 7.50%, 6/15/15 .... United States 1,500,000 1,357,500 Royal Caribbean Cruises Ltd., senior note, 7.25%, 6/15/16 ........ United States 1,500,000 1,391,250 Starwood Hotels & Resorts Worldwide Inc., senior note, 6.25%, 2/15/13 .................................................. United States 3,144,000 3,144,000 6.75%, 5/15/18 .................................................. United States 1,500,000 1,451,250 (h)Station Casinos Inc., senior note, 7.75%, 8/15/16 ................ United States 800,000 198,000 (c,i) Universal City Development, senior note, 144A, 8.875%, 11/15/15 .............................. United States 600,000 597,000 senior sub. note, 144A, 10.875%, 11/15/16 ........................ United States 200,000 201,000 Yum! Brands Inc., senior note, 5.30%, 9/15/19 .................... United States 3,000,000 3,039,894 ----------- 16,984,391 ----------- DIVERSIFIED FINANCIALS 7.0% American Express Centurion, senior note, 5.95%, 6/12/17 .......... United States 800,000 823,270 American Express Co., senior note, 7.00%, 3/19/18 ................ United States 4,300,000 4,756,991 (e)Bank of America Corp., pfd., sub. bond, M, 8.125%, .............. United States 6,000,000 5,403,180 Perpetual The Bear Stearns & Co. Inc., senior note, B, 6.95%, 8/10/12 ...... United States 1,100,000 1,235,275 The Bear Stearns Co. Inc., senior note, 4.50%, 10/28/10 .......... United States 675,000 699,163 The Bear Stearns Cos. LLC, B, 4.55%, 6/23/10 ..................... United States 1,000,000 1,025,568 (c)Cantor Fitzgerald LP, 144A, 7.875%, 10/15/19 .................... United States 5,600,000 5,644,694 Capital One Bank, sub. note, 8.80%, 7/15/19 ...................... United States 5,000,000 5,928,125 Capital One Capital V, pfd., 10.25%, 8/15/39 ..................... United States 3,100,000 3,546,881 Capital One Financial Corp., senior note, 7.375%, 5/23/14 ........ United States 4,600,000 5,226,037 The Charles Schwab Corp., senior note, 8.05%, 3/01/10 ............ United States 750,000 768,063 Citigroup Inc., senior note, 6.50%, 8/19/13 ..................................... United States 250,000 268,177 senior note, 5.50%, 10/15/14 .................................... United States 5,000,000 5,133,300 senior note, 8.125%, 7/15/39 .................................... United States 4,400,000 5,168,798 sub. note, 5.00%, 9/15/14 ....................................... United States 4,000,000 3,948,200 Commonwealth Edison Co., secured bond, 6.45%, 1/15/38 ............ United States 700,000 787,675
104 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) DIVERSIFIED FINANCIALS (CONTINUED) Deutsche Bank AG, 4.875%, 5/20/13 ............................... Germany 6,100,000 $ 6,528,652 The Export-Import Bank of Korea, senior note, 8.125%, 1/21/14 ... South Korea 3,700,000 4,244,399 General Electric Capital Corp., (f)FRN, 0.383%, 10/21/10 ....................................... United States 1,500,000 1,485,027 senior note, 5.625%, 5/01/18 ................................... United States 500,000 515,119 senior note, 6.00%, 8/07/19 .................................... United States 8,000,000 8,418,048 senior note, A, 8.50%, 4/06/18 ................................. United States 245,000,000 MXN 16,797,533 (c)GMAC LLC, senior note, 144A, 6.875%, 9/15/11 ........................................................ United States 1,500,000 1,455,000 8/28/12 ........................................................ United States 1,931,000 1,844,105 The Goldman Sachs Group Inc., 5.125%, 1/15/15 ................................................ United States 1,000,000 1,054,836 sub. note, 6.75%, 10/01/37 ..................................... United States 2,700,000 2,852,971 JPMorgan Chase & Co., 6.30%, 4/23/19 ................................................. United States 7,500,000 8,240,212 (e)junior sub. note, 1, 7.90%, Perpetual ...................... United States 4,500,000 4,539,321 JPMorgan Chase Bank NA, sub. note, 6.00%, 10/01/17 .............. United States 3,000,000 3,198,582 JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 .......... United States 4,000,000 3,686,376 Lazard Group, senior note, 6.85%, 6/15/17 ....................... United States 4,850,000 4,915,412 (h)Lehman Brothers Holdings Inc., senior note, 6.875%, 5/02/18 .... United States 6,575,000 1,093,094 Merrill Lynch & Co. Inc., 6.875%, 4/25/18 ....................... United States 12,000,000 12,932,916 Morgan Stanley, senior note, 6.00%, 4/28/15 ..................... United States 2,140,000 2,292,543 (c)Pricoa Global Funding I, 144A, 5.45%, 6/11/14 .................. United States 5,000,000 5,275,770 Textron Financial Corp., 5.125%, 11/01/10 ....................... United States 16,750,000 16,767,571 ----------- 158,500,884 ----------- ENERGY 2.9% Anadarko Petroleum Corp., senior note, 6.95%, 6/15/19 ........... United States 4,100,000 4,612,356 Baker Hughes Inc., senior note, 7.50%, 11/15/18 ................. United States 7,200,000 8,743,529 Canadian Natural Resources Ltd., 5.90%, 2/01/18 ................. Canada 5,000,000 5,390,430 Chesapeake Energy Corp., senior note, 6.625%, 1/15/16 ........... United States 3,000,000 2,898,750 Compagnie Generale de Geophysique-Veritas, senior note, 7.50%, 5/15/15 ................................................. France 1,100,000 1,097,250 (c)144A, 9.50%, 5/15/16 ....................................... France 900,000 945,000 ConocoPhillips, 4.60%, 1/15/15 .................................. United States 6,000,000 6,443,802 (f)Enterprise Products Operating LLC, junior sub. note, FRN, 7.034%, 1/15/68 ................................................ United States 1,500,000 1,382,082 (c)Gaz Capital SA, 144A, 6.212%, 11/22/16 ......................... Luxembourg 2,800,000 2,698,640 Hess Corp., 7.125%, 3/15/33 ..................................... United States 500,000 558,960 (c)Holly Corp., senior note, 144A, 9.875%, 6/15/17 ................ United States 700,000 728,000 (c)LUKOIL International Finance BV, 144A, 6.656%, 6/07/22 .......... Russia 4,100,000 3,864,250 Mariner Energy Inc., senior note, 11.75%, 6/30/16 ............... United States 700,000 771,750 (c)MarkWest Energy Partners LP, senior note, 144A, 6.875%, 11/01/14 ....................................................... United States 1,000,000 945,000 Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 ........... United States 1,100,000 1,116,500 (c)Petroleum Export Cayman, senior note, 144A, 5.265%, 6/15/11 .... Egypt 489,300 480,933 Plains All American Pipeline LP, senior note, 5.75%, 1/15/20 .... United States 5,000,000 5,145,680 (c)SandRidge Energy Inc., senior note, 144A, 9.875%, 5/15/16 ...... United States 1,200,000 1,278,000 Tesoro Corp., senior note, 9.75%, 6/01/19 ....................... United States 800,000 826,000
Annual Report | 105 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ---------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) ENERGY (CONTINUED) Transcontinental Gas Pipe Line, senior note, 6.05%, 6/15/18..... United States 550,000 $ 591,059 Valero Energy Corp., 6.125%, 6/15/17............................ United States 4,400,000 4,581,034 Weatherford International Ltd., 7.00%, 3/15/38.................. United States 3,400,000 3,528,727 XTO Energy Inc., senior bond, 5.50%, 6/15/18 ................... United States 6,000,000 6,260,874 ---------- 64,888,606 ---------- FOOD & STAPLES RETAILING 0.5% CVS Caremark Corp., senior note, 5.75%, 6/01/17................. United States 1,200,000 1,292,644 The Kroger Co., 6.15%, 1/15/20 ............................................... United States 2,500,000 2,740,883 senior note, 5.00%, 4/15/13 ................................. United States 275,000 290,541 Rite Aid Corp., senior secured note, 9.75%, 6/12/16 ............ United States 900,000 976,500 SUPERVALU Inc., senior note, 8.00%, 5/01/16 .................... United States 1,200,000 1,227,000 (c)Tesco PLC, 144A, 6.15%, 11/15/37 ............................... United Kingdom 4,900,000 5,268,607 ---------- 11,796,175 ---------- FOOD, BEVERAGE & TOBACCO 2.2% Altria Group Inc., senior note, 9.70%, 11/10/18 ............... United States 8,500,000 10,474,830 (c)Anheuser-Busch InBev NV, senior note, 144A, 7.75%, 1/15/19....................................................... United States 10,000,000 11,664,970 Bunge Ltd. Finance Corp., senior note, 5.875%, 5/15/13 ............................................. United States 2,000,000 2,123,910 5.10%, 7/15/15 ............................................... United States 680,000 678,924 (c)Cargill Inc., 144A, 6.00%, 11/27/17......................................... United States 6,000,000 6,507,822 senior note, 144A, 5.60%, 9/15/12............................. United States 600,000 644,171 ConAgra Foods Inc., 5.875%, 4/15/14............................. United States 4,700,000 5,142,759 Diageo Capital PLC, senior note, 7.375%, 1/15/14................ United Kingdom 1,900,000 2,210,745 General Mills Inc., senior note, 5.65%, 2/15/19................. United States 4,500,000 4,862,138 (c)JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 .............. United States 1,500,000 1,672,500 (c)Miller Brewing Co., 144A, 5.50%, 8/15/13 ...................... United States 1,000,000 1,069,964 Reynolds American Inc., senior secured note, 7.625%, 6/01/16.... United States 1,000,000 1,067,188 (c)SABMiller PLC, 144A, 6.50%, 7/01/16............................. South Africa 2,200,000 2,379,689 ---------- 50,499,610 ---------- HEALTH CARE EQUIPMENT & SERVICES 1.4% (c)CareFusion Corp., senior note, 144A, 6.375%, 8/01/19............ United States 5,000,000 5,398,345 Coventry Health Care Inc., senior note, 6.30%, 8/15/14.......... United States 4,750,000 4,673,705 DaVita Inc., senior sub. note, 7.25%, 3/15/15................... United States 1,500,000 1,488,750 HCA Inc., senior secured note, (c)144A, 7.875%, 2/15/20...................................... United States 2,000,000 2,065,000 (j)PIK, 9.625%, 11/15/16...................................... United States 2,103,000 2,237,066 Medco Health Solutions Inc., 7.125%, 3/15/18 ................... United States 4,500,000 5,099,058 Quest Diagnostics Inc., 6.95%, 7/01/37.......................... United States 4,000,000 4,620,397 (c)Tenet Healthcare Corp., senior note, 144A, 10.00%, 5/01/18............................ United States 500,000 553,750 senior secured note, 144A, 8.875%, 7/01/19 .................. United States 1,000,000 1,076,250 UnitedHealth Group Inc. 6.50%, 6/15/37 ......................... United States 2,300,000 2,342,946
106 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE --------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) HEALTH CARE EQUIPMENT & SERVICES (CONTINUED) (c)US Oncology Inc., senior secured note, 144A, 9.125%, 8/15/17 ...................................................... United States 1,200,000 $ 1,272,000 Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 ..................................................... United States 1,500,000 1,567,500 ------------ 32,394,767 ------------ INSURANCE 0.6% Aflac Inc., senior note, 8.50%, 5/15/19 ........................ United States 6,000,000 7,029,799 (f)Lincoln National Corp., junior sub. deb., FRN, 6.05%, 4/20/67....................................................... United States 3,800,000 2,975,997 (f)MetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 .......... United States 4,000,000 3,457,036 (c)Nationwide Mutual Insurance Co., 144A, 8.25%, 12/01/31 ......... United States 1,200,000 1,128,882 ------------ 14,591,714 ------------ MATERIALS 1.6% (c)Anglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 ..................................................... United Kingdom 6,500,000 7,596,953 (c,i)Associated Materials LLC, senior secured note, 144A, 9.875%, 11/15/16.................................. United States 700,000 721,000 Ball Corp., senior note, 7.125%, 9/01/16 ............................................. United States 300,000 308,250 7.375%, 9/01/19 ............................................. United States 300,000 308,250 (c)Crown Americas LLC and Crown Americas Capital Corp. II, senior note, 144A, 7.625%, 5/15/17............................ United States 1,500,000 1,545,000 The Dow Chemical Co., senior note, 4.85%, 8/15/12 .............. United States 6,000,000 6,250,686 Huntsman International LLC, (c)senior note, 144A, 5.50%, 6/30/16............................... United States 300,000 261,000 senior sub. note, 7.875%, 11/15/14............................ United States 1,500,000 1,425,000 (c)Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 ........................................ United Kingdom 1,000,000 565,000 (c)MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ......... United States 700,000 668,500 (c)NewPage Corp., senior secured note, 144A, 11.375%, 12/31/14...................................................... United States 800,000 802,000 (c)Novelis Inc., senior note, 144A, 11.50%, 2/15/15................ Canada 500,000 522,500 Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14...................................................... United States 700,000 701,750 Owens-Illinois Inc., senior note, 7.80%, 5/15/18 .............. United States 1,000,000 1,015,000 RPM International Inc., 6.25%, 12/15/13 ............................................. United States 1,000,000 999,378 6.50%, 2/15/18 ............................................... United States 5,000,000 5,071,180 (c)RPM U.K. G.P., 144A, 6.70%, 11/01/15 ........................... United States 1,000,000 1,004,076 Solo Cup Co., senior sub. note, 8.50%, 2/15/14 ................ United States 1,000,000 977,500 Solutia Inc., senior note, 8.75%, 11/01/17 .................... United States 600,000 621,000 Weyerhaeuser Co., 6.75%, 3/15/12 ............................................... United States 1,000,000 1,048,504 senior note, 7.375%, 10/01/19................................. United States 2,900,000 2,992,522 (c)Yara International ASA, 144A, 5.25%, 12/15/14 ................. Norway 1,000,000 1,042,216 ------------ 36,447,265 ------------
Annual Report | 107 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ------------------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) MEDIA 2.6% (c)British Sky Broadcasting Group PLC, senior note, 144A, 6.10%, 2/15/18....................................... United Kingdom 5,000,000 $5,350,205 (h,k)CCH I LLC, senior secured note, 11.00%, 10/01/15............. United States 250,000 51,250 (h,k)CCH II LLC, senior note, 10.25%, 9/15/10 ................... United States 2,125,000 2,581,875 (h,k)CCO Holdings LLC, senior note, 8.75%, 11/15/13............... United States 2,000,000 2,195,000 Clear Channel Communications Inc., senior note, 6.25%, 3/15/11 .................................................. United States 8,500,000 5,652,500 Comcast Corp., senior note, 6.30%, 11/15/17.................. United States 5,000,000 5,417,590 (h,k)Dex Media Inc., senior disc. note, 9.00%, 11/15/13........................ United States 400,000 74,000 senior note, B, 8.00%, 11/15/13 .......................... United States 900,000 166,500 (h,k)Dex Media West Finance, senior sub. note, 9.875%, 8/15/13...................................................... United States 1,000,000 202,500 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ........... United States 4,500,000 4,612,500 Lamar Media Corp., senior note, 9.75%, 4/01/14 .............. United States 1,500,000 1,657,500 LIN Television Corp., senior sub. note, 6.50%, 5/15/13....... United States 2,000,000 1,885,000 News America Holdings Inc., senior bond, 7.90%, 12/01/95 .... United States 500,000 527,626 News America Inc., senior deb., 7.25%, 5/18/18 ............................. United States 2,000,000 2,208,038 (c)senior note, 144A, 6.90%, 8/15/39....................... United States 1,800,000 1,914,628 Reed Elsevier PLC, senior note, 7.75%, 1/15/14 ............. United Kingdom 2,700,000 3,122,928 (c)Sinclair Television Group Inc., senior sec. note, 144A, 9.25%, 11/01/17........................................... United States 2,000,000 2,000,000 Time Warner Cable Inc., senior bond, 7.30%, 7/01/38 ............................. United States 625,000 706,089 senior note, 6.75%, 7/01/18 ............................. United States 8,500,000 9,369,142 Time Warner Inc., 7.70%, 5/01/32 ........................................... United States 550,000 622,911 senior note, 6.875%, 5/01/12.............................. United States 600,000 660,352 Viacom Inc., senior note, 6.25%, 4/30/16 ........................................... United States 2,000,000 2,174,786 6.125%, 10/05/17.......................................... United States 2,500,000 2,678,067 (c)Vivendi, senior note, 144A, 5.75%, 4/04/13.................. France 400,000 426,607 (c)WMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16............................................. United States 1,300,000 1,394,250 ----------- 57,651,844 ----------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.6% Amgen Inc., senior note, 5.85%, 6/01/17 ..................... United States 4,200,000 4,627,258 Glaxosmithkline Capital Inc., 4.85%, 5/15/13................. United States 25,000 26,974 Pfizer Inc., senior note, 6.20%, 3/15/19..................... United States 7,000,000 7,978,229 (c)Talecris Biotherapeutics Holdings Corp., senior note, 144A, 7.75%, 11/15/16................................................... United States 500,000 511,250 ----------- 13,143,711 ----------- REAL ESTATE 0.8% (c)Dexus Finance Property Ltd., 144A, 7.125%, 10/15/14.......... Australia 4,250,000 4,257,472 ERP Operating LP, 5.75%, 6/15/17 ............................ United States 2,000,000 2,017,631 (c)FelCor Lodging Trust Inc., senior secured note, 144A, 10.00%, 10/01/14............................................. United States 1,700,000 1,687,250
108 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (continued)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ------------------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) REAL ESTATE (CONTINUED) Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ...... United States 300,000 $ 258,000 HCP Inc., senior note, 6.70%, 1/30/18............................ United States 5,000,000 4,985,071 Kimco Realty Corp., senior note, 6.875%, 10/01/19 ............... United States 5,000,000 5,145,805 ---------- 18,351,229 ---------- RETAILING 1.7% Macy's Retail Holdings Inc., senior deb., 7.45%, 9/15/11 .................................. United States 10,000,000 10,300,000 senior note, 6.625%, 4/01/11................................... United States 5,000,000 5,100,000 senior note, 5.35%, 3/15/12 .................................. United States 14,000,000 13,807,500 Michaels Stores Inc., senior note, 10.00%, 11/01/14.............. United States 1,200,000 1,206,000 Target Corp., 6.00%, 1/15/18 ................................................ United States 5,000,000 5,618,070 6.50%, 10/15/37 .............................................. United States 2,800,000 3,105,194 ---------- 39,136,764 ---------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1% Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14...... United States 2,100,000 1,716,750 ---------- SOFTWARE & SERVICES 0.3% Electronic Data Systems Corp., senior note, B, 6.00%, 8/01/13.... United States 800,000 886,851 Fiserv Inc., senior note, 6.125%, 11/20/12 ..................... United States 2,500,000 2,748,970 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13................................... United States 500,000 511,250 senior sub. note, 10.25%, 8/15/15 ............................. United States 2,000,000 2,072,500 ---------- 6,219,571 ---------- TECHNOLOGY HARDWARE & EQUIPMENT 0.1% (c)ViaSat Inc., senior note, 144A, 8.875%, 9/15/16.................. United States 500,000 509,375 (f)Xerox Corp., senior note, FRN, 1.042%, 12/18/09.................. United States 650,000 650,057 ---------- 1,159,432 ---------- TELECOMMUNICATION SERVICES 1.8% AT&T Inc., 5.80%, 2/15/19........................................ United States 4,000,000 4,289,284 (c)Cellco Partnership/Verizon Wireless, senior note, 144A, 8.50%, 11/15/18.................................................. United States 6,300,000 7,858,929 (c)Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15........... Jamaica 1,500,000 1,441,875 Embarq Corp., senior note, 7.082%, 6/01/16....................... United States 2,500,000 2,733,898 GTE Corp., senior bond, 6.84%, 4/15/18 .......................... United States 750,000 813,301 Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16.............. Bermuda 1,000,000 1,070,000 Intelsat Subsidiary Holding Co. Ltd., senior note, 8.50%, 1/15/13 ...................................................... Bermuda 2,000,000 2,017,500 MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14............. United States 1,300,000 1,316,250 (c)Qwest Corp., senior note, 144A, 8.375%, 5/01/16.................. United States 1,600,000 1,660,000 Telecom Italia Capital SA, senior note, 4.95%, 9/30/14 ................................................ Italy 1,500,000 1,555,691 6.999%, 6/04/18 .............................................. Italy 6,000,000 6,598,524 Time Warner Entertainment Co. LP, senior bond, 8.375%, 3/15/23................................... United States 800,000 946,529 senior note, 8.875%, 10/01/12.................................. United States 350,000 405,253
Annual Report | 109 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE --------------------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS (CONTINUED) TELECOMMUNICATION SERVICES (CONTINUED) Verizon New York Inc., senior deb., A, 6.875%, 4/01/12 .......................................... United States 4,700,000 $ 5,133,119 B, 7.375%, 4/01/32 .......................................... United States 1,000,000 1,082,045 Verizon Pennsylvania Inc., senior bond, A, 5.65%, 11/15/11 ..... United States 275,000 293,613 Verizon Virginia Inc., A, 4.625%, 3/15/13 ...................... United States 1,000,000 1,046,044 (c)Windstream Corp., senior note, 144A, 7.875%, 11/01/17 .......... United States 900,000 913,500 ------------ 41,175,355 ------------ TRANSPORTATION 0.4% Burlington Northern and Santa Fe 99-2 Trust, secured bond, 7.57%, 1/02/21 ............................................... United States 260,783 308,105 (c)Ceva Group PLC, senior secured note, 144A, 10.00%, 9/01/14 ............................................. United Kingdom 100,000 94,000 11.625%, 10/01/16 ........................................... United Kingdom 300,000 306,000 (c)Delta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 ...................................................... United States 600,000 616,500 (c)DP World Ltd., 144A, 6.85%, 7/02/37 ............................ United Arab Emirates 3,700,000 3,287,035 Union Pacific Corp., 3.625%, 6/01/10 ............................................. United States 1,500,000 1,523,396 98-B, 6.85%, 1/02/19 ........................................ United States 1,038,106 1,143,333 senior note, 5.75%, 11/15/17 ................................ United States 1,350,000 1,445,855 Union Pacific Railroad Co., 2005-1, 5.082%, 1/02/29 ............ United States 284,337 280,607 ------------ 9,004,831 ------------ UTILITIES 2.6% Ameren Corp., senior note, 8.875%, 5/15/14 ..................... United States 6,400,000 7,182,189 CenterPoint Energy Inc., senior note, 6.85%, 6/01/15 .............................................. United States 1,000,000 1,050,804 6.125%, 11/01/17 ............................................ United States 1,400,000 1,463,046 6.50%, 5/01/18 .............................................. United States 7,000,000 7,080,395 CMS Energy Corp., senior note, 8.75%, 6/15/19 .................. United States 700,000 773,774 Dominion Resources Inc., 6.40%, 6/15/18 ........................ United States 3,650,000 4,078,853 DPL Inc., senior note, 6.875%, 9/01/11 ......................... United States 500,000 540,426 Duke Energy Corp., senior note, 5.65%, 6/15/13 .............................................. United States 525,000 565,387 6.25%, 6/15/18 .............................................. United States 1,800,000 1,965,935 5.05%, 9/15/19 .............................................. United States 5,000,000 5,048,845 Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 ............. United States 1,700,000 1,593,750 (c)E.ON International Finance BV, 144A, 5.80%, 4/30/18 ............ Germany 6,000,000 6,478,068 MidAmerican Energy Co., senior note, 5.95%, 7/15/17 ............ United States 2,200,000 2,409,471 Northeast Generation Co., senior secured note, B-1, 8.812%, 10/15/26 ..................................................... United States 380,938 335,804 NRG Energy Inc., senior note, 7.25%, 2/01/14 .............................................. United States 2,000,000 1,990,000 7.375%, 2/01/16 ............................................. United States 1,000,000 996,250 Teco Finance Inc., senior note, 7.20%, 5/01/11 ................. United States 7,315,000 7,688,438 Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 ............................................. United States 2,900,000 2,073,500
110 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ------------------------------------------------------------------------------------------------------------------------------ CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) Virginia Electric and Power Co., senior note, 8.875%, 11/15/38 ..................................................... United States 4,000,000 $ 5,670,132 ------------ 58,985,067 ------------ TOTAL CORPORATE BONDS (COST $737,308,238) ..................... 777,776,808 ------------ CONVERTIBLE BONDS 0.3% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% Mylan Inc., cvt., senior note, 1.25%, 3/15/12 ................. United States 3,000,000 2,970,000 PDL BioPharma Inc., cvt., sub. note, 2.75%, 8/16/23 ........... United States 1,900,000 2,130,375 ------------ 5,100,375 ------------ SOFTWARE & SERVICES 0.1% (c)VeriFone Holdings Inc., cvt., senior note, 144A, 1.375%, 6/15/12 ...................................................... United States 2,100,000 1,790,250 ------------ TOTAL CONVERTIBLE BONDS (COST $6,461,012) ..................... 6,890,625 ------------ ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES 12.2% BANKS 7.3% Banc of America Commercial Mortgage Inc., 2006-1, AM, 5.421%, 9/10/45 ...................................................... United States 2,660,000 2,306,165 Bear Stearns Commercial Mortgage Securities Inc., 2005-PW10, A4, 5.405%, 12/11/40 ......................................... United States 4,000,000 3,986,364 Citigroup/Deutsche Bank Commercial Mortgage Trust, (f)2005-CD1, A4, FRN, 5.339%, 7/15/44 ....................... United States 19,650,000 19,975,514 (f)2005-CD1, E, FRN, 5.339%, 7/15/44 ........................ United States 4,500,000 2,377,602 2006-CD3, A5, 5.617%, 10/15/48 ........................... United States 13,500,000 13,487,633 2007-CD4, B, 5.447%, 12/11/49 ............................ United States 4,100,000 1,266,230 2007-CD4, C, 5.476%, 12/11/49 ............................ United States 14,200,000 3,902,609 Countrywide Asset-Backed Certificates, 2004-7, AF4, 4.774%, 8/25/32 ...................................................... United States 28,773 28,698 FHLMC, 2643, OG, 5.00%, 7/15/32 ................................. United States 3,182,750 3,350,993 (f)2942, TF, FRN, 0.595%, 3/15/35 ........................... United States 2,353,138 2,346,048 FNMA, (f)2005-122, FN, FRN, 0.594%, 1/25/36 ....................... United States 4,872,464 4,718,713 G93-33, K, 7.00%, 9/25/23 ................................ United States 906,429 1,006,020 GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%, 1/10/38 ...................................................... United States 1,578,354 1,629,228 Greenwich Capital Commercial Funding Corp., 2004-GG1, A7, 5.317%, 6/10/36 ............................ United States 21,435,000 21,936,678 2005-GG5, A5, 5.224%, 4/10/37 ............................ United States 9,250,000 8,956,297 (f)2006-GG7, A4, FRN, 5.918%, 7/10/38 ...................... United States 21,200,000 20,373,323 2007-GG9, C, 6.116%, 3/10/39 ............................. United States 6,438,000 2,185,501 (f)GS Mortgage Securities Corp. II, 1997-GL, X2, IO, FRN, 0.29%, 7/13/30 ..................... United States 34,802 394 2006-GG6, A4, FRN, 5.553%, 4/10/38 ....................... United States 8,807,000 8,295,002 2007-GG10, C, FRN, 5.999%, 8/10/45 ....................... United States 4,610,000 1,187,360 LB-UBS Commercial Mortgage Trust, 2005-C5, A4, 4.954%, 9/15/30 ...................................................... United States 14,570,000 14,423,896
Annual Report | 111 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ---------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED) BANKS (CONTINUED) Morgan Stanley Capital I Trust, (f)2004-IQ7, A4, FRN, 5.537%, 6/15/38 ...................... United States 6,900,000 $ 6,912,788 (c)2007-IQ13, B, 144A, 5.517%, 3/15/44 ..................... United States 5,138,000 1,598,973 (c,f)Schiller Park CLO Ltd., 2007-1A, A2, 144A, FRN, 0.522%, 4/25/21 .......................................... United States 3,500,000 3,004,068 (f)South Carolina Student Loan Corp., 2008-1, A1, FRN, 0.861%, 9/02/14 ............................................... United States 563,580 563,078 (c,f)Wachovia Bank Commercial Mortgage Trust, 2007-WHL8, A1, 144A, FRN, 0.325%, 6/15/20 ................................ United States 16,640,923 14,267,919 (l)Weyerhaeuser Mortgage Co., 1984-A, 7.43%, 1/01/24 .............. United States 25,299 25,299 ------------ 164,112,393 ------------ DIVERSIFIED FINANCIALS 4.3% (f)Advanta Business Card Master Trust, 2005-A2, A2, FRN, 0.375%, 5/20/13 ........................... United States 982,802 956,023 2007-A4, A4, FRN, 0.275%, 4/22/13 ........................... United States 1,153,724 1,122,286 (f)AFC Home Equity Loan Trust, 1997-4, 2A2, FRN, 0.884%, 12/22/27 ..................................................... United States 178,659 106,548 (f)Amortizing Residential Collateral Trust, 2002-BC1, M1, FRN, 1.519%, 1/25/32 ......................................... United States 316,134 119,548 (f)Bank of America Credit Card Trust, 2007-A13, A13, FRN, 0.465%, 4/15/12 .............................................. United States 25,000,000 24,997,007 (f)Capital One Auto Finance Trust, 2006-C, A4, FRN, 0.275%, 5/15/13 ...................................................... United States 5,167,563 5,086,581 (f)Chase Funding Mortgage Loan Asset-Backed Certificates, 2004-2, 2A2, FRN, 0.744%, 2/25/35 ............................ United States 1,836,354 1,336,488 (f)Chase Issuance Trust, 2007-A9, A9, FRN, 0.275%, 6/16/14......... United States 16,450,000 16,233,526 Citigroup Commercial Mortgage Trust, 2006-C5, A2, 5.378%, 10/15/49 ........................... United States 1,100,000 1,126,219 (f)2007-C6, AM, FRN, 5.888%, 6/10/17 ....................... United States 1,840,000 1,352,927 (c,f)DLJ Mortgage Acceptance Corp., 1997-CF1, S, 144A, IO, FRN, 1.217%, 5/15/30 .......................................... United States 15,666 1 (f)First Franklin Mortgage Loan Asset-Backed Certificates, 2004-FF11, 1A2, FRN, 0.594%, 1/25/35 .......................... United States 760,091 626,644 JPMorgan Chase Commercial Mortgage Securities Corp., (f)2004-CB9, A4, FRN, 5.577%, 6/12/41 ...................... United States 11,324,540 11,423,473 2004-LN2, A2, 5.115%, 7/15/41 ........................... United States 697,106 690,626 2005-LDP2, AM, 4.78%, 7/15/42 ........................... United States 2,470,000 2,147,940 (f)2005-LDP5, A4, FRN, 5.344%, 12/15/44 .................... United States 19,800,000 19,913,705 (c)Legacy Benefits Insurance Settlements LLC, 2004-1, A, 144A, 5.35%, 2/10/39 ......................................... United States 2,028,195 1,849,460 (f)MBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 0.285%, 11/15/12 ............................................. United States 1,850,000 1,844,042 Residential Asset Securities Corp., 2001-KS2, AI5, 7.514%, 6/25/31 .............................. United States 8,866 4,453 2004-KS1, AI4, 4.213%, 4/25/32 .............................. United States 482,026 447,030 (f)2005-AHL2, A2, FRN, 0.504%, 10/25/35 ......................... United States 1,188,701 1,062,611
112 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE -------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED) DIVERSIFIED FINANCIALS (CONTINUED) (f)Securitized Asset-Backed Receivables LLC Trust, 2006-FR2, A2, FRN, 0.394%, 3/25/36 .......................... United States 3,452,739 $ 3,010,183 (f)SLM Student Loan Trust, 2005-4, A2, FRN, 0.362%, 4/26/21 ............................ United States 550,000 545,272 2005-9, A4, FRN, 0.382%, 1/25/23 ............................ United States 1,535,581 1,526,751 2006-9, A2, FRN, 0.282%, 4/25/17 ............................ United States 166,861 166,616 (f)Structured Asset Securities Corp., 2002-1A, 2A1, FRN, 3.848%, 2/25/32 .............................................. United States 52,087 44,646 ------------ 97,740,606 ------------ REAL ESTATE 0.5% (f)Ownit Mortgage Loan Asset-Backed Certificates, 2006-6, A2B, FRN, 0.354%, 9/25/37.................................... United States 15,306,610 12,128,772 ------------ RETAILING 0.1% (f)Carmax Auto Owner Trust, 2008-2, A2B, FRN, 1.145%, 9/15/11 ..................................................... United States 851,168 853,501 ------------ TOTAL ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES (COST $301,170,282)............................... 274,835,272 ------------ MORTGAGE-BACKED SECURITIES 31.8% (f)FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) ADJUSTABLE RATE 0.4% FHLMC, 2.723%, 11/01/27........................................ United States 5,316,049 5,424,968 FHLMC, 3.404%, 4/01/32......................................... United States 897,874 908,814 FHLMC, 3.465%, 4/01/30......................................... United States 463,796 476,260 FHLMC, 3.507%, 9/01/32......................................... United States 313,361 321,182 FHLMC, 4.034%, 7/01/34......................................... United States 578,343 589,063 FHLMC, 4.964%, 12/01/34........................................ United States 427,516 440,840 FHLMC, 5.868%, 3/01/25......................................... United States 134,886 138,500 FHLMC, 5.959%, 10/01/36........................................ United States 122,085 128,648 FHLMC, 6.334%, 6/01/36......................................... United States 993,801 1,052,161 ------------ 9,480,436 ------------ FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE 12.1% FHLMC 30 Year, 6.00%, 6/01/37.................................. United States 919,414 979,369 FHLMC 30 Year, 6.50%, 8/01/25 - 11/01/31....................... United States 415,374 450,315 FHLMC 30 Year, 7.00%, 7/01/31.................................. United States 14,319 15,782 FHLMC 30 Year, 8.00%, 2/01/30.................................. United States 126,845 144,364 FHLMC 30 Year, 8.50%, 10/01/24................................. United States 19,331 22,164 FHLMC Gold 15 Year, 5.00%, 10/01/17 - 7/01/23.................. United States 12,158,893 12,858,550 FHLMC Gold 15 Year, 5.00%, 9/01/18............................. United States 305,225 326,879 FHLMC Gold 15 Year, 5.50%, 11/01/22............................ United States 2,111,904 2,251,135 FHLMC Gold 15 Year, 6.00%, 2/01/17 - 9/01/22................... United States 5,309,335 5,694,306 (i)FHLMC Gold 30 Year, 4.50%, 3/01/39 - 11/01/39.................. United States 26,625,515 26,939,003 FHLMC Gold 30 Year, 5.00%, 1/01/37............................. United States 32,962,882 34,224,032 FHLMC Gold 30 Year, 5.00%, 8/01/33 - 1/01/38................... United States 20,590,799 21,380,810 (i)FHLMC Gold 30 Year, 5.00%, 11/01/39............................ United States 30,000,000 31,092,180 FHLMC Gold 30 Year, 5.50%, 1/01/35 - 9/01/38................... United States 45,347,533 47,806,935 FHLMC Gold 30 Year, 6.00%, 5/01/33 - 4/01/38................... United States 27,132,470 28,907,715
Annual Report | 113 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE -------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) FIXED RATE (CONTINUED) (i)FHLMC Gold 30 Year, 6.00%, 11/01/39 ........................ United States 37,750,000 $ 40,115,264 FHLMC Gold 30 Year, 6.50%, 4/01/28 - 3/01/39 ................... United States 17,834,619 19,159,158 FHLMC Gold 30 Year, 7.00%, 4/01/26 - 7/01/32 ................... United States 555,268 611,824 FHLMC Gold 30 Year, 7.50%, 3/01/32 ............................. United States 72,839 82,142 FHLMC Gold 30 Year, 8.50%, 8/01/30 ............................. United States 9,205 10,590 FHLMC Gold 30 Year, 9.00%, 1/01/22 ............................. United States 92,534 100,122 FHLMC Gold 30 Year, 10.00%, 10/01/30 ........................... United States 139,046 161,295 ------------ 273,333,934 ------------ (f)FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) ADJUSTABLE RATE 1.1% FNMA, 2.723%, 9/01/34 .......................................... United States 5,730,723 5,718,073 FNMA, 2.75%, 6/01/15 ........................................... United States 82,772 83,039 FNMA, 3.00%, 10/01/32 .......................................... United States 887,926 901,272 FNMA, 3.117%, 12/01/27 ......................................... United States 431,822 432,090 FNMA, 3.134%, 6/01/33 .......................................... United States 381,275 381,569 FNMA, 3.135%, 10/01/36 ......................................... United States 136,395 137,155 FNMA, 3.137%, 3/01/33 .......................................... United States 440,045 440,383 FNMA, 3.153%, 4/01/35 .......................................... United States 4,769,137 4,833,381 FNMA, 3.161%, 11/01/31 ......................................... United States 348,307 353,639 FNMA, 3.198%, 1/01/17 .......................................... United States 496,394 503,031 FNMA, 3.384%, 5/01/25 .......................................... United States 131,157 133,065 FNMA, 3.475%, 6/01/32 .......................................... United States 53,990 54,761 FNMA, 3.697%, 12/01/22 ......................................... United States 132,719 134,133 FNMA, 3.978%, 12/01/34 ......................................... United States 649,181 672,490 FNMA, 4.104%, 8/01/33 .......................................... United States 5,867,627 5,894,235 FNMA, 4.196%, 12/01/34 ......................................... United States 960,481 984,892 FNMA, 4.509%, 2/01/34 .......................................... United States 1,661,882 1,713,231 FNMA, 5.192%, 12/01/24 ......................................... United States 45,185 46,632 FNMA, 5.382%, 6/01/17 .......................................... United States 74,739 76,963 FNMA, 5.883%, 3/01/37 .......................................... United States 1,104,743 1,174,758 ------------ 24,668,792 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE 17.7% FNMA 15 Year, 4.50%, 3/01/19 - 6/01/19 ......................... United States 1,248,948 1,319,012 FNMA 15 Year, 5.00%, 6/01/18 - 7/01/18 ......................... United States 1,155,853 1,234,610 (i)FNMA 15 Year, 5.50%, 1/01/14 - 11/01/24 .................... United States 12,588,434 13,396,455 FNMA 15 Year, 6.00%, 8/01/16 - 9/01/22 ......................... United States 1,820,646 1,955,029 FNMA 15 Year, 6.50%, 10/01/12 - 9/01/16 ........................ United States 39,651 42,737 FNMA 30 Year, 4.50%, 4/01/38 - 1/01/39 ......................... United States 47,894,906 48,566,509 FNMA 30 Year, 5.00%, 4/01/38 ................................... United States 13,713,899 14,240,732 (i)FNMA 30 Year, 5.00%, 6/01/36 - 11/01/39 ........................ United States 112,053,752 116,344,753 (i)FNMA 30 Year, 5.50%, 6/01/33 - 11/01/39 ........................ United States 73,996,998 78,083,820 FNMA 30 Year, 6.00%, 8/01/37 ................................... United States 22,737,556 24,206,064 FNMA 30 Year, 6.00%, 9/01/32 - 9/01/38 ......................... United States 15,204,372 16,207,696 (i)FNMA 30 Year, 6.00%, 11/01/39 .................................. United States 68,000,000 72,239,392 (i)FNMA 30 Year, 6.50%, 5/01/28 - 11/01/39 ........................ United States 9,888,979 10,637,650 FNMA 30 Year, 7.00%, 11/01/25 - 1/01/31 ........................ United States 88,566 98,076 FNMA 30 Year, 7.50%, 1/01/30 ................................... United States 56,549 64,041
114 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ---------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (CONTINUED) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) FIXED RATE (CONTINUED) FNMA 30 Year, 8.50%, 4/01/30 - 5/01/32 ......................... United States 348,157 $ 399,261 FNMA 30 Year, 9.00%, 11/01/26 - 5/01/27 ........................ United States 675,224 775,378 ------------ 399,811,215 ------------ (f)GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) ADJUSTABLE RATE 0.0%(a) GNMA, 4.125%, 10/20/26 ......................................... United States 84,188 85,535 GNMA, 4.375%, 1/20/23 .......................................... United States 39,425 40,368 ------------ 125,903 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 0.5% GNMA I SF 30 Year, 6.00%, 1/15/39 .............................. United States 3,211,563 3,416,387 GNMA I SF 30 Year, 6.50%, 10/15/31 - 7/15/38 ................... United States 558,752 596,628 GNMA I SF 30 Year, 7.00%, 10/15/27 - 6/15/31 ................... United States 138,585 153,270 GNMA I SF 30 Year, 7.50%, 2/15/17 - 5/15/26 .................... United States 438,305 492,217 GNMA I SF 30 Year, 8.00%, 8/15/16 - 5/15/17 .................... United States 145,127 159,926 GNMA I SF 30 Year, 9.00%, 9/15/25 - 3/15/31 .................... United States 4,200 4,869 GNMA II SF 30 Year, 6.00%, 5/20/31 ............................. United States 30,817 33,144 GNMA II SF 30 Year, 6.50%, 3/20/28 - 7/20/38 ................... United States 5,425,678 5,785,535 GNMA II SF 30 Year, 7.50%, 8/20/30 - 1/20/33 ................... United States 192,330 216,603 GNMA II SF 30 Year, 8.00%, 5/20/27 - 7/20/27 ................... United States 204,684 233,925 ------------ 11,092,504 ------------ TOTAL MORTGAGE-BACKED SECURITIES (COST $697,785,992) ........... 718,512,784 ------------ FOREIGN GOVERNMENT AND AGENCY SECURITIES 12.5% (c)Emirate of Abu Dhabi, 144A, 6.75%, 4/08/19 ..................... United Arab Emirates 1,980,000 2,270,264 European Investment Bank, senior note, 4.50%, 5/15/13 . ............................................ Supranational(m) 2,700,000 NOK 484,457 1612/37, 6.50%, 9/10/14 ..................................... Supranational(m) 1,395,000 NZD 1,039,322 (f,n)Government of Argentina, senior bond, FRN, 0.943%, 8/03/12 ...................................................... Argentina 2,225,000 703,100 (g)Government of Ghana, Reg S, 8.50%, 10/04/17 .................... Ghana 300,000 299,820 Government of Hungary, 3.50%, 7/18/16 ............................................. Hungary 115,000 EUR 154,488 4.375%, 7/04/17 ............................................ Hungary 215,000 EUR 300,154 5.75%, 6/11/18 ............................................. Hungary 695,000 EUR 1,056,226 senior note, 3.875%, 2/24/20 ............................... Hungary 285,000 EUR 364,950 Government of Indonesia, FR19, 14.25%, 6/15/13 ...................................... Indonesia 7,995,000,000 IDR 966,934 FR34, 12.80%, 6/15/21 ...................................... Indonesia 9,705,000,000 IDR 1,183,908 FR35, 12.90%, 6/15/22 ...................................... Indonesia 21,000,000,000 IDR 2,572,775 FR36, 11.50%, 9/15/19 ...................................... Indonesia 12,200,000,000 IDR 1,386,074 FR40, 11.00%, 9/15/25 ...................................... Indonesia 21,230,000,000 IDR 2,289,728 FR44, 10.00%, 9/15/24 ...................................... Indonesia 75,880,000,000 IDR 7,588,000 (i)FR47, 10.00%, 2/15/2 8 ..................................... Indonesia 96,000,000,000 IDR 9,499,478 (g)senior bond, Reg S, 7.75%, 1/17/38 ........................ Indonesia 1,590,000 1,739,725 (c)senior note, 144A, 11.625%, 3/04/19 ....................... Indonesia 1,540,000 2,129,050 (g)Government of Iraq, Reg S, 5.80%, 1/15/28....................... Iraq 260,000 197,938 Government of Israel, 2680, 7.00%, 4/29/11 ..................... Israel 11,620,000 ILS 3,319,776 (c)Government of Lithuania, 144A, 6.75%, 1/ 15/15 ................ Lithuania 3,720,000 3,718,884
Annual Report | 115 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Government of Malaysia, (i)3.756%, 4/28/11 ........................................... Malaysia 32,550,000 MYR $ 9,731,844 3.833%, 9/28/11 ............................................ Malaysia 52,810,000 MYR 15,845,228 Government of Mexico, M 20, (i)7.50%, 6/03/27 ............................................. Mexico 902,900(o) MXN 6,251,745 10.00%, 12/05/24 ........................................... Mexico 400,000(o) MXN 3,488,619 Government of Norway, 6.00%, 5/16/11 ............................................. Norway 3,600,000 NOK 662,131 6.50%, 5/15/13 ............................................. Norway 35,500,000 NOK 6,843,176 Government of Peru, 7, 8.60%, 8/12/17 .......................................... Peru 3,200,000 PEN 1,362,716 7.84%, 8/12/20 ............................................. Peru 1,100,000 PEN 443,122 Government of Poland, 4.75%, 4/25/12 ............................................. Poland 9,660,000 PLN 3,322,215 5.00%, 10/24/13 ............................................ Poland 4,665,000 PLN 1,585,039 (i)5.75%, 4/25/14 ........................................... Poland 69,430,000 PLN 24,048,732 senior note, 6.375%, 7/15/19 ............................... Poland 4,500,000 4,974,133 (c)Government of Qatar, senior note, 144A, 6.55%, 4/09/19 .......... Qatar 2,010,000 2,246,879 Government of Russia, (c)144A, 7.50%, 3/31/30 ....................................... Russia 5,308,180 5,902,962 (g)senior bond, Reg S, 7.50%, 3/31/30 ......................... Russia 6,692,800 7,442,728 Government of South Africa, 6.875%, 5/27/19 ............................................ South Africa 2,680,000 2,988,200 senior note, 6.50%, 6/02/14 ................................ South Africa 195,000 216,384 senior note, 5.875%, 5/30/22 ............................... South Africa 3,115,000 3,206,503 Government of Sri Lanka, A, 8.50%, 1/15/13 ............................................. Sri Lanka 61,500,000 LKR 512,287 13.50%, 2/01/13 ............................................ Sri Lanka 71,700,000 LKR 681,491 11.25%, 7/15/14 ............................................ Sri Lanka 212,700,000 LKR 1,920,678 11.00%, 8/01/15 ............................................ Sri Lanka 241,800,000 LKR 2,173,724 Government of Sweden, 5.25%, 3/15/11 ............................................. Sweden 86,320,000 SEK 12,927,045 5.50%, 10/08/12 ............................................ Sweden 213,440,000 SEK 33,097,060 Government of Venezuela, 10.75%, 9/19/13 ............................................ Venezuela 715,000 684,613 (g)senior bond, Reg S, 5.375%, 8/07/10 ........................ Venezuela 1,150,000 1,117,225 (c)Government of Vietnam, 144A, 6.875%, 1/15/16 .................... Vietnam 150,000 157,875 KfW Bankengruppe, senior note, 6.50%, 11/15/11 .................. Germany 1,099,000 NZD 815,733 Korea Treasury Bond, (i)0400-1206, 4.00%, 6/10/12 .................................. South Korea 63,850,010,000 KRW 53,228,938 0475-1112, 4.75%, 12/10/11 ................................. South Korea 1,087,790,000 KRW 921,019 0525-1209, 5.25%, 9/10/12 .................................. South Korea 1,800,000,000 KRW 1,538,797 0525-1303, 5.25%, 3/10/13 .................................. South Korea 168,330,000 KRW 143,797 0550-1106, 5.50%, 6/10/11 .................................. South Korea 1,734,150,000 KRW 1,487,763 senior note, 7.125%, 4/16/19 ............................... South Korea 3,090,000 3,623,387 Nota Do Tesouro Nacional, (i)9.609%, 1/01/13 ............................................ Brazil 23,250(p) BRL 12,420,861 (q)Index Linked, 6.00%, 5/15/15 ............................... Brazil 840(p) BRL 854,698 (c)Peru Enhanced Pass-Through Finance Ltd., senior secured bond, A-1, 144A, zero cpn., 5/31/18............................ Peru 1,259,225 975,835
116 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN GOVERNMENT AND AGENCY SECURITIES (CONTINUED) Province of Ontario, 6.25%, 6/16/15 ............................ Canada 305,000 NZD $ 219,364 Queensland Treasury Corp., 13, 6.00%, 8/14/13 ........................................ Australia 7,410,000 AUD 6,751,711 (c)144A, 7.125%, 9/18/17 ..................................... Australia 3,320,00 NZD 2,484,437 ------------ TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $276,046,044)............................................ 282,565,745 ------------ U.S. GOVERNMENT AND AGENCY SECURITIES 8.9% FHLB, 1.625%, 7/27/11 .......................................... United States 8,000,000 8,097,608 FHLMC, 5.125%, 11/17/17 .......................................... United States 400,000 445,942 senior note, 5.00%, 4/18/17 ............................... United States 5,400,000 5,980,495 FNMA, 3.25%, 8/12/10 ............................................ United States 150,000 153,343 6.625%, 11/15/30 .......................................... United States 18,800,000 23,640,511 Morgan Stanley and Co., senior note, FDIC Guaranteed, 1.95%, 6/20/12 ...................................................... United States 500,000 506,935 U.S. Treasury Bond, 3.875%, 2/15/13 ........................................... United States 30,000,000 32,200,800 5.50%, 8/15/28 ............................................ United States 10,500,000 12,280,086 5.00%, 5/15/37 ............................................ United States 1,685,000 1,897,206 4.50%, 8/15/39 ............................................ United States 29,700,000 31,022,600 (r)Index Linked, 2.375%, 1/15/25 ............................. United States 8,014,617 8,533,228 U.S. Treasury Note, 5.125%, 6/30/11 ........................................... United States 16,000,000 17,177,504 1.50%, 7/15/12 ............................................ United States 8,000,000 8,054,376 2.75%, 2/28/13 ............................................ United States 35,000,000 36,323,455 3.375%, 7/31/13 ........................................... United States 185,000 195,753 1.875%, 4/30/14 ........................................... United States 650,000 643,094 2.625%, 6/30/14 ........................................... United States 3,680,000 3,751,013 3.875%, 5/15/18 ........................................... United States 45,000 47,008 4.00%, 8/15/18 ............................................ United States 715,000 751,923 3.125%, 5/15/19 ........................................... United States 2,000,000 1,957,032 (r)Index Linked, 2.00%, 1/15/16 .............................. United States 7,557,223 7,953,538 ------------ TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES (COST $ 201,134,395) .......................................... 201,613,450 ------------ (f,s)SENIOR FLOATING RATE INTERESTS 4.1% AUTOMOBILES & COMPONENTS 0.0%(a) Federal-Mogul Corp., Term Loan B, 2.188%, 12/27/14 ............. United States 906,201 698,341 ------------ CAPITAL GOODS 0.2% RBS Global Inc. (Rexnord), Incremental Tranche B-2, 2.50%, 7/22/13 .................... United States 590,760 566,637 Tranche B-1 Term Loan B, 2.75% - 2.813%, 7/22/13 ............ United States 2,813,246 2,710,093 TransDigm Inc., Term Loan B, 2.289% , 6/23/13 .................. United States 990,571 952,540 ------------ 4,229,270 ------------
Annual Report | 117 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ------------------------------------------------------------------------------------------------------------------------------------ (f,s)SENIOR FLOATING RATE INTERESTS (CONTINUED) COMMERCIAL & PROFESSIONAL SERVICES 0.3% ARAMARK Corp., Synthetic L/C, 2.14%, 1/26/14 ............................... United States 205,792 $ 189,243 Term Loan B, 2.118% - 2.158%, 1/26/14 ....................... United States 3,136,408 2,884,188 Duratek Inc. (EnergySolutions), Term Loan B, 4.05%, 6/07/13 .... United States 405,061 403,541 EnergySolutions LLC, Synthetic L/C, 4.00%, 6/07/13 ............................... United States 60,167 60,017 Synthetic L/C (Add-On), 4.00%, 6/07/13 ...................... United States 11,827 11,798 Term Loan B, 4.05%, 6/07/13 ................................. United States 844,271 841,105 (j)EnviroSolutions Inc., Initial Term Loan, PIK, 11.00%, 7/07/12 ....................................................... United States 962,830 724,529 JohnsonDiversey Inc., Delay Draw, Term Loan, 2.483%, 12/16/10 ..................... United States 87,850 87,493 Term Loan B, 2.483%, 12/16/11 ............................... United States 380,647 379,101 ------------ 5,581,015 ------------ CONSUMER DURABLES & APPAREL 0.1% Jarden Corp., Term Loan B1, 2.033%, 1/24/12 ............................... United States 201,641 195,037 Term Loan B2, 2.033%, 1/24/12 ............................... United States 199,801 192,808 Term Loan B4, 3.533%, 1/26/15 ............................... United States 1,357,054 1,351,287 Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 2.322%, 10/04/11 ...................................................... United States 812,195 805,427 ------------ 2,544,559 ------------ CONSUMER SERVICES 0.3% Education Management LLC, Term Loan C, 2.063%, 6/01/13 ......... United States 2,099,946 1,973,622 (h,j)Kuilima Resort Co. (Turtle Bay), First Lien Term Loan, PIK, 9.00%, 9/30/10 ........................................... United States 10,553,891 3,060,628 Penn National Gaming Inc., Term Loan B, 1.99% - 2.21%, 10/03/12 ...................................................... United States 1,848,577 1,791,676 ------------ 6,825,926 ------------ DIVERSIFIED FINANCIALS 0.0%(a) TD Ameritrade Holding Corp., Term Loan B, 1.75%, 12/31/12 ...... United States 749,644 729,025 ------------ FOOD & STAPLES RETAILING 0.1% (i)SUPERVALU Inc., Term Loan B, 1.504% - 1.531%, 6/02/12 .......... United States 2,186,697 2,093,900 ------------ FOOD, BEVERAGE & TOBACCO 0.3% Constellation Brands Inc., Term Loan B, 1.75%, 6/05/13 ......... United States 1,029,672 992,775 Dean Foods Co., Term Loan B, 1.625% - 1.665%, 4/02/14 .......... United States 1,153,630 1,080,807 (i)Wm. Wrigley Jr. Co., Term Loan B, 6.50%, 10/06/14 .............. United States 5,590,057 5,670,096 ------------ 7,743,678 ------------ HEALTH CARE EQUIPMENT & SERVICES 0.7% (i)Community Health Systems Inc., Delayed Draw Term Loan, 1.00% - 2.493%, 7/25/14 ............. United States 266,890 249,225 Term Loan, 2.493% - 2.622%, 7/25/14 ......................... United States 5,236,663 4,890,064 DaVita Inc., Term Loan B-1, 1.75% - 1.79%, 10/05/12 ............ United States 1,173,304 1,128,653 DJO Finance LLC, Term Loan B, 3.243% - 3.283%, 5/20/14 ......... United States 3,438,595 3,322,542 Fresenius Medical Care Holdings Inc., Term Loan B, 1.658% - 1.667%, 3/31/13 ...................................... Germany 561,799 540,966
118 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ---------------------------------------------------------------------------------------------------------------------------------- (f,s)SENIOR FLOATING RATE INTERESTS (CONTINUED) HEALTH CARE EQUIPMENT & SERVICES (CONTINUED) HCA Inc., Term Loan B-1, 2.533%, 11/18/13 ...................... United States 5,805,874 $ 5,418,414 LifePoint Hospitals Inc., Term Loan B, 2.015%, 4/15/12 ......... United States 1,276,973 1,240,260 ------------ 16,790,124 ------------ INSURANCE 0.1% (i)Conseco Inc., Term Loan, 6.50%, 10/10/13 ....................... United States 1,219,391 1,104,564 ------------ MATERIALS 0.6% (i)Ashland Inc., Term Loan B, 6.65%, 5/13/14 ...................... United States 1,376,764 1,401,432 Celanese U.S. Holdings LLC, Dollar Term Loan, 2.037%, 4/02/14 ....................................................... United States 2,029,600 1,903,673 Georgia-Pacific LLC, (i)Term Loan B, 2.283% - 2.464%, 12/20/12 .................... United States 510,196 492,479 Term Loan C, 3.533% - 3.714%, 12/23/14 .................... United States 1,576,130 1,568,644 Hexion Specialty Chemicals BV, Term Loan C-2, 2.563%, 5/03/13 ....................................................... Netherlands 152,304 121,082 Hexion Specialty Chemicals Inc., Term Loan C-1, 2.563%, 5/03/13 ....................................................... United States 701,123 557,393 Nalco Co., (i)Term Loan, 6.50%, 5/13/16 ................................. United States 1,012,467 1,031,450 Term Loan B, 2.063%, 11/04/10 ............................. United States 38,566 38,581 Novelis Corp., U.S. Term Loan, 2.25% - 2.29%, 7/07/14 .......... United States 555,752 501,875 (i)Rockwood Specialties Group Inc., Term Loan H, 6.00%, 5/15/14 ................................................... United States 5,464,988 5,542,181 ------------ 13,158,790 ------------ MEDIA 0.7% Cinemark USA Inc., Term Loan, 2.00% - 2.21%, 10/05/13 .......... United States 1,239,935 1,179,266 (i)CSC Holdings Inc. (Cablevision), Incremental Term Loan B-2, 2.049% - 2.194%, 3/29/16 ....................................... United States 4,917,710 4,768,925 DIRECTV Holdings LLC, Term Loan B, 1.743%, 4/13/13 ............. United States 295,019 289,566 Discovery Communications Inc., Term Loan B, 2.283%, 5/14/14 .... United States 406,153 395,085 (h)Metro-Goldwyn-Mayer Inc., Term Loan B, 20.50%, 4/08/12 ......... United States 1,439,699 828,547 (i)R.H. Donnelley Inc., Term Loan D-1, 3.75%, 6/30/11 .............................. United States 250,369 219,282 Term Loan D-2, 4.00%, 6/30/11 .............................. United States 596,857 515,428 Regal Cinemas Corp., Term Loan, 4.033%, 10/27/13 ............... United States 1,174,547 1,166,716 (h)Tribune Co., Incremental Term Loan, 5.25%, 5/14/14 ............. United States 2,018,473 911,918 Univision Communications Inc., Initial Term Loan, 2.533%, 9/29/14 ....................................................... United States 554,895 448,672 UPC Financing Partnership, Term Loan N, 1.996%, 12/31/14 ............................. Netherlands 607,212 569,515 (i)Term Loan T, 3.746%, 12/31/16 ............................. Netherlands 3,913,326 3,766,576 ------------ 15,059,496 ------------ PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 0.2% (i)Mylan Inc., Term Loan B, 3.50% - 3.563%, 10/02/14 .............. United States 4,908,999 4,786,274 ------------
Annual Report | 119 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ----------------------------------------------------------------------------------------------------------------------------------- (f,s)SENIOR FLOATING RATE INTERESTS (CONTINUED) RETAILING 0.0%(a) Dollar General Corp., Tranche B-1 Term Loan, 2.993% - 3.031%, 7/07/14 ....................................................... United States 344,167 $ 329,778 ------------ SOFTWARE & SERVICES 0.1% Affiliated Computer Services Inc., Additional Term Loan, 2.243% - 2.244%, 3/20/13 ............ United States 543,598 537,896 Term Loan B, 2.244%, 3/20/13 .............................. United States 16,348 16,176 Lender Processing Services Inc., Term Loan B, 2.743%, 7/02/14 ....................................................... United States 88,303 87,807 SunGard Data Systems Inc., Tranche A U.S. Term Loan, 1.994%, 2/28/14 ....................................................... United States 992,713 934,702 ------------ 1,576,581 ------------ TELECOMMUNICATION SERVICES 0.2% Intelsat Corp. (Panamsat), Incremental Term Loan B-2-A, 2.746%, 1/03/14 .............. United States 25,851 24,482 Incremental Term Loan B-2-B, 2.746%, 1/03/14 .............. United States 25,843 24,474 Incremental Term Loan B-2-C, 2.746%, 1/03/14 .............. United States 25,843 24,474 (i)Tranche B-2-A, 2.746%, 1/03/14 ............................ United States 1,357,903 1,285,976 (i)Tranche B-2-B, 2.746%, 1/03/14 ............................ United States 1,357,489 1,285,584 (i)Tranche B-2-C, 2.746%, 1/03/14 ............................ United States 1,357,488 1,285,584 (i)NTELOS Inc., Term Loan B, 5.75%, 8/07/15 .................. United States 726,306 731,450 Windstream Corp., Tranche B-2 Term Loan, 3.00% - 3.04%, 12/17/15 ...................................................... United States 504,696 490,905 ------------ 5,152,929 ------------ UTILITIES 0.2% NRG Energy Inc., Credit Link, 2.033%, 2/01/13 ................................ United States 1,306,970 1,232,908 Term Loan, 1.993% - 2.033%, 2/01/13 ......................... United States 2,432,633 2,294,783 Texas Competitive Electric Holdings Co. LLC, Term Loan B-2, 5.75%, 10/10/14 .............................................. United States 588,779 457,684 ------------ 3,985,375 ------------ TOTAL SENIOR FLOATING RATE INTERESTS (COST $92,874,561) 92,389,625 ------------ MUNICIPAL BONDS 2.2% Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Refunding, Series F1, 5.00%, 4/01/39 .................... United States 990,000 1,008,325 California State GO, Various Purpose, 6.00%, 4/01/38 ........... United States 15,000,000 15,952,050 Chicago Transit Authority Transfer Tax Receipts Revenue, Series A, 6.899%, 12/01/40 .................................... United States 800,000 874,680 Citizens Property Insurance Corp. Revenue, Senior Secured, High Risk Account, Series A-1, Assured Guaranty, 4.50%, 6/01/14 .... United States 16,000,000 16,927,200 Connecticut State GO, Series B, 5.00%, 4/15/18 ................. United States 650,000 746,883 District of Columbia University Revenue, Georgetown University, Refunding, Series D, BHAC Insured,, 5.50%, 4/01/36 ............ United States 655,000 720,775 Kentucky State Municipal Power Agency Power System Revenue, Prairie State Project, Series A, BHAC Insured,, 5.25%, 9/01/42 ....................................................... United States 1,015,000 1,051,804 Las Vegas Valley Water District GO, Refunding, Series A, NATL Insured, 5.00%, 6/01/26 ....................................... United States 640,000 654,016
120 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED)
FRANKLIN TOTAL RETURN FUND COUNTRY/ORGANIZATION PRINCIPAL AMOUNT(d) VALUE ----------------------------------------------------------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) Lewisville ISD, GO, School Building, 5.00%, 8/15/26............... United States 890,000 $ 956,243 Los Angeles USD, GO, Series I, 5.00%, 7/01/26........................................................ United States 295,000 309,499 7/01/27........................................................ United States 315,000 328,715 MTA Revenue, Series B, Assured Guaranty, 5.25%, 11/15/20.................... United States 705,000 771,763 Transportation, Series A, FSA Insured, 5.50%, 11/15/21......... United States 665,000 747,992 Palomar Pomerado Health GO, Election of 2004, Series A , NATL Insured, 5.125%, 8/01/37......................................... United States 3,395,000 3,256,552 Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn., 8/01/27........................................................ United States 1,150,000 417,738 8/01/30........................................................ United States 1,150,000 333,362 8/01/32........................................................ United States 1,440,000 358,387 8/01/33........................................................ United States 760,000 175,894 Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A, AMBAC Insured, 5.00%, 11/01/27................ United States 960,000 1,015,046 Tulare Sewer Revenue, Building America Bonds, Series B, FSA Insured, 8.75%, 11/15/44......................................... United States 2,895,000 2,898,647 --------------- TOTAL MUNICIPAL BONDS (COST $46,886,604).......................... 49,505,571 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $2,360,832,029)............................................ 2,404,502,532 --------------- SHORT TERM INVESTMENTS 2.8% FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $860,204) 0.0%(a) (t)Israel Treasury Bill, 10/06/10................................ Israel 3,250,000 ILS 853,964 --------------- U.S. GOVERNMENT AND AGENCY SECURITIES (COST $ 12,248,887) 0.6% (t,u) U.S. Treasury Bills, 11/27/09 - 2/25/10................... United States 12,250,000 12,249,840 --------------- TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS (COST $2,373,941,120)........................................... 2,417,606,336 ===============
SHARES ------------------- MONEY MARKET FUNDS (COST $49,259,377) 2.2% (v)Institutional Fiduciary Trust Money Market Portfolio, 0.00%................................................. United States 49,259,377 49,259,377 --------------- TOTAL INVESTMENTS (COST $2,423,200,497) 109.2%.................... 2,466,865,713 OTHER ASSETS, LESS LIABILITIES (9.2)%............................. (208,643,113) --------------- NET ASSETS 100.0%................................................. $ 2,258,222,600 ===============
(a) Rounds to less than 0.1% of net assets. (b) Non-income producing. (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, 2009, the aggregate value of these securities was $181,329,736, representing 8.03% of net assets. (d) The principal amount is stated in U.S. dollars unless otherwise indicated. (e) Perpetual security with no stated maturity date. (f) The coupon rate shown represents the rate at period end. Annual Report | 121 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN TOTAL RETURN FUND (g) 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, 2009, the aggregate value of these securities was $14,018,591, representing 0.62% of net assets. (h) See Note 8 regarding defaulted securities. (i) A portion or all of the security purchased on a when-issued, delayed delivery, or TBA basis. See Note 1(d). (j) Income may be received in additional securities and/or cash. (k) See Note 11 regarding other considerations. (l) Security has been deemed illiquid because it may not be able to be sold within seven days. At October 31, 2009, the value of this security was $25,299, representing less than 0.01% of net assets. (m) A supranational organization is an entity formed by two or more central governments through international treaties. (n) The principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date. (o) Principal amount is stated in 100 Mexican Peso Units. (p) Principal amount is stated in 1,000 Brazilian Real Units. (q) Redemption price at maturity is adjusted for inflation. See Note 1(i). (r) Principal amount of security is adjusted for inflation. See Note 1(i). (s) See Note 1(g) regarding senior floating rate interests. (t) The security is traded on a discount basis with no stated coupon rate. (u) Security or a portion of the security has been segregated as collateral for open futures, forward or swap contracts. At October 31, 2009, the aggregate value of these securities and/or cash pledged amounted to $11,609,375. (v) See Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. At October 31, 2009, the fund had the following financial futures contracts outstanding. See Note 1(e). FINANCIAL FUTURES CONTRACTS
NUMBER OF UNREALIZED UNREALIZED DESCRIPTION TYPE CONTRACTS NOTIONAL AMOUNT DELIVERY DATE APPRECIATION DEPRECIATION ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bond ............................... Long 100 $ 10,000,000 12/21/09 $ -- $ (259,625) U.S. Treasury 2 Year Note ........................ Long 585 117,000,000 12/31/09 1,067,991 -- U.S. Treasury 5 Year Note ........................ Long 980 98,000,000 12/31/09 1,743,175 -- U.S. Treasury 10 Year Note ....................... Short 875 87,500,000 12/21/09 -- (1,725,404) ---------------------------- Unrealized appreciation (depreciation) ......................................................... 2,811,166 (1,985,029) ---------------------------- Net unrealized appreciation (depreciation) .................................................. $ 826,137 =============
At October 31, 2009, the fund had the following forward exchange contracts outstanding. See Note 1(e). FORWARD EXCHANGE CONTRACTS
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION -------------------------------------------------------------------------------------------------------------------------------- New Zealand Dollar .......... CITI Buy 919,636 681,726 11/30/09 $ -- $ (24,093) New Zealand Dollar .......... CITI Sell 919,636 565,244 11/30/09 -- (92,389) New Zealand Dollar .......... DBAB Buy 1,615,798 1,202,865 11/30/09 -- (47,406) New Zealand Dollar .......... DBAB Sell 1,615,798 994,281 11/30/09 -- (161,179) New Zealand Dollar .......... UBSW Buy 1,625,591 1,203,344 11/30/09 -- (40,880) New Zealand Dollar .......... UBSW Sell 1,625,591 997,544 11/30/09 -- (164,919) Mexican Peso ................ CITI Sell 8,714,000 643,218 12/01/09 -- (13,850)
122 | Annual Report Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------------------------------------- New Zealand Dollar ........ BZWS Buy 2,694,930 1,998,021 12/02/09 $ -- $ (71,173) New Zealand Dollar ........ BZWS Sell 2,694,930 1,665,467 12/02/09 -- (261,381) New Zealand Dollar ........ DBAB Buy 696,949 518,760 12/02/09 -- (20,448) New Zealand Dollar ........ DBAB Sell 696,949 423,933 12/02/09 -- (74,378) New Zealand Dollar ........ FBCO Buy 229,994 170,472 12/02/09 -- (6,028) New Zealand Dollar ........ FBCO Sell 229,994 142,244 12/02/09 -- (22,199) Mexican Peso .............. UBSW Sell 122,211,000 9,000,000 12/31/09 -- (176,359) Euro ...................... UBSW Buy 8,223,000 12,233,933 1/11/10 -- (139,409) Euro ...................... UBSW Sell 8,223,000 11,384,579 1/11/10 -- (709,945) Euro ...................... BZWS Sell 6,429,000 8,996,421 1/13/10 -- (459,387) Philippine Peso ........... JPHQ Buy 88,100,000 1,889,492 1/13/10 -- (48,677) Euro ...................... DBAB Buy 1,086,000 1,617,380 1/15/10 -- (20,097) Euro ...................... DBAB Sell 1,086,000 1,517,001 1/15/10 -- (80,282) Euro ...................... CITI Sell 5,184,200 7,402,104 1/27/10 -- (222,446) Mexican Peso .............. CITI Sell 8,798,000 645,393 1/29/10 -- (12,475) New Zealand Dollar ........ UBSW Buy 1,087,848 801,744 1/29/10 -- (27,289) New Zealand Dollar ........ UBSW Sell 1,087,848 708,080 1/29/10 -- (66,375) Singapore Dollar .......... JPHQ Buy 21,834,100 15,697,822 2/08/10 -- (131,625) Singapore Dollar .......... JPHQ Sell 21,834,100 14,500,000 2/08/10 -- (1,066,197) Malaysian Ringgit ......... DBAB Buy 21,721,000 5,946,886 2/17/10 390,489 -- Singapore Dollar .......... UBSW Buy 16,171,000 11,652,255 3/23/10 -- (125,421) Singapore Dollar .......... UBSW Sell 16,171,000 10,646,871 3/23/10 -- (879,964) Indian Rupee .............. DBAB Buy 16,152,000 312,152 4/09/10 27,496 -- Indian Rupee .............. DBAB Buy 34,636,000 668,907 4/12/10 59,227 -- Indian Rupee .............. JPHQ Buy 23,264,000 445,927 4/13/10 43,095 -- Indian Rupee .............. JPHQ Buy 22,836,000 445,929 4/15/10 34,009 -- Indian Rupee .............. DBAB Buy 8,029,000 156,511 4/19/10 12,171 -- Indian Rupee .............. JPHQ Buy 11,408,000 223,599 4/19/10 16,073 -- Chilean Peso .............. CITI Buy 711,116,000 1,213,177 4/26/10 138,668 -- Euro ...................... UBSW Sell 11,680,000 15,190,074 4/26/10 -- (1,978,870) Indian Rupee .............. DBAB Buy 16,221,000 313,017 4/26/10 27,554 -- Chilean Peso .............. CITI Buy 564,340,000 960,988 4/27/10 111,868 -- Chilean Peso .............. JPHQ Buy 562,321,000 960,986 4/27/10 108,031 -- Indian Rupee .............. JPHQ Buy 2,314,000 44,715 4/27/10 3,865 -- Chilean Peso .............. CITI Buy 906,403,000 1,537,579 4/28/10 185,620 -- Chilean Peso .............. UBSW Buy 113,493,000 192,198 4/28/10 23,568 -- Indian Rupee .............. JPHQ Buy 11,481,000 223,583 4/28/10 17,424 -- Indian Rupee .............. JPHQ Buy 11,492,000 223,580 4/30/10 17,620 -- Indian Rupee .............. DBAB Buy 21,978,000 447,809 6/01/10 12,292 -- Indian Rupee .............. HSBC Buy 652,000 13,443 6/02/10 205 -- Indian Rupee .............. HSBC Buy 3,224,000 67,167 6/03/10 316 -- Indian Rupee .............. HSBC Buy 21,522,000 447,815 6/04/10 2,631 -- Indian Rupee .............. DBAB Buy 10,761,000 223,908 6/07/10 1,261 -- Indian Rupee .............. DBAB Buy 5,428,000 112,614 6/08/10 955 -- Indian Rupee .............. HSBC Buy 4,321,000 89,554 6/08/10 853 --
Annual Report | 123 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION -------------------------------------------------------------------------------------------------------------------------- Indian Rupee .............. DBAB Buy 4,383,000 90,093 6/10/10 $ 1,598 $ -- Indian Rupee .............. BZWS Buy 6,554,000 135,134 6/11/10 1,961 -- Indian Rupee .............. HSBC Buy 4,392,000 90,092 6/11/10 1,779 -- Indian Rupee .............. DBAB Buy 10,971,000 225,231 6/16/10 4,166 -- Indian Rupee .............. DBAB Buy 9,993,000 202,698 6/21/10 6,166 -- New Zealand Dollar ........ DBAB Buy 20,030,204 14,656,100 7/06/10 -- (573,182) New Zealand Dollar ........ DBAB Sell 20,030,204 12,600,000 7/06/10 -- (1,482,919) New Zealand Dollar ........ DBAB Buy 2,698,125 1,969,631 7/30/10 -- (76,598) New Zealand Dollar ........ DBAB Sell 2,698,125 1,736,243 7/30/10 -- (156,790) New Zealand Dollar ........ BZWS Buy 1,052,185 764,518 8/03/10 -- (26,603) New Zealand Dollar ........ BZWS Sell 1,052,185 675,503 8/03/10 -- (62,412) New Zealand Dollar ........ DBAB Buy 2,687,860 1,961,331 8/03/10 -- (76,290) New Zealand Dollar ........ DBAB Sell 2,687,860 1,726,547 8/03/10 -- (158,494) New Zealand Dollar ........ BZWS Buy 530,156 385,174 8/04/10 -- (13,406) New Zealand Dollar ........ BZWS Sell 530,156 340,360 8/04/10 -- (31,408) New Zealand Dollar ........ DBAB Buy 1,064,903 777,060 8/04/10 -- (30,304) New Zealand Dollar ........ DBAB Sell 1,064,903 680,367 8/04/10 -- (66,390) New Zealand Dollar ........ CITI Buy 2,669,265 1,938,420 8/05/10 -- (66,812) New Zealand Dollar ........ CITI Sell 2,669,265 1,743,097 8/05/10 -- (128,511) New Zealand Dollar ........ DBAB Buy 791,840 577,726 8/05/10 -- (22,512) New Zealand Dollar ........ DBAB Sell 791,840 516,121 8/05/10 -- (39,093) New Zealand Dollar ........ HSBC Buy 3,277,000 2,389,588 8/05/10 -- (91,855) New Zealand Dollar ........ HSBC Sell 3,277,000 2,119,564 8/05/10 -- (178,170) New Zealand Dollar ........ CITI Buy 1,045,341 759,022 8/06/10 -- (26,137) New Zealand Dollar ........ CITI Sell 1,045,341 683,146 8/06/10 -- (49,739) New Zealand Dollar ........ FBCO Buy 521,704 379,018 8/06/10 -- (13,253) New Zealand Dollar ........ FBCO Sell 521,704 339,759 8/06/10 -- (26,005) New Zealand Dollar ........ CITI Buy 1,031,453 748,732 8/09/10 -- (25,811) New Zealand Dollar ........ CITI Sell 1,031,453 678,139 8/09/10 -- (44,782) New Zealand Dollar ........ DBAB Buy 1,036,107 755,633 8/09/10 -- (29,450) New Zealand Dollar ........ DBAB Sell 1,036,107 681,551 8/09/10 -- (44,631) New Zealand Dollar ........ FBCO Sell 1,019,688 671,923 8/09/10 -- (42,751) New Zealand Dollar ........ FBCO Sell 1,021,476 678,393 8/11/10 -- (37,385) New Zealand Dollar ........ DBAB Sell 2,171,853 1,415,259 8/12/10 -- (106,463) New Zealand Dollar ........ DBAB Sell 1,142,000 741,272 8/13/10 -- (58,793) New Zealand Dollar ........ DBAB Sell 1,205,000 795,421 8/16/10 -- (48,516) Israeli Shekel ............ CITI Buy 2,375,000 626,748 8/17/10 6,474 -- Israeli Shekel ............ CITI Buy 2,376,000 625,964 8/19/10 7,523 -- Israeli Shekel ............ DBAB Buy 238,000 62,698 8/19/10 758 -- Israeli Shekel ............ CITI Buy 911,600 238,508 8/20/10 4,542 -- Israeli Shekel ............ CITI Buy 1,555,600 407,951 8/23/10 6,800 -- New Zealand Dollar ........ FBCO Sell 937,138 617,930 8/24/10 -- (37,857) New Zealand Dollar ........ DBAB Sell 933,000 623,711 8/27/10 -- (28,976) Euro ...................... BZWS Sell 101,400 149,296 9/20/10 417 -- Euro ...................... UBSW Buy 661,411 982,281 9/23/10 -- (11,197)
124 | Annual Report FRANKLIN INVESTORS SECURITIES TRUST STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN TOTAL RETURN FUND FORWARD EXCHANGE CONTRACTS (CONTINUED)
SETTLEMENT UNREALIZED UNREALIZED CURRENCY COUNTERPARTY TYPE QUANTITY CONTRACT AMOUNT(a) DATE APPRECIATION DEPRECIATION --------------------------------------------------------------------------------------------------------------------------- Euro ...................... UBSW Sell 661,411 969,781 9/23/10 $ -- $ (1,304) Euro ...................... JPHQ Sell 290,999 430,853 9/24/10 3,611 -- Malaysian Ringgit ......... JPHQ Buy 12,560,000 2,463,760 EUR 9/28/10 25,361 -- Euro ...................... DBAB Sell 19,250,000 28,161,403 10/04/10 -- (98,894) Philippine Peso ........... DBAB Buy 44,751,000 927,559 10/04/10 -- (8,554) Philippine Peso ........... HSBC Buy 35,897,000 742,057 10/04/10 -- (4,877) Philippine Peso ........... DBAB Buy 53,504,000 1,113,067 10/05/10 -- (14,373) Philippine Peso ........... HSBC Buy 53,517,000 1,113,067 10/05/10 -- (14,106) Indian Rupee .............. DBAB Buy 622,168,250 12,815,000 10/06/10 80,013 -- Philippine Peso ........... JPHQ Buy 14,135,000 296,829 10/06/10 -- (6,586) Philippine Peso ........... DBAB Buy 43,922,000 927,564 10/07/10 -- (25,738) Philippine Peso ........... CITI Buy 17,580,000 371,011 10/08/10 -- (10,072) Philippine Peso ........... DBAB Buy 35,146,000 742,040 10/08/10 -- (20,448) Philippine Peso ........... HSBC Buy 35,213,000 742,053 10/08/10 -- (19,085) Philippine Peso ........... JPHQ Buy 17,535,000 371,025 10/08/10 -- (11,009) Philippine Peso ........... DBAB Buy 10,465,000 222,612 10/12/10 -- (7,802) Philippine Peso ........... HSBC Buy 17,449,000 371,019 10/13/10 -- (12,871) Philippine Peso ........... JPHQ Buy 39,005,000 833,446 10/13/10 -- (32,852) Chinese Yuan .............. HSBC Buy 2,487,166 252,568 EUR 10/15/10 -- (4,457) Chinese Yuan .............. HSBC Buy 3,007,421 456,791 10/25/10 -- (13,709) Chinese Yuan .............. HSBC Buy 5,097,153 772,039 10/26/10 -- (21,049) Chinese Yuan .............. HSBC Buy 3,049,528 460,967 10/27/10 -- (11,648) Japanese Yen .............. DBAB Sell 879,763,200 9,600,000 10/28/10 -- (225,706) Euro ...................... DBAB Sell 14,185,000 20,973,941 10/29/10 153,734 -- ---------------------------- Unrealized appreciation (depreciation) .................................................. 1,540,194 (11,623,776) ---------------------------- Net unrealized appreciation (depreciation) .......................................... $ (10,083,582) =============
(a) In U.S. dollars unless otherwise indicated. At October 31, 2009, the fund had the following credit default swap contracts outstanding. See Note 1(e). CREDIT DEFAULT SWAP CONTRACTS
PERIODIC PAYMENT EXPIRATION UNREALIZED UNREALIZED DESCRIPTION COUNTERPARTY(a) NOTIONAL AMOUNT(b) RATE DATE APPRECIATION DEPRECIATION RATING(c) ----------------------------------------------------------------------------------------------------------------------------------- CONTRACTS TO BUY PROTECTION SINGLE NAME Aetna Inc. ......................... JPHQ $ 2,850,000 0.58% 3/20/13 $ 29,268 $ -- Aetna Inc. ......................... MLCO 5,000,000 0.62% 3/20/13 44,832 -- Centex Corp. ....................... GSCO 3,750,000 4.00% 3/20/12 -- (306,186) Centex Corp. ....................... GSCO 5,000,000 4.70% 9/20/12 -- (583,698) Clear Channel Communications Inc. .. CITI 8,500,000 5.00% 3/20/11 96,699 -- Dish Network Corp. ................. FBCO 4,500,000 1.00% 12/20/11 -- (29,472) D.R. Horton Inc. ................... FBCO 4,000,000 1.00% 6/20/12 -- (103,389)
Annual Report | 125 Franklin Investors Securities Trust STATEMENT OF INVESTMENTS, OCTOBER 31, 2009 (CONTINUED) FRANKLIN TOTAL RETURN FUND CREDIT DEFAULT SWAP CONTRACTS (CONTINUED)
PERIODIC PAYMENT EXPIRATION UNREALIZED UNREALIZED DESCRIPTION COUNTERPARTY(a) NOTIONAL AMOUNT(b) RATE DATE APPRECIATION DEPRECIATION RATING(c) ----------------------------------------------------------------------------------------------------------------------------------- CONTRACTS TO BUY PROTECTION (CONTINUED) SINGLE NAME (CONTINUED) Goodyear Tire & Rubber ........... FBCO $ 10,000,000 5.00% 9/20/11 $ 207,237 $ -- Macy's Retail Holdings Inc. ...... MSCO 5,000,000 5.00% 6/20/11 -- (74,480) Macy's Retail Holdings Inc. ...... FBCO 3,000,000 5.00% 9/20/11 -- (91,061) Macy's Retail Holdings Inc. ...... MSCO 7,000,000 5.00% 9/20/11 62,222 -- Macy's Retail Holdings Inc. ...... BOFA 5,000,000 5.00% 3/20/12 -- (92,820) Macy's Retail Holdings Inc. ...... FBCO 4,000,000 5.00% 3/20/12 -- (146,562) Macy's Retail Holdings Inc. ...... FBCO 5,000,000 5.00% 3/20/12 -- (91,317) Masco Corp. ...................... FBCO 15,000,000 5.00% 9/20/13 179,536 -- Meritage Homes Corp. ............. FBCO 5,000,000 5.00% 3/20/15 28,130 -- Ryland Group Inc. ................ FBCO 7,000,000 5.00% 6/20/12 17,734 -- Ryland Group Inc. ................ FBCO 10,000,000 5.00% 6/20/13 62,117 -- Standard Pacific Corp. ........... FBCO 4,000,000 5.00% 3/20/13 -- (437,079) Teco Finance Inc. ................ FBCO 7,315,000 2.80% 6/20/11 -- (209,913) Textron Financial Corp. .......... MLCO 16,750,000 0.27% 12/20/10 387,344 -- CONTRACTS TO SELL PROTECTION(d) SINGLE NAME UnitedHealth Group Inc. .......... JPHQ 2,850,000 0.85% 3/20/13 -- (94,023) A- UnitedHealth Group Inc. .......... MLCO 10,000,000 0.88% 3/20/13 -- (320,399) A- TRADED INDEX Non Investment LCDX.NA.13 ....................... FBCO 14,000,000 5.00% 12/20/14 -- (24,910) Grade -------------------------- Unrealized appreciation (depreciation) .......................................................................... 1,115,119 (2,605,309) -------------------------- Net unrealized appreciation (depreciation) ...................................................................... $(1,490,190) ===========
(a) Positions are generally not collateralized if the unrealized appreciation (depreciation) is under $250,000. Collateral requirements may be net of current positions at the individual counterparty for the fund. The table below summarizes the cash and/or securities held as collateral for each applicable counterparty at year end:
COUNTERPARTY COLLATERAL POSTED (RECEIVED) --------------------------------------------------------------------------------- BOFA $ 309,999 CITI (2,390,000) FBCO 4,858,985 GSCO 695,798 JPHQ 52,920 MLCO (99,000) MSCO 579,998 ----------------- Total collateral for credit default swaps $ 4,008,700 =================
(b) In U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts. (c) Based on Standard and Poor's (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings are based on mapping into equivalent ratings from external vendors. (d) The fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps, and failure to pay or bankruptcy for traded index swaps. See Abbreviations on page 154. 126 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES October 31, 2009
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...................... $ 1,918,935,303 $ 1,270,403,490 $ 139,274,556 $ 2,373,941,120 Cost - Sweep Money Fund (Note 7)................. 101,980,417 155,407,971 13,125,350 49,259,377 Cost - Repurchase agreements..................... 65,525,525 -- -- -- ------------------------------------------------------------------------ Total cost of investments........................ $ 2,086,441,245 $ 1,425,811,461 $ 152,399,906 $ 2,423,200,497 ------------------------------------------------------------------------ Value - Unaffiliated issuers..................... $ 1,931,567,816 $ 1,252,512,432 $ 143,031,929 $ 2,417,606,336 Value - Sweep Money Fund (Note 7)................ 101,980,417 155,407,971 13,125,350 49,259,377 Value - Repurchase agreements.................... 65,525,525 -- -- -- ------------------------------------------------------------------------ Total value of investments....................... 2,099,073,758 1,407,920,403 156,157,279 2,466,865,713 Cash............................................... -- 2,268,551 1,188 81,260 Cash on deposit from brokers....................... -- -- 20,000 2,489,000 Foreign currency, at value (cost $ --, $ --, $ 51,130 and $ 114,435).......................... -- -- 52,603 112,486 Receivables: Investment securities sold....................... 6,540,668 28,968,092 6,745,887 115,281,377 Capital shares sold.............................. 30,771,971 5,174,407 1,755,299 12,339,718 Interest......................................... 8,088,788 3,497,558 1,353,972 23,731,061 Variation margin................................. -- -- -- 165,863 Swaps (premiums paid $ --, $ --, $ 348,988 and $ 3,317,721)..................................... -- -- 351,284 3,642,204 Unrealized appreciation on forward exchange contracts........................................ -- -- 132,720 1,540,194 Unrealized appreciation on swap contracts.......... -- -- 67,230 1,115,119 Other assets....................................... 458 544 22 49,495 ------------------------------------------------------------------------ Total assets................................ 2,144,475,643 1,447,829,555 166,637,484 2,627,413,490 ------------------------------------------------------------------------ Liabilities: Payables: Investment securities purchased.................. 76,429,670 74,018,685 10,273,215 339,105,324 Capital shares redeemed.......................... 6,509,814 4,272,737 435,644 3,986,718 Affiliates....................................... 1,471,125 1,033,499 81,552 969,553 Allocator Funds (Note10)......................... -- -- -- 29,638 Distributions to shareholders.................... 704,341 886,901 53,701 1,245,281 Variation margin................................. -- -- 43,266 -- Swaps (premiums received $--, $--, $ 479,908 and $ 6,068,317)..................................... -- -- 499,052 6,472,140 Due to brokers..................................... -- -- 20,000 2,489,000 Unrealized depreciation on forward exchange contracts........................................ -- -- 517,277 11,623,776 Unrealized depreciation on swap contracts.......... -- -- 121,672 2,605,309 Accrued expenses and other liabilities............. 190,330 214,143 25,989 664,151 ------------------------------------------------------------------------ Total liabilities........................... 85,305,280 80,425,965 12,071,368 369,190,890 ------------------------------------------------------------------------ Net assets, at value........................ $ 2,059,170,363 $ 1,367,403,590 $ 154,566,116 $ 2,258,222,600 ========================================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 127 Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) October 31, 2009
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 ....................................... $ 2,063,132,781 $ 1,984,020,127 $ 150,486,870 $ 2,259,339,059 Undistributed net investment income ................... 149,899 193,858 340,926 13,099,344 Net unrealized appreciation (depreciation) ............ 12,632,513 (17,891,058) 3,321,039 32,930,136 Accumulated net realized gain (loss) .................. (16,744,830) (598,919,337) 417,281 (47,145,939) -------------------------------------------------------------------- Net assets, at value ........................... $ 2,059,170,363 $ 1,367,403,590 $ 154,566,116 $ 2,258,222,600 -------------------------------------------------------------------- CLASS A: Net assets, at value .................................. $ 1,375,234,402 $ 955,943,640 $ 152,673,393 $ 1,244,156,715 -------------------------------------------------------------------- Shares outstanding .................................... 153,419,160 109,494,974 14,983,255 128,896,439 -------------------------------------------------------------------- Net asset value per share (a) ......................... $ 8.96 $ 8.73 $ 10.19 $ 9.65 -------------------------------------------------------------------- Maximum offering price per share (net asset value per share / 97.75%, 97.75%, 97.75% and 95.75%, respectively) .............................. $ 9.17 $ 8.93 $ 10.42 $ 10.08 -------------------------------------------------------------------- CLASS B: Net assets, at value .................................. -- $ 14,747,058 -- $ 22,491,634 -------------------------------------------------------------------- Shares outstanding .................................... -- 1,690,775 -- 2,331,134 -------------------------------------------------------------------- Net asset value and maximum offering price per share (a) ...................................... -- $ 8.72 -- $ 9.65 -------------------------------------------------------------------- CLASS C: Net assets, at value .................................. $ 596,640,137 $ 209,896,790 -- $ 237,595,629 -------------------------------------------------------------------- Shares outstanding .................................... 66,605,470 24,038,098 -- 24,633,493 -------------------------------------------------------------------- Net asset value and maximum offering price per share(a) ....................................... $ 8.96 $ 8.73 -- $ 9.65 -------------------------------------------------------------------- CLASS R: Net assets, at value .................................. -- -- -- $ 85,023,657 -------------------------------------------------------------------- Shares outstanding .................................... -- -- -- 8,809,964 -------------------------------------------------------------------- Net asset value and maximum offering price per share .......................................... -- -- -- $ 9.65 -------------------------------------------------------------------- ADVISOR CLASS: Net assets, at value .................................. $ 87,295,824 $ 186,816,102 $ 1,892,723 $ 668,954,965 -------------------------------------------------------------------- Shares outstanding .................................... 9,730,603 21,388,199 185,616 69,208,694 -------------------------------------------------------------------- Net asset value and maximum offering price per share .......................................... $ 8.97 $ 8.73 $ 10.20 $ 9.67 --------------------------------------------------------------------
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. 128 | The accompanying notes are an integral part of these financial statements. | Annual Report Franklin Investors Securities Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the year ended October 31, 2009
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........................................ $ -- $ -- $ -- $ 62,785 Sweep Money Fund (Note 7)................................... 85,178 336,185 9,366 126,518 Interest....................................................... 41,792,278 53,351,425 3,412,895 94,707,606 ----------------------------------------------------------- Total investment income.............................. 41,877,456 53,687,610 3,422,261 94,896,909 ----------------------------------------------------------- Expenses: Management fees (Note 3a)...................................... 4,813,211 3,822,642 343,896 5,235,013 Administrative fees (Note 3b).................................. 1,248,768 2,322,802 173,127 3,385,176 Distribution fees: (Note 3c) Class A..................................................... 2,301,627 2,056,182 214,964 2,390,683 Class B..................................................... -- 154,843 -- 140,048 Class C..................................................... 1,932,815 1,201,143 -- 1,038,971 Class R..................................................... -- -- -- 374,674 Transfer agent fees (Note 3e).................................. 1,073,661 1,436,788 83,500 3,242,465 Special servicing agreement fees (Note 10)..................... -- -- -- 169,814 Custodian fees (Note 4)........................................ 19,997 13,799 3,526 86,900 Reports to shareholders........................................ 167,503 184,404 13,934 276,469 Registration and filing fees................................... 247,621 157,102 37,708 147,987 Professional fees.............................................. 53,447 167,820 68,455 124,359 Trustees' fees and expenses.................................... 33,363 42,895 2,183 55,836 Other.......................................................... 56,132 73,756 33,957 124,765 ----------------------------------------------------------- Total expenses....................................... 11,948,145 11,634,176 975,250 16,793,160 ----------------------------------------------------------- Expense reductions (Note 4).......................... (1,450) (10,546) (210) (7,908) Expenses waived/paid by affiliates (Note 3f)......... -- -- (195,766) (2,669,716) ----------------------------------------------------------- Net expenses...................................... 11,946,695 11,623,630 779,274 14,115,536 ----------------------------------------------------------- Net investment income......................... 29,930,761 42,063,980 2,642,987 80,781,373 ----------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments................................................. -- (114,296,904) 1,123,641 17,056,580 Foreign currency transactions............................... -- -- 74,455 18,480,063 Futures contracts........................................... -- -- 116,440 7,895,101 Swap contracts.............................................. -- 87,949 (9,146) 690,879 ----------------------------------------------------------- Net realized gain (loss)...................... -- (114,208,955) 1,305,390 44,122,623 ----------------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments................................................. 15,129,003 270,394,269 4,853,826 225,042,103 Translation of other assets and liabilities denominated in foreign currencies...................................... -- -- (642,537) (33,797,419) ----------------------------------------------------------- Net change in unrealized appreciation (depreciation)............................. 15,129,003 270,394,269 4,211,289 191,244,684 ----------------------------------------------------------- Net realized and unrealized gain (loss)............................ 15,129,003 156,185,314 5,516,679 235,367,307 ----------------------------------------------------------- Net increase (decrease) in net assets resulting from operations................................................ $ 45,059,764 $ 198,249,294 $ 8,159,666 $316,148,680 ===========================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 129 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, 2009 2008 2009 2008 ----------------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ........................... $ 29,930,761 $ 16,382,281 $ 42,063,980 $ 77,561,949 Net realized gain (loss) from investments and swap contracts .......................... -- 5,333 (114,208,955) (91,576,104) Net change in unrealized appreciation (depreciation) on investments ............... 15,129,003 282,195 270,394,269 (248,029,157) ----------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............. 45,059,764 16,669,809 198,249,294 (262,043,312) ----------------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ..................................... (26,172,009) (15,724,528) (30,411,405) (57,170,201) Class B ..................................... -- -- (470,076) (1,293,184) Class C ..................................... (7,108,205) (2,143,383) (6,116,252) (13,858,643) Advisor Class ............................... (897,961) (11,921) (5,261,032) (5,141,861) ----------------------------------------------------------------------- Total distributions to shareholders ................ (34,178,175) (17,879,832) (42,258,765) (77,463,889) ----------------------------------------------------------------------- Capital share transactions: (Note 2) Class A ..................................... 779,962,601 254,207,122 50,019,305 (332,371,457) Class B ..................................... -- -- (4,711,706) (16,146,106) Class C ..................................... 462,179,098 95,822,320 (2,250,763) (132,930,220) Advisor Class ............................... 83,073,721 4,127,226 74,420,345 31,134,948 ----------------------------------------------------------------------- Total capital share transactions ................... 1,325,215,420 354,156,668 117,477,181 (450,312,835) ----------------------------------------------------------------------- Redemption fees .................................... -- 18,455 -- 10,393 ----------------------------------------------------------------------- Net increase (decrease) in net assets .... 1,336,097,009 352,965,100 273,467,710 (789,809,643) Net assets: Beginning of year .................................. 723,073,354 370,108,254 1,093,935,880 1,883,745,523 ----------------------------------------------------------------------- End of year ........................................ $ 2,059,170,363 $ 723,073,354 $ 1,367,403,590 $ 1,093,935,880 ----------------------------------------------------------------------- Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of year ..................................... $ 149,899 $ (931) $ 193,858 $ 295,732 =======================================================================
130 | The accompanying notes are an integral part of these financial statements. | Annual Report 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, 2009 2008 2009 2008 --------------------------------------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................... $ 2,642,987 $ 880,098 $ 80,781,373 $ 62,129,737 Net realized gain (loss) from investments, foreign currency transactions, futures contracts and swap contracts ......................................... 1,305,390 (93,587) 44,122,623 (26,241,743) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .......... 4,211,289 (1,076,736) 191,244,684 (167,280,344) --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations .................................. 8,159,666 (290,225) 316,148,680 (131,392,350) --------------------------------------------------------------- Distributions to shareholders from: Net investment income: Class A ................................................ (2,848,608) (927,764) (62,015,836) (40,221,963) Class B ................................................ -- -- (1,362,970) (976,601) Class C ................................................ -- -- (9,144,126) (4,949,577) Class R ................................................ -- -- (4,895,622) (3,334,074) Advisor Class .......................................... (19,838) (23,907) (32,020,159) (16,507,475) --------------------------------------------------------------- Total distributions to shareholders ........................... (2,868,446) (951,671) (109,438,713) (65,989,690) --------------------------------------------------------------- Capital share transactions: (Note 2) Class A ................................................ 112,240,477 19,665,308 346,871,524 215,568,068 Class B ................................................ -- -- 837,046 1,718,251 Class C ................................................ -- -- 113,752,969 35,032,011 Class R ................................................ -- -- 7,444,788 21,223,255 Advisor Class .......................................... 1,778,258 86,659 265,284,034 113,820,897 --------------------------------------------------------------- Total capital share transactions .............................. 114,018,735 19,751,967 734,190,361 387,362,482 --------------------------------------------------------------- Redemption fees ............................................... -- 2,021 -- 17,114 --------------------------------------------------------------- Net increase (decrease) in net assets ........ 119,309,955 18,512,092 940,900,328 189,997,556 Net assets: Beginning of year ............................................. 35,256,161 16,744,069 1,317,322,272 1,127,324,716 --------------------------------------------------------------- End of year ................................................... $154,566,116 $ 35,256,161 $2,258,222,600 $ 1,317,322,272 =============================================================== Undistributed net investment income included in net assets: End of year ................................................ $ 340,926 $ 97,664 $ 13,099,344 $ 5,558,472 ===============================================================
Annual Report | The accompanying notes are an integral part of these financial statements. | 131 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, four of which are included in this report (Funds). The financial statements of the remaining funds in the Trust are presented separately. The classes of shares offered within each of the Funds are indicated below. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A & 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 Equity and other 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. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value. Corporate debt securities, government securities, municipal securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Funds 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 Funds' 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. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined. 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 Funds may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information 132 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) a. SECURITY VALUATION (CONTINUED) with respect to bond and note transactions, to assist in determining a current market value for each security. The Funds' 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. The Funds have 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 based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, 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 Funds' 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 Funds' 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. Annual Report | 133 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 30, 2009. The joint repurchase agreement is valued at cost. d. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, OR TBA BASIS The Funds may purchase securities on a when-issued, delayed delivery, and 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. DERIVATIVE FINANCIAL INSTRUMENTS Certain funds may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which 134 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Derivatives are marked to market daily based upon quotations from market makers or the Fund's independent pricing services and the Fund's net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations. Certain funds enter into financial futures contracts generally in order to manage interest rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell a security for a specific price on a future date. Required initial margin deposits of cash or securities are pledged or received by the Fund. Subsequent payments, known as variation margin, are made or received by the funds, depending on fluctuations in the value of the underlying security. Such variation margin is accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Certain funds enter into forward exchange contracts generally in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral. Certain funds enter into credit default swap contracts generally in order to manage or gain exposure to credit risk. A credit default swap is an agreement between the funds and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract (or other agreed upon amount) from the seller. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Payments received or paid to initiate a credit default swap contract are recorded as a liability or asset, and amortized over the term of the contract as a realized gain or loss. Pursuant to the terms of the credit default swap contract, cash or securities may be required to be deposited as collateral. Any cash received may be invested according to the funds investment objectives. See Note 9 regarding other derivative information. Annual Report | 135 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. MORTGAGE DOLLAR ROLLS The Funds may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the 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 invest 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. g. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the funds invest are generally readily marketable, but may be subject to some restrictions on resale. h. 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, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. i. 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 136 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) i. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONTINUED) 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, not including 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. j. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. k. REDEMPTION FEES A short term trading redemption fee 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. l. 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, Annual Report | 137 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) l. GUARANTEES AND INDEMNIFICATIONS (CONTINUED) 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, 2009, 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, 2009 Shares sold ......................................... 153,658,811 $1,373,899,677 43,871,800 $ 349,936,925 Shares issued in reinvestment of distributions ...... 2,396,268 21,436,555 2,799,741 22,053,766 Shares redeemed ..................................... (68,837,915) (615,373,631) (41,105,493) (321,971,386) ----------------------------------------------------------------- Net increase (decrease) ............................. 87,217,164 $ 779,962,601 5,566,048 $ 50,019,305 ================================================================= 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) ================================================================= CLASS B SHARES: Year ended October 31, 2009 Shares sold ......................................... 340,990 $ 2,692,011 Shares issued in reinvestment of distributions ...... 47,255 366,600 Shares redeemed ..................................... (980,351) (7,770,317) ------------------------------ Net increase (decrease) ............................. (592,106) $ (4,711,706) ============================== 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) ==============================
138 | Annual Report 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 C SHARES: Year ended October 31, 2009 Shares sold ......................................... 63,926,720 $ 571,646,893 7,379,125 $ 59,104,680 Shares issued in reinvestment of distributions ...... 628,661 5,623,492 572,753 4,487,978 Shares redeemed ..................................... (12,882,462) (115,091,287) (8,472,107) (65,843,421) ---------------------------------------------------------------- Net increase (decrease) ............................. 51,672,919 $ 462,179,098 (520,229) $ (2,250,763) ================================================================ 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) ================================================================ ADVISOR CLASS SHARES: Year ended October 31, 2009 Shares sold ......................................... 11,341,421 $ 101,662,527 13,995,010 $ 112,378,288 Shares issued in reinvestment of distributions....... 54,593 489,659 574,069 4,546,779 Shares redeemed ..................................... (2,130,256) (19,078,465) (5,166,287) (42,504,722) ---------------------------------------------------------------- Net increase (decrease).............................. 9,265,758 $ 83,073,721 9,402,792 $ 74,420,345 ================================================================ 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 ================================================================
(a) For the period May 15, 2008 (effective date) to October 31, 2008 for the Franklin Adjustable U.S. Government Securities Fund.
FRANKLIN LOW DURATION TOTAL RETURN FUND FRANKLIN TOTAL RETURN FUND ------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------- CLASS A SHARES: Year ended October 31, 2009 Shares sold .......................................... 15,628,787 $ 155,180,522 69,739,925 $ 630,431,263 Shares issued on merger (Note 12) .................... -- -- 1,237,985 11,798,001 Shares issued in reinvestment of distributions ....... 233,837 2,329,421 5,502,855 49,231,209 Shares redeemed ...................................... (4,550,880) (45,269,466) (38,320,456) (344,588,949) ------------------------------------------------------------- Net increase (decrease) .............................. 11,311,744 $ 112,240,477 38,160,309 $ 346,871,524 ============================================================= 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 =============================================================
Annual Report | 139 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 B SHARES: Year ended October 31, 2009 Shares sold ....................................................... 1,524,364 $ 13,537,850 Shares issued in reinvestment of distributions .................... 117,688 1,047,569 Shares redeemed ................................................... (1,540,552) (13,748,373) --------------------------- Net increase (decrease) ........................................... 101,500 $ 837,046 =========================== 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 =========================== CLASS C SHARES: Year ended October 31, 2009 Shares sold ....................................................... 17,497,919 $ 157,787,278 Shares issued on merger (Note 12) ................................. 30,897 294,142 Shares issued in reinvestment of distributions .................... 791,999 7,105,251 Shares redeemed ................................................... (5,732,519) (51,433,702) --------------------------- Net increase (decrease) ........................................... 12,588,296 $ 113,752,969 =========================== 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 =========================== CLASS R SHARES: Year ended October 31, 2009 Shares sold ....................................................... 3,499,337 $ 31,496,822 Shares issued in reinvestment of distributions .................... 468,725 4,176,856 Shares redeemed ................................................... (3,153,089) (28,228,890) --------------------------- Net increase (decrease) ........................................... 814,973 $ 7,444,788 =========================== 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 ===========================
140 | 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 ----------------------------------------------------------- ADVISOR CLASS SHARES: Year ended October 31, 2009 Shares sold ........................................... 254,582 $ 2,556,843 46,507,982 $ 422,923,427 Shares issued on merger (Note 12) ..................... -- -- 5,402,812 51,542,827 Shares issued in reinvestment of distributions ........ 600 5,987 2,983,790 26,725,786 Shares redeemed ....................................... (77,375) (784,572) (25,764,557) (235,908,006) ----------------------------------------------------------- Net increase (decrease) ............................... 177,807 $ 1,778,258 29,130,027 $ 265,284,034 =========================================================== 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 ===========================================================
(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
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
Annual Report | 141 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) a. MANAGEMENT FEES (CONTINUED) The Franklin Floating Rate Daily Access Fund pays an investment management fee to Advisers based on the average daily net assets of the fund as follows:
ANNUALIZED FEE RATE NET ASSETS ---------------------------------------------------------------------------------- 0.450% Up to and including $500 million 0.350% Over $500 million, up to and including $1 billion 0.300% Over $1 billion, up to and including $1.5 billion 0.250% Over $1.5 billion, up to and including $6.5 billion 0.225% Over $6.5 billion, up to and including $11.5 billion 0.200% Over $11.5 billion, up to and including $16.5 billion 0.190% Over $16.5 billion, up to and including $19 billion 0.180% Over $19 billion, up to and including $21.5 billion 0.170% In excess of $21.5 billion
The Franklin Low Duration Total Return Fund and the Franklin Total Return Fund pay an investment management fee to Advisers based on the average daily net assets of 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. b. ADMINISTRATIVE FEES The Franklin Adjustable U.S. Government 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. 142 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) c. DISTRIBUTION FEES The Funds' 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. On December 1, 2008, the Funds' Board of Trustees approved a modification to the Class A distribution plan, for those funds that had a Class A compensation plan, changing the form of the plan from a compensation to a reimbursement distribution plan. Under the distribution plan, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each Funds' shares up to the maximum annual plan rate for each class. This change was effective February 1, 2009. Prior to February 1, 2009, under the Franklin Floating Rate Daily Access Fund and the Franklin Low Duration Total Return Fund Class A compensation distribution plan, the funds paid Distributors for costs incurred in connection with the servicing, sale and distribution of the funds' shares up to a certain percentage per year of its average daily net assets. In addition, under the funds' compensation distribution plans, the funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN FRANKLIN ADJUSTABLE FLOATING LOW DURATION FRANKLIN U.S. GOVERNMENT RATE DAILY TOTAL RETURN TOTAL RETURN SECURITIES FUND ACCESS FUND FUND FUND ----------------------------------------------------------------------- Reimbursement Plans: Class A ................................. 0.25% 0.25% 0.25% 0.25% Compensation Plans: Class B ................................. -- 1.00% -- 0.65% Class C ................................. 0.65% 0.65% -- 0.65% Class R ................................. -- -- -- 0.50%
d. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the 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 .............. $ 407,160 $ 53,188 $ 89,043 $ 1,276,972 Contingent deferred sales charges retained ........... $ 248,736 $ 62,830 $ 22,382 $ 59,522
Annual Report | 143 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) e. TRANSFER AGENT FEES For the year ended October 31, 2009, 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 .................................. $ 622,134 $ 924,522 $ 48,082 $ 1,578,715
f. WAIVER AND EXPENSE REIMBURSEMENTS Advisers and FT Services have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Franklin Low Duration Total Return Fund and the Franklin Total Return Fund so that the common expenses (i.e. a combination of management fees, administrative fees, and other expenses, but excluding distribution fees and acquired fund fees and expenses for each class of the funds do not exceed 0.65% and 0.60%, respectively (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until February 28, 2011 and February 28, 2010, respectively. Effective March 1, 2010, Advisers and FT Services have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Franklin Total Return Fund so that the common expenses for each class of the fund do not exceed 0.63% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until February 28, 2011. 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, 2009, the custodian fees were reduced as noted in the Statements of Operations. 144 | Annual Report 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, 2009, the capital loss carryforwards were as follows:
FRANKLIN FRANKLIN ADJUSTABLE FLOATING FRANKLIN U.S. GOVERNMENT RATE DAILY TOTAL RETURN SECURITIES FUND ACCESS FUND FUND -------------------------------------------------- Capital loss carryforwards expiring in: 2010 .............................................. $ -- $ 192,099,191 $ -- 2011 .............................................. 585,362 108,452,146 137,613 2012 .............................................. 1,039,514 74,147,691 -- 2013 .............................................. 2,782,773 -- 372,525 2014 .............................................. 3,962,538 -- -- 2015 .............................................. 2,492,027 17,905,138 1,395,879 2016 .............................................. 1,492,446 91,562,953 42,938,101 2017 .............................................. 4,390,170 113,325,108 -- -------------------------------------------------- $ 16,744,830 $ 597,492,227 $ 44,844,118(a) ==================================================
(a) Includes $9,556,622 from the merged HSBC Investor Core Plus Fixed Income Fund, HSBC Investor Core Plus Fixed Income Fund (Advisor) and HSBC Investor Intermediate Duration Fixed Income Fund, which may be carried over to offset future capital gains, subject to certain limitations. During the year ended October 31, 2009, the Franklin Low Duration Total Return Fund and the Franklin Total Return Fund utilized $381,471 and $9,568,593 of capital loss carryforwards, respectively. On October 31, 2009, the Franklin Adjustable U.S. Government Securities Fund had expired capital loss carryforwards of $1,279,055 which were reclassified to paid-in capital. The tax character of distributions paid during the years ended October 31, 2009 and 2008, was as follows:
FRANKLIN ADJUSTABLE U.S. FRANKLIN FLOATING RATE GOVERNMENT SECURITIES FUND DAILY ACCESS FUND ----------------------------------------------------------------------- 2009 2008 2009 2008 ----------------------------------------------------------------------- Distributions paid from ordinary income .............. $ 34,178,175 $ 17,879,832 $ 42,258,765 $ 77,463,889 ========================================================================
FRANKLIN LOW DURATION TOTAL RETURN FUND FRANKLIN TOTAL RETURN FUND ----------------------------------------------------------------------- 2009 2008 2009 2008 ------------------------------------------------------------------------ Distributions paid from ordinary income .............. $ 2,868,446 $ 951,671 $ 109,438,713 $ 65,989,690 ========================================================================
Annual Report | 145 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At October 31, 2009, 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 ......................................... $ 2,086,441,245 $ 1,426,917,826 $ 152,735,976 $ 2,426,175,225 ------------------------------------------------------------------- Unrealized appreciation ..................................... $ 17,563,589 $ 25,000,903 $ 4,232,561 $ 100,005,870 Unrealized depreciation ..................................... (4,931,076) (43,998,326) (811,258) (59,315,382) ------------------------------------------------------------------- Net unrealized appreciation (depreciation) .................. $ 12,632,513 $ (18,997,423) $ 3,421,303 $ 40,690,488 =================================================================== Distributable earnings - undistributed ordinary income ...... $ 854,240 $ 994,437 $ 842,884 $ 6,497,587 ===================================================================
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, payments-in-kind, bond discounts and premiums, swaps, tax straddles 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, payments-in-kind, bond discounts and premiums, swaps, tax straddles 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, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN SECURITIES FUND FUND FUND FUND --------------------------------------------------------------------- Purchases ................................... $ 1,659,780,205 $ 653,520,093 $ 142,604,976 $ 3,996,389,721 Sales ....................................... $ 245,430,556 $ 501,041,403 $ 41,546,061 $ 3,317,120,633
146 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the 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. CREDIT RISK AND DEFAULTED SECURITIES At October 31, 2009, the Franklin Floating Rate Daily Access Fund, the Franklin Low Duration Total Return Fund, and the Franklin Total Return Fund had 81.74%, 12.30%, and 16.19%, respectively, of their portfolio invested in high yield, 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, 2009, the aggregate 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 $28,056,439, $93,250, and $11,363,312, respectively, representing 2.05%, 0.06%, and 0.50%, 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. 9. OTHER DERIVATIVE INFORMATION At October 31, 2009, the funds have invested in derivative contracts which are reflected on the Statements of Assets and Liabilities as follows:
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------------------------------------------------------------------------------------------------------------ DERIVATIVE CONTRACTS NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT ------------------------------------------------------------------------------------------------------------------------------------ FRANKLIN LOW DURATION TOTAL RETURN FUND Interest rate contracts .......... Unrealized appreciation Variation margin/Unrealized (depreciation) $193,131(a) appreciation (depreciation) $ (192,123)(a) Foreign exchange contracts .......... Unrealized appreciation on Unrealized depreciation on forward exchange contracts 132,720 forward exchange contracts (517,277) Credit contracts ....... Unrealized appreciation on Unrealized depreciation on swap contracts 67,230 swap contracts (121,672)
Annual Report | 147 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. OTHER DERIVATIVE INFORMATION (CONTINUED)
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------------------------------------------------------------------------------------------------------- DERIVATIVE CONTRACTS NOT ACCOUNTED FOR AS STATEMENT OF ASSETS AND FAIR VALUE STATEMENT OF ASSETS AND FAIR VALUE HEDGING INSTRUMENTS LIABILITIES LOCATION AMOUNT LIABILITIES LOCATION AMOUNT ------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TOTAL RETURN FUND Interest rate contracts .............. Variation margin/Unrealized Unrealized appreciation appreciation (depreciation) $2,811,166(a) (depreciation) $ (1,985,029)(a) Foreign exchange contracts .............. Unrealized appreciation on Unrealized depreciation on forward exchange contracts 1,540,194 forward exchange contracts (11,623,776) Credit contracts ........... Unrealized appreciation on Unrealized depreciation on swap contracts 1,115,119 swap contracts (2,605,309)
(a) Includes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day's variation margin is reported within the Statement of Assets and Liabilities. The effect of derivative contracts on the fund's Statement of Operations was as follows:
NOTIONAL CHANGE IN AMOUNT DERIVATIVE CONTRACTS UNREALIZED OUTSTANDING NOT ACCOUNTED FOR AS STATEMENT OF REALIZED APPRECIATION DURING THE HEDGING INSTRUMENTS OPERATIONS LOCATIONS GAIN (LOSS)(a) (DEPRECIATION)(a) PERIOD(a,b) --------------------------------------------------------------------------------------------------------------------------------- FRANKLIN FLOATING RATE DAILY ACCESS FUND Credit contracts ................. Net realized gain (loss) from swap contracts $ 87,949 $ -- $ 202,174 FRANKLIN LOW DURATION TOTAL RETURN FUND Interest rate contracts .......... Net realized gain (loss) from futures contracts/Net change in unrealized appreciation (depreciation) on investments 33,803 (37,596) 27,724,611 Foreign exchange contracts .................... Net realized gain (loss) from foreign currency transactions/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies (48,222) (463,692) 6,811,643 Credit contracts ................. Net realized gain (loss) from swap contracts/Net change in unrealized appreciation (depreciation) on investments (201,929) 138,628 11,416,603 FRANKLIN TOTAL RETURN FUND Interest rate contracts .......... Net realized gain (loss) from futures contracts/Net change in unrealized appreciation (depreciation) on investments 3,144,010 (962,197) 348,978,938
148 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. OTHER DERIVATIVE INFORMATION (CONTINUED)
NOTIONAL CHANGE IN AMOUNT DERIVATIVE CONTRACTS UNREALIZED OUTSTANDING NOT ACCOUNTED FOR AS STATEMENT OF REALIZED APPRECIATION DURING THE HEDGING INSTRUMENTS OPERATIONS LOCATIONS GAIN (LOSS)(a) (DEPRECIATION)(a) PERIOD(a,b) ----------------------------------------------------------------------------------------------------------------------------------- FRANKLIN TOTAL RETURN FUND (CONTINUED) Foreign exchange contracts .................... Net realized gain (loss) from foreign currency transactions/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies $ 300,508 $ (14,124,318) $ 166,544,048 Credit contracts .................. Net realized gain (loss) from swap contracts/Net change in unrealized appreciation (depreciation) on investments (4,299,137) (560,922) 178,656,260
(a) For the six months ended October 31, 2009. (b) Notional amount represents the U.S. dollar equivalent based on the foreign exchange rate at the time of contract entry. See Note 1(e) regarding derivative financial instruments. 10. SPECIAL SERVICING AGREEMENT On May 1, 2009, the Franklin Floating Rate Daily Access Fund and the Franklin Total Return Fund, which are eligible underlying investments of one or more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds), entered into a Special Servicing Agreement (SSA) with the Allocator Funds and certain service providers of the fund and the Allocator Funds. Under the SSA, the fund pays a portion of the Allocator Funds' expenses (other than any asset allocation, administrative and distribution fees), to the extent such payments are less than the amount of the benefits realized or expected to be realized by the fund from the investment in the fund by the Allocator Funds. The Allocator Funds and the fund are either managed by Advisers or administered by FT Services. For the year ended October 31, 2009, the Franklin Total Return Fund was held by one or more of the Allocator Funds and was allocated expenses as noted in the Statements of Operations. At October 31, 2009, 9.50% of the Franklin Total Return Fund's outstanding shares were held by one or more of the Allocator Funds. 11. OTHER CONSIDERATIONS From time to time, officers, directors or employees of the Franklin Low Duration Total Return Fund's and Franklin Total Return Fund's Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors' committees which, pursuant to the funds' policies and requirements of applicable securities laws, could prevent the funds from trading in the securities of such company for limited or extended periods of time. Annual Report | 149 FRANKLIN INVESTORS SECURITIES TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. MERGER On September 18, 2009, the Franklin Total Return Fund acquired the net assets of the HSBC Investor Core Plus Fixed Income Fund, the HSBC Investor Core Plus Fixed Income Fund (Advisor) and the HSBC Investor Intermediate Duration Fixed Income Fund (HSBC Funds) pursuant to a plan of reorganization approved by the HSBC Funds' shareholders. The merger was accomplished by a tax free exchange, and the net assets acquired and shares issued were as follows:
SHARES ISSUED BY UNREALIZED FRANKLIN TOTAL APPRECIATION FUND NAME NET ASSETS RETURN FUND (DEPRECIATION) ---------------------------------------------------------------------------------------------------------------- HSBC Investor Core Plus Fixed Income Fund ................... $ 9,077,390 952,516 $ 224,054 HSBC Investor Core Plus Fixed Income Fund (Advisor) ......... 44,020,021 4,614,257 1,126,957 HSBC Investor Intermediate Duration Fixed Income Fund ....... 10,537,559 1,104,921 159,093 ------------------------------------------------ Total ....................................................... $63,634,970 6,671,694 $ 1,510,104 ================================================
The combined net assets of the Franklin Total Return Fund immediately after the merger were $2,123,047,911. 13. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the year ended October 31, 2009, the Funds did not utilize the Global Credit Facility. The commitment fees the Funds incurred for the period 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 ---------------------------------------------------------------------------- Commitment fees .................... $1,979 $2,021 $134 $2,986
150 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. 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, 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 was transferred to the U.S. 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 December 8, 2008, the court entered a stipulated order of final judgment with respect to the dismissed claims, and Plaintiffs filed a notice of appeal from that judgment to the U.S. Court of Appeals for the Second Circuit on January 6, 2009. All appellate briefing has since been submitted and the parties are awaiting a schedule for oral argument. 15. FAIR VALUE MEASUREMENTS The Funds follow a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Funds' own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) - Level 3 - significant unobservable inputs (including the funds' own assumptions in determining the fair value of investments) Annual Report | 151 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of October 31, 2009, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL -------------------------------------------------------------- FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND ASSETS: Investments in Securities: Asset-Backed Securities and Commercial Mortgage-Backed Securities ......................... $ -- $ 44,503 $ -- $ 44,503 Mortgage-Backed Securities ............... -- 1,931,523,313 -- 1,931,523,313 Short Term Investments ................... 101,980,417 65,525,525 -- 167,505,942 -------------------------------------------------------------- Total Investments in Securities ......................... $ 101,980,417 $ 1,997,093,341 $ -- $ 2,099,073,758 ============================================================== FRANKLIN FLOATING RATE DAILY ACCESS FUND ASSETS: Investments in Securities: Equity Investments(a)..................... $ -- $ -- $ 181,360 $ 181,360 Senior Floating Rate Interests ........... -- 1,252,331,072 -- 1,252,331,072 Short Term Investments ....................... 155,407,971 -- -- 155,407,971 -------------------------------------------------------------- Total Investments in Securities ......................... $ 155,407,971 $ 1,252,331,072 $ 181,360 $ 1,407,920,403 ============================================================== FRANKLIN LOW DURATION TOTAL RETURN FUND ASSETS: Investments in Securities: Equity Investments(a) .................... $ 4,400 $ -- $ -- $ 4,400 Corporate Bonds .......................... -- 52,997,842 -- 52,997,842 Convertible Bonds ........................ -- 118,778 -- 118,778 Asset-Backed Securities and Commercial Mortgage-Backed Securities ......................... -- 8,066,107 -- 8,066,107 Mortgage-Backed Securities ............... -- 21,624,185 -- 21,624,185 Foreign Government and Agency Securities ............................ -- 14,411,636 -- 14,411,636 U.S. Government and Agency Securities ............................ -- 41,186,155 -- 41,186,155 Senior Floating Rate Interests ........... -- 4,328,218 -- 4,328,218 Short Term Investments ................... 13,325,349 94,609 -- 13,419,958 -------------------------------------------------------------- Total Investments in Securities ......................... $ 13,329,749 $ 142,827,530 $ -- $ 156,157,279 ============================================================== Financial Futures Contracts .................. 193,131 -- -- 193,131 Forward Exchange Contracts ................... -- 132,720 -- 132,720 Swaps ........................................ -- 67,230 -- 67,230 LIABILITIES: Financial Futures Contracts .................. 192,123 -- -- 192,123 Forward Exchange Contracts ................... -- 517,277 -- 517,277 Swaps ........................................ -- 121,672 -- 121,672
152 | Annual Report Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ------------------------------------------------------------- FRANKLIN TOTAL RETURN FUND ASSETS: Investments in Securities: Equity Investments(a,b) ................. $ -- $ 412,652 $ -- $ 412,652 Convertible Bonds ....................... -- 6,890,625 -- 6,890,625 Corporate Bonds ......................... -- 778,283,743 -- 778,283,743 Asset-Backed Securities and Commercial Mortgage-Backed Securities ........................ -- 274,809,973 25,299 274,835,272 Mortgage-Backed Securities .............. -- 718,512,784 -- 718,512,784 Foreign Government and Agency Securities ........................... -- 282,565,745 -- 282,565,745 U.S. Government and Agency Securities ........................... -- 201,106,515 -- 201,106,515 Senior Floating Rate Interests .......... -- 92,389,625 -- 92,389,625 Municipal Bonds ......................... -- 49,505,571 -- 49,505,571 Short Term Investments .................. 61,509,217 853,964 -- 62,363,181 ------------------------------------------------------------- Total Investments in Securities ........................ $ 61,509,217 $ 2,405,331,197 $ 25,299 $ 2,466,865,713 ============================================================= Financial Futures Contracts ................. 2,811,166 -- -- 2,811,166 Forward Exchange Contracts .................. -- 1,540,194 -- 1,540,194 Swaps ....................................... -- 1,115,119 -- 1,115,119 LIABILITIES: Financial Futures Contracts ................. 1,985,029 -- -- 1,985,029 Forward Exchange Contracts .................. -- 11,623,776 -- 11,623,776 Swaps ....................................... -- 2,605,309 -- 2,605,309
(a) For detailed industry descriptions, see the accompanying Statement of Investments. (b) Includes convertible preferred and preferred stocks. At October 31, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the funds' fair value, were as follows:
NET CHANGE NET CHANGE IN UNREALIZED IN APPRECIATION BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION) BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END ------------------------------------------------------------------------------------------ FRANKLIN FLOATING RATE DAILY ACCESS FUND ASSETS Equity Securities - Steel .... $ 181,360 $ -- $ -- $ -- $ -- $181,360 $ --
Annual Report | 153 Franklin Investors Securities Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED)
NET CHANGE NET CHANGE IN UNREALIZED IN APPRECIATION BALANCE AT NET UNREALIZED NET TRANSFER BALANCE AT (DEPRECIATION) BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF END OF ON ASSETS HELD OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 YEAR AT YEAR END ------------------------------------------------------------------------------------------- FRANKLIN TOTAL RETURN FUND ASSETS Asset-Backed Securities and Commercial Mortgage-Backed Securities ................... $ -- $ -- $ -- $ -- $ 25,299 $ 25,299 $ --
16. SUBSEQUENT EVENTS The Funds have evaluated subsequent events through December 16, 2009, the issuance date of the financial statements and determined that no events have occurred that require disclosure. ABBREVIATIONS COUNTERPARTY BOFA - Bank of America N.A. BZWS - Barclays Bank PLC CITI - Citibank N.A. DBAB - Deutsche Bank AG FBCO - Credit Suisse International GSCO - The Goldman Sachs Group, Inc. HSBC - HSBC Bank USA, N.A JPHQ - JPMorgan Chase Bank, N.A. MLCO - Merrill Lynch Capital Services, Inc. MSCO - Morgan Stanley UBSW - UBS AG CURRENCY AUD - Australian Dollar BRL - Brazilian Real EUR - Euro IDR - Indonesian Rupiah ILS - New Israeli Shekel KRW - South Korean Won LKR - Sri Lankan Rupee MXN - Mexican Peso MYR - Malaysian Ringgit NOK - Norwegian Krone NZD - New Zealand Dollar PEN - Peruvian Nuevo Sol PLN - Polish Zloty SEK - Swedish Krona SELECTED PORTFOLIO AMBAC - American Municipal Bond Assurance Corp. BHAC - Berkshire Hathaway Assurance Corp. CLO - Collateralized Loan Obligation DIP - Debtor-In-Possession FDIC - Federal Deposit Insurance Corp. 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 GO - General Obligation ID - Improvement District IDA - Industrial Development Authority/Agency IO - Interest Only ISD - Independent School District L/C - Letter of Credit MTA - Metropolitan Transit Authority NATL - National Public Finance Guarantee Corp. PIK - Payment-in-Kind SF - Single Family USD - Unified/Union School District 154 | 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 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, 2009, 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 five years in the period then ended, 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, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California December 16, 2009 Annual Report | 155 Franklin Investors Securities Trust TAX DESIGNATION (UNAUDITED) Under Section 854(b)(2) of the Internal Revenue Code (Code), the Franklin Total Return Fund designates the maximum amount allowable but no less than $28,801 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended October 31, 2009. Distributions, including qualified dividend income, paid during calendar year 2009 will be reported to shareholders on Form 1099-DIV in January 2010. 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 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, 2009:
FRANKLIN FRANKLIN FRANKLIN ADJUSTABLE FLOATING RATE LOW DURATION FRANKLIN U.S. GOVERNMENT DAILY ACCESS TOTAL RETURN TOTAL RETURN SECURITIES FUND FUND FUND FUND --------------------------------------------------------------------------------- $ 34,317,598 $ 38,632,626 $ 2,640,991 $ 67,733,700
156 | 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 133 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 110 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) (1971-2008); 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 110 ICO Global Communications One Franklin Parkway (Holdings) Limited (satellite San Mateo, CA 94403-1906 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 133 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas), San Mateo, CA 94403-1906 H.J. Heinz 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).
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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 110 None One Franklin Parkway 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 133 Hess Corporation (exploration and One Franklin Parkway refining of oil and gas). San Mateo, CA 94403-1906 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 141 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 110 None One Franklin Parkway Independent 2007 and Lead San Mateo, CA 94403-1906 Trustee Independent Trustee since 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 (1933) Trustee and Trustee since 1986 133 None One Franklin Parkway Chairman of and Chairman San Mateo, CA 94403-1906 the Board 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 41 of the investment companies in Franklin Templeton Investments.
158 | 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 ------------------------------------------------------------------------------------------------------------------------------------ **RUPERT H. JOHNSON, JR. (1940) Trustee and Trustee since 52 None One Franklin Parkway Vice President 1987 and Vice San Mateo, CA 94403-1906 President 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 43 of the investment companies in Franklin Templeton Investments. MARK BOYADJIAN (1964) Vice President Since 2003 Not Applicable Not Applicable One Franklin Parkway 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 2004 San Mateo, CA 94403-1906 Officer and 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 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable One Franklin Parkway Executive San Mateo, CA 94403-1906 Officer - Finance and Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; officer of 45 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). GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable One Franklin Parkway Chief Financial San Mateo, CA 94403-1906 Officer and Chief Accounting Officer PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton Investments.
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NUMBER OF PORTFOLIOS IN NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD ------------------------------------------------------------------------------------------------------------------------------------ ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004). DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable One Franklin Parkway 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 45 of the investment companies in Franklin Templeton Investments. STEVEN J. GRAY (1955) Vice President Since August Not Applicable Not Applicable One Franklin Parkway 2009 San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc.; and officer of 45 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. ROBERT C. ROSSELOT (1960) Vice President Since August Not Applicable Not Applicable 500 East Broward Blvd. 2009 Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the South; and officer of 45 of the investment companies in Franklin Templeton Investments. KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.
160 | 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 ------------------------------------------------------------------------------------------------------------------------------------ CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable One Franklin Parkway 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 45 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).
* 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 2006. 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. Annual Report | 161 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. 162 | Annual Report This page intentionally left blank. This page intentionally left blank. (FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR ELECTRONIC DELIVERY on franklintempleton.com 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 A2009 12/09 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 $386,047 for the fiscal year ended October 31, 2009 and $361,186 for the fiscal year ended October 31, 2008. (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 $2,762 for the fiscal year ended October 31, 2009 and $4,000 for the fiscal year ended October 31, 2008. 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 $0 for the fiscal year ended October 31, 2009 and $4,164 for the fiscal year ended October 31, 2008. 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 $0 for the fiscal year ended October 31, 2009 and $279,913 for the fiscal year ended October 31, 2008. 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 $2,762 for the fiscal year ended October 31, 2009 and $288,077 for the fiscal year ended October 31, 2008. (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 Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, 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/LAURA F. FERGERSON ---------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date December 28, 2009 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/LAURA F. FERGERSON ---------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date December 28, 2009 By/s/GASTON GARDEY ------------------ Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date December 28, 2009